<PAGE>
FILED PURSUANT TO RULE 424(b)(4)
PROSPECTUS REGISTRATION NUMBER 333-14587
DATED JANUARY 13, 1997
440,000 PREFERRED SECURITIES
[UNITED COMMUNITY BANCSHARES LOGO]
UNITED CAPITAL TRUST I
9.75% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
UNITED COMMUNITY BANCSHARES, INC.
$11,000,000 OF 9.75% JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
WILL BE ISSUED BY UNITED COMMUNITY BANCSHARES, INC. TO UNITED CAPITAL TRUST I
The 9.75% Cumulative Trust Preferred Securities ("Preferred Securities") offered
hereby represent beneficial interests in United Capital Trust I, a trust created
under the laws of the State of Delaware ("United Capital"). United Community
Bancshares, Inc., a Minnesota corporation ("United" or the "Company") will be
the owner of all the beneficial interests represented by common securities of
United Capital ("Common Securities") (the Common Securities and the Preferred
Securities are herein referred to the "Trust Securities"). Wilmington Trust
Company is the Property Trustee of United Capital. United Capital exists for the
purpose of issuing the Preferred Securities and investing the proceeds thereof
in 9.75% Junior Subordinated Deferrable Interest Debentures ("Junior
Subordinated Debentures") to be issued by the Company. The Company will use the
proceeds from the Junior Subordinated Debentures to provide a portion of the
financing for the Park Acquisition described herein. The Junior Subordinated
Debentures will mature on January 15, 2027, which date may be (1) shortened to a
date not earlier than January 15, 2002, or (2) extended to a date not later than
January 15, 2046, in each case if certain conditions are met (including, in the
case of shortening the Stated Maturity (as defined herein), the Company having
received prior approval of the Board of Governors of the Federal Reserve System
("Federal Reserve") to do so if then required under applicable capital
guidelines or policies of the Federal Reserve). The Preferred Securities will
have a preference under certain circumstances with respect to cash distributions
and amounts payable on liquidation, redemption or otherwise over the Common
Securities. See "Description of Preferred Securities -- Subordination of Common
Securities."
(CONTINUED ON FOLLOWING PAGE)
SEE "RISK FACTORS" BEGINNING ON PAGE 12 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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>
Proceeds to
Price to Underwriting United Capital
Public Commission (1) (2)(3)
<S> <C> <C> <C>
Per Preferred Security................ $25.00 (2) $25.00
Total................................. $11,000,000 (2) $11,000,000
</TABLE>
(1) United Capital and United have agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures, the
Company has agreed to pay the Underwriter as compensation for its arranging
the investment therein of such proceeds, $.75 per Preferred Security, or
$330,000 in the aggregate and an advisory fee equal to 1% of the gross
proceeds of the offering to the Underwriter (the "Advisory Fee"). See
"Underwriting."
(3) Before deducting expenses payable by United, estimated to be $401,000
excluding the Advisory Fee.
The shares of Preferred Securities are being offered by the Underwriter subject
to prior sale when, as and if delivered to and accepted by the Underwriter. It
is expected that the Preferred Securities will be ready for delivery in book-
entry form only through the facilities of The Depository Trust Company in New
York, New York, on or about January 16 , 1997, against payment therefor in
immediately available funds.
PIPER JAFFRAY INC.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
Holders of Preferred Securities will be entitled to receive preferential
cumulative cash distributions accruing from the date of original issuance and
payable quarterly in arrears on the last day of March, June, September and
December in each year, commencing March 31, 1997, at the annual rate of 9.75% of
the Liquidation Amount (as defined herein) of $25 per Preferred Securities
("Distributions"). The Company has the right to defer payment of interest on the
Junior Subordinated Debentures at any time or from time to time for a period not
to exceed 20 consecutive quarters with respect to each deferral period (each, an
"Extension Period"), provided that no Extension Period may 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, the Company
may elect to begin a new Extension Period subject to the requirements set forth
herein. If interest payments on the Junior Subordinated Debentures are so
deferred, Distributions on the Preferred Securities will also be deferred, and
the Company will not be permitted, subject to certain exceptions described
herein, to declare or pay any cash distributions with respect to its capital
stock or debt securities that rank pari passu with or junior to the Junior
Subordinated Debentures. During an Extension Period, interest on the Junior
Subordinated Debentures will continue to accrue (and the amount of Distributions
to which holders of the Preferred Securities are entitled will accumulate) at
the rate of 9.75% per annum, compounded quarterly, and holders of the Preferred
Securities will be required to accrue interest income for United States federal
income tax purposes. See "Description of Junior Subordinated Debentures --
Option to Extend Interest Payment Period," and "Certain Federal Income Tax
Consequences -- Potential Extension of Interest Payment Period and Original
Issue Discount."
The Company has, through the Guaranty, Trust Agreement, Junior Subordinated
Debentures, Indenture and the Expense Agreement (each as defined herein), taken
together, fully, irrevocably and unconditionally guaranteed all of United
Capital's obligations under the Preferred Securities. See "Relationship Among
the Preferred Securities, the Junior Subordinated Debentures and the Guaranty --
Full and Unconditional Guaranty." The Guaranty of the Company guarantees the
payment of Distributions and payments on liquidation or redemption of the
Preferred Securities, but only in each case to the extent of funds held by
United Capital, as described herein. See "Description of Guaranty." If the
Company does not make interest payments on the Junior Subordinated Debentures
held by United Capital, United Capital will have insufficient funds to pay
Distributions on the Preferred Securities. The Guaranty does not cover payments
of Distributions when United Capital does not have sufficient funds to pay such
Distributions. The obligations of the Company under the Guaranty and the Junior
Subordinated Debentures are subordinate and junior in right of payment to all
Senior Indebtedness (as defined in "Description of Junior Subordinated
Debentures -- Subordination") of the Company.
The Trust Securities are subject to mandatory redemption, in whole or in part,
upon repayment of the Junior Subordinated Debentures at maturity or their
earlier redemption in an amount equal to the amount of Junior Subordinated
Debentures maturing or being redeemed at a redemption price equal to the
aggregate liquidation preference of the Trust Securities plus accumulated and
unpaid Distributions thereon to the date of redemption. Subject to Federal
Reserve approval, if then required, the Junior Subordinated Debentures are
redeemable prior to maturity at the option of the Company (a) on or after
January 15, 2002, in whole at any time or in part from time to time, or (b) at
any time, in whole (but not in part), upon the occurrence and during the
continuance of a Tax Event or an Investment Company Event (as defined herein),
in each case 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. See "Description of Preferred
Securities -- Redemption."
The Company will have the right at any time to terminate United Capital and
cause the Junior Subordinated Debentures to be distributed to holders of
Preferred Securities in liquidation of United Capital, subject to the Company
having received prior approval of the Federal Reserve to do so if then required
under applicable capital guidelines or policies of the Federal Reserve. See
"Description of Preferred Securities -- Redemption." As of September 30, 1996,
after giving pro forma effect to the Park Acquisition, the Company had
approximately $40.7 million aggregate principal amount of Senior Indebtedness
outstanding. The terms of the Junior Subordinated Debentures place no limitation
on the amount of Senior Indebtedness that the Company can issue. See
"Description of Junior Subordinated Debentures -- Subordination." The Junior
Subordinated Debentures are unsecured and subordinated to all Senior
Indebtedness.
In the event of the termination of United Capital, after satisfaction of
liabilities to creditors of United Capital as required by applicable law, the
holders of Preferred Securities will be entitled to receive a Liquidation Amount
of $25 per Preferred Security ("Liquidation Amount"), plus accumulated and
unpaid Distributions thereon to the date of payment, which may be in the form of
a distribution of such amount of a Subordinated Debenture, subject to certain
exceptions. See "Description of Preferred Securities -- Liquidation Distribution
Upon Termination."
United does not intend to list the Preferred Securities on any securities
exchange or include them for quotation on the Nasdaq National Market or any
other quotation system. Although the Underwriter has indicated an intention to
make a market in the Preferred Securities, the Underwriter is not obligated to
make a market in the Preferred Securities, and any market making may be
discontinued at any time at the sole discretion of such Underwriter. There can
be no assurance that a market will develop for the Preferred Securities. See
"Risk Factors -- Limited Trading Market" and "Underwriting." Concurrently with
this Offering, United is offering by separate Prospectus up to 72,000 shares of
its Common Stock. See "Description of the Company's Capital Stock -- Common
Stock."
2
<PAGE>
The Preferred Securities will be represented by one or more global certificates
registered in the name of The Depository Trust Company (the "Depositary") or its
nominee. Beneficial interests in the Preferred Securities will be shown on, and
transfers thereof will be effected only through, records maintained by
participants in the Depositary. Except as described herein, Preferred Securities
in certificate form will not be issued in exchange for the global certificates.
See "Book-Entry Issuance."
AS USED HEREIN, THE "INDENTURE" MEANS THE SUBORDINATED INDENTURE, DATED AS OF
JANUARY 16, 1997, AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME, BETWEEN THE
COMPANY AND WILMINGTON TRUST COMPANY, AS TRUSTEE (THE "INDENTURE TRUSTEE"),
UNDER WHICH THE JUNIOR SUBORDINATED DEBENTURES WILL BE ISSUED.
--------------------------
UNITED COMMUNITY BANCHARES, INC.
OFFICE LOCATIONS
[MAP]
--------------------------
The Company intends to furnish to the holders of Preferred Securities 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 12 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.
--------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY EFFECT TRANSACTIONS WHICH
STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PREFERRED SECURITIES AT A LEVEL
ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
3
<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 $442 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.
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's common stock in the
approximate minimum amount of $5 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
(estimated as of September 30, 1996 to be approximately $46 million) is 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. As of the date of this Prospectus, all conditions
precedent to the consummation of the Park Acquisition have been satisfied or
waived, with the only remaining condition being the consummation of the sale of
the Preferred Securities offered hereby. The Park Acquisition will be accounted
for under the purchase method of accounting and will close concurrently with
this Offering. 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-
4
<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. Typically, 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 for federal
income tax purposes the interest paid to the trust on the subordinated
debentures. To take advantage of this new Federal Reserve Board approval, and to
be able to deduct the interest on the subordinated debentures, the Company
created United Capital Trust I ("United Capital"). United Capital is a statutory
business trust formed under Delaware law pursuant to (i) the Trust Agreement
executed by the Company, as Depositor, Wilmington Trust Company, as Property
Trustee and as Delaware Trustee, and the Administrative Trustees named therein
("Trust Agreement"), and (ii) the filing of a certificate of trust with the
Delaware Secretary of State on December 6 , 1996. United Capital's business and
affairs are conducted by its Property Trustee, Delaware Trustee, and three
individual Administrative Trustees who are officers of the Company. 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 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 an event of default under the Trust Agreement resulting from an event of
default under the Indenture, the rights of the
5
<PAGE>
Company as holder of the Common Securities to payment in respect of
Distributions and payments upon liquidation, redemption or otherwise will be
subordinated to the rights of the holders of the Preferred Securities. See
"Description of Preferred Securities -- Subordination of Common Securities." The
Company will acquire Common Securities in an aggregate liquidation amount equal
to 3% of the total capital of United Capital. United Capital has a term of 54
years, but may terminate earlier as provided in the 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.
THE OFFERING
<TABLE>
<S> <C>
Preferred Securities issuer....... United Capital.
Securities offered................ 440,000 Preferred Securities. The Preferred Securities
represent undivided beneficial interests in United
Capital's assets, which will consist solely of the
Junior Subordinated Debentures and payments thereunder.
Distributions..................... The distributions payable on each Preferred Security
will be fixed at a rate per annum of 9.75% of the
Liquidation Amount of $25 per Preferred Security, will
be cumulative, will accrue from the date of issuance of
the Preferred Securities, and will be payable quarterly
in arrears, on the last day of March, June, September
and December in each year, commencing March 31, 1997.
See "Description of Preferred Securities --
Distributions."
Option to extend interest payment
period........................... The Company has the right, at any time, to defer
payments of interest on the Junior Subordinated
Debentures for a period not exceeding 20 consecutive
quarters; provided, that no Extension Period may extend
beyond the Stated Maturity of the Junior Subordinated
Debentures. As a consequence of the Company's extension
of the interest payment period, quarterly Distributions
on the Preferred Securities would be deferred (though
such Distributions would continue to accrue with
interest thereon compounded quarterly, since interest
would continue to accrue and compound on the Junior
Subordinated Debentures, to the extent permitted by
applicable law) during any such Extension Period. During
an Extension Period, the Company will be prohibited,
subject to certain exceptions described herein, from
declaring or paying any cash distributions with respect
to its capital stock or debt securities that rank pari
passu with or junior to the Junior Subordinated
Debentures. Upon the termination of any Extension Period
and the payment of all amounts then due, the Company may
commence a new Extension Period, subject to the
foregoing requirements. See "Description of Junior
Subordinated Debentures -- Option to Extend Interest
Payment Period."
Should an Extension Period occur, Preferred Security
holders will continue to recognize interest income for
United States federal income tax purposes. See "Certain
Federal Income Tax Consequences -- Potential Extension
of Interest Payment Period and Original Issue Discount."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Redemption........................ Subject to Federal Reserve approval, if then required
under applicable capital guidelines or policies of the
Federal Reserve, the Junior Subordinated Debentures are
redeemable prior to maturity at the option of the
Company (1) on or after January 15, 2002, in whole at
any time or in part from time to time, or (2) at any
time, in whole (but not in part), upon the occurrence
and during the continuance of a Tax Event or an
Investment Company Event, in each case at the redemption
price equal to 100% of the principal amount of the
Junior Subordinated Debentures so redeemed, together
with any accrued but unpaid interest to the date fixed
for redemption. The Preferred Securities are subject to
mandatory redemption, upon repayment of the Junior
Subordinated Debentures at maturity or their earlier
redemption in an amount equal to the amount of Junior
Subordinated Debentures maturing on or being redeemed at
a redemption price equal to the aggregate liquidation
preference of the Preferred Securities plus accumulated
and unpaid Distributions thereon to the date of
redemption. See "Description of Junior Subordinated
Debentures -- Redemption."
Distribution of Junior
Subordinated Debentures.......... The Company has the right at any time to terminate the
Preferred Securities and cause the Junior Subordinated
Debentures to be distributed to holders of Preferred
Securities in liquidation of United Capital, subject to
the Company having received prior approval of the
Federal Reserve to do so if then required under
applicable capital guidelines or policies of the Federal
Reserve. See "Description of Preferred Securities --
Redemption."
Guaranty.......................... Under the terms of its Guaranty, the Company has
guaranteed the payment of Distributions and payments on
liquidation or redemption of the Preferred Securities,
but only in each case to the extent of funds held by
United Capital, as described herein. The Company has,
through the Guaranty, Trust Agreement, Junior
Subordinated Debentures, Indenture, and Expense
Agreement, taken together, fully, irrevocably and
unconditionally guaranteed all of United Capital's
obligations under the Preferred Securities. The
obligations of the Company under the Guaranty and the
Junior Subordinated Debentures are subordinate and
junior in right of payment to all Senior Indebtedness.
See "Description of Guaranty."
Ranking........................... The Preferred Securities will rank pari passu, and
payments thereon will be made pro rata, with the Common
Securities except as described under "Description of
Preferred Securities -- Subordination of Common
Securities." The Junior Subordinated Debentures will be
unsecured and subordinate and junior in right of payment
to all Senior Indebtedness to the extent and in the
manner set forth in the Indenture. See "Description of
Junior Subordinated Debentures." The Guaranty will
constitute an unsecured obligation of the Company and
will rank subordinate
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
and junior in right of payment to all Senior
Indebtedness to the extent and in the manner set forth
in the Guaranty Agreement. See "Description of
Guaranty."
Voting rights..................... Generally, the holders of the Preferred Securities will
not have any voting rights. See "Description of
Preferred Securities -- Voting Rights; Amendment of
Trust Agreement."
Listing........................... United does not intend to list the Preferred Securities
on any securities exchange or include it for quotation
on the Nasdaq National Market or any other quotation
system. See "Risk Factors -- Limited Public Market" and
"Underwriting."
Use of proceeds................... The proceeds from the sale of the Preferred Securities
offered hereby will be used by United Capital to
purchase the Junior Subordinated Debentures issued by
the Company. The net proceeds to the Company from the
sale of the Junior Subordinated Debentures will be used
to provide a portion of the financing for the Park
Acquisition and to increase the Company's qualifying
"Tier 1" capital in order for the Company to have
sufficient capital to consummate the Park Acquisition.
See "Use of Proceeds."
Risk factors...................... Prospective investors should consider certain risk
factors in connection with the purchase of the Preferred
Securities offered hereby. See "Risk Factors."
Underwriting...................... Piper Jaffray Inc. (the "Underwriter"), has agreed,
subject to the terms and conditions of a Purchase
Agreement to be entered into by the Underwriter, United
and United Capital, to purchase from United Capital
440,000 Preferred Securities. The Underwriter is
committed to purchase and pay for all such Preferred
Securities if any are purchased. See "Underwriting."
</TABLE>
8
<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
consummated concurrently with the closing of this Offering and 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
consummated concurrently with the closing of this Offering and 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."
9
<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>
10
<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............................................ $ 5.14 $ 3.92 $ 4.55
--------- --------- --------
--------- --------- --------
Weighted average common shares outstanding............................. 596,239 557,930 567,466
--------- --------- --------
--------- --------- --------
BALANCE SHEET DATA
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>
- ------------------------------
(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.
11
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE FOLLOWING
FACTORS IN CONNECTION WITH THE DECISION TO PURCHASE SHARES OF PREFERRED
SECURITIES.
DEPENDENCE ON DIVIDENDS FROM SUBSIDIARY BANKS
The ability of United Capital to pay amounts due on the Preferred Securities
is solely dependent upon the Company making payments on the Junior Subordinated
Debentures as and when required. As a holding company without significant assets
other than its equity interest in its subsidiary banks, United's ability to pay
interest on the Junior Subordinated Debentures to United Capital (and
consequently United Capital's ability to pay Distributions on the Preferred
Securities and the Company's ability to pay its obligations under the Guaranty)
depends primarily upon the cash dividends United receives from the subsidiary
banks. Dividend payments from the subsidiary banks are subject to regulatory
limitations, generally based on current and retained earnings, imposed by the
various regulatory agencies with authority over the respective subsidiary banks.
Payment of dividends is also subject to regulatory restrictions if such
dividends would impair the capital of the subsidiary banks. Payment of
subsidiary bank dividends is also subject to the bank's profitability, financial
condition and capital expenditures and other cash flow requirements. No
assurance can be given that the subsidiary banks will be able to pay dividends
at past levels, or at all, in the future. See "Supervision and Regulation."
Following the Park Acquisition, covenants in the Company's loan agreement
with Firstar will require, among other things, that each of Signal Bank, Goodhue
Bank and Park Bank maintains a ratio of total tangible stockholders' equity plus
allowance for loan losses to total assets of 7% or greater. As of September 30,
1996, such ratio was 8.7% at Signal Bank, 8.6% at Goodhue Bank, and, after
giving pro forma effect to the Park Acquisition, 9.0% at Park Bank. In the event
a subsidiary bank fails to maintain its minimum capital level, that bank will be
restricted from paying dividends to United. See "Acquisition of Park --
Financing."
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTY AND THE JUNIOR
SUBORDINATED DEBENTURES
The obligations of the Company under the Guaranty issued by the Company for
the benefit of the holders of Preferred Securities and the obligations of the
Company under the Junior Subordinated Debentures are unsecured and rank
subordinate and junior in right of payment to all Senior Indebtedness of the
Company. At September 30, 1996, after giving pro forma effect to the Park
Acquisition, the aggregate outstanding Senior Indebtedness of the Company was
approximately $40.7 million. Because the Company is a holding company, the right
of the Company to participate in any distribution of assets of any subsidiary,
including the Banks, upon such subsidiary's liquidation or reorganization or
otherwise (and thus the ability of holders of the Preferred Securities to
benefit indirectly from such distribution), is subject to the prior claims of
creditors of that subsidiary, except to the extent that the Company may itself
be recognized as a creditor of that subsidiary. Accordingly, the Junior
Subordinated Debentures will be effectively subordinated to all existing and
future liabilities of the subsidiaries, including the Banks, and holders of
Junior Subordinated Debentures should look only to the assets of the Company for
payments on the Junior Subordinated Debentures. At September 30, 1996, after
giving pro forma effect to the Park Acquisition, United would have outstanding
indebtedness and other liabilities, including deposits, of $610 million. See
"Description of Junior Subordinated Debentures." Neither the Indenture, the
Guaranty nor the Trust Agreement places any limitation on the amount of secured
or unsecured debt, including Senior Indebtedness that may be incurred by the
Company. See "Description of Guaranty -- Status of the Guaranty" and
"Description of Junior Subordinated Debentures -- Subordination."
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES
The Company has the right under the Indenture to 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 with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. As a consequence of any such
deferral, quarterly
12
<PAGE>
Distributions on the Preferred Securities by United Capital will be deferred
(and the amount of Distributions to which holders of the Preferred Securities
are entitled will accumulate additional Distributions thereon at the rate of
9.75% per annum, compounded quarterly from the relevant payment date for such
Distributions, to the extent permitted by applicable law) during any such
Extension Period. 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 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
with 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
and (d) purchases of Common Stock related to the 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 defer the
payment of interest, 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 Extension Period and the payment of all
interest then accrued and unpaid (together with interest thereon at the annual
rate of 9.75% compounded quarterly, to the extent permitted by applicable law),
the Company may elect to begin a new Extension Period subject to the above
requirements. There is no limitation on the number of times that the Company may
elect to begin an Extension Period. See "Description of Preferred Securities --
Extension Period" and "Description of Junior Subordinated Debentures -- Option
to Extend Interest Payment Period."
If the Company exercises its right to defer payments of interest, the
holders of Preferred Securities will be required to include their pro rata share
of original issue discount in gross income as it accrues for United States
federal income tax purposes in advance of the receipt of cash. See "Certain
Federal Income Tax Consequences -- Potential Extension of Interest Payment
Period and Original Issue Discount."
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 market price of the Preferred Securities is likely to
be adversely affected. A holder that disposes of such holder's Preferred
Securities during an Extension Period, therefore, might not receive the same
return on such holder's investment as a holder that continues to hold the
Preferred Securities. In addition, as a result of the existence of the Company's
right to defer interest payments, the market price of the Preferred Securities
may be more volatile than the market prices of other securities on which
original issue discount accrues that are not subject to such optional deferrals.
TAX EVENT OR INVESTMENT COMPANY EVENT REDEMPTION
Upon the occurrence and during the continuance 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 in whole
(but not in part) at 100% of the principal amount together with accrued but
unpaid interest to the date fixed for redemption within 90 days following the
occurrence of such Tax Event or Investment Company Event and therefore cause a
mandatory redemption of the Preferred Securities. The exercise of such right is
subject to the Company having received prior approval of the Federal Reserve to
do so if then required under applicable capital guidelines or policies of the
Federal Reserve.
A "Tax Event" means the receipt by the Company and United Capital of an
opinion of counsel experienced in such matters to the effect that, as a result
of any amendment to, or change (including any announced prospective change) in
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
which pronouncement or decision is announced on or after the date of issuance of
the
13
<PAGE>
Preferred Securities under the Trust Agreement, or the Junior Subordinated
Debentures under the Indenture, as the case may be, 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.
An "Investment Company Event" means the receipt by the Company and United
Capital of an opinion of counsel experienced in such matters to the effect that,
as a result of the occurrence of a change in law or regulation or a change in
interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority, United Capital is or will be
considered an "investment company" that is required to be registered under the
Investment Company Act, which change becomes effective on or after the date of
original issuance of the Preferred Securities.
See "Risk Factors -- Possible Tax Law Changes Affecting the Preferred
Securities" for a discussion of certain legislative proposals that, if adopted,
could give rise to a Tax Event, which may permit the Company to cause a
redemption of the Junior Subordinated Debentures (and therefore the Preferred
Securities) prior to January 15, 2002.
POSSIBLE TAX LAW CHANGES AFFECTING THE PREFERRED SECURITIES
On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill") was
released which would, among other things, generally deny interest deductions for
interest on an instrument issued by a corporation that has a maximum weighted
average maturity of more than 40 years. The Bill would also generally deny
interest deductions for interest on an instrument, issued by a corporation, that
has a maximum term of more than 20 years and that is not shown as indebtedness
on the separate balance sheet of the issuer or, where the instrument is issued
to a related party (other than a corporation), where the holder or some other
related party issues a related instrument that is not shown as indebtedness on
the issuer's consolidated balance sheet. If either provision were to apply to
the Junior Subordinated Debentures, the Company would be unable to deduct
interest on the Junior Subordinated Debentures. However, on March 29, 1996, the
Chairmen of the Senate Finance and House Ways and Means Committees issued a
joint statement to the effect that it was their intention that the effective
date of the President's legislative proposals, if adopted, will be no earlier
than the date of appropriate Congressional action. There can be no assurance,
however, that current or future legislative proposals or final legislation will
not affect the ability of the Company to deduct interest on the Junior
Subordinated Debentures. Such a change could give rise to a Tax Event, which may
permit the Company, upon approval of the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve, to cause a
redemption of the Preferred Securities before, as well as after January 15,
2002. See "Description of Junior Subordinated Debentures -- Redemption" and
"Description of Preferred Securities -- Redemption -- Tax Event Redemption." See
also "Certain Federal Income Tax Consequences -- Possible Tax Law Changes
Affecting the Preferred Securities."
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDER OF PREFERRED SECURITIES
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 in liquidation of United Capital. The exercise of 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. See "Description of Preferred Securities -- Redemption."
14
<PAGE>
SHORTENING OF STATED MATURITY OF JUNIOR SUBORDINATED DEBENTURES
The Company will have the right at any time to shorten the maturity of the
Junior Subordinated Debentures to a date not earlier than January 15, 2002. The
exercise of 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.
EXTENSION OF STATED MATURITY OF JUNIOR SUBORDINATED DEBENTURES
The Company will also have the right to extend the maturity of the Junior
Subordinated Debentures whether or not United Capital is terminated and the
Junior Subordinated Debentures are distributed to holders of the Preferred
Securities to a date no later than the January 15, 2046, provided that the
Company has received prior approval of the Federal Reserve if then required
under applicable capital guidelines or policies of the Federal Reserve, and only
if at the time such election is made and at the time of such extension (i) the
Company is not in bankruptcy, otherwise insolvent or in liquidation, (ii) the
Company is not in default in the payment of any interest or principal on the
Junior Subordinated Debentures, and (iii) United Capital is not in arrears on
payments of Distributions on the Preferred Securities and no deferred
Distributions are accumulated.
RIGHTS UNDER THE GUARANTY
The Guaranty will be qualified as an indenture under the Trust Indenture Act
of 1939, as amended (the "Trust Indenture Act"). Wilmington Trust Company
("Wilmington") will act as the indenture trustee under the Guaranty (the
"Guaranty Trustee") for the purposes of compliance with the Trust Indenture Act
and will hold the Guaranty for the benefit of the holders of the Preferred
Securities. Wilmington will also act as Indenture Trustee for the Junior
Subordinated Debentures and as Property Trustee and as Delaware Trustee under
the Trust Agreement. The Guaranty insures that the holders of the Preferred
Securities will receive the following payments, to the extent not paid by United
Capital: (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 Liquidation Amount and all accumulated
and unpaid Distributions to the date of redemption, 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 aggregate of the Liquidation Amount and all
accumulated and unpaid Distributions to the date of payment to the extent that
United Capital has funds on hand available therefor at such time and (b) the
amount of assets of United Capital remaining available for distribution to
holders of the Preferred Securities in liquidation of United Capital. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guaranty Trustee in
respect of the Guaranty or to direct the exercise of any trust power conferred
upon the Guaranty Trustee under the Guaranty. Any holder of the Preferred
Securities may institute a legal proceeding directly against the Company to
enforce such holder's rights under the Guaranty without first instituting a
legal proceeding against United Capital, the Guaranty Trustee or any other
person or entity. If the Company were to default on its obligation to pay
amounts payable under the Junior Subordinated Debentures, United Capital would
lack funds for the payment of Distributions or amounts payable on redemption of
the Preferred Securities or otherwise, and, in such event, holders of Preferred
Securities would not be able to rely upon the Guaranty for such amounts.
Instead, in the event a Debenture Event of Default (as defined herein) shall
have occurred and be continuing and such event is attributable to the failure of
the Company to pay interest on or principal of the Junior Subordinated
Debentures on the payment date on which such payment is due and payable, then 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
(a "Direct Action"). In connection with such Direct Action, the Company will
have a right of set-off under the Indenture to the extent of any payment made by
the Company
15
<PAGE>
to such holder of Preferred Securities in the Direct Action. Except as described
herein, holders of Preferred Securities will not be able to exercise directly
any other remedy available to the holders of the Junior Subordinated Debentures
or assert directly any other rights in respect of the Junior Subordinated
Debentures, including the right to accelerate the unpaid amount of the Junior
Subordinated Debentures. See "Description of Junior Subordinated Debentures --
Enforcement of Certain Rights by Holders of Preferred Securities" and "--
Debenture Events of Default" and "Description of Guaranty." The Trust Agreement
provides that each holder of Preferred Securities by acceptance thereof agrees
to the provisions of the Guaranty and the Indenture.
LIMITED COVENANTS
The covenants in the Indenture are limited and there are no covenants in the
Trust Agreement. As a result, neither the Indenture nor the Trust Agreement
protects holders of Junior Subordinated Debentures, or Preferred Securities,
respectively in the event of a material adverse change in the Company's
financial condition or results of operations or limits the ability of the
Company or any subsidiary to incur additional indebtedness. Therefore, the
provisions of these governing instruments should not be considered a significant
factor in evaluating whether the Company will be able to comply with its
obligations under the Junior Subordinated Debentures or the Guaranty.
LIMITED VOTING RIGHTS
Holders of Preferred Securities will generally have limited voting rights
relating only to the modification of the Preferred Securities and the exercise
of United Capital's rights as holder of Junior Subordinated Debentures and the
Guaranty. Holders of Preferred Securities will not be entitled to vote to
appoint, remove or replace the Property Trustee or the Delaware Trustee, and
such voting rights are vested exclusively in the holder of the Common Securities
except upon the occurrence of certain events described herein. The Property
Trustee, the Administrative Trustees and the Company may amend the Trust
Agreement without the consent of holders of Preferred Securities to ensure that
United Capital will be classified for United States federal income tax purposes
as a grantor trust even if such action adversely affects the interests of such
holders. See "Description of Preferred Securities -- Voting Rights; Amendment of
Trust Agreement" and "-- Removal of United Capital Trustees."
LIMITED TRADING MARKET
United does not intend to list the Preferred Securities on any securities
exchange, or include the Preferred Securities for quotation on the Nasdaq
National Market or any other market system. There is no existing public market
for the Preferred Securities, and there can be no assurance that an active or
liquid trading market for the Preferred Securities will develop following the
Offering, or that, if such a market does develop, it will continue. The
Underwriter has indicated an intention to make a market in the Preferred
Securities, although the Underwriter has no obligation to make a market and, if
such a market is made, there can be no assurance that an active trading market
will develop or that any such market making which does take place will not be
discontinued at any time at the sole discretion of the Underwriter. If the
Preferred Securities are traded after their original issuance, they may trade at
a discount to their stated value. See "Underwriting."
MARKET PRICES
There can be no assurance as to the market prices for Preferred Securities
or Junior Subordinated Debentures that may be distributed in exchange for
Preferred Securities if a liquidation of United Capital occurs. Accordingly, the
Preferred Securities that an investor may purchase, whether pursuant to the
offer made hereby or in the secondary market, or the Junior Subordinated
Debentures that a holder of Preferred Securities may receive on liquidation of
United Capital, may trade at a discount to the price that the investor paid to
purchase the Preferred Securities offered hereby. In addition, there can be no
assurance that the Company will not exercise its option to change the maturity
of the Junior Subordinated Debentures as permitted by the terms thereof and of
the Indenture. Because holders of Preferred Securities may receive Junior
Subordinated Debentures on liquidation of United Capital, prospective purchasers
of Preferred
16
<PAGE>
Securities are also making an investment decision with regard to the Junior
Subordinated Debentures and should carefully review all the information
regarding the Junior Subordinated Debentures contained herein. See "Description
of Junior Subordinated Debentures."
TRADING CHARACTERISTICS OF PREFERRED SECURITIES
The Preferred Securities may trade at prices that do not fully reflect the
value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. A holder of Preferred Securities that disposes of such
holder's Preferred Securities between record dates for payments of Distributions
(and consequently does not receive a Distribution from United Capital for the
period prior to such disposition) will nevertheless be required to include
accrued but unpaid interest on the Junior Subordinated Debentures through the
date of disposition in income as ordinary income and to add such amount to its
adjusted tax basis in the Preferred Securities disposed. Such holder will
recognize a capital loss to the extent the selling price (which may not fully
reflect the value of accrued but unpaid interest) is less than its adjusted tax
basis (which will include accrued but unpaid interest). Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes. See "Certain Federal Income Tax
Consequences -- Disposition of Preferred Securities."
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. Concurrently with the closing of
this Offering, the Company will consummate the Park Acquisition. The Park
Acquisition is 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. Available earnings and cash
flow to pay interest on the Junior Subordinated Debentures to United Capital
(and consequently United Capital's ability to pay Distributions on the Preferred
Securities) 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 requires the dedication of an
increased portion of cash flow to the payment of principal and interest, thereby
reducing funds available for interest on the Junior Subordinated Debentures (and
hence Distributions on the Preferred Securities), 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-
17
<PAGE>
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."
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 ability to pay interest on the Junior Subordinated Debentures (and
consequently United Capital's ability to pay Distributions on the Preferred
Securities) 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
18
<PAGE>
competitors have greater financial and other resources than United. No assurance
can be given that United will be able to continue to compete successfully in
these markets. In addition, recent legislation permitting nationwide interstate
banking and branching could increase competition by both in-state and
out-of-state banking or other financial institutions, and as a result could
adversely affect United's business. See "Business -- Competition."
DEPENDENCE UPON KEY PERSONNEL
The continued success of United is substantially dependent upon the efforts
of the directors and executive officers of United, in particular, R. Scott
Jones, Chairman and Galen T. Pate, President. The success of United depends in
large part on the retention of present key management personnel, and upon 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 the offering of United's Common
Stock occurring concurrently with this Offering, following completion of such
Common Stock 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 the concurrent 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."
POSSIBLE LACK OF AVAILABLE INFORMATION
The Company anticipates that it will not be required to register the
Preferred Securities or the Junior Subordinated Debentures pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and does not
presently intend voluntarily to effect such a registration. Following the
offering, the Company will be subject to the periodic and other reporting
requirements of the Exchange Act for the 1997 calendar year pursuant to Section
15(d) thereof. Thereafter, provided the Preferred Securities are 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 Preferred
Securities 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 the holders of the Preferred
Securities even if not required to do so pursuant to the Exchange Act. See
"Additional Information."
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.
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"). All conditions to the
Merger, including receipt of applicable regulatory approvals, have been
satisfied or waived, with the only remaining condition being the consummation of
the sale of the Preferred Securities offered hereby. It is expected that the
Merger will be consummated concurrently with the closing of this Offering.
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.
19
<PAGE>
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.
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
In connection with the Merger, the shareholders of PFC will receive
aggregate cash consideration estimated as of September 30, 1996 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. For accounting purposes, the Park Acquisition
will be accounted for under the purchase method for business combinations, which
requires adjusting the assets and liabilities of Park Bank to their fair value
and the recording of goodwill at an amount equal to the difference between the
aggregate cash payment and the fair value of the tangible assets and
liabilities. The Park Acquisition is subject to various conditions, including
bank regulatory approval, all of which have been satisfied or waived with the
only remaining condition being the consummation of the sale of the Preferred
Securities offered hereby.
20
<PAGE>
In the Merger Agreement, PFC and the Park Financial Corporation Common Stock
Revocable Trust (the "Trust"), a majority shareholder of PFC, have made various
representations and warranties relating to the due organization of PFC and Park
Bank, authorization of PFC to enter into the Merger Agreement, capitalization
and financial statements of PFC and Park Bank and other matters customary in
transactions of this type. The Merger Agreement includes covenants obligating
PFC and Park Bank to conduct their operations pending closing of the Merger in
the ordinary course of business and in compliance with various restrictions
intended to protect the financial condition of PFC and Park Bank and customary
in transactions of this type.
Pursuant to a separate Indemnification Agreement, the Trust and certain
beneficiaries of the Trust (the "Indemnifying Parties") have agreed to indemnify
United, the 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 Trust in the Merger Agreement.
FINANCING
The aggregate financing for the Park Acquisition will come from the proceeds
from this Offering, the proceeds from the sale of United's Common Stock
occurring concurrently with this Offering in the approximate minimum amount of
$5 million (after deducting offering expenses), cash on hand in the aggregate
amount of $7 million, and a loan from Firstar in the amount of $24 million. In
addition to providing financing for the Park Acquisition, the net proceeds from
the sale of the Junior Subordinated Debentures (purchased with the proceeds from
the Preferred Securities) and the net proceeds from the sale of the Common Stock
will also be used to increase United's qualifying "Tier 1" capital. "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.
United and Firstar have entered into a Loan Agreement, under which Firstar
is providing a loan of up to an aggregate amount of $27 million, of which $24
million will enable United to complete the Park Acquisition. The loan is for a
five-year term, with interest payable quarterly and principal (based on a ten-
year amortization) payable annually. Interest will accrue at a rate equal to 140
basis points in excess of the three-month LIBOR Rate. All indebtedness of United
to Firstar under the loan will be secured by a pledge of all of the stock of
Park Bank, Signal Bank and Goodhue Bank. The Loan Agreement with Firstar
contains 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
Bank 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 pledged to
Firstar.
21
<PAGE>
USE OF PROCEEDS
All of the proceeds from the sale of Preferred Securities will be invested
by United Capital in the Junior Subordinated Debentures. The net proceeds to the
Company from the sale of Junior Subordinated Debentures are estimated to be
$10,159,000 net of estimated underwriting commission, the Advisory Fee and other
estimated offering expenses. The Company will use the net proceeds from the sale
of Junior Subordinated Debentures, together with the proceeds from the offering
of the Company's Common Stock occurring concurrently with the Offering of the
Preferred Securities, to provide a portion of the financing for the Park
Acquisition and to increase the Company's qualifying "Tier 1" capital in order
for the Company to have sufficient capital to consummate the Park Acquisition.
The Preferred Securities are expected to qualify as Tier 1 capital. See
"Supervision and Regulation."
In addition to the net proceeds from the issuance of the Junior Subordinated
Debentures, United will receive an approximate minimum amount of $5 million from
the sale of its Common Stock occurring concurrently with this Offering and $24
million from the proceeds of a loan from Firstar, and will obtain $7 million
from cash-on-hand, to provide the financing for the Park Acquisition, estimated
as of September 30, 1996 to be $46 million in the aggregate. See "Acquisition of
Park."
ACCOUNTING TREATMENT
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 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 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.
All future reports of the Company filed under the Securities Exchange Act of
1934 will include a footnote to the financial statements stating that (i) the
Trust is wholly-owned; (ii) the sole assets of the Trust are the Junior
Subordinated Debentures (specifying the principal amount, interest rate and
maturity date of such Junior Subordinated Debentures); and (iii) the back-up
obligations, in the aggregate, constitute a full and unconditional guaranty by
the Company of the obligations of the Trust under the Preferred Securities. The
Trust will not provide separate reports under the Securities Exchange Act of
1934.
22
<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 Preferred Securities offered in this Offering, the
sale of the minimum number of shares of Common Stock offered by United
concurrently with this Offering and the proceeds from the financing from
Firstar. See "Acquisition of Park." In addition, certain capital ratios are also
presented. The table should be read in conjunction with the financial statements
and related notes contained elsewhere herein.
<TABLE>
<CAPTION>
AS OF 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 9.75% 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 Subornidated 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.
23
<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."
24
<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....... 277,345 257,376 263,006 244,125 217,317 112,583 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 3,602 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 0.49 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>
25
<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>
26
<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............................................ $ 5.14 $ 3.92 $ 4.55
--------- --------- --------
--------- --------- --------
Weighted average common shares outstanding............................. 596,239 557,930 567,466
--------- --------- --------
--------- --------- --------
BALANCE SHEET DATA
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.
27
<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, which will be consummated concurrently with completion
of this Offering, 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
28
<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
29
<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.
30
<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.
31
<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.
32
<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.
33
<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.
34
<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>
SEPTEMBER 30,
1996
----------------
AMOUNT PERCENT
------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Commercial and
agricultural.............. $166,013 59.2%
Residential real estate.... 66,139 23.6
Consumer................... 36,274 13.0
Leases..................... 11,787 4.2
------- --------
Totals loans and
leases.................. $280,213 100.0%
------- --------
------- --------
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1995 1994 1993 (1) 1992 (2) 1991 (2)
------------------- ------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(PRO FORMA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
agricultural.............. $ 149,859 56.3% $143,227 58.0% $112,790 51.3% $67,831 72.2% $57,997 67.9%
Residential real estate.... 69,577 26.2 58,828 23.8 66,834 30.4 13,539 14.4 14,373 16.8
Consumer................... 35,897 13.5 35,655 14.4 33,920 15.4 12,581 13.4 13,085 15.3
Leases..................... 10,572 4.0 9,271 3.8 6,498 2.9 -- -- -- --
--------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Totals loans and
leases.................. $ 265,905 100.0% $246,981 100.0% $220,042 100.0% $93,951 100.0% $85,455 100.0%
--------- -------- -------- -------- -------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
- ----------------------------------
(1) Combines Signal and Goodhue
(2) Includes the financial information of Signal only
The loan mix in United's portfolio indicates the trend toward commercial and
agricultural loans. This trend has resulted from a focus on growing the
commercial loan portfolio. United expects this trend to continue with the
addition of Park Bank.
COMMERCIAL AND AGRICULTURAL LOANS
Commercial and agricultural loans principally include loans to
manufacturing, wholesale, retail and agricultural businesses, including loans
secured by commercial real estate. Commercial loans are made on
35
<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>
36
<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.
37
<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.
38
<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.
39
<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.
40
<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.
41
<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.
42
<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.
43
<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,
44
<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
45
<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.
46
<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. The Park Acquisition will close concurrently with this
Offering.
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 1982,
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 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.
47
<PAGE>
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 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
48
<PAGE>
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 local Bank management to respond to local market conditions,
while at the same time providing for uniformity of basic lending policies among
all of United's subsidiary banks and facilitating overline lending among the
banks.
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Signal Bank participates in many of the SBA programs and is a "preferred
lender" 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 authorize, on behalf of the SBA, the SBA
guaranty on loans under the 7A program. This can represent a substantial time
savings in serving a customer's needs. Signal Bank has experienced significant
growth in its SBA lending division since its inception in 1991. The Bank
utilizes both the 504 program, which is focused toward longer-term financing of
buildings, and other long-term assets, and the 7A program which is primarily
used for financing of the equipment, inventory and working capital needs of
eligible businesses generally over a three- to seven-year term. The Bank's
collateral position in the SBA loans is enhanced by the SBA guaranty in the case
of 7A loans, and by lower loan-to-value ratios under the 504 program.
COMMERCIAL AND AGRICULTURAL LOANS. Loans in this category principally
include loans to manufacturing, wholesale, retail and agricultural businesses
including loans secured by commercial real estate. At 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 endeavoring to maximize investment income. United also attempts to
maximize tax advantages in balancing its portfolio. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Investment
Securities."
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DEPOSITS
Each of the Banks offers the usual and customary range of depository
products provided by commercial banks, including checking, savings and money
market accounts, and certificates of deposit. Deposits at each Bank are insured
by the Federal Deposit Insurance Corporation up to statutory limits. Local
managements of the Banks determine the type, mix and pricing of the depository
products offered to best compete in a Bank's particular marketplace.
OTHER CUSTOMER SERVICES AND PRODUCTS
Other aspects of the business of the Banks include cash management services
such as payroll processing, ACH originations and lock box services, safe deposit
box services, night depository services, wire transfers and automated teller
machines. The Banks have established "Investment Centers" which offer securities
brokerage services, annuities and mutual funds through an affiliation with a
brokerage service provider.
CONSUMER FINANCE BUSINESS
CCC, a wholly-owned subsidiary of United, engages in consumer credit
activities, and offers loans to consumers who are not traditional bank customers
for a variety of reasons including personal preferences, inability to obtain
small loans from traditional banks, blemished credit history, inability to
provide income verification data or lack of established credit history. CCC's
loan portfolio has grown from approximately $2.1 million as of December 31, 1993
to $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 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
51
<PAGE>
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.
Concurrently with the closing of this offering, United will close the Park
Acquisition and acquire 100% ownership of Park Bank. See "Acquisition of Park."
COMPETITION
United's Banks and CCC face significant competition from providers of
financial services throughout the Minneapolis-St. Paul metropolitan area and in
out-state Minnesota in all aspects of their business. The local financial
services industry is rapidly changing and highly competitive, dominated by
numerous banks of First Bank System and Norwest Corporation, and by TCF, fsb. In
addition, United competes with numerous banks, savings and loan associations,
securities brokerage firms and other financial services companies. Commercial
credit and leasing firms, consumer and commercial finance companies, factors,
and mortgage banks, also have some competitive effect on United. Some of these
entities and institutions are not subject to the same regulatory restrictions as
United. Many competitors of United have much greater financial resources,
greater name recognition and more offices with attendant personnel.
Management believes that each of United's Banks and CCC will be able to
continue to compete successfully in its respective communities. United believes
its competitive strengths include the reputation it has for developing and
continuing banking relationships, responsiveness to customer needs and
individualized customer service, and skilled and resourceful personnel. The
factors affecting competition include banking and financial services provided,
customer convenience and office location. United further believes that the
community commitment and involvement of its personnel and its commitment to
providing quality banking and financial services are factors that should allow
it to continue to maintain and improve its competitive position.
Legislation permitting full nationwide interstate banking and branching was
recently enacted by Congress. The Minnesota legislature has passed a law
permitting interstate branching (the acquisition of a bank in Minnesota by an
out-of-state bank without the requirement of maintaining a Minnesota banking
charter) as of June 1, 1997. These new laws may offer out-of-state banks an
enhanced opportunity to compete in United's markets. See "Supervision and
Regulation -- Recent Legislation."
United also faces competition in acquiring institutions. Minnesota has
recently experienced a significant consolidation of its banking industry, and
many large holding companies with greater resources than United (including
several out-of-state holding companies) are actively pursuing acquisitions in
Minnesota. This competition affects the acquisition opportunities for United and
can affect the cost of such acquisitions.
FACILITIES
United presently leases its principal office, consisting of approximately
3,860 square feet located at 2600 Eagan Woods Drive, Suite 155, Eagan,
Minnesota. The lease will expire July 31, 1999.
Signal Bank presently leases (i) its main office, consisting of
approximately 9,150 square feet plus an approximately 2,400 square foot
leasehold improvement, located at 100 Signal Hills, West St. Paul, Minnesota,
under a lease which will expire December 31, 2000; and (ii) two areas in the
Signal Hills Center which is located adjacent to Signal Bank's main office under
a lease which Signal Bank has terminated effective January 31, 1997, at which
time those employees will move to Signal Bank's main office. In addition, Signal
Bank operates branch offices in West St. Paul, Eagan and Savage, Minnesota. The
West St. Paul branch office is located in an approximately 4,000 square foot
detached building owned by Signal Bank and located
52
<PAGE>
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.
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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.
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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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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."
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<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 85% of 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
57
<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.
58
<PAGE>
RELATED PARTY TRANSACTIONS
United has entered into various transactions with its affiliates as set
forth below. United's management believes that the terms of the transactions are
no less favorable to United than would have been obtained from non-affiliates.
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.
These transactions were ratified by at least a majority of the independent
outside members of United's Board of Directors who do not have an interest in
the transactions.
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. United's acquisition
of such stock was ratified by at least a majority of the independent outside
members of United's Board of Directors who do not have an interest in the
transaction.
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
59
<PAGE>
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 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 the offering of United's Common Stock occurring concurrently with
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>
60
<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 the offering; to the extent such individuals purchase shares of Common
Stock in the offering, the number of shares and percentage owned by such
individual, and by all executive officers and directors as a group, will
exceed the amounts and percentages stated.
(2) Includes 200 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(3) Includes 1,200 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(4) Includes 900 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(5) Includes 67 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(6) Includes 1,800 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(7) Includes 720 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(8) Includes 5,800 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(9) Trustees of the United ESOP are: R. Scott Jones, Galen T. Pate, Marcia L.
O'Brien, John H. LeMay and Donald M. Davies.
(10) Includes 13,187 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
61
<PAGE>
SUPERVISION AND REGULATION
THE FOLLOWING DISCUSSION OF STATUTES AND REGULATIONS AFFECTING BANK HOLDING
COMPANIES AND BANKS IS A SUMMARY THEREOF AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH STATUTES AND REGULATIONS.
GENERAL
Commercial banking is highly regulated at both the federal and state level.
Deposits, reserves, investments, loans, consumer law compliance, issuance of
securities, payment of dividends, mergers and consolidations, electronic funds
transfers, management practices and other aspects of a holding company's and a
bank's operations are subject to regulation. This regulation is designed
primarily to protect depositors and not to benefit holders of securities of the
holding company or the bank. The highly regulated environment in which
commercial banks operate is subject to frequent change. Federal banking bills
are currently under consideration in Congress which, if enacted, could have a
variety of effects on this regulatory environment. In general, pending
legislation would repeal portions of the Glass-Steagall Act and would broaden
the permissible range of affiliations between commercial banks and investment
banks. In addition, these bills could limit the authority of the Office of the
Comptroller of the Currency to authorize new insurance activities for banks, and
could provide relief from a variety of federal banking regulations. United
cannot fully predict the nature or the extent of any effects which these
proposed regulatory changes or other possible regulatory changes may have on its
business and earnings. Such changes may have the effect of increasing or
decreasing the cost of doing business, modifying permissible activities, or
enhancing the competitive position of other financial institutions.
BANK HOLDING COMPANY REGULATION
In addition to a variety of generally applicable state and federal laws
governing businesses and employers, United is extensively regulated by special
laws applicable only to financial institutions. Virtually all aspects of
United's operations are subject to specific requirements or restrictions and
general regulatory oversight. With few exceptions, state and federal banking
laws have as their principal objective either the maintenance of the safety and
soundness of the financial institution and the federal deposit insurance system
or the protection of consumers or classes of consumers, rather than the specific
protection of shareholders of United.
SUPERVISION. As a bank holding company, United is subject to regulation by
the Federal Reserve Board under the BHC Act and various regulations adopted by
the Federal Reserve Board. United is required to file with the Federal Reserve
Board quarterly and annual reports and such additional information as the
Federal Reserve Board may require pursuant to the BHC Act. The Federal Reserve
Board also may examine United. United was examined most recently in August,
1996. United is not subject to any formal or informal enforcement actions by any
bank regulatory office as a result of such examination or for any other reason.
The Federal Reserve Board also has authority, in certain circumstances, to
approve or disapprove stock redemptions, changes in ownership or control, and
dividend payments. The Federal Reserve Board may also require that United
terminate an activity or terminate control of or liquidate or divest certain
non-bank subsidiaries or affiliates when the Federal Reserve Board believes the
activity or the control of the subsidiary or affiliate constitutes a significant
risk to the financial safety, soundness or stability of any of its banking
subsidiaries. Under the BHC Act and regulations adopted by the Federal Reserve
Board, a bank holding company and its non-banking subsidiaries are prohibited
from requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, United is
required by the Federal Reserve Board to maintain certain levels of capital.
PAYMENT OF DIVIDENDS BY UNITED. 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
62
<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.
63
<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
64
<PAGE>
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
(i) common shareholders' equity, (ii) qualifying perpetual preferred stock,
subject to certain limitations, and
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(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 June 1997. States, through legislative action taken
prior to June 1997, may opt out of the interstate branching
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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 PREFERRED SECURITIES
The Preferred Securities and the Common Securities will be issued pursuant
to the terms of the Trust Agreement. The Trust Agreement will be qualified as an
indenture under the Trust Indenture Act. Initially, Wilmington Trust Company
will be the Delaware Trustee and the Property Trustee and will act as trustee
for the purpose of complying with the Trust Indenture Act. The terms of the
Preferred Securities will include those stated in the Trust Agreement and those
made part of the Trust Agreement by the Trust Indenture Act. This summary
includes all material terms and provisions of the Preferred Securities and the
Trust Agreement. Wherever particular defined terms of the Trust Agreement (as
amended or supplemented from time to time) are referred to herein, such defined
terms are incorporated herein. The form of the Trust Agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
GENERAL
Pursuant to the terms of the Trust Agreement, the Trustees on behalf of
United Capital will issue the Preferred Securities and the Common Securities
(collectively, the "Trust Securities"). 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.
The Preferred Securities will rank pari passu, and payments will be made
thereon pro rata, with the Common Securities of United Capital except as
described under "-- Subordination of Common Securities."
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. The Guaranty executed by the Company for the
benefit of the holders of the Preferred Securities will be a guaranty on a
subordinated basis with respect to the Preferred Securities but will not
guaranty payment of Distributions or amounts payable on redemption or
liquidation of such Preferred Securities when United Capital does not have funds
on hand available to make such payments. See "Description of Guaranty."
DISTRIBUTIONS
PAYMENT OF DISTRIBUTIONS. The Preferred Securities represent beneficial
interests in United Capital, and Distributions on each Preferred Security will
be payable at the annual rate of 9.75% 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 Date"). Distributions on the
Preferred Securities will be payable to the holders thereof as they appear on
the register of United Capital or the relevant record date which, for so long as
the Preferred Securities remain in book-entry form, will be one Business Day
prior to the relevant Distribution Date and, in the event the Preferred
Securities are not in book-entry form, will be the 15th day of the month in
which the relevant Distribution Date occurs. Distributions will accumulate from
the date of original issuance. The first Distribution Date for the Preferred
Securities will be March 31, 1997. The amount of Distributions payable for any
period will be computed on the basis of a 360-day year of twelve 30-day months.
In the event that any date on which Distributions are payable on the Preferred
Securities is not a Business Day, then payment of the Distributions payable on
such date will be made on the next succeeding day that is a Business Day (and
without any additional Distributions, interest or other payment in respect of
any such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on the date such
payment was originally payable. As used in this Prospectus, a "Business Day"
shall mean any day other than a Saturday or a Sunday, or a day on which banking
institutions in the State of Minnesota are authorized or required by law or
executive order to remain closed or a day on which the corporate trust office of
the Property Trustee or the Delaware Trustee is closed for business.
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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 Trust Securities. See "Description of Junior Subordinated
Debentures." 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. See "Description of Guaranty."
EXTENSION PERIOD. The Company has the right under the Indenture to 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 with
respect to each such period (each, an "Extension Period"), provided that no
Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures. As a consequence of any such election, quarterly
Distributions on the Preferred Securities will be deferred by United Capital
during any such Extension Period. Distributions to which holders of the
Preferred Securities are entitled will accumulate additional Distributions
thereon at the rate per annum of 9.75% thereof, compounded quarterly from the
relevant Distribution Date, to the extent permitted under applicable law. The
term "Distributions" as used herein shall include any such additional
Distributions. 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 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
with 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
and (d) purchases of Common Stock 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 defer the payment of interest,
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, the Company may elect to begin a new Extension Period. Subject to the
foregoing, there is no limitation on the number of times that the Company may
elect to begin an Extension Period.
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.
REDEMPTION
MANDATORY REDEMPTION. The Preferred Securities are subject to mandatory
redemption upon the repayment or redemption, in whole or in part, of any Junior
Subordinated Debentures. The Junior Subordinated Debentures can be redeemed at
Stated Maturity or earlier as provided in the Indenture. The proceeds from any
such repayment or redemption shall be applied by the Property Trustee to redeem
a Like Amount (as defined below) of the Trust Securities, upon not less than 30
nor more than 60 days notice, at the Redemption Price (as defined below) on the
date of redemption (the "Redemption Date"). See "Description of Junior
Subordinated Debentures -- Redemption." If less than all of the Junior
Subordinated Debentures are to be repaid or redeemed on a Redemption Date, then
the proceeds from such repayment or redemption shall be allocated to the
redemption of the Preferred Securities and the Common Securities pro rata
according to their respective Liquidation Amounts (as defined below). The
Preferred Securities and the Common Securities have aggregate Liquidation
Amounts equal to 97% and 3%, respectively, of the total capital of United
Capital.
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The Company will have the right to redeem the Junior Subordinated Debentures
(i) 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 in the
Subordinated Debentures so redeemed to the date fixed for redemption, plus 100%
of the principal amount thereof, or (ii) at any time, in whole (but not in
part), upon the occurrence of a Tax Event or an Investment Company Event at a
redemption price equal to the accrued and unpaid interest in the Junior
Subordinated Debentures so redeemed to the date fixed for redemption, plus 100%
of the principal amount thereof, in each case subject to receipt of prior
approval by the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. See "Description of Subordinated
Debentures -- Redemption."
TAX EVENT REDEMPTION, INVESTMENT COMPANY EVENT REDEMPTION OR DISTRIBUTION OF
JUNIOR SUBORDINATED DEBENTURES. If a Tax Event or an Investment Company Event
shall occur and be continuing, the Company has 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.
"Additional Sums" means the additional amounts as may be necessary to be
paid by the Company with respect to the Junior Subordinated Debentures in order
that the amount of Distributions then due and payable by United Capital on the
outstanding Preferred Securities and Common Securities of United Capital shall
not be reduced as a result of any additional taxes, duties and other
governmental charges to which United Capital has become subject as a result of a
Tax Event or an Investment Company Event.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount (as defined below) equal to that
portion of the principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Preferred Securities based upon the relative
Liquidation Amounts of such classes and the proceeds of which will be used to
pay the Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of United Capital, Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of the Trust Securities of the holder to whom such Junior Subordinated
Debentures are distributed.
"Liquidation Amount" means the stated amount of $25 per Trust Security.
"Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount of such Trust Security, plus accumulated and unpaid
Distributions to the Redemption Date, allocated on a pro rata basis (based on
Liquidation Amounts) among the Trust Securities.
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.
After the liquidation date fixed for any distribution of Junior Subordinated
Debentures for Preferred Securities (i) such Preferred Securities will no longer
be deemed to be outstanding, (ii) the Depositary or its
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nominee, as the record holder of the Preferred Securities, will receive a
registered global certificate or certificates representing the Junior
Subordinated Debentures to be delivered upon such distribution and (iii) any
certificates representing Preferred Securities not held by the Depositary or its
nominee will be deemed to represent the Junior Subordinated Debentures having a
principal amount equal to the Liquidation Amount of such Preferred Securities,
and bearing accrued and unpaid interest in an amount equal to the accrued and
unpaid Distributions on the Preferred Securities until such certificates are
presented to the Administrative Trustees or their agent for transfer or
reissuance.
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities if a dissolution and liquidation of United
Capital were to occur. Accordingly, the Preferred Securities that an investor
may purchase, or the Junior Subordinated Debentures that the investor may
receive on dissolution and liquidation of United Capital, may trade at a
discount to the price that the investor paid to purchase the Preferred
Securities offered hereby.
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the Preferred
Securities shall be made and the Redemption Price shall be payable on each
Redemption Date only to the extent that United Capital has funds on hand
available for the payment of such Redemption Price. See "-- Subordination of
Common Securities."
If United Capital gives a notice of redemption in respect of its Preferred
Securities, then, by 12:00 noon, Minneapolis time, on the Redemption Date, to
the extent funds are available, the Property Trustee will deposit with the
Depositary funds sufficient to pay the aggregate Redemption Price and will give
the Depositary irrevocable instructions and authority to pay the Redemption
Price to the holders of such Preferred Securities. See "Book-Entry Issuance." If
such Preferred Securities are no longer in book-entry form, the Property
Trustee, to the extent funds are available, will deposit with the paying agent
for such Preferred Securities funds sufficient to pay the aggregate Redemption
Price and will give such paying agent irrevocable instructions and authority to
pay the Redemption Price to the holders thereof upon surrender of their
certificates evidencing such Preferred Securities. Notwithstanding the
foregoing, Distributions payable on or prior to the Redemption Date for any
Preferred Securities called for redemption shall be payable to the holders of
such Preferred Securities on the relevant record dates for the related
Distribution Dates. If notice of redemption shall have been given and funds
deposited as required, then upon the date of such deposit, all rights of the
holders of such Preferred Securities so called for redemption will cease, except
the right of the holders of such Preferred Securities to receive the Redemption
Price, but without interest on such Redemption Price, and such Preferred
Securities will cease to be outstanding. In the event that any date fixed for
redemption of Preferred Securities is not a Business Day, then payment of the
Redemption Price payable on such date will be made on the next succeeding day
which is a Business Day (and without any additional Distribution, interest or
other payment in respect of any such delay) except that, if such Business Day
falls in the next calendar year, such payment will be made on the immediately
preceding Business Day, in each case, with the same force and effect as if made
on such date. In the event that payment of the Redemption Price in respect of
Preferred Securities called for redemption is improperly withheld or refused and
not paid either by United Capital or by the Company pursuant to the Guaranty,
Distributions on such Preferred Securities will continue to accrue, at the then
applicable rate, from the Redemption Date originally established by United
Capital for such Preferred Securities to the date such Redemption Price is
actually paid, in which case the actual payment date will be the date fixed for
redemption for purposes of calculating the Redemption Price. See "Description of
Guaranty."
Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Preferred Securities by tender, in the
open market or by private agreement.
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Payment of the Redemption Price on the Preferred Securities and any
distribution of Junior Subordinated Debentures to holders of Preferred
Securities shall be made to the applicable recordholders thereof as they appear
on the register for such Preferred Securities on the relevant record date, which
date shall be one Business Day prior to the relevant Redemption Date or
liquidation date, as applicable; provided, however, that in the event that any
Preferred Securities are not in book-entry form, the relevant record date for
such Preferred Securities shall be a date at least 15 days prior to the
Redemption Date or liquidation date, as applicable. In the case of a
liquidation, the record date shall be no more than 45 days before the
liquidation date.
If less than all of the Preferred Securities and Common Securities issued by
United Capital are to be redeemed on a Redemption Date, then the aggregate
Redemption Price for such Preferred Securities and Common Securities to be
redeemed shall be allocated pro rata to the Preferred Securities and the Common
Securities based upon the relative Liquidation Amounts of such classes. The
particular Preferred Securities to be redeemed shall be selected by the Property
Trustee from the outstanding Preferred Securities not previously called for
redemption, by such method as the Property Trustee shall deem fair and
appropriate and which may provide for the selection for redemption of portions
(equal to $25 or an integral multiple thereof) of the Liquidation Amount of
Preferred Securities. The Property Trustee shall promptly notify the Trust
Securities registrar in writing of the Preferred Securities selected for
redemption and, in the case of any Preferred Securities selected for partial
redemption, the Liquidation Amount thereof to be redeemed. For all purposes of
the Trust Agreement, unless the context otherwise requires, all provisions
relating to the redemption of Preferred Securities shall relate to the portion
of the aggregate Liquidation Amount of Preferred Securities which has been or is
to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each Holder of Trust Securities to be
redeemed at such Holder's registered address. Unless United Capital defaults in
payment of the Redemption Price, on and after the Redemption Date Distributions
will cease to accrue on such Preferred Securities or portions thereof called for
redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, shall be made pro rata based on
the Liquidation Amount of the Preferred Securities and Common Securities;
provided, however, that if on any Distribution Date or Redemption Date any Event
of Default resulting from a Debenture Event of Default shall have occurred and
be continuing, no payment of any Distribution on, or Redemption Price of, any of
the Common Securities, and no other payment on account of the redemption,
liquidation or other acquisition of such Common Securities, shall be made unless
payment in full in cash of all accumulated and unpaid Distributions on all of
the outstanding Preferred Securities for all Distribution periods terminating on
or prior thereto, or in the case of payment of the Redemption Price the full
amount of such Redemption Price on all of the outstanding Preferred Securities
then called for redemption, shall have been made or provided for, and all funds
available to the Property Trustee shall first be applied to the payment in full
in cash of all Distributions on, or Redemption Price of, the Preferred
Securities then due and payable.
In the case of any Event of Default under the Trust Agreement resulting from
a Debenture Event of Default, the Company as holder of the Common Securities
will be deemed to have waived any right to act with respect to any such Event of
Default under the Trust Agreement until the effect of all such Events of Default
with respect to such Preferred Securities have been cured, waived or otherwise
eliminated. Until any such Events of Default under the Trust Agreement with
respect to the Preferred Securities have been so cured, waived or otherwise
eliminated, the Property Trustee shall act solely on behalf of the Holders of
the Preferred Securities and not on behalf of the Company as holder of the
Common Securities, and only the Holders of the Preferred Securities will have
the right to direct the Property Trustee to act on their behalf.
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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 the 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 as described under "Description of Preferred Securities --
Redemption -- Mandatory Redemption;" 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 by the Trustees as expeditiously as
the Trustees determine to be possible by distributing, 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 (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because United Capital has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by United
Capital on the Preferred Securities shall be paid on a pro rata basis. The
holder(s) of the Common Securities will be entitled to receive distributions
upon any such liquidation pro rata with the holders of the Preferred Securities,
except that if a Debenture Event of Default has occurred and is continuing, the
Preferred Securities shall have a priority over the Common Securities.
Under current United States federal income tax law and interpretations and
assuming, as expected, United Capital is treated as a grantor trust, a
distribution of the Junior Subordinated Debentures should not be a taxable event
to holders of the Preferred Securities. Should there be a change in law, a
change in legal interpretation, a Tax Event or other circumstances, however, the
distribution could be a taxable event to holders of the Preferred Securities.
See "Certain Federal Income Tax Consequences." If the Company elects neither to
redeem the Junior Subordinated Debentures prior to maturity nor to liquidate
United Capital and distribute the Junior Subordinated Debentures to holders of
the Preferred Securities, the Preferred Securities will remain outstanding until
the repayment of the Junior Subordinated Debentures.
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. See "Description of Junior
Subordinated Debentures -- General."
LIQUIDATION AMOUNT
The amount payable on the Preferred Securities in the event of any
liquidation of United Capital is $25 per Preferred Security plus accrued and
unpaid Distributions thereon to the date of payment, which may be in the form of
a distribution of such amount in Junior Subordinated Debentures, subject to
certain exceptions. See "Description of Preferred Securities -- Liquidation
Distribution Upon Termination."
EVENTS OF DEFAULT; NOTICE
Any one of the following events that has occurred and is continuing
constitutes an "Event of Default" under the Trust Agreement (an "Event of
Default") with respect to the Preferred Securities (whatever the
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reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default under the Indenture
(see "Description of Junior Subordinated Debentures -- Debenture Events of
Default"); or
(ii) default by the Property Trustee in the payment of any Distribution
when it becomes due and payable, and continuation of such default for a
period of 30 days; or
(iii) default by the Property Trustee in the payment of any Redemption
Price of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Trustees in the Trust Agreement (other than
a covenant or warranty a default in the performance of which or the breach
of which is dealt with in clauses (ii) or (iii) above), and continuation of
such default or breach for a period of 60 days after there has been given,
by registered or certified mail, to the defaulting Trustee or Trustees by
the holders of at least 25% in aggregate Liquidation Amount of the
outstanding Preferred Securities, a written notice specifying such default
or breach and requiring it to be remedied and stating that such notice is a
"Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by the Company to appoint a
successor Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Company unless such Event of Default shall have
been cured or waived. The Company and the Administrative Trustees are required
to file annually with the Property Trustee a certificate as to whether or not
they are in compliance with all the conditions and covenants applicable to them
under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
Preferred Securities shall have a preference over the Common Securities upon
termination of United Capital as described above. See "-- Liquidation
Distribution Upon Termination." Upon a Debenture Event of Default, unless the
principal of all the Junior Subordinated Debentures has already become due and
payable, either the Property Trustee or the holders of not less than 25% in
aggregate principal amount of the Junior Subordinated Debentures then
outstanding may declare all of the Junior Subordinated Debentures to be due and
payable immediately by giving notice in writing to the Company (and to the
Property Trustee, if notice is given by holders of the Junior Subordinated
Debentures). If the Property Trustee or the holders of the Junior Subordinated
Debentures fail to declare the principal of all of the Junior Subordinated
Debentures due and payable upon a Debenture Event of Default, the holders of at
least 25% in Liquidation Amount of the Preferred Securities then outstanding
shall have the right to declare the Junior Subordinated Debentures immediately
due and payable. In either event, payment of principal and interest on the
Junior Subordinated Debentures shall remain subordinated to the extent provided
in the Indenture. In addition, holders of the Preferred Securities have the
right in certain circumstances to bring a Direct Action (as hereinafter
defined). See "-- Enforcement of Certain Rights by Holders of Preferred
Securities."
REMOVAL OF UNITED CAPITAL TRUSTEES
Unless a Debenture Event of Default shall have occurred and be continuing,
any Trustee may be removed at any time by the holder of the Common Securities.
If a Debenture Event of Default has occurred and is continuing, the Property
Trustee and the Delaware Trustee may be removed at such time by the holders of a
majority in Liquidation Amount of the outstanding Preferred Securities. In no
event will the holders of the Preferred Securities have the right to vote to
appoint, remove or replace the Administrative Trustees, which voting rights are
vested exclusively in the Company as the holder of the Common Securities.
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No resignation or removal of a Trustee and no appointment of a successor trustee
shall be effective until the acceptance of appointment by the successor trustee
in accordance with the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the Trust Property may
at the time be located, the Company, as the holder of the Common Securities, and
the Administrative Trustees shall have power to appoint one or more persons
either to act as a co-trustee, jointly with the Property Trustee, of all or any
part of such Trust Property, or to act as separate trustee of any such property,
in either case with such powers as may be provided in the instrument of
appointment, and to vest in such person or persons in such capacity any
property, title, right or power deemed necessary or desirable, subject to the
provisions of the Trust Agreement. In case a Debenture Event of Default has
occurred and is continuing, the Property Trustee alone shall have power to make
such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any person resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
person succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee under the Trust Agreement,
provided such person shall be otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF UNITED CAPITAL
United Capital may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other Person, except as
described below. United Capital may, at the request of the Company, with the
consent of the Administrative Trustees and without the consent of the holders of
the Preferred Securities, merge with or into, consolidate, amalgamate, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to a trust organized as such under the laws of any State;
provided, that (i) such successor entity either (a) expressly assumes all of the
obligations of United Capital with respect to the Preferred Securities or (b)
substitutes for the Preferred Securities other securities having substantially
the same terms as the Preferred Securities (the "Successor Securities") so long
as the Successor Securities rank the same as the Preferred Securities rank in
priority with respect to Distributions and payments upon liquidation, redemption
and otherwise, (ii) the Company expressly appoints a trustee of such successor
entity possessing substantially the same powers and duties as the Property
Trustee in its capacity as the holder of the Junior Subordinated Debentures,
(iii) such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the Preferred Securities (including any Successor
Securities) in any material respect, (iv) such successor entity has a purpose
identical to that of United Capital, (v) prior to such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease, the Company has
received an opinion from independent counsel to United Capital experienced in
such matters to the effect that (a) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Preferred Securities (including
any Successor Securities) in any material respect, and (b) following such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease,
neither United Capital nor such successor entity will be required to register as
an "investment company" under the Investment Company Act and (vi) the Company or
any permitted successor or assignee owns all of the common securities of such
successor entity and guarantees the obligations of such successor entity under
the Successor Securities at least to the extent provided by the Guaranty.
Notwithstanding the foregoing, United Capital shall not, except with the consent
of holders of 100% in Liquidation Amount of the Preferred Securities,
consolidate, amalgamate, merge with or into, or be replaced by or convey,
transfer or lease its properties and assets substantially as an entirety to any
other entity or permit any other entity to
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consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause United Capital or the successor entity to be classified as other
than a grantor trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under "Description of Guaranty -- Amendments
and Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Preferred Securities (i) to cure any ambiguity, correct or
supplement any provisions in the Trust Agreement that may be inconsistent with
any other provision, or to make any other provisions with respect to matters or
questions arising under the Trust Agreement, which shall not be inconsistent
with the other provisions of the Trust Agreement, or (ii) to modify, eliminate
or add to any provisions of the Trust Agreement to such extent as shall be
necessary to ensure that United Capital will be classified for United States
federal income tax purposes as a grantor trust at all times that any Trust
Securities are outstanding or to ensure that United Capital will not be required
to register as an "investment company" under the Investment Company Act;
provided, however, that in the case of clause (i), such action shall not
adversely affect in any material respect the interests of any holder of Trust
Securities, and any amendments of such Trust Agreement shall become effective
when notice thereof is given to the holders of Trust Securities. The Trust
Agreement may be amended by the Trustees and the Company with (i) the consent of
holders representing not less than a majority in the aggregate Liquidation
Amount of the outstanding Trust Securities, and (ii) receipt by the Trustees of
an opinion of counsel to the effect that such amendment or the exercise of any
power granted to the Trustees in accordance with such amendment will not affect
United Capital's status as a grantor trust for United States federal income tax
purposes or United Capital's exemption from status as an "investment company"
under the Investment Company Act, provided that without the consent of each
holder of Trust Securities, such Trust Agreement may not be amended to (i)
change the amount or timing of any Distribution on the Trust Securities or
otherwise adversely affect the amount of any Distribution required to be made in
respect of the Trust Securities as of a specified date or (ii) restrict the
right of a holder of Trust Securities to institute suit for the enforcement of
any such payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee, or
executing any trust or power conferred on the Property Trustee with respect to
the Junior Subordinated Debentures, (ii) waive any past default that is waivable
under the Indenture, (iii) exercise any right to rescind or annul a declaration
that the principal of all the Junior Subordinated Debentures shall be due and
payable or (iv) consent to any amendment, modification or termination of the
Indenture or the Junior Subordinated Debentures, where such consent shall be
required, without, in each case, obtaining the prior approval of the holders of
a majority in aggregate Liquidation Amount of all outstanding Preferred
Securities; provided, however, that where a consent under the Indenture would
require the consent of each holder of Junior Subordinated Debentures affected
thereby, no such consent shall be given by the Property Trustee without the
prior consent of each holder of the Preferred Securities. The Trustees shall not
revoke any action previously authorized or approved by a vote of the holders of
the Preferred Securities except by subsequent vote of the holders of the
Preferred Securities. The Property Trustee shall notify each holder of Preferred
Securities of any notice of default with respect to the Junior Subordinated
Debentures. In addition to obtaining the foregoing approvals of the holders of
the Preferred Securities, prior to taking any of the foregoing actions, the
Trustees shall obtain an opinion of counsel experienced in such matters to the
effect that United Capital will not be classified as an association taxable as a
corporation for United States federal income tax purposes on account of such
action.
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or pursuant
to written consent. The Property Trustee will
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cause a notice of any meeting at which holders of Preferred Securities are
entitled to vote, or of any matter upon which action by written consent of such
holders is to be taken, to be given to each holder of record of Preferred
Securities in the manner set forth in the Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
for United Capital to redeem and cancel its Preferred Securities in accordance
with the Trust Agreement.
Notwithstanding the fact that holders of Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Trustees or any
affiliate of the Company or any Trustee, shall, for purposes of such vote or
consent, be treated as if they were not outstanding.
GLOBAL PREFERRED SECURITIES
The Preferred Securities will be represented by one or more global
certificates registered in the name of the Depositary or its nominee ("Global
Preferred Security"). Beneficial interests in the Preferred Securities will be
shown on, and transfers thereof will be effected only through, records
maintained by participants in the Depositary. Except as described below,
Preferred Securities in certificated form will not be issued in exchange for the
global certificates. See "Book-Entry Issuance."
A global security shall be exchangeable for Preferred Securities registered
in the names of persons other than the Depositary or its nominee only if (i) the
Depositary notifies the Company that it is unwilling or unable to continue as a
depositary for such global security and no successor depositary shall have been
appointed, or if at any time the Depositary ceases to be a clearing agency
registered under the Securities Exchange Act of 1934, as amended, at a time when
the Depositary is required to be so registered to act as such depositary, (ii)
the Company in its sole discretion determines that such global security shall be
so exchangeable, or (iii) there shall have occurred and be continuing an Event
of Default under the Indenture. Any global security that is exchangeable
pursuant to the preceding sentence shall be exchangeable for definitive
certificates registered in such names as the Depositary shall direct. It is
expected that such instructions will be based upon directions received by the
Depositary with respect to ownership of beneficial interests in such global
security. In the event that Preferred Securities are issued in definitive form,
such Preferred Securities will be in denominations of $25 and integral multiples
thereof and may be transferred or exchanged at the offices described below.
Unless and until it is exchanged in whole or in part for the individual
Preferred Securities represented thereby, a Global Preferred Security may not be
transferred except as a whole by the Depositary to a nominee of such Depositary
or by a nominee of such Depositary to such Depositary or another nominee of such
Depositary or by the Depositary or any nominee to a successor Depositary or any
nominee of such successor.
Payments on Preferred Securities represented by a global security will be
made to the Depositary, as the depositary for the Preferred Securities. In the
event the Preferred Securities are issued in definitive form, Distributions will
be payable, the transfer of the Preferred Securities will be registrable, and
Preferred Securities will be exchangeable for Preferred Securities of other
denominations of a like aggregate Liquidation Amount, at the corporate office of
the Property Trustee, or at the offices of any paying agent or transfer agent
appointed by the Administrative Trustees, provided that payment of any
Distribution may be made at the option of the Administrative Trustees by check
mailed to the address of the persons entitled thereto or by wire transfer. In
addition, if the Preferred Securities are issued in certificated form, the
record dates for payment of Distributions will be the 15th day of the month in
which the relevant Distribution Date occurs. For a description of the terms of
the depositary arrangements relating to payments, transfers, voting rights,
redemptions and other notices and other matters, see "Book-Entry Issuance."
Upon the issuance of a Global Preferred Security, and the deposit of such
Global Preferred Security with or on behalf of the Depositary, the Depositary
for such Global Preferred Security or its nominee will credit, on its book-entry
registration and transfer system, the respective aggregate Liquidation Amounts
of
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the individual Preferred Securities represented by such Global Preferred
Securities to the accounts of Participants. Such accounts shall be designated by
the dealers, underwriters or agents with respect to such Preferred Securities.
Ownership of beneficial interests in a Global Preferred Security will be limited
to Participants or persons that may hold interests through Participants.
Ownership of beneficial interests in such Global Preferred Security will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by the applicable Depositary or its nominee (with respect to
interests of Participants) and the records of Participants (with respect to
interests of persons who hold through Participants). The laws of some states
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and such laws may impair the ability
to transfer beneficial interests in a Global Preferred Security.
So long as the Depositary for a Global Preferred Security, or its nominee,
is the registered owner of such Global Preferred Security, such Depositary or
such nominee, as the case may be, will be considered the sole owner or holder of
the Preferred Securities represented by such Global Preferred Security for all
purposes under the Trust Agreement governing such Preferred Securities. Except
as provided below, owners of beneficial interests in a Global Preferred Security
will not be entitled to have any of the individual Preferred Securities
represented by such Global Preferred Security registered in their names, will
not receive or be entitled to receive physical delivery of any such Preferred
Securities in definitive form and will not be considered the owners or holders
thereof under the Trust Agreement.
None of the Company, the Property Trustee, any Paying Agent, or the
Securities Registrar (defined below) for such Preferred Securities will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Global
Preferred Security representing such Preferred Securities or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
The Company expects that the Depositary for Preferred Securities or its
nominee, upon receipt of any payment of the Liquidation Amount, Distributions or
Redemption Price in respect of a permanent Global Preferred Security immediately
will credit Participants' accounts with payments in amounts proportionate to
their respective beneficial interest in the aggregate Liquidation Amount of such
Global Preferred Security as shown on the records of such Depositary or its
nominee. The Company also expects that payments by Participants to owners of
beneficial interests in such Global Preferred Security held through such
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name." Such payments will be the responsibility of
such Participants.
If the Depositary for the Preferred Securities is at any time unwilling,
unable or ineligible to continue as depositary and a successor depositary is not
appointed by the Company within 90 days, United Capital will issue individual
Preferred Securities in exchange for the Global Preferred Security. In addition,
United Capital may at any time and in its sole discretion, subject to any
limitations described herein relating to such Preferred Securities, determine
not to have any Preferred Securities represented by one or more Global Preferred
Securities and, in such event, will issue individual Preferred Securities in
exchange for the Global Preferred Security or Securities representing the
Preferred Securities. Further, if United Capital so specifies with respect to
the Preferred Securities, an owner of a beneficial interest in a Global
Preferred Security representing Preferred Securities may, on terms acceptable to
the Company, the Property Trustee and the Depositary for such Global Preferred
Security, receive individual Preferred Securities in exchange for such
beneficial interests, subject to any limitations described herein. In any such
instance, an owner of a beneficial interest in a Global Preferred Security will
be entitled to physical delivery of individual Preferred Securities represented
by such Global Preferred Security equal in Liquidation Amount to such beneficial
interest and to have such Preferred Securities registered in its name.
Individual Preferred Securities so issued will be issued in denominations,
unless otherwise specified by United Capital, of $25 and integral multiples
thereof.
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PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities shall be made to the
Depositary, which shall credit the relevant accounts at the Depositary on the
applicable Distribution Dates or, if any Preferred Securities are not held by
the Depositary, such payments shall be made by check mailed to the address of
the holder entitled thereto as such address shall appear on the Register. The
paying agent ("Paying Agent") shall initially be the Property Trustee and any
copaying agent chosen by the Property Trustee and acceptable to the
Administrative Trustees and the Company. The Paying Agent shall be permitted to
resign as Paying Agent upon 30 days' written notice to the Property Trustee and
the Company. In the event that the Property Trustee shall no longer be the
Paying Agent, the Administrative Trustees shall appoint a successor (which shall
be a bank or trust company acceptable to the Administrative Trustees and the
Company) to act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Preferred Securities. Registration of transfers of Preferred Securities will be
effected without charge by or on behalf of United Capital, but upon payment of
any tax or other governmental charges that may be imposed in connection with any
transfer or exchange. United Capital will not be required to register or cause
to be registered the transfer of Preferred Securities after such Preferred
Securities have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action or to construe ambiguous provisions
in the applicable Trust Agreement or is unsure of the application of any
provision of the Trust Agreement, and the matter is not one on which holders of
Preferred Securities are entitled under the Trust Agreement to vote, then the
Property Trustee shall take such action as is directed by the Company and if not
so directed, may take such action as it deems advisable and in the best
interests of the holders of the Trust Securities and will have no liability
except for its own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate United Capital 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. In this connection, the Company and
the Administrative Trustees are authorized to take any action, not inconsistent
with applicable law, the certificate of trust of United Capital or the Trust
Agreement, that the Company and the Administrative Trustees determine in their
discretion to be necessary or desirable for such purposes, as long as such
action does not materially adversely affect the interests of the holders of the
related Preferred Securities.
Holders of the Preferred Securities have no preemptive or similar rights.
United Capital may not borrow money, or issue debt or mortgage or pledge any
of its assets.
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DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures will be issued under the Subordinated
Indenture, dated as of January 16, 1997 ("Indenture"), between the Company and
Wilmington Trust Company, as trustee ("Indenture Trustee"). The following
summary of the terms and provisions of the Junior Subordinated Debentures and
the Indenture does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Indenture, which has been filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part, and to the Trust Indenture Act. The Indenture is qualified under the Trust
Indenture Act. Whenever particular defined terms of the Indenture are referred
to herein, such defined terms are incorporated herein or therein by reference.
Concurrently with the issuance of the Preferred Securities, United Capital
will invest the proceeds thereof, together with the consideration paid by the
Company for the Common Securities, in the Junior Subordinated Debentures issued
by the Company. The Junior Subordinated Debentures will be issued as unsecured
debt under the Indenture.
GENERAL
The Junior Subordinated Debentures will bear interest at the annual rate of
9.75% 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, to the person in whose name each Junior
Subordinated Debenture is registered, subject to certain exceptions, at the
close of business on the Business Day next preceding such Interest Payment Date.
It is anticipated that, until the liquidation, if any, of United Capital, the
Junior Subordinated Debentures will be held in the name of the Property Trustee
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. In the event that any date on which interest is
payable on the Junior Subordinated Debentures is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect
of any such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment will be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on the date such
payment was originally payable. 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 9.75% thereof,
compounded quarterly. The term "interest" as used herein shall include quarterly
interest payments, interest on quarterly interest payments not paid on the
applicable Interest Payment Date and Additional Sums (as defined below), as
applicable.
The Junior Subordinated Debentures will mature on January 15, 2027 (such
date, as it may be shortened or extended as hereinafter described, the "Stated
Maturity"). 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, provided that at the time such election is made and at the
time of extension (i) the Company is not in bankruptcy, otherwise insolvent or
in liquidation, (ii) the Company is not in default in the payment of any
interest or principal on the Junior Subordinated Debentures, and (iii) United
Capital is not in arrears on payments of Distributions on the Preferred
Securities and no deferred Distributions are accumulated. In the event that the
Company elects to shorten or extend the Stated Maturity of the Junior
Subordinated Debentures, it shall give notice to the Debenture Trustee, and the
Debenture Trustee shall give notice of such shortening or extension to the
holders of the Junior Subordinated Debentures no less than 90 days prior to the
effectiveness thereof.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Indebtedness of the
Company. See "Description of Junior Subordinated Debentures -- Subordination."
Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any of the subsidiaries, including
the Banks, upon any such subsidiaries'
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liquidation or reorganization or otherwise (and thus the ability of holders of
the Preferred Securities to benefit indirectly from such distribution), is
subject to the prior claim of creditors of that Bank, except to the extent that
the Company may itself be recognized as a creditor of such Bank. Accordingly,
the Junior Subordinated Debentures will be effectively subordinated to all
existing and future liabilities of the Banks, and holders of Junior Subordinated
Debentures should look only to the assets of the Company for payments on the
Junior Subordinated Debentures. The Indenture does not limit the incurrence or
issuance of other secured or unsecured debt of the Company, including Senior
Indebtedness, whether under the Indenture or any existing indenture or other
indenture that the Company may enter into in the future or otherwise. See
"Description of Junior Subordinated Debentures -- Subordination."
OPTION TO EXTEND INTEREST PAYMENT PERIOD
The Company has the right under the Indenture 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 9.75%, compounded
quarterly, to the extent permitted by applicable law). During an Extension
Period, interest will continue to accrue and holders of Junior Subordinated
Debentures will be required to accrue interest income for United States federal
income tax purposes. See "Certain Federal Income Tax Consequences -- Potential
Extension of Interest Payment Period and Original Issue Discount."
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, 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 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 must give the Property Trustee, the
Administrative Trustees and the Debenture Trustee notice of its election of such
Extension Period at least one Business Day prior to the earlier of (i) the date
the Distributions on the Preferred Securities would have been payable except for
the election to begin such Extension Period or (ii) the date the Administrative
Trustees are required to give notice to the holders of such Preferred Securities
of the record date for the date such Distributions are payable, but in any event
not less than one Business Day prior to such record date. The Debenture Trustee
shall give notice of the Company's election to begin a new Extension Period to
the holders of the Preferred Securities. There is no limitation on the number of
times that the Company may elect to begin an Extension Period.
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
("Additional Sums") 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.
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REDEMPTION
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, the Junior Subordinated Debentures are redeemable prior to
maturity at the option of the Company (i) on or after January 15, 2002, in whole
at any time or in part from time to time, or (ii) at any time in whole (but not
in part), upon the occurrence and during the continuance of a Tax Event or an
Investment Company Event, in each case 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.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Junior Subordinated
Debentures to be redeemed at such holder's registered address. Unless the
Company defaults in payment of the redemption price, on and after the redemption
date interest ceases to accrue on such Junior Subordinated Debentures or
portions thereof called for redemption.
The Junior Subordinated Debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of Preferred Securities -- Liquidation
Distribution Upon Termination," under certain circumstances involving the
termination of United Capital, the Junior Subordinated Debentures may be
distributed to the holders of the Preferred Securities in liquidation of United
Capital after satisfaction of liabilities to creditors of United Capital as
provided by applicable law. If distributed to holders of Preferred Securities in
liquidation, the Junior Subordinated Debentures will initially be issued in the
form of one or more global securities and the Depositary, or any successor
depositary for the Preferred Securities, will act as depositary for the Junior
Subordinated Debentures. It is anticipated that the depositary arrangements for
the Junior Subordinated Debentures would be substantially identical to those in
effect for the Preferred Securities. If the Junior Subordinated Debentures are
distributed to the holders of Preferred Securities upon the liquidation of
United Capital, there can be no assurance as to the market price of any Junior
Subordinated Debentures that may be distributed to the holders of Preferred
Securities.
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 a Debenture Event of Default 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 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 Guaranty and (d) purchases of Common Stock related to
rights under any of the Company's benefit plans for its directors, officers or
employees).
SUBORDINATION
In the Indenture, the Company has covenanted and agreed that any Junior
Subordinated Debentures issued thereunder will be subordinate and junior in
right of payment to all Senior Indebtedness to the extent
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provided in the Indenture. Upon any payment or distribution of assets to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors, marshaling of assets or any bankruptcy,
insolvency, debt restructuring or similar proceedings in connection with any
insolvency or bankruptcy proceeding of the Company, the holders of Senior
Indebtedness will first be entitled to receive payment in full of principal of
(and premium, if any) and interest, if any, on such Senior Indebtedness before
the holders of Junior Subordinated Debentures will be entitled to receive or
retain any payment in respect of the principal of or interest, if any, on the
Junior Subordinated Debentures.
No payments on account of principal or interest, if any, in respect of the
Junior Subordinated Debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to Senior Indebtedness or an
event of default with respect to any Senior Indebtedness resulting in the
acceleration of the maturity thereof, or if any judicial proceeding shall be
pending with respect to any such default.
"Debt" means with respect to any person, whether recourse is to all or a
portion of the assets of such person and whether or not contingent, (i) every
obligation of such person for money borrowed; (ii) every obligation of such
person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such person; (iv) every obligation of such person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such person; and (vi) every
obligation of the type referred to in clauses (i) through (v) of another person
and all dividends of another person the payment of which, in either case, such
person has guaranteed or is responsible or liable, directly or indirectly, as
obligor or otherwise.
"Senior Indebtedness" means Senior Debt and/or Subordinated Debt.
"Senior Debt" means the principal of (and premium, if any) and interest, if
any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not such
claim for post-petition interest is allowed in such proceeding), on Debt,
whether incurred on or prior to the date of the Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Junior Subordinated Debentures or to other
Debt which is pari passu with, or subordinated to, the Junior Subordinated
Debentures; provided, however, that Senior Debt shall not be deemed to include
(i) any Debt of the Company which when incurred and without respect to any
election under section 1111(b) of the United States Bankruptcy Code of 1978, as
amended, was without recourse to the Company, (ii) any Debt of the Company to
any of its subsidiaries, (iii) any Debt to any employee of the Company, (iv) any
Debt which by its terms is subordinated to trade accounts payable or accrued
liabilities arising in the ordinary course of business to the extent that
payments made to the holders of such Debt by the holders of the Junior
Subordinated Debentures as a result of the subordination provisions of the
Indenture would be greater than they otherwise would have been as a result of
any obligation of such holders to pay amounts over to the obligees on such trade
accounts payable or accrued liabilities arising in the ordinary course of
business as a result of subordination provisions to which such Debt is subject,
(v) any Debt which constitutes Subordinated Debt, and (vi) any other debt
securities issued pursuant to the Indenture.
"Subordinated Debt" means the principal of (and premium, if any) and
interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not such claim for post-petition interest is allowed in such proceeding), on
Debt, whether incurred on or prior to the date of the Indenture or thereafter
incurred, which is by its terms expressly provided to be junior and subordinate
to other Debt of the Company (other than the Junior Subordinated Debentures).
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The Indenture places no limitation on the amount of additional Senior
Indebtedness that may be incurred by the Company. The Company expects from time
to time to incur additional indebtedness constituting Senior Indebtedness.
DENOMINATIONS, REGISTRATION AND TRANSFER
The Junior Subordinated Debentures will be represented by global
certificates registered in the name of the Depositary or its nominee ("Global
Subordinated Debenture"). Beneficial interests in the Junior Subordinated
Debentures will be shown on, and transfers thereof will be effected only
through, records maintained by the Depositary. Except as described below, Junior
Subordinated Debentures in certificated form will not be issued in exchange for
the global certificates. See "Book-Entry Issuance."
Unless and until a Global Subordinated Debenture is exchanged in whole or in
part for the individual Junior Subordinated Debentures represented thereby, it
may not be transferred except as a whole by the Depositary for such Global
Subordinated Debenture to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by the
Depositary or any nominee to a successor Depositary or any nominee of such
successor.
A global security shall be exchangeable for Junior Subordinated Debentures
registered in the names of persons other than the Depositary or its nominee only
if (i) the Depositary notifies the Company that it is unwilling or unable to
continue as a depositary for such global security and no successor depositary
shall have been appointed, or if at any time the Depositary ceases to be a
clearing agency registered under the Securities Exchange Act of 1934, as
amended, at a time when the Depositary is required to be so registered to act as
such depositary, (ii) the Company in its sole discretion determines that such
global security shall be so exchangeable or (iii) there shall have occurred and
be continuing an Event of Default under the Indenture with respect to such
global security. Any global security that is exchangeable pursuant to the
preceding sentence shall be exchangeable for definitive certificates registered
in such names as the Depositary shall direct. It is expected that such
instructions will be based upon directions received by the Depositary from its
Participants with respect to ownership of beneficial interests in such global
security. In the event that Junior Subordinated Debentures are issued in
definitive form, such Junior Subordinated Debentures will be in denominations of
$25 and integral multiples thereof and may be transferred or exchanged at the
offices described below.
Payments on Junior Subordinated Debentures represented by a global security
will be made to the Depositary, as the depositary for the Junior Subordinated
Debentures. In the event Junior Subordinated Debentures are issued in definitive
form, principal and interest will be payable, the transfer of the Junior
Subordinated Debentures will be registrable, and Junior Subordinated Debentures
will be exchangeable for Junior Subordinated Debentures of other denominations
of a like aggregate principal amount, at the corporate office of the Indenture
Trustee, or at the offices of any paying agent or transfer agent appointed by
the Company, provided that payment of interest may be made at the option of the
Company by check mailed to the address of the persons entitled thereto or by
wire transfer. In addition, if the Junior Subordinated Debentures are issued in
certificated form, the record dates for payment of interest will be the 15th day
of the month in which such payment is to be made. For a description of the
Depositary and the terms of the depositary arrangements relating to payments,
transfers, voting rights, redemptions and other notices and other matters, see
"Book-Entry Issuance."
The Company will appoint the Indenture Trustee as securities registrar under
the Indenture (the "Securities Registrar"). Junior Subordinated Debentures may
be presented for exchange as provided above, and may be presented for
registration of transfer (with the form of transfer endorsed thereon, or a
satisfactory written instrument of transfer, duly executed), at the office of
the Securities Registrar. The Company may at any time rescind the designation of
any such transfer agent or approve a change in the location through which any
such transfer agent acts, provided that the Company maintains a transfer agent
in the place of payment. The Company may at any time designate additional
transfer agents with respect to the Junior Subordinated Debentures.
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In the event of any redemption, neither the Company nor the Indenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of Junior
Subordinated Debentures and ending at the close of business on the day of
mailing of the relevant notice of redemption or (ii) transfer or exchange any
Junior Subordinated Debentures so selected for redemption, except, in the case
of any Junior Subordinated Debentures being redeemed in part, any portion
thereof not to be redeemed.
GLOBAL JUNIOR SUBORDINATED DEBENTURES
Upon the issuance of the Global Subordinated Debenture, and the deposit of
such Global Subordinated Debenture with or on behalf of the Depositary, the
Depositary for such Global Subordinated Debenture or its nominee will credit, on
its book-entry registration and transfer system, the respective principal
amounts of the individual Junior Subordinated Debentures represented by such
Global Subordinated Debenture to the accounts of persons that have accounts with
such Depositary ("Participants"). Ownership of beneficial interests in a Global
Subordinated Debenture will be limited to Participants or persons that may hold
interests through Participants. Ownership of beneficial interests in such Global
Subordinated Debenture will be shown on, and the transfer of that ownership will
be effected only through, records maintained by the applicable Depositary or its
nominee (with respect to interests of Participants) and the records of
Participants (with respect to interests of persons who hold through
Participants). The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Subordinated Debenture.
So long as the Depositary for a Global Subordinated Debenture, or its
nominee, is the registered owner of such Global Subordinated Debenture, such
Depositary or such nominee, as the case may be, will be considered the sole
owner or holder of the Junior Subordinated Debentures represented by such Global
Subordinated Debenture for all purposes under the Indenture governing such
Junior Subordinated Debentures. Except as provided below, owners of beneficial
interests in a Global Subordinated Debenture will not be entitled to have any of
the individual Junior Subordinated Debentures represented by such Global
Subordinated Debenture registered in their names, will not receive or be
entitled to receive physical delivery of any such Junior Subordinated Debentures
in definitive form and will not be considered the owners or holders thereof
under the Indenture.
Payments of principal of and interest on individual Junior Subordinated
Debentures represented by a Global Subordinated Debenture registered in the name
of the Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner of the Global Subordinated Debenture
representing such Junior Subordinated Debentures. None of the Company, the
Indenture Trustee, any Paying Agent, or the Securities Registrar for such Junior
Subordinated Debentures will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests of the Global Subordinated Debenture representing such Junior
Subordinated Debentures or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal or interest in respect of a permanent Global Subordinated
Debenture representing the Junior Subordinated Debentures, immediately will
credit Participants' accounts with payments in amounts proportionate to their
respective beneficial interest in the principal amount of the Global
Subordinated Debenture as shown on the records of such Depositary or its
nominee. The Company also expects that payments by Participants to owners of
beneficial interests in such Global Subordinated Debenture held through such
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name." Such payments will be the responsibility of
such Participants.
If the Depositary is at any time unwilling, unable or ineligible to continue
as depositary and a successor depositary is not appointed by the Company within
90 days, the Company will issue individual Junior
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Subordinated Debentures in exchange for the Global Subordinated Debenture. In
addition, the Company may at any time and in its sole discretion, determine not
to have the Junior Subordinated Debentures represented by one or more Global
Subordinated Debentures and, in such event, will issue individual Junior
Subordinated Debentures in exchange for the Global Subordinated Debenture.
Further, if the Company so specifies with respect to the Junior Subordinated
Debentures, an owner of a beneficial interest in a Global Subordinated Debenture
representing Junior Subordinated Debentures may, on terms acceptable to the
Company, the Indenture Trustee and the Depositary for such Global Subordinated
Debenture, receive individual Junior Subordinated Debentures in exchange for
such beneficial interests. In any such instance, an owner of a beneficial
interest in a Global Subordinated Debenture will be entitled to physical
delivery of individual Junior Subordinated Debentures equal in principal amount
to such beneficial interest and to have such Junior Subordinated Debentures
registered in its name. Individual Junior Subordinated Debentures so issued will
be issued in denominations, unless otherwise specified by the Company, of $25
and integral multiples thereof.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Junior Subordinated
Debentures will be made at the office of the Indenture Trustee, except that at
the option of the Company payment of any interest may be made (i) except in the
case of Global Subordinated Debentures, by check mailed to the address of the
person entitled thereto as such address shall appear in the securities register
or (ii) by transfer to an account maintained by the person entitled thereto as
specified in the securities register, provided that proper transfer instructions
have been received by the regular record date. Payment of any interest on Junior
Subordinated Debentures will be made to the person in whose name such
Subordinated Debenture is registered at the close of business on the regular
record date for such interest. The Company may at any time designate additional
Paying Agents or rescind the designation of any Paying Agent; however the
Company will at all times be required to maintain a Paying Agent in each place
of payment for the Junior Subordinated Debentures.
Any moneys deposited with the Indenture Trustee or any Paying Agent, or then
held by the Company in trust, for the payment of the principal of or interest on
the Junior Subordinated Debentures and remaining unclaimed for two years after
such principal or interest has become due and payable shall, at the request of
the Company, be repaid to the Company and the holder of such Junior Subordinated
Debenture shall thereafter look, as a general unsecured creditor, only to the
Company for payment thereof.
MODIFICATION OF INDENTURE
From time to time the Company and the Indenture Trustee may, without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies (provided that any such action
does not materially adversely affect the interests of the holders of the Junior
Subordinated Debentures or the Preferred Securities so long as they remain
outstanding) and qualifying, or maintaining the qualification of, the Indenture
under the Trust Indenture Act. The Indenture contains provisions permitting the
Company and the Indenture Trustee, with the consent of the holders of not less
than a majority in principal amount of the outstanding Junior Subordinated
Debentures, to modify the Indenture in a manner affecting the rights of the
holders of the Junior Subordinated Debentures; provided, that no such
modification may, without the consent of the holder of each outstanding Junior
Subordinated Debenture, (i) change the Stated Maturity of the Junior
Subordinated Debentures, or reduce the principal amount thereof, or reduce the
rate or extend the time of payment of interest thereon or (ii) reduce the
percentage of principal amount of Junior Subordinated Debentures, the holders of
which are required to consent to any such modification of the Indenture,
provided that so long as any of the Preferred Securities remain outstanding, no
such modification may be made that adversely affects the holders of such
Preferred Securities in any material respect, and no termination of the
Indenture may occur, and no waiver of any Debenture Event of Default or
compliance with any covenant under the Indenture may be effective, without the
prior consent of the holders of at least a
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majority of the aggregate Liquidation Amount of the Preferred Securities unless
and until the principal of the Junior Subordinated Debentures and all accrued
and unpaid interest thereon have been paid in full and certain other conditions
are satisfied.
DEBENTURE 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 a "Debenture 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 holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Indenture
Trustee. 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 a Debenture Event of Default. The
holders of a majority in aggregate outstanding principal amount of the Junior
Subordinated Debentures may annul such declaration and waive the default if the
default (other than the non-payment of the principal of the Junior Subordinated
Debentures which has become due solely by such acceleration) has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Indenture Trustee.
Should the holders of the Junior Subordinated Debentures fail to annul such
declaration and waive such default, the holders of a majority in aggregate
Liquidation Amount of the Preferred Securities shall have such right.
In case a Debenture 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.
The Company is required to file annually with the Indenture Trustee a
certificate as to whether or not the Company is in compliance with all the
conditions and covenants applicable to it under the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a Debenture 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"). 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.
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The holders of the Preferred Securities would not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures unless there
shall have been an Event of Default under the Trust Agreement. See "Description
of Preferred Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, and no Person shall consolidate with
or merge into the Company or convey, transfer or lease its properties and assets
substantially as an entirety to the Company, unless (i) in case the Company
consolidates with or merges into another Person or conveys or transfers its
properties and assets substantially as an entirety to any Person, the successor
Person is organized under the laws of the United States or any state or the
District of Columbia, and such successor Person expressly assumes the Company's
obligations on the Junior Subordinated Debentures issued under the Indenture;
(ii) immediately after giving effect thereto, no Debenture Event of Default, and
no event which, after notice or lapse of time or both, would become a Debenture
Event of Default, shall have occurred and be continuing; and (iii) certain other
conditions as prescribed in the Indenture are met.
The general provisions of the Indenture do not afford holders of the Junior
Subordinated Debentures protection in the event of a highly leveraged or other
transaction involving the Company that may adversely affect holders of the
Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Junior
Subordinated Debentures not previously delivered to the Indenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at their Stated Maturity within one year, and the Company deposits or causes to
be deposited with the Indenture Trustee trust funds, in trust, for the purpose
and in an amount in the currency or currencies in which the Junior Subordinated
Debentures are payable sufficient to pay and discharge the entire indebtedness
on the Junior Subordinated Debentures not previously delivered to the Indenture
Trustee for cancellation, for the principal and interest to the date of the
deposit or to the Stated Maturity, as the case may be, then the Indenture will
cease to be of further effect (except as to the Company's obligations to pay all
other sums due pursuant to the Indenture and to provide the officers'
certificates and opinions of counsel described therein), and the Company will be
deemed to have satisfied and discharged the Indenture.
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of Minnesota.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Indenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Indenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Indenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
COVENANTS OF THE COMPANY
The Company will covenant in the Indenture, as to the Junior Subordinated
Debentures, that if and so long as (i) United Capital is the holder of all such
Junior Subordinated Debentures, (ii) a Tax Event in respect of United Capital
has occurred and is continuing and (iii) the Company has elected, and has not
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revoked such election, to pay Additional Sums (as defined under "Description of
Preferred Securities -- Redemption") in respect of the Preferred Securities, the
Company will pay to United Capital such Additional Sums. The Company will also
covenant, as to the Junior Subordinated Debentures, (i) to maintain directly or
indirectly 100% ownership of the Common Securities of United Capital to which
Junior Subordinated Debentures have been issued, provided that certain
successors which are permitted pursuant to the Indenture may succeed to the
Company's ownership of the Common Securities, (ii) not to voluntarily terminate,
wind up or liquidate United Capital, except upon prior approval of the Federal
Reserve if then so required under applicable capital guidelines or policies of
the Federal Reserve, and except (a) in connection with a distribution of Junior
Subordinated Debentures to the holders of the Preferred Securities in
liquidation of United Capital, or (b) in connection with certain mergers,
consolidations or amalgamations permitted by the Trust Agreement and (iii) to
use its reasonable efforts, consistent with the terms and provisions of the
Trust Agreement, to cause United Capital to remain classified as a grantor trust
and not as an association taxable as a corporation for United States federal
income tax purposes.
BOOK-ENTRY ISSUANCE
The Depositary will act as securities depositary for all of the Preferred
Securities and the Junior Subordinated Debentures. The Preferred Securities and
the Junior Subordinated Debentures will be issued only as fully-registered
securities registered in the name of Cede & Co. (the Depositary's nominee). One
or more fully-registered global certificates will be issued for the Preferred
Securities and the Junior Subordinated Debentures and will be deposited with the
Depositary.
The Depositary is a limited purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depositary holds securities that its Participants deposit with the
Depositary. The Depositary also facilitates the settlement among Participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in Participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
"Direct Participants" include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. The Depositary
is owned by a number of its Direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc. and the National Association
of Securities Dealers, Inc. Access to the Depositary system is also available to
others such as securities brokers and dealers, banks and trust companies that
clear through or maintain custodial relationships with Direct Participants,
either directly or indirectly ("Indirect Participants"). The rules applicable to
the Depositary and its Participants are on file with the Commission.
Purchases of Preferred Securities or Junior Subordinated Debentures within
the Depositary system must be made by or through Direct Participants, which will
receive a credit for the Preferred Securities or Junior Subordinated Debentures
on the Depositary's records. The ownership interest of each actual purchaser of
each Preferred Security and each Junior Subordinated Debenture ("Beneficial
Owner") is in turn to be recorded on the Direct and Indirect Participants'
records. Beneficial Owners will not receive written confirmation from the
Depositary of their purchases, but Beneficial Owners are expected to receive
written confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the Direct or Indirect Participants through
which the Beneficial Owners purchased Preferred Securities or Junior
Subordinated Debentures. Transfers of ownership interests in the Preferred
Securities or Junior Subordinated Debentures are to be accomplished by entries
made on the books of Participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing their ownership
interests in Preferred Securities or Junior Subordinated Debentures, except in
the event that use of the book-entry system for the Preferred Securities or
Junior Subordinated Debentures is discontinued.
The Depositary has no knowledge of the actual Beneficial Owners of the
Preferred Securities or Junior Subordinated Debentures; the Depositary's records
reflect only the identity of the Direct Participants to
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whose accounts such Preferred Securities or Junior Subordinated Debentures are
credited, which may or may not be the Beneficial Owners. The Participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners and the voting
rights of Direct Participants, Indirect Participants and Beneficial Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices will be sent to Cede & Co. as the registered holder of
the Preferred Securities or Junior Subordinated Debentures. If less than all of
the Preferred Securities or the Junior Subordinated Debentures are being
redeemed, the Depositary will determine by lot or pro rata the amount of the
Preferred Securities of each Direct Participant to be redeemed.
Although voting with respect to the Preferred Securities or the Junior
Subordinated Debentures is limited to the holders of record of the Preferred
Securities or Junior Subordinated Debentures, in those instances in which a vote
is required, neither the Depositary nor Cede & Co. will itself consent or vote
with respect to Preferred Securities or Junior Subordinated Debentures. Under
its usual procedures, the Depositary would mail an omnibus proxy (the "Omnibus
Proxy") to the relevant Trustee as soon as possible after the record date. The
Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts such Preferred Securities or Junior Subordinated
Debentures are credited on the record date (identified in a listing attached to
the Omnibus Proxy).
Distribution payments on the Preferred Securities or the Junior Subordinated
Debentures will be made by the relevant Trustee to the Depositary. The
Depositary's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on the
Depositary's records unless the Depositary has reason to believe that it will
not receive payments on such payment date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices and will be the responsibility of such Participant and not of the
Depositary, the relevant Trustee, United Capital or the Company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of Distributions to the Depositary is the responsibility of the relevant
Trustee, disbursement of such payments to Direct Participants is the
responsibility of the Depositary, and disbursements of such payments to the
Beneficial Owners is the responsibility of Direct and Indirect Participants.
The Depositary may discontinue providing its services as securities
depositary with respect to any of the Preferred Securities or the Junior
Subordinated Debentures at any time by giving reasonable notice to the relevant
Trustee and the Company. In the event that a successor securities depositary is
not obtained, definitive Preferred Security or Junior Subordinated Debenture
certificates representing such Preferred Securities or Junior Subordinated
Debentures are required to be printed and delivered. The Company, at its option,
may decide to discontinue use of the system of book-entry transfers through the
Depositary (or a successor depositary). After a Debenture Event of Default, the
holders of a majority in liquidation preference of Preferred Securities or
aggregate principal amount of Junior Subordinated Debentures may determine to
discontinue the system of book-entry transfers through the Depositary. In any
such event, definitive certificates for such Preferred Securities or Junior
Subordinated Debentures will be printed and delivered.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that United
Capital and the Company believe to be accurate, but United Capital and the
Company assume no responsibility for the accuracy thereof. Neither United
Capital nor the Company has any responsibility for the performance by the
Depositary or its Participants of their respective obligations as described
herein or under the rules and procedures governing their respective operations.
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DESCRIPTION OF GUARANTY
The 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.
Wilmington Trust Company will act as indenture trustee ("Guaranty Trustee")
under the Guaranty for the purposes of compliance with the Trust Indenture Act,
and the Guaranty will be qualified as an Indenture under the Trust Indenture
Act. This summary includes all material terms and provisions of the Guaranty.
The form of the Guaranty has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The 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.
If the Company does not make interest payments on the Junior Subordinated
Debentures held by United Capital, United Capital will not be able to pay
Distributions on the Preferred Securities and will not have funds legally
available therefor. The Guaranty will rank subordinate and junior in right of
payment to all Senior Indebtedness of the Company. See "-- Status of the
Guaranty." Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise, is subject to the prior
claims of creditors of that subsidiary, except to the extent the Company may
itself be recognized as a creditor of that subsidiary. Accordingly, the
Company's obligations under the Guaranty will be effectively subordinated to all
existing and future liabilities of the Company's subsidiaries, and claimants
should look only to the assets of the Company for payments thereunder. Except as
otherwise described herein, the Guaranty does not limit the incurrence or
issuance of other secured or unsecured debt of the Company, including Senior
Indebtedness, whether under the Indenture, any other indenture that the Company
may enter into in the future, or otherwise.
The Company has, through the Guaranty, the Trust Agreement, the Junior
Subordinated Debentures, the Indenture and the Expense Agreement, taken
together, fully, irrevocably and unconditionally guaranteed all of United
Capital's obligations under 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. See
"Relationship Among the Preferred Securities, the Junior Subordinated Debentures
and the Guaranty."
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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. The
Guaranty will not be discharged except by payment of the Guaranty Payments in
full to the extent not paid by United Capital or upon distribution of the Junior
Subordinated Debentures to the holders of the Preferred Securities. The Guaranty
does not place a limitation on the amount of additional Senior Indebtedness that
may be incurred by the Company. The Company expects from time to time to incur
additional indebtedness constituting Senior Indebtedness.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will be
required), the Guaranty may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of such
outstanding Preferred Securities. See "Description of Preferred Securities --
Voting Rights; Amendment of Trust Agreement." All guarantees and agreements
contained in the Guaranty shall bind the successors, assigns, receivers,
trustees and representatives of the Company and shall inure to the benefit of
the holders of the Preferred Securities then outstanding.
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. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guaranty Trustee in
respect of the Guaranty or to direct the exercise of any trust or power
conferred upon the Guaranty Trustee under the Guaranty.
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.
The Company, as guarantor, is required to file annually with the Guaranty
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guaranty.
INFORMATION CONCERNING THE GUARANTY TRUSTEE
The Guaranty Trustee, other than during the occurrence and continuance of a
default by the Company in performance of the Guaranty, undertakes to perform
only such duties as are specifically set forth in the Guaranty and, after
default with respect to the Guaranty, must exercise the same degree of care and
skill as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to this provision, the Guaranty Trustee is under no obligation
to exercise any of the powers vested in it by the Guaranty at the request of any
holder of any Preferred Securities unless it is offered reasonable indemnity
against the costs, expenses and liabilities that might be incurred thereby.
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.
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GOVERNING LAW
The Guaranty will be governed by and construed in accordance with the laws
of the State of Minnesota.
THE EXPENSE AGREEMENT
Pursuant to the Expense Agreement entered into by the Company under the
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
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 under "Description of Guaranty." Taken together, the Company's
obligations under the Junior Subordinated Debentures, the Indenture, the 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. The obligations of the Company under the Guaranty
are subordinate and junior in right of payment to all Senior Indebtedness of the
Company.
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.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a payment under the Guaranty.
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.
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A default or event of default under any Senior Indebtedness of the Company
would not constitute a default or Event of Default. However, in the event of
payment defaults under, or acceleration of, Senior Indebtedness of the Company,
the subordination provisions of the Indenture provide that no payments may be
made in respect of the Junior Subordinated Debentures until such Senior
Indebtedness has been paid in full or any payment default thereunder has been
cured or waived. Failure to make required payments on the Junior Subordinated
Debentures would constitute an Event of Default.
LIMITED PURPOSE OF UNITED CAPITAL
The Preferred Securities evidence a beneficial interest in United Capital,
and United Capital exists for the sole purpose of issuing its Preferred
Securities and Common Securities and investing the proceeds thereof in Junior
Subordinated Debentures. A principal difference between the rights of a holder
of a Preferred Security and a holder of a Junior Subordinated Debenture is that
a holder of a Junior Subordinated Debenture is entitled to receive from the
Company the principal amount of and interest accrued on Junior Subordinated
Debentures held, while a holder of Preferred Securities is entitled to receive
Distributions from United Capital (or from the Company under the Guaranty) if
and to the extent United Capital has funds available for the payment of such
Distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
United Capital involving the liquidation of the Junior Subordinated Debentures,
the holders of the Preferred Securities will be entitled to receive, out of
assets held by United Capital, the Liquidation Distribution in cash. See
"Description of Preferred Securities -- Liquidation Distribution Upon
Termination." Upon any voluntary or involuntary liquidation or bankruptcy of the
Company, the Property Trustee, as holder of the Junior Subordinated Debentures,
would be a subordinated creditor of the Company, subordinated in right of
payment to all Senior Indebtedness as set forth in the Indenture, but entitled
to receive payment in full of principal and interest before any stockholders of
the Company receive payments or distributions. Since the Company is the
guarantor under the Guaranty and has agreed to pay for all costs, expenses and
liabilities of United Capital (other than United Capital's obligations to the
holders of its Preferred Securities), the positions of a holder of the Preferred
Securities and a holder of the Junior Subordinated Debentures relative to other
creditors and to stockholders of the Company in the event of liquidation or
bankruptcy of the Company are expected to be substantially the same.
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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.
97
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This section is a summary of the material United States federal income tax
considerations that may be relevant to the purchasers of Preferred Securities
and is based upon the formal opinion of Fredrikson & Byron, P.A., counsel to the
Company and United Capital, insofar as it relates to matters of law and legal
conclusions. The conclusions expressed herein are based upon current provisions
of the Internal Revenue Code of 1986, as amended ("Code"), regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change at any time, with possible retroactive effects. Subsequent
changes may cause tax consequences to vary substantially from the consequences
described below. Furthermore, the authorities on which this summary is based are
subject to various interpretations, and it is therefore possible that the
federal income tax treatment of the purchase, ownership, and disposition of
Preferred Securities may differ from the treatment described below.
No attempt has been made in the following discussion to comment on all
United States federal income tax matters affecting purchasers of Preferred
Securities. Moreover, the discussion generally focuses on holders of Preferred
Securities who are individual citizens or residents of the United States and who
acquire Preferred Securities on their original issue at their offering price and
hold Preferred Securities as capital assets. The discussion has only limited
application to dealers in securities, corporations, estates, trusts or
nonresident aliens and does not address all the tax consequences that may be
relevant to holders who may be subject to special tax treatment, such as, for
example, banks, thrifts, real estate investment trusts, regulated investment
companies, insurance companies, dealers in securities or currencies, tax-exempt
investors, or persons that will hold the Preferred Securities as a position in a
"straddle," as part of a "synthetic security" or "hedge," as part of a
"conversion transaction" or other integrated investment, or as other than a
capital asset. This summary also does not address the tax consequences to
persons that have a functional currency other than the U.S. dollar or the tax
consequences to shareholders, partners or beneficiaries of a holder of Preferred
Securities. Further, it does not include any description of any alternative
minimum tax consequences or the tax laws of any state or local government or of
any foreign government that may be applicable to the Preferred Securities.
Accordingly, each prospective investor should consult the investor's own tax
advisors in analyzing the federal, state, local and foreign tax consequences of
the purchase, ownership or disposition of Preferred Securities.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
Fredrikson & Byron, P.A. has rendered its opinion that the Junior
Subordinated Debentures will be classified for United States federal income tax
purposes as indebtedness of the Company under current law, and, by acceptance of
a Preferred Security, each holder covenants to treat the Junior Subordinated
Debentures as indebtedness and the Preferred Securities as evidence of an
indirect beneficial ownership interest in the Junior Subordinated Debentures. No
assurance can be given, however, that such position of the Company will not be
challenged by the Internal Revenue Service or, if challenged, that such a
challenge will not be successful. The remainder of this discussion assumes that
the Junior Subordinated Debentures will be classified for United States federal
income tax purposes as indebtedness of the Company.
CLASSIFICATION OF UNITED CAPITAL
With respect to the Preferred Securities, Fredrikson & Byron, P.A. has
rendered its opinion that, under then current law and assuming full compliance
with the terms of the Trust Agreement and Indenture, United Capital will be
classified for United States federal income tax purposes as a grantor trust and
not as an association taxable as a corporation. Accordingly, for United States
federal income tax purposes, each holder of Preferred Securities generally will
be treated as owning an undivided beneficial interest in the Junior Subordinated
Debentures, and each holder will be required to include in such holder's gross
income any original issue discount ("OID") accrued with respect to such holder's
allocable share of the Junior Subordinated Debentures whether or not cash is
actually distributed to such holder.
98
<PAGE>
POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
Because the Company has the option, under the terms of the Junior
Subordinated Debentures, to defer payments of interest by extending interest
payment periods for up to 20 consecutive quarters, all of the stated interest
payments on the Junior Subordinated Debentures will be treated as OID.
Fredrikson & Byron, P.A. has rendered its opinion that holders of debt
instruments issued with OID must include that discount in income on an economic
accrual basis before the receipt of cash attributable to the interest,
regardless of their method of tax accounting. Generally, all of a holder's
taxable interest income with respect to the Junior Subordinated Debentures will
be accounted for as OID. Actual payments and distributions of stated interest
will not, however, be separately reported as taxable income. The amount of OID
that accrues in any quarter will approximately equal the amount of the interest
that accrues on the Junior Subordinated Debentures in that quarter at the stated
interest rate. In the event that the interest payment period is extended,
holders will continue to accrue OID approximately equal to the amount of the
interest payment due at the end of the extended interest payment period on an
economic accrual basis over the length of the extended interest payment period.
Because income on the Preferred Securities will constitute OID, corporate
holders of Preferred Securities will not be entitled to a dividends-received
deduction with respect to any income recognized with respect to the Preferred
Securities.
MARKET DISCOUNT AND ACQUISITION PREMIUM
Holders of Preferred Securities other than a holder who purchased the
Preferred Securities upon original issuance may be considered to have acquired
their undivided interests in the Junior Subordinated Debentures with "market
discount" or "acquisition premium" as such phrases are defined for United States
federal income tax purposes. Such holders are advised to consult their tax
advisors as to the income tax consequences of the acquisition, ownership and
disposition of the Preferred Securities.
RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF UNITED
CAPITAL
Under certain circumstances, as described under "Description of the
Preferred Securities -- Redemption," the Junior Subordinated Debentures may be
distributed to holders of Preferred Securities upon a liquidation of United
Capital. Under current United States federal income tax law, and given the
conclusions set forth in the opinion of Fredrikson & Byron, P.A., such a
distribution would be treated as a nontaxable exchange to each such holder and
would result in such holder having an aggregate tax basis in the Junior
Subordinated Debentures received in the liquidation equal to such holder's
aggregate tax basis in the Preferred Securities immediately before the
distribution. A holder's holding period in the Junior Subordinated Debentures so
received in liquidation of United Capital would include the period for which
such holder held the Preferred Securities.
If, however, a Tax Event occurs which results in United Capital being
treated as an association taxable as a corporation, the distribution would
likely constitute a taxable event to holders of the Preferred Securities. Under
certain circumstances described herein, the Junior Subordinated Debentures may
be redeemed for cash and the proceeds of such redemption distributed to holders
in redemption of their Preferred Securities. Under current law, such a
redemption would, for United States federal income tax purposes, constitute a
taxable disposition of the redeemed Preferred Securities, and a holder would
recognize gain or loss as if the holder sold such Preferred Securities for cash.
See "Description of Preferred Securities -- Redemption."
DISPOSITION OF PREFERRED SECURITIES
A holder that sells Preferred Securities will recognize gain or loss equal
to the difference between the amount realized on the sale of the Preferred
Securities and the holder's adjusted tax basis in such Preferred Securities. A
holder's adjusted tax basis in the Preferred Securities generally will be its
initial purchase price increased by OID previously includible in such holder's
gross income to the date of disposition and decreased by payments received on
the Preferred Securities to the date of disposition. The character of such gain
or loss is uncertain under recently issued tax regulations and holders should
consult their own tax advisors as to the consequences of the sale of the
Preferred Securities.
99
<PAGE>
The Preferred Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest with respect to the underlying
Junior Subordinated Debentures. A holder that disposes of such holder's
Preferred Securities between record dates for payments of distributions thereon
will be required to include accrued but unpaid interest on the Junior
Subordinated Debentures through the date of disposition in income as ordinary
income, and to add such amount to such holder's adjusted tax basis in such
holder's pro rata share of the underlying Junior Subordinated Debentures deemed
disposed of. To the extent the selling price is less than the holder's adjusted
tax basis (which basis will include, in the form of OID, all accrued but unpaid
interest), a holder will recognize a loss.
POSSIBLE TAX LAW CHANGES AFFECTING THE PREFERRED SECURITIES
On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill") was
released which would, among other things, generally deny interest deductions for
interest on an instrument issued by a corporation that has a maximum weighted
average maturity of more than 40 years. The Bill would also generally deny
interest deductions for interest on an instrument, issued by a corporation, that
has a maximum term of more than 20 years and that is not shown as indebtedness
on the separate balance sheet of the issuer or, where the instrument is issued
to a related party (other than a corporation), where the holder or some other
related party issues a related instrument that is not shown as indebtedness on
the issuer's consolidated balance sheet. If either provision were to apply to
the Junior Subordinated Debentures, the Company would be unable to deduct
interest on the Junior Subordinated Debentures. However, on March 29, 1996, the
Chairmen of the Senate Finance and House Ways and Means Committees issued a
joint statement to the effect that it was their intention that the effective
date of the President's legislative proposals, if adopted, will be no earlier
than the date of appropriate Congressional action. There can be no assurance,
however, that current or future legislative proposals or final legislation will
not affect the ability of the Company to deduct interest on the Junior
Subordinated Debentures. Such a change could give rise to a Tax Event, which may
permit the Company, upon approval of the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve, to cause a
redemption of the Preferred Securities before, as well as after January 15,
2002. See "Description of Junior Subordinated Debentures -- Redemption" and
"Description of Preferred Securities -- Redemption -- Tax Event Redemption."
BACKUP WITHHOLDING AND INFORMATION REPORTING
The amount of OID accrued on the Preferred Securities held of record by
individual citizens or residents of the United States, or certain trusts,
estates, and partnerships, will be reported to the Internal Revenue Service on
Forms 1099, which forms should be mailed to such holders of Preferred Securities
by January 31 following each calendar year. Payments made on, and proceeds from
the sale of, the Preferred Securities may be subject to a "backup" withholding
tax (currently at 31%) unless the holder complies with certain identification
and other requirements. Any amounts withheld under the backup withholding rules
will be allowed as a credit against the holder's United States federal income
tax liability, provided the required information is provided to the Internal
Revenue Service.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT
ADDRESS ALL FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF PREFERRED SECURITIES
AND MAY NOT BE APPLICABLE DEPENDING UPON THE PARTICULAR SITUATION OF A HOLDER OF
PREFERRED SECURITIES. HOLDERS OF PREFERRED SECURITIES SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
100
<PAGE>
UNDERWRITING
Piper Jaffray Inc. (the "Underwriter"), has agreed, subject to the terms and
conditions of a Purchase Agreement to be entered into by the Underwriter, United
and United Capital, to purchase from United Capital 440,000 Preferred
Securities. The Underwriter is committed to purchase and pay for all such
Preferred Securities if any are purchased.
The Underwriter has advised United and United Captial that it proposes to
offer the Preferred Securities directly to the public initially at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $.50 per Preferred
Security. The Underwriter may allow and such dealers may reallow a concession
not in excess of $.25 per Preferred Security to certain other brokers and
dealers. After the public offering, the public offering price, concession and
reallowance, and other selling terms may be changed by the Underwriter. The
Company and the Underwriter have agreed that approximately 44,250 of the
Preferred Securities offered hereby will be reserved for sale to individuals
identified by the Company.
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Company, the Purchase Agreement provides that the Company will pay as
compensation for the Underwriter's arranging the investment therein of such
proceeds an amount of $.75 per Preferred Security and for advising services $.25
per Preferred Security. In addition, the Company has agreed to reimburse the
Underwriter for up to $50,000 of the Underwriter's legal fees relating to the
offering of the Preferred Securities.
United does not intend to list the Preferred Securities on any securities
exchange or include it for quotation on the Nasdaq National Market or any other
quotation system, and no active trading market is expected to develop. Although
the Underwriter has indicated an intention to make a market in the Preferred
Securities, the Underwriter is not obligated to make a market in the Preferred
Securities, and any market making may be discontinued at any time in the sole
discretion of the Underwriter. If the Preferred Securities is traded after the
original issuance, it may trade at a discount to its issue price.
Each of United and United Captial has agreed to indemnify the Underwriter
and its controlling persons against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
Underwriter may be required to make in respect thereof.
The Underwriter has advised United that it does not intend to confirm sales
to any account over which it exercises discretionary authority in excess of 5%
of the number of Preferred Securities offered hereby.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the formation of
United Capital will be passed upon by Richards, Layton & Finger, P.A.,
Wilmington, Delaware, special Delaware counsel to the Company and United
Capital. The validity of the Guaranty and the Junior Subordinated Debentures
will be passed upon for the Company by Fredrikson & Byron, P.A., Minneapolis,
Minnesota, counsel to the Company. Certain legal matters in connection with this
Offering will be passed upon for the Underwriter by Faegre & Benson LLP,
Minneapolis, Minnesota. Fredrikson & Byron, P.A. and Faegre & Benson LLP will
rely on the opinions of Richards, Layton & Finger as to matters of Delaware law.
Certain matters relating to United States federal income tax considerations will
be passed upon for the Company by Fredrikson & Byron, P.A.
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.
101
<PAGE>
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).
102
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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 COST FAIR VALUE AMORTIZED 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>
YEAR ENDED DECEMBER 31
-------------------------------------------
1995 1994 1993
NINE MONTHS ENDED ------------- ------------- -------------
SEPTEMBER 30, 1996
------------------
(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>
DECEMBER 31
------------------------------
1995 1994
SEPTEMBER 30, -------------- --------------
1996
--------------
(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
----------------------------
1995 1994
SEPTEMBER 30, ------------- -------------
1996
-------------
(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
------------------------------
1995 1994
SEPTEMBER 30, -------------- --------------
1996
--------------
(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
----------------------------
1995 1994
SEPTEMBER 30, ------------- -------------
1996
-------------
(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
----------------------------
1995 1994
SEPTEMBER 30, ------------- -------------
1996
-------------
(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
--------------------------
1995 1994
SEPTEMBER 30, ------------ ------------
1996
-------------
(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, UNITED CAPITAL OR BY THE UNDERWRITER. 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................................................................... 4
Risk Factors.............................................................. 12
Acquisition of Park....................................................... 19
Use of Proceeds........................................................... 22
Accounting Treatment...................................................... 22
Capitalization............................................................ 23
Selected Financial Data................................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................. 28
Business.................................................................. 47
Management................................................................ 54
Principal Shareholders.................................................... 60
Supervision and Regulation................................................ 62
Description of Preferred Securities....................................... 68
Description of Junior Subordinated Debentures............................. 80
Book-Entry Issuance....................................................... 89
Description of Guaranty................................................... 91
Relationship Among Preferred Securities, Junior Subordinated Debentures
and Guaranty........................................................... 93
Description of the Company's Capital Stock................................ 95
Certain Federal Income Tax Consequences................................... 98
Underwriting.............................................................. 101
Legal Matters............................................................. 101
Experts................................................................... 101
Additional Information.................................................... 102
Index to Financial Information............................................ F-1
</TABLE>
UNTIL FEBRUARY 7, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE PREFERRED SECURITIES COVERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS.
440,000 PREFERRED SECURITIES
UNITED CAPITAL TRUST I
9.75% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
[LOGO]
-----------------
P R O S P E C T U S
-----------------
PIPER JAFFRAY INC.
January 13, 1997
