<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 31, 1996
REGISTRATION NO. 333-15067
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
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: / /
------------------------
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 DECEMBER 31, 1996
UNITED COMMUNITY BANCSHARES, INC.
72,000 SHARES MAXIMUM
[LOGO]
47,160 SHARES MINIMUM
COMMON STOCK
United Community Bancshares, Inc. ("United" or the "Company") is offering up to
72,000 shares of its Common Stock, $.01 par value, (the "Shares"), at an
offering price of $106.00 per share. A minimum purchase of 100 Shares ($10,600)
has been established, but may be waived at the discretion of United. See "The
Offering." The Company does not intend to list the Shares for trading on the
Nasdaq SmallCap Market, the Nasdaq National Market or any other quotation system
or on any securities exchange. 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." The Shares are offered and may be sold only to investors who
meet certain suitability requirements. See "The Offering." The Company will use
the proceeds from the sale of the Shares to provide a portion of the financing
for the Park Acquisition described herein. In the event that the Park
Acquisition is not consummated, then the Company will use the proceeds from this
Offering to repay debt. See "Use of Proceeds."
Concurrently with this offering, the Company's wholly-owned subsidiary, United
Capital Trust I ("United Capital") is offering by separate Prospectus 440,000 of
its % Cumulative Trust Preferred Securities (the "Preferred Securities").
SEE "RISK FACTORS" BEGINNING ON PAGE 9 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 (72,000 Shares)........................ $7,632,000 $7,632,000
</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 72,000 Shares have been sold, or until such time as the Company
elects to terminate the Offering, 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 January 15, 1997, all moneys received will be refunded
promptly without interest or deduction. See "The Offering."
THE DATE OF THIS PROSPECTUS IS , 1997.
<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 in this Prospectus includes "forward looking statements" 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 9 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 $422 million in assets as of September 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 privately-held bank holding company which owns Park
National Bank ("Park Bank"), a national bank with assets of approximately $203
million as of September 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 Capital's
Preferred Securities in the approximate amount of $10.2 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 actual purchase price (currently estimated to be approximately $46 million)
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. 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-
3
<PAGE>
St. Paul metropolitan area. The Company does not have any pending arrangements,
agreements or understandings regarding acquisitions other than the Park
Acquisition. 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 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.
UNITED CAPITAL
In connection with the Park Acquisition discussed herein, the Company must
raise equity which will be considered "Tier 1" capital in order to have
sufficient regulatory capital to consummate the Park Acquisition. "Tier 1"
capital is generally defined as (i) the sum of common shareholders' equity,
qualifying perpetual preferred stock (subject to certain limitations) and
minority interests in the equity accounts of consolidated subsidiaries, less
(ii) goodwill and other intangibles. On October 21, 1996, the Federal Reserve
Board approved the use of certain cumulative preferred instruments in Tier 1
capital as minority interest in the equity accounts of consolidated
subsidiaries. These preferred instruments are sold by a trust wholly-owned by a
corporation, and the proceeds from the sale of preferred instruments are used by
the trust to purchase the corporation's subordinated debt. The corporation's
interest payments on the subordinated debentures are used by the trust to make
the dividend payments on the preferred instruments. A significant benefit of
this structure is the corporation's ability to deduct the interest for federal
income tax purposes paid to the trust on the subordinated debentures. To take
advantage of this new Federal Reserve Board release, and to be able to deduct
the interest on the subordinated debentures, the Company created United Capital
Trust I ("United Capital"), a statutory business trust formed under Delaware law
on December 6, 1996. Concurrently with this Offering, United Capital is offering
its % Cumulative Trust Preferred Securities (the "Preferred Securities"). The
Federal Reserve Board has approved the Preferred Securities as Tier 1 capital.
All of the Common Securities will be owned by the Company. The Common Securities
will rank pari passu, and payments will be made thereon pro rata, with the
Preferred Securities, except that upon the occurrence and during the continuance
of certain events of default under its Trust Agreement, the rights of the
Company as holder of the Common Securities to payment in respect of
distributions and payments upon liquidation, redemption or otherwise of United
Capital will be subordinated to the rights of the holders of the Preferred
Securities. United Capital has a term of 54 years, but may terminate earlier as
provided in its Trust Agreement. The principal executive office of United
Capital is located at 2600 Eagan Woods Drive, Suite 155, Eagan, Minnesota 55121,
and its telephone number is (612) 552-2828.
For financial reporting purposes, United Capital will be treated as a
subsidiary of the Company and, accordingly, the accounts of United Capital will
be included in the consolidated financial statements of the Company. The
Preferred Securities will be presented as a separate line item in the
consolidated balance
4
<PAGE>
sheet of the Company under the caption "Company obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely junior subordinated
debentures," and appropriate disclosures about the Preferred Securities, the
Guaranty relating thereto and the Junior Subordinated Debentures will be
included in the notes to consolidated financial statements. For financial
reporting purposes, the Company will record distributions payable on the
Preferred Securities as "minority interest in preferred securities dividends of
subsidiary" in the consolidated statements of operations.
THE OFFERING
United is offering a minimum of 47,160 shares and a maximum of 72,000 shares
of its Common Stock, $0.01 par value (the "Shares"), at a price of $106.00 per
Share. See "Description of the Company's Capital Stock -- 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 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 72,000 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 618,686
shares of United's Common 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." In addition, after
completion of the Preferred Securities offering by United Capital occurring
concurrently with this Offering, there will be 440,000 of United Capital's
Preferred Securities outstanding. See "Description of Junior Subordinated
Debentures and Preferred Securities."
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."
RISK FACTORS
Prospective investors should consider certain risk factors in connection
with the purchase of the Shares offered hereby. See "Risk Factors."
5
<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
nine months ended September 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 nine months ended
September 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 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."
6
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 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.......................................... $ 25,001 $ 22,919 $ 31,206 $ 25,516 $ 23,930
Interest expense......................................... 10,445 9,397 12,848 9,159 9,035
--------- --------- --------- --------- -----------
Net interest income...................................... 14,556 13,522 18,358 16,357 14,895
Provision for loan and lease losses...................... 146 41 61 234 605
--------- --------- --------- --------- -----------
Net interest income after provision for loan and lease
losses.................................................. 14,410 13,481 18,297 16,123 14,290
Noninterest income....................................... 3,448 2,886 3,919 3,837 3,947
Noninterest expense...................................... 12,775 12,147 16,531 16,131 14,995
--------- --------- --------- --------- -----------
Income before income taxes and cumulative effect of
change in accounting principle.......................... 5,083 4,220 5,685 3,829 3,242
Income tax expense....................................... 1,678 1,249 2,056 1,396 1,138
--------- --------- --------- --------- -----------
Income before cumulative effect of change in accounting
principle............................................... 3,405 2,971 3,629 2,433 2,104
Cumulative effect of change in accounting principle
(2)..................................................... -- -- -- -- 181
--------- --------- --------- --------- -----------
Net income............................................... $ 3,405 $ 2,971 $ 3,629 $ 2,433 $ 2,285
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Income per common share before cumulative effect of
change in accounting principle.......................... $ 6.20 $ 5.82 $ 6.97 $ 4.82 $ 4.17
Cumulative effect of change in accounting principle...... -- -- -- -- .36
--------- --------- --------- --------- -----------
Net income per common share.............................. $ 6.20 $ 5.82 $ 6.97 $ 4.82 $ 4.53
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Weighted average common shares outstanding............... 549,079 510,770 520,306 504,686 505,084
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
BALANCE SHEET DATA
Total assets............................................. $ 441,850 $ 411,431 $ 421,841 $ 383,984 $ 347,687
Net loans and leases..................................... 277,345 257,376 263,006 244,125 217,317
Investment securities.................................... 103,453 98,896 101,837 83,434 82,610
Deposits................................................. 351,825 325,027 340,723 312,947 291,590
Securities sold under repurchase agreements.............. 27,556 27,966 23,173 27,747 15,321
Notes payable and other borrowings....................... 16,709 16,813 15,762 12,412 10,549
Total stockholders' equity............................... 39,880 35,751 36,969 27,525 26,745
KEY RATIOS
Return on average assets (3)(4).......................... 1.06% 1.01% 0.91% 0.68% 0.61%
Return on average equity (3)(4).......................... 12.33 13.57 11.65 9.22 8.22
Average stockholders' equity to average assets........... 8.59 7.45 7.79 7.34 7.48
Net interest margin (3).................................. 5.03 5.10 5.13 5.12 5.01
Operating efficiency ratio............................... 70.96 74.03 74.21 79.88 79.58
Nonperforming loans/total loans and leases............... .43 .41 0.28 0.27 0.64
Allowance for loan and lease losses/total loans and
leases.................................................. 1.02 1.12 1.09 1.16 1.24
Allowance for loan and lease losses/nonperforming loans
and leases.............................................. 239.80 269.94 385.51 423.74 192.99
Common stock dividend payout ratio (5)................... 0.00 0.00 0.00 0.00 10.37
Ratio of earnings to fixed charges: (6)
Including interest on deposits......................... 1.48x 1.45x 1.44x 1.42x 1.36x
Excluding interest on deposits......................... 3.83x 3.31x 3.28x 3.27x 3.94x
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR
AS OF AND FOR THE THE
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- ----------------
1996 1995 1995
--------- --------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
PRO FORMA
OPERATING DATA
Interest income........................................................ $ 36,615 $ 33,685 $ 45,818
Interest expense....................................................... 16,229 14,788 20,207
--------- --------- --------
Net interest income.................................................... 20,386 18,897 25,611
Provision for loan and lease losses.................................... 475 581 781
--------- --------- --------
Net interest income after provision for loan and lease losses.......... 19,911 18,316 24,830
Noninterest income..................................................... 4,686 4,146 5,578
Noninterest expense.................................................... 18,433 17,905 24,255
--------- --------- --------
Income before income taxes and minority interest in preferred
securities dividends of subsidiary.................................... 6,164 4,557 6,153
Income tax expense..................................................... 2,481 1,752 2,747
Minority interest in preferred securities dividends of subsidiary...... (617) (617) (823)
--------- --------- --------
Net income............................................................. $ 3,066 $ 2,188 $ 2,583
--------- --------- --------
--------- --------- --------
Net income per common share (7)........................................ $ 5.14 $ 3.92 $ 4.55
--------- --------- --------
--------- --------- --------
Weighted average common shares outstanding (7)......................... 596,239 557,930 567,466
--------- --------- --------
--------- --------- --------
BALANCE SHEET DATA (8)
Total assets........................................................... $ 665,425 $ 621,228 $ 639,153
Net loans and leases................................................... 391,877 368,172 372,868
Investment securities.................................................. 171,722 157,852 162,882
Deposits............................................................... 516,791 481,361 506,477
Securities sold under repurchase agreements............................ 45,067 40,440 33,839
Notes payable and other borrowings..................................... 40,709 40,813 39,762
Total stockholders' equity............................................. 44,849 40,720 41,938
KEY RATIOS
Return on average assets (3)........................................... 0.64% 0.50% 0.43%
Return on average equity (3)........................................... 9.55 7.96 6.94
Average stockholders' equity to average assets......................... 6.65 6.26 6.17
Net interest margin (3)................................................ 4.87 4.91 4.86
Operating efficiency ratio............................................. 73.52 77.70 77.77
Nonperforming loans/total loans and leases............................. .66 1.22 0.53
Allowance for loan and lease losses/total loans and leases............. 1.25 1.37 1.40
Allowance for loan and lease losses/nonperforming loans and leases..... 189.12 112.22 264.26
Common stock dividend payout ratio (5)................................. 0.00 0.00 0.00
Ratio of earnings to fixed charges: (6)
Including interest on deposits....................................... 1.38x 1.30x 1.30x
Excluding interest on deposits....................................... 2.67x 2.28x 2.26x
</TABLE>
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(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 nine months ended September 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,
earnings consist of earnings before income taxes and fixed charges. Fixed
charges consist of one-third rent expense and interest expense.
(7) Earnings per share information has been computed based on the assumption
that the minimum 47,160 shares are issued.
(8) In the event this Offering is completed but neither the concurrent offering
of Preferred Securities nor the Park Acquisition are completed (and taking
into account costs and expenses associated with the termination of the
offering of Preferred Securities and the Park Acquisition, estimated at
$1,401,000), the Company's September 30, 1996 Balance Sheet Data as adjusted
to reflect the minimum offering would include $441,850,000 in Total Assets,
$13,141,000 in Notes Payable and Other Borrowings and $43,448,000 in Total
Stockholder's Equity; as adjusted to reflect the maximum offering, such
amounts would be $443,901,000 in Total Assets, $12,559,000 in Notes Payable
and Other Borrowings and $46,081,000 in Total Stockholder's Equity.
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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
United believes the majority of its growth will come from acquisitions of
banks and other financial institutions. Such acquisitions, including the Park
Acquisition discussed below, 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.
ACQUISITION OF PARK
NO ASSURANCE OF SUCCESSFUL INTEGRATION. 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. Based on September 30, 1996 financial information, the Park
Acquisition would increase the Company's assets by approximately 33.6% to $665
million. The Company's ability to integrate Park Bank into its current operation
without adversely affecting the level of profitability of the Company as a whole
cannot be assured.
INCREASED DEBT AND DECREASED CAPITAL RATIOS. 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 Junior
Subordinated Debentures will require the dedication of an increased portion of
cash flow to the payment of principal and interest on bank debt, and to the
payment of the interest on the Junior Subordinated Debentures, 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 would 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."
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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."
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, 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
10
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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 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."
RESTRICTIONS ON TRANSFERABILITY
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."
SHARES NOT LISTED ON AN EXCHANGE
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. The Company does not intend to list the
shares for trading on the Nasdaq SmallCap Market, the Nasdaq National Market or
any other quotation system or on any securities exchange. There is no assurance
that investors in this offering will be able to sell their shares.
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<PAGE>
PRIOR RIGHTS OF JUNIOR SUBORDINATED DEBENTURES
The Shares offered in this Offering are subject to the superior rights of
United's Junior Subordinated Debentures which will be purchased by United
Capital with the proceeds from the sale of the Preferred Securities which are
being offered concurrently with this Offering. United Capital is entitled to
receive payments with respect to the Junior Subordinated Debentures (and
consequently the holders of the Preferred Securities are entitled to receive
distributions 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 the Junior Subordinated Debentures (for the benefit of the
holders of the Preferred Securities) are entitled to share in United's assets
available for distribution to creditors 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 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 preferred stock with such
superior rights. See "Description of the Company's Capital Stock -- Common
Stock."
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 the Company's Capital Stock -- 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 the Company's Capital Stock -- No Preemptive
Rights."
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 the Company's Capital Stock -- 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
the Company's Capital Stock -- 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)
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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."
RESTRICTIONS ON DIVIDENDS AND DISTRIBUTIONS ON, AND REDEMPTIONS OF, COMMON
STOCK.
The Company does not anticipate the payment of cash dividends on its Common
Stock in the foreseeable future. The Indenture governing the Junior Subordinated
Debentures (the "Indenture") provides that the Company may defer the payment of
interest on the Junior Subordinated Debentures at any time or from time to time
for a period not exceeding 20 consecutive quarters (each, an "Extension
Period"), provided that no Extension Period may extend beyond the stated
maturity of the Junior Subordinated Debentures. During any such Extension
Period, the Company may not declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment with respect to, any of
the Company's capital stock, subject to certain limited exceptions. The Company
has no current intention of exercising its right to defer payments of interest
by extending the interest payment period on the Junior Subordinated Debentures.
However, should the Company elect to exercise such right in the future, the
Company will be restricted from paying cash dividends or other distributions on
the Company's Common Stock. The Company's proposed loan agreement with Firstar
Bank Milwaukee, N.A. includes covenants requiring that the Company maintain
certain financial ratios which may indirectly prevent the Company from paying
dividends or distributions on, or making redemptions of, its Common Stock. See
"Description of the Company's Capital Stock -- Dividend Policy."
ADVERSE TAX ISSUES AFFECTING THE PREFERRED SECURITIES
Although the Company expects that it will be able to deduct the interest
payable on the Junior Subordinated Debentures for federal income tax purposes,
there is no assurance that changes in applicable law or interpretations by
regulatory authorities will not prevent the Company from deducting such interest
payments. The inability of the Company to deduct such interest payments would
have an adverse effect on the Company's operations and may cause the Company to
consider restructuring the debt represented by the Junior Subordinated
Debentures and the Preferred Securities. Upon receipt by the Company and United
Capital of an opinion of Counsel experienced in such matters to the effect that
there is more than an insubstantial risk that (i) United Capital is, or will be
within 90 days of the date of such opinion, subject to United States federal
income tax with respect to income received or accrued on the Junior Subordinated
Debentures, (ii) interest payable by the Company on the Junior Subordinated
Debentures is not, or within 90 days of such opinion will not be, deductible by
the Company, in whole or in part, for United States federal income tax purposes,
or (iii) United Capital is, or will be within 90 days of the date of the
opinion, subject to more than a de minimis amount of other taxes, duties,
assessments or other governmental charges (herein referred to as a "Tax Event"),
then the Company has the right to redeem the Junior Subordinated Debentures in
whole (but not in part) at 100% of the principal amount together with accrued
but unpaid interest and cause a mandatory redemption of the Preferred
Securities. The Company has similar rights of redemption in the event the
Company and United Capital receive an opinion of counsel experienced in such
matters to the effect that United Capital is or will be considered an
"investment company" that is required to be registered under The Investment
Company Act (an "Investment Company Event"). If the Company chooses to redeem
the Junior Subordinated Debentures and the Preferred Securities, the costs of
undertaking such redemption and obtaining alternative financing may adversely
affect the Company's operations.
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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 (the "Selling Trust") 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. Applicable regulatory approvals were
obtained in December 1996. It is expected that the debt financing and the sale
of the Preferred Securities 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 September 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 September 30, 1996,
77% 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.
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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.
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 September 30, 1996, PFC and Park Bank employed
78 persons, 65 on a full-time basis and 13 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 will be 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.
United expects that the loan agreement with Firstar (the "Loan Agreement") will
contain warranties and covenants customary in loan transactions of this type,
including: (i) the Company is duly organized and has the corporate power to
conduct its business and to execute the Loan Agreement; (ii) the Company and the
Banks will comply with all applicable laws; (iii) the Company and the Banks are
not subject to litigation or regulatory proceedings; (iv) the Company and the
Banks will not incur additional indebtedness; (v) the Company's property will
not be subject to any additional liens; (iv) the Company will pay all taxes and
other liabilities when due; (vi) the Company will provide periodic financial
information to Firstar; and (vii) the Company will cause each Bank to maintain
the following financial covenants: (a) a ratio of total tangible equity plus
loan loss reserves to all assets of at least 7.0%; (b) a ratio of nonperforming
loans plus other real estate to total loans plus other real estate of not
greater than 3.0%; (c) a ratio of nonperforming loans plus other real estate to
total tangible equity plus loan loss reserves of not greater than 24.0%; and (d)
an average return on assets of at least 0.75% for Signal Bank and Goodhue Bank,
and 0.45% for Park Bank. In the event that the Company breaches any of its
representations or agreements under the Loan Agreement, or defaults on any other
indebtedness, or suffers a material adverse change in its business or files
bankruptcy or is otherwise insolvent, Firstar may declare the entire unpaid
principal balance of the loan to be immediately due and payable, and may
foreclose upon the stock of Park Bank, Signal Bank and Goodhue Bank that will be
pledged to Firstar.
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REGULATORY CAPITAL. United must obtain at least $10.2 million from the sale
of United Capital's Preferred Securities being offered concurrently with this
Offering to have sufficient regulatory capital to consummate the Park
Acquisition. In the event United Capital does not complete the offering of
Preferred Securities, the Company 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. The Board of Governors of the Federal Reserve System approved the
proposed Park Acquisition in December 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.
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 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.
INDEMNIFICATION AGREEMENT. Pursuant to a separate Indemnification
Agreement, the Selling Trust and certain beneficiaries of the Trust (the
"Indemnifying Parties") have agreed to indemnify United, the
16
<PAGE>
surviving corporation of the Merger, and Park Bank from and against any and all
claims, losses, damages, liabilities or expenses arising or incurred within six
years after the Merger as a result of any claims, actions or proceedings made or
brought against United, the surviving corporation of the Merger, and Park Bank
by the Indemnifying Parties or the other shareholders of PFC for any or no
reason. There will be no indemnification for claims brought by third parties, or
for claims based upon inaccuracies of the representations and warranties made by
PFC and the Selling Trust in the Merger Agreement.
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 $7,602,000 (assuming the maximum number of Shares are sold).
United intends to use all of the proceeds from this Offering, together with the
proceeds from United Capital's offering of Preferred Securities 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 $10.2 million from the sale of United Capital's Preferred
Securities 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.
DILUTION
At September 30, 1996, the net tangible book value of United's Common Stock
was $36,195,345 or $66.21 per share. Net tangible book value per share of
United's Common Stock represents total assets reduced by total liabilities,
divided by the number of outstanding shares of United Common Stock. See
"Financial Information."
The pro forma net tangible book value at September 30, 1996, after giving
effect to the sale of 47,160 (minimum) or 72,000 (maximum) Shares of Common
Stock in this Offering (and after deducting estimated offering expenses), would
have been $41,164,305 or $69.32 per share if the minimum number of Shares are
sold and $43,797,345 or $70.79 per share if the maximum number of Shares are
sold. This represents an immediate increase of $3.11 per share to existing
shareholders and an immediate dilution of $36.68 per share to new investors if
the minimum number of Shares are sold, and an immediate increase in net tangible
book value of $4.58 per share to existing shareholders and an immediate dilution
of $35.21 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), and (ii) the Park Acquisition, the pro
forma net tangible book value of United's Common Stock as of September 30, 1996,
would have been $19,940,574 or $33.58 per share if the minimum number of Shares
are sold, and $22,573,614 or $36.49 per share if the maximum number of Shares
are sold. This represents an
17
<PAGE>
additional decrease in net tangible book value of $35.74 per share to both
existing shareholders and new investors if the minimum number of Shares are
sold, and $34.30 per share to both existing shareholders and new investors if
the maximum number of Shares are sold.
The following table illustrates the total net tangible book value per share
dilution at September 30, 1996 for Existing Shareholders and New Investors,
taking into account the effects of the sale of Common Stock in 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 offering and Park
Acquisition............................................ $ 66.21 $ 66.21
Increase realized by existing shareholders due to
Common Stock Offering................................ 3.11 4.58
Dilution of net tangible book value to new investors
after Common Stock Offering.......................... (36.68) (35.21)
----------- ------------ ----------- ------------
Pro forma net tangible book value after Common Stock
Offering and before Park Acquisition..................... 69.32 69.32 70.79 70.79
Decrease realized by shareholders due to Park
Acquisition............................................ (35.74) (35.74) (34.30) (34.30)
----------- ------------ ----------- ------------
Pro forma net tangible book value per share after Common
Stock Offering and Park Acquisition...................... $ 33.58 $ 33.58 $ 36.49 $ 36.49
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Total pro forma net tangible book value per share
dilution............................................. $ (32.63) $ (72.42) $ (29.72) $ (69.51)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</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.
18
<PAGE>
The following table illustrates the pro forma transfer price per share
dilution at September 30, 1996 for Existing Shareholders and New Investors,
taking into account the effect of 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
Transfer price per share before offering and Park
Acquisition.............................................. $ 106.22 $ 106.22
Increase realized by existing shareholders due to Common
Stock Offering......................................... 4.11 6.07
Increase in transfer price per share to new investors
after Common Stock Offering............................ 4.33 6.29
----------- ------------ ----------- ------------
Pro forma transfer price per share after Common Stock
Offering and before Park Acquisition..................... 110.33 110.33 112.29 112.29
Decrease realized by shareholders due to Park
Acquisition.......................................... (17.87) (17.87) (17.16) (17.16)
----------- ------------ ----------- ------------
Pro forma transfer price per share after Common Stock
Offering and Park Acquisition............................ $ 92.46 $ 92.46 $ 95.13 $ 95.13
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Pro Forma Transfer Price Per Share Dilution........... $ (13.76) $ (13.54) $ (11.09) $ (10.87)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</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 88.4% $ 21,021,068 73.4% $ 38.45
New investors......................................... 72,000 11.6% 7,632,000 26.6% 106.00
--------- ----- ------------- ----- -----------
Total............................................... 618,686 100.0% $ 28,653,068 100.0% $ 46.31
--------- ----- ------------- ----- -----------
--------- ----- ------------- ----- -----------
</TABLE>
The tables in this section assume no exercise of outstanding stock options
under the 1994 Stock Plan. At September 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."
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of United as of September
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 Preferred Securities offered by United Capital
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 SEPTEMBER 30, 1996
------------------------
ACTUAL PRO FORMA (1)
--------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt.......................................................................... $ 3,150 $ 27,150
Company obligated mandatorily redeemable preferred securities of subsidiary trust
holding solely junior subordinated debentures (2)...................................... -- 10,159
Stockholders' equity
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 25,984
Retained earnings..................................................................... 18,918 18,918
Unrealized loss on securities available for sale...................................... (59) (59)
--------- -------------
Total stockholders' equity.......................................................... 39,880 44,849
--------- -------------
Total capitalization.................................................................... $ 43,030 $ 82,158
--------- -------------
--------- -------------
Regulatory capital ratios (3):
Tier 1 risk-based capital............................................................. 13.4% 7.0%
Total risk-based capital.............................................................. 14.4% 8.2%
Leverage.............................................................................. 8.6% 5.0%
</TABLE>
- ------------------------
(1) The pro forma information set forth above as of September 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.
(2) The subsidiary trust is United Capital which is a wholly-owned subsidiary of
the Company and holds the Junior Subordinated Debentures as its sole asset.
The Preferred Securities are issued by United Capital. The sole assets of
United Capital consist of approximately $11,340,200 principal amount of
Junior Subordinated Debentures issued by United to United Capital. The
Junior Subordinated Debentures will bear interest at the rate of % per
annum and will mature on January 15, 2027, which date may be shortened to a
date not earlier than January 15, 2002 or extended to a date not later than
January 15, 2046, in either case, if certain conditions are met. Upon the
occurrence of a Tax Event or an Investment Company Event (whether occurring
before or after January 15, 2002), the Company has the right to redeem the
Junior Subordinated Debentures. See "Description of Junior Subordinated
Debentures -- Redemption." The Company owns all of the Common Securities of
United Capital.
(3) Pro forma regulatory capital ratios include Company obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely junior
subordinated debentures as Tier 1 capital.
20
<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;
financial information as of and for the year ended December 31, 1993 on an
historical basis including the results of Signal only and on an unaudited pro
forma basis 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 pro forma 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 nine months ended September 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 nine months ended
September 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 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."
21
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED
AS OF AND FOR THE
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------------------------------
1996 1995 1995 1994 1993 (1) 1993 (2) 1992 (2) 1991 (2)
--------- --------- --------- --------- ----------- --------- --------- ---------
(PRO FORMA)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNITED -- TABLE 1
OPERATING DATA
Interest income.............. $ 25,001 $ 22,919 $ 31,206 $ 25,516 $ 23,930 $ 11,424 $ 11,276 $ 12,783
Interest expense............. 10,445 9,397 12,848 9,159 9,035 3,671 4,334 6,470
--------- --------- --------- --------- ----------- --------- --------- ---------
Net interest income.......... 14,556 13,522 18,358 16,357 14,895 7,753 6,942 6,313
Provision for loan and lease
losses...................... 146 41 61 234 605 300 488 2,000
--------- --------- --------- --------- ----------- --------- --------- ---------
Net interest income after
provision for loan and lease
losses...................... 14,410 13,481 18,297 16,123 14,290 7,453 6,454 4,313
Noninterest income........... 3,448 2,886 3,919 3,837 3,947 2,148 2,419 1,808
Noninterest expense.......... 12,775 12,147 16,531 16,131 14,995 7,416 6,537 5,609
--------- --------- --------- --------- ----------- --------- --------- ---------
Income before income taxes
and cumulative effect of
change in accounting
principle................... 5,083 4,220 5,685 3,829 3,242 2,185 2,336 512
Income tax expense........... 1,678 1,249 2,056 1,396 1,138 725 725 171
--------- --------- --------- --------- ----------- --------- --------- ---------
Income before cumulative
effect of change in
accounting principle........ 3,405 2,971 3,629 2,433 2,104 1,460 1,611 341
Cumulative effect of change
in accounting principle
(3)......................... -- -- -- -- 181 106 -- --
--------- --------- --------- --------- ----------- --------- --------- ---------
Net income................... $ 3,405 $ 2,971 $ 3,629 $ 2,433 $ 2,285 $ 1,566 $ 1,611 $ 341
--------- --------- --------- --------- ----------- --------- --------- ---------
--------- --------- --------- --------- ----------- --------- --------- ---------
Income per common share
before cumulative effect of
change in accounting
principle................... $ 6.20 $ 5.82 $ 6.97 $ 4.82 $ 4.17 $ 4.78 $ 5.43 $ 1.13
Cumulative effect of change
in accounting principle..... -- -- -- -- .36 .35 -- --
--------- --------- --------- --------- ----------- --------- --------- ---------
Net income per common
share....................... $ 6.20 $ 5.82 $ 6.97 $ 4.82 $ 4.53 $ 5.13 $ 5.43 $ 1.13
--------- --------- --------- --------- ----------- --------- --------- ---------
--------- --------- --------- --------- ----------- --------- --------- ---------
Weighted average common
shares outstanding.......... 549,079 510,770 520,306 504,686 505,084 305,513 296,654 301,142
--------- --------- --------- --------- ----------- --------- --------- ---------
--------- --------- --------- --------- ----------- --------- --------- ---------
BALANCE SHEET DATA
Total assets................. $ 441,850 $ 411,431 $ 421,841 $ 383,984 $ 347,687 $ 173,195 $ 155,095 $ 152,370
Net loans and leases......... 277,345 257,376 263,006 244,125 217,317 112,588 92,516 83,262
Investment securities........ 103,453 98,896 101,837 83,434 82,610 39,596 40,938 43,886
Deposits..................... 351,825 325,027 340,723 312,947 291,590 147,517 140,446 139,317
Securities sold under
repurchase agreements....... 27,556 27,966 23,173 27,747 15,321 6,766 -- --
Notes payable and other
borrowings.................. 16,709 16,813 15,762 12,412 10,549 3,600 1,572 1,144
Total stockholders' equity... 39,880 35,751 36,969 27,525 26,745 13,709 11,943 10,674
KEY RATIOS
Return on average assets
(4)(5)...................... 1.06% 1.01% 0.91% 0.68% 0.61% 0.95% 1.10% 0.23%
Return on average equity
(4)(5)...................... 12.33 13.57 11.65 9.22 8.22 12.21 14.55 3.24
Average stockholders' equity
to average assets........... 8.59 7.45 7.79 7.34 7.48 7.81 7.59 7.20
Net interest margin (4)...... 5.03 5.10 5.13 5.12 5.01 5.36 5.23 4.72
Operating efficiency ratio... 70.96 74.03 74.21 79.88 79.58 74.90 69.83 69.07
Nonperforming loans/total
loans and leases............ 0.43 0.41 0.28 0.27 0.64 .49 0.45 2.72
Allowance for loan and lease
losses/total loans and
leases...................... 1.02 1.12 1.09 1.16 1.24 1.32 1.53 2.57
Allowance for loan and lease
losses/ nonperforming loans
and leases.................. 239.80 269.94 385.51 423.74 192.99 268.04 336.07 94.32
Common stock dividend payout
ratio (6)................... 0.00 0.00 0.00 0.00 10.37 8.97 0.00 0.00
Ratio of earnings to fixed
charges (7)
Including interest on
deposits.................. 1.48x 1.45x 1.44x 1.42x 1.36x 1.59x 1.53x 1.08x
Excluding interest on
deposits.................. 3.83x 3.31x 3.28x 3.27x 3.94x 7.75x 16.68x 3.76x
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE
SEPTEMBER 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............................... $ 11,857 $ 11,011 $ 14,969 $ 11,663 $ 9,744 $ 10,549 $ 12,907
Interest expense.............................. 4,519 4,126 5,672 3,538 2,927 4,229 6,604
--------- --------- --------- --------- --------- --------- ---------
Net interest income........................... 7,338 6,885 9,297 8,125 6,817 6,320 6,303
Provision for loan and lease losses........... 329 540 720 740 552 678 1,974
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for loan
and lease losses............................. 7,009 6,345 8,577 7,385 6,265 5,642 4,329
Noninterest income............................ 1,238 1,260 1,659 1,556 2,102 2,824 2,894
Noninterest expense........................... 4,606 4,723 6,338 6,076 6,234 6,557 6,862
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting principle..... 3,641 2,882 3,898 2,865 2,133 1,909 361
Income tax expense............................ 1,402 1,096 1,497 1,030 659 579 228
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle and extraordinary
credit....................................... 2,239 1,786 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.................................... $ 2,239 $ 1,786 $ 2,401 $ 1,835 $ 2,324 $ 1,423 $ 195
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Income per common share before cumulative
effect of change in accounting principle and
extraordinary credit......................... $ 4.74 $ 3.78 $ 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................... $ 4.74 $ 3.78 $ 5.09 $ 3.89 $ 4.96 $ 3.00 $ 0.41
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average common shares outstanding.... 472,710 471,510 471,540 471,931 468,692 473,668 479,441
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA
Total assets.................................. $ 208,527 $ 193,300 $ 200,570 $ 181,505 $ 157,650 $ 153,524 $ 156,092
Net loans and leases.......................... 116,569 114,474 113,499 102,882 94,368 82,035 87,187
Investment securities......................... 71,780 61,641 63,765 55,632 45,468 46,941 43,510
Deposits...................................... 164,966 156,334 165,754 156,704 135,363 132,037 136,151
Total stockholders' equity.................... 24,592 21,934 22,888 19,237 18,152 15,640 14,557
KEY RATIOS
Return on average assets (4)(5)............... 1.48% 1.29% 1.28% 1.09% 0.99% 0.96% 0.13%
Return on average equity (4)(5)............... 12.78 12.11 12.07 9.97 8.88 9.49 1.35
Average stockholders' equity to average
assets....................................... 11.55 10.67 10.63 10.93 11.20 10.08 9.35
Net interest margin (4)....................... 5.12 5.30 5.29 5.19 4.97 4.63 4.58
Operating efficiency ratio.................... 53.71 57.99 57.85 62.76 69.90 71.71 74.61
Nonperforming loans/total loans and leases.... 1.19 .59 1.07 1.69 1.25 4.38 5.95
Allowance for loan and lease losses/total
loans and leases............................. 1.83 1.98 2.14 1.93 1.61 1.74 1.78
Allowance for loan and lease
losses/nonperforming loans and leases........ 154.36 335.85 199.20 113.93 129.18 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: (7)
Including interest on deposits.............. 1.79x 1.68x 1.66x 1.77x 1.68x 1.43x 1.05x
Excluding interest on deposits.............. 6.80x 7.29x 6.65x 8.76x 7.58x 5.20x 1.51x
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR
NINE MONTHS ENDED THE
SEPTEMBER 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........................................................ $ 36,615 $ 33,685 $ 45,818
Interest expense....................................................... 16,229 14,788 20,207
--------- --------- --------
Net interest income.................................................... 20,386 18,897 25,611
Provision for loan and lease losses.................................... 475 581 781
--------- --------- --------
Net interest income after provision for loan and lease losses.......... 19,911 18,316 24,830
Noninterest income..................................................... 4,686 4,146 5,578
Noninterest expense.................................................... 18,433 17,905 24,255
--------- --------- --------
Income before income taxes and minority interest in preferred
securities dividends of subsidiary.................................... 6,164 4,557 6,153
Income tax expense..................................................... 2,481 1,752 2,747
Minority interest in preferred securities dividends of subsidiary...... (617) (617) (823)
--------- --------- --------
Net income............................................................. $ 3,066 $ 2,188 $ 2,583
--------- --------- --------
--------- --------- --------
Net income per common share (9)........................................ $ 5.14 $ 3.92 $ 4.55
--------- --------- --------
--------- --------- --------
Weighted average common shares outstanding (9)......................... 596,239 557,930 567,466
--------- --------- --------
--------- --------- --------
BALANCE SHEET DATA (10)
Total assets........................................................... $ 665,425 $ 621,228 $ 639,153
Net loans and leases................................................... 391,877 368,172 372,868
Investment securities.................................................. 171,722 157,852 162,882
Deposits............................................................... 516,791 481,361 506,477
Securities sold under repurchase agreements............................ 45,067 40,440 33,839
Notes payable and other borrowings..................................... 40,709 40,813 39,762
Total stockholders' equity............................................. 44,849 40,720 41,938
KEY RATIOS
Return on average assets (4)........................................... 0.64% 0.50% 0.43%
Return on average equity (4)........................................... 9.55 7.96 6.94
Average stockholders' equity to average assets......................... 6.65 6.26 6.17
Net interest margin (4)................................................ 4.87 4.91 4.86
Operating efficiency ratio............................................. 73.52 77.70 77.77
Nonperforming loans/total loans and leases............................. .66 1.22 0.53
Allowance for loan and lease losses/total loans and leases............. 1.25 1.37 1.40
Allowance for loan and lease losses/nonperforming loans and leases..... 189.12 112.22 264.26
Common stock dividend payout ratio (6)................................. 0.00 0.00 0.00
Ratio of earnings to fixed charges: (7)
Including interest on deposits....................................... 1.38x 1.30x 1.30x
Excluding interest on deposits....................................... 2.67x 2.28x 2.26x
</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 nine months ended September 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,
earnings consist of earnings before income taxes and fixed charges. Fixed
charges consist of one-third rent expense and interest expense.
(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 Preferred Securities nor the Park Acquisition are completed (and taking
into account costs and expenses associated with the termination of the
offering of Preferred Securities and the Park Acquisition, estimated at
$1,401,000), the Company's September 30, 1996 Balance Sheet Data as adjusted
to reflect the minimum offering would include $441,850,000 in Total Assets,
$13,141,000 in Notes Payable and Other Borrowings and $43,448,000 in Total
Stockholder's Equity; as adjusted to reflect the maximum offering, such
amounts would be $443,901,000 in Total Assets, $12,559,000 in Notes Payable
and Other Borrowings and $46,081,000 in Total Stockholder's Equity.
24
<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 and 1994 and United's unaudited pro forma results of
operations as of and for the year ended December 31, 1993. In addition, this
discussion includes United's historical results of operations and financial
condition as of and for the nine months ended September 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 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 nine months ended September 30, 1996 increased
$434,000 or 14.6% to $3.4 million from $3.0 million for the nine months ended
September 30, 1995. Net income for the year ended December 31, 1995 increased
$1.2 million or 49.2% 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 September 30, 1996 increased $20.0 million or 4.7% to $441.8
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 1.06% for the nine months ended
September 30, 1996 compared with 1.01% for the nine months ended September 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 12.33% for the nine months ended
September 30, 1996 compared with 13.57% for the nine months ended September 30,
1995. The return on average equity using
25
<PAGE>
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.
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 nine months ended September 30, 1996 increased
$1.0 million or 7.6% to $14.6 million from $13.5 million for the nine months
ended September 30, 1995. Net interest income was positively impacted by an
increase of $32.5 million or 9.2% in average interest-earning assets to $386.8
million for the nine months ended September 30, 1996 from $354.3 million for the
nine months ended September 30, 1995, offset by a decrease of .02% in average
yields on average interest-earning assets to 8.63% for the nine months ended
September 30, 1996 from 8.65% for the nine months ended September 30, 1995.
Average interest-earning assets were impacted by an 8.4% increase in average
loans and leases due to continued loan demand and a 15.2% 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 $22.5 million or 7.5% in average interest-bearing liabilities
to $322.9 million for the nine months ended September 30, 1996 from $300.4
million for the nine months ended September 30, 1995 and an increase in the rate
paid on average interest-bearing liabilities of .14% to 4.32% for the nine
months ended September 30, 1996 from 4.18% for the nine months ended September
30, 1995. Average interest-bearing liabilities increased due primarily to an
increase of $34.9 million or 49.6% 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 $12.5 million in the savings and time deposit accounts
between the periods. The Company also utilized increased FHLB advances of $5.0
million to fund a portfolio of fixed-rate residential real estate loans, while
notes payable were reduced by $2.1 million using proceeds from a stock offering.
The net interest spread declined .16% to 4.31% for the nine months ended
September 30, 1996 from 4.47% for the nine months ended September 30, 1995 while
net interest margin declined to 5.03% from 5.10%. 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 24.9% 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
26
<PAGE>
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 9.8% 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-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 87.7% 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>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 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..................... $ (94) $ (49) $ (143) $ 246 $ 190 $ 436
Taxable investment securities.......... 541 99 640 517 589 1,106
Non-taxable investment securities...... 48 (2) 46 69 (7) 62
Loans and leases....................... 1,547 (8) 1,539 1,956 2,130 4,086
----------- ----- ----------- ----------- ----------- -----------
Total interest-earning assets........ $ 2,042 $ 40 $ 2,082 $ 2,788 $ 2,902 $ 5,690
----------- ----- ----------- ----------- ----------- -----------
----------- ----- ----------- ----------- ----------- -----------
INTEREST-BEARING LIABILITIES:
Deposits -- interest-bearing:
Interest-bearing demand deposits..... $ 6 $ (48) $ (42) $ (32) $ 7 $ (25)
Savings.............................. (99) (98) (197) (259) 7 (252)
Money market......................... 1,133 97 1,230 919 1,325 2,244
Time................................. (270) 374 104 (42) 984 942
----------- ----- ----------- ----------- ----------- -----------
Total interest-bearing deposits.... 770 325 1,095 586 2,323 2,909
Federal funds purchased and securities
sold under repurchase agreements...... (126) 25 (101) 210 402 612
FHLB advances.......................... 224 2 226 312 17 329
Notes payable.......................... (83) (89) (172) (36) (125) (161)
----------- ----- ----------- ----------- ----------- -----------
Total interest-bearing liabilities... $ 785 $ 263 $ 1,048 $ 1,072 $ 2,617 $ 3,689
----------- ----- ----------- ----------- ----------- -----------
----------- ----- ----------- ----------- ----------- -----------
CHANGE IN NET INTEREST INCOME............ $ 1,257 $ (223) $ 1,034 $ 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.
27
<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 nine months ended
September 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>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Federal funds sold........ $ 10,102 $ 390 5.16% $ 12,255 $ 533 5.81%
Taxable investment
securities............... 92,895 4,195 6.03% 80,627 3,555 5.90%
Non-taxable investment
securities(2)............ 9,245 355 5.13% 8,011 309 5.16%
Loans and leases(3)....... 274,533 20,061 9.76% 253,371 18,522 9.77%
--------- --------- --------- ---------
Total interest-earning
assets................. 386,775 25,001 8.63% 354,264 22,919 8.65%
Noninterest-earning
assets................... 42,759 41,482
--------- ---------
Total assets............ $ 429,534 $ 395,746
--------- ---------
--------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Deposits --
interest-bearing:
Interest bearing demand
deposits............... $ 33,809 $ 246 0.97% $ 33,119 $ 288 1.16%
Savings................. 30,006 455 2.03% 35,399 652 2.46%
Money market............ 105,291 3,516 4.46% 70,391 2,286 4.34%
Time.................... 108,133 4,504 5.56% 115,213 4,400 5.11%
--------- --------- --------- ---------
Total interest-bearing
deposits............. 277,239 8,721 4.20% 254,122 7,626 4.01%
Federal funds purchased
and securities sold under
repurchase agreements.... 25,569 957 5.00% 29,011 1,058 4.88%
FHLB advances............. 12,112 546 6.02% 7,121 320 6.01%
Notes payable............. 7,977 221 3.70% 10,109 393 5.20%
--------- --------- --------- ---------
Total interest-bearing
liabilities............ 322,897 10,445 4.32% 300,363 9,397 4.18%
Noninterest-bearing
liabilities.............. 69,739 66,107
--------- ---------
Total liabilities....... 392,636 366,470
Stockholders' equity...... 36,898 29,276
--------- ---------
Total liabilities and
stockholders' equity... $ 429,534 $ 395,746
--------- ---------
--------- ---------
Net interest income....... $ 14,556 $ 13,522
Net interest spread....... 4.31% 4.47%
Net interest margin....... 5.03% 5.10%
<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)
(DOLLARS IN THOUSANDS)
<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 $814,733 and $682,698 for the nine months ended September
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.
28
<PAGE>
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses was $146,000 for the nine months
ended September 30, 1996, an increase of $105,000 over the provision for loan
and lease losses of $41,000 for the nine months ended September 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>
NINE MONTHS ENDED
YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- ---------------------------------
1996 1995 1995 1994 1993 (1)
--------- --------- --------- --------- -----------
(PRO FORMA)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges and other fees................... $ 2,442 $ 2,136 $ 2,923 $ 2,963 $ 3,097
Net investment securities gains (losses)......... -- (23) (32) 79 285
Earnings on cash surrender value life
insurance....................................... 297 291 377 462 385
Gain on sale of assets........................... 394 462 599 333 38
Interest on tax refunds.......................... 277 -- -- -- --
Other............................................ 38 20 52 -- 142
--------- --------- --------- --------- -----------
$ 3,448 $ 2,886 $ 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 $3.4 million for the nine months
ended September 30, 1996, an increase of $562,000 or 19.5% over noninterest
income of $2.9 million for the nine months ended September 30, 1995.
Approximately $306,000 of the increase was primarily due to increased service
charges and overdraft fees. The remaining increase was primarily due to $277,000
of interest received on the tax refunds resulting from the favorable
determination of a tax lawsuit for the years 1979 through 1983 and to a decrease
in gain on sale of assets of $68,000 or 14.7% for the nine months ended
September 30, 1996 compared to the nine months ended September 30, 1995.
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.
29
<PAGE>
NONINTEREST EXPENSE
The following table presents the components of noninterest expense for the
periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- ---------------------------------
1996 1995 1995 1994 1993 (1)
--------- --------- --------- --------- -----------
(PRO FORMA)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits............... $ 7,323 $ 6,866 $ 9,292 $ 8,510 $ 7,642
Occupancy.................................... 646 744 1,208 1,060 958
Depreciation................................. 1,141 912 1,253 1,216 899
Amortization of intangibles.................. 576 618 824 562 562
FDIC assessment.............................. 4 320 351 644 690
Professional fees............................ 267 179 297 468 865
Other real estate expenses................... 6 9 9 507 414
Other........................................ 2,812 2,499 3,297 3,164 2,965
--------- --------- --------- --------- -----------
$ 12,775 $ 12,147 $ 16,531 $ 16,131 $ 14,995
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</TABLE>
- ------------------------
(1) Combines Signal and Goodhue.
Noninterest expense was $12.8 million for the nine months ended September
30, 1996, an increase of $628,000 or 5.2% over noninterest expense of $12.1
million for the nine months ended September 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 7.6% over noninterest expense of $15.0
million for the pro forma year ended December 31, 1993.
Salaries and employee benefits expense was $7.3 million for the nine months
ended September 30, 1996, an increase of $457,000 or 6.7% over salaries and
employee benefits expense of $6.9 million for the nine months ended September
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 $646,000 for the nine months ended September 30, 1996,
a decrease of $98,000 or 13.2% from occupancy expense of $744,000 for the nine
months ended September 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 14.0% 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 10.6% 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 $1.1 million for the nine months ended September
30, 1996, an increase of $229,000 or 25.1% over depreciation expense of $912,000
for the nine months ended September 30, 1995. This increase was due to the
acceleration of the amortization of leasehold improvements resulting from
terminating a lease for Signal Bank's operations center in the Signal Hills
Center effective January 31, 1997.
30
<PAGE>
Depreciation expense was $1.3 million for the year ended December 31, 1995, an
increase of $37,000 or 3.0% 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 $576,000 for the nine months ended September 30, 1996, a
decrease of $42,000 or 6.8% from amortization of intangibles expense of $618,000
for the nine months ended September 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 nine 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 $4,000 for the nine months ended September 30,
1996, a decrease of $316,000 or 98.8% from FDIC assessment expense of $320,000
for the nine months ended September 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 $267,000 for the nine months ended September
30, 1996, an increase of $88,000 or 49.2% over professional fees expense of
$179,000 for the nine months ended September 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 nine months ended
September 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.
31
<PAGE>
INCOME TAX EXPENSE
Income tax expense was $1.7 million for the nine months ended September 30,
1996, an increase of $429,000 or 34.3% over income tax expense of $1.2 million
for the nine months ended September 30, 1995. The effective tax rate increased
from 29.6% for the nine months ended September 30, 1995 to 33.0% for the nine
months ended September 30, 1996. 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
September 30, 1996 statement of income was 40.2%. 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 $280.2 million at September 30, 1996, an increase of $14.3 million or
5.4% 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
September 30, 1996 and December 31, 1995, 1994, pro forma 1993 and historical
1992 and 1991:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------
SEPTEMBER 30,
1996 1995 1994 1993 (1) 1992 (2) 1991 (2)
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(PRO FORMA)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
agricultural... $166,013 59.2% $149,859 56.3% $143,227 58.0% $112,790 51.3% $ 67,831 72.2% $ 57,997 67.9%
Residential
real estate... 66,139 23.6 69,577 26.2 58,828 23.8 66,834 30.4 13,539 14.4 14,373 16.8
Consumer....... 36,274 13.0 35,897 13.5 35,655 14.4 33,920 15.4 12,581 13.4 13,085 15.3
Leases......... 11,787 4.2 10,572 4.0 9,271 3.8 6,498 2.9 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Totals loans
and leases.. $280,213 100.0% $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
32
<PAGE>
the financial strength and repayment ability of the borrower as well as the
collateral securing the loans. As of September 30, 1996, commercial loans
represented the largest class of loans at $166.0 million or 59.2% of total loans
up from $149.9 million or 56.3% of total loans at December 31, 1995.
RESIDENTIAL REAL ESTATE LOANS
Residential real estate loans principally include residential real estate
first mortgages and home equity lines of credit. As of September 30, 1996,
residential real estate loans were $66.1 million or 23.6% 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 September 30, 1996, consumer loans were $36.3
million or 13.0% of total loans up 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 September 30, 1996, leases were $11.8 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 September 30, 1996. The amounts exclude residential real estate
loans, consumer loans and leases.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 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....................................... $ 130,405 $ 28,256 $ 7,352 $ 166,013
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY
--------------------------
FIXED RATE VARIABLE RATE
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
Commercial and agricultural loans due
after one year with:.................................................................. $ 28,015 $ 7,593
----------- ------
----------- ------
</TABLE>
33
<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 September 30,
1996 and December 31, 1995, 1994, pro forma 1993, and historical 1992 and 1991:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------------
1996 1995 1994 1993(1) 1992(2) 1991(2)
------------- --------- --------- --------- --------- ---------
(PRO FORMA)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans.................................... $ 722 $ 403 $ 459 $ 722 $ 61 $ 1,482
Accrual loans which are past due 90 days or more as
to principal or interest........................... 342 249 104 573 102 364
Troubled debt restructurings........................ 132 100 111 117 264 479
------ --------- --------- --------- --------- ---------
Total nonperforming loans and leases.............. 1,196 752 674 1,412 427 2,325
Other real estate owned............................. -- -- 355 1,182 1,223 810
------ --------- --------- --------- --------- ---------
Total nonperforming assets.......................... $ 1,196 $ 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............. .27% .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 September 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 $319,000 as of September 30, 1996. This increase
was largely the result of one new loan of $201,000 being placed on nonaccrual
status. 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 $2.6 million as of September 30, 1996. The pro forma total
nonperforming loans and leases/total loans and leases would be .66% and the pro
forma total nonperforming assets/total assets would be .40% as of September 30,
1996 on a pro forma basis combining the nonperforming loans and assets of United
and Park Bank.
34
<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>
NINE MONTHS ENDED
SEPTEMBER 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... 286 119 167 176 810 1,578 943
Residential real estate....... -- -- -- 15 25 -- 6
Consumer...................... 262 90 135 196 109 83 162
Leases........................ 22 30 35 61 26 -- --
--------- --------- --------- --------- ----------- ----------- -----------
Total charge-offs........... 570 239 337 448 970 1,661 1,111
--------- --------- --------- --------- ----------- ----------- -----------
Recoveries:
Commercial and agricultural... 255 172 214 212 215 342 68
Residential real estate....... -- 1 1 5 5 32 12
Consumer...................... 138 55 77 127 104 41 29
Leases........................ -- 24 27 1 -- -- --
--------- --------- --------- --------- ----------- ----------- -----------
Total recoveries............ 393 252 319 345 324 415 109
--------- --------- --------- --------- ----------- ----------- -----------
Net charge-offs (recoveries).... 177 (13) 18 103 646 1,246 1,002
Provision for loan and lease
losses......................... 146 41 61 234 605 488 2,000
--------- --------- --------- --------- ----------- ----------- -----------
Balance, end of period.......... $ 2,868 $ 2,910 $ 2,899 $ 2,856 $ 2,725 $ 1,435 $ 2,193
--------- --------- --------- --------- ----------- ----------- -----------
--------- --------- --------- --------- ----------- ----------- -----------
Net charge-offs
(recoveries)/average loans
outstanding.................... 0.06% (0.01%) 0.01% 0.04% 0.32 % 1.42 % 1.12 %
Allowance for loan and lease
losses/total loans and
leases......................... 1.02% 1.12% 1.09% 1.16% 1.24 % 1.53 % 2.57 %
Nonperforming loans and
leases/total loans and
leases......................... 0.43% 0.41% 0.28% 0.27% 0.64 % 0.45 % 2.72 %
Allowance for loan and lease
losses/ nonperforming loans and
leases......................... 239.80% 269.94% 385.51% 423.74% 192.99 % 336.07 % 94.32 %
</TABLE>
- ------------------------------
(1) Combines Signal and Goodhue.
(2) Includes the financial information of Signal only.
35
<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,
SEPTEMBER 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... $1,493 59.2% $1,718 56.3% $1,786 58.0% $1,263 51.3% $ 997 72.2% $1,650 67.9%
Residential
real estate... 9 23.6 14 26.2 15 23.8 272 30.4 236 14.4 239 16.8
Consumer....... 235 13.0 212 13.5 185 14.4 333 15.4 191 13.4 275 15.3
Leases......... 223 4.2 230 4.0 190 3.8 199 2.9 -- -- -- --
Unallocated.... 908 -- 725 -- 680 -- 658 -- 11 -- 29 --
------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Total........ $2,868 100.0% $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.
36
<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 September 30, 1996 and December 31, 1995, 1994 and pro forma 1993:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
SEPTEMBER 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......... $ 57,315 55.4% $ 60,135 59.0% $ 49,122 58.9% $ 40,397 48.9%
Obligations of states and
political subdivisions...... 12,667 12.2 7,757 7.6 8,023 9.6 5,490 6.7
Mortgage-backed securities... 31,397 30.4 31,956 31.4 23,796 28.5 30,682 37.1
Equity securities............ 2,074 2.0 1,989 2.0 2,493 3.0 6,041 7.3
--------- ----- --------- ----- ----------- ----- ----------- -----
Total investment
securities................ $ 103,453 100.0% $ 101,837 100.0% $ 83,434 100.0% $ 82,610 100.0%
--------- ----- --------- ----- ----------- ----- ----------- -----
--------- ----- --------- ----- ----------- ----- ----------- -----
</TABLE>
- ------------------------------
(1) Combines Signal and Goodhue.
Investment securities were $103.5 million at September 30, 1996, an increase
of $1.7 million or 1.6% 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.
37
<PAGE>
MATURITY OF DEBT INVESTMENT SECURITIES
As of September 30, 1996, debt investment securities had the following
maturity and yield characteristics:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 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........ $20,979 5.07% $33,326 6.71% $ 3,010 8.03% $ -- -- % $ 57,315 6.18%
Obligations of states and
political subdivisions
(1)........................ 481 6.67 2,105 7.64 6,889 7.64 3,192 7.98 12,667 7.69
Mortgage-backed securities
(2)........................ -- -- -- -- -- -- -- -- 31,397 6.15
Equity securities (2)....... -- -- -- -- -- -- -- -- 2,074 --
-------- --- -------- --- -------- --- -------- --- -------- ---
Total Investment
Securities............... $21,460 5.11% $35,431 6.77% $ 9,899 7.76% $ 3,192 7.98% $103,453 6.23%
-------- --- -------- --- -------- --- -------- --- -------- ---
-------- --- -------- --- -------- --- -------- --- -------- ---
</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 September 30, 1996 and December 31, 1995, 1994 and pro
forma 1993:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
SEPTEMBER 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..................... $ 70,444 20.0% $ 70,872 20.8% $ 69,261 22.1% $ 61,962 21.3%
Interest-bearing demand..... 33,700 9.6 34,032 10.0 35,499 11.3 35,854 12.3
Money market accounts....... 111,269 31.6 80,034 23.5 47,109 15.1 39,408 13.5
Savings deposits............ 29,710 8.5 47,735 14.0 42,956 13.7 50,205 17.2
Time certificates of
deposit:
Less than $100,000........ 93,215 26.5 93,960 27.6 100,321 32.1 89,893 30.8
Over $100,000............. 13,487 3.8 14,090 4.1 17,801 5.7 14,268 4.9
--------- ----- --------- ----- --------- ----- --------- -----
$ 351,825 100.0% $ 340,723 100.0% $ 312,947 100.0% $ 291,590 100.0%
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
</TABLE>
- ------------------------------
(1) Combines Signal and Goodhue.
Total deposits were $351.8 million as of September 30, 1996, an increase of
$11.1 million or 3.3% from the December 31, 1995 amount. 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.
38
<PAGE>
The following table presents a maturity distribution of time certificates of
deposit of $100,000 or more at September 30, 1996:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
--------------
(IN THOUSANDS)
<S> <C>
Time Certificates of Deposits of $100,000 or more
Three months or less................................................ $ 2,473
Over three months to six months..................................... 1,246
Over six months to twelve months.................................... 2,706
Over twelve months.................................................. 7,062
-------
Total............................................................. $ 13,487
-------
-------
</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 nine months ended September 30, 1996 and the years ended
December 31, 1995, 1994 and pro forma 1993:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER ---------------------------------
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... $ 27,556 $ 23,173 $ 27,747 $ 15,321
Weighted average rate at period end..... 4.84% 5.17% 4.22% 2.63%
Daily average outstanding for the
period................................. $ 24,435 $ 29,343 $ 22,854 $ 11,827
Weighted average rate for the period.... 4.96% 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% (7.43% at September 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 September 30, 1996
and December 31, 1995, 1994 and pro forma 1993:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER ---------------------------------
30, 1996 1995 1994 1993 (1)
----------- --------- --------- -----------
(PRO FORMA)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Line of credit to bank..................... $ 1,000 $ -- $ 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............................... 188 -- -- --
----------- --------- --------- -----------
$ 16,709 $ 15,762 $ 12,412 $ 10,549
----------- --------- --------- -----------
----------- --------- --------- -----------
</TABLE>
- ------------------------
(1) Combines Signal and Goodhue.
39
<PAGE>
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."
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 September 30, 1996 increased $4.1 million or
11.5% to $39.9 million from $35.8 million as of September 30, 1995. This
increase was due primarily to the retention of current period earnings.
Stockholders' equity as of December 31, 1995 increased $9.5 million or 34.3%
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 September 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
SEPTEMBER 30, 1996 ------------------------------
---------------------------- WELL ADEQUATELY
CAPITAL CATEGORY ACTUAL PRO FORMA CAPITALIZED CAPITALIZED
- ------------------------------------------- ----------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Tier 1 risk-based capital.................. 13.4% 7.0% 6.0% 4.0%
Total risk-based capital................... 14.4% 8.2% 10.0% 8.0%
Leverage ratio............................. 8.6% 5.0% 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 September 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.
40
<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 September 30, 1996,
United had outstanding commitments to extend credit amounting to $35 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
September 30, 1996. The table also presents the gap between interest rate
sensitive assets and liabilities as a percentage of total assets as of September
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,
41
<PAGE>
and 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............................................ $ 7,875 $ -- $ -- $ 7,875
Investment securities......................................... 39,760 52,494 11,199 103,453
Loans and leases.............................................. 184,893 68,712 26,608 280,213
----------- ----------- ----------- -----------
Total rate sensitive assets................................. $ 232,528 $ 121,206 $ 37,807 $ 391,541
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Savings, money market and interest-bearing checking........... $ 174,679 $ -- $ -- $ 174,679
Time deposits................................................. 60,872 44,286 1,544 106,702
Short-term borrowings......................................... 23,812 3,744 -- 27,556
Notes payable and other borrowings............................ 7,256 9,453 -- 16,709
----------- ----------- ----------- -----------
Total rate sensitive liabilities............................ $ 266,619 $ 57,483 $ 1,544 $ 325,646
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Rate sensitive gap............................................ $ (34,091) $ 63,723 $ 36,263 $ 65,895
Cumulative rate sensitive gap................................. $ (34,091) $ 29,632 $ 65,895
Rate sensitive gap % to total assets.......................... (7.7)% 14.4% 8.2% 14.9%
Cumulative rate sensitive gap % to total assets............... (7.7)% 6.7% 14.9%
</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 September 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 the Banks' 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 nine months ended September 30, 1996, investment
activities used a net $17 million. Loan originations, net of principal
repayments and purchases of investment securities accounted primarily for this
use. If general interest rates decline, United would expect to experience an
increase in prepayments, particularly in its fixed
42
<PAGE>
rate loans. The increased funds from this 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 nine months ended September 30, 1996, financing activities provided
a net $17 million. Historically, the primary financing activity of United has
been deposits and securities sold under repurchase agreements. Deposits
increased $11.1 million for the nine months ended September 30, 1996 and
securities sold under repurchase agreements increased $4.3 million for the nine
months ended September 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 amortize 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.
43
<PAGE>
BUSINESS
GENERAL
United is a bank holding company with $442 million in assets as of September
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
September 30, 1996. Subject to the receipt of regulatory approvals and the
receipt of proceeds from a loan with Firstar Bank Milwaukee, N.A. and proceeds
from the offering of Preferred Securities occurring concurrently with this
Offering, the Park Acquisition is expected to close in January 1997.
United Capital, a wholly-owned subsidiary of the Company, exists for the
purpose of issuing the Preferred Securities and purchasing the Junior
Subordinated Debentures from the Company, and has no independent operations.
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, organized and chartered as a state
bank in Minnesota in 1887 and subsequently chartered as a national bank in 1904.
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 $94 million since January 1, 1994 to $442 million at September 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. United also believes that community banks
benefit from strong boards of directors consisting of individuals who are also
actively
44
<PAGE>
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.
BANKS
Signal Bank had total assets of $227 million as of September 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 $208 million as of September 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 the Rushford and Lanesboro 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
45
<PAGE>
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 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 intended 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
46
<PAGE>
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.
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
which has made a certain number of SBA loans, and which 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 issue, 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 September 30, 1996,
approximately 59.2% of loans outstanding were in this category, of which 88.0%
were classified as commercial and 12.0% 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 September 30, 1996, these
loans represented approximately 23.6% 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 September 30, 1996,
approximately 13.0% 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
September 30, 1996, approximately 4.2% 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
47
<PAGE>
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."
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 $6.4 million at September 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 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. The Company does not have any pending arrangements,
agreements or understandings regarding acquisitions other than the Park
Acquisition. In assessing acquisitions, United focuses
48
<PAGE>
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 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
49
<PAGE>
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 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 September 30, 1996, United and its subsidiaries employed 224 persons,
184 on a full-time basis and 40 on a part-time basis. Following the Park
Acquisition, United and its subsidiaries will employ approximately 302 persons,
249 on a full-time basis and 53 on a part-time basis.
50
<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.
51
<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. Mr. LeMay is the spouse of Kathleen
M. LeMay, a director of Signal Bank.
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).
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<PAGE>
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 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. Mr. S. Jones and Mr. Pate each serve four
year terms, Mr. Albrecht and Mr. Fritz each serve three year terms, Mr.
Barenbaum and Mr. Broughton each serve two year terms, and Mr. O. Jones and Mr.
Langer each serve one year terms.
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."
53
<PAGE>
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.
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. 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
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<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 $ 31,476 $ 67,104
Galen T. Pate............................................. 5,800 10,200 $ 109,876 $ 184,704
Marcia L. O'Brien......................................... 1,200 2,800 $ 20,984 $ 44,736
John H. LeMay............................................. 720 2,080 $ 11,576 $ 30,624
Donald M. Davies.......................................... 1,200 2,800 $ 20,984 $ 44,736
John C. Dorsey............................................ 900 2,100 $ 15,738 $ 33,552
</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 December 31, 1995 the price
determined by the formula was $93.06. Value is calculated on the basis of
$93.06 minus the option exercise price and multiplying the result by the
number of shares of common stock underlying the option.
55
<PAGE>
RELATED PARTY 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
September 30, 1996 and at December 31, 1995 were $4,158,133 and $5,244,845,
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
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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 (unless otherwise indicated, each named person has
sole voting and investment power):
<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% 1.58%
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
Larry C. Barenbaum (2) 15,507 2.84% 2.61% 2.51%
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% 8.11%
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
</TABLE>
57
<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>
John W. Johnson (5) 67 * * *
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
Ora G. Jones, Jr. (2) 15,509 2.84% 2.61% 2.51%
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
R. Scott Jones (6) 58,860 10.73% 9.88% 9.49%
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
Louis J. Langer (2) 21,379 3.91% 3.60% 3.45%
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% 2.63% 2.53%
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
United ESOP
2600 Eagan Woods Drive, Suite 155 67,948 12.43% 11.44% 10.98%
Eagan, MN 55121 (9)
All executive officers and directors as a group (14 198,138 35.39% 32.64% 31.36%
individuals) (10)
</TABLE>
- ------------------------
* Less than 1.0%.
(1) Assuming that none of such individuals purchases any shares of Common Stock
in this Offering; to the extent such individuals purchase shares of Common
Stock in this 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 13,187 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
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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. The Federal Reserve Board has indicated
that banking organizations should generally pay cash dividends out of current
operating earnings and the current rate of earnings retention should be
consistent with the organization's capital needs, asset quality and overall
financial condition. The 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
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<PAGE>
financial position. The Federal Reserve may, and in certain circumstances must,
prohibit a bank holding company from making any capital distributions without
prior approval of the Federal Reserve Board, if the subsidiary institution is
undercapitalized. The Federal Reserve Board also may impose limitations on the
payment of dividends as a condition to its approval of certain applications,
including applications for approval of mergers or acquisitions.
REGULATORY CAPITAL REQUIREMENTS. The Federal Reserve Board's capital
guidelines establish the following minimum regulatory capital requirements for
bank holding companies: (i) a capital leverage requirements expressed as a
percentage of total assets, (ii) a risk-based requirement expressed as a
percentage of total risk-weighted assets, and (iii) a Tier 1 leverage
requirement expressed as a percentage of total assets. Tier 1 capital consists
of common stockholders' equity, qualifying preferred stock, and minority
interests in the equity accounts of consolidated subsidiaries. On October 21,
1996, the Federal Reserve Board approved the use of certain cumulative preferred
stock instruments in Tier 1 capital as minority interest in the equity accounts
of consolidated subsidiaries. The Federal Reserve Board has approved the
Preferred Securities as Tier 1 capital. The failure of a bank holding company to
meet its risk-weighted capital ratios may result in supervisory action, as well
as an inability to obtain approval of any regulatory applications and,
potentially, increased frequency of examination. The federal bank regulators
have previously indicated a desire to raise minimum capital requirements for
banking organizations and have suggested that revisions to the risk-based
capital requirements should be made. The effect of any future change in the
required capital ratios of the Company cannot be determined at this time.
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 transactional services; and (18) acting as a futures
commission merchant. Recently enacted legislation allows well capitalized bank
holding companies to engage in certain activities without the advance approval
of the Federal Reserve Board. Well capitalized bank holding companies are
required merely to notify the Federal Reserve Board within ten business days of
engaging in such activity. 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, following completion of the Park Acquisition, Park
Bank.
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<PAGE>
The recent enactment of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 ("EGRPRA") streamlines the nonbanking activities
application process for well capitalized and well managed bank holding
companies. See "-- Recent Regulatory Developments." Under EGRPRA, qualified bank
holding companies may commence a regulatory approved nonbanking activity without
prior notice to the Federal Reserve Board; written notice is merely required
within ten business days after commencing the activity. Also, under EGRPRA, the
prior notice period is reduced to 12 business days in the event of any
nonbanking acquisition or share purchase, assuming the size of the acquisition
does not exceed 10% of risk-weighted assets of the acquiring bank holding
company and the consideration does not exceed 15% in Tier 1 capital. This prior
notice requirement also applies to commencing a nonbanking activity de novo
which has been previously approved by order of the Federal Reserve, but not yet
implemented by regulations.
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 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
61
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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. 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
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(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 September
30, 1996, Signal Bank had a Tier 1 risk-based capital ratio of 13.6%, Goodhue
Bank had a Tier 1 risk-based capital ratio of 12.6%, and Park Bank had a Tier 1
risk-based capital ratio of 11.7%.
The Banks also must maintain an allowable leverage ratio. The 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
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 September 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
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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.
On September 30, 1996, EGRPRA was signed into law, which provides for the
recapitalization of SAIF and includes approximately 40 regulatory relief
initiatives. Among other matters, this legislation provides for expedited
application procedures for nonbanking activities by well capitalized and well
managed bank holding companies, provides reforms to the Fair Credit Reporting
Act, and provides other forms of regulatory relief to the financial services
industry.
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DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
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 September 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.
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 September 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 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. Under the
Minnesota Business Corporation Act (the "MBCA"), United may declare and pay
dividends on the Common 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."
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.
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 any preferred
stock then outstanding.
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
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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 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.
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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, following
the Park Acquisition, Park Bank. See "Supervision and Regulation." 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 any class or series of stock having
preferential dividend rights, and to the prior payment of all accrued and unpaid
interest on the Junior Subordinated Debentures. The Indenture provides that the
Company may defer the payment of interest on the Junior Subordinated Debentures
at any time or from time to time for a period not exceeding 20 consecutive
quarters (each, an "Extension Period"), provided that no Extension Period may
extend beyond the stated maturity of the Junior Subordinated Debentures. During
any such Extension Period, the Company may not declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock, subject to certain limited
exceptions. The Company has no current intention of exercising its right to
defer payments of interest by extending the interest payment period on the
Junior Subordinated Debentures. However, should the Company elect to exercise
such right in the future, the Company will be restricted from paying cash
dividends or other distributions on the Company's Common Stock. The Company's
proposed loan agreement with Firstar Bank Milwaukee, N.A. includes covenants
requiring that the Company maintain certain financial ratios which may
indirectly prevent the Company from paying dividends or distributions on, or
making redemptions of, its Common Stock.
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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
United Capital's concurrent offering of Preferred Securities 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.
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.
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DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES AND PREFERRED SECURITIES
United Capital exists for the exclusive purposes of (i) issuing and selling
the Preferred Securities and Common Securities, (ii) using the proceeds from the
sale of Preferred Securities and Common Securities to acquire Junior
Subordinated Debentures issued by the Company and (iii) engaging in only those
other activities necessary, advisable or incidental thereto (such as registering
the transfer of the Preferred Securities). Accordingly, the Junior Subordinated
Debentures will be the sole assets of United Capital, and payments under the
Junior Subordinated Debentures will be the sole revenue of United Capital. All
of the Common Securities will be owned by the Company.
The business of United Capital will be conducted in such a way that United
Capital will not be deemed to be an "investment company" required to be
registered under the Investment Company Act or classified as an association
taxable as a corporation for United States federal income tax purposes and so
that the Junior Subordinated Debentures will be treated as indebtedness of the
Company for United States federal income tax purposes.
JUNIOR SUBORDINATED DEBENTURES
GENERAL. The Junior Subordinated Debentures will bear interest at the
annual rate of % of the principal amount thereof, payable quarterly in
arrears on the last day of March, June, September and December in each year
(each, an "Interest Payment Date") beginning March 31, 1997. The Junior
Subordinated Debentures will be held in trust for the benefit of the holders of
the Preferred Securities. The amount of interest payable for any period will be
computed on the basis of a 360-day year of twelve 30-day months. Accrued
interest that is not paid on the applicable Interest Payment Date will bear
additional interest on the amount thereof (to the extent permitted by law) at
the rate per annum of % thereof, compounded quarterly. The Junior
Subordinated Debentures will mature on January 15, 2027. Such date may be
shortened at any time by the Company to any date not earlier than January 15,
2002, subject to the Company having received prior approval of the Federal
Reserve if then required under applicable capital guidelines or policies of the
Federal Reserve. Such date may also be extended at any time at the election of
the Company but in no event to a date later than January 15, 2046.
OPTION TO EXTEND INTEREST PAYMENT PERIOD. The Company has the right at any
time during the term of the Junior Subordinated Debentures to defer the payment
of interest at any time or from time to time for a period not exceeding 20
consecutive quarters (each such period an "Extension Period"), provided that no
Extension Period may extend beyond the stated maturity of the Junior
Subordinated Debentures. At the end of such Extension Period, the Company must
pay all interest then accrued and unpaid (together with interest thereon at the
annual rate of %, compounded quarterly, to the extent permitted by applicable
law). During an Extension Period, interest will continue to accrue. During any
such Extension Period, the Company may not (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock or (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of the Company (including other Junior Subordinated Debentures)
that rank pari passu with or junior in interest to the Junior Subordinated
Debentures or make any guaranty payments with respect to any guaranty by the
Company of the debt securities of any subsidiary of the Company if such guaranty
ranks pari passu or junior in interest to the Junior Subordinated Debentures
(other than (a) dividends or distributions in Common Stock, (b) any declaration
of a dividend in connection with the implementation of a shareholders' rights
plan, or the issuance of stock under any such plan in the future or the
redemption or repurchase of any such rights pursuant thereto, (c) payments under
the guaranty with respect to the Preferred Securities, and (d) purchases of
Common Stock related to rights under any of the Company's benefit plans for its
directors, officers or employees). Prior to the termination of any such
Extension Period, the Company may further extend the interest payment period,
provided that no Extension Period may exceed 20 consecutive quarters or extend
beyond the stated maturity of the Junior Subordinated Debentures. Upon the
termination of any such Extension Period and the payment of all amounts then due
on any Interest Payment Date, the Company
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may elect to begin a new Extension Period subject to the above requirements. No
interest shall be due and payable during an Extension Period, except at the end
thereof. The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures.
REDEMPTIONS. The Company will have the right to redeem the Junior
Subordinated Debentures on or after January 15, 2002, in whole at any time or in
part from time to time at a redemption price equal to the accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed for
redemption, plus 100% of the principal amount thereof, subject to receipt of
prior approval by the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. If a Tax Event or an Investment
Company Event shall occur and be continuing, the Company will have the right to
redeem the Junior Subordinated Debentures in whole (but not in part) and thereby
cause a mandatory redemption of the Preferred Securities and Common Securities
in whole (but not in part) at the redemption price within 90 days following the
occurrence of such Tax Event or Investment Company Event. In the event a Tax
Event or an Investment Company Event has occurred and is continuing and the
Company does not elect to redeem the Junior Subordinated Debentures and thereby
cause a mandatory redemption of the Preferred Securities and Common Securities
or to liquidate United Capital and cause the Junior Subordinated Debentures to
be distributed to holders of the Preferred Securities and Common Securities in
liquidation of United Capital as described below, such Preferred Securities and
Common Securities will remain outstanding and Additional Sums (as defined below)
may be payable on the Junior Subordinated Debentures.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES. Subject to the Company
having received prior approval of the Federal Reserve if so required under
applicable capital guidelines or policies of the Federal Reserve, the Company
will have the right at any time to liquidate United Capital and, after
satisfaction of the liabilities of creditors of United Capital as provided by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of Preferred Securities and Common Securities in liquidation of
United Capital.
RESTRICTIONS ON CERTAIN PAYMENTS. If at any time (i) there shall have
occurred any event of which the Company has actual knowledge that (a) with the
giving of notice or the lapse of time, or both, would constitute an Event of
Default under the Indenture and (b) in respect of which the Company shall not
have taken reasonable steps to cure, or (ii) the Company shall have given notice
of its election of an Extension Period as provided in the Indenture with respect
to the Junior Subordinated Debentures and shall not have rescinded such notice,
or such Extension Period, or any extension thereof, shall be continuing, or
(iii) while the Junior Subordinated Debentures are held by United Capital, the
Company shall be in default with respect to its payment of any obligation under
the related Guaranty, then the Company will not (1) declare or pay any dividends
or distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock or (2) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of the Company (including other Junior Subordinated Debt) that
rank pari passu with or junior in interest to the Junior Subordinated Debentures
or make any guaranty payments with respect to any guaranty by the Company of the
debt securities of any subsidiary of the Company if such guaranty ranks pari
passu or junior in interest to the Junior Subordinated Debentures (other than
(a) dividends or distributions in Common Stock, (b) any declaration of a
dividend in connection with the implementation of a shareholders' rights plan,
or the issuance of stock under any such plan in the future or the redemption or
repurchase of any such rights pursuant thereto, (c) payments under the related
Guaranty and (d) purchases of Common Stock related to rights under any of the
Company's benefit plans for its directors, officers or employees).
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EVENTS OF DEFAULT. The Indenture provides that any one or more of the
following described events with respect to the Junior Subordinated Debentures
that has occurred and is continuing constitutes an "Event of Default" with
respect to the Junior Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Junior Subordinated
Debentures, when due (subject to the deferral of any due date in the case of
an Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated Debentures
when due whether at maturity, upon redemption by declaration or otherwise;
or
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice to the
Company from the Indenture trustee or to the Company and the Indenture
trustee by the holders of at least 25% in aggregate outstanding principal
amount of the Junior Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.
The Indenture trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures may declare
the principal due and payable immediately upon an Event of Default. In addition,
in case an Event of Default shall occur and be continuing as to the Junior
Subordinated Debentures, the property trustee will have the right to declare the
principal of and the interest on such Junior Subordinated Debentures, and any
other amounts payable under the Indenture, to be forthwith due and payable and
to enforce its other rights as a creditor with respect to such Junior
Subordinated Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES. If an
Event of Default has occurred and is continuing and such event is attributable
to the failure of the Company to pay interest or principal on the Junior
Subordinated Debentures on the date such interest or principal is otherwise
payable, a holder of Preferred Securities may institute a legal proceeding
directly against the Company for enforcement of payment to such holder of the
principal of or interest on such Junior Subordinated Debentures having a
principal amount equal to the aggregate liquidation amount of the Preferred
Securities of such holder ("Direct Action"). The Company may not amend the
Indenture to remove the foregoing right to bring a Direct Action without the
prior written consent of the holders of all of the Preferred Securities. If the
right to bring a Direct Action is removed, United Capital may become subject to
the reporting obligations under the Securities Exchange Act of 1934, as amended.
The Company shall have the right under the Indenture to set-off any payment made
to such holder of Preferred Securities by the Company in connection with a
Direct Action.
ADDITIONAL SUMS. If United Capital is required to pay any additional taxes,
duties or other governmental charges as a result of a Tax Event, the Company
will pay as additional amounts on the Junior Subordinated Debentures such
amounts as shall be required so that the distributions payable by United Capital
shall not be reduced as a result of any such additional taxes, duties or other
governmental charges.
PREFERRED SECURITIES
GENERAL. The Preferred Securities will represent preferred beneficial
interests in United Capital and the holders thereof will be entitled to a
preference in certain circumstances with respect to distributions and amounts
payable on redemption or liquidation over the Common Securities of United
Capital, as well as other benefits as described in the Trust Agreement. Legal
title to the Junior Subordinated Debentures will be held by the property trustee
in trust for the benefit of the holders of the Preferred Securities and Common
Securities.
PAYMENT OF DISTRIBUTIONS. Distributions on each Preferred Security will be
payable at the annual rate of % of the stated liquidation amount of $25,
payable quarterly in arrears on the last day of March, June, September and
December in each year, to the holders of the Preferred Securities on the
relevant record dates (each date on which distributions are payable in
accordance with the foregoing, a "Distribution
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Date"). The amount of distributions payable for any period will be computed on
the basis of a 360-day year of twelve 30-day months. The funds of United Capital
available for distribution to holders of its Preferred Securities will be
limited to payments under the Junior Subordinated Debentures in which United
Capital will invest the proceeds from the issuance and sale of its Preferred
Securities. If the Company does not make interest payments on the Junior
Subordinated Debentures, the property trustee will not have funds available to
pay distributions on the Preferred Securities. The payment of distributions (if
and to the extent United Capital has funds legally available for the payment of
such distributions and cash sufficient to make such payments) is guaranteed by
the Company.
LIQUIDATION DISTRIBUTION UPON TERMINATION. The Company will have the right
at any time to terminate United Capital and cause the Junior Subordinated
Debentures to be distributed to the holders of the Preferred Securities. Such
right is subject to the Company having received prior approval of the Federal
Reserve if then required under applicable capital guidelines or policies of the
Federal Reserve.
In addition, pursuant to its Trust Agreement, United Capital shall
automatically terminate upon expiration of its term and shall earlier terminate
on the first to occur of: (i) certain events of bankruptcy, dissolution or
liquidation of the Company; (ii) delivery by the Company of written direction to
the property trustee to terminate United Capital (which direction is optional
and wholly within the discretion of the Company); (iii) redemption of all of the
Preferred Securities; and (iv) the entry of an order for the dissolution of
United Capital by a court of competent jurisdiction.
If an early termination occurs as described in clause (i), (ii) or (iv)
above, United Capital shall be liquidated, after satisfaction of liabilities to
creditors of United Capital as provided by applicable law, to the holders of
such trust securities a like amount of the Junior Subordinated Debentures,
unless such distribution is determined by the property trustee not to be
practical, in which event such holders will be entitled to receive out of the
assets of United Capital available for distribution to holders, after
satisfaction of liabilities to creditors of United Capital as provided by
applicable law, an amount equal to, in the case of holders of Preferred
Securities, the aggregate of the liquidation amount plus accrued and unpaid
distributions thereon to the date of payment. If the Company elects to liquidate
United Capital and thereby causes the Junior Subordinated Debentures to be
distributed to holders of the Preferred Securities in liquidation of United
Capital, the Company shall continue to have the right to shorten or extend the
maturity of such Junior Subordinated Debentures, subject to certain conditions.
73
<PAGE>
GUARANTY
A Preferred Securities Guaranty Agreement (the "Guaranty") will be executed
and delivered by the Company concurrently with the issuance of the Preferred
Securities for the benefit of the holders of the Preferred Securities. A
guaranty trustee will hold the Guaranty for the benefit of the holders of the
Preferred Securities.
GENERAL. The Guaranty will be an irrevocable guaranty on a subordinated
basis of United Capital's obligations under the Preferred Securities, but will
apply only to the extent that United Capital has funds sufficient to make such
payments, and is not a guaranty of collection. The Company will irrevocably
agree to pay in full on a subordinated basis, to the extent set forth herein,
the Guaranty Payments (as defined below) to the holders of the Preferred
Securities, as and when due, regardless of any defense, right of set-off or
counterclaim that United Capital may have or assert other than the defense of
payment. The following payments with respect to the Preferred Securities, to the
extent not paid by or on behalf of United Capital (the "Guaranty Payments"),
will be subject to the Guaranty: (i) any accumulated and unpaid distributions
required to be paid on the Preferred Securities, to the extent that United
Capital has funds on hand available therefor at such time, (ii) the redemption
price with respect to any Preferred Securities called for redemption to the
extent that United Capital has funds on hand available therefor at such time,
and (iii) upon a voluntary or involuntary dissolution, winding up or liquidation
of United Capital (unless the Junior Subordinated Debentures are distributed to
holders of the Preferred Securities), the lesser of (a) the liquidation
distribution and (b) the amount of assets of United Capital remaining available
for distribution to holders of Preferred Securities. The Company's obligation to
make a Guaranty Payment may be satisfied by direct payment of the required
amounts by the Company to the holders of the Preferred Securities or by causing
United Capital to pay such amounts to such holders.
STATUS OF THE GUARANTY. The Guaranty will constitute an unsecured
obligation of the Company and will rank subordinate and junior in right of
payment to all senior indebtedness of the Company in the same manner as the
Junior Subordinated Debentures. The Guaranty will constitute a guaranty of
payment and not of collection. For example, the guaranteed party may institute a
legal proceeding directly against the Company to enforce its rights under the
Guaranty without first instituting a legal proceeding against any other person
or entity. The Guaranty will be held for the benefit of the holders of the
Preferred Securities.
EVENTS OF DEFAULT. An event of default under the Guaranty will occur upon
the failure of the Company to perform any of its payment or other obligations
thereunder. Any holder of Preferred Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guaranty without
first instituting a legal proceeding against United Capital, the guaranty
trustee or any other person or entity.
TERMINATION OF THE GUARANTY. The Guaranty will terminate and be of no
further force and effect upon full payment of the redemption price of the
Preferred Securities, upon full payment of the amounts payable upon liquidation
of United Capital or upon distribution of the Junior Subordinated Debentures to
the holders of the Preferred Securities. The Guaranty will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of the Preferred Securities must restore payment of any sums paid under such
Preferred Securities or the Guaranty.
THE EXPENSE AGREEMENT
Pursuant to the Expense Agreement entered into by the Company in connection
with United Capital's Trust Agreement (the "Expense Agreement"), the Company
will irrevocably and unconditionally guaranty to each person or entity to whom
United Capital becomes indebted or liable, the full payment of any costs,
expenses or liabilities of United Capital, other than obligations of United
Capital to pay to the holders of the Preferred Securities or other similar
interests in United Capital of the amounts due such holders pursuant to the
terms of the Preferred Securities or such other similar interests, as the case
may be.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES AND THE GUARANTY
74
<PAGE>
FULL AND UNCONDITIONAL GUARANTY. Payments of distributions and other
amounts due on the Preferred Securities (to the extent United Capital has funds
available for the payment of such distributions) are irrevocably guaranteed by
the Company as and to the extent set forth above. Taken together, the Company's
obligations under the Junior Subordinated Debentures, and the related Indenture,
the related Trust Agreement, the Expense Agreement, and the Guaranty provide, in
the aggregate, a full, irrevocable and unconditional guaranty of payment of
distributions and other amounts due on the Preferred Securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such guaranty. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guaranty of United Capital's obligations under the Preferred
Securities. If and to the extent that the Company does not make payments on the
Junior Subordinated Debentures, United Capital will not pay distributions or
other amounts due on the Preferred Securities. The Guaranty does not cover
payment of distributions when United Capital does not have sufficient funds to
pay such Distributions. In such event, the remedy of a holder of Preferred
Securities is to institute a legal proceeding directly against the Company for
enforcement of payment of such distributions to such holder.
SUFFICIENCY OF PAYMENTS. As long as payments of interest and other payments
are made when due on the Junior Subordinated Debentures, such payments will be
sufficient to cover distributions and other payments due on the Preferred
Securities, primarily because (i) the aggregate principal amount of the Junior
Subordinated Debentures will be equal to the sum of the aggregate stated
liquidation amount of the Preferred Securities and Common Securities; (ii) the
interest rate and interest and other payment dates on the Junior Subordinated
Debentures will match the distribution rate and distribution and other payment
dates for the Preferred Securities; (iii) the Company shall pay for all and any
costs, expenses and liabilities of United Capital except United Capital's
obligations to holders of the Preferred Securities; and (iv) the Trust Agreement
further provides that United Capital will not engage in any activity that is not
consistent with the limited purposes of United Capital.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES. A holder of any
Preferred Security may institute a legal proceeding directly against the Company
to enforce its rights under the Guaranty without first instituting a legal
proceeding against the Guaranty Trustee, United Capital or any other person or
entity.
75
<PAGE>
THE OFFERING
GENERAL
United is offering a minimum of 47,160 shares and a maximum of 72,000 shares
of its Common Stock, $0.01 par value (the "Shares"), at a price of $106.00 per
Share. See "Description of the Company's Capital Stock -- 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 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.
76
<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 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.
Following the merger of Signal and Goodhue on January 1, 1994, the Company
elected to retain an accounting firm not previously engaged by either Signal or
Goodhue. Accordingly, on July 19, 1994, the accounting firm of Leininger &
Leininger, Ltd. was dismissed as United's principal accountant. Leininger &
Leininger, Ltd.'s report on the consolidated financial statements of United as
of and for the year ended December 31, 1993 did not contain an adverse opinion
or a disclaimer of opinion, nor was it qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to change accountants was
recommended by the Audit Committee of the Board of Directors and approved by the
Board of Directors on October 25, 1994.
There have been no disagreements with Leininger & Leininger, Ltd. on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope of procedure. There have been no reportable events.
The accounting firm of McGladrey & Pullen, LLP was engaged on October 25,
1994. McGladrey & Pullen was not consulted regarding any matter prior to being
engaged.
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).
77
<PAGE>
INDEX TO FINANCIAL INFORMATION
UNITED COMMUNITY BANCSHARES, INC.
Independent Auditor's Reports............................................. F-2
Consolidated Balance Sheets as of September 30, 1996 (unaudited) and
December 31, 1995 and 1994............................................... F-4
Consolidated Statements of Income for the Nine Months Ended September 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 Nine Months Ended
September 30, 1996 (unaudited) and for the Years Ended December 31, 1995,
1994 and 1993............................................................ F-6
Consolidated Statements of Cash Flows for the Nine Months Ended September
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
PARK FINANCIAL CORPORATION
Independent Auditor's Report.............................................. F-33
Consolidated Balance Sheets as of September 30, 1996 (unaudited) and
December 31, 1995 and 1994............................................... F-34
Consolidated Statements of Income for the Nine Months Ended September 30,
1996 and 1995 (unaudited) and for the Years Ended December 31, 1995, 1994
and 1993................................................................. F-35
Consolidated Statements of Stockholders' Equity for the Nine Months Ended
September 30, 1996 (unaudited) and for the Years Ended December 31, 1995,
1994 and 1993............................................................ F-36
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 1996 and 1995 (unaudited) and for the Years Ended December 31, 1995,
1994 and 1993............................................................ F-37
Notes to Consolidated Financial Statements................................ F-38
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Consolidated Financial Statements of United and PFC... F-51
Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1996... F-52
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended
December 31, 1995........................................................ F-53
Unaudited Pro Forma Consolidated Statement of Income for the Nine Months
Ended September 30, 1996................................................. F-54
Unaudited Pro Forma Consolidated Statement of Income for the Nine Months
Ended September 30, 1995................................................. F-55
Note to the Unaudited Pro Forma Consolidated Financial Statements......... F-56
Unaudited Pro Forma Consolidated Financial Statements of United and
Goodhue.................................................................. F-58
Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 1993.... F-59
Unaudited Pro Forma Consolidated Statement of Income for the Year Ended
December 31, 1993........................................................ F-60
Note to the Unaudited Pro Forma Consolidated Financial Statements......... F-61
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
SEPTEMBER 30, -------------------------------
1996 1995 1994
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks............................ $ 24,001,941 $ 20,513,154 $ 19,351,643
Federal funds sold................................. 7,875,000 8,725,000 7,975,000
-------------- -------------- --------------
Investment securities available for sale........... 103,453,335 101,836,962 70,278,070
Investment securities held to maturity............. -- -- 13,156,388
-------------- -------------- --------------
Total investment securities.................... 103,453,335 101,836,962 83,434,458
-------------- -------------- --------------
Loans and leases................................... 280,212,723 265,904,636 246,981,259
Allowance for loan and lease losses................ (2,867,523) (2,899,165) (2,856,288)
-------------- -------------- --------------
Net loans and leases........................... 277,345,200 263,005,471 244,124,971
-------------- -------------- --------------
Property and equipment, net........................ 10,887,181 10,654,578 10,991,515
Accrued interest receivable........................ 3,431,399 3,180,346 2,742,358
Cash surrender value of life insurance............. 9,421,321 9,116,888 8,485,485
Intangible assets, net............................. 3,684,285 4,188,801 4,861,489
Other assets....................................... 1,750,314 619,375 2,016,584
-------------- -------------- --------------
Total assets................................... $ 441,849,976 $ 421,840,575 $ 383,983,503
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits......................................... $ 351,825,044 $ 340,723,249 $ 312,946,989
Securities sold under repurchase agreements...... 27,556,398 23,173,292 27,746,565
Accrued expenses and other liabilities........... 5,880,339 5,213,321 3,352,717
Notes payable and other borrowings............... 16,708,565 15,762,119 12,412,281
-------------- -------------- --------------
Total liabilities.............................. 401,970,346 384,871,981 356,458,552
-------------- -------------- --------------
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................................ 18,917,959 15,513,033 11,884,002
Unrealized gain (loss) on securities available
for sale........................................ (59,397) 612,546 (1,652,626)
-------------- -------------- --------------
Total stockholders' equity..................... 39,879,630 36,968,594 27,524,951
-------------- -------------- --------------
Total liabilities and stockholders' equity..... $ 441,849,976 $ 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>
NINE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31
----------------------------- ---------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans and leases................................ $ 20,061,287 $ 18,522,558 $ 25,089,584 $ 21,004,079 $ 9,069,781
Investment securities -- taxable................ 4,194,890 3,554,566 4,949,453 3,843,603 2,098,870
Investment securities -- tax exempt............. 354,488 309,161 405,726 343,892 139,757
Federal funds sold.............................. 389,775 532,775 760,820 324,871 115,164
------------- ------------- ------------- ------------- -------------
Total interest income......................... 25,000,440 22,919,060 31,205,583 25,516,445 11,423,572
------------- ------------- ------------- ------------- -------------
INTEREST EXPENSE:
Deposits........................................ 8,721,275 7,626,718 10,438,601 7,529,696 3,367,221
Federal funds purchased and securities sold
under repurchase agreements.................... 956,487 1,057,758 1,453,699 841,693 106,567
Notes payable and other borrowings.............. 767,214 712,785 955,752 788,064 197,037
------------- ------------- ------------- ------------- -------------
Total interest expense........................ 10,444,976 9,397,261 12,848,052 9,159,453 3,670,825
------------- ------------- ------------- ------------- -------------
Net interest income........................... 14,555,464 13,521,799 18,357,531 16,356,992 7,752,747
PROVISION FOR LOAN AND LEASE LOSSES............... 145,823 41,215 60,999 234,454 300,000
------------- ------------- ------------- ------------- -------------
Net interest income after provision for loan
and lease losses............................. 14,409,641 13,480,584 18,296,532 16,122,538 7,452,747
------------- ------------- ------------- ------------- -------------
NONINTEREST INCOME:
Service charges and other fees.................. 2,442,366 2,135,645 2,922,664 2,962,662 1,770,532
Net investment securities gains (losses)........ -- (22,869) (32,329) 79,351 75,194
Other........................................... 1,005,623 773,744 1,028,650 795,321 302,721
------------- ------------- ------------- ------------- -------------
Total noninterest income...................... 3,447,989 2,886,520 3,918,985 3,837,334 2,148,447
------------- ------------- ------------- ------------- -------------
NONINTEREST EXPENSE:
Salaries and employee benefits.................. 7,323,248 6,865,658 9,291,893 8,510,365 3,687,963
Occupancy....................................... 645,535 743,539 1,208,300 1,060,089 436,175
Depreciation.................................... 1,141,406 911,640 1,252,682 1,215,848 490,090
Amortization of intangibles..................... 576,460 617,700 824,140 561,882 83,196
FDIC assessment................................. 3,500 320,157 350,856 643,845 352,542
Other........................................... 3,084,568 2,688,716 3,603,063 4,139,114 2,366,160
------------- ------------- ------------- ------------- -------------
Total noninterest expense..................... 12,774,717 12,147,410 16,530,934 16,131,143 7,416,126
------------- ------------- ------------- ------------- -------------
Income before income taxes and cumulative
effect of change in accounting principle..... 5,082,913 4,219,694 5,684,583 3,828,729 2,185,068
INCOME TAX EXPENSE................................ 1,677,987 1,249,086 2,055,552 1,395,772 725,224
------------- ------------- ------------- ------------- -------------
Income before cumulative effect of change in
accounting principle......................... 3,404,926 2,970,608 3,629,031 2,432,957 1,459,844
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE........................................ -- -- -- -- 106,168
------------- ------------- ------------- ------------- -------------
Net income.................................... $ 3,404,926 $ 2,970,608 $ 3,629,031 $ 2,432,957 $ 1,566,012
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
AVERAGE SHARES OUTSTANDING........................ 549,079 510,770 520,306 504,686 305,513
------------- ------------- ------------- ------------- -------------
EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE................... $ 6.20 $ 5.82 $ 6.97 $ 4.82 $ 4.78
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE........................................ -- -- -- -- 0.35
------------- ------------- ------------- ------------- -------------
Earnings per share after cumulative effect of
change in accounting principle............... $ 6.20 $ 5.82 $ 6.97 $ 4.82 $ 5.13
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
DIVIDENDS PER SHARE............................... $ -- $ -- $ -- $ -- $ 0.46
</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 Nine Months Ended September
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).............. -- -- -- 3,404,926 -- 3,404,926
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)........................ -- -- -- -- (671,943) (671,943)
Tax effect of stock options
exercised (unaudited).............. -- -- 1,269 -- -- 1,269
--------- ---------- ------------- ------------- ------------- -------------
BALANCE, SEPTEMBER 30, 1996
(UNAUDITED).......................... 546,686 $ 5,466 $ 21,015,602 $ 18,917,959 $ (59,397) $ 39,879,630
--------- ---------- ------------- ------------- ------------- -------------
--------- ---------- ------------- ------------- ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31
----------------------- -------------------------------------
1996 1995 1995 1994 1993
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................. $3,404,926 $ 2,970,608 $ 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................................... -- 22,869 32,329 (79,351) (75,194)
Net amortization and accretion of bond
premiums and discounts................... (168,125) (197,926) (310,582) 222,538 101,403
Provision for loan and lease losses....... 145,823 41,215 60,999 234,454 300,000
Depreciation.............................. 1,141,406 911,640 1,252,682 1,215,848 490,090
Amortization of intangibles............... 576,460 617,700 824,140 561,882 83,196
Earnings on cash surrender value of life
insurance................................ (297,168) (291,086) (377,103) (462,453) (249,871)
Net (gain) on sale of loans............... (326,651) (366,401) (485,626) (195,048) --
Net (gain) loss on sale of other real
estate................................... (49,657) (53,934) (63,247) (67,674) 9,951
Net (gain) loss on sale of property and
equipment................................ 25,424 (41,532) (49,923) (70,718) --
Provision for deferred income taxes....... (272,000) 18,713 24,950 (232,134) (97,572)
Other, net................................ 57,486 1,126,722 912,636 (244,419) 885,553
---------- ----------- ----------- ----------- -----------
Net cash flows from operating
activities............................. 4,237,924 4,758,588 5,450,286 3,315,882 2,907,400
---------- ----------- ----------- ----------- -----------
CASH FLOWS USED FOR INVESTING ACTIVITIES
Net (increase) decrease in federal funds
sold....................................... 850,000 650,000 (750,000) (2,525,000) (500,000)
Net cash flows (used for) from investment
securities................................. (2,579,317) (12,613,185) (14,396,539) (3,859,963) 1,315,307
Net increase in loans and leases............ (14,253,158) (12,946,229) (18,513,417) (26,999,676) (20,366,731)
Purchases of property and equipment......... (1,463,038) (858,912) (1,028,111) (2,350,262) (402,918)
Proceeds from sales of property and
equipment.................................. 29,900 75,791 117,349 409,934 --
Proceeds from sales of other real estate
owned...................................... 49,657 202,847 327,160 1,116,100 263,801
Purchase of cash surrender value of life
insurance.................................. (7,265) -- (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............................. (17,373,221) (25,489,688) (34,497,858) (38,898,176) (19,690,541)
---------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits.................... 11,116,159 12,158,121 27,879,916 21,791,336 7,071,058
Net increase (decrease) in securities sold
under repurchase agreements................ 4,383,106 219,402 (4,573,273) 12,421,478 6,766,347
Proceeds from notes payable and other
borrowings................................. 1,948,035 9,003,000 9,003,000 9,532,420 3,242,000
Payments made on notes payable and other
borrowings................................. (1,000,000) (4,600,000) (5,650,000) (1,084,420) (1,211,721)
Net proceeds from issuance of common
stock...................................... 176,784 3,629,604 3,549,440 4,182,272 341,870
Dividends paid.............................. -- -- -- -- (141,138)
---------- ----------- ----------- ----------- -----------
Net cash flows from financing
activities............................. 16,624,084 20,410,127 30,209,083 46,843,086 16,068,416
---------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 3,488,787 (320,973) 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...................................... $24,001,941 $19,030,670 $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 September 30, 1996,
and for the nine-month periods ended September 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.................................. 505,084
--------------
Earnings per share before cumulative effect of change in
accounting principle....................................... $ 4.17
Cumulative effect of change in accounting principle......... 0.36
--------------
Earnings per share after cumulative effect of change in
accounting principle....................................... $ 4.53
--------------
--------------
</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 September 30, 1996 and December 31,
1995 and 1994, were approximately $2,719,000 (unaudited), $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>
SEPTEMBER 30, 1996
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
U.S. Treasury securities............................... $ 23,547,218 $ 58,022 $ (70,162) $ 23,535,078
U.S. government corporations and agencies.............. 33,869,354 168,331 (257,422) 33,780,263
Obligations of states and political subdivisions....... 12,469,183 226,734 (29,405) 12,666,512
Mortgage-backed securities............................. 31,592,077 97,958 (293,303) 31,396,732
Corporate equity securities............................ 2,074,750 -- -- 2,074,750
-------------- ----------- ----------- --------------
$ 103,552,582 $ 551,045 $ (650,292) $ 103,453,335
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
</TABLE>
<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>
F-15
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INVESTMENT SECURITIES AVAILABLE FOR SALE (CONTINUED)
CONTRACTUAL MATURITIES:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------ ------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Due in one year or less............... $21,515,838 $21,459,774 $20,366,550 $20,328,311
Due after one year through five
years................................ 35,048,068 35,430,715 41,660,447 42,362,872
Due after five years through ten
years................................ 9,965,877 9,899,283 3,856,410 4,049,502
Due after ten years................... 3,355,972 3,192,081 1,102,684 1,151,041
----------- ----------- ----------- -----------
69,885,755 69,981,853 66,986,091 67,891,726
Mortgage-backed securities............ 31,592,077 31,396,732 31,836,062 31,956,586
Corporate equity securities........... 2,074,750 2,074,750 1,988,650 1,988,650
----------- ----------- ----------- -----------
$103,552,582 $103,453,335 $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>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross gains................................. $ -- $ 40,963 $ 40,980 $ 88,146 $ 75,194
Gross losses................................ -- (63,832) (73,309) (8,795) --
--------- --------- --------- --------- ---------
$ -- $ (22,869) $ (32,329) $ 79,351 $ 75,194
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
PLEDGED SECURITIES:
Investment securities available for sale with a carrying value of
$61,344,309 (unaudited), $74,161,604 and $56,422,299 at September 30, 1996 and
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>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31
SEPTEMBER 30, ----------------------------------
1996 1995 1994 1993
--------------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning..................... $ 612,546 $(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
period, net......................... (1,125,406) 3,792,056 (2,970,444) --
Deferred tax effect related to
unrealized gain (loss).............. 453,463 (1,526,884) 1,196,051 --
--------------- ---------- ---------- ----------
Balance, ending........................ $ (59,397) $ 612,546 $(1,652,626) $ --
--------------- ---------- ---------- ----------
--------------- ---------- ---------- ----------
</TABLE>
F-16
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-17
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. LOANS AND LEASES
COMPOSITION OF LOANS AND LEASES:
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER 31
30, ------------------------
1996 1995 1994
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Commercial......................................... $73,684,777 $70,543,465 $70,360,974
Commercial real estate............................. 71,436,790 62,730,992 58,782,276
Agricultural....................................... 11,590,971 10,582,438 11,025,108
Agricultural real estate........................... 9,300,890 6,002,566 3,058,571
----------- ----------- -----------
Total commercial and agricultural.................. 166,013,428 149,859,461 143,226,929
Residential real estate............................ 66,138,736 69,576,597 58,828,211
Consumer........................................... 36,292,399 35,896,609 35,654,852
Leases............................................. 13,453,970 12,119,437 10,737,398
Less unearned income............................... (1,685,810) (1,547,468) (1,466,131)
----------- ----------- -----------
280,212,723 265,904,636 246,981,259
Less allowance for loan and lease losses........... (2,867,523) (2,899,165) (2,856,288)
----------- ----------- -----------
Net loans and leases............................... $277,345,200 $263,005,471 $244,124,971
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
ALLOWANCE FOR LOAN AND LEASE LOSSES:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 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..................... 145,823 41,215 60,999 234,454 300,000
Loans charged off............... (569,684) (239,241) (337,079) (447,987) (475,424)
Recoveries...................... 392,219 252,218 318,957 345,020 240,920
Allowance for loan losses
acquired....................... -- -- -- 1,223,931 --
--------- --------- --------- --------- ---------
Balance, ending................... $2,867,523 $2,910,480 $2,899,165 $2,856,288 $1,500,870
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
IMPAIRED LOANS:
The Company had no impaired loans at September 30, 1996 (unaudited) and
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-18
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31
SEPTEMBER 30, ------------------------
1996 1995 1994
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land......................................... $ 1,474,391 $ 1,474,391 $ 1,474,391
Buildings and improvements................... 8,833,665 8,080,458 8,065,593
Equipment.................................... 9,511,313 8,924,949 8,563,263
Leasehold improvements....................... 1,433,718 1,458,058 1,407,587
------------- ----------- -----------
21,253,087 19,937,856 19,510,834
Less accumulated depreciation and
amortization................................ 10,365,906 9,283,278 8,519,319
------------- ----------- -----------
Property and equipment, net.................. $ 10,887,181 $10,654,578 $10,991,515
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
NOTE 9. DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31
SEPTEMBER 30, ------------------------
1996 1995 1994
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Noninterest-bearing demand deposits.......... $ 70,443,833 $70,871,849 $69,261,369
NOW and money market accounts................ 144,968,933 114,066,189 82,607,658
Savings deposits............................. 29,709,643 47,735,468 42,955,654
Time certificates, $100,000 or more.......... 13,487,127 14,090,029 17,801,590
Other time deposits.......................... 93,215,508 93,959,714 100,320,718
------------- ----------- -----------
Total........................................ $ 351,825,044 $340,723,249 $312,946,989
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
NOTE 10. NOTES PAYABLE AND OTHER BORROWINGS
NOTES PAYABLE:
<TABLE>
<CAPTION>
DECEMBER 31
SEPTEMBER 30, ------------------------
1996 1995 1994
------------- ----------- -----------
(UNAUDITED)
<S> <C> <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....... $ 3,150,000 $ 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 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....................................... 370,530 362,119 362,281
Unsecured note payable to Minnesota
Department of Agriculture,
noninterest-bearing, due November 30,
2015........................................ 188,035 -- --
------------- ----------- -----------
Total........................................ $ 15,708,565 $15,762,119 $11,912,281
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
F-19
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. NOTES PAYABLE AND OTHER BORROWINGS (CONTINUED)
The term note payable to a bank includes certain covenants including
maintenance of certain ratios, including capital to assets and average return on
assets.
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 $2,000,000. The
agreement has an expiration date of April 3, 1997. The line of credit has a
balance of $1,000,000 (unaudited) as of September 30, 1996 and 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.
F-20
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
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>
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
SEPTEMBER 30, ------------------------
1996 1995 1994
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Commitments to extend credit................. $ 35,038,000 $21,224,000 $20,860,000
Standby letters of credit.................... 2,860,000 2,976,000 2,468,000
------------- ----------- -----------
$ 37,898,000 $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
F-21
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
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 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 September 30,
1996 (unaudited) and 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
SEPTEMBER 30, ------------------------
1996 1995 1994
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notional amount outstanding at beginning of
period:..................................... $ 4,480,000 $ 7,000,000 $ --
Additions.................................. -- 1,480,000 7,000,000
Terminations............................... -- (4,000,000) --
------------- ----------- -----------
Notional amount outstanding at end of
period...................................... $ 4,480,000 $ 4,480,000 $ 7,000,000
------------- ----------- -----------
------------- ----------- -----------
Unrealized gain (loss)....................... $ 56,239 $ (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 September 30, 1996 (unaudited) and December 31, 1995.
F-22
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
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.
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.
F-23
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14. STOCK OPTION PLAN (CONTINUED)
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
-----------
-----------
Options granted (unaudited)..................... 22,134 94.20
Options exercised (unaudited)................... (160) 73.46
----------- ----------------
September 30, 1996 (unaudited).................... 69,367 14,787 $ 73.46 - 94.20
----------- ----------- ----------------
----------- ----------- ----------------
</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 September 30,
1996 and December 31, 1995, was $105.62 (unaudited) and $93.06, respectively.
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>
F-24
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
NOTE 18. ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
YEAR ENDED DECEMBER 31
------------------------------ ----------------------------------------------
1996 1995 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET CASH FLOWS USED FOR
INVESTMENT SECURITIES:
Available-for-sale securities:
Maturities.................. $ 27,070,132 $ 18,199,599 $ 47,854,796 $ 13,974,815 $ --
Sales....................... -- 7,666,148 7,666,148 7,985,749 --
Purchases................... (29,649,449) (39,494,763) (70,933,314) (24,072,986) --
Held-to-maturity securities:
Maturities.................. -- 1,232,302 1,232,302 3,484,667 --
Purchases................... -- (216,471) (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.......... $ (2,579,317) $ (12,613,185) $ (14,396,539) $ (3,859,963) $ 1,315,307
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
F-25
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. ADDITIONAL CASH FLOW INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30 YEAR ENDED DECEMBER 31
--------------------------- --------------------------------------------
1996 1995 1995 1994 1993
------------- ------------ ------------- --------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash payments for interest......... $ 10,461,677 $ 8,840,436 $ 12,260,709 $ 8,753,626 $ 3,765,777
Cash payments for income taxes..... 2,149,000 1,150,000 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 5).......................... -- -- 11,972,456 -- --
Net change in unrealized gain
(loss) on securities available-
for-sale.......................... (671,943) 1,625,670 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-26
<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-27
<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
SEPTEMBER 30, -------------------------------
1996 1995 1994
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Assets:
Cash and due from banks............................. $ 118,201 $ 112,503 $ 36,869
Advances to nonbank subsidiaries.................... 1,590,000 600,000 --
Property and equipment, net......................... 199,135 215,098 1,257,782
Accrued interest receivable......................... 9,510 3,548 --
Cash surrender value of life insurance.............. 720,886 696,709 1,433,883
Intangible assets, net.............................. 482,500 760,000 1,130,000
Other assets........................................ 605,541 231,521 1,141,876
Investment in bank subsidiaries..................... 38,047,910 35,672,594 30,696,843
Investment in nonbank subsidiaries.................. 2,932,700 2,723,190 1,531,224
-------------- -------------- --------------
Total assets.......................................... $ 44,706,383 $ 41,015,163 $ 37,228,477
-------------- -------------- --------------
-------------- -------------- --------------
Liabilities and stockholders' equity:
Accrued expenses and other liabilities.............. $ 676,753 $ 646,569 $ 653,526
Notes payable....................................... 4,150,000 3,400,000 9,050,000
-------------- -------------- --------------
Total liabilities..................................... 4,826,753 4,046,569 9,703,526
Stockholders' equity.................................. 39,879,630 36,968,594 27,524,951
-------------- -------------- --------------
Total liabilities and stockholders' equity............ $ 44,706,383 $ 41,015,163 $ 37,228,477
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-28
<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>
NINE MONTHS ENDED SEPTEMBER
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...... 403,200 311,400 450,800 855,573 --
Management fee income from nonbank subsidiaries... 48,600 17,550 23,400 16,232 --
Interest income from nonbank subsidiaries......... 59,241 2,898 11,012 -- --
Other income...................................... 27,651 22,658 35,614 67,030 --
------------- ------------- ------------- ------------- -------------
Total income...................................... 1,838,692 1,454,506 2,620,826 2,488,835 800,000
------------- ------------- ------------- ------------- -------------
Interest expense.................................. 199,708 376,155 424,533 583,964 45,357
Salaries and employee benefits.................... 1,335,992 1,089,493 1,467,509 1,136,502 25,655
Occupancy......................................... 52,651 38,156 55,214 205,342 --
Depreciation...................................... 56,917 52,611 69,863 229,680 --
Amortization of intangibles....................... 277,500 277,500 370,000 370,000 --
Other............................................. 188,711 116,320 180,979 402,908 178,400
------------- ------------- ------------- ------------- -------------
Total expenses.................................... 2,111,479 1,950,235 2,568,098 2,928,396 249,412
------------- ------------- ------------- ------------- -------------
Income (loss) before income tax benefit and equity
in undistributed earnings of subsidiaries........ (272,787) (495,729) 52,728 (439,561) 550,588
Income tax benefit................................ 637,987 941,114 831,565 787,410 100,776
------------- ------------- ------------- ------------- -------------
Income before equity in undistributed earnings of
subsidiaries..................................... 365,200 445,385 884,293 347,849 651,364
Equity in undistributed earnings of bank
subsidiaries..................................... 3,047,259 2,503,463 2,710,578 2,050,046 914,648
Equity in undistributed earnings/(loss) of nonbank
subsidiaries..................................... (7,533) 21,760 34,160 35,062 --
------------- ------------- ------------- ------------- -------------
Net income........................................ $ 3,404,926 $ 2,970,608 $ 3,629,031 $ 2,432,957 $ 1,566,012
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-29
<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>
NINE MONTHS ENDED SEPTEMBER
30 YEAR ENDED DECEMBER 31
----------------------------- ---------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 3,404,926 $ 2,970,608 $ 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.................................. (3,039,726) (2,525,223) (2,744,738) (2,085,108) (914,648)
Depreciation................................... 56,917 52,611 69,863 229,680 --
Amortization of intangibles.................... 277,500 277,500 370,000 370,000 --
Earnings on cash surrender value of life
insurance..................................... (24,177) (22,378) (29,764) (66,906) --
Other, net..................................... (348,529) (26,512) 899,849 (357,944) 22,101
------------- ------------- ------------- ------------- -------------
Net cash flows from operating activities........... 326,911 726,606 2,194,241 522,679 673,465
------------- ------------- ------------- ------------- -------------
Cash flows from investing activities:
Advances to nonbank subsidiaries................. (990,000) (250,000) (600,000) -- --
Purchases of property and equipment.............. (40,954) (52,730) (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................. (217,043) (1,157,806) (1,157,806) (17,622,846) --
Acquisition of other assets...................... -- -- -- (1,500,000) --
------------- ------------- ------------- ------------- -------------
Net cash flows (used for)/from investing
activities........................................ (1,247,997) 399,047 (18,047) (21,977,285) --
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from notes payable...................... 1,750,000 -- -- 9,532,420 242,000
Payments made on notes payable................... (1,000,000) (4,600,000) (5,650,000) (1,084,420) (1,211,721)
Net proceeds from issuance of common stock....... 176,784 3,629,604 3,549,440 13,035,128 341,870
Dividends paid................................... -- -- -- -- (141,138)
------------- ------------- ------------- ------------- -------------
Net cash flows (used for)/from financing
activities........................................ 926,784 (970,396) (2,100,560) 21,483,128 (768,989)
------------- ------------- ------------- ------------- -------------
Net increase/(decrease) in cash.................... 5,698 155,257 75,634 28,522 (95,524)
Cash
Beginning........................................ 112,503 36,869 36,869 8,347 103,871
------------- ------------- ------------- ------------- -------------
Ending........................................... $ 118,201 $ 192,126 $ 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-30
<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 September
30, 1996 and December 31, 1995, and unaudited results of operations for the year
ended December 31, 1995:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- --------------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Assets:
Cash and due from banks........................................................ $ 14,028,271 $ 13,169,628
Interest-bearing deposits with banks........................................... 1,256,000 876,000
Federal funds sold............................................................. -- 4,900,000
Investment securities.......................................................... 71,779,691 63,764,635
Loans, net..................................................................... 116,569,192 113,498,772
Property and equipment, net.................................................... 2,062,337 2,130,254
Other assets................................................................... 2,831,685 2,230,636
-------------- --------------
Total assets..................................................................... $ 208,527,176 $ 200,569,925
-------------- --------------
-------------- --------------
Liabilities and stockholders' equity:
Deposits....................................................................... $ 164,965,563 $ 165,753,622
Securities sold under repurchase agreements.................................... 17,510,802 10,665,906
Accrued expenses and other liabilities......................................... 1,458,702 1,262,022
-------------- --------------
Total liabilities................................................................ 183,935,067 177,681,550
Stockholders' equity............................................................. 24,592,109 22,888,375
-------------- --------------
Total liabilities and stockholders' equity....................................... $ 208,527,176 $ 200,569,925
-------------- --------------
-------------- --------------
</TABLE>
F-31
<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-32
<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-33
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------------
1996 1995 1994
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and Due from Banks............................ $ 14,028,271 $ 13,169,628 $ 10,383,932
Interest Bearing Deposits with Banks............... 1,256,000 876,000 --
Federal Funds Sold................................. -- 4,900,000 7,600,000
Commercial Paper................................... 3,511,281 1,570,357 2,281,129
Securities:
Available-for-Sale............................... 68,268,410 61,044,394 52,837,500
Held-to-Maturity................................. -- 1,149,884 513,559
Loans (Less Allowance for Loan Losses of $2,174,975
in 1996, $2,481,705 in 1995 and $2,019,723 in
1994)............................................. 116,569,192 113,498,772 102,882,230
Land, Buildings, Leasehold Improvements and
Equipment (Less Accumulated Depreciation and
Amortization)..................................... 2,062,337 2,130,254 2,225,913
Other Assets....................................... 2,831,685 2,230,636 2,780,933
-------------- -------------- --------------
Total Assets................................. $ 208,527,176 $ 200,569,925 $ 181,505,196
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Demand........................................... $ 45,038,960 $ 46,810,324 $ 46,295,507
Money Market Demand and NOW Accounts............. 14,591,118 15,456,490 14,991,459
Regular Savings.................................. 12,675,617 10,197,306 12,695,656
Money Market Savings............................. 40,693,028 38,356,160 32,696,892
Savings Certificates and Other Time.............. 51,966,840 54,933,342 50,024,887
-------------- -------------- --------------
$ 164,965,563 $ 165,753,622 $ 156,704,401
Securities Sold Under Repurchase Agreements........ 17,510,802 10,665,906 4,354,251
Accrued Interest Payable and Other Liabilities..... 1,458,702 1,262,022 1,209,228
-------------- -------------- --------------
Total Liabilities............................ $ 183,935,067 $ 177,681,550 $ 162,267,880
-------------- -------------- --------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common Stock, Par Value $1 Per Share; 5,000,000
Shares Authorized; 472,710 Shares Issued and
Outstanding in 1996 and 650,000 Shares Issued in
1995 and 1994................................... $ 472,710 $ 650,000 $ 650,000
Additional Contributed Capital................... -- 1,198,497 1,198,497
Retained Earnings................................ 24,152,130 22,033,841 19,633,033
Net Unrealized Gain (Loss) on Available-for-Sale
Securities...................................... (32,731) 502,191 (702,815)
-------------- -------------- --------------
Total........................................ $ 24,592,109 $ 24,384,529 $ 20,778,715
Less: Common Stock in Treasury (at Cost); 177,290
Shares in 1995 and 178,490 Shares in 1994....... -- 1,496,154 1,541,399
-------------- -------------- --------------
Total Stockholders' Equity................... $ 24,592,109 $ 22,888,375 $ 19,237,316
-------------- -------------- --------------
Total Liabilities and Stockholders' Equity... $ 208,527,176 $ 200,569,925 $ 181,505,196
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-34
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------- ------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans................. $8,382,177 $8,320,374 $11,268,722 $ 8,833,418 $7,110,961
Interest on Investment Securities:
U.S. Treasury Securities................. 1,042,121 1,000,296 1,273,402 1,153,539 456,010
Obligations of Other U.S. Government
Agencies and Corporations............... 963,115 660,341 918,354 574,718 1,061,439
Obligations of States and Political
Subdivisions............................ 517,369 208,625 313,653 379,287 641,937
Other Securities......................... 777,898 586,589 831,094 449,920 320,451
Interest on Federal Funds Sold and Interest
Bearing Deposits.......................... 174,252 234,470 363,523 272,043 153,652
----------- ----------- ----------- ----------- ----------
Total Interest Income.................. 11,856,932 11,010,695 14,968,748 11,662,925 9,744,450
----------- ----------- ----------- ----------- ----------
INTEREST EXPENSE
Interest on Deposits....................... 4,007,924 3,798,083 5,171,989 3,361,568 2,820,531
Interest on Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements................................ 511,106 327,618 499,627 176,035 106,727
----------- ----------- ----------- ----------- ----------
Total Interest Expense................. 4,519,030 4,125,701 5,671,616 3,537,603 2,927,258
----------- ----------- ----------- ----------- ----------
NET INTEREST INCOME.......................... 7,337,902 6,884,994 9,297,132 8,125,322 6,817,192
PROVISION FOR LOAN LOSSES.................... 329,274 540,000 720,000 740,227 552,000
----------- ----------- ----------- ----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES...................................... 7,008,628 6,344,994 8,577,132 7,385,095 6,265,192
----------- ----------- ----------- ----------- ----------
OTHER INCOME
Service Fees............................... 1,179,247 1,150,735 1,529,870 1,404,965 1,358,658
Investment Securities Gains................ 1,000 39,125 39,125 68,902 430,726
Other...................................... 58,076 70,116 89,717 81,965 312,407
----------- ----------- ----------- ----------- ----------
Total Other Income..................... 1,238,323 1,259,976 1,658,712 1,555,832 2,101,791
----------- ----------- ----------- ----------- ----------
OTHER EXPENSE
Salaries................................... 1,984,767 2,116,241 3,174,566 3,015,073 2,829,026
Profit Sharing and Other Employee
Benefits.................................. 453,302 227,207 315,196 297,794 252,311
Net Occupancy Expenses..................... 460,763 443,950 595,766 596,926 689,163
Equipment Expenses......................... 444,948 387,744 522,021 491,051 526,182
Other Operating Expenses................... 1,262,452 1,547,561 1,730,224 1,674,680 1,937,104
----------- ----------- ----------- ----------- ----------
Total Other Expense.................... 4,606,232 4,722,703 6,337,773 6,075,524 6,233,786
----------- ----------- ----------- ----------- ----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE... 3,640,719 2,882,267 3,898,071 2,865,403 2,133,197
PROVISION FOR INCOME TAX EXPENSE............. 1,402,063 1,096,242 1,497,263 1,030,415 659,104
----------- ----------- ----------- ----------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE......................... 2,238,656 1,786,025 2,400,808 1,834,988 1,474,093
Cumulative Effect of Change in Accounting
Principle................................... -- -- -- -- 850,221
----------- ----------- ----------- ----------- ----------
NET INCOME................................... $2,238,656 $1,786,025 $ 2,400,808 $ 1,834,988 $2,324,314
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
PER SHARE OF COMMON STOCK
Income Before Cumulative Effect of Change
in Accounting Principle................... $ 4.74 $ 3.78 $ 5.09 $ 3.89 $ 3.15
Cumulative Effect of Change in Accounting
Principle................................. -- -- -- -- 1.81
----------- ----------- ----------- ----------- ----------
$ 4.74 $ 3.78 $ 5.09 $ 3.89 $ 4.96
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-35
<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 (UNAUDITED).... 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.................................. -- -- -- (534,922) -- (534,922)
Retirement of Treasury Stock............ (177,290) (1,198,497) (120,367) -- 1,496,154 --
Net Income for the Nine Months.......... -- -- 2,238,656 -- -- 2,238,656
---------- ------------ ------------- -------------- ------------- -------------
BALANCE, SEPTEMBER 30, 1996............... $ 472,710 $ -- $ 24,152,130 $ (32,731) $ -- $ 24,592,109
---------- ------------ ------------- -------------- ------------- -------------
---------- ------------ ------------- -------------- ------------- -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-36
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 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................................. $ 2,238,656 $ 1,786,025 $ 2,400,808 $ 1,834,988 $ 2,324,314
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Cumulative Effect of Accounting Change... -- -- -- -- (850,221)
Depreciation and Amortization............ 314,854 237,318 318,006 323,460 362,047
Deferred Income Taxes.................... 69,188 (121,025) 48,642 72,309 108,217
Investment Premium Amortization (Net).... 99,723 163,715 210,731 201,264 412,489
Provision for Loan Losses................ 329,274 540,000 720,000 740,227 552,000
(Gain) Loss on Sale of Other Real Estate
and Equipment, Net...................... -- -- -- -- 42,431
Securities Gains......................... (1,000) (39,125) (39,125) (68,902) (430,726)
(Increase) Decrease in Interest and Fees
Receivable.............................. (257,458) (444,112) (317,378) (438,304) 93,829
(Increase) Decrease in Prepaid Expenses
and Other Assets........................ (56,166) (28,488) 47,074 (66,338) 55,693
Increase (Decrease) in Interest
Payable................................. (101,783) (105,675) (53,511) 127,225 (73,727)
Increase (Decrease) in Other
Liabilities............................. 298,463 269,953 74,924 229,179 (186,022)
-------------- -------------- -------------- -------------- --------------
Net Cash Provided by Operating
Activities............................ 2,933,751 2,258,586 3,410,171 2,955,108 2,410,324
-------------- -------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Available-for-Sale
Securities................................ (26,923,773) (15,001,702) (22,110,843) (34,334,524) (23,866,396)
Proceeds from Sales, Maturities or Called
Available-for-Sale Securities............. 19,859,382 10,789,250 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................................ (380,000) (689,000) (876,000) -- --
Net Increase in Loans...................... (3,399,694) (12,131,531) (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..................................... (1,940,924) (403,646) 710,772 (2,281,129) --
Purchase of Properties and Equipment....... (246,936) (198,351) (222,347) (287,310) (154,825)
-------------- -------------- -------------- -------------- --------------
Net Cash Used by Investing
Activities............................ (13,031,945) (17,634,980) (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.................. (788,059) (370,817) 9,049,221 21,341,090 3,326,146
Net Increase (Decrease) in Short-Term
Borrowings................................ 6,844,896 9,304,619 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............................ 6,056,837 8,933,802 15,406,121 22,366,850 2,080,419
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. (4,041,357) (6,442,592) 85,696 4,312,681 (5,279,477)
Cash and Cash Equivalents -- Beginning of
Period...................................... 18,069,628 17,983,932 17,983,932 13,671,251 18,950,728
-------------- -------------- -------------- -------------- --------------
CASH AND CASH EQUIVALENTS -- END OF PERIOD... $ 14,028,271 $ 11,541,340 $ 18,069,628 $ 17,983,932 $ 13,671,251
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Period for:
Interest................................... $ 4,620,813 $ 4,227,376 $ 5,725,127 $ 3,410,378 $ 3,000,985
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Income Taxes............................... $ 1,066,316 $ 953,425 $ 1,422,747 $ 917,608 $ 750,949
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-37
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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-38
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 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-39
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 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. As of September
30, 1996, the Company retired all of its outstanding treasury stock.
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.
INTERIM FINANCIAL DATA
The interim financial statements are unaudited; however, in management's
opinion, the interim financial statements include all adjustments necessary for
a fair presentation of the financial results for the interim periods.
F-40
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 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-41
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 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-42
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 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-43
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 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-44
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 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-45
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 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-46
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 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-47
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 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-48
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 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-49
<PAGE>
PARK FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996 and 1995 (Unaudited)
and December 31, 1995, 1994 and 1993
14 SUBSEQUENT EVENTS
On October 7, 1996, the Company entered into a merger agreement with United
Community Bancshares, Inc. The merger has been approved by the Board of
Directors and will be completed upon regulatory approval and fulfillment of
certain covenants and conditions.
An appreciation bonus of approximately $1,000,000 will be paid to certain
employees of the Company's Bank subsidiary upon the successful closing of the
merger. An accrual for this bonus will be recorded by the Bank in November 1996.
F-50
<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 September 30, 1996 included
elsewhere herein and assumes that the transactions were consummated on September
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 Nine Months Ended September 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-51
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED
BALANCE SHEET OF UNITED AND PFC
SEPTEMBER 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..... $ 24,001,941 $ 15,127,960(a) $ 39,129,901 $ 15,284,271 $(45,139,540)(c) $ 38,837,322
24,000,000(d)
5,562,690(e)
Federal funds sold.......... 7,875,000 7,875,000 -- 7,875,000
Investment securities
available for sale......... 103,453,335 103,453,335 71,779,691 (3,511,281) (e) 171,721,745
Loans and leases............ 280,212,723 280,212,723 118,744,167 (1,972,776)(e) 396,849,114
(135,000)(c)
Allowance for loan and
lease losses........... (2,867,523) (2,867,523) (2,174,975) 70,274(e) (4,972,224)
------------- ------------- ------------- ------------- -------------
Net loans and
leases............... 277,345,200 277,345,200 116,569,192 (2,037,502) 391,876,890
------------- ------------- ------------- ------------- -------------
Property and equipment,
net........................ 10,887,181 10,887,181 2,062,337 (11,084)(e) 12,938,434
Cash surrender value of life
insurance.................. 9,421,321 9,421,321 -- 9,421,321
Intangible assets, net...... 3,684,285 3,684,285 -- 21,223,731(c) 24,908,016
Other assets................ 5,181,713 5,181,713 2,831,685 (167,136)(e) 7,846,262
------------- ------------- ------------- ------------- ------------- -------------
Total assets............ $ 441,849,976 $ 15,127,960 $456,977,936 $ 208,527,176 $ (80,122) $665,424,990
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits.................. $ 351,825,044 $351,825,044 $ 164,965,563 $516,790,607
Securities sold under
repurchase agreements.... 27,556,398 27,556,398 17,510,802 45,067,200
Accrued expenses and other
liabilities.............. 5,880,339 5,880,339 1,458,702 595,300(b) 7,851,028
(29,313)(e)
(54,000)(c)
Notes payable and other
borrowings............... 16,708,565 16,708,565 -- 24,000,000(d) 40,708,565
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities....... 401,970,346 -- 401,970,346 183,935,067 24,511,987 610,417,400
------------- ------------- ------------- ------------- ------------- -------------
Company obligated
mandatorily redeemable
preferred securities of
subsidiary trust holding
solely junior subordinated
debentures................. -- 10,159,000(a) 10,159,000 -- 10,159,000
------------- ------------- ------------- ------------- ------------- -------------
Stockholders' equity:
Common stock.............. 5,466 472(a) 5,938 472,710 (472,710)(c) 5,938
Additional paid-in
capital.................. 21,015,602 (30,000)(a) 25,984,090 -- -- 25,984,090
4,998,488(a)
Retained earnings......... 18,917,959 18,917,959 24,152,130 (23,556,830)(c) 18,917,959
(595,300)(b)
Unrealized loss on
securities available
for sale............... (59,397) (59,397) (32,731) 32,731(c) (59,397)
------------- ------------- ------------- ------------- ------------- -------------
Total stockholders'
equity............... 39,879,630 4,968,960 44,848,590 24,592,109 (24,592,109) 44,848,590
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholders'
equity............... $ 441,849,976 $ 15,127,960 $456,977,936 $ 208,527,176 $ (80,122) $665,424,990
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
See Note to the Unaudited Pro Forma Consolidated Financial Statements
F-52
<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 securities......................... 5,355,179 3,336,503 (140,917)(h) 8,550,765
Federal funds sold............................ 760,820 363,523 1,124,343
------------- ------------- ----------------- ------------
Total interest income....................... 31,205,583 14,968,748 (356,229) 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 borrowings............ 955,752 -- 1,687,200(g) 2,642,952
------------- ------------- ----------------- ------------
Total interest expense...................... 12,848,052 5,671,616 1,687,200 20,206,868
------------- ------------- ----------------- ------------
Net interest income........................... 18,357,531 9,297,132 (2,043,429) 25,611,234
Provision for loan and lease losses............. 60,999 720,000 -- 780,999
------------- ------------- ----------------- ------------
Net interest income after provision for loan (2,043,429)
and lease losses........................... 18,296,532 8,577,132 24,830,235
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 1,414,915(f) 7,923,198
------------- ------------- ----------------- ------------
Total noninterest expense................... 16,530,934 6,337,773 1,386,102 24,254,809
------------- ------------- ----------------- ------------
Income before income taxes and minority interest (3,429,531)
in preferred securities dividends of
subsidiary..................................... 5,684,583 3,898,071 6,153,123
Income tax expense.............................. 2,055,552 1,497,263 (805,846)(i) 2,746,969
Minority interest in preferred securities -- -- (660,000)(j) (822,900)
dividends of subsidiary........................ (162,900)(k)
------------- ------------- ----------------- ------------
Net income...................................... $ 3,629,031 $ 2,400,808 $ (3,446,585) $ 2,583,254
------------- ------------- ----------------- ------------
------------- ------------- ----------------- ------------
Earnings per common share..................... $ 6.97 $ 5.09 $ 4.55
Weighted average common shares outstanding.... 520,306 471,540 567,466
</TABLE>
See Note to the Unaudited Pro Forma Consolidated Financial Statements
F-53
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF INCOME OF UNITED AND PFC
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
STATEMENT OF
UNITED PFC ADJUSTMENTS INCOME
------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases............................... $ 20,061,287 $ 8,382,177 $ 20,250(f) $ 28,322,282
(141,432)(h)
Investment securities.......................... 4,549,378 3,300,503 (120,828)(h) 7,729,053
Federal funds sold............................. 389,775 174,252 564,027
------------- ------------ ----------------- ------------
Total interest income........................ 25,000,440 11,856,932 (242,010) 36,615,362
------------- ------------ ----------------- ------------
Interest expense:
Deposits....................................... 8,721,275 4,007,924 12,729,199
Federal funds purchased and securities sold
under repurchase agreements................... 956,487 511,106 1,467,593
Notes payable and other borrowings............. 767,214 -- 1,265,400(g) 2,032,614
------------- ------------ ----------------- ------------
Total interest expense....................... 10,444,976 4,519,030 1,265,400 16,229,406
------------- ------------ ----------------- ------------
Net interest income.......................... 14,555,464 7,337,902 (1,507,410) 20,385,956
Provision for loan and lease losses.............. 145,823 329,274 -- 475,097
------------- ------------ ----------------- ------------
Net interest income after provision for loan (1,507,410)
and lease losses............................ 14,409,641 7,008,628 19,910,859
Noninterest income:
Service charges and other fees................. 2,442,366 1,179,247 3,621,613
Net investment securities gains................ -- 1,000 1,000
Other.......................................... 1,005,623 58,076 1,063,699
------------- ------------ ----------------- ------------
Total noninterest income..................... 3,447,989 1,238,323 -- 4,686,312
------------- ------------ ----------------- ------------
Noninterest expense:
Salaries and employee benefits................. 7,323,248 2,438,069 9,761,317
Occupancy...................................... 645,535 460,763 1,106,298
Depreciation................................... 1,141,406 444,948 (8,573)(h) 1,577,781
Other.......................................... 3,664,528 1,262,452 1,061,186(f) 5,988,166
------------- ------------ ----------------- ------------
Total noninterest expense.................... 12,774,717 4,606,232 1,052,613 18,433,562
------------- ------------ ----------------- ------------
Income before income taxes and minority interest (2,560,023)
in preferred securities dividends of
subsidiary...................................... 5,082,913 3,640,719 6,163,609
Income tax expense............................... 1,677,987 1,402,063 (599,535)(i) 2,480,515
Minority interest in preferred securities -- -- (495,000)(j) (617,175)
dividends of subsidiary......................... (122,175)(k)
------------- ------------ ----------------- ------------
Net income................................... $ 3,404,926 $ 2,238,656 $ (2,577,663) $ 3,065,919
------------- ------------ ----------------- ------------
------------- ------------ ----------------- ------------
Earnings per common share...................... $ 6.20 $ 4.74 $ 5.14
Weighted average common shares outstanding..... 549,079 472,710 596,239
</TABLE>
See Note to the Unaudited Pro Forma Consolidated Financial Statements
F-54
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF INCOME OF UNITED AND PFC
NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
STATEMENT OF
UNITED PFC ADJUSTMENTS INCOME
------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases............................... $ 18,522,558 $ 8,320,374 $ 20,250(f) $ 26,709,707
(153,475)(h)
Investment securities.......................... 3,863,727 2,455,851 (111,582)(h) 6,207,996
Federal funds sold............................. 532,775 234,470 767,245
------------- ------------ ----------------- ------------
Total interest income........................ 22,919,060 11,010,695 (244,807) 33,684,948
------------- ------------ ----------------- ------------
Interest expense:
Deposits....................................... 7,626,718 3,798,083 11,424,801
Federal funds purchased and securities sold
under repurchase agreements................... 1,057,758 327,618 1,385,376
Notes payable and other borrowings............. 712,785 -- 1,265,400(g) 1,978,185
------------- ------------ ----------------- ------------
Total interest expense....................... 9,397,261 4,125,701 1,265,400 14,788,362
------------- ------------ ----------------- ------------
Net interest income.......................... 13,521,799 6,884,994 (1,510,207) 18,896,586
Provision for loan and lease losses.............. 41,215 540,000 -- 581,215
------------- ------------ ----------------- ------------
Net interest income after provision for loan (1,510,207)
and lease losses............................ 13,480,584 6,344,994 18,315,371
Noninterest income:
Service charges and other fees................. 2,135,645 1,150,735 3,286,380
Net investment securities (losses)............. (22,869) 39,125 16,256
Other.......................................... 773,744 70,116 843,860
------------- ------------ ----------------- ------------
Total noninterest income..................... 2,886,520 1,259,976 -- 4,146,496
------------- ------------ ----------------- ------------
Noninterest expense:
Salaries and employee benefits................. 6,865,658 2,343,448 9,209,106
Occupancy...................................... 743,539 443,950 1,187,489
Depreciation................................... 911,640 387,744 (26,237)(h) 1,273,147
Other.......................................... 3,626,573 1,547,561 1,061,186(f) 6,235,320
------------- ------------ ----------------- ------------
Total noninterest expense.................... 12,147,410 4,722,703 1,034,949 17,905,062
------------- ------------ ----------------- ------------
Income before income taxes and minority interest (2,545,156)
in preferred securities dividends of
subsidiary...................................... 4,219,694 2,882,267 4,556,805
Income tax expense............................... 1,249,086 1,096,242 (593,588)(i) 1,751,740
Minority interest in preferred securities -- -- (495,000)(j) (617,175)
dividends of subsidiary......................... (122,175)(k)
------------- ------------ ----------------- ------------
Net income................................... $ 2,970,608 $ 1,786,025 $ (2,568,743) $ 2,187,890
------------- ------------ ----------------- ------------
------------- ------------ ----------------- ------------
Earnings per common share...................... $ 5.82 $ 3.78 $ 3.92
Weighted average common shares outstanding..... 510,770 471,510 557,930
</TABLE>
See Note to the Unaudited Pro Forma Consolidated Financial Statements
F-55
<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 securities 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 securities are assumed to be sold at a price of $25.00
per share. Total offering costs of the preferred securities are estimated to
be $841,000 and total offering costs of the common stock are estimated to be
$30,000.
(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 calculation of the purchase price:
<TABLE>
<S> <C>
Equity of PFC, excluding unrealized loss on securities
available for sale.................................... $ 24,624,840
Premium................................................ 21,110,000
Bonus accrual.......................................... (1,000,000)
Tax benefit related to bonus........................... 404,700
------------
Purchase price......................................... 45,139,540
PFC book value......................................... 24,592,109
------------
Purchase price in excess of book value................. $ 20,547,431
------------
------------
</TABLE>
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............................................... 21,223,731
-----------
Purchase price in excess of book value................. $20,547,431
-----------
-----------
</TABLE>
The following table summarizes the allocation of the purchase price:
<TABLE>
<S> <C>
Fair value adjustment to loans, net of tax
effect...................................... $ (81,000)
PFC book value............................... 24,592,109
Bonus, net of tax effect..................... (595,300)
Goodwill..................................... 21,223,731
------------
Purchase price............................... $ 45,139,540
------------
------------
</TABLE>
(d) Reflects the additional proceeds received from bank financing to be obtained
from Firstar in conjunction with the Park Acquisition.
F-56
<PAGE>
(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 $1,414,915 and $1,061,186 for the year ended
December 31, 1995 and for the nine months ended September 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 nine months ended September
30, 1996 and 1995 is $27,000 and $20,250, respectively.
(g) Reflects the additional interest expense incurred as a result of the
additional financing of $24,000,000 required to complete the Park
Acquisition. The interest rate is assumed to be 140 basis points over the 90
day LIBOR rate or 7.03%. 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 $30,000 for the year ended December
31, 1995 and by approximately $22,500 for each of the nine months ended
September 30, 1996 and 1995, respectively.
(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 nine months
ended September 30, 1996 and 1995 resulting in decreased income tax expense
of $805,846, $599,535 and $593,588 respectively.
(j) Reflects the dividends paid on the preferred securities at an assumed rate
of 10.0% per annum paid quarterly on $11,000,000 of preferred securities,
net of income taxes. The effective tax rate is assumed to be forty percent.
(k) Reflects the amortization of the $841,000 of offering costs associated with
the preferred securities over a five year term. Amortization expense for the
year ended December 31, 1995 and for each of the nine months ended September
30, 1996 and 1995 is $162,900 and $122,175, respectively.
F-57
<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 as of December 31, 1993
is derived from the audited balance sheets of United and Goodhue which are not
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 Statement of
Income of United which is included herein and from the audited Consolidated
Statement of Income of Goodhue which is not included 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-58
<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-59
<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............................................. 3,367,221 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 borrowings................... 197,037 31,552 475,032(h) 703,621
------------ ------------ -------------- ------------
Total interest expense............................. 3,670,825 4,889,533 475,032 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 after provision for loan and (475,032 )
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
Other................................................ 2,801,898 2,214,788 219,487(g) 5,495,369
(110,804)(g)
370,000(i)
------------ ------------ -------------- ------------
Total noninterest expense.......................... 7,416,126 7,099,910 478,683 14,994,719
------------ ------------ -------------- ------------
Income before income taxes and cumulative effect of (953,715 )
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 cumulative effect of change in (660,024 )
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............................... $ 4.78 $ 11.80 $ 4.17
Cumulative effect of change in accounting principle.... .35 .68 .36
------------ ------------ ------------
Earnings per share after cumulative effect of change in
accounting principle.................................. $ 5.13 $ 12.48 $ 4.53
------------ ------------ ------------
------------ ------------ ------------
Average shares outstanding............................. 305,513 110,497 505,084
</TABLE>
F-60
<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-61
<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.............................................................. 9
Acquisition of Park....................................................... 14
Use of Proceeds........................................................... 17
Dilution.................................................................. 17
Capitalization............................................................ 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 25
Business.................................................................. 44
Management................................................................ 51
Principal Shareholders.................................................... 57
Supervision and Regulation................................................ 59
Description of the Company's Capital Stock................................ 65
Restrictions on Transferability........................................... 68
Description of Junior Subordinated Debentures and Preferred Securities.... 70
The Offering.............................................................. 76
Legal Matters............................................................. 76
Experts................................................................... 77
Additional Information.................................................... 77
Index to Financial Information............................................ F-1
Subscription Agreement.................................................... A-1
</TABLE>
72,000 SHARES MAXIMUM
47,160 SHARES MINIMUM
[UNITED COMMUNITY BANCSHARES LOGO]
COMMON STOCK
-----------------
P R O S P E C T U S
-----------------
, 1997
<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............................................... $ 2,313
Registrant's Legal Fees............................................ 10,000
Accountants' Fees and Expenses..................................... 1,000
Printing Expenses.................................................. 15,000
Blue Sky Fees and Expenses......................................... 1,000
Miscellaneous...................................................... 687
---------
Total.............................................................. $ 30,000
---------
---------
</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).
Under the Trust Agreement, the Company will agree to indemnify each of the
trustees of United Capital or any predecessor trustee for United Capital, and to
hold each Trustee harmless against, any loss, damage, claims, liability or
expense incurred without negligence or bad faith on its part, arising out of or
in connection with the acceptance or administration of the Trust Agreement,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties under the Trust Agreement.
II-1
<PAGE>
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.
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 Form of Common Stock Certificate
4.2 Form of Indenture, to be dated January , 1997*
4.3 Form of Junior Subordinated Debenture (included as an exhibit to Exhibit 4.2)*
4.4 Certificate of Trust of United Capital Trust I, dated as of December 6, 1996*
4.5 Trust Agreement of United Capital Trust I, dated as of December 6, 1996*
4.6 Form of Amended and Restated Trust Agreement of United Capital Trust I, to be dated January , 1997*
4.7 Form of Preferred Security Certificate of United Capital Trust I (included as an exhibit to Exhibit
4.6)*
4.8 Form of Preferred Securities Guaranty Agreement for United Capital Trust I*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
4.9 Form of Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit 4.6)*
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*+
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.*
10.15 Form of Term Loan Agreement with Firstar Bank Milwaukee, N.A.*
12.1 Statement Regarding Computation of Ratios*
16 Letter Regarding Change in Certifying Accountant*
21 Subsidiaries of United Community Bancshares, Inc.*
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 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. 333-14587.
+ Management agreement or compensatory plan or arrangement.
II-3
<PAGE>
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.
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 Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on December 31, 1996.
UNITED COMMUNITY BANCSHARES, INC.
By /s/ GALEN T. PATE
------------------------------------------
Galen T. Pate, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
* Chairman and Director (principal
------------------------------------------- executive officer) December 31, 1996
R. Scott Jones
/s/ GALEN T. PATE President and Director (principal
------------------------------------------- executive officer) December 31, 1996
Galen T. Pate
Executive Vice President and
/s/ MARCIA L. O'BRIEN Chief Financial Officer
------------------------------------------- (principal financial and December 31, 1996
Marcia L. O'Brien accounting officer)
*
------------------------------------------- Director December 31, 1996
Arlin A. Albrecht
*
------------------------------------------- Director December 31, 1996
Larry C. Barenbaum
*
------------------------------------------- Director December 31, 1996
Spencer A. Broughton
*
------------------------------------------- Director December 31, 1996
James P. Fritz
*
------------------------------------------- Director December 31, 1996
John W. Johnson
</TABLE>
Signatures continued on following page
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
*
------------------------------------------- Director December 31, 1996
Ora G. Jones
*
------------------------------------------- Director December 31, 1996
Louis J. Langer
*Executed by Galen T. Pate as Attorney-in-fact
for each of the individuals listed:
/s/ GALEN T. PATE
-------------------------------------------
Galen T. Pate,
ATTORNEY-IN-FACT
</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>
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 Form of Common Stock Certificate
4.2 Form of Indenture, to be dated January , 1997*
4.3 Form of Junior Subordinated Debenture (included as an exhibit to Exhibit 4.2)*
4.4 Certificate of Trust of United Capital Trust I, dated as of December 6, 1996*
4.5 Trust Agreement of United Capital Trust I, dated as of December 6, 1996*
4.6 Form of Amended and Restated Trust Agreement of United Capital Trust I, to be dated January , 1997*
4.7 Form of Preferred Security Certificate of United Capital Trust I (included as an exhibit to Exhibit
4.6)*
4.8 Form of Preferred Securities Guaranty Agreement for United Capital Trust I*
4.9 Form of Agreement as to Expenses and Liabilities (included as an exhibit to Exhibit 4.6)*
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*+
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.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.15 Form of Term Loan Agreement with Firstar Bank Milwaukee, N.A.*
12.1 Statement Regarding Computation of Ratios*
16 Letter Regarding Change in Certifying Accountant*
21 Subsidiaries of United Community Bancshares, Inc.*
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 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. 333-14587.
+ Management agreement or compensatory plan or arrangement.
<PAGE>
EXHIBIT 4.1
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
NUMBER SHARES
UNITED COMMUNITY BANCSHARES, INC.
THIS CERTIFIES THAT ____________________________________ is the record holder
of ___________________________Shares of the Capital Stock of
UNITED COMMUNITY BANCSHARES, INC.
TRANSFERRABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN
PERSON OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED, OR
ASSIGNED.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO
AFFIXED THIS 15TH DAY OF SEPTEMBER A.D. 1995
_______________________________ _____________________________
Chairman President
CERTIFICATE FOR ____ SHARES OF CAPITAL STOCK ISSUED TO __________
DATED _______________
For Value Recieved, _________ hereby sell, assign and transfer unto
______________________ Shares of the Capital Stock represented by the within
Certificate, and do hereby irrevocably constitute and appoint
______________________ Attorney to transfer the said Stock on the books of
the within named Corporation with full power of substitution in the premises.
Dated _________________ 19__
In presence of ______________________________________
NOTICE. THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
(Reverse Side of Common Stock Certificate)
The shares of stock 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.
614634
<PAGE>
EXHIBIT 5.1
December 31, 1996
United Community Bancshares, Inc.
2600 Eagan Woods Drive, Suite 155
Eagan, MN 55121
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
In connection with the Registration Statement on Form S-1 filed by United
Community Bancshares, Inc. (the "Company"), with the Securities and Exchange
Commission (Registration No. 333-15067) relating to an offering of 72,000
shares of Common Stock, $.01 par value ("Common Stock"), to be offered by the
Company, please be advised that as counsel to the Company, upon examination
of such corporate documents and records as we have deemed necessary or
advisable for the purposes of this opinion, it is our opinion that:
1. The Company is a validly existing corporation in good standing under
the laws of the State of Minnesota.
2. The shares of Common Stock being offered by the Company, when issued
and paid for as contemplated by the Registration Statement, will be
validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm under the heading
"Legal Matters" in the Prospectus comprising a part of the Registration
Statement.
Very truly yours,
FREDRIKSON & BYRON, P.A.
By /s/ Lynn M. Gardin
---------------------
Its Vice President
614532
<PAGE>
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
McGLADREY & PULLEN, LLP
St. Paul, Minnesota
December 31, 1996
<PAGE>
[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.
Leininger & Leininger, Ltd.
Plymouth, Minnesota
December 31, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to the Registration Statement No.
333-15067 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 such
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
December 31, 1996
