SPECIAL FINANCIAL REPORT
CONTAINS ONLY FINANCIAL STATEMENTS FOR
THE THREE YEARS ENDED DECEMBER 31, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996 Commission File No.: 333-15067
UNITED COMMUNITY BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-1380239
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2600 Eagan Woods Drive, Suite 155
Eagan, Minnesota 55121
(Address of principal executive offices)
Registrant's telephone number, including area code:
(612) 552-2828
------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 10, 1997 was approximately $37,759,485 based upon the
December 31, 1996 financial results and the formula transfer price of the
Registrant's Common Stock under Article 7 of the Registrant's Bylaws.
Shares of $.01 par value Common Stock outstanding at March 10, 1997:
610,148 shares.
<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, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years ended December 31, 1996, 1995, and 1994. 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, 1996 and 1995, and the
results of their operations and their cash flows for the years ended December
31, 1996, 1995, and 1994, in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
St. Paul, Minnesota McGLADREY & PULLEN, LLP
February 19, 1997
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------------------
ASSETS 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 27,774,060 $ 20,513,154
Federal funds sold 15,725,000 8,725,000
Investment securities available for sale 102,360,467 101,836,962
Loans and leases 286,204,870 265,904,636
Allowance for loan and lease losses (3,168,098) (2,899,165)
----------------------------------
Net loans and leases 283,036,772 263,005,471
----------------------------------
Property and equipment, net 11,630,681 10,654,578
Accrued interest receivable 3,369,793 3,180,346
Cash surrender value of life insurance 9,577,434 9,116,888
Intangible assets, net 3,516,113 4,188,801
Other assets 2,147,453 619,375
----------------------------------
Total assets $ 459,137,773 $ 421,840,575
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 372,792,254 $ 340,723,249
Securities sold under repurchase agreements 21,797,343 23,173,292
Accrued expenses and other liabilities 6,165,548 5,213,321
Notes payable and other borrowings 17,516,476 15,762,119
----------------------------------
Total liabilities 418,271,621 384,871,981
----------------------------------
Commitments, Contingencies, and Credit Risk
Common Stock Owned by Employee Stock
Ownership Plan Participants
Par value $0.01 per share; 67,948
and 65,798 shares held (Note 1) 7,360,127 6,123,162
----------------------------------
Stockholders' Equity
Common stock, par value $0.01 per share;
5,000,000 shares authorized; 476,271
and 478,952 shares issued 4,763 4,790
Additional paid-in capital 17,525,797 17,808,360
Retained earnings 15,579,526 12,419,736
Unrealized gain on securities available for sale 395,939 612,546
----------------------------------
33,506,025 30,845,432
----------------------------------
Total liabilities and stockholders' equity $ 459,137,773 $ 421,840,575
==================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans and leases $ 27,005,660 $ 25,089,584 $ 21,004,079
Investment securities--taxable 5,605,725 4,949,453 3,843,603
Investment securities--tax exempt 533,932 405,726 343,892
Federal funds sold 567,430 760,820 324,871
---------------------------------------------
Total interest income 33,712,747 31,205,583 25,516,445
---------------------------------------------
Interest expense:
Deposits 11,770,388 10,438,601 7,529,696
Federal funds purchased and securities
sold under repurchase agreements 1,273,169 1,453,699 841,693
Notes payable and other borrowings 1,041,962 955,752 788,064
---------------------------------------------
Total interest expense 14,085,519 12,848,052 9,159,453
---------------------------------------------
Net interest income 19,627,228 18,357,531 16,356,992
Provision for loan and lease losses 594,977 60,999 234,454
---------------------------------------------
Net interest income after provision
for loan and lease losses 19,032,251 18,296,532 16,122,538
---------------------------------------------
Noninterest income:
Service charges and other fees 3,378,801 2,922,664 2,962,662
Net investment securities gains (losses) - (32,329) 79,351
Other 1,391,201 1,028,650 795,321
---------------------------------------------
Total noninterest income 4,770,002 3,918,985 3,837,334
---------------------------------------------
Noninterest expense:
Salaries and employee benefits 10,194,267 9,291,893 8,510,365
Occupancy 843,966 1,208,300 1,060,089
Depreciation 1,534,614 1,252,682 1,215,848
Amortization of intangibles 827,696 824,140 561,882
FDIC assessment 4,000 350,856 643,845
Other 4,244,603 3,603,063 4,139,114
---------------------------------------------
Total noninterest expense 17,649,146 16,530,934 16,131,143
---------------------------------------------
Income before income taxes 6,153,107 5,684,583 3,828,729
Income tax expense 1,956,431 2,055,552 1,395,772
---------------------------------------------
Net income $ 4,196,676 $ 3,629,031 $ 2,432,957
=============================================
Average shares outstanding 548,777 520,160 504,540
Earnings per share $ 7.65 $ 6.98 $ 4.82
Dividends per share - - -
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Unrealized
Additional Gain (Loss)
Common Stock Paid-In on Securities
---------------------------------------------- Retained Available
Shares Par Value Capital Earnings for Sale Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 260,951 $ 260,951 $ 2,536,797 $ 8,069,684 $ - $ 10,867,432
Change in par value from $1.00 to
$0.01 per share - (258,341) 258,341 - - -
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
Increase in stock owned by ESOP
participants (21,900) (219) (1,404,009) - - (1,404,228)
Net change in fair value of stock
owned by ESOP participants - - - (749,311) - (749,311)
Net change in unrealized loss on
securities available for sale - - - - (1,652,626) (1,652,626)
---------------------------------------------------------------------------------------------
Balance, December 31, 1994 438,622 4,387 14,424,261 9,753,330 (1,652,626) 22,529,352
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) (16) (143,213) - - (143,229)
Increase in stock owned by ESOP
participants (2,103) (21) (164,917) - - (164,938)
Net change in fair value of stock
owned by ESOP participants - - - (962,625) - (962,625)
Net change in unrealized gain on
securities available for sale - - - - 2,265,172 2,265,172
---------------------------------------------------------------------------------------------
Balance, December 31, 1995 478,952 4,790 17,808,360 12,419,736 612,546 30,845,432
Net income - - - 4,196,676 - 4,196,676
Common stock issued 2,467 25 226,418 - - 226,443
Common stock repurchased (2,998) (30) (310,193) - - (310,223)
Increase in stock owned by ESOP
participants (2,150) (22) (200,057) - - (200,079)
Net change in fair value of stock
owned by ESOP participants - - - (1,036,886) - (1,036,886)
Net change in unrealized gain on
securities available for sale - - - - (216,607) (216,607)
Tax effect of stock options exercised - - 1,269 - - 1,269
---------------------------------------------------------------------------------------------
Balance, December 31, 1996 476,271 $ 4,763 $ 17,525,797 $ 15,579,526 $ 395,939 $ 33,506,025
=============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 4,196,676 $ 3,629,031 $ 2,432,957
Adjustments to reconcile net income to net cash
flows from operating activities:
Net investment securities (gains) losses - 32,329 (79,351)
Net amortization and accretion of bond premiums
and discounts (216,918) (310,582) 222,538
Provision for loan and lease losses 594,977 60,999 234,454
Depreciation 1,534,614 1,252,682 1,215,848
Amortization of intangibles 827,696 824,140 561,882
Earnings on cash surrender value of life insurance (401,165) (377,103) (462,453)
Net gain on sale of loans (439,624) (485,626) (195,048)
Net gain on sale of other real estate (79,991) (63,247) (67,674)
Net (gain) loss on sale of property and equipment 22,723 (49,923) (70,718)
Provision for deferred income taxes (367,435) 24,950 (232,134)
Other, net (252,680) 912,636 (244,419)
---------------------------------------------------
Net cash flows from operating activities 5,418,873 5,450,286 3,315,882
---------------------------------------------------
Cash Flows Used for Investing Activities
Net increase in federal funds sold (7,000,000) (750,000) (2,525,000)
Net cash flows used for investment securities (672,770) (14,396,539) (3,859,963)
Net increase in loans and leases (20,312,331) (18,513,417) (26,999,676)
Purchases of property and equipment (2,610,980) (1,028,111) (2,350,262)
Proceeds from sales of property and equipment 32,600 117,349 409,934
Proceeds from sales of other real estate owned 79,991 327,160 1,116,100
Purchase of cash surrender value of life insurance (59,381) (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 (30,542,871) (34,497,858) (38,898,176)
---------------------------------------------------
</TABLE>
(Continued)
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Net increase in deposits 32,088,157 27,879,916 21,791,336
Net increase (decrease) in securities sold under
repurchase agreements (1,375,949) (4,573,273) 12,421,478
Proceeds from notes payable and other borrowings 3,839,476 9,003,000 9,532,420
Payments made on notes payable and other borrowings (2,083,000) (5,650,000) (1,084,420)
Proceeds from issuance of common stock 226,443 3,692,669 4,182,272
Repurchase of common stock (310,223) (143,229) -
---------------------------------------------------
Net cash flows from financing activities 32,384,904 30,209,083 46,843,086
---------------------------------------------------
Net increase in cash and cash equivalents 7,260,906 1,161,511 11,260,792
Cash and Cash Equivalents
Beginning 20,513,154 19,351,643 8,090,851
---------------------------------------------------
Ending $ 27,774,060 $ 20,513,154 $ 19,351,643
===================================================
</TABLE>
See Notes to Consolidated Financial Statements
(Additional Cash Flow Information - Note 15).
<PAGE>
UNITED COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization: United Community Bancshares, Inc. and its subsidiaries provide a
full range of financial services. The accompanying consolidated financial
statements 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). 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.
<PAGE>
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.
<PAGE>
Note 1. Summary of Significant Accounting Policies (Continued)
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.
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.
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.
<PAGE>
Note 1. Summary of Significant Accounting Policies (Continued)
Under the terms of the ESOP, participants who have terminated may elect to have
their distributions made in cash, United common stock, or both. If stock
distributed under the plan to a participant is not readily tradable on an
established market, the participant has the option to require the Company to
purchase the stock distributed. This put option must be exercised within six
months of receiving the stock or by March 31 following the end of the initial
six-month period. If the put options are not exercised within these periods, the
put options expire.
The Securities and Exchange Commission's Accounting Series Release No. 268
requires that to the extent there are conditions (regardless of their
probability of occurrence) whereby holders of equity securities may demand cash
in exchange for their securities, the Company must reflect the maximum possible
cash requirements related to those securities outside of stockholders' equity.
Accordingly, the common stock owned by the ESOP participants is reflected on the
accompanying balance sheet at its fair value.
401(k) profit sharing plan: The Company also provides a 401(k) profit sharing
plan 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.
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.
<PAGE>
Note 1. Summary of Significant Accounting Policies (Continued)
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.
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.
<PAGE>
Note 1. Summary of Significant Accounting Policies (Continued)
Emerging accounting standards: The Financial Accounting Standards Board has
issued Statement No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities, which becomes effective for
transactions occurring after December 31, 1996. The statement does not permit
earlier or retroactive application. The statement distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings. A
transfer of financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in exchange. The
statement also establishes standards on the initial recognition and measurement
of servicing assets and other retained interests and servicing liabilities, and
their subsequent measurement.
The statement requires that debtors reclassify financial assets pledged as
collateral and that secured parties recognize those assets and their obligation
to return them in certain circumstances in which the secured party has taken
control of those assets. In addition, the statement requires that a liability be
derecognized only if the debtor is relieved of its obligation through payment to
the creditor or by being legally released from being the primary obligor under
the liability, either judicially or by the creditor.
Management does not believe the application of the statement to transactions of
the Company that have been typical in the past will materially affect the
Company's financial position and results of operations.
Note 2. Restrictions on Cash and Cash Equivalents
The subsidiary banks are required to maintain reserve balances, in cash or on
deposit with the Federal Reserve Bank, based upon a percentage of deposits. The
total required reserve balances as of December 31, 1996 and 1995, were
approximately $2,552,000 and $3,092,000, respectively.
Note 3. Investment Securities Available for Sale
Summary of securities:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 22,520,520 $ 122,736 $ (21,069) $ 22,622,187
U.S. government corporations and
agencies 2,785,647 283,092 (63,169) 33,005,570
Obligations of states and political
subdivisions 13,721,452 359,927 (23,614) 14,057,765
Mortgage-backed securities 30,592,462 120,561 (112,828) 30,600,195
Corporate equity securities 2,074,750 -- -- 2,074,750
-----------------------------------------------------------------
$101,694,831 $ 886,316 $(220,680) $102,360,467
=================================================================
</TABLE>
<PAGE>
Note 3. Investment Securities Available for Sale (Continued)
<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>
Contractual maturities:
<TABLE>
<CAPTION>
--------------------------------
December 31, 1996
--------------------------------
Amortized Fair
Cost Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 20,439,514 $ 20,447,098
Due after one year through five years 34,217,673 34,517,497
Due after five years through ten years 9,600,645 9,824,148
Due after ten years 4,769,787 4,896,779
---------------------------------
69,027,619 69,685,522
Mortgage-backed securities 30,592,462 30,600,195
Corporate equity securities 2,074,750 2,074,750
---------------------------------
$ 101,694,831 $ 102,360,467
=================================
</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:
Year Ended December 31
---------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
Gross gains $ -- $ 40,980 $ 88,146
Gross losses -- (73,309) ( 8,795)
---------------------------------------------
$ -- $(32,329) $ 79,351
=============================================
Pledged securities: Investment securities available for sale with a carrying
value of $64,939,888 and $74,161,604 at December 31, 1996 and 1995,
respectively, were pledged to secure public deposits and for other purposes as
required or permitted by law.
<PAGE>
Note 3. Investment Securities Available for Sale (Continued)
Changes in the net unrealized gain (loss) on securities available for sale
included in equity:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <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 year, net (360,522) 3,792,056 (2,970,444)
Deferred tax effect related to unrealized
gain (loss) 143,915 (1,526,884) 1,196,051
-----------------------------------------------------------
Balance, ending $ 395,939 $ 612,546 $(1,652,626)
===========================================================
</TABLE>
Note 4. Loans and Leases
Composition of loans and leases:
<TABLE>
<CAPTION>
December 31
---------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $ 79,060,956 $ 70,543,465
Commercial real estate 68,377,044 62,730,992
Agricultural 11,008,655 10,582,438
Agricultural real estate 9,411,587 6,002,566
---------------------------------
Total commercial and agricultural 167,858,242 149,859,461
Residential real estate 67,570,045 69,576,597
Consumer 38,567,732 35,896,609
Leases 13,915,002 12,119,437
Less unearned income (1,706,151) (1,547,468)
---------------------------------
286,204,870 265,904,636
Less allowance for loan and lease losses (3,168,098) (2,899,165)
---------------------------------
Net loans and leases $ 283,036,772 $263,005,471
=================================
</TABLE>
Allowance for loan and lease losses:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning $ 2,899,165 $ 2,856,288 $ 1,500,870
Provision charged to operations 594,977 60,999 234,454
Loans charged off (762,837) (337,079) (447,987)
Recoveries 436,793 318,957 345,020
Allowance for loan losses acquired -- -- 1,223,931
-----------------------------------------------
Balance, ending $ 3,168,098 $ 2,899,165 $ 2,856,288
===============================================
</TABLE>
Impaired loans: The Company had no material impaired loans at December 31, 1996
and 1995.
<PAGE>
Note 5. Property and Equipment
December 31
------------------------------
1996 1995
- ------------------------------------------------------------------------------
Land $ 1,474,391 $ 1,474,391
Buildings and improvements 9,674,752 8,080,458
Equipment 9,924,246 8,924,949
Leasehold improvements 1,433,719 1,458,058
------------------------------
22,507,108 19,937,856
Less accumulated depreciation and amortization 10,876,427 9,283,278
------------------------------
Property and equipment, net $ 11,630,681 $ 10,654,578
==============================
Note 6. Deposits
December 31
------------------------------------
1996 1995
- -------------------------------------------------------------------------------
Noninterest-bearing demand deposits $ 80,146,030 $ 70,871,849
NOW and money market accounts 158,406,180 114,066,189
Savings deposits 27,640,755 47,735,468
Time certificates, $100,000 or more 14,605,809 14,090,029
Other time deposits 91,993,480 93,959,714
--------------------------------
Total $ 372,792,254 $ 340,723,249
================================
At December 31, 1996, the scheduled maturities of time deposits are as follows:
1997 $ 62,893,580
1998 30,913,794
1999 6,395,957
2000 4,263,972
2001 and thereafter 2,131,986
------------
$106,599,289
============
Note 7. Notes Payable and Other Borrowings
Notes payable:
December 31
---------------------------
1996 1995
- -------------------------------------------------------------------------------
Term note payable to a bank, interest at LIBOR
plus 1.8% (7.43% at December 31, 1996), 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
Term note payable to a bank, interest at prime
(8.25% at December 31, 1996), due
May 1, 1997, secured by the loans of CCC 1,400,000 --
<PAGE>
Note 7. Notes Payable and Other Borrowings (Continued)
December 31
--------------------------
1996 1995
- -------------------------------------------------------------------------------
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
$38,847,000 of residential real estate mortgage
loans 12,000,000 12,000,000
Unsecured term notes payable to certain individuals,
interest varies from 6.0% to 9.0%, payable
semiannually, notes had original maturities of
three years 277,000 362,119
Unsecured note payable to Minnesota Department of
Agriculture, noninterest-bearing, due
November 30, 2015 289,476 --
--------------------------
Total $ 17,116,476 $15,762,119
==========================
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:
Year ending December 31:
1997 $ 8,045,000
1998 6,598,000
1999 2,184,000
2015 289,476
-------------
$ 17,116,476
=============
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 $400,000 as of December 31, 1996. Borrowings under this
line of credit are secured by all the common stock of Signal, GCNB, and CCC.
Note 8. Income Taxes
The cumulative tax effects of the primary temporary differences are shown in the
following table:
December 31
--------------------------
1996 1995
- -------------------------------------------------------------------------------
Deferred tax assets:
Loan loss allowances $ 777,021 $ 666,351
Deferred compensation accruals 517,862 403,326
Amortization of intangible assets 161,638 47,061
Other 38,386 --
--------------------------
Total deferred tax assets 1,494,907 1,116,738
--------------------------
<PAGE>
Note 8. Income Taxes (Continued)
December 31
------------------------
1996 1995
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment (168,456) (233,031)
Acquisition adjustment (747,787) (808,250)
Unrealized gain on securities available for sale (269,698) (413,613)
Other (536,530) (400,758)
----------------------------
Total deferred tax liabilities (1,722,471) (1,855,652)
----------------------------
Net deferred tax liabilities $ (227,564) $ (738,914)
============================
The Company evaluated the available evidence supporting the realization of its
deferred tax assets and determined it is more likely than not that the assets
will be realized.
The provision for income taxes charged to operations consists of the following:
Year Ended December 31
-----------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------
Current tax expense $ 2,323,866 $ 2,030,602 $ 1,627,906
Deferred tax expense (benefit) (367,435) 24,950 (232,134)
-----------------------------------------
$ 1,956,431 $ 2,055,552 $ 1,395,772
=========================================
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
-----------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 2,153,587 $ 1,989,604 $ 1,340,055
Increase (decrease) in income taxes
resulting from:
State income taxes, net of federal tax benefit 385,467 355,473 245,489
Tax-exempt interest income (net of
disallowed expenses) (398,133) (354,330) (324,612)
Intangible asset amortization 76,821 76,821 76,821
Other (261,311) (12,016) 58,019
----------------------------------------------------
$ 1,956,431 $ 2,055,552 $ 1,395,772
====================================================
</TABLE>
Included in other tax expense above for 1996 are refunds received from the state
of Minnesota from the settlement of a class action lawsuit. The refunds reduced
tax expense (net of federal income taxes) by approximately $174,000.
<PAGE>
Note 9. 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:
December 31
-----------------------------
1996 1995
- -------------------------------------------------------------------------------
Commitments to extend credit $ 29,751,000 $ 21,224,000
Standby letters of credit 2,465,000 2,976,000
-----------------------------
$ 32,216,000 $ 24,200,000
=============================
Commitments to extend credit: Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer's creditworthiness
on a case-by-case basis. If deemed necessary upon extension of credit, the
amount of collateral obtained is based on management's credit evaluation of the
party. Collateral held varies, but may include accounts receivable, inventory,
equipment, and real estate.
Standby letters of credit: Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to 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.
<PAGE>
Note 9. Commitments, Contingencies, and Credit Risk (Continued)
Interest rate swaps: Interest rate swaps involve the contractual exchange of
fixed and floating rate interest payment obligations based on a notional
principal amount. The Company enters into interest rate swap contracts to manage
interest rate risk caused by fluctuations in interest rates. At December 31,
1996 and 1995, interest rate swaps totaling $4,480,000 hedged the note payable
to a bank and a commercial loan. Activity with respect to interest rate swap
contracts was as follows:
December 31
---------------------------
1996 1995
- -------------------------------------------------------------------------------
Notional amount outstanding at beginning of year $ 4,480,000 $ 7,000,000
Additions -- 1,480,000
Terminations -- (4,000,000)
---------------------------
Notional amount outstanding at end of year $ 4,480,000 $ 4,480,000
===========================
Unrealized gain (loss) $ 26,855 $ (30,172)
===========================
The Company is a receiver of floating-rate interest and a payer of fixed-rate
interest. The weighted average interest rate paid was 5.56 and 5.45 percent and
the weighted average interest rate received was 5.64 and 6.13 percent during
1996 and 1995, respectively. The swaps terminate in January 1999.
Interest rate swap contracts will result in gains and losses subsequent to the
date of the contract, due to interest rate movements. The Company amortizes the
gain or loss on terminated contracts over the original life of the hedge if the
hedged item remains outstanding. There were no unamortized gains or losses at
December 31, 1996.
Lease commitments: At December 31, 1996, 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:
Year ending December 31:
1997 $ 206,439
1998 209,972
1999 169,349
2000 85,000
2001 --
-----------
$ 670,760
===========
Total rent expense under these leases for the years ended December 31, 1996,
1995, and 1994, was $291,038, $241,527, and $184,384, 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.
<PAGE>
Note 10. Benefit Plans
Employee stock ownership plan: Contributions to the plan were $342,564,
$309,362, and $199,208 in 1996, 1995, and 1994, respectively.
401(k) profit sharing plan: Contributions to the plan were $134,587, $127,143,
and $311,726, in 1996, 1995, and 1994, respectively.
Note 11. 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 employees and directors in order for them
to purchase common stock of the Company at 100 percent of the repurchase price
on the dates of grant.
Under the plan, options become exercisable over a five-year period beginning one
year after date of grant and expire ten years from date of grant. There are no
charges or credits to income in connection with the grant or exercise of
options. Compensation cost based on the grant date fair value of awards (the
method described in FASB No. 123) was not material in either 1996 or 1995. The
approximate weighted average contractual remaining life of the options is eight
years. The number and exercise price of options under this plan were as follows:
Outstanding Exercisable Exercise Price
Options Options per Share
----------------------------------------------
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 February 1, 1996 22,133 94.20
Options exercised (160) 73.46
------- ------------------
December 31, 1996 69,366 14,787 $ 73.46 - 94.20
======= ========== ==================
Note 12. 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.
<PAGE>
Note 12. Common Stock Repurchase Agreement (Continued)
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 plus one
hundred percent (100%) of the intangible assets recorded divided by the number
of shares outstanding. Adjusted consolidated tangible book value 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
intangible assets recorded. The per share repurchase price as of December 31,
1996, was $108.32.
Note 13. 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 $10,035,052 and $11,902,788 at December
31, 1996 and 1995, respectively. Activity with respect to related-party loans
was as follows:
Balance, December 31, 1995 $ 11,902,788
New loans advanced 4,780,358
Repayments 6,648,094
------------
Balance, December 31, 1996 $ 10,035,052
============
Note 14. Regulatory Capital Requirements
The Company's subsidiary banks are subject to various regulatory capital
requirements administered by the Banks' primary federal regulatory agency.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Banks must meet specific capital guidelines that
involve quantitative measures of assets and certain off-balance sheet items as
calculated under regulatory accounting practices. The Banks' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company's subsidiary banks to maintain minimum ratios (set forth in
the table below) of total risk-based capital, Tier I risk-based capital, and
Tier I leverage. Management believes, as of December 31, 1996, that the
Company's subsidiary banks meet all capital adequacy requirements to which they
are subject.
<PAGE>
Note 14. Regulatory Capital Requirement (Continued)
Below is a comparison of the Company's and the Company's subsidiary banks' 1996
actual ratios with the minimum requirements for well capitalized and adequately
capitalized banks, as defined by the federal regulatory agencies' Prompt
Corrective Action Rules (both subsidiary banks were classified as well
capitalized at December 31, 1996):
For Capital Adequacy Purposes
-----------------------------
Actual Well Adequately
Ratio Capitalized Capitalized
- --------------------------------------------------------------------------------
As of December 31, 1996:
Total risk-based capital (to
risk-weighted assets):
Consolidated 14.23% 10.0% 8.0%
Signal Bank, Inc. 15.00% 10.0% 8.0%
Goodhue County National Bank 13.26% 10.0% 8.0%
Tier I capital (to risk-weighted assets):
Consolidated 13.11% 6.0% 4.0%
Signal Bank, Inc. 13.75% 6.0% 4.0%
Goodhue County National Bank 12.31% 6.0% 4.0%
Leverage ratio:
Consolidated 8.66% 5.0% 3.0%
Signal Bank, Inc. 8.80% 5.0% 4.0%
Goodhue County National Bank 7.98% 5.0% 4.0%
Note 15. Additional Cash Flow Information
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Cash Flows Used for Investment Securities:
Available-for-sale securities:
Maturities $ 44,651,839 $ 47,854,796 $ 13,974,815
Sales -- 7,666,148 7,985,749
Purchases (45,324,609) (70,933,314) (24,072,986)
Held-to-maturity securities:
Maturities -- 1,232,302 3,484,667
Purchases -- (216,471) (5,232,208)
--------------------------------------------
Net cash flows used for investment securities $ (672,770) $(14,396,539) $ (3,859,963)
============================================
</TABLE>
<PAGE>
Note 15. Additional Cash Flow Information (Continued)
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow
Information:
Cash payments for interest $ 14,186,611 $ 12,260,709 $ 8,753,626
Cash payments for income taxes 2,844,000 1,884,820 2,216,337
============================================
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 -- 11,972,456 --
Net change in unrealized gain (loss) on
securities available-for-sale (216,607) 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>
<PAGE>
Note 16. Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------
1996 1995
------------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 27,774,060 $ 27,774,060 $ 20,513,154 $ 20,513,154
Federal funds sold 15,725,000 15,725,000 8,725,000 8,725,000
Investment securities available
for sale 102,360,467 102,360,467 101,836,962 101,836,962
Loans and leases 286,204,870 284,047,870 265,904,636 265,669,636
Less allowance for loan and lease
losses (3,168,098) -- (2,899,165) --
Accrued interest receivable 3,369,793 3,369,793 3,180,346 3,180,346
Cash surrender value of life
insurance 9,577,434 9,577,434 9,116,888 9,116,888
Financial liabilities:
Deposits 372,792,254 373,282,254 340,723,249 341,692,249
Securities sold under repurchase
agreements 21,797,343 21,835,343 23,173,292 23,173,292
Accrued interest payable 2,062,464 2,062,464 2,163,556 2,163,556
Notes payable and other
borrowings 17,516,476 17,462,415 15,762,119 15,801,470
Off-balance sheet financial
instruments:
Interest rate swaps in a net gain
(loss) position -- 26,855 -- (30,172)
</TABLE>
<PAGE>
Note 17. Parent Company Financial Information
Condensed financial information for United Community Bancshares, Inc. (parent
company only) follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31
--------------------------
1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 73,623 $ 112,503
Advances to nonbank subsidiaries 950,000 600,000
Property and equipment, net 180,368 215,098
Accrued interest receivable 9,049 3,548
Cash surrender value of life insurance 768,940 696,709
Intangible assets, net 390,000 760,000
Other assets 1,358,746 231,521
Investment in bank subsidiaries 38,669,333 35,672,594
Investment in nonbank subsidiaries 2,984,138 2,723,190
-------------------------
Total assets $45,384,197 $41,015,163
=========================
Liabilities and stockholders' equity:
Accrued expenses and other liabilities $ 968,045 $ 646,569
Notes payable 3,550,000 3,400,000
-------------------------
Total liabilities 4,518,045 4,046,569
Common stock owned by ESOP participants 7,360,127 6,123,162
Stockholders' equity 33,506,025 30,845,432
-------------------------
Total liabilities and stockholders' equity $45,384,197 $41,015,163
=========================
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend income from bank subsidiaries $ 2,300,000 $ 2,100,000 $ 1,550,000
Management fee income from bank
subsidiaries 537,600 450,800 855,573
Management fee income from nonbank
subsidiaries 64,800 23,400 16,232
Interest income from nonbank subsidiaries 90,139 11,012 --
Other income 37,090 35,614 67,030
-------------------------------------------------
Total income 3,029,629 2,620,826 2,488,835
-------------------------------------------------
</TABLE>
<PAGE>
Note 17. Parent Company Financial Information (Continued)
CONDENSED STATEMENTS OF INCOME (Continued)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense 274,612 424,533 583,964
Salaries and employee benefits 1,883,232 1,467,509 1,136,502
Occupancy 70,381 55,214 205,342
Depreciation 75,685 69,863 229,680
Amortization of intangibles 370,000 370,000 370,000
Other 253,144 180,979 402,908
--------------------------------------------------
Total expenses 2,927,054 2,568,098 2,928,396
--------------------------------------------------
Income (loss) before income tax benefit and equity
in undistributed earnings of subsidiaries 102,575 52,728 (439,561)
Income tax benefit 886,850 831,565 787,410
-------------------------------------------------
Income before equity in undistributed earnings
of subsidiaries 989,425 884,293 347,849
Equity in undistributed earnings of bank
subsidiaries 3,213,347 2,710,578 2,050,046
Equity in undistributed earnings/(loss) of
nonbank subsidiaries (6,096) 34,160 35,062
-------------------------------------------------
Net income $ 4,196,676 $ 3,629,031 $ 2,432,957
=================================================
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
-------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 4,196,676 $ 3,629,031 $ 2,432,957
Adjustments to reconcile net income to net
cash flows from operating activities:
Equity in undistributed earnings of
subsidiaries (3,207,251) (2,744,738) (2,085,108)
Depreciation 75,685 69,863 229,680
Amortization of intangibles 370,000 370,000 370,000
Earnings on cash surrender value of life
insurance (33,615) (29,764) (66,906)
Gain on sale of property and equipment (9,057) (5,570)
Other, net (809,981) 899,849 (357,944)
-------------------------------------------------
Net cash flows from operating activities 582,457 2,188,671 522,679
-------------------------------------------------
</TABLE>
<PAGE>
Note 17. Parent Company Financial Information (Continued)
CONDENSED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from investing activities:
Advances to nonbank subsidiaries (1,750,000) (600,000) --
Repayments from nonbank subsidiaries 1,400,000 -- --
Purchases of property and equipment (48,898) (106,079) (1,487,462)
Proceeds from sales of property and
equipment 17,000 28,275 --
Transfer of property and equipment -- 1,056,195 --
Purchase of cash surrender value of life
insurance (38,616) (36,450) (36,450)
Transfer of cash surrender value of life
insurance -- 803,388 (1,330,527)
Investments in subsidiaries, net (267,043) (1,157,806) (17,622,846)
Acquisition of other assets -- -- (1,500,000)
--------------------------------------------------
Net cash flows (used for)/from investing
activities (687,557) (12,477) (21,977,285)
--------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable 2,150,000 -- 9,532,420
Payments made on notes payable (2,000,000) (5,650,000) (1,084,420)
Net proceeds from issuance of common
stock (83,780) 3,549,440 13,035,128
Dividends paid -- -- --
--------------------------------------------------
Net cash flows (used for)/from financing
activities 66,220 (2,100,560) 21,483,128
--------------------------------------------------
Net increase/(decrease) in cash (38,880) 75,634 28,522
Cash
Beginning 112,503 36,869 8,347
---------------------------------------------------
Ending $ 73,623 $ 112,503 $ 36,869
===================================================
</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.
<PAGE>
Note 17. Parent Company Financial Information (Continued)
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.
Note 18. Acquisition
On January 16, 1997, United acquired Park Financial Corporation (PFC), a bank
holding company headquartered in St. Louis Park, Minnesota, which owns one
hundred percent of Park National Bank. The total purchase price paid was
$46,888,247.
To facilitate this transaction, the Company issued 57,254 additional shares of
its common stock for cash proceeds totaling $6,068,924, received $10,560,000
from the proceeds of the sale of the Company's junior subordinated deferrable
interest debentures, and incurred acquisition indebtedness totaling $22 million.
The remaining balance of $8,259,323 was obtained from cash on hand. The existing
note payable to bank in the amount of $3,150,000 and the line of credit in the
amount of $400,000 were retired on January 16, 1997.
The acquisition 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 following is an unaudited summary of PFC's balance sheet as of December 31,
1996 and 1995, and unaudited results of operations for the years ended December
31, 1996 and 1995:
CONDENSED BALANCE SHEETS
December 31
-----------------------------
1996 1995
- -----------------------------------------------------------------------------
(Unaudited) (Unaudited)
Assets:
Cash and due from banks $ 13,705,862 $ 13,169,628
Interest-bearing deposits with banks 1,346,000 876,000
Federal funds sold 13,300,000 4,900,000
Investment securities 65,387,364 63,764,635
Loans, net 117,865,059 113,498,772
Property and equipment, net 1,995,506 2,130,254
Other assets 3,130,329 2,230,636
------------------------------
Total assets $216,730,120 $200,569,925
==============================
<PAGE>
Note 18. Acquisition (Continued)
CONDENSED BALANCE SHEETS (Continued)
December 31
--------------------------------
1996 1995
- -------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Liabilities and stockholders' equity:
Deposits $180,250,371 $165,753,622
Securities sold under repurchase agreements 9,348,726 10,665,906
Accrued expenses and other liabilities 1,290,303 1,262,022
------------------------------
Total liabilities 190,889,400 177,681,550
Stockholders' equity 25,840,720 22,888,375
------------------------------
Total liabilities and stockholders' equity $216,730,120 $200,569,925
==============================
CONDENSED STATEMENTS OF INCOME
Year Ended December 31
------------------------------
1996 1995
- -------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Interest income $ 15,964,700 $ 14,968,748
Interest expense 5,961,987 5,671,616
------------------------------
Net interest income 10,002,713 9,297,132
Provision for loan losses 446,574 720,000
------------------------------
Net interest income after provision
for loan losses 9,556,139 8,577,132
Noninterest income 1,691,904 1,658,712
Noninterest expense 7,400,698 6,337,773
------------------------------
Income before income taxes 3,847,345 3,898,071
Income tax expense 1,477,541 1,497,263
------------------------------
Net income $ 2,369,804 $ 2,400,808
==============================
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
UNITED COMMUNITY BANCSHARES, INC.
_____________________, 1997 By /s/ Galen T. Pate
Galen T. Pate, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Company,
in the capacities, and on the dates, indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints R.
Scott Jones and Galen T. Pate as the undersigned's true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for the undersigned and in the undersigned's name, place and
stead, in any and all capacities, to sign any or all amendments to this Annual
Report on Form 10-K and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Name and Title Date
/s/ R. Scott Jones
R. Scott Jones, Chairman of the Board
and Director
(principal executive officer)
/s/ Galen T. Pate
Galen T. Pate, President and Director
(principal executive officer)
Signatures continued on following page
<PAGE>
Name and Title Date
/s/ Marcia L. O'Brien
Marcia L. O'Brien, Executive Vice President
and Chief Financial Officer (principal financial
and accounting officer)
/s/ Arlin A. Albrecht
Arlin A. Albrecht, Director
/s/ Larry C. Barenbaum
Larry C. Barenbaum, Director
/s/ Spencer A. Broughton
Spencer A. Broughton, Director
/s/ James P. Fritz
James P. Fritz, Director
/s/ John W. Johnson
John W. Johnson, Director
/s/ Ora G. Jones
Ora G. Jones, Director
/s/ Louis J. Langer
Louis J. Langer, Director
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 27,774,060
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15,725,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 102,360,467
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 286,204,870
<ALLOWANCE> 3,168,098
<TOTAL-ASSETS> 459,137,773
<DEPOSITS> 372,792,254
<SHORT-TERM> 21,797,343
<LIABILITIES-OTHER> 6,165,548
<LONG-TERM> 17,516,476
0
0
<COMMON> 4,763
<OTHER-SE> 33,501,262
<TOTAL-LIABILITIES-AND-EQUITY> 459,137,773
<INTEREST-LOAN> 27,005,660
<INTEREST-INVEST> 6,139,657
<INTEREST-OTHER> 567,430
<INTEREST-TOTAL> 33,712,747
<INTEREST-DEPOSIT> 11,770,388
<INTEREST-EXPENSE> 14,085,519
<INTEREST-INCOME-NET> 19,627,228
<LOAN-LOSSES> 594,977
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 17,649,146
<INCOME-PRETAX> 6,153,107
<INCOME-PRE-EXTRAORDINARY> 4,196,676
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,196,676
<EPS-PRIMARY> 7.65
<EPS-DILUTED> 7.65
<YIELD-ACTUAL> 8.71
<LOANS-NON> 913,000
<LOANS-PAST> 346,000
<LOANS-TROUBLED> 36,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,899,165
<CHARGE-OFFS> 762,837
<RECOVERIES> 436,793
<ALLOWANCE-CLOSE> 3,168,098
<ALLOWANCE-DOMESTIC> 2,068,469
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,099,629
</TABLE>
