<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UNITED COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MINNESOTA 6712 41-1380239
- --------------------------- -------------------------- ---------------------
(State or jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or Industrial Classification Identification
organization) Code) Number)
</TABLE>
2600 EAGAN WOODS DRIVE, SUITE 155
EAGAN, MINNESOTA 55121
(612) 552-2828
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
R. SCOTT JONES, CHAIRMAN
GALEN T. PATE, PRESIDENT
UNITED COMMUNITY BANCSHARES, INC.
2600 EAGAN WOODS DRIVE, SUITE 155
EAGAN, MINNESOTA 55121
(612) 552-2828
(Name address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPY TO:
LYNN M. GARDIN, ESQ.
FREDRIKSON & BYRON, P.A.
900 Second Avenue South, Suite 1100
Minneapolis, Minnesota 55402
(612) 347-7102
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: / /
If this Form is filed to register additional securities of an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING REGISTRATION
SECURITISES TO BE REGISTERED BE REGISTERED PER SHARE (1) PRICE (1) FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value,...................... 56,600 $106.00 $5,999,600 $1,819
Total Registration Fee....... $1,819
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
------------------------
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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- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS CONTROL NO. _________
SUBJECT TO COMPLETION DATED OCTOBER 30, 1996
[LOGO]
UNITED COMMUNITY BANCSHARES, INC.
56,600 SHARES MAXIMUM
47,160 SHARES MINIMUM
COMMON STOCK
United Community Bancshares, Inc. ("United") is offering up to 56,600 shares of
its Common Stock, $.01 par value, (the "Shares"), at an offering price of
$106.00 per share. The Shares are offered and may be sold only to investors who
meet certain suitability requirements. See "The Offering."
Concurrently with this offering, the Company is offering by separate Prospectus
440,000 shares of its % Cumulative Perpetual Preferred Stock, Series A (the
"Series A Preferred Stock").
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE ISSUANCE AND SALE OF THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, THE OFFICE
OF THE COMPTROLLER OF THE CURRENCY (THE "OCC"), THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC"), OR THE MINNESOTA DEPARTMENT OF COMMERCE (THE
"DEPARTMENT"), NOR HAS THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, THE
OCC, THE FDIC, OR THE DEPARTMENT, PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. THESE SECURITIES ARE NOT DEPOSITS AND WILL NOT BE INSURED BY THE
FDIC OR ANY OTHER GOVERNMENT AGENCY.
<TABLE>
<CAPTION>
Price to Proceeds to
Common Stock Investors Company(1)(2)(3)
<S> <C> <C>
Per Share............................................ $106.00 $106.00
Total Minimum (47,160 Shares)........................ $4,998,960 $4,998,960
Total Maximum (56,600 Shares)........................ $5,999,600 $5,999,600
</TABLE>
(1) The Shares will be offered by officers and directors of the Company who will
receive no commissions or other remuneration in connection with their
participation in the sales of the Company's securities. See "The Offering."
(2) Before deducting offering expenses payable by the Company estimated at
$30,000.
(3) The offering commences on the date of this Prospectus and will remain open
until all 56,600 Shares have been sold, or January 15, 1997, whichever
occurs first.
Until the minimum of 47,160 Shares has been sold or the offering has been
terminated, all subscription amounts will be promptly transmitted to and
deposited in an escrow account at Firstar Bank Milwaukee, N.A., Milwaukee,
Wisconsin, pursuant to an Escrow Agreement. If subscriptions for 47,160 Shares
have not been received by December 31, 1996 (unless extended by United without
further notice to no later than January 15, 1997), all moneys received will be
refunded promptly without interest or deduction. See "The Offering."
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
--------------------------
UNITED COMMUNITY BANCHARES, INC.
OFFICE LOCATIONS
[MAP]
------------------------
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by an independent auditing firm and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial information.
--------------------------
Information contained in this Prospectus contains "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
which can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," anticipate," "estimate," or "continue" or the negative thereof
or other variations thereon or comparable terminology. The statements in "Risk
Factors" beginning on page 7 of the Prospectus constitute cautionary statements
identifying important factors, including certain risks and uncertainties, with
respect to such forward-looking statements that could cause actual results to
differ materially from those reflected in such forward-looking statements.
--------------------------
IMPORTANT NOTICES TO INVESTORS
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE, ILLIQUID, INVOLVE A HIGH
DEGREE OF RISK AND MAY NOT BE AN APPROPRIATE INVESTMENT FOR PERSONS WHO CANNOT
AFFORD TO LOSE THEIR ENTIRE INVESTMENT. IN MAKING AN INVESTMENT DECISION,
INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF UNITED AND THE TERMS OF THIS
OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES WILL BE
SUBJECT TO RESTRICTIONS ON THE TRANSFERABILITY AND RESALE BY AGREEMENT BETWEEN
INVESTORS AND UNITED AND MAY NOT BE TRANSFERRED OR SOLD EXCEPT AS PERMITTED BY
SUCH AGREEMENT. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR A SUBSTANTIAL PERIOD OF TIME.
UNITED RESERVES THE RIGHT TO ACCEPT OR REJECT SUBSCRIPTIONS IN WHOLE OR IN PART.
SEE "RISK FACTORS."
2
<PAGE>
SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN A COMPLETE STATEMENT OF SUCH
INFORMATION OR OF ALL MATERIAL FEATURES OF THE PROPOSED OFFERING AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND SHOULD BE READ IN CONJUNCTION
WITH, THE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO
CONTAINED HEREIN.
THE COMPANY
United Community Bancshares, Inc. ("United" or the "Company"), a bank
holding company with $429 million in assets as of June 30, 1996, operates Signal
Bank, Inc. ("Signal Bank") and The Goodhue County National Bank ("Goodhue Bank")
(collectively, Signal Bank and Goodhue Bank are referred to as the "Banks").
Signal Bank is a state-chartered bank with offices in Eagan, Savage and West St.
Paul, Minnesota. Goodhue Bank is a national bank with offices in Red Wing,
Lanesboro and Rushford, Minnesota. In addition to the Banks, United also
operates Consumers Credit Corporation ("CCC"), a consumer finance company with
offices in Hastings, Northfield, Red Wing and West St. Paul, Minnesota.
COMMUNITY BANKING PHILOSOPHY. United's operating strategy for the Banks has
emphasized relationship banking for owner-operated small-to-medium-sized
businesses, nonprofit organizations, professionals and consumers in market areas
surrounding the Banks' offices. Management of each Bank believes that a
significant number of its commercial customers prefer to bank with locally
managed institutions which provide a full-service banking relationship covering
the customer's commercial banking business and the personal needs of its
management and employees. United provides its Banks with the advantages of
affiliation with a multi-bank holding company, including services such as data
processing services, credit policy formulation, accounting services, investment
portfolio management and specialized staff support while generally granting
substantial autonomy to management of the Banks with respect to the day-to-day
operations and customer service decisions. The Company believes this autonomy
allows the Banks to better serve customers in their respective communities and
thereby enhances the Banks' business opportunities and operations. The Company
also maintains local bank charters and boards of directors, as well as
encourages all of its personnel to become active in community groups and
projects.
PROPOSED ACQUISITION OF PARK BANK. United has entered into a Merger
Agreement, dated October 7, 1996 (the "Merger Agreement") with Park Financial
Corporation ("PFC"), a bank holding company which owns Park National Bank ("Park
Bank"), a national bank with assets of approximately $203 million as of June 30,
1996 (the "Park Acquisition"). Park Bank operates its principal office in St.
Louis Park, Minnesota and a branch in New Hope, Minnesota. Park Bank provides a
wide range of commercial and consumer services primarily to owner-operated
small-to-medium-sized businesses, professionals and consumers principally in the
western and northwestern portions of the seven-county Minneapolis-St. Paul
metropolitan area. The cash purchase price of approximately $46 million will be
obtained from the proceeds of this Offering, together with the proceeds from the
concurrent sale of United's Series A Preferred Stock in the approximate amount
of $10.3 million (net of estimated offering expenses), a loan from Firstar Bank
Milwaukee, N.A. in the approximate amount of $24 million and cash on hand of
approximately $7 million. The Park Acquisition is subject to various conditions
which the Company expects will be satisfied to permit a closing of the Park
Acquisition in January 1997. The Park Acquisition will be accounted for under
the purchase method of accounting. See "Acquisition of Park."
GROWTH STRATEGIES. United's strategy is to continue to grow by acquiring
other financial institutions and financial service providers, expanding existing
bank and consumer finance businesses internally, and pursuing other financial
service opportunities. United's acquisition strategy is to identify banks with
at least $50 million in assets in Minnesota and Wisconsin communities within a
100 mile radius of the Minneapolis-St. Paul metropolitan area. In assessing
acquisitions, United focuses on credit quality, past performance of the bank,
management strengths and weaknesses, location, community demographics, relative
health of the local economy, organizational structure of the bank and
consideration for and terms of the acquisition. Management believes there are a
number of community banks which meet United's criteria and whose owners would be
interested in selling their banks to a community-based organization like United.
United will
3
<PAGE>
continue to expand its current business operations by identifying products or
services which have been successful in one or more of its offices and expanding
these products or services to other offices. For example, Signal Bank is a
"preferred lender" with the Small Business Administration ("SBA"), and its
expertise in making SBA loans will be utilized by other United subsidiary banks.
Similarly, Goodhue Bank's lease financing experience will allow the United
subsidiary banks to participate in more equipment financing transactions. In
addition, United's strategy is to grow CCC's loan portfolio by building CCC's
indirect and direct consumer finance business and by the acquisition or start-up
of new offices.
The Company is a Minnesota corporation and its principal executive offices
are located at 2600 Eagan Woods Drive, Suite 155, Eagan, Minnesota 55121, and
its telephone number is (612) 552-2828. United was formed on January 1, 1994
through the merger of Goodhue County Financial Corporation ("Goodhue"), the
former holding company for Goodhue Bank, into Signal Bancshares, Inc.
("Signal"), the former holding company for Signal Bank. Upon consummation of the
merger, the name of the Company was changed to United Community Bancshares, Inc.
References to United or the Company means United and its subsidiaries unless the
context otherwise requires.
THE OFFERING
United is offering a minimum of 47,160 shares and a maximum of 56,600 shares
of its Common Stock, $0.01 par value (the "Shares"), at a price of $106.00 per
Share. See "Description of Securities -- Common Stock." A minimum purchase of
100 Shares ($10,600) has been established, but may be waived at the discretion
of United. All proceeds will be held in an escrow account at Firstar Bank
Milwaukee, N.A. until minimum proceeds of $4,998,960 are received. If the
minimum of $4,998,960 is not received by December 31, 1996 (subject to extension
at the discretion of United to no later than January 15, 1997), all proceeds
will be returned to subscribers without interest or deduction.
Upon receipt of subscription agreements for the purchase of 47,160 Shares
together with aggregate proceeds of $4,998,960, United may close on the sale of
47,160 Shares. Thereafter, United may continue to accept subscriptions and
payment therefor until a maximum of 56,600 Shares have been sold or until the
Offering is terminated.
OUTSTANDING SHARES
As of September 30, 1996, there were 546,686 shares of United's Common Stock
outstanding, and there are no other shares of any other capital stock of United
outstanding. After completion of this Offering, there will be a minimum of
593,846 shares of United's Common Stock outstanding, and a maximum of 603,286
shares of United's Common Stock outstanding. In addition, after completion of
the Series A Preferred Stock offering by United occurring concurrently with this
Offering, there will be 440,000 shares of Series A Preferred Stock outstanding.
The outstanding number of shares does not include up to 100,000 shares of Common
Stock reserved for issuance under the 1994 Stock Plan, of which 69,367 shares
are subject to outstanding options. See "Management -- 1994 Stock Option Plan."
USE OF PROCEEDS
United will use all of the net proceeds of the Offering to provide a portion
of the financing for the Park Acquisition and to increase United's qualifying
"Tier 1" capital in order for United to have sufficient capital to consummate
the Park Acquisition. In the event that the Park Acquisition is not consummated,
then the proceeds will be used to repay debt. See "Use of Proceeds."
TRANSFERABILITY
Transfer of the Shares will be highly restricted and investors must be able
to bear the risk of an investment in the Shares for a substantial period of
time. As a condition of the sale of the Shares, an investor must sign a covenant
that will prohibit such investor from selling the Shares for up to two years
without the prior written consent of the Company. In addition, transfers will be
restricted by Article 7 of United's Bylaws which grants to United and
shareholders of United the first option to purchase any Shares an investor may
desire to transfer. See "Restrictions on Transferability."
4
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial information presented below reflects certain financial
information of United on an historical basis as of and for the periods indicated
and on an unaudited pro forma basis (i) as of and for the year ended December
31, 1993 taking into account the merger of Goodhue and Signal, which was
accounted for using the purchase method of accounting effective January 1, 1994,
as if such transaction had occurred on January 1, 1993, (ii) as of and for the
six months ended June 30, 1996 giving effect to the Park Acquisition (including
related equity and debt financing transactions), which will be accounted for
using the purchase method of accounting, as if such transaction had occurred on
January 1, 1996, and (iii) as of and for the six months ended June 30, 1995 and
the year ended December 31, 1995 giving effect to the Park Acquisition
(including related equity and debt financing transactions), which will be
accounted for using the purchase method of accounting, as if such transaction
had occurred on January 1, 1995. This data should be read in conjunction with
each of United's, Goodhue's and PFC's Consolidated Financial Statements and
related notes included herein and in conjunction with the unaudited Pro Forma
Combined Financial Statements and related notes included herein. See "Index to
Financial Information," "Selected Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------- ---------------------------------
1996 1995 1995 1994 1993(1)
--------- --------- --------- --------- -----------
(PRO FORMA)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
UNITED
OPERATING DATA
Interest income.......................................... $ 16,451 $ 14,843 $ 31,206 $ 25,516 $ 23,930
Interest expense......................................... 6,875 6,013 12,848 9,159 9,035
--------- --------- --------- --------- -----------
Net interest income...................................... 9,576 8,830 18,358 16,357 14,895
Provision for loan and lease losses...................... 95 20 61 234 605
--------- --------- --------- --------- -----------
Net interest income after provision for loan and lease
losses.................................................. 9,481 8,810 18,297 16,123 14,290
Noninterest income....................................... 2,390 1,938 3,919 3,837 3,947
Noninterest expense...................................... 8,556 8,208 16,531 16,131 14,995
--------- --------- --------- --------- -----------
Income before income taxes and cumulative effect of
change in accounting principle.......................... 3,315 2,540 5,685 3,829 3,242
Income tax expense....................................... 1,034 897 2,056 1,396 1,138
--------- --------- --------- --------- -----------
Income before cumulative effect of change in accounting
principle............................................... 2,281 1,643 3,629 2,433 2,104
Cumulative effect of change in accounting principle
(2)..................................................... -- -- -- -- 181
--------- --------- --------- --------- -----------
Net income............................................... $ 2,281 $ 1,643 $ 3,629 $ 2,433 $ 2,285
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Net income per common share before cumulative effect of
change in accounting principle.......................... $ 4.09 $ 3.19 $ 6.86 $ 4.74 $ 4.10
Cumulative effect of change in accounting principle...... -- -- -- -- .35
--------- --------- --------- --------- -----------
Net income per common share.............................. $ 4.09 $ 3.19 $ 6.86 $ 4.74 $ 4.45
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Weighted average common shares outstanding............... 557,284 514,784 528,787 513,167 513,565
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
BALANCE SHEET DATA
Total assets............................................. $ 428,933 $ 402,356 $ 421,841 $ 383,984 $ 347,687
Net loans and leases..................................... 272,965 252,948 263,006 244,125 217,317
Investment securities.................................... 104,523 92,238 101,837 83,434 82,610
Deposits................................................. 340,225 317,874 340,723 312,947 291,590
Securities sold under repurchase agreements.............. 29,283 29,160 23,173 27,747 15,321
Notes payable and other borrowings....................... 16,097 19,664 15,762 12,412 10,549
Total stockholders' equity............................... 38,500 30,998 36,969 27,525 26,745
KEY RATIOS
Return on average assets (3)(4).......................... 1.08% 0.85% 0.91% 0.68% 0.61%
Return on average equity (3)(4).......................... 12.43 11.47 11.65 9.22 8.22
Average stockholders' equity to average assets........... 8.69 7.43 7.79 7.34 7.48
Net interest margin (3).................................. 5.08 5.17 5.13 5.12 5.01
Operating efficiency ratio............................... 71.50 76.22 74.21 79.88 79.58
Nonperforming loans/total loans and leases............... 0.43 0.34 0.28 0.27 0.64
Allowance for loan and lease losses/total loans and
leases.................................................. 1.08 1.14 1.09 1.16 1.24
Allowance for loan and lease losses/nonperforming loans
and leases.............................................. 250.63 339.28 385.51 423.74 192.99
Common stock dividend payout ratio (5)................... 0.00 0.00 0.00 0.00 10.37
Ratio of earnings to fixed charges and preferred stock
dividends: (6)
Including interest on deposits, FHLB advances, federal
funds purchased and securities sold under repurchase
agreements (7)........................................ 1.48x 1.42x 1.44x 1.42x 1.36x
Excluding interest on deposits, FHLB advances, federal
funds purchased and securities sold under repurchase
agreements (7)........................................ 19.94x 9.25x 12.24x 6.94x 50.88x
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR
AS OF AND FOR THE THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------- ----------------
1996 1995 1995
--------- --------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
PRO FORMA
OPERATING DATA
Interest income...................................................... $ 24,135 $ 21,776 $ 45,818
Interest expense..................................................... 10,708 9,446 20,113
--------- --------- --------
Net interest income.................................................. 13,427 12,330 25,705
Provision for loan and lease losses.................................. 334 380 781
--------- --------- --------
Net interest income after provision for loan and lease losses........ 13,093 11,950 24,924
Noninterest income................................................... 3,213 2,754 5,578
Noninterest expense.................................................. 12,253 12,124 24,265
--------- --------- --------
Income before income taxes........................................... 4,053 2,580 6,237
Income tax expense................................................... 1,578 1,161 2,784
--------- --------- --------
Net income........................................................... $ 2,475 $ 1,419 $ 3,453
--------- --------- --------
--------- --------- --------
Net income per common share (8)...................................... $ 3.25 $ 1.62 $ 4.23
--------- --------- --------
--------- --------- --------
Weighted average common shares outstanding (8)....................... 604,444 561,944 575,947
--------- --------- --------
--------- --------- --------
BALANCE SHEET DATA (9)
Total assets......................................................... $ 652,143 $ 605,359 $ 636,731
Net loans and leases................................................. 386,011 359,085 372,868
Investment securities................................................ 177,182 151,556 163,302
Deposits............................................................. 506,668 471,700 506,477
Securities sold under repurchase agreements.......................... 46,491 39,942 33,839
Notes payable and other borrowings................................... 38,989 41,395 37,489
Total stockholders' equity........................................... 53,758 46,257 52,228
KEY RATIOS
Return on average assets (3)(4)...................................... 0.79% 0.50% 0.59%
Return on average equity (3)(4)...................................... 13.49 9.91 11.09
Average stockholders' equity to average assets....................... 5.84 7.71 7.88
Net interest margin (3).............................................. 4.72 4.82 4.80
Operating efficiency ratio........................................... 73.64 80.38 77.57
Nonperforming loans/total loans and leases........................... 1.01 0.69 0.53
Allowance for loan and lease losses/total loans and leases........... 1.39 1.35 1.40
Allowance for loan and lease losses/nonperforming loans and leases... 137.76 195.16 264.26
Common stock dividend payout ratio (5)............................... 0.00 0.00 0.00
Ratio of earnings to fixed charges and preferred stock dividends: (6)
Including interest on deposits, FHLB advances, federal funds
purchased and securities sold under repurchase agreements (7)..... 1.27x 1.17x 1.20x
Excluding interest on deposits, FHLB advances, federal funds
purchased and securities sold under repurchase agreements (7)..... 2.70x 1.86x 2.13x
</TABLE>
- ------------------------------
(1) Combines the results of operations and financial condition of Signal and
Goodhue.
(2) Cumulative effect of change in accounting principle in 1993 represents the
adoption of Statement of Financial Accounting Standard ("SFAS") No. 109
Accounting for Income Taxes.
(3) Annualized for the six months ended June 30, 1996 and 1995.
(4) Computed using income before cumulative effect of change in accounting
principle.
(5) Dividends per common share divided by net income per common share.
(6) For the purpose of calculating the ratio of earnings to fixed charges and
preferred stock dividends, earnings consist of earnings before income taxes
and fixed charges. Fixed charges consist of one-third rent expense and
interest expense. Preferred stock dividends are assumed to equal the amount
of pre-tax income that would be necessary to pay such dividends.
(7) FHLB advances are Federal Home Loan Bank advances.
(8) Earnings per share information has been computed based on the assumption
that the minimum 47,160 shares are issued.
(9) In the event this Offering is completed but neither the concurrent offering
of Series A Preferred Stock nor the Park Acquisition are completed (and
taking into account costs and expenses associated with the termination of
the offering of Series A Preferred Stock and the Park Acquisition, estimated
at $1,270,000), the Company's June 30, 1996 Balance Sheet Data as adjusted
to reflect the minimum offering would include $429,057,000 in Total Assets,
$12,522,000 in Notes Payable and Other Borrowings and $42,199,000 in Total
Stockholder's Equity; as adjusted to reflect the maximum offering, such
amounts would be $430,058,000 in Total Assets, $12,522,000 in Notes Payable
and Other Borrowings and $43,200,000 in Total Stockholder's Equity.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES INVOLVES SIGNIFICANT RISK, AND NET TANGIBLE BOOK
VALUE DILUTION FROM THE OFFERING PRICE. PROSPECTIVE INVESTORS SHOULD BE AWARE OF
THE FOLLOWING RISK FACTORS AND SHOULD REVIEW CAREFULLY THE INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS IN EVALUATING THE OFFERING AND UNITED AND ITS
BUSINESSES.
RISKS INVOLVED IN ACQUISITION STRATEGY; ACQUISITION OF PARK
United believes the majority of its growth will come from acquisitions of
banks and other financial institutions. Such acquisitions involve risks of
adversely changing results of operations, changes in capital structure,
including increased reliance on debt, unforeseen liabilities relating to the
acquired institution or arising out of the acquisition transaction, or asset
quality problems of the acquired entity and other conditions not within the
control of United, such as adverse personnel relations, loss of customers
because of change of identity, deterioration in local economic conditions and
other risks affecting the acquired institution. Acquisition candidates may not
be available or available on terms favorable to United in the future. United
must compete with a variety of individuals and institutions, including major
regional bank holding companies, for suitable acquisition candidates. Such
competition could affect United's ability to make acquisitions and increase the
price that United pays for certain acquisitions.
The Company currently expects to complete the Park Acquisition in January
1997, and if completed, the Park Acquisition will be the Company's first
acquisition since the merger with Goodhue in 1994. United's financial results
will be dependent in part on the successful integration of Park Bank with
United. Among other things, the Park Acquisition will involve a significant
increase in the Company's long-term indebtedness and interest expense due to the
addition of approximately $24 million of long-term debt financing in connection
with the Park Acquisition. This indebtedness and the issuance of the Series A
Preferred Stock will require the dedication of an increased portion of cash flow
to the payment of principal and interest, and to the payment of the Series A
Preferred Stock dividends, thereby reducing funds available for capital
expenditures and other cash flow requirements. In addition, Park Bank's
percentage of nonperforming loans to total loans is somewhat greater than the
Banks' percentage of nonperforming loans to total loans, and as a result
United's overall percentage of nonperforming loans to total loans will increase
over its current level. The Park Acquisition will also result in a decrease from
the historical regulatory capital ratios of the Company. Following completion of
the Park Acquisition, it is anticipated that United's Tier 1 risk-based capital
and leverage ratios will be only somewhat above regulatory minimums for a
"well-capitalized" institution, and that United's total risk-based capital ratio
will be above the regulatory minimum for an "adequately capitalized" institution
but below the regulatory minimum for a "well-capitalized" institution.
Accordingly, United will be deemed "adequately capitalized" for purposes of
various federal banking regulations applicable to United. These lower capital
ratios could inhibit the Company's ability to effect certain acquisitions in the
future or result in other regulatory limitations, especially if the Company
should experience adverse results of operations or other events causing further
decreases in tangible capital. There can be no assurance that either the
subsidiary banks or United will be able to maintain capital at levels which will
not result in adverse operating or financial restrictions or that access to
adequate capital or capital on terms satisfactory to United will exist in the
event capital restoration is necessary or desirable. See "Acquisition of Park";
"Supervision and Regulation."
TERMINATION OF PARK ACQUISITION
The Park Acquisition is subject to various conditions (See "Acquisition of
Park -- Terms of Park Acquisition") and there is no assurance that all of such
conditions will be satisfied. Because the closing of this Offering is expected
to take place before the Park Acquisition, investors in this Offering have no
assurance that the Park Acquisition will be completed as currently anticipated.
In the event the Company does not close the Park Acquisition, the Company may be
required to pay $1 million to PFC pursuant to a letter of credit provided as
liquidated damages. See "Acquisition of Park -- Terms of Park Acquisition."
7
<PAGE>
GOVERNMENT REGULATION
The banking industry is highly regulated by both federal and state
regulatory authorities. United and its subsidiaries are subject to supervision
and regular examinations by agents of the Federal Reserve Board, the Office of
the Comptroller of the Currency, the Federal Deposit Insurance Corporation or
the Minnesota Department of Commerce. Under federal and state banking law,
United and its subsidiaries are subject to substantial supervision and
limitations with respect to making loans, extending credit, purchasing
securities, paying dividends, making acquisitions, branching and many other
aspects of the banking business. Regulation includes among other things, capital
reserve requirements, dividend limitations, limitations on products and services
offered, geographical limits, consumer credit regulations, community investment
requirements and restrictions on transactions with affiliated parties. Financial
institution regulation has been the subject of significant legislation in recent
years, is subject to currently pending legislation, and may be the subject of
further significant legislation in the future, none of which is within the
control of United. This regulation substantially affects the business and
financial results of all financial institutions and holding companies, including
United and the subsidiary banks, and United is not able to predict the impact of
changes in such regulations on United's business and profitability, some of
which may be materially adverse to United. See "Supervision and Regulation."
INTEREST RATE RISK
United's financial condition is substantially dependent on each subsidiary
bank's cash flow and net income. The net income of each bank depends to a great
extent upon its net interest rate spread, which is the difference between the
average interest rate earned by the bank on its loans, securities and other
interest-earning assets, and the average interest rate it pays on deposits and
other interest-bearing liabilities. Interest rates are highly sensitive to many
factors beyond the control of the banks, including general economic conditions
and policies of various governmental and regulatory authorities. Increases or
decreases in interest rates may cause significant decreases in the net interest
income and net income of the banks. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset/Liability Management --
Interest Rate Sensitivity."
LOCAL ECONOMIC CONDITIONS
The success of United depends to a great extent upon general economic
conditions in the communities it serves, primarily the Minneapolis-St. Paul
metropolitan area and southeastern Minnesota, and particularly conditions
affecting small and medium sized businesses which are a significant portion of
United's borrowers. A decline in the economy of these areas could have an
adverse effect on United's business, including the demand for new loans,
refinancing activity, the ability of borrowers to repay outstanding loans and
the value of loan collateral, and could adversely affect the Banks' and Park
Bank's net income. See "Business -- Banks" and "Business -- Lending and
Investments."
COMPETITION
The financial services industry is rapidly changing and highly competitive.
United competes with the system banks of two large multi-bank holding companies,
as well as numerous other banks, savings and loan associations, credit unions,
securities brokerage firms and other financial services companies. Some of these
competitors have greater financial and other resources than United. No assurance
can be given that United will be able to continue to compete successfully in
these markets. In addition, recent legislation permitting nationwide interstate
banking and branching could increase competition by both in-state and
out-of-state banking or other financial institutions, and as a result could
adversely affect United's business. See "Business -- Competition."
DEPENDENCE UPON KEY PERSONNEL
The continued success of United is substantially dependent upon the efforts
of the directors and executive officers of United, in particular, R. Scott
Jones, Chairman and Galen T. Pate, President. The success of United depends in
large part on the retention of present key management personnel, and upon
8
<PAGE>
the ability to hire and retain additional qualified personnel in the future when
needed. United does not have employment contracts with any management personnel
or any key-person life insurance coverage on any management personnel. See
"Management."
CONCENTRATION OF OWNERSHIP IN MANAGEMENT
Assuming they do not purchase shares in this Offering, following completion
of this Offering, the directors and officers of United, the principal executive
officers of United's subsidiaries and the United Employee Stock Ownership Plan
will hold approximately 43.8% (assuming the minimum number of shares of Common
Stock are sold in this Offering) of the United Common Stock then outstanding. In
addition, senior management has received, and may in the future receive, stock
options under the 1994 Stock Option Plan, which if exercised would increase the
number of shares of United Common Stock held by management. Because of such
share ownership, these individuals may be able to exercise significant influence
in the election of members of United's Board of Directors and the outcome of
other corporate actions. See "Management" and "Principal Shareholders."
NO PUBLIC MARKET; OFFERING PRICE
There is no public market for United's Common Stock, and United does not
expect that one will develop following the Offering. As a result, a purchaser of
the Shares offered in the Offering must bear the economic risk of an investment
for an indefinite period of time. The offering price was determined by United,
and is approximately equal to the formula transfer price under Article 7 of
United's Bylaws based upon the September 30, 1996 financial results. See
"Restrictions on Transferability."
NET TANGIBLE BOOK VALUE DILUTION
The investors in the Offering will incur an immediate dilution in net
tangible book value per share from the offering price. In addition, as
acquisitions occur in the future, investors in the Offering may suffer
additional dilution in net tangible book value per share. See "Dilution."
TRANSFERABILITY OF THE SHARES
There is presently no market, public or private, for the Company's Common
Stock and there can be no assurance that a market will ever develop or, if
developed, that it will be maintained. Each investor in this Offering will be
required to enter into a covenant restricting the ability of investors to
transfer their shares for up to two years from the date of purchase without the
prior written consent of the Company. As a result, a purchaser must bear the
economic risk of an investment in the shares for a substantial period of time.
United Common Stock to be issued in the Offering will also be subject to certain
rights of first refusal in favor of United and others at a formula transfer
price as provided in Article 7 of the Bylaws of United. The certificates
evidencing the Shares will bear a legend specifying these restrictions. See
"Restrictions on Transferability."
PRIOR RIGHTS OF PREFERRED STOCK
The Shares offered in this Offering are subject to the superior rights of
United's Series A Preferred Stock which is being offered concurrently with this
Offering. Owners of the Series A Preferred Stock are entitled to receive
dividends on a cumulative basis before any dividends may be paid on the Common
Stock, and in the event of the liquidation, dissolution or winding-up of United,
the holder of each share of Series A Preferred Stock is entitled to share in
United's assets available for distribution to shareholders prior to any holder
of the Common Stock of United. In addition, the Shares offered in this Offering
could become junior to the rights of any series of additional preferred stock
issued in the future with such superior rights as may be designated by United's
Board of Directors with respect to payment of dividends and payments in the
event of the liquidation, dissolution or winding-up of United. There can be no
assurance that the Board of Directors will not designate one or more series of
additional preferred stock with such superior rights. See "Description of
Securities -- Common Stock."
9
<PAGE>
NO CUMULATIVE VOTING
United shareholders do not have cumulative voting rights in the election of
United's directors. Cumulative voting makes it possible for less than a majority
of the shareholders to elect one or more members of the Board of Directors.
Under non-cumulative voting, a majority of the shareholders can elect the entire
Board of Directors. See "Description of Securities -- No Cumulative Voting."
NO PREEMPTIVE RIGHTS
United shareholders do not have preemptive rights with respect to any new
shares of stock issued by United. Preemptive rights entitle a shareholder to
subscribe on a pro rata basis to purchase additional shares of capital stock at
any time the company proposes to issue additional shares. Preemptive rights
enable a shareholder to maintain the shareholder's proportional voting power (if
any) and proportional rights to receive dividends and other distributions by
United. See "Description of Securities -- No Preemptive Rights."
LACK OF DIVIDENDS
Payment of dividends on United's Common Stock will be at the discretion of
United's Board of Directors and are subject to the prior payment of dividends on
the Series A Preferred Stock (and any other preferred stock issued in the
future); however, dividends on United's Common Stock are not contemplated in the
foreseeable future. See "Description of Securities -- Dividend Policy."
LIMITATION ON DIRECTORS' LIABILITY
United's Articles of Incorporation provide, as permitted by governing
Minnesota law, that its directors shall have no personal liability for certain
breaches of their fiduciary duties to United. This provision may reduce the
likelihood of derivative litigation against directors and may discourage
shareholders from bringing a lawsuit against directors for breach of their duty.
See "Description of Securities -- Limitation of Director Liability;
Indemnification."
ANTI-TAKEOVER CONSIDERATIONS
As a Minnesota corporation, United is subject to certain anti-takeover
provisions of the Minnesota Business Corporation Act (the "MBCA"). The
provisions of the MBCA could have the effect of delaying, deferring or
preventing a change in control of United, may discourage bids for United's
Common Stock at a premium over the then existing transfer price of the Common
Stock established under Article 7 of United's Bylaws, and may adversely affect
other rights of the holders of the Shares. In addition, United's Board of
Directors is considering the adoption of a "poison pill" plan which, although
intended to have the effect of preserving Common Stock shareholder value, may
have the same effect as the MBCA anti-takeover provisions. See "Description of
Securities -- Anti-Takeover Provisions."
POSSIBLE LACK OF AVAILABLE INFORMATION
The Company anticipates that it will not be required to register the Common
Stock pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and does not presently intend voluntarily to effect such a registration.
Following the offering, the Company will be subject to the periodic and other
reporting requirements of the Exchange Act for the 1997 calendar year pursuant
to Section 15(d) thereof. Thereafter, provided the Common Stock is then held by
less than 300 holders of record at the beginning of any subsequent fiscal year
the Company could cease to be subject to the obligation to file such reports
with respect to such fiscal year. The Company anticipates that the Common Stock
will be held by less than 300 holders of record at the end of 1997, and
therefore that it will then cease to be subject to the reporting requirements of
the Exchange Act at that time. The Company intends to provide quarterly and
annual financial information to its shareholders even if not required to do so
pursuant to the Exchange Act. See "Additional Information."
10
<PAGE>
ACQUISITION OF PARK
THE INFORMATION CONTAINED IN THIS PROSPECTUS WITH RESPECT TO THE PARK
ACQUISITION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF
THE MERGER AGREEMENT, A COPY OF WHICH HAS BEEN FILED AS AN EXHIBIT TO THE
REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
In early 1995, the officers of United began exploring the possibility of the
acquisition of Park Bank with the majority owner, Andrew Darling. Mr. Darling's
death in December, 1995 halted further negotiations. After time, Mr. Darling's
heirs decided to sell Park Bank, and established a bidding process. Twenty-three
parties requested and received an informational packet, and of that group
sixteen parties submitted a confidential bid proposal. From that group, United
and one other party were given the opportunity to conduct a due diligence
investigation, and each then submitted a final confidential bid. United was
selected as the buyer in June, 1996. The price and certain terms of the Park
Acquisition resulted from the bidding process. The other terms and conditions of
the Merger Agreement resulted from negotiations between management of United and
PFC's majority shareholder and management of PFC.
GENERAL
United's wholly-owned subsidiary, PFC Acquisition Corp. ("Newco") and PFC
have entered into the Merger Agreement, pursuant to which Newco will merge into
PFC, with PFC as the surviving corporation (the "Merger"). The Merger is subject
to certain conditions, including receipt of applicable regulatory approvals and
receipt of debt and equity financing in amounts sufficient to enable United and
Newco to consummate the Park Acquisition. It is expected that applicable
regulatory approvals will be obtained by December 1996, and that the debt
financing and the sale of the Series A Preferred Stock being offered
concurrently with this Offering will close in January 1997. United expects that
all other conditions precedent to the Merger will be satisfied or waived and
that the Merger will be consummated in January 1997. Following the Merger,
United expects to continue operations of Park Bank in a manner substantially
consistent with past practice and plans to retain the existing management of
Park Bank.
PFC began operations as a one-bank holding company on October 1, 1975. PFC
owns all of the issued and outstanding capital stock of Park Bank, formerly
known as Park National Bank of St. Louis Park, which was chartered in 1963. Park
Bank, with assets of approximately $203 million as of June 30, 1996, engages in
commercial and consumer banking activities primarily in the western and
northwestern portions of the seven-county Minneapolis-St. Paul metropolitan
area. Management of United believes that the acquisition of Park Bank will (i)
broaden the base of operations for the entire United consolidated group and
could diversify risk that may exist in each market area; (ii) result in
economies of scale due to the combination of resources; (iii) result in a larger
organization that should better enable management to attract well-qualified
employees and provide opportunities to broaden access to capital markets and
acquisition opportunities; and (iv) allow each of United's subsidiary banks to
access the products, services, talents and capabilities of the other subsidiary
banks and their management and employees. See "Business -- Growth Strategies."
BUSINESS OF PARK BANK
Park Bank provides a wide range of commercial and consumer banking products
and services for small-to-medium-sized businesses, consumers and professionals.
Park Bank has a market niche focused on the lending and cash management needs of
owner-operated businesses in light manufacturing, wholesale/ distribution and
service industries with sales of $250,000 to $25 million. At June 30, 1996, 79%
of Park Bank's loans were commercial, commercial real estate or commercial
construction loans, with the real estate loans primarily placed on
owner-occupied facilities. The commercial lending activities are principally in
the western and northwestern portions of the seven-county Minneapolis-St. Paul
metropolitan area.
Park Bank provides its consumer customers with a competitive variety of
deposit products and services, installment and home equity line of credit loans,
discount brokerage services, and other customary banking services. A majority of
Park Bank's consumer business is originated within a two-to-three mile radius of
its banking offices in St. Louis Park and New Hope, Minnesota.
11
<PAGE>
Park Bank competes with the system banks of two large multi-bank holding
companies, as well as numerous other banks, savings and loan associations,
credit unions, securities brokerage firms and other financial services
companies. Management believes that the experience and reputation of Park Bank
in the small-to-medium-sized business market is very complementary to that of
Signal Bank, which will enhance the ability of both banks to compete more
effectively through the sharing of resources and expertise, such as SBA loan
programs.
Park Bank presently leases its main office, consisting of approximately
27,000 square feet located at 5353 Wayzata Boulevard, St. Louis Park, Minnesota,
under a lease which expires on October 31, 2004, with several options to renew.
Park Bank operates a branch office in an approximately 5,200 square foot
detached building owned by Park Bank and located at 7001 Bass Lake Road, New
Hope, Minnesota. Management believes that Park Bank's facilities are adequate to
meet its foreseeable needs. As of June 30, 1996, PFC and Park Bank employed 80
persons, 65 on a full-time basis and 15 on a part-time basis.
TERMS OF THE PARK ACQUISITION
PURCHASE PRICE. In connection with the Merger, the shareholders of PFC will
receive aggregate cash consideration estimated to be approximately $46 million
(the actual consideration will be based on the November 30, 1996 book value of
PFC plus a premium plus a fixed daily accrual representing earnings from
November 30, 1996 through the closing date of the Park Acquisition). Following
the Park Acquisition, United will own all of the issued and outstanding stock of
PFC which in turn owns all of the issued and outstanding stock of Park Bank.
BANK FINANCING. Firstar Bank Milwaukee, N.A. ("Firstar") has issued a
commitment letter to United, respecting Firstar's willingness to provide a loan
of up to an aggregate amount of $27 million, of which $24 million will be used
by United to finance the Park Acquisition. The commitment letter expires
February 14, 1997. The loan is for a five-year term, with interest payable
quarterly and principal (based on a ten-year amortization) payable annually.
Interest will accrue at a rate equal to 140 basis points in excess of the three-
month LIBOR Rate. All indebtedness of United to Firstar under the loan will be
secured by a pledge of all of the stock of Park Bank, Signal Bank and Goodhue
Bank. As a condition to the loan, Firstar will require that United execute
customary loan documents, containing standard terms, conditions and covenants.
REGULATORY CAPITAL. United must obtain at least $10.3 million from the sale
of United's Series A Preferred Stock being offered concurrently with this
Offering to have sufficient regulatory capital to consummate the Park
Acquisition. In the event United does not complete the offering of Series A
Preferred Stock, it will not be able to complete the Park Acquisition. See "Use
of Proceeds."
EFFECTIVE DATE. If all statutory requirements are met, and if certain
conditions set forth in the Merger Agreement are satisfied or waived, the Park
Acquisition will become effective as of 12:01 a.m. January 16, 1997 (unless such
date is extended by the mutual agreement of the parties).
COVENANTS AND CONDITIONS. The consummation of the Park Acquisition is
subject to the fulfillment of certain covenants and conditions. The obligations
of all parties to the Merger Agreement are subject to the condition that all
necessary state and federal bank regulatory authorities have approved the Park
Acquisition. A final application has been submitted to the Board of Governors of
the Federal Reserve System for approval of the proposed Park Acquisition, and it
is anticipated the approval will be received on or about November 30, 1996. The
obligations of United under the Merger Agreement are subject to the following
additional conditions: (i) PFC shall have materially performed all of its
obligations and complied with all of its conditions under the Merger Agreement
(principally, to conduct its and Park Bank's business in the ordinary and usual
course); (ii) there shall be no court or governmental order prohibiting the
consummation of the transactions contemplated by the Merger Agreement; (iii)
PFC's total book value shall not be less than $23.8 million; and (iv) various
documents shall be delivered to United at, or prior to, the closing. Except for
the requirement of regulatory approval, any of the foregoing conditions may be
waived at any time prior to the Park Acquisition by the parties.
12
<PAGE>
AMENDMENT OF THE MERGER AGREEMENT. The Merger Agreement may be amended by
the parties in writing at any time. The Merger Agreement may be terminated and
the Park Acquisition abandoned at any time: (i) by mutual written consent of the
parties; (ii) by United in the event of any material breach of any of the
representations, warranties or covenants of PFC contained in the Merger
Agreement which are not timely cured; or (iii) by PFC in the event of any
material breach of any of the representations, warranties or covenants of United
contained in the Merger Agreement which are not timely cured. With respect to
items (ii) and (iii), United and PFC have agreed that "material breach" by PFC
means (a) PFC's book value is less than $23.8 million at November 30, 1996, or
(b) any other breach by PFC, which either alone or when combined with other then
existing breaches, would or could result in a liability in excess of $250,000;
and that "material breach" by United means (x) United fails to deliver the
merger consideration for the PFC stock (even if such failure is due to United's
failure to obtain any regulatory approval), or (y) any other breach by United,
which either alone or when combined with other than existing breaches, would or
could result in a liability in excess of $250,000.
TERMINATION OF MERGER AGREEMENT. Firstar Bank of Milwaukee, N.A., has
issued its irrevocable letter of credit for the account of United, in favor of
PFC pursuant to the Merger Agreement, in the aggregate amount of $1 million. PFC
shall be entitled to make one draw, if any, under the letter of credit only as
follows: (1) in the event that PFC terminates the Merger Agreement in accordance
with item (iii) above, and United has not obtained binding commitments for the
debt and equity financing necessary to consummate the Park Acquisition, then PFC
shall be entitled to draw under the letter of credit in the amount of $1 million
as liquidated damages; or (2) in the event that PFC terminates the Merger
Agreement in accordance with item (iii) above and United has obtained binding
commitments for the debt and equity financing necessary to consummate the Park
Acquisition, then PFC shall be entitled to draw under the letter of credit in
the amount of $500,000 as liquidated damages; or (3) in the event that the
parties terminate the Merger Agreement in accordance with item (i) or United
terminates the Merger Agreement in accordance with item (ii), then PFC shall not
be entitled to any draw under the letter of credit. If the Merger Agreement is
terminated, as provided above, it will become void and there will be no further
liability or obligation under the Merger Agreement on the part of any party.
ACCOUNTING TREATMENT. For accounting purposes, the Park Acquisition will be
treated as a purchase and will be accounted for under the purchase method for
business combinations, which requires recording the assets and liabilities of
Park Bank at their fair value.
CLOSING CONTINGENT. No assurance can be given that the Park Acquisition
will occur, and in the event that the Park Acquisition does not occur United
intends to use the proceeds from this Offering to repay debt.
USE OF PROCEEDS
The net proceeds from the sale of the Shares, after deducting expenses of
the Offering, are estimated to be $4,968,960 (assuming the minimum number of
Shares are sold) or $5,969,600 (assuming the maximum number of Shares are sold).
United intends to use all of the proceeds from this Offering, together with the
proceeds from the offering of United's Series A Preferred Stock occurring
concurrently with this Offering, to provide a portion of the financing for the
Park Acquisition and to increase United's qualifying "Tier 1" capital in order
for United to have sufficient capital to consummate the Park Acquisition. See
"Supervision and Regulation."
In addition to the proceeds from this Offering, United will receive
approximately $10.3 million from the sale of its Series A Preferred Stock
occurring concurrently with this Offering and $24 million from the proceeds of a
loan from Firstar Bank Milwaukee, N.A., and will obtain $7 million from
cash-on-hand, to provide the financing for the Park Acquisition, estimated to be
$46 million in the aggregate. See "Acquisition of Park."
In the event that the Park Acquisition is not consummated, then the net
proceeds from the sale of the Shares will be used by United to repay debt.
13
<PAGE>
DILUTION
At June 30, 1996, the net tangible book value of United's Common Stock was
$34,647,069 or $63.38 per share. Net tangible book value per share of United's
Common Stock represents total tangible assets reduced by total liabilities, less
the par or stated value of any preferred stock, divided by the number of
outstanding shares of United Common Stock. See "Financial Information."
The pro forma net tangible book value at June 30, 1996, after giving effect
to the sale of 47,160 (minimum) or 56,600 (maximum) Shares of Common Stock in
this Offering (and after deducting estimated offering expenses), would have been
$39,616,029 or $66.71 per share if the minimum number of Shares are sold and
$40,616,669 or $67.33 per share if the maximum number of Shares are sold. This
represents an immediate increase of $3.33 per share to existing shareholders and
an immediate dilution of $39.29 per share to new investors if the minimum number
of Shares are sold, and an immediate increase in net tangible book value of
$3.95 per share to existing shareholders and an immediate dilution of $38.67 per
share to new investors if the maximum number of Shares are sold.
After giving effect to (i) the sale of Common Stock in this Offering (after
deducting estimated offering expenses), (ii) the sale of 440,000 shares of
United's Series A Preferred Stock in the offering occurring concurrently with
this Offering (less estimated legal and offering expenses of $710,000), and
(iii) the Park Acquisition, the pro forma net tangible book value of United's
Common Stock as of June 30, 1996, would have been $17,536,533 or $29.53 per
share if the minimum number of Shares are sold, and $18,537,173 or $30.73 per
share if the maximum number of Shares are sold. This represents an additional
decrease in net tangible book value of $37.18 per share to both existing
shareholders and new investors if the minimum number of Shares are sold, and
$36.60 per share to both existing shareholders and new investors if the maximum
number of Shares are sold.
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<PAGE>
The following table illustrates the total net tangible book value per share
dilution at June 30, 1996 for Existing Shareholders and New Investors, taking
into account the effects of the sale of Common Stock in this Offering, the sale
of the Series A Preferred Stock being offered concurrently with this Offering,
and the Park Acquisition, based on the minimum and maximum offering:
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
------------------------- -------------------------
EXISTING EXISTING
SHAREHOLDER NEW INVESTOR SHAREHOLDER NEW INVESTOR
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Offering Price per share.................................. $ 106.00 $ 106.00
Net tangible book value before offerings and Park
Acquisition............................................ $ 63.38 $ 63.38
Increase realized by existing shareholders due to
Common Stock Offering................................ 3.33 3.95
Dilution of net tangible book value to new investors
after Common Stock Offering.......................... (39.29) (38.67)
----------- ------------ ----------- ------------
Pro forma net tangible book value after Common Stock
Offering and before Preferred Stock Offering and Park
Acquisition.............................................. 66.71 66.71 67.33 67.33
Decrease realized by shareholders due to costs of
Preferred Stock Offering............................... (1.20) (1.20) (1.18) (1.18)
Decrease realized by shareholders due to Park
Acquisition............................................ (35.98) (35.98) (35.42) (35.42)
----------- ------------ ----------- ------------
Pro forma net tangible book value per share after Common
Stock Offering, Preferred Stock Offering and Park
Acquisition.............................................. $ 29.53 $ 29.53 $ 30.73 $ 30.73
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Total pro forma net tangible book value per share
dilution............................................. $ (33.85) $ (76.47) $ (32.65) $ (75.27)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
Under Article 7 of United's Bylaws (see "Restrictions on Transferability"),
each shareholder of United Common stock grants to United and its shareholders
the right of first refusal to purchase any shares of United Common Stock which a
shareholder intends to transfer (other than transfers to such shareholder's
spouse, child or grandchild, or to certain trusts or charitable organizations).
In the event that any United shareholder elects to sell his/her Shares, and
United elects to purchase such Shares pursuant to its right of first refusal,
the transfer price to be paid by United to such shareholder is based on a
calculation which is different from the foregoing calculation in that it is
equal to One Hundred Fifty Percent (150%) of the "Total Adjusted Consolidated
Tangible Book Value" per share plus One Hundred Percent (100%) of the "Total
Consolidated Intangible Book Value" per share.
15
<PAGE>
The following table illustrates the pro forma transfer price per share
dilution at June 30, 1996 for Existing Shareholders and New Investors, taking
into account the effects of the Park Acquisition and the sale of the Series A
Preferred Stock being offered concurrently with this Offering, based on the
minimum and maximum offering:
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
------------------------- -------------------------
EXISTING EXISTING
SHAREHOLDER NEW INVESTOR SHAREHOLDER NEW INVESTOR
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Offering Price per share.................................. $ 106.00 $ 106.00
Transfer price per share before offerings and Park
Acquisition.............................................. $ 102.98 $ 102.98
Increase realized by existing shareholders due to Common
Stock Offering......................................... 4.37 5.18
Increase in transfer price per share to new investors
after Common Stock Offering............................ 1.35 2.16
----------- ------------ ----------- ------------
Pro forma transfer price per share after Common Stock
Offering and before Preferred Stock offering and Park
Acquisition.............................................. 107.35 107.35 108.16 108.16
Decrease realized by shareholders due to costs of
Preferred Stock offering............................. (1.79) (1.79) (1.77) (1.77)
Decrease realized by shareholders due to Park
Acquisition.......................................... (17.99) (17.99) (17.71) (17.71)
----------- ------------ ----------- ------------
Pro forma transfer price per share after Common Stock
Offering, Preferred Stock Offering and Park
Acquisition.............................................. $ 87.57 $ 87.57 $ 88.68 $ 88.68
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Pro Forma Transfer Price Per Share Dilution........... $ (15.41) $ (18.43) $ (14.30) $ (17.32)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
The following table summarizes the difference between the number of shares
of Common Stock purchased from United, the total consideration paid and the
average price per share paid by the existing shareholders and by new investors,
giving effect to the Common Stock minimum and maximum offerings:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
After Common Stock minimum offering:
Existing shareholders................................. 546,686 92.1% $ 21,021,068 80.8% $ 38.45
New investors......................................... 47,160 7.9% 4,998,960 19.2% 106.00
--------- ----- ------------- --------- ---------
Total............................................... 593,846 100.0% $ 26,020,028 100.0% $ 43.82
--------- ----- ------------- --------- ---------
--------- ----- ------------- --------- ---------
After Common Stock maximum offering:
Existing shareholders................................. 546,686 90.6% $ 21,021,068 77.8% $ 38.45
New investors......................................... 56,600 9.4% 5,999,600 22.2% 106.00
--------- ----- ------------- --------- ---------
Total............................................... 603,286 100.0% $ 27,020,668 100.0% $ 44.79
--------- ----- ------------- --------- ---------
--------- ----- ------------- --------- ---------
</TABLE>
The tables in this section assume no exercise of outstanding stock options
under the 1994 Stock Plan. At June 30, 1996, 100,000 shares of Common Stock were
reserved for issuance under the 1994 Stock Plan, of which 69,367 shares are
subject to outstanding options at an average exercise price of $81.95. To the
extent these options are exercised, there will be further dilution to new
investors. See "Management -- 1994 Stock Option Plan."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of United as of June 30,
1996, and pro forma capitalization of United after giving effect to the Park
Acquisition, the sale of the minimum number of shares of Common Stock offered in
this Offering, the sale of the Series A Preferred Stock offered by United
concurrently with this Offering and the proceeds from the financing from
Firstar. See "Acquisition of Park." In addition, certain capital ratios are also
presented. The table should be read in conjunction with the financial statements
and related notes contained elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
------------------------
ACTUAL PRO FORMA (1)
--------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term Debt.......................................................................... $ 3,150 $ 26,042
Stockholders' Equity
Series A Preferred Stock, $25.00 stated value; 440,000 shares authorized; no shares
issued and outstanding (actual); 440,000 shares issued and outstanding (pro forma)... -- 11,000
Common Stock, $.01 par value; 5,000,000 shares authorized; 546,686 shares issued and
outstanding (actual); 593,846 shares issued and outstanding (pro forma).............. 5 6
Additional paid-in capital............................................................ 21,016 25,274
Retained earnings..................................................................... 17,795 17,795
Unrealized loss on securities available for sale...................................... (316) (316)
--------- -------------
Total stockholders' equity.......................................................... 38,500 53,759
--------- -------------
Total Capitalization.................................................................... $ 41,650 $ 79,801
--------- -------------
--------- -------------
Regulatory capital ratios:
Tier 1 risk-based capital............................................................. 13.6% 7.0%
Total risk-based capital.............................................................. 14.7% 8.4%
Leverage.............................................................................. 8.3% 4.8%
</TABLE>
- ------------------------
(1) The pro forma information set forth above as of June 30, 1996 may not be
indicative of the financial condition of the Company on the date of the Park
Acquisition which is expected to close in January, 1997. Earnings from the
operations of Park Bank during the period from July 1, 1996 to the date of
the Park Acquisition are expected to increase the cash merger consideration
requiring United to increase long-term debt to be incurred of $22.9 million
as shown above to the $24.0 million amount set forth elsewhere herein. See
"Acquisition of Park" and "Use of Proceeds."
17
<PAGE>
SELECTED FINANCIAL DATA
The following tables presented below reflect certain consolidated financial
information of United on an historical basis as of and for the dates indicated
and on an unaudited pro forma basis as of and for the year ended December 31,
1993 giving effect to the merger of Goodhue and Signal which was accounted for
using the purchase method of accounting (appearing in Table 1); certain
financial information of PFC on an historical basis as of and for the dates
indicated (appearing in Table 2); and certain unaudited pro forma consolidated
financial information of United giving effect to the Park Acquisition (including
related debt and equity transactions) using the purchase method of accounting
(appearing in Table 3). For a description of the purchase method of accounting
with respect to the merger with Goodhue and the Park Acquisition and the related
effects on the historical financial statements of United, see unaudited Pro
Forma Consolidated Financial Statements of United included elsewhere herein. The
historical consolidated financial data as of and for the five years ended
December 31, 1995 (except United as of and for the year ended December 31,
1993), are derived from audited consolidated financial statements of United and
PFC. The historical consolidated financial data as of and for the six months
ended June 30, 1996 and 1995 are derived from the unaudited historical financial
statements of United and PFC and reflect, in the opinions of management of
United and PFC, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data. The results of
operations for the six months ended June 30, 1996 may not be indicative of
results of operations to be obtained for the entire fiscal year. The selected
consolidated financial and other data should be read in conjunction with each of
United's, Goodhue's and PFC's Consolidated Financial Statements and related
notes included herein and in conjunction with the unaudited Pro Forma
Consolidated Financial Statements and related notes included herein. See "Index
to Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
18
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------------------------------
1996 1995 1995 1994 1993 (1) 1992 (2) 1991 (2)
--------- --------- --------- --------- ----------- --------- ---------
(PRO FORMA)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
UNITED -- TABLE 1
OPERATING DATA
Interest income................ $ 16,451 $ 14,843 $ 31,206 $ 25,516 $ 23,930 $ 11,276 $ 12,783
Interest expense............... 6,875 6,013 12,848 9,159 9,035 4,334 6,470
--------- --------- --------- --------- ----------- --------- ---------
Net interest income............ 9,576 8,830 18,358 16,357 14,895 6,942 6,313
Provision for loan and lease
losses........................ 95 20 61 234 605 488 2,000
--------- --------- --------- --------- ----------- --------- ---------
Net interest income after
provision for loan and lease
losses........................ 9,481 8,810 18,297 16,123 14,290 6,454 4,313
Noninterest income............. 2,390 1,938 3,919 3,837 3,947 2,419 1,808
Noninterest expense............ 8,556 8,208 16,531 16,131 14,995 6,537 5,609
--------- --------- --------- --------- ----------- --------- ---------
Income before income taxes and
cumulative effect of change in
accounting principle.......... 3,315 2,540 5,685 3,829 3,242 2,336 512
Income tax expense............. 1,034 897 2,056 1,396 1,138 725 171
--------- --------- --------- --------- ----------- --------- ---------
Income before cumulative effect
of change in accounting
principle..................... 2,281 1,643 3,629 2,433 2,104 1,611 341
Cumulative effect of change in
accounting principle (3)...... -- -- -- -- 181 -- --
--------- --------- --------- --------- ----------- --------- ---------
Net income..................... $ 2,281 $ 1,643 $ 3,629 $ 2,433 $ 2,285 $ 1,611 $ 341
--------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- ----------- --------- ---------
Net income per common share
before cumulative effect of
change in accounting
principle..................... $ 4.09 $ 3.19 $ 6.86 $ 4.74 $ 4.10 $ 5.28 $ 1.10
Cumulative effect of change in
accounting principle.......... -- -- -- -- .35 -- --
--------- --------- --------- --------- ----------- --------- ---------
Net income per common share.... $ 4.09 $ 3.19 $ 6.86 $ 4.74 $ 4.45 $ 5.28 $ 1.10
--------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- ----------- --------- ---------
Weighted average common shares
outstanding................... 557,284 514,784 528,787 513,167 513,565 305,135 309,623
--------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- ----------- --------- ---------
BALANCE SHEET DATA
Total assets................... $ 428,933 $ 402,356 $ 421,841 $ 383,984 $ 347,687 $ 155,095 $ 152,370
Net loans and leases........... 272,965 252,948 263,006 244,125 217,317 92,516 83,262
Investment securities.......... 104,523 92,238 101,837 83,434 82,610 40,938 43,886
Deposits....................... 340,225 317,874 340,723 312,947 291,590 140,446 139,317
Securities sold under
repurchase agreements......... 29,283 29,160 23,173 27,747 15,321 -- --
Notes payable and other
borrowings.................... 16,097 19,664 15,762 12,412 10,549 1,572 1,144
Total stockholders' equity..... 38,500 30,998 36,969 27,525 26,745 11,943 10,674
KEY RATIOS
Return on average assets
(4)(5)........................ 1.08% 0.85% 0.91% 0.68% 0.61% 1.10% 0.23%
Return on average equity
(4)(5)........................ 12.43 11.47 11.65 9.22 8.22 14.55 3.24
Average stockholders' equity to
average assets................ 8.69 7.43 7.79 7.34 7.48 7.59 7.20
Net interest margin (4)........ 5.08 5.17 5.13 5.12 5.01 5.23 4.72
Operating efficiency ratio..... 71.50 76.22 74.21 79.88 79.58 69.83 69.12
Nonperforming loans/total loans
and leases.................... 0.43 0.34 0.28 0.27 0.64 0.45 2.72
Allowance for loan and lease
losses/total loans and
leases........................ 1.08 1.14 1.09 1.16 1.24 1.53 2.57
Allowance for loan and lease
losses/ nonperforming loans
and leases.................... 250.63 339.28 385.51 423.74 192.99 336.07 94.32
Common stock dividend payout
ratio (6)..................... 0.00 0.00 0.00 0.00 10.37 0.00 0.00
Ratio of earnings to fixed
charges and preferred stock
dividends: (7)
Including interest on
deposits, FHLB advances,
federal funds purchased and
securities sold under
repurchase agreements....... 1.48x 1.42x 1.44x 1.42x 1.36x 1.53x 1.08x
Excluding interest on
deposits, FHLB advances,
federal funds purchased and
securities sold under
repurchase agreements....... 19.94x 9.25x 12.24x 6.94x 50.88x 16.57x 3.75x
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
PFC -- TABLE 2
OPERATING DATA
Interest income........................ $ 7,844 $ 7,074 $ 14,969 $ 11,663 $ 9,744 $ 10,549 $ 12,907
Interest expense....................... 3,036 2,637 5,672 3,538 2,927 4,229 6,604
--------- --------- --------- --------- --------- --------- ---------
Net interest income.................... 4,808 4,437 9,297 8,125 6,817 6,320 6,303
Provision for loan and lease losses.... 240 360 720 740 552 678 1,974
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for
loan and lease losses................. 4,568 4,077 8,577 7,385 6,265 5,642 4,329
Noninterest income..................... 823 817 1,659 1,556 2,102 2,824 2,894
Noninterest expense.................... 2,990 3,228 6,338 6,076 6,234 6,557 6,862
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
cumulative effect of change in
accounting principle.................. 2,401 1,666 3,898 2,865 2,133 1,909 361
Income tax expense..................... 925 630 1,497 1,030 659 579 228
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of
change in accounting principle and
extraordinary credit.................. 1,476 1,036 2,401 1,835 1,474 1,330 133
Cumulative effect of change in
accounting principle (3).............. -- -- -- -- 850 -- --
Tax benefit arising from carry forward
of prior year operating loss.......... -- -- -- -- -- 93 62
--------- --------- --------- --------- --------- --------- ---------
Net income............................. $ 1,476 $ 1,036 $ 2,401 $ 1,835 $ 2,324 $ 1,423 $ 195
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per common share before
cumulative effect of change in
accounting principle and extraordinary
credit................................ $ 3.12 $ 2.19 $ 5.09 $ 3.89 $ 3.15 $ 2.80 $ .28
Cumulative effect of change in
accounting principle.................. -- -- -- -- 1.81 -- --
Extraordinary credit................... -- -- -- -- -- .20 .13
--------- --------- --------- --------- --------- --------- ---------
Net income per common share............ $ 3.12 $ 2.19 $ 5.09 $ 3.89 $ 4.96 $ 3.00 $ 0.41
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average common shares
outstanding........................... 473,077 473,059 471,540 471,931 468,692 473,668 479,441
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA
Total assets........................... $ 208,230 $ 186,705 $ 200,570 $ 181,505 $ 157,650 $ 153,524 $ 156,092
Net loans and leases................... 115,080 108,298 113,499 102,882 94,368 82,035 87,187
Investment securities.................. 75,738 61,802 63,765 55,632 45,468 46,941 43,510
Deposits............................... 166,443 153,827 165,754 156,704 135,363 132,037 136,151
Total stockholders' equity............. 23,684 21,156 22,888 19,237 18,152 15,640 14,557
KEY RATIOS
Return on average assets (4)(5)........ 1.43% 1.13% 1.27% 1.08% 0.99% 0.94% 0.13%
Return on average equity (4)(5)........ 12.63 10.22 11.35 9.72 8.90 9.22 1.35
Average stockholders' equity to average
assets................................ 11.29 11.03 11.19 11.14 11.13 10.18 9.44
Net interest margin (4)................ 4.99 5.21 5.24 5.14 4.95 4.68 4.39
Operating efficiency ratio............. 53.10 61.43 57.85 62.76 69.90 71.71 74.61
Nonperforming loans/total loans and
leases................................ 2.35 1.28 1.07 1.69 1.25 4.38 5.95
Allowance for loan and lease
losses/total loans and leases......... 2.18 1.85 2.14 1.93 1.61 1.74 1.78
Allowance for loan and lease losses/
nonperforming loans and leases........ 92.77 144.28 199.20 113.93 129.18 39.78 29.85
Common stock dividend payout ratio
(6)................................... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Ratio of earnings to fixed charges and
preferred stock dividends: (7)
Including interest on deposits, FHLB
advances, federal funds purchased
and securities sold under repurchase
agreements.......................... 1.78x 1.62x 1.66x 1.77x 1.68x 1.43x 1.05x
Excluding interest on deposits, FHLB
advances, federal funds purchased
and securities sold under repurchase
agreements.......................... 45.46x 32.43x 21.52x 15.84x 10.78x 5.49x 1.65x
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR
SIX MONTHS ENDED THE
JUNE 30, YEAR ENDED
-------------------- DECEMBER 31,
1996 1995 1995
--------- --------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
PRO FORMA -- TABLE 3(8)
OPERATING DATA
Interest income...................................................... $ 24,135 $ 21,776 $ 45,818
Interest expense..................................................... 10,708 9,446 20,113
--------- --------- --------
Net interest income.................................................. 13,427 12,330 25,705
Provision for loan and lease losses.................................. 334 380 781
--------- --------- --------
Net interest income after provision for loan and lease losses........ 13,093 11,950 24,924
Noninterest income................................................... 3,213 2,754 5,578
Noninterest expense.................................................. 12,253 12,124 24,265
--------- --------- --------
Income before income taxes........................................... 4,053 2,580 6,237
Income tax expense................................................... 1,578 1,161 2,784
--------- --------- --------
Net income........................................................... $ 2,475 $ 1,419 $ 3,453
--------- --------- --------
--------- --------- --------
Net income per common share (9)...................................... $ 3.25 $ 1.62 $ 4.23
--------- --------- --------
--------- --------- --------
Weighted average common shares outstanding (9)....................... 604,444 561,944 575,947
--------- --------- --------
--------- --------- --------
BALANCE SHEET DATA (10)
Total assets......................................................... $ 652,143 $ 605,359 $ 636,731
Net loans and leases................................................. 386,011 359,085 372,868
Investment securities................................................ 177,182 151,556 163,302
Deposits............................................................. 506,668 471,700 506,477
Securities sold under repurchase agreements.......................... 46,491 39,942 33,839
Notes payable and other borrowings................................... 38,989 41,395 37,489
Total stockholders' equity........................................... 53,758 46,257 52,228
KEY RATIOS
Return on average assets (4)......................................... 0.79% 0.50% 0.59%
Return on average equity (4)......................................... 13.49 9.91 11.09
Average stockholders' equity to average assets....................... 5.84 7.71 7.88
Net interest margin (4).............................................. 4.72 4.82 4.80
Operating efficiency ratio........................................... 73.64 80.38 77.57
Nonperforming loans/total loans and leases........................... 1.01 0.69 0.53
Allowance for loan and lease losses/total loans and leases........... 1.39 1.35 1.40
Allowance for loan and lease losses/nonperforming loans and leases... 137.76 195.16 264.26
Common stock dividend payout ratio (6)............................... 0.00 0.00 0.00
Ratio of earnings to fixed charges and preferred stock dividends: (7)
Including interest on deposits, FHLB advances, federal funds
purchased and securities sold under repurchase agreements......... 1.27x 1.17x 1.20x
Excluding interest on deposits, FHLB advances, federal funds
purchased and securities sold under repurchase agreements......... 2.70x 1.86x 2.13x
</TABLE>
- ------------------------------
(1) Combines the results of operations and financial condition of Signal and
Goodhue.
(2) Includes the accounts of Signal only.
(3) Cumulative effect of change in accounting principle in 1993 represents the
adoption of Statement of Financial Accounting Standard (SFAS) No. 109
Accounting for Income Taxes.
(4) Annualized for the six months ended June 30, 1996 and 1995.
(5) Computed using income before cumulative effect of change in accounting
principle.
(6) Dividends per share divided by net income per share.
(7) For the purpose of calculating the ratio of earnings to fixed charges and
preferred stock dividends, earnings consist of earnings before income taxes
and fixed charges. Fixed charges consist of one-third rent expense and
interest expense. Preferred stock dividends are assumed to equal the amount
of pre-tax income that would be necessary to pay such dividends.
(8) Combines the results of operations and financial condition of United and
PFC.
(9) Earnings per share information has been computed based on the assumption
that the minimum 47,160 shares are issued.
(10) In the event this Offering is completed but neither the concurrent offering
of Series A Preferred Stock nor the Park Acquisition are completed (and
taking into account costs and expenses associated with the termination of
the offering of Series A Preferred Stock and the Park Acquisition, estimated
at $1,270,000), the Company's June 30, 1996 Balance Sheet Data as adjusted
to reflect the minimum offering would include $429,057,000 in Total Assets,
$12,522,000 in Notes Payable and Other Borrowings and $42,199,000 in Total
Stockholder's Equity; as adjusted to reflect the maximum offering, such
amounts would be $430,058,000 in Total Assets, $12,522,000 in Notes Payable
and Other Borrowings and $43,200,000 in Total Stockholder's Equity.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BASIS OF PRESENTATION
The following discussion and analysis provides information regarding
United's historical results of operations and financial condition for the years
ended December 31, 1995, 1994 and 1993 and for the six months ended June 30,
1996 and 1995. This discussion and analysis should be read in conjunction with
United's Consolidated Financial Statements and the notes thereto and the other
financial information included herein.
The comparison of 1994 data to 1993 data is substantially affected by the
merger of Goodhue into Signal on January 1, 1994. For comparative purposes, an
unaudited pro forma consolidated balance sheet and statement of income of Signal
and Goodhue as of December 31, 1993 and for the year then ended, prepared as
though the Signal and Goodhue merger had occurred on January 1, 1993, have been
included elsewhere herein. See "Index to Financial Information." Pro forma
results do not purport to represent what United's results of operations or
financial condition would actually have been if the transactions had occurred on
the dates indicated, and do not project United's results or financial condition
for or to any future period or date. For purposes of this Management's
Discussion and Analysis, 1994 financial data will be compared to the pro forma
1993 financial data. The financial data for 1992 and 1991 include the financial
information of Signal only.
The Park Acquisition will substantially affect United's future operations
and will have a significant impact on comparisons of income, expense and balance
sheet items for 1997 periods to 1996 periods. United expects the Park
Acquisition will be completed in January, 1997. United intends to account for
the Park Acquisition using the purchase method of accounting. As a result of the
Park Acquisition, among other things, United will incur a substantial increase
in long-term debt and related interest expense and in goodwill and related
goodwill amortization. Although management believes that following the Park
Acquisition the Company will be "adequately capitalized" for purposes of various
federal banking regulations, the recording of the goodwill in connection with
the Park Acquisition will result in a significant decrease in tangible capital
and in regulatory capital ratios from those in existence prior to the Park
Acquisition.
OVERVIEW
United's net income for the six months ended June 30, 1996 increased
$638,000 or 38.8% to $2.3 million from $1.6 million for the six months ended
June 30, 1995. Net income for the year ended December 31, 1995 increased $1.2
million or 49.3% to $3.6 million from $2.4 million in 1994. Net income before
the cumulative effect of change in accounting principle in 1994 increased
$329,000 or 15.6% from $2.1 million in 1993.
Total assets at June 30, 1996 increased $7.1 million or 1.7% to $428.9
million from $421.8 million at December 31, 1995. Total assets at December 31,
1995 increased $37.8 million or 9.8% from $384.0 million at December 31, 1994
which was an increase of $36.3 million or 10.4% over the total assets at
December 31, 1993.
The annualized return on average assets was 1.08% for the six months ended
June 30, 1996 compared with .85% for the six months ended June 30, 1995. The
return on average assets using income before the cumulative effect of change in
accounting principle was .91% for the year ended December 31, 1995 compared with
.68% and .61% for the years ended December 31, 1994 and pro forma 1993,
respectively.
The annualized return on average equity was 12.43% for the six months ended
June 30, 1996 compared with 11.47% for the six months ended June 30, 1995. The
return on average equity using income before the cumulative effect of change in
accounting principle was 11.65% for the year ended December 31, 1995 compared
with 9.22% and 8.22% for the years ended December 31, 1994 and pro forma 1993,
respectively.
22
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is interest earned on loans and other earning assets
less interest paid on deposits and other borrowed funds. Earning assets are
categorized as federal funds sold, investment securities and loans and leases.
Interest-bearing liabilities are categorized as deposits, federal funds
purchased and securities sold under repurchase agreements, Federal Home Loan
Bank ("FHLB") advances, and notes payable.
Net interest income for the six months ended June 30, 1996 increased
$746,000 or 8.4% to $9.6 million from $8.8 million for the six months ended June
30, 1995. Net interest income was positively impacted by an increase of $35.9
million or 10.4% in average interest-earning assets to $380.1 million at June
30, 1996 from $344.2 million at June 30, 1995, and by an increase of .03% in
average yields on average interest-earning assets to 8.73% for the six months
ended June 30, 1996 from 8.70% for the six months ended June 30, 1995. Average
interest-earning assets were impacted by an 8.0% increase in average loans and
leases due to continued loan demand and a 20.3% increase in average taxable
investment securities resulting from increased deposit growth in excess of loan
demand. The positive impact to net interest income was partially offset by the
increase of $24.6 million or 8.4% in average interest-bearing liabilities to
$316.6 million at June 30, 1996 from $292.0 million at June 30, 1995 and an
increase in the rate paid on average interest-bearing liabilities of .23% to
4.38% for the six months ended June 30, 1996 from 4.15% for the six months ended
June 30, 1995. Average interest-bearing liabilities increased due primarily to
an increase of $39.0 million or 61.4% in money market deposit accounts resulting
from marketing a new money market product that the Company featured as its prime
interest-bearing deposit account. The money market deposit increase partially
resulted in a decrease of $15.5 million in the savings and time deposit accounts
between the periods. The Company also utilized increased FHLB advances of $7.5
million to fund a portfolio of fixed-rate residential real estate loans, while
notes payable were reduced by $4.1 million using proceeds from a stock offering.
The net interest spread declined 0.20% to 4.35% for the six months ended June
30, 1996 from 4.55% for the six months ended June 30, 1995 while net interest
margin declined to 5.08% from 5.17%. United expects its overall cost of funds to
increase after the Park Acquisition due to the additional interest expense
incurred on long-term debt.
Net interest income for 1995 increased $2.0 million or 12.2% to $18.4
million from $16.4 million for 1994. Net interest income was positively impacted
by an increase of $38.4 million or 12.0% in average interest-earning assets to
$357.8 million for the year ended December 31, 1995 from $319.4 for the year
ended December 31, 1994 and by an increase of .73% in average yields on average
interest-earning assets to 8.72% for 1995 compared to 7.99% for 1994. This
increase was due to a general rising rate environment during 1995. Average
interest-earning assets were impacted by a 9.3% increase in average loans and
leases and a 13.4% increase in average taxable investment securities. The
positive impact to net interest income was partially offset by the increase of
$30.9 million or 11.4% in average interest-bearing liabilities to $301.1 million
for the year ended December 31, 1995 from $270.2 million for the year ended
December 31, 1994 and an increase in the rate paid on average interest-bearing
liabilities of .88% to 4.27% for 1995 from 3.39% for 1994. Average
interest-bearing liabilities increased primarily due to an increase of $35.0
million or 86.4% in money market deposit accounts resulting from marketing a new
money market product that the Company featured as its prime interest-bearing
deposit account. This increase partially resulted in a decrease of $12.0 million
in the savings and time deposit accounts between the periods. The Company
utilized increased FHLB advances of $5.4 million to fund a portfolio of
fixed-rate residential real estate loans. Securities sold under repurchase
agreements increased $5.9 million or 25.1% due to commercial customer demand. As
a result of greater increases in the rates paid on average interest-bearing
liabilities than the increase in yields on average interest-earning assets, the
net interest spread was reduced .15% to 4.45% for 1995 from 4.60% for 1994. Net
interest margin was not impacted by the decrease in spread due to the net
increase in average interest-earning assets.
Net interest income for 1994 increased $1.5 million or 10.1% to $16.4
million from $14.9 for pro forma 1993. Net interest income was positively
impacted by an increase of $22.0 million or 7.4% in average interest-
23
<PAGE>
earning assets to $319.4 million for the year ended December 31, 1994 from
$297.4 million for the pro forma year ended December 31, 1993 and offset by a
decrease of .06% in average yields on average interest-earning assets to 7.99%
for 1994 from 8.05% for pro forma 1993. Average interest-earning assets were
impacted by a 13.3% increase in average loans and by a 7.4% decrease in average
taxable investment securities. The net positive impact to net interest income
was partially offset by the increase of $8.6 million or 3.3% increase in average
interest-bearing liabilities to $270.2 million at December 31, 1994 from $261.6
for the pro forma year ended December 31, 1993 and enhanced by a decrease in the
rate paid on average interest-bearing liabilities of .06% to 3.39% for 1994 from
3.45% for pro forma 1993. Average interest-bearing liabilities increased
primarily due to an increase of $11.0 million or 88.0% in securities sold under
repurchase agreements resulting from increased marketing of this product. Net
interest spread did not change from 1993 to 1994. Net interest margin increased
from 5.01% in 1993 to 5.12% in 1994 due to the net increase in average
interest-earning assets.
The following table presents the changes in net interest income by volume
and rate and the total thereof for the periods indicated. Changes in net
interest income due to both volume and rate have been included in changes due to
rate.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1996 VS. 1995 1995 VS. 1994
--------------------------------------- ---------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
--------------------------------------- ---------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold..................... $ (1) $ (36) $ (37) $ 246 $ 190 $ 436
Taxable investment securities.......... 458 38 496 517 589 1,106
Non-taxable investment securities...... 7 (3) 4 69 (7) 62
Loans and leases....................... 968 177 1,145 1,956 2,130 4,086
----------- ----- ----------- ----------- ----------- -----------
Total interest-earning assets........ $ 1,432 $ 176 $ 1,608 $ 2,788 $ 2,902 $ 5,690
----------- ----- ----------- ----------- ----------- -----------
----------- ----- ----------- ----------- ----------- -----------
INTEREST-BEARING LIABILITIES:
Deposits -- interest-bearing:
Interest-bearing demand deposits..... $ 3 $ (22) $ (19) $ (32) $ 7 $ (25)
Savings.............................. (84) (30) (114) (259) 7 (252)
Money market......................... 839 50 889 919 1,325 2,244
Time................................. (193) 252 59 (42) 984 942
----------- ----- ----------- ----------- ----------- -----------
Total interest-bearing deposits.... 565 250 815 586 2,323 2,909
Federal funds purchased and securities
sold under repurchase agreements...... (62) 32 (30) 210 402 612
FHLB advances.......................... 225 -- 225 312 17 329
Notes payable.......................... (149) 1 (148) (36) (125) (161)
----------- ----- ----------- ----------- ----------- -----------
Total interest-bearing liabilities... $ 579 $ 283 $ 862 $ 1,072 $ 2,617 $ 3,689
----------- ----- ----------- ----------- ----------- -----------
----------- ----- ----------- ----------- ----------- -----------
CHANGE IN NET INTEREST INCOME............ $ 853 $ (107) $ 746 $ 1,716 $ 285 $ 2,001
----------- ----- ----------- ----------- ----------- -----------
----------- ----- ----------- ----------- ----------- -----------
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994 VS. 1993 (1)
---------------------------------------
INCREASE (DECREASE)
DUE TO CHANGE IN
---------------------------------------
VOLUME RATE TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold..................... $ (62) $ 19 $ (43)
Taxable investment securities.......... (333) (307) (640)
Non-taxable investment securities...... 135 (75) 60
Loans and leases....................... 2,506 (297) 2,209
----------- ----- -----------
Total interest-earning assets........ $ 2,246 $ (660) $ 1,586
----------- ----- -----------
----------- ----- -----------
INTEREST-BEARING LIABILITIES:
Deposits -- interest-bearing:
Interest-bearing demand deposits..... $ 10 $ (84) $ (74)
Savings.............................. (30) (112) (142)
Money market......................... (152) 12 (140)
Time................................. 189 (257) (68)
----------- ----- -----------
Total interest-bearing deposits.... 17 (441) (424)
Federal funds purchased and securities
sold under repurchase agreements...... 334 130 464
FHLB advances.......................... 25 (2) 23
Notes payable.......................... (47) 108 61
----------- ----- -----------
Total interest-bearing liabilities... $ 329 $ (205) $ 124
----------- ----- -----------
----------- ----- -----------
CHANGE IN NET INTEREST INCOME............ $ 1,917 $ (455) $ 1,462
----------- ----- -----------
----------- ----- -----------
</TABLE>
- --------------------------
(1) Combines Signal and Goodhue.
24
<PAGE>
The following table presents, for the periods and as of the dates indicated,
information regarding United's average balance sheet. Ratio, yield and rate
information are based on average daily balances during the six months ended June
30, 1996 and 1995 and the years ended December 31, 1995, 1994 and 1993.
Non-accrual loans are included in the average balances for loans and leases,
net, for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Federal funds sold........ $ 11,121 $ 294 5.33% $ 11,144 $ 331 5.99%
Taxable investment
securities............... 93,390 2,754 5.95% 77,635 2,258 5.87%
Non-taxable investment
securities(2)............ 8,306 213 5.17% 8,054 209 5.23%
Loans and leases(3)....... 267,237 13,190 9.95% 247,378 12,045 9.82%
--------- --------- --------- ---------
Total interest-earning
assets................. 380,054 16,451 8.73% 344,211 14,843 8.70%
Noninterest-earning
assets................... 42,417 41,226
--------- ---------
Total assets............ $ 422,471 $ 385,437
--------- ---------
--------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Deposits --
interest-bearing:
Interest bearing demand
deposits............... $ 33,640 $ 176 1.06% $ 33,201 195 1.18%
Savings................. 30,075 288 1.93% 37,990 402 2.13%
Money market............ 102,588 2,256 4.43% 63,560 1,367 4.34%
Time.................... 108,570 3,015 5.60% 116,168 2,956 5.13%
--------- --------- --------- ---------
Total interest-bearing
deposits............. 274,873 5,735 4.21% 250,919 4,920 3.95%
Federal funds purchased
and securities sold under
repurchase agreements.... 25,797 635 4.96% 28,457 665 4.71%
FHLB advances............. 12,000 362 6.08% 4,541 137 6.08%
Notes payable............. 3,941 143 7.32% 8,053 291 7.29%
--------- --------- --------- ---------
Total interest-bearing
liabilities............ 316,611 6,875 4.38% 291,970 6,013 4.15%
Noninterest-bearing
liabilities.............. 69,163 64,818
--------- ---------
Total liabilities....... 385,774 356,788
Stockholders' equity...... 36,697 28,649
--------- ---------
Total liabilities and
stockholders' equity... $ 422,471 $ 385,437
--------- ---------
--------- ---------
Net interest income....... $ 9,576 $ 8,830
Net interest spread....... 4.35% 4.55%
Net interest margin....... 5.08% 5.17%
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1995 1994 1993(1)
---------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(PRO FORMA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Federal funds sold........ $ 13,011 $ 761 5.85% $ 7,404 $ 325 4.39% $ 8,917 $ 368 4.13%
Taxable investment
securities............... 83,441 4,949 5.93% 73,555 3,843 5.22% 79,450 4,483 5.64%
Non-taxable investment
securities(2)............ 7,924 406 5.12% 6,593 344 5.22% 4,473 284 6.35%
Loans and leases(3)....... 253,398 25,090 9.90% 231,809 21,004 9.06% 204,553 18,795 9.19%
-------- -------- -------- -------- -------- --------
Total interest-earning
assets................. 357,774 31,206 8.72% 319,361 25,516 7.99% 297,393 23,930 8.05%
Noninterest-earning
assets................... 41,798 39,978 44,722
-------- -------- --------
Total assets............ $399,572 $359,339 $342,115
-------- -------- --------
-------- -------- --------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Deposits --
interest-bearing:
Interest bearing demand
deposits............... $ 32,679 $ 364 1.11% $ 35,636 $ 389 1.09% $ 34,895 $ 463 1.33%
Savings................. 34,441 818 2.38% 45,436 1,070 2.35% 46,603 1,212 2.60%
Money market............ 75,567 3,307 4.38% 40,538 1,063 2.62% 46,413 1,203 2.59%
Time.................... 113,905 5,949 5.22% 114,863 5,007 4.36% 110,746 5,075 4.58%
-------- -------- -------- -------- -------- --------
Total interest-bearing
deposits............. 256,592 10,438 4.07% 236,473 7,529 3.18% 238,657 7,953 3.33%
Federal funds purchased
and securities sold under
repurchase agreements.... 29,343 1,454 4.96% 23,487 842 3.58% 12,510 378 3.03%
FHLB advances............. 8,351 504 6.04% 3,000 175 5.83% 2,573 152 5.91%
Notes payable............. 6,794 452 6.65% 7,216 613 8.50% 7,893 552 6.99%
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities............ 301,080 12,848 4.27% 270,176 9,159 3.39% 261,633 9,035 3.45%
Noninterest-bearing
liabilities.............. 67,354 62,778 54,901
-------- -------- --------
Total liabilities....... 368,434 332,954 316,534
Stockholders' equity...... 31,138 26,385 25,581
-------- -------- --------
Total liabilities and
stockholders' equity... $399,572 $359,339 $342,115
-------- -------- --------
-------- -------- --------
Net interest income....... $18,358 $16,357 $14,895
Net interest spread....... 4.45% 4.60% 4.60%
Net interest margin....... 5.13% 5.12% 5.01%
</TABLE>
- ----------------------------------
(1) Combines Signal and Goodhue.
(2) Yields are calculated using stated rates, not tax-equivalent rates.
(3) Includes loan fees $546,942 and $417,720 for the six months ended June 30,
1996 and 1995, respectively and $883,416, $806,104 and $807,639 for the
years ended December 31, 1995, 1994 and pro forma 1993, respectively.
25
<PAGE>
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses was $95,000 for the six months ended
June 30, 1996, an increase of $75,000 over the provision for loan and lease
losses of $20,000 for the six months ended June 30, 1995. The provision for loan
and lease losses was $61,000 for the year ended December 31, 1995, a decrease of
$173,000 or 73.9% from the year ended December 31, 1994 amount. The provision
for loan and lease losses was $234,000 for the year ended December 31, 1994, a
decrease of $371,000 or 61.3% from the pro forma provision for loan and lease
losses of $605,000 for the year ended December 31, 1993. Annual fluctuations in
the provision for loan and lease losses result from management's regular
assessment of the adequacy of the allowance for loan and lease losses. See
"Allowance for Loan and Lease Losses" below. The amount of loan and lease loss
provision to be taken in future periods will depend on management's assessment
of the adequacy of the allowance for loan and lease losses in relation to the
entire loan portfolio.
NONINTEREST INCOME
The following table presents the components of noninterest income for the
periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------- ---------------------------------
1996 1995 1995 1994 1993 (1)
--------- --------- --------- --------- -----------
(PRO FORMA)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges and other fees................... $ 1,612 $ 1,414 $ 2,923 $ 2,963 $ 3,097
Net investment securities gains (losses)......... -- (18) (32) 79 285
Earnings on cash surrender value life
insurance....................................... 198 194 377 462 385
Gain on sale of assets........................... 293 240 599 333 38
Interest on tax refunds.......................... 277 -- -- -- --
Other............................................ 10 108 52 -- 142
--------- --------- --------- --------- -----------
$ 2,390 $ 1,938 $ 3,919 $ 3,837 $ 3,947
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</TABLE>
- ------------------------
(1) Combines Signal and Goodhue.
Noninterest income consists mainly of service charges on deposit accounts
and other service fees, earnings on cash surrender value of life insurance and
gain on sale of assets. Noninterest income was $2.4 million for the six months
ended June 30, 1996, an increase of $452,000 or 23.3% over noninterest income of
$1.9 million for the six months ended June 30, 1995. Approximately $200,000 of
the increase was primarily due to increased service charges and overdraft fees.
The remaining increase was primarily due to the interest received on the tax
refunds resulting from the favorable determination of a tax lawsuit for the
years 1979 through 1983. Noninterest income was $3.9 million for the year ended
December 31, 1995, an increase of $82,000 or 2.1% over the year ended December
31, 1994. This increase was primarily due to an increase of $266,000 in gain on
sales of assets offset by a reduction of $111,000 in net investment securities
gains (losses) from a gain of $79,000 for the year ended December 31, 1994 to a
loss of $32,000 for the year ended December 31, 1995 and a decrease of $85,000
in earnings on cash surrender value of life insurance. Noninterest income was
$3.8 million for the year ended December 31, 1994, a decrease of $110,000 or
2.8% from pro forma noninterest income of $3.9 million for the year ended
December 31, 1993. This decrease was due primarily to the reduction in net
investment securities gains from $285,000 for the pro forma year ended December
31, 1993 to $79,000 for the year ended December 31, 1994, and a reduction of
$134,000 in service charges and other fees, and offset by an increase of
$295,000 in gain on sale of assets.
26
<PAGE>
NONINTEREST EXPENSE
The following table presents the components of noninterest expense for the
periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------- ---------------------------------
1996 1995 1995 1994 1993 (1)
--------- --------- --------- --------- -----------
(PRO FORMA)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits................. $ 4,965 $ 4,519 $ 9,292 $ 8,510 $ 7,642
Occupancy...................................... 445 485 1,208 1,060 958
Depreciation................................... 755 588 1,253 1,216 899
Amortization of intangibles.................... 378 412 824 562 562
FDIC assessment................................ 3 339 351 644 690
Data processing................................ 374 279 497 543 488
Professional fees.............................. 190 124 297 468 865
Other real estate expenses..................... 6 9 9 507 414
Other.......................................... 1,440 1,453 2,800 2,621 2,477
--------- --------- --------- --------- -----------
$ 8,556 $ 8,208 $ 16,531 $ 16,131 $ 14,995
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</TABLE>
- ------------------------
(1) Combines Signal and Goodhue.
Noninterest expense was $8.6 million for the six months ended June 30, 1996,
an increase of $348,000 or 4.2% over noninterest expense of $8.2 million for the
six months ended June 30, 1995. Noninterest expense was $16.5 million for the
year ended December 31, 1995, an increase of $400,000 or 2.5% over noninterest
expense of $16.1 million for the year ended December 31,1994. Noninterest
expense was $16.1 million for the year ended December 31,1994, an increase of
$1.1 million or 7.3% over noninterest expense of $15.0 million for the pro forma
year ended December 31, 1993.
Salaries and employee benefits expense was $5.0 million for the six months
ended June 30, 1996, an increase of $446,000 or 9.9% over salaries and employee
benefits expense of $4.5 million for the six months ended June 30, 1995. This
increase was due primarily to increased staffing and scheduled salary
adjustments as well as an increased bonus accrual.
Salaries and employee benefits expense was $9.3 million for the year ended
December 31, 1995, an increase of $782,000 or 9.2% over salaries and employee
benefits expense of $8.5 million for the year ended December 31, 1994. This
increase was due to increased staffing and scheduled salary adjustments.
Salaries and employee benefits expense was $8.5 million for the year ended
December 31, 1994, an increase of $868,000 or 11.4% over salaries and employee
benefits expense of $7.6 million for the pro forma year ended December 31, 1993.
This increase was due primarily to the installation of a formula based incentive
plan and scheduled salary adjustments.
Occupancy expense was $445,000 for the six months ended June 30, 1996, a
decrease of $40,000 or 8.2% from occupancy expense of $485,000 for the six
months ended June 30, 1995. This decrease was due to the receipt of property tax
refunds for certain property tax valuations that had been contested. Occupancy
expense was $1.2 million for the year ended December 31, 1995, an increase of
$148,000 or 13.5% over occupancy expense of $1.1 million for the year ended
December 31, 1994. This increase was due to additional space leased in 1995 to
house the operations of the data processing subsidiary, Unitech. Occupancy
expense was $1.1 million for the year ended December 31, 1994, an increase of
$102,000 or 10.2% over occupancy expense of $1.0 million for the pro forma year
ended December 31, 1993. This increase was due to additional space leased in
1994 to house the operations of the holding company.
Depreciation expense was $755,000 for the six months ended June 30, 1996, an
increase of $167,000 or 28.4% over depreciation expense of $588,000 for the six
months ended June 30, 1995. This increase was due to the acceleration of the
amortization of leasehold improvements resulting from terminating a lease for
27
<PAGE>
Signal Bank's operations center in the Signal Hills Center effective January 31,
1997. Depreciation expense was $1.3 million for the year ended December 31,
1995, an increase of $37,000 or 3.1% over depreciation expense of $1.2 million
for the year ended December 31, 1994. This increase was due to the amortization
of leasehold improvements relating to additional space leased and depreciation
of equipment purchased. Depreciation expense was $1.2 million for the year ended
December 31, 1994, an increase of $317,000 or 35.3% over depreciation expense of
$899,000 for the pro forma year ended December 31, 1993. This increase was due
primarily to additional computer equipment purchased in 1994 to process data for
both Banks.
Historically, intangible amortization has related to goodwill and other
intangibles resulting from the merger of Signal with Goodhue. Amortization of
intangibles expense was $378,000 for the six months ended June 30, 1996, a
decrease of $34,000 or 8.3% from amortization of intangibles expense of $412,000
for the six months ended June 30, 1995. Amortization of intangibles expense was
$824,000 for the year ended December 31, 1995, an increase of $262,000 or 46.6%
over amortization of intangibles expense of $562,000 for the year ended December
31, 1994. The fluctuation between the six month and twelve month periods is due
to the difference in amortization periods assigned to various assets and
liabilities which were adjusted to fair market value at the time of the merger.
Amortization of intangibles expense was $562,000 for the year ended December 31,
1994 equal to the amortization of intangibles expense of $562,000 for the pro
forma year ended December 31, 1993. Due to purchase accounting and resulting
goodwill, United expects amortization of intangible expense to increase after
the Park Acquisition by approximately $1.4 million annually.
FDIC assessment expense was $3,000 for the six months ended June 30, 1996, a
decrease of $336,000 or 99.1% from FDIC assessment expense of $339,000 for the
six months ended June 30, 1995. This reduction was due to the FDIC lowering the
assessment rate to $750 per Bank per quarter from 4 cents per $100 of deposits.
FDIC assessment expense was $351,000 for the year ended December 31, 1995, a
decrease of $293,000 or 45.5% from FDIC assessment expense of $644,000 for the
year ended December 31, 1994. This decrease was due to the FDIC lowering the
assessment rate from 23 cents per $100 of deposits to 4 cents per $100 of
deposits. FDIC assessment expense was $644,000 for the year ended December 31,
1994, a decrease of $46,000 or 6.7% from FDIC assessment expense of $690,000 for
the pro forma year ended December 31, 1993. This decrease was due to a reduction
in the FDIC assessment rate from 26 cents per $100 of deposits to 23 cents per
$100 of deposits in 1994. The increase in the FDIC assessment rate resulting
from the merger of the Bank Insurance Fund and the Savings Association Insurance
Fund in the amount of 1.29 cents per $100 of deposits for each of the years in
the 3-year period commencing in 1997, will not have a material impact on
United's financial results.
Professional fees expense was $190,000 for the six months ended June 30,
1996, an increase of $66,000 or 53.2% over professional fees expense of $124,000
for the six months ended June 30, 1995. This increase is primarily due to costs
associated with the Park Acquisition. Professional fees expense was $297,000 for
the year ended December 31, 1995, a decrease of $171,000 or 36.5% from
professional fees expense of $468,000 for the year ended December 31, 1994. This
decrease was primarily due to the decrease in nonrecurring merger expenses
associated with the Goodhue merger. Professional fees expense was $468,000 for
the year ended December 31, 1994, a decrease of $397,000 or 45.9% from
professional fees expense of $865,000 for the pro forma year ended December 31,
1993. This decrease was due to the decreased use of outside consultants in
Goodhue Bank and the decrease in nonrecurring merger related expenses associated
with the Goodhue merger.
Other real estate expenses are immaterial for the six months ended June 30,
1996 and 1995 and the year ended December 31, 1995 due to little activity with
respect to other real estate owned. Other real estate expenses for the years
ended December 31, 1994 and pro forma 1993 reflect loss on disposal of the other
real estate owned and associated expenses.
INCOME TAX EXPENSE
Income tax expense was $1.0 million for the six months ended June 30, 1996,
an increase of $137,000 or 15.3% over income tax expense of $897,000 for the six
months ended June 30, 1995. The effective tax rate
28
<PAGE>
decreased from 35.3% for the six months ended June 30, 1995 to 31.2% for the six
months ended June 30, 1996 primarily due to the favorable determination of a tax
lawsuit for the years 1979 through 1983. Income tax expense was $2.1 million for
the year ended December 31, 1995, an increase of $660,000 or 47.3% over income
tax expense of $1.4 million for the year ended December 31, 1994. The effective
tax rate decreased from 36.5% for the year ended December 31, 1994 to 36.2% for
the year ended December 31, 1995. Income tax expense was $1.4 million for the
year ended December 31, 1994, an increase of $258,000 or 22.7% over income tax
expense of $1.1 million for the pro forma year ended December 31, 1993. The
effective tax rate increased from the 1993 pro forma ratio of 35.1% to 36.5% for
the year ended December 31, 1994. United expects its effective tax rate to
increase after the Park Acquisition due primarily to the nondeductibility of the
goodwill amortization. The effective tax rate for the pro forma December 31,
1995 statement of income was 44.6%. The effective tax rate for the pro forma
June 30, 1996 statement of income was 38.9%. This decrease was due to the
favorable determination of a tax lawsuit for the years 1979 through 1983 and
resulting non-taxable income.
FINANCIAL CONDITION
LOANS AND LEASES
United's lending activities are presently guided by the general loan
policies established by the subsidiaries' Boards of Directors. United is
establishing a system-wide credit policy to assist local management and to
maintain system-wide credit standards. United has continued its strategy to seek
out small business and leasing opportunities to expand its loan portfolio. Total
loans were $276.0 million at June 30, 1996, an increase of $10.1 million or 3.8%
over the December 31, 1995 amount. Total loans were $265.9 million at December
31, 1995, an increase of $18.9 million or 7.7% over the December 31, 1994
amount. Total loans were $247.0 million at December 31, 1994, an increase of
$27.0 million or 12.3% over the pro forma December 31, 1993 amount of $220.0
million.
The following table presents a summary of United's loan portfolio as of June
30, 1996 and December 31, 1995, 1994, pro forma 1993 and historical 1992 and
1991:
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------
AMOUNT PERCENT
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Commercial and
agricultural............ $162,438 58.9%
Residential real
estate.................. 66,038 23.9
Consumer................. 35,940 13.0
Leases................... 11,539 4.2
-------- --------
Totals loans and
leases................ $275,955 100.0%
-------- --------
-------- --------
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993 (1) 1992 (2) 1991 (2)
------------------ ------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(PRO FORMA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
agricultural............ $149,859 56.3% $143,227 58.0% $112,790 51.3% $ 67,831 72.2% $ 57,997 67.9%
Residential real
estate.................. 69,577 26.2 58,828 23.8 66,834 30.4 13,539 14.4 14,373 16.8
Consumer................. 35,897 13.5 35,655 14.4 33,920 15.4 12,581 13.4 13,085 15.3
Leases................... 10,572 4.0 9,271 3.8 6,498 2.9 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Totals loans and
leases................ $265,905 100.0% $246,981 100.0% $220,042 100.0% $ 93,951 100.0% $ 85,455 100.0%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
- ----------------------------------
(1) Combines Signal and Goodhue
(2) Includes the financial information of Signal only
The loan mix in United's portfolio indicates the trend toward commercial and
agricultural loans. This trend has resulted from a focus on growing the
commercial loan portfolio. United expects this trend to continue with the
addition of Park Bank.
COMMERCIAL AND AGRICULTURAL LOANS
Commercial and agricultural loans principally include loans to
manufacturing, wholesale, retail and agricultural businesses, including loans
secured by commercial real estate. Commercial loans are made on the financial
strength and repayment ability of the borrower as well as the collateral
securing the loans. As of June 30, 1996, commercial loans represented the
largest class of loans at $162.4 million or 58.9% of total loans up from $149.9
million or 56.3% of total loans at December 31, 1995.
29
<PAGE>
RESIDENTIAL REAL ESTATE LOANS
Residential real estate loans principally include residential real estate
first mortgages and home equity lines of credit. As of June 30, 1996,
residential real estate loans were $66.0 million or 23.9% of total loans down
from $69.6 million or 26.2% of total loans at December 31, 1995.
CONSUMER
Consumer loans include automobile and home improvement loans, personal lines
of credit and overdrafts. As of June 30, 1996, consumer loans were $35.9 million
or 13.0% of total loans which was little changed from $35.9 million or 13.5% of
total loans at December 31, 1995.
LEASES
Leases principally include leases on equipment to manufacturing, retail and
wholesale businesses. As of June 30, 1996, leases were $11.5 million or 4.2% of
total loans up from $10.6 million or 4.0% of total loans at December 31, 1995.
MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF LOANS
The following table presents a distribution of the maturity of loans and,
for those loans due after one year, the sensitivity of loans to interest rate
changes as of June 30, 1996. The amounts exclude residential real estate loans,
consumer loans and leases.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996, MATURING IN
------------------------------------------------
ONE YEAR ONE TO OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
---------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and agricultural....................................... $ 128,277 $ 27,233 $ 6,928 $ 162,438
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY
--------------------------
FIXED RATE VARIABLE RATE
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
Commercial and agricultural loans due
after one year with:.................................................................. $ 25,996 $ 8,165
----------- ------
----------- ------
</TABLE>
30
<PAGE>
NONPERFORMING ASSETS
United reports all loans which are 90 days or more past due as nonaccrual
loans, excluding those loans which in management's opinion are well
collateralized or exhibit other characteristics which make them fully
collectible. United does not return a loan to accrual status until it is brought
current with respect to both principal and interest and future principal
payments are no longer in doubt. When a loan is placed on nonaccrual status, any
previously accrued and uncollected interest is reversed. United adopted FASB
Statement No. 114, Accounting by Creditors for Impairment of a Loan on January
1, 1995. United defines a loan as impaired when it is probable that United will
be unable to collect all principal and interest payments due in accordance with
the terms of the loan agreement. The effect of adopting Statement No. 114 was
not significant to United.
The following table presents the nonperforming assets as of June 30, 1996
and December 31, 1995, 1994, pro forma 1993, and historical 1992 and 1991:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------------------------------
1996 1995 1994 1993(1) 1992(2) 1991(2)
----------- --------- --------- --------- --------- ---------
(PRO FORMA)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans......................................... $ 721 $ 403 $ 459 $ 722 $ 61 $ 1,482
Accrual loans which are past due 90 days or more as to
principal or interest................................... 338 249 104 573 102 364
Troubled debt restructurings............................. 134 100 111 117 264 479
----------- --------- --------- --------- --------- ---------
Total nonperforming loans and leases................... 1,193 752 674 1,412 427 2,325
Other real estate owned.................................. -- -- 355 1,182 1,223 810
----------- --------- --------- --------- --------- ---------
Total nonperforming assets............................... $ 1,193 $ 752 $ 1,029 $ 2,594 $ 1,650 $ 3,135
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Total nonperforming loans and leases/total loans and
leases.................................................. .43% .28% .27% .64% .45% 2.72%
Total nonperforming assets/total assets.................. .28% .18% .27% .75% 1.06% 2.06%
</TABLE>
- ------------------------
(1) Combines Signal and Goodhue
(2) Includes the financial information of Signal only
Nonperforming loans as a percentage of total loans and leases outstanding
increased as of June 30, 1996 to .43% compared with .28% and .27% as of December
31, 1995 and 1994, respectively. This increase was primarily due to an increase
in nonaccrual loans of $318,000 as of June 30, 1996. This increase was largely
the result of one new loan of $207,000 being placed on nonaccural pending the
sale of a business which occurred in August, 1996. The substantial majority of
the increase in nonperforming loans and leases in 1993 relates to the pro forma
inclusion of the Goodhue Bank. The overall improvement over the periods
presented is largely due to the Banks' increased monitoring of the loan
portfolios and collection efforts as well as the strengthening of the economy.
The effect of the nonaccrual of interest on these nonperforming loans and leases
was not significant to the results of operations during the periods. The
combined nonperforming loans of United and Park Bank approximate $4.0 million as
of June 30, 1996. The pro forma total nonperforming loans and leases/total loans
and leases would be 1.01% and the pro forma total nonperforming assets/total
assets would be .61% as of June 30, 1996 on a pro forma basis combining the
nonperforming loans and assets of United and Park Bank.
31
<PAGE>
ALLOWANCE FOR LOAN AND LEASE LOSSES
The current level of the allowance for loan and lease losses is a result of
management's assessment of the risks within the portfolio based on the
information revealed in the credit review processes. United utilizes a
risk-rating system on all loans and a quarterly review and reporting process
which results in the calculation of the guideline reserves based on the risk
within the portfolio. This assessment of risk takes into account the composition
of the loan portfolio, previous loan loss experience, current economic
conditions and other factors that in management's opinion deserve special
recognition.
The following table presents a summary of United's allowance for loan and
lease losses for the periods shown:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------------
1996 1995 1995 1994 1993 (1) 1992 (2) 1991 (2)
--------- --------- --------- --------- ----------- ----------- -----------
(PRO FORMA)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning of period.... $ 2,899 $ 2,856 $ 2,856 $ 2,725 $ 2,766 $ 2,193 $ 1,195
Charge-offs:
Commercial and agricultural... 146 31 167 176 810 1,578 943
Residential real estate....... -- -- -- 15 25 -- 6
Consumer...................... 142 35 135 196 109 83 162
Leases........................ 7 24 35 61 26 -- --
--------- --------- --------- --------- ----------- ----------- -----------
Total charge-offs........... 295 90 337 448 970 1,661 1,111
--------- --------- --------- --------- ----------- ----------- -----------
Recoveries:
Commercial and agricultural... 202 88 214 212 215 342 68
Residential real estate....... -- -- 1 5 5 32 12
Consumer...................... 89 36 77 127 104 41 29
Leases........................ -- 18 27 1 -- -- --
--------- --------- --------- --------- ----------- ----------- -----------
Total recoveries............ 291 142 319 345 324 415 109
--------- --------- --------- --------- ----------- ----------- -----------
Net charge-offs (recoveries).... 4 (52) 18 103 646 1,246 1,002
Provision for loan and lease
losses......................... 95 20 61 234 605 488 2,000
--------- --------- --------- --------- ----------- ----------- -----------
Balance, end of period.......... $ 2,990 $ 2,928 $ 2,899 $ 2,856 $ 2,725 $ 1,435 $ 2,193
--------- --------- --------- --------- ----------- ----------- -----------
--------- --------- --------- --------- ----------- ----------- -----------
Net charge-offs
(recoveries)/average loans
outstanding.................... 0.00% (0.02%) 0.01% 0.04% 0.32 % 1.42 % 1.12 %
Allowance for loan and lease
losses/total loans and
leases......................... 1.08% 1.14% 1.09% 1.16% 1.24 % 1.53 % 2.57 %
Nonperforming loans and
leases/total loans and
leases......................... 0.43% 0.34% 0.28% 0.27% 0.64 % 0.45 % 2.72 %
Allowance for loan and lease
losses/ nonperforming loans and
leases......................... 250.63% 339.28% 385.51% 423.74% 192.99 % 336.07 % 94.32 %
</TABLE>
- ------------------------------
(1) Combines Signal and Goodhue.
(2) Includes the financial information of Signal only.
32
<PAGE>
ALLOCATED ALLOWANCE FOR LOAN AND LEASE LOSSES
While the allowance for loan and lease losses is available to absorb credit
losses in the entire portfolio, the table below presents an estimate of the
allowance for loan and lease losses allocated by loan type. The unallocated
portion of the allowance for loan or lease losses represents allowance available
for the entire portfolio as well as reserves identified for qualitative factors,
unfunded commitments, and letters of credit. In 1993, management changed the
methodology of allocating the allowance for loan and lease losses. Prior to
1993, the allowance was allocated primarily based on the percentage of loan type
to total loans applied to the calculated allowance for loan and lease losses. In
1993, management enhanced the analysis of the adequacy of the allowance for loan
and lease losses by allocating specific reserves to specific criticized loans,
an allocation to the remaining criticized loans, an allocation based on
historical loss experience and a specific allocation to the lease portfolio.
This change in allocation reflects the decrease in allocation to residential
real estate loans and the increase in the unallocated portion of the allowance.
Although the residential real estate loans approximate twenty-five percent of
the loan portfolio, actual net charge-offs have been minimal, hence a minimal
allocation to the residential real estate portfolio. A significant portion of
the allowance for loan and lease losses is allocated to the commercial and
agriculture loan portfolios due to their higher degree of risk as well as their
historical loan loss experience.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------
JUNE 30, 1996 1995 1994 1993 (1) 1992 (2) 1991 (2)
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(PRO FORMA)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
agricultural... $1,527 58.9% $1,718 56.3% $1,786 58.0% $1,263 51.3% $ 997 72.2% $1,650 67.9%
Residential
real estate... 8 23.9 14 26.2 15 23.8 272 30.4 236 14.4 239 16.8
Consumer....... 225 13.0 212 13.5 185 14.4 333 15.4 191 13.4 275 15.3
Leases......... 210 4.2 230 4.0 190 3.8 199 2.9 -- -- -- --
Unallocated.... 1,020 -- 725 -- 680 -- 658 -- 11 -- 29 --
------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Total........ $2,990 100.0% $2,899 100.0% $2,856 100.0% $2,725 100.0% $1,435 100.0% $2,193 100.0%
------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
</TABLE>
- ------------------------------
(1) Combines Signal and Goodhue.
(2) Includes the financial information of Signal only.
33
<PAGE>
INVESTMENT SECURITIES
United's investment portfolio is managed to meet United's liquidity needs
while maximizing investment income. Additionally, management augments the
quality of the loan portfolio by maintaining a high quality investment portfolio
oriented toward U.S. Treasury securities and U.S. government agency securities.
The portfolio also provides the opportunity to structure maturities and
repricing time tables in a flexible manner and to meet applicable requirements
for pledging securities in connection with deposits of states and political
subdivisions and securities sold under repurchase agreements. The portfolio is
comprised of U.S. Treasury securities, U.S. government agency instruments,
mortgage-backed securities, obligations of states and political subdivisions and
a modest amount of equity securities including Federal Reserve Stock and FHLB
stock. Federal funds sold are additional investments which are not classified as
investment securities. All investment securities are classified as available for
sale and recorded at fair value. Unrealized gains or losses, net of the deferred
tax effect, are reported as increases or decreases in stockholders' equity.
The following table presents a summary of United's investment portfolio as
of June 30, 1996 and December 31, 1995, 1994 and pro forma 1993:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
JUNE 30, 1996 1995 1994 1993 (1)
---------------------- ---------------------- ------------------------ ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ----------- --------- ----------- ----------- ----------- ----------- -----------
(PRO FORMA)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S.
government agencies......... $ 59,255 56.7% $ 60,135 59.0% $ 49,122 58.9% $ 40,397 48.9%
Obligations of states and
political subdivisions...... 10,912 10.4 7,757 7.6 8,023 9.6 5,490 6.7
Mortgage-backed securities... 32,281 30.9 31,956 31.4 23,796 28.5 30,682 37.1
Equity securities............ 2,075 2.0 1,989 2.0 2,493 3.0 6,041 7.3
--------- ----- --------- ----- ----------- ----- ----------- -----
Total investment
securities................ $ 104,523 100.0% $ 101,837 100.0% $ 83,434 100.0% $ 82,610 100.0%
--------- ----- --------- ----- ----------- ----- ----------- -----
--------- ----- --------- ----- ----------- ----- ----------- -----
</TABLE>
- ------------------------------
(1) Combines Signal and Goodhue.
Investment securities were $104.5 million at June 30, 1996, an increase of
$2.7 million or 2.7% over the December 31, 1995 amount. During 1996, management
placed greater emphasis on the purchase of nontaxable municipal securities due
to the favorable tax treatment of these securities, making their tax-equivalent
yields more attractive than the yield on taxable U.S. government securities.
Investment securities were $101.8 million at December 31, 1995, an increase of
$18.4 million or 22.1% over the December 31, 1994 amount. During 1995,
management was faced with excess deposits to invest over loan demand. Management
invested amounts in U.S. government securities necessary to maintain sufficient
pledgeable securities for the securities sold under repurchase agreements and
invested the remaining funds into mortgage-backed securities to increase yield.
Investment securities were $83.4 million at December 31, 1994, an increase of
$824,000 or 1.0% over the pro forma December 31, 1993 amount of $82.6 million.
During 1994, management altered the mix of the investment portfolio, decreasing
the mortgage-backed securities portfolio and increasing the U.S. government
securities portfolio to achieve the desired asset/liability structure. The
investment portfolio as a percent of total assets has remained fairly stable at
approximately 24%, except for 1994 when it fell to approximately 22% due to high
loan demand.
34
<PAGE>
MATURITY OF DEBT INVESTMENT SECURITIES
As of June 30, 1996, debt investment securities had the following maturity
and yield characteristics:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996 MATURING IN
-------------------------------------------------------------------------------------------------------
OVER ONE YEAR OVER 5 YEARS
ONE YEAR OR LESS THROUGH 5 YEARS THROUGH 10 YEARS OVER 10 YEARS TOTAL
------------------- ------------------- ------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S.
government agencies........ $22,437 5.03% $35,789 6.65% $ 1,029 8.00% $ -- -- % $ 59,255 6.06%
Obligations of states and
political subdivisions
(1)........................ 551 7.48 1,881 7.60 6,675 7.63 1,805 7.89 10,912 7.66
Mortgage-backed securities
(2)........................ -- -- -- -- -- -- -- -- 32,281 6.20
Equity securities (2)....... -- -- -- -- -- -- -- -- 2,075 --
-------- --- -------- --- -------- --- -------- --- -------- ---
Total Investment
Securities............... $22,988 5.10% $37,670 6.69% $ 7,704 7.68% $ 1,805 7.89% $104,523 6.28%
-------- --- -------- --- -------- --- -------- --- -------- ---
-------- --- -------- --- -------- --- -------- --- -------- ---
</TABLE>
- ------------------------------
(1) Yields are presented on a tax-equivalent basis to reflect the tax-exempt
nature of these securities. The incremental tax rate applied is 34%.
(2) Anticipated maturities on mortgage-backed securities are not readily
determinable since they may be prepaid without penalty and equity securities
do not have stated maturity dates.
DEPOSITS
United emphasizes developing relationships with individuals and business
customers in order to increase its core deposit base. United has numerous
deposit products, including checking accounts, money market accounts, savings
accounts and certificates of deposit, designed to meet the individual needs of
its customers. The following table sets forth the distribution of United's
deposits by type as of June 30, 1996 and December 31, 1995, 1994 and pro forma
1993:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
JUNE 30, 1996 1995 1994 1993 (1)
---------------------- ---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(PRO FORMA)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand..................... $ 65,234 19.2% $ 70,872 20.8% $ 69,261 22.1% $ 61,962 21.3%
Interest-bearing demand..... 34,030 10.0 34,032 10.0 35,499 11.3 35,854 12.3
Money market accounts....... 105,997 31.2 80,034 23.5 47,109 15.1 39,408 13.5
Savings deposits............ 27,459 8.1 47,735 14.0 42,956 13.7 50,205 17.2
Time certificates of
deposit:
Less than $100,000........ 93,050 27.3 93,960 27.6 100,321 32.1 89,893 30.8
Over $100,000............. 14,455 4.2 14,090 4.1 17,801 5.7 14,268 4.9
--------- ----- --------- ----- --------- ----- --------- -----
$ 340,225 100.0% $ 340,723 100.0% $ 312,947 100.0% $ 291,590 100.0%
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
</TABLE>
- ------------------------------
(1) Combines Signal and Goodhue.
Total deposits were $340.2 million as of June 30, 1996, a decrease of
$498,000 or .1% from the December 31, 1995 amount. This decrease is normal and
seasonal. Deposits were $340.7 million as of December 31, 1995, an increase of
$27.8 million or 8.9% over the December 31, 1994 amount. Deposits were $312.9
million as of December 31, 1994, an increase of $21.3 million or 7.3% over the
December 31, 1993 pro forma amount of $291.6 million. Money market accounts have
increased due to the Banks' introduction of a new money market account product,
which has caused some customers to move their deposits from savings and time
deposit accounts to the new money market account.
35
<PAGE>
The following table presents a maturity distribution of time certificates of
deposit of $100,000 or more at June 30, 1996:
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------
(IN THOUSANDS)
<S> <C>
Time Certificates of Deposits of $100,000 or more
Three months or less................................................ $ 2,072
Over three months to six months..................................... 3,047
Over six months to twelve months.................................... 1,341
Over twelve months.................................................. 7,995
-------
Total............................................................. $ 14,455
-------
-------
</TABLE>
SHORT-TERM BORROWINGS
Borrowings with original maturities of one year or less are classified as
short-term. The following table presents a summary of United's short-term
borrowings for the six months ended June 30, 1996 and the years ended December
31, 1995, 1994 and pro forma 1993:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------------
1996 1995 1994 1993 (1)
--------- --------- --------- -----------
(PRO FORMA)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities sold under repurchase agreements
outstanding at period end.................. $ 24,308 $ 23,173 $ 27,747 $ 15,321
Weighted average rate at period end......... 4.87% 5.17% 4.22% 2.63%
Daily average outstanding for the period.... $ 24,482 $ 29,343 $ 22,854 $ 11,827
Weighted average rate for the period........ 4.97% 4.96% 3.56% 3.01%
Highest outstanding at any month end........ $ 28,324 $ 34,268 $ 31,343 $ 18,809
</TABLE>
- ------------------------
(1) Combines Signal and Goodhue.
NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings consist primarily of a term note payable
to a bank due January 3, 1999 with annual installments of $500,000 and interest
at LIBOR plus 1.80% (6.96% at June 30, 1996) and four advances from the Federal
Home Loan Bank of Des Moines due between May 12, 1997 and June 5, 1998 with
interest rates between 5.67% and 6.61%. The following table presents a summary
of United's notes payable and other borrowings as of June 30, 1996 and December
31, 1995, 1994 and pro forma 1993:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------------
1996 1995 1994 1993 (1)
--------- --------- --------- -----------
(PRO FORMA)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Line of credit to bank........................ $ 425 $ -- $ 500 $ --
Term note payable to bank..................... 3,150 3,400 8,550 7,182
FHLB advances................................. 12,000 12,000 3,000 3,000
Unsecured term notes payable to certain
individuals.................................. 371 362 362 367
Note payable to Minnesota Department of
Agriculture.................................. 151 -- -- --
--------- --------- --------- -----------
$ 16,097 $ 15,762 $ 12,412 $ 10,549
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
- ------------------------
(1) Combines Signal and Goodhue.
The advances from the FHLB were obtained to match fund certain pools of
fixed rate residential mortgage loans held in United's portfolio, and to provide
asset/liability management tools to the affiliate Banks. See "Asset/Liability
Management."
36
<PAGE>
Principal reduction on the term note payable to bank has been accelerated
due to the proceeds of two stock offerings in 1994 and 1995. The term note
payable is with Firstar. United intends to refinance this note with Firstar at a
reduced rate, at the same time financing is obtained from Firstar in connection
with the Park Acquisition. United will incur additional indebtedness of
approximately $24 million to finance the Park Acquisition. See "Acquisition of
Park."
Advances on the line of credit and the unsecured term notes payable to
certain individuals were primarily obtained to fund the working capital of CCC.
CAPITAL MANAGEMENT
Stockholders' equity as of June 30, 1996 increased $7.5 million or 24.2% to
$38.5 million from $31.0 million as of June 30, 1995. This increase was due to a
$3.7 million common stock offering occurring in the second half of 1995, the
retention of current period earnings and the net change in unrealized gains on
securities available for sale.
Stockholders' equity as of December 31, 1995 increased $9.5 million or 34.5%
to $37.0 million from $27.5 million as of December 31, 1994. This increase was
due to the retention of current year earnings, a $3.7 million common stock
offering and the net change in unrealized gains on securities available for
sale.
Stockholders' equity as of December 31, 1994 increased $780,000 or 2.9% to
$27.5 million from $26.7 million as of pro forma December 31, 1993. This
increase was due to the retention of current year earnings offset by the net
change in unrealized loss on securities available for sale.
Risk-based capital guidelines established by regulatory agencies set minimum
capital standards based on the risk associated with a financial institution's
assets. See "Supervision and Regulation -- Regulatory Capital Requirements." The
primary component of such capital standards is Tier 1 capital which is defined
as stockholders' equity less intangible assets. United has increased its Tier 1
capital since its merger with Goodhue through earnings and two common stock
offerings totaling $8.1 million. Below is a comparison of United's June 30, 1996
risk-based capital ratios on an historical basis and on a pro forma basis giving
effect to the Park Acquisition and the related equity and debt financing with
the minimum requirements for well capitalized and adequately capitalized banks,
as defined by the federal regulatory agencies' Prompt Corrective Action Rules:
<TABLE>
<CAPTION>
MINIMUM REQUIREMENTS
JUNE 30, 1996 ------------------------------
---------------------------- WELL ADEQUATELY
CAPITAL CATEGORY ACTUAL PRO FORMA CAPITALIZED CAPITALIZED
- ------------------------------------------- ----------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Tier 1 risk-based capital.................. 13.6% 7.0% 6.0% 4.0%
Total risk-based capital................... 14.7% 8.4% 10.0% 8.0%
Leverage ratio............................. 8.3% 4.8% 5.0% 4.0%
</TABLE>
Although substantially reduced from historical levels due to additional debt
and goodwill incurred in connection with the Park Acquisition, Tier 1 risk-based
capital and leverage ratios of United immediately following the Park Acquisition
are anticipated to be above pro forma June 30, 1996 levels and at or above "well
capitalized" minimums, while United's total risk-based capital ratio is
anticipated to be above the "adequately capitalized" minimum. As a result,
United would be deemed "adequately capitalized" for purposes of federal banking
regulations.
37
<PAGE>
ASSET/LIABILITY MANAGEMENT
LIQUIDITY MANAGEMENT
Liquidity management is an effort of management to provide a continuing flow
of funds to meet its financial commitments, customer borrowing needs and deposit
withdrawal requirements. The liquidity position of United and its subsidiary
banks is monitored by Asset/Liability Committees of each of the Banks in
consultation with United's staff. United adjusts its investments in liquid
assets based upon management's assessment of (i) expected loan demand, (ii)
expected deposit flows, (iii) yields available on interest-bearing deposits and
(iv) the objective of its asset/liability management program. The largest
category of assets representing a ready source of liquidity for United is its
short-term financial instruments which include federal funds sold and investment
securities maturing within one year. Liquidity is also provided through the
regularly scheduled maturities of assets. The liquidity position of United is
also greatly enhanced by its significant base of core deposits. United also
maintains available lines of Federal funds borrowing from non-affiliated
financial institutions, and is a member of the FHLB. Excess liquidity is
generally invested in interest-bearing overnight deposits and other short-term
government and agency obligations. United anticipates it will have sufficient
funds available to meet its current loan commitments. At June 30, 1996, United
had outstanding commitments to extend credit amounting to $25 million.
INTEREST RATE SENSITIVITY
Effective asset/liability management also includes minimizing the impact of
future interest rate changes on net interest income. Management of interest rate
sensitivity is accomplished through the composition of loans and investments,
and by adjusting the maturities on interest-earning assets and interest-bearing
liabilities. Interest rate sensitivity indicates a financial institution's
potential earnings exposure to fluctuating interest rates. Rate sensitivity and
liquidity are related since both are affected by maturing assets and
liabilities. However, interest rate sensitivity also takes into consideration
those assets and liabilities with interest rates that are subject to change
prior to maturity. While no single measure can completely identify the impact of
changes in interest rates on net interest income, one traditional gauge of
interest rate sensitivity is to measure, over a variety of time periods, the
differences in the amounts of United's rate sensitive assets and rate sensitive
liabilities. These differences, or "gaps," provide an indication of the extent
that net interest income may be affected by future changes in interest rates.
A positive gap exists when rate sensitive assets exceed rate sensitive
liabilities and indicates that a greater volume of assets than liabilities will
reprice during a given time period. This mismatch may enhance earnings in a
rising rate environment and may inhibit earnings when interest rates decline.
Conversely, when rate sensitive liabilities exceed rate sensitive assets, a
negative gap results, indicating that a greater volume of liabilities than
assets will reprice during the period. In this case, a rising rate environment
may inhibit earnings and declining rates may enhance earnings.
The following table presents United's interest rate gap analysis as of June
30, 1996. The table also presents the gap between interest rate sensitive assets
and liabilities as a percentage of total assets as of June 30, 1996. In
calculating the gap values, amortization flows are based on contractual
characteristics of the loans and investment securities, as well as the
anticipated prepayment characteristics. Prepayment rates for mortgages and
mortgage-related investments reflect expectations based on national assumptions,
and
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prepayments on consumer loans reflect United's historical experience.
Non-maturity deposit balances are positioned in the one year or less category
based on expected repricing behavior given historical experience and
management's expectations.
<TABLE>
<CAPTION>
REPRICING IN OR MATURING IN:
-----------------------------------------------------
ONE YEAR ONE TO FIVE OVER FIVE
OR LESS YEARS YEARS TOTAL
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal funds sold............................................ $ 3,425 $ -- $ -- $ 3,425
Investment securities......................................... 37,621 53,268 13,634 104,523
Loans and leases.............................................. 184,181 66,469 25,305 275,955
----------- ----------- ----------- -----------
Total rate sensitive assets................................. $ 225,227 $ 119,737 $ 38,939 $ 383,903
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Savings, money market and interest-bearing checking........... $ 167,486 $ -- $ -- $ 167,486
Time deposits................................................. 60,117 45,818 1,570 107,505
Short-term borrowings......................................... 25,319 3,964 -- 29,283
Notes payable and other borrowings............................ 6,639 9,458 -- 16,097
----------- ----------- ----------- -----------
Total rate sensitive liabilities............................ $ 259,561 $ 59,240 $ 1,570 $ 320,371
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Rate sensitive gap............................................ $ (34,334) $ 60,497 $ 37,369 $ 63,532
Cumulative rate sensitive gap................................. $ (34,334) $ 26,163 $ 63,532
Rate sensitive gap % to total assets.......................... (8.0)% 14.1% 8.7% 14.8%
Cumulative rate sensitive gap % to total assets............... (8.0)% 6.1% 14.8%
</TABLE>
Gap analysis attempts to capture interest rate risk which is attributable to
the mismatching of interest rate sensitive assets and liabilities. However,
varying interest rate environments often create unexpected changes in interest
rate sensitivity, for example changing loan prepayments. These unexpected
changes are not captured very well in most gap analyses and, as a result, a gap
report may not provide a complete assessment of United's interest rate risk.
Therefore, United primarily utilizes simulation software and duration analyses
under rising, falling and the most likely interest rate forecasts to model net
interest income and the market value of portfolio equity at the subsidiary bank
levels. The modeling estimates changes in net interest income in response to
increases or decreases in market interest rates. The model uses the rates and
maturities of the Banks' existing portfolios of interest-earning assets and
interest-bearing liabilities and revises each portfolio based on how the market
interest rates move and how the specific Bank products would respond to changes
in rates. The structuring of the Banks' balance sheets are targeted to ensure
that earnings do not exhibit large variations. At June 30, 1996, the Banks'
computer simulations under the most likely interest rate scenario provided by an
independent forecaster indicate that the projected earnings are within
acceptable parameters. Given the Banks' current interest rate risk profile,
management's response to increase in interest rates is to promote variable rate
deposit products and loans.
CASH FLOW
United's principal sources of funds are deposits, scheduled loan repayments
and prepayments of loan principal, borrowings, maturities of investment
securities, mortgage-backed securities and short-term investments and
operations. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions, and competition.
United generally manages the pricing of its deposits to maintain a steady
deposit balance.
The primary source of cash from operating activities is net income.
The primary investing activities of United are lending and purchasing
investment securities. For the six months ended June 30, 1996, investment
activities used a net $9 million. Loan originations, net of principal repayments
accounted primarily for this use. If general interest rates decline, United
would expect to experience an increase in prepayments, particularly in its fixed
rate loans. The increased funds from this
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source could not necessarily be re-invested at yields and terms to maintain the
net interest margins United has experienced during the last three fiscal years.
For the year ended December 31, 1995, investment activities used a net $35
million. Loan originations and purchases of investment securities accounted
primarily for this use.
For the six months ended June 30, 1996, financing activities provided a net
$6 million. Historically, the primary financing activity of United has been
deposits and securities sold under repurchase agreements. Deposits decreased
$500,000 for the six months ended June 30, 1996 and securities sold under
repurchase agreements increased $6.1 million for the six months ended June 30,
1996. For the year ended December 31, 1995, financing activities provided a net
$30 million. Deposits increased $27.9 million, securities sold under repurchase
agreements decreased $4.6 million, net proceeds from notes payable provided $3.3
million and a common stock offering provided $3.5 million.
EMERGING ACCOUNTING STANDARDS
TRANSFER AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES: FASB Statement No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES, establishes new standards
for transfers and servicing of financial assets and extinguishments of
liabilities. The new standard will require the Company to recognize the
servicing of assets it controls and liabilities incurred after a transfer of
financial assets. This statement will require, among other things, that the
Company record an asset or liability for servicing rights when it sells loans
and retains the servicing and then amorize the asset or liability over the
period during which servicing income is expected to be received. This statement
is effective for transactions occurring after December 31, 1996. In management's
opinion, the adoption of this statement will not have a material effect on
United's financial statements.
LONG-LIVED ASSETS: FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF, establishes new
accounting standards for the impairment of long-lived assets, certain
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identified intangibles to be disposed of. This
statement is effective for United's year ending December 31, 1996. In
management's opinion, the adoption of this statement will not have a material
effect on United's financial statements.
STOCK-BASED COMPENSATION: FASB Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, provides a choice of accounting methods for valuing
stock-based compensation plans and requires certain disclosures about the effect
on net income and earnings per share regardless of the method used to account
for them. This statement is effective for United's year ending December 31,
1996. In management's opinion, the adoption of this statement will not have a
material effect on United's financial statements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation.
Substantially all of the assets and liabilities of United are monetary in
nature. As a result, interest rates have more impact on United's performance
than the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services. The liquidity and the maturity structure of United's assets
and liabilities are important to the maintenance of acceptable performance
levels. United discloses the estimated fair values of its financial instruments
in accordance with FASB Statement No. 107.
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BUSINESS
GENERAL
United is a bank holding company with $429 million in assets as of June 30,
1996, which operates Signal Bank and Goodhue Bank. Signal Bank is a
state-chartered bank with offices in Eagan, Savage and West St. Paul, Minnesota.
Goodhue Bank is a national bank with offices in Red Wing, Lanesboro and
Rushford, Minnesota. In addition to the Banks, United also operates Consumers
Credit Corporation ("CCC"), a consumer finance company with offices in Hastings,
Northfield, Red Wing and West St. Paul, Minnesota. United has entered into a
Merger Agreement, dated October 7, 1996 with PFC, a bank holding company which
owns Park Bank, a national bank with assets of approximately $203 million as of
June 30, 1996. Subject to receipt of regulatory approvals and receipt of
proceeds from a loan with Firstar Bank Milwaukee, N.A. and proceeds from the
offering of Series A Preferred Stock occurring concurrently with this offering,
the Park Acquisition is expected to close in January 1997.
HISTORY
United is the product of a merger, effective January 1, 1994, of Signal and
Goodhue. Signal, formed in 1980, was the holding company for Signal Bank, a
Minnesota state bank organized and chartered in 1963. Goodhue, formed in 1983,
was the holding company for Goodhue Bank, a national bank organized and
chartered in 1874. United was formed with a view to developing a multi-bank
holding company owning banks rooted in their communities, each sharing its
particular strengths with other banks in the group. United believes that the
advantages of holding company affiliation can be combined with a high-level of
customer service by allowing each bank to manage on an autonomous basis, the
day-to-day business of the bank and service to its customers. Total assets of
the Company were $348 million as of the date of the merger of Signal and
Goodhue. Total assets of United have increased $81 million since January 1, 1994
to $429 million at June 30, 1996. At December 31, 1995, United ranked ninth in
total assets among all Minnesota-based bank holding companies owning banks in
Minnesota.
COMMUNITY BANKING PHILOSOPHY
United's Banks operate a total of four offices in the Minneapolis/St. Paul
metropolitan area as well as five offices in rural southeastern Minnesota. The
Company believes that this diversity of markets brings strength to the Company's
overall balance sheet. The Banks are community banks which provide a full range
of services to consumers and businesses in all of the communities which United
serves. The Banks generally operate with significant local autonomy, with
general oversight and support from United. The Company believes this autonomy
allows the Banks to better serve the customers in their respective communities,
and thus enhances the Banks' business opportunities and operations. The Company
has maintained, and in connection with future acquisitions intends to generally
maintain, local charters, existing management and boards of directors.
Generally, Banks' management operates independently of the Company when making
human resource, credit, pricing, new product development, and other decisions
relative to how the Bank operates in its market. United fosters an environment
of cooperation and collaboration among its Banks and CCC. Affiliates are
encouraged to share expertise in order to bring a broader array of products and
services to the Company's customers. The individual Banks have strengths which
are leveraged throughout the Company in areas such as SBA lending and leasing
products which do not need to be replicated in each subsidiary bank because of
this sharing philosophy.
United believes strongly that the community banks which it owns should
invest a portion of their financial and human resources back into the
communities within which they operate. The Banks of United are consistent
winners of the "Keystone Award" which is given to corporations in the state of
Minnesota that contribute at least two percent of their pre-tax income to
charitable organizations and community activities. United also believes that
community banks benefit from strong boards of directors consisting of
individuals who are also actively involved in their communities. The Banks'
directors not only represent the community interests but also serve to increase
the Banks' visibility in the community thereby enhancing the Banks' marketing
efforts and growth strategies.
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BANKS
Signal Bank had total assets of $217 million as of June 30, 1996 and offices
located in the southern and southeastern portions of the Minneapolis-St. Paul
metropolitan area. This area is home to a wide variety of commercial, nonprofit,
cultural and entertainment enterprises, including a significant number of
small-to-medium-sized businesses. The extensive small-to-medium-sized business
experience of Signal Bank permits it to develop its commercial customers
throughout this entire area. Signal Bank's status as a preferred lender with the
SBA (see "Business -- Lending and Investments") enables it to provide expedited
service to its customers when making loans guaranteed under the SBA programs and
because of this, it obtains referrals throughout the seven-county metropolitan
area.
Signal Bank offers a full range of financial services to its commercial
customers, including short- and medium-term loans, revolving credit facilities,
inventory and accounts receivable financing, equipment financing, commercial
mortgage lending, installment loans, safe deposit box services, cash management
services, and various savings accounts, money market accounts, time certificates
of deposit and checking accounts. Since 1991, Signal has increasingly emphasized
the origination of SBA loans. Other services provided include night depository
services, automated teller machines and brokerage services through an
affiliation with a brokerage service provider.
Signal Bank serves the banking needs of its consumer customers located
primarily in the rapidly growing communities of Savage, Eagan, Inver Grove
Heights and Burnsville and the more mature communities of West St. Paul, Mendota
Heights and South St. Paul by providing a complete range of retail products.
These products include checking and savings accounts, money market accounts,
certificates of deposit, personal installment loans, home improvement loans,
home equity lines of credit, loans for the purchase or refinancing of principal
residences or second homes, safe deposit box services, and brokerage services
through an affiliation with a brokerage service provider.
Goodhue Bank (with total assets of $206 million as of June 30, 1996) is the
largest bank in Red Wing, Minnesota. Red Wing is a community of approximately
15,500 and is the county seat of Goodhue County (population approximately
41,600), located approximately fifty miles from the Minneapolis-St. Paul
metropolitan area. Over 30 industries provide jobs in this area, including the
Treasure Island Casino, Red Wing Shoe Company, Northern States Power Company,
Jostens, and Reidell Shoes, Inc. Tourism has also developed into a major sector
of the area's economy in recent years.
Goodhue Bank provides a complete range of commercial and consumer banking
services from its two offices within the community. These services include
checking, savings, money market deposit accounts, and time certificates of
deposit, safe deposit box services, cash management services and brokerage
services through an affiliation with a brokerage service provider. The Bank
makes a full range of loans to its commercial and consumer customers. Goodhue's
leasing department provides equipment financing alternatives to a variety of
industries. Its location in an agricultural section of southeastern Minnesota
involves the Bank in agricultural lending, including livestock loans, dairy
production, crop loans and loans for buildings and equipment. The Bank has
offices in the communities of Rushford and Lanesboro, which are located in
Filmore County in the extreme southern part of Minnesota. This market is
primarily an agricultural area which is also developing a strong tourism
industry. The banking services provided by these two offices parallel those of
the other offices of the Bank.
See also "Acquisition of Park" for a description of Park Bank, its market
area and business.
ADMINISTRATION OF THE BANKS
United administers its Banks under a philosophy called "Earned Autonomy."
"Earned Autonomy" means that the Company cedes operating authority to the
individual member Banks. Ongoing financial performance and asset quality targets
are set in a collaborative process between the Banks and the staff of United.
Provided that the Banks perform within these targets, the Banks are free to
operate in their markets
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as they choose (with assistance from the Company as needed). United believes
that the Banks know their markets better than United's staff and therefore know
best how to deploy human and financial resources in an effort to increase their
market share.
Although each of the Banks operates with a significant level of autonomy and
independence, United has centralized operations for certain functions, and makes
available its corporate staff and centralized resources for other functions upon
request. United's Strategic Plan calls for continuing emphasis to be placed on
improving the Company's efficiency ratio. The Company continues to emphasize the
consolidation of certain functions where economies of scale can be achieved such
as:
DATA PROCESSING. United's wholly-owned subsidiary, Unitech Services, Inc.
("Unitech"), provides all of United's and the Banks' data processing
requirements. Unitech performs such data processing services through the use of
computer hardware it owns and maintains and software it licenses.
ACCOUNTING. United provides all accounting services, including general
ledger administration, budgeting, internal and external reporting, and accounts
payable processing.
INVESTMENTS. Although each Bank makes its own investment decisions, United
provides administrative and analytical support to the Banks in the management of
their investment portfolios in order to increase efficiencies and consistency.
CREDIT POLICY FORMULATION. Customer credit decisions are made by the local
management of each Bank under comprehensive credit policies approved by the
Board of Directors of each Bank. To assist local management and to maintain
system-wide credit standards, United is establishing a system-wide credit
policy. See "Lending and Investments" below. In addition, United's corporate
staff will provide individual Banks with assistance on credit review and
collection upon request.
SPECIALIZED STAFF SUPPORT. United provides the Banks with legal and
compliance services, internal auditing, asset/liability modeling, and retirement
plan administration. In addition, United is planning to provide other services
for the benefit of the Banks such as marketing assistance, human resource
services and benefits administration, and centralized purchasing of supplies.
United believes that centralizing these services promotes efficiency and cost
savings for the Banks without interfering with their community-oriented
management.
LENDING AND INVESTMENTS
The Banks offer short-term and long-term loans for business and personal
purposes. The Banks focus their lending activities on individuals and
small-to-medium-sized businesses in their market areas. Lending has been
primarily focused within the seven-county Minneapolis-St. Paul metropolitan area
and southeastern Minnesota, with the leasing operations at Goodhue Bank covering
a broader geographical area. The markets of the Banks include a wide variety of
businesses; therefore, United does not believe it is unduly exposed to problems
in any particular industry group.
United believes that it can best serve its customers, and thereby enhance
United's business, operations and profitability, by maximizing local autonomy in
credit decisions. Generally, each Bank's management operates independently of
the Company in making credit decisions within comprehensive credit policies
approved by the Bank's Board of Directors. These separate credit policies are
each tailored to maximize the safety and soundness of the Banks and still be
responsive to the particular credit needs of the communities which the Banks
serve. The policies both provide specific lending authorities to Bank officers,
reflecting their individual experience and level of authority, type of loan and
collateral, and establish thresholds at which loan requests must be approved by
a committee comprised of officers or Board members. United is currently
developing a uniform credit policy, to be implemented in 1997, which will retain
the flexibility of local Bank management to respond to local market conditions,
while at the same time providing for uniformity of basic lending policies among
all of United's subsidiary banks and facilitating overline lending among the
banks.
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Signal Bank participates in many of the SBA programs and is one of six bank
"preferred lenders" in Minnesota. Preferred lender status is granted to a lender
who has made a certain number of SBA loans, and who in the opinion of the SBA
has staff who are qualified and experienced in this area. As a preferred lender,
Signal Bank has the authority to authorize, on behalf of the SBA, the SBA
guaranty on loans under the 7A program. This can represent a substantial time
savings in serving a customer's needs. Signal Bank has experienced significant
growth in its SBA lending division since its inception in 1991. The Bank
utilizes both the 504 program, which is focused toward longer-term financing of
buildings, and other long-term assets, and the 7A program which is primarily
used for financing of the equipment, inventory and working capital needs of
eligible businesses generally over a three- to seven-year term. The Bank's
collateral position in the SBA loans is enhanced by the SBA guaranty in the case
of 7A loans, and by lower loan-to-value ratios under the 504 program.
COMMERCIAL AND AGRICULTURAL LOANS. Loans in this category principally
include loans to manufacturing, wholesale, retail and agricultural businesses
including loans secured by commercial real estate. At June 30, 1996,
approximately 58.9% of loans outstanding were in this category, of which 88.5%
were classified as commercial and 11.5% were classified as agricultural. The
Banks provide loans and lines of credit for the operations and expansion needs
of local businesses. These loans generally have prime-based adjustable interest
rates and maturities of seven years or less. While the Banks look to a
borrower's business operations as the principal source of repayment, they also
generally obtain mortgages on real estate, security interests in inventory,
accounts receivable and other personal property, and personal guaranties as
collateral support for the loans. Goodhue Bank provides loans to the
agricultural industry in many of the communities it serves. Goodhue Bank's
agricultural loans relate to a variety of agricultural credit needs, including
crop loans, livestock loans, dairy production loans, and building and equipment
loans.
RESIDENTIAL REAL ESTATE LOANS. These loans include residential real estate
first mortgages and home equity lines of credit. At June 30, 1996, these loans
represented approximately 24% of loans outstanding. The Banks originate variable
and fixed rate first real estate mortgages, in accordance with the guidelines of
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"), which are most often sold servicing retained
into the secondary market. The Banks also originate first and second real estate
mortgages which are retained in the Banks' portfolios. Generally these loans are
underwritten in accordance with the FNMA and FHLMC guidelines, with the
exception of being shorter in term and having variable rates. Loan to values
reflect industry standards of 80% or less and up to 95% with mortgage insurance.
The Banks continue to experience increases in home equity lines of credit, which
are made on both a fixed-rate and variable-rate basis and generally have
maturities of five to seven years and are generally secured by second mortgages
on the borrower's home.
CONSUMER LOANS. Loans in this category include automobile loans, home
improvement loans and personal lines of credit. At June 30, 1996, approximately
13% of total loans were consumer loans, which generally are on an installment
basis, carry an adjustable-rate of interest, and have maturities of three to
five years, and are secured by automobiles, boats, and other types of personal
property.
LEASES. Leases are made on equipment to manufacturing, retail and wholesale
businesses on a fixed rate basis, having maturities of three to five years. At
June 30, 1996, approximately 4% of total loans were leases made by Goodhue Bank.
OTHER INVESTMENTS. United maintains a diversified portfolio of investments,
primarily consisting of U.S. Treasury securities, obligations of U.S. government
corporations and agencies, and obligations of states and their political
subdivisions. United attempts to balance its portfolio to meet its liquidity
needs while endeavoring to maximize investment income. United also attempts to
maximize tax advantages in balancing its portfolio. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Investment
Securities."
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DEPOSITS
Each of the Banks offers the usual and customary range of depository
products provided by commercial banks, including checking, savings and money
market accounts, and certificates of deposit. Deposits at each Bank are insured
by the Federal Deposit Insurance Corporation up to statutory limits. Local
managements of the Banks determine the type, mix and pricing of the depository
products offered to best compete in a Bank's particular marketplace.
OTHER CUSTOMER SERVICES AND PRODUCTS
Other aspects of the business of the Banks include cash management services
such as payroll processing, ACH originations and lock box services, safe deposit
box services, night depository services, wire transfers and automated teller
machines. The Banks have established "Investment Centers" which offer securities
brokerage services, annuities and mutual funds through an affiliation with a
brokerage service provider.
CONSUMER FINANCE BUSINESS
CCC, a wholly-owned subsidiary of United, engages in consumer credit
activities, and offers loans to consumers who are not traditional bank customers
for a variety of reasons including personal preferences, inability to obtain
small loans from traditional banks, blemished credit history, inability to
provide income verification data or lack of established credit history. CCC's
loan portfolio has grown from approximately $2.1 million as of December 31, 1993
to $5.9 million at June 30, 1996. Loans originated by CCC primarily range in
size from $500 to $5,000 with terms of two to five years and various rates of
interest generally ranging from 15% to 21%. Most loans are secured by
automobiles, recreational vehicles or other personal property and are originated
directly by CCC. CCC operates from four leased offices located in Red Wing
(since 1985), Hastings (since 1994), Northfield (since 1995) and West St. Paul
(since 1996).
GROWTH STRATEGIES
United's strategy is to continue to grow by acquiring other financial
institutions and financial product and service providers, expanding existing
bank and consumer finance businesses internally, and pursuing other financial
service opportunities.
INTERNAL GROWTH. United intends to continue to grow its existing
businesses, in large part by identifying products or services which have been
successful in one or more subsidiary banks and expanding these products and
services to other subsidiary banks. Goodhue Bank and, if the Park Acquisition is
consummated, Park Bank, will utilize Signal Bank's status as a "preferred
lender" with the SBA to increase their SBA lending. Signal Bank's mortgage
department will enable the subsidiary banks to increase their mortgage lending.
Goodhue Bank's lease financing experience will allow the subsidiary banks to
increase lease financing transactions. In addition, the subsidiary banks are
constantly developing and evaluating different deposit products to meet the
needs of their customers. The subsidiary banks, with the assistance of United,
will evaluate the needs of their respective customers to determine which of the
many delivery systems they will use, including personal computers and automated
teller machines. United intends to expand CCC's lending activity by building a
referral network among automobile, boat and other recreational vehicle
dealerships, and by the acquisition and start-up of new offices.
ACQUISITIONS. An equally important strategy is to continue to grow by
acquiring other financial institutions and financial service providers. United's
acquisition strategy is to identify banks with at least $50 million in assets in
Minnesota and Wisconsin communities within a 100-mile radius of the
Minneapolis-St. Paul metropolitan area. In assessing acquisitions, United
focuses on credit quality, past performance of the bank, management strengths
and weaknesses, location, community demographics, relative health of the local
economy, organizational structure of the entity, and consideration for and terms
of the acquisition. Management believes there are a number of community banks
which meet United's criteria and whose owners would be interested in selling
their banks to a community-based organization like United. The Company believes
that the reputation of its principal officers, its community banking experience
and its philosophy of permitting significant autonomy and independence in
management of its Banks, position United well to take advantage of future
expansion opportunities. Management believes that by standardizing
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certain products, services and systems and providing appropriate holding company
services, the bank officers and personnel can concentrate on individual customer
service and community relations. Management also believes services provided by
United should benefit the individual banks by lowering expenses through
centralization of administration and data processing services, by streamlining
credit policy formation and supervision and by facilitating compliance with the
requirements of multiple-layered banking regulations. Ultimately, such
standardization and centralization is intended to contribute to United's
acquisition strategy by improving the results of operations of acquired banks.
COMPETITION
United's Banks and CCC face significant competition from providers of
financial services throughout the Minneapolis-St. Paul metropolitan area and in
out-state Minnesota in all aspects of their business. The local financial
services industry is rapidly changing and highly competitive, dominated by
numerous banks of First Bank System and Norwest Corporation, and by TCF, fsb. In
addition, United competes with numerous banks, savings and loan associations,
securities brokerage firms and other financial services companies. Commercial
credit and leasing firms, consumer and commercial finance companies, factors,
and mortgage banks, also have some competitive effect on United. Some of these
entities and institutions are not subject to the same regulatory restrictions as
United. Many competitors of United have much greater financial resources,
greater name recognition and more offices with attendant personnel.
Management believes that each of United's Banks and CCC will be able to
continue to compete successfully in its respective communities. United believes
its competitive strengths include the reputation it has for developing and
continuing banking relationships, responsiveness to customer needs and
individualized customer service, and skilled and resourceful personnel. The
factors affecting competition include banking and financial services provided,
customer convenience and office location. United further believes that the
community commitment and involvement of its personnel and its commitment to
providing quality banking and financial services are factors that should allow
it to continue to maintain and improve its competitive position.
Legislation permitting full nationwide interstate banking and branching was
recently enacted by Congress. The Minnesota legislature has passed a law
permitting interstate branching (the acquisition of a bank in Minnesota by an
out-of-state bank without the requirement of maintaining a Minnesota banking
charter) as of June 1, 1997. These new laws may offer out-of-state banks an
enhanced opportunity to compete in United's markets. See "Supervision and
Regulation -- Recent Legislation."
United also faces competition in acquiring institutions. Minnesota has
recently experienced a significant consolidation of its banking industry, and
many large holding companies with greater resources than United (including
several out-of-state holding companies) are actively pursuing acquisitions in
Minnesota. This competition affects the acquisition opportunities for United and
can affect the cost of such acquisitions.
FACILITIES
United presently leases its principal office, consisting of approximately
3,860 square feet located at 2600 Eagan Woods Drive, Suite 155, Eagan,
Minnesota. The lease will expire July 31, 1999.
Signal Bank presently leases (i) its main office, consisting of
approximately 9,150 square feet plus an approximately 2,400 square foot
leasehold improvement, located at 100 Signal Hills, West St. Paul, Minnesota,
under a lease which will expire December 31, 2000; and (ii) two areas in the
Signal Hills Center which is located adjacent to Signal Bank's main office under
a lease which Signal Bank has terminated effective January 31, 1997, at which
time those employees will move to Signal Bank's main office. In addition, Signal
Bank operates branch offices in West St. Paul, Eagan and Savage, Minnesota. The
West St. Paul branch office is located in an approximately 4,000 square foot
detached building owned by Signal Bank and located at 2060 South Robert Street.
The Eagan branch office is located in an approximately 16,000 square foot
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detached building owned by Signal Bank and located at 1270 Yankee Doodle Road,
Eagan, Minnesota. The Savage branch office is located in an approximately 6,000
square foot detached building owned by Signal Bank and located at 12302
Princeton Avenue South.
Goodhue Bank owns (i) its main office, consisting of approximately 38,000
square feet, located at 222 Bush Street, Red Wing, Minnesota (approximately
6,700 square feet are leased to non-bank tenants); (ii) a detached drive-up
facility, located at Bush and Fourth Street, Red Wing, Minnesota, consisting of
an auto bank with open office area, teller area and 7 drive-up lanes covered by
a canopy on a lot totalling 27,360 square feet; and (iii) a 5,250 square foot
office building, located at 421 West 4th Street, Red Wing, Minnesota, which is
currently occupied by non-bank tenants. In addition, Goodhue Bank owns three
branches in Rushford and Lanesboro, Minnesota. The Rushford Branches consist of
a 9,800 square foot bank building located at 101 West Jessie Street and a
drive-up facility located on Mill Street in Rushford. The Lanesboro Branch
consists of a 3,200 square foot building on the corner of 2nd and E Streets in
Lanesboro.
CCC leases a 1,200 square foot office at 432 West Third Street in Red Wing,
under a lease which expires December 31, 1998; a 1,400 square foot office in the
County Crossroads Center in Hastings, Minnesota, under a lease which expires
September 30, 1998; and a 1,700 square foot office located at 1014 South Highway
3, Northfield, Minnesota, under a lease which expires July 31, 1999.
Unitech leases a 6,120-square foot office located in 5400 Babcock Trail,
Inver Grove Heights, Minnesota, under a lease which expires September 30, 1999
(with an option to renew the lease for an additional five-year period).
EMPLOYEES
As of June 30, 1996, United and its subsidiaries employed 234 persons, 194
on a full-time basis and 40 on a part-time basis. If the Park Acquisition is
consummated, United and its subsidiaries will employ approximately 314 persons,
259 on a full-time basis and 55 on a part-time basis.
47
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions of the executive officers and directors of
United, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
R. Scott Jones 52 Director and Chairman of the Board
Galen T. Pate 57 Director and President
Marcia L. O'Brien 40 Executive Vice President and Chief Financial Officer
John H. LeMay 57 Executive Vice President and Corporate Counsel
Donald M. Davies 50 Executive Vice President
Arlin A. Albrecht 59 Director
Larry C. Barenbaum 49 Director
Spencer A. Broughton 68 Director
James P. Fritz 56 Director
John W. Johnson 65 Director
Ora G. Jones 79 Director
Louis J. Langer 71 Director
John C. Dorsey 57 President of Signal Bank
Thomas W. Longlet 45 President of Goodhue Bank
</TABLE>
R. SCOTT JONES has served as Chairman of the Board and a director of United
since January 1, 1994. Mr. Jones had served as a director and Chief Executive
Officer of Goodhue from 1983 until the merger with Signal. Mr. Jones has been a
director (since 1975), Chairman (since 1993), Chief Executive Officer (since
1983) and President (from 1983 to 1993) of Goodhue Bank. Mr. Jones has been a
director of Signal Bank since July, 1992. Mr. Jones has been a director of CCC
since 1986. Mr. Jones has held various positions with the American Bankers
Association, a national trade association located in Washington, D.C., and was
recently elected First Vice President, from which office he is expected to
advance to President in October of 1998. R. Scott Jones is the son of Ora G.
Jones (see below) and is the spouse of Anne E. Jones, a director of Goodhue
Bank.
GALEN T. PATE has served as President and a director of United since January
1, 1994. Mr. Pate, a founder of Signal, had served as a director of Signal from
its inception in 1980 until the merger with Goodhue and had been Chairman and
President of Signal from 1989 until the merger with Goodhue. Mr. Pate has been
Chairman (since 1988) and Chief Executive Officer (from 1988 to 1995) and
President (from 1975 to 1988) of Signal Bank. Mr. Pate has been a director of
Goodhue Bank since 1992. Mr. Pate has been a director of CCC since 1994. Mr.
Pate is currently the Chairman and President of BancInsure, Inc., a captive
insurance company insuring banks in 26 states. Mr. Pate is also a director of
the Bank Marketing Association, a national trade association located in
Washington, D.C.
MARCIA L. O'BRIEN has served as Executive Vice President and Chief Financial
Officer of United since January 1, 1994. She has been Chief Financial Officer of
Signal Bank since 1986 and Senior Vice President of Signal Bank since 1988. Ms.
O'Brien was employed by KPMG Peat Marwick as a Senior Manager from 1983 to 1986.
48
<PAGE>
JOHN H. LEMAY has served as Executive Vice President and Corporate Counsel
of United since 1995. He has been Corporate Counsel of Signal Bank since 1985
and Senior Vice President since 1990. Mr. LeMay was a partner in the law firm of
Sweeney, O'Connor & LeMay from 1976 to 1985.
DONALD M. DAVIES has served as Executive Vice President of United since
January 1, 1994. From 1992 to 1994 Mr. Davies served as Chief Financial Officer
and Treasurer of Goodhue. From 1992, Mr. Davies has been Treasurer and Secretary
of CCC. From 1990 to 1992, Mr. Davies was self-employed as a consultant to
various community banks in Minnesota. From 1989 to 1990, Mr. Davies held various
positions with Norwest Corporation, including Vice President -- Community Bank
Acquisitions, and Chief Administrative Officer of the Greater Minnesota
Community Banks. From 1976 to 1989, Mr. Davies was the Chief Financial Officer
of The Bank Group, Inc., a $350 million community banking organization located
in Wayzata, Minnesota.
ARLIN A. ALBRECHT has served as a director of United since January 1, 1994
and was director of Goodhue from 1986 until the merger with Signal. Mr. Albrecht
has been a director of Goodhue Bank since 1986. Since 1960, Mr. Albrecht has
held various positions with Red Wing Publishing Company and has been President
and Chief Executive Officer since 1992. Red Wing Publishing owns 16 newspapers
throughout the states of Minnesota and Wisconsin. Mr. Albrecht is a director and
the Chairman of River Region Health Services, a health services company located
in Red Wing, Minnesota.
LARRY C. BARENBAUM has served as a director of United since January 1, 1994
and has been a director of Signal Bank since 1980. Since 1992, Mr. Barenbaum has
been the owner and President of LCB Enterprises, Inc., a company located in
Minneapolis, Minnesota engaged in sales representation and acquisitions of small
businesses. Since 1994, Mr. Barenbaum has been President and a director of ACII
Corp., a jewelry wholesaler. In addition, Mr. Barenbaum is a director of Brauns,
a ready-wear retail store in Minneapolis, Minnesota.
SPENCER A. BROUGHTON has served as a director of United since January 1,
1994 and was a director of Goodhue from 1983 until the merger with Signal. Mr.
Broughton has been a director of Goodhue Bank since 1969. From 1962 to 1996, Mr.
Broughton held various positions with Citizens Security Group, a property and
casualty insurance company located in Red Wing, Minnesota including Chairman and
Chief Executive Officer from 1970 to 1996 and was a director from 1963 to 1996.
He now serves as a consultant to the Meridian Insurance Group of Indianapolis,
Indiana. In addition, Mr. Broughton is a director of Alliance of American
Insurers, a national trade association; and a director of Insurance Federation
of Minnesota, a state trade association.
JAMES P. FRITZ has served as a director of United since January 1, 1994. Mr.
Fritz, a founder of Signal, had served as a director of Signal from its
inception in 1980 until the merger with Goodhue. Mr. Fritz also has been a
director of Signal Bank since 1980. Mr. Fritz has been President and Chairman of
Fritz Company, Inc., a candy and tobacco distributor in Newport, Minnesota,
since 1982.
JOHN W. JOHNSON has served as a director of United since 1995. Mr. Johnson
has been President and Chief Executive Officer of Community Bank Spring Green,
Spring Green, Wisconsin, since its formation in 1996. Mr. Johnson was Chairman
of M & I Bank Southwest from June 1994 until 1995 and President and Chief
Executive Officer of Valley Bank Southwest from 1986 until 1994. Mr. Johnson was
also Senior Vice President -- West Region and a director of Valley
Bancorporation from 1986 to 1994. Mr. Johnson is Secretary/Treasurer and a
director of BancInsure, Inc., a captive insurance company insuring banks in 26
states.
ORA G. JONES has served as a director of United since January 1, 1994 and
was a director of Goodhue from 1983 until the merger with Signal. Since 1943,
Mr. Jones has been a director of Goodhue Bank and was the Chairman from 1958 to
1993. Mr. Jones has been a director of CCC since 1986. Ora G. Jones is the
father of R. Scott Jones (see above).
LOUIS J. LANGER has served as a director of United since January 1, 1994.
Mr. Langer, a founder of Signal, had served as a director of Signal from its
inception in 1980 until the merger with Goodhue. Mr. Langer has
49
<PAGE>
served as a director of Signal Bank from 1967 to 1996. From 1946 until 1995 Mr.
Langer was Chairman of Langer Construction Co., a general building contractor in
West St. Paul, Minnesota and was President from 1946 to 1991.
JOHN C. DORSEY has served as Chief Executive Officer of Signal Bank since
January, 1996 and as President and a director since 1988. From 1983 to 1987 he
was Executive Vice President of Signal Bank.
THOMAS W. LONGLET has served as President, Chief Operating Officer and a
director of Goodhue Bank since 1995. Mr. Longlet was President of the Highland
Bank, St. Paul, Minnesota from 1991 until 1995. Mr. Longlet was Senior Vice
President of Norwest Commercial Insurance Services, Minneapolis, Minnesota from
1990 until 1991. Mr. Longlet was President and Managing Officer of two Norwest
Banks from 1986 until 1990.
Each of the directors of United named above serve terms of varying length as
determined by United's shareholders.
United's Board has an Audit Committee consisting of Spencer A. Broughton,
James P. Fritz, Ora G. Jones and Louis J. Langer. The responsibilities of the
Audit Committee are to review the results and scope of the audits and other
services provided by the Company's independent auditors, as well as the
Company's accounting principles and its system of internal controls, and report
the results of its review to the Board.
United's Board has a Compensation Committee consisting of Arlin A. Albrecht,
Larry C. Barenbaum and James P. Fritz. The responsibilities of the Compensation
Committee are to make recommendations concerning executive compensation and
incentive compensation, subject to ratification by the Board, and administer the
Company's 1994 Stock Option Plan.
OFFICER AND DIRECTOR COMPENSATION
The following table sets forth certain information regarding compensation
paid for services performed in 1995 to United's chief executive officers, and
the four highest paid executive officers of United and its subsidiaries whose
total salary and bonuses earned during 1995 exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------------------- AWARDS/SHARES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER (1) OPTIONS (# OF SHARES) (2)
- --------------------------------------------- ---------- ---------- ----------------- -------------------------
<S> <C> <C> <C> <C>
R. Scott Jones, Chairman..................... $ 192,400 $ 185,000 $ 9,373 3,000
Galen T. Pate, President..................... $ 192,400 $ 185,000 $ 8,407 3,000
Marcia L. O'Brien, Executive
Vice President and Chief Financial
Officer..................................... $ 83,200 $ 70,000 $ 8,053 2,000
John H. LeMay, Executive Vice President and
Corporate Counsel........................... $ 94,120 $ 55,000 $ 7,435 2,000
Donald M. Davies, Executive Vice President... $ 83,200 $ 55,000 $ 7,276 2,000
John C. Dorsey, President of Signal Bank..... $ 135,200 $ 82,000 $ 6,516 1,500
</TABLE>
- ------------------------
(1) Represents noncash value attributed to personal use of Company automobiles.
(2) See "Management -- 1994 Stock Option Plan."
Directors of United receive an annual fee of $5,000 for their services. In
1995, directors of United were each granted an option to acquire 333 1/3 shares
of United's Common Stock, which becomes exercisable as to twenty percent (20%)
of the shares on each of the first five anniversaries of the date of grant.
50
<PAGE>
Signal Bank has entered into Executive Salary Continuation Agreements with
each of Galen T. Pate, Marcia L. O'Brien, John H. LeMay, and John C. Dorsey and
United has entered into an Executive Salary Continuation Agreement with Donald
M. Davies, pursuant to which each such officer, or a designated beneficiary,
will receive $40,000 annually upon such officer's retirement at age 65 for a
period of 13 years. Under the agreement, the companies indicate they intend to
adjust the amount payable under the agreements to reflect 50% of each such
officer's then current salary, however, the companies are not obligated to make
any such adjustment. In the event of such officer's death before retirement at
age 65, the companies will pay to the officer's beneficiary $40,000 per year for
10 years. In the event of such officer's disability before retirement at age 65,
the companies will pay the officer a lump sum ranging from $12,611 to $290,398
as provided on a vesting schedule attached to each agreement.
1994 STOCK OPTION PLAN
United's Board of Directors adopted the 1994 Stock Option Plan (the "1994
Stock Plan") in April, 1994, which was approved by United's stockholders in
April, 1995. The purpose of the 1994 Stock Plan is to attract and retain
officers and directors, and to motivate them to produce a superior return to the
shareholders of United by offering such persons an opportunity to realize stock
appreciation, by facilitating stock ownership, and by rewarding them for
achieving a high level of corporate financial performance.
The 1994 Stock Plan is administered by the Compensation Committee (the
"Committee"), which is appointed by the Board of Directors. Subject to the
provisions of the 1994 Stock Plan, the Committee has the exclusive power to make
awards under the 1994 Stock Plan, to determine when and to whom awards will be
granted, and the form, amount and other terms and conditions of each award. The
types of awards that may be granted under the 1994 Stock Plan include incentive
and non-qualified stock options. Subject to certain restrictions applicable to
incentive stock options, awards will be exercisable by the recipients at such
times as are determined by the Committee.
Options may be granted to recipients at such exercise prices as the
Committee may determine but not less than their fair market value as of the date
the option is granted. Stock options may be granted and exercised at such times
as the Committee may determine, except that, unless applicable federal tax laws
are modified, (1) no incentive stock option may be granted at less than fair
market value, (2) no incentive stock option may be granted more than ten years
after the effective date of the 1994 Stock Plan, (3) an incentive stock option
shall not be exercisable more than ten years after the date of grant, and (4)
the aggregate fair market value of the shares of Common Stock with respect to
which incentive stock options may first become exercisable in any calendar year
for any employee may not exceed $100,000 under the 1994 Stock Plan or any other
plan of United. Additional restrictions apply to an incentive stock option
granted to an individual who beneficially owns more than ten percent of the
combined voting power of all classes of stock of United.
As of May 1, 1994, the effective date of the 1994 Stock Plan, the total
number of shares of United Common Stock available for distribution under the
1994 Stock Plan was 100,000 (subject to adjustment for future stock splits,
stock dividends and similar changes in the capitalization of United). As of the
date of this Prospectus, options to purchase an aggregate of 69,367 shares of
Common Stock were outstanding and an aggregate of 30,473 shares of Common Stock
were available for future grants of awards under the 1994 Stock Plan. Options
granted pursuant to United's 1994 Stock Plan are exercisable at an exercise
price equal to the fair market value as determined by the Board of Directors on
the date of grant. In January 1996, a former employee exercised his options to
acquire 160 shares at an aggregate exercise price of $11,754. Options
outstanding have a per share exercise price ranging from $73.46 to $94.20, and
expire ten years from the date of grant of the option (unless exercised prior to
that time).
The 1994 Stock Plan will remain in effect until all stock subject to it is
distributed or all awards have expired or lapsed, whichever occurs later. The
1994 Stock Plan also gives the Board the right to terminate, suspend or modify
the 1994 Stock Plan, except that amendments to the 1994 Stock Plan are subject
to
51
<PAGE>
shareholder approval if needed to comply with Rule 16b-3 under the Securities
Exchange Act of 1934, as amended, the incentive stock option provisions of the
Internal Revenue Code of 1986, as amended, their successor provisions, or any
other applicable law or regulation.
The following table summarizes option grants made during 1995 to the
executive officers of United and its subsidiaries:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POTENTIAL REALIZABLE
SHARES TOTAL OPTIONS VALUE AT ASSUMED
UNDERLYING GRANTED TO ALL EXERCISE ANNUAL RATES (2)
THE EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME OPTIONS (1) 1995 SHARE DATE 5% 10%
- ----------------------------- ------------- ----------------- ----------- ------------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
R. Scott Jones............... 3,000 14.1% $ 79.80 January 31, 2005 $ 150,570 $ 381,540
Galen T. Pate................ 3,000 14.1% 79.80 January 31, 2005 150,570 381,540
Marcia L. O'Brien............ 2,000 9.4% 79.80 January 31, 2005 100,380 254,360
John H. LeMay................ 2,000 9.4% 79.80 January 31, 2005 100,380 254,360
Donald M. Davies............. 2,000 9.4% 79.80 January 31, 2005 100,380 254,360
John C. Dorsey............... 1,500 7.0% 79.80 January 31, 2005 75,285 190,770
</TABLE>
- ------------------------
(1) Each option becomes exercisable as to twenty percent of the shares on each
of the first five anniversaries of the date of grant. Each option has a term
of ten years, subject to earlier termination in the event of the optionee's
cessation of service with United.
(2) The potential realizable value is based on a 10-year term of each option at
the time of grant. Assumed stock price appreciation of 5% and 10% is
mandated by rules of the Securities and Exchange Commission and is not
intended to forecast actual future financial performance or possible future
appreciation. The potential realizable value is calculated by assuming that
the deemed fair value of United's Common Stock for financial statement
presentation purposes on the date of grant appreciates at the indicated rate
for the entire term of the option and that the option is exercised at the
exercise price and sold on the last day of its term at the appreciated
price.
The following table provides information related to the number and value of
options held at December 31, 1995 by the named executive officers. No options
were exercised during 1995. The Company does not have any outstanding stock
appreciation rights ("SARs").
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END(#) AT FY-END ($) (1)
---------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
R. Scott Jones............................................ 1,800 4,200 $ 48,360 $ 106,500
Galen T. Pate............................................. 5,800 10,200 $ 164,280 $ 280,380
Marcia L. O'Brien......................................... 1,200 2,800 $ 32,240 $ 71,000
John H. LeMay............................................. 720 2,080 $ 18,330 $ 50,134
Donald M. Davies.......................................... 1,200 2,800 $ 32,240 $ 71,000
John C. Dorsey............................................ 900 2,100 $ 24,180 $ 53,250
</TABLE>
- ------------------------
(1) Article 7 of United's Bylaws establishes a formula to determine the price at
which United is entitled to exercise its right of first refusal relating to
proposed transfers by United shareholders. As of June 30, 1996 the price
determined by the formula was $102.44. Value is calculated on the basis of
$102.44 minus the option exercise price and multiplying the result by the
number of shares of common stock underlying the option.
52
<PAGE>
CERTAIN TRANSACTIONS
Total loans to all directors and executive officers of United, the principal
executive officers of Signal Bank and Goodhue Bank and principal holders of
United Common Stock (including their affiliates) as a group (14 individuals) at
June 30, 1996 and at December 31, 1995 were $5,339,738 and $5,395,229,
respectively. United believes that such loans are made in the ordinary course of
business with normal credit terms, including interest rate and
collateralization, and do not represent more than a normal risk of collection.
United owns 5% of the issued and outstanding stock of Community Bank Spring
Green, and John W. Johnson (a director of United) is a director, the President,
and a minority shareholder of Community Bank Spring Green.
Galen T. Pate (the President and a director of United) is Chairman and
President of BancInsure, Inc., and John W. Johnson (a director of United) is a
director and the Secretary/Treasurer of BancInsure, Inc. The Company paid
approximately $117,000 in premiums to BancInsure, Inc. during 1995 and
anticipates that premiums to be paid in 1996 will be approximately the same.
In March 1996, United Community Bancshares, Inc. Employee Stock Ownership
Plan (the "United ESOP") purchased 2,150 shares of common stock for an aggregate
purchase price of $200,079. Trustees of the ESOP include: R. Scott Jones, a
director and Chairman of the Board of United, Galen T. Pate, a director and
President of United, Marcia L. O'Brien, Executive Vice President and Chief
Financial Officer of United, John H. LeMay, an Executive Vice President and
Corporate Counsel of United, and Donald M. Davies, an Executive Vice President
of United.
UNITED EMPLOYEE STOCK OWNERSHIP PLAN AND UNITED 401(K) PROFIT SHARING PLAN
United sponsors an employee stock ownership plan for the benefit of certain
of its employees, called the "United Community Bancshares, Inc. Employee Stock
Ownership Plan" (the "United ESOP"). The United ESOP is a qualified retirement
plan designed to invest primarily in United capital stock. The United ESOP
currently holds 67,948 shares of United Common Stock, or 12.4% of the United
Common Stock outstanding, which has been allocated to individual participant
accounts in the United ESOP. The trustees of the United ESOP are R. Scott Jones,
Galen T. Pate, Marcia L. O'Brien, John H. LeMay and Donald M. Davies, and the
trustees are entitled to vote the shares of United Common Stock held by the ESOP
in connection with most matters brought before the United shareholders. These
individuals also serve as trustees of the United Community Bancshares, Inc.
401(k) Profit Sharing Plan.
United also sponsors a 401(k) plan, called the "United Community Bancshares,
Inc. 401(k) Profit Sharing Plan" (the "United 401(k) Plan"), a qualified
retirement plan maintained for the benefit of certain of its employees.
Contributions to the United 401(k) Plan are made by participants through pre-tax
salary deductions. United may make matching contributions in such amount as
determined by United's Board of Directors. Participants may direct the
investment of their contributions in one or more investment funds under the
401(k) Plan, which include a choice of seven mutual funds. The United 401(k)
Plan does not presently invest in United stock.
The United ESOP and United 401(k) Plan cover all eligible employees of
United and its subsidiaries. The provisions of the United ESOP are as follows.
New employees enter the ESOP on the first entry date after completing one year
of service. United's Board of Directors may, in its discretion, elect to make a
contribution to the ESOP for a year, in such amount as the Board determines. The
ESOP contribution for a year, if any, will be allocated pro rata on the basis of
compensation to the accounts of those participants who have completed 1,000
hours of service with United and are employed on the last day of the plan year,
December 31. It is anticipated that the Trustees of the ESOP will continue to
invest contributions primarily in United Common Stock. Participants will become
vested in the amounts in their accounts under a graduated vesting schedule (100%
vested upon completing 6 years of vesting service, 80% vested after 5
53
<PAGE>
years, 60% vested after 4 years, 40% vested after 3 years, 20% vested after 2
years, and 0% vested prior to completing 2 years of service). A participant who
terminates employment before completing the number of years of vesting service
to become 100% vested will forfeit the portion of his or her account that is not
vested.
The United 401(k) Plan provisions are as follows. New employees enter the
United 401(k) Plan on the first entry date after completing one year of service.
Three types of contributions are permitted. First, participants may make 401(k)
contributions through pre-tax salary deductions of up to 15% of their qualifying
compensation. Second, United will match 50% of up to the first 5% of pay which
is contributed as a 401(k) contribution made by each participant. Third,
United's Board of Directors may, in its discretion, elect to make a profit
sharing contribution to the United 401(k) Plan for a year, in such amount as the
Board determines. The profit sharing contribution for a year, if any, will be
allocated pro rata on the basis of compensation to the accounts of those
participants who have completed 1,000 hours of service with United and are
employed on the last day of the plan year, December 31. Participants will become
vested in the amounts in their accounts under a graduated vesting schedule (100%
vested upon completing 6 years of vesting service, 80% vested after 5 years, 60%
vested after 4 years, 40% vested after 3 years, 20% vested after 2 years, and 0%
vested prior to completing 2 years of service). A participant who terminates
employment before completing the number of years of vesting service to become
100% vested will forfeit the portion of his or her account that is not vested.
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of United's Common Stock, as of October 1, 1996 and as adjusted to
give effect to this Offering, by each shareholder known to United to own
beneficially more than 5% of the outstanding United Common Stock, by each
director or executive officer of United, and by all such directors and officers
(14 individuals) as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF UNITED
COMMON STOCK OWNED
NUMBER OF PERCENTAGE OF UNITED AFTER OFFERING (1)
NAME AND ADDRESS UNITED SHARES OWNED PRIOR --------------------------
OF BENEFICIAL OWNER OWNED TO OFFERING MINIMUM MAXIMUM
- ------------------------------------------------------ ------------- --------------------- ------------ ------------
<S> <C> <C> <C> <C>
Arlin A. Albrecht (2) 9,775 1.79% 1.65% 1.62%
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
Larry C. Barenbaum (2) 15,507 2.84% 2.61% 2.57%
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
Spencer A. Broughton (2) 1,725 * * *
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
Donald M. Davies (3) 1,800 * * *
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
John C. Dorsey (4) 2,900 * * *
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
James P. Fritz (2) 50,213 9.18% 8.45% 8.32%
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
John W. Johnson (5) 67 * * *
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF UNITED
COMMON STOCK OWNED
NUMBER OF PERCENTAGE OF UNITED AFTER OFFERING (1)
NAME AND ADDRESS UNITED SHARES OWNED PRIOR --------------------------
OF BENEFICIAL OWNER OWNED TO OFFERING MINIMUM MAXIMUM
- ------------------------------------------------------ ------------- --------------------- ------------ ------------
<S> <C> <C> <C> <C>
Ora G. Jones, Jr. (2) 15,509 2.84% 2.61% 2.57%
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
R. Scott Jones (6) 58,860 10.73% 9.88% 9.73%
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
Louis J. Langer (2) 21,379 3.91% 3.60% 3.54%
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
John H. LeMay (7) 1,966 * * *
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
Marcia L. O'Brien (3) 2,180 * * *
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
Galen T. Pate (8) 15,800 2.86% 2.66% 2.62%
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
United ESOP
2600 Eagan Woods Drive, Suite 155 67,948 12.43% 11.44% 11.26%
Eagan, MN 55121 (9)
All executive officers and directors as a group (14 198,138 35.36% 32.61% 32.12%
individuals) (10)
</TABLE>
- ------------------------
* Less than 1.0%.
(1) Assuming that none of such individuals purchases any shares of Common Stock
in the offering; to the extent such individuals purchase shares of Common
Stock in the offering, the number of shares and percentage owned by such
individual, and by all executive officers and directors as a group, will
exceed the amounts and percentages stated.
(2) Includes 200 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(3) Includes 1,200 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(4) Includes 900 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(5) Includes 67 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(6) Includes 1,800 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(7) Includes 720 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(8) Includes 5,800 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(9) Trustees of the United ESOP are: R. Scott Jones, Galen T. Pate, Marcia L.
O'Brien, John H. LeMay and Donald M. Davies.
(10) Includes 13,667 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
55
<PAGE>
SUPERVISION AND REGULATION
THE FOLLOWING DISCUSSION OF STATUTES AND REGULATIONS AFFECTING BANK HOLDING
COMPANIES AND BANKS IS A SUMMARY THEREOF AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH STATUTES AND REGULATIONS.
GENERAL
Commercial banking is highly regulated at both the federal and state level.
Deposits, reserves, investments, loans, consumer law compliance, issuance of
securities, payment of dividends, mergers and consolidations, electronic funds
transfers, management practices and other aspects of a holding company's and a
bank's operations are subject to regulation. This regulation is designed
primarily to protect depositors and not to benefit holders of securities of the
holding company or the bank. The highly regulated environment in which
commercial banks operate is subject to frequent change. Federal banking bills
are currently under consideration in Congress which, if enacted, could have a
variety of effects on this regulatory environment. In general, pending
legislation would repeal portions of the Glass-Steagall Act and would broaden
the permissible range of affiliations between commercial banks and investment
banks. In addition, these bills could limit the authority of the Office of the
Comptroller of the Currency to authorize new insurance activities for banks, and
could provide relief from a variety of federal banking regulations. United
cannot fully predict the nature or the extent of any effects which these
proposed regulatory changes or other possible regulatory changes may have on its
business and earnings. Such changes may have the effect of increasing or
decreasing the cost of doing business, modifying permissible activities, or
enhancing the competitive position of other financial institutions.
BANK HOLDING COMPANY REGULATION
In addition to a variety of generally applicable state and federal laws
governing businesses and employers, United is extensively regulated by special
laws applicable only to financial institutions. Virtually all aspects of
United's operations are subject to specific requirements or restrictions and
general regulatory oversight. With few exceptions, state and federal banking
laws have as their principal objective either the maintenance of the safety and
soundness of the financial institution and the federal deposit insurance system
or the protection of consumers or classes of consumers, rather than the specific
protection of shareholders of United.
SUPERVISION. As a bank holding company, United is subject to regulation by
the Federal Reserve Board under the BHC Act and various regulations adopted by
the Federal Reserve Board. United is required to file with the Federal Reserve
Board quarterly and annual reports and such additional information as the
Federal Reserve Board may require pursuant to the BHC Act. The Federal Reserve
Board also may examine United. United was examined most recently in August,
1996. United is not subject to any formal or informal enforcement actions by any
bank regulatory office as a result of such examination or for any other reason.
The Federal Reserve Board also has authority, in certain circumstances, to
approve or disapprove stock redemptions, changes in ownership or control, and
dividend payments. The Federal Reserve Board may also require that United
terminate an activity or terminate control of or liquidate or divest certain
non-bank subsidiaries or affiliates when the Federal Reserve Board believes the
activity or the control of the subsidiary or affiliate constitutes a significant
risk to the financial safety, soundness or stability of any of its banking
subsidiaries. Under the BHC Act and regulations adopted by the Federal Reserve
Board, a bank holding company and its non-banking subsidiaries are prohibited
from requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, United is
required by the Federal Reserve Board to maintain certain levels of capital.
PAYMENT OF DIVIDENDS BY UNITED. Federal Reserve Board policy strongly
discourages a bank holding company from declaring or paying a cash dividend
which would impose undue pressure on the capital of subsidiary banks or would be
funded only through borrowings or other arrangements that might adversely affect
the holding company's financial position.
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ACTIVITY LIMITATIONS. The BHC Act, in general, limits the activities that
may be engaged in by a bank holding company and its subsidiaries to those so
closely related to banking, managing or controlling banks as to be a proper
incident thereto. The Federal Reserve Board, in making such determinations,
considers whether performance of the activities by a bank holding company can
reasonably be expected to produce benefits to the public without any adverse
effects such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. A bank holding
company may engage, subject to Federal Reserve Board guidelines and approvals,
in such closely-related activities as: (1) making or acquiring loans and other
extensions of credit of the type made by mortgage, finance, credit card, or
factoring companies; (2) operating an industrial bank; (3) servicing loans and
other extensions of credit; (4) performing the functions of a trust company; (5)
acting as an investment or financial advisor; (6) leasing certain real estate or
personal property; (7) making investments to promote community welfare; (8)
providing data processing and data transmission services; (9) acting as an
underwriter for credit life insurance and credit health and accident insurance
directly related to extensions of credit by the holding company system; (10)
providing courier services for checks and certain other instrument exchanges
among banks and for audit and accounting media of a banking or financial nature;
(11) providing certain kinds of management consulting advice; (12) selling, at
retail, money orders, travelers' checks and U.S. savings bonds; (13) performing
real estate appraisals; (14) arranging commercial real estate equity financing;
(15) providing securities brokerage services; (16) underwriting or dealing in
government obligations and money market instruments; (17) engaging in foreign
exchange advisory and transnational services; and (18) acting as a futures
commission merchant. The Federal Reserve Board recently proposed amendments to
its regulations defining the scope of permissible bank holding company
activities which will, if adopted, broaden the scope of such activities. United
may, in the future, if appropriate opportunities arise, engage in the
acquisition of additional banks, subject to the approval of the Federal Reserve
Board. See "Business -- Growth Strategies -- Acquisitions." For the near future,
the business of United will essentially be the operation of Signal Bank, Goodhue
Bank, CCC and Unitech, and, if the Park Acquisition is consummated, Park Bank.
Under the BHC Act, United must obtain prior Federal Reserve approval before
it acquires direct or indirect ownership or control of any voting shares of any
bank or other bank holding company if, after such acquisition, it will own or
control directly or indirectly more than 5% of the voting stock of the entity,
unless it already owns a majority of the voting stock of the entity. United also
must obtain prior Federal Reserve approval before it acquires all or
substantially all of the assets of a bank or merges or consolidates with another
bank holding company. United will be, with limited exceptions, prohibited from
acquiring direct or indirect ownership or control of a company which is not a
bank or a bank holding company, and must engage in the business of banking or
managing or controlling banks or furnishing services to or performing services
for its subsidiary Banks. The Federal Reserve, by order or regulation, may
authorize United to engage in or acquire stock in a company engaged in
activities so closely related to banking or managing or controlling banks as to
be a proper incident thereto. In reviewing any application or proposal by
United, the Federal Reserve is required to consider the financial and managerial
resources and future prospects of United and the banks concerned, the
convenience and needs of the community to be served, as well as the probable
effect of the transaction upon competition. Recent decisions by the Federal
Reserve under the BHC Act have underscored the importance placed by the Federal
Reserve upon the record of the applicant and its subsidiary banks in meeting the
credit needs of its community in accordance with the Community Reinvestment Act
of 1977. See "Community Reinvestment Act and Other Consumer Protection Statutes"
below.
BANK REGULATION
The continued earnings and growth of United's Banks will be influenced by
general economic conditions, the monetary and fiscal policies of the federal
government and the policies of regulatory agencies, particularly the Federal
Reserve Board. The Federal Reserve Board implements national monetary policies
by its open-market operations in United States Government securities, by
adjusting the required level of reserves for financial institutions subject to
its reserve requirement and by varying the discount rate applicable to
borrowings by banks which are members of the Federal Reserve System. The actions
of the
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Federal Reserve Board in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates charged on loans and
deposits. The nature and impact of any future changes in monetary policies
cannot be predicted.
SUPERVISION. Signal Bank, as a state chartered banking corporation, is
subject to primary supervision, examination and regulation by the Minnesota
Department of Commerce and the Federal Deposit Insurance Corporation. Each of
Goodhue Bank and Park Bank, as a national chartered banking corporation, is
subject to primary supervision, examination and regulation by the Office of the
Comptroller of the Currency (the "OCC"). Various requirements and restrictions
under the laws of the State of Minnesota and the United States also affect the
operation of United's subsidiary banks. These statutes and regulations relate to
many aspects of the operations of United's subsidiary banks, including reserves
against deposits, loans, investments, mergers and acquisitions, borrowings,
dividends and locations of branch offices. Some of these statutes and
regulations and their effect on United's subsidiary banks are discussed below.
Moreover, from time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
intermediaries are frequently made. The likelihood of any major changes and the
impact of such changes are impossible to predict.
PAYMENT OF DIVIDENDS BY THE BANKS. There are state and federal statutory
and regulatory requirements limiting the amount of dividends which may be paid
to United by its subsidiary banks. Generally, a bank may pay cash dividends out
of current operating earnings to the extent that the current rate of earnings
retention is consistent with the bank's capital needs, asset quality and overall
financial condition. The governing regulatory agency has the authority to
prohibit a bank from engaging in business practices which the governing
regulatory agency considers to be unsafe or unsound. It is possible, depending
upon the financial condition of United's subsidiary banks, that the governing
regulatory agency may assert that the payment of dividends to United by any one
or more of the banks might, under some circumstances, be such an unsafe and
unsound practice.
COMMON LIABILITY. Under federal law, a depository institution insured by
the FDIC can be held liable for any loss incurred by, or reasonably expected to
be incurred by, the FDIC in connection with the default of a commonly controlled
FDIC-insured depository institution or any assistance provided by the FDIC to a
commonly controlled FDIC-insured institution in danger of default. These
provisions can have the effect of making subsidiary banks of United responsible
for FDIC-insured losses at another subsidiary bank.
AFFILIATE TRANSACTION LIMITATIONS. Financial institutions are subject to
certain restrictions imposed by federal law on any extensions of credit to, or
the issuance of a guarantee or letter of credit on behalf of, United or other
affiliates, the purchase of or investment in stock or other securities thereof,
the taking of such securities as collateral for loans and the purchase of assets
from United or other affiliates. Such restrictions prevent United and such other
affiliates from borrowing from Signal Bank, Goodhue Bank and any other
subsequently acquired bank unless the loans are secured by marketable
obligations of specified amounts. Further, such secured loans, investments and
other transactions between any of the subsidiary banks and United or any other
affiliate are limited to 10% of any subsidiary bank's capital and surplus (as
defined by federal regulations) and such secured loans, investments and other
transactions are limited, in the aggregate, to 20% of any subsidiary bank's
capital and surplus (as defined by federal regulations). Such transactions must
also comply with regulations prohibiting terms that would be preferential to
United or other affiliates of the banks. All affiliate transactions are in
compliance with these provisions.
REGULATORY CAPITAL REQUIREMENTS.
Each of United's subsidiary banks is required to comply with capital
adequacy standards set by the respective primary federal regulatory agency. The
regulations may establish higher minimum requirements if, for example, a bank
has previously received special attention or has a high susceptibility to
interest rate risk. Banks with capital ratios below the required minimum are
subject to certain administrative actions.
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More than one capital adequacy standard applies, and all applicable standards
must be satisfied for an institution to be considered to be in compliance. There
are two basic measures of capital adequacy: a risk-based capital measure, and a
Tier 1 leverage measure.
The risk-based capital measure was adopted to assist in the assessment of
capital adequacy of financial institutions by, (i) making regulatory capital
requirements more sensitive to differences in risk profiles among organizations;
(ii) introducing off-balance-sheet items into the assessment of capital
adequacy; (iii) reducing the disincentive to holding liquid, low-risk assets;
and (iv) achieving greater consistency in evaluation of capital adequacy of
major banking organizations throughout the world. The risk-based guidelines
include both a definition of capital and a framework for calculating
risk-weighted assets by assigning assets and off-balance-sheet items to broad
risk categories. An institution's risk-based capital ratios are calculated by
dividing its qualifying capital by its risk-weighted assets.
Qualifying capital consists of two types of capital components: "core
capital elements" ("Tier 1" capital) and "supplementary capital elements" ("Tier
2" capital). Tier 1 capital is generally defined as the sum of core capital
elements less goodwill and other intangibles. Core capital elements consist of
(i) common shareholders' equity, (ii) qualifying perpetual preferred stock,
subject to certain limitations, and (iii) minority interests in the equity
accounts of consolidated subsidiaries. Supplementary capital ("Tier 2" capital)
consists of such additional capital elements as (i) allowance for loan and lease
losses (subject to limitations); (ii) perpetual preferred stock which does not
qualify as Tier 1 capital (subject to certain conditions); (iii) hybrid capital
instruments, perpetual debt and mandatory convertible debt securities; and (iv)
term subordinated debt and intermediate-term preferred stock (subject to
limitations). The maximum amount of Tier 2 capital that may be included in
qualifying total capital is limited to 100% of Tier 1 capital (net of goodwill).
Under current capital adequacy standards, financial institutions must meet a
minimum ratio of qualifying capital to risk-weighted assets of 8%. Of that
ratio, at least half, or 4%, must be in the form of Tier 1 capital. At June 30,
1996, Signal Bank had a Tier 1 risk-based capital ratio of 10.7%, Goodhue Bank
had a Tier 1 risk-based capital ratio of 12.2%, and Park Bank had a Tier 1
risk-based capital ratio of 11.2%.
The Banks also must maintain an allowable leverage ratio. The minimum
leverage ratio is defined as the ratio of Tier 1 capital to average total
assets. Under current capital adequacy standards, financial institutions must
meet a minimum leverage ratio of 4%. Each of Signal Bank, Goodhue Bank and Park
Bank is in compliance with all capital standards currently applicable.
As a result of the FDIC Improvement Act of 1991, the federal bank regulatory
agencies are directed to adopt regulations defining banks as "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." Under the law, depending upon the bank's
classification, a bank may be directed to prepare and implement a capital
restoration plan, to be guaranteed by its parent bank holding company. Further,
banks are subject to increased restrictions upon activities and heightened
regulatory management as capital classifications decline.
Generally, under regulations adopted by all of the bank federal regulatory
agencies, "well capitalized" has been defined as an institution with a total
capital to risk-based asset ratio of 10%, a Tier 1 capital to risk-based asset
ratio of 6% and a Tier 1 leverage ratio of 5%. The regulations further provide
that an "adequately capitalized" institution must have a total capital to
risk-based asset ratio of at least 8%, a Tier 1 capital to risk-based asset
ratio of 4% and a Tier 1 leverage ratio of 4%. Institutions not satisfying the
requirements for "adequately capitalized" will be deemed "undercapitalized."
Institutions with a total capital to risk-based asset ratio of 6% or less, a
Tier 1 capital to risk-based asset ratio of 3% or less, or a Tier 1 leverage
ratio of 3% or less will be deemed "significantly undercapitalized." Finally,
the regulations provide that an institution with a Tier 1 leverage ratio of less
than 2% will be deemed "critically undercapitalized." Federal bank regulatory
agencies, including the FDIC, are authorized to down-grade a financial
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institution from one capital category to the next if an examination reveals that
the asset quality, management, earnings or liquidity of that institution are
less than satisfactory. Under the regulations, each of Signal Bank, Goodhue Bank
and Park Bank would be deemed a "well capitalized" institution based upon its
equity capital as of June 30, 1996.
Signal Bank was examined most recently in April 1996. Goodhue Bank was
examined most recently in August 1996. Park Bank was examined most recently in
January 1996. Such regulatory examinations by the OCC, the FDIC or Minnesota
Department of Commerce, as the case may be, are not audits and are conducted
solely for the benefit of the bank regulators in the discharge of their
supervisory responsibilities. Neither Signal Bank nor Goodhue Bank nor Park Bank
is subject to any formal or informal enforcement actions by any bank regulatory
office as a result of such examinations or for any other reason.
ACQUISITIONS AND BRANCHING. On September 29, 1994, the Riegle-Neal
Interstate Banking and Branching Act of 1994 (the "RNA") became effective,
creating a federal scheme for interstate banking and branching. The RNA
authorizes, for "well-capitalized" institutions, bank holding company
acquisitions of banks anywhere in the nation. The RNA will also permit
subsidiaries of the same bank holding company to act as agents for one another
in receiving and renewing deposits, closing and servicing loans, and accepting
loan payments. RNA will permit nationwide branching through acquisition or
consolidation no later than June 1997. States, through legislative action taken
prior to June 1997, may opt out of the interstate branching provisions of the
RNA or opt in to allow interstate branching prior to June 1997. Banking
organizations located in states which opt out of this portion of the RNA will
not be able to branch interstate. Of those states that have considered and acted
upon the state branching provisions of the RNA to date, the vast majority have
opted in. The Minnesota legislature has taken action to opt in and has
authorized interstate branching effective June 1, 1997. The RNA could present
acquisition and branching opportunities to United, and could allow out-of-state
banks easy access to markets currently served by United thereby increasing
competition. See "Business -- Competition."
COMMUNITY REINVESTMENT ACT AND OTHER CONSUMER PROTECTION STATUTES
The Community Reinvestment Act of 1977 ("CRA") requires a financial
institution to help meet the credit needs of its entire community, including
low-income and moderate-income areas. On May 3, 1995, the federal banking
agencies issued final regulations which change the manner in which they measure
a bank's compliance with its CRA obligations. The final regulations adopt a
performance-based evaluation system which bases CRA ratings on an institution's
actual lending, service and investment performance, rather than the extent to
which the institution conducts needs assessments, documents community outreach
or complies with other procedural requirements. Federal banking agencies may
take CRA compliance into account when regulating and supervising bank and
holding company activities; for example, CRA performance may be considered in
approving proposed bank acquisitions. The Banks are also subject to a variety of
consumer protection laws and fair lending laws. Violations of these laws may
cause regulators to impose substantial penalties or take other administrative
action. Goodhue Bank has received an "outstanding" CRA rating, and each of
Signal Bank and Park Bank have received a "satisfactory" CRA rating.
RECENT LEGISLATION
The deposits of Signal Bank, Goodhue Bank and Park Bank are insured by the
Bank Insurance Fund ("BIF") which is administered by the FDIC. The FDIC also
administers the Savings Association Insurance Fund ("SAIF"). Each insurance fund
has the same designated reserve ratio; however, the BIF has met its designated
reserve ratio and the SAIF has not, resulting in a significant deposit insurance
premium disparity between financial institutions insured by SAIF and BIF.
Recently passed legislation has provided for a merger of the two funds and
clarified responsibility for financial obligations resulting from the failure of
savings and loan associations. The financial impact on United of the assessments
mandated by this legislation is not material.
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DESCRIPTION OF SECURITIES
GENERAL
The Company's Restated Articles of Incorporation, as amended (the "Restated
Articles") authorize the issuance of 6,000,000 shares of which 5,000,000 are
designated Common Stock, par value $.01 per share solely for the purpose of a
statute or regulation imposing a tax or fee based upon the capitalization of the
Company, and 1,000,000 are undesignated. As of June 30, 1996, 546,686 shares of
Common Stock were issued and outstanding.
The Restated Articles authorize the Board to provide, without further
shareholder action, for the issuance of one or more classes or series from the
undesignated shares as it may determine from time to time by a resolution
setting forth the designation of the class or series and fixing the relative
rights and preferences of the class or series; provided however, that the common
shares of the corporation shall be the only class or series of stock of the
corporation entitled to vote, and the right to vote shall not accrue to any
other class or series of stock except as otherwise required by law. Pursuant to
this authority, the Board of Directors has designated 440,000 shares as %
Cumulative Perpetual Preferred Stock, Series A (the "Series A Preferred Stock"),
$25.00 stated value per share. The rights, preferences, privileges,
qualifications, restrictions and limitations of the Series A Preferred Stock are
described in a Statement of Designation to be filed with the Minnesota Secretary
of State ("Statement of Designation"). For a complete legal description of the
Company's securities, reference is made to the Company's Restated Articles and
the Statement of Designation, both of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
SERIES A PREFERRED STOCK
GENERAL. United has designated 440,000 shares of Series A Preferred Stock
for issuance in the offering of the Series A Preferred Stock taking place
concurrently with this Offering. As of the date of this Prospectus there are no
shares of any class or series of preferred stock outstanding and the Series A
Preferred Stock will be issued only if the Offering of Series A Preferred Stock
is completed, which cannot be assured. The Board of Directors of United has the
authority, without shareholder approval (except as may be required by the
Minnesota Business Corporation Act (the "MBCA")), to issue the remaining
undesignated shares with conversion, liquidation, dividend and other rights
which could be senior to or on a parity with the Series A Preferred Stock. In
addition, future issuances of additional shares of preferred stock could under
certain circumstances have the effect of delaying or preventing a change of
control of United. See "Description of Securities -- Anti-Takeover Provisions."
The following statements are brief summaries of certain provisions relating
to the Series A Preferred Stock and are qualified in their entirety by the
Statement of Designation.
DIVIDENDS. Holders of shares of the Series A Preferred Stock will receive,
when, as and if declared by the Board of Directors of United, dividends which
will accrue from the date of issue at an annual amount equal to $ per share
(the "Series A Dividend Amount") and which will be payable quarterly in arrears
on January 15, April 15, July 15 and October 15 of each year, commencing April
15, 1997. Under the MBCA, United may declare and pay dividends on the Series A
Preferred Stock only if United will be able to pay its debts in the ordinary
course of business after making the distribution. In addition, United's primary
source of cash to make dividend payments is dividends that United receives from
its subsidiary banks, which may be unable to make payments to United under
various applicable regulations. See "-- Dividend Policy" and "Supervision and
Regulation." If United had no cash, it would be unable to pay the scheduled
dividends on the Series A Preferred Stock. Unpaid dividends would accumulate and
be payable when United next had the ability to pay them. Dividends will be
payable to holders of record of the Series A Preferred Stock as they appear on
the books of United on such respective dates, not exceeding 60 days preceding
such dividend payment date, as may be fixed by the Board of Directors of United
in advance of the payment of each particular dividend.
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The Company has received a commitment for additional debt financing for the
Park Acquisition and plans to enter into a loan agreement with respect to such
financing on or before the closing of the Park Acquisition. This loan agreement
may require United to maintain certain ratios or impose other restrictions which
could directly or indirectly restrict United's ability to pay dividends.
The Series A Preferred Stock will rank prior to the Common Stock as to
dividends and upon liquidation. Before any dividends (other than dividends
payable in Common Stock) on any class or series of stock of United ranking
junior to the Series A Preferred Stock as to dividends or upon liquidation shall
be declared or paid or set apart for payment, the holders of shares of the
Series A Preferred Stock shall be entitled to receive cumulative cash dividends,
but only when and as declared by the Board of Directors. No dividends shall be
declared on any class or series of stock ranking on a parity with the Series A
Preferred Stock as to dividends in respect of any dividend period unless there
shall likewise be or have been declared on the Series A Preferred Stock
dividends at the Series A Dividend Amount for all quarterly periods coinciding
with or ending before such quarterly period. If United is in default with
respect to any dividends payable on, or any obligation to retire shares of, its
Series A Preferred Stock, United may not declare or pay or set apart for payment
any dividends or make any distribution in cash or other property on, or redeem,
purchase or otherwise acquire, any other class or series of stock ranking junior
to or on a parity with the Series A Preferred Stock either as to dividends or
upon liquidation, except actions consistent with the preceding sentence with
respect to preferred stock ranking on a parity with the Series A Preferred
Stock. Accruals of dividends will not bear interest. When dividends are not paid
in full upon the Series A Preferred Stock and any other series or class of stock
ranking on a parity with the Series A Preferred Stock as to dividends, all
dividends declared upon the Series A Preferred Stock and such other series or
class of stock will be declared pro rata so that the amount of dividends
declared per share on the Series A Preferred Stock and such other series or
class of stock will in all cases bear the same ratio that accrued dividends per
share on the Series A Preferred Stock, and on such other series or class of
stock, bear to each other.
The amount of dividends payable per share for each dividend period shall be
computed by dividing the Series A Dividend Amount by four. The amount of
dividends payable for the initial dividend period or any period shorter than a
full dividend period shall be computed on the basis of a 360-day year comprised
of twelve 30-day months commencing as of the issuance of the Series A Preferred
Stock.
NO CONVERSION RIGHTS. The holders of Series A Preferred Stock will not be
entitled at any time to convert their shares of Series A Preferred Stock into
shares of Common Stock or into any other shares of the capital stock of United.
REDEMPTION AT THE OPTION OF UNITED. At any time on and after January 15,
2000, the Series A Preferred Stock may be redeemed, in whole or in part, by
United at its sole option (with prior Federal Reserve Board approval), on any
date upon not less than 30 days' and not more than 60 days' prior written notice
at the following per share redemption amounts: $25.75, if the redemption date is
within the 12-month period beginning January 15, 2000; $25.38, if the redemption
date is within the 12-month period beginning January 15, 2001; and $25.00, if
the redemption date is on or after January 15, 2002; plus in each case accrued
and unpaid dividends to the date fixed for redemption. United shall, on or prior
to the date fixed for redemption, but not earlier than 45 days prior to the
redemption date, deposit in a separate account a sum sufficient to redeem the
shares called for redemption, and United shall pay from such account to the
holders of shares called for redemption the redemption price upon surrender of
their certificates. Such deposit shall be deemed to constitute full payment of
such shares to their holders and from and after the date of such deposit,
notwithstanding that any certificates for such shares shall not have been
surrendered for cancellation, the shares represented thereby shall no longer be
deemed outstanding, the right to receive dividends and distributions shall cease
to accrue from and after the redemption date, and all rights of the holders of
the Series A Preferred Stock called for redemption as shareholders of United
shall cease and terminate, except the right to receive the redemption price,
without interest, upon the surrender of their respective certificates.
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Unless full accumulated dividends on all outstanding shares of the Series A
Preferred Stock shall have been or contemporaneously are declared and paid or
set apart for payment for all past dividend periods, the Series A Preferred
Stock may not be redeemed unless all the outstanding Series A Preferred Stock is
redeemed, and United may not purchase any shares of the Series A Preferred Stock
otherwise than pursuant to a purchase offer made on the same terms to all
holders of Series A Preferred Stock, provided that United may complete the
purchase or redemption of shares of Series A Preferred Stock for which a
purchase contract was entered into, or notice of redemption of which was
initially given, prior to such default.
Notice of redemption shall be mailed to each holder of Series A Preferred
Stock to be redeemed at the address shown on the books of United not less than
30 days nor more than 60 days prior to the redemption date. If less than all of
the outstanding shares of Series A Preferred Stock are to be redeemed, United
will select the shares to be redeemed by lot, pro rata (as nearly as may be), or
in such other equitable manner as the Board of Directors of United may
determine.
United is required to obtain the approval of the Federal Reserve Board for
any redemption of any shares of the Series A Preferred Stock. Because redemption
of the Series A Preferred Stock would reduce United's regulatory capital,
redemption could be effected only if United had sufficient excess capital to
meet applicable guidelines after the redemption. The Federal Reserve generally
does not favor substantial reductions of capital even if excess capital exists.
LIMITED VOTING RIGHTS. The Series A Preferred Stock has no voting rights,
except as indicated herein or otherwise provided by the MBCA. The MBCA provides
the Series A Preferred Stock with certain rights to vote on amendments to the
Articles of Incorporation, notwithstanding any provisions of the Articles of
Incorporation to the contrary, in certain circumstances that would affect the
holders or attributes of the Series A Preferred Stock. The MBCA also provides
certain voting rights to the Series A Preferred Stock in approving certain plans
of merger if any provision of the plan, if included in an amendment to the
Articles of Incorporation, would entitle the stock to such voting rights.
So long as any shares of the Series A Preferred Stock are outstanding,
United will not, without the consent of the holders of a majority of the
outstanding shares of Series A Preferred Stock, voting separately as a class,
(i) amend, alter or repeal or otherwise change any provision of the Restated
Articles or the Statement of Designation authorizing the Series A Preferred
Stock, if such amendment, alteration or repeal would materially and adversely
affect the rights, preferences, powers or privileges of the Series A Preferred
Stock; or (ii) create, authorize or issue, or increase the number of authorized
or issued shares of, any class or series of capital stock of United, or any
warrants, options or other rights convertible or exchangeable into any class or
series of capital stock of United, ranking prior to the Series A Preferred Stock
either as to cash dividend rights or rights on liquidation, dissolution or
winding up or ranking on a parity with the Series A Preferred Stock either as to
cash dividend rights or rights upon liquidation.
Whenever dividends on the Series A Preferred Stock shall be in arrears in an
amount equal to at least six quarterly dividends, the holders of Series A
Preferred Stock (voting as a class and with all other series of preferred stock
ranking on a parity with the Series A Preferred Stock either as to dividends or
upon liquidation and upon which like voting rights have been conferred and are
exercisable) will be entitled to vote for the election of two additional
directors on the terms set forth below until, in the case of the Series A
Preferred Stock, all past dividends in arrears on the Series A Preferred Stock
shall have been paid in full. Holders of all series of preferred stock which are
granted such voting rights (which rank on a parity with the Series A Preferred
Stock) will vote as a class, and each holder of such preferred stock will have
one vote for each share of stock held. In such case, the Board of Directors of
United will be increased by two directors, and the holders of such series of
preferred stock will have the exclusive right as a class, as outlined above, to
elect two directors at the next annual meeting of shareholders, subject to the
extent required by regulation or statute and to prior notification to the
Federal Reserve Board. Such directors may be removed only by a vote
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of the majority of holders of preferred stock which were entitled to elect such
directors. Upon any termination of the right of the holders of such series of
preferred stock as a class to vote for directors, the term of office of all
directors then in office elected by such series of preferred stock shall
automatically terminate.
LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or
winding-up of United, whether voluntary or involuntary, before any payment or
distribution of the assets of United, or proceeds thereof, shall be made to or
set apart for the holders of any class or series of stock of United ranking
junior to the Series A Preferred Stock upon liquidation, the holders of the
Series A Preferred Stock shall be entitled to receive $25.00 per share of Series
A Preferred Stock, plus an amount equal to all dividends (whether or not earned
or declared) accrued and unpaid to the date of final distribution, but such
holders shall not be entitled to any further payment. If, upon any liquidation,
dissolution or winding-up of United, the assets of United, or proceeds thereof,
distributable among the holders of shares of the Series A Preferred Stock and
any other class or series of preferred stock ranking on a parity with the Series
A Preferred Stock as to payments upon liquidation, dissolution or winding-up
shall be insufficient to pay in full such preferential amount, then such assets,
or the proceeds thereof, shall be distributed among all holders of the Series A
Preferred Stock and any other class or series ranking on parity with the Series
A Preferred Stock ratably in accordance with the respective amounts that would
be payable on such shares if all amounts payable thereon were paid in full. The
voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of
stock, securities or other consideration) of all or substantially all the
property or assets of United or a consolidation, merger or plan of exchange of
United with one or more other corporations whether or not United is the
corporation surviving in such consolidation or merger (in which consolidation or
merger or plan of exchange any stockholders of United receive distributions of
cash or securities or other property) will be deemed to be a liquidation,
dissolution or winding-up of United.
TRANSFER AGENT AND REGISTRAR. The transfer agent, dividend disbursing agent
and registrar for the Series A Preferred Stock is United.
COMMON STOCK
GENERAL. United is currently authorized to issue 5,000,000 shares of Common
Stock, $.01 par value solely for the purpose of a statute or regulation imposing
a tax or fee based on the capitalization of the Company. As of June 30, 1996,
546,686 shares of Common Stock were issued and outstanding. No share of Common
Stock is entitled to preference over any other share and each such share is
equal to other shares of Common Stock in all respects. In any distribution of
capital assets, whether voluntary or involuntary, holders of Common Stock are
entitled to receive pro rata the assets remaining after creditors and holders,
if any, of stock with a liquidation preference have been paid in full.
VOTING. Common shareholders are entitled to one vote for each share held of
record on each matter submitted to a vote of the common shareholders.
DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. Subject to the preferential
dividend rights of the Series A Preferred Stock, and any subsequent classes or
series of stock with such rights and preferences superior to the Common Stock as
the Board of Directors may designate, and the restrictions described below with
respect to United's creditors, the Common Stock shareholders are entitled to
receive dividends as and when declared by the Board of Directors of United.
However, dividends on United's Common Stock are not contemplated in the
foreseeable future. See "Description of Securities -- Dividend Policy." United's
ability to pay dividends on the Common Stock is subject to the same provisions
of the MBCA applicable to the Series A Preferred Stock. See "Description of
Securities -- Series A Preferred Stock -- Dividends."
Federal and state banking laws regulate United's ability to pay dividends
and redeem its equity securities. No redemptions of any equity securities are
permitted without the approval of the Federal Reserve Board if the aggregate
amount of such redemptions exceeds 10% of the net worth of United over a
12-month period. In addition, no redemption of or dividend on the Common Stock
is permitted if it would constitute an unsafe or unsound practice according to
the Federal Reserve Board.
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If United were liquidated, the common stockholders would be entitled to
receive, pro rata, all assets available for distribution to them after
satisfaction of United's liabilities and any payment applicable to the Series A
Preferred Stock, and any other preferred stock, then outstanding. See "Series A
Preferred Stock -- Liquidation Rights" above.
RIGHT OF FIRST REFUSAL. Article 7 of the Company's Bylaws grants the
Company the option to purchase the shares of Common Stock held by a stockholder
or such stockholder's estate in the event of the stockholder's death,
insolvency, or desire to sell or transfer shares. If the Company does not
exercise its option to purchase the available shares within 60 days, the other
stockholders may acquire the shares in proportion to their ownership of the
Company. The Company's ESOP may acquire all remaining shares of stock not
purchased by other stockholders.
NO CUMULATIVE VOTING
The Restated Articles of Incorporation of United provide that United
shareholders will not have cumulative voting rights in the electing of
directors. Under cumulative voting, a shareholder could cast that number of
votes equal to such shareholder's shares multiplied by the number of directors
to be elected in favor of one candidate or among several candidates. Cumulative
voting makes it possible for less than a majority of the shareholders to elect
one or more members of the board of directors. Under non-cumulative voting, a
majority of the shareholders can elect the entire board of directors.
NO PREEMPTIVE RIGHTS
The Restated Articles of Incorporation of United provide that United
shareholders will not have any preemptive rights to subscribe for or purchase
additional shares of United capital stock. This means that a United shareholder
will not be entitled to acquire a certain fraction of the unissued securities or
rights to purchase securities of United before United may offer them to other
persons. Preemptive rights enable a shareholder to maintain the shareholder's
proportional voting power and proportional rights to receive dividends and other
distributions by the company.
LIMITATION OF DIRECTOR LIABILITY; INDEMNIFICATION
The MBCA permits Minnesota corporations, in their Articles of Incorporation,
to limit or eliminate the personal liability of directors to corporations and
their shareholders for monetary damages for breach of directors' fiduciary duty
of care. The duty of care requires that, when acting on behalf of a corporation,
directors must exercise an informed business judgment based on all material
information reasonably available to them. Absent the limitations authorized by
the MBCA, directors are accountable to corporations and their shareholders for
monetary damages for conduct constituting gross negligence in the exercise of
their duty of care. Although the MBCA provision does not change directors' duty
of care, it enables corporations to limit available relief to equitable remedies
such as injunction or rescission.
United's Restated Articles of Incorporation limit the liability of the
directors to the fullest extent permitted by the MBCA. Specifically, directors
of United will not be personally liable for monetary damages for breach of their
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to United or its shareholders, (ii) acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) corporate distributions which are in contravention of restrictions
in the MBCA, United's Restated Articles of Incorporation or Bylaws, or any
agreement to which United is a party, (iv) violations of the Minnesota
securities laws, (v) any transaction from which the director derives an improper
personal benefit, or (vi) any act or omission occurring prior to the effective
date of the provision in United's Restated Articles of Incorporation eliminating
or limiting liability. This provision will not change the liability of United's
directors under the federal securities laws. United's Restated Articles of
Incorporation also provide that if the MBCA is later amended, then the liability
of the directors of United will be eliminated or limited to the fullest extent
permitted by the MBCA, as so amended. The inclusion of this provision in the
Restated Articles of Incorporation may have the effect of reducing the
likelihood of
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derivative litigation against directors and may 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
benefitted United and its shareholders.
Minnesota Statutes Section 302A.521 provides that officers and directors of
United have the right to indemnification from United for liability arising out
of certain actions. United has included in its Bylaws a provision to indemnify
its directors and officers for expenses and liabilities to the fullest extent
permitted by Minnesota law.
ANTI-TAKEOVER PROVISIONS
Certain provisions of Minnesota law and United's Restated Articles of
Incorporation described below could have an anti-takeover effect. These
provisions are intended to provide management flexibility to enhance United
shareholder value, the likelihood of continuity and stability in the composition
of United's Board of Directors and in the policies formulated by the Board and
to discourage an unsolicited takeover of United, if the Board determines that
such a takeover is not in the best interests of United and its shareholders.
However, these provisions could have the effect of discouraging certain attempts
to acquire United which could deprive United's shareholders of opportunities to
sell their shares of Common Stock at prices higher than prevailing market
prices.
Section 302A.671 of the Minnesota Statutes applies, with certain exceptions,
to any acquisitions of voting stock of United (from a person other than United,
and other than in connection with certain mergers and exchanges to which United
is a party) resulting in the beneficial ownership of 20% or more of the voting
stock then outstanding. Section 302A.671 requires approval of the granting of
voting rights for the shares received pursuant to any such acquisition by a
majority vote of the shareholders of United. In general, shares acquired without
such approval are denied voting rights and are redeemable at their then fair
market value by United within 30 days after the acquiring person has failed to
deliver a timely information statement to United or the date the shareholders
voted not to grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by United, or any subsidiary of United, with any shareholder who
purchases 10% or more of United's voting shares (an "interested shareholder")
within four years following such interested shareholder's share acquisition
date, unless the business combination is approved by a committee of all of the
disinterested members of the Board of Directors of United before the interested
shareholder's share acquisition date.
In addition, the existence of undesignated stock in the Restated Articles of
Incorporation allows the Board of Directors of United, without further
shareholder action, to issue preferred stock in amounts that could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, control of United.
DIVIDEND POLICY
Funds available to United for the payment of dividends, redemption of stock
and operating expenses will consist principally of tax benefit payments and
dividends received by United from Signal Bank and Goodhue Bank, and, if the Park
Acquisition is consummated, Park Bank. See "Supervision and Regulation." Payment
of dividends on United's Series A Preferred Stock is also subject to certain
regulatory restrictions. Payment of dividends on United's Common Stock is also
subject to certain regulatory restrictions and will be at the discretion of
United's Board of Directors; however, dividends on United's Common Stock are not
contemplated in the foreseeable future and, if ever declared, would be subject
to the prior payment of all accrued and unpaid dividends on United's Series A
Preferred Stock and any other class or series of stock having preferential
dividend rights.
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RESTRICTIONS ON TRANSFERABILITY
COVENANT NOT TO SELL STOCK
As a condition of the sale of the Shares, an investor must sign a covenant
that will prohibit such investor from selling the Shares purchased in this
Offering by such investor until the earlier of (i) a period ending 180 days
after the date of the closing of a public offering which results in the listing
of the Company's Common Stock for trading on the Nasdaq SmallCap Market, the
Nasdaq National Market, or any securities exchange registered under the
Securities Act of 1934, as amended (neither this offering of Common Stock nor
the Company's concurrent offering of Series A Preferred Stock constitutes such
an offering) or (ii) two years from the date of such investor's purchase of the
Shares, without the prior written consent of the Company. Investors must,
therefore, be prepared to bear the economic risks of an investment in the Shares
for a substantial period of time.
To effectuate the purpose of the covenant not to sell described above, the
Company will place a legend upon each certificate representing the Shares sold
hereunder which will state that the Shares evidenced by such certificate are
subject to the restrictive covenant and that the holder of such Shares cannot
sell or assign such Shares without the consent of the Company. In addition,
prospective investors should be aware that an underwriter of a public offering
of the Company's Common Stock would likely ask the Company to withhold
consenting to a transfer of the Shares under (i) above without such
underwriter's consent during and for a time after such public offering.
Prospective investors are advised to seek independent legal counsel of their own
choice regarding the effects of the restrictions on transferability of the
Shares, the investment representations which each investor will be required to
make in the Subscription Agreement, requirements imposed by the Securities Act
of 1933, as amended, and by state securities laws, and other legal matters
relevant to this Offering.
ARTICLE 7 OF UNITED'S BYLAWS
Under Article 7 of United's Bylaws, each shareholder of United Common Stock
grants to United and its shareholders the right of first refusal to purchase any
shares of United Common Stock which a shareholder intends to transfer (other
than transfers to such shareholder's spouse, child or grandchild, or to certain
trusts or charitable organizations). The price at which such option may be
exercised is equal to One Hundred Fifty Percent (150%) of the "Total Adjusted
Consolidated Tangible Book Value" plus One Hundred Percent (100%) of the "Total
Consolidated Intangible Book Value" of such stock as of the most recent quarter
ended prior to receipt of written notice from the shareholder indicating a
desire to transfer United's stock. "Total Adjusted Consolidated Tangible Book
Value" is defined as the "Adjusted Consolidated Book Value" (which includes all
equity accounts of United, but does not include any cumulative unrealized gain
or loss resulting from the subsidiary banks' compliance with the Statement of
Financial Accounting Standards No. 115 issued
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by the Financial Accounting Standards Board) less the "Consolidated Intangible
Book Value" (which is the balance of intangible assets that are unamortized,
unaccredited or not depreciated, as determined in accordance with generally
accepted accounting principles). The formula is as follows:
<TABLE>
<S> <C>
Stock Transfer Price Per Share =
Consolidated Stockholders' Equity of United..................................... $
Subtract: Cumulative Unrealized Gains
Resulting from FASB 115.......................................... ( )
Add: Cumulative Unrealized Losses
Resulting from FASB 115.......................................... $
---------
Adjusted Consolidated Book Value of United...................................... $
Subtract Consolidated Intangible Book Value................................. ( )
---------
Total Adjusted Consolidated Tangible Book Value of United....................... $
Multiply by 150 percent......................................................... x 1.50
Consolidated Tangible Transfer Value............................................ $
Plus Consolidated Intangible Book Value......................................... $
$
---------
Total Stock Transfer Price Calculation.......................................... $
Divide by Number of Shares Outstanding..........................................
---------
Stock Transfer Price Per Share.................................................. $
---------
---------
</TABLE>
If United declines to purchase the shares or is prevented by applicable law
from purchasing the shares, then the shareholders of United shall have the
right, subject to applicable law, to purchase their respective pro rata portion
of the shares. The description of Article 7 of the Bylaws which is provided
herein is qualified in its entirety by reference to the actual provisions of
Article 7 of the Bylaws which has been filed as an Exhibit to the Registration
Statement of which this Prospectus is a part.
Under Article 7 of the Bylaws, shareholders desiring to transfer their
shares will be required to give notice of such proposed transfer to United.
Within 60 days of such notice United must elect whether to purchase any of the
shares intended to be transferred; provided that: (i) if such purchase would,
when added to all such purchases from shareholders during the preceding
twelve-month period, exceed ten percent of the outstanding Common Stock at the
beginning of such twelve-month period; or (ii) if such purchase would, if
consummated at that time, violate applicable law; then United may elect to delay
such purchase until such time, not to exceed three years, when such purchase
could lawfully be consummated. If United elects not to purchase all of the
shares, the shareholders of United will have the right, subject to applicable
law, to purchase all of the shares not purchased by United.
Shareholders must elect whether to purchase the shares within 90 days of the
date of United's notice to shareholders of their option to purchase. If the
shareholders elect not to purchase all of the shares or fail to purchase the
shares within the appropriate time limitations, the United Employee Stock
Ownership Plan ("ESOP") will have 30 days in which to elect to purchase such
shares. If the ESOP fails to purchase such shares, electing shareholders shall
be given a second opportunity to purchase the shares. If the shares still remain
unpurchased, the shareholder proposing to transfer the shares may transfer to
others, provided applicable securities law and other applicable law requirements
are satisfied.
The Company has called a meeting of shareholders to be held November 8, 1996
for the purpose of amending that portion of Article 7 of the Bylaws which
provides for automatic termination of Article 7. Article 7.18 currently provides
that Article 7 automatically terminates upon the successful completion of an
initial public offering pursuant to a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"). Although the offering
of Common Stock pursuant to this Prospectus and the Company's concurrent
offering of Series A Preferred Stock are being registered under the Securities
Act, a
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<PAGE>
trading market for the Company's stock is not expected to develop. The Company
believes that Article 7 should continue to be effective until a trading market
for the Company's Common Stock develops and so has proposed an amendment to
Article 7.18. The Amendment provides that Article 7 will automatically terminate
upon the registration of the Company's Common Stock under the Securities Act if
the Common Stock is listed for trading on the Nasdaq SmallCap Market, the Nasdaq
National Market or any securities exchange registered under the Securities
Exchange Act of 1934, as amended. The Company expects that the proposed
amendment will be approved.
THE OFFERING
GENERAL
United is offering a minimum of 47,160 shares and a maximum of 56,600 shares
of its Common Stock, $0.01 par value (the "Shares"), at a price of $106.00 per
Share. See "Description of Securities -- Common Stock." A minimum purchase of
100 Shares ($10,600) has been established, but may be waived at the discretion
of United. All proceeds will be held in an escrow account at Firstar Bank
Milwaukee, N.A. (the "Escrow Agent") until minimum proceeds of $4,998,960 are
received. If the minimum of $4,998,960 is not received by December 31, 1996
(subject to extension at the discretion of United to no later than January 15,
1997), all proceeds will be returned to subscribers without interest or
deduction. Each person who proposes to purchase Shares will be required to
deliver to United a fully completed and executed Subscription Agreement in the
form accompanying this Prospectus and the full purchase price in cash or its
equivalent for all Shares proposed to be purchased.
SUITABILITY REQUIREMENTS
Each potential investor desiring to purchase the Shares will be required to
represent to United in the Subscription Agreement that such investor's
commitment to investments that are not readily marketable is not
disproportionate to his or her net worth, that an investment in the Shares will
not cause such commitment to become excessive, that such investor has adequate
means of providing for his or her current needs and contingencies and has no
need for liquidity with respect to his or her investment in the Shares, and that
such investor can withstand a complete loss of such investment in the Shares, is
able to bear the economic risk of an investment in the Shares and has, either
alone or with a purchaser representative, such knowledge and experience in
financial and business matters that such investor is capable of evaluating the
merits and risks of an investment in the Shares.
SUBSCRIPTIONS
Prospective investors who desire to purchase Shares hereunder must (i)
complete and sign a copy of the Subscription Agreement, (ii) make a check for
the amount subscribed payable to "United Community Bancshares, Inc. Escrow
Account," and (iii) forward the completed and executed Subscription Agreement
and the check to United (at: 2600 Eagan Woods Drive, Suite 155, Eagan, Minnesota
55121, Attention: R. Scott Jones), who will then forward the check to the Escrow
Agent. United reserves the right to reject any Subscription Agreement and to
return the purchase price without interest. UNITED MAY NOT ACCEPT SUBSCRIPTION
AGREEMENTS OR CHECKS UNTIL THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS
IS A PART IS DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION WHICH
IS EXPECTED TO BE IN DECEMBER 1996.
LEGAL MATTERS
Fredrikson & Byron, P.A., Minneapolis, Minnesota, will pass on the validity
of the stock offered hereunder for United.
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<PAGE>
EXPERTS
The consolidated financial statements of United as of December 31, 1995 and
1994 and for the years then ended included in this Prospectus have been audited
by McGladrey & Pullen, LLP, independent auditors, as stated in their report
appearing herein, and such financial statements are included in reliance upon
such report given upon the authority of said firm as experts in accounting and
auditing.
The consolidated statements of income, stockholders' equity and cash flows
of United for the year ended December 31, 1993 included in this Prospectus have
been audited by Leininger & Leininger, Ltd., independent auditors, as stated in
their report appearing herein, and such financial statements are included in
reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of Goodhue as of December 31, 1993 and
1992 and for the years then ended included in this Prospectus have been audited
by KPMG Peat Marwick LLP, independent auditors, as stated in their report
appearing herein, and such financial statements are included in reliance upon
such report given upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of PFC as of December 31, 1995, 1994
and 1993 and for the years then ended included in this Prospectus have been
audited by Larson, Allen, & Weishair & Co., LLP, independent auditors, as stated
in their report appearing herein, and such financial statements are included in
reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
United has filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a Registration Statement (the "Registration Statement") under the
Securities Act of 1933, as amended, with respect to the stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to United and such stock, reference is made to the
Registration Statement and the schedules and exhibits filed as a part thereof.
Statements contained in this Prospectus regarding the contents of any contract
or any other document are not necessarily complete and, in each instance,
reference is hereby made to the copy of such contract or document filed as an
exhibit to the Registration Statement, and the full text of each such statement
is qualified in its entirety by reference to such contract or document. The
Registration Statement, including exhibits thereto, may be inspected without
charge at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices at Northwestern Atrium Center, 500 West
Madison Street, Room 1400, Chicago, IL 60661, and 7 World Trade Center, Suite
1300, New York, NY 10048. Copies of such material can also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
that contains reports, proxy statements and other information filed by the
Company at (http://www.sec.gov).
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INDEX TO FINANCIAL INFORMATION
UNITED COMMUNITY BANCSHARES, INC.
Independent Auditor's Reports............................................. F-2
Consolidated Balance Sheets as of June 30, 1996 (unaudited) and December
31, 1995 and 1994........................................................ F-4
Consolidated Statements of Income for the Six Months Ended June 30, 1996
and 1995 (unaudited) and for the Years Ended December 31, 1995, 1994 and
1993..................................................................... F-5
Consolidated Statements of Stockholders' Equity for the Six Months Ended
June 30, 1996 (unaudited) and for the Years Ended December 31, 1995, 1994
and 1993................................................................. F-6
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1996 and 1995 (unaudited) and for the Years Ended December 31, 1995, 1994
and 1993................................................................. F-7
Notes to Consolidated Financial Statements................................ F-8
GOODHUE COUNTY FINANCIAL CORPORATION
Independent Auditors' Report.............................................. F-31
Consolidated Balance Sheets as of December 31, 1993 and 1992.............. F-32
Consolidated Statements of Income for the Years Ended
December 31, 1993 and 1992............................................... F-33
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1993 and 1992............................................... F-34
Consolidated Statements of Cash Flows for the Years Ended December 31,
1993 and 1992............................................................ F-35
Notes to Consolidated Financial Statements................................ F-36
PARK FINANCIAL CORPORATION
Independent Auditor's Report.............................................. F-49
Consolidated Balance Sheets as of June 30, 1996 (unaudited) and December
31, 1995 and 1994........................................................ F-50
Consolidated Statements of Income for the Six Months Ended June 30, 1996
and 1995 (unaudited) and for the Years Ended December 31, 1995, 1994 and
1993..................................................................... F-51
Consolidated Statements of Stockholders' Equity for the Six Months Ended
June 30, 1996 (unaudited) and for the Years Ended December 31, 1995, 1994
and 1993................................................................. F-52
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1996 and 1995 (unaudited) and for the Years Ended December 31, 1995, 1994
and 1993................................................................. F-53
Notes to Consolidated Financial Statements................................ F-54
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Consolidated Financial Statements of United and PFC... F-66
Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1996........ F-67
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended
December 31, 1995........................................................ F-68
Unaudited Pro Forma Consolidated Statement of Income for the Six Months
Ended June 30, 1996...................................................... F-69
Unaudited Pro Forma Consolidated Statement of Income for the Six Months
Ended June 30, 1995...................................................... F-70
Note to the Unaudited Pro Forma Consolidated Financial Statements......... F-71
Unaudited Pro Forma Consolidated Financial Statements of United and
Goodhue.................................................................. F-73
Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 1993.... F-74
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended
December 31, 1993........................................................ F-75
Note to the Unaudited Pro Forma Consolidated Financial Statements......... F-76
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
United Community Bancshares, Inc.
and Subsidiaries
Eagan, Minnesota
We have audited the accompanying consolidated balance sheets of United
Community Bancshares, Inc. and Subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Community Bancshares, Inc. and Subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
St. Paul, Minnesota
February 23, 1996
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
United Community Bancshares, Inc.
and Subsidiary
Eagan, Minnesota
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows for United Community Bancshares, Inc. and
Subsidiary (formerly Signal Bancshares, Inc. and Subsidiary) for the year ended
December 31, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of United Community
Bancshares, Inc. and Subsidiary's operations and their cash flows for the year
ended December 31, 1993, in conformity with generally accepted accounting
principles.
LEININGER & LEININGER, LTD.
Minneapolis, Minnesota
February 18, 1994
F-3
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30 -------------------------------
1996 1995 1994
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks............................ $ 19,245,954 $ 20,513,154 $ 19,351,643
Federal funds sold................................. 3,425,000 8,725,000 7,975,000
-------------- -------------- --------------
Investment securities available for sale........... 104,523,116 101,836,962 70,278,070
Investment securities held to maturity............. -- -- 13,156,388
-------------- -------------- --------------
Total investment securities.................... 104,523,116 101,836,962 83,434,458
-------------- -------------- --------------
Loans and leases................................... 275,955,203 265,904,636 246,981,259
Allowance for loan and lease losses................ (2,989,690) (2,899,165) (2,856,288)
-------------- -------------- --------------
Net loans and leases........................... 272,965,513 263,005,471 244,124,971
-------------- -------------- --------------
Property and equipment, net........................ 10,537,048 10,654,578 10,991,515
Accrued interest receivable........................ 3,408,007 3,180,346 2,742,358
Cash surrender value of life insurance............. 9,314,969 9,116,888 8,485,485
Intangible assets, net............................. 3,852,457 4,188,801 4,861,489
Other assets....................................... 1,660,722 619,375 2,016,584
-------------- -------------- --------------
Total assets................................... $ 428,932,786 $ 421,840,575 $ 383,983,503
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits......................................... $ 340,225,090 $ 340,723,249 $ 312,946,989
Securities sold under repurchase agreements...... 29,282,911 23,173,292 27,746,565
Accrued expenses and other liabilities........... 4,828,164 5,213,321 3,352,717
Notes payable and other borrowings............... 16,097,095 15,762,119 12,412,281
-------------- -------------- --------------
Total liabilities.............................. 390,433,260 384,871,981 356,458,552
-------------- -------------- --------------
COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share;
5,000,000 shares authorized; 546,686, 544,750,
and 502,317, shares issued...................... 5,466 5,448 5,023
Additional paid-in capital....................... 21,015,602 20,837,567 17,288,552
Retained earnings................................ 17,794,504 15,513,033 11,884,002
Unrealized gain (loss) on securities available
for sale........................................ (316,046) 612,546 (1,652,626)
-------------- -------------- --------------
Total stockholders' equity..................... 38,499,526 36,968,594 27,524,951
-------------- -------------- --------------
Total liabilities and stockholders' equity..... $ 428,932,786 $ 421,840,575 $ 383,983,503
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
----------------------------- ---------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans and leases................................ $ 13,190,219 $ 12,046,404 $ 25,089,584 $ 21,004,079 $ 9,069,781
Investment securities -- taxable................ 2,754,299 2,257,788 4,949,453 3,843,603 2,098,870
Investment securities -- tax exempt............. 212,938 208,657 405,726 343,892 139,757
Federal funds sold.............................. 293,714 330,644 760,820 324,871 115,164
------------- ------------- ------------- ------------- -------------
Total interest income......................... 16,451,170 14,843,493 31,205,583 25,516,445 11,423,572
------------- ------------- ------------- ------------- -------------
INTEREST EXPENSE:
Deposits........................................ 5,734,866 4,919,770 10,438,601 7,529,696 3,367,221
Federal funds purchased and securities sold
under repurchase agreements.................... 634,696 664,735 1,453,699 841,693 106,567
Notes payable and other borrowings.............. 505,302 428,090 955,752 788,064 197,037
------------- ------------- ------------- ------------- -------------
Total interest expense........................ 6,874,864 6,012,595 12,848,052 9,159,453 3,670,825
------------- ------------- ------------- ------------- -------------
Net interest income........................... 9,576,306 8,830,898 18,357,531 16,356,992 7,752,747
PROVISION FOR LOAN AND LEASE LOSSES............... 94,648 20,203 60,999 234,454 300,000
------------- ------------- ------------- ------------- -------------
Net interest income after provision for loan
and lease losses............................. 9,481,658 8,810,695 18,296,532 16,122,538 7,452,747
------------- ------------- ------------- ------------- -------------
NONINTEREST INCOME:
Service charges and other fees.................. 1,611,671 1,413,543 2,922,664 2,962,662 1,770,532
Net investment securities gains (losses)........ -- (18,584) (32,329) 79,351 75,194
Other........................................... 778,411 542,684 1,028,650 795,321 302,721
------------- ------------- ------------- ------------- -------------
Total noninterest income...................... 2,390,082 1,937,643 3,918,985 3,837,334 2,148,447
------------- ------------- ------------- ------------- -------------
NONINTEREST EXPENSE:
Salaries and employee benefits.................. 4,964,532 4,519,089 9,291,893 8,510,365 3,687,963
Occupancy....................................... 444,598 485,221 1,208,300 1,060,089 436,175
Depreciation.................................... 754,866 587,666 1,252,682 1,215,848 490,090
Amortization of intangibles..................... 378,047 411,800 824,140 561,882 83,196
FDIC assessment................................. 3,000 338,735 350,856 643,845 352,542
Other........................................... 2,010,815 1,865,652 3,603,063 4,139,114 2,366,160
------------- ------------- ------------- ------------- -------------
Total noninterest expense..................... 8,555,858 8,208,163 16,530,934 16,131,143 7,416,126
------------- ------------- ------------- ------------- -------------
Income before income taxes and cumulative
effect of change in accounting principle..... 3,315,882 2,540,175 5,684,583 3,828,729 2,185,068
INCOME TAX EXPENSE................................ 1,034,411 896,726 2,055,552 1,395,772 725,224
------------- ------------- ------------- ------------- -------------
Income before cumulative effect of change in
accounting principle......................... 2,281,471 1,643,449 3,629,031 2,432,957 1,459,844
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE........................................ -- -- -- -- 106,168
------------- ------------- ------------- ------------- -------------
Net income.................................... $ 2,281,471 $ 1,643,449 $ 3,629,031 $ 2,432,957 $ 1,566,012
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
AVERAGE SHARES OUTSTANDING........................ 557,284 514,784 528,787 513,167 313,994
------------- ------------- ------------- ------------- -------------
EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE................... $ 4.09 $ 3.19 $ 6.86 $ 4.74 $ 4.65
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE........................................ -- -- -- -- 0.34
------------- ------------- ------------- ------------- -------------
Earnings per share after cumulative effect of
change in accounting principle............... $ 4.09 $ 3.19 $ 6.86 $ 4.74 $ 4.99
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
DIVIDENDS PER SHARE............................... $ -- $ -- $ -- $ -- $ 0.45
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994, and 1993 and Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON STOCK ADDITIONAL ON SECURITIES
--------------------- PAID-IN RETAINED AVAILABLE
SHARES PAR VALUE CAPITAL EARNINGS FOR SALE TOTAL
--------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992............ 296,383 $ 296,383 $ 3,620,194 $ 8,026,171 $ -- $ 11,942,748
Net income.......................... -- -- -- 1,566,012 -- 1,566,012
Common stock issued................. 7,126 7,126 377,678 -- -- 384,804
Common stock repurchased............ (763) (763) (42,171) -- -- (42,934)
Dividends........................... -- -- -- (141,138) -- (141,138)
--------- ---------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1993............ 302,746 302,746 3,955,701 9,451,045 -- 13,709,492
Change in par value from $1.00 to
$0.01 per share.................... -- (299,719) 299,719 -- -- --
Net income.......................... -- -- -- 2,432,957 -- 2,432,957
Common stock issued:
For acquisition of GCFC........... 138,067 1,381 8,851,475 -- -- 8,852,856
In stock offering................. 61,504 615 4,181,657 -- -- 4,182,272
Net change in unrealized loss on
securities available for sale...... -- -- -- -- (1,652,626) (1,652,626)
--------- ---------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1994............ 502,317 5,023 17,288,552 11,884,002 (1,652,626) 27,524,951
Net income.......................... -- -- -- 3,629,031 -- 3,629,031
Common stock issued................. 44,010 440 3,692,229 -- -- 3,692,669
Common stock repurchased............ (1,577) (15) (143,214) -- -- (143,229)
Net change in unrealized gain on
securities available for sale...... -- -- -- -- 2,265,172 2,265,172
--------- ---------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1995............ 544,750 5,448 20,837,567 15,513,033 612,546 36,968,594
Net income (unaudited).............. -- -- -- 2,281,471 -- 2,281,471
Common stock issued (unaudited)..... 2,467 24 226,419 -- -- 226,443
Common stock repurchased
(unaudited)........................ (531) (6) (49,653) -- -- (49,659)
Net change in unrealized loss on
securities available for sale
(unaudited)........................ -- -- -- -- (928,592) (928,592)
Tax effect of stock options
exercised (unaudited).............. -- -- 1,269 -- -- 1,269
--------- ---------- ------------- ------------- ------------- -------------
BALANCE, JUNE 30, 1996 (UNAUDITED).... 546,686 $ 5,466 $ 21,015,602 $ 17,794,504 $ (316,046) $ 38,499,526
--------- ---------- ------------- ------------- ------------- -------------
--------- ---------- ------------- ------------- ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30 YEAR ENDED DECEMBER 31
----------------------- -------------------------------------
1996 1995 1995 1994 1993
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................. $2,281,471 $ 1,643,449 $ 3,629,031 $ 2,432,957 $ 1,566,012
Adjustments to reconcile net income to net
cash flows from operating activities:
Cumulative effect of accounting change.... -- -- -- -- (106,168)
Net investment securities (gains)
losses................................... -- 18,584 32,329 (79,351) (75,194)
Net amortization and accretion of bond
premiums and discounts................... (79,219) (51,595) (310,582) 222,538 101,403
Provision for loan and lease losses....... 94,648 20,203 60,999 234,454 300,000
Depreciation.............................. 754,866 587,666 1,252,682 1,215,848 490,090
Amortization of intangibles............... 378,047 411,800 824,140 561,882 83,196
Earnings on cash surrender value of life
insurance................................ (198,081) (193,857) (377,103) (462,453) (249,871)
Net (gain) on sale of loans............... (229,594) (210,196) (485,626) (195,048) --
Net (gain) loss on sale of other real
estate................................... (49,657) (1,737) (63,247) (67,674) 9,951
Net gain on sale of property and
equipment................................ (13,439) (28,312) (49,923) (70,718) --
Provision for deferred income taxes....... (200,000) 12,475 24,950 (232,134) (97,572)
Other, net................................ (796,105) 207,071 912,636 (244,419) 885,553
---------- ----------- ----------- ----------- -----------
Net cash flows from operating
activities............................. 1,942,937 2,415,551 5,450,286 3,315,882 2,907,400
---------- ----------- ----------- ----------- -----------
CASH FLOWS USED FOR INVESTING ACTIVITIES
Net (increase) decrease in federal funds
sold....................................... 5,300,000 (2,525,000) (750,000) (2,525,000) (500,000)
Net cash flows (used for) from investment
securities................................. (4,159,348) (6,010,007) (14,396,539) (3,859,963) 1,315,307
Net increase in loans and leases............ (9,887,934) (8,616,042) (18,513,417) (26,999,676) (20,366,731)
Purchases of property and equipment......... (671,767) (401,084) (1,028,111) (2,350,262) (402,918)
Proceeds from sales of property and
equipment.................................. 25,400 52,000 117,349 409,934 --
Proceeds from sales of other real estate
owned...................................... 49,657 57,973 327,160 1,116,100 263,801
Purchase of cash surrender value of life
insurance.................................. -- -- (254,300) (156,450) --
Acquisition of other assets................. -- -- -- (1,500,000) --
Cash paid, net of cash acquired upon
purchase of subsidiaries................... -- -- -- (3,032,859) --
---------- ----------- ----------- ----------- -----------
Net cash flows used for investing
activities............................. (9,343,992) (17,442,160) (34,497,858) (38,898,176) (19,690,541)
---------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits......... (488,583) 4,978,459 27,879,916 21,791,336 7,071,058
Net increase (decrease) in securities sold
under repurchase agreements................ 6,109,619 1,413,587 (4,573,273) 12,421,478 6,766,347
Proceeds from notes payable and other
borrowings................................. 1,336,035 9,003,000 9,003,000 9,532,420 3,242,000
Payments made on notes payable and other
borrowings................................. (1,000,000) (1,750,000) (5,650,000) (1,084,420) (1,211,721)
Net proceeds from issuance of common
stock...................................... 176,784 161,472 3,549,440 4,182,272 341,870
Dividends paid.............................. -- -- -- -- (141,138)
---------- ----------- ----------- ----------- -----------
Net cash flows from financing
activities............................. 6,133,855 13,806,518 30,209,083 46,843,086 16,068,416
---------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ (1,267,200) (1,220,091) 1,161,511 11,260,792 (714,725)
CASH AND CASH EQUIVALENTS
Beginning................................... 20,513,154 19,351,643 19,351,643 8,090,851 8,805,576
---------- ----------- ----------- ----------- -----------
Ending...................................... $19,245,954 $18,131,552 $20,513,154 $19,351,643 $ 8,090,851
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
(Additional Cash Flow Information -- Note 18).
F-7
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
United Community Bancshares, Inc. (United) was formerly known as Signal
Bancshares, Inc. On January 1, 1994, Signal Bancshares, Inc. amended and
restated its Articles of Incorporation to change its name to United Community
Bancshares, Inc. Also on January 1, 1994, United acquired Goodhue County
Financial Corporation (GCFC) and its wholly-owned subsidiaries, Goodhue County
National Bank and Consumers Credit Corporation.
United Community Bancshares, Inc. and its subsidiaries provide a full range
of financial services. The accompanying consolidated financial statements for
1995 and 1994 include the accounts of United Community Bancshares, Inc. and its
wholly-owned subsidiaries, Signal Bank, Inc. (Signal), Goodhue County National
Bank (GCNB), Consumers Credit Corporation (CCC), and Unitech Services, Inc.
(Unitech). The accompanying consolidated financial statements for 1993 include
the accounts of Signal Bancshares, Inc. and its wholly-owned subsidiary, Signal
Bank, Inc. These entities are collectively referred to herein as the Company.
All significant intercompany balances and transactions have been eliminated in
consolidation.
BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES:
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the balance sheet
and revenues and expenses for the years then ended. Actual results could differ
from those estimates.
CASH, CASH EQUIVALENTS, AND CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents includes
cash on hand and amounts due from banks. Cash flows from loans, federal funds
purchased and sold, deposits, and securities sold under repurchase agreements
are reported net.
INVESTMENT SECURITIES:
The Company accounts for debt and marketable equity securities in accordance
with Financial Accounting Standards Board (FASB) Statement No. 115. This
statement requires that management determine the appropriate classification of
securities at the date of adoption and thereafter as each individual security is
acquired. In addition, the appropriateness of such classification is reassessed
at each balance sheet date. The classifications and related accounting policies
under FASB Statement No. 115 are as follows:
HELD-TO-MATURITY SECURITIES: Securities classified as held-to-maturity are
those debt securities the Company has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity needs, or changes
in general economic conditions. These securities are carried at cost adjusted
for amortization of premiums and accretion of discounts, computed by the
interest method over their contractual lives.
AVAILABLE-FOR-SALE SECURITIES: Securities classified as available-for-sale
are those debt securities that the Company intends to hold for an indefinite
period of time, but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Securities available for sale are
carried at fair value. Unrealized gains or losses, net of the related deferred
tax effect, are reported as increases or decreases in stockholders' equity.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
LOANS AND ALLOWANCE FOR LOAN LOSSES:
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses.
F-8
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb estimated losses on existing loans that may become uncollectible,
based on evaluation of the collectibility of loans and prior loan loss
experience. This evaluation also takes into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions.
On January 1, 1995, the Company adopted FASB Statement No. 114, ACCOUNTING
BY CREDITORS FOR IMPAIRMENT OF A LOAN. Statement No. 114 has been amended by
FASB Statement No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN--INCOME
RECOGNITION AND DISCLOSURES. Statement No. 114, as amended, defines a loan as
impaired when it is probable the Company will be unable to collect all principal
and interest payments due in accordance with the terms of the loan agreement.
The statement further requires that the impairment of loans that have been
separately identified for evaluation be measured based on the present value of
expected future cash flows or, alternatively, the observable market price of the
loans or the fair value of the collateral. However, for those loans that are
collateral dependent (that is, if repayment of those loans is expected to be
provided solely by the underlying collateral) and for which management has
determined foreclosure is probable, the measure of impairment of those loans is
to be based on the fair value of the collateral. The effect of adopting
Statement No. 114 was not significant to the Company.
Interest on loans is recognized over the terms of the loans and is
calculated using the simple-interest method on principal amounts outstanding.
For impaired loans, accrual of interest is discontinued on a loan when
management believes, after considering collection efforts and other factors,
that the borrower's financial condition is such that collection of interest is
doubtful. Cash collections on impaired loans are credited to the loan receivable
balance, and no interest income is recognized on those loans until the principal
balance has been collected.
Loan origination, commitment, and other fees and costs incurred to extend
credit are not significant and are recorded in the income statement when
received or incurred.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided principally by the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
amortized over the terms of the respective leases.
CASH SURRENDER VALUE OF LIFE INSURANCE:
The Company maintains life insurance contracts which are informally related
to certain deferred compensation, salary continuation, and key executive life
insurance agreements with officers and directors of the Company. The Company's
investment in cash surrender value of life insurance is recorded at the amount
that can be realized under the insurance contracts.
INTANGIBLE ASSETS:
Intangible assets include costs in excess of net assets acquired and certain
covenants not to compete, resulting from the acquisition of Goodhue County
Financial Corporation (GCFC) on January 1, 1994, and a deposit base premium
resulting from the acquisition of certain branches in 1988. These intangible
assets are being amortized over the expected period of benefit from 3 to 15
years.
F-9
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER REAL ESTATE OWNED:
Real estate acquired through foreclosure or insubstance foreclosure is
recorded in other assets at the lower of cost or fair value of the asset less
the estimated costs to sell the asset. When a property is acquired, any excess
of the recorded loan balance over its estimated fair value is charged against
the allowance for loan losses. Any subsequent declines in fair value and
operating expenses are recorded in other expenses. Property is evaluated
regularly to ensure that the recorded amount is supported by its current fair
value.
INCOME TAXES:
The Company files a consolidated federal and a unitary state income tax
return. Deferred taxes are provided on an asset and liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss or tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the amounts of assets and liabilities recorded for income
tax and financial reporting purposes. Deferred tax assets are reduced by a
valuation allowance when management determines that it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
During 1993, the Company adopted the provisions of FASB Statement No. 109,
ACCOUNTING FOR INCOME TAXES, which supersedes Accounting Principles Board
Opinion No. 11, the basis of the Company's accounting for income taxes prior to
the change. The effect of the adjustments as of January 1, 1993, to adopt FASB
Statement No. 109 has been reflected in the consolidated statements of income as
a cumulative effect of change in accounting principle.
EARNINGS PER SHARE:
Earnings per share data is computed based on the weighted average number of
shares outstanding. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, stock issued and to be issued for consideration
below the initial public offering price during the 12-month period preceding the
date of the initial filing of the registration statement has been included in
the calculation of shares outstanding, as if they were outstanding for all
periods presented up through the date of the initial public offering.
EMPLOYEE BENEFIT PLANS:
EMPLOYEE STOCK OWNERSHIP PLAN: The Company provides a noncontributory
employee stock ownership plan (ESOP) covering substantially all employees
eligible as to age and length of service. The amount of the contribution to the
ESOP trust is determined annually at the discretion of the Board of Directors
and complies with the requirements of the plan agreement.
401(k) PROFIT SHARING PLAN: The Company also provides a 401(k) profit
sharing plan beginning January 1, 1994, which covers substantially all of the
Company's employees who are eligible as to age and length of service. A
participant may elect to make contributions of up to 15 percent of the
participant's annual compensation. The Company makes a matching contribution of
50 percent of each participant's contribution, up to a maximum matching
contribution of 2 1/2 percent of compensation. The Company also may make a
discretionary profit sharing contribution determined annually by the Board of
Directors.
INTEREST SWAP:
The Company engages in interest rate swap transactions to manage its
interest rate risk. Income or expense on swaps is recorded as an adjustment to
interest income or expense.
F-10
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
FASB Statement No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS, requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instruments. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. In
addition, the tax ramifications related to the realization of the unrealized
gains can have a significant effect on market value estimates and have not been
considered in the estimates. The derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instruments. Statement No. 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
CASH AND DUE FROM BANKS: Fair value of cash and due from banks is based on
the carrying value reported on the consolidated balance sheets.
FEDERAL FUNDS SOLD: Fair value of federal funds sold is based on the
carrying value reported on the consolidated balance sheets.
INVESTMENT SECURITIES: Fair values for all securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
LOANS: For variable-rate loans that reprice frequently and that have
experienced no significant change in credit risk, fair values are based on
carrying values. Fair values for all other loans are estimated based on
discounted cash flows, using interest rates currently being offered for loans
with similar terms to borrowers with similar credit quality.
CASH SURRENDER VALUE OF LIFE INSURANCE: Fair value of cash surrender value
of life insurance is based on the carrying value reported on the consolidated
balance sheets.
DEPOSITS: Fair values of demand, savings, and NOW accounts are based on the
carrying values reported on the consolidated balance sheets. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
of deposit of similar remaining maturities.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS: Fair value of securities sold
under repurchase agreements is based on the carrying value reported on the
consolidated balance sheets.
F-11
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NOTES PAYABLE AND OTHER BORROWINGS: Fair values of variable-rate, long-term
borrowings are based on carrying values. Fair value of fixed-rate long-term debt
is estimated by discounting the future cash flows using interest rates currently
being offered on debt of similar remaining maturity.
ACCRUED INTEREST RECEIVABLE AND PAYABLE: Fair values of both accrued
interest receivable and payable are based on the carrying values reported on the
consolidated balance sheets.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Fair value of interest rate swaps
are based on quoted market prices. Loan commitments and standby letter of credit
fees are not material. As such, there are no carrying amounts or fair value
disclosures related to these financial instruments.
MORTGAGE SERVICING RIGHTS: FASB Statement No. 122, ACCOUNTING FOR MORTGAGE
SERVICING RIGHTS, establishes a new standard for capitalizing mortgage servicing
rights. This standard will require the Company to record an asset for mortgage
servicing rights when it sells mortgages and retains the servicing, and then
amortize this asset over the period during which servicing income is expected to
be received. This statement is effective for the Company's year ending December
31, 1996. In management's opinion, this statement will not have a material
effect on the Company's financial statements.
LONG-LIVED ASSETS: FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, establishes new
accounting standards for the impairment of long-lived assets, certain
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identified intangibles to be disposed of. This
statement is effective for the Company's year ending December 31, 1996. In
management's opinion, the adoption of this statement will not have a material
effect on the Company's financial statements.
STOCK-BASED COMPENSATION: In October 1995, the FASB issued Statement No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. FASB Statement No. 123 provides a
choice of accounting methods for valuing stock-based compensation plans and
requires certain disclosures about the effect on net income and earnings per
share regardless of the method used to account for them. This statement is
effective for the Company's year ending December 31, 1996. In management's
opinion, this statement will not have a material effect on the Company's
financial statements.
RECLASSIFICATIONS:
Certain of the 1994 and 1993 amounts have been reclassified to conform with
the 1995 presentation. These reclassifications had no effect on net income or
stockholders' equity.
INTERIM FINANCIAL INFORMATION (UNAUDITED):
The accompanying consolidated financial statements as of June 30, 1996, and
for the six-month periods ended June 30, 1996 and 1995, are unaudited but, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for fair presentation of the financial position
and results of operations. The operating results for the interim periods are not
necessarily indicative of the operating results to be expected for a full year
or for other interim periods.
NOTE 2. ACQUISITION
On January 1, 1994, the Company acquired Goodhue County Financial
Corporation (GCFC), a bank holding company headquartered in Red Wing, Minnesota.
F-12
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. ACQUISITION (CONTINUED)
A summary of the assets acquired, liabilities assumed, and purchase price
paid in connection with the acquisition are as follows:
<TABLE>
<S> <C>
Assets acquired:
Cash and cash equivalents................................. $ 6,231,125
Loans, net of allowance for loan losses of $1,223,931..... 104,734,005
Federal funds sold........................................ 4,950,000
Investments............................................... 43,013,653
Property and equipment.................................... 5,938,643
Other assets.............................................. 4,834,005
Cost in excess of net assets acquired....................... 3,292,310
--------------
Total assets................................................ $ 172,993,741
--------------
--------------
Liabilities assumed:
Deposits.................................................. $ 144,069,164
Other liabilities......................................... 1,882,552
Securities sold under repurchase agreements............... 8,558,740
Notes payable............................................. 366,445
--------------
Total liabilities........................................... 154,876,901
--------------
Purchase price:
Issuance of common stock by United........................ 8,852,856
Cash paid by United....................................... 9,263,984
--------------
Total purchase price........................................ 18,116,840
--------------
$ 172,993,741
--------------
--------------
</TABLE>
The acquisition was accounted for as a purchase and, accordingly, the
results of operations of GCFC are included in the accompanying consolidated
financial statements for periods subsequent to the acquisition date.
To facilitate this transaction, and provide operating funds, the Company
issued 61,504 additional shares of its common stock for cash proceeds totaling
$4,182,272 and incurred acquisition indebtedness of $6.8 million. United also
issued 138,067 shares of its common stock totaling $8.8 million and paid cash
totaling $9.3 million to the shareholders of GCFC in exchange for their shares
of GCFC common and preferred stock.
The Company also entered into two noncompete agreements with management of
GCFC totaling $1,500,000, which were paid in full during 1994, recorded as a
prepaid expense, and are being amortized over a three- to five-year period.
F-13
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. ACQUISITION (CONTINUED)
The unaudited pro forma consolidated results of operations for the year
ended December 31, 1993, as though the acquisition of GCFC had occurred on
January 1, 1993, is as follows:
<TABLE>
<S> <C>
Net interest income......................................... $ 14,894,908
Provision for loan and lease losses......................... 604,628
--------------
Net interest income after provision for loan and lease
losses..................................................... 14,290,280
Noninterest income.......................................... 3,947,242
Noninterest expense......................................... 14,994,719
--------------
Income before income taxes and cumulative effect of change
in accounting principle.................................... 3,242,803
Income tax expense.......................................... 1,138,533
--------------
Income before cumulative effect of change in accounting
principle.................................................. 2,104,270
Cumulative effect of change in accounting principle......... 181,168
--------------
Net income.................................................. $ 2,285,438
--------------
--------------
Average shares outstanding.................................. 513,565
--------------
Earnings per share before cumulative effect of change in
accounting principle....................................... $ 4.10
Cumulative effect of change in accounting principle......... 0.35
--------------
Earnings per share after cumulative effect of change in
accounting principle....................................... $ 4.45
--------------
--------------
</TABLE>
NOTE 3. RESTRICTIONS ON CASH AND CASH EQUIVALENTS
The subsidiary banks are required to maintain reserve balances, in cash or
on deposit with the Federal Reserve Bank, based upon a percentage of deposits.
The total required reserve balances as of December 31, 1995 and 1994, were
approximately $3,092,000 and $2,534,000, respectively.
F-14
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INVESTMENT SECURITIES AVAILABLE FOR SALE
SUMMARY OF SECURITIES:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities............................. $ 29,648,393 $ 293,400 $ (100,502) $ 29,841,291
U.S. government corporations and agencies............ 29,745,481 548,338 -- 30,293,819
Obligations of states and political subdivisions..... 7,592,217 184,799 (20,400) 7,756,616
Mortgage-backed securities........................... 31,836,062 209,427 (88,903) 31,956,586
Corporate equity securities.......................... 1,988,650 -- -- 1,988,650
-------------- ------------ ----------- --------------
$ 100,810,803 $ 1,235,964 $ (209,805) $ 101,836,962
-------------- ------------ ----------- --------------
-------------- ------------ ----------- --------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities................................ $ 43,038,726 $ 1,468 $ (1,291,575) $ 41,748,619
U.S. government corporations and agencies............... 7,425,437 -- (52,042) 7,373,395
Mortgage-backed securities.............................. 20,024,787 3,754 (1,365,759) 18,662,782
Corporate equity securities............................. 2,555,017 -- (61,743) 2,493,274
------------- ----------- ------------- -------------
$ 73,043,967 $ 5,222 $ (2,771,119) $ 70,278,070
------------- ----------- ------------- -------------
------------- ----------- ------------- -------------
</TABLE>
CONTRACTUAL MATURITIES:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------
AMORTIZED COST FAIR VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less.......................................................... $ 20,366,550 $ 20,328,311
Due after one year through five years............................................ 41,660,447 42,362,872
Due after five years through ten years........................................... 3,856,410 4,049,502
Due after ten years.............................................................. 1,102,684 1,151,041
-------------- --------------
66,986,091 67,891,726
Mortgage-backed securities....................................................... 31,836,062 31,956,586
Corporate equity securities...................................................... 1,988,650 1,988,650
-------------- --------------
$ 100,810,803 $ 101,836,962
-------------- --------------
-------------- --------------
</TABLE>
Anticipated maturities on mortgage-backed securities are not readily
determinable since they may be prepaid without penalty, and corporate equity
securities do not have stated maturity dates.
REALIZED GAINS AND LOSSES:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Gross gains.................................................................... $ 40,980 $ 88,146 $ 75,194
Gross losses................................................................... (73,309) (8,795) --
---------- ---------- ---------
$ (32,329) $ 79,351 $ 75,194
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
F-15
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INVESTMENT SECURITIES AVAILABLE FOR SALE (CONTINUED)
PLEDGED SECURITIES:
Investment securities available for sale with a carrying value of
$74,161,604 and $56,422,299 at December 31, 1995 and 1994, respectively, were
pledged to secure public deposits and for other purposes as required or
permitted by law.
CHANGES IN THE NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE
INCLUDED IN EQUITY:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning................................................... $ (1,652,626) $ -- $ --
Initial unrealized gain on date of adoption of Statement No. 115,
net of related deferred tax effect................................ -- 121,767 --
Unrealized gain (loss) during the year, net........................ 3,792,056 (2,970,444) --
Deferred tax effect related to unrealized gain (loss).............. (1,526,884) 1,196,051 --
------------- ------------- -------------
Balance, ending...................................................... $ 612,546 $ (1,652,626) $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
NOTE 5. INVESTMENT SECURITIES HELD TO MATURITY
SUMMARY OF SECURITIES:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Mortgage-backed securities................................ $ 5,133,212 $ 2,684 $ (225,274) $ 4,910,622
Obligations of states and political subdivisions.......... 8,023,176 16,463 (269,113) 7,770,526
------------- ----------- ----------- -------------
$ 13,156,388 $ 19,147 $ (494,387) $ 12,681,148
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
RECLASSIFICATIONS:
Upon adoption of FASB Statement No. 115, certain securities were initially
classified as held-to-maturity due to uncertainty as to the regulatory treatment
of unrealized gains and losses. This uncertainty was resolved in 1994, and as
permitted by Financial Accounting Standards Board Special Report -- A GUIDE TO
IMPLEMENTATION OF STATEMENT NO. 115 ON ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES, held-to-maturity securities with an amortized cost
of $11,972,456 and a fair value of $12,295,565 were reclassified as
available-for-sale on December 31, 1995. These securities were transferred to
allow more flexibility in managing the Company's assets.
The reclassification was made at fair value, and the difference between the
amortized cost and fair value on the date of transfer, net of the related
deferred tax effect, was recognized as an increase in the unrealized gain on
available-for-sale securities in stockholders' equity.
PLEDGED SECURITIES:
Investment securities held to maturity with a carrying value of $2,995,814
at December 31, 1994, were pledged to secure public deposits and for other
purposes as required or permitted by law.
F-16
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SECURITIES HELD FOR INVESTMENT AND ACCOUNTING CHANGE
As of January 1, 1994, the Company changed its method of accounting for debt
and equity securities in accordance with FASB Statement No. 115. The January 1,
1994, balance of stockholders' equity was increased by $204,547, net of the
$82,780 related deferred tax effect, to recognize the net unrealized holding
gain on securities available for sale at that date.
NOTE 7. LOANS AND LEASES
COMPOSITION OF LOANS AND LEASES:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Commercial....................................................................... $ 70,543,465 $ 70,360,974
Commercial real estate........................................................... 62,730,992 58,782,276
Agricultural..................................................................... 10,582,438 11,025,108
Agricultural real estate......................................................... 6,002,566 3,058,571
-------------- --------------
Total commercial and agricultural................................................ 149,859,461 143,226,929
Residential real estate.......................................................... 69,576,597 58,828,211
Consumer......................................................................... 35,896,609 35,654,852
Leases........................................................................... 12,119,437 10,737,398
Less unearned income............................................................. (1,547,468) (1,466,131)
-------------- --------------
265,904,636 246,981,259
Less allowance for loan and lease losses......................................... (2,899,165) (2,856,288)
-------------- --------------
Net loans and leases............................................................. $ 263,005,471 $ 244,124,971
-------------- --------------
-------------- --------------
</TABLE>
ALLOWANCE FOR LOAN AND LEASE LOSSES:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 YEAR ENDED DECEMBER 31
-------------------------- ----------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning......................... $ 2,899,165 $ 2,856,288 $ 2,856,288 $ 1,500,870 $ 1,435,374
Provision charged to operations.......... 94,648 20,203 60,999 234,454 300,000
Loans charged off........................ (295,272) (91,702) (337,079) (447,987) (475,424)
Recoveries............................... 291,149 143,894 318,957 345,020 240,920
Allowance for loan losses acquired....... -- -- -- 1,223,931 --
------------ ------------ ------------ ------------ ------------
Balance, ending............................ $ 2,989,690 $ 2,928,683 $ 2,899,165 $ 2,856,288 $ 1,500,870
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
IMPAIRED LOANS:
The Company had no impaired loans at December 31, 1995.
NONACCRUAL LOANS:
Nonaccrual loans totaled $459,388 at December 31, 1994. The effect of
nonaccrual loans was not significant to the results of operations.
F-17
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Land............................................................................... $ 1,474,391 $ 1,474,391
Buildings and improvements......................................................... 8,080,458 8,065,593
Equipment.......................................................................... 8,924,949 8,563,263
Leasehold improvements............................................................. 1,458,058 1,407,587
------------- -------------
19,937,856 19,510,834
Less accumulated depreciation and amortization..................................... 9,283,278 8,519,319
------------- -------------
Property and equipment, net........................................................ $ 10,654,578 $ 10,991,515
------------- -------------
------------- -------------
</TABLE>
NOTE 9. DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Noninterest-bearing demand deposits.............................................. $ 70,871,849 $ 69,261,369
NOW and money market accounts.................................................... 114,066,189 82,607,658
Savings deposits................................................................. 47,735,468 42,955,654
Time certificates, $100,000 or more.............................................. 14,090,029 17,801,590
Other time deposits.............................................................. 93,959,714 100,320,718
-------------- --------------
Total............................................................................ $ 340,723,249 $ 312,946,989
-------------- --------------
-------------- --------------
</TABLE>
NOTE 10. NOTES PAYABLE AND OTHER BORROWINGS
NOTES PAYABLE:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Term note payable to a bank, interest at LIBOR plus 1.8% (7.75% at December 31,
1995), due January 3, 1999, with annual installments of $500,000, secured by all
the common stock of Signal, GCNB, and CCC......................................... $ 3,400,000 $ 8,550,000
Advances from the Federal Home Loan Bank of Des Moines, principal due between May
12, 1997 and June 5, 1998, plus interest payable monthly at rates between 5.67%
and 6.61%, secured by blanket pledge agreements totaling $46,167,000 of
residential real estate mortgage loans............................................ 12,000,000 3,000,000
Unsecured term notes payable to certain individuals, interest varies from 6.0% to
10.0%, payable semiannually, notes had original maturities of three to five
years............................................................................. 362,119 362,281
------------- -------------
Total.............................................................................. $ 15,762,119 $ 11,912,281
------------- -------------
------------- -------------
</TABLE>
The term note payable to a bank includes certain covenants including
maintenance of certain ratios, including capital to assets and average return on
assets.
F-18
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. NOTES PAYABLE AND OTHER BORROWINGS (CONTINUED)
FUTURE ANNUAL MATURITIES:
<TABLE>
<S> <C>
Years ending December 31:
1996...................................................... $ 573,119
1997...................................................... 6,673,000
1998...................................................... 6,616,000
1999...................................................... 1,900,000
--------------
$ 15,762,119
--------------
--------------
</TABLE>
LINE OF CREDIT:
The Company has an open line of credit with a bank for $750,000. The
agreement has an expiration date of April 3, 1996. The line of credit was unused
at December 31, 1995. Borrowings under this line of credit are secured by all
the common stock of Signal, GCNB, and CCC.
NOTE 11. INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE
The cumulative tax effects of the primary temporary differences are shown in
the following table:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Deferred tax assets:
Loan loss allowances.............................................................. $ 666,351 $ 684,118
Deferred compensation accruals.................................................... 403,326 322,159
Unrealized loss on securities available for sale.................................. -- 1,113,271
Amortization of intangible assets................................................. 47,061 --
Other............................................................................. -- 23,732
------------- -------------
Total deferred tax assets........................................................... 1,116,738 2,143,280
------------- -------------
Deferred tax liabilities:
Property and equipment............................................................ (233,031) (218,664)
Acquisition adjustment............................................................ (808,250) (869,582)
Amortization of intangible assets................................................. -- (96,659)
Unrealized gain on securities available for sale.................................. (413,613) --
Other............................................................................. (400,758) (145,455)
------------- -------------
Total deferred tax liabilities...................................................... (1,855,652) (1,330,360)
------------- -------------
Net deferred tax assets (liabilities)............................................... $ (738,914) $ 812,920
------------- -------------
------------- -------------
</TABLE>
The Company evaluated the available evidence supporting the realization of
its deferred tax assets and determined it is more likely than not that the
assets will be realized.
The provision for income taxes charged to operations consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1995 1994 1993
------------ ------------ ----------
<S> <C> <C> <C>
Current tax expense....................................................... $ 2,030,602 $ 1,627,906 $ 822,796
Deferred tax expense (benefit)............................................ 24,950 (232,134) (97,572)
------------ ------------ ----------
$ 2,055,552 $ 1,395,772 $ 725,224
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
F-19
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Computed "expected" tax expense.......................................... $ 1,989,604 $ 1,340,055 $ 742,923
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit......................... 355,473 245,489 125,192
Tax-exempt interest income (net of disallowed expenses)................ (354,330) (324,612) (160,485)
Intangible asset amortization.......................................... 76,821 76,821 --
Other.................................................................. (12,016) 58,019 17,594
------------ ------------ -----------
$ 2,055,552 $ 1,395,772 $ 725,224
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
As discussed in Note 1, effective January 1, 1993, the Company adopted the
provisions of FASB Statement No. 109. This resulted in the recognition of
$106,168 of deferred tax assets at January 1, 1993, which was included in the
consolidated statement of income as a cumulative effect of a change in
accounting principle.
NOTE 12. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. They involve, to varying degrees, elements of credit risk in
excess of amounts recognized on the consolidated balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other parties to the financial instruments for these commitments is represented
by the contractual amounts of the instruments. The Company uses the same credit
policies in making commitments as it does for on-balance sheet instruments.
These commitments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Commitments to extend credit....................................................... $ 21,224,000 $ 20,860,000
Standby letters of credit.......................................................... 2,976,000 2,468,000
------------- -------------
$ 24,200,000 $ 23,328,000
------------- -------------
------------- -------------
</TABLE>
COMMITMENTS TO EXTEND CREDIT: Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition
established in the contract. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. If deemed necessary upon extension of
credit, the amount of collateral obtained is based on management's credit
evaluation of the party. Collateral held varies, but may include accounts
receivable, inventory, equipment, and real estate.
STANDBY LETTERS OF CREDIT: Standby letters of credit are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to
F-20
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
support public and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. Collateral held varies as specified above and is
required in instances which the Company deems necessary.
INTEREST RATE SWAPS: Interest rate swaps involve the contractual exchange
of fixed and floating rate interest payment obligations based on a notional
principal amount. The Company enters into interest rate swap contracts to manage
interest rate risk caused by fluctuations in interest rates. At December 31,
1995, interest rate swaps totaling $4,480,000 hedged the note payable to a bank
and a commercial loan. At December 31, 1994, the interest rate swap totaling
$7,000,000 hedged the note payable to a bank. Activity with respect to interest
rate swap contracts was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Notional amount outstanding at beginning of year:..................................... $ 7,000,000 $ --
Additions........................................................................... 1,480,000 7,000,000
Terminations........................................................................ (4,000,000) --
------------ ------------
Notional amount outstanding at end of year............................................ $ 4,480,000 $ 7,000,000
------------ ------------
------------ ------------
Unrealized gain (loss)................................................................ $ (30,172) $ 605,000
------------ ------------
------------ ------------
</TABLE>
The Company is a receiver of floating-rate interest and a payer of
fixed-rate interest. The weighted average interest rate paid was 5.45 and 5.32
percent and the weighted average interest rate received was 6.13 and 4.39
percent, during 1995 and 1994, respectively. The swaps terminate in January,
1999.
Interest rate swap contracts will result in gains and losses subsequent to
the date of the contract, due to interest rate movements. The Company amortizes
the gain or loss on terminated contracts over the original life of the hedge if
the hedged item remains outstanding. There were no unamortized gains or losses
at December 31, 1995.
LEASE COMMITMENTS:
At December 31, 1995, the Company was obligated under noncancelable leases
for office space, with terms including renewal options from three to five years.
The following is a schedule of future minimum rental payments under the
noncancelable operating leases:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
<S> <C>
1996............................................................ $ 239,161
1997............................................................ 206,129
1998............................................................ 207,565
1999............................................................ 167,527
2000............................................................ 85,000
---------
$ 905,382
---------
---------
</TABLE>
Total rent expense under these leases for the years ended December 31, 1995,
1994, and 1993, was $241,527, $184,384, and $59,424, respectively.
F-21
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK:
The Banks originate loans to customers who are primarily located in the
Minneapolis-St. Paul seven-county metropolitan area and Goodhue County. Although
the Banks' loan portfolios are diversified, a substantial portion of their
borrowers' ability to repay their loans is dependent on the economic strength of
these areas.
NOTE 13. BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN:
Contributions to the plan were $309,362, $199,208, and $269,296 in 1995,
1994, and 1993, respectively.
401(k) PROFIT SHARING PLAN:
Contributions to the plan were $127,143, $311,726, and $-0- in 1995, 1994,
and 1993, respectively.
NOTE 14. STOCK OPTION PLAN
In April 1994, the Company's Board of Directors approved the 1994 Stock
Option Plan, which authorizes the issuance of up to 100,000 shares of the
Company's common stock to key employees and directors of the Company. The plan
extends through April 30, 2004. The plan provides for the granting of
nonqualified stock options and incentive stock options to purchase common stock
of the Company at 100 percent of the repurchase price on the dates of grant.
Under the plan, options become exercisable over a five-year period beginning
one year after date of grant and expire ten years from date of grant. There are
no charges or credits to income in connection with the grant or exercise of
options. The number and exercise price of options under this plan were as
follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE EXERCISE PRICE
OPTIONS OPTIONS PER SHARE
----------- ------------- ----------------
<S> <C> <C> <C>
December 31, 1993................................. 0 0 $ 0
-----
-----
Options granted May 1, 1994..................... 27,500 73.46
----------- ----------------
December 31, 1994................................. 27,500 0 73.46
-----
-----
Options granted February 1, 1995................ 21,333 79.80
Options Canceled................................ (1,440) 73.46 - 79.80
----------- ----------------
December 31, 1995................................. 47,393 5,500 $ 73.46 - 79.80
----------- ----- ----------------
----------- ----- ----------------
</TABLE>
NOTE 15. COMMON STOCK REPURCHASE AGREEMENT
Article 7 of the Company's bylaws grants the Company the option to purchase
the shares of common stock held by a stockholder or his estate in the event of
the stockholder's death, insolvency, or desire to sell or transfer shares. If
the Company does not exercise its option to purchase the available shares within
60 days, the other stockholders may acquire the shares in proportion to their
ownership of the Company. The Company's Employee Stock Ownership Plan may
acquire all remaining shares of stock not purchased by other stockholders.
The repurchase price of common stock shall be equal to one hundred fifty
percent (150%) of the adjusted consolidated tangible book value of the Company.
This is defined to include all equity accounts of the Company but shall not
include any cumulative unrealized gain or loss on investment securities
available for sale, less the adjusted intangible assets recorded, divided by the
number of shares outstanding. The per share repurchase price as of December 31,
1995, was $93.06.
F-22
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16. LOANS AND OTHER TRANSACTIONS WITH RELATED PARTIES
Stockholders of the Company, and officers and directors, including their
families and companies of which they are principal owners, are considered to be
related parties. These related parties were loan customers of, and had other
transactions with, the Company in the ordinary course of business. In
management's opinion, these loans and transactions were on the same terms as
those for comparable loans and transactions with nonrelated parties. Total loans
to related parties were approximately $11,902,788 and $9,693,885 at December 31,
1995 and 1994, respectively. Activity with respect to related-party loans was as
follows:
<TABLE>
<S> <C>
Balance, December 31, 1994.................................. $ 9,693,885
New loans advanced........................................ 4,757,846
Repayments................................................ (2,548,943)
--------------
Balance, December 31, 1995.................................. $ 11,902,788
--------------
--------------
</TABLE>
NOTES 17. REGULATORY CAPITAL REQUIREMENTS
The Federal Reserve Board and other bank regulatory agencies have adopted
risk-based capital guidelines for banks and bank holding companies. The main
objectives of the risk-based capital framework are to provide a more consistent
system for comparing capital positions of banking organizations and to take into
account the different risks among banking organizations' assets and off-balance
sheet items. Bank regulatory agencies have supplemented the risk-based capital
standard with a leverage ratio for Tier 1 capital to total reported assets. The
minimum leverage ratio standard is 3 percent. Depending upon the judgment of the
various regulatory agencies, a greater leverage ratio may be required based upon
the relative risk of the organization.
Below is a comparison of the Company's 1995 actual with the minimum
requirements for well capitalized and adequately capitalized banks, as defined
by the federal regulatory agencies' Prompt Corrective Action Rules:
<TABLE>
<CAPTION>
MINIMUM REQUIREMENTS
------------------------------
1995 WELL ADEQUATELY
ACTUAL CAPITALIZED CAPITALIZED
----------- ------------- ---------------
<S> <C> <C> <C>
Tier 1 risk-based capital........................................... 12.63% 6.0% 4.0%
Total risk-based capital............................................ 13.75 10.0 8.0
Leverage ratio...................................................... 8.15 5.0 4.0
</TABLE>
Banking regulations restrict the amount of dividends that may be paid by the
Banks without prior approval of bank supervisory authorities.
F-23
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
NET CASH FLOWS USED FOR INVESTMENT SECURITIES:
Available-for-sale securities:
Maturities................................................... $ 47,854,796 $ 13,974,815 $ --
Sales........................................................ 7,666,148 7,985,749 --
Purchases.................................................... (70,933,314) (24,072,986) --
Held-to-maturity securities:
Maturities................................................... 1,232,302 3,484,667 --
Purchases.................................................... (216,471) (5,232,208) --
Investment securities:
Maturities................................................... -- -- 24,501,156
Sales........................................................ -- -- 1,972,318
Purchases.................................................... -- -- (25,158,167)
-------------- -------------- --------------
Net cash flows (used for) from investment securities............. $ (14,396,539) $ (3,859,963) $ 1,315,307
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1995 1994 1993
------------- --------------- ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest....................................... $ 12,260,709 $ 8,753,626 $ 3,765,777
Cash payments for income taxes................................... 1,884,820 2,216,337 398,472
------------- --------------- ------------
------------- --------------- ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Securities held for investment reclassified to:
Held-to-maturity securities.................................... $ -- $ 11,447,407 $ --
Available-for-sale securities.................................. -- 71,162,630 --
Held-to-maturity securities transferred to available-for-sale
(Note 4)........................................................ 11,972,456 -- --
Net change in unrealized gain (loss) on securities
available-for-sale.............................................. 2,265,172 (1,652,626) --
Other real estate acquired in settlement of loans................ -- 221,258 --
------------- --------------- ------------
------------- --------------- ------------
ACQUISITION OF SUBSIDIARIES:
Fair value of assets acquired, principally customer loans,
investments, property and equipment, and cost in excess of net
assets acquired, excluding net cash acquired $ -- $ 166,762,616 $ --
Fair value of deposits and other liabilities assumed............. -- (154,876,901) --
Common stock issued for acquisition of GCFC...................... -- (8,852,856) --
------------- --------------- ------------
Net cash paid...................................................... -- 3,032,859 --
Cash acquired...................................................... -- 6,231,125 --
------------- --------------- ------------
Cash paid.......................................................... $ -- $ 9,263,984 $ --
------------- --------------- ------------
------------- --------------- ------------
</TABLE>
F-24
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------
1995 1994
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks...................... $ 20,513,154 $ 20,513,154 $ 19,351,643 $ 19,351,643
Federal funds sold........................... 8,725,000 8,725,000 7,975,000 7,975,000
Investment securities available for sale..... 101,836,962 101,836,962 70,278,070 70,278,070
Investment securities held to maturity....... -- -- 13,156,388 12,681,148
Loans and leases............................. 265,904,636 265,669,636 246,981,259 240,395,330
Less allowance for loan and lease losses..... (2,899,165) -- (2,856,288) --
Accrued interest receivable.................. 3,180,346 3,180,346 2,742,358 2,742,358
Cash surrender value of life insurance....... 9,116,888 9,116,888 8,485,485 8,485,485
Financial liabilities:
Deposits..................................... 340,723,249 341,692,249 312,946,989 312,523,082
Securities sold under repurchase
agreements.................................. 23,173,292 23,173,292 27,746,565 27,746,565
Accrued interest payable..................... 2,163,556 2,163,556 1,576,213 1,576,213
Notes payable and other borrowings........... 15,762,119 15,801,470 12,412,281 12,182,983
Off-balance sheet financial instruments:
Interest rate swaps in a net gain (loss)
position.................................... -- (30,172) -- 605,000
</TABLE>
F-25
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for United Community Bancshares, Inc.
(parent company only) follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
JUNE 30, 1996 1995 1994
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Assets:
Cash and due from banks............................. $ 7,612 $ 112,503 $ 36,869
Advances to nonbank subsidiaries.................... 1,175,000 600,000 --
Property and equipment, net......................... 217,902 215,098 1,257,782
Accrued interest receivable......................... 6,690 3,548 --
Cash surrender value of life insurance.............. 712,823 696,709 1,433,883
Intangible assets, net.............................. 575,000 760,000 1,130,000
Other assets........................................ 600,414 231,521 1,141,876
Investment in bank subsidiaries..................... 36,370,543 35,672,594 30,696,843
Investment in nonbank subsidiaries.................. 2,883,032 2,723,190 1,531,224
-------------- -------------- --------------
Total assets.......................................... $ 42,549,016 $ 41,015,163 $ 37,228,477
-------------- -------------- --------------
-------------- -------------- --------------
Liabilities and stockholders' equity:
Accrued expenses and other liabilities.............. $ 474,490 $ 646,569 $ 653,526
Notes payable....................................... 3,575,000 3,400,000 9,050,000
-------------- -------------- --------------
Total liabilities..................................... 4,049,490 4,046,569 9,703,526
Stockholders' equity.................................. 38,499,526 36,968,594 27,524,951
-------------- -------------- --------------
Total liabilities and stockholders' equity............ $ 42,549,016 $ 41,015,163 $ 37,228,477
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-26
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
YEAR ENDED DECEMBER 31
----------------------------- ---------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Dividend income from bank subsidiaries............ $ 1,300,000 $ 1,100,000 $ 2,100,000 $ 1,550,000 $ 800,000
Management fee income from bank subsidiaries...... 268,800 207,600 450,800 855,573 --
Management fee income from nonbank subsidiaries... 32,400 11,700 23,400 16,232 --
Interest income from nonbank subsidiaries......... 31,920 -- 11,012 -- --
Other income...................................... 19,587 15,139 35,614 67,030 --
------------- ------------- ------------- ------------- -------------
Total income...................................... 1,652,707 1,334,439 2,620,826 2,488,835 800,000
------------- ------------- ------------- ------------- -------------
Interest expense.................................. 126,500 277,477 424,533 583,964 45,357
Salaries and employee benefits.................... 915,731 658,341 1,467,509 1,136,502 25,655
Occupancy......................................... 35,087 21,230 55,214 205,342 --
Depreciation...................................... 38,150 35,214 69,863 229,680 --
Amortization of intangibles....................... 185,000 185,000 370,000 370,000 --
Other............................................. 103,195 77,270 180,979 402,908 178,400
------------- ------------- ------------- ------------- -------------
Total expenses.................................... 1,403,663 1,254,532 2,568,098 2,928,396 249,412
------------- ------------- ------------- ------------- -------------
Income (loss) before income tax benefit and equity
in undistributed earnings of subsidiaries........ 249,044 79,907 52,728 (439,561) 550,588
Income tax benefit................................ 423,087 418,900 831,565 787,410 100,776
------------- ------------- ------------- ------------- -------------
Income before equity in undistributed earnings of
subsidiaries..................................... 672,131 498,807 884,293 347,849 651,364
Equity in undistributed earnings of bank
subsidiaries..................................... 1,626,542 1,131,732 2,710,578 2,050,046 914,648
Equity in undistributed earnings/(loss) of nonbank
subsidiaries..................................... (17,202) 12,910 34,160 35,062 --
------------- ------------- ------------- ------------- -------------
Net income........................................ $ 2,281,471 $ 1,643,449 $ 3,629,031 $ 2,432,957 $ 1,566,012
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-27
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
YEAR ENDED DECEMBER 31
----------------------------- ---------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 2,281,471 $ 1,643,449 $ 3,629,031 $ 2,432,957 $ 1,566,012
Adjustments to reconcile net income to net cash
flows from operating activities:
Equity in undistributed earnings of
subsidiaries.................................. (1,609,340) (1,144,642) (2,744,738) (2,085,108) (914,648)
Depreciation................................... 38,150 35,214 69,863 229,680 --
Amortization of intangibles.................... 185,000 185,000 370,000 370,000 --
Earnings on cash surrender value of life
insurance..................................... (16,114) (14,859) (29,764) (66,906) --
Other, net..................................... (542,845) 351,116 899,849 (357,944) 22,101
------------- ------------- ------------- ------------- -------------
Net cash flows from operating activities........... 336,322 1,055,278 2,194,241 522,679 673,465
------------- ------------- ------------- ------------- -------------
Cash flows from investing activities:
Advances to nonbank subsidiaries................. (575,000) -- (600,000) -- --
Purchases of property and equipment.............. (40,954) (22,081) (83,374) (1,487,462) --
Transfer of property and equipment............... -- 1,056,195 1,056,195 -- --
Purchase of cash surrender value of life
insurance....................................... -- -- (36,450) (36,450) --
Transfer of cash surrender value of life
insurance....................................... -- 803,388 803,388 (1,330,527) --
Investments in subsidiaries, net................. (177,043) (1,157,806) (1,157,806) (17,622,846) --
Acquisition of other assets...................... -- -- -- (1,500,000) --
------------- ------------- ------------- ------------- -------------
Net cash flows (used for)/from investing
activities........................................ (792,997) 679,696 (18,047) (21,977,285) --
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from notes payable...................... 1,175,000 -- -- 9,532,420 242,000
Payments made on notes payable................... (1,000,000) (1,750,000) (5,650,000) (1,084,420) (1,211,721)
Net proceeds from issuance of common stock....... 176,784 161,472 3,549,440 13,035,128 341,870
Dividends paid................................... -- -- -- -- (141,138)
------------- ------------- ------------- ------------- -------------
Net cash flows (used for)/from financing
activities........................................ 351,784 (1,588,528) (2,100,560) 21,483,128 (768,989)
------------- ------------- ------------- ------------- -------------
Net increase/(decrease) in cash.................... (104,891) 146,446 75,634 28,522 (95,524)
Cash
Beginning........................................ 112,503 36,869 36,869 8,347 103,871
------------- ------------- ------------- ------------- -------------
Ending........................................... $ 7,612 $ 183,315 $ 112,503 $ 36,869 $ 8,347
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
Federal law prevents United from borrowing from its subsidiary banks unless
the loans are secured by specific assets. Such secured loans by any subsidiary
bank are generally limited to 10 percent of the subsidiary banks' capital and
surplus, and aggregate loans to United and its nonbank subsidiaries are limited
to 20 percent of the subsidiary banks' capital and surplus.
The payment of dividends to United by the subsidiary banks is subject to
various federal and state regulatory limitations. A national bank must obtain
the approval of the Comptroller of the Currency if the total of all dividends
declared in any calendar year exceeds that bank's net profits for that year
combined with its retained net profits for the preceding two calendar years. A
Minnesota state-chartered bank must obtain the approval of the Minnesota
Department of Commerce if the total of all dividends declared in any calendar
year exceeds 50 percent of the bank's net profits for the preceding year.
F-28
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21. ACQUISITION (UNAUDITED)
On October 7, 1996, United entered into an agreement with Park Financial
Corporation (PFC), a bank holding company headquartered in St. Louis Park,
Minnesota, to merge PFC and PFC Acquisition Corp., a wholly-owned subsidiary of
United. The merger is subject to the receipt of regulatory approvals and the
absence of any material adverse change in the condition of PFC or Park National
Bank. United anticipates that the necessary regulatory approvals will be
received and the merger will occur in January 1997.
The aggregate estimated purchase price of $46 million will be obtained from
the net proceeds of an $11 million preferred stock offering, the proceeds of a
$5 million common stock offering, additional debt financing of $24 million, and
cash on hand of $7 million.
The merger will be accounted for under the purchase method of accounting
and, accordingly, the assets and liabilities of Park National Bank will be
recorded at their fair values, with any remaining purchase price being allocated
to goodwill.
The purchase price of PFC is the November 30, 1996, book value of PFC, plus
a premium, plus a fixed daily accrual representing earnings from November 30,
1996, through the closing date.
The following is an unaudited summary of PFC's balance sheet as of June 30,
1996 and December 31, 1995, and unaudited results of operations for the year
ended December 31, 1995:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, 1996 1995
-------------- --------------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Assets:
Cash and due from banks........................................................ $ 11,306,786 $ 13,169,628
Interest-bearing deposits with banks........................................... 1,161,000 876,000
Federal funds sold............................................................. -- 4,900,000
Investment securities.......................................................... 74,144,977 63,764,635
Loans, net..................................................................... 116,673,197 113,498,772
Property and equipment, net.................................................... 2,071,075 2,130,254
Other assets................................................................... 2,872,679 2,230,636
-------------- --------------
Total assets..................................................................... $ 208,229,714 $ 200,569,925
-------------- --------------
-------------- --------------
Liabilities and stockholders' equity:
Deposits....................................................................... $ 166,443,237 $ 165,753,622
Securities sold under repurchase agreements.................................... 17,208,342 10,665,906
Accrued expenses and other liabilities......................................... 894,073 1,262,022
-------------- --------------
Total liabilities................................................................ 184,545,652 177,681,550
Stockholders' equity............................................................. 23,684,062 22,888,375
-------------- --------------
Total liabilities and stockholders' equity....................................... $ 208,229,714 $ 200,569,925
-------------- --------------
-------------- --------------
</TABLE>
F-29
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21. ACQUISITION (UNAUDITED) (CONTINUED)
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
DECEMBER 31,
1995
-------------
<S> <C>
(UNAUDITED)
Interest income.................................................................................... $ 14,968,748
Interest expense................................................................................... 5,671,616
-------------
Net interest income................................................................................ 9,297,132
Provision for loan losses.......................................................................... 720,000
-------------
Net interest income after provision for loan losses................................................ 8,577,132
Noninterest income................................................................................. 1,658,712
Noninterest expense................................................................................ 6,337,773
-------------
Income before income taxes......................................................................... 3,898,071
Income tax expense................................................................................. 1,497,263
-------------
Net income......................................................................................... $ 2,400,808
-------------
-------------
</TABLE>
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Goodhue County Financial Corporation:
We have audited the accompanying consolidated balance sheets of Goodhue
County Financial Corporation and subsidiaries (the Corporation) as of December
31, 1993 and 1992 and the related consolidated statements of income,
shareholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Goodhue
County Financial Corporation and subsidiaries at December 31, 1993 and 1992 and
the results of their operations and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in note 2 to the consolidated financial statements, the
Corporation changed its method of accounting for income taxes in 1993 to adopt
the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES.
KPMG PEAT MARWICK LLP
March 4, 1994
Minneapolis, Minnesota
F-31
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and 1992
<TABLE>
<CAPTION>
1993 1992
-------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks........................................................... $ 6,160,289 8,681,770
Interest-bearing deposits in other banks.......................................... 70,836 4,236,138
Federal funds sold................................................................ 4,950,000 5,600,000
-------------- -------------
Cash and cash equivalents................................................... 11,181,125 18,517,908
Investment securities available for sale (market value of $43,013,653 in 1993 and
$49,049,234 in 1992)............................................................. 42,817,189 48,449,936
Loans and leases, net of unearned income.......................................... 104,395,435 101,875,239
Allowance for credit losses....................................................... (1,223,931) (1,331,434)
-------------- -------------
Net loans and leases........................................................ 103,171,504 100,543,805
Property and equipment, net....................................................... 5,039,918 4,871,036
Accrued income receivable......................................................... 1,282,300 1,220,915
Other assets...................................................................... 3,551,705 3,542,133
-------------- -------------
Total Assets................................................................ $ 167,043,741 177,145,733
-------------- -------------
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing........................................................... $ 25,883,806 26,797,587
Interest bearing.............................................................. 117,597,967 130,039,263
-------------- -------------
Total deposits.............................................................. 143,481,773 156,836,850
Securities sold under repurchase agreements....................................... 8,554,941 6,405,592
Notes payable..................................................................... 357,000 357,000
Accrued interest payable.......................................................... 596,475 732,113
Accrued expenses and other liabilities............................................ 462,961 569,888
-------------- -------------
153,453,150 164,901,443
-------------- -------------
Shareholders' equity:
12% cumulative preferred stock $25 par value, 15,000 shares authorized, 11,050
shares issued and outstanding.................................................. 276,244 276,244
18% noncumulative preferred stock $100 par value, 33,000 shares authorized,
25,574 shares issued and outstanding........................................... 2,557,363 2,557,363
-------------- -------------
Total preferred shareholders' equity........................................ 2,833,607 2,833,607
-------------- -------------
Common stock -- $10 par value, 15,000 shares authorized, 11,050 shares issued
and outstanding.............................................................. 110,497 110,497
Additional paid-in capital.................................................... 171,450 171,450
Retained earnings............................................................. 10,475,037 9,128,736
-------------- -------------
Total common shareholders' equity........................................... 10,756,984 9,410,683
-------------- -------------
Total shareholders' equity.................................................. 13,590,591 12,244,290
-------------- -------------
Total liabilities and shareholders' equity.................................. $ 167,043,741 177,145,733
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1993 and 1992
<TABLE>
<CAPTION>
1993 1992
------------- ------------
<S> <C> <C>
Interest income:
Interest and fees on loans and leases.............................................. $ 9,725,971 10,488,456
Interest on federal funds sold..................................................... 145,786 109,461
Interest on deposits in other banks................................................ 107,343 164,434
Interest on investment securities:
Taxable.......................................................................... 2,383,653 2,877,589
Exempt from federal income tax................................................... 143,973 204,859
------------- ------------
Total interest on investment securities........................................ 2,527,626 3,082,448
------------- ------------
Total interest income.......................................................... 12,506,726 13,844,799
------------- ------------
Interest expense:
Interest on deposits............................................................... 4,585,589 5,948,507
Interest on short-term borrowings.................................................. 272,392 259,202
Interests on notes payable......................................................... 31,552 33,135
------------- ------------
Total interest expense......................................................... 4,889,533 6,240,844
------------- ------------
Net interest income............................................................ 7,617,193 7,603,955
Provisions for credit losses......................................................... 304,628 242,984
------------- ------------
Net interest income after provision for credit losses.......................... 7,312,565 7,360,971
------------- ------------
Noninterest income:
Service charges on deposit accounts................................................ 943,514 873,049
Investment securities transactions................................................. 210,256 11,290
Annuity and investment commissions................................................. 107,628 145,909
Other.............................................................................. 537,397 574,297
------------- ------------
Total noninterest income....................................................... 1,798,795 1,604,545
------------- ------------
Noninterest expense:
Salaries and employee benefits..................................................... 3,954,059 3,708,259
Occupancy expenses, net............................................................ 931,063 818,998
Data processing.................................................................... 202,514 195,907
Professional services.............................................................. 545,658 291,321
Federal deposit insurance expense.................................................. 336,996 336,304
Marketing.......................................................................... 161,904 135,117
Other.............................................................................. 967,716 877,648
------------- ------------
Total noninterest expense...................................................... 7,099,910 6,363,554
------------- ------------
Income before income taxes and cumulative effect of change in accounting
principle..................................................................... 2,011,450 2,601,962
Provision for income taxes........................................................... 707,000 924,000
------------- ------------
Income before cumulative effect of change in accounting principle.............. 1,304,450 1,677,962
------------- ------------
Cumulative effect of change in accounting principle.................................. 75,000 0
------------- ------------
Net income..................................................................... $ 1,379,450 1,677,962
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1993 and 1992
<TABLE>
<CAPTION>
12% CUMULATIVE ADDITIONAL
PREFERRED 18% NONCUMULATIVE COMMON PAID-IN RETAINED
STOCK PREFERRED STOCK STOCK CAPITAL EARNINGS TOTAL
-------------- ----------------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1991............... $ 285,244 2,670,183 114,097 687,424 7,496,710 11,253,658
Net income.............................. 0 0 0 0 1,677,962 1,677,962
Stock issued............................ 800 7,828 320 24,031 0 32,979
Stock redeemed.......................... (9,800) (120,648) (3,920) (540,005) 0 (674,373)
Preferred stock dividends declared...... 0 0 0 0 (45,936) (45,936)
-------------- ----------------- --------- ----------- ------------ ------------
Balance December 31, 1992............... 276,244 2,557,363 110,497 171,450 9,128,736 12,244,290
Net income.............................. 0 0 0 0 1,379,450 1,379,450
Preferred stock dividends declared...... 0 0 0 0 (33,149) (33,149)
-------------- ----------------- --------- ----------- ------------ ------------
Balance December 31, 1993............... $ 276,244 2,557,363 110,497 171,450 10,475,037 13,590,591
-------------- ----------------- --------- ----------- ------------ ------------
-------------- ----------------- --------- ----------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1993 and 1992
<TABLE>
<CAPTION>
1993 1992
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................................... $ 1,379,450 1,677,962
Adjustments to reconcile net income to net cash flows from (used in) operating
activities:
Provision for credit losses.................................................... 304,628 242,984
Depreciation and amortization.................................................. 409,320 555,093
Investment securities transactions............................................. (210,256) (11,290)
FHLB stock dividends........................................................... (28,900) (60,730)
Deferred income taxes.......................................................... (79,000) (62,000)
Accrued income receivable...................................................... (61,385) 294,654
Accrued interest payable....................................................... (135,638) (257,666)
Other assets, net.............................................................. (12,572) (578,632)
Accrued expenses and other liabilities, net.................................... (27,927) (6,095,406)
-------------- -------------
Net cash flows from (used in) operating activities........................... 1,537,720 (4,295,031)
-------------- -------------
Cash flows used in investing activities:
Proceeds from sales of investment securities..................................... 9,145,845 302,251
Proceeds from maturities of investment securities................................ 39,980,168 34,978,370
Purchases of investment securities............................................... (43,125,000) (28,257,209)
Loans and leases, net............................................................ (2,932,327) (4,785,836)
Purchases of property and equipment, net......................................... (704,312) (473,522)
-------------- -------------
Net cash flows from investing activities..................................... 2,364,374 1,764,054
-------------- -------------
Cash flows from financing activities:
Deposits, net.................................................................... (13,355,077) 6,545,628
Securities sold under repurchase agreements, net................................. 2,149,349 751,734
Stock issued..................................................................... 0 32,979
Stock redeemed................................................................... 0 (674,373)
Dividends paid................................................................... (33,149) (45,936)
-------------- -------------
Net cash flows from (used in) financing activities........................... (11,238,877) 6,610,032
-------------- -------------
Net (decrease) increase in cash and cash equivalents......................... (7,336,783) 4,079,055
Cash and cash equivalents:
Beginning of year................................................................ 18,517,908 14,438,853
-------------- -------------
End of year...................................................................... $ 11,181,125 18,517,908
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1992
(1) BUSINESS
Goodhue County Financial Corporation and subsidiaries (the Corporation)
provide a full range of banking and financial services to individual and
commercial customers who are primarily located in southeastern Minnesota and
western Wisconsin. The Corporation is subject to competition from other
financial institutions. The Corporation is subject to the regulations of certain
federal agencies and undergoes periodic examinations by those regulatory
authorities.
(2) SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Corporation are prepared in
conformity with generally accepted accounting principles and prevailing
practices in the banking industry. The following summarizes significant
accounting policies used in preparing the consolidated financial statements.
CONSOLIDATION
The consolidated financial statements of the Corporation include the
accounts of Goodhue County Financial Corporation (the Parent), The Goodhue
County National Bank of Red Wing (the Bank) and Consumers Credit Corporation, a
consumer finance company. All material intercompany accounts and transactions
have been eliminated.
BASIS OF FINANCIAL STATEMENT PRESENTATION
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenue and expenses for the
period. Actual results may differ from those estimates.
Material estimates include the determination of the allowance for credit
losses. Management believes that the allowance for credit losses is adequate.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the purpose of the consolidated statements of cash flows, cash and due
from banks, interest-bearing deposits in other banks and federal funds sold are
considered to be cash and cash equivalents. Cash payments for interest expense
and income taxes were approximately $5,025,000 and $344,000, respectively, for
the year ended December 31, 1993 and $6,499,000 and $1,406,000 respectively, for
the year ended December 31, 1992.
INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale are carried at the lower of
aggregate amortized cost or market value. Gains and losses on sales of
investment securities are computed on a specific-identification basis.
LOANS AND LEASES
Loans are carried at the principal amount outstanding. Recognition of
interest income on loans is suspended when collectibility of principal or
interest is uncertain or principal or interest payments are 90 or more days
delinquent, unless, in the opinion of management, the loan is both well secured
and in process of collection. When loans are placed on a cash basis
(nonaccrual), any accrued interest receivable is charged against interest income
of the current year, or the allowance for credit losses, if accrued in a prior
year.
Payments of principal or interest received on cash-basis loans are applied
to reduce loan principal or reported as interest income, depending on the
judgment of management as to the ultimate collectibility of
(Continued)
F-36
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1992
the remaining loan amount. A cash-basis loan may be returned to accrual basis
when principal and interest payments are fully current and, in the opinion of
management, the collection of all future principal and interest payments is
reasonably assured.
The Bank provides equipment financing to lessees through finance leasing
arrangements. Leases are carried at the aggregate of lease rental payments
receivable, estimated residual values and unearned income. Unearned income,
including investment tax credits, is amortized over the lease terms by methods
producing level rates of return on net investments in leases. Estimated residual
values are recorded based on estimates by management of future equipment values
at the maturity of the leases.
ALLOWANCE FOR CREDIT LOSSES
An allowance for credit losses is maintained which is considered adequate to
absorb losses inherent in the loan and lease portfolios. A judgment is made by
management as to the adequacy of the allowance considering credit losses charged
to the allowance during the period, changes in the size, nature and risk of
credit portfolios, and general economic and business conditions. While
management uses information currently available to recognize losses on loans and
leases, future additions to the allowance may be necessary based upon changes in
economic conditions.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on accelerated methods for assets placed in service
prior to 1984 and a straight-line method for assets placed in service thereafter
over the estimated useful lives of the assets.
INCOME TAXES
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS No.
109), effective for fiscal years beginning after December 15, 1992. The
Corporation implemented SFAS No. 109 for the year ended December 31, 1993 and
the impact was an increase in the net deferred tax asset of approximately
$75,000.
The Corporation files a consolidated federal and a unitary state income tax
return.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS (SFAS No. 107), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using discounted cash flow analysis or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS No. 107 excludes all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
in note 15 do not represent the underlying value of the Bank.
RECLASSIFICATIONS
The prior year's financial statements are reclassified to conform with any
significant changes in current financial statement presentation.
(Continued)
F-37
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1992
(3) INVESTMENT SECURITIES AVAILABLE FOR SALE
Amortized cost and estimated market value of investment securities available
for sale at December 31, 1993 were:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities.......................... $ 16,049,556 52,727 36,345 16,065,938
U.S. agency securities............................ 6,836,865 886 20,426 6,817,325
States and political subdivisions................. 2,048,939 84,153 8,970 2,124,122
Corporate securities.............................. 3,255,946 152,854 0 3,408,800
------------- ----------- ----------- ------------
28,191,306 290,620 65,741 28,416,185
------------- ----------- ----------- ------------
Mortgage-backed securities:
Federal agencies................................ 12,046,881 10,036 46,952 12,009,965
Collateralized mortgage obligations............. 1,779,302 33,862 25,361 1,787,803
------------- ----------- ----------- ------------
Total mortgage-backed securities.............. 13,826,183 43,898 72,313 13,797,768
Federal Reserve stock............................. 52,500 0 0 52,500
FHLB stock........................................ 746,700 0 0 746,700
Other stock....................................... 500 0 0 500
------------- ----------- ----------- ------------
$ 42,817,189 334,518 138,054 43,013,653
------------- ----------- ----------- ------------
------------- ----------- ----------- ------------
</TABLE>
The amortized cost and estimated market value of U.S. Treasury, U.S. agency,
state and political subdivision, and corporate securities at December 31, 1993,
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------- ------------
<S> <C> <C>
Due in one year or less.................................................... $ 4,960,919 5,023,035
Due after one year through five years...................................... 22,135,945 22,255,325
Due after five years through ten years..................................... 725,528 720,597
Due after ten years........................................................ 368,914 417,228
------------- ------------
$ 28,191,306 28,416,185
------------- ------------
------------- ------------
</TABLE>
(Continued)
F-38
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1992
Amortized cost and estimated market value of investment securities available
for sale at December 31, 1992 were:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities.......................... $ 4,004,805 49,958 0 4,054,763
U.S. agency securities............................ 4,971,645 0 0 4,971,645
States and political subdivisions................. 2,269,634 93,103 852 2,361,885
Corporate securities.............................. 4,271,056 184,200 0 4,455,256
------------- ----------- ----- ------------
15,517,140 327,261 852 15,843,549
------------- ----------- ----- ------------
Mortgage-backed securities:
Federal agencies................................ 29,452,659 256,150 3,128 29,705,681
Collateralized mortgage obligations............. 2,709,337 19,867 0 2,729,204
------------- ----------- ----- ------------
Total mortgage-backed securities.............. 32,161,996 276,017 3,128 32,434,885
Federal Reserve stock............................. 52,500 0 0 52,500
FHLB stock........................................ 717,800 0 0 717,800
Other stock....................................... 500 0 0 500
------------- ----------- ----- ------------
$ 48,449,936 603,278 3,980 49,049,234
------------- ----------- ----- ------------
------------- ----------- ----- ------------
</TABLE>
Proceeds from the sale of investment securities during 1993 were $9,145,845.
Gross gains of $210,256 were realized on the sale. Proceeds from the sale of
investment securities during 1992 were $302,251. Gross gains of $11,290 were
realized on the sale.
At December 31, 1993 and 1992, the Corporation held no obligations of states
(including political subdivisions of such states) which exceeded 10% of
shareholders' equity.
Investment securities carried at approximately $26 million and $29 million
were pledged at December 31, 1993 and 1992, respectively, to secure certain
deposits and securities sold under repurchase agreements.
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, which will be adopted by the Company
on January 1, 1994. The statement requires that securities be classified into
one of three categories: trading account securities, securities available for
sale, or securities held to maturity. Securities classified as available for
sale must be reported at fair value with unrealized gains and losses reported,
net of tax, as a separate component of stockholders' equity. As of December 31,
1993, net unrealized gains related to securities classified as available for
sale on adoption of SFAS No. 115 were $196,464 before income taxes.
(Continued)
F-39
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1992
(4) LOANS AND LEASES
The carrying amount of loans and leases at December 31, consisted of:
<TABLE>
<CAPTION>
1993 1992
-------------- -------------
<S> <C> <C>
Commercial and agricultural loans............................. $ 38,824,168 35,522,003
Real estate loans............................................. 38,435,645 39,668,676
Less unearned income........................................ (80,579) (63,623)
Consumer loans................................................ 21,096,234 20,453,389
Less unearned income........................................ (378,069) (369,809)
Lease financing............................................... 7,542,674 7,780,529
Less unearned income........................................ (1,044,638) (1,115,926)
-------------- -------------
$ 104,395,435 101,875,239
-------------- -------------
-------------- -------------
</TABLE>
The Bank originates loans to individual and commercial customers who are
primarily located in southeastern Minnesota and western Wisconsin. Although the
Bank has a diversified loan portfolio, a substantial portion of its borrowers'
ability to honor their loans is dependent on the economic strength of
southeastern Minnesota and western Wisconsin.
Certain directors and executive officers of the Parent and Bank, including
their immediate families and companies in which they are principal owners, are
loan customers of the Bank. These loans were made in the ordinary course of
business at normal credit terms and do not represent more than a usual risk of
collection. The amounts of these loans outstanding at December 31, 1993 and 1992
were approximately $3,958,000 and $2,572,000, respectively.
(5) ALLOWANCE FOR CREDIT LOSSES
A summary of transactions affecting the allowance for credit losses for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
1993 1992
------------ ----------
<S> <C> <C>
Balance at beginning of year....................................... $ 1,331,434 1,320,509
Provision for credit losses........................................ 304,628 242,984
Credit losses...................................................... (495,541) (310,467)
Recoveries of credit losses........................................ 83,410 78,408
------------ ----------
Net credit losses.............................................. (412,131) (232,059)
------------ ----------
Balance at end of year............................................. $ 1,223,931 1,331,434
------------ ----------
------------ ----------
</TABLE>
Nonperforming assets at December 31 were:
<TABLE>
<CAPTION>
1993 1992
---------- ---------
<S> <C> <C>
Cash-basis loans....................................................... $ 576,021 225,728
Other real estate owned................................................ 232,936 141,003
---------- ---------
$ 808,957 366,731
---------- ---------
---------- ---------
</TABLE>
There were no material commitments to lend funds to customers whose loans
were classified as nonperforming at December 31, 1993.
(Continued)
F-40
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1992
In 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 114, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN, which must be adopted for the Corporation's 1995 financial
statements. It requires that impaired loans, as defined within SFAS No. 114, be
measured based on the present value of expected future cash flow discounted at
the loan's effective rate, at the loan's market price, or the fair value of the
collateral if the loan is collateral dependent. The adoption of SFAS No. 114 is
not expected to have a material effect on the Corporation's consolidated
financial statements.
(6) PROPERTY AND EQUIPMENT
Property and equipment at December 31 consisted of:
<TABLE>
<CAPTION>
1993 1992
------------- -----------
<S> <C> <C>
Land, buildings and improvements................................. $ 5,483,780 5,318,435
Furniture and equipment.......................................... 3,663,028 3,159,406
Accumulated depreciation......................................... (4,106,890) (3,606,805)
------------- -----------
$ 5,039,918 4,871,036
------------- -----------
------------- -----------
</TABLE>
(7) DEPOSITS AND RESERVE REQUIREMENTS
Deposits at December 31 consisted of:
<TABLE>
<CAPTION>
1993 1992
-------------- -------------
<S> <C> <C>
Deposits without stated maturity:
Demand and other noninterest bearing........................ $ 25,883,806 25,797,587
Regular savings............................................. 14,081,428 13,148,999
NOW accounts................................................ 12,212,093 14,046,451
Super NOW accounts.......................................... 2,611,595 1,985,865
Money market deposit accounts............................... 25,701,247 34,363,929
-------------- -------------
Total deposits without stated maturity.................... 80,490,169 90,342,831
Savings certificates.......................................... 56,037,921 63,197,934
Certificates of deposit of $100,000 or more................... 6,953,683 3,296,085
-------------- -------------
$ 143,481,773 156,836,850
-------------- -------------
-------------- -------------
</TABLE>
Interest expense on certificates of deposit of $100,000 or more for the
years ended December 31, 1993 and 1992 was approximately $97,000 and $176,000,
respectively.
The Bank is required by Federal Reserve Board regulations to maintain
certain average minimum reserve balances. The amount of the required reserve
balance is included in cash and due from banks and at December 31, 1993 was
$200,000.
(Continued)
F-41
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1992
(8) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements are U.S. Treasury and federal
agency securities and generally mature in 30 to 90 days. Details of these
borrowings for the years ended December 31 were:
<TABLE>
<CAPTION>
1993 1992
--------------- -------------
<S> <C> <C>
Balance as of December 31.................................... $ 8,554,941 6,405,592
Average interest rate as of December 31...................... 2.69% 3.70%
Average annual balance....................................... $ 8,553,851 5,729,604
Average annual interest rate................................. 3.12% 4.52%
Highest balance at any month end............................. $ 12,813,116 6,405,592
</TABLE>
(9) NOTES PAYABLE
Notes payable at December 31 related to consumer finance company operations.
The notes are 6.00% to 11.50% unsecured notes payable to certain individuals
with original maturities of three to five years. The notes provide for
semiannual payments of interest. Principal maturities of notes payable at
December 31, 1993 were:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
1994.............................................................................. $ 172,000
1995.............................................................................. 114,000
1996.............................................................................. 71,000
----------
$ 357,000
----------
----------
</TABLE>
(10) SHAREHOLDERS' EQUITY
The holders of the 12% cumulative preferred stock are entitled to one and
one-half votes per share. The 12% cumulative preferred stock is redeemable at
the option of the Corporation at $26.25 per share together with any accrued and
unpaid dividends. In the event of liquidation of the Corporation, the holders of
the 12% preferred stock are entitled to the stock's par value ($25 per share)
together with any accrued and unpaid dividends. If insufficient assets exist to
provide the holders of both classes of preferred stock the respective stock's
par value, then any accrued and unpaid dividends on the 12% preferred stock
shall be paid first and any remaining assets shall be used to pay the respective
par value of the two classes of preferred stock without preference. The
Corporation declared dividends of $3 per share on the 12% cumulative preferred
stock in 1993 and 1992.
The 18% noncumulative preferred stock is redeemable at the Corporation's
option at $118 per share together with any dividends declared but unpaid. In the
event of liquidation of the Corporation, the holders of the 18% noncumulative
preferred stock are entitled to the stock's par value ($100 per share) together
with any declared but unpaid dividends. The 18% noncumulative preferred stock
has preference upon liquidation over the common stock. If insufficient assets
exist in the event of liquidation, then the order of preference is as provided
above. The Corporation declared no dividend in 1993 and dividends of $.50 per
share on the 18% noncumulative preferred stock in 1992.
All cumulative dividends on the 12% cumulative preferred stock must be paid
prior to any payment of dividends on the 18% noncumulative preferred stock. No
cash dividends may be declared on the common stock in any year unless an 18%
dividend has been declared in that year on the 18% noncumulative preferred
stock.
(Continued)
F-42
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1992
(11) RESTRICTION OF DIVIDENDS FROM BANK
National banking laws restrict the payment of dividends by the Bank. The
prior approval of the Comptroller of the Currency is required if dividends
declared in any calendar year by a national bank exceed the total of its net
income, as defined, for the current year and retained earnings for the two
preceding years. Under this limitation and considering regulatory capital
requirements, additional dividends of up to approximately $1,875,000 could be
declared by the Bank at December 31, 1993 without prior regulatory approval.
(12) INCOME TAXES
The components of income tax expense (benefit) for the years ended December
31 were:
<TABLE>
<CAPTION>
1993 1992
---------- ---------
<S> <C> <C>
Current:
Federal.............................................................. $ 531,500 756,000
State................................................................ 179,500 230,000
---------- ---------
Total current...................................................... 711,000 986,000
---------- ---------
Deferred:
Federal.............................................................. (9,000) (57,000)
State................................................................ 5,000 (5,000)
---------- ---------
Total deferred..................................................... (4,000) (62,000)
---------- ---------
$ 707,000 924,000
---------- ---------
---------- ---------
</TABLE>
Deferred tax liabilities (assets) at December 31 included the following
temporary differences:
<TABLE>
<CAPTION>
1993 1992
----------- ----------
<S> <C> <C>
Provisions for credit losses......................................... $ (328,666) (214,200)
Leasing transactions................................................. 0 48,045
Depreciation......................................................... 125,159 57,165
FHLB stock dividend.................................................. 36,047 31,336
Real estate taxes.................................................... 49,296 0
Other, net........................................................... 9,020 (599)
----------- ----------
$ (109,144) (78,253)
----------- ----------
----------- ----------
</TABLE>
A reconciliation from the statutory federal income tax rate to the effective
tax rate for the years ended December 31 follows:
<TABLE>
<CAPTION>
1993 1992
------------ ------------
<S> <C> <C>
Statutory federal income tax rate........................................ 34.0% 34.0%
State income taxes, net of federal income tax benefit.................... 6.1 5.7
Tax-exempt income, net of nondeductible expense.......................... (2.8) (2.6)
Increase in cash value of life insurance................................. (1.7) (2.0)
Other, net............................................................... (.5) .4
--- ---
Effective tax rate..................................................... 35.1% 35.5%
--- ---
--- ---
</TABLE>
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS No.
109). Under the asset and liability method of
(Continued)
F-43
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1992
SFAS No. 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The Company adopted the provisions of SFAS No. 109 without restating prior
years' financial statements, resulting in an increase of the net deferred tax
asset of approximately $75,000 as of January 1, 1993. This amount was reported
separately as a cumulative effect of a change in the method of accounting for
income taxes in the consolidated statement of income for the year ended December
31, 1993.
The Bank has determined that it is not required to establish a valuation
reserve for the deferred tax asset. Management believes it is more likely than
not that the federal portion of the deferred tax asset will be realized through
carryback to taxable income in prior years or future reversals of existing
taxable temporary differences. Based on the Bank's historical level of taxable
income and their projections for future taxable income over the periods the
state portion of the deferred tax asset is deductible, management also believes
it is more likely than not that the state portion of the deferred tax asset will
be realized through future taxable income. There can be no assurance, however,
that the Bank will generate any specific level of earnings in the future.
(13) PROFIT SHARING PLAN
The Corporation maintains a defined contribution profit sharing plan which
covers all full-time employees meeting certain minimum employment service
requirements. Profit sharing plan expense for the years ended December 31 was
$140,738 and $324,459 for 1993 and 1992, respectively.
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments involve, to varying degrees, elements of credit,
market (interest rate), or liquidity risk in excess of the amount recognized in
the balance sheet.
The Bank makes contractual commitments to extend credit and lines of credit,
which are subject to the Bank's credit approval and monitoring procedures. At
December 31, 1993 and 1992 the outstanding commitments to extend credit and
lines of credit totaled $6,856,000 and $7,196,000, respectively.
The Bank guarantees the performance by certain customers of their
obligations by issuing standby letters of credit. The risk involved in issuing
standby letters of credit is essentially the same as the credit risk involved in
extending loan facilities to customers and they are subject to the same credit
evaluations. At December 31, 1993 and 1992 the outstanding letters of credit
totaled $1,311,000 and $591,000, respectively.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires that the Corporation disclose estimated fair values
for its financial instruments. Fair value estimates, methods and assumptions are
set forth below for the Corporation's financial instruments as of December 31.
CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS IN OTHER BANKS, AND
FEDERAL FUNDS SOLD
The carrying amount reported in the balance sheet for cash and short-term
instruments is a reasonable estimate of fair value.
(Continued)
F-44
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1992
INVESTMENT SECURITIES AVAILABLE FOR SALE
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments. See note 3 for fair
values of investment securities.
LOANS AND LEASES
The fair values of loans and leases are estimated using discounted cash flow
analyses on a portfolio basis, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. The carrying
amount of accrued interest approximates its fair value. The carrying amounts
(shown net of unearned income) and fair values of loans and leases at December
31 were:
<TABLE>
<CAPTION>
1993 1992
----------------------------- ----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Commercial and agricultural loans........ $ 38,824,168 38,945,384 35,522,003 35,515,311
Real estate loans, net................... 38,355,066 39,672,826 39,605,053 40,354,070
Consumer loans, net...................... 20,718,165 20,792,149 20,083,580 20,143,632
Lease financing, net..................... 6,498,036 6,547,577 6,664,603 6,739,399
-------------- ------------- ------------- -------------
Total loans.......................... $ 104,395,435 105,957,936 101,875,239 102,752,412
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
ACCRUED INTEREST RECEIVABLE
The carrying amount of accrued interest receivable approximates its fair
value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
Loan commitment and standby letter of credit fees are not material. As such,
there are no carrying amount or fair value disclosures related to these
off-balance-sheet financial instruments.
(Continued)
F-45
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1992
DEPOSITS
The fair values of deposits without a stated maturity are equal to the
amount payable on demand at the reporting date (that is, carrying value). Fair
values for certificates of deposit are estimated using discounted cash flow
analysis using interest rates currently being offered on certificates. The
carrying amount and fair value of deposits at December 31 were:
<TABLE>
<CAPTION>
1993 1992
----------------------------- ----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Deposits without stated maturity:
Demand and other noninterest bearing... $ 25,883,806 25,883,806 26,797,587 26,797,587
Regular savings........................ 14,081,428 14,081,428 13,148,999 13,148,999
NOW accounts........................... 12,212,093 12,212,093 14,046,451 14,046,451
Super NOW accounts..................... 2,611,595 2,611,595 1,985,865 1,985,865
Money market deposit accounts.......... 25,701,247 25,701,247 34,363,929 34,363,929
-------------- ------------- ------------- -------------
Total deposits without stated
maturity............................ 80,490,169 80,490,169 90,342,831 90,342,831
Savings certificates..................... 56,037,921 56,582,293 63,197,934 63,781,993
Certificates of deposit of $100,000 or
more.................................... 6,953,683 6,996,702 3,296,085 3,308,135
-------------- ------------- ------------- -------------
Total deposits....................... $ 143,481,773 144,069,164 156,836,850 157,432,959
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The carrying amounts of overnight repurchase agreements approximate their
fair values. Fair values for other repurchase agreements are estimated using
discounted cash flow analysis using interest rates currently being offered on
repurchase agreements with similar maturities. The carrying amount and fair
value of repurchase agreements at December 31 were:
<TABLE>
<CAPTION>
1993 1992
------------------------ ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Overnight repurchase agreement........... $ 6,612,941 6,612,941 1,180,330 1,180,330
Other repurchase agreements.............. 1,942,000 1,945,799 5,225,262 5,244,365
------------ ---------- ---------- ----------
Total repurchase agreements.............. $ 8,554,941 8,558,740 6,405,592 6,424,695
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
</TABLE>
ACCRUED INTEREST PAYABLE
The carrying amount of accrued interest payable approximates its fair value.
NOTES PAYABLE
Fair values of notes payable related to consumer finance company operations
are estimated using discounted cash flow analysis using interest rates currently
offered for renewing notes. The carrying amount and fair value of notes payable
at December 31, 1993 and 1992 were $357,000 and $366,445, and $357,000 and
$377,653, respectively.
(Continued)
F-46
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1992
(16) PARENT COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1993 1992
------------- ------------
<S> <C> <C>
Assets:
Cash............................................................................... $ 533,922 242,190
Investments in subsidiaries........................................................ 13,096,601 11,894,795
Other assets....................................................................... 18,447 160,425
------------- ------------
Total assets..................................................................... $ 13,648,970 12,297,410
------------- ------------
------------- ------------
Liabilities and shareholders' equity:
Accrued expenses and other liabilities............................................. $ 58,379 53,120
Shareholders' equity............................................................... 13,590,591 12,244,290
------------- ------------
Total liabilities and shareholders' equity....................................... $ 13,648,970 12,297,410
------------- ------------
------------- ------------
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1993 1992
------------ ----------
<S> <C> <C>
Income:
Dividends from subsidiaries.......................................................... $ 750,000 820,000
Management fees from subsidiaries.................................................... 111,610 74,370
------------ ----------
Total income....................................................................... 861,610 894,370
Expenses:
Salaries and employee benefits....................................................... 116,348 112,186
Other................................................................................ 183,618 4,463
------------ ----------
Total expenses..................................................................... 299,966 116,649
------------ ----------
Income before income taxes and equity in undistributed earnings of subsidiaries.... 561,644 777,721
Income tax benefit..................................................................... (16,000) (17,000)
------------ ----------
Income before equity in undistributed earnings of subsidiaries..................... 577,644 794,721
Equity in undistributed earnings of subsidiaries....................................... 801,806 883,241
------------ ----------
Net income......................................................................... $ 1,379,450 1,677,962
------------ ----------
------------ ----------
</TABLE>
(Continued)
F-47
<PAGE>
GOODHUE COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993 and 1992
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1993 1992
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................... $ 1,379,450 1,677,962
Adjustments to reconcile net income to net cash flows from operating activities:
Equity in undistributed earnings of subsidiaries................................... (801,806) (883,241)
Other assets, net.................................................................. 141,978 (135,366)
Accrued expenses and other liabilities, net........................................ 5,259 (1,975)
------------ ----------
Net cash flow from operating activities.......................................... 724,881 657,380
------------ ----------
Cash flows from investing activities:
Advances to subsidiaries............................................................. (400,000) 0
------------ ----------
Net cash flow used in investing activities....................................... (400,000) 0
------------ ----------
Cash flows from financing activities:
Stock issued......................................................................... 0 32,979
Stock redeemed....................................................................... 0 (674,373)
Dividends paid....................................................................... (33,149) (45,936)
------------ ----------
Net cash flow used in financing activities....................................... (33,149) (687,330)
------------ ----------
Net increase (decrease) in cash.................................................. 291,732 (29,950)
Cash:
Beginning of year.................................................................... 242,190 272,140
------------ ----------
End of year.......................................................................... $ 533,922 242,190
------------ ----------
------------ ----------
</TABLE>
(17) SUBSEQUENT EVENT
Effective on January 1, 1994 the Corporation merged into Signal Bancshares,
Inc., a single-bank holding company (sole owner of Signal Bank, Inc. located in
West St. Paul, Minnesota), to form United Community Bancshares, Inc., a
multibank holding company. As a result of the merger transaction, all
Corporation stock was converted into United Common Stock, cash, or a combination
of United Common Stock and cash.
(Continued)
F-48
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Park Financial Corporation and Subsidiary
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Park
Financial Corporation (a Minnesota corporation) and Subsidiary at December 31,
1995 and 1994, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995. 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 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Park
Financial Corporation and Subsidiary at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As described in Note 1 to the consolidated financial statements and as
required by generally accepted accounting principles, the Company changed its
method of accounting for investments in debt securities in 1994 and income taxes
in 1993.
LARSON, ALLEN, WEISHAIR, & CO., LLP
Minneapolis, Minnesota
January 31, 1996
F-49
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------------
1996 1995 1994
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and Due from Banks............................ $ 11,306,786 $ 13,169,628 $ 10,383,932
Interest Bearing Deposits with Banks............... 1,161,000 876,000 --
Federal Funds Sold................................. -- 4,900,000 7,600,000
Commercial Paper................................... 1,593,001 1,570,357 2,281,129
Securities:
Available-for-Sale............................... 72,658,567 61,044,394 52,837,500
Held-to-Maturity................................. 1,486,410 1,149,884 513,559
Loans (Less Allowance for Loan Losses of $2,565,670
in 1996, $2,481,705 in 1995 and $2,019,723 in
1994)............................................. 115,080,196 113,498,772 102,882,230
Land, Buildings, Leasehold Improvements and
Equipment (Less Accumulated Depreciation and
Amortization)..................................... 2,071,075 2,130,254 2,225,913
Other Assets....................................... 2,872,679 2,230,636 2,780,933
-------------- -------------- --------------
Total Assets................................. $ 208,229,714 $ 200,569,925 $ 181,505,196
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Demand........................................... $ 45,152,021 $ 46,810,324 $ 46,295,507
Money Market Demand and NOW Accounts............. 14,029,246 15,456,490 14,991,459
Regular Savings.................................. 11,116,218 10,197,306 12,695,656
Money Market Savings............................. 39,724,092 38,356,160 32,696,892
Savings Certificates and Other Time.............. 56,421,660 54,933,342 50,024,887
-------------- -------------- --------------
$ 166,443,237 $ 165,753,622 $ 156,704,401
Securities Sold Under Repurchase Agreements........ 17,208,342 10,665,906 4,354,251
Accrued Interest Payable and Other Liabilities..... 894,073 1,262,022 1,209,228
-------------- -------------- --------------
Total Liabilities............................ $ 184,545,652 $ 177,681,550 $ 162,267,880
-------------- -------------- --------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common Stock, Par Value $1 Per Share; 5,000,000
Shares Authorized; 650,000 Shares Issued........ $ 650,000 $ 650,000 $ 650,000
Additional Contributed Capital................... 1,198,497 1,198,497 1,198,497
Retained Earnings................................ 23,510,215 22,033,841 19,633,033
Net Unrealized Gain (Loss) on Available-for-Sale
Securities...................................... (178,496) 502,191 (702,815)
-------------- -------------- --------------
Total........................................ $ 25,180,216 $ 24,384,529 $ 20,778,715
Less: Common Stock in Treasury (at Cost); 177,290
Shares in 1996 and 1995 and 178,490 Shares in
1994............................................ 1,496,154 1,496,154 1,541,399
-------------- -------------- --------------
Total Stockholders' Equity................... $ 23,684,062 $ 22,888,375 $ 19,237,316
-------------- -------------- --------------
Total Liabilities and Stockholders' Equity... $ 208,229,714 $ 200,569,925 $ 181,505,196
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-50
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
------------------------- ------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans................. $5,512,547 $5,298,164 $11,268,722 $ 8,833,418 $7,110,961
Interest on Investment Securities:
U.S. Treasury Securities................. 661,431 694,725 1,273,402 1,153,539 456,010
Obligations of Other U.S. Government
Agencies and Corporations............... 642,093 438,826 918,354 574,718 1,061,439
Obligations of States and Political
Subdivisions............................ 344,186 130,557 313,653 379,287 641,937
Other Securities......................... 522,168 325,740 831,094 449,920 320,451
Interest on Federal Funds Sold and Interest
Bearing Deposits.......................... 161,577 185,608 363,523 272,043 153,652
----------- ----------- ----------- ----------- ----------
Total Interest Income.................. 7,844,002 7,073,620 14,968,748 11,662,925 9,744,450
----------- ----------- ----------- ----------- ----------
INTEREST EXPENSE
Interest on Deposits....................... 2,712,324 2,462,046 5,171,989 3,361,568 2,820,531
Interest on Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements................................ 323,781 174,408 499,627 176,035 106,727
----------- ----------- ----------- ----------- ----------
Total Interest Expense................. 3,036,105 2,636,454 5,671,616 3,537,603 2,927,258
----------- ----------- ----------- ----------- ----------
NET INTEREST INCOME.......................... 4,807,897 4,437,166 9,297,132 8,125,322 6,817,192
PROVISION FOR LOAN LOSSES.................... 240,000 360,000 720,000 740,227 552,000
----------- ----------- ----------- ----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES...................................... 4,567,897 4,077,166 8,577,132 7,385,095 6,265,192
----------- ----------- ----------- ----------- ----------
OTHER INCOME
Service Fees............................... 782,230 745,889 1,529,870 1,404,965 1,358,658
Investment Securities Gains................ 1,000 -- 39,125 68,902 430,726
Other...................................... 39,917 70,564 89,717 81,965 312,407
----------- ----------- ----------- ----------- ----------
Total Other Income..................... 823,147 816,453 1,658,712 1,555,832 2,101,791
----------- ----------- ----------- ----------- ----------
OTHER EXPENSE
Salaries................................... 1,330,361 1,413,550 3,174,566 3,015,073 2,829,026
Profit Sharing and Other Employee
Benefits.................................. 296,785 148,021 315,196 297,794 252,311
Net Occupancy Expenses..................... 307,812 296,293 595,766 596,926 689,163
Equipment Expenses......................... 272,905 285,694 522,021 491,051 526,182
Other Operating Expenses................... 782,235 1,084,229 1,730,224 1,674,680 1,937,104
----------- ----------- ----------- ----------- ----------
Total Other Expense.................... 2,990,098 3,227,787 6,337,773 6,075,524 6,233,786
----------- ----------- ----------- ----------- ----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE... 2,400,946 1,665,832 3,898,071 2,865,403 2,133,197
PROVISION FOR INCOME TAX EXPENSE............. 924,572 629,553 1,497,263 1,030,415 659,104
----------- ----------- ----------- ----------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE......................... 1,476,374 1,036,279 2,400,808 1,834,988 1,474,093
Cumulative Effect of Change in Accounting
Principle................................... -- -- -- -- 850,221
----------- ----------- ----------- ----------- ----------
NET INCOME................................... $1,476,374 $1,036,279 $ 2,400,808 $ 1,834,988 $2,324,314
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
PER SHARE OF COMMON STOCK
Income Before Cumulative Effect of Change
in Accounting Principle................... $ 3.12 $ 2.19 $ 5.09 $ 3.89 $ 3.15
Cumulative Effect of Change in Accounting
Principle................................. -- -- -- -- 1.81
----------- ----------- ----------- ----------- ----------
$ 3.12 $ 2.19 $ 5.09 $ 3.89 $ 4.96
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-51
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS) ON
ADDITIONAL AVAILABLE-
COMMON CONTRIBUTED RETAINED FOR-SALE TREASURY
STOCK CAPITAL EARNINGS SECURITIES STOCK TOTAL
---------- ------------ ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992................ $ 650,000 $ 1,198,497 $ 15,473,731 $ -- $ (1,682,298) $ 15,639,930
2,600 Shares of Common Stock Purchased
for Treasury........................... -- -- -- -- (86,870) (86,870)
8,225 Shares of Common Stock Sold from
Treasury............................... -- -- -- -- 274,962 274,962
Net Income for the Year................. -- -- 2,324,314 -- -- 2,324,314
---------- ------------ ------------- -------------- ------------- -------------
BALANCE, DECEMBER 31, 1993................ 650,000 1,198,497 17,798,045 -- (1,494,206) 18,152,336
5,000 Shares of Common Stock Purchased
for Treasury........................... -- -- -- -- (196,890) (196,890)
3,900 Shares of Common Stock Sold from
Treasury............................... -- -- -- -- 149,697 149,697
Net Change in Unrealized Gain (Loss) on
Securities Available-for-Sale, Net of
Taxes.................................. -- -- -- (702,815) -- (702,815)
Net Income for the Year................. -- -- 1,834,988 -- -- 1,834,988
---------- ------------ ------------- -------------- ------------- -------------
BALANCE, DECEMBER 31, 1994................ 650,000 1,198,497 19,633,033 (702,815) (1,541,399) 19,237,316
1,200 Shares of Common Stock Sold from
Treasury............................... -- -- -- -- 45,245 45,245
Net Change in Unrealized Gain (Loss) on
Securities Available-for-Sale, Net of
Taxes.................................. -- -- -- 1,205,006 -- 1,205,006
Net Income for the Year................. -- -- 2,400,808 -- -- 2,400,808
---------- ------------ ------------- -------------- ------------- -------------
BALANCE, DECEMBER 31, 1995................ 650,000 1,198,497 22,033,841 502,191 (1,496,154) 22,888,375
Net Change in Unrealized Gain (Loss) on
Securities Available-for-Sale, Net of
Taxes.................................. -- -- -- (680,687) -- (680,687)
Net Income for the Six Months........... -- -- 1,476,374 -- -- 1,476,374
---------- ------------ ------------- -------------- ------------- -------------
BALANCE, JUNE 30, 1996
(UNAUDITED)............................... $ 650,000 $ 1,198,497 $ 23,510,215 $ (178,496) $ (1,496,154) $ 23,684,062
---------- ------------ ------------- -------------- ------------- -------------
---------- ------------ ------------- -------------- ------------- -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-52
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
------------------------------- ------------------------------------------------
1996 1995 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net Income................................. $ 1,476,374 $ 1,036,279 $ 2,400,808 $ 1,834,988 $ 2,324,314
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Cumulative Effect of Change.............. -- -- -- -- (850,221)
Depreciation and Amortization............ 174,463 160,273 318,006 323,460 362,047
Deferred Income Taxes.................... 166,367 (32,671) 48,642 72,309 108,217
Investment Premium Amortization (Net).... 76,623 114,199 210,731 201,264 412,489
Provision for Loan Losses................ 240,000 360,000 720,000 740,227 552,000
(Gain) Loss on Sale of Other Real Estate
and Equipment, Net...................... -- -- -- -- 42,431
Securities Gains......................... (1,000) -- (39,125) (68,902) (430,726)
(Increase) Decrease in Interest and Fees
Receivable.............................. (317,580) (97,561) (317,378) (438,304) 93,829
(Increase) Decrease in Prepaid Expenses
and Other Assets........................ (37,038) (79,921) 47,074 (66,338) 55,693
Increase (Decrease) in Interest
Payable................................. (4,255) (104,714) (53,511) 127,225 (73,727)
Increase (Decrease) in Other
Liabilities............................. (363,694) (233,751) 74,924 229,179 (186,022)
-------------- -------------- -------------- -------------- --------------
Net Cash Provided by Operating
Activities............................ 1,410,260 1,122,133 3,410,171 2,955,108 2,410,324
-------------- -------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Available-for-Sale
Securities................................ (26,911,685) (9,910,037) (22,110,843) (34,334,524) (23,866,396)
Proceeds from Sales, Maturities or Called
Available-for-Sale Securities............. 13,750,884 5,300,000 16,254,248 22,866,982 25,356,770
Purchase of Held-to-Maturity Securities.... -- -- (1,149,884) -- --
Net Increase in Interest Bearing Deposits
with Banks................................ (285,000) (396,000) (876,000) -- --
Net Increase in Loans...................... (1,821,424) (5,775,557) (11,336,542) (6,973,296) (11,297,959)
Proceeds from the Sale of Other Real
Estate.................................... -- -- -- -- 192,190
Net (Increase) Decrease in Commercial
Paper..................................... (22,644) (203,202) 710,772 (2,281,129) --
Purchase of Properties and Equipment....... (115,284) (146,173) (222,347) (287,310) (154,825)
-------------- -------------- -------------- -------------- --------------
Net Cash Used by Investing
Activities............................ (15,405,153) (11,130,969) (18,730,596) (21,009,277) (9,770,220)
-------------- -------------- -------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Demand Deposits, NOW
Accounts, Savings Accounts, and
Certificates of Deposits.................. 689,615 (2,877,889) 9,049,221 21,341,090 3,326,146
Net Increase (Decrease) in Short-Term
Borrowings................................ 6,542,436 6,427,251 6,311,655 1,072,953 (1,433,819)
Sales of Treasury Stock.................... -- -- 45,245 149,697 274,962
Purchase of Treasury Stock................. -- -- -- (196,890) (86,870)
-------------- -------------- -------------- -------------- --------------
Net Cash Provided by Financing
Activities............................ 7,232,051 3,549,362 15,406,121 22,366,850 2,080,419
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. (6,762,842) (6,459,474) 85,696 4,312,681 (5,279,477)
Cash and Cash Equivalents -- Beginning of
Year........................................ 18,069,628 17,983,932 17,983,932 13,671,251 18,950,728
-------------- -------------- -------------- -------------- --------------
CASH AND CASH EQUIVALENTS -- END OF YEAR..... $ 11,306,786 $ 11,524,458 $ 18,069,628 $ 17,983,932 $ 13,671,251
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest................................... $ 3,040,360 $ 2,637,501 $ 5,725,127 $ 3,410,378 $ 3,000,985
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Income Taxes............................... $ 916,316 $ 617,425 $ 1,422,747 $ 917,608 $ 750,949
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-53
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and 1995 (Unaudited)
and December 31, 1995, 1994 and 1993
1 NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF ACTIVITIES
Park Financial Corporation is a one-bank holding company providing bank and
bank-related services through its subsidiary, Park National Bank. The majority
of the subsidiary bank's business activity is with customers located within the
immediate area of the subsidiary bank.
A summary of the Company's significant accounting and reporting policies
consistently applied in the preparation of the accompanying consolidated
financial statements follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Park National Bank. All significant
intercompany accounts and transactions have been eliminated in preparing the
consolidated financial statements.
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal funds
are sold and purchased for one day periods. Cash flows for loans originated by
the Company, deposits and securities sold under agreement to repurchase are
reported net. In 1993, other real estate of $1,586,378 was transferred to loans.
CONCENTRATION OF CREDIT RISK
Substantially all of the Company's loans, commitments to extend credit and
standby letters of credit have been granted to customers in the Bank's market
area. Investments in securities issued by State and political subdivisions (see
Note 2) involve diverse governmental entities. The concentration of credit by
type of loan is set forth in Note 3. Standby letters of credit were granted
primarily to commercial customers.
INVESTMENT SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES. This statement requires that management determine the
appropriate classification of securities at the date of adoption and thereafter
as each individual security is acquired. In addition, the appropriateness of
such classification is reassessed at each balance sheet date. The
classifications and related accounting policies under SFAS No. 115 are as
follows:
HELD-TO-MATURITY SECURITIES
Held to maturity securities consist of bonds, notes and debentures for
which the Company has the positive intent and ability to hold to maturity.
Held-to-maturity securities are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method
over the period to maturity.
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale Securities consist of bonds, notes, and debentures
not classified as held-to-maturity securities. Unrealized holding gains and
losses, net of tax, on available-for-sale securities are reported as a net
amount in a separate component of stockholders' equity until realized. Gains
and losses on the sale of available-for-sale securities are determined using
the specific-identification method.
F-54
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996 and 1995 (Unaudited)
and December 31, 1995, 1994 and 1993
1 NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRADING ACCOUNT SECURITIES
Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading account
securities and are reported at fair value. Gains or losses on sales of
trading account securities, adjustments to fair values, and other
noninterest income are included in trading account profits and commissions.
The Company had no investments it classified as trading at December 31, 1995
and 1994.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company and its bank subsidiary have not invested in instruments which
are typically described as derivative financial instruments, and have no current
plans to do so, for trading, investing, hedging or other purposes.
LOANS AND ALLOWANCES FOR LOSSES
Loans are stated at the amount of unpaid principal. Interest on loans is
calculated by using the simple interest method on daily balances of the
principal amount outstanding.
Loans are reduced by an allowance for losses, which is established through
provisions for loan losses charged to expense. Loans are charged against the
allowance for losses when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that management believes will
be adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of collectibility and prior loss experience.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall quality, review of specific problem
loans and current economic conditions that may affect the borrowers' ability to
pay. Accrual of interest is discontinued when management believes, after
consideration of economic and business conditions and collection efforts, that
the borrowers' financial condition is such that collection of interest is
doubtful. Interest on these loans is recognized only when actually paid by the
borrower if collection of the principal is likely to occur.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates may affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could vary from the estimates that
were used.
BUILDINGS, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Buildings and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided on the straight-line method for financial reporting
purposes at rates sufficient to absorb the cost over the estimated useful life
of each asset which range from 3 to 32 years. For income tax reporting purposes,
depreciation is provided using accelerated methods. Leasehold improvements are
amortized over the term of the lease or the estimated useful lives of the
improvements, whichever is shorter.
INCOME TAXES
In 1993, the Company began providing for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109 (SFAS 109). In
accordance with SFAS 109, the asset and liability approach is used to determine
deferred income taxes. The asset and liability approach requires recognition of
deferred tax liabilities and assets for the expected future consequences of
temporary differences between the financial reporting basis and tax basis of
assets and liabilities. A valuation allowance is provided when it is
F-55
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996 and 1995 (Unaudited)
and December 31, 1995, 1994 and 1993
1 NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
more likely than not that a deferred tax asset will not be realized. The effect
of the adjustment as of January 1, 1993 to adopt SFAS 109 has been reflected in
the income statement as a cumulative effect of an accounting change and
increased 1993 net earnings by $850,221.
The Company and its subsidiary bank file consolidated federal and unitary
state income tax returns.
EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) defined contribution profit sharing
plan covering substantially all officers and employees. The Company matches
employee contributions in accordance with the plan agreement. Additional annual
contributions by the Company are voluntary and made at the discretion of the
Board of Directors. Contributions of $64,275, $69,931 and $65,481 were made to
the plan at December 31, 1995, 1994 and 1993, respectively.
TREASURY STOCK
The Company records the purchase of its common stock at cost. Gains or
losses on the sale of treasury stock are based on the net proceeds and the cost
basis of the common stock using the last-in, first-out method.
NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is calculated on the basis of the
weighted average number of shares outstanding during the year which totaled
471,540, 471,931 and 468,692 shares in 1995, 1994 and 1993, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1993 financial
statements in order to conform to the 1995 presentation. These reclassifications
had no effect on net income or stockholders' equity as originally presented.
F-56
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996 and 1995 (Unaudited)
and December 31, 1995, 1994 and 1993
2 SECURITIES
The amortized cost and estimated market values of investments in debt and
equity securities at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Available-For-Sale:
U.S. Government Obligations.................... $ 18,045,014 $ 104,094 $ (14,323) $ 18,134,785
Obligations of Federal Agencies................ 16,928,813 284,297 (39,150) 17,173,960
Obligations of States and Political
Subdivisions.................................. 10,267,585 155,872 (19,516) 10,403,941
Corporate Securities........................... 12,914,844 376,325 (9,974) 13,281,195
Mortgage-Backed Securities..................... 2,001,654 0 (641) 2,001,013
Other Securities............................... 49,500 0 0 49,500
------------- ----------- ----------- -------------
$ 60,207,410 $ 920,588 $ (83,604) $ 61,044,394
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
Held-to-Maturity:
Obligations of Federal Agencies................ $ 1,149,884 $ 0 $ 0 $ 1,149,884
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
1994
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Available-For-Sale:
U.S. Government Obligations................. $ 29,195,538 $ 0 $ (653,597) $ 28,541,941
Obligations of Federal Agencies............. 12,970,556 0 (289,994) 12,680,562
Obligations of States and Political
Subdivisions............................... 6,033,104 55,289 (111,134) 5,977,259
Corporate Securities........................ 3,750,581 0 (116,974) 3,633,607
Mortgage-Backed Securities.................. 2,009,581 0 (54,950) 1,954,631
Other Securities............................ 49,500 0 0 49,500
------------- ----------- ------------- -------------
$ 54,008,860 $ 55,289 $ (1,226,649) $ 52,837,500
------------- ----------- ------------- -------------
------------- ----------- ------------- -------------
Held-to-Maturity:
Obligations of States and Political
Subdivisions............................... $ 513,559 $ 0 $ (48,872) $ 464,687
------------- ----------- ------------- -------------
------------- ----------- ------------- -------------
</TABLE>
During 1995, the Bank transferred a held-to-maturity security of $512,307 to
available-for-sale.
F-57
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996 and 1995 (Unaudited)
and December 31, 1995, 1994 and 1993
2 SECURITIES (CONTINUED)
The amortized cost and estimated market value of securities at December 31,
1995, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties. Mortgage-backed
securities are included below at their stated maturity date.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------------- --------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Due in One Year or Less................................ $ 20,105,750 $ 20,108,571 $ 1,149,884 $ 1,149,884
Due after One Year through Five Years.................. 30,374,477 31,097,515 0 0
Due after Five Years through Ten Years................. 5,515,537 5,617,695 0 0
Due After Ten Years.................................... 4,211,646 4,220,613 0 0
------------- ------------- ------------ ------------
Total.............................................. $ 60,207,410 $ 61,044,394 $ 1,149,884 $ 1,149,884
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
Gross gains from sales of securities available-for-sale were $39,125,
$68,902 and $430,726 for 1995, 1994 and 1993, respectively.
Investment securities with a carrying amount of $32,595,000 and $31,864,222
at December 31, 1995 and 1994, respectively, were pledged to secure public
deposits and securities sold under repurchase agreements and for other purposes
required or permitted by law.
3 LOANS
Major classifications of loans at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Commercial............................................................. $ 70,905,502 $ 61,320,880
Consumer............................................................... 11,113,783 13,107,442
Real Estate............................................................ 33,151,994 29,580,177
Ready Reserve.......................................................... 549,627 568,641
Other.................................................................. 259,571 324,813
-------------- --------------
Total.............................................................. $ 115,980,477 $ 104,901,953
Less: Allowance for Loan Losses........................................ 2,481,705 2,019,723
-------------- --------------
Loans (Net)........................................................ $ 113,498,772 $ 102,882,230
-------------- --------------
-------------- --------------
</TABLE>
The impairment of loans having carrying values of $1,889,581 in 1995 have
been recognized in conformity with FASB Statement No. 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN. The total allowance for credit losses
related to these loans was $849,341 in 1995. For impairment recognized in
conformity with FASB Statement No. 114, the entire change in present value of
expected cash flows is reported as bad debt expense in the same manner which
impairment initially was recognized or as a reduction in the amount of bad debt
expense that otherwise would be reported.
F-58
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996 and 1995 (Unaudited)
and December 31, 1995, 1994 and 1993
3 LOANS (CONTINUED)
Changes in the allowance for loan losses as of December 31, 1995, 1994 and
1993 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Balance, Beginning of Year.................................... $ 2,019,723 $ 1,545,320 $ 1,455,760
Provision Charged to Operations............................. 720,000 740,227 552,000
Loans Charged Off........................................... (380,882) (429,094) (632,066)
Recoveries.................................................. 122,864 163,270 169,626
------------ ------------ ------------
Balance, End of Year.......................................... $ 2,481,705 $ 2,019,723 $ 1,545,320
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
In the ordinary course of business, the Company and its subsidiary bank have
granted loans to certain directors, officers, employees and stockholders and the
companies with which they are associated. The approximate aggregate amount of
all such loans at December 31, 1995 and 1994 was $1,805,534 and $2,078,120,
respectively.
4 LAND, BUILDINGS, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Major classifications of these assets at December 31, 1995 and 1994 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Buildings and Improvements........................................ $ 981,364 $ 981,364
Leasehold Improvements............................................ 733,251 733,251
Equipment......................................................... 2,717,230 2,556,028
Other............................................................. 21,111 21,111
------------ ------------
$ 4,452,956 $ 4,291,754
Less: Accumulated Depreciation and Amortization................... 2,808,792 2,551,931
------------ ------------
$ 1,644,164 $ 1,739,823
Land.............................................................. 486,090 486,090
------------ ------------
Total......................................................... $ 2,130,254 $ 2,225,913
------------ ------------
------------ ------------
</TABLE>
5 OTHER ASSETS
Other assets consist of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Accrued Interest and Fees Receivable.............................. $ 1,785,362 $ 1,467,984
Deferred Taxes.................................................... 297,943 1,118,544
Prepaid Expenses and Other........................................ 147,331 194,405
------------ ------------
Total......................................................... $ 2,230,636 $ 2,780,933
------------ ------------
------------ ------------
</TABLE>
6 NOTE PAYABLE
At December 31, 1995 and 1994, the Company had $3,000,000 and $6,000,000,
respectively, available for use under a one year revolving promissory note with
an unrelated bank. Interest which is payable monthly was at the federal funds
rate plus 2.25% in 1995 and at the lenders prime rate in 1994 (effective rate of
7.63% on December 31, 1995 and 8.5% on December 31, 1994). The promissory notes
are collateralized by all of the outstanding shares of common stock of Park
National Bank. No borrowings were outstanding under the line at December 31,
1995 and 1994.
F-59
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996 and 1995 (Unaudited)
and December 31, 1995, 1994 and 1993
7 INCOME TAXES
The provision for income tax expense in the statements of income for the
years ended December 31, 1995, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ----------
<S> <C> <C> <C>
Current......................................................... $ 1,448,621 $ 958,106 $ 550,887
Deferred........................................................ 48,642 72,309 108,217
------------ ------------ ----------
Total....................................................... $ 1,497,263 $ 1,030,415 $ 659,104
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
Deferred tax expense results from temporary differences in the recognition
of revenue and expense for financial reporting and income tax purposes. The
principal sources of these differences are the provision for loan losses for tax
purposes which differs from the provision for financial reporting purposes, from
using accelerated methods of depreciation for tax purposes only, and the
benefits of alternative minimum tax credit carryforwards.
The Company has alternative minimum tax credit carryforwards of $-0- and
$352,014 at December 31, 1995 and 1994, respectively.
Income tax expense differs from income tax expense computed by applying the
statutory federal income tax rate. The reasons for these differences are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------- -------------------------- -------------------------
PERCENT PERCENT PERCENT
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
----------- ------------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income Tax Expense at Statutory
Rate........................... $ 1,325,344 34.0% $ 974,237 34.0% $ 725,287 34.0%
State Taxes, Net of Federal Tax
Benefit........................ 253,107 6.5 186,089 6.5 135,615 6.4
Exempt Interest from Investments
and Loans...................... (105,080) (2.7) (123,355) (4.3) (209,000) (9.8)
Other........................... 23,892 0.6 (6,556) (0.2) 7,202 0.3
----------- --- ----------- --- ---------- ---
Income Tax Expense............ $ 1,497,263 38.4% $ 1,030,415 36.0% $ 659,104 30.9%
----------- --- ----------- --- ---------- ---
----------- --- ----------- --- ---------- ---
</TABLE>
8 COMMITMENTS AND CONTINGENT LIABILITIES
The Company conducts the majority of its operations in leased facilities. In
addition to basic rent, the Company is obligated to pay a percentage of
insurance, real estate taxes, and other building operating and maintenance
costs. The lease, which expires on October 31, 2004 includes a mark to market
clause which allows the landlord to adjust the rent to market once during the
period beginning on November 1, 1999 until the end of the lease. The lease
includes options to renew for three additional successive ten year periods under
similar terms. The Bank has also entered into sublease agreements with various
tenants. These subleases call for base rental payments and operating expenses
payable to Park National Bank and expire in 1998.
F-60
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996 and 1995 (Unaudited)
and December 31, 1995, 1994 and 1993
8 COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The approximate minimum annual rental commitments as of December 31, 1995
are as follows:
<TABLE>
<CAPTION>
GROSS SUBLEASE NET
YEAR ENDING DECEMBER 31, AMOUNT AMOUNT AMOUNT
- ---------------------------------------------------------------- ------------ ---------- ------------
<S> <C> <C> <C>
1996............................................................ $ 307,000 $ (44,000) $ 263,000
1997............................................................ 312,000 (44,000) 268,000
1998............................................................ 315,000 (11,000) 304,000
1999............................................................ 263,000 0 263,000
------------ ---------- ------------
Total....................................................... $ 1,197,000 $ (99,000) $ 1,098,000
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
The total rental expense under all lease agreements was $570,568, $578,057
and $652,839 in 1995, 1994 and 1993, respectively.
In the normal course of business there are outstanding various commitments
and contingent liabilities, such as commitments to extend credit, items held for
collections, and unsold travelers checks, which are not reflected in the
accompanying financial statements. The subsidiary bank does not anticipate
losses as a result of these transactions.
9 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company's subsidiary bank is a party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. The instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the balance sheets. The contract or notional amounts of these
instruments reflect the extent of involvement the subsidiary bank has in
particular classes of financial instruments.
The subsidiary bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of these instruments. The subsidiary bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments.
The contract or notional amount of financial instruments whose contract
amounts represent credit risk were approximately $32,434,688 and $25,513,751 for
commitments to extend credit and $1,211,354 and $3,321,931 for standby letters
of credit at December 31, 1995 and 1994, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the subsidiary bank upon extension of credit is
based on management's credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
subsidiary bank to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The subsidiary bank
holds appropriate collateral supporting those commitments for which collateral
is deemed necessary.
F-61
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996 and 1995 (Unaudited)
and December 31, 1995, 1994 and 1993
10 JUMBO CERTIFICATES OF DEPOSIT
Certificate of deposits equal to or in excess of $100,000 totaled
approximately $14,560,270 and $17,633,692 at December 31, 1995 and 1994,
respectively. Interest expense related to these deposits totaled approximately
$317,000 and $762,000 at December 31, 1995 and 1994, respectively.
11 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS IN BANKS,
FEDERAL FUNDS SOLD, AND COMMERCIAL PAPER
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE
For these short-term receivables and payables, the carrying value is a
reasonable estimate of fair value.
INVESTMENT SECURITIES
For securities held as investments, fair value equals quoted market price,
if available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
LOANS
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for 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.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
OTHER BORROWINGS
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
F-62
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996 and 1995 (Unaudited)
and December 31, 1995, 1994 and 1993
11 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
COMMITMENTS TO EXTEND CREDIT, LINE-OF-CREDIT ARRANGEMENTS,
CREDIT CARD ARRANGEMENTS, AND LETTERS OF CREDIT
For these commitments, the carrying amount is a reasonable estimate of fair
value, since the stated fees and interest rates charged on these arrangements
does not significantly vary from the terms currently being offered.
<TABLE>
<CAPTION>
1995 1994
------------------------------ ------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial Assets:
Investment Securities........................ $ 62,194,278 $ 62,194,278 $ 53,351,059 $ 53,302,187
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Loans........................................ $ 115,980,477 $ 104,901,953
Less: Allowance for Loan Losses.............. 2,481,705 2,019,723
-------------- --------------
Net Loans.................................. $ 113,498,772 $ 115,485,449 $ 102,882,230 $ 104,084,659
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Financial Liabilities:
Deposits..................................... $ 165,753,622 $ 165,915,248 $ 156,704,401 $ 157,155,168
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
12 REGULATORY CAPITAL REQUIREMENTS
Federal regulatory agencies have adopted various capital standards for
financial institutions, including risk-based capital standards. The primary
objectives of the risk-based capital framework are to provide a more consistent
system for comparing capital positions of financial institutions' assets and
off-balance-sheet items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to asset ratio (leverage ratio). In addition, regulatory
agencies consider the published capital levels as minimum levels and may require
a financial institution to maintain capital at higher levels.
A comparison of the capital of the Company's bank subsidiary as of December
31, 1995, with the minimum requirements is presented below:
<TABLE>
<CAPTION>
WELL ADEQUATELY
ACTUAL CAPITALIZED CAPITALIZED
----------- ------------- ---------------
<S> <C> <C> <C>
Total Risk-Based Capital................................... 12.2% 10% 8%
Tier 1 Risk-Based Capital.................................. 10.6% 6% 4%
Leverage Ratio............................................. 8.1% 5% 4%
</TABLE>
Banking regulations restrict the amount of dividends that may be paid
without prior approval of Bank supervisory authorities.
F-63
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996 and 1995 (Unaudited)
and December 31, 1995, 1994 and 1993
13 PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Park Financial Corporation (parent
Company only) follows:
BALANCE SHEETS (in 000's)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Interest-Bearing Deposits with Subsidiary Bank.............................................. $ 15 $ 1,642
Investments Held to Maturity................................................................ 1,150 0
Commercial Paper............................................................................ 1,570 2,281
Loans (Less Allowance for Loan Losses $101 in 1995 and 1994)................................ 3,501 1,086
Investment in Bank Subsidiary............................................................... 16,553 14,237
Other Assets................................................................................ 137 56
--------- ---------
Total Assets............................................................................ $ 22,926 $ 19,302
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Other Liabilities........................................................................... $ 38 $ 65
Stockholders' Equity........................................................................ 22,888 19,237
--------- ---------
Total Liabilities and Stockholders' Equity.............................................. $ 22,926 $ 19,302
--------- ---------
--------- ---------
</TABLE>
INCOME STATEMENT (in 000's)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Dividend Income from Bank Subsidiary................................................. $ 1,150 $ 1,000 $ 1,000
Interest............................................................................. 394 223 271
Other................................................................................ 47 166 248
--------- --------- ---------
Total Income..................................................................... $ 1,591 $ 1,389 $ 1,519
Expenses............................................................................. 208 272 385
--------- --------- ---------
Income before Income Taxes, Equity in Undistributed Earnings of Subsidiary and
Cumulative Effect of Change in Accounting Principle................................. $ 1,383 $ 1,117 $ 1,134
Provision for Income Taxes........................................................... 94 47 54
--------- --------- ---------
Income before Equity in Undistributed Earnings of Bank Subsidiary and Cumulative
Effect of Change in Accounting Principle............................................ $ 1,289 $ 1,070 $ 1,080
Equity in Undistributed Earnings of Bank Subsidiary.................................. 1,112 765 1,264
--------- --------- ---------
Income before Cumulative Effect of Change in Accounting Principle.................... $ 2,401 $ 1,835 $ 2,344
Cumulative Effect of Change in Accounting Principle.................................. 0 0 (20)
--------- --------- ---------
NET INCOME........................................................................... $ 2,401 $ 1,835 $ 2,324
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-64
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996 and 1995 (Unaudited)
and December 31, 1995, 1994 and 1993
13 PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS (in 000's)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Income....................................................................... $ 2,401 $ 1,835 $ 2,324
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Equity in Undistributed Earnings of Subsidiary................................. (1,112) (765) (1,264)
(Increase) Decrease in Prepaid Expenses and Other Assets....................... (81) 129 481
Increase (Decrease) in Other Liabilities....................................... (26) (30) (58)
--------- --------- ---------
Net Cash Provided by Operating Activities.................................... $ 1,182 $ 1,169 $ 1,483
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Held to Maturity Securities......................................... $ (1,150) $ 0 $ 0
Net (Increase) Decrease in Loans................................................. (2,415) 1,132 2,193
Net (Increase) Decrease in Commercial Paper...................................... 711 (795) (1,487)
--------- --------- ---------
Net Cash Provided (Used) by Investing Activities............................. $ (2,854) $ 337 $ 706
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Short-Term Borrowings............................................ $ 0 $ 0 $ (2,225)
Sales of Treasury Stock.......................................................... 45 150 275
Purchase of Treasury Stock....................................................... 0 (197) (87)
--------- --------- ---------
Net Cash Provided (Used) by Financing Activities............................. $ 45 $ (47) $ (2,037)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................................................... $ (1,627) $ 1,459 $ 152
Cash and Cash Equivalents -- Beginning of Year..................................... 1,642 183 31
--------- --------- ---------
CASH AND CASH EQUIVALENTS -- END OF YEAR........................................... $ 15 $ 1,642 $ 183
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest......................................................................... $ 25 $ 0 $ 54
--------- --------- ---------
--------- --------- ---------
Income Taxes Paid (Refund)....................................................... $ 156 $ 105 $ (71)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Federal law prevents the corporation from borrowing from its subsidiary bank
unless the loans are secured by specified assets. Such secured loans by any
subsidiary bank are generally limited to 10 percent of the subsidiary bank's
capital and surplus.
The payment of dividends to the corporation by subsidiary banks is subject
to various federal and state regulatory limitations. The bank must obtain the
approval of the Comptroller of the Currency if the total of all dividends
declared in any calendar year exceeds the bank's net profits for that year
combined with its retained net profits for the preceding two calendar years.
F-65
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS OF UNITED AND PFC
The Unaudited Pro Forma Consolidated Balance Sheet is derived from the
unaudited balance sheets of United and PFC as of June 30, 1996 included
elsewhere herein and assumes that the transactions were consummated on June 30,
1996. The Unaudited Pro Forma Consolidated Statement of Income for the Year
Ended December 31, 1995 is derived from the audited Consolidated Statements of
Income of United and PFC included elsewhere herein and assumes that the
transactions were consummated on January 1, 1995. The Unaudited Pro Forma
Consolidated Statements of Income for the Six Months Ended June 30, 1996 and
1995 are derived from the unaudited Consolidated Statements of Income of United
and PFC included elsewhere herein and assumes that the transactions were
consummated on January 1, 1996, and January 1, 1995, respectively.
The Unaudited Pro Forma Consolidated Financial Statements do not purport to
represent what United's results of operations or financial condition would
actually have been if the transactions had occurred on the dates indicated, and
do not project United's results or financial condition for or to any future
period or date. The Unaudited Pro Forma Consolidated Financial Statements are
presented for comparative purposes only. The pro forma adjustments, as discussed
in Note 1, are based on available information and certain assumptions that
management believes are reasonable.
The acquisition will be accounted for using the purchase method of
accounting. The purchase price of the acquisition will be allocated to the
tangible assets and liabilities of PFC based upon management's preliminary
estimates of their fair value with the remainder allocated to goodwill. The
allocation of purchase price for the acquisition is subject to revision when
additional information concerning asset and liability valuations are obtained.
In the opinion of United's management, and assuming a stable interest rate
environment, the asset and liability valuations for the acquisition will not be
materially different from the Unaudited Pro Forma Consolidated Financial
Statements presented.
F-66
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF UNITED AND PFC
JUNE 30, 1996
<TABLE>
<CAPTION>
COMMON AND PRO FORMA
PREFERRED CONSOLIDATED
STOCK UNITED BALANCE
UNITED OFFERING PRO FORMA PFC ADJUSTMENTS SHEET
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks..... $ 19,245,954 $ 15,258,960(a) $ 34,504,914 $ 12,467,786 $(44,377,258)(c) $ 30,450,690
22,892,354(d)
4,962,894(e)
Federal funds sold.......... 3,425,000 3,425,000 -- 3,425,000
Investment securities
available for sale......... 104,523,116 104,523,116 72,658,567 177,181,683
Investment securities held
to maturity................ -- -- 1,486,410 (1,486,410)(e) --
------------- ------------- ------------- ------------- -------------
Total investment
securities............. 104,523,116 104,523,116 74,144,977 (1,486,410) 177,181,683
------------- ------------- ------------- ------------- -------------
Loans and leases............ 275,955,203 275,955,203 119,238,867 (3,593,476)(e) 391,465,594
(135,000)(c)
Allowance for loan and
lease losses........... (2,989,690) (2,989,690) (2,565,670) 101,000(e) (5,454,360)
------------- ------------- ------------- ------------- -------------
Net loans and
leases............... 272,965,513 272,965,513 116,673,197 (3,627,476) 386,011,234
------------- ------------- ------------- ------------- -------------
Property and equipment,
net........................ 10,537,048 10,537,048 2,071,075 (12,414)(e) 12,595,709
Cash surrender value of life
insurance.................. 9,314,969 9,314,969 -- 9,314,969
Intangible assets, net...... 3,852,457 3,852,457 -- 21,369,496(c) 25,221,953
Other assets................ 5,068,729 5,068,729 2,872,679 7,941,408
------------- ------------- ------------- ------------- ------------- -------------
Total assets............ $ 428,932,786 $ 15,258,960 $444,191,746 $ 208,229,714 $ (278,814) $652,142,646
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits.................. $ 340,225,090 $340,225,090 $ 166,443,237 $506,668,327
Securities sold under
repurchase agreements.... 29,282,911 29,282,911 17,208,342 46,491,253
Accrued expenses and other
liabilities.............. 4,828,164 4,828,164 894,073 595,300(b) 6,235,131
(28,406)(e)
(54,000)(c)
Notes payable and other
borrowings............... 16,097,095 16,097,095 -- 22,892,354(d) 38,989,449
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities....... 390,433,260 -- 390,433,260 184,545,652 23,405,248 598,384,160
------------- ------------- ------------- ------------- ------------- -------------
Stockholders' equity:
Preferred stock........... -- 11,000,000(a) 11,000,000 -- 11,000,000
Common stock.............. 5,466 472(a) 5,938 650,000 (650,000)(c) 5,938
Additional paid-in
capital.................. 21,015,602 (740,000)(a) 25,274,090 1,198,497 (1,198,497)(c) 25,274,090
4,998,488(a)
Retained earnings......... 17,794,504 17,794,504 23,510,215 (22,914,915)(c) 17,794,504
(595,300)(b)
Unrealized loss on
securities available
for sale............... (316,046) (316,046) (178,496) 178,496(c) (316,046)
Less treasury stock..... -- -- (1,496,154) 1,496,154(c) --
------------- ------------- ------------- ------------- ------------- -------------
Total stockholders'
equity............... 38,499,526 15,258,960 53,758,486 23,684,062 (23,684,062) 53,758,486
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholders'
equity............... $ 428,932,786 $ 15,258,960 $444,191,746 $ 208,229,714 $ (278,814) $652,142,646
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
See Note to the Unaudited Pro Forma Consolidated Financial Statements
F-67
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME OF UNITED AND PFC
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
STATEMENT OF
UNITED PFC ADJUSTMENTS INCOME
----------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases....... $25,089,584 $11,268,722 $ 27,000(f) $ 36,142,994
(242,312)(h)
Investment (140,917)(h)
securities............ 5,355,179 3,336,503 8,550,765
Federal funds sold..... 760,820 363,523 1,124,343
----------- ----------- --------------- ------------
Total interest (356,229)
income.............. 31,205,583 14,968,748 45,818,102
----------- ----------- --------------- ------------
Interest expense:
Deposits............... 10,438,601 5,171,989 15,610,590
Federal funds purchased
and securities sold
under repurchase
agreements............ 1,453,699 499,627 1,953,326
Notes payable and other 1,593,308(g)
borrowings............ 955,752 -- 2,549,060
----------- ----------- --------------- ------------
Total interest 1,593,308
expense............. 12,848,052 5,671,616 20,112,976
----------- ----------- --------------- ------------
Net interest income.... 18,357,531 9,297,132 (1,949,537) 25,705,126
Provision for loan and --
lease losses............ 60,999 720,000 780,999
----------- ----------- --------------- ------------
Net interest income (1,949,537)
after provision for
loan and lease
losses.............. 18,296,532 8,577,132 24,924,127
Noninterest income:
Service charges and
other fees............ 2,922,664 1,529,870 4,452,534
Net investment
securities gains...... (32,329) 39,125 6,796
Other.................. 1,028,650 89,717 1,118,367
----------- ----------- --------------- ------------
Total noninterest --
income.............. 3,918,985 1,658,712 5,577,697
----------- ----------- --------------- ------------
Noninterest expense:
Salaries and employee
benefits.............. 9,291,893 3,489,762 12,781,655
Occupancy.............. 1,208,300 595,766 1,804,066
Depreciation........... 1,252,682 522,021 (28,813)(h) 1,745,890
Other.................. 4,778,059 1,730,224 1,424,633(f) 7,932,916
----------- ----------- --------------- ------------
Total noninterest 1,395,820
expense............. 16,530,934 6,337,773 24,264,527
----------- ----------- --------------- ------------
Income before income (3,345,357)
taxes................... 5,684,583 3,898,071 6,237,297
Income tax expense....... 2,055,552 1,497,263 (768,290)(i) 2,784,525
----------- ----------- --------------- ------------
Net income............. 3,629,031 2,400,808 (2,577,067) 3,452,772
Dividends on preferred 1,017,500(j)
stock................. -- -- 1,017,500
----------- ----------- --------------- ------------
Net income applicable $(3,594,567)
to common equity.... $ 3,629,031 $ 2,400,808 $ 2,435,272
----------- ----------- --------------- ------------
----------- ----------- --------------- ------------
Earnings per common
share................. $ 6.86 $ 5.09 $ 4.23
Weighted average common
shares outstanding.... 528,787 471,540 575,947
</TABLE>
See Note to the Unaudited Pro Forma Consolidated Financial Statements
F-68
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME OF UNITED AND PFC
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
STATEMENT OF
UNITED PFC ADJUSTMENTS INCOME
----------- ---------- --------------- ------------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases....... $13,190,219 $5,512,547 $ 13,500(f) $ 18,618,243
(98,023)(h)
Investment (75,554)(h)
securities............ 2,967,237 2,169,878 5,061,561
Federal funds sold..... 293,714 161,577 455,291
----------- ---------- --------------- ------------
Total interest (160,077)
income.............. 16,451,170 7,844,002 24,135,095
----------- ---------- --------------- ------------
Interest expense:
Deposits............... 5,734,866 2,712,324 8,447,190
Federal funds purchased
and securities sold
under repurchase
agreements............ 634,696 323,781 958,477
Notes payable and other 796,654(g)
borrowings............ 505,302 -- 1,301,956
----------- ---------- --------------- ------------
Total interest 796,654
expense............. 6,874,864 3,036,105 10,707,623
----------- ---------- --------------- ------------
Net interest (956,731)
income.............. 9,576,306 4,807,897 13,427,472
Provision for loan and --
lease losses............ 94,648 240,000 334,648
----------- ---------- --------------- ------------
Net interest income (956,731)
after provision for
loan and lease
losses.............. 9,481,658 4,567,897 13,092,824
Noninterest income:
Service charges and
other fees............ 1,611,671 782,230 2,393,901
Net investment
securities gains...... -- 1,000 1,000
Other.................. 778,411 39,917 818,328
----------- ---------- --------------- ------------
Total noninterest --
income.............. 2,390,082 823,147 3,213,229
----------- ---------- --------------- ------------
Noninterest expense:
Salaries and employee
benefits.............. 4,964,532 1,627,146 6,591,678
Occupancy.............. 444,598 307,812 752,410
Depreciation........... 754,866 272,905 (5,151)(h) 1,022,620
Other.................. 2,391,862 782,235 712,317(f) 3,886,414
----------- ---------- --------------- ------------
Total noninterest 707,166
expense............. 8,555,858 2,990,098 12,253,122
----------- ---------- --------------- ------------
Income before income (1,663,897)
taxes................... 3,315,882 2,400,946 4,052,931
Income tax expense....... 1,034,411 924,572 (380,632)(i) 1,578,351
----------- ---------- --------------- ------------
Net income............. 2,281,471 1,476,374 (1,283,265) 2,474,580
Dividends on preferred 508,750(j)
stock................. -- -- 508,750
----------- ---------- --------------- ------------
Net income applicable $(1,792,015)
to common equity.... $ 2,281,471 $1,476,374 $ 1,965,830
----------- ---------- --------------- ------------
----------- ---------- --------------- ------------
Earnings per common
share................. $ 4.09 $ 3.12 $ 3.25
Weighted average common
shares outstanding.... 557,284 472,710 604,444
</TABLE>
See Note to the Unaudited Pro Forma Consolidated Financial Statements
F-69
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME OF UNITED AND PFC
SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
STATEMENT OF
UNITED PFC ADJUSTMENTS INCOME
----------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases....... $12,046,404 $ 5,298,164 $ 13,500(f) $ 17,276,246
(81,822)(h)
Investment (72,653)(h)
securities............ 2,466,445 1,589,848 3,983,640
Federal funds sold..... 330,644 185,608 516,252
----------- ----------- --------------- ------------
Total interest (140,975)
income.............. 14,843,493 7,073,620 21,776,138
----------- ----------- --------------- ------------
Interest expense:
Deposits............... 4,919,770 2,462,046 7,381,816
Federal funds purchased
and securities sold
under repurchase
agreements............ 664,735 174,408 839,143
Notes payable and other 796,654(g)
borrowings............ 428,090 -- 1,224,744
----------- ----------- --------------- ------------
Total interest 796,654
expense............. 6,012,595 2,636,454 9,445,703
----------- ----------- --------------- ------------
Net interest (937,629)
income.............. 8,830,898 4,437,166 12,330,435
Provision for loan and --
lease losses............ 20,203 360,000 380,203
----------- ----------- --------------- ------------
Net interest income (937,629)
after provision for
loan and lease
losses.............. 8,810,695 4,077,166 11,950,232
Noninterest income:
Service charges and
other fees............ 1,413,543 745,889 2,159,432
Net investment
securities (losses)... (18,584) -- (18,584)
Other.................. 542,684 70,564 613,248
----------- ----------- --------------- ------------
Total noninterest --
income.............. 1,937,643 816,453 2,754,096
----------- ----------- --------------- ------------
Noninterest expense:
Salaries and employee
benefits.............. 4,519,089 1,561,571 6,080,660
Occupancy.............. 485,221 296,293 781,514
Depreciation........... 587,666 285,694 (23,662)(h) 849,698
Other.................. 2,616,187 1,084,229 712,317(f) 4,412,733
----------- ----------- --------------- ------------
Total noninterest 688,655
expense............. 8,208,163 3,227,787 12,124,605
----------- ----------- --------------- ------------
Income before income (1,626,284)
taxes................... 2,540,175 1,665,832 2,579,723
Income tax expense....... 896,726 629,553 (365,587)(i) 1,160,692
----------- ----------- --------------- ------------
Net income............. 1,643,449 1,036,279 (1,260,697) 1,419,031
Dividends on preferred 508,750(j)
stock................. -- -- 508,750
----------- ----------- --------------- ------------
Net income applicable $(1,769,447)
to common equity.... $ 1,643,449 $ 1,036,279 $ 910,281
----------- ----------- --------------- ------------
----------- ----------- --------------- ------------
Earnings per common
share................. $ 3.19 $ 2.19 $ 1.62
Weighted average common
shares outstanding.... 514,784 472,710 561,944
</TABLE>
See Note to the Unaudited Pro Forma Consolidated Financial Statements
F-70
<PAGE>
NOTE TO THE UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS OF UNITED AND PFC
NOTE 1: PRO FORMA ADJUSTMENTS
Management's assumptions and the related pro forma adjustments are as
follows:
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) Reflects the sale of $11,000,000 of preferred stock and approximately
$5,000,000 of common stock. A total of 47,160 shares of the common stock are
assumed to be sold at a price of $106.00 per share. A total of 440,000
shares of preferred stock are assumed to be sold at a price of $25.00 per
share. Total offering costs of the preferred and common stock offerings are
estimated to be $740,000.
(b) Reflects a $1,000,000 appreciation bonus granted to employees of PFC by the
former owner. The after-tax effect is estimated to be $595,300, resulting in
an increase in accrued liabilities and a reduction in equity.
(c) Reflects the allocation of the purchase price and the elimination of PFC's
equity. The purchase price is $21,110,000 plus the equity of PFC excluding
the unrealized loss on securities available for sale. The investment
securities are recorded at fair value, therefore no adjustments are
required. The fair value adjustment to loans was a decrease of $135,000.
This adjustment to loans was based on discounted cash flows, using interest
rates currently being offered for loans with similar terms to borrowers with
similar credit quality. Management determined that no fair value adjustment
was necessary for deposits based on a discounted cash flow calculation that
applies interest rates currently being offered on certificates of deposit of
similar remaining maturities to the existing certificate of deposit
portfolio.
The following table summarizes the purchase price in excess of book value:
<TABLE>
<S> <C>
Bonus, net of tax effect....................................... $ (595,300)
Fair value adjustment to loans................................. (135,000)
Deferred taxes on loan adjustment.............................. 54,000
Goodwill....................................................... 21,369,496
----------
Purchase price in excess of book value......................... $20,693,196
----------
----------
</TABLE>
(d) Reflects the additional proceeds received from bank financing to be obtained
from Firstar in conjunction with the Park Acquisition.
(e) Reflects the cash liquidation and extinguishment of PFC's parent
company-only assets and liabilities (excluding its investment in Park Bank).
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(f) Reflects the effect of push-down accounting to goodwill resulting in
additional amortization of $1,424,633 and $712,317 for the year ended
December 31, 1995 and for the six months ended June 30, 1996 and 1995,
respectively. Goodwill will be amortized over 15 years. A further effect of
push-down accounting is to accrete to income the loan fair value adjustment
over the estimated life of the respective portfolio. The accretion for the
year ended December 31, 1995 and for each of the six months ended June 30,
1996 and 1995 is $27,000 and $13,500, respectively.
(g) Reflects the additional interest expense incurred as a result of the
additional financing of $22,892,354 required to complete the Park
Acquisition. The interest rate is assumed to be 140 basis points over the 90
day LIBOR rate or 6.96%. The actual interest rate may be higher or lower
than this rate. A change of 0.125% in the interest rate would change the pro
forma interest expense by approximately $29,000 for the year ended December
31, 1995 and by approximately $14,500 for each of the six months ended June
30, 1996 and 1995, respectively.
F-71
<PAGE>
(h) Reflects the reduction of interest income and depreciation assuming PFC's
loans, investment securities and property and equipment were assumed to be
sold on January 1, 1995 and January 1, 1996, respectively. The amounts
eliminated reflect actual interest income and depreciation expense recorded
for the periods.
(i) Reflects the tax effect of the taxable pro forma adjustments. The goodwill
amortization is not tax deductible. The effective tax rate is assumed to be
forty percent for the year ended December 31, 1995 and for the six months
ended June 30, 1996 and 1995 resulting in decreased income tax expense of
$768,290, $380,632 and $365,587 respectively.
(j) Reflects the dividends paid on the preferred stock at an assumed rate of
9.25% per annum paid quarterly on $11,000,000 of preferred stock.
F-72
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS OF UNITED AND GOODHUE
On January 1, 1994 Signal merged with Goodhue and changed its name to
United. Goodhue shareholders converted their Goodhue common or preferred shares
for common stock of United pursuant to an established conversion ratio for cash
or for a combination of both cash and common stock. In addition to the merger of
United and Goodhue, a noncompete agreement aggregating $1,500,000 was entered
into with the majority stockholders of Goodhue. A total of $8,852,856 worth of
Goodhue stock was converted for United stock and $9,263,984 worth of Goodhue
stock was exchanged for cash. United raised $4,182,272 in equity from a common
stock offering, the proceeds of which were used to reduce a portion of the debt
incurred with the merger.
The Unaudited Pro Forma Consolidated Balance Sheet is derived from the
audited balance sheets of United as of December 31, 1993 which is not included
herein and Goodhue as of December 31, 1993 which is included herein and assumes
that the transactions were consummated on December 31, 1993. The Unaudited Pro
Forma Consolidated Statement of Income for the year ended December 31, 1993 is
derived from the audited Consolidated Statements of Income of United and Goodhue
included elsewhere herein and assumes that the transactions were consummated on
January 1, 1993.
The Unaudited Pro Forma Consolidated Financial Statements do not purport to
represent what United's results of operations or financial condition would
actually have been if the transactions had occurred on the dates indicated. The
unaudited Pro Forma Consolidated Financial Statements are presented for
comparative purposes only. The pro forma adjustments, as discussed in Note 1,
are based on available information and certain assumptions that management
believes are reasonable.
The unaudited pro forma information with respect to the purchase of Goodhue
was based on the historical financial statements of Goodhue. The acquisition has
been accounted for using the purchase method of accounting. The purchase price
for the acquisition has been allocated to the tangible assets and liabilities of
Goodhue based upon management's estimates of their fair value with the remainder
allocated to goodwill.
F-73
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF UNITED AND GOODHUE
DECEMBER 31, 1993
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
UNITED GOODHUE ADJUSTMENTS BALANCE SHEET
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks...................... $ 8,090,851 $ 6,231,125 $ (9,263,984)(b) $ 14,320,667
(1,500,000)(d)
10,762,675(e)
Federal funds sold........................... 500,000 4,950,000 5,450,000
Investment securities........................ 39,596,384 42,817,189 196,464(a) 82,610,037
Loans and leases............................. 114,083,609 104,395,435 1,562,501(a) 220,041,545
Allowance for loan and lease losses........ (1,500,870) (1,223,931) (2,724,801)
-------------- -------------- -------------- --------------
Net loans and leases..................... 112,582,739 103,171,504 1,562,501 217,316,744
-------------- -------------- -------------- --------------
Property and equipment, net.................. 4,302,610 5,039,918 898,725(a) 10,241,253
Other assets................................. 8,122,217 4,834,005 3,292,310(a) 17,748,532
1,500,000(d)
-------------- -------------- -------------- --------------
Total assets............................. $ 173,194,801 $ 167,043,741 $ 7,448,691 $ 347,687,233
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits................................... $ 147,516,564 $ 143,481,773 $ 591,190(a) $ 291,589,527
Securities sold under repurchase 6,766,347 8,554,941 15,321,288
agreements................................
Accrued expenses and other liabilities..... 1,600,398 1,059,436 823,116(a) 3,482,950
Notes payable and other borrowings......... 3,602,000 357,000 9,445(a) 10,548,848
10,762,675(e)
(4,182,272)(f)
-------------- -------------- -------------- --------------
Total liabilities........................ 159,485,309 153,453,150 8,004,154 320,942,613
-------------- -------------- -------------- --------------
Stockholders' equity:
Preferred stock............................ -- 2,833,607 (2,833,607)(b) --
Common stock............................... 302,746 110,497 (110,497)(b) 5,023
1,381(b)
(299,719)(c)
615(f)
Additional paid-in capital................... 3,955,701 171,450 (171,450)(b) 17,288,552
8,851,475(b)
299,719(c)
4,181,657(f)
Retained earnings............................ 9,451,045 10,475,037 4,526,249(a) 9,451,045
(15,001,286)(b)
-------------- -------------- -------------- --------------
Total stockholders' equity............... 13,709,492 13,590,591 (555,463) 26,744,620
-------------- -------------- -------------- --------------
Total liabilities and stockholders' $ 173,194,801 $ 167,043,741 $ 7,448,691 $ 347,687,233
equity..................................
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
See Note to the Unaudited Pro Forma Consolidated Financial Statements
F-74
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME OF UNITED AND GOODHUE
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
STATEMENT OF
UNITED GOODHUE ADJUSTMENTS INCOME
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases....... $ 9,069,781 $ 9,725,971 $18,795,752
Investment securities
-- taxable............ 2,098,870 2,383,653 4,482,523
Investment securities
-- tax exempt......... 139,757 143,973 283,730
Federal funds sold..... 115,164 253,129 368,293
----------- ----------- ------------- ------------
Total interest --
income.............. 11,423,572 12,506,726 23,930,298
----------- ----------- ------------- ------------
Interest expense:
Deposits............... 23,367,221 4,585,589 7,952,810
Federal funds purchased
and securities sold
under repurchase
agreements............ 106,567 272,392 378,959
Notes payable and other 475,032(h)
borrowings............ 197,037 31,552 703,621
----------- ----------- ------------- ------------
Total interest 475,032
expense............. 3,670,825 4,889,533 9,035,390
----------- ----------- ------------- ------------
Net interest income.... 7,752,747 7,617,193 (475,032) 14,894,908
Provision for loan and --
lease losses............ 300,000 304,628 604,628
----------- ----------- ------------- ------------
Net interest income (475,032)
after provision for
loan and lease
losses................ 7,452,747 7,312,565 14,290,280
Noninterest income:
Service charges and
other fees............ 1,770,532 1,326,777 3,097,309
Net investment
securities gains...... 75,194 210,256 285,450
Other.................. 302,721 261,762 564,483
----------- ----------- ------------- ------------
Total noninterest --
income.............. 2,148,447 1,798,795 3,947,242
----------- ----------- ------------- ------------
Noninterest expense:
Salaries and employee
benefits.............. 3,687,963 3,954,059 7,642,022
Occupancy and
depreciation.......... 926,265 931,063 1,857,328
219,487(g)
(110,804)(g)
Other.................. 2,801,898 2,214,788 370,000(i) 5,495,369
----------- ----------- ------------- ------------
Total noninterest 478,683
expense............. 7,416,126 7,099,910 14,994,719
----------- ----------- ------------- ------------
Income before income (953,715)
taxes and cumulative
effect of change in
accounting
principle............. 2,185,068 2,011,450 3,242,803
Income tax expense..... 725,224 707,000 (293,691)(j) 1,138,533
----------- ----------- ------------- ------------
Income before (660,024)
cumulative effect of
change in accounting
principle........... 1,459,844 1,304,450 2,104,270
Cumulative effect of --
change in accounting
principle........... 106,168 75,000 181,168
----------- ----------- ------------- ------------
Net income......... $ 1,566,012 $ 1,379,450 $(660,024) $ 2,285,438
----------- ----------- ------------- ------------
----------- ----------- ------------- ------------
Earnings per share before
cumulative effect of
change in accounting
principle............... $ 4.65 $ 11.80 $ 4.10
Cumulative effect of
change in accounting
principle............... .34 .68 .35
----------- ----------- ------------
Earnings per share after
cumulative effect of
change in accounting
principle............... $ 4.99 $ 12.48 $ 4.45
----------- ----------- ------------
----------- ----------- ------------
Average shares
outstanding............. 313,994 110,497 513,565
</TABLE>
F-75
<PAGE>
NOTE TO THE UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS OF UNITED AND GOODHUE
NOTE 1: PRO FORMA ADJUSTMENTS
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) Reflects the allocation of the purchase price based on estimated fair values
of the tangible assets and liabilities of Goodhue with the remaining
purchase price being allocated to goodwill.
(b) Reflects the exchange or redemption of Goodhue preferred and common stock
for United stock or cash.
(c) Reflects the change in par value of United stock from $1 per share to $.01
per share.
(d) Reflects the noncompete agreement.
(e) Reflects the additional proceeds received from bank financing obtained to
complete the merger.
(f) Reflects the application of the common stock offering proceeds to the debt.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(g) Reflects the effect of push-down accounting to goodwill resulting in
additional amortization of $219,487 for the year ended December 31, 1993.
The effect of push-down accounting to the tangible assets and liabilities
resulted in accretion of $110,804 for the year ended December 31, 1993.
(h) Reflects the additional interest expense incurred as a result of the
additional financing obtained to complete the merger (net of the repayment
from proceeds of the common stock offering). The interest rate used was
7.12%, the rate actually in effect.
(i) Reflects the amortization of the noncompete agreements.
(j) Reflects the tax effect of the taxable pro forma adjustments. The goodwill
amortization is not tax deductible. The effective tax rate is assumed to be
forty percent for the year ended December 31, 1993 resulting in decreased
income tax expense of $293,691.
F-76
<PAGE>
SAMPLE
NOT FOR EXECUTION
EXHIBIT A
UNITED COMMUNITY BANCSHARES, INC.
SUBSCRIPTION AGREEMENT
INCLUDING INVESTMENT REPRESENTATIONS
COMMON STOCK
$106.00 PER SHARE
The undersigned hereby subscribes for the purchase of shares of
Common Stock, $.01 par value (the "Shares") of United Community Bancshares, Inc.
a Minnesota corporation (the "Company"), at $106.00 per Share in the aggregate
amount of $ (minimum investment 100 Shares or $10,600). The undersigned
herewith submits the undersigned's check payable to "United Community
Bancshares, Inc. Escrow Account" in full payment for such Shares. The Company
has the unconditional right to accept or reject this offer by notice delivered
to the undersigned at the address set forth below.
The undersigned understands that the payment made to the Company by the
undersigned herewith will be placed in an escrow account with Firstar Bank
Milwaukee, N.A. (the "Escrow Agent") until commitments for the Minimum Shares
(47,160) are received. If commitments for the Minimum Shares are not received by
December 31, 1996 (or a date not later than January 15, 1997 to which this
offering is extended), this offering will terminate and the undersigned's
payment will be returned in full without interest. Once commitments for the
Minimum Shares are received, the Company may remove funds and accrued interest
from the escrow account and use such funds and interest for the Company's
purposes.
1. CERTAIN REPRESENTATIONS OF THE SUBSCRIBER. In connection with, and in
consideration of, the sale of the Shares to the undersigned, the undersigned
hereby represents and warrants to the Company and its officers, directors,
employees, agents and shareholders that the undersigned:
(a) Has received and is familiar with a copy of the Prospectus of the
Company dated , 1996, and all Exhibits thereto, and
modifications or supplements thereto (the "Prospectus").
(b) Realizes that a purchase of the Shares represents a speculative
investment involving a high degree of risk, for the reasons described in
the Prospectus.
(c) Realizes that the price per Share materially exceeds amounts paid by
prior purchasers of the Company's securities and that the undersigned
will experience substantial dilution in the per share net tangible book
value of the Shares purchased by the undersigned immediately upon
purchase.
(d) Has adequate means of providing for the undersigned's current needs and
contingencies, can bear the economic risk of an investment in the Shares
for an indefinite period of time, can afford to sustain a complete loss
of such investment, has no need for liquidity in connection with an
investment in the Shares and can afford to hold the Shares indefinitely.
(e) Does not have commitments to investments that are not readily marketable
that are disproportionate to the undersigned's net worth, and an
investment in the Shares will not cause such commitment to become
excessive.
(f) Realizes that there is no present market for the Company's securities,
that no such market is expected to develop in the near future and that
there are significant restrictions on the transferability of the Shares.
(g) Is experienced and knowledgeable in financial and business matters,
capable of evaluating the merits and risks of investing in the Shares and
does not need or desire the assistance of a knowledgeable representative
to aid in the evaluation of such risks (or, in the alternative, has a
A-1
<PAGE>
SAMPLE
NOT FOR EXECUTION
knowledgeable representative that is not affiliated with the Company or
the Company's agents whom such investor intends to use in connection with
a decision as to whether to purchase the Shares).
(h) Has attained the age of majority (as established in his or her state of
domicile) and, in any event, is under no disability with respect to
entering into a contractual relationship with the Company and in
executing this Subscription Agreement and Investment Letter.
(i) Agrees that the laws of the State of Minnesota shall govern the validity
of this Subscription Agreement, the construction of its terms and the
interpretation of the rights and duties of the parties.
(j) Acknowledges, warrants and represents that the undersigned has had the
timely opportunity to have the undersigned's own legal counsel advise the
undersigned as to the appropriateness of the undersigned's investment in
the Company.
2. COVENANT NOT TO SELL STOCK; ARTICLE 7 OF BYLAWS. The undersigned hereby
covenants and agrees that the undersigned will not sell, offer to sell, assign,
transfer, encumber, contract to sell, grant an option to purchase or otherwise
dispose of any of the Shares purchased hereby owned of record or beneficially by
the undersigned for the lesser of (i) a period ending 180 days after the date of
the closing of a public offering which results in the listing of the Company's
Common Stock for trading on the Nasdaq SmallCap Market, the Nasdaq National
Market or any securities exchange registered under the Securities Act of 1934,
as amended (the undersigned is aware that neither this offering of Common Stock
nor the Company's concurrent offering of Preferred Stock constitute such an
offering) or (ii) two years from the date of this subscription agreement,
without the prior written consent of the Company.
In addition to the foregoing, the undersigned hereby represents and warrants
that the undersigned has read and understood the section of the Prospectus
entitled "Restrictions on Transferability" and acknowledges and agrees to abide
by the terms of Article 7 of the Company's Bylaws which grant to the Company and
the other shareholders of the Company a right of first refusal to purchase any
Shares which the undersigned wishes to transfer, at a price determined by a
formula set forth in Article 7.
The undersigned is aware that Article 7 of the Company's Bylaws will prevent
a trading market in the Common stock from developing until the Common Stock is
listed on the Nasdaq stock market or on a national securities exchange. The
price determined by Article 7 is not related to any public trading market and
may be less than the prices for the stock of comparable companies whose stock is
traded in the public market. The undersigned may be required to bear the risk of
investing in the Shares for a substantial period of time and has had the
opportunity to consult the undersigned's financial and legal advisors regarding
the financial and legal implications of this investment.
To effectuate the purposes of Article 7 and the covenant not to sell
described above, the undersigned consents to the placement of the following
legends (in addition to any other legend) on the certificates representing the
Shares:
"The securities represented by this certificate are subject to a
restrictive Covenant Not to Sell Stock dated as of
and may not be sold, offered for sale, assigned,
transferred, encumbered, made subject to a contract for sale or an
option to purchase, or otherwise disposed of without compliance
with such Covenant."
"The shares of stock represented by this certificate are subject
to certain purchase options in the corporation and others as set
forth in Article 7 of the Bylaws, which Bylaws are available for
inspection at the principal office of the corporation."
3. RESIDENCE. The undersigned represents and warrants that the undersigned
is a bona fide resident of (or if an entity is organized or incorporated under
the laws of, and is domiciled in), the State of
A-2
<PAGE>
SAMPLE
NOT FOR EXECUTION
(INSERT NAME OF STATE) and that the Shares are being purchased by the
undersigned in the undersigned's name solely for the undersigned's own
beneficial interest and not as nominee for, on behalf of, for the beneficial
interest of, or with the intention to transfer to, any other person, trust, or
organization, (except as specifically set forth in paragraph 7 of this
Agreement.)
PARAGRAPHS 4 AND 5 ARE REQUIRED IN CONNECTION WITH EXEMPTIONS FROM CERTAIN
STATE LAWS BEING RELIED ON BY THE COMPANY WITH RESPECT TO THE OFFER AND SALE OF
THE SHARES. ALL OF SUCH INFORMATION WILL BE KEPT CONFIDENTIAL, AND WILL BE
REVIEWED ONLY BY THE COMPANY AND ITS COUNSEL AND OTHERS TO THE EXTENT NECESSARY
TO DEMONSTRATE COMPLIANCE WITH APPLICABLE SECURITIES LAWS. The undersigned
agrees to furnish any additional information that the Company and its counsel
deems necessary to verify the responses set forth below.
4. ACCREDITED STATUS. The undersigned represents and warrants as follows
(CHECK IF APPLICABLE):
I. Accredited Investor:
INDIVIDUALS
- --- (a)The undersigned is an individual with a net worth, or a joint net worth
together with his or her spouse, in excess of $1,000,000. (In calculating
net worth, you may include equity in personal property and real estate,
including your principal residence, cash, short term investments, stock
and securities. Equity in personal property and real estate should be
based on the fair market value of such property minus debt secured by
such property.)
- --- (b)The undersigned is an individual that had an individual income in excess
of $200,000 in each of the prior two years and reasonably expects an
income in excess of $200,000 in the current year; or
- --- (c)The undersigned is an individual that had with his or her spouse joint
income in excess of $300,000 in each of the prior two years and
reasonably expects joint income in excess of $300,000 in the current
year.
- --- (d)The undersigned is a director or executive officer of the Company.
ENTITIES
- --- (e)The undersigned, if other than an individual, is an entity all of whose
equity owners meet one of the tests set forth in (a) through (d) above.
Please identify each person included in such entity and the test each
qualifies under (individual retirement account investors should check
this box, if applicable)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
- --- (f)The undersigned is an entity and is an "Accredited Investor" as defined
in Rule 501(a) of Regulation D under the Act. This representation is
based on the following (check one or more as applicable):
------- (i)
The undersigned (or, in the case of a trust, the undersigned trustee)
is a bank or savings and loan association as defined in Sections
3(a)(2) and 3(a)(5)(A), respectively, of the Act acting either in its
individual or fiduciary capacity.
------- (ii)
The undersigned is an insurance company as defined in Section 2(13)
of the Act.
------- (iii)
The undersigned is an investment company registered under the
Investment Company Act of 1940 or a business development company as
defined in Section 2(a)(48) of that Act.
A-3
<PAGE>
SAMPLE
NOT FOR EXECUTION
------- (iv)
The undersigned is a Small Business Investment Company licensed by
the U.S. Small Business Administration under Section 301(c) or (d) of
the Small Business Investment Act of 1958.
------- (v)
The undersigned is an employee benefit plan within the meaning of
Title 1 of the Employee Retirement Income Security Act of 1974 and
either (check one or more, as applicable):
---------- (A)
the investment decision is made by a plan fiduciary, as defined
in Section 3(21) of such Act, which is either a bank, savings and
loan association, insurance company, or registered investment
adviser; or
---------- (B)
the employee benefit plan has total assets in excess of
$5,000,000; or
---------- (C)
the plan is a self-directed plan with investment decisions made
solely by persons who are "Accredited Investors" as defined under
the 1933 Act.
------- (vi)
The undersigned is a private business development company as defined
in Section 202(a)(22) of the Investment Advisers Act of 1940.
------- (vii)
The undersigned has total assets in excess of $5,000,000, was not
formed for the specific purpose of acquiring shares of the Company
and is one or more of the following (check one or more, as
appropriate):
---------- (A)
an organization described in Section 501(c)(3) of the Internal
Revenue Code; or
---------- (B)
a corporation; or
---------- (C)
a Massachusetts or similar business trust; or
---------- (D)
a partnership.
------- (viii)
The undersigned is a trust with total assets exceeding $5,000,000,
which was not formed for the specific purpose of acquiring Shares of
the Company and whose purchase is directed by a person who has such
knowledge and experience in financial and business matters that he is
capable of evaluating the merits and risks of the investment in the
Shares. (IF ONLY THIS RESPONSE IS CHECKED, please contact the Company
to receive and complete an information statement before this
subscription can be considered by the Company.)
- --- II. The undersigned does not meet any of the financial qualifications set
forth in 4.1(a)-(f) above (and is therefore NOT an "Accredited Investor") but
does meet the requirements of paragraph l(g) above, as well as all other
requirements set forth herein.
5. ENTITIES. If the undersigned is an entity, the individual signing on
behalf of such entity and the entity jointly and severally agree and certify
that:
(a) the undersigned was not organized for the specific purpose of acquiring
the Shares; and
(b) this Agreement has been duly authorized by all necessary action on the
part of the undersigned, has been duly executed by an authorized officer
or representative of the undersigned, and is a legal, valid, and binding
obligation of the undersigned enforceable in accordance with its terms.
6. RELATIONSHIP TO BROKERAGE FIRMS. (Please answer the following questions
by checking the appropriate response.)
(a)
- --- YES
- --- NO: Are you a director, officer, partner, branch manager, registered
representative, employee, shareholder of, or similarly related to or
employed by, a brokerage firm? (IF YES, please contact the Company to
provide additional information before your subscription can be
considered.)
(b)
- --- YES
- --- NO: Is your spouse, father, mother, father-in-law, mother-in-law, or any of
your brothers, sisters, brothers-in-law, sisters-in-law or children, or
any relative which you support, a
A-4
<PAGE>
SAMPLE
NOT FOR EXECUTION
director, officer, partner, branch manager, registered representative,
employee, shareholder of, or similarly related to or engaged by, a
brokerage firm? (IF YES, please contact the Company to provide additional
information before your subscription can be considered.)
(c)
- --- YES
- --- NO: Does the Subscriber own voting securities of any brokerage firm? (IF
YES, please contact the Company to provide additional information before
your subscription can be considered.)
(d)
- --- YES
- --- NO: If the undersigned is an entity, is any director, officer, partner or 5%
owner of the undersigned also a director, officer, partner, branch
manager, registered representative, employee, shareholder of, or
similarly related to or employed by a brokerage firm? (IF YES, please
contact the Company to provide additional information before the
Subscriber's subscription can be considered.)
7. MISCELLANEOUS.
(a) Manner in Which Title Is to Be Held: (check one)
<TABLE>
<S> <C>
Individual Ownership
- ----------
Joint Tenant with Right of Survivorship Partnership
- ----------
Tenants in Common
- ----------
Corporation
- ----------
Other (describe)
- ----------
</TABLE>
(b) The undersigned agrees that the undersigned understands the meaning and
legal consequences of the agreements, representations and warranties
contained herein, agrees that such agreements, representations and
warranties shall survive and remain in full force and effect after the
execution hereof and payment for the Shares and further agrees to
indemnify and hold harmless the Company, each current and future officer,
director, employee, agent and shareholder from and against any and all
loss, damage or liability due to, or arising out of, a breach of any
agreement, representation or warranty of the undersigned contained
herein.
(c) This Agreement shall be construed and interpreted in accordance with
Minnesota law.
<TABLE>
<S> <C>
INDIVIDUAL SUBSCRIBERS: Signature
Name (Typed or Printed)
Street Address Social Security Number
City, State and Zip Code Signature (If more than one individual
subscriber)
Telephone Number Name (Typed or Printed)
Fax Telephone Number Social Security Number
</TABLE>
A-5
<PAGE>
SAMPLE
NOT FOR EXECUTION
<TABLE>
<S> <C>
ENTITY SUBSCRIBERS:
(Individual retirement account and Signature
self-directed 401(k) plan trustees or
custodians should execute this section) Name (Typed or Printed) and Title/Capacity
Name of Entity
Street Address
City, State and Zip Code
Business Telephone Number
Fax Telephone Number
Tax Identification or Social Security Number
</TABLE>
United Community Bancshares, Inc. hereby acknowledges receipt from
of such subscriber's check in the amount of $ , and accepts this
subscription for Shares, an aggregate of $ ($106.00 per Share)
as of , 199 .
UNITED COMMUNITY BANCSHARES, INC.
By ___________________________________
Its ______________________________
A-6
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY UNITED. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF UNITED SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- -------------------------------------------------------------------------- ----
<S> <C>
Summary................................................................... 3
Risk Factors.............................................................. 7
Acquisition of Park....................................................... 11
Use of Proceeds........................................................... 13
Dilution.................................................................. 14
Capitalization............................................................ 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 22
Business.................................................................. 41
Management................................................................ 48
Principal Shareholders.................................................... 54
Supervision and Regulation................................................ 56
Description of Securities................................................. 61
Restrictions on Transferability........................................... 67
The Offering.............................................................. 69
Legal Matters............................................................. 69
Experts................................................................... 70
Additional Information.................................................... 70
Index to Financial Information............................................ F-1
Subscription Agreement.................................................... A-1
</TABLE>
56,600 SHARES MAXIMUM
47,160 SHARES MINIMUM
[UNITED COMMUNITY BANCSHARES LOGO]
COMMON STOCK
-----------------
P R O S P E C T U S
-----------------
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following expenses will be paid by the Registrant in connection with the
distribution of the securities registered hereby and do not include the
underwriting discount to be paid to the Underwriters. All of such expenses,
except for the SEC registration fee and NASD fee are estimated.
<TABLE>
<S> <C>
SEC Registration Fee................................................ $ 1,819
Registrant's Legal Fees............................................. *
Accountants' Fees and Expenses...................................... *
Printing Expenses................................................... *
Blue Sky Fees and Expenses.......................................... *
Miscellaneous....................................................... *
---------
Total............................................................... $ *
---------
---------
</TABLE>
- ------------------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 302A.521, subd. 2, of the Minnesota Statutes requires the Registrant
to indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect to
the Registrant, against judgments, penalties, fines, including, without
limitation, excise taxes assessed against the person with respect to an employee
benefit plan, settlements, and reasonable expenses, including attorneys' fees
and disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions if such person (1) has not been
indemnified by another organization or employee benefit plan for the same
judgments, penalties or fines; (2) acted in good faith; (3) received no improper
personal benefit, and statutory procedure has been followed in the case of any
conflict of interest by a director; (4) in the case of a criminal proceeding,
had no reasonable cause to believe the conduct was unlawful; and (5) in the case
of acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, board committee member or employee, reasonably believed that the
conduct was in the best interests of the Registrant, or, in the case of
performance by a director, officer or employee of the Registrant involving
service as a director, officer, partner, trustee, employee or agent of another
organization or employee benefit plan, reasonably believed that the conduct was
not opposed to the best interests of the Registrant. In addition, Section
302A.521, subd. 3, requires payment by the Registrant, upon written request, of
reasonable expenses in advance of final disposition of the proceeding in certain
instances. A decision as to required indemnification is made by a disinterested
majority of the Board of Directors present at a meeting at which a disinterested
quorum is present, or by a designated committee of the Board, by special legal
counsel, by the shareholders, or by a court.
Provisions regarding indemnification of officers and directors of the
Registrant are contained in Bylaw Section 5.1 of the Registrant's Bylaws
(Exhibit 3.2 to this Registration Statement).
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On January 1, 1994, United issued 138,067 shares of its Common Stock to
shareholders of Goodhue in exchange for the conversion of the outstanding
Goodhue shares in connection with the merger of Signal and Goodhue, in reliance
upon an exemption under Rule 506 of Regulation D. Concurrently with that merger
transaction, United issued 61,504 shares of its Common Stock to investors in
exchange for an aggregate purchase price of $4,182,272, in reliance upon an
exemption under Rule 506 of Regulation D. Based upon Letter of Investment Intent
and Subscription Agreements, United believes the former Goodhue shareholders and
the purchasing investors were "sophisticated investors" and they were either
"accredited" investors or did not exceed an aggregate of 35 nonaccredited
investors.
II-1
<PAGE>
In March, 1995, United issued 2,103 shares to the United Community
Bancshares, Inc. Employee Stock Ownership Plan in exchange for an aggregate
purchase price of $164,938, in reliance upon Section 4(2) of the Act.
In August, 1995, United issued 41,907 shares of its Common Stock to
investors in exchange for an aggregate purchase price of $3,527,731, in reliance
upon an exemption under Section 3(a) (11) of the Act and Rule 147 thereunder.
Based upon Letter of Investment Intent and Subscription Agreements, United
believes that all of the investors were residents of the State of Minnesota, the
state in which United is incorporated.
In January, 1996, United issued 160 shares upon exercise of a stock option
granted to a former employee in exchange for an aggregate purchase price of
$11,754, in reliance upon an exemption under Section 4(2) of the Act.
Also in January, 1996, United issued 50 shares to an accredited investor in
exchange for an aggregate purchase price of $4,653, in reliance upon an
exemption under Section 4(2) of the Act.
In March, 1996, United issued 2,150 shares to the United Community
Bancshares, Inc. Employee Stock Ownership Plan in exchange for an aggregate
purchase price of $200,079, in reliance upon an exemption under Section 4(2) of
the Act.
In April, 1996, United issued 107 shares to an accredited investor in
exchange for an aggregate purchase price of $9,957, in reliance upon an
exemption under Section 4(2) of the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Merger Agreement with Park Financial Corporation dated October 7, 1996*
2.2 Indemnification Agreement with the Park Financial Corporation Revocable Trust dated October 7, 1996*
3.1 Restated Articles of Incorporation*
3.2 Bylaws*
4.1 Statement of Designation**
4.2 Form of Common Stock Certificate**
4.3 Form of Series A Preferred Stock Certificate**
4.4 Restated Articles of Incorporation (filed as Exhibit 3.1)
4.5 Bylaws (filed as Exhibit 3.2)
5.1 Opinion and Consent of Fredrikson & Byron, P.A.**
10.1 1994 Stock Option Plan*+
10.2 Executive Salary Continuation Agreement between Signal Bank and Galen T. Pate*+
10.3 Executive Salary Continuation Agreement between Signal Bank and Marcia L. O'Brien*+
10.4 Executive Salary Continuation Agreement between Signal Bank and John H. LeMay*+
10.5 Executive Salary Continuation Agreement between Signal Bank and John C. Dorsey*+
10.6 Executive Salary Continuation Agreement between United and Donald M. Davies*+
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.7 Lease Agreement between United and Whitewood (Minneapolis) Limited Partnership, dated September 7, 1995,
respecting 2600 Eagan Woods Drive, Suite 155, Eagan, Minnesota.*
10.8 Lease Agreement between Signal Bank and Signal Hills Company (a Minnesota corporation), dated January 1,
1976, as amended, respecting 100 Signal Hills, West St. Paul, Minnesota.*
10.9 Lease Agreement between Signal Bank and Signal Hills Company (a Minnesota general partnership), dated
January 29, 1993, respecting an area in the Signal Hills Center.*
10.10 Lease Agreement between Signal Bank and Signal Hills Company (a Minnesota general partnership), dated
July 20, 1986, respecting an area in the Signal Hills Center.*
10.11 Lease Agreement between United and ELPO Partnership, dated January 1, 1996, respecting 432 West Third
Street, Red Wing, Minnesota.*
10.12 Lease Agreement between CCC and County Crossroads Center United Partnership, dated August 27, 1993,
respecting the County Crossroads Center, Hastings, Minnesota.*
10.13 Lease Agreement between CCC and Lubbers' Properties Inc., dated June 8, 1994, respecting 1014 South
Highway 3, Northfield, Minnesota.*
10.14 Sublease Agreement between United and CENEX, Inc., dated August, 1994, as amended, respecting 5400
Babcock Trail, Inver Grove Heights, Minnesota.*
12.1 Statement Regarding Computation of Ratios*
23.1 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
23.2 Consent of McGladrey & Pullen, LLP, independent auditors
23.3 Consent of Leininger & Leininger, Ltd., independent auditors
23.4 Consent of KPMG Peat Marwick LLP, independent auditors
23.5 Consent of Larson, Allen & Weishair & Co., LLP, independent auditors
24 Power of Attorney (included on signature page of the Registration Statement)
27 Financial Data Schedule
</TABLE>
- ------------------------
*Incorporated by reference from the Exhibit with the same number in the
Registrant's Form S-1 Registration Statement, SEC File No. 333-1487.
** To be filed by amendment.
+ Management agreement or compensatory plan or arrangement.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 as expressed in the Securities Act
of 1933 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 Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-3
<PAGE>
The undersigned Registrant further undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus 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.
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 Minneapolis, State of
Minnesota, on October 29, 1996.
UNITED COMMUNITY BANCSHARES, INC.
By /s/ R. SCOTT JONES
------------------------------------------
R. Scott Jones, CHAIRMAN
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature to this
Registration Statement appears below hereby constitutes and appoints R. Scott
Jones and Galen T. Pate, and each of them, as his or her true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his or
her behalf individually and in the capacity stated below and to perform any acts
necessary to be done in order to file all amendments and post-effective
amendments to this Registration Statement, and any and all instruments or
documents filed as part of or in connection with this Registration Statement or
the amendments thereto, and each of the undersigned does hereby ratify and
confirm all that said attorney-in-fact and agent, or his or her substitutes,
shall do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------ -------------------
<C> <S> <C>
/s/ R. SCOTT JONES Chairman and Director (principal
------------------------------------------- executive officer) October 29, 1996
R. Scott Jones
/s/ GALEN T. PATE President and Director (principal
------------------------------------------- executive officer) October 29, 1996
Galen T. Pate
/s/ MARCIA L. O'BRIEN Executive Vice President and Chief
------------------------------------------- Financial Officer (principal October 29, 1996
Marcia L. O'Brien financial and accounting officer)
/s/ ARLIN A. ALBRECHT
------------------------------------------- Director October 29, 1996
Arlin A. Albrecht
/s/ LARRY C. BARENBAUM
------------------------------------------- Director October 29, 1996
Larry C. Barenbaum
/s/ SPENCER A. BROUGHTON
------------------------------------------- Director October 29, 1996
Spencer A. Broughton
</TABLE>
Signatures continued on following page
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------ -------------------
<C> <S> <C>
/s/ JAMES P. FRITZ
------------------------------------------- Director October 29, 1996
James P. Fritz
/s/ JOHN W. JOHNSON
------------------------------------------- Director October 29, 1996
John W. Johnson
/s/ ORA G. JONES
------------------------------------------- Director October 29, 1996
Ora G. Jones
/s/ LOUIS J. LANGER
------------------------------------------- Director October 29, 1996
Louis J. Langer
</TABLE>
II-6
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
UNITED COMMUNITY BANCSHARES, INC.
EXHIBIT INDEX TO FORM S-1
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
4.1 Statement of Designation**
4.2 Form of Common Stock Certificate**
4.3 Form of Series A Preferred Stock Certificate**
5.1 Opinion and Consent of Fredrikson & Byron, P.A.**
12.1 Statement regarding computation of ratios
23.1 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
23.2 Consent of McGladrey & Pullen, LLP, independent auditors
23.3 Consent of Leininger & Leininger, Ltd., independent auditors
23.4 Consent of KPMG Peat Marwick LLP, independent auditors
23.5 Consent of Larson, Allen & Weishair & Co., LLP, independent auditors
24 Power of Attorney (included on signature page of the Registration Statement)
27 Financial Data Schedule
</TABLE>
- ------------------------
** To be filed by amendment.
<PAGE>
EXHIBIT 12.1
STATEMENT REGARDING COMPUTATION OF RATIOS
For the purpose of calculating the ratio of earnings to fixed charges and
preferred stock dividends, earnings consist of earnings before income taxes and
fixed charges. Fixed charges consist of on-third rent expense and interest
expense. Preferred stock dividends are assumed to equal the amount of pre-tax
income that would be necessary to pay such dividends.
For the purpose of calculating the common stock dividend payout ratio, dividends
per share is divided by net income per share.
<TABLE>
<CAPTION>
CALCULATION OF THE RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
As of and for the
Six Months Ended June 30 As of and for the years ended December 31
------------------------- --------------------------------------------------------------
UNITED 1996 1995 1995 1994 1993 1992 1991
- ------------------------------ ---------- ----------- --------- -------- -------- ------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes
and cumulative effect of change
in accounting principle $3,315 $2,540 $5,685 $3,829 3,242 2,336 512
Interest expense 6,875 6,013 12,848 9,159 9,035 4,334 6,470
1/3 rent expense 49 31 81 61 20 39 51
---------- -------- --------- -------- -------- -------- --------
Total Earnings $10,239 $8,584 $18,614 $13,049 $12,297 $6,709 $7,033
---------- -------- --------- -------- -------- -------- --------
---------- -------- --------- -------- -------- -------- --------
Interest expense $6,875 $6,013 $12,848 $9,159 $9,035 $4,334 $6,470
1/3 rent expense 49 31 81 61 20 39 51
Pretax income necessary to pay
preferred stock dividends 0 0 0 0 0 0 0
---------- -------- --------- -------- -------- -------- --------
Total Fixed Charges $6,924 $6,044 $12,929 $9,220 $9,055 $4,373 $6,521
---------- -------- --------- -------- -------- -------- --------
Ratio 1.48 1.42 1.44 1.42 1.36 1.53 1.08
---------- -------- --------- -------- -------- -------- --------
---------- -------- --------- -------- -------- -------- --------
Income before income taxes
and cumulative effect of change
in accounting principle 3,315 2,540 5,685 3,829 3,242 2,336 512
Interest expense 6,875 6,013 12,848 9,159 9,035 4,334 6,470
Less interest on deposits, FHLB
advances, federal funds
purchased and securities sold
under repurchase agreements (6,749) (5,736) (12,423) (8,575) (8,990) (4,223) (6,335)
1/3 rent expense 49 31 81 61 20 39 51
---------- -------- --------- -------- -------- -------- --------
Total Earnings $3,490 $2,848 $6,191 $4,474 $3,307 $2,486 $698
---------- -------- --------- -------- -------- -------- --------
---------- -------- --------- -------- -------- -------- --------
Interest expense 6,875 6,013 12,848 9,159 9,035 4,334 6,470
Less interest on deposits, FHLB
advances, federal funds
purchased and securities sold
under repurchase agreements (6,749) (5,736) (12,423) (8,575) (8,990) (4,223) (6,335)
1/3 rent expense 49 31 81 61 20 39 51
Pretax income necessary to pay
preferred stock dividends 0 0 0 0 0 0 0
---------- -------- --------- -------- -------- -------- --------
Total Fixed Charges $175 $308 $506 $645 $65 $150 $186
---------- -------- --------- -------- -------- -------- --------
---------- -------- --------- -------- -------- -------- --------
Ratio 19.94 9.25 12.24 6.94 50.88 16.57 3.75
---------- -------- --------- -------- -------- -------- --------
---------- -------- --------- -------- -------- -------- --------
</TABLE>
CALCULATION OF THE RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
<TABLE>
<CAPTION>
As of and for the
Six Months Ended June 30 As of and for the years ended December 31
------------------------- --------------------------------------------------------------
PFC 1996 1995 1995 1994 1993 1992 1991
- ------------------------------ ---------- ----------- --------- -------- -------- ------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes
and cumulative effect of change
in accounting principle $2,401 $1,666 $3,898 $2,865 2,133 1,909 361
Interest expense 3,036 2,637 5,672 3,538 2,927 4,229 6,604
1/3 rent expense 54 53 190 193 218 229 232
---------- -------- --------- -------- -------- -------- --------
Total Earnings $5,491 $4,356 $9,760 $6,596 $5,278 $6,367 $7,197
---------- -------- --------- -------- -------- -------- --------
---------- -------- --------- -------- -------- -------- --------
Interest expense $3,036 $2,637 $5,672 $3,538 $2,927 $4,229 $6,604
1/3 rent expense 54 53 190 193 218 229 232
Pretax income necessary to pay
preferred stock dividends 0 0 0 0 0 0 0
---------- -------- --------- -------- -------- -------- --------
Total Fixed Charges $3,090 $2,690 $5,862 $3,731 $3,145 $4,458 $6,836
---------- -------- --------- -------- -------- -------- --------
---------- -------- --------- -------- -------- -------- --------
Ratio 1.78 1.62 1.66 1.77 1.68 1.43 1.05
---------- -------- --------- -------- -------- -------- --------
---------- -------- --------- -------- -------- -------- --------
Income before income taxes
and cumulative effect of change
in accounting principle 2,401 1,666 3,898 2,865 2,133 1,909 361
Interest expense 3,036 2,637 5,672 3,538 2,927 4,229 6,604
Less interest on deposits, FHLB
advances, federal funds
purchased and securities sold
under repurchase agreements (3,036) (2,637) (5,672) (3,538) (2,927) (4,033) (6,279)
1/3 rent expense 54 53 190 193 218 229 232
---------- -------- --------- -------- -------- -------- --------
Total Earnings $2,455 $1,719 $4,088 $3,058 $2,351 $2,334 $918
---------- -------- --------- -------- -------- -------- --------
---------- -------- --------- -------- -------- -------- --------
Interest expense 3,036 2,637 5,672 3,538 2,927 4,229 6,604
Less interest on deposits, FHLB
advances, federal funds
purchased and securities sold
under repurchase agreements (3,036) (2,637) (5,672) (3,538) (2,927) (4,033) (6,279)
1/3 rent expense 54 53 190 193 218 229 232
Pretax income necessary to pay
preferred stock dividends 0 0 0 0 0 0 0
---------- -------- --------- -------- -------- -------- --------
Total Fixed Charges $54 $53 $190 $193 $218 $425 $557
---------- -------- --------- -------- -------- -------- --------
---------- -------- --------- -------- -------- -------- --------
Ratio 45.46 32.43 21.52 15.84 10.78 5.49 1.65
---------- -------- --------- -------- -------- -------- --------
---------- -------- --------- -------- -------- -------- --------
</TABLE>
<PAGE>
As of and for
As of and for the the year ended
Six Months Ended June 30 December 31
- ----------------------------------- ------------------------- --------------
PRO FORMA 1996 1995 1995
- ----------------------------------- -------- -------- --------
(dollars in thousands)
Income before income taxes
and cumulative effect of change
in accounting principle $4,053 $2,580 $6,237
Interest expense 10,708 9,446 20,113
1/3 rent expense 103 84 271
-------- -------- --------
Total Earnings $14,864 $12,110 $26,621
-------- -------- --------
-------- -------- --------
Interest expense $10,708 $9,446 $20,113
1/3 rent expense 103 84 271
Pretax income necessary to pay
preferred stock dividends 855 855 1,709
-------- -------- --------
Total Fixed Charges $11,666 $10,385 $22,093
-------- -------- --------
-------- -------- --------
Ratio 1.27 1.17 1.20
-------- -------- --------
-------- -------- --------
Income before income taxes
and cumulative effect of change
in accounting principle 4,053 2,580 6,237
Interest expense 10,708 9,446 20,113
Less interest on deposits, FHLB
advances, federal funds
purchased and securities sold
under repurchase agreements (9,785) (8,372) (18,095)
1/3 rent expense 103 84 271
-------- -------- --------
Total Earnings $5,079 $3,738 $8,526
-------- -------- --------
-------- -------- --------
Interest expense 10,708 9,446 20,113
Less interest on deposits, FHLB
advances, federal funds
purchased and securities sold
under repurchase agreements (9,785) (8,372) (18,095)
1/3 rent expense 103 84 271
Pretax income necessary to pay
preferred stock dividends 855 855 1,709
-------- -------- --------
Total Fixed Charges $1,881 $2,013 $3,998
-------- -------- --------
-------- -------- --------
Ratio 2.70 1.86 2.13
-------- -------- --------
-------- -------- --------
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated February 23, 1996 relating to the consolidated financial
statements of United Community Bancshares, Inc., as of and for the years
ended December 31, 1995 and 1994, and to the reference to our Firm under the
caption "Experts" in the Prospectus.
/s/ McGLADREY & PULLEN, LLP
St. Paul, Minnesota McGLADREY & PULLEN, LLP
October 29, 1996
<PAGE>
EXHIBIT 23.3
[LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated February 18, 1994 relating to the consolidated statements of
income, stockholders' equity, and cash flows of United Community Bancshares,
Inc. and Subsidiary (formerly Signal Bancshares, Inc. and Subsidiary), as of
and for the year ended December 31, 1993, and to the reference to our Firm
under the caption "Experts" in the Prospectus.
/s/ LEININGER & LEININGER, LTD
Plymouth, Minnesota
October 29, 1996
<PAGE>
EXHIBIT 23.4
[LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
United Community Bancshares, Inc.:
We consent to the use of our report dated March 4, 1994 on the consolidated
financial statements of Goodhue County Financial Corporation and
subsidiaries as of and for the years ended December 31, 1993 and 1992,
included herein, and to the reference to our firm under the heading "Experts"
in the Prospectus.
/s/ KPMG PEAT MARWICK LLP
October 29, 1996
Minneapolis, Minnesota
<PAGE>
EXHIBIT 23.5
[LETTERHEAD]
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of United Community
Bancshares, Inc. on Form S-1 of our report dated January 31, 1996, appearing
in the Prospectus, which is a part of this Registration Statement, and to
the reference to us under the heading "Experts" in such Prospectus.
/s/ LARSON, ALLEN, WEISHAIR & CO., LLP
LARSON, ALLEN, WEISHAIR & CO., LLP
Minneapolis, Minnesota
October 29, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1996 DEC-31-1995
<CASH> 19,246 20,513
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 3,425 8,725
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 104,523 101,837
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 275,955 265,905
<ALLOWANCE> 2,990 (2,899)
<TOTAL-ASSETS> 428,933 421,841
<DEPOSITS> 340,225 340,723
<SHORT-TERM> 29,283 23,173
<LIABILITIES-OTHER> 4,828 5,213
<LONG-TERM> 16,097 15,762
0 0
0 0
<COMMON> 5 5
<OTHER-SE> 38,495 36,964
<TOTAL-LIABILITIES-AND-EQUITY> 428,933 421,841
<INTEREST-LOAN> 13,190 25,090
<INTEREST-INVEST> 2,967 5,355
<INTEREST-OTHER> 294 761
<INTEREST-TOTAL> 16,451 31,206
<INTEREST-DEPOSIT> 5,735 10,439
<INTEREST-EXPENSE> 6,875 12,848
<INTEREST-INCOME-NET> 9,576 18,358
<LOAN-LOSSES> 95 61
<SECURITIES-GAINS> 0 (32)
<EXPENSE-OTHER> 8,556 16,531
<INCOME-PRETAX> 3,315 5,685
<INCOME-PRE-EXTRAORDINARY> 2,281 3,629
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,281 3,629
<EPS-PRIMARY> 4.09 6.86
<EPS-DILUTED> 4.09 6.86
<YIELD-ACTUAL> 8.73 8.72
<LOANS-NON> 721 403
<LOANS-PAST> 338 249
<LOANS-TROUBLED> 134 100
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 2,899 2,856
<CHARGE-OFFS> 295 337
<RECOVERIES> 291 319
<ALLOWANCE-CLOSE> 2,990 2,899
<ALLOWANCE-DOMESTIC> 1,970 2,174
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,020 725
</TABLE>
