1
As filed with the Securities
and Exchange Commission on __________, 1996 Registration No. 33-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
------------------
UNIONBANCORP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 6027 36-3145350
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
------------------
122 WEST MADISON STREET
OTTAWA, ILLINOIS 61350
(815) 434-3900
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
------------------
R. SCOTT GRIGSBY
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
UNIONBANCORP, INC.
122 WEST MADISON STREET
OTTAWA, ILLINOIS 61350
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
With copies to:
JOHN E. FREECHACK, ESQ. RICHARD G. CLEMENS, ESQ.
DENNIS R. WENDTE, ESQ. TRACY D. DAW, ESQ.
BARACK, FERRAZZANO, KIRSCHBAUM & PERLMAN SIDLEY & AUSTIN
333 WEST WACKER DRIVE, SUITE 2700 ONE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60606 CHICAGO, ILLINOIS 60603
(312) 984-3100 (312) 853-7000
Approximate date of commencement of proposed sale to the public: AS SOON
AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
=========================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class Amount to be Offering Price Aggregate Amount of
of Securities to be Registered Registered (1) per Share (2) Offering Price (2) Registration Fee
- ---------------------------------------------------------------------------------------------------------
Common Stock, $1.00 Par Value 1,265,000 $11.50 $14,547,500 $5,017
- ---------------------------------------------------------------------------------------------------------
Preferred Stock Purchase Rights 1,265,000 (3) (3) (3)
=========================================================================================================
(1) Includes 165,000 shares of Common Stock subject to the Underwriter's
over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) The Preferred Stock Purchase Rights of the Company initially are attached
to and trade with shares of the Company's Common Stock being registered
hereby. No consideration will be received by the Registrant for the
issuance of such securities.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICIATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED ____________, 1996
1,100,000 SHARES
UNIONBANCORP, INC.
COMMON STOCK
All of the shares of Common Stock, par value $1.00 per share (the
"Common Stock"), of UnionBancorp, Inc. (the "Company") being offered hereby
(this "Offering") are being sold by the Company. The Company, which is
headquartered in Ottawa, Illinois, had two subsidiary banks as of June 30,
1996, UnionBank, with its main office located in Streator, Illinois, and
UnionBank/Sandwich, with its main office located in Sandwich, Illinois. In
August, 1996, the Company purchased Prairie Bancorp, Inc., a multi-bank holding
company headquartered in Princeton, Illinois, and its six bank subsidiaries.
See "The Acquisitions -- Prairie Bancorp, Inc. -- Business." Immediately prior
to the closing of this Offering, the Company also expects to complete the
purchase of Country Bancshares, Inc., a bank holding company headquartered in
Macomb, Illinois, and its bank subsidiary, Omni Bank. See "The Acquisitions --
Country Bancshares, Inc. -- Business." The proceeds of this Offering will be
used to retire debt that was incurred or assumed by the Company in connection
with these acquisitions. See "Use of Proceeds" and "The Acquisitions."
The Common Stock is currently quoted on the OTC Bulletin Board, and is
expected to be approved for quotation on the Nasdaq National Market under the
symbol "UBCD" prior to consummation of the Offering. As of August 5, 1996, the
last per share sale price for Common Stock quoted on the OTC Bulletin Board was
$11.00. See "Market for Common Stock and Dividends."
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
SEE "INVESTMENT CONSIDERATIONS" BEGINNING ON PAGE 14 FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH PROSPECTIVE INVESTOR.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
========================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- --------------------------------------------------------
Per Share $ $ $
- --------------------------------------------------------
Total(3) $ $ $
========================================================
(1) The Company has agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the
Company, estimated at $___________________.
(3) The Company has granted the Underwriter a 30-day option
to purchase up to 165,000 additional shares of Common Stock, on
the same terms and conditions as set forth above, solely to cover
over-allotments, if any. See "Underwriting." If the Underwriter
exercises such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be
$________________, $______________ and $________________,
respectively.
The shares of Common Stock are offered by the Underwriter when, as and
if received and accepted by it, subject to its right to reject orders in whole
or in part and subject to certain other conditions. It is expected that
delivery of the certificates for the shares of Common Stock will be made
against payment therefor in Chicago, Illinois, on or about ______________,
1996.
HOEFER & ARNETT
INCORPORATED
_____________, 1996
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UNIONBANCORP, INC.
CURRENT AND PROPOSED MARKET AREA
[MAP]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements appearing elsewhere in this Prospectus.
All per share amounts in this Prospectus have been adjusted for a three-for-one
split of the Common Stock in the form of a dividend which took effect on May
20, 1996. Unless the context clearly suggests otherwise, references in this
Prospectus to the Company include all of its direct and indirect subsidiaries.
Except as otherwise indicated, the information contained in this Prospectus
assumes the Underwriter's over-allotment option is not exercised.
THE COMPANY
UnionBancorp, Inc. (the "Company"), is a multi-bank holding company
headquartered in Ottawa, Illinois, located approximately 85 miles southwest of
Chicago. The Company is one of the leading banking and trust institutions in
LaSalle and contiguous counties in north central Illinois as evidenced by its
approximate 11% share of deposits in LaSalle County. The Company conducts a
full service community banking and trust business through its two subsidiary
banks: UnionBank ("UnionBank/Streator") and UnionBank/Sandwich
("UnionBank/Sandwich," and collectively with UnionBank/Streator, the "Union
Banks"). The Company also operates three non-bank subsidiaries engaged in
providing data processing, debt collection and property management services to
the Union Banks and third parties. At June 30, 1996, the Company had
consolidated assets of approximately $296.6 million, deposits of approximately
$259.1 million and stockholders' equity of approximately $23.5 million.
UnionBank/Streator has four locations in Ottawa, three in Streator, and
one in each of Triumph and Peru, Illinois. UnionBank/Sandwich has one location
in each of Sandwich and Plano, Illinois. The Union Banks operate as community
banks that focus on long-term relationships with customers and providing
individualized quality service. Reflecting its community banking heritage, the
Company has a stable deposit base from customers located within its north
central Illinois market area. Its recent financial performance is
characterized by consistent core earnings, an increasingly diversified loan
portfolio and strong asset quality.
On August 6, 1996, the Company acquired six additional bank subsidiaries
through the purchase of Prairie Bancorp, Inc. ("Prairie"), a multi-bank holding
company headquartered in Princeton, Illinois. The main offices of Prairie's
subsidiary banks (collectively, the "Prairie Banks") are located in the
Illinois communities of Ferris, Hanover, Ladd, Manlius, Tampico and Tiskilwa.
The Prairie Banks also have branches in three other Illinois communities.
Immediately prior to the closing of this Offering, the Company also expects to
complete the acquisition of Country Bancshares, Inc., a one-bank holding
company headquartered in Hull, Illinois ("Country"), with offices in six
western Illinois communities not currently served by the Company. The
acquisitions of Prairie and Country (the "Acquisitions") will increase the
total assets of the Company from approximately $296.6 million to $633.3
million, an increase of 114%. See the summary descriptions of the acquisitions
set forth below and "The Acquisitions."
The Company's strategic plan contemplates an increase in profitability and
stockholder value through a significant expansion of the Company's market area,
substantial growth in its asset size and improved operational efficiencies. In
1993, the Company began implementing this plan by realigning its management
structure through the redefinition of certain officers' duties and functions,
hiring additional experienced senior executives and developing among its
employees an aggressive sales culture. The acquisitions of Prairie and Country
are expected to increase significantly the presence of the Company within the
region's banking industry. Because of the reputations of the Company and its
executive officers in the banking industry, the Company believes that it will
be an attractive alternative to future sellers of community banks and thrifts.
The Company believes that it can successfully manage these community-based
institutions to increase their profitability by expanding cross-selling efforts
and emphasizing those products and services offering the highest return on
investment.
The Company's operating strategy is to provide customers with the business
sophistication and breadth of products of a regional financial services
company, while retaining the special attention to personal service and the
local appeal of a community bank. Decentralized decision making authority
vested in the presidents and senior officers of the Company's bank subsidiaries
allows for rapid response time and flexibility in dealing with customer
requests and credit needs. The participation of the Company's directors,
officers and employers in area civic and
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service organizations demonstrates the Company's continuing commitment to
the communities it serves. Management believes that these qualities
distinguish the Company from its competitors and will allow the Company to
compete successfully in its market area against larger regional and out of
state institutions.
THE ACQUISITIONS
The acquisition of Prairie was completed on August 6, 1996, and the
acquisition of Country is expected to be consummated immediately prior to the
closing of this Offering. The Acquisitions will increase the Company's assets
from $296.6 million to $633.3 million and the number of its banking locations
from 11 to 27.
Prairie is a multi-bank holding company that owns the six Prairie Banks.
In addition to their respective main office locations, the Prairie Banks have
four branch locations in the Illinois communities of Carthage, Elizabeth and
Princeton. Country is a one-bank holding company that owns all of the capital
stock of Omni Bank. Omni Bank's main office is located in Macomb, Illinois,
with branch locations in five nearby Illinois communities. Prairie and Country
had consolidated assets at June 30, 1996, of approximately $226.0 million and
$103.2 million, respectively.
Management of the Company believes that the Acquisitions present an
excellent opportunity for increased earnings. The Prairie Banks have
traditionally maintained a low loan to deposit ratio and instead have
concentrated on attempting to increase earnings through management of their
investment portfolios. Recently, profitability of the Prairie Banks has
declined as interest rates have continued to rise and investment portfolio
values have fallen. The Company intends to increase the profitability of the
Prairie Banks by expanding their loan portfolios. The Company believes that it
can grow the Prairie Banks' loan portfolios by enhancing marketing efforts,
expanding loan products and increasing employee training. The Company also
believes that by following a more conservative investment policy, it will be
able to reduce the size of and better manage the investment portfolios of the
Prairie Banks.
Omni Bank has experienced rapid growth in recent years. In certain
circumstances, this rapid growth has strained Omni Bank's administrative and
data processing capabilities. The Company believes that consolidation of the
administrative operations of Omni Bank and improved management controls will
lead to improved efficiencies and will help to ensure that future expansion is
managed profitably.
In addition to the immediate increase in asset size and the potential for
improved future profitability, the Acquisitions will allow the Company to
expand its market area into what it believes are desirable banking locations.
Most of the Prairie Banks are the sole financial institution in their
communities and many are located in county seats and Omni Bank is based in a
growing college community. Through the Acquisitions, the Company will increase
from two bank subsidiaries with eleven locations in north central Illinois, to
nine bank subsidiaries and twenty seven locations in thirteen counties across
northern, north central and western Illinois. The resulting market area of the
Company will extend from the far western suburbs of the Chicago metropolitan
area across central and northern Illinois to the Mississippi River in western
Illinois. This expansion will increase the geographic diversity of the
Company's loan portfolio which is expected to decrease the Company's overall
lending risks. See "The Acquisitions -- Prairie Bancorp, Inc." and "-- Country
Bancshares, Inc."
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The table below presents certain unaudited condensed and consolidated
historical financial and operating data for the Company and certain unaudited
pro forma condensed combined financial and operating data for the Company after
giving effect to (i) this Offering, (ii) the Acquisitions as if they had each
occurred as of June 30, 1996 and (iii) the pro forma adjustments described in
the Notes to the Unaudited Pro Forma Combined Condensed Financial Statements of
the Company which appear elsewhere in this Prospectus. The amount of Pro Forma
Combined Net Income for the six-month period ended June 30, 1996, shown below
does not reflect revenue enhancements or cost savings anticipated by management
of the Company as a result of the Acquisitions.
AS OF AND FOR THE
SIX MONTHS ENDED
JUNE 30, 1996
-----------------------
PRO FORMA
ACTUAL COMBINED
---------- -----------
(DOLLARS IN THOUSANDS)
Assets............................................. $296,605 $633,254
Loans, net of unearned discount.................... 185,840 325,001
Deposits........................................... 259,087 537,773
Stockholders' equity............................... 23,452 41,659
Net income......................................... 1,111 1,526
THE OFFERING
Stock being offered hereby....... 1,100,000 shares(1)
Common Stock outstanding after
the Offering..................... 3,951,403 shares(1)
Use of proceeds.................. The net proceeds of the Offering will be
used to facilitate the Acquisitions by
retiring debt that was incurred or
assumed by the Company in connection with
the Acquisitions, thus allowing the
Company to continue to meet its necessary
regulatory capital requirements. See
"Use of Proceeds."
Nasdaq symbol.................... "UBCD"
- --------------
(1) An additional 165,000 shares of Common Stock may be sold pursuant to an
over-allotment option granted by the Company to the Underwriter. See
"Underwriting."
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UNIONBANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
STATEMENT OF INCOME DATA 1996 1995 1995 1994 1993 1992 1991
-------- --------- --------- --------- --------- --------- ---------
Interest income........................ $ 11,278 $ 10,193 $21,368 $ 18,627 $ 18,604 $ 20,127 $ 19,437
Interest expense....................... 5,850 5,217 11,249 8,706 8,798 10,482 11,595
-------- --------- --------- --------- --------- --------- ---------
Net interest income................... $ 5,428 $ 4,976 $10,119 $ 9,921 $ 9,806 9,645 7,842
Provision for loan losses.............. 500 342 684 660 1,268 1,297 650
-------- --------- --------- --------- --------- --------- ---------
Net interest income after provision
for loan losses....................... $ 4,928 $ 4,634 $ 9,435 $ 9,261 $ 8,538 $ 8,348 $ 7,192
Noninterest income..................... 1,324 1,187 2,570 2,283 2,512 1,893 1,580
Noninterest expense.................... 4,761 4,413 8,771 8,247 7,841 7,335 6,965
-------- --------- --------- --------- --------- --------- ---------
Net income before income taxes......... $ 1,491 $ 1,408 $ 3,234 $ 3,297 $ 3,209 $ 2,906 $ 1,807
Provision (credit) for income taxes.... 380 365 881 703 747 595 507
-------- --------- --------- --------- --------- --------- ---------
Net income............................. $ 1,111 $ 1,043 $ 2,353 $ 2,594 $ 2,462 $ 2,311 $ 1,300
======== ========= ========= ========= ========= ========= =========
PER SHARE DATA(1)
Net income............................. $ 0.51 $ 0.49 $ 1.09 $ 1.22 $ 1.15 $ 1.08 $ 0.61
Cash dividends......................... 0.07 0.07 0.13 0.12 0.09 0.07 0.07
Dividend payout ratio.................. 12.77% 13.61% 12.06% 9.57% 7.78% 6.13% 10.91%
Book value............................. $ 11.00 $ 10.40 $ 11.01 $ 9.21 $ 8.92 $ 7.83 $ 6.82
Weighted average shares outstanding.... 2,169,012 2,131,737 2,148,897 2,132,712 2,132,760 2,132,760 2,136,195
Period end shares outstanding.......... 2,131,737 2,131,737 2,131,737 2,131,737 2,132,760 2,132,760 2,132,760
BALANCE SHEET DATA
Investments and Federal funds sold..... $ 87,154 $ 89,376 $95,182 $ 86,460 $ 95,098 $ 83,057 $ 90,902
Total loans............................ 185,840 175,227 180,819 161,134 148,371 146,569 131,915
Allowance for loan losses.............. 1,597 1,871 2,014 1,704 1,787 1,586 1,384
Total assets........................... 296,605 282,987 303,533 272,038 266,666 249,121 240,535
Total deposits......................... 259,087 247,939 261,727 232,334 237,455 222,513 214,520
Stockholders' equity................... 23,452 22,164 23,475 19,629 19,026 16,702 14,553
EARNINGS PERFORMANCE DATA
Return on average total assets(2)...... 0.75% 0.76% 0.83% 0.98% 0.97% 0.95% 0.60%
Return on average stockholders'
equity(2)............................. 9.49 10.11 10.83 13.29 13.88 15.00 9.64
Net interest margin ratio.............. 4.23 4.27 4.15 4.38 4.46 4.52 4.18
Efficiency ratio(3).................... 65.60 66.35 64.16 61.87 59.05 60.99 68.49
ASSET QUALITY RATIOS
Nonperforming assets to total assets 0.64% 0.52% 0.95% 0.87% 1.64% 1.64% 2.04%
Nonperforming loans to total loans..... 0.70 0.32 1.22 0.90 2.06 2.32 3.07
Net loan charge-offs to average
loans(2).............................. 1.00 0.10 0.22 0.49 0.71 0.78 0.34
Allowance for loan losses to total
loans................................. 0.86 1.07 1.11 1.06 1.20 1.08 1.05
Allowance for loan losses to
nonperforming loans................... 122.75 337.55 90.93 117.44 58.61 46.56 34.18
CAPITAL RATIOS
Average equity to average assets....... 7.95% 7.62% 7.67% 7.38% 6.98% 6.34% 6.27%
Total capital to risk adjusted assets.. 12.54 12.07 12.35 12.28 10.97 10.23 8.72
Tier 1 leverage........................ 7.92 7.79 7.95 7.68 7.00 6.33 6.33
- ---------------
(1) Restated to reflect the three-for-one stock split which took effect May 20,
1996.
(2) Interim periods annualized.
(3) Calculated as noninterest expense less amortization of intangibles and
expenses related to other real estate owned divided by the sum of net
interest income before provision for loan losses and total noninterest
income excluding securities gains and losses.
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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
set forth the consolidated balance sheet at June 30, 1996, and the consolidated
income statements for the six month period ended June 30, 1996 and for the year
ended December 31, 1995, for the Company, Prairie and Country, the adjustments
reflecting the August, 1996, acquisition of Prairie and the proposed
acquisition of Country and the pro forma combined information. The
Acquisitions will be accounted for as purchases and the assets acquired and
liabilities assumed in the Acquisitions will be recorded at their estimated
fair market values, with the excess of the respective purchase prices over the
net fair market values recorded as goodwill. None of the information regarding
the Company has been adjusted to reflect the acquisition of LaSalle County
Collections, Inc., a collection agency ("LaSalle Collections"), that was
consummated on August 1, 1996, and which, in the opinion of the Company's
management, did not have a material effect on the Company from a financial
viewpoint. The information with respect to the Company as of June 30, 1996,
and the pro forma information are unaudited. The pro forma balance sheet
assumes that the Acquisitions were consummated on June 30, 1996. The pro forma
income statements assume that the Acquisitions were consummated at the
beginning of the period indicated. The pro forma financial statements should
be read in conjunction with the financial statements and footnotes thereto
appearing elsewhere in this Prospectus. The pro forma combined balance sheet
and statements of income are not necessarily indicative of the combined
financial position at consummation of the Acquisitions or the results of
operations following consummation of the Acquisitions.
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UNIONBANCORP, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
PRO FORMA UNIONBANCORP
UNIONBANCORP PRAIRIE COUNTRY ADJUSTMENTS PRO FORMA
------------ ----------- -------- ---------------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks.............. $ 11,403 $ 7,967 $ 2,945 11,000 A $ 23,626
(5,235) B
(11,445) C
5,680 D
1,311 E
Federal funds sold................... 225 2,131 2,075 4,431
-------- -------- -------- --------
Total cash and cash equivalents...... 11,628 10,098 5,020 -- 28,057
Securities available for sale........ 58,003 39,459 26,131 -- 123,593
Securities held to maturity.......... 28,926 97,832 -- (2,547) F 124,211
Loans, net of unearned discount...... 185,840 73,834 66,573 (1,246) E 325,001
Less: Allowance for loan losses...... (1,597) (784) (500) -- (2,881)
Net loans............................ 184,243 73,050 66,073 322,120
Premises and equipment, net.......... 6,830 3,184 3,633 271 G 13,853
(65) E
Accrued interest receivable.......... 2,940 2,099 1,215 -- 6,254
Other real estate.................... 346 22 69 -- 437
Goodwill............................. 518 -- 76 3,524 B 8,392
4,274 C
Core deposits........................ 355 -- -- 1,700 H 2,055
Other assets......................... 2,816 288 955 223 I 4,282
-------- -------- -------- ------- --------
Total assets......................... $296,605 $226,032 $103,172 $ 7,445 $633,254
======== ======== ========= ======= ========
LIABILITIES
Deposits
Noninterest-bearing.................. $ 34,515 $ 12,378 $ 10,491 $ 57,384
Interest bearing..................... 224,572 175,462 80,355 480,389
-------- -------- -------- --------
Total deposits....................... 259,087 187,840 90,846 537,773
Federal funds purchased and -------- -------- -------- --------
securities sold under repurchase
agreements.......................... 7,544 8,470 100 16,114
Other borrowings..................... 4,391 3,950 4,150 (4,150) J 15,024
5,680 D
1,003 K
FHLB advances........................ -- 11,721 4,300 16,021
Accounts payable and accrued
liabilities......................... 2,131 1,543 1,336 5,010
-------- -------- -------- --------
Total liabilities.................... 273,153 213,524 100,732 589,942
-------- -------- -------- --------
MINORITY INTEREST IN SUBSIDIARIES..... -- 796 -- 796
MANDATORY REDEEMABLE PREFERRED STOCK.. -- -- -- 857 B 857
STOCKHOLDERS' EQUITY
Preferred stock...................... -- 6,092 314 (6,092) B 500
500 B
(314) C
Common stock......................... 2,400 1 26 1,100 A 4,211
(1) B
711 B
(26) C
Paid-in capital...................... 1,033 1,579 1,058 9,900 A 17,932
4,150 J
(1,579) B
6,999 B
(5,208) C
Retained earnings.................... 21,537 3,874 1,157 (3,874) B 21,537
7 C
Deferred compensation related to ESOP -- -- -- (1,003) K
Unrealized gain (loss) on
securities available for sale....... (997) 166 (115) (166) B (997)
115 C
Less: Treasury stock (521) -- (521)
-------- -------- -------- --------
Total stockholders' equity........... 23,452 11,712 2,440 41,659
Total liabilities and -------- -------- -------- ------- --------
stockholders' equity................ $296,605 $226,032 $103,172 $ 7,445 $633,254
======== ======== ========= ======= ========
See Notes to Pro Forma Combined Condensed Balance Sheet (Unaudited)
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UNIONBANCORP, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
PRO FORMA UNIONBANCORP
UNIONBANCORP PRAIRIE COUNTRY ADJUSTMENTS PRO FORMA
------------ -------- -------- ------------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income......................... $ 11,278 $ 7,527 $ 3,818 150 L $ 22,806
33 M
Interest expense........................ 5,850 4,792 2,449 (172) N 13,153
-------- ------- ------- 234 O --------
Net interest income..................... $ 5,428 $ 2,735 $ 1,369 $ 9,653
Provision for loan losses............... 500 20 145 665
-------- ------- ------- --------
Net interest income after provision for
loan losses............................. 4,928 2,715 1,224 8,988
-------- ------- ------- --------
Noninterest Income
Service charges on deposit accounts..... 151 205 311 667
Other service charges................... 748 -- -- 748
Trust service fees...................... 183 -- -- 183
Other operating income.................. 242 51 290 583
-------- ------- ------- --------
Total noninterest income................ 1,324 256 601 2,181
-------- ------- ------- --------
Noninterest expense
Salaries and employee benefits.......... 2,544 1,206 856 4,606
Net occupancy expense................... 384 351 237 3 P 979
4 M
Equipment expense....................... 331 -- -- 331
Other noninterest expense............... 1,502 660 507 340 Q 3,009
-------- ------- ------- --------
Total noninterest expense............... 4,761 2,217 1,600 8,925
-------- ------- ------- --------
Income before income tax expense........ 1,491 754 225 2,244
Minority interest....................... -- 42 -- 42
Income tax expense...................... 380 215 70 11 K 676
-------- ------- ------- ----- --------
Net income.............................. 1,111 497 155 1,526
-------- ------- ------- --------
Primary earnings per common share....... $ 0.51 $ 0.35
Weighted average number of common shares
outstanding (in thousands).............. 2,169 3,989
-------- --------
- --------------
See Notes to Pro Forma Combined Condensed Statement of Income (Unaudited)
9
11
UNIONBANCORP, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
PRO FORMA UNIONBANCORP
UNIONBANCORP PRAIRIE COUNTRY ADJUSTMENTS PRO FORMA
------------ -------- ------- ---------------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks.............. $ 16,166 $ 4,458 $ 2,215 11,000 A $ 23,413
(5,235) B
(11,445) C
5,680 D
574 E
Federal funds sold................... 2,265 2,045 10,045 14,355
-------- ------- ------- --------
Total cash and cash equivalents...... 18,431 6,503 12,260 37,768
Securities available for sale........ 63,891 103,826 22,630 190,347
Securities held to maturity.......... 29,026 42,499 -- (2,253) F 69,272
Loans, net of unearned discount...... 180,819 67,133 56,597 (509) E 304,040
Less: Allowance for loan losses...... (2,014) (741) (420) (3,175)
-------- ------- ------- --------
Net loans............................ 178,805 66,392 56,177 300,865
Premises and equipment, net.......... 6,571 3,327 3,749 271 G 13,853
(65) E
Accrued interest receivable.......... 3,386 2,114 1,085 6,585
Other real estate.................... 441 -- 54 495
Goodwill............................. 551 18 124 3,215 B 8,160
4,252 C
Core deposits........................ 391 4 -- 1,700 H 2,095
Other assets......................... 2,040 291 526 109 I 2,966
-------- ------- ------- ------ --------
Total assets......................... $ 303,533 $224,974 $96,605 $7,294 $ 632,406
======== ======= ======= ====== ========
LIABILITIES
Deposits
Noninterest-bearing.................. $ 35,688 $ 13,017 $10,880 $ 59,585
Interest bearing..................... 226,039 170,279 75,666 471,984
-------- ------- ------- --------
Total deposits....................... 261,727 183,296 86,546 531,569
-------- ------- ------- --------
Federal funds purchased and
securities sold under repurchase
agreements.......................... 11,505 6,456 100 18,061
Other borrowings..................... 4,346 3,950 4,150 (4,150) J 14,979
5,680 D
1,003 K
FHLB Advances........................ -- 16,993 2,000 18,993
Accounts payable and accrued
liabilities......................... 2,480 1,663 1,347 5,490
-------- ------- ------- --------
Total liabilities.................... 280,058 212,358 94,143 589,092
-------- ------- ------- --------
MINORITY INTEREST IN SUBSIDIARIES......... -- 775 -- 775
------ --------
MANDATORY REDEEMABLE PREFERRED STOCK...... -- -- 857 B 857
(6,092) B
STOCKHOLDERS' EQUITY 500 B
Preferred stock...................... -- 6,092 315 (315) C 500
Common stock......................... 2,400 1 26 1,100 A 4,211
(1) B
711 B
(26) C
Paid-in capital...................... 1,026 1,579 1,058 9,900 A 17,925
4,150 J
(1,579) B
6,999 B
(5,208) C
Retained earnings.................... 20,568 3,686 1,001 (3,686) B 20,568
(1,001) C
Deferred compensation related to ESOP -- -- -- (1,003) K (575)
Unrealized gain on (483) B
securities available for sale....... 2 483 62 (62) C 2
Less: Treasury stock................. (521) -- -- (521)
-------- ------- ------- --------
Total stockholders' equity........... 23,475 11,841 2,462 41,682
-------- ------- ------- ------- --------
Total liabilities and
stockholders' equity................ $303,533 $224,974 $96,605 $7,294 $ 632,406
======== ======= ======= ======= ========
See Notes to Pro Forma Combined Condensed Balance Sheet (Unaudited)
10
12
UNIONBANCORP, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
PRO FORMA UNIONBANCORP
UNIONBANCORP PRAIRIE COUNTRY ADJUSTMENTS PRO FORMA
------------ -------- -------- ------------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income......................... $ 21,368 $ 15,123 $ 6,030 300 L $ 42,851
30 M
Interest expense........................ 11,248 10,327 3,532 (317) O 25,259
-------- -------- ------- --------
Net interest income..................... $ 10,120 $ 4,796 $ 2,498 $ 17,592
Provision for loan losses............... 684 (31) 40 693
-------- -------- ------- --------
Net interest income after provision for
loan losses........................... 9,436 4,827 2,458 16,899
-------- -------- ------- --------
NONINTEREST INCOME
Service charges on deposit accounts..... 952 317 494 1,763
Other service charges................... 242 -- -- 242
Trust service fees...................... 330 -- -- 330
Other operating income.................. 1,046 676 94 1,816
-------- -------- ------- --------
Total noninterest income................ 2,570 993 588 4,151
-------- -------- ------- --------
Noninterest expense
Salaries and employee benefits.......... 4,451 2,424 1,511 8,386
Net occupancy expense................... 665 702 493 7 P 1,874
7 M
Equipment expense....................... 584 -- -- 584
Other noninterest expense............... 3,071 1,496 836 680 Q 6,083
-------- -------- ------- --------
Total noninterest expense............... 8,771 4,622 2,840 16,927
-------- -------- ------- --------
Income before income tax expense........ 3,235 1,198 206 4,123
Minority interest....................... -- 95 -- 95
Income tax expense (benefit)............ 882 275 3 R 1,157
-------- -------- ------- --------
Net Income.............................. 2,353 828 209 2,871
-------- -------- ------- --------
Primary earnings per common share
net income............................. $ 1.09 $ .66
Weighted average number of common shares
outstanding (in thousands)............. $ 2,149 3,969
-------- --------
See Notes to Pro Forma Combined Condensed Statement of Income (Unaudited)
11
13
UNIONBANCORP, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
The unaudited pro forma combined condensed financial statements
combine the three entities at June 30, 1996, and for the six months then
ended. In combining the entities, the following adjustments were made:
(A) To record the proceeds of the $11.0 million of net capital
estimated to be raised through the Offering based on an assumed sale
by the Company of 1,100,000 shares of Common Stock at a price of
$11.50 per share, net of underwriting discounts, commissions and
other estimated offering expenses.
(B) To record the payment of $5.235 million in cash, the issuance of
710,576 shares of Common Stock valued at $10.85 per share, the
issuance of 2,762.24 shares of Series A Preferred Stock valued at
$500,000 and 857 shares of Series B Preferred Stock of the Company
valued at $1,000 per share to the stockholders of Prairie for 100%
of their outstanding stock, elimination of Prairie's equity accounts
and the recording of goodwill in the amount of $3.524 million.
(C) To record the payment of $11.445 million in cash for 100% of
Country's outstanding shares, elimination of Country's equity
accounts and the recording of goodwill in the amount of $4.274
million.
(D) To record the estimated $5.680 million of debt incurred in
connection with the Acquisitions and funded through loan proceeds.
(E) To record the sale of assets to Country stockholders.
(F) To record the estimated fair value of the investment portfolio of
Prairie.
(G) To record the estimated fair value of fixed assets acquired from
Prairie and Country.
(H) To record the estimated fair value of core deposits acquired from
Prairie and Country.
(I) To record the estimated deferred federal income tax on the net fair
value increases resulting from the Acquisitions.
(J) To record the payment of $4.15 million to retire outstanding
liabilities of Country stockholders in connection with the Country
acquisition.
(K) To record the purchase by the Company's ESOP of 87,200 shares of
the Offering at a price of $11.50 per share.
(L) To record the increase in interest income associated with the fair
market adjustment to the investment portfolio of Prairie. Accretion
of the fair market adjustment to the investment portfolio recorded
in connection with the Prairie Acquisition is estimated to be
approximately $300,000 during each of the years in the five year
period ended December 31, 2000.
(M) To record the effects of sale of assets to Country stockholders.
(N) To record the increase in interest expense associated with
acquisition debt.
(O) To record the elimination of interest expense on distribution of
Country's debt.
(P) To record the depreciation on fair market value increases of
depreciable fixed assets acquired with the Acquisitions.
(Q) To record the amortization of the goodwill and core deposit premium
recorded in connection with the Acquisitions. Amortization of
goodwill and core deposit premiums recorded in connection with the
Acquisitions will be approximately $680,000 during each of the years
in the five year period ended December 31, 2000.
(R) To record the effect of the pro forma adjustments using an
effective tax rate of 38.8% for the six months ended June 30, 1996.
12
14
UNIONBANCORP, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED)
The unaudited pro forma combined condensed financial statements
combine the three entities at December 31, 1995, and for the twelve
months then ended. In combining the entities, the following adjustments
were made:
(A) To record the proceeds of the $11.0 million of net capital
estimated to be raised through the Offering based on an assumed sale
by the Company of 1,100,000 shares of Common Stock at a price of
$11.50 per share, net of underwriting discounts, commissions and
other estimated offering expenses.
(B) To record the payment of $5.235 million in cash, the issuance of
710,576 shares of Common Stock valued at $10.85 per share, the
issuance of 2,762.24 shares of Series A Preferred Stock valued at
$500,000 and 857 shares of Series B Preferred Stock of the Company
valued at $1,000 per share to the stockholders of Prairie for 100%
of their outstanding stock, elimination of Prairie's equity accounts
and the recording of goodwill in the amount of $3.215 million.
(C) To record the payment of $11.445 million in cash for 100% of
Country's outstanding shares, elimination of Country's equity
accounts and the recording of goodwill in the amount of $4.252
million.
(D) To record the estimated $5.680 million of debt incurred in
connection with the Acquisitions and funded through loan proceeds.
(E) To record the sale of assets to Country stockholders.
(F) To record the estimated fair value of the investment portfolio of
Prairie.
(G) To record the estimated fair value of fixed assets acquired from
Prairie and Country.
(H) To record the estimated fair value of core deposits acquired from
Prairie and Country.
(I) To record the estimated deferred federal income tax on the net fair
value increases resulting from the Acquisitions.
(J) To record the payment of $4.15 million to retire outstanding
liabilities of Country stockholders in connection with the Country
acquisition.
(K) To record the purchase by the Company's ESOP of 87,200 shares of
the Offering at a price of $11.50 per share.
(L) To record the increase in interest income associated with the fair
market adjustment to the investment portfolio of Prairie. Accretion
of the fair market adjustment to the investment portfolio recorded
in connection with the Prairie Acquisition is estimated to be
approximately $300,000 during each of the years in the five year
period ended December 31, 2000.
(M) To record the effects of sale of assets to Country stockholders.
(N) To record the increase in interest expense associated with
acquisition debt.
(O) To record the elimination of interest expense on distribution of
Country's debt.
(P) To record the depreciation on fair market value increases of
depreciable fixed assets acquired with the Acquisitions.
(Q) To record the amortization of the goodwill and core deposit premium
recorded in connection with the Acquisitions. Amortization of
goodwill and core deposit premiums recorded in connection with the
Acquisitions will be approximately $680,000 during each of the years
in the five year period ended December 31, 2000.
(R) To record the effect of the pro forma adjustments using an
effective tax rate of 38.8% for the year ended December 31, 1995.
13
15
INVESTMENT CONSIDERATIONS
In addition to other information contained in this Prospectus, the
following factors should be considered carefully in evaluating the
Company, its business and prospects before purchasing any of the shares
of Common Stock offered hereby. The order of the following is not
intended to be indicative of the relative importance of any described
risk, nor is the following intended to be inclusive of all risks of
investment in the Common Stock.
CONSOLIDATION ISSUES -- GENERAL
As a result of the Acquisitions, the Company's asset size has
substantially increased. The Company has not previously consummated an
acquisition on the same scale as the Acquisitions. The future prospects
of the Company will depend, in significant part, on a number of factors,
including, without limitation, the Company's ability to integrate the
Acquisitions; its ability to compete effectively in new market areas in
the western, northwestern and southwestern portions of Illinois; its
success in retaining earning assets, including loans, acquired in the
Acquisitions; its ability to generate new earning assets; and its ability
to attract and retain qualified management and other appropriate
personnel. No assurance can be given with respect to the Company's
ability to accomplish any of the foregoing or that the Company will be
able to achieve results in the future similar to those achieved in the
past or that the Company will be able to manage effectively the growth
resulting from the Acquisitions. See "The Acquisitions."
CONSOLIDATION ISSUES -- CREDIT QUALITY
In connection with the Acquisitions, the Company and its
representatives reviewed the loan portfolios of the Prairie Banks and
Omni Bank. The Company's examinations were made using criteria, analyses
and collateral evaluations that the Company has traditionally used in the
review of its existing business. Nonperforming assets (including
nonaccrual loans 90 days or more past due) at June 30, 1996 totaled
approximately $850,000 at the Prairie Banks and $1,678,000 at Omni Bank.
Nonperforming assets (including loans 90 days or more past due) at
December 31, 1995, totaled approximately $673,000 at the Prairie Banks
and $594,000 at Omni Bank. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Prairie Bancorp, Inc."
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Country Bancshares, Inc."
At June 30, 1996, the Company's allowance for loan losses was 0.86%
of total loans, while on a pro forma basis assuming consummation of the
Acquisitions, the Company's allowance for loan losses would have been
.89% at June 30, 1996. At December 31, 1995, the Company's allowance
for loan losses was 1.11% of total loans, while on a pro forma basis at
December 31, 1995, the Company's allowance for loan losses would have
been 1.04%.
The Company has sought to improve the quality of Omni Bank's loan
portfolio by requiring the sale at book value of certain of Omni Bank's
loans to the principal stockholders of Country as a condition to the
closing of the Country Acquisition. Pursuant to the terms of the Country
Acquisition, the principal stockholders of Country will acquire from Omni
Bank all obligations payable to Omni Bank by certain borrowers whose
loans have been identified by the Company as being loans which bear more
than an average risk of loss. See "The Acquisitions -- Country
Bancshares, Inc. -- Acquisition of Certain Property from Omni Bank."
IMPACT OF INTEREST RATES AND ECONOMIC CONDITIONS
The results of operations for financial institutions, including the
Union Banks, the Prairie Banks and Omni Bank (collectively, the "Bank
Subsidiaries"), may be materially and adversely affected by changes in
prevailing economic conditions, including declines in real estate market
values, rapid changes in interest rates and the monetary and fiscal
policies of the federal government. See "Supervision and Regulation --
General" and "-- Recent Regulatory Developments." The profitability of
financial institutions such as the Bank Subsidiaries is in part dependent
on the spread between the interest rates earned on investments and loans
and the interest rates paid on deposits and other interest-bearing
liabilities. The net interest spread and margin of the Bank Subsidiaries
will be affected by general economic conditions and other factors beyond
the control of the Company that influence market interest rates. While
Prairie's investment portfolio has a relatively long duration and is
subject to the risk of the rising cost of interest-sensitive liabilities,
the Company has sought to limit possible losses from certain securities
held for investment by the Prairie Banks. The terms of the Prairie
Acquisition Agreement (as defined below)
14
16
provide that, under certain circumstances, the conversion value of the shares
of the Company's newly authorized Series A Preferred Stock (the "Series A
Preferred Stock") issued at the closing of the Prairie Acquisition to the
two principal Prairie stockholders (the "Principal Prairie Stockholders") will
be adjusted to offset the amount of any future losses incurred by the Company
in connection with Prairie's consolidated investment portfolio. See "The
Acquisitions -- Prairie Bancorp, Inc. -- Consideration for Prairie Common and
Preferred Stock."
COMPETITION
The Company and the Bank Subsidiaries face strong competition for
deposits, loans and other financial services from numerous Illinois and
out-of-state banks, thrifts, credit unions and other financial
institutions as well as other entities which provide financial services.
Some of the financial institutions and financial services organizations
with which the Bank Subsidiaries compete are not subject to the same
degree of regulation as are the Bank Subsidiaries. In addition, some of
these entities have greater capital resources than the Company or the
Bank Subsidiaries. See "Business -- Market Area" and -- Competition."
Additionally, federal legislation regarding interstate branching and
banking may increase competition in the future from larger out-of-state
banks. See "Supervision and Regulation -- Recent Regulatory
Developments."
NO ASSURANCE OF DIVIDENDS
The Company will be dependent upon dividends paid by the Bank
Subsidiaries for funds to pay dividends on the Common Stock, if and when
such dividends are declared. No assurance can be given that future
earnings of the Bank Subsidiaries, and resulting dividends to the
Company, will continue to be sufficient to permit the legal payment of
dividends to the Company's stockholders at any time in the future.
Moreover, holders of shares of the Preferred Stock issued in connection
with the Acquisitions will first be entitled to receive dividends on the
Preferred Stock before any dividends may be paid on the Common Stock. In
addition, the Company does not currently own 100% of the Common Stock of
certain of the Prairie Banks, thus the Company would not receive the full
amount of any dividends paid by the Prairie Banks in which there are
outstanding minority interests. See "The Acquisitions -- Prairie
Bancorp, Inc. -- General." For a more detailed discussion of the
regulatory and other limitations on the payment of cash dividends by the
Company, see the "Prairie Banks," "Supervision and Regulation -- The
Company -- Dividends" and "Description of Capital Stock -- Preferred
Stock."
DEPENDENCE ON MANAGEMENT
The Company and the Union Banks are dependent upon the services of
R. Scott Grigsby, Chairman of the Board and President of the Company and
Chairman of the Board and Chief Executive Officer of UnionBank/Streator,
Charles J. Grako, Executive Vice President and Chief Financial Officer of
the Company, Wayne L. Bismark, Executive Vice President and Chief Credit
Officer of the Company, and other senior officers of the Company and the
Union Banks. The loss of any of these individuals could adversely affect
the operations of the Company and the Bank Subsidiaries. The Company has
entered into employment agreements (which include certain non-competition
covenants) with Messrs. Grigsby, Grako, Bismark and certain other senior
officers in an effort to assure the continued availability of their
services to the Company. See "Business -- Employees" and "Management --
Employment Agreements."
IMMEDIATE DILUTION
The purchasers of the shares of Common Stock offered hereby will
experience immediate dilution in the pro forma net tangible book value of
their shares in an approximate amount of $3.73 per share as compared to
the per share price of this Offering. In the event the Company issues
additional Common Stock in the future, including shares issued in connection
with future acquisitions, the exercise of outstanding stock options or upon
conversion of the Series A Preferred Stock, purchasers of Common Stock in this
Offering may experience further dilution. See "Dilution."
LIMITATIONS ON CHANGE OF CONTROL
Section 203 of the Delaware General Corporation Law (the "DGCL")
limits the Company's ability to engage in certain business combinations
with interested stockholders. The Company's Certificate of
Incorporation,
15
17
as amended (the "Certificate of Incorporation"), provides for a staggered Board
of Directors which classifies the Board of Directors into three classes, each
of which is elected for a three year term. The Board of Directors of the
Company is also further authorized to issue preferred stock in one or more
additional series, with such terms, conditions and preferences as it deems
appropriate, without stockholder action. Such shares could be issued in a
manner which could render more difficult or discourage an attempt to obtain
control of the Company by means of a tender offer, merger, proxy contest or
otherwise. In addition, federal law requires the approval of the Board of
Governors of the Federal Reserve System (the "FRB") prior to acquisition of
"control" (as defined in applicable federal statutes and regulations) of a bank
holding company. Furthermore, the Company's Board of Directors has recently
adopted a Stockholders' Rights Plan that entitles the Company's stockholders to
purchase additional shares of Common Stock at a rate that would be
substantially less than the market value of such Common Stock if any person
acquires 15% or more of the outstanding shares of Common Stock. All of the
foregoing may have the effect of delaying or preventing a change in control of
the Company which may prevent a holder of Common Stock from realizing a premium
as a result of a change in control of the Company. See "Description of Capital
Stock -- Certain Anti-Takeover Considerations."
LIMITED TRADING HISTORY FOR COMMON STOCK
The Common Stock is currently quoted on the OTC Bulletin Board and
is expected to be approved for quotation on the Nasdaq National Market
prior to consummation of the Offering. Prior to this Offering, however,
there has been no regular and liquid market for the Common Stock, and
there can be no assurance that a regular and liquid trading market will
develop and continue after this Offering or that the market price of the
Common Stock will not decline below the initial public offering price.
The initial public offering price has been determined through
negotiations between the Company and representatives of the Underwriter
and may not be indicative of the market price of the Common Stock
following this Offering. See "Market for Common Stock and Dividends."
SHARES ELIGIBLE FOR FUTURE SALE; CONCENTRATION OF OWNERSHIP
The Company will have approximately 3,951,403 shares of Common Stock
outstanding following this Offering (assuming 1,100,000 shares are issued in
this Offering and no exercise of options to purchase Common Stock granted
under the Company's 1993 Stock Option Plan, and further assuming that none of
the shares of Series A Preferred Stock issued in the Prairie Acquisition are
converted into Common Stock). The Company's management believes that 1,596,971
of these shares will be held by "affiliates" of the Company, and therefore will
be "restricted securities" and may not be sold unless they are sold pursuant to
an exemption from registration, including an exemption contained in Rule 145
under the Securities Act, or are registered under the Securities Act. Sales of
substantial amounts of Common Stock in the public market pursuant to
registration under the Securities Act, Rule 145 or otherwise, or even the
potential for such sales, could adversely affect the prevailing market prices
for the Common Stock and impair the Company's ability to raise capital through
the sale of its equity securities. See "Shares Eligible for Future Sale."
After the consummation of this Offering, the Principal Prairie
Stockholders will be the Company's largest stockholders, each holding
approximately 9% of the shares of Common Stock outstanding. Each of the
Principal Prairie Stockholders has entered into a "Standstill Agreement"
whereby they have agreed not to take any actions that would increase their
respective percentage ownership above 12.5% of the total number of issued and
outstanding shares of Common Stock, excluding shares obtainable or obtained
through the conversion of Series A Preferred Stock or actions approved by the
Company's Board of Directors, for a four-year period (the "Standstill Period")
following the Prairie Acquisition. Under the Standstill Agreement, each of the
Principal Prairie Stockholders has granted a limited proxy to the President of
the Company to vote their shares of Common Stock with respect to any election
of directors of the Company during the Standstill Period. Notwithstanding the
Standstill Agreement, each of the Principal Prairie Stockholders may
nonetheless be able to exert influence on the Company's future strategic
direction with regard to, among other things, the long-term independence of the
Company. See "The Acquisitions -- Prairie Bancorp, Inc. -- Restrictions
Applicable to Certain Prairie Stockholders."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,100,000
shares of Common Stock offered hereby, after deducting underwriting
discounts and estimated offering expenses, are estimated to be approximately
16
18
$11,000,000 ($________ if the Underwriter's over-allotment
option is exercised in full). Of such amount, the Company intends to use
approximately $_____________ of the net proceeds to retire indebtedness
incurred by the Company, and approximately $__________ of the net
proceeds to repay indebtedness assumed by the Company, in each case in
connection with the Acquisitions.
With respect to the indebtedness incurred in connection with the
Acquisitions, such indebtedness was obtained through loans from LaSalle
National Bank, Chicago, Illinois, in the form of a term loan in the principal
amount of $26,000,000 and a revolving credit loan in the principal amount of
$500,000. The term loan bears interest, at the Company's option, at a rate of
either: (i) the London Inter-Bank Offered Rate plus 125 basis points, (ii) the
prime rate or (iii) a rate equal to 150 basis points in excess of the then
current rate on U. S. Treasury Bills with the same maturity. The term loan
matures on August 2, 1997, and requires a principal payment in the amount of
$10,000,000 to be made on November 1, 1996. The revolving credit loan bears
interest at the LaSalle National Bank prime rate. The Company's obligations
under the loans are secured by a pledge to LaSalle National Bank of all of the
shares of capital stock of the Bank Subsidiaries held by the Company. The
retirement and repayment of such indebtedness will allow the Company, upon
consummation of the Acquisitions, to continue to meet certain minimum capital
requirements imposed by the FRB.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1996, and adjusted capitalization reflecting the
issuance and sale of the Common Stock offered by the Company hereby (assuming
no exercise of the Underwriter's over-allotment option) and the resulting net
proceeds of $11,000,000 after deduction of all estimated expenses of the
Offering. See "Use of Proceeds." The table also reflects the effect of the
Acquisitions. See "The Acquisitions."
JUNE 30, 1996
-------------
ACTUAL AS ADJUSTED
------ -----------
(DOLLARS IN THOUSANDS)
LONG-TERM DEBT:
Federal Home Loan Bank borrowings................. $ -- $ 16,021
Notes payable..................................... 4,391 15,024
----------- -----------
$ 4,391 $ 31,045
=========== ===========
MINORITY INTEREST IN SUBSIDIARIES................... -- 796
MANDATORY REDEEMABLE PREFERRED STOCK
Series B Preferred Stock.......................... -- 857
STOCKHOLDERS' EQUITY:
Series A Preferred Stock.......................... 500(1)
Common stock, $1.00 par value; 10,000,000 shares
authorized; 2,400,000 issued and outstanding,
4,210,576 issued and outstanding, as adjusted.... 2,400 4,211(2)
Surplus........................................... 1,074 17,973
Retained earnings................................. 21,537 21,537
Deferred compensation related to employee stock
ownership plan................................... -- (1,003)
Unrealized (loss) on securities available for sale (997) (997)
Deferred compensation-stock option plans.......... (41) (41)
Less: treasury stock, at cost; 268,263 shares.... (521) (521)
----------- -----------
Total stockholders' equity........................ $ $23,452 $ 41,659
Total capitalization............................. $ $27,843 $ 74,357
=========== ===========
- ----------
(1) Valuation of 2,762 shares of Series A Preferred Stock with $75 per share
cumulative dividends is based upon the fair market value of such preferred
stock as determined by an appraisal considering the marketability,
liquidity and convertibility features of such preferred stock.
(2) Excludes 9,090 shares of Common Stock issued in connection with the
acquisition of LaSalle Collections.
17
19
DILUTION
None of the Company's directors or officers have purchased Common Stock
from the Company during the past five years, although certain of such officers
and directors have received grants of stock options during such time period.
However, in connection with the Prairie Acquisition the Company issued 710,576
shares of Common Stock. See "The Acquisitions -- Prairie Bancorp, Inc." The
following sets forth information, after giving effect to the Acquisitions and
as of June 30, 1996, regarding the dilution to be realized by purchasers in
this Offering as compared to the persons receiving Common Stock in the Prairie
Acquisition.
The net tangible book value of the Company as of June 30, 1996, was
approximately $22,579,000, or $10.59 per share. "Net tangible book value" per
share represents stockholders equity attributable to common stock less
intangible assets, divided by the number of outstanding shares excluding shares
held by the Company as treasury stock. The pro forma net tangible book value
of the Company as of June 30, 1996 after consideration of the effect of the
Acquisitions would have been approximately $20,715,000, or $7.26 per share.
Dilution per share represents the difference between the amount per share
paid by purchasers of shares of Common Stock in this Offering and the as
adjusted pro forma net tangible book value per share of Common Stock
immediately after completion of this Offering. After giving effect to the sale
of 1,100,000 shares of Common Stock to be sold by the Company in this Offering,
including deductions for underwriting discounts, commissions and the estimated
offering expenses, and after giving effect to the Prairie Acquisition, pro
forma net tangible book value of the Company as of June 30, 1996, would have
been approximately $30,712,000 or $7.77 per share. This represents an
immediate increase in pro forma net tangible book value, after consideration of
the effect of the Prairie Acquisition, of $0.51 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$3.73 per share to new investors purchasing shares of Common Stock in this
Offering, as illustrated in the following table:
Initial public offering price per share $11.50
Net tangible book value per share as of June 30, 1996 $10.59
Decrease in net tangible book value per share attributable to acquisition $(3.33)
Increase in pro forma net tangible book value per share attributable
to investors in this Offering $0.51
Pro forma net tangible book value per share after the Offering $7.77
Dilution per share to new investors $3.73
The following table summarizes on a pro forma basis, as of June 30, 1996,
assuming the conversion of all outstanding shares of Series A Preferred Stock
issued in connection with the Prairie Acquisition into Common Stock (at a
conversion rate based upon the book value per share of the Company as of June
30, 1996, and assuming no reduction in the conversion ratio), the difference
between the persons who received Common Stock in the Prairie Acquisition and
the purchasers of Common Stock in this Offering regarding the total
consideration paid and the average price per share paid (before deducting
underwriting discounts and commissions and estimated offering expenses):
SHARES TOTAL AVERAGE PRICE
PURCHASED CONSIDERATION PER SHARE
------------------ -------------------- ----------------
NUMBER PERCENT AMOUNT PERCENT
------ ------- ------ -------
Prairie stockholders(1) 847,514 43.5% $ 8,209,750 39.4% $ 9.69
Stockholders purchasing
in this Offering 1,100,000 56.5% $12,650,000 60.6% $11.50
--------- ----- ----------- ------ ------
Totals 1,947,514 100.0% $20,859,750 100.00% $10.71
========= ===== =========== ====== ======
- --------------
(1) Does not include shares of Common Stock issued by the Company to acquire
LaSalle Collections.
As of June 30, 1996, there were options outstanding to purchase a total of
109,650 shares of Common Stock at a weighted average exercise price of $6.90
per share under the Stock Option Plan. To the extent outstanding options are
exercised, there will be further dilution to new investors. If all outstanding
options were exercised, the pro forma net tangible book value per share
immediately after completion of this Offering would be
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$7.75. This represents an immediate dilution in net tangible book value of
$0.02 per share to purchasers of Common Stock in this Offering. See
"Management -- Stock Option Plan."
MARKET FOR COMMON STOCK AND DIVIDENDS
The Company's Common Stock has been quoted on the OTC Bulletin Board since
January 1996, and is expected to be approved for quotation on the Nasdaq
National Market under the symbol "UBCD" prior to consummation of this Offering.
Prior to this Offering, however, there has been no regular and liquid market
for the Common Stock, and there can be no assurance that a regular and liquid
trading market will develop or continue after this Offering or that the market
price will not decline below the initial public offering price. On June 30,
1996, the Company estimates that it had approximately 430 stockholders. The
Company currently serves as its own transfer agent and registrar, however, it
is expected that prior to the completion of this Offering, Harris Trust and
Savings Bank will become transfer agent and registrar for the Common Stock. As
of August 5, 1996, the last per share sale price for Common Stock quoted on the
OTC Bulletin Board was $11.00.
The table below indicates the high and low sales prices of the Common
Stock for transactions of which the Company is aware, and the dividends
declared per share for the Common Stock during the periods indicated, in each
case adjusted for the three-for-one stock split which took effect on May 20,
1996. Because the Company is not aware of the price at which certain private
transactions in the Common Stock have occurred, the prices shown may not
necessarily represent the complete range of prices at which transactions in the
Common Stock have occurred during such periods. Such prices also are not
necessarily indicative of the price which may be obtained in a public offering
or an active established market.
STOCK SALES(1)
----------------------------
CASH
HIGH LOW DIVIDENDS(1)
---- --- ------------
1994
First Quarter............................. $6.75 $6.75 $0.026
Second Quarter............................ 6.75 6.75 0.030
Third Quarter............................. 7.50 6.75 0.030
Fourth Quarter............................ 7.67 7.50 0.030
1995
First Quarter............................. 7.67 7.67 0.033
Second Quarter............................ 8.83 8.33 0.033
Third Quarter............................. 8.83 8.83 0.033
Fourth Quarter............................ 9.00 8.83 0.033
1996
First Quarter............................. 11.33 10.67 0.033
Second Quarter............................ 12.00 10.67 0.033
Third Quarter (7/1-8/5/96) ............... 12.00 11.00 0.035
- ----------------
(1) Restated to reflect the three-for-one stock split which took effect on
May 20, 1996.
The holders of the Common Stock are entitled to receive dividends as
declared by the Board of Directors of the Company, which considers payment of
dividends quarterly. Upon the consummation of the Prairie Acquisition,
preferential dividends are required to be paid or accrued quarterly with respect
to the outstanding shares of Preferred Stock (as defined below). See
"Description of Capital Stock -- Preferred Stock." The ability of the Company
to pay dividends in the future will be primarily dependent upon its receipt of
dividends from the Bank Subsidiaries. In determining cash dividends, the Board
of Directors considers the earnings, capital requirements, debt and dividend
servicing requirements, financial ratio guidelines it has established, financial
condition of the Company and other relevant factors. The Bank Subsidiaries'
ability to pay dividends to the
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Company and the Company's ability to pay dividends to its stockholders are also
subject to certain regulatory restrictions. See "Supervision and Regulation --
The Company -- Dividends" and "-- The Bank Subsidiaries -- Dividends."
The Company has paid regular cash dividends on the Common Stock since it
commenced operations in 1982. The Company currently expects to pay cash
dividends on the Common Stock after the Acquisitions at the Company's current
rate. There can be no assurance, however, that any such dividends will be paid
by the Company or that such dividends will not be reduced or eliminated in the
future. The timing and amount of dividends will depend upon the earnings,
capital requirements and financial condition of the Company and the Bank
Subsidiaries as well as the general economic conditions and other relevant
factors affecting the Company and the Bank Subsidiaries. See "Investment
Considerations -- No Assurance of Dividends." The Company entered into a new
loan agreement in connection with the Acquisitions replacing the Company's
prior loan agreement. The new loan agreement contains no direct prohibitions
against the payment by the Company of dividends, but indirectly restricts such
dividends through the required maintenance of minimum capital ratios. In
addition, the terms of the Series A Preferred Stock, and the Company's newly
authorized Series B Preferred Stock issued to certain of Prairie's preferred
stockholders (the "Series B Preferred Stock," and collectively with the Series
A Preferred Stock, the "Preferred Stock"), prohibit the payment of dividends by
the Company on the Common Stock during any period for which dividends on the
respective series of Preferred Stock are in arrears. See "Description of
Capital Stock -- Preferred Stock."
THE ACQUISITIONS
PRAIRIE BANCORP, INC.
BUSINESS
Prairie was organized in 1989 as an Illinois corporation and its main
office is located in Princeton, Illinois. Prairie engages in no significant
activities other than owning and managing the six Prairie Banks. Three of the
Prairie Banks (the Manlius, Ladd and Tiskilwa Banks) are located in Bureau
County. Bureau County is adjacent to and west of LaSalle County, where the
Company is headquartered. The Manlius Bank also operates two branches in
Princeton, the county seat of Bureau County. The Tampico Bank is located in
Whiteside County, which is immediately northwest of Bureau County. The Hanover
Bank is located in Jo Daviess County in the northwest corner of Illinois. The
Ferris Bank is located in western Illinois approximately 25 miles west of
Macomb, Illinois, the headquarters of Omni Bank. See the map on page 2 of this
Prospectus.
At June 30, 1996, Prairie had total consolidated assets of approximately
$226.0 million, total consolidated deposits of approximately $187.8 million and
total consolidated stockholders' equity of approximately $11.7 million.
Each of the Prairie Banks is a community bank located in a predominantly
agricultural area. Each Prairie Bank offers interest and noninterest bearing
deposit accounts and makes consumer, commercial and agricultural loans. As of
June 30, 1996, the combined Prairie Banks' loan portfolios in aggregate book
value and as a percentage of the total consolidated loan portfolio consisted of
$41.0 million of real estate loans (55.5% of total loans), $25.9 million of
commercial loans (35.0% of total loans) and $7.0 million of consumer loans
(9.5% of total loans). As of June 30, 1996, the combined Prairie Banks' total
nonaccrual loans equaled $248,000, or 0.34% of total loans. The allowance for
possible loan losses was $784,000, or 316.1% of total nonaccrual loans and
1.06% of the gross loan portfolio. Other real estate owned by the Prairie
Banks had an aggregate value at June 30, 1996, of $22,000. The combined
Prairie Banks' net income after taxes was $828,000 for 1995 and $497,000 for
the six months ended June 30, 1996. See the consolidated financial statements
of Prairie included in this Prospectus.
Prairie emphasizes operating autonomy at each of its subsidiary banks and
a conservative lending policy. The president of each of the Prairie Banks is
an experienced banker who resides in the vicinity of their banks' respective
communities. Prairie is managed by Robert L. Davidson, whose primary
responsibility is managing the investment portfolio of the Prairie Banks.
ACQUISITION BY THE COMPANY
On January 22, 1996, the Company entered into an Agreement and Plan of
Merger (as subsequently
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amended the "Prairie Acquisition Agreement") with Prairie pursuant to
which the Company agreed to acquire all of the issued and outstanding shares of
Prairie's common and preferred stock (the "Prairie Common Stock" and "Prairie
Preferred Stock," respectively). Prairie's stockholders approved the Prairie
Acquisition Agreement on February 29, 1996 and the transaction was consummated
on August 6, 1996. As a result of the Prairie Acquisition, Prairie became a
wholly-owned subsidiary of the Company.
As more fully set forth below and subject to certain future possible
adjustments, the total net value of the consideration in connection with the
Prairie Acquisition was $6,599,000, which was paid in a combination of cash and
securities of the Company. Prairie does not own 100% of the capital stock of
each of the Prairie Banks, although Prairie is in all cases the controlling
stockholder of such institutions. The percentage ownership of Prairie, as well
as additional information about each of the Prairie Banks, is set forth in the
following table. The Company intends in the future to acquire all of the
outstanding stock of the Prairie Banks held by minority stockholders and not
currently owned by Prairie. The Company estimates that the total cost to
acquire such minority interests will be approximately $845,000.
PERCENTAGE TOTAL ASSETS
LOCATION OF BRANCH OWNERSHIP AS OF
NAME OF BANK MAIN OFFICE LOCATIONS OF PRAIRIE JUNE 30, 1996
- ------------ ----------- --------- ---------- -------------
Farmers State Bank of Ferris Carthage Ferris 100.0% $49,368,000
("Ferris Bank")
Hanover State Bank Hanover Elizabeth 100.0% $25,626,000
("Hanover Bank")
Bank of Ladd Ladd 80.0% $42,211,000
("Ladd Bank")
First National Bank of Manlius Manlius Princeton (2) 98.5% $64,618,000
("Manlius Bank")
Tampico National Bank Tampico 99.4% $19,643,000
("Tampico Bank")
Tiskilwa State Bank Tiskilwa 95.0% $24,387,000
("Tiskilwa Bank")
CONSIDERATION FOR PRAIRIE COMMON STOCK AND PRAIRIE PREFERRED STOCK
At the closing of the Prairie Acquisition (the "Prairie Closing"),
stockholders of Prairie received the following consideration in exchange for
their shares of Prairie's capital stock: holders of Prairie Common Stock and
Prairie's Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock received a total of 710,576 shares of Common Stock, 2,762.24
shares of Series A Preferred Stock and $5,000,000 in cash and holders of
Prairie Series A Preferred Stock received a total of 857 shares of Series B
Preferred Stock and $235,000 in cash. The Company's Series A Preferred Stock is
convertible into Common Stock, subject to certain adjustments intended to
offset the amount of losses incurred by the Company upon the post-closing sale
of certain securities in Prairie's consolidated investment portfolio. See
"Description of Capital Stock of the Company -- Preferred Stock."
The Prairie Acquisition Agreement provides for an adjustment of the
aggregate conversion value of the shares of Series A Preferred Stock. Assuming
that all of Prairie's investment portfolio was held as available for sale
securities, as of June 30, 1996, the aggregate amount of unrealized losses in
Prairie's investment portfolio was $1.9 million. Pursuant to the Prairie
Acquisition Agreement, a portion of the securities in Prairie's consolidated
investment portfolio in the approximate face amount of $61.7 million were
designated as Part B Securities (the "Part B Securities"). In general, the
Prairie Acquisition Agreement provides that any losses recognized by the
Company upon the post-closing sale of any of the Part B securities will have
the effect of reducing the conversion value of the Series A Preferred Stock
held by the Principal Prairie Stockholders and thus reduce the number of shares
of Common Stock into which such Series A Preferred Stock is convertible. See
"Description of Capital Stock of the Company -- Preferred Stock."
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RESTRICTIONS APPLICABLE TO PRINCIPAL PRAIRIE STOCKHOLDERS
The shares of Common Stock exchanged in the Prairie Acquisition and the
shares of Common Stock which are issuable upon conversion of the Series A
Preferred Stock held by the Principal Prairie Stockholders are subject to the
terms and conditions of a Standstill Agreement between the Company and the
Principal Prairie Stockholders executed at the time of the Prairie Closing.
The Standstill Agreement provides that prior to the fourth anniversary of the
Prairie Closing, each of the Principal Prairie Stockholders may not, either
alone or with any affiliate, increase his holdings of Common Stock to 12.5% or
more of the then issued and outstanding shares of Common Stock.
Notwithstanding the foregoing, each of the Principal Prairie Stockholders is
entitled to exceed such 12.5% ownership limitation as a result of: (i)
acquiring shares of Common Stock upon conversion of shares of Series A
Preferred Stock; (ii) receiving additional shares of Common Stock pursuant to
stock dividends or other offerings made by the Company generally to all holders
of Common Stock; or (iii) actions approved by the Company's Board of Directors
and affecting all holders of the Common Stock generally.
The Standstill Agreement further provides that during the Standstill
Period, the Principal Prairie Stockholders will not make any offer to sell or
transfer any shares of Common Stock to an unrelated third party to the extent
such shares, when aggregated with all other shares of Common Stock transferred
by such individual, represent 5% or more of the then issued and outstanding
shares of Common Stock, without first providing the Company with the
opportunity to purchase such shares on the same terms and conditions offered by
such third party. During the Standstill Period, each of the Principal Prairie
Stockholders has granted a limited proxy to the President of the Company for
all shares of Common Stock held by each of the Principal Prairie Stockholders
with respect to any stockholder vote regarding elections to the Company's Board
of Directors. The proxy granted to the President of the Company will terminate
on the earlier of the expiration of the Standstill Period or at such time, if
any, as any third party or group unaffiliated with any of the Principal Prairie
Stockholders acquires 25% or more of the issued and outstanding Common Stock.
Subject to certain exceptions for issuances of Common Stock under employee
benefit plans, the Standstill Agreement grants each Principal Prairie
Stockholder the right to purchase from the Company additional shares of Common
Stock in the event of certain dilutive actions on the part of the Company.
REGISTRATION AGREEMENT
The Company also has entered into a Registration Agreement that grants to
the Principal Prairie Stockholders certain "piggyback" registration rights with
respect to the Common Stock owned by such stockholders. Pursuant to the
Registration Agreement, whenever the Company proposes to register any of its
securities under the Securities Act and the registration form to be used may be
used for the registration of Common Stock held by the Principal Prairie
Stockholders, the Company must give notice to such stockholders and they may
elect to include in such registration all or any part of the shares of Common
Stock then owned by them. Notwithstanding such election, however, all or any
portion of the shares of Common Stock elected by the Prairie Principal
Stockholders may subsequently be excluded from such registration statement if
the Company's underwriter determines that the number of securities requested to
be registered would exceed the number of securities that can be sold in such
registered offering.
COUNTRY BANCSHARES, INC.
BUSINESS
Country is a one-bank holding company headquartered in Macomb, Illinois.
Country engages in no significant activities other than owning and managing
Omni Bank. The directors of Country are the record and beneficial owners of
approximately 90% of the outstanding common stock of Country.
Country's only subsidiary, Omni Bank, was created by the merger on
December 7, 1994, of three other banks. The First National Bank in
Blandinsville, Blandinsville, Illinois, merged into the Paloma Exchange Bank,
Paloma, Illinois. The Paloma Exchange Bank subsequently purchased the assets
and assumed the liabilities of Omni Bank, Hull, Illinois. The Paloma Exchange
Bank then changed its name to Omni Bank and relocated its main office from
Paloma to Macomb, Illinois.
Macomb, located in the west central part of Illinois in McDonough County,
serves as the county seat and
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the region's business, educational and entertainment center by providing
retail and manufacturing opportunities, as well as health care,
entertainment and cultural activities for the area's residents. Macomb is the
home of Western Illinois University which has approximately 12,500 students.
Omni Bank's five branches (Blandinsville, Camp Point, East Hannibal, Hull and
Paloma, Illinois) are located in predominantly agricultural areas. Omni Bank
has recently exercised an option to purchase a parcel of real estate in
Hannibal, Missouri for possible future expansion.
At June 30, 1996, Country had total consolidated assets of approximately
$103.2 million, total consolidated deposits of approximately $90.8 million and
total consolidated stockholders' equity of approximately $2.4 million.
Omni Bank is a community bank whose business includes conventional
consumer and commercial products and services, including interest and
noninterest bearing depository accounts, commercial, industrial, consumer, real
estate and agricultural lending. At June 30, 1996, Omni Bank's loan portfolio
in aggregate book value and as a percentage of the total loan portfolio
consisted of $39.2 million in real estate loans (58.3% of total loans), $22.4
million in commercial and industrial loans (33.3% of total loans), and $5.0
million in consumer loans (7.5% of total loans) and $600,000 in other loans
(0.9% of total loans). At June 30, 1996, Omni Bank had total nonaccrual loans
of $1.3 million, representing 1.96% of gross loans. The allowance for loan
losses equaled $500,000, or 38.0% of total nonaccrual loans, and 0.75% of total
loans. Omni Bank reported net income of $155,288 for the first six months of
1996 and net income of $208,598 for the year ended December 31, 1995. See the
consolidated financial statements of Country included in this Prospectus.
ACQUISITION BY THE COMPANY
On March 21, 1996, the Company entered into an Agreement and Plan of
Merger (the "Country Acquisition Agreement") with Country pursuant to which the
Company will acquire all of the issued and outstanding shares of Country's
common and preferred stock (the "Country Common Stock" and the "Country
Preferred Stock," respectively). Country's stockholders approved the Country
Acquisition Agreement and the transactions contemplated thereunder on May 20,
1996. Following the consummation of the Country Acquisition, Country will be a
wholly-owned subsidiary of the Company. The Company filed the necessary
regulatory applications requesting approval from the FRB and the Illinois
Commissioner of Banks and Real Estate (the "Illinois Commissioner"), on May 1,
and May 16, 1996, respectively, and has subsequently received all necessary
approvals to consummate the Country Acquisition. The consideration to be paid
in connection with the Country Acquisition is $11,445,000, which amount is
subject to adjustment based upon the book value of certain of Country's loans
at the closing of the Country Acquisition (the "Country Closing").
CONSIDERATION FOR COUNTRY COMMON AND PREFERRED STOCK
The Country Acquisition Agreement provides that upon consummation of the
Country Acquisition, holders of Country Common Stock and Country Preferred
Stock will receive the following consideration in exchange for their shares of
Country's capital stock. Holders of Series 1 and Series 2 Class A Preferred
Stock of Country will each receive cash equal to $295 plus the amount of any
accrued but unpaid dividends for each such share. Each holder of Country
Common Stock will receive cash in an amount as computed pursuant to a formula
set forth in the Country Acquisition Agreement. The formula provides that the
holders of Country Common Stock will receive an aggregate of $11,445,000 in
cash less the amount paid to the holders of Series 1 and Series 2 Class A
Preferred Stock of Country and less the amount necessary to satisfy in full all
of the outstanding liabilities of Country immediately prior to the Country
Closing. In addition to the foregoing, the cash price per share of Country
Common Stock may be increased if, prior to the Country Closing, Omni Bank
experiences recoveries on certain of its loans in excess of their current book
values. Any such increase in the cash price per share of Country Common Stock
would be equal to the amount by which such recovery, if any, exceeds the book
value of such loans.
NON-COMPETITION AGREEMENTS
At or prior to the Country Closing, non-competition agreements are to be
executed by Ivan and Betty Wharton, the President and the Chairman of Country,
respectively (the "Whartons"), which provide, among other things, that for
three years following the Country Closing neither of the Whartons will compete
directly or indirectly with Omni Bank by becoming an employee, officer,
director or consultant to any financial institution maintaining an office
within a five-mile radius of any of Omni Bank's offices. The Whartons will
each receive $5,000 as consideration for the execution of their respective
non-competition agreements.
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ACQUISITION OF CERTAIN PROPERTY FROM OMNI BANK
As a condition to the Company's obligation to consummate the Country
Acquisition, the Whartons must acquire from Omni Bank all obligations payable
to Omni Bank by certain borrowers whose loans have been identified by the
Company as bearing more than an average risk of loss. The Whartons have agreed
to acquire any such loans from Omni Bank for cash at or prior to the Country
Closing at the respective book value of each such loan at the time of the
Country Closing. As a further condition to the Company's obligation to close
the Country Acquisition, the Whartons have also agreed to acquire for cash at
their respective book values all parcels of real estate and improvements owned
by Omni Bank in Paloma, Illinois, including Omni Bank's Paloma branch office
and certain other property located adjacent to this branch. Pursuant to the
Country Acquisition Agreement, Omni Bank will lease the Paloma branch office
from the Whartons over a ten-year term. Under the lease agreement, Omni Bank
also has the right to purchase the property at any time during the term of the
lease for a price equal to the then current appraised fair market value of the
property.
INDEMNIFICATION
The Whartons have each agreed to indemnify and hold the Company harmless
against any losses or damages incurred by the Company in connection with any of
the Omni Bank loans to be acquired by them or in connection with certain
contingent liabilities associated with the Paloma, Illinois property. This
indemnity will expire three years after the date of the Country Closing.
ANTICIPATED EFFECTS AND BENEFITS OF THE ACQUISITIONS
Management of the Company believes that the Acquisitions will provide a
cost-effective means for the Company to expand into new markets for financial
services in northwestern, western and southwestern Illinois. The Company's
management believes it can achieve revenue enhancements, operating
efficiencies, loan diversification and additional growth opportunities as a
result of the Acquisitions.
Revenue enhancements, primarily in the form of increased net interest
income, are anticipated from, among other things, expanding the Company's
commercial and retail banking services into new markets. Historically, the
Prairie Banks have maintained a low loan to deposit ratio and have concentrated
on attempting to increase earnings through management of their investment
portfolios. The Company believes that margin gains can be achieved by
converting lower yielding securities at the Prairie Banks into higher yielding
loans through increased marketing efforts. Following the consummation of the
Acquisitions, the Company intends to increase the volume of consumer and
commercial lending by Prairie and to expand the types of loan products offered
to include auto and student loans, loans secured by equipment, inventory and
accounts receivable, letters of credit, Small Business Administration ("SBA")
financing and minority business loans.
The Company also anticipates revising Omni Bank's rate structure and
repricing certain loans, deposits and services to reflect the gross margin
objectives of the Company. In addition, the Company expects to increase
interest and non-interest income by cross-selling products and services to the
customers of Omni Bank. Fee based income is expected to increase through the
offering of new services to customers of all of the newly acquired banks. The
Company intends to offer its corporate cash management services to customers
through the Prairie Banks and Omni Bank.
The Company expects that it will be able to increase significantly the
operating efficiencies at the Prairie Banks and Omni Bank. The Company intends
to consolidate all data processing services within UnionData Corp, Inc., the
Company's data processing subsidiary ("UnionData"). This consolidation should
also enable the Company to track closely the financial operations of each of
its branches and make additional operational changes on a timely basis. The
Company intends to consolidate certain other functions at the holding company
level, including human resources, loan review and audit and property
management.
The Acquisitions will allow the Company to expand its market area into
what it believes are desirable banking locations. Most of the Prairie Banks
are the sole financial institution in their communities and many are located in
county seats. Omni Bank is based in a growing college community. Through the
Acquisitions, the Company will increase from two bank subsidiaries with eleven
locations in north central Illinois, to nine bank subsidiaries and twenty seven
locations in thirteen counties across northern, north central and western
Illinois. The
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resulting market area of the Company will extend from the far
western suburbs of the Chicago metropolitan area across central and northern
Illinois to the Mississippi River in western Illinois. This expansion will
increase the geographic diversity of the Company's loan portfolio, which is
expected to decrease the Company's overall lending risks.
The Acquisitions are expected to increase significantly the presence of
the Company within the region's banking industry. Because of the reputations
of the Company and its executive officers in the banking industry, the Company
believes that it will be an attractive alternative to future sellers of
community banks and thrifts. The Company believes that it can successfully
manage these community-based institutions to increase their profitability by
expanding cross-selling efforts and emphasizing those products and services
offering the highest return on investment.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial information
for the Company for each of the years in the five-year period ended December
31, 1995, and for the six months ended June 30, 1996 and 1995. This summary
should be read in conjunction with the Consolidated Financial Statements of the
Company including the notes thereto, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations of the Company." In the
opinion of management of the Company, the data presented for the six months
ended June 30, 1996 and 1995, which is derived from unaudited consolidated
financial statements, reflects all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the financial position and
results of operations for such periods. Results for the six month period ended
June 30, 1996, are not necessarily indicative of results that may be expected
for any other interim period or the entire year.
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SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
STATEMENT OF INCOME DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income..................... $11,278 $10,193 $21,368 $18,627 $18,604 $20,127 $19,437
Interest expense.................... 5,850 5,217 11,249 8,706 8,798 10,482 11,595
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income................ $5,428 $4,976 $10,119 $9,921 $9,806 $9,645 $7,842
Provision for loan losses........... 500 342 684 660 1,268 1,297 650
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses.......... $4,928 $4,634 $9,435 $9,261 $8,538 $8,348 $7,192
Noninterest income................... 1,324 1,187 2,570 2,283 2,512 1,893 1,580
Noninterest expense.................. 4,761 4,413 8,771 8,247 7,841 7,335 6,965
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income before income taxes....... $1,491 $1,408 $3,234 $3,297 $3,209 $2,906 $1,807
Provision (credit) for income taxes.. 380 365 881 703 747 595 507
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income......................... $1,111 $1,043 $2,353 $2,594 $2,462 $2,311 $1,300
=========== =========== =========== =========== =========== =========== ===========
PER SHARE DATA(1)
Net income........................... $0.51 $0.49 $1.09 $1.22 $1.15 $1.08 $0.61
Cash dividends....................... 0.07 0.07 0.13 0.12 0.09 0.07 0.07
Dividend payout ratio................ 12.77% 13.61% 12.06% 9.57% 7.78% 6.13% 10.91%
Book value........................... $11.00 $10.40 $11.01 $9.21 $8.92 $7.83 $6.82
Weighted average shares
outstanding......................... 2,169,012 2,131,737 2,148,897 2,132,712 2,132,760 2,132,760 2,136,195
Period end shares outstanding........ 2,131,737 2,131,737 2,131,737 2,131,737 2,132,760 2,132,760 2,132,760
BALANCE SHEET DATA
Investments and Federal funds sold... $87,154 $89,376 $95,182 $86,460 $95,098 $83,057 $90,902
Total loans.......................... 185,840 175,227 180,819 161,134 148,371 146,569 131,915
Allowance for loan losses............ 1,597 1,871 2,014 1,704 1,787 1,586 1,384
Total assets......................... 296,605 282,987 303,533 272,038 266,666 249,121 240,535
Total deposits....................... 259,087 247,939 261,727 232,334 237,455 222,513 214,520
Stockholders' equity................. 23,452 22,164 23,475 19,629 19,026 16,702 14,553
EARNINGS PERFORMANCE DATA
Return on average total assets(2).... 0.75% 0.76% 0.83% 0.98% 0.97% 0.95% 0.60%
Return on average stockholders'
equity(2)........................... 9.49 10.11 10.83 13.29 13.88 15.00 9.64
Net interest margin ratio............ 4.23 4.27 4.15 4.38 4.46 4.52 4.18
Efficiency ratio(3).................. 65.60 66.35 64.16 61.87 59.05 60.99 68.49
ASSET QUALITY RATIOS
Nonperforming assets to total
assets.............................. 0.64% 0.52% 0.95% 0.87% 1.64% 1.64% 2.04%
Nonperforming loans to total loans... 0.70 0.32 1.22 0.90 2.06 2.32 3.07
Net loan charge-offs to average
loans(2)............................ 1.00 0.10 0.22 0.49 0.71 0.78 0.34
Allowance for loan losses to total
loans............................... 0.86 1.07 1.11 1.06 1.20 1.08 1.05
Allowance for loan losses to
nonperforming loans................. 122.75 337.55 90.93 117.44 58.61 46.56 34.18
CAPITAL RATIOS
Average equity to average assets..... 7.95% 7.62% 7.67% 7.38% 6.98% 6.34% 6.27%
Total capital to risk adjusted assets 12.54 12.07 12.35 12.28 10.97 10.23 8.72
Tier 1 leverage...................... 7.92 7.79 7.95 7.68 7.00 6.33 6.33
- --------------
(1) Restated to reflect the three-for-one stock split which took effect on
May 20, 1996.
(2) Interim periods annualized.
(3) Calculated as noninterest expense less amortization of intangibles and
expenses related to other real estate owned divided by the sum of net
interest income before provision for loan losses and total noninterest
income excluding securities gains and losses.
27
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
The following discussion provides additional information regarding the
operations and financial condition of the Company for the six months ended June
30, 1996 and 1995, and the three years ended December 31, 1995. This
discussion should be read in conjunction with "Selected Consolidated Financial
Data," the consolidated statements of financial condition of the Company and
the accompanying notes thereto included elsewhere in this Prospectus.
GENERAL
The Company derives substantially all of its revenues and income from the
operations of its banking subsidiaries, the Union Banks, which provide a full
range of commercial and consumer banking services to businesses and
individuals, primarily in LaSalle and contiguous counties in north central
Illinois. As of June 30, 1996, the Company had total assets of $296.6 million,
net loans of $184.2 million, total deposits of $259.0 million and total
stockholders' equity of $23.5 million. As a result of internal loan and
deposit portfolio growth, coupled with a relatively stable net interest margin,
the Company reported net income of $1,111,000 for the six months ended June 30,
1996, compared with net income of $1,043,000 for the six months ended June 30,
1995.
RESULTS OF OPERATIONS
NET INCOME
Net income was $1,111,000 ($.51 per share) for the six months ended June
30, 1996, compared with net income of $1,043,000 ($.49 per share) for the six
months ended June 30, 1995, an increase of $68,000 or 6.5%. The increase in
earnings in 1996 compared with 1995 was primarily attributable to growth in the
Company's loan and deposit portfolios.
Net income was $2,353,000 for 1995 ($1.09 per share), compared with net
income of $2,594,000 for 1994 ($1.22 per share) and $2,462,000 for 1993 ($1.15
per share). The $241,000 (9.3%) decrease in earnings for 1995 compared to 1994
was primarily attributable to start-up costs related to the opening of two new
banking facilities during that year. The $132,000 (5.4%) increase in 1994 as
compared to 1993 resulted primarily from a $608,000 decrease in the provision
for loan losses which reflected improvement in the quality of the loan
portfolio as evidenced by a reduction in net charge-offs during the same
period.
NET INCOME BEFORE INCOME TAXES
Net income before income taxes was $1,491,000 for the six months ended
June 30, 1996, compared with $1,408,000 for the first six months of 1995, a
5.9% increase. Net income before income taxes was $3,234,000 in 1995, a
decrease of $63,000 or 1.9% compared with $3,297,000 in 1994, which
represented an increase of $88,000, or 2.7%, compared with $3,209,000 in 1993.
The decline in net income before income taxes for 1995 compared to 1994 was
primarily attributable to start-up costs related to the opening of two new
banking facilities during that year.
NET INTEREST INCOME
Net interest income is the difference between income earned on
interest-earning assets and the interest expense incurred on interest-bearing
liabilities. The net yield on total interest-earning assets, also referred to
as interest rate margin or net interest margin, represents net interest income
divided by average interest-earning assets. The Company's principal
interest-earning assets are loans, investment securities and federal funds
sold.
Net interest income was $5,428,000 for the first six months of 1996, an
increase of $452,000 or 9.1% compared with the first six months of 1995,
resulting principally from an increase in average interest-earning assets from
$251.6 million to $274.8 million, a significant portion of which was comprised
of loans. The increase in net interest income resulting from increased
interest-earning assets was partially offset in interest-bearing liabilities
from $221.4 million to $239.4 million. In addition, the Company experienced a
decrease in its net interest margin from 4.27% at June 30, 1995, to 4.23% at
June 30, 1996. The decrease in net interest margin resulted principally from
28
30
the cost of interest-bearing liabilities increasing more than the yield on
interest-earning assets. The yield on interest-earning assets increased from
8.45% to 8.51%, while the cost of interest-bearing liabilities increased from
4.75% to 4.91% during such period.
Net interest income was $10,119,000 for 1995, an increase of $198,000 or
2.0% compared with net interest income of $9,921,000 for 1994, which
represented an increase of $115,000 or 1.2% compared with net interest income
of $9,806,000 for 1993. The Company's average total interest-earning assets
increased from approximately $242.8 million for 1994 to $261.0 million for
1995, representing a 7.5% increase resulting principally from an increase in
loans. The net interest margin declined to 4.15% at December 31, 1995, from
4.38% at December 31, 1994. Although interest rates on average earning assets
increased to 8.46% in 1995 from 7.96% in 1994, rates on average interest
bearing liabilities increased to 4.90% in 1995 from 4.08% in 1994. The
increase in average earning assets primarily resulted from average rate
increases in the loan portfolio and reflected an overall increase in market
rates of interest. The most significant variances comprising the increase in
interest bearing liabilities were interest rates on NOW Accounts and Money
Market Accounts due to new tiered pricing products introduced by the Company in
1995, as well as interest rates on time deposits reflecting the increase in
market rates of interest.
The following table sets forth for each category of interest-earning
assets and interest-bearing liabilities the average amounts outstanding, the
interest earned or paid on such amounts and the average rate paid for the six
months ended June 30, 1996 and 1995, and for the years ended December 31, 1995,
1994 and 1993. The table also sets forth the average rate earned on all
interest-earning assets, the average rate paid on all interest-bearing
liabilities and the net yield on average interest-earning assets for the same
period.
29
31
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
FOR THE YEARS
FOR THE SIX MONTHS ENDED JUNE 30, ENDED DECEMBER 31,
-------------------------------------------------------- ---------------------------
1996 1995 1995
--------------------------- --------------------------- ---------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ------- ------- ------- ------- ------- ------- -------
ASSETS
INTEREST-EARNING ASSETS:
Interest earning deposits.............. $ 30 $ 1 5.32% $ 22 $ 1 5.33% $ 27 $ 2 5.85%
Investment securities:
Taxable............................... 66,450 1,978 5.99 61,096 1,755 5.79 62,808 3,636 5.79
Non-taxable (1)....................... 24,989 946 7.61 23,852 945 7.99 24,463 1,919 7.84
-------- -------- -------- -------- -------- --------
Total investment securities.......... 91,439 2,924 6.43 84,948 2,700 6.41 87,271 5,555 6.37
-------- -------- -------- -------- -------- --------
Federal funds sold.................... 1,184 32 5.43 1,429 44 6.21 2,577 156 6.05
-------- -------- -------- -------- -------- --------
Loans: (2) (3)
Commercial and industrial............. 58,078 2,791 9.66 54,024 2,659 9.93 55,431 5,524 9.97
Real estate mortgages................. 101,844 4,506 8.89 90,595 3,963 8.82 94,050 8,380 8.91
Installment and other................. 24,328 1,087 8.99 22,424 986 8.87 23,523 2,103 8.94
Fees on loans......................... 0 288 0.00 0 192 0.00 0 362 0.00
Less: Allowance for loan losses....... (2,113) 0 0.00 (1,808) 0 0.00 (1,878) 0 0.00
-------- -------- -------- -------- -------- --------
Net loans (tax equivalent)........... 182,137 8,672 9.57 165,235 7,800 9.52 171,126 16,369 9.57
-------- -------- ------- -------- -------- ------- -------- -------- -------
Total interest-earning assets.......... 274,790 11,629 8.51 251,634 10,545 8.45 261,001 22,082 8.46
-------- -------- -------- -------- -------- --------
NONEARNING ASSETS:
Cash and due from banks................ 10,725 10,064 10,763
Premises and equipment, net............ 6,809 5,839 6,042
Other assets........................... 5,700 5,521 5,585
-------- -------- --------
Total nonearning assets 23,234 21,424 22,390
-------- -------- --------
Total assets......................... $298,024 $273,058 $283,391
======== ======== ========
LIABILITIES
INTEREST-BEARING DEPOSITS:
NOW accounts.......................... $ 30,649 $ 392 2.57 $ 28,547 $ 362 2.56 $ 31,097 $ 843 2.71
Money market accounts................. 22,263 355 3.20 19,132 264 2.78 19,691 584 2.97
Savings deposits...................... 24,029 313 2.62 23,536 308 2.64 23,146 611 2.64
Time, $100,000 and over............... 14,016 407 5.84 12,639 341 5.44 12,040 687 5.71
Other time deposits................... 133,488 3,923 5.91 125,477 3,512 5.64 129,147 7,534 5.84
Federal funds purchased and
repurchase agreements................ 10,499 276 5.29 7,147 212 5.98 9,825 567 5.77
Notes payable......................... 4,416 184 8.38 4,873 218 9.02 4,696 423 9.00
-------- -------- ------- -------- -------- ------- -------- -------- -------
Total interest-bearing liabilities.... 239,360 5,850 4.91 221,351 5,217 4.75 229,642 11,249 4.90
-------- -------- -------- -------- -------- --------
Noninterest-bearing liabilities:
Noninterest-bearing deposits.......... 32,380 29,121 29,950
Other liabilities..................... 2,605 1,789 2,071
-------- -------- --------
Total noninterest-bearing
liabilities.......................... 34,985 30,910 32,021
-------- -------- --------
Stockholders' equity.................. 23,679 20,797 21,728
Total liabilities and stockholders'
equity............................... $298,024 $273,058 $283,391
======== ======== ========
Net interest income (tax equivalent).. $ 5,779 $ 5,328 $ 10,833
======== ======== ========
Net interest income (tax equivalent)
to total earning assets.............. 4.23% 4.27% 4.15%
Interest bearing liabilities to
earning assets....................... 87.11% 87.97% 87.99%
-------- -------- --------
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1994 1993
---------------------------- ---------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- -------- ------- ------- -------
ASSETS
INTEREST-EARNING ASSETS:
Interest earning deposits............. $ -- $ -- 0.00% $ 54 $ 2 3.57%
Investment securities:
Taxable..............................
Non-taxable (1)...................... 68,946 3,937 5.71 63,134 4,024 6.37
22,818 1,869 8.19 17,236 1,540 8.94
Total investment securities......... -------- -------- -------- --------
91,764 5,806 6.33 80,370 5,564 6.92
Federal funds sold................... -------- -------- -------- --------
629 38 6.04 4,667 140 3.00
Loans: (2) (3) -------- -------- -------- --------
Commercial and industrial............
Real estate mortgages................ 57,093 5,074 8.89 56,965 5,056 8.43
Installment and other................ 78,262 6,522 8.33 76,124 6,394 8.40
Fees on loans........................ 16,831 1,552 9.22 17,366 1,799 10.36
Less: Allowance for loan losses...... 0 339 0.00 0 258 0.00
(1,731) 0 0.00 (1,794) 0 0.00
Net loans (tax equivalent).......... -------- -------- -------- --------
150,455 13,487 8.96 148,661 13,507 9.09
Total interest-earning assets......... -------- -------- --------- -------- -------- -------
242,848 19,331 7.96 233,752 19,213 8.22
NONEARNING ASSETS: -------- -------- -------- --------
Cash and due from banks...............
Premises and equipment, net........... 10,867 10,322
Other assets.......................... 5,282 4,572
5,637 5,502
Total nonearning assets -------- --------
21,786 20,396
Total assets........................ -------- --------
$264,634 $254,148
======== ========
LIABILITIES
INTEREST-BEARING DEPOSITS:
NOW accounts......................... $ 27,187 $ 627 2.31 $ 26,786 $ 628 2.34
Money market accounts................ 22,108 590 2.67 22,562 648 2.87
Savings deposits..................... 26,288 723 2.75 26,103 807 3.09
Time, $100,000 and over.............. 15,912 755 4.74 17,190 830 4.83
Other time deposits.................. 112,094 5,398 4.82 108,159 5,483 5.07
Federal funds purchased and
repurchase agreements............... 4,574 242 5.29 2,015 62 3.08
Notes payable........................ 5,135 371 7.22 5,528 340 6.15
-------- -------- --------- -------- -------- -------
Total interest-bearing liabilities... 213,298 8,706 4.08 208,343 8,798 4.22
-------- -------- -------- --------
Noninterest-bearing liabilities:
Noninterest-bearing deposits......... 29,622 26,026
Other liabilities.................... 2,194 2,047
-------- --------
Total noninterest-bearing
liabilities......................... 31,816 28,073
-------- --------
Stockholders' equity................. 19,520 17,732
Total liabilities and stockholders'
equity.............................. $264,634 $254,148
======== ========
Net interest income (tax
equivalent)......................... $ 10,625 $ 10,415
======== ========
Net interest income (tax equivalent)
to total earning assets............. 4.38% 4.46%
Interest bearing liabilities to
earning assets...................... 87.83% 89.13%
-------- --------
(1) Tax equivalent basis.
(2) Nonaccrual loans are included in the average balances.
(3) Overdraft loans are excluded in the average balances.
30
32
The Company's net interest income is affected by changes in the amount and
mix of interest-earning assets and interest-bearing liabilities, referred to as
a "volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as a "rate change." The following table reflects
the changes in net interest income stemming from changes in interest rates and
from asset and liability volume, including mix. The change in interest
attributable to both rate and volume has been allocated to the changes in the
rate and the volume on a pro rata basis.
RATE/VOLUME ANALYSIS OF
NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30, 1996 FOR THE YEARS ENDED DECEMBER 31,
COMPARED TO 1995 1995 COMPARED TO 1994 1994 COMPARED TO 1993
---------------- --------------------- ---------------------
CHANGE DUE TO CHANGE DUE TO CHANGE DUE TO
---------------------- ------------------------- -------------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- --- ------ ---- ---
INTEREST INCOME:
Interest earning deposits $ 0 $ 0 $ 0 $ 0 $ 2 $ 2 $ (1) $ (1) $ (2)
Investment securities:
Taxable.................. 160 63 223 (354) 53 (301) (9) (78) (87)
Tax-exempt............... 45 (44) 1 131 (81) 50 466 (137) 329
Federal funds sold....... (7) (5) (12) 118 0 118 (178) 76 (102)
Loans.................... 829 43 872 1,936 946 2,882 0 (20) (20)
------ ------ ------ ------- ------- ------- ------- ------- -------
Total interest income.... $1,027 $ 57 $1,084 $1,831 $ 920 $2,751 $278 $ (160) $118
------ ------ ------ ------- ------- ------- ------- ------- -------
INTEREST EXPENSE:
NOW accounts............. 28 2 30 97 119 216 9 (10) (1)
Money market
accounts................. 47 44 91 (68) 62 (6) (13) (45) (58)
Savings deposits......... 7 (2) 5 (84) (28) (112) 6 (90) (84)
Time, $100,000 and
over..................... 39 27 66 (203) 135 (68) (61) (14) (75)
Other time............... 240 171 411 894 1,242 2,136 196 (281) (85)
Federal funds purchased
and repurchase
agreements............... 91 (27) 64 301 24 325 114 66 180
Notes payable............ (20) (14) (34) (34) 86 52 (26) 57 31
------ ------ ------ ------- ------- ------- ------- ------- -------
Total interest expense... $ 432 $ 201 $ 633 903 $1,640 $2,543 $225 $ (317) $(92)
------ ------ ------ ------- ------- ------- ------- ------- -------
NET INTEREST MARGIN...... $ 595 $ (144) $ 451 $ 928 $ (720) $ 208 $ 53 $ 157 $210
====== ====== ====== ======= ======= ======= ======= ======= =======
PROVISION FOR LOAN LOSSES
The amount of the provision for loan losses is based on monthly
evaluations of the loan portfolio, with particular attention directed toward
nonperforming and other potential problem loans. During these evaluations,
consideration is also given to such factors as management's evaluation of
specific loans, the level and composition of nonperforming loans, historical
loss experience, results of examinations by regulatory agencies, an internal
asset review process, the market value of collateral, the strength and
availability of guaranties, concentrations of credits and other judgmental
factors.
The Company recorded a $500,000 provision for loan losses during the six
months ended June 30, 1996, compared with $342,000 during the first six months
of 1995. Although the Company's ratio of net charge-offs to average loans
remained unchanged for these periods, the Company made additional provisions to
the allowance to compensate for growth in the loan portfolio and to maintain
the allowance for loan losses at what management believes to be an adequate
level.
31
33
The 1995 provision for loan losses was $684,000 compared with $660,000 in
1994 and $1,268,000 in 1993. The 3.6% increase in the 1995 provision for loan
losses when compared with 1994 was primarily a result of
a $19,685,000, or 12.2% increase in loans outstanding which was partially
offset by a $369,000 or 49.7% decrease in net charge-offs. The 47.9% decrease
from 1993 to 1994 was primarily a result of a $324,000, or 30.37% decrease in
net charge-offs.
NONINTEREST INCOME
The following table sets forth the various categories of noninterest
income for the six months ended June 30, 1996 and 1995, and for the years ended
December 31, 1995, 1994 and 1993.
NONINTEREST INCOME
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
---------------------------- -------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- -------------
Service charges......... $ 488 $ 458 $ 952 $ 895 $ 822
Merchant fee income..... 237 184 418 357 343
Trust income............ 183 150 330 301 200
Gain on sale of loans... 142 45 288 130 574
Securities gains, net... 13 61 98 118 185
Other noninterest income 261 289 484 482 388
------------- ------------- ------------- ------------- -------------
Total noninterest income $1,324 $1,187 $2,570 $2,283 $2,512
============= ============= ============= ============= =============
Noninterest income is generated primarily from fees associated with
noninterest and interest-bearing accounts. Noninterest income for the first
six months of 1996 was $1,324,000, an increase of $137,000 or 11.5% compared
with noninterest income of $1,187,000 for the first six months of 1995.
Noninterest income was $2,570,000 for 1995, an increase of $287,000 or 12.6%
compared with noninterest income of $2,283,000 for 1994, which represented a
decrease of $229,000 or 9.1% from $2,512,000 in 1993. The growth of the Union
Banks during 1996 increased the number and balance of noninterest and
interest-bearing accounts, resulting in increased noninterest income.
Specifically, service charges increased on demand deposit accounts, the largest
component of noninterest bearing deposit accounts, and charges grew for items
such as insufficient funds and overdrafts primarily on transactional deposit
products such as demand, NOW and Money Market accounts. The increase in
service charge income to $952,000 for the year ended December 31, 1995, from
$895,000 and $822,000 for the years ended December 31, 1994, and 1993,
respectively, was related to increases in deposit account balances and
increases in the service charge schedule during those periods. Merchant fee
income is derived from the Company's credit card operations, comprised
primarily of merchant fees (56% of total merchant fees), interchange fees (18%
of total merchant fees) and annual fees (11% of total merchant fees). Total
merchant fee income has continued to increase as the Company adds new merchants
to its customer list and as credit card activity has grown. Other noninterest
income is primarily derived from fee-based banking services such as loan
servicing fees, and sales of travelers checks and money orders.
The Company, through its affiliates, provides trust services to its
customers by acting as executor, administrator, trustee, agent and in various
other fiduciary capacities for client accounts. Total assets under management
at June 30, 1996, were approximately $80 million. Trust income, which is
predominately comprised of fees assessed based on the market value of managed
client portfolios, increased by $29,000 during 1995, which followed a $101,000
increase in 1994.
A significant contribution to the Company's noninterest income was also
made by its residential real estate mortgage and origination, sales and
servicing operations. In addition, during 1995 the Company implemented a
program in connection with the SBA which guarantees repayment on portions of
loans if a borrower defaults. Revenues from both of these operations are a
substantial component of noninterest income and include commissions and fees
for third party loan servicing, origination and other fees received at closing
and realized gains on the sale of loans into the secondary market.
32
34
NONINTEREST EXPENSE
The following table shows the Company's noninterest expense for the
periods indicated:
NONINTEREST EXPENSE
(DOLLARS IN THOUSANDS)
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
---------------- ----------------------
1996 1995 1995 1994 1993
------- ------- ------ ------ ------
Salaries and employee benefits.... $2,544 $2,174 $4,451 $3,868 $3,613
Occupancy expense, net............ 384 336 665 574 550
Furniture and equipment expenses.. 331 274 584 560 576
FDIC deposit assessment........... 3 259 271 526 502
Other noninterest expense......... 1,499 1,370 2,800 2,719 2,600
------- ------- ------ ------ ------
Total noninterest expense....... $4,761 $4,413 $8,771 $8,247 $7,841
======= ======= ====== ====== ======
Noninterest expense was $4,761,000 for the first six months of 1996, an
increase of $348,000 or 6.9% compared with noninterest expense of $4,413,000
for the first six months of 1995. The growth of UnionBank/Streator resulted in
additional personnel, occupancy and office expenses, due primarily to the
opening of new banking facilities in each of Plano and Peru, Illinois, in May
and October, 1995, respectively.
Noninterest expense was $8,771,000 for 1995, an increase of $524,000 or
6.4% compared with noninterest expense of $8,247,000 for 1994, which
represented an increase of $406,000 or 5.2% compared with noninterest expense
of $7,841,000 for 1993. The increase in noninterest expense for 1995 from 1994
was attributable to a 15.1%, or $583,000, increase in salaries and employee
benefits and a 10.1%, or $115,000, increase in occupancy and equipment
expenses, due primarily to the opening of two banking facilities during 1995.
Deposits held by the Union Banks are insured by the Bank Insurance Fund
("BIF") of the Federal Deposit Insurance Corporation ("FDIC"), and as
FDIC-insured institutions, the Union Banks are required to pay deposit
insurance premium assessments to the FDIC. The amount an institution pays for
FDIC deposit insurance coverage is determined in accordance with a risk-based
assessment system under which each insured depository institution is placed
into one of nine categories and assessed insurance premiums based upon its
level of capital and the results of supervisory evaluations. The FDIC has
issued refunds to the best-rated institutions for assessments which exceeded
the recapitalization requirements of the BIF. The Union Banks received a total
refund from the FDIC of approximately $148,000. In addition, recent changes in
the deposit insurance assessment rate are expected to significantly reduce the
cost of deposit insurance for the Union Banks. See "Regulation and Supervision
- -- The Bank Subsidiaries -- Deposit Insurance".
INCOME TAXES
During 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." The principal
effect of SFAS No. 109 is to provide a tax benefit for cumulative book loss
reserves in excess of tax reserves. SFAS No. 109 provides that deferred tax
assets may be reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax asset will not be realized. In
accordance with the provisions of SFAS No. 109, the Company elected not to
restate prior years and has determined that the cumulative effect of
implementation was not significant. The Company and its subsidiaries filed a
consolidated tax return for 1995.
The Company has recorded income tax expense of $380,000 on income before
taxes of $1,491,000 for the six months ended June 30, 1996, an effective tax
rate of 25.5%, as compared with income tax expense of $365,000 on income before
taxes of $1,408,000 for the six months ended June 30, 1995, an effective tax
rate of 25.9%. The Company recorded income tax expense of $881,000, $703,000
and $747,000 for the years ended December 31, 1995, 1994 and 1993,
respectively, and effective tax rates were 27.2%, 21.3% and 23.3%,
respectively, for such
33
35
periods. The Company's effective tax rate is lower than statutory rates
because the Company derives a significant amount of interest income from
municipal securities, which are exempt from federal tax.
INTEREST RATE SENSITIVITY MANAGEMENT
The operating income and net income of the Union Banks depend, to a
substantial extent, on "rate differentials," i.e., the differences between the
income the Union Banks receive from loans, securities and other earning assets,
and the interest expense they pay to obtain deposits and other liabilities.
These rates are highly sensitive to many factors which are beyond the control
of the Union Banks, including general economic conditions and the policies of
various governmental and regulatory authorities. See "Investment
Considerations -- Impact of Interest Rates and Economic Conditions."
The objective of monitoring and managing the interest rate risk position
of the balance sheet is to contribute to earnings and to minimize fluctuations
in net interest income. The potential for earnings to be affected by changes
in interest rates is inherent in a financial institution. Interest rate
sensitivity is the relationship between changes in market interest rates and
changes in net interest income due to the repricing characteristics of assets
and liabilities. An asset sensitive position in a given period will result in
more assets being subject to repricing; therefore, as interest rates rise, such
a position will have a positive effect on net interest income. Conversely, in
a liability sensitive position, where liabilities reprice more quickly than
assets in a given period, a rise in interest rates will have an adverse effect
on net interest income.
One method of analyzing interest rate risk is to evaluate the balance of
the Company's interest rate sensitivity position. A mix of assets and
liabilities that are roughly equal in volume, term and repricing represents a
matched interest rate sensitivity position. Any excess of assets or
liabilities in a particular period results in an interest rate sensitivity gap.
The following table presents the interest rate sensitivity for the Company's
interest-earning assets and interest-bearing liabilities at June 30, 1996:
INTEREST-RATE SENSITIVE ASSETS AND LIABILITIES
(DOLLARS IN THOUSANDS)
JUNE 30, 1996
--------------------------------------------------------------------
3 MONTHS 3 MONTHS TO 6 MONTHS TO 1 YEAR TO
OR LESS 6 MONTHS 1 YEAR 5 YEARS OVER 5 YRS. TOTAL
------- ----------- ----------- --------- ----------- --------
INTEREST-EARNING ASSETS
Investment securities.................... $ 8,260 $ 4,911 $ 3,383 $ 33,034 $37,341 $ 86,929
Loans.................................... 104,239 5,718 17,327 41,233 17,323 185,840
-------- ----------- ----------- --------- ----------- --------
TOTAL INTEREST-EARNING ASSETS............ $112,499 $ 10,629 $ 20,710 $ 74,267 $54,664 $272,769
======== =========== =========== ========= =========== ========
INTEREST-BEARING LIABILITIES.............
NOW accounts............................. $ -- $ -- $ -- $ 30,091 $ -- $ 30,091
Money market accounts.................... 22,140 -- -- -- -- 22,140
Savings.................................. -- -- -- 24,238 -- 24,238
Time, $100,000 and over.................. 6,185 5,362 6,605 6,927 -- 25,079
Other time............................... 16,657 18,428 44,590 43,350 -- 123,025
-------- ----------- ----------- --------- ----------- --------
Total interest-bearing deposits.......... $ 44,982 $ 23,790 $ 51,195 $ 104,606 $ -- $224,573
Federal funds and repurchase agreements.. 6,544 -- 1,000 -- -- 7,544
Notes payable............................ 4,391 -- -- -- -- 4,391
-------- ----------- ----------- --------- ----------- --------
TOTAL INTEREST-BEARING LIABILITIES....... $ 55,917 $ 23,790 $ 52,195 $ 104,606 $ -- $236,508
======== =========== =========== ========= =========== ========
Period interest sensitivity gap.......... $ 56,582 $ (13,161) $(31,485) $ (30,339) $54,664 $ 36,261
Cumulative interest sensitivity.......... $ 56,582 $ 43,421 $ 11,936 $ (18,403) $36,261 $ 36,261
Cumulative gap as a percent of total
assets.................................. 19.08% 14.64% 4.02% (6.20%) 12.73% 12.73%
Cumulative interest-sensitive assets as
a percent of cumulative interest-
sensitive liabilities................... 201.19% 154.48% 109.05% 92.22% 115.33% 115.33%
The cumulative rate-sensitive gap position at one year was an
asset-sensitive position of $11.9 million, or 4%, which indicates that
the Company is currently in a closely matched interest rate-sensitive
position. In addition,
34
36
the Company also utilizes a dynamic gap asset-liability model that takes into
account projected future balances or the difference between interest
sensitive assets and interest sensitive liabilities at specific future time
periods. The cumulative dynamic rate-sensitive gap position at one year,
projected as of June 30, 1997, was an asset sensitive position of $4.1 million
or 1%. Accordingly, the Company believes it will not experience a significant
impact in the short term from changes in interest rates.
The Company undertakes this interest rate-sensitivity analysis to monitor
the potential risk to future earnings from the impact of possible future
changes in interest rates on currently existing net assets or net liability
positions. However, this type of analysis is as of a point-in-time, when in
fact the Company's interest rate sensitivity can quickly change as market
conditions, customer needs and management strategies change. Thus, interest
rate changes do not affect all categories of assets and liabilities equally or
at the same time. Pursuant to its investment policy, the Company does not
purchase derivative financial instruments, although the Company currently owns
such instruments as a result of securities acquired in connection with the
Acquisitions.
The preceding table does not necessarily indicate the impact of general
interest rate movements on the Company's net interest income because the
repricing of certain assets and liabilities is discretionary and is subject to
competitive and other pressures. As of June 30, 1996, the Union Banks held
approximately $5.6 million in mortgage-backed securities. Although the
mortgage-backed securities have various stated maturities, it is not uncommon
for mortgage-backed securities to prepay outstanding principal prior to stated
maturities. As a result, assets and liabilities indicated as repricing within
the same period may, in fact, reprice at different times and at different rate
levels.
ANALYSIS OF FINANCIAL CONDITION
LOANS AND ASSET QUALITY
The Company's loans are diversified by borrower and industry group. Loan
growth has occurred every year over the past five years and can be attributed
to acquisitions, increased loan demand and the addition of new loan products.
The following table describes the composition of loans by major categories
outstanding at June 30, 1996 and at December 31, 1995, 1994, 1993, 1992 and
1991.
LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
-------- ------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- ------- ------- ------- ------- -------
AGGREGATE PRINCIPAL AMOUNT
----------------------------------------------------------
Commercial and industrial loans.. $ 41,465 $ 38,298 $ 36,802 $ 37,129 $ 36,087 $ 32,098
Agricultural loans............... 14,251 17,079 14,391 14,702 14,121 11,955
Real estate:
Commercial mortgages............. 46,542 44,393 36,727 32,744 30,783 31,236
Construction loans............... 5,924 7,437 5,047 3,018 3,150 1,381
Agricultural loans............... 9,339 10,229 12,169 12,606 11,689 8,464
1-4 family mortgages............. 41,226 36,637 33,623 27,505 28,076 24,760
Installment loans................ 24,682 24,072 19,765 18,262 20,906 20,801
Other loans...................... 2,414 2,681 2,641 2,511 2,043 1,665
-------- -------- -------- -------- -------- --------
Gross loans...................... 185,843 180,826 161,165 148,477 146,855 132,360
Unearned discount................ (3) (7) (31) (106) (286) (445)
-------- -------- -------- -------- -------- --------
Total loans...................... 185,840 180,819 161,134 148,371 146,569 131,915
Allowance for loan losses........ (1,597) (2,014) (1,704) (1,787) (1,586) (1,384)
-------- -------- -------- -------- -------- --------
Loans, net....................... $184,243 $178,805 $159,430 $146,584 $144,983 $130,531
======== ======== ======== ======== ======== ========
PERCENTAGE OF TOTAL LOAN PORTFOLIO
----------------------------------------------------------
Commercial and industrial loans.. 22.31% 21.18% 22.84% 25.01% 24.57% 24.25%
Agricultural loans............... 7.67 9.45 8.93 9.90 9.62 9.03
Real estate:
Commercial mortgages............. 25.04 24.55 22.79 22.05 20.96 23.60
Construction loans............... 3.19 4.11 3.13 2.03 2.14 1.04
Agricultural loans............... 5.03 5.66 7.55 8.49 7.96 6.39
1-4 family mortgages............. 22.18 20.26 20.86 18.53 19.12 18.71
Installment loans.............. 13.28 13.31 12.26 12.30 14.24 15.72
Other Loans.................... 1.30 1.48 1.64 1.69 1.39 1.26
-------- -------- -------- -------- -------- --------
Gross Loans.................... 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
======== ======== ======== ======== ======== ========
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37
As of June 30, 1996 and December 31, 1995, commitments of the Union
Banks under standby letters of credit and unused lines of credit totaled
approximately $45,834,000 and $43,797,000, respectively.
Stated loan maturities (including variable rate loans reset to market
interest rates) of the total loan portfolio, net of unearned income, as of June
30, 1996 and December 31, 1995 were as follows:
STATED LOAN MATURITIES(1)
(DOLLARS IN THOUSANDS)
WITHIN 1 YEAR AFTER
1 YEAR TO 5 YEARS 5 YEARS TOTAL
------- ---------- ------- --------
JUNE 30, 1996
Fixed rate....... $30,562 $45,861 $ 8,900 $ 85,323
Variable rate.... 20,362 24,804 54,329 99,495
Nonaccrual....... 267 617 138 1,022
------- ------- ------- --------
Total............ $51,191 $71,282 $63,367 $185,840
======= ======= ======= ========
DECEMBER 31, 1995
Fixed rate....... $30,630 $46,083 $ 7,505 $ 84,218
Variable rate.... 18,000 25,808 51,666 95,474
Nonaccrual....... 734 140 253 1,127
------- ------- ------- --------
Total............ $49,364 $72,031 $59,424 $180,819
======= ======= ======= ========
(1) Maturities based upon contractual maturity dates
Rate sensitivities of the total loan portfolio, net of unearned income,
as of June 30, 1996 and December 31, 1995 were as follows:
LOAN REPRICING
(DOLLARS IN THOUSANDS)
WITHIN 1 YEAR AFTER
1 YEAR TO 5 YEARS 5 YEARS TOTAL
------- ---------- ------- -------
JUNE 30, 1996
Total Portfolio.. $64,886 $31,734 $2,875 $99,495
DECEMBER 31, 1995
Total Portfolio.. $64,303 $28,763 $2,408 $95,474
The maturities presented above are based upon contractual maturities.
Many of these loans are made on a short-term basis with the possibility of
renewal at time of maturity. All loans, however, are reviewed on a continuous
basis for creditworthiness.
NONPERFORMING ASSETS
The Company's financial statements are prepared on the accrual basis of
accounting, including the recognition of interest income on its loan portfolio,
unless a loan is placed on nonaccrual status. Loans are placed on a nonaccrual
status when there are serious doubts regarding the collectibility of all
principal and interest due
36
38
under the terms of the loan. Amounts received on nonaccrual loans generally
are applied first to principal and then to interest after all principal has
been collected. It is the policy of the Union Banks not to renegotiate the
terms of a loan because of a delinquent status. Rather, a loan is generally
transferred to nonaccrual status if it is not in the process of collection and
is delinquent in payment of either principal or interest beyond 90 days. Loans
which are 90 days delinquent but are well secured and in the process of
collection are not included in nonperforming assets.
Other nonperforming assets consist of real estate acquired through loan
foreclosures or other workout situations and other assets acquired through
repossessions. The following table summarizes nonperforming assets by category
as of June 30, 1996, and as of December 31, 1995, 1994, 1993, 1992 and 1991:
NONPERFORMING ASSETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
JUNE 30, --------------------------------------
1996 1995 1994 1993 1992 1991
-------- ------ ------ ------ ------ ------
Nonaccrual loans...................... $ 1,022 $1,127 $ 891 $1,671 $2,148 $3,712
Loans 90 days past due and still
accruing interest..................... 279 1,088 560 1,378 1,258 337
------- ------ ------ ------ ------ ------
Total nonperforming loans............ 1,301 2,215 1,451 3,049 3,406 4,049
Other real estate owned............... 346 441 672 1,096 664 857
Other nonperforming assets(1)......... 240 240 240 240 -- --
------- ------ ------ ------ ------ ------
Total nonperforming assets........... $ 1,887 $2,896 $2,363 $4,385 $4,070 $4,906
======= ====== ====== ====== ====== ======
Nonperforming loans to total loans.... 0.70% 1.22% 0.90% 2.06% 2.32% 3.07%
Nonperforming assets to total loans... 1.02 1.60 1.47 2.96 2.77 3.71
Nonperforming assets to total assets.. 0.64 0.95 0.87 1.64 1.64 2.04
(1) Represents a single municipal security in default status.
The classification of a loan as nonaccrual does not necessarily indicate
that the principal is uncollectible, in whole or in part. A determination as
to collectibility is made by the Union Banks on a case-by-case basis. The
Union Banks consider both the adequacy of the collateral and the other
resources of the borrower in determining the steps to be taken to collect
nonaccrual loans. The final determination as to the steps taken is made based
upon the specific facts of each situation. Alternatives that are typically
considered to collect nonaccrual loans are foreclosure, collection under
guarantees, loan restructuring or judicial collection actions.
Each of the Company's loans is assigned a rating based upon an internally
developed grading system. A separate credit administration department also
reviews grade assignments on an ongoing basis. Management continuously
monitors nonperforming, impaired and past due loans to prevent further
deterioration of these loans. Management is not aware of any material loans
classified for regulatory purposes as loss, doubtful, substandard, or special
mention, that have been excluded from classification under nonperforming assets
or impaired loans. Management further believes that credits classified as
nonperforming assets or impaired loans include any material loans as to which
any doubts exist as to their collectibility in accordance with the contractual
terms of the loan agreement.
On January 1, 1995, the Company adopted guidelines for impaired loans
required by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended by Statement No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures." The adoption of SFAS 114 did not
significantly impact the comparability of the allowance related tables of the
Company included in this Prospectus.
37
39
The following table sets forth a summary of other real estate owned and
other collateral acquired as of June 30, 1996:
OTHER REAL ESTATE OWNED
JUNE 30, 1996
-------------------------
NUMBER OF NET BOOK
DESCRIPTION PARCELS CARRYING VALUE
- ----------------------- --------- --------------
Developed property.......... 1 $ 188,000
Vacant land or unsold lots.. 2 158,000
--------- --------------
Total real estate........... 3 $ 346,000
========= ==============
ALLOWANCE FOR LOAN LOSSES
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the quality of the collateral for such loan. The allowance for loan losses
represents the Company's estimate of the allowance necessary to provide for
losses incurred in the loan portfolio. In making this determination, the
Company analyzes the ultimate collectibility of the loans in its portfolio,
incorporating feedback provided by internal loan staff and provided by
examinations performed by regulatory agencies. The Company makes an ongoing
evaluation as to the adequacy of the allowance for loan losses. To establish
the appropriate level of the allowance, all loans (including nonperforming
loans), commitments to extend credit and standby letters of credit are reviewed
and classified as to potential loss exposure. Specific allowances are then
established for those loans, commitments to extend credit or standby letters of
credit with identified loss exposure, and an additional allowance is maintained
based upon the size, quality and concentration characteristics of the remaining
loan portfolio using both historical quantitative trends and the Company's
evaluation of qualitative factors including future economic and industry
outlooks. The determination by the Company of the appropriate level of its
allowance for loan losses was $1,597,000 at June 30, 1996.
The allowance for loan losses is based on estimates and ultimate losses
will vary from current estimates. These estimates are reviewed monthly and as
adjustments, either positive or negative, become necessary a corresponding
increase or decrease is made in the provision for loan losses. The following
table presents a detailed analysis of the Company's allowance for loan losses
for the six months ended June 30, 1996, and for the years ended December 31,
1995, 1994, 1993, 1992 and 1991.
38
40
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ----------------------------------------------
1996 1995 1994 1993 1992 1991
-------- ---- ---- ---- ---- ----
Beginning balance............................... $ 2,014 $ 1,704 $ 1,787 $ 1,586 $ 1,384 $ 886
-------- -------- -------- -------- -------- --------
Charge-offs:
Commercial and industrial loans................. 726 114 413 577 381 278
Real estate mortgages........................... 70 173 371 445 613 54
Installment and other loans..................... 142 250 240 257 307 202
-------- -------- -------- -------- -------- --------
Total charge-offs............................... 938 537 1,024 1,279 1,301 534
-------- -------- -------- -------- -------- --------
Recoveries:
Commercial and industrial loans................. 5 70 142 144 95 21
Real estate mortgages........................... -- 56 83 2 39 62
Installment and other loans..................... 16 37 56 66 72 56
-------- -------- -------- -------- -------- --------
Total recoveries................................ 21 163 281 212 206 139
-------- -------- -------- -------- -------- --------
Net charge-offs................................. 917 374 743 1,067 1,095 395
-------- -------- -------- -------- -------- --------
Provision for loan losses....................... 500 684 660 1,268 1,297 650
-------- -------- -------- -------- -------- --------
Allowance associated with the
acquisition of Ottawa National Bank............ -- -- -- -- -- 243
-------- -------- -------- -------- -------- --------
Ending balance.................................. $ 1,597 $ 2,014 $ 1,704 $ 1,787 $ 1,586 $ 1,384
======== ======== ======== ======== ======== ========
Period end total loans, net of unearned
interest....................................... $185,840 $180,819 $161,134 $148,371 $146,569 $131,915
======== ======== ======== ======== ======== ========
Average loans................................... $184,242 $173,004 $152,186 $150,455 $140,945 $116,577
======== ======== ======== ======== ======== ========
Ratio of net charge-offs to average loans....... 1.00% 0.22% 0.49% 0.71% 0.78% 0.34%
Ratio of provision for loan losses to
average loans.................................. 0.54 0.40 0.43 0.84 0.92 0.56
Ratio of allowance for loan losses to
ending total loans............................. 0.86 1.11 1.06 1.20 1.08 1.05
Ratio of allowance for loan losses to
total nonperforming loans...................... 122.75 90.93 117.44 58.61 46.56 34.18
Ratio of allowance for loan losses to
total nonperforming assets..................... 84.63 69.54 72.11 40.75 38.97 28.21
Ratio of allowance at end of period to
average loans.................................. 0.87 1.16 1.12 1.19 1.13 1.19
The following table sets forth an allocation of the allowance for loan
losses among categories as of June 30, 1996, and December 31, 1995, 1994, 1993,
1992 and 1991. The Company believes that any allocation of the allowance for
loan losses into categories lends an appearance of precision which does not
exist. The allowance is utilized as a single unallocated allowance available
for all loans. The following allocation table should not be interpreted as an
indication of the specific amounts or the relative proportion of future charges
to the allowance.
39
41
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
DECEMBER 31,
JUNE 30, --------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---------------- --------------- --------------- --------------- --------------- ----------------
LOAN LOAN LOAN LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO GROSS TO GROSS TO GROSS TO GROSS TO GROSS TO GROSS
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ ------- ------ ------- ------ -------- ------ ------- ------ --------
Commercial
and industrial loans. $ 358 28.75% $ 800 29.43% $ 327 31.89% $ 336 35.03% $ 320 35.22% $ 293 35.20%
Real estate........... 374 56.52 388 55.59 325 53.74 288 50.97 239 49.43 104 49.13
Installment and other
loans................ 233 13.33 235 13.36 194 12.63 173 12.24 191 13.83 154 14.18
Unallocated........... 632 1.40 591 1.62 858 1.74 990 1.76 836 1.53 833 1.49
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................. $1,597 100.00% $2,014 100.00% $1,704 100.00% $1,787 100.00% $1,586 100.00% $1,384 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
INVESTMENT ACTIVITIES
The Company's investment portfolio, which represented 32.2% of
the Company's earning asset base as of June 30, 1996, is managed to
minimize interest rate risk, maintain sufficient liquidity and
maximize return. Investment securities which are classified as
held-to-maturity are purchased with the intent and ability of the
Company to hold them to maturity. Securities classified as
held-to-maturity are carried at historical cost. The Company's
financial planning anticipates income streams based on normal maturity
and reinvestment. Investment securities classified as
available-for-sale are purchased with the intent to provide liquidity
and to increase returns. The securities classified as
available-for-sale are carried at fair value. The Company does not
have any securities classified as trading.
Securities held-to-maturity, carried at amortized cost, were
$28,926,000 at June 30, 1996, compared to $29,026,000 at December 31,
1995, and $28,667,000 at December 31, 1994. The change in the
unrealized position was due to interest rate movements during the
periods. There was an unrealized loss on securities held-to-maturity
of $184,000 at June 30, 1996, compared with an unrealized gain of
$160,000 at December 31, 1995 and an unrealized loss of $1,500,000 at
December 31, 1994.
Securities available-for-sale, carried at fair value, were
$58,003,000 at June 30, 1996, compared with $63,891,000 at December
31, 1995, and $56,593,000 at December 31, 1994.
The following tables describe the composition of investments by
major category and maturity as of June 30, 1996 and as of December 31,
1995, 1994 and 1993:
INVESTMENT PORTFOLIO
(DOLLARS IN THOUSANDS)
DECEMBER 31,
JUNE 30, ----------------------------------------------------------
1996 1995 1994 1993
------------------ ----------------- ------------------ -----------------
% OF % OF % OF % OF
HELD TO MATURITY AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
------ --------- ------ --------- ------ --------- ------ ---------
U.S. Treasury securities......... $ 100 0.12% $ 117 0.13% $ -- -- $26,120 30.73%
U.S. government agencies......... 2,000 2.30 2,000 2.15 3,000 3.52 21,232 24.98
U.S. government agency mortgage
backed securities............... -- -- -- -- -- 7,036 8.28
States and political
subdivisions.................... 26,584 30.58 26,660 28.69 25,402 29.79 23,576 27.74
Collateralized mortgage
obligations...................... 2 0.00 9 0.01 25 0.03 72 0.08
Other securities................. 240 0.28 240 0.26 240 0.28 6,962 8.19
------- ----- ------- ----- ------- ----- ------- ------
TOTAL............................ $28,926 33.28% $29,026 31.24% $28,667 33.62% $84,998 100.00%
======= ===== ======= ===== ======= ===== ======= ======
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42
DECEMBER 31,
JUNE 30, -----------------------------------------------------------
1996 1995 1994 1993
----------------- ------------------ ------------------ ------------------
% OF % OF % OF % OF
AVAILABLE FOR SALE AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
------ --------- ------ --------- ------ --------- ------ ---------
U.S. Treasury securities......... $13,831 15.91% $18,279 19.67% $24,416 28.64% $-- --%
U.S. government agencies......... 38,141 43.88 36,987 39.81 19,672 23.07 -- --
U.S. government agency mortgage
backed securities............... 5,550 6.38 6,084 6.55 8,232 9.66 -- --
States and political
subdivisions................... 408 0.47 913 0.98 885 1.04 -- --
Collateralized mortgage
obligations..................... 74 0.08 106 0.11 165 0.19 -- --
Other securities................. -- -- 1,522 1.64 3,223 3.78 -- --
------- ----- ------- ----- ------- ----- --- ---
TOTAL............................ $58,004 66.72% $63,891 68.76% $56,593 66.38% $-- --%
======= ===== ======= ===== ======= ===== === ===
Prior to January 1, 1994, all debt securities were carried at amortized
cost. Effective January 1, 1994, the Company adopted SFAS No. 115, and
classified investments as held-to-maturity or available-for-sale.
The following tables set forth the maturities and yields of investment
securities as of June 30, 1996 and as of December 31, 1995:
INVESTMENT PORTFOLIO
MATURITY REPRICING SCHEDULE
(DOLLARS IN THOUSANDS)
JUNE 30, 1996
MATURING OR REPRICING
----------------------------------------------------------------------
AFTER 1 BUT AFTER 5 BUT
WITHIN 1 YEAR WITHIN 5 YEARS WITHIN 10 YEARS AFTER 10 YEARS TOTAL
------------- -------------- --------------- -------------- -----
HELD-TO-MATURITY AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
------ ----- ------ ----- ------ ----- ------ ----- ------
U.S. Treasury securities............. $ 100 5.45% $ -- --% $ -- --% $ -- - $ 100
U.S. government agencies............. -- -- 1,000 4.52 1,000 3.23 -- -- 2,000
States and political subdivisions
(1)................................. 2,407 8.62 13,659 7.23 8,034 7.34 2,484 8.28 26,584
Collateralized mortgage obligations.. -- -- -- -- 2 9.14 -- -- 2
Other securities..................... -- -- -- -- 240 -- -- -- 240
------ ------- ---- ------ ---- ----- -------
TOTAL................................ $2,507 $14,659 $9,276 $2,484 $28,926
====== ======= ====== ====== =======
MATURING OR REPRICING
----------------------------------------------------------------------
AFTER 1 BUT AFTER 5 BUT
WITHIN 1 YEAR WITHIN 5 YEARS WITHIN 10 YEARS AFTER 10 YEARS TOTAL
------------- -------------- --------------- -------------- -----
AVAILABLE-FOR-SALE AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
------ ----- ------ ----- ------ ----- ------ ----- ------
U.S. Treasury securities............. $7,023 4.60% $ 6,807 5.29% $ -- --% -- --% $13,830
U.S. government agencies............. 495 6.12 7,881 5.46 29,765 6.63 -- -- 38,141
U.S. government agency
mortgage backed securities.......... 293 6.70 3,417 5.72 412 7.30 1,428 6.31 5,550
States and political subdivisions
(1)................................. -- -- 193 6.00 215 9.00 -- -- 408
Collateralized mortgage obligations.. -- -- 74 5.70 -- -- -- -- 74
------ ---- ------- ---- ------- ---- ------ ---- -------
TOTAL................................ $7,811 $18,372 $30,392 $1,428 $58,003
====== ======= ======= ====== =======
(1) Rates on obligations of States and political subdivisions have been
adjusted to tax equivalent yields using a 34% income tax rate.
41
43
INVESTMENT PORTFOLIO
MATURITY REPRICING SCHEDULE
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1995
MATURING OR REPRICING
-------------------------------------------------------------------------------------
AFTER 1 BUT AFTER 5 BUT
WITHIN WITHIN WITHIN AFTER
1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
---------------- --------------- --------------- ---------------- -------
HELD-TO-MATURITY AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
------ ----- ------ ----- ------ ----- ------ ----- -------
U.S. Treasury securities............. $ 117 5.44% $ -- --% $ -- --% $ -- --% $ 117
U.S. government agencies............. -- -- 1,000 3.42 1,000 3.39 -- -- 2,000
States and political
subdivisions (1)..................... 1,665 8.76 14,512 7.32 7,416 7.36 3,067 8.16 26,660
Collateralized mortgage obligations.. -- -- 9 10.01 -- -- -- -- 9
Other securities..................... -- -- -- -- 240 -- -- -- 240
------ ------- ------ ------ -------
TOTAL (1)............................ $1,782 $15,521 $8,656 $3,067 $29,026
====== ======= ====== ====== =======
AFTER 1 BUT AFTER 5 BUT
WITHIN WITHIN WITHIN AFTER
1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
-------------- ---------------- -------------- ---------------- ------
AVAILABLE-FOR-SALE AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
------ ----- ------ ----- ------ ----- ------ ----- ------
U.S. Treasury securities............. $8,283 4.41% $ 9,488 5.21% $ 508 5.61% $ -- --% $18,279
U.S. government agencies............. -- -- 12,672 5.68 24,315 6.75 -- -- 36,987
U.S. government agency
mortgage backed securities......... -- -- 3,958 5.51 521 7.50 1,605 6.27 6,084
States and political subdivisions (1) 500 6.60 195 6.00 218 9.00 -- -- 913
Collateralized mortgage obligations.. -- -- 106 5.85 -- -- -- -- 106
Other securities..................... -- -- 1,522 6.08 -- -- -- -- 1,522
------ ------- ------- ------ -------
TOTAL (1)............................ $8,783 $27,941 $25,562 $1,605 $63,891
====== ======= ======= ====== =======
(1) Rates on obligations of States and political subdivisions have been
adjusted to tax equivalent yields using a 34% income tax rate.
DEPOSIT ACTIVITIES
Deposits are attracted through the offering of a broad variety
of deposit instruments, including checking accounts, money market
accounts, regular savings accounts, term certificate accounts
(including "jumbo" certificates in denominations of $100,000 or
more), and retirement savings plans. The Company's average balance
of total deposits was $256,825,000 for the six months ended June 30,
1996, representing an increase of $11,754,000 or 4.8% compared with
the average balance of total deposits for the year ended December
31, 1995. The Company's average balance of total deposits was
$245,071,000 for the year ended December 31, 1995, an increase of
$11,860,000 or 5.06% compared with the average balance of total
deposits outstanding for 1994 of $233,211,000, which represented an
increase of $6,385,000 or 2.8% compared with the average balance of
total deposits outstanding for 1993 of $226,826,000. The increases
in deposits were due to internally generated growth.
The following table sets forth certain information regarding
the Union Banks' average deposits as of June 30, 1996 and December
31, 1995, 1994 and 1993.
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AVERAGE DEPOSITS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
FOR THE SIX MONTHS ENDED ----------------------------------
JUNE 30, 1996 1995
---------------------------------- ----------------------------------
AVERAGE PERCENT OF AVERAGE RATE AVERAGE PERCENT OF AVERAGE RATE
AMOUNT TOTAL PAID AMOUNT TOTAL PAID
------- --------- ------------ ------- ---------- ------------
Noninterest-bearing
demand deposits........ $ 32,380 12.61% --% $ 29,950 12.22% --%
Savings accounts........ 24,029 9.36 2.62 23,146 9.45 2.64
Interest-bearing demand
deposits............... 52,912 20.60 2.84 50,788 20.72 2.81
Time, less than $100,000 133,488 51.98 5.91 129,147 52.70 5.84
Time, $100,000 or more.. 14,016 5.45 5.84 12,040 4.91 5.71
-------- ------ ---- -------- ------ ----
Total deposits......... $256,825 100.00% 4.24% $245,071 100.00% 4.19%
======== ====== ==== ======== ====== ====
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1994 1993
---------------------------------- ---------------------------------
AVERAGE PERCENT OF AVERAGE RATE AVERAGE PERCENT OF AVERAGE RATE
AMOUNT TOTAL PAID AMOUNT TOTAL PAID
------- --------- ------------- ------- ---------- ------------
Noninterest-bearing
demand deposits........ $ 29,622 12.70% --% $ 26,026 11.47% --%
Savings accounts........ 26,288 11.27 2.75 26,103 11.51 3.09
Interest-bearing demand
deposits............... 49,295 21.14 2.47 49,348 21.76 2.59
Time, less than $100,000 112,094 48.07 4.82 108,159 47.68 5.07
Time, $100,000 or more.. 15,912 6.82 4.74 17,190 7.58 4.83
-------- ------ ---- -------- ------ ----
Total deposits......... $233,211 100.00% 3.47% $226,826 100.00% 3.70%
======== ====== ==== ======== ====== ====
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As of June 30, 1996, non-brokered time deposits over $100,000 represented
9.7% of total deposits, compared with 9.0% of total deposits as of December 31,
1995, and 9.4% as of December 31, 1994. The Union Banks do not have and do not
solicit brokered deposits.
The following table sets forth the remaining maturities for time deposits
of $100,000 or more at June 30, 1996 and at December 31, 1995:
TIME DEPOSITS OF $100,000 OR MORE
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
MATURITY RANGE 1996 1995
- -------------- -------- ------------
Three months or less................. $ 6,185 $ 6,024
Over three months through six months. 5,362 3,128
Over six months through twelve months 6,605 5,013
Over twelve months................... 6,927 9,487
------- -------
$25,079 $23,652
======= =======
RETURN ON EQUITY AND ASSETS
The following are various ratios for the Company for the six months ended
June 30, 1996 and the years ended December 31, 1995, 1994, and 1993.
RETURN ON EQUITY AND ASSETS
FOR THE
SIX MONTHS FOR THE YEARS ENDED DECEMBER 31,
ENDED -------------------------------------
JUNE 30, 1996 1995 1994 1993
------------- ----------- ----------- -----------
Return on average assets... 0.75% 0.83% 0.98% 0.97%
Return on average equity... 9.49 10.83 13.29 13.88
Average equity to
average assets............ 7.95 7.67 7.38 6.98
Dividend payout rates...... 12.77 12.06 9.57 7.78
LIQUIDITY
The Union Banks' investment securities portfolios, including federal funds
sold, and its cash and due from bank deposit balances serve as the primary
sources of liquidity for the Company. At June 30, 1996, 10.6% of the Union
Banks' interest-bearing liabilities were in the form of time deposits of
$100,000 and over. Substantially all of such large deposits were obtained from
the Union Banks' market areas and none of such deposits are brokered deposits.
Management believes these deposits to be a stable source of funds. However, if
a large number of these time deposits matured at approximately the same time
and were not renewed, the Union Banks' liquidity could be adversely affected.
Currently, the maturities of the Union Banks' large time deposits are spread
throughout the year, with 24.7% maturing in the third quarter of 1996, 21.4%
maturing in the fourth quarter of 1996, 26.3% maturing in the first and second
quarter of 1997, and the remaining 27.6% maturing thereafter. The Union Banks
monitor those maturities in an effort to minimize any adverse effect on
liquidity.
In the longer term, the liquidity of the Company and its ability to meet
its cash obligations will depend substantially upon its receipt of dividends
from the Union Banks, which are limited by banking statutes and regulation.
See "Regulation and Supervision -- The Bank Subsidiaries -- Dividends."
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CAPITAL RESOURCES
The Union Banks are expected to meet a minimum risk-based capital to
risk-weighted assets ratio of 8%, of which at least one-half (or 4%) must be in
the form of Tier 1 (core) capital. The remaining one-half (or 4%) may be in
the form of Tier 1 (core) or Tier 2 (supplementary) capital. The amount of
loan loss allowance that may be included in capital is limited to 1.25% of
risk-weighted assets. The ratio of Tier 1 (core) and the combined amount of
Tier 1 (core) and Tier 2 (supplementary) capital to risk-weighted assets for
the Union Banks were 11.74% and 12.54%, respectively, at June 30, 1996, and
11.34% and 12.35%, respectively, at December 31, 1995. The Union Banks are
currently, and expect to continue to be, in compliance with these guidelines.
See "Regulation and Supervision -- Capital Adequacy Guidelines."
The Board of Governors of the FRB has announced a policy known as the
"source of strength doctrine" that requires a bank holding company to serve as
a source of financial and managerial strength for its subsidiary banks. The
FRB has interpreted this requirement to require that a bank holding company,
such as the Company, stand ready to use available resources to provide adequate
capital funds to its subsidiary banks during periods of financial stress or
adversity. The FRB has stated that it would generally view a failure to assist
a troubled or failing subsidiary bank in these circumstances as an unsound or
unsafe banking practice or a violation of the FRB's Regulation Y or both,
justifying a cease and desist order or other enforcement action, particularly
if appropriate resources are available to the bank holding company on a
reasonable basis.
The following table sets forth an analysis of the Company's capital
ratios:
RISK-BASED CAPITAL RATIOS
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31, MINIMUM WELL-
-------- --------------------------- CAPITAL CAPITALIZED
1996 1995 1994 1993 RATIOS RATIOS
-------- ------- ------- ------- -------- ---------
Tier 1 risk-based capital.. $ 23,617 $ 22,530 $ 20,322 $ 17,801
Tier 2 risk-based capital.. 1,597 2,014 1,704 1,787
Total capital.............. 25,214 24,544 22,026 19,588
Risk-weighted assets....... 201,133 198,731 179,307 178,613
Capital ratios:
Tier 1 risk-based capital.. 11.74% 11.34% 11.33% 9.97% 4.00% 6.00%
Tier 2 risk-based capital.. 12.54 12.35 12.28 10.97 8.00 10.00
Leverage Ratio............. 7.92 7.95 7.68 7.00 3.00 5.00
ACCOUNTING MATTERS
In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 114 "Accounting by Creditors of Impairment of a Loan" as amended by SFAS
No. 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures." Together, these standards require that when a loan is
impaired, a creditor must measure impairment based upon the present value of
expected future cash flows discounted at the loan's effective interest rate,
the fair value of the collateral if the loan is collateral dependent or the
loan's observable market price. A loan is considered impaired when based upon
current information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. These standards also require certain disclosures regarding impaired
loans. The Company adopted these standards effective January 1, 1995. The
adoption of these accounting standards did not have a material effect on the
Company's consolidated financial position or results of operations because the
Company's recognition and measurement policies regarding nonperforming loans
were materially consistent with these accounting standards.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This Statement requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Measurement of an impairment loss for such long-
lived assets and identifiable intangibles is to be based upon the fair value
of the asset. This Statement is
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effective for fiscal years beginning after December 15, 1995.
The FASB has issued SFAS No. 122 "Accounting for Mortgage Servicing
Rights" which became effective for years beginning after December 15, 1995.
This Statement amends FASB Statement No. 65 "Accounting for Certain Mortgage
Banking Activities" to require that an entity recognize as separate assets the
rights to service mortgage loans for others, however those rights are acquired.
An entity that acquires mortgage servicing rights through either the purchase
or origination of mortgage loans and sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans (without mortgage servicing
rights) based upon their relative fair values. If it is not practicable to
estimate the fair values separately, the entire cost of purchasing or
originating the loans should be allocated to the mortgage loans (without the
mortgage servicing rights) and no cost should be allocated to the mortgage
servicing rights. This Statement also requires that an entity assess its
capitalized mortgage servicing rights for impairment based upon the fair value
of those rights.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement defines a fair value based method of accounting
for an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities electing to continue to use the method of accounting specified in
Opinion No. 25 must make pro forma disclosures of net income and, if presented,
earnings per share, as if the fair value method of accounting defined in SFAS
No. 123 had been applied. This Statement is effective for fiscal years
beginning after December 15, 1995.
IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES
The financial statements and related financial data concerning the Company
presented in this Prospectus 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. The primary effect of inflation on the operations of the Company is
reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, changes in interest rates have a more
significant effect on the performance of a financial institution than do the
effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Interest rates are highly
sensitive to many factors which are beyond the control of the Company,
including the influence of domestic and foreign economic conditions and the
monetary and fiscal policies of the United States government and federal
agencies, particularly the FRB. See "Investment Considerations -- Impact of
Interest Rates and Economic Conditions."
BUSINESS
THE COMPANY
The Company is a multi-bank holding company with its corporate
headquarters located in Ottawa, Illinois, which is approximately 85 miles
southwest of Chicago. As of June 30, 1996, the Company had consolidated assets
of approximately $296.6 million. The Company will have 27 banking locations
with consolidated assets of approximately $625.8 million following consummation
of the Acquisitions, which have been or will be completed prior to the closing
of this Offering.
The Company was incorporated in Delaware in 1981. The Company's principal
executive offices are located at 122 West Madison Street, Ottawa, Illinois
61350, and its telephone number is (815) 434-3900.
THE SUBSIDIARIES
Prior to the Acquisitions, the Company operated through its two
wholly-owned subsidiary banks, UnionBank/Streator, which has its main office
located in Streator, Illinois, and UnionBank/Sandwich, which has
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its main office located in Sandwich, Illinois. UnionBank/Streator has
nine locations in the Illinois communities of Ottawa, Streator, Triumph and
Peru, while UnionBank/Sandwich has two locations, one each in Sandwich
and Plano, Illinois.
Management of the Company believes that the new branches in Plano and
Peru, Illinois, offer excellent opportunities for the Company to expand its
retail and commercial customer base. The Company's marketing focus at the two
new branches has been to promote mortgages and home equity lines of credit with
additional emphasis being placed on cross selling to customers the full line of
the Company's other financial products and services. In addition, employees at
both of these branches have adopted a proactive business development strategy
which, when coupled with the Company's commercial loan, deposit and other
services, offer opportunities to develop long term relationships with existing
and new commercial customers. At June 30, 1996, the Plano and Peru branches
had grown to approximately $2,731,000 and $1,973,000 of total assets,
respectively.
The Union Banks' full-service banking business includes customary consumer
and commercial products and services, including the following: demand,
savings, time deposit, individual retirement and Keogh accounts; commercial,
industrial, consumer and real estate lending; safe deposit operations; trust
services; and an extensive variety of additional services tailored to meet the
needs of individual customers, such as the acquisition of U.S. Treasury notes
and bonds, the sale of traveler's checks, money orders, cashier's checks and
foreign currency, direct deposit, discount brokerage and other special
services. Commercial and consumer loans are made to corporations, partnerships
and individuals, primarily on a secured basis. Commercial lending focuses on
business, capital, construction, inventory and real estate. Direct and
indirect installment loans are made to consumers and commercial customers and
mortgage loans are originated and serviced.
In connection with the Prairie Acquisition, the Company acquired six
additional bank subsidiaries with a total of ten banking offices located in
portions of north central, northwestern and western Illinois. The Country
Acquisition will result in the addition of another six new banking offices in
western Illinois.
The Company also has three non-bank subsidiaries: UnionData which
provides data processing services to the Union Banks and third parties; Union
Corporation ("Union Corporation"), which primarily serves as an owner and
lessor of banking offices to the Union Banks; and LaSalle Collections, a
recently acquired collection agency which serves the greater LaSalle County
area.
MARKET AREA
Prior to the Acquisitions, the Company served the banking needs of LaSalle
and contiguous counties located in north central Illinois (LaSalle and portions
of Livingston, Grundy, Bureau, Kendall, DeKalb and Kane Counties) through the
Union Banks. The Company has an 11% share of aggregate deposits in its primary
market of LaSalle County, based upon deposit data as of June 30, 1995. The
Company also has more outstanding loans in LaSalle County than any other
financial institution in this area. The Company has recently expanded its
lending and deposit gathering activities from north central Illinois into
certain of the counties surrounding the Chicago metropolitan area, including
Kane and Kendall Counties.
The Company's banking market in north central Illinois is primarily
agricultural, although in the past few years there have been a number of new
businesses and manufacturing facilities that have moved to the area and
commenced operations. Moreover, agricultural lending has played a much smaller
role within the areas located closer to the metropolitan Chicago area. In
response to these changes, the Company has increased its consumer, commercial
and real estate lending in these areas.
The Acquisitions increase the Company's market share within north central
Illinois (primarily in LaSalle and Bureau Counties) and expand the Company's
presence into northwestern Illinois (Jo Daviess and Whiteside Counties) and
western and southwestern Illinois (Hancock, McDonough, Adams and Pike
Counties). The resulting market area of the Company will extend from the
western suburbs of the Chicago metropolitan area across central and northern
Illinois to the Mississippi River and the western border of Illinois.
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ACQUISITION AND EXPANSION STRATEGY
The Company seeks to diversify both its market area and asset base while
increasing profitability through acquisitions and expansion. One of the
Company's primary goals is to expand through the acquisition of established
financial service organizations, primarily commercial banks or thrifts, to the
extent suitable candidates can be identified and acceptable business terms
negotiated.
Over the past several years, the Company has built an experienced
management team and a sales-driven employee work force that is implementing a
business plan that contemplates a significant expansion of the Company's market
areas and substantial growth in its asset size. Consistent with the Company's
plan, the Company acquired Prairie and has entered into an agreement to acquire
Country. The Acquisitions will increase the total assets of the Company from
approximately $296.6 million to $633.3 million, an increase of 114%. The
Acquisitions are expected to increase the presence of the Company within the
region's banking community. Because of the business reputations of the Company
and its executive officers in the banking industry, the Company believes that
it represents a very attractive acquiror to the owners of other community banks
and thrifts who decide to sell their institutions. The Company believes that
it can successfully manage these community-based institutions to increase their
profitability by expanding cross-selling efforts and placing a greater emphasis
on those products and services offering the highest return on investment.
The Company's current acquisition strategy is focused on traditional
community banks or thrifts located within its expanded market area as a result
of the Acquisitions. A large number of such financial institutions are located
within this geographic area. It is possible that, as a result of consolidation
within the banking industry generally, the Company may in the future also look
beyond these geographic areas for acquisition opportunities. In addition to
price and terms, other factors considered by the Company in determining the
desirability of an acquisition candidate include the financial condition,
earnings potential, quality of management, market area and competitive
environment.
The Company will also consider establishing branches, loan production
offices or other business facilities as a means of expanding its presence in
current or new market areas. In addition, the Company may expand into other
lines of business closely related to banking if it believes these lines could
be profitable without undue risk to the Company. The Company is not, however,
actively involved in any negotiations or discussions regarding any such
acquisitions, the opening of any new branches or entering into any new lines of
business at this time. There can be no assurance that any further acquisitions
will be made or that any branches or other offices will be established.
OPERATING STRATEGY
Corporate policy, strategy and goals are established by the Board of
Directors of the Company. Operational and administrative policies for the
Union Banks are also established by the Company. Within this framework, the
Union Banks focus on providing personalized services and quality products to
their customers to meet the needs of the communities in which they operate.
Recognizing the substantial changes and growth opportunities in its market
area, beginning in 1993, the Company redirected its existing resources and
personnel to create an aggressive sales environment within the organization.
In addition to promotions from within the organization, the Company hired
experienced senior bank executives who were familiar with its market area, with
an emphasis on the commercial lending area. The Company's senior management
group has been carefully built after taking into account each individual's
specific abilities and expertise. The Company believes that the combination of
these talents in one organization provides an encouraging outlook for the
Company's future continued growth.
Each of the Union Banks operates as a traditional community bank with
conveniently located facilities and a professional, highly motivated staff that
focuses on long-term relationships with customers and providing them with
individualized quality service. As part of its community banking approach, the
Company encourages officers of the Union Banks to actively participate in
community organizations. In addition, within credit and rate of return
parameters, the Company attempts to ensure that each of the Union Banks meets
the credit needs of its respective communities and invests in local municipal
securities. The Company attempts to attract and retain customers by building
relationships as opposed to focusing solely on specific transactions. The
Company continually monitors
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its own performance and levels of customer satisfaction through one-on-one
conversations, customer surveys and focus groups.
The Company uses a variety of marketing strategies to attract and retain
customers, the most important of which is its officer/director call program.
Officers and directors of the Union Banks regularly call on customers and
potential customers to maintain and develop deposit and other special service
relationships, including payroll, discount brokerage, cash management, lock box
and trust services. The importance of this program is highlighted by the fact
that the completion by directors of customer calls can be a significant factor
in the award of director stock options.
The Company has invested substantial time, effort and expense in training
its employees to deliver value to customers by explaining to them how the
Company's products and services can meet the customer's financial needs. This
has led to significant gains in cross-selling the Company's products and
services to its existing customer base. The Company is also evaluating its
employee compensation structure so that the best performing employees can be
compensated commensurate with their contributions to the organization. These
efforts serve to emphasize the Company's shift to a sales culture, with skills,
compensation and environment all supporting that culture.
The Company conducts all of its own data processing for the Union Banks
through its wholly-owned subsidiary, UnionData. The Company believes that
retaining control of its data processing in conjunction with implementing its
acquisition strategy will lead to decreased marginal operating costs, more
effective service to its customers and increased efficiencies. To provide a
high level of customer service and to manage effectively its growth,
acquisition and operating strategies, the Company also focuses on continued
improvement of its internal operating systems. UnionData continuously
evaluates technological innovation that can be used to improve customer service
levels, increase sales effectiveness and enhance staff productivity.
The Company's automated platform system installed in 1995 increases
operating efficiencies which allow customer service representatives to more
easily cross-sell additional products to customers. The Company's UB-24
automated teller machines (ATMs) have helped the Company expand its market
area, enhance customer service and utilize staff more effectively. The Company
is also currently upgrading all of its current banking locations with new
teller terminals to further support the Company's commitment to quality service
and increased efficiencies.
PRODUCTS AND SERVICES
GENERAL
The Union Banks provide a range of commercial and retail lending services
to corporations, partnerships and individuals, including, but not limited to,
commercial business loans, commercial and residential real estate construction
and mortgage loans, loan participations, consumer loans, revolving lines of
credit and letters of credit. The Union Banks make direct and indirect
installment loans to consumers and commercial customers, and originate and
service residential mortgages and handle the secondary marketing of those
mortgages.
The Union Banks aggressively market their services to qualified lending
customers in both the commercial and consumer sectors. The Union Banks'
commercial lending officers actively solicit the business of new companies
entering their respective markets as well as long-standing members of these
communities. Through personalized, professional service and competitive
pricing, the Union Banks have been successful in attracting new commercial
lending customers. At the same time, the Union Banks actively advertise their
consumer loan products and continually attempt to make their lending officers
more accessible. Through convenient locations and regular advertising, the
Union Banks have been successful in capitalizing on the moderate growth in loan
demand in its market area, particularly with respect to residential mortgages,
home equity loans and installment loans.
COMMERCIAL, REAL ESTATE AND AGRICULTURAL LOANS
The Union Banks aggressively seek new commercial, real estate and
agricultural loans in their respective market areas and much of the increase in
these loans in recent years can be attributed to the successful solicitation of
new business. The Union Banks' areas of emphasis include, but are not limited
to, loans to wholesalers, manufacturers, building contractors, agri-businesses,
farmers, developers, business services companies and retailers. The Union
Banks provide a wide range of commercial business loans, including lines of
credit for working capital
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purposes and term loans for the acquisition of equipment and other purposes.
Collateral for these loans generally includes accounts receivable, inventory,
equipment and real estate. Loans may be made on an unsecured basis when
warranted by the overall financial condition of the borrower. Terms of
commercial business loans generally range from one to five years. The
majority of the Union Banks' commercial business loans either have floating
interest rates or reprice within one year. The primary repayment risk
for commercial loans is the failure of the business due to economic or
financial factors. In most cases, the Union Banks have collateralized these
loans and/or taken personal guarantees to help assure repayment.
The Company has also generated loans which are guaranteed by the SBA.
Management believes that making such loans helps the local communities in which
the Union Banks operate by adding jobs and increasing the tax base, and also
provides the Company with a source of income and solid future lending
relationships as SBA-backed businesses grow and prosper. During 1995,
UnionBank/Streator made 37 SBA loans totalling approximately $4.0 million. The
Company intends to expand the number of these loans in the future.
Agricultural loans, many of which are secured by crops, machinery and real
estate, are made to finance capital improvements and farm operations as well as
acquisitions of livestock and machinery. These loans are expected to be repaid
from cash flows or from proceeds from the sale of selected assets of the
borrowers. The Company's consolidated loan portfolio includes a concentration
of loans to agricultural and agricultural-related industries. These loans
totalled approximately $12.7 million, or 6.8% of total loans, as of June 30,
1996. Credit losses arising from lending transactions with agricultural
entities are similar to the Union Banks' credit loss experience on their loan
portfolios as a whole. The Union Banks' agricultural lending officers attempt
to work closely with their agricultural customers, including companies and
individual farmers, and to assist them in the preparation of budgets and cash
flow projections for the ensuing crop year. These budgets and cash flow
projections are monitored closely during the year and reviewed with customers
on a regular basis.
During recent years, the Company has undertaken several initiatives to
improve asset quality. The Company's Board of Directors reviews, on a monthly
basis, a report of all criticized assets and requests for new loans over
$10,000. Requests for new loans over $500,000 are approved by a directors'
loan committee.
Loan review personnel and commercial lenders interact each month with the
Boards of Directors of the Union Banks. Management has attempted to identify
problem loans at an early stage and to aggressively seek a resolution of these
situations. Management believes that this policy has contributed to the
Company's below average level of problem loans compared to its industry peer
group. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Nonperforming Loans and Assets."
CONSUMER LENDING
The Union Banks provide a wide variety of consumer loans including motor
vehicle, home improvement, home equity, student loans, signature loans and
small personal credit lines. One of the areas of concentration is direct and
indirect automobile financing in the Company's market area. The Union Banks
have been able to compete effectively in this market segment by providing quick
turn-around service to local automobile dealers. Due to the expanded growth
and development along the Illinois and Fox Rivers, the Union Banks have also
recently begun to work with area boat dealerships on financing arrangements.
The Union Banks have been operating as a principal in the MasterCard and
Visa credit card programs since 1988. The Union Banks' primary strategy in
this area has been to solicit credit card business from its existing customer
base. The Company's credit card division has aggressively sought to acquire
merchant processing business as well as credit card receivables. The Company
currently has outstanding over 3,700 cards and is processing card receipts for
340 merchants.
The Company inaugurated a debit card program in 1994, and was the first
organization in its general market area to introduce this service to its
customers. While acceptance of debit cards in the market has developed slowly,
card usage has been steadily increasing. Management believes that the use of
credit and debit cards will provide opportunities for growth and leadership in
its new markets.
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MORTGAGE BANKING
The Company's mortgage portfolio is currently in excess of $70,000,000
with over 1,400 customers. The Company utilizes Federal Home Loan Mortgage
Corporation and Federal National Mortgage Association programs and several
other government and private sources to satisfy its customers' residential
lending needs. In 1995, the real estate division computerized all of its
operations, allowing outside sales representatives to complete applications
from the customer's home or office. This technological innovation has allowed
the Company's three outside sales representatives to cover a wider market area
in seeking new real estate lending business. The Company believes that its
mortgage product is a core piece of its overall customer relationship. To
solidify this relationship, the Company uses state of the art mortgage
servicing software to be directly responsive to the many needs of its customer
base.
INVESTMENT MANAGEMENT AND TRUST SERVICES
The Company's Investment Management and Trust Division, which is operated
through UnionBank/Streator, increased its assets under management during 1995
by over 50% to a total of $55.7 million. Because of the importance of this
growing segment of its business, the Company has embarked on a strategic
initiative to better position itself to deliver quality financial services to
its customers. To emphasize its commitment, the Company recently added
"Investment Management" to the name of its Trust Department. Management
believes that the new name more accurately reflects the services desired by and
offered to the Company's customer base and the future direction of the
Company's trust and fiduciary activities.
The Company has enhanced its ability to serve its trust customers by
upgrading to a state of the art trust accounting system. The Investment
Management and Trust Services Department can provide on-line, real time
information regarding its customers' accounts. All of this Division's
employees have a personal computer available at their work areas through which
customer account information is immediately accessible. The Company also
maintains over 90% (all that are depository eligible) of its assets with a
third party custodian. The Company has found that such custodial functions can
be more economically and efficiently handled by an outside provider.
Management believes that this allows the Company to devote more time to
providing personalized service to its customers.
Management's focus in the trust area is to build financial relationships
within the community bank environment. The Company expects that the future
needs of its customers may fall within broadly defined areas such as
investment, tax planning, estate management, retirement/financial planning,
fiduciary responsibilities and farm management. The Company intends to
position the Investment Management and Trust Services Department to meet these
future needs and to continue to expand this line of business.
DATA PROCESSING AND DATA MANAGEMENT
Cash management services provided by the Company continue to enhance the
value of relationships with corporate customer accounts. The Company's
corporate cash management services allow business customers to use office
computers to gain immediate access to their accounts and to monitor their
finances in an efficient and convenient manner.
UnionData is also aggressively marketing a new automated payment option
called Direct Payment which is an efficient, electronic payment alternative to
paper checks. With Direct Payment, a customer authorizes a company to
electronically collect a preauthorized amount from the customer's checking
account to pay a bill or make a donation. UnionData has also marketed a direct
deposit program as a convenient and safe way to receive social security, salary
and dividend payments and other similar income items. The Company believes
that UnionData is a leader in operating products technology within its market
area. In 1995, UnionData was awarded a contract with the LaSalle County
Circuit Clerk to electronically process child support payments. Utilizing this
technology has reduced the Circuit Clerk's operating costs while providing a
new revenue source for UnionData.
COMPETITION
The Company's market area is highly competitive. Within the three
Illinois counties served by the Company's banking offices prior to the
Acquisitions, 34 other commercial banks, 8 savings and loan associations
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and 25 credit unions currently operate offices. In addition, many other
financial institutions based in surrounding communities and in Chicago,
Illinois, actively compete for customers within the Company's market area.
The Company also faces competition from finance companies, insurance
companies, mortgage companies, securities brokerage firms, money market
funds, loan production offices and other providers of financial services.
See "Investment Considerations -- Competition."
The Company competes for loans principally through the range and quality
of the services it provides and through competitive interest rates and loan
fees. The Company believes that its long-standing presence in the communities
its serves and personal service philosophy enhance its ability to compete
favorably in attracting and retaining individual and business customers. The
Company actively solicits deposit-related customers and competes for deposits
by offering customers personal attention, professional service and competitive
interest rates.
EMPLOYEES
At June 30, 1996, the Company employed 160 full-time equivalent employees.
The Company places high priority on staff development which involves extensive
training, including customer service training. New employees are selected on
the basis of both technical skills and customer service capabilities. None of
the Company's employees are covered by a collective bargaining agreement with
the Company. The Company offers a variety of employee benefits and management
considers its employee relations to be excellent.
PROPERTIES
At June 30, 1996, the Company operated eleven banking offices in the
Illinois cities of Ottawa, Streator, Sandwich, Triumph, Peru and Plano. The
principal offices of the Company, UnionBank/Streator and UnionBank/Sandwich are
located in Ottawa, Streator and Sandwich, Illinois, respectively. All of the
Company's offices are owned by one of the Union Banks or by Union Corporation,
and are not subject to any mortgage or material encumbrance. The Company
believes that its current facilities are adequate for its existing business.
As a result of the Acquisitions, the Company will increase the number of its
banking offices to a total of 27.
LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries, including the Bank
Subsidiaries, are involved in any pending legal proceedings other than routine
legal proceedings occurring in the normal course of business, which, in the
opinion of management, in the aggregate, are not material to the Company's
consolidated financial condition.
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MANAGEMENT
The following table sets forth certain information concerning the
Company's directors and executive officers.
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
R. Scott Grigsby.... 44 Chairman of the Board, President, Chief
Executive Officer and Director
Richard J. Berry.... 44 Director
Walter E. Breipohl.. 43 Director
L. Paul Broadus..... 61 Director
John Michael Daw.... 49 Director and Senior Agricultural Representative
Jimmie D. Lansford.. 56 Director and Senior Vice President,
Organizational Development and Planning
Lawrence J. McGrogan 58 Director
C. Robert Myers..... 77 Director
I. J. Reinhardt, Jr. 58 Director
H. Dean Reynolds.... 67 Director
John A. Trainor..... 66 Director
Scott C. Sullivan... 44 Proposed Director
Robert J. Doty...... 69 Proposed Director
Wayne L. Bismark.... 52 Executive Vice President
Charles J. Grako.... 42 Executive Vice President and Chief Financial
Officer
Robert B. Pennington 43 President, UnionBank/Sandwich
Everett J. Solon.... 43 President, UnionBank/Streator
The Company has a classified board of directors currently comprised of
eleven members, with directors serving staggered three-year terms. One class
is elected at each annual meeting of the Company's stockholders. The terms of
Messrs. Broadus, Daw, Lansford and Reinhardt as Class II directors expire in
1997; the terms of Messrs. Grigsby, Myers and Reynolds as Class III directors
expire in 1998; and the terms of Messrs. Berry, Breipohl, McGrogan and Trainor
as Class I directors expire in 1999. There are no family relationships among
any of the directors or executive officers of the Company or its subsidiaries.
Pursuant to the terms of the Prairie Acquisition Agreement, the Company has
agreed to add Messrs. Doty and Sullivan to its Board of Directors.
Each of the Company's directors is paid a fee of $100 for each board
meeting attended and $100 for each committee meeting attended. Each of the
Company's directors also receives an annual grant of options to purchase shares
of Common Stock under the Company's Stock Option Plan. Such grants are
generally made with an exercise price equal to 75% of the most recently
appraised per share fair market value of the Common Stock on the date of grant
and become exercisable in equal portions over five years. During the fiscal
year ended December 31, 1995, each director was granted options to purchase
between 1,800 and 2,550 shares of Common Stock at a price of $6.25 per share.
Beginning in 1997, the Stock Option Plan provides for annual formula grants to
each of the Company's directors of options to purchase up to 3,000 shares of
Common Stock with an exercise price of 75% of the then current market price of
the Common Stock on the date of the grant. See "Management -- Executive
Compensation -- Stock Option Plan."
DIRECTORS
R. SCOTT GRIGSBY is the Chairman of the Board and President of the Company
and the Chairman and Chief Executive Officer of UnionBank/Streator. Mr. Grigsby
also serves as Chairman of the Board of UnionBank/Sandwich and Union
Corporation, as well as a director of UnionData. Mr. Grigsby has been with the
Company since its formation in 1982. He has spent all of his career in the
financial services industry. Mr. Grigsby is a past president of the Illinois
Bankers Association and is currently involved extensively with the American
Bankers Association. He has been active in local and regional economic
development projects. He currently serves as a member of the Board of Directors
of St. Mary's Hospital, Streator, Illinois and as a Trustee of the Illinois
Valley Community College, LaSalle, Illinois.
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RICHARD J. BERRY is a principal and serves as the managing attorney for
the law firm of Myers, Daugherity, Berry & O'Conor, Ltd., with offices in both
Ottawa and Streator, Illinois. His practice is concentrated in the areas of
banking and financial institutions and civil litigation. Mr. Berry is a member
of the LaSalle County, American and Illinois Bar Associations, and of the
American Academy of Healthcare Attorneys. Mr. Berry was a charter member of
the Committee on Bank Counsel of the Illinois Bankers Association and served as
Chairman of that committee in 1988. He is a frequent lecturer and speaker at
various banking seminars and schools. He was granted special recognition in
1995 by the Illinois Bankers Association for his efforts on behalf of the
banking industry in negotiating and drafting of the Grain Code, a comprehensive
revision of Illinois laws relating to grain dealers and grain warehouses. Mr.
Berry is active in numerous civic and community affairs, including serving as a
director of the Streator Area Chamber of Commerce and Streator YMCA. He
presently serves on the board of directors of the New Hope Center and Streator
Unlimited in Streator, Illinois. Mr. Berry has served as a director of the
Company since 1985. He also serves on the Board of Directors and is counsel to
UnionBank/Streator and UnionData. He previously served as a director of
UnionBank/Sandwich.
WALTER E. BREIPOHL is the co-owner of Kaszynski/Breipohl Realtors, a real
estate brokerage and development company located in Ottawa and Peru, Illinois.
Mr. Breipohl's firm performs work throughout the state of Illinois. He is a
founding and charter member of the Illinois Commercial Association of Realtors,
a member of the Illinois Association of Realtors and the National Association
of Realtors. Mr. Breipohl has worked in economic development extensively in
the Ottawa, Illinois, area as a director of the Northern Illinois Development
Corporation, Chairman of the Ottawa Area Industrial Development Corporation and
the Greater Ottawa Area Chamber of Commerce. He is presently serving as a
director of the Heritage Corridor Convention and Visitors Bureau and the
Community Hospital of Ottawa, Illinois. Mr. Breipohl has served as a member of
the Boards of Directors of UnionBank/Streator and the Company since 1993.
L. PAUL BROADUS founded Broadus Oil Corporation, a wholesale and retail
oil company located in Streator, Illinois, in 1963, and he continues to serve
as its president. He is a member of the Illinois Petroleum Marketers
Association and the Illinois Association of Convenience Stores. He is a past
recipient of the Cephas Williams Award for long term service and investment
leadership to the city of Streator, Illinois. Mr. Broadus joined the board of
directors of UnionBank/Streator in 1985 and the Company's Board of Directors in
1986. He also serves as a director of UnionData.
JOHN MICHAEL DAW recently joined the Company as its Senior Agricultural
Representative after serving 27 years as President of Farmers Grain Service in
Grand Ridge, Illinois. He is a member of both the state and federal Grain and
Feed Associations. He is the past secretary of the Grand Ridge Zoning
Commission and a current director of the Grand Ridge Zoning Board. He also
serves as a director of the LaSalle County Health Department. Mr. Daw's
primary responsibility with the Company will be supervising the farm land
management operations of the Investment Management and Trust Services
Department. Mr. Daw has served as a member of the Boards of Directors of
UnionBank/Streator and the Company since 1990 and 1991, respectively. Mr. Daw
also serves as a director of UnionData.
JIMMIE D. LANSFORD recently joined the Company as Senior Vice President
after three decades of employment in the healthcare industry. For the last
nine years, Mr. Lansford served as Chief Executive Officer of St. Mary's
Hospital located in Streator, Illinois, which is a member of the Hospital
Sisters Health System, a thirteen hospital group serving Illinois and
Wisconsin. Mr. Lansford has been active as a member of the committee to bring
a National Veterans Cemetery to Joliet, Illinois, a life member of the VFW,
American Legion, Marine Corp League and AmVets. He has been a past member of
both regional, state and national healthcare associations. Having worked many
years in a multi-hospital organization, management expects Mr. Lansford to make
significant use of the planning and communication skills he brings with him
from his former employment. Mr. Lansford has served on the Boards of Directors
of the Company and UnionBank/Streator since 1988.
LAWRENCE J. MCGROGAN is the Chief Executive Officer of Handy Foods, Inc., a
four grocery chain based in Ottawa, Illinois. Mr. McGrogan has 33 years of
retail grocery experience and has lived in Ottawa, Illinois his entire life. He
has served on the Boards of Directors of the Company and UnionBank/Streator
since 1987. Mr. McGrogan is the past chairman of the Ottawa Area Chamber of
Commerce and Ottawa YMCA. He is a past recipient of the Leo Parkerson Award for
Outstanding Community Service in Ottawa, Illinois.
C. ROBERT MYERS is the retired Chief Executive Officer of Peabody Myers
Corporation. Peabody-Myers
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is a worldwide manufacturing company specializing in agricultural and
municipal pollution control and cleaning equipment with sales in excess of
$30,000,000 in 1989. Since his retirement from active business in 1982,
Mr. Myers has been involved in various civic and community activities. He is
a past recipient of the Cephas Williams Award for long term service and
investment leadership to the city of Streator, Illinois. He has been a
member of many state, national and international manufacturing associations.
He joined the Board of Directors of UnionBank/Streator in 1978 and served as
its Chairman from 1987 to 1994. He has served as a director of the Company
since its formation in 1981.
I. J. REINHARDT, JR. is a director and General Manager of St. Louis
Beverage Company, Ottawa, Illinois, a wholesale beverage distribution company.
After graduation from St. Louis University, Mr. Reinhardt spent two years in
Nepal working with the Peace Corps. He has been a member of the Associated
Beer Distributors of Illinois for 20 years and currently serves as its
president. He joined the Board of Directors of UnionBank/Streator and the
Company in 1990 and 1991, respectively. He also serves as a director of
UnionData.
H. DEAN REYNOLDS is the former owner and manager of Reynolds-West &
Associates, an insurance agency located in Streator, Illinois. Mr. Reynolds
operated the agency for 37 years. He has been active in civic and community
activities for many years, including serving as president of the Streator
Chamber of Commerce. He is a past recipient of the Cephas Williams Award for
long term service and investment leadership to the city of Streator, Illinois.
He has served on the board of the Illinois Chamber of Commerce and held
leadership positions in various state and national insurance associations. Mr.
Reynolds joined the Board of Directors of UnionBank/Streator and the Company in
1971 and 1981, respectively.
JOHN A. TRAINOR is the president and owner of Trainor Grain and Supply
Co., a grain elevator and agricultural supply business located in Forrest,
Illinois. Mr. Trainor has been involved in all aspects of the agriculture
industry since 1954. He has served on the board of both the state and federal
Grain and Feed Associations as well as serving as the State Association
President. He has represented the United States on numerous trips to foreign
countries to assist in their agricultural development. He has consulted with
the United States Department of Agriculture on various matters for many years.
Mr. Trainor joined the Board of Directors of UnionBank/Streator and the Company
in 1985.
OFFICERS
WAYNE L. BISMARK is the Executive Vice President and Chief Credit Officer
of the Company. Mr. Bismark joined the Company in 1994. Prior to joining the
Company, Mr. Bismark had been employed since 1983 in the Financial Institutions
Division of the LaSalle National Bank in Chicago, Illinois. He is responsible
for the overall performance of the Company's lending activities. Mr. Bismark
has worked in the banking industry for almost 25 years, with extensive
experience in lending and product sales at both the wholesale and retail
levels. Mr. Bismark serves as a director of a local social service agency and
is active in many civic organizations. He is also active in regional economic
development associations and professional banking organizations.
CHARLES J. GRAKO has been the Executive Vice President and Chief Financial
Officer of the Company since 1990. He also serves as Secretary of the Company
and UnionBank/Streator, and as a director of UnionBank/Sandwich. Mr. Grako is
a Certified Public Accountant and has spent the majority of his career in the
banking industry. He first joined the Company as Controller in 1986.
ROBERT B. PENNINGTON is the President of UnionBank/Sandwich, a position he
has held since 1981. Mr. Pennington has spent over 20 years in the financial
services industry after beginning his career as a supervisor in the consumer
loan business with Household Finance Company. Mr. Pennington currently serves
as a director of UnionBank/Sandwich. He has been active in community and civic
activities, including serving as President of the Sandwich Chamber of Commerce
and as a member of various economic development committees. He was a charter
member and the first president of the Sandwich Jaycees and the Sandwich Kiwanis
Club.
EVERETT J. SOLON is the President of UnionBank/Streator. Mr. Solon has
been with the Company for 14 years during which time much of his work has
focused on agricultural lending, farm management and marketing. He became
president of UnionBank/Streator in 1994. Mr. Solon has been active in
community activities, especially in the field of education. He has served for
many years as a director of the Streator Township High School District. He has
also worked as a director and instructor for the Illinois Bankers Association
School of Banking. He has
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served on the Board of Directors of UnionBank/Streator since 1994.
PROPOSED DIRECTORS
ROBERT J. DOTY is the retired President and Chief Executive Officer of the
First National Bank, Manlius, Illinois. He has over 36 years of experience in
the banking industry. Prior to the Prairie Acquisition, Mr. Doty had served as
Chairman of the Board of Directors of Prairie since 1989.
SCOTT C. SULLIVAN is a partner of the law firm of Williams & McCarthy,
Rockford, Illinois. Mr. Sullivan has been a practicing attorney since 1979.
He is a member of several national, state and regional bar associations. Prior
to the Prairie Acquisition, he had served as a director of Prairie since 1995,
and he currently serves as a director of two of the Prairie Banks. Mr.
Sullivan is active in numerous civil and community activities in the Rockford
area.
EXECUTIVE COMPENSATION
CASH COMPENSATION
The table below shows the compensation earned during the last three fiscal
years by the Company's President and the other executive officers of the Company
(including those who are employed by the Company's subsidiaries) whose cash
compensation exceeded $100,000 during the fiscal year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------------
(A) --------------------- (G) (I)
NAME AND SECURITIES ALL OTHER
PRINCIPAL POSITION (B) (C) (D) UNDERLYING COMPENSATION
WITH THE COMPANY YEAR SALARY($) BONUS($) OPTIONS/SARS (#)(1) ($)(2)
=======================================================================================
R. Scott Grigsby,
Chairman of the
Board, President 1995 $142,000 $12,800 3,036 $21,832
and Chief 1994 127,952 23,725 6,900 24,855
Executive Officer 1993 119,800 24,250 --- 22,231
Charles J. Grako,
Executive Vice 1995 $94,500 $7,676 1,080 $14,929
President and Chief 1994 71,459 9,000 2,500 13,810
Financial Officer 1993 60,000 11,900 --- 11,665
Wayne L. Bismark,
Executive Vice 1995 $94,500 $7,675 1,080 $12,895
President and Chief 1994 75,000 7,500 --- ---
Credit Officer 1993 75,000 8,900 --- ---
(1) Options vest at a rate of 20% per year on or about each anniversary of
the date of grant.
(2) Amounts shown represent the dollar value of allocations to each officer
under the Company's Employee Stock Ownership Plan for Messrs. Grigsby and
Grako. Such amounts also include annual payments of $2,901 and $2,034 for
premiums for split dollar life insurance policies for Messrs. Grigsby and
Grako, respectively.
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STOCK OPTION INFORMATION
The following table sets forth certain information concerning the number
and value of stock options granted in the last fiscal year to the individuals
named above in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
FOR OPTION TERM
======================================================================================================================
(A) (B) (C) (D) (E) (F) (G) (H)
% OF TOTAL OPTIONS
NAME AND PRINCIPAL OPTIONS GRANTED TO
POSITION THE GRANTED EMPLOYEES IN FISCAL EXERCISE OR BASE EXPIRATION
COMPANY (#)(1) YEAR PRICE ($/SH) DATE 5%($) 10%($) 0%($)
======================================================================================================================
R. Scott Grigsby,
Chairman of the
Board, President
and Chief Executive 1,536 5.1% $8.33 1/15/05 $8,046 $20,391 $ -0-
Officer 1,500 5.0% 6.25 1/15/05 10,978 23,033 3,120
Charles J. Grako,
Executive Vice
President and Chief
Financial Officer 1,080 3.6% $8.33 1/15/05 $5,658 $14,338 $ -0-
Wayne L. Bismark,
Executive Vice
President and Chief
Credit Officer 1,080 3.6% $8.33 1/15/05 $5,658 $14,338 $ -0-
- ---------------
(1) Options vest at a rate of 20% per year on or about each anniversary of
the date of grant.
STOCK OPTION PLAN
INTRODUCTION
The Board of Directors of the Company has adopted a stock incentive plan
known as the UnionBancorp, Inc. 1993 Stock Option Plan (the "Stock Option
Plan"). The Stock Option Plan is intended to promote equity
ownership of the Company by directors of the Company and selected officers and
employees of the Company and its subsidiaries, to increase their proprietary
interest in the success of the Company and to encourage them to remain in the
employ of the Company. The Stock Option Plan was approved by the Company's
stockholders on April 12, 1993, and an amendment to the Stock Option Plan was
approved on July 19, 1996.
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ADMINISTRATION
The Stock Option Plan is administered by the UnionBancorp, Inc. 1993 Stock
Option Plan Administrative Committee which is comprised of at least two
non-employee directors appointed by the Company's Board of Directors (the
"Stock Option Committee"). The Stock Option Committee has the authority,
subject to approval by the Board of Directors, to select the employees to whom
awards may be granted, to determine the terms of each award and, subject to
approval of the Company's Board of Directors, to interpret the provisions of
the Stock Option Plan and to make all other determinations that it may deem
necessary or advisable for the administration of the Stock Option Plan. The
Stock Option Plan is intended to be administered so as to comply with the
provisions of Rule 16b-3 promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act").
The Stock Option Plan provides for the grant of "incentive stock options,"
as defined under Section 422(b) of the Internal Revenue Code of 1986, as
amended, options that do not so qualify (referred to as "nonstatutory options")
and stock appreciation rights ("SARs"), as determined in each individual case
by the Stock Option Committee. The Board of Directors has reserved 600,000
shares of Common Stock for issuance under the Stock Option Plan. In general,
if any award (including an award granted to a non-employee director) granted
under the Stock Option Plan expires, terminates, is forfeited or is cancelled
for any reason, the shares of Common Stock allocable to such award may again be
made subject to an award granted under the Stock Option Plan.
AWARDS
Directors and key policy-making employees of the Company and its
subsidiaries are eligible to receive grants under the Stock Option Plan.
Directors may be granted nonstatutory options and employees may be granted
incentive and nonstatutory options. Awards may be granted subject to a vesting
requirement and in any event will become fully vested upon a merger or change
of control of the Company. The exercise price of incentive stock options
granted under the Stock Option Plan must at least equal the fair market value
of the Common Stock subject to the option on the date the option is granted.
The exercise price of nonstatutory options and SARs are determined by the Stock
Option Committee. The Stock Option Plan provides for an annual formula grant
for each director. The formula used to determine the exact grant to be made to
each director is based upon a series of factors that may be weighted
differently each year depending upon the issues then facing the Company, but in
no event will the formula grant exceed 3,000 shares per year. The Stock Option
Plan provides that option grants to directors will have an exercise price of
75% of the then current market price of Common Stock on the date of the grant.
An incentive stock option granted under the Stock Option Plan to an
employee owning more than 10% of the total combined voting power of all classes
of capital stock of the Company is subject to the further restriction that such
option must have an exercise price of at least 110% of the fair market value of
the shares of Common Stock issuable upon exercise of the option (determined as
of the date the option is granted) and may not have an exercise term of more
than five years. Incentive stock options are also subject to the further
restriction that the aggregate fair market value (determined as of the date of
grant) of Common Stock as to which any such incentive stock option first
becomes exercisable in any calendar year is limited to $100,000. To the extent
options covering more than $100,000 worth of Common Stock become exercisable in
any one calendar year, the excess will be nonstatutory options. For purposes
of determining which, if any, options have been granted in excess of the
$100,000 limit, options will be considered to become exercisable in the order
granted.
Each director and key employee eligible to participate in the Stock Option
Plan is notified by the Stock Option Committee. To receive an award under the
Stock Option Plan, an award agreement must be executed which specifies the type
of award to be granted, the number of shares of Common Stock (if any) to which
the award relates, the terms and conditions of the award and the date granted.
In the case of an award of options, the award agreement also specifies the
price at which the shares of Common Stock subject to the option may be
purchased, the date(s) on which the option becomes exercisable and whether the
option is an incentive stock option or a nonstatutory option.
The full exercise price for all shares of Common Stock purchased upon the
exercise of options granted under the Stock Option Plan must be paid in any one
or a combination of cash, personal check, personal note, award surrender or
Common Stock owned at the time of exercise. Incentive stock options granted to
employees under the Stock Option Plan may remain outstanding and exercisable
for ten years from the date of grant or until the expiration of three months
(or such greater period, up to one year, as the Stock Option Committee may
determine
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if employment is terminated due to disability) from the date on which
the person to whom they were granted ceases to be employed by the Company.
Nonstatutory options and SARs granted under the Stock Option Plan remain
outstanding and exercisable for such period as the Stock Option Committee may
determine.
Awards of options to purchase an aggregate of 109,650 shares of Common
Stock have been made by the Stock Option Committee pursuant to the Stock Option
Plan as of this date of this Prospectus.
INCOME TAX
No taxable income is recognized by the option holder for income tax
purposes at the time of the grant or exercise of an incentive stock option, nor
is there any income tax deduction available to the Company as a result of such
a grant or exercise. Any gain or loss recognized by an option holder on the
later disposition of shares of Common Stock acquired pursuant to the exercise
of an incentive stock option generally will be treated as capital gain or loss
if such disposition does not occur prior to one year after the date of exercise
of the option, or two years after the date the option was granted.
As in the case of incentive stock options, the grant of nonstatutory stock
options or SARs will not result in taxable income for income tax purposes to
the recipient of the awards, nor will the Company be entitled to an income tax
deduction. Upon the exercise of nonstatutory stock options or SARs, the award
holder will generally recognize ordinary income for income tax purposes equal
to the difference between the exercise price and the fair market value of the
shares of Common Stock acquired or deemed acquired on the date of exercise, and
the Company will be entitled to an income tax deduction in the amount of the
ordinary income recognized by the option holder. In general, any gain or loss
realized by the option holder on the subsequent disposition of such shares will
be a capital gain or loss.
AMENDMENT AND TERMINATION
The Stock Option Plan expires ten years after its adoption, unless sooner
terminated by the Board of Directors. The Board of Directors has authority to
amend the Stock Option Plan in such manner as it deems advisable, except that
the Board of Directors is not permitted without stockholder approval to amend
the plan in a manner which would prevent the grant of incentive stock options
or increase the number of shares of Common Stock available. The Stock Option
Plan provides for appropriate adjustment, as determined by the Stock Option
Committee, in the number and kind of shares and the number, kind and per share
exercise price of shares subject to unexercised options, in the event of any
change in the outstanding shares of Common Stock by reason of a stock split,
stock dividend, combination or reclassification of shares, recapitalization,
merger or similar event.
EMPLOYMENT AGREEMENTS
The Company and certain of its subsidiaries have entered into three-year
employment agreements with Messrs. Grigsby, Bismark, Grako and Solon, and
two-year agreements with Messrs. Daw and Lansford. Unless earlier terminated
by the Company (or the subsidiary, if applicable) or the respective employee,
the employment term under each agreement extends for an additional year on each
anniversary of the agreement. Each agreement specifies a minimum annual salary
for the initial year of the agreement and provides for an automatic minimum
four percent annual increase for each subsequent year. Each agreement also
provides that the respective employee is entitled to participate in any
executive bonus plan and other incentive compensation or benefit plan
established by the Company or the applicable subsidiary.
Each agreement is terminable by the employee upon thirty days' prior
written notice and automatically terminates upon the death or disability of the
employee. The Company may terminate each agreement at any time for "cause"
without incurring any additional obligations. Each agreement provides
severance benefits in the event the employee is terminated without cause or
"constructively discharged," as defined in each agreement. The severance
benefits are equal to the salary and benefits the terminated employee would
have received through the end of the normal term of the agreement. If any of
the employment agreements is terminated in connection with a "change in
control," as defined in each agreement, the employee is entitled to receive
severance compensation equal to three times his annual salary and other
compensation at the rates then in effect at the time of termination. The
terminated employee in such case will also be entitled to continuation of
participation in other benefit plans for the remaining term of his agreement.
If a change of control had occurred on June 30, 1996, based upon 1996 salary
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and 1995 bonus information, the amount payable with respect to salary and bonus
would have been approximately as follows: Mr. Grigsby, $485,700; Mr. Bismark,
$320,700; Mr. Grako, $320,703; Mr. Daw, $144,000; Mr. Lansford, $240,000; and
Mr. Solon, $260,000. In addition, each officer would be entitled to receive
other benefits for such periods. The employment agreements also require the
Company to provide each employee with indemnification insurance and
indemnification for any expenses arising out of each person's employment with
the Company or the applicable subsidiary.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information as of August 7, 1996,
concerning the Common Stock beneficially owned by: (i) each person expected by
the Company to beneficially own more than 5% of the outstanding Common Stock
following this Offering; (ii) each of the Company's current and proposed
directors, and those executive officers of the Company named in the Summary
Compensation Table; and (iii) all such directors, proposed directors and
executive officers of the Company as a group. The Company's only class of
voting securities is the Common Stock, except, however, under certain
circumstances the outstanding shares of Preferred Stock may also be entitled to
vote on certain matters.
EXPECTED
PERCENT OF NUMBER OF PERCENT OF
NUMBER OF CLASS PRIOR TO SHARES AFTER CLASS AFTER THIS
NAME OF BENEFICIAL OWNER SHARES(1)(2) THIS OFFERING THIS OFFERING(1)(2) OFFERING
- ------------------------ ------------ ------------- ------------------- -----------------
5% STOCKHOLDERS
UnionBank/Streator, as Trustee
for the UnionBancorp, Inc.
Employee Stock Ownership Plan
("ESOP")(3)
201 East Main Street
Streator, Illinois 61364........... 450,918 14.4% 538,118 13.6%
Dennis J. McDonnell(4)
One Parkview Plaza
Oakbrook Terrace, Illinois 60181.. 355,288 12.5 355,288 9.0
Wayne W. Whalen(4)
333 W. Wacker Drive, Suite 2100
Chicago, Illinois 60606........... 355,288 12.5 355,288 9.0
DIRECTORS
Richard J. Berry(5)................ 25,023 0.9 30,023 0.8
Walter E. Breipohl................. 9,684 0.3 11,184 0.3
L. Paul Broadus.................... 17,019 0.6 18,019 0.5
John Michael Daw................... 15,960 0.6 17,960 0.5
R. Scott Grigsby(6)................ 771,479 27.0 772,479 19.4
Jimmie D. Lansford................. 12,384 0.4 14,384 0.4
Lawrence J. McGrogan(7)............ 20,508 0.7 22,008 0.6
C. Robert Myers(8)................. 35,520 1.3 35,520 0.9
I. J. Reinhardt, Jr(9)............. 11,370 0.4 13,370 0.3
H. Dean Reynolds(10)............... 24,870 0.9 25,870 0.7
John A. Trainor(11)................ 18,984 0.7 20,484 0.5
PROPOSED DIRECTORS
Robert Doty (12)................... -- -- -- --
Scott Sullivan (12)................ -- -- -- --
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PERCENT OF NUMBER OF PERCENT OF
NUMBER OF CLASS PRIOR TO SHARES AFTER CLASS AFTER THIS
NAME OF BENEFICIAL OWNER SHARES(1)(2) THIS OFFERING THIS OFFERING(1)(2) OFFERING
- ------------------------ ------------ ------------- ------------------- -----------------
NAMED EXECUTIVE OFFICERS
Charles J. Grako................. 21,049 0.7 22,049 0.6
Wayne L. Bismark................. 4,716 0.2 6,016 0.2
All directors, proposed
directors and executive
officers as a group (17
persons)(13)..................... 1,036,053 36.1 1,058,853 26.7
- -----------------
(1) The information contained in this column is based upon information
furnished to the Company by the persons named above and the members of the
designated group and reflects the three-for-one stock split in the form of
a stock dividend which took effect on May 20, 1996. Amounts reported
include shares held directly as well as shares which are held in
retirement account and shares held by certain members of the named
individuals' families or held by trusts of which the named individual is
a trustee or substantial beneficiary, with respect to which shares the
respective individual may be deemed to have sole or shared voting and/or
investment power. The nature of beneficial ownership for shares shown in
this column is sole voting and investment power, except as set forth in
the footnotes below. Inclusion of shares shall not constitute an
admission of beneficial ownership or voting and investment power over
included shares.
(2) Includes an aggregate of 32,400 shares held by the Filly Street Trust, an
Illinois general partnership (the "Partnership"), the partnership
interests of which are wholly owned by certain of the Company's directors
and officers. Voting and investment power over these shares is shared by
Messrs. Berry, Broadus, Breipohl, Grigsby, Daw, Lansford, McGrogan and
Trainor who, based upon the current holdings of the partners of the
Partnership, each indirectly own 3,564 of such shares. Mr. Grako also has
an interest in the partnership amounting to indirect ownership of 340 of
such shares. The balance of the interests in such shares are held by an
individual who is not a director or officer of the Company. The
information also includes shares presently obtainable through the exercise
of options to purchase shares of common stock granted under the Company's
Stock Option Plan as follows: Mr. Berry - 1,020 shares; Mr. Breipohl -
1,020 shares; Mr. Broadus - 870 shares; Mr. Daw - 1,020 shares; Mr.
Grigsby - 3,367 shares; Mr. Lansford - 1,020 shares; Mr. McGrogan -
1,020 shares; Mr. Myers - 1,020 shares; Mr. Reinhardt - 870 shares; Mr.
Reynolds - 870 shares; Mr. Trainor - 1,020 shares; Mr. Grako - 1,296
shares; and Mr. Bismark - 216 shares. Option holders have the sole power
to exercise their respective options and would also be entitled to
exercise sole voting and investment power over the shares issued upon the
exercise of such options.
(3) Includes 442,467 shares held by the ESOP but which are allocated to
particular participants' accounts, over which shares the trustee of the
ESOP has shared voting and no investment power.
(4) Messrs. McDonnell and Whalen have sole investment power over such shares.
Pursuant to the terms of the Standstill Agreement executed by the Company
and these individuals, the President of the Company has a limited proxy
with respect to such shares until August 6, 2000.
(5) Includes 13,800 shares held jointly by Mr. Berry and his spouse, 3,000
shares held individually by Mr. Berry's spouse and 3,639 shares held in
trusts for which Mr. Berry is a co-trustee, over all of which shares Mr.
Berry has shared voting and investment power.
(6) Includes 710,576 shares over which Mr. Grigsby, as President of the
Company, is entitled to exercise a limited proxy pursuant to the Standstill
Agreement between the Company and the Principal Prairie Stockholders.
Also includes 17,853 shares held by Mr. Grigsby jointly with his spouse,
over which shares Mr. Grigsby has shared voting and investment power, 105
shares held solely by Mr. Grigsby's spouse, over which shares Mr. Grigsby
has no voting or investment power, and 32,412 shares allocated to Mr.
Grigsby under the Company's ESOP.
(7) Includes 11,040 shares held by Mr. McGrogan jointly with his spouse, over
which shares Mr. McGrogan has shared voting and investment power, and also
includes 1,884 shares owned solely by his spouse, over which shares Mr.
McGrogan has no voting or investment power.
(8) Includes 17,250 shares held solely by Mr. Myers' spouse, over which
shares Mr. Myers has no voting or investment power.
(9) Includes 4,500 shares held by Mr. Reinhardt jointly with his spouse and
3,000 shares held in a retirement account, over all of which shares Mr.
Reinhardt has shared voting and investment power.
(10) Includes 1,200 shares held by the mother of Mr. Reynolds, over which
shares Mr. Reynolds has shared voting and investment power.
(11) Includes 1,200 shares held solely by Mr. Trainor's spouse, over which
shares Mr. Trainor has no voting or investment power.
(12) Messrs. Doty and Sullivan will become directors of the Company pursuant
to the terms of the Prairie Acquisition.
(13) Includes 710,576 shares over which Mr. Grigsby, as President of the
Company, is entitled to exercise a limited proxy pursuant to the Standstill
Agreement between the Company and the Principal Prairie Stockholders.
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The directors, executive officers and affiliates of the Company have
indicated their intention to purchase in the aggregate, approximately 110,000
shares or 10% (8.7% if the Underwriter's over-allotment option is exercised in
full) of the Common Stock to be offered in this Offering. The largest total
number of shares expected to be purchased by any single director, executive
officer or affiliate is approximately 5,000 shares or 0.5% (0.4% if the
Underwriters' over-allotment option is exercised in full) of the Common Stock
to be offered in this Offering. If 110,000 shares of Common Stock to be
offered in this Offering are in fact purchased by the directors, executive
officers and affiliates of the Company as a group, they will then own a
combined total of approximately 1,596,971 shares, or 40.4% of Common Stock
outstanding after this Offering (38.8% if the proposed Underwriters'
over-allotment option is exercised in full). The number of shares and
percentages owned as discussed above include certain shares owned by spouses,
children, as custodian or trustee, and options exercisable within 60 days.
SUPERVISION AND REGULATION
GENERAL
The growth and earnings performance of the Company and the Bank
Subsidiaries can be affected not only by management decisions and general
economic conditions, but also by the policies of various governmental
regulatory authorities including, but not limited to, the FRB, the Office of
the Comptroller of the Currency (the "OCC"), the FDIC, the Illinois
Commissioner, the Internal Revenue Service and state taxing authorities and the
Securities and Exchange Commission (the "SEC"). Financial institutions and
their holding companies are extensively regulated under federal and state law.
The effect of such statutes, regulations and policies can be significant, and
cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and the Bank Subsidiaries, regulate, among
other things, the scope of business, investments, reserves against deposits,
capital levels relative to operations, the nature and amount of collateral for
loans, the establishment of branches, mergers, consolidations and dividends.
The system of supervision and regulation applicable to the Company and the Bank
Subsidiaries establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds and the depositors, rather than the stockholders, of financial
institutions.
The following references to material statutes and regulations affecting
the Company and the Bank Subsidiaries are brief summaries thereof and do not
purport to be complete and are qualified in their entirety by reference to such
statutes and regulations. Any change in applicable law or regulations may have
a material effect on the business of the Company and the Bank Subsidiaries.
RECENT REGULATORY DEVELOPMENTS
On August 8, 1995, the FDIC amended its regulations to change the range of
deposit insurance assessments charged to members of the BIF from the
then-prevailing range of .23% to .31% of deposits, to a range of .04% to .31%
of deposits. On November 14, 1995, the FDIC further reduced the deposit
insurance assessments for BIF-member institutions, such that the range of BIF
assessments for the semi-annual assessment period which commenced January 1,
1996, is between 0% and .27% of deposits. BIF-member institutions which
qualify for the 0% assessment category will, however, still have to pay the
$1,000 minimum semi-annual assessment required by federal statute. The Bank
Subsidiaries are all members of the BIF.
Various proposals have been introduced in Congress that, if adopted,
would, among other things, ultimately require federal thrift institutions to
convert to state or national banks and merge the BIF and the Savings
Association Insurance Fund (the "SAIF"), which insures the accounts of savings
associations, into a single deposit insurance fund administered by the FDIC.
This pending legislation would also require the BIF and the SAIF to share, on a
pro rata basis according to the amount of deposits insured by each fund, the
cost of repaying the obligations issued in the late 1980's to recapitalize the
Federal Savings and Loan Insurance Corporation, the SAIF's predecessor
insurance fund. At this time, it is not possible to predict whether, or in
what form, any such legislation will be adopted or the impact such legislation
would have on the Company or the Bank Subsidiaries.
THE COMPANY
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GENERAL
The Company, as the sole stockholder of the Union Banks; Prairie, as the
sole or controlling stockholder of each of the Prairie Banks; and Country, as
the sole stockholder of Omni Bank, are each bank holding companies. As bank
holding companies, each of the Company, Prairie and Country are registered
with, and subject to regulation by, the FRB under the BHCA. Under FRB policy,
a bank holding company is expected to act as a source of financial strength to
its bank subsidiaries and to commit resources to support its bank subsidiaries
in circumstances where the holding company might not do so absent such policy.
Under the BHCA, a bank holding company is subject to periodic examination by
the FRB and is required to file periodic reports of its operations and such
additional information as the FRB may require.
The Company, Prairie and Country are also subject to the requirements of
the Illinois Bank Holding Company Act.
INVESTMENTS AND ACTIVITIES
Under the BHCA, a bank holding company must obtain FRB approval before:
(i) acquiring, directly or indirectly, ownership or control of any voting
shares of another bank or bank holding company if, after such acquisition, it
would own or control more than 5% of such shares (unless it already owns or
controls the majority of such shares); (ii) acquiring all or substantially all
of the assets of another bank or bank holding company; or (iii) merging or
consolidating with another bank holding company.
Prior to September 29, 1995, the BHCA prohibited the FRB from approving
any direct or indirect acquisition by a bank holding company of more than 5% of
the voting shares, or of all or substantially all of the assets, of a bank
located outside of the state in which the operations of the bank holding
company's banking subsidiaries were principally located unless the laws of the
state in which the bank to be acquired is located specifically authorized such
an acquisition. Pursuant to amendments to the BHCA which took effect September
29, 1995, a bank holding company may now acquire banks located in any state of
the United States without regard to geographic restrictions or reciprocity
requirements imposed by state law, subject to certain conditions, including
limitations on the aggregate amount of deposits that may be held by the
acquiring bank holding company and all of its insured depository institution
affiliates.
The BHCA also prohibits, with certain exceptions noted below, a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any company which is not a bank and from
engaging in any business other than that of banking, managing and controlling
banks or furnishing services to banks and their subsidiaries, except that bank
holding companies may engage in, and may own shares of companies engaged in,
certain businesses found by the FRB to be "so closely related to banking . . .
as to be a proper incident thereto." Under current regulations of the FRB, such
banking-related businesses include the operation of a thrift, sales and consumer
finance, equipment leasing, the operation of a computer service bureau,
including software development, and mortgage banking and brokerage.
CAPITAL REQUIREMENTS
The FRB uses capital adequacy guidelines in its examination and regulation
of bank holding companies. If capital falls below minimum guideline levels, a
bank holding company, among other things, may be denied approval to acquire or
establish additional banks or non-bank businesses. Such ratios do not apply to
a bank holding company with less than $150 million of consolidated assets, such
as Country.
The FRB's capital guidelines establish the following minimum regulatory
capital requirements for bank holding companies: a risk-based requirement
expressed as a percentage of total risk-weighted assets, and a leverage
requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, of which at least one-half must be Tier 1 capital (which consists
principally of stockholders' equity). The leverage requirement consists of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated
companies, with minimum requirements of 4% to 5% for all others.
The risk-based and leverage standards presently used by the FRB are
minimum requirements and higher capital levels will be required if warranted by
the particular circumstances or risk profiles of individual banking
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organizations. Further, any banking organization experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions (i.e., Tier 1 capital less all intangible assets),
well above the minimum levels.
As of June 30, 1996, the Company and Prairie each had regulatory capital
in excess of the FRB's minimum requirements, as set forth below.
LEVERAGE RISK-BASED
RATIO RATIO
----- -----
Company.......... 7.92% 12.54%
Prairie.......... 5.11% 14.76%
DIVIDENDS
The FRB has issued a policy statement on the payment of cash dividends by
bank holding companies. In the policy statement, the FRB expressed its view
that a bank holding company experiencing earnings weakness should not pay cash
dividends exceeding its net income or which could only be funded through
methods which would weaken the bank holding company's financial health, such as
borrowing. Additionally, the FRB possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable statutes
and regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies.
In addition to the restrictions on dividends imposed by the FRB, the DGCL
only permits the Company to pay dividends out of its surplus, or if the Company
has no such surplus, out of its net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. Under the Illinois
Business Corporation Act, as amended, an Illinois corporation such as Prairie
or Country is prohibited from paying dividends if, after giving effect to the
dividend, the corporation would be insolvent or the net assets of the
corporation would be less than zero or less than the maximum amount then
payable to stockholders of the corporation who would have preferential
distribution rights if the corporation were liquidated.
THE BANK SUBSIDIARIES
GENERAL
Each of the Ferris Bank, the Hanover Bank, the Ladd Bank, the Tiskilwa
Bank and Omni Bank (collectively the "State Banks") is an Illinois-chartered
bank, the deposit accounts of which are insured by the BIF. As BIF-insured and
Illinois-chartered banks, the State Banks are subject to the examination,
supervision, reporting and enforcement requirements of the FDIC, as
administrator of the BIF, and the Illinois Commissioner, as the chartering
authority for Illinois banks.
The Union Banks are Illinois-chartered banks, the deposit accounts of
which are insured by the BIF, and are also members of the Federal Reserve
System. As Illinois-chartered and FDIC-insured member banks, the Union Banks
are subject to the examination, supervision, reporting and enforcement
requirements of the Illinois Commissioner, as the chartering authority for
Illinois banks, the FRB, as the primary federal regulator of its member banks,
and the FDIC, as administrator of the BIF.
The Manlius Bank and Tampico Bank (collectively the "National Banks") are
national banks, chartered by the OCC under the National Bank Act. The deposit
accounts of the National Banks are insured by the BIF, and each of the National
Banks is a member of the Federal Reserve System. As BIF-insured national
banks, the National Banks are subject to the examination, supervision,
reporting and enforcement requirements of the OCC, as the chartering authority
for national banks, and the FDIC, as administrator of the BIF.
DEPOSIT INSURANCE
As FDIC-insured institutions, the Bank Subsidiaries are required to pay
deposit insurance premium assessments
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to the FDIC. The amount an institution pays for FDIC deposit insurance
coverage is determined in accordance with a risk-based assessment system
under which each insured depository institution is placed into one of nine
categories and assessed insurance premiums based upon its level of capital
and the results of supervisory evaluations. Institutions classified as
well-capitalized (as defined by the FDIC) and considered healthy are assessed
at the lowest rate while institutions that are less than adequately
capitalized (as defined by the FDIC) and considered of substantial
supervisory concern are assessed at the highest rate. For the semi-annual
assessment period ended December 31, 1995, BIF assessments for all insured
institutions ranged from 0.04% to 0.31% of deposits. For the semi-annual
assessment period which began January 1, 1996, BIF assessments ranged from a
minimum of $1,000 to 0.27% of deposits. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order or any condition imposed in writing by, or included in a
written agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of insurance
if the institution has no tangible capital. Management of the Company is not
aware of any activity or condition that could result in termination of the
deposit insurance of any Bank Subsidiaries.
CAPITAL REQUIREMENTS
Under federal regulations, the Bank Subsidiaries are subject to the
following minimum capital standards: a leverage requirement consisting of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated
banks with minimum requirements of 4% to 5% for all others, and a risk-based
capital requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital.
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, federal regulations
provide that additional capital may be required to take adequate account of the
risks posed by concentrations of credit and nontraditional activities, interest
rate risk and the institution's ability to manage such risks.
None of the Bank Subsidiaries has been required by its primary federal
regulator to increase its capital to an amount in excess of the minimum
regulatory requirement. As of June 30, 1996, each of the Bank Subsidiaries
exceeded its minimum regulatory capital requirements, as set forth below:
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LEVERAGE RISK-BASED
RATIO RATIO
-------- ----------
UnionBank/Streator 9.17% 14.37%
UnionBank/Sandwich 7.06% 11.60%
Ferris Bank....... 6.81% 17.39%
Hanover Bank...... 8.43% 20.66%
Ladd Bank......... 7.57% 14.65%
Manlius Bank...... 7.09% 15.75%
Tampico Bank...... 6.96% 17.48%
Tiskilwa Bank..... 7.43% 15.46%
Omni Bank......... 6.59% 11.09%
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Depending upon the capital category to which an institution
is assigned, the regulators' corrective powers include: requiring the
submission of a capital restoration plan; placing limits on asset growth and
restrictions on activities; requiring the institution to issue additional
capital stock (including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the interest rate the
institution may pay on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or directors be
dismissed; prohibiting the institution from accepting deposits from
correspondent banks; requiring the institution to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated debt; and
ultimately, appointing a receiver for the institution.
Additionally, institutions insured by the FDIC may be liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with the default of commonly controlled FDIC insured depository institutions or
any assistance provided by the FDIC to commonly controlled FDIC insured
depository institutions in danger of default.
DIVIDENDS
Under the Illinois Banking Act, Illinois-chartered banks may not pay,
without prior regulatory approval, dividends in excess of their adjusted
profits. Federal law also imposes limitations on the amount of dividends that
a state member bank, such as one of the Union Banks, or a national bank, such
as one of the National Banks, may pay without prior regulatory approval.
Generally, the amount is limited to the current year's net earnings of the bank
plus the adjusted retained earnings for the two preceding years.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations. As described above,
the Company, Prairie, Country and the Bank Subsidiaries each exceeded its
minimum capital requirements under applicable guidelines as of June 30, 1996.
As of such date, approximately $6.78 million was available to be paid as
dividends by the Bank Subsidiaries.
INSIDER TRANSACTIONS
The Bank Subsidiaries are subject to certain restrictions imposed by the
Federal Reserve Act on any extensions of credit to the Company, Prairie,
Country and their subsidiaries, on investments in the stock or other securities
of the Company, Prairie, Country and their subsidiaries and the acceptance of
the stock or other securities of the Company, Prairie, Country and their
subsidiaries as collateral for loans. Certain limitations and reporting
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requirements are also placed on extensions of credit by the Bank Subsidiaries
to their respective directors and officers, to directors and officers of the
Company, Prairie, Country and their subsidiaries, to principal stockholders of
the Company, Prairie and Country, and to "related interests" of such directors,
officers and principal stockholders. In addition, such legislation and
regulations may affect the terms upon which any person becoming a director or
officer of the Company, Prairie, Country or one of their subsidiaries or a
principal stockholder of the Company may obtain credit from banks with which
one of the Bank Subsidiaries maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS
On July 10, 1995, the federal banking regulators published final
guidelines establishing operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines, which took effect on August 9, 1995, establish standards for
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
compensation, fees and benefits. In general, the guidelines prescribe the
goals to be achieved in each area and each institution is responsible for
establishing its own procedures to achieve those goals. If an institution
fails to comply with any of the standards set forth in the guidelines, the
institution's primary federal regulator may require the institution to submit a
plan for achieving and maintaining compliance. The preamble to the guidelines
states that the agencies expect to require a compliance plan from an
institution where the failure to meet one or more of the standards is of such
severity that it could threaten the safe and sound operation of the
institution. Failure to submit an acceptable compliance plan, or failure to
adhere to a compliance plan that has been accepted by the appropriate
regulator, constitutes grounds for further enforcement action. The federal
banking agencies have also published for comment proposed asset quality and
earnings standards which, if adopted, would be added to the safety and
soundness guidelines. This proposal, like the final guidelines, would
establish the goals to be achieved with respect to asset quality and earnings,
and each institution would be responsible for establishing its own procedures
to meet such goals.
BRANCHING AUTHORITY
Illinois-chartered banks, such as the Union Banks and the State Banks,
have the authority under Illinois law to establish branches anywhere in the
state of Illinois, subject to receipt of all required regulatory approvals.
Federal law grants the same branching authority to the National Banks.
Effective June 1, 1997 (or earlier if expressly authorized by applicable state
law), the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act") allows banks to establish interstate branch networks
through acquisitions of other banks, subject to certain conditions, including
certain limitations on the aggregate amount of deposits that may be held by the
surviving bank and all of its insured depository institution affiliates. The
establishment of de novo interstate branches or the acquisition of individual
branches of a bank in another state (rather than the acquisition of an
out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if
specifically authorized by state law. The legislation allows individual states
to "opt-out" of certain provisions of the Riegle-Neal Act by enacting
appropriate legislation prior to June 1, 1997. Illinois has enacted
legislation permitting interstate bank mergers beginning on June 1, 1997.
STATE BANK ACTIVITIES
Under federal law, as implemented by final regulations adopted by the
FDIC, FDIC insured state banks are prohibited, subject to certain exceptions,
from making or retaining equity investments of a type, or in an amount, that
are not permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary, respectively, unless
the bank meets, and continues to meet, its minimum regulatory capital
requirements and the FDIC determines the activity would not pose a significant
risk to the deposit insurance fund of which the bank is a member.
Impermissible investments and activities must be divested or discontinued
within certain time frames set by the FDIC. These restrictions have not had,
and are not currently expected to have, a material impact on the operations of
the Bank Subsidiaries.
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DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The authorized capital stock of the Company presently consists of
10,000,000 shares of Common Stock, par value $1.00 per share, and 200,000
shares of Preferred Stock, no par value.
COMMON STOCK
As of June 30, 1996, the Company had issued and outstanding 2,131,737
shares of Common Stock. All outstanding shares of Common Stock are, and the
shares offered hereby will be, fully paid and nonassessable. The holders of
Common Stock are entitled to one vote for each share held of record on all
matters to be voted upon by stockholders and may not cumulate votes for the
election of directors. Thus, the owners of a majority of the shares of Common
Stock outstanding may elect all of the directors up for election in any given
year, if they choose to do so, and the owners of the balance of such shares
would not be able to elect any directors. Subject to certain preferences
applicable to the shares of Preferred Stock to be issued in connection with the
Prairie Acquisition, each share of outstanding Common Stock is entitled to
participate equally in any distribution of net assets made to the stockholders
in liquidation, dissolution or winding up of the Company and is entitled to
participate equally in dividends as and when declared by the Company's Board of
Directors. There are no redemption, sinking fund, conversion or preemptive
rights with respect to the shares of Common Stock. All shares of Common Stock
have equal rights and preferences. The Company currently acts as the transfer
agent and registrar for the Common Stock.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes its Board of
Directors to fix or alter the rights, preferences, privileges and restrictions
of any wholly unissued series of Preferred Stock, including the dividend
rights, original issue price, conversion rights, voting rights, terms of
redemption, liquidation preferences and sinking fund terms thereof, and the
number of shares constituting any such series and the designation thereof and
to increase or decrease the number of shares of such series subsequent to the
issuance of shares of such series (but not below the number of shares then
outstanding). Pursuant to this authority, the Board of Directors has
established and authorized the issuance of 2,762.24 shares of Series A
Preferred Stock and 1,092 shares of Series B Preferred Stock in connection with
the Prairie Acquisition. See "The Acquisitions -- Prairie Bancorp, Inc." The
Board of Directors has also established and authorized the issuance of 4,500
shares of the Company's Series C Junior Participating Preferred Stock (the
"Series C Preferred Stock"). See " -- Certain Anti-Takeover Considerations --
Stockholders' Rights Plan." Because the terms of the Preferred Stock can be
fixed by the Board of Directors without stockholder action, the Preferred Stock
could be issued with terms calculated to defeat a proposed takeover of the
Company or to make the removal of management more difficult. The Board of
Directors, without stockholder approval, could issue Preferred Stock with
dividend, voting and conversion rights which could adversely affect the rights
of the holders of Common Stock.
The following statements with respect to the Preferred Stock are subject
to the detailed provisions of the Certificate of Incorporation, the Certificate
of Designations and Preferences for the Series A Preferred Stock (the "Series A
Preferred Certificate of Designations") and the Certificate of Designations and
Preferences for the Series B Preferred Stock (the "Series B Preferred
Certificate of Designations"), each as filed with the Delaware Secretary of
State, and the bylaws of the Company (the "Bylaws"). These statements do not
purport to be complete and are subject to and qualified in their entirety by
reference to the terms of the Certificate of Incorporation, the Series A
Preferred Certificate of Designations, the Series B Preferred Certificate of
Designations and the Bylaws, copies of each of which are available from the
Company upon request.
DIVIDENDS
Preferential cumulative cash dividends are payable on the Series A
Preferred Stock quarterly at an annual rate of $75.00 per share. Preferential
cumulative cash dividends are payable on the Series B Preferred Stock quarterly
at an annual rate of $60.00 per share. No dividends, other than those payable
solely in the form of Common Stock, may be paid during any fiscal year of the
Company with respect to shares of Common Stock or any other security issued by
the Company (other than with respect to the Series A Preferred Stock or the
Series B Preferred Stock)
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until dividends in the total annual amounts of $75.00 per share and $60.00
per share, respectively, are paid on the outstanding shares of Series A
Preferred Stock and the Series B Preferred Stock. Dividends accrue on each
share of Preferred Stock from the date of issuance and from day to day
thereafter, whether or not earned or declared. Dividends on the Preferred
Stock are cumulative, so that if such dividends are not fully paid when due,
any deficiency for any prior year and the amount owed in the current year
must be fully paid before any dividend or other distribution may be paid
on or set apart for the shares of Common Stock.
RIGHTS TO CONVERSION
Pursuant to the Prairie Acquisition Agreement, the Aggregate Conversion
Value (as defined below) of the shares of Series A Preferred Stock issued to
the Principal Prairie Stockholders will depend upon the aggregate, after-tax
loss, if any, incurred by the Company upon the sale of the Part B Securities.
See "The Acquisitions -- Consideration for Prairie Common Stock and Prairie
Preferred Stock." Such after-tax loss, if any, is computed by subtracting the
aggregate net sale proceeds realized upon a sale by the Company of the Part B
Securities from their aggregate book value and applying an effective tax rate
to such sale of 38.8% (the "Securities Loss"). The shares of Series A
Preferred Stock are convertible into the number of shares of Common Stock that
results from multiplying $1,000 by the number of such shares (the "Aggregate
Conversion Value") and dividing the product by the conversion price (1.075
times the Common Stock per share book value). Therefore, a reduction of the
Aggregate Conversion Value will reduce the number of shares of Common Stock
issuable upon the conversion of the Series A Preferred Stock.
The Company must sell the Part B Securities no later than the fourth
anniversary of the Prairie Closing, but may sell them earlier if at any time
the anticipated Securities Loss, based upon a valuation of the Part B
Securities, is greater than the aggregate stated value ($1,000 per share), plus
accrued but unpaid dividends, of the shares of Series A Preferred Stock issued
to the Principal Prairie Stockholders at the Prairie Closing, after taking into
account tax effects of a sale of such securities. If the Securities Loss is
greater than such amount, the Company must sell the Part B Securities as soon
as is reasonably practicable. In either of these cases, the Principal Prairie
Stockholders will have no liability for the Securities Loss beyond the
Aggregate Conversion Value of the Series A Preferred Stock.
The Company may also request permission from the Principal Prairie
Stockholders for other sales of all or part of the Part B Securities. If the
Principal Prairie Stockholders consent to such sale, the after-tax loss or gain
will be aggregated with all other losses and gains upon the sale of the final
portion of the Part A Securities to determine if there will be a reduction in
the Aggregate Conversion Value. If permission for the sale of any Part B
Securities is refused, the Principal Prairie Stockholders will incur special
additional obligations with respect to those securities for which permission to
sell was refused (the "Subject Securities"). Upon the sale of all the Part B
Securities, the Company will aggregate all after-tax gains and losses (other
than those resulting from sales of Subject Securities). The aggregate amount is
then added to the aggregate after-tax gain or loss upon the sale of Subject
Securities. If the result is a net after-tax loss that is in excess of the
Aggregate Conversion Value, the Principal Prairie Stockholders have agreed to
pay to the Company in cash the amount of any such after-tax loss to the extent
of the net after-tax loss on the sales of Subject Securities.
RIGHTS TO REDEMPTION
The Series A Preferred Stock is not redeemable for cash. Each original
holder of Series B Preferred Stock (or upon such holders' deaths, their
respective executors or personal representatives) will have the option,
exercisable at their sole discretion, to sell, and the Company will be
obligated to redeem, such holder's shares of Series B Preferred Stock upon the
earlier to occur of the death of the respective original holder of Series B
Preferred Stock or ten years after the original issuance date of the Series B
Preferred Stock. The per share price payable by the Company for such shares of
Series B Preferred Stock will be equal to $1,000 per share, plus any accrued
but unpaid dividends. Notwithstanding the foregoing, the Company will not be
obligated to redeem for cash any shares of Series B Preferred Stock if such
redemption would cause it to be in violation of any statute, rule, or
regulation or agreement to which it is a party relating to minimum capital
requirements, provided that the Company is required to use its best efforts
promptly to remedy any such violation and shall promptly complete the
redemption of such shares after such violation has been cured.
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LIQUIDATION RIGHTS
On dissolution, winding up or liquidation of the Company, voluntary or
otherwise, holders of Preferred Stock will be entitled to receive, out of the
assets of the Company available for distribution to stockholders, the amount of
$1,000 per share, plus any accrued but unpaid dividends, before any payment or
distribution may be made on shares of Common Stock or any other securities
issued by the Company which rank junior to the Preferred Stock. If the assets
of the Company available for distribution to the holders of shares of Preferred
Stock upon any dissolution, liquidation or winding up of the Company are
insufficient to pay in full all amounts to which such holders are entitled,
then all of the assets of the Company to be distributed will be distributed
ratably to the holders of Preferred Stock.
VOTING RIGHTS
Holders of shares of Series A Preferred Stock are not entitled to vote
except: (i) as required by law; (ii) to approve the authorization or issuance
of any shares of any class or series of stock which ranks senior or on a parity
with the Series A Preferred Stock in respect of dividends and distributions
upon the dissolution, liquidation or winding up of the Company; (iii) during
any period of time when two dividend payments on shares of Series A Preferred
Stock have accrued but have not been paid; (iv) upon conversion of the shares
of Series A Preferred Stock into shares of Common Stock; or (v) if the holders
of Common Stock vote on a proposal to merge or otherwise enter into a
transaction with a third party pursuant to which the Company is not the
surviving entity. Holders of shares of Series B Preferred Stock are not
entitled to vote except as required by law. If holders of Preferred Stock are
entitled to vote on any matter as described above, they will be entitled to
receive notice of any stockholders' meeting at which such matter will be
considered and will be entitled to vote as a class.
CERTAIN ANTI-TAKEOVER CONSIDERATIONS
GENERAL
The Certificate of Incorporation contains certain provisions that may be
perceived as having an "anti-takeover" effect. The purpose of these provisions
is to encourage any party seeking to acquire control of the Company to
negotiate the transaction, in advance, with the Company's Board of Directors
and to present any proposed transaction approved by the Company's Board of
Directors to all of the Company's stockholders. These provisions may also have
the effect of discouraging takeovers, including takeovers that a majority of
the stockholders of the Company may deem to be desirable and in which the
stockholders may receive a substantial premium over market value in payment for
their shares. In addition, the provisions may make it more difficult or
time-consuming for the stockholders to change the management of the Company,
even if a majority of the stockholders believe that such a change would be
beneficial.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors is divided into three classes with each
director serving a staggered three-year term. With a staggered board of
directors, at least two annual meetings are required to effect a change in the
composition of a majority of the board of directors. Without a staggered board
of directors, a person or entity which acquired a simple majority of Common
Stock would have the power to change the composition of the board of directors
at a single annual meeting.
NUMBER OF DIRECTORS, FILLING OF BOARD OF DIRECTORS' VACANCIES AND REMOVAL
OF DIRECTORS
The Certificate of Incorporation provides that the number of directors of
the Company will be fifteen, or such other number as is determined from time to
time by the affirmative vote of at least 70% of all shares of the Company
entitled to vote in the election of directors, or of at least two-thirds of the
directors of the Company. Under the DGCL and the Certificate of Incorporation,
a majority of the Board of Directors, though less than a quorum, or the sole
remaining director, may fill vacancies on the Board of Directors or newly
created directorships resulting from any increase in the authorized number of
directors. Under the DGCL and the Certificate of Incorporation, a director
serving on a staggered board may only be removed for cause. Neither the DGCL
nor the Company's Certificate of Incorporation define "cause." The
circumstances under which directors may be removed are therefore judicially
determined and would generally be expected to include fraud, criminal conduct
or gross
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abuse of office amounting to a breach of fiduciary duty to the Company.
The provisions relating to the fixing of the number of directors, the
filling of vacancies on the board and the removal of directors are intended to
prevent a substantial stockholder from circumventing the purposes of a
staggered board by increasing the number of directors on the board or removing
incumbent directors without cause and then filling the newly created
directorships or vacancies with such stockholder's own nominees. Such
provisions may, however, make it more difficult to remove a director in the
event of dissatisfaction with the director's performance.
STOCKHOLDER ACTION
The Certificate of Incorporation provides that stockholder action may be
taken only at an annual or special meeting of stockholders and not by written
consent without a meeting. This prohibition could be used to delay the taking
of any action requiring stockholder approval which is not approved by the Board
of Directors, whether or not a majority of the stockholders believes such
action may be desirable. Under such circumstances, stockholders may be
required to wait until the next annual meeting of stockholders to take action
which does not have the support of a majority of the entire Board of Directors.
TRANSACTIONS WITH INTERESTED STOCKHOLDERS
The Certificate of Incorporation provides that the Company is to be
governed by Section 203 of the DGCL ("Section 203"). Section 203 restricts
certain forms of business combinations by Delaware corporations with an
"Interested Stockholder" for a period of three years from the date that such a
person became an "Interested Stockholder" unless: (i) prior to such date, the
corporation's board of directors approved either the business combination or
the transaction which resulted in the stockholder becoming an "Interested
Stockholder;" (ii) upon consummation of the transaction, the Interested
Stockholder owns at least 85% of the voting stock of the corporation (excluding
shares held by persons who are directors and also officers and under certain
types of employee stock plans); or (iii) on or subsequent to such date, the
business combination is approved by the corporation's board of directors and
authorized at an annual or special meeting of the stockholders by the
affirmative vote of at least 66 2/3% of the outstanding voting stock, other than
stock owned by the "Interested Stockholder." An "Interested Stockholder" is
defined as any individual, corporation, partnership, unincorporated association
or other entity which: (x) owns 15% or more of the outstanding voting stock of
the corporation; (y) is an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date on which it
is sought to be determined whether such person is an Interested Stockholder; or
(z) is an affiliate or associate of such a person.
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
Article XI of the Certificate of Incorporation also provides that any
amendment, alteration, change or repeal of Articles VI or X of the Certificate
of Incorporation, which pertain to the authority of the Board of Directors and
the number, election, classification, filling of vacancies and removal of
directors, respectively, as well as any amendment to Article XI itself, may
occur only by the affirmative vote of not less than 70% of all shares of stock
of the Company then entitled to vote in the election of directors or a majority
of such shares if the action is approved by two-thirds of all directors.
Article XI requires similar approval for the adoption of any agreement
regarding the merger or consolidation of the Company with or into any other
corporation, the authorization of any sale, lease or exchange of all or
substantially all of the Company's assets or the authorization of the
dissolution of the Company.
LIMITATION OF DIRECTORS' LIABILITY
As permitted by the provisions of the DGCL, the Certificate of
Incorporation eliminates in certain circumstances the monetary liability of
directors of the Company to the Company or its stockholders for a breach of
their fiduciary duty as directors. These provisions do not eliminate or limit
the liability of a director for: (i) a breach of the director's duty of
loyalty to the Company or its stockholders; (ii) acts or omissions by a
director not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) liability arising under Section 174 of the DGCL
(relating to the declaration of dividends and purchase or redemption of shares
in violation of the DGCL); or (iv) any transaction from which the director
derived an improper personal benefit. In addition,
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these provisions do not limit the rights of the Company or its stockholders,
in appropriate circumstances, to seek equitable remedies such as injunctive
or other forms of non-monetary relief.
INDEMNIFICATION
As permitted by Section 145 of the DGCL, the Certificate of Incorporation
requires the Company to indemnify all persons who it may indemnify pursuant
thereto. Under such provisions, any director, officer, employee or agent who,
in his or her capacity as such, is made or threatened to be made a party to any
suit or proceeding, must be indemnified if such director, officer, employee or
agent acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Company. The DGCL further
provides that such indemnification is not exclusive of any other rights to
which such individuals may be entitled under the Certificate of Incorporation,
any agreement, insurance policies, vote of stockholders or disinterested
directors or otherwise.
STOCKHOLDERS' RIGHTS PLAN
The Company has adopted a Stockholders' Rights Plan pursuant to which the
Company declared on July 17, 1996, a dividend distribution of one right for
each share of Common Stock then or subsequently outstanding (the "Rights").
Under the plan, until such time as a "triggering event" occurs, each Right
entitles the holder thereof to purchase from the Company one one-thousandth of
a share of a newly authorized Series C Preferred Stock at a purchase price of
$50, subject to adjustment for stock splits, recapitalizations and other
similar transactions. Each Right is transferrable only together with its
underlying share of Common Stock. The Rights will be triggered as a result of
any person (other than a specifically permitted person) becoming the beneficial
holder of 15% or more of the then outstanding shares of Common Stock. Upon
such occurrence, each Right, other than rights held by the person or affiliated
group whose holdings exceeded such threshold, will permit the holder thereof to
purchase that number of shares of Common Stock having a market value equal to
$100. The Rights will also be triggered if the Company is acquired in a merger
or other business combination (in which any shares of the Common Stock are
converted into or exchanged for other securities or assets), or if more than
50% of the assets or earning power of the Company and its subsidiaries (taken
as a whole) are sold or transferred in one or a series of related transactions.
In such event, each Right, other than Rights held by the person or affiliated
group whose holdings exceeded the 15% threshold, will entitle its holder to
purchase that number of shares of common stock of the acquiring company having
a market value at the time of such transaction equal to $100. Following the
occurrence of any triggering event, each Right becomes separated from its
underlying share of Common Stock and may thereafter be separately transferred.
Under the plan, at any time prior to ten days following the occurrence of any
triggering event the Board of Directors may cause the Company to redeem the
Rights in whole, but not in part, at a
price of $0.01 per Right, subject to adjustment. The Board may also extend the
period during which the Rights may be redeemed.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this Offering, the Company will have 3,951,403
shares of Common Stock outstanding (4,116,403 shares if the Underwriter's
over-allotment option is exercised in full). Of these shares, the 1,100,000
shares of Common Stock sold in this Offering (1,265,000 shares if the
Underwriter's over-allotment option is exercised in full) will be freely
tradeable by persons other than affiliates of the Company, without restriction
under the Securities Act. Of the remaining 2,842,314 shares of Common Stock,
the 710,576 shares of Common Stock issued in connection with the Prairie
Acquisition and the approximately 886,395 shares of Common Stock held by other
affiliates of the Company will be "restricted" securities within the meaning of
Rule 144 under the Securities Act and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemptions contained in Rule 144. Commencing 90 days
after the date of this Prospectus, the shares beneficially owned by persons who
are affiliates of the Company would be eligible for public sale pursuant to
Rule 144, subject to the volume restrictions discussed below. However, the
directors and executive officers of the Company and owners of 5% or more of
Common Stock have agreed not to sell, contract to sell or otherwise dispose of
any shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of the Underwriter. Additionally,
the Company has a right of first refusal with respect to the transfer by the
Principal Prairie Stockholders of more than 5% of the Company's shares to a
single purchaser. See "The Acquisition -- Prairie Bancorp, Inc. --
Restrictions Applicable to Principal Prairie Stockholders."
In general, Rule 144 as currently in effect provides that a person (or
persons whose shares are aggregated),
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including an affiliate of the Company, who has beneficially owned his or her
shares for at least two years (including the prior holding period of any prior
owner other than an affiliate) is entitled to sell within any three-month
period that number of shares which does not exceed the greater of 1% of the
outstanding shares of the Common Stock or the average weekly trading volume
during the four calendar weeks preceding each such sale. Sales under Rule 144
also are subject to certain manner of sale provisions, notice requirements
and the availability of current public information about the Company. A
person (or persons whose shares are aggregated) who is not or has not been
deemed an "affiliate" of the Company for at least three months, and who has
beneficially owned shares for at least three years (including the holding
period of any prior owner other than an affiliate) would be entitled to sell
such shares under Rule 144 without regard to the limitations discussed above.
Prior to this Offering, there has been no regular and liquid market for
the Common Stock. Sales of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
the Company and the Underwriter, the Underwriter has agreed to purchase from
the Company, and the Company has agreed to sell to the Underwriter, 1,100,000
shares of Common Stock.
The Underwriting Agreement provides that the obligations of the
Underwriter thereunder are subject to the satisfaction of certain conditions
precedent. The Underwriter is committed to purchase and pay for all 1,100,000
shares of Common Stock if any are purchased. The Company has been advised that
the Underwriter proposes to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus, and to certain securities dealers at such price less a concession
not in excess of $.___ per share, and that the Underwriter and such dealers may
allow to other dealers including any underwriter, a discount not in excess of
$.___ per share. After commencement of this Offering, the offering price and
concession and discounts may be changed by the Underwriter. The Company has
agreed to pay the Underwriter an expense allowance not to exceed 1.5% of the
aggregate offering price.
The Underwriter has informed the Company that it does not intend to make
sales to any accounts over which it exercises discretionary authority.
At the request of the Company, the Underwriter has reserved up to
approximately 110,000 shares (the "Reserved Shares") of Common Stock for sale
to directors, executive officers and affiliates of the Company who have
expressed an interest in purchasing shares of Common Stock in this Offering.
The Reserved Shares will be sold to such directors, executive officers and
affiliates through brokerage accounts opened specifically for such purpose
through the Underwriter. The price for such Reserved Shares will be the
initial public offering price. The number of shares available to the general
public will be reduced to the extent such persons purchase the Reserved Shares.
Any Reserved Shares that are not so purchased by such persons at the initial
closing of this Offering will be sold by the Underwriter to the general public
on the same terms as the other shares of Common Stock offered hereby.
The Underwriter has obtained an option from the Company exercisable for a
period of 30 days following the offering date, under which the Underwriter may
purchase up to 15% of the total number of shares of Common Stock offered at the
same price per share which the Company will receive for the shares offered
herein. The Underwriter may exercise such option only once to cover
over-allotments.
The Company and its executive officers and directors, as well as the
Company's 5% stockholders, have agreed not to offer, sell, contract or
otherwise dispose of any Common Stock for at least 180 days after this
Offering, without the written consent of the Underwriter.
Prior to this Offering, there has been a limited market for the Common
Stock. The initial public offering price was determined by negotiation among
the Company and the Underwriter. The factors considered in determining the
initial public offering price include the history of and prospects for the
business in which the Company operates, past and present operations, revenues
and earnings of the Company and the trend of such earnings, the prospects for
such earnings, the general condition of the securities markets at the time of
the offering and the demand for
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similar securities of reasonably comparable companies.
The Company and the Underwriter have agreed to indemnify, or to contribute
to payments made by, each other against certain civil liabilities, including
certain civil liabilities under the Securities Act.
The Underwriter has from time to time performed various investment banking
and other services for the Company for which customary compensation has been
received. The Underwriter has rendered financial advisory and investment
banking services in connection with the Prairie Acquisition. The Company paid
the Underwriter a fee of $ for providing such services.
LEGAL OPINIONS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Barack, Ferrazzano, Kirschbaum & Perlman, Chicago,
Illinois. Certain legal matters will be passed upon for the Underwriter by
Sidley & Austin, Chicago, Illinois.
EXPERTS
The consolidated financial statements of the Company and its subsidiaries
and Prairie and its subsidiaries as of December 31, 1995 and 1994, and for each
of the years in the three-year period ended December 31, 1995, as well as the
consolidated financial statements of Country and its subsidiary as of December
31, 1995 and 1994 and each of the years in the two-year period ended December
31, 1995, have been included herein in reliance upon the report of McGladrey &
Pullen, LLP, independent certified public accountants, and upon the authority
of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement on Form S-1
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the Common
Stock being offered pursuant to this Prospectus. This Prospectus does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
SEC. For further information with respect to the Company and the Common Stock
offered hereby, reference is made to the Registration Statement, including the
exhibits thereto. Statements contained in this Prospectus concerning the
provisions of such documents are necessarily summaries of such documents and
each such statement is qualified in its entirety by reference to the copy of
the applicable document filed with the SEC.
Following the commencement of this Offering, the Company will be subject
to the informational requirements of the Exchange Act and in accordance
therewith will file reports, proxy and information statements and other
information with the SEC. Such reports, proxy statements and other information
concerning the Company can be inspected and copied at the public reference
facilities of the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, as well as the SEC's Regional Offices at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 75 Park Place, Room 1400, New York, New York
10007. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the Company is required to file electronic versions of
these documents with the SEC through the SEC's Electronic Data Gathering,
Analysis and Retrieval (EDGAR) system. The Commission maintains a World Wide
Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
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INDEX TO FINANCIAL STATEMENTS AND FINANCIAL INFORMATION
UNIONBANCORP, INC.
PRAIRIE BANCORP, INC.
COUNTRY BANCSHARES, INC.
PAGE
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UNIONBANCORP, INC.
Consolidated Balance Sheets (Unaudited) at June 30, 1996 and December 31, 1995 F-2
Consolidated Statements of Income (Unaudited) for the Six Months Ended June 30, 1996 and 1995 F-3
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 1996 and 1995 F-4
Notes to Unaudited Consolidated Financial Statements F-5
Independent Auditor's Report F-10
Consolidated Balance Sheets at December 31, 1995 and 1994 F-11
Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993 F-12
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 F-13
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 F-14
Notes to Consolidated Financial Statements F-16
PRAIRIE BANCORP, INC.
Selected Consolidated Financial Data F-37
Management's Discussion and Analysis of Financial Condition and Results of Operations F-38
Consolidated Balance Sheets (Unaudited) at June 30, 1996 and December 31, 1995 F-64
Consolidated Statements of Income (Unaudited) for the Six Months Ended June 30, 1996 and 1995 F-65
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 1996 and 1995 F-66
Notes to Unaudited Consolidated Financial Statements F-67
Independent Auditor's Report F-71
Consolidated Balance Sheets at December 31, 1995 and 1994 F-72
Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993 F-73
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 F-74
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 F-76
Notes to Consolidated Financial Statements F-78
COUNTRY BANCSHARES, INC.
Selected Consolidated Financial Data F-93
Management's Discussion and Analysis of Financial Condition and Results of Operations F-94
Consolidated Balance Sheets (Unaudited) at June 30, 1996 and December 31, 1995 F-117
Consolidated Statements of Income (Unaudited) for the Six Months Ended June 30, 1996 and 1995 F-118
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 1996 and 1995 F-119
Notes to Unaudited Consolidated Financial Statements F-120
Independent Auditor's Report F-123
Consolidated Balance Sheets at December 31, 1995 and 1994 F-124
Consolidated Statements of Income for the Years Ended December 31, 1995 and 1994 F-125
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995 and 1994 F-126
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995 and 1994 F-127
Notes to Consolidated Financial Statements F-129
F - 1
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UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
June 30,
1996 December 31,
(Unaudited) 1995
- ----------------------------------------------------------------- -------------
ASSETS
Cash and due from banks $ 11,403,209 $ 16,166,689
Federal funds sold 225,000 2,265,000
Securities held to maturity (fair value
$28,742,172 in 1996; $29,186,580 in 1995) 28,925,982 29,026,216
Securities available for sale 58,003,129 63,890,813
Loans (net of allowance for loan losses of
$1,596,965 in 1996 and $2,013,996 in 1995) 184,243,005 178,805,012
Premises and equipment, net 6,829,352 6,570,710
Intangible assets 894,581 943,126
Deferred income taxes 748,866 --
Accrued interest and other assets 5,331,888 5,865,773
------------- -------------
Total assets $ 296,605,012 $ 303,533,339
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Demand $ 34,514,560 $ 35,688,034
Savings and NOW 76,469,008 80,871,775
Other time 123,025,044 121,515,122
Time deposits of $100,000 or more 25,078,691 23,652,388
------------- -------------
Total deposits 259,087,303 261,727,319
Securities sold under agreements to repurchase 7,544,134 11,505,134
Short-term borrowings 4,391,250 4,346,250
Deferred income taxes -- 9,587
Accrued interest and other liabilities 2,130,430 2,470,057
------------- -------------
Total liabilities 273,153,117 280,058,347
============= =============
Stockholders' Equity
Common stock, $1 par value; 10,000,000 shares
authorized; 2,400,000 issued and outstanding 2,400,000 2,400,000
Surplus 1,074,272 1,074,272
Retained earnings 21,537,352 20,567,981
Unrealized gain (loss) on securities available
for sale (997,242) 1,918
Deferred compensation - stock option plans (41,290) (47,982)
------------- -------------
23,973,092 23,996,189
Less treasury stock, at cost; 268,263 shares 521,197 521,197
------------- -------------
Total stockholders' equity 23,451,895 23,474,992
------------- -------------
Total liabilities and stockholders' equity $ 296,605,012 $ 303,533,339
============= =============
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F - 2
78
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Six Months Ended
June 30,
---------------------
1996 1995
---- ----
(Unaudited)
Interest income:
Loans and fees on loans $ 8,642,619 $ 7,768,780
Securities:
U.S. Treasury securities 401,451 588,300
U.S. Government agencies and
corporations 1,474,920 985,996
States and political subdivisions 676,382 692,687
Mortgage-backed securities 2,785 5,820
Corporate bonds 8,694 68,898
Other securities 38,014 37,513
Federal funds sold 33,333 44,515
----------- -----------
Total interest income 11,278,198 10,192,509
----------- -----------
Interest expense:
Deposits 5,389,555 4,786,937
Securities sold under
agreements to repurchase 275,865 211,607
Short-term borrowings 184,475 217,965
----------- -----------
Total interest expense 5,849,895 5,216,509
----------- -----------
Net interest income
5,428,303 4,976,000
Provision for loan losses 500,000 342,000
----------- -----------
Net interest income
after provision for
loan losses
4,928,303 4,634,000
----------- -----------
Noninterest income:
Trust department 183,498 150,000
Service charges and fees 899,264 800,134
Gain on sale of assets 1,500 60,572
Gain on sale of securities 12,998 61,038
Gain on sale of loans 142,321 44,692
Other 84,777 70,165
----------- -----------
1,324,358 1,186,601
----------- -----------
Noninterest expenses:
Salaries and wages 2,018,362 1,750,096
Employee benefits 525,362 423,594
Occupancy and equipment rental 715,235 609,471
Other 1,501,893 1,629,501
----------- -----------
4,760,852 4,412,662
----------- -----------
Income before income
taxes 1,491,809 1,407,939
Income taxes 380,523 365,403
----------- -----------
Net income
$ 1,111,286 $ 1,042,536
=========== ===========
Earnings per share
of common stock
$ 0.51 $ 0.49
=========== ===========
Weighted average
number of shares
outstanding
2,169,012 2,131,737
=========== ===========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F - 3
79
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Six Months Ended
June 30,
----------------------
1996 1995
--------- ---------
(Unaudited)
- ------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 1,111,286 $ 1,042,536
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 297,215 238,534
Amortization of intangibles 48,545 96,144
Amortization of deferred compensation - stock options 6,692 --
Provision for loan losses 500,000 342,000
Provision for deferred income taxes (125,000) (301,307)
(Gain) on sales of securities (12,998) (61,038)
(Gain) on sales of loans (142,321) (44,692)
(Gain) on sale of equipment (1,500) --
Amortization of bond premiums, net 238,833 236,514
(Gain) on sale of real estate acquired in settlement of loans (2,524) (41,089)
Change in assets and liabilities:
Decrease in accrued interest and other assets 1,853,331 921,596
Increase (decrease) in accrued interest and other liabilities (339,627) 1,162,000
=========== ============
Net cash provided by operating activities 3,431,932 3,591,198
=========== ============
Cash Flows from Investing Activities
Investment securities:
Held to maturity:
Proceeds from calls and maturities 782,285 1,125,713
Purchases (875,525) (2,494,534)
Available for sale:
Proceeds from sales 11,820,096 10,209,448
Proceeds from calls and maturities 2,750,000 1,269,763
Purchases (11,584,987) (11,329,088)
Net decrease in federal funds sold 2,040,000 300,000
Net (increase) in loans (5,937,993) (13,925,000)
Purchase of premises and equipment (556,057) (1,053,523)
Proceeds from sale of real estate acquired in settlement of loans 153,000 499,000
Proceeds from sale of equipment 1,700 --
=========== ============
Net cash (used in) investing activities (1,407,481) (15,398,221)
=========== ============
Cash Flows from Financing Activities
Net (decrease) in demand deposits, NOW accounts and savings
accounts (5,576,241) (2,014,661)
Net increase in time deposits 2,936,225 17,620,096
Net (decrease) in securities sold under agreements to repurchase (3,961,000) (7,008,924)
Payments on short-term borrowings (45,000) (598,459)
Dividends paid (141,915) (141,916)
----------- ------------
Net cash provided by financing activities (6,787,931) 7,856,136
----------- ------------
Net increase (decrease) in cash and due from banks (4,763,480) (3,950,887)
Cash and due from banks:
Beginning 16,166,689 12,997,888
----------- ------------
End $ 11,403,209 $ 9,047,001
=========== ============
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F - 4
80
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The financial information of UnionBancorp, Inc. and subsidiaries included
herein is unaudited; however, such information reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim periods.
The results of the interim period ended June 30, 1996 are not necessarily
indicative of the results expected for the year ending December 31, 1996.
NOTE 2. SECURITIES
Amortized costs and fair values of securities are summarized as follows:
HELD TO MATURITY June 30, 1996
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ------------ ----------
U.S. Treasury $ 99,610 $ -- $ -- $ 99,610
U.S. Government agencies
and corporations 2,000,000 -- 280,000 1,720,000
States and political
subdivisions 26,584,564 376,412 271,240 26,689,736
Mortgage backed securities 1,808 -- -- 1,808
Corporate bonds 240,000 -- 8,982 231,018
------------ ---------- ---------- ------------
$ 28,925,982 $ 376,412 $ 560,222 $ 28,742,172
============ ========== ========== ============
December 31, 1995
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ------------ ----------
U.S. Treasury $ 117,307 $ -- $ -- $ 117,307
U.S. Government agencies
and corporations 2,000,000 -- 120,855 1,879,145
States and political
subdivisions 26,660,119 496,019 214,800 26,941,338
Mortgage backed
securities 8,790 -- -- 8,790
Corporate bonds 240,000 -- -- 240,000
------------ ------------ ------------- ------------
$ 29,026,216 $ 496,019 $ 335,655 $ 29,186,580
------------ ------------ ------------- ------------
(Continued)
F - 5
81
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AVAILABLE FOR SALE June 30, 1996
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ----------- ------------
U.S. Treasury $ 13,972,631 $ -- $ 142,839 $ 13,829,792
U.S. Government agencies
and corporations 39,483,790 3,065 1,345,695 38,141,160
States and political
subdivisions 393,973 14,852 1,153 407,672
Mortgage backed
securities 5,682,968 12,717 145,135 5,550,550
Collateralized mortgage
obligations 74,246 -- 291 73,955
Other 25,000 -- 25,000
---------- ---------- ----------- ------------
$ 59,632,608 $ 30,634 $ 1,660,113 $ 58,003,129
========== =========== =========== ============
December 31, 1995
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- ------------
U.S. Treasury $ 18,329,568 $ 24,352 $ 75,165 $ 18,278,755
U.S. Government agencies
and corporations 36,908,777 303,127 225,033 36,986,871
States and political
subdivisions 893,372 19,780 -- 913,152
Mortgage backed
securities 6,218,441 30,314 58,920 6,189,835
Corporate bonds 1,512,522 9,678 1,522,200
Other 25,000 25,000
----------- --------- --------- ------------
$ 63,887,680 $ 387,251 $ 384,118 $ 63,890,813
=========== ========= ========= ============
(Continued)
F - 6
82
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of securities classified as held to maturity
and available for sale at June 30, 1996 and December 31, 1995, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
HELD TO MATURITY
June 30, December
1996 31, 1995
------------ ------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
Due in one year
or less $ 2,506,693 $ 2,527,164 $ 1,781,958 $ 1,910,134
Due after one year
through five years 14,658,598 14,579,020 15,521,431 15,522,016
Due after five
years through ten 9,276,608 9,091,067 8,655,643 8,583,561
years
Due after ten 2,484,083 2,544,921 3,067,184 3,170,869
years
------------ ------------ ------------ ------------
$ 28,925,982 $ 28,742,172 $ 29,026,216 $ 29,186,580
============ ============ ============ ============
AVAILABLE FOR SALE June 30, 1996 December 31, 1995
------------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ------------ ----------- ---------
Due in one year or
less $ 7,541,292 $ 7,518,400 $ 8,825,478 $ 8,782,725
Due after one year
through five years 15,429,302 14,954,121 24,168,022 23,983,759
Due after five
years through ten
years 30,979,046 29,980,058 24,782,767 25,040,870
Due after ten years - - - -
Mortgage backed
securities 5,682,968 5,550,550 6,111,413 6,083,459
------------ ------------ ------------ ------------
$ 59,632,608 $ 58,003,129 $ 63,887,680 $ 63,890,813
============= ============ ============ ============
Securities with carrying values of approximately $41,079,000 and $50,338,000 at
June 30, 1996 and December 31, 1995, respectively, were pledged to secure
public deposits, to secure securities sold under agreements to repurchase and
for other purposes as required or permitted by law.
(Continued)
F - 7
83
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 3. LOANS
The major classifications of loans follow:
June 30, December 31,
1996 1995
------------ ------------
Commercial $ 53,431,532 $ 53,225,736
Real estate 105,024,022 100,505,607
Installment 24,776,731 24,166,864
Other 2,611,100 2,928,008
------------ ------------
185,843,385 180,826,215
------------ ------------
Deduct:
Unearned interest 3,415 7,207
Allowance for loan losses 1,596,965 2,013,996
------------ ------------
1,600,380 2,021,203
------------ ------------
$184,243,005 $178,805,012
============ ============
NOTE 4. ALLOWANCE FOR LOAN LOSSES
An analysis of activity in the allowance for loan losses follows:
Six Months Ended
June 30,
-----------------------------
1996 1995
------------ ------------
Balance, January 1 $ 2,013,996 $ 1,704,281
Provision for loan losses 500,000 342,000
Recoveries 20,839 92,153
Loans charged off (937,870) (267,873)
------------ ------------
Balance, end of period $ 1,596,965 $ 1,870,561
============ ============
(Continued)
F - 8
84
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 5. SHORT TERM BORROWINGS
Short term borrowings include a note payable to a third party lender and
securities sold under agreements to repurchase.
Average and maximum balances and rates on notes payable and securities sold
under agreements to repurchase were as follows:
Six Months Ended
June 30,
---------------------------
1996 1995
----------- -----------
Maximum month end balance $16,168,000 $13,349,000
Average month end balance 13,708,333 10,758,000
Weighted average interest rate for the period 6.06% 6.76%
Weighted average interest rate at end of period 6.33% 7.04%
NOTE 6. CONTINGENT LIABILITIES
At June 30, 1996 and December 31, 1995, loan commitments, including standby
letters of credit, were as follows:
Range of Rates
Variable Rate Fixed Rate Total on Fixed Rate
Commitments Commitments Commitments Commitments
----------- ----------- ------------ --------------
June 30, 1996 $40,118,000 $ 5,716,000 $ 45,834,000 6.25% - 11.25%
December 31, 1995 $40,686,000 $ 3,111,000 $ 43,797,000 6.25% - 11.25%
NOTE 7. STOCK SPLIT
On May 20, 1996, the Company effected a three-for-one stock split in the form
of a stock dividend. All references in the accompanying financial statements
to number of shares and per share amounts have been retroactively restated to
reflect the stock split.
F - 9
85
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
UnionBancorp, Inc.
Ottawa, Illinois
We have audited the accompanying consolidated balance sheets of UnionBancorp,
INC. AND SUBSIDIARIES as of December 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1995. 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 UnionBancorp, INC.
AND SUBSIDIARIES as of 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 3 to the consolidated financial statements, the Company
changed its method of accounting for investment securities in 1994.
McGLADREY & PULLEN, LLP
Champaign, Illinois
January 17, 1996 (except for Note 15 for
which the date is May 20, 1996)
F - 10
86
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
1995 1994
- -------------------------------------------------------------- -------------
ASSETS
Cash and due from banks $ 16,166,689 $ 12,997,888
Federal funds sold 2,265,000 1,200,000
Securities held to maturity (fair value
$29,186,580 in 1995; $27,167,255 in 1994) 29,026,216 28,667,104
Securities available for sale 63,890,813 56,592,941
Loans (net of allowance for loan losses of
$2,013,996 in 1995 and $1,704,281 in 1994) 178,805,012 159,429,967
Premises and equipment 6,570,710 5,687,817
Intangible assets 943,126 1,063,274
Deferred income taxes - 967,396
Accrued interest and other assets 5,865,773 5,431,645
------------- -------------
Total assets $ 303,533,339 $ 272,038,032
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits :
Demand $ 35,688,034 $ 32,216,560
Savings and NOW 80,871,775 72,687,101
Other time 121,515,122 105,489,487
Time deposits of $100,000 or more 23,652,388 21,940,417
------------- -------------
Total deposits 261,727,319 232,333,565
Securities sold under agreements to repurchase 11,505,134 13,118,187
Short-term borrowings 4,346,250 5,026,250
Deferred income taxes 9,587 -
Accrued interest and other liabilities 2,470,057 1,931,433
------------- -------------
Total liabilities 280,058,347 252,409,435
------------- -------------
Commitments, Contingencies and Credit Risk
Stockholders' Equity
Common stock, $1 par value;
10,000,000 shares authorized; 2,400,000
issued and outstanding 2,400,000 2,400,000
Surplus 1,074,272 1,007,352
Retained earnings 20,567,981 18,498,987
Unrealized gain (loss) on securities
available for sale 1,918 (1,756,545)
Deferred compensation - stock option plans (47,982) -
------------- -------------
23,996,189 20,149,794
Less treasury stock, at cost; 268,263 shares 521,197 521,197
------------- -------------
Total stockholders' equity 23,474,992 19,628,597
------------- -------------
Total liabilities and stockholders'
equity $ 303,533,339 $ 272,038,032
============= =============
See Accompanying Notes to Consolidated Financial Statements.
F - 11
87
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
- ---------------------------------------------------- ------------ ------------
Interest income:
Loans and fees on loans $ 16,321,505 $ 13,418,765 $ 13,420,804
Securities:
U.S. Treasury securities 1,062,279 1,571,375 1,474,998
U.S. Government agencies and
corporations 2,202,236 1,796,107 1,795,948
States and political subdivisions 1,404,076 1,396,783 1,240,966
Mortgage backed securities 9,526 9,986 14,121
Corporate bonds 114,983 346,326 458,559
Other securities 97,052 49,967 58,144
Federal funds sold 156,350 38,128 140,328
------------ ------------ ------------
Total interest income 21,368,007 18,627,437 18,603,868
------------ ------------ ------------
Interest expense:
Deposits 10,257,286 8,093,166 8,363,475
Securities sold under agreements
to repurchase 522,469 233,742 61,545
Short-term borrowings 468,852 379,317 373,005
------------ ------------ ------------
Total interest expense 11,248,607 8,706,225 8,798,025
------------ ------------ ------------
Net interest income 10,119,400 9,921,212 9,805,843
Provision for loan losses 684,000 660,000 1,268,000
------------ ------------ ------------
Net interest income after
provision for loan losses 9,435,400 9,261,212 8,537,843
------------ ------------ ------------
Noninterest expenses:
Trust department 330,130 300,837 200,306
Service charges and fees 1,194,062 1,127,596 1,017,892
Gain on sale of assets 36,736 2,145 -
Gain on sale of securities 97,940 117,618 185,369
Gain on sale of loans 287,562 130,163 573,773
Other 623,375 604,437 534,585
------------ ------------ ------------
2,569,805 2,282,796 2,511,925
------------ ------------ ------------
Noninterest expenses:
Salaries and wages 3,580,455 3,064,940 2,875,946
Employee benefits 870,270 802,681 736,886
Occupancy and equipment rental 1,248,711 1,133,926 1,126,169
FDIC assessment 270,966 525,956 502,322
Other 2,800,357 2,719,955 2,599,379
------------ ------------ ------------
8,770,759 8,247,458 7,840,702
------------ ------------ ------------
Income before income taxes 3,234,446 3,296,550 3,209,066
Income taxes 881,620 703,025 747,399
------------ ------------ ------------
Net income $ 2,352,826 $ 2,593,525 $ 2,461,667
============ ============ ===========-
Earnings per share of
common stock $ 1.09 $ 1.22 $ 1.15
============ ============ ===========-
Weighted average number of
shares outstanding 2,148,897 2,132,712 2,132,760
============ ============ ===========-
See Accompanying Notes to Consolidated Financial Statements.
F - 12
88
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- ---------------------------------------------------------------------------------------------
Unrealized
Gain (Loss) on
Securities
Common Retained Available
Stock Surplus Earnings for Sale
---------- ----------- ----------- --------------
Balance, December 31, 1992 $2,400,000 $ 996,488 $13,883,330 $ -
Net income - - 2,461,667 -
Cash dividends, $.09 per share - - (191,414) -
Realized loss included in
net income - - - -
Change in unrealized loss on
marketable equity securities - - - -
---------- ----------- ----------- --------------
Balance, December 31, 1993 $2,400,000 $ 996,488 $16,153,583 $ -
Effect of adoption of change
in method of accounting
for securities - - - 831,467
Net income - - 2,593,525 -
Cash dividends, $.12 per share (248,121) -
Issuance of 1,977 shares of
treasury stock - 10,864 - -
Redemption of 3,000 shares of
qualifying directors' stock - - - -
Change in unrealized loss on
securities available for sale - - - (2,588,012)
---------- ---------- ----------- -------------
Balance, December 31, 1994 $2,400,000 $1,007,352 $18,498,987 $ (1,756,545)
Net income - - 2,352,826 -
Cash dividends, $.13 per share - - (283,832) -
Issuance of Nonqualifying
stock options - 66,920 - -
Amortization of unearned
compensation on Nonqual-
ifying stock options - - - -
Change in unrealized gain
(loss) on securities
available for sale - - - 1,758,463
---------- ---------- ----------- -------------
Balance, December 31, 1995 $2,400,000 $1,074,272 $20,567,981 $ 1,918
========== ========== =========== =============
Unrealized Deferred
Loss on Compen-
Marketable sation
Equity Stock Treasury
Securities Option Plans Stock Total
---------- ------------ --------- -----------
Balance, December 31, 1992 $ (53,007) $ - $(524,490) $16,702,321
Net income - - - 2,461,667
Cash dividends, $.09 per share - - - (191,414)
Realized loss included in
net income 50,968 - - 50,968
Change in unrealized loss on
marketable equity securities 2,039 - - 2,039
---------- ----------- --------- -----------
Balance, December 31, 1993 $ - $ - $(524,490) $19,025,581
Effect of adoption of change
in method of accounting
for securities - - - 831,467
Net income - - - 2,593,525
Cash dividends, $.12 per share - - - (248,121)
Issuance of 1,977 shares of
treasury stock - - 4,293 15,157
Redemption of 3,000 shares of
qualifying directors' stock - - (1,000) (1,000)
Change in unrealized loss on
securities available for sale - - - (2,588,012)
---------- ----------- --------- -----------
Balance, December 31, 1994 $ - $ - $(521,197) $19,628,597
Net income - - - 2,352,826
Cash dividends, $.13 per share - - - (283,832)
Issuance of Nonqualifying
stock options - (66,920) - -
Amortization of unearned
compensation on Nonqual-
ifying stock options - 18,938 - 18,938
Change in unrealized gain
(loss) on securities
available for sale - - - 1,758,463
---------- ----------- --------- -----------
Balance, December 31, 1995 $ - $ (47,982) $(521,197) $23,474,992
========== =========== ========= ===========
See Accompanying Notes to Consolidated Financial Statements.
F - 13
89
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
- --------------------------------------------------- ------------ ------------
Cash Flows from Operating Activities
Net income $ 2,352,826 $ 2,593,525 2,461,667
Adjustments to reconcile
net income to net cash provided
by operating activities:
Depreciation 525,689 528,722 530,628
Amortization of intangibles 120,148 162,191 141,170
Amortization of deferred
compensation - stock options 18,938 -- --
Provision for loan losses 684,000 660,000 1,268,000
Provision for deferred income taxes (137,860) (31,733) (208,841)
(Gain) on sales of securities (97,940) (117,618) (236,337)
Loss on sale of marketable equity
securities, net -- -- 50,968
(Gain) on sales of loans (287,562) (130,163) (573,773)
(Gain) on sale of equipment (36,736) (2,145) --
Amortization of bond premiums, net 448,276 639,575 500,233
(Gain) loss on sale of real estate
acquired in settlement of loans (32,577) 65,396 37,800
Change in assets and liabilities:
(Increase) decrease in accrued
interest and other assets (666,548) 11,606 (461,645)
Increase (decrease) in accrued
interest and other liabilities 538,624 346,240 (489,646)
----------- ---------- ----------
Net cash provided by
operating activities 3,429,278 4,725,596 3,020,224
----------- ---------- ----------
Cash Flows from Investing Activities
Investment securities:
Held to maturity:
Proceeds from calls and maturities 3,858,289 1,279,344 12,198,225
Purchases (4,300,502) (6,197,199) (38,747,790)
Available for sale:
Proceeds from sales 17,318,490 21,561,650 --
Proceeds from maturities 6,230,000 6,620,607 --
Purchases (28,240,291) (27,357,269) --
Proceeds from sales of
investment securities -- -- 21,051,185
Proceeds from sales of
marketable equity securities -- -- 896,027
Net (increase) decrease in federal
funds sold (1,065,000) 8,900,000 (7,600,000)
Net (increase) in loans (20,306,173) (13,894,291) (3,238,150)
Purchase of premises and equipment (1,430,773) (1,200,591) (1,425,190)
Proceeds from sale of real estate
acquired in settlement of loans 799,687 727,290 623,340
Proceeds from sale of equipment 58,927 40,630 --
----------- ---------- ----------
Net cash (used in)
investing activities (27,077,346) (9,519,829) (16,242,353)
----------- ---------- ----------
(Continued)
F - 14
90
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
- --------------------------------------------------------------------- ------------- ------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts $11,656,148 $ (6,853,365) $ 10,691,779
Net increase in time deposits 17,737,606 1,732,124 4,249,936
Net increase (decrease) in securities sold
under agreements to repurchase (1,613,053) 9,976,139 1,497,708
Payments on short-term borrowings (680,000) (253,750) (520,000)
Dividends paid (283,832) (248,121) (191,414)
Proceeds from issuance of treasury stock -- 14,157 --
----------- ------------ -------------
Net cash provided by financing activities 26,816,869 4,367,184 15,728,009
----------- ------------ -------------
Net increase (decrease) in cash and
due from banks 3,168,801 (427,049) 2,505,880
Cash and due from banks:
Beginning of year 12,997,888 13,424,937 10,919,057
=========== ============ =============
End of year $16,166,689 $ 12,997,888 $ 13,424,937
=========== ============ =============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest - depositors $ 9,977,772 $ 7,912,371 $ 8,585,723
=========== ============ =============
- repurchase agreements $ 371,155 $ 170,773 $ 59,604
=========== ============ =============
- short-term borrowings $ 576,273 $ 356,620 $ 324,315
=========== ============ =============
Income taxes $ 993,757 $ 832,862 $ 482,695
=========== ============ =============
Supplemental Schedule of Noncash Investing
and Financing Activities
Transfer of loans to real estate acquired in
settlement of loans $ 534,690 $ 518,934 $ 942,517
Change in unrealized gain (loss) on securities =========== ============ =============
available for sale $ 2,873,306 $ (2,870,173) $ --
Increase (decrease) in deferred taxes attributable =========== ============ =============
to the unrealized gain (loss) on securities
available for sale $(1,114,843) $ 1,113,628 $ --
Decrease in unrealized loss on marketable =========== ============ =============
equity securities -- -- 2,039
=========== ============ =============
Issuance of nonqualifying stock options 66,920 -- --
=========== ============ =============
See Accompanying Notes to Consolidated Financial Statements.
F - 15
91
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and reporting practices prescribed for
the banking industry.
The significant accounting and reporting policies for UnionBancorp, Inc. and
its subsidiaries (the "Company") follow:
Nature of Business
The Company is a two bank holding company with two nonbank subsidiaries. The
Company provides a full range of banking services to individual and corporate
customers in the North Central Illinois area. The Company is subject to
competition from other financial institutions and nonfinancial institutions
providing financial products. Additionally, the Company and its bank
subsidiaries are subject to regulations of certain regulatory agencies and
undergo periodic examinations by those regulatory agencies.
Basis of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, UnionBank, UnionBank/Sandwich (collectively, the
"Union Banks"), UnionData Corp., Inc. and Union Corporation. All material
intercompany accounts and transactions have been eliminated in consolidation.
Basis of accounting
In preparing the consolidated financial statements, Company management is
required to make estimates and assumptions which significantly affect the
amounts reported in the consolidated financial statements. Significant
estimates which are particularly susceptible to change in a short period of
time include the determination of the allowance for loan losses and valuation
of real estate and other properties acquired in connection with foreclosures or
in satisfaction of amounts due from borrowers on loans. Actual results could
differ from those estimates.
Assets held in an agency or fiduciary capacity, other than trust cash on
deposit with the Union Banks, are not assets of the Union Banks and,
accordingly, are not included in the accompanying consolidated financial
statements.
Securities held to maturity
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 premium and
accretion of discount, computed using the interest method over their
contractual lives.
(Continued)
F - 16
92
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Securities available for sale
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. The difference
between fair value and cost, adjusted for amortization of premium and accretion
of discounts, results in an unrealized gain or loss. Unrealized gains or
losses are reported as increases or decreases in stockholders' equity, net of
the related deferred tax effect. Gains or losses from the sale of securities
are determined using the specific identification method.
Loans
Loans are stated at the principal amount outstanding, net of unearned interest
and the allowance for loan losses.
Unearned interest on certain installment loans is credited to income over the
term of the loan using the interest method. For all other loans, interest is
credited to income as earned using the simple interest method applied to the
daily balances of the principal outstanding.
The Company's policy is to discontinue the accrual of interest income on any
loan when, in the opinion of management, there is reasonable doubt as to the
timely collectibility of interest or principal. Interest income on these loans
is recognized to the extent interest payments are received and the principal is
considered fully collectible.
Allowance for Loan Losses
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 the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb losses on existing loans that may become uncollectible, based on
evaluation of the collectibility of loans and prior loss experience. The
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 borrowers'
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. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Union Banks' allowances for loan losses, and may require additions to the
allowance based on their judgment about information available to them at the
time of their examinations.
(Continued)
F - 17
93
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On January 1, 1995, the Company adopted Financial Accounting Standards Board
Statement No. 114 (Statement No. 114), "Accounting by Creditors for the
Impairment of a Loan," as amended by Statement No. 118, which requires loans to
be considered impaired when, based on current information and events, it is
probable that the bank will not be able to collect all amounts due. The
portion of the allowance for loan losses applicable to impaired loans has been
computed based on the present value of the estimated future cash flows of
interest and principal discounted at the loan's effective interest rate or on
the fair value of the collateral for collateral dependent loans. The entire
change in present value of expected cash flows of impaired loans or of
collateral value is reported as bad debt expense in the same manner in which
impairment initially was recognized or as a reduction in the amount of bad debt
expense that otherwise would be reported.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the accelerated and straight-line methods over the
estimated useful lives of the assets.
Intangible assets
The excess of the purchase price over the fair value of identifiable tangible
and intangible assets acquired is amortized using the straight-line method over
fifteen years.
Deferred income taxes
Deferred taxes are provided on a liability method. Deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, 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.
Per share data
Earnings per share are calculated on the weighted average number of shares
outstanding, including common stock equivalents, outstanding during the year.
Shares held by the employee stock ownership plan are considered to be
outstanding shares regardless of whether they are allocated to participants or
held as unallocated shares.
Statements of cash flows
For purposes of reporting cash flows, cash and due from banks includes cash on
hand and amounts due from banks (including cash items in process of clearing).
(Continued)
F - 18
94
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Accounting for mortgage servicing rights
The FASB has issued Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" (Statement No.
121) which becomes effective for years beginning after December 15, 1995.
Statement No. 121 generally requires long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of
the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment is recognized.
Management believes that adoption of this Statement will not have a material
effect on Union's financial statements.
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of
In May 1995 , the Financial Accounting Standards Board issued Statement No.
122 , "Accounting for Mortgage Servicing Rights" (Statement No. 122).
Statement No. 122 requires the Union Banks to recognize as separate assets
rights to service mortgage loans for others, however those servicing rights are
acquired. If the Union Banks acquire mortgage servicing rights through either
the purchase or origination of mortgage loans and sell or securitize those
loans with servicing rights retained, the Union Banks should allocate the total
cost of the mortgage loans to mortgage servicing rights and the loans (without
the mortgage servicing rights) based on their relative fair values. The
mortgage servicing rights should be amortized in proportion to and over the
period of estimated net servicing income.
Statement No. 122 is effective for years beginning after December 15, 1995.
The Company believes the adoption of Statement No. 122 will not have a material
impact on its consolidated financial statements.
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation" (Statement No. 123). Statement
No. 123 establishes a fair value based method of accounting for stock options
and other equity instruments.
Statement No. 123 permits the continued use of the intrinsic value method
included in Accounting Principle Board Opinion 25, "Accounting for Stock Issued
to Employees", but regardless of the method used to account for the
compensation cost associated with stock option or similar plans, it requires
employers to disclose information required by Statement No. 123.
Statement No. 123 is effective for fiscal years beginning after December 15,
1995. The Company believes the adoption of Statement No. 123 will not have a
material impact on its consolidated financial statements.
NOTE 2. CASH AND DUE FROM BANKS
The Union Banks are required to maintain legal reserves composed of funds on
deposit with the Federal Reserve Bank and cash on hand. The required balances
as of December 31, 1995 and 1994, were $1,973,000 and $1,816,000, respectively.
(Continued)
F - 19
95
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. SECURITIES
The Company adopted Financial Accounting Standards Board Statement No. 115
(Statement No. 115), "Accounting for Certain Investments in Debt and Equity
Securities" as of January 1, 1994. The effect of adopting Statement No. 115 on
the accompanying balance sheet as of January 1, 1994 was an increase in
stockholders' equity of $831,467, net of the related income tax effect of
$527,138, to recognize the net unrealized gain in securities available for sale
at that date.
Amortized costs and fair values of securities are summarized as follows:
HELD TO MATURITY December 31, 1995
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------ ----------- ----------- ----------
U.S. Treasury $ 117,307 $ -- $ -- $ 117,307
U.S. Government agencies and
corporations 2,000,000 -- 120,855 1,879,145
States and political subdivisions 26,660,119 496,019 214,800 26,941,338
Mortgage backed securities 8,790 -- -- 8,790
Corporate bonds 240,000 -- -- 240,000
------------ --------- --------- ------------
$ 29,026,216 $ 496,019 $ 335,655 $ 29,186,580
============ ========= ========= ============
December 31, 1994
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- ----------- ----------- -----------
U.S. Government agencies and
corporations $ 3,000,000 $ -- $ 343,290 $ 2,656,710
States and political
subdivisions 25,401,667 95,862 1,252,421 24,245,108
Mortgage backed securities 25,437 -- -- 25,437
Corporate bonds 240,000 -- -- 240,000
------------ ---------- ----------- -------------
$ 28,667,104 $ 95,862 $ 1,595,711 $ 27,167,255
============ ========== =========== =============
(Continued)
F - 20
96
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
AVAILABLE FOR SALE December 31, 1995
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------- ---------- ---------- ------------
U.S. Treasury $ 18,329,568 $ 24,352 $ 75,165 $ 18,278,755
U.S. Government agencies and
corporations 36,908,777 303,127 225,033 36,986,871
Mortgage backed securities 6,218,441 30,314 58,920 6,189,835
States and political subdivisions 893,372 19,780 -- 913,152
Corporate bonds 1,512,522 9,678 -- 1,522,200
Other 25,000 -- 25,000 --
------------ --------- --------- ------------
$ 63,887,680 $ 387,251 $ 384,118 $ 63,890,813
============ ========= ========= ============
December 31, 1994
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------ ---------- ----------- ------------
U.S. Treasury $ 25,607,492 $ -- $ 1,191,856 $ 24,415,636
U.S. Government agencies and
corporations 20,945,060 1,087 1,274,353 19,671,794
Mortgage backed securities 8,713,702 86,992 403,438 8,397,256
States and political
subdivisions 893,152 -- 7,937 885,215
Corporate bonds 3,278,708 -- 55,668 3,223,040
Other 25,000 -- 25,000 --
------------ -------- ----------- ------------
$ 59,463,114 $ 88,079 $ 2,958,252 $ 56,592,941
============ ======== =========== ============
The amortized cost and fair value of securities classified as held to maturity
and available for sale at December 31, 1995, by contractual maturity, are
shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
(Continued)
F - 21
97
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 1995
----------------------------------------------------------
Available
Held to Maturity for Sale
-----------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ------------ -----------
Due in one year or less $ 1,781,958 $ 1,910,134 $ 8,825,478 $ 8,782,725
Due after one year through five years 15,521,431 15,522,016 24,168,022 23,983,759
Due after five years through ten years 8,655,643 8,583,561 24,782,767 25,040,870
Due after ten years 3,067,184 3,170,869 -- --
Mortgage backed securities -- -- 6,111,413 6,083,459
------------ ------------ ------------ ------------
$ 29,026,216 $ 29,186,580 $ 63,887,680 $ 63,890,813
============ ============= ============ ============
Securities with carrying values of approximately $50,338,000 and $37,064,000 at
December 31, 1995 and 1994, respectively, were pledged to secure public
deposits, to secure securities sold under agreements to repurchase and for
other purposes as required or permitted by law.
Realized gains and losses from securities available for sale during 1995 and
1994 and investment securities during 1993 follow:
Years Ended
December 31,
------------------------------------------
1995 1994 1993
------------ ------------ -------------
Securities:
Gross gains $ 171,882 $ 228,672 $ 315,712
Gross losses (73,942) (111,054) (79,375)
--------- --------- ---------
Net gain $ 97,940 $ 117,618 $ 236,337
Marketable equity securities:
Gross gains $ -- $ -- $ --
Gross losses -- -- (50,968)
--------- --------- ---------
Net gain $ -- $ -- $ (50,968)
--------- --------- ---------
$ 97,940 $ 117,618 $ 185,369
========= ========= =========
(Continued)
F - 22
98
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. LOANS
The major classifications of loans follow:
December 31,
----------------------------
1995 1994
------------- -------------
Commercial $ 53,225,736 $ 51,401,761
Real estate 100,505,607 86,625,493
Installment 24,166,864 20,350,626
Other 2,928,008 2,787,697
------------- -------------
180,826,215 161,165,577
------------- -------------
Deduct:
Unearned interest 7,207 31,329
Allowance for loan losses 2,013,996 1,704,281
------------- -------------
2,021,203 1,735,610
------------- -------------
$ 178,805,012 $ 159,429,967
------------- -------------
The Company's opinion as to the ultimate collectibility of these loans is
subject to estimates regarding future cash flows from operations and the value
of property, real and personal, pledged as collateral. These estimates are
affected by changing economic conditions and the economic prospects of
borrowers.
The following table presents data on impaired loans at December 31, 1995:
Impaired loans for which an allowance has been provided $733,294
Impaired loans for which no allowance has been provided $ --
--------
Total loans determined to be impaired $733,294
========
Allowance for loan loss for impaired loans included in allowance for loan losses $500,000
========
Average recorded investment in impaired loans $422,539
========
Interest income recognized from impaired loans $ --
========
Cash basis interest recognized from impaired loans $ --
========
Loans on which the accrual of interest had been discontinued or reduced
amounted to $1,060,750 and $1,683,402, at December 31, 1994 and 1993,
respectively, which had the effect of reducing interest income approximately
$167,000 and $231,000, for the years ended December 31, 1994 and 1993,
respectively.
(Continued)
F - 23
99
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company and its subsidiaries conduct most of their business activities,
including granting agribusiness, commercial, residential and installment loans
with customers in the Illinois counties of LaSalle, Livingston, Grundy, Bureau,
Kendall, DeKalb and Kane. The loan portfolio includes a concentration of loans
to agricultural and agricultural-related industries amounting to approximately
$27,308,000 and $26,560,000 as of December 31, 1995 and 1994, respectively.
Generally those loans are collateralized by assets of those entities. The
loans are expected to be repaid from cash flows or from proceeds from the sale
of selected assets of the borrowers. Credit losses arising from lending
transactions with agricultural entities compare favorably with the Company's
credit loss experience on the loan portfolio as a whole.
In the normal course of business, loans are made to employees, executive
officers, directors and principal stockholders of the Company and its
subsidiaries and to parties which the Company or its directors, executive
officers and stockholders have the ability to significantly influence its
management or operations (related parties). In the opinion of management, the
terms of these loans, including interest rates and collateral, are similar to
those prevailing for comparable transactions with other customers and do not
involve more than a normal risk of collectibility. Changes in such loans
during the year ended December 31, 1995:
Balance at the beginning of year $ 8,178,000
New loans, extensions and modifications 8,936,000
Repayments (5,776,000)
------------
Balance at end of year $ 11,338,000
============
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans were
$47,777,424, $46,546,355, and $43,062,391 at December 31, 1995, 1994 and 1993,
respectively.
During 1995, 1994 and 1993, the Company sold residential mortgages with
balances of approximately $13,122,711, $9,158,620 and $29,485,699,
respectively, to the Federal Home Loan Mortgage Corporation. Gains of
$137,456, $130,163 and $573,773, respectively, were realized on those sales. In
addition, during 1995, the Company sold mortgage loans with balances of
approximately $103,030 to the Illinois Housing Development Authority for a
gain of $2,435 and commercial loans with balances of approximately $1,446,777
to the Small Business Administration for a gain of $86,467. The Company also
realized a gain of $61,204 on the sale of its entire portfolio of student loans
during 1995.
(Continued)
F - 24
100
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5. ALLOWANCE FOR LOAN LOSSES
An analysis of activity in the allowance for loan losses follows:
Years Ended
December 31,
----------------------------------------
1995 1994 1993
------------ ----------- -------------
Balance at beginning of year $ 1,704,281 $ 1,786,953 $ 1,586,416
Provision for loan losses 684,000 660,000 1,268,000
Recoveries 162,580 281,334 211,566
Loans charged off (536,865) (1,024,006) (1,279,029)
----------- ----------- -----------
Balance at end of year $ 2,013,996 $ 1,704,281 $ 1,786,953
=========== =========== ===========
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment consisted of:
December 31,
-------------------------------------------
1995 1994
--------------------- ---------------------
Land $ 746,699 $ 733,447
Buildings 6,022,219 5,858,466
Furniture and equipment 5,586,126 4,464,933
----------- -----------
12,355,044 11,056,846
Less accumulated depreciation 5,784,334 5,369,029
----------- -----------
$ 6,570,710 $ 5,687,817
=========== ===========
(Continued)
F - 25
101
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. DEPOSITS
A maturity distribution of time certificates of deposit in denominations of
$100,000 or more was as follows:
December 31,
--------------------------
1995 1994
------------ -------------
3 months or less $ 6,024,323 $ 10,204,186
Over 3 months through 6 months 3,127,908 2,646,656
Over 6 months through 12 months 5,012,932 4,873,892
Over 12 months 9,487,225 4,215,683
------------ ------------
$ 23,652,388 $ 21,940,417
============ ============
NOTE 8. SHORT-TERM BORROWINGS
Short-term borrowings included a note payable to a third party lender and
securities sold under agreements to repurchase. Average and maximum balances
and rates on aggregate short-term borrowings outstanding were as follows:
Years ended December 31,
---------------------------------
1995 1994 1993
--------- ------------ ---------
Maximum month-end balance $ 20,007,000 $ 18,213,000 $ 8,990,000
Average month-end balance 13,944,000 10,644,000 7,417,000
Weighted average interest rate for the year 7.38% 5.47% 4.57%
Weighted average interest rate at year end 7.33% 6.69% 4.51%
The note payable for $4,321,250 contains certain covenants which limit the
amounts of dividends paid, the purchase of other banks and/or businesses, the
purchase of investments not in the ordinary course of business, the changes in
capital structure and the guarantees of other liabilities and obligations. In
addition, the Company must maintain certain financial ratios. The Company was
in compliance with all covenants for the year ended December 31, 1995.
(Continued)
F - 26
102
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 9. INCOME TAXES
Income taxes consisted of:
Years ended December 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
Federal:
Current $ 879,002 $ 684,038 $ 918,169
Deferred (133,850) (30,796) (192,350)
--------- --------- ---------
745,152 653,242 725,819
--------- --------- ---------
State:
Current 140,478 50,720 38,071
Deferred (4,010) (937) (16,491)
--------- --------- ---------
136,468 49,783 21,580
--------- --------- ---------
$ 881,620 $ 703,025 $ 747,399
========= ========= =========
The Company's income tax expense differed from the statutory federal rate of
34% as follows:
Years ended December 31,
------------------------------------------
1995 1994 1993
------------ ------------- ---------------
Expected income taxes $ 1,099,712 $ 1,120,827 $ 1,091,082
Income tax effect of:
Interest earned on tax free investments and loans (471,483) (464,804) (402,382)
Nondeductible interest expense incurred to
carry tax-free investments and loans 62,775 48,746 39,993
Tax-exempt dividends (396) (8,854) (13,799)
Nondeductible amortization 23,060 23,060 23,060
State income taxes, net of federal tax benefit 90,069 32,857 14,243
Other 77,883 (48,807) (4,798)
------------ ----------- -----------
$ 881,620 $ 703,025 $ 747,399
=========== =========== ===========
(Continued)
F - 27
103
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The deferred income taxes in the accompanying balance sheets include the
following amounts of deferred tax assets and liabilities:
December 31,
-------------------------
1995 1994
------------ -----------
Deferred tax liability $ (482,768) $ (467,261)
Deferred tax asset 473,181 1,434,657
---------- -----------
Net deferred tax asset (liability) $ (9,587) $ 967,396
========== ===========
The tax effects of principal temporary differences are shown in the following
table:
December 31,
------------------------
1995 1994
------------ ---------
Allowance for loan losses $ 446,966 $ 331,033
Deferred compensation 26,215 11,898
Premises and equipment basis (311,720) (243,713)
Core deposits (151,778) (180,237)
Securities available for sale (1,215) 1,113,628
Leases (4,037) (12,783)
Other (14,018) (52,430)
--------- ----------
$ (9,587) $ 967,396
========= ==========
NOTE 10. EMPLOYEE STOCK OWNERSHIP PLAN
The Company's Employees' Stock Ownership Plan (the "ESOP") covers all full-time
employees who have completed six months of service and have attained the
minimum age of twenty and one-half years. Vesting in the ESOP is based on
years of continuous service. A participant is 100 percent vested after seven
years of credited service.
The ESOP operates as a leveraged employee stock ownership plan. The ESOP owns
450,945 shares of the Company's common stock. These shares are held in trust
and are allocated to participant's accounts in the ESOP as the related loan
obligation is repaid. At December 31, 1995, 416,232 shares were allocated to
ESOP participants. Principal and interest on the loan are required to be paid
in quarterly installments through April 1996. The loan, with an outstanding
balance of $46,875, bears interest at 88% of prime, with an effective rate of
7.48% as of December 31, 1995.
(Continued)
F - 28
104
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Company contributions, when aggregated with the ESOP's dividend and interest
earnings, are, at a minimum, equal to the amount required by the ESOP to pay
the principal and interest on the loan, plus the sum required to purchase
allocated shares from terminated participants. The Company expenses all cash
contributions made to the ESOP. Contributions were $236,959, $250,576 and
$244,020 for the years ended December 31, 1995, 1994 and 1993, respectively.
NOTE 11. STOCK OPTION PLAN
In April 1993, the Company adopted the 1993 Stock Option Plan (the "Option
Plan"). Under the Option Plan, non-qualified options, incentive stock options,
and/or stock appreciation rights may be granted to employees and outside
directors of the Company and its subsidiaries to purchase the Company's common
stock at an exercise price to be determined by the Option Plan's administrative
committee. Pursuant to the Option Plan, 600,000 shares of the Company's
unissued common stock have been reserved and are available for issuance upon
the exercise of options and rights granted under the Option Plan.
A summary of the activity in the Option Plan follows:
Exercise
Granted Vested Forfeited Exercisable Outstanding Price
------------ ------ --------- ----------- ----------- -------------
December 31,
1993 - - - - -
December 31,
1994 38,100 7,620 - 7,620 38,100 $5.04 - $6.75
December 31,
1995 30,300 - - - 30,300 $6.75 - $8.33
---------- ------ --------- ----------- ----------
Total 68,400 7,620 - 7,620 68,400
========== ====== ========= =========== ==========
The Company recognizes compensation expense on non-qualified stock options over
the stated vesting period for the difference between fair value and the
exercise price of the options granted. The Company recognized compensation
expense of $18,938 during 1995 related to non-qualified stock options.
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107, "Disclosures about Fair
Value of Financial Instruments" (Statement No. 107), requires disclosure of
fair value information about financial instruments, whether or not recognized
in the balance sheet, for which it is practicable to estimate that value. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
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.
(Continued)
F - 29
105
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
Cash and due from banks
The carrying amounts reported in the balance sheet for cash and due from banks
approximate their fair values.
Federal funds sold
The stated carrying amounts of federal funds sold approximate their fair
values.
Securities
Fair values for 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. The carrying amount of accrued
interest receivable approximates its fair value.
Loans
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
fixed-rate loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to
borrowers with similar credit quality. The carrying amount of accrued interest
receivable approximates its fair value.
Off-balance-sheet instruments
Fair values for the Company's off-balance-sheet instruments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing. The
fair value of these items is not material.
Deposit liabilities
The fair values for demand deposits equal their carrying amounts, which
represents the amount payable on demand. The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. 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
to a schedule of aggregated expected monthly maturities on time deposits. The
carrying amount of accrued interest payable approximates its fair value.
Short-term borrowings
The stated carrying amounts of borrowings under agreements to repurchase, and
other short-term borrowings approximate their fair values.
(Continued)
F - 30
106
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The estimated fair values of the Company's financial instruments were as
follows:
December 31,
------------------------------------------------------
1995 1994
------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ------------ ------------ ------------
Financial Assets:
Cash and due from banks $ 16,166,689 $ 16,166,689 $ 12,997,888 $ 12,997,888
Federal funds sold 2,265,000 2,265,000 1,200,000 1,200,000
Securities 92,917,029 93,077,393 85,260,045 83,760,196
Loans 178,805,012 178,927,747 159,429,967 159,290,869
Financial Liabilities:
Deposits 261,727,319 262,490,548 232,333,565 232,040,448
Short-term borrowings 15,851,384 15,851,384 18,144,437 18,144,437
In addition, other assets and liabilities of the Company that are not defined
as financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not
recognized in financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the earnings potential of
loan servicing rights, the earnings potential of the trust operations, the
trained work force, customer goodwill and similar items.
NOTE 13. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
In the normal course of business, there are outstanding various contingent
liabilities such as claims and legal action, which are not reflected in the
consolidated financial statements. In the opinion of management, no material
losses are anticipated as a result of these actions or claims.
The Union Banks are parties to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of their
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance
sheet. The contractual amounts of those instruments reflect the extent of
involvement in particular classes of financial instruments.
(Continued)
F - 31
107
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company'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 written, is represented by the contractual amount of
those instruments. The Union Banks use the same credit policies in making
commitments and conditional obligations as they do for on-balance-sheet
instruments. Financial instruments whose contract amounts represent credit risk
at December 31, 1995 follow:
Range of Rates
Variable Rate Fixed Rate Total on Fixed Rate
Commitments Commitments Commitments Commitments
--------------- ------------- ------------ --------------
Commitments to extend credit and
standby letters of credit $ 40,686,000 $ 3,111,000 $ 43,797,000 6.25%-11.25%
The Company has employment agreements with its executive officers and certain
other management personnel. These agreements generally continue until
terminated by the executive or the Company and provide for continued salary and
benefits to the executive under certain circumstances. The agreements provide
the employees with additional rights after a change of control of the Company
occurs.
The Company does not engage in the use of interest rate swaps, or futures,
forwards or option contracts.
NOTE 14. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The primary source of funds for the Company is dividends from its subsidiaries.
Certain regulatory requirements restrict the amount of dividends that may be
paid by the Union Banks to the Company. As a practical matter, dividend
payments are restricted to maintain prudent capital levels.
(Continued)
F - 32
108
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Condensed financial information for UnionBancorp, Inc. follows:
BALANCE SHEETS (PARENT COMPANY ONLY) December 31,
ASSETS 1995 1994
- ------------------------------------------------------------------- --------------- ---------------
Cash and due from banks $ 34 $ 6,065
Investment in subsidiaries 27,558,293 24,079,645
Premises and equipment 152,060 118,775
Intangible assets 75,799 99,877
Other assets 76,324 514,062
------------ ------------
$ 27,862,510 $ 24,818,424
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short-term borrowings $ 4,346,250 $ 5,026,250
Deferred income taxes 11,985 --
Other liabilities 29,283 163,577
----------- ------------
4,387,518 5,189,827
----------- ------------
Stockholders' Equity
Common stock, $1 par value; 10,000,000 shares authorized; 2,400,000
issued and outstanding 2,400,000 2,400,000
Surplus 1,074,272 1,007,352
Retained earnings 20,567,981 18,498,987
Unrealized gain (loss) on securities available for sale 1,918 (1,756,545)
Deferred compensation - stock option plans (47,982) --
------------ ------------
23,996,189 20,149,794
Less treasury stock, at cost; 268,263 shares 521,197 521,197
------------ ------------
23,474,992 19,628,597
------------ ------------
$ 27,862,510 $ 24,818,424
------------ ------------
(Continued)
F - 33
109
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
INCOME STATEMENTS (PARENT COMPANY ONLY)
Years Ended December 31,
----------------------------------------
1995 1994 1993
------------- ----------- -----------
Dividends from subsidiaries $ 1,532,126 $ 1,149,052 $ 1,010,176
Management fees and other 981,309 652,384 659,715
----------- ----------- -----------
Total income 2,513,435 1,801,436 1,669,891
----------- ----------- -----------
Interest expense 422,462 371,299 339,998
Other expenses 1,275,215 883,090 691,630
------------ ----------- -----------
Total expenses 1,697,677 1,254,389 1,031,628
------------ ----------- -----------
Income before income tax benefit and equity
in undistributed earnings of subsidiaries 815,758 547,047 638,263
Income tax benefit (216,883) (251,040) (214,853)
------------ ----------- -----------
Income before equity in undistributed
earnings of subsidiaries 1,032,641 798,087 853,116
Equity in undistributed earnings of subsidiaries 1,320,185 1,795,438 1,608,551
------------ ----------- -----------
Net income $ 2,352,826 $ 2,593,525 $ 2,461,667
============ =========== ===========
(Continued)
F - 34
110
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) Years Ended December 31,
----------------------------------------------
1995 1994 1993
------------- ----------- ------------
Cash Flows from Operating Activities
Net income $ 2,352,826 $ 2,593,525 $ 2,461,667
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 17,494 9,656 2,150
Undistributed earnings of subsidiaries (1,320,185) (1,795,438) (1,608,551)
Amortization of intangible 24,078 24,078 24,077
Amortization of deferred compensation -
stock options 18,938 - -
Provision for deferred income taxes 11,985 - -
Change in assets and liabilities:
Decrease in other assets 437,738 224,186 2,804
Increase (decrease) in other liabilities (134,294) 30,748 (146,770)
------------ ------------ -----------
Net cash provided by operating activities 1,408,580 1,086,755 735,377
------------ ------------ -----------
Cash Flows from Investing Activities
Investment in subsidiary (400,000) (500,000) -
Purchases of premises and equipment (50,779) (123,456) (4,359)
------------ ------------ -----------
Net cash (used in) financing activities (450,779) (623,456) (4,359)
------------ ------------ -----------
Cash Flows from Financing Activities
Payments on short-term borrowings (680,000) (253,750) (520,000)
Dividends paid (283,832) (248,121) (191,414)
Proceeds from issuance of treasury stock - 14,157 -
------------ ------------ -----------
Net cash (used in) financing activities (963,832) (487,714) (711,414)
------------ ------------ -----------
Net increase (decrease) in cash and
due from banks (6,031) (24,415) 19,604
Cash and due from banks:
Beginning of year 6,065 30,480 10,876
------------ ------------ -----------
End of year $ 34 $ 6,065 $ 30,480
============ ============ ===========
Supplemental Schedule of Noncash Investing
and Financing Activities
Change in unrealized gain (loss) on securities
available for sale $ 1,758,463 $ (1,756,545) $ -
Issuance of nonqualifying stock options 66,920 - -
(Continued)
F - 35
111
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. SUBSEQUENT EVENTS
On May 20, 1996, the Company effected a three-for-one stock split in the form
of a stock dividend. All references in the accompanying financial statements
to number of shares and per share amounts have been retroactively restated to
reflect the stock split.
F - 36
112
PRAIRIE BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data of Prairie Bancorp, Inc.
should be read in conjunction with the Consolidated Financial Statements of
Prairie Bancorp, Inc. and the Notes thereto appearing elsewhere in this
Prospectus and the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Prairie Bancorp,
Inc." The selected historical consolidated financial data as of and for the
three years in the period ended December 31, 1995 are derived from Prairie's
Consolidated Financial Statements which have been audited by independent public
accountants. The selected historical consolidated financial data as of and for
the years ended December 31, 1992 and 1991 and the six months ended June 30,
1996 and June 30, 1995 is unaudited.
Six Months Ended
June 30,
-----------------------
1996 1995
----------- ----------
INCOME STATEMENT DATA: (unaudited)
Interest income $ 7,527 $ 7,477
Interest expense 4,792 5,127
---------- ----------
Net interest income 2,735 2,350
Provision for loan losses 20 (22)
---------- ----------
Net interest income after
provision for loan losses $ 2,715 $ 2,372
Noninterest income 256 683
Noninterest expense 2,217 2,374
Minority interest 42 44
Net income before income taxes 712 637
Income taxes 215 156
---------- ----------
Net income $ 497 $ 481
========== ==========
Preferred stock dividends 309 229
Net income applicable to common stock 188 252
COMMON SHARE DATA:
Net income $ 188 $ 252
Book value 5,620 5,214
Weighted average common shares outstanding 1 1
Period end shares outstanding 1 1
BALANCE SHEET DATA:
Total assets $ 226,032 $ 225,470
Loans, net 73,050 65,243
Allowance for loan losses 784 750
Total deposits 187,840 172,464
Stockholders' equity 11,712 11,306
Preferred stock portion of stockholders' equity 6,092 6,092
Common stock portion of stockholders' equity 5,620 5,214
PERFORMANCE DATA:
Return on average total assets (1) 0.44% 0.43%
Return on average stockholders' equity (1) 8.44 9.10
Net interest margin 2.64 2.23
Loans to deposits 38.89 37.83
Efficiency ratio (2) 73.85 64.49
ASSET QUALITY RATIOS:
Nonperforming assets to total assets 0.38% 0.69%
Nonperforming loans to total loans 1.11 2.35
Net loan charge-offs to average loans (1) (0.03) (0.09)
Allowance for loan losses to total loans 1.06 1.14
Allowance for loan losses to nonperforming
loans 95.96 48.26
CAPITAL RATIOS:
Tier I risk-based capital 13.82% 14.51%
Total risk-based capital 14.76 15.48
Leverage 5.11 4.97
- --------
113
Years Ended December 31,
---------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- --------- --------- ----------
INCOME STATEMENT DATA: (unaudited) (unaudited)
(Dollars in Thousands, Except Per Share Data)
Interest income $ 15,123 $ 13,251 $ 10,466 $ 9,818 $ 7,291
Interest expense 10,327 8,582 6,300 5,973 4,649
---------- ---------- ---------- ---------- ---------
Net interest income 4,796 4,669 4,166 3,845 2,642
Provision for loan losses (31) 10 (100) 252 47
---------- ---------- ---------- ---------- ---------
Net interest income after
provision for loan losses $ 4,827 $ 4,659 $ 4,266 $ 3,593 $ 2,595
Noninterest income 993 1,097 1,440 1,133 411
Noninterest expense 4,622 4,648 4,011 3,588 2,245
Minority interest 95 95 113 80 90
Net income before income taxes 1,103 1,013 1,582 1,058 671
Income taxes 275 227 271 172 217
---------- ---------- ---------- ---------- ---------
Net income $ 828 $ 786 $ 1,311 $ 886 $ 454
========== ========== ========== ========== =========
Preferred stock dividends 484 344 66 65 -
Net income applicable to common stock 344 442 1,245 821 454
COMMON SHARE DATA:
Net income $ 344 $ 442 $ 1,245 $ 821 $ 454
Book value 5,749 4,376 4,480 3,075 1,954
Weighted average common shares outstanding 1 1 1 1 1
Period end shares outstanding 1 1 1 1 1
BALANCE SHEET DATA:
Total assets $ 224,974 $ 228,188 $ 178,798 $ 140,667 $ 86,593
Loans, net 66,392 60,080 53,023 49,369 33,462
Allowance for loan losses 741 715 781 963 499
Total deposits 183,296 180,910 143,167 125,754 76,592
Stockholders' equity 11,841 8,968 5,572 4,167 1,954
Preferred stock portion of stockholders' equity 6,092 4,592 1,092 1,092 -
Common stock portion of stockholders' equity 5,749 4,376 4,480 3,075 1,954
PERFORMANCE DATA:
Return on average total assets (1) 0.37% 0.36% 0.89% 0.74% 0.53%
Return on average stockholders' equity (1) 7.96 10.81 26.92 28.94 28.79
Net interest margin 2.29 2.34 3.30 3.96 3.73
Loans to deposits 36.22 33.21 37.04 39.26 43.69
Efficiency ratio (2) 71.83 71.23 55.03 59.68 69.34
ASSET QUALITY RATIOS:
Nonperforming assets to total assets 0.30% 0.21% 0.27% 0.39% 0.39%
Nonperforming loans to total loans 1.00 0.75 0.75 0.93 1.01
Net loan charge-offs to average loans (1) (0.09) 0.13 0.16 0.32 (0.08)
Allowance for loan losses to total loans 1.10 1.18 1.45 1.91 1.47
Allowance for loan losses to nonperforming
loans 110.10 155.77 192.36 205.33 145.91
CAPITAL RATIOS:
Tier I risk-based capital 14.52% 12.29% 8.82% 7.15% 5.17%
Total risk-based capital 15.46 13.25 10.07 8.77 6.49
Leverage 5.05 4.28 3.04 2.94 2.24
- --------
(1) All interim periods have been annualized.
(2) Calculated as noninterest expense less amortization of intangibles and
expenses related to other real estate owned divided by the sum of net
interest income before provision for loan losses and total noninterest
income excluding securities gains and losses.
F - 37
114
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF PRAIRIE BANCORP, INC.
The following discussion provides additional information regarding the
operations and financial condition of Prairie Bancorp, Inc. ("Prairie") for the
six months ended June 30, 1996 and 1995 and the three years ended December
31, 1995. The discussion should be read in conjunction with the consolidated
statements of financial condition as of December 31, 1995 and 1994 and the
results of operations for the three years ended December 31, 1995 and for the
six months ended June 30, 1996 and 1995 and accompanying notes included
elsewhere in the prospectus.
GENERAL
Prairie derives substantially all of its revenues and income from the
operations of its subsidiaries, the Prairie Banks, which provide a full range
of commercial and consumer banking services to businesses and individuals,
primarily in central and western Illinois. As of June 30, 1996, Prairie had
total assets of $226.0 million, net loans of $73.0 million, total deposits of
$187.8 million and total stockholders' equity of $11.7 million. Prairie's
reported net income grew to $497,000 for the six months ended June 30, 1996
from net income of $481,000 for the six months ended June 30, 1995 as a result
of internal loan and deposit portfolio growth generating higher net interest
income partially offset by a decrease in securities gains in 1996 compared to
1995.
RESULTS OF OPERATIONS
NET INCOME
Net income of Prairie was $497,000 ($188 per common share) for the six months
ended June 30, 1996, compared with net income of $481,000 ($252 per common
share) for the six months ended June 30, 1995, an increase of $16,000 or 3.3%.
Net income per common share in 1996 decreased due to additional dividends paid
on preferred stock issued during 1995. Factors contributing to the increase in
net income in 1996 compared with 1995 include the higher percentage of loans to
total assets and replacement of other borrowings with lower cost deposits.
Net income was $828,000 for 1995 ($344 per common share), compared with net
income of $786,000 for 1994 ($442 per common share) and $1,311,000 for 1993
($1,245 per common share). Net income per common share in 1995 decreased due
to additional dividends paid on preferred stock issued during 1995. The
increase in net income for 1995 from 1994 was due primarily to an increase in
net interest income after provision for loan losses of $168,000. The decrease
in net income from 1993 to 1994 was attributable to an increase in net interest
income after provision for loan losses of $393,000 coupled with an increase in
noninterest expense of $637,000 partially attributable to the opening of new
branches and a decrease in securities gains of $361,000.
NET INCOME BEFORE INCOME TAXES
Net income before income taxes was $712,000 for the six months ended June 30,
1996, compared with $637,000 for the first six months of 1995, an 11.8%
increase.
Net income before income taxes was $1,103,000 in 1995 compared with $1,013,000
in 1994 and $1,582,000 in 1993.
F - 38
115
NET INTEREST INCOME
Net interest income is the difference between income earned on interest-earning
assets and the interest expense incurred on interest-bearing liabilities. The
net yield on total interest-earning assets, also referred to as interest rate
margin or net interest margin, represents net interest income divided by
average interest-earning assets. Prairie's principal interest-earning assets
are loans, investment securities and federal funds sold.
Net interest income was $2,735,000 for the first six months of 1996, an
increase of $385,000 or 16.38% compared with the first six months of 1995,
resulting principally from an increase in loans. In addition, Prairie
experienced an increase in the net interest spread from 1.9% to 2.28% for the
six months ended June 30, 1995 and 1996, respectively. The foregoing increase
resulted principally from the fact that the yield on interest-earning assets
increased and the cost of the interest-bearing liabilities decreased slightly.
The yield on interest-earning assets increased from 6.93% to 7.10%, while the
cost of interest-bearing liabilities decreased from 5.03% to 4.82% for the six
months ended June 30, 1995 and 1996, respectively.
Net interest income was $4,796,000 for 1995, an increase of $127,000 or 2.72%
compared with net interest income of $4,669,000 for 1994, which represented an
increase of $503,000 or 12.07% compared with net interest income of $4,166,000
for 1993. Prairie's average total interest-earning assets increased from
approximately $208 million for 1994 to $217 million for 1995, representing a
4.56% increase resulting principally from an increase in loans. The net
interest margin of 2.29% for 1995 decreased from 2.34% for 1994.
The following table sets forth for each category of interest-earning assets and
interest-bearing liabilities the average amounts outstanding, the interest
earned or paid on such amounts and the average rate paid for the six months
ended June 30, 1996 and 1995 and for the three years ended December 31, 1995,
1994 and 1993. The table also sets forth the average rate earned on all
interest-earning assets, the average rate paid on all interest-bearing
liabilities, and the net yield on average interest-earning assets for the same
period.
F - 39
116
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Six Months Ended June 30,
-------------------------------------------------------------------------
1996 1995
-------------------------------------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
-------------- ------------ ------- ------------- ---------- ---------
ASSETS
Interest-earning assets:
Interest-bearing deposits $ 484,000 $ 12,000 4.96% $ 371,000 $ 10,000 5.39%
Federal funds sold 2,088,000 50,000 4.79 623,000 20,000 6.42
U.S. Treasury and
agency securities 7,079,000 178,000 5.03 7,106,000 173,000 4.87
States and political (1) 6,471,000 294,000 9.09 6,718,000 289,000 8.60
Mortgage-backed securities 126,875,000 3,916,000 6.17 138,984,000 4,287,000 6.17
Other 1,384,000 44,000 6.36 1,869,000 64,000 6.85
Loans (2) (3) 70,483,000 3,136,000 8.90 62,474,000 2,720,000 8.71
------------- ----------- ----- ------------- ----------- ------
Total interest
earning assets $ 214,864,000 $ 7,630,000 7.10% $ 218,145,000 $ 7,563,000 6.93%
------------- ----------- ----- ------------- ----------- ------
Less: Allowance for loan
losses 763,000 742,000
Cash and due from banks 5,728,000 3,318,000
Premises and equipment 3,256,000 3,245,000
Other assets 2,418,000 1,909,000
------------- -------------
Total assets $ 225,503,000 $ 225,875,000
============= =============
LIABILITIES
Interest-earning liabilities:
Interest-bearing demand
deposits $ 20,846,000 $ 279,000 2.68% $ 17,757,000 $ 244,000 2.75%
Savings deposits 48,580,000 886,000 3.65 52,783,000 1,078,000 4.08
Time deposits 103,445,000 2,783,000 5.38 97,009,000 2,628,000 5.42
------------- ----------- ----- ------------- ----------- ------
Total interest-bearing
deposits $ 172,871,000 $ 3,948,000 4.57 $ 167,549,000 $ 3,950,000 4.72
------------- ----------- ----- ------------- ----------- ------
Short-term borrowings 7,463,000 264,000 7.07 6,108,000 203,000 6.65
Federal Home Loan Bank
advances and notes
payable 18,307,000 580,000 6.34 30,346,000 974,000 6.42
------------- ----------- ----- ------------- ----------- ------
Total interest-bear-
ing liabilities $ 198,641,000 $ 4,792,000 4.82 $ 204,003,000 $ 5,127,000 5.03
------------- ----------- ----- ------------- ----------- ------
Noninterest-bearing
deposits 12,698,000 9,913,000
Other liabilities 2,388,000 1,387,000
------------- -------------
Total liabilities 213,727,000 215,303,000
Stockholders' equity 11,776,000 10,572,000
------------- -------------
Total liabilities
and equity $ 225,503,000 $ 225,875,000
============= =============
Net interest income $ 2,838,000 $ 2,436,000
=========== ===========
Net interest spread 2.28 1.90
===== ======
Net interest margin 2.64% 2.23%
===== ======
______________
(1) Interest income and yield on nontaxable securities are reflected on a tax
equivalent basis based upon a statutory Federal income tax rate of 34% .
(2) Loans on nonaccrual status have been included in the computation of average
balances.
(3) The interest income on loans includes loan fees. Loan fees were $18,000
and $16,000 for the six months ended June 30, 1996 and 1995, respectively.
F - 40
117
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
Years Ended December 31,
--------------------------------------------------------------------
1995 1994
-------------------------------- ---------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
- ----------------------------------------- ------------ ---- ------------ -------- ------
ASSETS
Interest-earning assets:
Interest-bearing deposits $ 228,000 $ 16,000 7.02% $ 463,000 $ 22,000 4.75%
Federal funds sold 1,443,000 96,000 6.65 934,000 41,000 4.39
U.S. Treasury and
agency securities 6,894,000 335,000 4.86 10,190,000 516,000 5.06
States and political (1) 6,136,000 545,000 8.88 7,574,000 656,000 8.66
Mortgage-backed
securities 135,875,000 8,357,000 6.15 128,395,000 7,070,000 5.51
Other 1,849,000 126,000 6.81 2,717,000 128,000 4.71
Loans (2)(3) 64,662,000 5,819,000 9.00 57,339,000 5,003,000 8.73
------------ ------------ ---- ------------ ----------- ----
Total interest-
earning
assets (1) $217,087,000 $ 15,294,000 7.05% $207,612,000 $13,436,000 6.47%
------------ ------------ ------------ -----------
Less: Allowance for
loan losses 727,000 768,000
Cash and due from banks 3,845,000 3,575,000
Premises and equipment 3,419,000 3,097,000
Other assets 2,203,000 2,042,000
------------ ------------
Total assets $225,827,000 $215,558,000
============ ============
LIABILITIES
Interest-bearing
liabilities:
Interest-bearing demand
deposits $ 19,402,000 $ 559,000 2.88% $ 18,656,000 $ 528,000 2.83%
Savings deposits 50,630,000 1,996,000 3.94 61,449,000 2,460,000 4.00
Time deposits 99,974,000 5,494,000 5.50 78,356,000 3,677,000 4.69
------------ ------------ ---- ------------ ----------- ----
Total interest-bearing
liabilities $170,006,000 $ 8,049,000 4.73 $158,461,000 $ 6,665,000 4.21
------------ ------------ ---- ------------ ----------- ----
Short-term
borrowings 7,523,000 510,000 6.78 6,404,000 386,000 6.03
Federal Home Loan B
Bank advances and
notes payable 24,367,000 1,768,000 7.26 31,017,000 1,531,000 4.94
------------ --------- ---- ------------ ----------- ----
Total interest-
bearing
liabilities $201,896,000 $ 10,327,000 5.12 $195,882,000 $ 8,582,000 4.38
------------ ------------ ------------ -----------
Noninterest-bearing
deposits 11,994,000 11,038,000
Other liabilities 1,532,000 1,368,000
------------ ------------
Total liabilities 215,422,000 208,288,000
Stockholders' equity 10,405,000 7,270,000
------------ ------------
Total liabilities
and equity $225,827,000 $215,558,000
============ ============
Net interest income $ 4,967,000 $ 4,854,000
============ ===========
Net interest spread 1.93 2.09
==== ====
Net interest margin 2.29% 2.34%
==== ====
118
Years Ended December 31,
--------------------------------
1993
--------------------------------
Interest
Average Income/ Average
Balance Expense Rate
- ------------------------------------------- --------- -------
ASSETS
Interest-earning assets:
Interest-bearing deposits $ 495,000 $ 19,000 3.84%
Federal funds sold 1,531,000 49,000 3.20
U.S. Treasury and
agency securities 6,427,000 493,000 7.67
States and political (1) 11,756,000 1,388,000 11.81
Mortgage-backed
securities 66,465,000 4,100,000 6.17
Other 1,778,000 91,000 5.12
Loans (2)(3) 52,134,000 4,804,000 9.21
------------ ----------- ----
Total interest-
earning
assets (1) $140,586,000 $10,944,000 7.78%
------------ -----------
Less: Allowance for
loan losses 888,000
Cash and due from banks 3,865,000
Premises and equipment 2,075,000
Other assets 1,859,000
------------
Total assets $147,497,000
============
LIABILITIES
Interest-bearing
liabilities:
Interest-bearing demand
deposits $ 17,735,000 $ 554,000 3.12%
Savings deposits 39,488,000 1,638,000 4.15
Time deposits 61,019,000 3,140,000 5.15
------------ ----------- ----
Total interest-bearing
liabilities $118,242,000 $ 5,332,000 4.51
------------ ----------- ----
Short-term
borrowings 3,395,000 258,000 7.60
Federal Home Loan B
Bank advances and
notes payable 13,286,000 710,000 5.34
------------ ----------- ----
Total interest-
bearing
liabilities $134,923,000 $ 6,300,000 4.67
------------ -----------
Noninterest-bearing
deposits 6,346,000
Other liabilities 1,358,000
------------
Total liabilities 142,627,000
Stockholders' equity 4,870,000
------------
Total liabilities
and equity $147,497,000
============
Net interest income $ 4,644,000
===========
Net interest spread 3.12
====
Net interest margin 3.30%
====
- -----------------------------
(1) Interest income and yield on nontaxable securities are reflected on a tax
equivalent basis based upon a statutory Federal income tax rate of 34%.
(2) Loans on nonaccrual status have been included in the computation of average
balances.
(3) The interest income on loans includes loan fees. Loan fees were $30,000,
$21,000, and $22,000 for the years ended December 31, 1995, 1994 and 1993.
F - 41
119
Prairie's net interest income is affected by changes in the amount and mix of
interest-earning assets and interest-bearing liabilities, referred to as a
"volume change". It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as a "rate change". The following table reflects
the changes in net interest income stemming from changes in interest rates and
from asset and liability volume, including mix. The change in interest
attributable to both rate and volume has been allocated to the changes in the
rate and the volume on a pro rata basis.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
Six Months Ended June 30, 1996 Compared Years Ended December 31, 1995
with Six Months Ended June 30, 1995 Compared with December 31, 1994
----------------------------------- ---------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------------- ---------------------------------------
Volume (1) Rate Net Volume (1) Rate Net
- --------------------------------- ----------- ----------- ---------- ----------- ----------- -----------
Interest Income:
Loans $ 355,000 $ 61,000 $ 416,000 $ 655,000 $ 161,000 $ 816,000
Interest-earning deposits 5,000 (3,000) 2,000 (14,000) 8,000 (6,000)
Federal funds sold 45,000 (15,000) 30,000 28,000 27,000 55,000
U.S. Treasury and agency
securities (1,000) 6,000 5,000 (161,000) (20,000) (181,000)
State and political (23,000) 28,000 5,000 (128,000) 17,000 (111,000)
Mortgage backed securities (375,000) 4,000 (371,000) 428,000 859,000 1,287,000
Other interest-earning assets (16,000) (4,000) (20,000) (49,000) 47,000 (2,000)
---------- ----------- ---------- --------- ----------- -----------
Total interest income $ (10,000) $ 77,000 $ 67,000 $ 759,000 $ 1,099,000 $ 1,858,000
--------- ---------- ---------- --------- ----------- -----------
Interest
Expense:
Interest-bearing deposits $ 248,000 $ (250,000) $ (2,000) $ 508,000 $ 876,000 $ 1,384,000
Short-term borrowings 47,000 14,000 61,000 72,000 52,000 124,000
Federal Home Loan Bank
advances and notes payable (382,000) (12,000) (394,000) (377,000) 614,000 237,000
--------- ---------- ----------- ---------- ----------- -----------
Total interest expense $ (87,000) $ (248,000) $ (335,000) $ 203,000 $ 1,542,000 $ 1,745,000
--------- ---------- ---------- --------- ----------- -----------
Net interest margin $ 77,000 $ 325,000 $ 402,000 $ 556,000 $ (443,000) $ 113,000
========== ========== ========== ========= =========== ===========
Years Ended December 31, 1994
Compared with December 31, 1993
------------------------------------------
Increase (Decrease) Due to
------------------------------------------
Volume (1) Rate Net
- -------------------------------- ----------- ------------ -----------
Interest Income:
Loans $ 463,000 $ (264,000) $ 199,000
Interest-earning deposits (1,000) 4,000 3,000
Federal funds sold (23,000) 15,000 (8,000)
U.S. Treasury and agency
securities 227,000 (204,000) 23,000
State and political (419,000) (313,000) (732,000)
Mortgage backed securities 3,452,000 (482,000) 2,970,000
Other interest-earning assets 45,000 (8,000) 37,000
----------- ------------ ---------
Total interest income $ 3,744,000 $ (1,252,000) $ 2,492,000
----------- ------------ -----------
Interest
Expense:
Interest-bearing deposits $ 1,712,000 (379,000) $ 1,333,000
Short-term borrowings 190,000 (62,000) 128,000
Federal Home Loan Bank
advances and notes payable 879,000 (58,000) 821,000
----------- ------------ -----------
Total interest expense $ 2,781,000 $ (499,000) $ 2,282,000
----------- ------------ -----------
Net interest margin $ 963,000 $ (753,000) $ 210,000
=========== ============ ===========
(1) Nonaccrual loans are included in the average volumes used in
calculating this table.
F - 42
120
PROVISION FOR LOAN LOSSES
The amount of the provision for loan losses is based on periodic (not less than
quarterly) evaluations of the loan portfolio, with particular attention
directed toward nonperforming and other potential problem loans. During these
evaluations, consideration is given to such factors as management's evaluation
of specific loans, the level and composition of nonperforming loans, historical
loss experience, results of examinations by regulatory agencies, an internal
asset review process, the market value of collateral, the strength and
availability of guaranties, concentrations of credits, and other judgmental
factors.
Prairie recorded a $20,000 provision for loan losses during the six months
ended June 30, 1996 compared with a $22,000 negative provision during the first
six months of 1995. As Prairie's ratio of net charge-offs to average loans
remained unchanged for these periods, Prairie provided amounts to compensate
for growth in the loan portfolio in order to maintain the allowance for loan
losses at an adequate level.
During 1995, recoveries exceeded charge-offs by $57,000 which resulted in a
negative provision for loan losses in the amount of $31,000. A negative
provision has the effect of reducing the allowance for loan losses. The
$10,000 provision for loan losses recorded during 1994 was significantly
increased from the negative $100,000 provision recorded in 1993 and was due
primarily to an increase in loans of 12.61%.
NONINTEREST INCOME
The following table sets forth the various categories of noninterest income for
the six months ended June 30, 1996 and 1995 and for the years ended December
31, 1995, 1994 and 1993.
Six Months Ended Years Ended
June 30, December 31,
------------------ ------------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- ---------- ----------
Noninterest income
Service charges and fees $205,000 $ 166,000 $346,000 $ 317,000 $ 300,000
Securities gains, net -- 406,000 402,000 505,000 866,000
Other 51,000 111,000 245,000 275,000 274,000
-------- --------- -------- ---------- ----------
Total noninterest
income $256,000 $ 683,000 $993,000 $1,097,000 $1,440,000
======== ========= ======== ========== ==========
Noninterest income is generated primarily from fees associated with noninterest
and interest-bearing accounts as well as securities gains. Noninterest income
for the first six months of 1996 was $256,000, a decrease of $427,000 or 62.52%
compared with noninterest income of $683,000 for the first six months of 1995.
The decrease in noninterest income is the result of a decrease of $406,000 in
securities gains during the first six months of 1996 compared with the first
six months of 1995. Excluding security gains, noninterest income would have
shown a slight increase during this period.
Noninterest income was $993,000 for 1995, a decrease of $104,000 or 9.48%
compared with noninterest income of $1,097,000 for 1994, which represented a
decrease of $343,000 or 23.82% from 1993. While service charges remained
fairly constant from 1993 to 1995, securities gains decreased $103,000 or
20.40% from 1994 to 1995 and $361,000 or 41.69% from 1993 to 1994. Management
elected to reposition the composition of its portfolio in 1993 to reduce
fixed-rate exposure of assets and for tax-related reasons. Gains in 1994 and
1995 were from securities classified as available for sale and were due to
interest rate movements.
F - 43
121
NONINTEREST EXPENSE
The following table sets forth the various categories of noninterest expense
for the six months ended June 30, 1996 and 1995 and for the years ended
December 31, 1995, 1994 and 1993.
Six Months Ended Years Ended
June 30, December 31,
-------------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- --------- ---------
Salaries, wages and
employee benefits $ 1,206,000 $ 1,190,000 $ 2,424,000 $ 2,190,000 $ 1,827,000
Occupancy and
equipment 351,000 329,000 702,000 669,000 500,000
Other:
Professional fees 36,000 35,000 91,000 82,000 142,000
Office supplies 69,000 60,000 137,000 152,000 158,000
Travel and
entertainment 14,000 13,000 49,000 47,000 42,000
Telephone 36,000 32,000 61,000 60,000 51,000
Advertising 34,000 38,000 126,000 144,000 96,000
Postage 58,000 57,000 105,000 89,000 96,000
Amortization of
intangibles 8,000 11,000 58,000 35,000 53,000
Dues and
subscriptions 9,000 10,000 33,000 37,000 35,000
Insurance 12,000 13,000 59,000 66,000 58,000
Credit cards 6,000 4,000 9,000 12,000 10,000
Bank service
charge 44,000 49,000 97,000 100,000 112,000
FDIC assessment 17,000 100,000 157,000 367,000 297,000
Other 317,000 433,000 514,000 598,000 534,000
----------- ----------- ----------- ----------- -----------
Total other
expenses 660,000 855,000 1,496,000 1,789,000 1,684,000
----------- ----------- ----------- ----------- -----------
Total non-
interest
expense $ 2,217,000 $ 2,374,000 $ 4,622,000 $ 4,648,000 $ 4,011,000
=========== =========== =========== =========== ===========
Noninterest expense was $2,217,000 for the first six months of 1996, a decrease
of $157,000 or 6.61% compared with noninterest expense of $2,374,000 for the
first six months of 1995. An $83,000 decrease in FDIC assessments and general
expense controls were the primary reasons for the decline.
Deposits held by the Prairie Banks are insured by the Bank Insurance Fund
("BIF") of the Federal Deposit Insurance Corporation ("FDIC"), and as
FDIC-insured institutions, the Prairie Banks are required to pay deposit
insurance premium assessments to the FDIC. The amount an institution pays for
FDIC deposit insurance coverage is determined in accordance with a risk-based
assessment system under which each insured depository institution is placed
into one of nine categories and assessed insurance premiums based upon its
level of capital and the results of supervisory evaluations. The FDIC has
issued refunds to the best-rated institutions for assessment which exceeded the
recapitalization requirements of the BIF. The Prairie Banks received a total
refund from the FDIC of approximately $136,000. The change in the deposit
insurance assessment rate is expected to significantly reduce the cost of
deposit insurance for the Prairie Banks. See "Regulation and Supervision--The
Bank Subsidiaries--Deposit Insurance".
F - 44
122
Noninterest expense was $4,622,000 for 1995, a decrease of $26,000 or .56%
compared with noninterest expense of $4,648,000 for 1994, which represented an
increase of $637,000 or 15.88% compared with noninterest expense of $4,011,000
for 1993. The decrease in noninterest expense from 1994 to 1995 was due
primarily to a decrease in FDIC insurance of $210,000 and management's emphasis
on expense control. Salaries and wages increased $234,000 for the same period,
offsetting some of the reduction in other expenses. Noninterest expense
increased from 1993 to 1994 primarily as a result of a 19.87% increase in
salaries and benefits, a 33.80% increase in occupancy and equipment expense,
and a 23.57% increase in FDIC insurance. All such increases were due to
deposit growth, both from new branches opened and aggressive marketing efforts.
INCOME TAXES
During 1993, Prairie adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". The principal effect of SFAS
No. 109 is to allow a tax benefit for cumulative book loss reserves in excess
of tax reserves. SFAS No. 109 provides that deferred tax assets may be reduced
by a valuation allowance if, based on the weight of available experience, it is
more likely than not that some portion or all of the deferred tax asset will
not be realized. In accordance with the provisions of SFAS No. 109, Prairie
elected not to restate prior years and has determined that the cumulative
effect of implementation was not significant. Prairie and the Prairie Banks
filed a consolidated tax return for 1995.
Prairie has recorded income tax expense of $215,000 on income before taxes of
$712,000 for the six months ended June 30, 1996, an effective tax rate of
30.2%, as compared with income tax expense of $156,000 on income before taxes
of $637,000 for the six months ended June 30, 1995, an effective tax rate of
24.5%. Prairie recorded income tax expense of $275,000, $227,000 and $271,000
on income before taxes of $1,103,000, $1,013,000 and $1,582,000 for the years
ended December 31, 1995, 1994 and 1993, respectively. Effective tax rates were
24.9%, 22.4% and 17.1% for such periods. Prairie's effective tax rates varied
from the statutory tax rate primarily due to interest income on municipal
investments, which is exempt from federal income tax.
INTEREST RATE SENSITIVITY MANAGEMENT
The operating income and net income of the Prairie Banks depend, to a
substantial extent, on "rate differentials", i.e., the differences between the
income the Prairie Banks receive from loans, securities and other earning
assets, and the interest expense they pay to obtain deposits and other
liabilities. These rates are highly sensitive to many factors which are beyond
the control of the Prairie Banks, including general economic conditions and the
policies of various governmental and regulatory authorities. See "Investment
Considerations -- Impact of Interest Rates and Economic Conditions."
The objective of monitoring and managing the interest rate risk position of the
balance sheet is to contribute to earnings and to minimize the adverse changes
in net interest income. The potential for earnings to be affected by changes
in interest rates is inherent in a financial institution. Interest rate
sensitivity is the relationship between changes in market interest rates and
changes in net interest income due to the repricing characteristics of assets
and liabilities. An asset sensitive position in a given period will result in
more assets being subject to repricing; therefore, as interest rates rise, such
a position will have a positive effect on net interest income. Conversely, in
a liability sensitive position, where liabilities reprice more quickly than
assets in a given period, a rise in interest rates will have an adverse effect
on net interest income.
One way to analyze interest rate risk is to evaluate the balance of Prairie's
interest rate sensitivity position. A mix of assets and liabilities that are
roughly equal in volume and term and repricing represents a matched interest
rate sensitivity position. Any excess of assets or liabilities in a particular
period results in an interest rate sensitivity gap. The following table
presents the interest rate sensitivity for Prairie's interest-earning assets
and interest-bearing liabilities at June 30, 1996:
F - 45
123
INTEREST-RATE SENSITIVE ASSETS AND LIABILITIES
June 30, 1996 3 months 3 months to 6 months
or less 6 months to 1 year
------------- ------------- ------------
Interest-earning assets:
Interest-earning deposits $ 2,871,000 $ - $ -
Federal funds sold 2,131,000 - -
Investment securities 1,728,000 - 1,013,000
Loans 9,648,000 6,200,000 21,782,000
------------- ------------- ------------
Interest-earning assets $ 16,378,000 $ 6,200,000 $ 22,795,000
------------- ------------- ------------
Interest-bearing liabilities:
Interest-bearing demand deposits $ 21,519,000 $ - $ -
Savings deposits 46,662,000 - -
Time deposits 40,918,000 20,189,000 22,352,000
Repurchase agreements and federal
fund purchased 4,468,000 220,000 763,000
Federal Home Loan Bank advances
and notes payable 6,500,000 500,000 566,000
------------- ------------- ------------
Interest-bearing liabilities $ 120,067,000 $ 20,909,000 $ 23,681,000
------------- ------------- ------------
Period interest sensitivity gap $(103,689,000) $ (14,709,000) $ (886,000)
============= ============= ============
Cumulative interest sensitivity gap $(103,689,000) $(118,398,000) $119,284,000
============= ============= ============
Cumulative gap as a percent of assets (45.87)% (52.38)% (52.77)%
============= ============= ============
Cumulative interest-sensitive assets
as a percent of cumulative
interest-sensitive liabilities 13.64% 16.02% 27.56%
============= ============= ============
June 30, 1996 1 year to
5 years Over 5 years Total
------------ ------------ ------------
Interest-earning assets:
Interest-earning deposits $ - $ - $ 2,871,000
Federal funds sold - - 2,131,000
Investment securities 5,580,000 128,970,000 137,291,000
Loans 30,318,000 4,886,000 72,834,000
------------ ------------ ------------
Interest-earning assets $ 35,898,000 $133,856,000 $215,127,000
------------ ------------ ------------
Interest-bearing liabilities:
Interest-bearing demand deposits $ - $ - $ 21,519,000
Savings deposits - - 46,662,000
Time deposits 20,756,000 3,066,000 107,281,000
Repurchase agreements and federal
fund purchased 2,451,000 568,000 8,470,000
Federal Home Loan Bank advances
and notes payable 6,410,000 1,695,000 15,671,000
------------ ------------ ------------
Interest-bearing liabilities $ 29,617,000 $ 5,329,000 $199,603,000
------------ ------------ ------------
Period interest sensitivity gap $ 6,281,000 $128,527,000 $ 15,524,000
============ ============ ============
Cumulative interest sensitivity gap $113,003,000 $ 15,524,000 $ 15,524,000
============ ============ ============
Cumulative gap as a percent of assets (50.00)% 6.87%
============ ============
Cumulative interest-sensitive assets
as a percent of cumulative
interest-sensitive liabilities 41.83% 107.78%
============ ============
The cumulative rate-sensitive gap position at one year was a
liability-sensitive position of $119.3 million, or negative 52.77%, which
indicates that Prairie was in a mismatched interest rate-sensitive position at
June 30, 1996. In connection with the Prairie Acquisition, the Company took
certain measures in an effort to minimize interest-rate risk associated with
Prairie's investment portfolio. See "Description of Capital Stock of
Company--Preferred Stock--Rights to Conversion."
Prairie undertakes this interest rate-sensitivity analysis to monitor the
potential risk to future earnings from the impact of possible future changes in
interest rates on currently existing net assets or net liability positions.
However, this type of analysis is as of a point-in-time, when in fact Prairie's
interest rate sensitivity can quickly change as market conditions, customer
needs and management strategies change. Thus, interest rate changes do not
affect all categories of assets and liabilities equally or at the same time.
Prairie is not involved in the purchase of derivative financial instruments or
structured notes.
The preceding table does not necessarily indicate the impact of general
interest rate movements on Prairie's net interest income because the repricing
of certain assets and liabilities is discretionary and is subject to
competitive and other pressures. Currently, the Prairie Banks are holding
approximately $122 million in mortgage-backed securities. Although the
mortgage-backed securities have a stated maturity greater than five years, it
is not uncommon for mortgage-backed securities to prepay outstanding principal
prior to stated maturities. As a result, assets and liabilities indicated as
repricing within the same period may, in fact, reprice at different times and
at different rate levels.
F - 46
124
ANALYSIS OF FINANCIAL CONDITION
LOANS AND ASSET QUALITY
Prairie's loans are diversified by borrower and industry group. Loan growth
has occurred every year over the past five years and can be attributed to
acquisitions, increased loan demand and the addition of new lending products.
The following table describes the composition of loans by major categories
outstanding at June 30, 1996 and at December 31, 1995, 1994, 1993, 1992 and
1991.
LOAN PORTFOLIO ANALYSIS
December 31,
June 30, ------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- -------- -------- -------- ------- ----------
Aggregate Principal Amount
-------------------------------------------------------------------------------
Loans:
Commercial $ 25,885,000 $ 21,327,000 $ 20,625,000 $ 21,729,000 $ 19,594,000 $ 14,367,000
Real estate 40,972,000 37,652,000 33,422,000 27,153,000 25,093,000 15,487,000
Installment 7,014,000 8,218,000 6,889,000 5,228,000 6,125,000 4,435,000
------------- ------------ ------------ ------------ ------------ ------------
Gross loans 73,871,000 67,197,000 60,936,000 54,110,000 50,812,000 34,289,000
Less: Allowance
for loan
losses 784,000 741,000 715,000 781,000 963,000 499,000
Unearned
interest 37,000 64,000 141,000 306,000 480,000 328,000
------------- ------------ ------------ ------------ ------------ ------------
Loans, net $ 73,050,000 $ 66,392,000 $ 60,080,000 $ 53,023,000 $ 49,369,000 $ 33,462,000
============= ============ ============ ============ ============ ============
Percentage of Total Loan Portfolio
-------------------------------------------------------------------------------
Loans:
Commercial 35.04% 31.74% 33.85% 40.16% 38.56% 41.90%
Real estate 55.46 56.03 54.85 50.18 49.38 45.17
Installment 9.50 12.23 11.30 9.66 12.06 12.93
------------- ------------ ------------ ------------ ------------ ------------
Gross loans 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
============= ============ ============ ============ ============ ============
As of June 30, 1996 and December 31, 1995, commitments of the Prairie Banks
under standby letters of credit and unused lines of credit totaled
approximately $4,712,000 and $4,673,000, respectively.
The loan portfolio includes a concentration of loans to agricultural and
agricultural-related industries amounting to approximately $15,009,000 as of
June 30, 1996.
F - 47
125
Stated loan maturities (including floating rate loans reset to market interest
rates) of the total loan portfolio, net of unearned income, as of June 30, 1996
and December 31, 1995 were:
STATED LOAN MATURITIES
Within One One Year to After Five
Year Five Years Years Total
------------ ------------- ------------ ------------
JUNE 30, 1996
Stated Loan Maturities/Floating Rates Reset:
Commercial $ 18,773,000 $ 6,219,000 $ 893,000 $ 25,885,000
Real estate 18,915,000 18,568,000 3,489,000 40,972,000
Installment loans 2,767,000 4,068,000 142,000 6,977,000
------------ ------------ ----------- ------------
Total $ 40,455,000 $ 28,855,000 $ 4,524,000 $ 73,834,000
============ ============ =========== ============
Within One One Year to After Five
Year Five Years Years Total
------------ ------------ ----------- ------------
DECEMBER 31, 1995
Stated Loan Maturities/Floating Rates Reset:
Commercial $ 15,149,000 $ 5,763,000 $ 415,000 $ 21,327,000
Real estate 12,263,000 23,976,000 1,413,000 37,652,000
Installment loans 3,379,000 4,131,000 644,000 8,154,000
------------ ------------ ------------ ------------
Total $ 30,791,000 $ 33,870,000 $ 2,472,000 $ 67,133,000
============ ============ ============ ============
Rate sensitivities of the total loan portfolio, net of unearned income, as of
June 30, 1996 and December 31, 1995 were as follows:
LOAN REPRICING
Within One One Year to After Five
Year Five Years Years Total
------------ ------------ ----------- ------------
JUNE 30, 1996
Fixed rate $ 31,289,000 $ 24,194,000 $ 4,212,000 $ 59,695,000
Variable rate 7,093,000 6,124,000 674,000 13,891,000
Nonaccrual 248,000 -- -- 248,000
------------ ------------ ----------- ------------
Total $ 38,630,000 $ 30,318,000 $ 4,886,000 $ 73,834,000
============ ============ =========== ============
Within One One Year to After Five
Year Five Years Years Total
------------ ------------ ----------- ------------
DECEMBER 31, 1995
Fixed rate $ 21,474,000 $ 31,743,000 $ 1,961,000 $ 55,178,000
Variable rate 6,356,000 5,249,000 -- 11,605,000
Nonaccrual 350,000 -- -- 350,000
------------ ------------ ----------- ------------
Total $ 28,180,000 $ 36,992,000 $ 1,961,000 $ 67,133,000
============ ============ =========== ============
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The maturities presented above are based upon contractual maturities. Many of
these loans are made on a short-term basis with the possibility of renewal at
time of maturity. All loans, however, are reviewed on a continuous basis for
creditworthiness.
NONPERFORMING ASSETS
Prairie's financial statements are prepared on the accrual basis of accounting,
including the recognition of interest income on its loan portfolio, unless a
loan is placed on a nonaccrual basis. Loans are placed on a nonaccrual basis
when there are serious doubts regarding the collectibility of all principal and
interest due under the terms of the loan. Amounts received on nonaccrual loans
generally are applied first to principal and then to interest after all
principal has been collected. It is the policy of the Prairie Banks not to
renegotiate the terms of a loan because of a delinquent status. Rather, a loan
is generally transferred to nonaccrual status if it is not in the process of
collection and is delinquent in payment of either principal or interest beyond
90 days.
Other nonperforming assets consist of real estate acquired through loan
foreclosures or other workout situations and other assets acquired through
repossessions. The following table summarizes nonperforming assets by category
as of June 30, 1996 and as of December 31, 1995, 1994, 1993, 1992 and 1991:
F - 49
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NONPERFORMING ASSETS
December 31,
June 30, ---------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
Nonaccrual loans $248,000 $350,000 $228,000 $301,000 $378,000 $265,000
Loans 90 days past due and
still accruing interest 569,000 323,000 231,000 105,000 91,000 77,000
-------- -------- -------- -------- -------- --------
Total nonperforming loans 817,000 673,000 459,000 406,000 469,000 342,000
Other real estate owned and
other assets 33,000 - 18,000 69,000 82,000 -
-------- -------- -------- -------- -------- --------
Total nonperforming assets $850,000 $673,000 $477,000 $475,000 $551,000 $342,000
======== ======== ======== ======== ======== ========
Nonperforming assets to
total assets 0.38% 0.30% 0.21% 0.27% 0.39% 0.39%
Nonperforming loans to
total loans 1.11 1.00 0.75 0.75 0.93 1.01
Nonperforming assets to
total loans 1.15 1.00 0.78 0.88 1.09 1.01
The classification of a loan on nonaccrual status does not necessarily indicate
that the principal is uncollectible, in whole or in part. A determination as
to collectibility is made by Prairie Banks on a case-by-case basis. Prairie
Banks consider both the adequacy of the collateral and the other resources of
the borrower in determining the steps to be taken to collect nonaccrual loans.
The final determination as to these steps is made on a case-by-case basis.
Alternatives that are typically considered to collect nonaccrual loans are
foreclosure, collecting on guarantees, restructuring the loan or collection
lawsuits.
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On January 1, 1995, Prairie adopted guidelines for impaired loans required by
Financial Accounting Standards Board Statement No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by Statement No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." The adoption of FAS 114 did not significantly impact the
comparability of the allowance related tables of Prairie included in this
Prospectus.
The following table sets forth a summary of other real estate owned and other
collateral acquired as of June 30, 1996:
OTHER REAL ESTATE OWNED & OTHER COLLATERAL ACQUIRED
Number of
Parcels/ Net Book
Description Autos Carrying Value
- --------------------------------------------- --------------
Developed property 1 $ 22,000
Repossessed automobiles 1 11,000
----------- --------------
2 $ 33,000
=========== ==============
ALLOWANCE FOR LOAN LOSSES
In originating loans, management of Prairie recognizes that credit losses will
be experienced and the risk of loss will vary with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the quality of the collateral for such loan. The allowance for loan losses
represents Prairie's estimate of the allowance necessary to provide for losses
incurred in the loan portfolio. In making this determination, Prairie analyzes
the ultimate collectibility of Prairie's loan portfolio, incorporating feedback
provided by internal loan staff and provided by examinations performed by
regulatory agencies. Prairie makes an ongoing evaluation as to the adequacy of
the allowance for loan losses. To establish the appropriate level of the
allowance, all loans (including nonperforming loans), commitments to extend
credit and standby letters of credit are reviewed and classified as to
potential loss exposure. Specific allowances are then established for those
loans, commitments to extend credit or standby letters of credit with
identified loss exposure and an additional allowance is maintained based upon
the size, quality and concentration characteristics of the remaining loan
portfolio using both historical quantitative trends and Prairie's evaluation of
qualitative factors including future economic and industry outlooks. The
determination by Prairie of the appropriate level of the allowance amount was
$784,000 at June 30, 1996.
The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. These estimates are reviewed monthly and as
adjustments, either positive or negative, become necessary they are reported in
earnings in the periods in which they become known. The following table
presents a detailed analysis of Prairie's allowance for loan losses for the six
months ended June 30, 1996 and for the years ended December 31, 1995, 1994,
1993, 1992 and 1991:
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ALLOWANCE FOR LOAN LOSSES
December 31,
June 30, --------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- ------------ ------------ ------------ ------------ ------------
Beginning balance $ 741,000 $ 715,000 $ 781,000 $ 963,000 $ 499,000 $ 424,000
------------ ------------ ------------ ------------ ------------ ------------
Charge-offs:
Commercial 23,000 53,000 96,000 60,000 102,000 12,000
Real estate 32,000 -- 4,000 28,000 100,000 5,000
Installment loans 47,000 34,000 53,000 65,000 49,000 22,000
------------ ------------ ------------ ------------ ------------ ------------
Total charge-offs 102,000 87,000 153,000 153,000 251,000 39,000
------------ ------------ ------------ ------------ ------------ ------------
Recoveries:
Commercial 97,000 125,000 66,000 32,000 18,000 52,000
Real estate 20,000 -- 3,000 24,000 53,000 --
Installment loans 8,000 19,000 8,000 15,000 26,000 15,000
------------ ------------ ------------ ------------ ------------ ------------
Total recoveries 125,000 144,000 77,000 71,000 97,000 67,000
------------ ------------ ------------ ------------ ------------ ------------
Net charge-offs (23,000) (57,000) 76,000 82,000 154,000 (28,000)
Bank acquisition -- -- -- -- 366,000 --
Provision for loan losses 20,000 (31,000) 10,000 (100,000) 252,000 47,000
------------ ------------ ------------ ------------ ------------ ------------
Ending balance $ 784,000 $ 741,000 $ 715,000 $ 781,000 $ 963,000 $ 499,000
============ ============ ============ ============ ============ ============
Period end total loans, net
of unearned interest $ 73,834,000 $ 67,133,000 $ 60,795,000 $ 53,804,000 $ 50,332,000 $ 33,961,000
============ ============ ============ ============ ============ ============
Average loans $ 70,483,000 $ 64,662,000 $ 57,339,000 $ 52,134,000 $ 47,887,000 $ 33,850,000
============ ============ ============ ============ ============ ============
Ratio of net charge-offs
to average loans (0.03)% (0.09)% 0.13% 0.16% 0.32% (0.08)%
============ ============ ============ ============ ============ ============
Ratio of provision for loan
losses to average loans 0.03 (0.05) 0.02 (0.19) 0.53 0.14
============ ============ ============ ============ ============ ============
Ratio of allowance for loan
losses to ending total loans 1.06 1.10 1.18 1.45 1.91 1.47
============ ============ ============ ============ ============ ============
Ratio of allowance for loan
losses to total nonperforming
loans 95.96 110.10 155.77 192.36 205.33 145.91
============ ============ ============ ============ ============ ============
Ratio of allowance for loan
losses to total nonperforming
assets 92.24 110.10 149.90 164.42 174.77 145.91
============ ============ ============ ============ ============ ============
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The following table sets forth an allocation of the allowance for loan losses
among categories as of June 30, 1996 and December 31, 1995, 1994, 1993, 1992
and 1991. Management of Prairie believes that any allocation of the allowance
for loan losses into categories lends an appearance of precision which does not
exist. The allowance is utilized as a single unallocated allowance available
for all loans. The following allocation table should not be interpreted as an
indication of the specific amounts or the relative proportion of future charges
to the allowance and has been derived by applying a general allowance to the
portfolio as a whole, in addition to specific allowance amounts for internally
classified loans. In retrospect, the specific allocation in any particular
category may prove excessive or inadequate and consequently may be reallocated
in the future to reflect the then current condition. Accordingly, the entire
allowance is available to absorb losses in any category.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
June 30, 1996 December 31, 1995 December 31, 1994 December 31, 1993 December 31, 1992
----------------------- --------------------- --------------------- --------------------- ---------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
----------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Commercial $ 296,000 35.04% $ 223,000 31.74% $ 243,000 33.85% $ 286,000 40.16% $ 257,000 38.56%
Real estate 374,000 55.46 399,000 56.03 368,000 54.85 373,000 50.18 567,000 49.38
Installment
loans 114,000 9.50 119,000 12.23 104,000 11.30 122,000 9.66 139,000 12.06
--------- -------- --------- --------- --------- --------- --------- --------- --------- ---------
Total $ 784,000 100.00% $ 741,000 100.00% $ 715,000 100.00% $ 781,000 100.00% $ 963,000 100.00%
========= ======== ========= ========= ========= ========= ========= ========= ========= =========
December 31, 1991
----------------------
Percent of
Loans in
Each
Category
to Total
Amount Loans
--------- ----------
Commercial $ 191,000 41.90%
Real estate 206,000 45.17
Installment
loans 102,000 12.93
--------- ---------
Total $ 499,000 100.00%
========= =========
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INVESTMENT ACTIVITIES
The investment portfolio, which was 64.62% of Prairie's earning asset base as
of June 30, 1996, was being managed to maximize return as well as maintain
sufficient liquidity. Investment securities which are classified as
held-to-maturity are purchased with the intent and ability of Prairie to hold
them to maturity. Securities classified as held-to-maturity are carried at
historical cost. Prairie's financial planning anticipates income streams based
on normal maturity and reinvestment. Investment securities classified as
available-for-sale are purchased with the intent to provide liquidity and to
increase returns. The securities classified as available-for-sale are carried
at fair value. Prairie does not have any securities classified as trading.
Securities held-to-maturity, carried at amortized cost, amounted to $97.8
million at June 30, 1996, compared with $103.8 million at December 31, 1995 and
$135.1 million at December 31, 1994. The net unrealized loss on securities
held-to-maturity was $2.5 million at June 30, 1996 compared with unrealized
losses of $2.2 million at December 31, 1995 and $8.4 million at December 31,
1994. The changes in unrealized loss were attributable to both a decline in
amounts held-to-maturity and interest rate movements during 1995.
Securities available-for-sale, carried at fair value, were $39.5 million at
June 30, 1996, compared to $42.5 million at December 31, 1995 and $20.6 million
at December 31, 1994. On December 31, 1995, based on management's reassessment
of their previous designations of securities, giving consideration to liquidity
needs, interest rate risk and other factors, securities with an amortized cost
of $20.9 million and an unrealized gain of $452,000 were transferred from
held-to-maturity to available-for-sale. The transfer was allowed pursuant to a
FASB Special Report, "A Guide to Implementation of Statement No. 115 on
Accounting for Certain Investments in Debt and Equity Securities".
Prior to January 1, 1994, all debt securities were carried at amortized cost.
Effective January 1, 1994, Prairie adopted SFAS No. 115, and classified
investments as held-to-maturity or available-for-sale.
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The following tables describe the composition of investments by major category
and maturity:
INVESTMENT PORTFOLIO
HELD TO
MATURITY
June 30, December 31,
----------- -------------------------------------------
1996 1995 1994 1993 (1)
----------- ------------ ------------ ------------
U.S. Treasury $ - $ - $ - $ 2,642,000
U.S. Government agencies - - - 6,049,000
States and political subdivisions 377,000 514,000 747,000 12,282,000
Mortgage-backed securities 37,351,000 42,009,000 71,515,000 52,537,000
Collateralized mortgage obligations 60,104,000 61,303,000 62,883,000 39,704,000
Other - - - 1,743,000
----------- ------------ ------------ ------------
Total $97,832,000 $103,826,000 $135,145,000 $114,957,000
=========== ============ ============ ============
AVAILABLE FOR SALE
June 30, December 31,
----------- -------------------------------------------
1996 1995 1994 1993 (1)
----------- ------------ ------------ ------------
U.S. Treasury $ 1,973,000 $ 1,028,000 $ 1,005,000 $ -
U.S. Government agencies 5,582,000 5,574,000 5,602,000 -
Mortgage-backed securities 22,911,000 26,604,000 4,755,000 -
States and political subdivisions 6,137,000 5,914,000 7,280,000 -
Collateralized mortgage obligations 1,609,000 1,859,000 - -
Other 1,247,000 1,520,000 1,949,000 -
----------- ------------ ----------- ------------
Total $39,459,000 $ 42,499,000 $20,591,000 $ -
=========== ============ =========== ============
(1) Prairie adopted Financial Accounting Standards Board (FASB) Statement No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
effective January 1, 1994 and classified securities as held to maturity or
available for sale. For purposes of this table, securities as of December
31, 1993 are classified as held to maturity.
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INVESTMENT PORTFOLIO MATURITY/REPRICING SCHEDULE
JUNE 30, 1996
Maturing or Repricing
------------------------------------------------------------------------------------------------
After 1 Year but After 5 Years but
Within 1 Year Within 5 Years Within 10 Years After 10 Years
-------------------- ----------------- --------------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
HELD-TO-MATURITY
Mortgage-backed
securities $ - $ - $ - $ 37,619,000 6.09%
States and political
subdivisions (1) 50,000 9.34% 168,000 9.57% 108,000 11.06% -
Collateralized
mortgage
obligations - - 51,000 5.76 -
Other - - - 59,836,000 5.21
----------- ----------- ----------- ------------
Total $ 50,000 $ 168,000 $ 159,000 $ 97,455,000
=========== =========== =========== ============
AVAILABLE-FOR-SALE
U.S. Treasury $ 1,013,000 5.74 $ - $ - $ -
U.S. Government
agencies 1,678,000 4.75 3,905,000 4.72 - -
Mortgage-backed
securities - - - 28,497,000 6.18
States and political
subdivisions (1) - 1,507,000 8.69 2,859,000 8.98 -
----------- ----------- ----------- ------------
Total $ 2,691,000 $ 5,412,000 $ 2,859,000 $ 28,497,000
=========== =========== =========== ============
(1) Rates on obligations of states and political subdivisions have been
adjusted to tax equivalent yields using a 34% income tax rate.
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INVESTMENT PORTFOLIO MATURITY/REPRICING SCHEDULE
DECEMBER 31, 1995
Maturing or Repricing
---------------------------------------------------------------------------------------------------------
After 1 Year but After 5 Years but
Within 1 Year Within 5 Years Within 10 Years After 10 Years
----------------------- -------------------- --------------------- ----------------------
Amount Yield Amount Yield Amount Yield Amount Yield
----------- ------- -------- ------- -------- ------- -------- -------
HELD-TO-MATURITY
Mortgage-backed
securities $ - $ - $ 290,000 9.05% $ 41,719,000 6.16%
States and political
subdivisions (1) 130,000 9.46% 198,000 9.38% 186,000 10.94 -
Collateralized mortgage
obligations 6,000 6.38 - 1,225,000 5.74 60,072,000 5.74
----------- ----------- ----------- ------------
Total $ 136,000 $ 198,000 $ 1,701,000 $101,791,000
=========== =========== =========== ============
AVAILABLE-FOR-SALE
U.S. Treasury $ - $ 1,028,000 4.96 $ - $ -
U.S. Government
agencies 1,664,000 4.57 3,910,000 5.03 - -
Mortgage-backed
securities - - - 26,604,000 6.35
States and political
subdivisions (1) - 153,000 7.87 1,406,000 9.28 4,355,000 9.58
Collateralized mortgage
obligations - - - 1,859,000 7.94
Other - - - 1,520,000 6.76
----------- - ----------- ----------- ------------
Total $ 1,664,000 $ 5,091,000 $ 1,406,000 $ 34,338,000
=========== =========== =========== ============
(1) Rates on obligations of states and political subdivisions have been
adjusted to tax equivalent yields using a 34% income tax rate.
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DEPOSIT ACTIVITIES
Deposits are attracted through the offering of a broad variety of deposit
instruments, including checking accounts, money market accounts, regular
savings accounts, term certificate accounts (including "jumbo" certificates in
denominations of $100,000 or more), and retirement savings plans. Prairie's
average balance of total deposits was $185,569,000 for the six months ended
June 30, 1996, representing an increase of $3,569,000 or 1.96% compared with
the average balance of total deposits for the year ended December 31, 1995.
Prairie's average balance of total deposits was $182,000,000 for the year ended
1995, an increase of $12,501,000 or 7.38% compared with the average balance of
total deposits outstanding for 1994 of $169,499,000, an increase of $44,911,000
or 36.05% compared with the average balance of total deposits outstanding for
1993 of $124,588,000. The increases in deposits were due to pricing
strategies designed to attract new deposits and the opening of new branches.
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The following table sets forth certain information regarding Prairie Banks'
average deposits as of June 30, 1996 and December 31, 1995, 1994 and 1993.
AVERAGE DEPOSITS
June 30, 1996 December 31, 1995 December 31, 1994
--------------------------------- ---------------------------- -----------------------------
Average Percent Average Average Percent Average Average Percent Average
Amount Total Rate Amount Total Rate Amount Total Rate
------------- --------- -------- -------- -------- ------- ------- ------- -------
Non-interest bearing
demand deposits $ 12,698,000 6.8% -- $ 11,994,000 6.6% -- $ 11,038,000 6.5% --
Interest-bearing
demand deposits 20,846,000 11.2 2.68% 19,402,000 10.7 2.88% 18,656,000 11.0 2.83%
Savings deposits 48,580,000 26.2 3.65 50,630,000 27.8 3.94 61,449,000 36.3 4.00
Time deposits 103,445,000 55.8 5.38 99,974,000 54.9 5.50 78,356,000 46.2 4.69
------------- ----- ---- ------------- ------ ---- ------------- ----- ----
$ 185,569,000 100.0% 4.30% $ 182,000,000 100.0% 4.42% $ 169,499,000 100.0% 3.93%
============= ===== ==== ============= ===== ==== ============= ===== ====
December 31, 1993
-----------------------------
Average Percent Average
Amount Total Rate
------- ------- -------
Non-interest bearing
demand deposits $ 6,346,000 5.1% --
Interest-bearing
demand deposits 17,735,000 14.2 3.12%
Savings deposits 39,488,000 31.7 4.15
Time deposits 61,019,000 49.0 5.15
------------- ----- -----
$ 124,588,000 100.0% 4.28%
============= ===== =====
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As of June 30, 1996, non-brokered time deposits over $100,000 represented
14.07% of total deposits, compared with 15.92% of total deposits as of December
31, 1995 and 10.97% as of December 31, 1994. The Prairie Banks do not have and
do not solicit brokered deposits.
The following table sets forth the remaining maturities for time deposits of
$100,000 or more at June 30, 1996 and at December 31, 1995:
TIME DEPOSITS OF $100,000 OR MORE
June 30, December 31,
MATURITY RANGE 1996 1995
---------- ------------
Three months or less $12,543,000 $15,871,000
Three through six months 8,629,000 3,754,000
Six through twelve months 2,047,000 5,346,000
Over twelve months 3,203,000 4,211,000
----------- -----------
Total $26,422,000 $29,182,000
=========== ===========
RETURN ON EQUITY AND ASSETS
The following are various ratios for Prairie for the six months ended June 30,
1996 and the years ended December 31, 1995, 1994 and 1993.
RETURN ON EQUITY AND ASSETS
For the For the
Six Months Years Ended
Ended December 31,
June 30, --------------------------
1996 1995 1994 1993
---------- ---- ---- ----
Return on average assets 0.44% 0.37% 0.36% 0.89%
Return on average equity 8.44 7.96 10.81 26.92
Average equity to average assets 5.22 4.61 3.37 3.30
Dividend payout rates 62.17 58.45 43.77 5.03
LIQUIDITY
The Prairie Banks' investment securities portfolios, including federal funds
sold, and their cash and due from bank deposit balances serve as the primary
sources of liquidity for Prairie. At June 30, 1996, 13.24% of Prairie Banks'
interest-bearing liabilities were in the form of time deposits of $100,000 and
over. Substantially all of such large deposits were obtained from the Prairie
Banks' market areas and none of such deposits were brokered deposits.
Management believes these deposits to be a stable source of funds. However, if
a large number of these time deposits matured at approximately the same time
and were not renewed, the Prairie Banks' liquidity could be adversely affected.
Currently, the maturities of the Prairie Banks' large time deposits are spread
throughout the year, with 47% maturing in the third quarter of 1996, 33%
maturing in the fourth quarter of 1996, 8% maturing in the first and second
quarter of 1997, and the remaining 12% maturing thereafter. The Prairie Banks
monitor those maturities in an effort to minimize any adverse effect on
liquidity.
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138
Prairie raised $1,500,000 during 1995, $3,500,000 during 1994, and $1,092,000
during 1992 through the issuance of Preferred Stock for acquisition of
additional shares of subsidiary banks and debt service.
In the longer term, the liquidity of Prairie and its ability to meet its cash
obligations will depend substantially on its receipt of dividends from the
Prairie Banks, which are limited by banking statutes and regulation. See
"Regulation and Supervision".
CAPITAL RESOURCES
Prairie's stockholders' equity at June 30, 1996 was $11.71 million compared
with $11.84 million at December 31, 1995. The decrease in equity was the
result of a decline in the net unrealized gain on securities available for
sale, partially offset by net income for the period. Prairie had consolidated
net income of $497,000 for the six months ended June 30, 1996.
The Prairie Banks are expected to meet a minimum risk-based capital to
risk-weighted assets ratio of 8%, of which at least one-half (or 4%) must be in
the form of Tier 1 (core) capital. The remaining one-half (or 4%) may be in
the form of Tier 1 (core) or Tier 2 (supplementary) capital. The amount of
loan loss allowance that may be included in capital is limited to 1.25% of
risk-weighted assets. The ratio of Tier 1 (core) and the combined amount of
Tier 1 (core) and Tier 2 (supplementary) capital to risk-weighted assets for
the Prairie Banks were 13.82% and 14.76% respectively, at June 30, 1996, and
14.52% and 15.46%, respectively, at December 31, 1995. The Prairie Banks are
currently, and expect to continue to be, in compliance with these guidelines.
See "Regulation and Supervision -- Capital Adequacy Guidelines".
The Board of Governors of the Federal Reserve System has announced a policy
sometimes known as the "source of strength doctrine" that requires a bank
holding company to serve as a source of financial and managerial strength to
its subsidiary banks. The FRB has interpreted this requirement to require that
a bank holding company, such as Prairie, stand ready to use available resources
to provide adequate capital funds to its subsidiary banks during periods of
financial stress or adversity. The FRB has stated that it would generally view
a failure to assist a troubled or failing subsidiary bank in these
circumstances as an unsound or unsafe banking practice or a violation of
Regulation Y or both, justifying a cease and desist order or other enforcement
action, particularly if appropriate resources are available to the bank holding
company on a reasonable basis.
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The following table sets forth an analysis of Prairie Banks' capital ratios:
RISK-BASED CAPITAL RATIOS
December 31, Minimum Well-
June 30, ---------------------------------------- Capital Capitalized
1996 1995 1994 1993 Ratios Ratios
----------- ------------ ----------- ----------- ------- -----------
Tier I risk-based
capital $11,546,000 $ 11,358,000 $ 9,115,000 $ 5,438,000
Tier II risk-based
capital 784,000 741,000 715,000 771,000
Total capital 12,330,000 12,099,000 9,830,000 6,209,000
Risk-weighted
assets 83,541,000 78,238,000 74,192,000 61,668,000
Capital ratios:
Tier I risk-
based capital 13.82% 14.52% 12.29% 8.82% 4.00% 6.00%
Tier II risk-
based capital 14.76 15.46 13.25 10.07 8.00 10.00
Leverage ratio 5.11 5.05 4.28 3.04 3.00 5.00
ACCOUNTING MATTERS
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114
"Accounting by Creditors of Impairment of a Loan" as amended by SFAS No. 118
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". Together, these statements require that when a loan is impaired,
a creditor shall measure impairment based on the present value of expected
future cash flows discounted at the loan's effective interest rate, the fair
value of the collateral if the loan is collateral dependent or the loan's
observable market price. A loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The new statements also require certain disclosures regarding
impaired loans. Prairie adopted these statements effective January 1, 1995.
The adoption of these accounting statements did not have a material effect on
Prairie's consolidated financial position or results of operations since
Prairie's recognition and measurement policies regarding nonperforming loans
are materially consistent with the accounting statements.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of". This Statement requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Measurement of an impairment loss for
long-lived assets and identifiable intangibles that an entity expects to hold
and use should be based on the fair value of the asset. This Statement is
effective for fiscal years beginning after December 15, 1995.
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The Financial Accounting Standards Board has issued SFAS No. 122, "Accounting
for Mortgage Servicing Rights" which became effective for years beginning after
December 15, 1995. This Statement amends FASB Statement No. 65, "Accounting
for Certain Mortgage Banking Activities" to require that an entity recognize as
separate assets rights to service mortgage loans for others however those
rights are acquired. An entity that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or securitizes
those loans with servicing rights retained should allocate the total cost of
the mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. If it is not
practicable to estimate the fair values separately, the entire cost of
purchasing or originating the loans should be allocated to the mortgage loans
(without the mortgage servicing rights) and no cost should be allocated to the
mortgage servicing rights. This Statement also requires that an entity assess
its capitalized mortgage servicing rights for impairment based on the fair
value of those rights.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". This Statement defines a fair value
based method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
all employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Entities electing to continue to use the method of
accounting specified in Opinion 25 must make pro forma disclosures of net
income and, if presented, earnings per share, as if the fair value method of
accounting defined in this Statement had been applied. This Statement is
effective for fiscal years beginning after December 15, 1995.
IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES
The financial statements and related financial data concerning Prairie
presented in this Prospectus 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. The primary effect of inflation on the operations of Prairie is
reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, changes in interest rates have a more
significant effect on the performance of a financial institution than do the
effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Interest rates are highly
sensitive to many factors which are beyond the control of the Prairie Banks,
including the influence of domestic and foreign economic conditions and the
monetary and fiscal policies of the United States government and federal
agencies, particularly the FRB. See "Investment Considerations -- Impact of
Interest Rates and Economic Conditions".
F - 63
141
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
June 30,
1996 December 31,
(Unaudited) 1995
- ------------------------------------------------------------------------------- ------------
ASSETS
Cash and due from banks $ 7,967,000 $ 4,458,000
Federal funds sold 2,131,000 2,045,000
Securities held to maturity (fair value $95,285,000
in 1996 and $101,623,000 in 1995) 97,832,000 103,826,000
Securities available for sale 39,459,000 42,499,000
Loans (net of allowance for loan losses of $784,000
in 1996 and $741,000 in 1995) 73,050,000 66,392,000
Premises and equipment 3,184,000 3,327,000
Accrued interest and other assets 2,409,000 2,427,000
------------ ------------
Total assets $226,032,000 $224,974,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 12,378,000 $ 13,017,000
Interest bearing 175,462,000 170,279,000
------------ ------------
Total deposits 187,840,000 183,296,000
Federal funds purchased 1,980,000 275,000
Repurchase agreements 6,490,000 6,181,000
Federal Home Loan Bank advances 11,721,000 16,993,000
Notes payable 3,950,000 3,950,000
Accrued interest and other liabilities 1,543,000 1,663,000
------------ ------------
Total liabilities 213,524,000 212,358,000
------------ ------------
Minority interest in subsidiaries 796,000 775,000
------------ ------------
Stockholders' Equity
Common stock, no par value; authorized, issued and outstanding
1,000 shares 1,000 1,000
Preferred stock 6,092,000 6,092,000
Additional paid-in capital 1,579,000 1,579,000
Retained earnings 3,874,000 3,686,000
Unrealized gain on securities available for sale, net 166,000 483,000
------------ ------------
Total stockholders' equity 11,712,000 11,841,000
------------ ------------
Total liabilities and stockholders' equity $226,032,000 $224,974,000
============ ============
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-64
142
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Six Months Ended
June 30,
-----------------------------
1996 1995
---------- -----------
(Unaudited)
- ---------------------------------------------------------------------------------------------
Interest income:
Loans and fees on loans $ 3,136,000 $ 2,720,000
Taxable 4,094,000 4,507,000
Exempt from federal income taxes 191,000 159,000
Dividends 44,000 61,000
Other 62,000 30,000
----------- -----------
Total interest income 7,527,000 7,477,000
----------- -----------
Interest expense:
Deposits 3,948,000 3,950,000
Short-term borrowings 264,000 203,000
Federal Home Loan Bank advances and notes payable 580,000 974,000
----------- -----------
Total interest expense 4,792,000 5,127,000
----------- -----------
Net interest income 2,735,000 2,350,000
Provision for loan losses 20,000 (22,000)
----------- -----------
Net interest income after provision for loan losses 2,715,000 2,372,000
----------- -----------
Noninterest income:
Service charges and fees 205,000 166,000
Gain on sale of securities - 406,000
Other 51,000 111,000
----------- -----------
256,000 683,000
----------- -----------
Noninterest expenses:
Salaries and wages 965,000 952,000
Employee benefits 241,000 238,000
Occupancy and equipment 351,000 329,000
FDIC assessment 17,000 100,000
Other 643,000 755,000
----------- -----------
2,217,000 2,374,000
----------- -----------
Income before minority interest and income taxes 754,000 681,000
Minority interest 42,000 44,000
----------- -----------
Income before income taxes 712,000 637,000
Income taxes 215,000 156,000
----------- -----------
Net income $ 497,000 $ 481,000
=========== ===========
Net income applicable to common stock $ 188,000 $ 252,000
============================
Earnings per share of common stock 188 252
============================
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-65
143
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1996 and 1995
Six Months Ended
June 30,
------------------------
1996 1995
----------- -----------
(Unaudited)
- ----------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 497,000 $ 481,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 188,000 170,000
Provision for loan losses 20,000 (22,000)
Amortization of premiums and accretion of discounts on
securities, net 168,000 96,000
(Gain) on sale of securities, net - (406,000)
Minority interest in net income of subsidiaries, net of
dividends paid 34,000 20,000
Change in assets and liabilities:
Decrease in accrued interest receivable and other assets 18,000 207,000
Increase in accrued interest payable and other liabilities 50,000 23,000
---------- -----------
Net cash provided by operating activities 975,000 569,000
---------- -----------
Cash Flows from Investing Activities
(Increase) decrease in federal funds sold (86,000) 954,000
Investment securities:
Held to maturity:
Proceeds from maturities, calls and paydowns 5,933,000 3,975,000
Purchases (40,000) (587,000)
Available for sale:
Proceeds from maturities, calls and paydowns 3,098,000 293,000
Proceeds from sales 920,000 9,466,000
Purchases (1,545,000) (7,034,000)
Net (increase) in loans (6,678,000) (5,141,000)
Purchase of premises and equipment (45,000) (226,000)
---------- -----------
Net cash provided by investing activities 1,557,000 1,700,000
---------- -----------
Cash Flows from Financing Activities
Net (decrease) in noninterest-bearing deposits (639,000) (1,411,000)
Net increase (decrease) in interest-bearing deposits 5,183,000 (7,035,000)
Net increase (decrease) in federal funds purchased 1,705,000 (110,000)
Net increase (decrease) in repurchase agreements 309,000 (2,194,000)
Net increase (decrease) in Federal Home Loan Bank advances (5,272,000) 6,711,000
Principal payments on notes payable (1,050,000)
Proceeds from issuance of preferred stock -- 1,500,000
Dividends paid (309,000) (229,000)
Purchase of minority interest in subsidiaries - (74,000)
---------- -----------
Net cash provided by (used in) financing activities 977,000 (3,892,000)
---------- -----------
Net increase (decrease) in cash and due from banks 3,509,000 (1,623,000)
Cash and due from banks:
Beginning 4,458,000 5,361,000
---------- -----------
End $7,967,000 $ 3,738,000
========== ===========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-66
144
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
The financial information of Prairie Bancorp, Inc. and subsidiaries included
herein is unaudited; however, such information reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim periods.
The results of the interim period ended June 30, 1996 are not necessarily
indicative of the results expected for the year ending December 31, 1996.
NOTE 2. SECURITIES
Amortized costs and fair values of securities are summarized as follows:
HELD TO MATURITY June 30, 1996
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------ ----------- ------------ ------------
States and political subdivisions $ 377,000 $ 16,000 $ - $ 393,000
Mortgage-backed securities 97,455,000 - (2,563,000) 94,892,000
------------ ----------- ------------ ------------
$ 97,832,000 $ 16,000 $ (2,563,000) $ 95,285,000
============ =========== ============ ============
December 31, 1995
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------ ----------- ------------ ------------
States and political subdivisions $ 514,000 $ 25,000 $ - $ 539,000
Mortgage-backed securities 103,312,000 151,000 (2,379,000) 101,084,000
------------ ----------- ------------ ------------
$103,826,000 $ 176,000 $ (2,379,000) $101,623,000
============ =========== ============ ============
AVAILABLE FOR SALE June 30, 1996
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------ ----------- ------------ ------------
U.S. Treasury and government
agency securities $ 7,714,000 $ - $ (159,000) $ 7,555,000
States and political subdivisions 6,061,000 76,000 - 6,137,000
Mortgage-backed securities 24,173,000 347,000 - 24,520,000
Other 1,247,000 - - 1,247,000
------------ ----------- ------------ ------------
$ 39,195,000 $ 423,000 $ (159,000) $ 39,459,000
============ =========== ============ ============
(Continued)
F-67
145
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ----------- ------------ -----------
U.S. Treasury and government
agency securities $ 6,730,000 $ - $ (128,000) $ 6,602,000
States and political
subdivisions 5,577,000 337,000 - 5,914,000
Mortgage-backed securities 27,908,000 563,000 (8,000) 28,463,000
Other 1,520,000 - - 1,520,000
----------- ----------- ------------ -----------
$41,735,000 $ 900,000 $ (136,000) $42,499,000
=========== =========== ============ ===========
The amortized cost and fair value of investment securities as of June 30, 1996
and December 31, 1995, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because the mortgages
underlying the mortgage-backed and related securities may be called or prepaid
without any penalties. Therefore, these securities are not included in the
maturity categories in the following summary. Certain other securities are
excluded from the maturity categories because they do not have a fixed maturity
date.
HELD TO MATURITY June 30, 1996 December 31, 1995
------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ------------ ------------
Due in one year or less $ 50,000 $ 50,000 $ 130,000 $ 132,000
Due after one year through five years 168,000 173,000 198,000 204,000
Due after five years through ten years 159,000 170,000 186,000 203,000
Mortgage-backed securities 97,455,000 94,892,000 103,312,000 101,084,000
----------- ----------- ------------ ------------
$97,832,000 $95,285,000 $103,826,000 $101,623,000
=========== =========== ============ ============
AVAILABLE FOR SALE June 30, 1996 December 31, 1995
------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ------------ ------------
Due in one year or less $ 2,779,000 $ 2,691,000 $ 1,700,000 $ 1,664,000
Due after one year through five years 5,566,000 5,412,000 5,183,000 5,091,000
Due after five years through ten years 2,855,000 2,859,000 1,329,000 1,406,000
Due after ten years 2,575,000 2,730,000 4,095,000 4,355,000
Mortgage-backed securities 24,173,000 24,520,000 27,908,000 28,463,000
Other 1,247,000 1,247,000 1,520,000 1,520,000
----------- ----------- ----------- -----------
$39,195,000 $39,459,000 $41,735,000 $42,499,000
=========== =========== =========== ===========
(Continued)
F - 68
146
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONOSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Securities with carrying values of approximately $73,888,000 and $71,689,000 at
June 30, 1996 and December 31, 1995, respectively, were pledged to secure
public deposits as permitted or required by law.
NOTE 3. LOANS
The major classifications of loans follow:
June 30, December 31,
1996 1995
------------ ------------
Commercial $ 25,885,000 $ 21,327,000
Real estate 40,972,000 37,652,000
Installment 7,014,000 8,218,000
------------ ------------
73,871,000 67,197,000
------------ ------------
Deduct:
Unearned interest 37,000 64,000
Allowance for loan losses 784,000 741,000
------------ ------------
821,000 805,000
------------ ------------
$ 73,050,000 $ 66,392,000
============ ============
NOTE 4. ALLOWANCE FOR LOAN LOSSES
An analysis of activity in the allowance for loan losses follows:
Six Months Ended
June 30,
---------------------
1996 1995
---------- ---------
Balance, January 1 $ 741,000 $ 715,000
Provision for loan losses 20,000 (22,000)
Recoveries 125,000 108,000
Loans charged off 102,000 51,000
--------- ---------
Balance, end of period $ 784,000 $ 750,000
========= =========
(Continued)
F - 69
147
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5. SHORT TERM BORROWINGS
Short term borrowings include federal funds purchased and securities sold under
agreements to repurchase.
Average and maximum balances and rates on federal funds purchased and
securities sold under agreements to repurchase were as follows:
Six Months Ended
June 30,
---------------------------------
1996 1995
-------------- ------------------
Maximum month end balance $ 13,573,000 $ 9,822,000
Average month end balance 7,463,000 6,108,000
Weighted average interest rate for the period 7.07% 6.65%
Weighted average interest rate at end of period 5.98% 6.70%
NOTE 6. CONTINGENT LIABILITIES
At June 30, 1996 and December 31, 1995, loan commitments and standby letters of
credit, were as follows:
June 30, December 31,
1996 1995
--------------- ------------
Unused lines-of-credit $ 4,360,000 $ 4,598,000
Standby letters of credit 352,000 75,000
F - 70
148
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Prairie Bancorp, Inc.
Princeton, Illinois
We have audited the accompanying consolidated balance sheets of Prairie
Bancorp, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31,
1995. 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
Prairie Bancorp, Inc. and Subsidiaries as of 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, the
Company changed its method of accounting for investment securities in
1994.
McGLADREY & PULLEN, LLP
Davenport, Iowa
January 26, 1996
F - 71
149
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
1995 1994
- --------------------------------------------------------------------------- -------------
ASSETS
Cash and due from banks $ 4,458,000 $ 5,361,000
Federal funds sold 2,045,000 954,000
Securities held to maturity (fair value $101,623,000 in 1995;
$126,794,000 in 1994) 103,826,000 135,145,000
Securities available for sale 42,499,000 20,591,000
Loans, net of allowance for loan losses of $741,000 in 1995;
$715,000 in 1994 66,392,000 60,080,000
Premises and equipment 3,327,000 3,303,000
Accrued interest and other assets 2,427,000 2,754,000
------------ ------------
Total assets $224,974,000 $228,188,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing $ 13,017,000 $ 11,171,000
Interest bearing 170,279,000 169,739,000
------------ ------------
Total deposits 183,296,000 180,910,000
Federal funds purchased 275,000 960,000
Repurchase agreements 6,181,000 8,869,000
Federal Home Loan Bank advances 16,993,000 21,079,000
Notes payable 3,950,000 5,245,000
Accrued interest and other liabilities 1,663,000 1,397,000
------------ ------------
Total liabilities 212,358,000 218,460,000
------------ ------------
Minority interest in subsidiaries 775,000 760,000
------------ ------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, no par value; authorized, issued, and
outstanding 1,000 shares 1,000 1,000
Preferred stock 6,092,000 4,592,000
Additional paid-in capital 1,579,000 1,579,000
Retained earnings 3,686,000 3,342,000
Unrealized gain (loss) on securities available for sale 483,000 (546,000)
------------ ------------
Total stockholders' equity 11,841,000 8,968,000
------------ ------------
Total liabilities and stockholders'
equity $224,974,000 $228,188,000
============ ============
See Accompanying Notes to Consolidated Financial Statements.
F - 72
150
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993
- -------------------------------------------------------------------- ----------- ------------
Interest income:
Interest and fees on loans $ 5,819,000 $ 5,003,000 $ 4,804,000
Interest and dividends on investment-taxable 8,753,000 7,716,000 4,664,000
Exempt from federal income taxes 318,000 343,000 887,000
Dividends 121,000 126,000 43,000
Other interest income 112,000 63,000 68,000
----------- ----------- -----------
Total interest income 15,123,000 13,251,000 10,466,000
----------- ----------- -----------
Interest expense:
Interest on deposits 8,049,000 6,665,000 5,332,000
Interest on short-term borrowings 510,000 386,000 258,000
Interest on Federal Home Loan Bank
advances and notes payable 1,768,000 1,531,000 710,000
----------- ----------- -----------
Total interest expense 10,327,000 8,582,000 6,300,000
----------- ----------- -----------
Net interest income 4,796,000 4,669,000 4,166,000
Provision for loan losses (31,000) 10,000 (100,000)
----------- ----------- -----------
Net interest income after provision
for loan losses 4,827,000 4,659,000 4,266,000
Other income:
Service charges 317,000 277,000 263,000
Gain on security transactions 402,000 505,000 866,000
Other operating income 274,000 315,000 311,000
----------- ----------- -----------
Total other income 993,000 1,097,000 1,440,000
----------- ----------- -----------
Other expenses:
Salaries and wages 2,142,000 1,902,000 1,552,000
Employee benefits 282,000 288,000 275,000
Occupancy and equipment 702,000 669,000 500,000
Professional fees 91,000 82,000 142,000
FDIC insurance 157,000 367,000 297,000
Office supplies 137,000 152,000 158,000
Advertising 126,000 144,000 96,000
Other expense 985,000 1,044,000 991,000
----------- ----------- -----------
Total other expenses 4,622,000 4,648,000 4,011,000
----------- ----------- -----------
Income before minority interest and
income taxes 1,198,000 1,108,000 1,695,000
Minority interest 95,000 95,000 113,000
----------- ----------- -----------
Income before income taxes 1,103,000 1,013,000 1,582,000
Income tax expense 275,000 227,000 271,000
----------- ----------- -----------
Net income $ 828,000 $ 786,000 $ 1,311,000
=========== =========== ===========
Net income applicable to common stock $ 344,000 $ 442,000 $ 1,245,000
=========== =========== ===========
Earnings per share of common stock 344 442 1,245
=========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements.
F - 73
151
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
Series A Series B
Common Preferred Preferred
Stock Stock Stock
------ ---------- ----------
Balance, December 31,1992 $1,000 $1,092,000 $ -
Net income for year ended December 31, 1993 - - -
Dividend on preferred stock ($60 per share) - - -
Stockholders' contribution - - -
------ ---------- ----------
Balance, December 31, 1993 1,000 1,092,000 -
Net income for year ended December 31,
1994 - - -
Preferred stock, Series B, no par, issued
2,500 shares - - 2,500,000
Preferred stock, Series C, no par, issued
1,000 shares - - -
Dividends on Series A preferred stock
($60.00 per share) - - -
Dividends on Series B preferred stock
($230.17 per share) - - -
Dividends on Series C preferred stock
($49.11 per share) - - -
Effect of Adoption of SFAS No. 115, net - - -
Change in unrealized losses on securities
available for sale, net - - -
------ ---------- ----------
Balance, December 31, 1994 1,000 1,092,000 2,500,000
Net income for year ended December 31, 1995 - - -
Preferred stock, Series D, no par, issued
1,500 shares - - -
Dividends on Series B preferred stock
($108.16 per share) - - -
Dividends on Series C preferred stock
($108.32 per share) - - -
Dividends on Series D preferred stock
($70.13 per share) - - -
Change in unrealized gain (loss) on securities
available for sale, net - - -
------ ---------- ----------
Balance, December 31, 1995 $1,000 $1,092,000 $2,500,000
====== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
F - 74
152
- ------------------------------------------------ ---------------------------
Unrealized
Gain (Loss)
Series C Series D Additional on Securities
Preferred Preferred Paid-In Retained Available
Stock Stock Capital Earnings For Sale, Net Total
- ---------- ---------- ---------- ----------- ------------- ------------
$ - $ - $1,419,000 $1,655,000 $ - $ 4,167,000
- - - 1,311,000 - 1,311,000
- - - (66,000) - (66,000)
- - 160,000 - - 160,000
- ---------- ---------- ---------- ---------- ------------ -----------
- - 1,579,000 2,900,000 - 5,572,000
- - - 786,000 - 786,000
- - - - - 2,500,000
1,000,000 - - - - 1,000,000
- - - (65,000) - (65,000)
- - - (230,000) - (230,000)
- - - (49,000) - (49,000)
- - - - 442,000 442,000
- - - - (988,000) (988,000)
- ---------- ---------- ---------- ---------- ------------ -----------
1,000,000 - 1,579,000 3,342,000 (546,000) 8,968,000
- - - 828,000 - 828,000
- 1,500,000 - - - 1,500,000
- - - (271,000) - (271,000)
- - - (108,000) - (108,000)
- - - (105,000) - (105,000)
- - - - 1,029,000 1,029,000
- ---------- ---------- ---------- ---------- ------------ -----------
$1,000,000 $1,500,000 $1,579,000 $3,686,000 $ 483,000 $11,841,000
========== ========== ========== ========== ============ ===========
F - 75
153
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993
- ----------------------------------------------------------------------- ------------- -------------
Cash Flows from Operating Activities:
Net income $ 828,000 $ 786,000 $ 1,311,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 380,000 343,000 247,000
Deferred income taxes 20,000 23,000 5,000
Provision for loan losses (31,000) 10,000 (100,000)
Amortization of premiums and accretion of
discounts on investment securities, net 239,000 422,000 140,000
(Gain) on sale of investment securities, net (402,000) (505,000) (866,000)
Minority interest in net income of subsidiaries,
net of dividends paid 38,000 37,000 69,000
(Increase) decrease in:
Accrued interest receivable (116,000) (242,000) 141,000
Other assets 140,000 58,000 (185,000)
Increase (decrease) in:
Accrued interest payable 92,000 242,000 (17,000)
Other liabilities (108,000) (398,000) 352,000
----------- ------------ ------------
Net cash provided by operating activities 1,080,000 776,000 1,097,000
----------- ------------ ------------
Cash Flows from Investing Activities:
(Increase) decrease in federal funds sold (1,091,000) 96,000 1,794,000
Proceeds from maturities, calls and principal
of investment securities held to maturity 10,797,000 12,730,000 25,959,000
Proceeds from maturities, calls and principal
of investment securities available for sale 668,000 1,025,000 -
Proceeds from sale of investment securities
available for sale 12,740,000 16,983,000 12,963,000
Purchase of investment securities held to maturity (587,000) (60,128,000) (74,363,000)
Purchase of investment securities available for sale (12,401,000) (12,187,000) -
Loans originated, net (6,281,000) (7,047,000) (2,975,000)
Purchase of property and equipment (404,000) (811,000) (945,000)
----------- ------------ ------------
Net cash provided by (used in) investing
activities $ 3,441,000 $(49,339,000) $(37,567,000)
----------- ------------ ------------
(Continued)
F - 76
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PRAIRIE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993
- --------------------------------------------------------------------------- ----------- ---------
Cash Flows from Financing Activities:
Net increase in noninterest-bearing deposits $ 1,846,000 $ 1,310,000 $ 1,062,000
Net increase in interest-bearing deposits 540,000 36,433,000 16,351,000
Net increase (decrease) in federal funds purchased (685,000) 702,000 108,000
Net increase (decrease) in repurchase agreements (2,688,000) 2,523,000 3,947,000
Net increase (decrease) in Federal Home Loan Bank
advances (4,086,000) 5,522,000 13,607,000
Principal payments on note payable (1,295,000) (350,000) -
Proceeds from note payable - - 1,150,000
Proceeds from issuance of preferred stock 1,500,000 3,500,000 -
Stockholders' contribution - - 160,000
Dividends paid preferred stock (484,000) (344,000) (66,000)
Purchase of minority interest in subsidiaries (72,000) - -
Minority interest contribution - - 92,000
----------- ----------- -----------
Net cash provided by (used in) financing
activities (5,424,000) 49,296,000 36,411,000
----------- ----------- -----------
Net increase (decrease) in cash and due
from banks (903,000) 733,000 (59,000)
Cash and due from banks:
Beginning 5,361,000 4,628,000 4,687,000
----------- ----------- -----------
Ending $ 4,458,000 $ 5,361,000 $ 4,628,000
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information,
payments for:
Interest $10,235,000 $ 8,339,000 $ 6,317,000
=========== =========== ===========
Income taxes $ 127,000 $ 212,000 $ 125,000
=========== =========== ===========
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Transfer of loans to other real estate acquired in
settlement of loans $ - $ 18,000 $ -
=========== =========== ===========
Securities transferred to available for sale at
amortized cost $ - $19,955,000 $ -
=========== =========== ===========
Securities transferred from held to maturity
to available for sale, at fair value $21,387,000 $ - $ -
=========== =========== ===========
Change in unrealized gain (loss) on securities
available for sale $ 1,643,000 $ (879,000) $ -
=========== =========== ===========
Increase (decrease) in deferred taxes attributable to
the unrealized gain (loss) on securities available
for sale $ 614,000 $ 33,000 $ -
=========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements.
F - 77
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PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and reporting practices prescribed for
the banking industry.
The significant accounting and reporting policies for Prairie Bancorp, Inc. and
its subsidiaries follow:
Nature of business: Prairie Bancorp, Inc. is a six bank holding company. The
Banks provide a full range of banking services to individual and corporate
customers in the Northwestern Illinois area. The Banks are subject to
competition from other financial institutions and nonfinancial institutions
providing financial products. Additionally, Prairie Bancorp, Inc. and its Bank
subsidiaries are subject to regulations of certain regulatory agencies and
undergo periodic examinations by those regulatory agencies.
Accounting estimates: In preparing the consolidated financial statements,
Company management is required to make estimates and assumptions which
significantly affect the amounts reported in the consolidated financial
statements. Significant estimates which are particularly susceptible to change
in a short period of time include the determination of the allowance for loan
losses and valuation of real estate and other properties acquired in connection
with foreclosures or in satisfaction of amounts due from borrowers on loans.
Actual results could differ from those estimates.
Principles of consolidation: The consolidated financial statements include the
accounts of Prairie and its majority owned subsidiaries, First National Bank of
Manlius (Manlius) (98.50% owned), Tampico National Bank (Tampico) (99.41%
owned), Bank of Ladd (Ladd) (80% owned), Tiskilwa State Bank (Tiskilwa) (94.99%
owned) and its wholly-owned subsidiaries Farmers State Bank of Ferris (Ferris),
and Hanover State Bank (Hanover), collectively referred to as the "Prairie
Banks". All significant intercompany balances and transactions have been
eliminated in consolidation.
Presentation of cash flows: For purposes of reporting cash flows, cash and due
from banks include cash on hand and amounts due from banks, including cash
items in process of clearing. Cash flows from loans originated by the
subsidiary banks, deposits, federal funds purchased and securities sold under
agreements to repurchase and Federal Home Loan Bank advances are reported net.
Investment securities: Prior to January 1, 1994, all debt securities were
carried at amortized cost. Effective January 1, 1994, Prairie adopted
Financial Accounting Standards Board (FASB) Statement No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" and classified investments
as held to maturity or available for sale. The effect of adopting Statement
No. 115 on the accompanying balance sheet as of January 1, 1994 was an increase
in stockholders' equity of $442,000 net of the related income tax effect of
$228,000 to recognize the net unrealized gain in securities available for sale
at that date. There were no investments held for trading purposes during 1994
and 1995.
Securities classified as held to maturity are those for which the subsidiary
bank's have the ability and intent to hold to maturity. Securities meeting
such criteria at the date of purchase and as of the balance sheet date are
carried at cost, adjusted for amortization of premiums and discounts computed
using the interest method over their contractual lives.
Securities classified as available for sale are those debt securities that the
subsidiary banks intend 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. The differences between fair value and cost, adjusted for amortization
of premium and accretion of discounts, results in an unrealized gain or loss.
Unrealized gains or losses are reported as increases or decreases in
stockholders' equity, net of the related deferred tax effect. Gains or losses
from the sale of securities are determined using the specific identification
method.
F - 78
156
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Pursuant to a FASB Special Report "A Guide to Implementation of Statement No.
115 on Accounting for Certain Investments in Debt and Equity Securities"
Prairie transferred at fair value $21,387,000 of investment securities from
held to maturity to available for sale on December 31, 1995 which increased
stockholders' equity by $298,000 net of the related income tax effect of
$154,000.
Loans: Loans are stated at the principal amount outstanding, net of unearned
discount and the allowance for loan losses. Interest on all loans except
installment loans is credited to income based on the principal amount
outstanding. Interest on installment loans is credited to income over the term
of the loan using a method which approximates the interest method.
Unearned discount on certain installment loans is credited to income over the
term of the loan using the interest method. For all other loans, interest is
credited to income as earned using the simple interest method applied to the
daily balances of the principal outstanding.
The Company's policy is to discontinue the accrual of interest income on any
loan when, in the opinion of management, there is reasonable doubt as to the
timely collectibility of interest or principal. Interest income on these loans
is recognized to the extent interest payments are received and the principal is
considered fully collectible.
Allowance for loan losses: The allowance for loan losses is maintained at a
level considered adequate to provide for losses that can be reasonably
anticipated. The allowance is increased by provisions charged to operating
expense and reduced by net charge-offs. The Prairie Banks make continuous
credit reviews of the loan portfolios and consider current economic conditions,
historical loan loss experience and other factors in determining the adequacy
of the allowance balance. In addition, regulatory agencies, as an integral
part of their examination process, periodically review the Company Banks'
allowances for loan losses, and may require additions to the allowance based on
their judgment about information available to them at the time of their
examinations.
On January 1, 1995, Prairie adopted FASB Statement of Financial Accounting
Standards No. 114 "Accounting by Creditors for Impairment of a Loan", as
amended by Statement No. 118, which requires loans to be considered impaired
when, based on current information and events, it is probable the Company will
not be able to collect all amounts due. The portion of the allowance for loan
losses applicable to impaired loans has been computed based on the present
value of the estimated future cash flows of interest and principal discounted
at the loan's effective interest rate or on the fair value of the collateral
for collateral dependent loans. The entire change in present value of expected
cash flows of impaired loans is reported as bad debt expense in the same manner
in which impairment initially was recognized or as a reduction in the amount of
bad debt expense that otherwise would be reported. The Company recognizes
interest income on impaired loans on an accrual basis.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed by the straight-line and
declining balance methods over their estimated useful lives.
Income taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, 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.
F - 79
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PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Preferred stock: Terms of the preferred stock are as follows:
Series A Preferred Stock: Dividends are 6%, cumulative, nonparticipating and
senior to Common Stock, Series B, Series C, and Series D Preferred Stock
dividends. Dividends have been declared through December 31, 1995.
1,000,000 shares have been authorized and 1,092 have been issued with no par
value. These shares are callable in whole or in part at $1,000 per share plus
accumulated dividends at any time, but may not be called in part without
dividends being paid current. These shares are to be liquidated in Prairie's
dissolution senior to the Common Stock, the Series B, Series C, and Series D
Preferred Stock at $1,000 per share plus accumulated dividends, with merger or
consolidation of Prairie not deemed to be a dissolution. These shares are
non-voting except for a proposed issuance of Preferred Stock senior to Series
A Preferred Stock or an amendment to the Articles of Incorporation relative to
the terms of Series A Preferred Stock.
Series B Preferred Stock: Dividends are 2% plus Prime (as determined by
averaging the LaSalle National Bank of Chicago prime rate for the prior 6
months), non-cummulative, nonparticipating and senior to Common Stock, Series
C and Series D Preferred Stock dividends. 1,000,000 shares have been
authorized and 2,500 have been issued with no par value. These shares are
callable in whole or in part at $1,000 per share plus dividends declared and
unpaid, if any, at any time. These shares are to be liquidated in Prairie's
dissolution senior to the Common Stock, Series C and Series D Preferred Stock
at $1,000 per share plus dividends declared and unpaid, if any, with merger or
consolidation of Prairie not deemed to be a dissolution. These shares are
non-voting except for a proposed issuance of Preferred Stock senior to Series
B Preferred Stock or an amendment to the Articles of Incorporation relative to
the terms of Series B Preferred Stock.
Series C Preferred Stock: Dividends are 2% plus Prime (as determined by
averaging the LaSalle National Bank of Chicago prime rate for the prior 6
months), non-cummulative, nonparticipating and senior to Common Stock and
Series D Preferred Stock dividends. 1,000,000 shares have been authorized and
1,000 have been issued with no par value. These shares are callable in whole
or in part at $1,000 per share plus dividends declared and unpaid, if any, at
any time. These shares are to be liquidated in Prairie's dissolution senior
to the Common Stock and Series D Preferred Stock at $1,000 per share plus
dividends declared and unpaid, if any, with merger or consolidation of Prairie
not deemed to be a dissolution. These shares are non-voting except for a
proposed issuance of Preferred Stock senior to Series C Preferred Stock or an
amendment to the Articles of Incorporation relative to the terms of Series C
Preferred Stock.
Series D Preferred Stock: Dividends are 2% plus Prime (as determined by
averaging the LaSalle National Bank of Chicago prime rate for the prior 6
months), non-cummulative, nonparticipating and senior to Common Stock
dividends. 1,000,000 shares have been authorized and 1,500 have been issued
with no par value. These shares are callable in whole or in part at $1,000
per share plus dividends declared and unpaid, if any, at any time. These
shares are to be liquidated in Prairie's dissolution senior to the Common
Stock at $1,000 per share plus dividends declared and unpaid, if any, with
merger or consolidation of Prairie not deemed to be a dissolution. These
shares are non-voting except for a proposed issuance of Preferred Stock senior
to Series D Preferred Stock or an amendment to the Articles of Incorporation
relative to the terms of Series D Preferred Stock.
Current accounting developments: The Financial Accounting Standards Board has
issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" (Statement No. 121) which becomes
effective for years beginning after December 15, 1995. Statement No. 121
generally requires long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the review for recoverability, the entity should
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment is recognized. Management believes that adoption of
this Statement will not have a material effect on Prairie's financial
statements.
F - 80
158
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Financial Accounting Standards Board has issued Statement No. 122
"Accounting for Mortgage Servicing Rights" (Statement No. 122) which becomes
effective for years beginning after December 15, 1995. This Statement amends
FASB Statement No. 65 "Accounting for Certain Mortgage Banking Activities" to
require that an entity recognize as separate assets rights to service mortgage
loans for others, however those rights are acquired. An entity that acquires
mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing rights
retained should allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values. If it is not practicable to estimate the fair
values separately, the entire cost of purchasing or originating the loans
should be allocated to the mortgage loans (without the mortgage servicing
rights) and no cost should be allocated to the mortgage servicing rights. This
Statement also requires that an entity assess its capitalized mortgage
servicing rights for impairment based on the fair value of those rights.
Management believes that adoption of this Statement will not have a material
effect on Prairie's financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123 (Statement No. 123), Accounting for
Stock-Based Compensation. Statement No. 123 establishes a fair value based
method of accounting for stock options and other equity instruments. Statement
No. 123 permits the continued use of the intrinsic value method included in
Accounting Principle Board Opinion 25 ("APB-25"), Accounting for Stock Issued
to Employees, but regardless of the method used to account for the compensation
cost associated with stock option or similar plans, it requires employers to
disclose information required by Statement No. 123. Statement No. 123 is
effective for fiscal years beginning after December 15, 1995. Prairie believes
the adoption of Statement No. 123 will not have a material impact on its
consolidated financial statements.
Earnings per share of common stock: Earnings per share of common stock is
computed by dividing net income, after deducting preferred stock dividends, by
the weighted average number of shares outstanding during the reported period.
NOTE 2. CASH AND DUE FROM BANKS
Two of the Bank subsidiaries are required to maintain legal reserves composed
of funds on deposit with the Federal Reserve Bank and cash on hand. The
required balances as of December 31, 1995 and 1994 were $54,000 and $68,000,
respectively.
F - 81
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PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities as of December 31,
1995 and 1994 are as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
------------ ---------- ----------- ------------
December 31, 1995
--------------------------------------------------------------------------
Securities held to maturity:
States and political subdivisions $ 514,000 $ 25,000 $ - $ 539,000
Mortgage-backed and related
securities 103,312,000 151,000 (2,379,000) 101,084,000
------------ -------- ----------- ------------
Total $103,826,000 $176,000 $(2,379,000) $101,623,000
============ ======== =========== ============
Securities available for sale:
U.S. Treasury and government
agency securities $ 6,730,000 $ - $ (128,000) $ 6,602,000
States and political subdivisions 5,577,000 337,000 - 5,914,000
Mortgage-backed and related
securities 27,908,000 563,000 (8,000) 28,463,000
Other 1,520,000 - - 1,520,000
------------ -------- ----------- ------------
Total $ 41,735,000 $900,000 $ (136,000) $ 42,499,000
============ ======== =========== ============
December 31, 1994
--------------------------------------------------------------------------
Securities held to maturity:
States and political subdivisions $ 747,000 $ 16,000 $ - $ 763,000
Mortgage-backed and related
securities 134,398,000 40,000 (8,407,000) 126,031,000
------------ -------- ----------- ------------
Total $135,145,000 $ 56,000 $(8,407,000) $126,794,000
============ ======== =========== ============
Securities available for sale:
U.S. Treasury and government
agency securities $ 7,006,000 $ 4,000 $ (403,000) $ 6,607,000
States and political subdivisions 7,537,000 14,000 (271,000) 7,280,000
Mortgage-backed and related
securities 4,978,000 - (223,000) 4,755,000
Other 1,949,000 - - 1,949,000
------------ -------- ----------- ------------
Total $ 21,470,000 $ 18,000 $ (897,000) $ 20,591,000
============ ======== =========== ============
F - 82
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PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The amortized cost and fair value of the investment securities as of December
31, 1995, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because the mortgages underlying the
mortgage-backed and related securities may be called or prepaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following summary. Other securities are excluded from the
maturity categories as there is no fixed maturity date.
December 31, 1995
---------------------------------------------------------------
Securities Held to Maturity Securities Available for Sale
------------------------------ -----------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ------------ -------------- -----------
Due in one year or less $ 130,000 $ 132,000 $ 1,700,000 $ 1,664,000
Due after one year through five years 198,000 204,000 5,183,000 5,091,000
Due after five years through ten years 186,000 203,000 1,329,000 1,406,000
Due after ten years - - 4,095,000 4,355,000
------------ ------------ ----------- -----------
514,000 539,000 12,307,000 12,516,000
Mortgage-backed and related
securities 103,312,000 101,084,000 27,908,000 28,463,000
Other - - 1,520,000 1,520,000
------------ ------------ ----------- -----------
$103,826,000 $101,623,000 $41,735,000 $42,499,000
============ ============ =========== ===========
Gross realized gains and losses for the years ended December 31, 1995, 1994,
and 1993 are as follows:
1995 1994 1993
--------- --------- ---------
Realized gains $407,000 $574,000 $893,000
Realized (losses) (5,000) (69,000) (27,000)
As of December 31, 1995 and 1994, investment securities with a carrying value
of approximately $71,689,000 and $68,212,000, respectively, were pledged to
collateralize government and public deposits and to secure securities sold
under agreements to repurchase as permitted or required by law.
Prairie transferred securities with an amortized cost of $20,935,000 and an
unrealized gain of $452,000 from held to maturity to available for sale on
December 31, 1995, based on management's reassessment of their previous
designations of securities giving consideration of liquidity needs, management
of interest rate risk, and other factors.
NOTE 4. LOANS
Loans as of December 31, 1995 and 1994 are summarized as follows:
1995 1994
----------- -----------
Real estate, mortgage $37,652,000 $33,422,000
Commercial and agricultural 21,327,000 20,625,000
Installment 8,218,000 6,889,000
----------- -----------
67,197,000 60,936,000
Less:
Unearned discount 64,000 141,000
Allowance for loan losses 741,000 715,000
----------- -----------
Loans, net $66,392,000 $60,080,000
=========== ===========
F - 83
161
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Prairie's opinion as to the ultimate collectibility of these loans is subject
to estimates regarding future cash flows from operations and the value of
property, real and personal, pledged as collateral. These estimates are
affected by changing economic conditions and the economic prospects of
borrowers.
Changes in the allowance for loan losses for the years ended December 31, 1995,
1994, and 1993 were as follows:
1995 1994 1993
--------- ---------- ----------
Balance, beginning $715,000 $ 781,000 $ 963,000
Provision for loan losses (31,000) 10,000 (100,000)
Loans charged off (87,000) (153,000) (153,000)
Recoveries 144,000 77,000 71,000
-------- --------- ---------
Balance, ending $741,000 $ 715,000 $ 781,000
======== ========= =========
Management believes that loan balances on loans determined to be impaired are
immaterial.
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1995 and 1994 are summarized as
follows:
1995 1994
---------- ----------
Land $ 305,000 $ 301,000
Buildings and improvements 3,036,000 2,849,000
Furniture and equipment 2,556,000 2,348,000
---------- ----------
5,897,000 5,498,000
Less accumulated depreciation 2,570,000 2,195,000
---------- ----------
$3,327,000 $3,303,000
========== ==========
NOTE 6. DEPOSITS
A maturity distribution of time certificates of deposit in denominations of
$100,000 or more were as follows:
1995 1994
----------- -----------
3 months or less $15,871,000 $ 6,706,000
Over 3 months through 6 months 3,754,000 5,186,000
Over 6 months through 12 months 5,346,000 4,161,000
Over 12 months 4,211,000 3,795,000
----------- -----------
$29,182,000 $19,848,000
=========== ===========
NOTE 7. SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased and securities sold under
agreements to repurchase.
Average and maximum balances and rates on aggregate short-term borrowings
outstanding were as follows:
1995 1994 1993
------------ ----------- -----------
Maximum month-end balance $15,390,000 $15,203,000 $9,473,000
Average month-end balance 7,523,000 6,404,000 3,395,000
Weighted average interest rate for the year 6.78% 6.03% 7.60%
Weighted average interest rate at year-end 6.30 6.22 7.20
F - 84
162
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. FEDERAL HOME LOAN BANK ADVANCES
Pursuant to agreements with the Federal Home Loan Bank (FHLB), advances are
collateralized by qualifying first mortgage loans and investment securities.
Advances as of December 31, 1995 carry fixed interest rates ranging from 4.3%
through 7.5%. The maturities of advances as of December 31, 1995 were as
follows:
Year ended December 31:
1996 $12,272,000
1997 566,000
1998 2,960,000
Thereafter 1,195,000
-----------
$16,993,000
===========
NOTE 9. NOTE PAYABLE
Prairie has a $4,195,000 revolving promissory note with a balance of $3,950,000
as of December 31, 1995. The loan is secured by Prairie's stock in the
Prairie Banks. The note bears interest at the rate of LaSalle National Bank's
prime rate (8.5% at December 31, 1995). Payments of interest on the note are
required to be made quarterly until all amounts outstanding are paid. The
balance is due on or before April 1, 1996. The loan agreement contains certain
affirmative and negative covenants. Prairie was in compliance with the
covenants as of December 31, 1995.
NOTE 10. PROFIT SHARING PLANS
Prairie has a 401(k) plan covering substantially all employees. Participants
are not required to make any contribution but may make a voluntary contribution
of up to 12% of their compensation. The plan provides for discretionary
contributions to be determined annually by Prairie's Board of Directors. The
total contributions to the plan for the years ended December 31, 1995, 1994,
and 1993 were $106,000, $125,000, and $111,000, respectively.
NOTE 11. INCOME TAXES
The components of income tax expense for the years ended December 31, 1995,
1994, and 1993 were as follows:
1995 1994 1993
-------- -------- --------
Current $ 255,000 $ 204,000 $ 266,000
Deferred 20,000 23,000 5,000
--------- --------- ---------
$ 275,000 $ 227,000 $ 271,000
========= ========= =========
A reconciliation of the expected federal income tax expense using a statutory
federal rate of 34% to the income tax expense included in the statements of
income for the years ended December 31, 1995, 1994, and 1993 is as follows:
1995 1994 1993
---------- ---------- ----------
Computed "expected" tax expense $ 407,000 $ 388,000 $ 571,000
Tax exempt interest income, net (130,000) (182,000) (303,000)
Other (2,000) 21,000 3,000
--------- --------- ---------
$ 275,000 $ 227,000 $ 271,000
========= ========= =========
There were no state income taxes for the years ended December 31, 1995, 1994,
and 1993 due primarily to U.S. Treasury interest exemption and net operating
loss carryforwards utilized.
F - 85
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PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The net deferred tax assets (liabilities) on the consolidated balance sheets
included in other assets (liabilities) as of December 31, 1995 and 1994 include
the following amounts:
1995 1994
---------- ---------
Deferred tax assets:
Net unrealized losses on securities available for sale $ - $306,000
Allowance for loan losses 73,000 96,000
--------- --------
73,000 402,000
--------- --------
Deferred tax liabilities:
Net unrealized gains on securities available for sale (260,000) -
Premises and equipment (90,000) (87,000)
Other (6,000) (12,000)
--------- --------
(356,000) (99,000)
--------- --------
Net deferred tax assets (liabilities) $(283,000) $303,000
========= ========
NOTE 12. REGULATORY CAPITAL REQUIREMENTS
Federal regulatory agencies have adopted various capital standards for banks,
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 banks and to take into account the different
risks among banks' assets and off-balance sheet items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to assets ratio (leverage ratio). In addition,
regulatory agencies consider the published capital levels as minimum levels and
may require banks to maintain capital at higher levels.
A comparison of Prairie's and each of the Prairie Banks' capital as of December
31, 1995 with the minimum requirements is presented below:
Minimum Prairie
Requirements Bancorp, Inc. Manlius Tampico
------------ ------------- ------- -------
Tier 1 risk-based capital 4.00% 14.52% 13.67% 24.54%
Total risk-based capital 8.00 15.46 14.31 25.70
Leverage ratio 3.00 5.05 6.56 6.77
Ladd Tiskilwa Ferris Hanover
------ -------- ------ -------
Tier 1 risk-based capital 17.87% 20.37% 16.74% 24.53%
Total risk-based capital 18.50 21.52 17.51 25.78
Leverage ratio 7.04 6.83 5.70 8.10
According to Federal Reserve Board capital guidelines, Prairie is considered to
be adequately capitalized. According to FDIC capital guidelines, the Prairie
Banks are considered to be well capitalized.
National bank regulations restrict the amount of dividends that may be paid by
banks to their stockholders. Dividends declared by national banks that exceed
the net income for the current year plus retained net income for the preceding
two years must be approved by the Comptroller of the Currency. Under this
formula, dividends of approximately $301,000 and $106,000 may be paid without
prior regulatory approval by Manlius and Tampico, respectively.
Regardless of formal regulatory restrictions, Prairie and the Prairie Banks may
not pay dividends that would result in their capital levels being reduced below
the minimum requirements shown above.
F - 86
164
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. PARENT COMPANY ONLY FINANCIAL INFORMATION
Following is condensed financial information of Prairie Bancorp, Inc. (parent
company only) as of December 31, 1995 and 1994 and for the three years ended
December 31, 1995.
BALANCE SHEETS (PARENT COMPANY ONLY) December 31,
---------------------------
1995 1994
------------- ------------
ASSETS
Cash $ 257,000 $ 122,000
Investment in subsidiaries 15,428,000 14,013,000
Premises and equipment, net 46,000 54,000
Other assets 72,000 149,000
------------- -----------
$ 15,803,000 $14,338,000
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 3,950,000 $ 5,245,000
Other liabilities 12,000 125,000
------------- -----------
3,962,000 5,370,000
------------- -----------
Stockholders' equity:
Common stock, no par value; authorized, issued and outstanding
1,000 shares 1,000 1,000
Preferred stock 6,092,000 4,592,000
Additional paid-in capital 1,579,000 1,579,000
Retained earnings 3,686,000 3,342,000
Unrealized gains (losses) on securities
available for sale 483,000 (546,000)
------------- -----------
Total stockholders' equity 11,841,000 8,968,000
------------- -----------
$ 15,803,000 $14,338,000
============= ===========
F - 87
165
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INCOME STATEMENTS (PARENT COMPANY ONLY) Years Ended December 31,
-------------------------------------
1995 1994 1993
---------- ---------- -----------
Operating revenue:
Dividends received from subsidiaries $1,392,000 $ 980,000 $ 865,000
Other 47,000 124,000 124,000
---------- ---------- ----------
1,439,000 1,104,000 989,000
Operating expenses 911,000 858,000 712,000
---------- ---------- ----------
Income before income tax (credits)
and equity in undistributed
net income of subsidiaries 528,000 246,000 277,000
Income tax (credits) (274,000) (247,000) (185,000)
---------- ---------- ----------
802,000 493,000 462,000
Equity in undistributed net income of subsidiaries 26,000 293,000 850,000
---------- ---------- ----------
Net income $ 828,000 $ 786,000 $1,311,000
========== ========== ==========
F - 88
166
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) Years Ended December 31,
--------------------------------------
1995 1994 1993
----------- ----------- -----------
Cash Flows from Operating Activities:
Net income $ 828,000 $ 786,000 $ 1,311,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
subsidiaries (26,000) (293,000) (850,000)
Depreciation 11,000 5,000 -
Decrease in other assets 77,000 78,000 21,000
(Decrease) in other liabilities (113,000) (172,000) (122,000)
----------- ----------- -----------
Net cash provided by operating
activities 777,000 404,000 360,000
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchase of additional shares of subsidiaries (360,000) (3,046,000) (1,712,000)
Purchase of premises and equipment (3,000) (59,000) -
----------- ----------- -----------
Net cash (used in) investing activities (363,000) (3,105,000) (1,712,000)
----------- ----------- -----------
Cash Flows from Financing Activities:
Cash dividends paid (484,000) (345,000) (66,000)
Proceeds from note payable - - 1,150,000
Principal payments on notes payable (1,295,000) (350,000) -
Proceeds from issuance of preferred stock 1,500,000 3,500,000 -
Stockholders' contribution - - 160,000
----------- ----------- -----------
Net cash provided by (used in)
financing activities (279,000) 2,805,000 1,244,000
----------- ----------- -----------
Net increase (decrease) in cash 135,000 104,000 (108,000)
Cash, beginning 122,000 18,000 126,000
----------- ----------- -----------
Cash, ending $ 257,000 $ 122,000 $ 18,000
=========== =========== ===========
F - 89
167
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. RELATED PARTY TRANSACTIONS
In the normal course of business, loans are made to employees, executive
officers, directors, principal stockholders of Prairie and the Prairie Banks
and to parties which Prairie or its directors, executive officers, and
stockholders have the ability to significantly influence its management or
operations (related parties). In the opinion of management, the terms of these
loans, including interest rates and collateral, are similar to those prevailing
for comparable transactions with other customers and do not involve more than a
normal risk of collectibility. Changes in such loans during the year ended
December 31, 1995 are as follows:
Balance, beginning $ 1,455,000
New loans, extensions, and modifications 608,000
Repayments (1,205,000)
-----------
Balance, ending $ 858,000
===========
NOTE 15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding various contingent
liabilities such as claims and legal action, which are not reflected in the
consolidated financial statements. In the opinion of management, no material
losses are anticipated as a result of these actions or claims.
The Prairie Banks are parties 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 unused lines of credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheets.
The Prairie Banks' exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for unused lines of credit and
standby letters of credit is represented by the contractual amounts of these
instruments. The Prairie Banks use the same credit policies in making
commitments and conditional obligations as they do for on-balance sheet
instruments.
Financial instruments whose contractual amounts represent credit risk are as
follows:
Unused lines of credit $4,598,000
Standby letters of credit 75,000
Unused lines of credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. These agreements
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Prairie Banks evaluate each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained
if deemed necessary by the Prairie Banks upon extension of credit is based upon
management's credit evaluation of the counter-party. Collateral varies but may
include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Prairie
Banks to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements and extend for no more than one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
Prairie does not engage in the use of interest rate swaps or futures, forwards
or option contracts.
F - 90
168
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Concentration of credit risk: The Prairie Banks grant commercial, residential
and consumer loans to customers throughout the Prairie Banks' market areas
which are primarily in the following Illinois counties:
Banks County
----- ------
Manlius, Ladd and Tiskilwa Bureau
Tampico Whiteside
Ferris Hancock
Hanover Jo Davies
Although the Prairie Banks have diversified loan portfolios, a substantial
portion of their debtors' ability to honor their contracts is dependent upon
the agribusiness and industrial economic sectors. The Prairie Banks' policy
for requiring collateral is consistent with prudent lending practice and
anticipates the potential for economic fluctuations. Collateral varies but may
include accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties. It is the policy of the Prairie Banks
to file financing statements and mortgages covering collateral pledged.
NOTES 16. DISCLOSURES ABOUT 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. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
These fair value disclosures are not intended to represent the market value of
Prairie. The investment securities held to maturity and loan portfolios are
intended to be held to maturity, and unrealized gains and losses are not
intended to be realized. Income taxes and transaction costs have not been
considered in estimating fair values.
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: For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Investment securities: For investment securities held to maturity and
securities available for sale, 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.
Federal funds sold: The carrying amount is a reasonable estimate of fair
value.
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.
Deposits: The fair value of demand deposits, NOW accounts, savings accounts,
and money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
by discounting cash flows using the rates currently offered for deposits of
similar remaining maturities.
Federal funds purchased: The carrying amount is a reasonable estimate of fair
value.
F - 91
169
PRAIRIE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Repurchase agreements: For short-term agreements, the carrying amount is a
reasonable estimate of fair value. For agreements with a term greater than
six months, fair value is estimated by discounting cash flows using the rates
currently offered for agreements of similar remaining maturities.
Federal Home Loan Bank advances and note payable: The cash flows discounted
at rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Commitments to extend credit and standby letters of credit: The fair value of
commitments is estimated using the fees currently charged to enter into
similar agreements. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
commitment rates. The fair value of letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
them.
The estimated fair values of Prairie's financial instruments rounded to the
nearest $1,000 are as follows:
December 31, 1995
------------------------------------
Carrying
Amount Fair Value
----------- -----------
Financial assets:
Cash and due from banks $ 4,458,000 $ 4,458,000
Investment securities:
Held to maturity 103,826,000 101,623,000
Available for sale 42,499,000 42,499,000
Federal funds sold 2,045,000 2,045,000
Loans, net 66,392,000 66,167,000
Financial liabilities:
Deposits 183,296,000 184,211,000
Federal funds purchased 275,000 275,000
Repurchase agreements 6,181,000 6,353,000
Federal Home Loan Bank advances and note payable 20,943,000 21,012,000
Unrecognized financial instruments:
Commitments to extend credit - -
Standby letters of credit - -
In addition, other assets and liabilities of Prairie that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not
recognized in financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the trained work force,
customer goodwill and similar items.
NOTE 17. SUBSEQUENT EVENTS
In January of 1996, Prairie entered into an Agreement and Plan of Merger which
would merge Prairie Bancorp, Inc. with Prairie Acquisition Corporation, a
wholly-owned subsidiary of Union Bancorp, Inc, in which Prairie would be the
surviving entity.
F - 92
170
COUNTRY BANCSHARES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data of Country Bancshares, Inc.
should be read in conjunction with the Consolidated Financial Statements of
Country Bancshares, Inc. and the Notes thereto appearing elsewhere in this
Prospectus and the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Country
Bancshares, Inc." The selected historical consolidated financial data as of
and for the two years in the period ended December 31, 1995 are derived from
Country's Consolidated Financial Statements which have been audited by
independent public accountants. The selected historical consolidated financial
data as of and for the six months ended June 30, 1996 and June 30, 1995 is
unaudited.
Six Months Ended
June 30, Years Ended December 31,
----------------------------------- ----------------------------------
1996 1995 1995 1994
--------------- -------------- --------------- -------------
INCOME STATEMENT DATA: (unaudited)
Interest income $ 3,817,540 $ 2,677,130 $ 6,029,752 $ 3,808,189
Interest expense 2,449,162 1,480,190 3,531,998 1,789,304
-------------- ------------ ------------- ------------
Net interest income 1,368,378 1,196,940 2,497,754 2,018,885
Provision for loan losses 144,713 - 40,200 15,800
-------------- ------------ ------------- ------------
Net interest income after provision
for loan losses $ 1,223,665 $ 1,196,940 $ 2,457,554 $ 2,003,085
Noninterest income 601,489 254,870 588,735 398,227
Noninterest expense 1,599,866 1,400,247 2,840,209 2,485,239
Net income before income taxes 225,288 51,563 206,080 (83,927)
Income tax (benefit) 70,000 18,000 (2,518) (46,830)
-------------- ------------ ------------- ------------
Net income $ 155,288 $ 33,563 $ 208,598 $ (37,097)
============== ============ ============= ============
COMMON SHARE DATA:
Net income $ 5.92 $ 1.28 $ 7.95 $ (3.57)
Book value 93.06 85.27 93.89 83.99
Weighted average common shares outstanding 26,225 26,225 26,225 10,403
Period end common shares outstanding 26,225 26,225 26,225 26,225
BALANCE SHEET DATA:
Total assets $ 103,172,283 $ 81,506,381 $ 96,604,878 $ 64,245,341
Loans, net 66,073,420 47,265,290 56,177,110 37,648,698
Allowance for loan losses 500,318 381,092 420,426 329,251
Total deposits 90,844,320 74,030,796 86,546,471 58,945,175
Stockholders' equity 2,440,428 2,236,120 2,462,260 2,202,557
PERFORMANCE DATA:
Return (loss) on average total assets (1) 0.30% 0.09% 0.26% (0.06)%
Return (loss) on average
stockholders' equity (1) 12.78 3.05 8.94 (1.79)
Net interest margin 2.90 3.61 3.39 3.90
Loans to deposits 72.73 63.85 64.91 63.87
Efficiency ratio (2) 80.80 95.89 91.49 102.66
ASSET QUALITY RATIOS:
Nonperforming assets to total assets 1.63% 0.62% 0.61% 1.00%
Nonperforming loans to total loans 2.39 0.94 0.95 1.54
Net loan charge-offs to average loans (1) 0.21 (0.12) (0.11) 0.04
Allowance for loan losses to total loans 0.75 0.80 0.74 0.87
Allowance for loan losses
to nonperforming loans 31.09 84.88 77.80 55.97
CAPITAL RATIOS: (OMNI BANK)
Tier I risk-based capital 10.51% 13.87% 11.44% 11.40%
Total risk-based capital 11.30 14.69 12.20 12.29
Leverage 6.41 7.92 6.61 6.78
- --------------
(1) All interim periods have been annualized.
(2) Calculated as noninterest expense less amortization of intangibles and
expenses related to other real estate owned divided by the sum of net
interest income before provision for loan losses and total noninterest
income excluding securities gains and losses.
F - 93
171
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF COUNTRY BANCSHARES, INC.
The following discussion provides additional information regarding the
operations and financial condition of Country Bancshares, Inc. ("Country") for
the six months ended June 30, 1996 and 1995 and the years ended December 31,
1995 and 1994. The discussion should be read in conjunction with the
consolidated statements of financial condition as of, and the results of
operations, for the years ended December 31, 1995 and 1994 and for the six
months ended June 30, 1996 and 1995 and accompanying notes included elsewhere
in the Prospectus.
GENERAL
Country derives substantially all of its revenues and income from the
operations of its subsidiary, Omni Bank, which provides a full range of
commercial and consumer banking services to businesses and individuals,
primarily in the western Illinois area. As of June 30, 1996, Country had total
assets of $103.2 million, net loans of $66.1 million, total deposits of $90.8
million and total stockholders' equity of $2.4 million. Country reported net
income of $155,288 for the six months ended June 30, 1996 compared with net
income of $33,563 for the six months ended June 30, 1995 as a result of
internal loan and deposit portfolio growth.
On December 5, 1994, Country merged with Paloma Bancshares, Inc. and its two
subsidiaries, Paloma Exchange Bank and First National Bank of Blandinsville.
In conjunction with the merger, Paloma Bancshares, Inc. was merged into Country
and Paloma Exchange Bank and First National Bank of Blandinsville were merged
into Omni Bank. Country continues to actively serve the banking needs of these
local communities, as it has served the local communities of its other
branches.
During 1995 and the first six months of 1996, Country substantially expanded
its efforts to increase deposits, loans and total assets, and Country increased
its emphasis on the Macomb market. Deposits grew from $58.9 million at the end
of December 31, 1994 to $90.8 million at the end of June, 1996, a 54.1%
increase. Loans, net of the allowance for loan losses, increased from $37.6
million to $66.0 million, a 75.5% increase. During the same period, total
assets grew from $64.2 million to $103.2 million, a 60.6% increase.
RESULTS OF OPERATIONS
NET INCOME
Net income was $155,288 ($5.92 per share) for the six months ended June 30,
1996, compared with net income of $33,563 ($1.28 per share) for the six months
ended June 30, 1995, an increase of $121,725 or 362.7%. Factors contributing
to the increase in net income in 1996 compared with 1995 included growth in
Country's loan and deposit portfolios and a gain of approximately $190,000 on
the sale of a nonperforming loan.
Net income was $208,598 for 1995 ($7.95 per share), compared with a net loss of
$37,097 for 1994 ($3.57 per share). The net income per share in 1994 was
affected by additional shares issued in December 1994 in connection with the
acquisition of Paloma Bancshares. The $245,695 increase in net income for 1995
was attributable to an increase in net interest income resulting from growth in
Country's loan and deposit portfolios.
NET INCOME BEFORE INCOME TAXES
Net income before income taxes was $225,288 for the six months ended June 30,
1996, compared with $51,563 for the first six months of 1995, an increase of
$173,725 or 336.9%.
F - 94
172
Net income before income taxes was $206,080 in 1995 compared with a net loss of
$83,927 in 1994, an increase of $290,007 or 345.5%. The improvement in net
income before income taxes for 1995 compared to 1994 was primarily attributable
to an increase in net interest income resulting from growth in Country's loan
and deposit portfolios.
NET INTEREST INCOME
Net interest income is the difference between income earned on interest-earning
assets and the interest expense incurred on interest-bearing liabilities. The
net yield on total interest-earning assets, also referred to as interest rate
margin or net interest margin, represents net interest income divided by
average interest-earning assets. Country's principal interest-earning assets
are loans, investment securities and federal funds sold.
Net interest income was $1,368,378 for the first six months of 1996, an
increase of $171,438 or 14.3% compared with the first six months of 1995,
resulting principally from an increase in average total interest-earning assets
from $66.9 million to $95.4 million, a significant portion of which was
comprised of loans (typically the highest yielding asset). The increase in
average total interest-earning assets was offset by an increase in
interest-bearing liabilities from $60.3 million to $ 87.8 million, and a
decrease in the net interest spread from 3.12% to 2.46% for the six months
ended June 30, 1995 and 1996, respectively. The foregoing decrease resulted
principally from the fact that the cost of interest-bearing liabilities
increased more than the yield on the interest-earning assets. The yield on
interest-earning assets remained constant, while the cost of interest-bearing
liabilities increased from 4.95% to 5.64% for the six months ended June 30,
1995 and 1996, respectively.
Net interest income was $2,497,754 for 1995, an increase of $478,869 or 23.7%
compared with net interest income of $2,018,885 for 1994, which represented an
increase of $79,893 or 4.1% compared with 1993. Country's average total
interest-earning assets increased from approximately $51.8 million for 1994 to
$73.8 million for 1995, representing a 42.5% increase resulting principally
from an increase in loans. The net interest margin decreased to 3.39% for 1995
from 3.9% for 1994.
The following table sets forth for each category of interest-earning assets and
interest-bearing liabilities the average amounts outstanding, the interest
earned or paid on such amounts and the average rate paid for the six months
ended June 30, 1996 and 1995 and for the years ended December 31, 1995 and
1994. The table also sets forth the average rate earned on all
interest-earning assets, the average rate paid on all interest-bearing
liabilities, the net interest spread and the net interest margin on average
interest-earning assets for the same periods.
F - 95
173
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Six Months Ended June 30,
----------------------------------------------------------------------
1996 1995
---------------------------------- ----------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
- -------------------------------------------- ----------- ---------- --------- ----------- ---------
ASSETS
Interest-earning assets:
Certificates of deposit $ - $ - - $ 66,514 $ 2,098 6.36%
Federal funds sold 10,781,494 291,516 5.47% 9,145,144 266,247 5.87
U.S. Treasury and agency
securities 22,217,655 662,565 6.03 15,224,434 474,509 6.29
Municipal securities (1) 224,738 6,862 6.17 866,560 25,057 5.83
Loans (2)(3) 61,576,465 2,845,217 9.34 41,539,741 1,908,931 9.27
Other interest-earning
assets 552,668 11,380 4.16 36,000 288 1.61
------------ ---------- -------- ----------- ---------- --------
Total interest
earning assets $ 95,353,020 $3,817,540 8.10% $66,878,393 $2,677,130 8.07%
------------ ---------- ----------- ----------
Less: Allowance for loan
losses (454,823) (328,706)
Cash and due from banks 2,504,080 2,581,790
Premises and equipment 3,640,239 2,642,988
Other assets 1,458,842 1,339,942
------------ -----------
Total assets $102,501,358 $73,114,407
============ ===========
LIABILITIES
Interest-earning liabilities:
Interest-bearing demand
deposits $ 9,885,649 $ 127,138 2.60% $ 9,636,665 $ 123,900 2.59%
Savings deposits 4,194,065 46,042 2.22 4,384,383 48,062 2.21
Time deposits 66,165,783 1,996,417 6.10 43,602,306 1,204,228 5.57
Notes payable 7,519,475 279,565 7.52 2,654,587 104,000 7.90
------------ ---------- -------- ----------- ---------- --------
Total interest-bearing
liabilities $ 87,764,972 $2,449,162 5.64 $60,277,941 $1,480,190 4.95
------------ ---------- ----------- ----------
Noninterest-bearing
deposits 10,873,509 9,729,877
Other liabilities 1,411,533 887,200
------------ -----------
Total liabilities 100,050,014 70,895,018
------------ -----------
Stockholders' equity 2,451,344 2,219,389
------------ -----------
Total liabilities
and equity $102,501,358 $73,114,407
============ ===========
Net interest income $1,368,378 $1,196,940
========== ==========
Net interest spread 2.46% 3.12%
======== ========
Net interest margin 2.90% 3.61%
======== ========
- ---------------------
(1) Interest income on tax exempt securities does not reflect the tax
equivalent yield.
(2) Loans on nonaccrual status have been included in the computation of average
balances.
(3) The interest income on loans includes loan fees. Loan fees were $210,998
and $85,262 for the six months ended June 30, 1996 and 1995, respectively.
F - 96
174
AVERAGE BALANCE SHEET AND ANALYSIS FORMAT OF NET INTEREST INCOME
Years Ended December 31,
-----------------------------------------------------------------------------------
1995 1994
---------------------------------------- -----------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
- -------------------------------------------- ----------- --------- ------------ ----------- --------
ASSETS
Interest-earning assets:
Certificates of deposit $ 32,984 $ 2,098 6.36% $ 182,000 $ 1,567 0.86%
Federal funds sold 9,096,414 531,491 5.84 5,443,003 232,514 4.27
U.S. Treasury and
agency securities 16,698,794 1,075,320 6.44 11,586,634 453,987 3.92
Municipal securities (1) 852,461 49,399 5.79 998,487 62,237 6.23
Loans (2)(3) 46,980,953 4,370,787 9.30 33,501,783 3,043,219 9.08
Other interest-earning
assets 96,572 657 0.68 42,000 14,665 34.90
----------- ---------- -------- ----------- ---------- --------
Total interest
earning assets $73,758,178 $6,029,752 8.18% $51,753,907 $3,808,189 7.36%
----------- ---------- ----------- ----------
Less: Allowance for
loan losses (362,922) (327,908)
Cash and due from banks 2,729,000 3,755,172
Premises and equipment 3,180,227 2,218,879
Other assets 1,078,368 1,206,148
----------- -----------
Total assets $80,382,851 $58,606,198
=========== ===========
LIABILITIES
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 9,787,777 $ 247,420 2.53% $11,315,861 $ 253,863 2.24%
Savings deposits 4,296,022 94,218 2.19 4,935,017 102,304 2.07
Time deposits 49,407,934 2,872,390 5.81 28,202,734 1,219,893 4.33
Notes payable 3,343,222 317,970 9.51 2,412,500 213,244 8.84
----------- ---------- -------- ----------- ---------- --------
Total interest-bearing
liabilities $66,834,955 $3,531,998 5.28 $46,866,112 $1,789,304 3.82
----------- ---------- ----------- ----------
Noninterest-bearing
deposits 10,309,771 9,055,273
Other liabilities 905,716 614,492
----------- -----------
Total liabilities 78,050,442 56,535,877
Stockholders' equity 2,332,409 2,070,321
----------- -----------
Total liabilities
and equity $80,382,851 $58,606,198
=========== ===========
Net interest income $2,497,754 $2,018,885
========== ==========
Net interest spread 2.90% 3.54%
======== ========
Net interest margin 3.39% 3.90%
======== ========
- ---------------------
(1) Interest income on tax exempt securities does not reflect the tax
equivalent yield.
(2) Loans on nonaccrual status have been included in the computation of average
balances.
(3) The interest income on loans includes loan fees. Loan fees were $261,239
and $155,034 for the years ended December 31, 1995 and 1994, respectively.
F - 97
175
Country's net interest income is affected by changes in the amount and mix of
interest-earning assets and interest-bearing liabilities, referred to as a
"volume change". It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as a "rate change". The decline in the net yield on
total interest-earning assets from 1995 through the first six months of 1996
resulted principally from an increase in investment securities as a percentage
of total interest-earning assets, which produced a lower average rate of return
for Country than loans. The following table reflects the changes in net
interest income stemming from changes in interest rates and from asset and
liability volume, including mix. The change in interest attributable to both
rate and volume has been allocated to the changes in the rate and the volume on
a pro rata basis.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
Six Months Ended June 30, 1996 Compared Years Ended December 31, 1995
with Six Months Ended June 30, 1995 Compared with December 31, 1994
--------------------------------------- ------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------------- ------------------------------------
Volume (1) Rate Changes Volume (1) Rate Changes
- ---------------------------------------------- --------- ----------- ------------- --------- ----------
Interest Income:
Loans $ 925,765 $ 10,521 $ 936,286 $1,252,333 $ 75,235 $1,327,568
Certificates of deposit (1,049) (1,049) (2,098) (78) 609 531
Federal funds sold 41,997 (16,728) 25,269 193,146 105,831 298,977
U.S. Treasury and agency 207,572 (19,516) 188,056 252,733 368,600 621,333
Municipal securities (19,682) 1,487 (18,195) (8,670) (4,168) (12,838)
Other interest-earning assets 9,996 1,096 11,092 (57,089) 43,081 (14,008)
---------- ---------- ---------- ---------- ---------- ----------
Total interest income $1,164,599 $ (24,189) $1,140,410 $1,632,375 $589,188 $2,221,563
---------- ---------- ---------- ---------- ---------- ----------
Interest Expense:
Interest-bearing deposits $ 3,202 $ 36 $ 3,238 $ (105,338) $ 98,895 $ (6,443)
Savings deposits (2,089) 69 (2,020) (14,636) 6,550 (8,086)
Time deposits 740,857 51,332 792,189 1,133,721 518,776 1,652,497
Borrowed funds 82,432 93,133 175,565 87,491 17,235 104,726
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense $ 824,402 $ 144,570 $ 968,972 $1,101,238 $641,456 $1,742,694
---------- ---------- ---------- ---------- ---------- ----------
Net interest margin $ 340,197 $ (168,759) $ 171,438 $ 531,137 $(52,268) $ 478,869
========== ========== ========== ========== ========== ==========
Years Ended December 31, 1994
Compared with December 31, 1993
------------------------------------
Increase (Decrease) Due to
------------------------------------
Volume (1) Rate Changes
- -------------------------------------------- --------- -----------
Interest Income:
Loans $ 401,672 $ 133,289 $ 534,961
Certificates of deposit 331 (1,612) (1,281)
Federal funds sold 6,089 105,974 112,063
U.S. Treasury and agency 73,000 (281,367) (208,367)
Municipal securities (11,168) (37,755) (48,923)
Other interest-earning assets (7,241) (42,964) (50,205)
---------- ---------- ----------
Total interest income $ 462,683 $(124,435) $ 338,248
---------- ---------- ----------
Interest Expense:
Interest-bearing deposits $ (31,865) $ (25,598) $ (57,463)
Savings deposits (3,786) (44,706) (48,492)
Time deposits 290,298 832 291,130
Borrowed funds (4,089) 77,269 73,180
---------- ---------- ----------
Total interest expense $ 250,558 $ 7,797 $ 258,355
---------- ---------- ----------
Net interest margin $ 212,125 $(132,232) $ 79,893
========== ========== ==========
- -----------------
(1) Nonaccrual loans are included in the average volumes used in calculating
this table.
F - 98
176
PROVISION FOR LOAN LOSSES
The amount of the provision for loan losses is based on periodic (not less than
quarterly) evaluations of the loan portfolio, with particular attention
directed toward nonperforming and other potential problem loans. During these
evaluations, consideration is given to such factors as management's evaluation
of specific loans, the level and composition of nonperforming loans, historical
loss experience, results of examinations by regulatory agencies, the market
value of collateral, the strength and availability of guaranties,
concentrations of credits, and other judgmental factors.
Country recorded a $144,713 provision for loan losses during the six months
ended June 30, 1996 compared with no provision during the first six months of
1995. As Country's ratio of net charge-offs to average loans increased
slightly during 1996, additional amounts were provided to compensate for
ongoing growth in the loan portfolio in order to maintain the allowance for
loan losses at an adequate level.
The 1995 provision for loan losses was $40,200 compared with $15,800 in 1994.
The increase in the 1995 provision occurred as a result of the 40.2% growth in
average loans outstanding.
NONINTEREST INCOME
The following table sets forth the various categories of noninterest income for
the six months ended June 30, 1996 and 1995 and for the years ended December
31, 1995 and 1994.
Six Months Ended Years Ended
June 30, December 31,
------------------ ------------------
1996 1995 1995 1994
-------- -------- -------- --------
Noninterest income
Service charges $311,050 $220,024 $494,659 $379,881
Securities gains, net - - 5,730 -
Other 290,439 34,846 88,346 18,346
-------- -------- -------- --------
Total noninterest
income $601,489 $254,870 $588,735 $398,227
======== ======== ======== ========
Noninterest income is generated primarily from fees associated with noninterest
and interest-bearing accounts. Noninterest income for the first six months of
1996 was $601,489, an increase of $346,619 or 136% compared with noninterest
income of $254,870 for the first six months of 1995. The growth of Omni Bank
during 1996 increased the number and balance of noninterest and
interest-bearing accounts, which resulted in increased noninterest income.
Other noninterest income was $290,439 for the first six months of 1996, an
increase of $255,593 compared with other noninterest income of $34,846 for the
first six months of 1995. The increase in other noninterest income is
primarily due to a gain of approximately $190,000 on the sale of a
nonperforming loan.
Noninterest income was $588,735 for 1995, an increase of $190,508 or 47.8%
compared with noninterest income of $398,227 for 1994. Noninterest income
increased from 1994 to 1995 in all categories, primarily as a result of the
growth of Omni Bank's noninterest and interest-bearing accounts.
F - 99
177
NONINTEREST EXPENSE
The following table sets forth the various categories of noninterest expense
for the six months ended June 30, 1996 and 1995 and for the years ended
December 31, 1995 and 1994.
Six Months Ended Years Ended
June 30, December 31,
----------------------- ----------------------
1996 1995 1995 1994
----------- ---------- ---------- ----------
Salaries and wages $ 783,244 $ 632,073 $1,317,433 $1,138,623
Employee benefits 72,414 104,955 193,329 201,804
Occupancy and equipment 236,884 214,829 492,966 400,992
FDIC assessment (120) 78,017 84,524 97,558
Other expenses:
Legal 108,288 23,062 28,720 26,850
Stationary, supplies and printing 50,177 43,026 76,834 71,671
Telephone 34,577 38,025 56,367 65,309
Postage 48,186 36,838 74,081 68,317
Correspondent bank charges 40,719 36,050 74,926 42,178
Directors fees 13,050 16,845 38,230 66,900
Amortization 8,149 8,176 16,325 3,851
Other 204,298 168,351 386,474 301,186
---------- ---------- ---------- ----------
Total other expenses 507,444 370,373 751,957 646,262
---------- ---------- ---------- ----------
Total noninterest expense $1,599,866 $1,400,247 $2,840,209 $2,485,239
========== ========== ========== ==========
Noninterest expense was $1,599,866 for the first six months of 1996, an
increase of $199,619 or 14.3% compared with noninterest expense of $1,400,247
for the first six months of 1995. The growth of Omni Bank resulted in
additional personnel, occupancy and office expenses.
Deposits held by Omni Bank are insured by the Bank Insurance Fund ("BIF") of
the Federal Deposit Insurance Corporation ("FDIC"), and as FDIC-insured
institutions, the Omni Banks are required to pay deposit insurance premium
assessments to the FDIC. The amount an institution pays for FDIC deposit
insurance coverage is determined in accordance with a risk-based assessment
system under which each insured depository institution is placed into one of
nine categories and assessed insurance premiums based upon its level of capital
and the results of supervisory evaluations. The FDIC has issued refunds to the
best-rated institutions for assessment which exceeded the recapitalization
requirements of the BIF. The Omni Banks received a total refund from the FDIC
of approximately $41,000. The change in the deposit insurance assessment rate
is expected to significantly reduce the cost of deposit insurance for the Omni
Banks. See "Regulation and Supervision--The Bank Subsidiaries--Deposit
Insurance".
Noninterest expense was $2,840,209 for 1995, an increase of $354,970 or 14.3%
compared with noninterest expense of $2,485,239 for 1994. The increase in
noninterest expense for 1995 from 1994 was attributable to a 12.7% increase in
salaries and employee benefits and a 22.9% increase in occupancy expenses. The
increase in salaries and benefits and occupancy expenses were due primarily to
additional staffing associated with Omni Bank's loan and deposit growth.
F - 100
178
INCOME TAXES
Country has recognized an income tax expense of $70,000 on income before income
taxes of $225,288 for the six months ended June 30, 1996, an effective tax rate
of 31.1%, as compared with an income tax expense of $18,000 on income before
income taxes of $51,563 for the six months ended June 30, 1995, an effective
tax rate of 34.9%. Country recognized income tax benefits of $2,518 and
$46,830 on income before income taxes of $206,080 and loss before income taxes
of $83,927 for the years ended December 31, 1995 and 1994, respectively.
Effective tax benefits were 1.2% and 55.8% for those years. - Country's
effective tax rates varied from the statutory tax rate primarily due to
interest income on municipal investments, which is exempt from federal income
tax.
INTEREST RATE SENSITIVITY MANAGEMENT
The operating income and net income of Omni Bank depend, to a substantial
extent, on "rate differentials", i.e., the differences between the income Omni
Bank receives from loans, securities and other earning assets, and the interest
expense it pays to obtain deposits and other liabilities. These rates are
highly sensitive to many factors which are beyond the control of Omni Bank,
including general economic conditions and the policies of various governmental
and regulatory authorities. See "Investment Considerations--Impact of Interest
Rates and Economic Conditions".
The objective of monitoring and managing the interest rate risk position of the
balance sheet is to contribute to earnings and to minimize the adverse changes
in net interest income. The potential for earnings to be affected by changes
in interest rates is inherent in a financial institution. Interest rate
sensitivity is the relationship between changes in market interest rates and
changes in net interest income due to the repricing characteristics of assets
and liabilities. An asset sensitive position in a given period will result in
more assets being subject to repricing; therefore, as interest rates rise, such
a position will have a positive effect on net interest income. Conversely, in
a liability sensitive position, where liabilities reprice more quickly than
assets in a given period, a rise in interest rates will have an adverse effect
on net interest income.
One way to analyze interest rate risk is to evaluate the balance of Country's
interest rate sensitivity position. A mix of assets and liabilities that are
roughly equal in volume and term and repricing represents a matched interest
rate sensitivity position. Any excess of assets or liabilities in a particular
period results in an interest rate sensitivity gap. The following table
presents the interest rate sensitivity for Country's interest-earning assets
and interest-bearing liabilities at June 30, 1996:
F - 101
179
INTEREST-RATE SENSITIVE ASSETS AND LIABILITIES
3 months 3 months to 6 months 1 year to
or less 6 months to 1 year 5 years Over 5 years Total
------------- ------------ ------------- ------------ ------------ -----------
Interest-earning assets:
Federal funds sold $ 2,075,000 $ - $ - $ - $ - $ 2,075,000
Investment securities 2,599,694 2,076,413 2,770,500 18,597,017 87,000 26,130,624
Loans 9,070,263 3,750,900 10,996,561 19,295,000 24,081,333 67,194,057
Other interest-earning assets - - - - 714,300 714,300
------------ ------------ ------------ ------------ ----------- -----------
Interest-earning assets $ 13,744,957 $ 5,827,313 $ 13,767,061 $ 37,892,017 $24,882,633 $96,113,981
------------ ------------ ------------ ------------ ----------- -----------
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 9,921,512 $ - $ - $ - $ - $ 9,921,512
Savings deposits 4,320,923 - - - - 4,320,923
Time deposits 15,699,200 16,744,700 25,510,355 8,157,100 - 66,111,355
Notes payable and other
borrowings 3,550,000 - - 700,000 4,300,000 8,550,000
------------ ------------ ------------ ------------ ----------- -----------
Interest-bearing liabilities $ 33,491,635 $ 16,744,700 $ 25,510,355 $ 8,857,100 $ 4,300,000 $88,903,790
------------ ------------ ------------ ------------ ----------- -----------
Period interest sensitivity gap $(19,746,678) $(10,917,387) $(11,743,294) $ 29,034,917 $20,582,633 $ 7,210,191
============ ============ ============ ============ =========== ===========
Cumulative interest
sensitivity gap $(19,746,678) $(30,664,065) $(42,407,359) $(13,372,442) $ 7,210,191
============ ============ ============ ============ ===========
Cumulative gap as a percentage
of total assets (19.14)% (29.72)% (41.10)% (12.96) 6.99%
============ ============ ============ ============ ===========
Cumulative interest-sensitive
assets as a percentage of
cumulative interest-sensitive
liabilities 41.0% 39.0% 44.0% 84.2% 108.1%
============ ============ ============ ============ ===========
The cumulative rate-sensitive gap position at one year was a
liability-sensitive position of $42.4 million, or negative 41.1%, which
indicates that Country was in a liability interest rate-sensitive position at
June 30, 1996. Accordingly, Country's earnings could experience a significant
negative impact from increases in interest rates.
Country undertakes this interest rate-sensitivity analysis to monitor the
potential risk to future earnings from the impact of possible future changes in
interest rates on currently existing net assets or net liability positions.
However, this type of analysis is as of a point-in-time, when in fact Country's
interest rate sensitivity can quickly change as market conditions, customer
needs and management strategies change. Thus, interest rate changes do not
affect all categories of assets and liabilities equally or at the same time.
Country is not involved in the purchase of derivative financial instruments or
structured notes.
The preceding table does not necessarily indicate the impact of general
interest rate movements on Country's net interest income because the repricing
of certain assets and liabilities is discretionary and is subject to
competitive and other pressures.
F - 102
180
ANALYSIS OF FINANCIAL CONDITION
LOANS AND ASSET QUALITY
Country's loans are diversified by borrower and industry group. Loan growth
has occurred every year over the past two years and can be attributed to
mergers, increased loan demand and the addition of new lending products. The
following table describes the composition of loans by major categories
outstanding at June 30, 1996 and at December 31, 1995 and 1994.
December 31,
June 30, -------------------------
1996 1995 1994
----------- ----------- -----------
Aggregate Principal Amount
---------------------------------------
Loans:
Commercial $22,368,261 $20,005,093 $13,347,394
Real estate 39,191,966 32,381,324 21,898,594
Installment 5,048,167 4,374,598 3,012,595
Other 585,663 413,635 57,903
----------- ----------- -----------
Gross loans 67,194,057 57,174,650 38,316,486
Less: Allowance for loan losses (500,318) (420,426) (329,251)
Unearned interest (620,319) (577,114) (338,537)
----------- ----------- -----------
Loans, net $66,073,420 $56,177,110 $37,648,698
=========== =========== ===========
Percentage of Total Loan Portfolio
---------------------------------------
Loans:
Commercial loans 33.29% 34.99% 34.83%
Real estate loans 58.33 56.64 57.15
Installment loans 7.51 7.65 7.86
Other 0.87 0.72 0.16
----------- ----------- -----------
Gross loans 100.00% 100.00% 100.00%
=========== =========== ===========
As of June 30, 1996 and December 31, 1995, commitments of Omni Bank under
standby letters of credit and unused lines of credit totaled approximately
$10,587,900 and $9,975,700, respectively.
The loan portfolio includes a concentration of loans to agricultural and
agricultural-related industries amounting to approximately $15,104,000 as of
June 30, 1996.
Stated loan maturities (including floating rate loans reset to market interest
rates) of the total loan portfolio, before unearned income, as of June 30, 1996
and December 31, 1995 were:
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181
STATED LOAN MATURITIES
Within One One Year to After Five
Year Five Years Years Total
----------- ----------- ----------- -----------
JUNE 30, 1996
Stated Loan Maturities/Floating Rates Reset:
Commercial $13,638,661 $ 6,644,200 $ 2,085,400 $22,368,261
Real estate 9,357,100 7,987,900 21,846,966 39,191,966
Installment 236,300 4,662,900 148,967 5,048,167
Other 585,663 - - 585,663
----------- ----------- ----------- -----------
Total $23,817,724 $19,295,000 $24,081,333 $67,194,057
=========== =========== =========== ===========
Within One One Year to After Five
Year Five Years Years Total
----------- ----------- ----------- -----------
DECEMBER 31, 1995
Stated Loan Maturities/Floating Rates Reset:
Commercial $11,123,793 $ 7,463,100 $ 1,418,200 $20,005,093
Real estate 6,668,200 10,079,700 15,633,424 32,381,324
Installment 253,478 3,928,565 192,555 4,374,598
Other 413,635 - - 413,635
----------- ----------- ----------- -----------
Total $18,459,106 $21,471,365 $17,244,179 $57,174,650
=========== =========== =========== ===========
Rate sensitivities of the total loan portfolio, before unearned income, as of
June 30, 1996 and December 31, 1995 were as follows:
LOAN REPRICING
Within One One Year to After Five
Year Five Years Years Total
----------- ----------- ----------- -----------
JUNE 30, 1996
Fixed rate $13,165,940 $17,250,643 $ 9,754,426 $40,171,009
Variable rate 9,339,185 2,044,335 14,324,257 25,707,777
Nonaccrual 1,315,271 - - 1,315,271
----------- ----------- ----------- -----------
Total $23,820,396 $19,294,978 $24,078,683 $67,194,057
=========== =========== =========== ===========
Within One One Year to After Five
Year Five Years Years Total
----------- ----------- ----------- -----------
DECEMBER 31, 1995
Fixed rate $10,121,019 $18,865,501 $ 5,059,704 $34,046,224
Variable rate 7,888,455 2,855,827 11,982,144 22,726,426
Nonaccrual 402,000 - - 402,000
----------- ----------- ----------- -----------
Total $18,411,474 $21,721,328 $17,041,848 $57,174,650
=========== =========== =========== ===========
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The maturities presented above are based upon contractual maturities. Many of
these loans are made on a short-term basis with the possibility of renewal at
time of maturity. All loans, however, are reviewed on a continuous basis for
creditworthiness.
NONPERFORMING ASSETS
Country's financial statements are prepared on the accrual basis of accounting,
including the recognition of interest income on its loan portfolio, unless a
loan is placed on a nonaccrual basis. Loans are placed on a nonaccrual basis
when there are serious doubts regarding the collectibility of all principal and
interest due under the terms of the loan. Amounts received on nonaccrual loans
generally are applied first to principal and then to interest after all
principal has been collected. It is the policy of Omni Bank not to renegotiate
the terms of a loan because of a delinquent status. Rather, a loan is
generally transferred to nonaccrual status if it is not in the process of
collection and is delinquent in payment of either principal or interest beyond
90 days.
Other nonperforming assets consist of real estate acquired through loan
foreclosures or other workout situations and other assets acquired through
repossessions. The following table summarizes nonperforming assets by category
as of June 30, 1996 and as of December 31, 1995 and 1994:
NONPERFORMING ASSETS
December 31,
June 30, -------------------
1996 1995 1994
---------- -------- --------
Nonaccrual loans (1) $1,315,271 $402,000 $365,120
Loans 90 days past due and still
accruing interest 293,835 138,377 223,139
---------- -------- --------
Total nonperforming loans 1,609,106 540,377 588,259
Other real estate owned and other assets 69,084 53,707 53,036
---------- -------- --------
Total nonperforming assets $1,678,190 $594,084 $641,295
========== ======== ========
Nonperforming assets to total assets 1.63% 0.61% 1.00%
Nonperforming loans to total loans 2.39 0.95 1.54
(1) Includes loans of $1,246,019, $225,000 and $225,000 at June 30, 1996,
December 31, 1995 and December 31, 1994, respectively, that will be sold
to the shareholders of Country as part of the acquisition.
The classification of a loan on nonaccrual status does not necessarily indicate
that the principal is uncollectible, in whole or in part. A determination as
to collectibility is made by Omni Bank on a case-by-case basis. Omni Bank
considers both the adequacy of the collateral and the other resources of the
borrower in determining the steps to be taken to collect nonaccrual loans. The
final determination as to these steps is made on a case-by-case basis.
Alternatives that are considered are foreclosure, collecting on guarantees,
restructuring the loan or collection lawsuits.
F - 105
183
On January 1, 1995, Country adopted guidelines for impaired loans required by
Financial Accounting Standards Board Statement No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by Statement No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." The adoption of SFAS No. 114 did not significantly impact the
comparability of the allowance related tables of Country included in this
prospectus.
The following table sets forth a summary of other real estate owned and other
collateral acquired as of June 30, 1996:
OTHER REAL ESTATE OWNED & OTHER COLLATERAL ACQUIRED
Number of
Parcels/ Net Book
Description Autos Carrying Value
- ------------------------------------- --------------
Developed property 2 $ 37,379
Vacant land or unsold lots 1 3,857
Repossessed automobiles 14 27,848
--------- --------------
17 $ 69,084
========= ==============
ALLOWANCE FOR LOAN LOSSES
In originating loans, management of Country recognizes that credit losses will
be experienced and the risk of loss will vary with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the quality of the collateral for such loan. The allowance for loan losses
represents Country's estimate of the allowance necessary to provide for losses
incurred in the loan portfolio. In making this determination, Country analyzes
the ultimate collectibility of Country's loan portfolio, incorporating feedback
provided by internal loan staff and provided by examinations performed by
regulatory agencies. Country makes an ongoing evaluation as to the adequacy of
the allowance for loan losses. To establish the appropriate level of the
allowance, all loans (including nonperforming loans), commitments to extend
credit and standby letters of credit are reviewed and classified as to
potential loss exposure. Specific allowances are then established for those
loans, commitments to extend credit or standby letters of credit with
identified loss exposure and an additional allowance is maintained based upon
the size, quality, and concentration characteristics of the remaining loan
portfolio using both historical quantitative trends and Country's evaluation of
qualitative factors including future economic and industry outlooks. The
determination by Country of the appropriate level of the allowance amount was
$500,318 at June 30, 1996.
The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. These estimates are reviewed monthly and as
adjustments, either positive or negative, become necessary they are reported in
earnings in the periods in which they become known. The following table
presents a detailed analysis of Country's allowance for loan losses for the six
months ended June 30, 1996 and for the years ended December 31, 1995 and 1994.
F - 106
184
ALLOWANCE FOR LOAN LOSSES
December 31,
June 30, --------------------------
1996 1995 1994
----------- ----------- -----------
Beginning balance $ 420,426 $ 329,251 $ 326,565
----------- ----------- -----------
Charge-offs:
Commercial - 33,331 32,449
Real estate 55,000 16,000 1,000
Installment 8,929 - 5,000
Other 892 - -
----------- ----------- -----------
Total charge-offs 64,821 49,331 38,449
----------- ----------- -----------
Recoveries:
Commercial - 2,214 22,335
Real estate - 92,495 1,000
Installment - 5,597 2,000
----------- ----------- -----------
Total recoveries - 100,306 25,335
----------- ----------- -----------
Net charge-offs 64,821 (50,975) 13,114
Provision for loan losses 144,713 40,200 15,800
----------- ----------- -----------
Ending balance $ 500,318 $ 420,426 $ 329,251
=========== =========== ===========
Period end total loans, net of unearned interest $66,573,738 $56,597,536 $37,977,949
=========== =========== ===========
Average loans $61,576,465 $46,980,953 $33,501,783
=========== =========== ===========
Ratio of net charge-offs to average loans 0.21% (0.11)% 0.04%
=========== =========== ===========
Ratio of provision for loan losses to average loans 0.47 0.09 0.05
=========== =========== ===========
Ratio of allowance for loan losses to ending
total loans 0.75 0.74 0.87
=========== =========== ===========
Ratio of allowance for loan losses to total
nonperforming loans 31.09 77.80 55.97
=========== =========== ===========
Ratio of allowance for loan losses to total
nonperforming assets 29.81 70.77 51.34
=========== =========== ===========
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185
The following table sets forth an allocation of the allowance for loan losses
among categories as of June 30, 1996 and December 31, 1995 and 1994.
Management of Country believes that any allocation of the allowance for loan
losses into categories lends an appearance of precision which does not exist.
The allowance is utilized as a single unallocated allowance available for all
loans. The following allocation table should not be interpreted as an
indication of the specific amounts or the relative proportion of future charges
to the allowance and has been derived by applying a general allowance to the
portfolio as a whole, in addition to specific allowance amounts for internally
classified loans. In retrospect, the specific allocation in any particular
category may prove excessive or inadequate and consequently may be reallocated
in the future to reflect the then current condition. Accordingly, the entire
allowance is available to absorb losses in any category.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
June 30, 1996 December 31, 1995 December 31, 1994
------------------------- ----------------------------- -----------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
each each each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------------- ---------- ----------------- ---------- ----------------- ----------
Commercial $ 275,358 33.29% $ 237,191 34.99% $ 174,569 34.83%
Real estate 149,237 58.33 117,616 56.64 109,493 57.15
Installment 75,723 7.51 65,619 7.65 45,189 7.86
Other - 0.87 - 0.72 - 0.16
------------- ---------- ----------------- ---------- ----------------- ----------
Total $ 500,318 100.00% $ 420,426 100.00% $ 329,251 100.00%
============= ========== ================= ========== ================= ==========
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186
INVESTMENT ACTIVITIES
The investment portfolio, which was 27.2% of Country's earning asset base as of
June 30, 1996, is being managed to minimize interest rate risk, maintain
sufficient liquidity and maximize return. Country's financial planning
anticipates income streams based on normal maturity and reinvestment. The
short duration of the portfolio provides adequate liquidity through normal
maturities. Investment securities classified as available-for-sale are
purchased with the intent to provide liquidity and to increase returns. The
securities classified as available-for-sale are carried at fair value. Country
currently does not have any securities classified as held-to-maturity or
trading.
Prior to January 1, 1994, all debt securities were carried at amortized cost.
Effective January 1, 1994, Country adopted SFAS No. 115, and classified
investments as held-to-maturity or available-for-sale.
The following tables describe the composition of investments by major category
and maturity:
INVESTMENT PORTFOLIO
December 31,
HELD TO MATURITY June 30, -----------------------------------
1996 1995 1994
---------------- ------------------ ---------------
U.S. Treasury $ - $ - $ 9,464,335
U.S. Government agencies and corporations - - 2,634,794
States and political subdivisions - - 875,372
Mortgage backed securities - - 515,897
---------------- ------------------ ---------------
Total $ - $ - $ 13,490,398
================ ================== ===============
December 31,
AVAILABLE FOR SALE June 30, -----------------------------------
1996 1995 1994
---------------- ------------------ ---------------
U.S. Treasury $ 17,043,156 $ 12,928,391 $ -
U.S. Government agencies and corporations 8,426,172 9,403,563 -
States and political subdivisions 225,250 263,375 -
Mortgage backed securities 436,046 34,532 -
---------------- ------------------ ---------------
Total $ 26,130,624 $ 22,629,861 $ -
================ ================== ===============
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187
INVESTMENT PORTFOLIO MATURITY/REPRICING SCHEDULE
JUNE 30, 1996 Maturing or Repricing
--------------------------------------------------------------------------------------------
After 1 Year but After 5 Years but
Within 1 Year Within 5 Years Within 10 Years
-------------------------- ---------------------- -----------------------
Amount Yield Amount Yield Amount Yield
------------- ----------- --------------- ----- ----------- ------
AVAILABLE-FOR-SALE
U.S. Treasury $4,317,063 6.96% $ 12,726,093 5.28% $ - -
U.S. Government
agencies and
corporations 3,020,294 5.62 5,405,878 7.79 - -
States and political
subdivisions (1) 109,250 6.35 29,000 4.00 87,000 5.66%
Mortgage backed
securities - - - - - -
------------- ----------- --------------- ---------
Total $7,446,607 $ 18,160,971 $ 87,000
============= =============== =========
JUNE 30, 1996 Maturing or Repricing
---------------------------------------------------------
After 10 Years Total
--------------------------------------- ----------------
Amount Yield Amount
---------------- --------------------- ----------------
AVAILABLE-FOR-SALE
U.S. Treasury $ - - $ 17,043,156
U.S. Government
agencies and
corporations - - 8,426,172
States and political
subdivisions (1) - - 225,250
Mortgage backed
securities 436,046 8.25% 436,046
---------------- ----------------
Total $ 436,046 $ 26,130,624
================ ================
DECEMBER 31, 1995 Maturing or Repricing
--------------------------------------------------------------------------------------------
After 1 Year but After 5 Years but
Within 1 Year Within 5 Years Within 10 Years
-------------------------- ---------------------- -----------------------
Amount Yield Amount Yield Amount Yield
------------- ----------- --------------- ----- ----------- ------
AVAILABLE-FOR-SALE
U.S. Treasury $4,225,641 6.28% $ 8,702,750 5.39% $ - -
U.S. Government
agencies and
corporations 5,044,813 5.43 4,358,750 6.65 - -
States and political
subdivisions (1) 62,000 4.98 106,375 4.41 95,000 5.66%
Mortgage backed
securities - - - - - -
------------- --------------- -----------
Total $9,332,454 $ 13,167,875 $ 95,000
============= =============== ===========
DECEMBER 31, 1995 Maturing or Repricing
---------------------------------------------------------
After 10 Years Total
--------------------------------------- ----------------
Amount Yield Amount
---------------- --------------------- ----------------
AVAILABLE-FOR-SALE
U.S. Treasury $ - - $ 12,928,391
U.S. Government
agencies and
corporations - - 9,403,563
States and political
subdivisions (1) - - 263,375
Mortgage backed
securities 34,532 9.50% 34,532
---------------- ----------------
Total $ 34,532 $ 22,629,861
================ ================
- ----------------
(1) Rates on tax-exempt securities have been adjusted to tax equivalent yields
using a 34% income tax rate.
F - 110
188
DEPOSIT ACTIVITIES
Deposits are attracted through the offering of a broad variety of deposit
instruments, including checking accounts, money market accounts, regular
savings accounts, term certificate accounts (including "jumbo" certificates in
denominations of $100,000 or more), and retirement savings plans. Country's
average balance of total deposits was $91,119,006 for the six months ended June
30, 1996, representing an increase of $17,317,502 or 23.5% compared with the
average balance of total deposits for the year ended December 31, 1995.
Country's average balance of total deposits was $73,801,504 for the year ended
1995, an increase of $20,292,619 or 37.9% compared with the average balance of
total deposits outstanding for 1994 of $53,508,885. The increases in deposits
were due to internally generated growth.
F - 111
189
The following table sets forth certain information regarding Omni Bank's
average deposits as of June 30, 1996 and December 31, 1995 and 1994.
AVERAGE DEPOSITS
June 30, 1996 December 31, 1995 December 31, 1994
--------------------------------- --------------------------------- ---------------------------------
Average Percent of Average Average Percent of Average Average Percent of Average
Amount Total Rate Paid Amount Total Rate Paid Amount Total Rate Paid
----------- ---------- --------- ----------- ---------- --------- ----------- ---------- ---------
Noninterest-bearing
demand deposits $10,873,509 11.93% - $10,309,771 13.97% - $ 9,055,273 16.92% -
Interest-bearing
demand deposits 9,885,649 10.85 2.60% 9,787,777 13.26 2.53% 11,315,861 21.15 2.24%
Savings deposits 4,194,065 4.60 2.22 4,296,022 5.82 2.19 4,935,017 9.22 2.07
Time deposits 66,165,783 72.62 6.10 49,407,934 66.95 5.81 28,202,734 52.71 4.33
----------- ------- ------ ----------- ------- ------ ----------- ------- ------
$91,119,006 100.00% 4.80% $73,801,504 100.00% 4.35% $53,508,885 100.00% 2.95%
=========== ======= ====== =========== ======= ====== =========== ======= ======
F - 112
190
As of June 30, 1996, non-brokered time deposits of $100,000 or more represented
12.1% of total deposits, compared with 11.6% of total deposits as of December
31, 1995 and 6.9% as of December 31, 1994. Omni Bank does not have and does
not solicit brokered deposits.
The following table sets forth the remaining maturities for time deposits of
$100,000 or more at June 30, 1996 and at December 31, 1995:
TIME DEPOSITS OF $100,000 OR MORE
June 30, December 31,
MATURITY RANGE 1996 1995
----------- -----------
Three months or less $ 3,235,709 $ 3,650,267
Three through six months 2,347,481 1,459,803
Six through twelve months 3,800,292 3,563,272
Over twelve months 1,649,225 1,389,404
----------- -----------
Total $11,032,707 $10,062,746
=========== ===========
RETURN ON EQUITY AND ASSETS
The following are various ratios for Country for the six months ended June 30,
1996 and the years ended December 31, 1995 and 1994.
RETURN ON EQUITY AND ASSETS
For the
Six Months For the Years Ended
Ended December 31,
June 30, ----------------------------
1996 1995 1994
---------- ------------- -------------
Return on average assets 0.30% 0.26% (0.06)%
Return on average equity 12.78 8.94 (1.79)
Average equity to average assets 2.39 2.90 3.53
Dividend payout rates on common stock 0.00 0.00 0.00
LIQUIDITY
Omni Bank's investment securities portfolio, including federal funds sold, and
its cash and due from bank deposit balances serve as the primary sources of
liquidity. At June 30, 1996, 11.1% of Omni Bank's interest-bearing liabilities
were in the form of time deposits of $100,000 and over. Substantially all of
such large deposits were obtained from Omni Bank's market area and none of such
deposits were brokered deposits. Management believes these deposits to be a
stable source of funds. However, if a large number of these time deposits
matured at approximately the same time and were not renewed, Omni Bank's
liquidity could be adversely affected. Currently, the maturities of Omni
Bank's large time deposits are spread throughout the year, with 29.3% maturing
in the third quarter of 1996, 21.3% maturing in the fourth quarter of 1996,
34.4% maturing in the first and second quarter of 1997, and the remaining 15.0%
maturing thereafter. Omni Bank monitors those maturities in an effort to
minimize any adverse effect on liquidity.
F - 113
191
In the longer term, the liquidity of Country and its ability to meet its cash
obligations will depend substantially on its receipt of dividends from Omni
Bank, which are limited by banking statutes and regulation. See "Supervision
and Regulation".
CAPITAL RESOURCES
Country's stockholders' equity at June 30, 1996 was $2.4 million, compared with
$2.5 million at December 31, 1995. The decrease in equity has been the result
of the retention of earnings offset by the equity effect of unrealized losses
on securities available for sale of $177,120. Country had consolidated net
income of $155,288 for the six months ended June 30, 1996.
Omni Bank is expected to meet a minimum risk-based capital to risk-weighted
assets ratio of 8%, of which at least one-half (or 4%) must be in the form of
Tier 1 (core) capital. The remaining one-half (or 4%) may be in the form of
Tier 1 (core) or Tier 2 (supplementary) capital. The amount of loan loss
allowance that may be included in capital is limited to 1.25% of risk-weighted
assets. The ratio of Tier 1 (core) and the combined amount of Tier 1 (core)
and Tier 2 (supplementary) capital to risk-weighted assets for Omni Bank were
10.51% and 11.30%, respectively, at June 30, 1996, and 11.44% and 12.20%,
respectively, at December 31, 1995. Omni Bank is currently, and expects to
continue to be, in compliance with these guidelines. See "Supervision and
Regulation-- The Bank Subsidiaries--Capital Requirements".
The Board of Governors of the Federal Reserve System has announced a policy
sometimes known as the "source of strength doctrine" that requires a bank
holding company to serve as a source of financial and managerial strength to
its subsidiary banks. The FRB has interpreted this requirement to require that
a bank holding company, such as Country, stand ready to use available resources
to provide adequate capital funds to its subsidiary banks during periods of
financial stress or adversity. The FRB has stated that it would generally view
a failure to assist a troubled or failing subsidiary bank in these
circumstances as an unsound or unsafe banking practice or a violation of
Regulation Y or both, justifying a cease and desist order or other enforcement
action, particularly if appropriate resources are available to the bank holding
company on a reasonable basis. The requirement that a bank holding company,
such as Country, make its assets and resources available to a failing
subsidiary bank could have an adverse effect upon Country and its stockholders.
F - 114
192
The following table sets forth an analysis of Omni Bank's capital ratios:
RISK-BASED CAPITAL RATIOS
December 31, Minimum Well-
June 30, ------------------------- Capital Capitalized
1996 1995 1994 Ratios Ratios
----------- ----------- ----------- ------- -----------
Tier I risk-based
capital $ 6,622,354 $ 6,390,183 $ 4,221,850
Tier II risk-based
capital 500,318 420,426 329,251
Total capital 7,122,672 6,810,609 4,551,101
Risk-weighted
assets 63,005,853 55,843,031 37,038,615
Capital ratios:
Tier I risk-based
capital 10.51% 11.44% 11.40% 4.00% 6.00%
Tier II risk-based
capital 11.30 12.20 12.29 8.00 10.00
Leverage ratio 6.41 6.61 6.78 4.00 5.00
ACCOUNTING MATTERS
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors of Impairment of a Loan" as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". Together, these statements require that when a loan is impaired,
a creditor shall measure impairment based on the present value of expected
future cash flows discounted at the loan's effective interest rate, the fair
value of the collateral if the loan is collateral dependent or the loan's
observable market price. A loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The new statements also require certain disclosures regarding
impaired loans. Country adopted these statements effective January 1, 1995.
The adoption of these accounting statements did not have a material effect on
Country's consolidated financial position or results of operations since
Country's recognition and measurement policies regarding nonperforming loans
are materially consistent with the accounting statements.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of". This Statement requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Measurement of an impairment loss for
long-lived assets and identifiable intangibles that an entity expects to hold
and use should be based on the fair value of the asset. This Statement is
effective for fiscal years beginning after December 15, 1995.
F - 115
193
The Financial Accounting Standards Board has issued SFAS No. 122, "Accounting
for Mortgage Servicing Rights" which became effective for years beginning after
December 15, 1995. This Statement amends FASB Statement No. 65, "Accounting
for Certain Mortgage Banking Activities" to require that an entity recognize as
separate assets rights to service mortgage loans for others however those
rights are acquired. An entity that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or securitizes
those loans with servicing rights retained should allocate the total cost of
the mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. If it is not
practicable to estimate the fair values separately, the entire cost of
purchasing or originating the loans should be allocated to the mortgage loans
(without the mortgage servicing rights) and no cost should be allocated to the
mortgage servicing rights. This Statement also requires that an entity assess
its capitalized mortgage servicing rights for impairment based on the fair
value of those rights.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". This Statement defines a fair value
based method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
all employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Entities electing to continue to use the method of
accounting specified in Opinion 25 must make pro forma disclosures of net
income and, if presented, earnings per share, as if the fair value method of
accounting defined in this Statement had been applied. This Statement is
effective for fiscal years beginning after December 15, 1995.
IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES
The financial statements and related financial data concerning Country
presented in this Prospectus 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. The primary effect of inflation on the operations of Country is
reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, changes in interest rates have a more
significant effect on the performance of a financial institution than do the
effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Interest rates are highly
sensitive to many factors which are beyond the control of Country, including
the influence of domestic and foreign economic conditions and the monetary and
fiscal policies of the United States government and federal agencies,
particularly the FRB. See "Investment Considerations--Impact of Interest
Rates and General Economic Conditions".
F - 116
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COUNTRY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
June 30,
1996 December 31,
(Unaudited) 1995
- ----------------------------------------------------------------------------------- ------------
ASSETS
Cash and due from banks $ 2,945,125 $ 2,214,864
Federal funds sold 2,075,000 10,045,000
Securities available for sale 26,130,624 22,629,861
Loans (net of allowance for loan losses of $500,318 in 1996 and
$420,426 in 1995) 66,073,420 56,177,110
Premises and equipment, net 3,632,931 3,748,388
Accrued interest and other assets 2,315,183 1,789,655
------------- ------------
Total assets $ 103,172,283 $ 96,604,878
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Demand $ 10,490,530 $ 10,880,457
Savings and NOW 14,242,435 13,828,262
Other time 55,078,648 51,775,006
Time deposits of $100,000 or more 11,032,707 10,062,746
------------- ------------
Total deposits 90,844,320 86,546,471
Short term borrowings 3,550,000 3,550,000
Long term borrowings 5,000,000 2,700,000
Income taxes payable - 9,466
Deferred income taxes 181,139 279,798
Accrued interest and other liabilities 1,156,396 1,056,883
------------- ------------
Total liabilities 100,731,855 94,142,618
------------- ------------
Stockholders' Equity
Preferred stock 314,470 314,470
Common stock 26,225 26,225
Surplus 1,057,776 1,057,776
Retained earnings 1,156,673 1,001,385
Unrealized gain (loss) on securities available for sale (114,716) 62,404
------------- ------------
Total stockholders' equity 2,440,428 2,462,260
------------- ------------
Total liabilities and stockholders' equity $ 103,172,283 $ 96,604,878
============= ============
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F - 117
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COUNTRY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Six Months Ended
June 30,
-------------------------
1996 1995
------------ ------------
(Unaudited)
- --------------------------------------------------------------------------------
Interest income:
Loans and fees on loans $ 2,845,217 $ 1,908,931
Securities:
U.S. Treasuries 419,930 253,715
U.S. Government agencies and corporations 242,635 220,794
States and political subdivisions 6,862 25,057
Federal funds sold 291,516 266,247
Other 11,380 2,386
----------- -----------
Total interest income 3,817,540 2,677,130
----------- -----------
Interest expense:
Deposits 2,169,597 1,376,190
Notes payable 279,565 104,000
----------- -----------
Total interest expense 2,449,162 1,480,190
----------- -----------
Net interest income 1,368,378 1,196,940
Provision for loan losses 144,713 --
----------- -----------
Net interest income after provision for
loan losses 1,223,665 1,196,940
----------- -----------
Noninterest income:
Service charges and fees 311,050 220,024
Other 290,439 34,846
----------- -----------
601,489 254,870
----------- -----------
Noninterest expenses:
Salaries and wages 783,244 632,073
Employee benefits 72,414 104,955
Occupancy and equipment rental 236,884 214,829
FDIC assessment (120) 78,017
Other 507,444 370,373
----------- -----------
1,599,866 1,400,247
----------- -----------
Income before income taxes 225,288 51,563
Income taxes 70,000 18,000
----------- -----------
Net income $ 155,288 $ 33,563
=========== ===========
Earnings per share of common stock $ 5.92 $ 1.28
=========== ===========
Weighted average number of common
shares outstanding 26,225 26,225
=========== ===========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-118
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COUNTRY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Six Months Ended
June 30,
-------------------------
1996 1995
----------- -----------
(Unaudited)
- -----------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 155,288 $ 33,563
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 136,523 80,325
Provision for loan losses 144,713 -
Amortization of bond premiums, net 19,104 17,214
Change in assets and liabilities:
(Increase) in accrued interest
and other assets (525,529) (249,976)
Increase in accrued interest
and other liabilities 90,048 297,839
----------- -----------
Net cash provided by operating
activities 20,147 178,965
----------- -----------
Cash Flows from Investing Activities
Investment securities:
Held to maturity:
Proceeds from calls,
paydowns and maturities - 1,034,552
Purchases - (6,202,433)
Available for sale:
Proceeds from sales 1,000,000 -
Proceeds from calls,
paydowns and maturities 5,683,264 -
Purchases (10,478,910) -
Net (increase) decrease in
federal funds sold 7,970,000 (3,043,000)
Net decrease in certificates of deposit - 199,000
Net (increase) in loans (10,041,023) (9,616,592)
Purchase of premises and equipment (21,066) (236,089)
----------- -----------
Net cash (used in) investing activities (5,887,735) (17,864,562)
----------- -----------
Cash Flows from Financing Activities
Net increase in demand deposits,
NOW accounts and savings accounts 24,246 682,171
Net increase in time deposits 4,273,603 14,403,450
Payments on short term borrowings - (12,500)
Proceeds from short term borrowings - 2,070,000
Payments on long term borrowings - (175,000)
Proceeds from long term borrowings 2,300,000 -
----------- -----------
Net cash provided by
financing activities 6,597,849 16,968,121
----------- -----------
Net increase (decrease) in
cash and due from banks 730,261 (717,476)
Cash and due from banks:
Beginning 2,214,864 3,624,274
----------- -----------
End $ 2,945,125 $ 2,906,798
=========== ===========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
F-119
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COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
The financial information of Country Bancshares, Inc. and subsidiary included
herein is unaudited; however, such information reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim periods.
The results of the interim period ended June 30, 1996 are not necessarily
indicative of the results expected for the year ending December 31, 1996.
NOTE 2. SECURITIES
Amortized costs and fair values of securities are summarized as follows:
AVAILABLE FOR SALE June 30, 1996
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ---------- ----------- ------------
U.S. Treasury $ 17,191,771 $ 23,200 $ 171,815 $ 17,043,156
U.S. Government agencies and
corporations 8,449,090 55,280 78,198 8,426,172
States and political
subdivisions 223,621 1,629 -- 225,250
Mortgage backed securities 439,954 -- 3,908 436,046
------------ -------- --------- ------------
$ 26,304,436 $ 80,109 $ 253,921 $ 26,130,624
============ ======== ========= ============
AVAILABLE FOR SALE December 31, 1995
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ---------- ----------- ------------
U.S. Treasury $ 12,858,183 $ 75,043 $ 4,835 $ 12,928,391
U.S. Government agencies and
corporations 9,373,853 63,797 34,087 9,403,563
States and political subdivisions 261,468 1,907 -- 263,375
Mortgage backed securities 34,390 142 -- 34,532
------------ --------- -------- ------------
$ 22,527,894 $ 140,889 $ 38,922 $ 22,629,861
============ ========= ======== ============
(Continued)
F-120
198
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO UNAUDITED CONSIDILATED FINANCIAL STATEMENTS
The amortized cost and fair value of securities classified as available for
sale at June 30, 1996 and December 31, 1995, by contractual maturity, are
shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
June 30, 1996 December 31, 1995
------------------------ ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
Due in one year or less $ 7,462,344 $ 7,446,607 $ 9,330,269 $ 9,332,454
Due after one year
through five years 18,315,267 18,160,971 13,068,500 13,167,875
Due after five years
through ten years 86,871 87,000 94,735 95,000
Due after ten years - - - -
Mortgage backed securities 439,954 436,046 34,390 34,532
----------- ----------- ----------- -----------
$26,304,436 $26,130,624 $22,527,894 $22,629,861
=========== =========== =========== ===========
Securities with carrying values of approximately $13,749,000 and $9,174,000 at
June 30, 1996 and December 31, 1995, respectively, were pledged to secure
public deposits, to secure securities sold under agreements to repurchase and
for other purposes as required or permitted by law.
NOTE 3. LOANS
The major classifications of loans follow:
June 30, December 31,
1996 1995
------------ ------------
Commercial $ 22,368,261 $ 20,005,093
Real estate 39,191,966 32,381,324
Installment 5,048,167 4,374,598
Other 585,663 413,635
------------ ------------
67,194,057 57,174,650
------------ ------------
Deduct:
Unearned interest 620,319 577,114
Allowance for loan losses 500,318 420,426
------------ ------------
1,120,637 997,540
------------ ------------
$ 66,073,420 $ 56,177,110
============ ============
(Continued)
F-121
199
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. ALLOWANCE FOR LOAN LOSSES
An analysis of activity in the allowance for loan losses follows:
Six Months Ended
June 30,
--------------------
1996 1995
--------- ---------
Balance, January 1 $ 420,426 $ 329,251
Provision for loan losses 144,713 -
Recoveries - 98,922
Loans charged off (64,821) (47,081)
--------- ---------
Balance, end of period $ 500,318 $ 381,092
========= =========
NOTE 5. SHORT TERM BORROWINGS
Short term borrowings include a note payable to a third party lender and
securities sold under agreements to repurchase.
Average and maximum balances and rates on notes payable and securities sold
under agreements to repurchase were as follows:
Six Months Ended
June 30,
-------------------------
1996 1995
----------- ------------
Maximum month end balance $ 3,550,000 $ 3,520,000
Average month end balance 3,550,000 1,685,146
Weighted average interest rate for the period 8.75% 8.73%
Weighted average interest rate at end of period 8.75% 8.88%
NOTE 6. CONTINGENT LIABILITIES
At June 30, 1996 and December 31, 1995, loan commitments, including standby
letters of credit, approximated $10,587,900 and $9,975,700, respectively,
substantially all of which are variable rate commitments.
F - 122
200
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Country Bancshares, Inc.
Macomb, Illinois
We have audited the accompanying consolidated balance sheets of Country
Bancshares, Inc. 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 Country Bancshares,
Inc. 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
Champaign, Illinois
May 24, 1996
F - 123
201
COUNTRY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
1995 1994
- --------------------------------------------------------------- ------------
ASSETS
Cash and due from banks $ 2,214,864 $ 3,624,274
Certificates of deposit - 199,000
Federal funds sold 10,045,000 5,694,000
Securities held to maturity (fair value
$13,315,525 in 1994) - 13,490,398
Securities available for sale 22,629,861 -
Loans (net of allowance for loan losses
of $420,426 in 1995 and $329,251 in
1994) 56,177,110 37,648,698
Premises and equipment 3,748,388 2,486,855
Income tax receivable 38,483
Accrued interest and other assets 1,789,655 1,063,633
------------ ------------
Total assets $ 96,604,878 $ 64,245,341
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Demand $ 10,880,457 $ 9,273,375
Savings and NOW 13,828,262 14,757,651
Other time 51,775,006 30,854,632
Time deposits of $100,000 or more 10,062,746 4,059,517
------------ ------------
Total deposits 86,546,471 58,945,175
Short term borrowings 3,550,000 1,462,500
Long term borrowings 2,700,000 875,000
Deferred income taxes 279,798 283,524
Income tax payable 9,466 -
Accrued interest and other liabilities 1,056,883 476,585
------------ ------------
Total liabilities 94,142,618 62,042,784
------------ ------------
Commitments, Contingencies and Credit Risk
Stockholders' Equity
Preferred stock 314,470 314,470
Common stock 26,225 26,225
Surplus 1,057,776 1,057,776
Retained earnings 1,001,385 804,086
Unrealized gain on securities available for sale 62,404 -
------------ ------------
Total stockholders' equity 2,462,260 2,202,557
------------ ------------
Total liabilities and stockholders'
equity $ 96,604,878 $ 64,245,341
============ ============
See Accompanying Notes to Consolidated Financial Statements.
F - 124
202
COUNTRY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
- ----------------------------------------------- -----------
Interest income:
Loans and fees on loans $ 4,370,787 $ 3,043,219
Securities:
U.S. Treasury securities 494,713 354,108
U.S. Government agencies and
corporations 580,607 99,879
States and political
subdivisions 49,399 62,237
Federal funds sold 531,491 232,514
Other 2,755 16,232
---------- ----------
Total interest income 6,029,752 3,808,189
---------- ----------
Interest expense:
Deposits 3,214,028 1,576,060
Notes payable 317,970 213,244
---------- ----------
Total interest
expense 3,531,998 1,789,304
---------- ----------
Net interest income 2,497,754 2,018,885
Provision for loan losses 40,200 15,800
---------- ----------
Net interest income
after provision for
loan losses 2,457,554 2,003,085
---------- ----------
Noninterest income:
Service charges and fees 494,659 379,881
Other 94,076 18,346
---------- ----------
588,735 398,227
---------- ----------
Noninterest expenses:
Salaries and wages 1,317,433 1,138,623
Employee benefits 193,329 201,804
Occupancy and equipment rental 492,966 400,992
FDIC assessment 84,524 97,558
Other 751,957 646,262
---------- ----------
2,840,209 2,485,239
---------- ----------
Income (loss) before
income taxes 206,080 (83,927)
Income taxes (benefit) (2,518) (46,830)
---------- ----------
Net income (loss) $ 208,598 $ (37,097)
========== ==========
Earnings (loss) per
share of common stock $ 7.95 $ (3.57)
========== ==========
Weighted average
number of shares
outstanding 26,225 10,403
========== ==========
See Accompanying Notes to Consolidated Financial Statements.
F - 125
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COUNTRY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
- -----------------------------------------------------------------------------------------------------------------
Unrealized
Gain on
Securities
Preferred Common Retained Available
Stock Stock Surplus Earnings for Sale Total
---------- -------- ----------- ----------- ---------- -----------
Balance, December 31, 1993 $ 112,985 $ 8,934 $ 974,985 $ 841,183 $ - $ 1,938,087
Issuance of 683 shares of Series 2
preferred stock and 17,291 shares
of common stock 201,485 17,291 82,791 - 301,567
Net (loss) - - - (37,097) - (37,097)
---------- -------- ----------- --------- -------- -----------
Balance, December 31, 1994 314,470 26,225 1,057,776 804,086 2,202,557
Net income - - - 208,598 - 208,598
Change in unrealized gain on
securities available for sale - - - - 62,404 62,404
Cash dividends on Series 1 preferred
stock, $29.50 per share - - - (11,299) - (11,299)
---------- -------- ---------- ---------- -------- -----------
Balance, December 31, 1995 $ 314,470 $ 26,225 $1,057,776 $1,001,385 $ 62,404 $ 2,462,260
========== ======== ========== ========== ======== ===========
See Accompanying Notes to Consolidated Financial Statements.
F - 126
204
COUNTRY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
- ----------------------------------------------------------------------------------- ------------
Cash Flows from Operating Activities
Net income (loss) $ 208,598 $ (37,097)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 262,315 141,317
Amortization of intangibles 6,496 (6,307)
Provision for loan losses 40,200 15,800
Provision for deferred income taxes (43,289) 132,323
Amortization of bond premiums, net 36,077 33,586
Gain on sale of securities (5,730) -
Change in assets and liabilities:
(Increase) in accrued interest and other assets (694,034) (341,883)
Increase in accrued interest and other liabilities 589,763 158,920
------------ ------------
Net cash provided by operating activities 400,396 96,659
------------ ------------
Cash Flows from Investing Activities
Investment securities:
Held to maturity:
Proceeds from calls and maturities 5,752,214 3,836,000
Proceeds from paydowns 80,925 687,288
Purchases (13,787,981) (6,367,430)
Available for sale:
Proceeds from sales 1,360,280 -
Purchases (2,473,281) -
Net (increase) in loans (18,568,612) (8,988,128)
Net (increase) in federal funds sold (4,351,000) (502,000)
Net (increase) decrease in certificates of deposit 199,000 (34,000)
Purchase of premises and equipment (1,523,848) (677,271)
Proceeds from sale of real estate acquired in settlement of loans - 662,937
------------ ------------
Net cash (used in) investing activities (33,312,303) (11,382,604)
------------ ------------
(Continued)
F - 127
205
COUNTRY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
- -------------------------------------------------------------- -------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts $ 677,693 $(2,550,249)
Net increase in time deposits 26,923,603 13,422,831
Proceeds from short term borrowings 2,100,000 -
Payments on short term borrowings (12,500) (25,000)
Payments on long term borrowings (175,000) (125,000)
Proceeds from long term borrowings 2,000,000 -
Proceeds from issuance of common stock - 100,082
Proceeds from issuance of preferred stock - 201,485
Dividends paid (11,299) -
----------- -----------
Net cash provided by financing activities 31,502,497 11,024,149
----------- -----------
Net increase in cash and due from banks (1,409,410) (261,796)
Cash and due from banks:
Beginning of year 3,624,274 3,886,070
----------- -----------
End of year $ 2,214,864 $ 3,624,274
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest - depositors $ 2,640,061 $ 1,396,387
=========== ===========
- short-term borrowings $ 259,090 $ 86,475
=========== ===========
- long-term borrowings $ 74,672 $ 97,365
=========== ===========
Income taxes $ (7,178) $ (101,349)
=========== ===========
Supplemental Schedule of Noncash Investing
and Financing Activities
Transfer of loans to real estate acquired
in settlement of loans $ - $ 22,682
=========== ===========
Change in unrealized gain on securities
available for sale $ 101,967 $ -
=========== ===========
Increase in deferred taxes attributable
to the unrealized gain on securities
available for sale $ (39,563) $ -
=========== ===========
Amortized cost of securities transferred
from held to maturity to available for
sale $21,431,021 $ -
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
F - 128
206
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and reporting practices prescribed for
the banking industry.
The significant accounting and reporting policies for Country Bancshares, Inc.
and its subsidiary ("Country"), follow:
Nature of Business
Through its subsidiary, Omni Bank ("Omni Bank"), Country provides a full range
of banking services to individual and corporate customers in its five
locations in the western Illinois area. Country is subject to competition from
other financial institutions and nonfinancial institutions providing financial
products. Additionally, Country and Omni Bank are subject to regulations of
certain regulatory agencies and undergo periodic examinations by those
regulatory agencies.
Basis of consolidation
The consolidated financial statements include the accounts of Country and its
wholly-owned subsidiary, Omni Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of accounting
In preparing the consolidated financial statements, Country management is
required to make estimates and assumptions which significantly affect the
amounts reported in the consolidated financial statements. Significant
estimates which are particularly susceptible to change in a short period of
time include the determination of the allowance for loan losses and valuation
of real estate and other properties acquired in connection with foreclosures or
in satisfaction of amounts due from borrowers on loans. Actual results could
differ from those estimates.
Securities held to maturity
Securities classified as held to maturity are those debt securities Country 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 premium and
accretion of discount, computed using the interest method over their
contractual lives.
(Continued)
F - 129
207
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Securities available for sale
Securities classified as available for sale are those debt securities that
Country 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 Country's assets and liabilities,
liquidity needs, regulatory capital considerations, and other similar factors.
Securities available for sale are carried at fair value. The difference
between fair value and cost, adjusted for amortization of premium and accretion
of discounts, results in an unrealized gain or loss. Unrealized gains or
losses are reported as increases or decreases in stockholders' equity, net of
the related deferred income tax effect. Gains or losses from the sale of
securities are determined using the specific identification method .
Amortization of premiums and accretion of discounts, computed using the
interest method, are recognized in interest income using the interest method
over their contractual lives.
Loans
Loans are stated at the principal amount outstanding, net of unearned interest
and the allowance for loan losses.
Unearned interest on certain installment loans is credited to income over the
term of the loan using the interest method. For all other loans, interest is
credited to income as earned using the simple interest method applied to the
daily balances of the principal outstanding.
Country's policy is to discontinue the accrual of interest income on any loan
when, in the opinion of management, there is reasonable doubt as to the timely
collectibility of interest or principal. Interest income on these loans is
recognized to the extent interest payments are received and the principal is
considered fully collectible.
Allowance for loan losses
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 the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb losses on existing loans that may become uncollectible, based on
evaluation of the collectibility of loans and prior loss experience. The
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 borrowers'
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. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
Omni Bank's allowance for loan losses, and may require Omni Bank to make
additions to the allowance based on their judgment about information available
to them at the time of their examinations.
(Continued)
F - 130
208
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
On January 1, 1995, Country adopted Financial Accounting Standards Board
Statement No. 114 (Statement No. 114), "Accounting by Creditors for the
Impairment of a Loan," as amended by Statement No. 118, which requires loans to
be considered impaired when, based on current information and events, it is
probable that Omni Bank will not be able to collect all amounts due. The
portion of the allowance for loan losses applicable to impaired loans has been
computed based on the present value of the estimated future cash flows of
interest and principal discounted at the loan's effective interest rate or on
the fair value of the collateral for collateral dependent loans. The entire
change in present value of expected cash flows of impaired loans or of
collateral value is reported as bad debt expense in the same manner in which
impairment initially was recognized or as a reduction in the amount of bad debt
expense that otherwise would be reported.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the accelerated and straight-line methods over the
estimated useful lives of the assets.
Deferred income taxes
Deferred taxes are provided on a liability method. Deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, 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.
Per share data
Earnings per share of common stock are calculated on the weighted average
number of shares of common stock outstanding during the year.
Statements of cash flows
For purposes of reporting cash flows, cash and due from banks include cash on
hand and amounts due from banks (including cash items in process of clearing).
(Continued)
F - 131
209
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of
The Financial Accounting Standards Board has issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" (Statement No. 121). Statement No. 121 generally requires
long-lived assets and certain identifiable intangibles to be held and used by
an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the entity should
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows
(discounted and without interest charges) is less than the carrying amount of
the asset, an impairment is recognized. Management believes that adoption of
this Statement will not have a material effect on Country's financial
statements.
Accounting for mortgage servicing rights
In May 1995, the Financial Accounting Standards Board issued Statement No.
122, "Accounting for Mortgage Servicing Rights" (Statement No. 122). Statement
No. 122 requires Omni Bank to recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. If
Omni Bank acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells or securitizes those loans with
servicing rights retained, Omni Bank should allocate the total cost of the
mortgage loans to mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values. The mortgage servicing
rights should be amortized in proportion to and over the period of estimated
net servicing income.
Statement No. 122 is effective for years beginning after December 15, 1995.
Country believes the adoption of Statement No. 122 will not have a material
impact on its consolidated financial statements.
Accounting for Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock Based Compensation" (Statement No. 123). Statement
No. 123 establishes a fair value based method of accounting for stock options
and other equity instruments. Statement No. 123 permits the continued use of
the intrinsic value method included in Accounting Principle Board Opinion 25,
"Accounting for Stock Issued to Employees", but regardless of the method used
to account for the compensation cost associated with stock option or similar
plans, it requires employers to disclose information required by Statement No.
123.
Statement No. 122 is effective for years beginning after December 15, 1995.
Country believes the adoption of Statement No. 122 will not have a material
impact on its consolidated financial statements.
NOTE 2. CASH AND DUE FROM BANKS
Omni Bank is required to maintain legal reserves composed of funds on deposit
with the Federal Reserve Bank and cash on hand. The required balances as of
December 31, 1995 and 1994, were $361,000 and $25,000, respectively.
(Continued)
F - 132
210
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES
Country adopted Financial Accounting Standards Board Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (Statement
No. 115) as of January 1, 1994. Country elected to classify its entire
portfolio as held to maturity and therefore the financial statements were not
affected by adopting Statement No. 115.
In November 1995, the Financial Accounting Standards Board decided to allow all
enterprises to make a one-time reassessment of the classification of securities
made under Statement No. 115. These transfers were only allowed during the
period from the issuance of the Financial Accounting Standards Board Special
Report through December 31, 1995. Country transferred its entire security
portfolio, with an amortized cost of $21,431,021, from the held to maturity
classification to the available for sale classification and recorded, as a
component of equity, an unrealized gain of $49,038, net of $31,090 of deferred
taxes, to allow for more flexibility in managing Country's asset mix.
Amortized costs and fair values of securities are summarized as follows:
AVAILABLE FOR SALE
December 31, 1995
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ------------
U.S. Treasury $ 12,858,183 $ 75,043 $ 4,835 $ 12,928,391
U.S. Government agencies and
corporations 9,373,853 63,797 34,087 9,403,563
States and political
subdivisions 261,468 1,907 - 263,375
Mortgage backed securities 34,390 142 - 34,532
------------ ---------- ---------- ------------
$ 22,527,894 $ 140,889 $ 38,922 $ 22,629,861
============ ========== ========== ============
HELD TO MATURITY
December 31, 1994
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ------------
U.S. Treasury $ 9,464,335 $ - $ 184,929 $ 9,279,406
U.S. Government agencies and
corporations 2,634,794 6,456 34,343 2,606,907
States and political
subdivisions 875,372 13,845 1,750 887,467
Mortgage backed securities 515,897 25,848 - 541,745
------------ ---------- ---------- ------------
$ 13,490,398 $ 46,149 $ 221,022 $ 13,315,525
============ ========== ========== ============
(Continued)
F - 133
211
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The amortized cost and fair value of securities classified as available for
sale at December 31, 1995, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
December 31, 1995
-------------------------
Available for Sale
-------------------------
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ 9,330,269 $ 9,332,454
Due after one year through five years 13,068,500 13,167,875
Due after five years through ten years 94,735 95,000
Due after ten years - -
Mortgage backed securities 34,390 34,532
----------- -----------
$22,527,894 $22,629,861
=========== ===========
Securities with carrying values of approximately $9,174,000 and $200,000 at
December 31, 1995 and 1994, respectively, were pledged to secure public
deposits, to secure securities sold under agreements to repurchase and for
other purposes as required or permitted by law.
Realized gains and losses from securities available for sale during 1995 and
1994 follows:
1995 1994
----------- -----------
Gross gains $ 36,084 $ -
Gross losses 30,354 -
----------- -----------
$ 5,730 $ -
=========== ===========
(Continued)
F - 134
212
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. LOANS
The major classifications of loans follow:
December 31,
--------------------------
1995 1994
------------ ------------
Commercial $ 20,005,093 $ 13,347,394
Real estate 32,381,324 21,898,594
Installment 4,374,598 3,012,595
Other 413,635 57,903
------------ ------------
57,174,650 38,316,486
------------ ------------
Deduct:
Unearned interest 577,114 338,537
Allowance for loan losses 420,426 329,251
------------ ------------
997,540 667,788
------------ ------------
$ 56,177,110 $ 37,648,698
============ ============
Country's opinion as to the ultimate collectibility of these loans is subject
to estimates regarding future cash flows from operations and the value of
property, real and personal, pledged as collateral. These estimates are
affected by changing economic conditions and the economic prospects of
borrowers.
The following table presents data on impaired loans at December 31, 1995:
Impaired loans for which an allowance has been provided $ -
Impaired loans for which an allowance has not been provided 389,297
---------------
Total loans determined to be impaired $ 389,297
===============
Allowance for loan loss for impaired loans included in the allowance for loan losses $ -
===============
Average recorded investment in impaired loans $ 212,932
===============
Interest income recognized from impaired loans $ -
===============
Cash basis interest income recognized from impaired loans $ 400
===============
Loans on which the accrual of interest had been discontinued or reduced
amounted to $369,104 at December 31, 1994, which had the effect of reducing
interest income approximately $35,000.
Country and Omni Bank conduct most of their business activities, including
granting agribusiness, commercial, residential and installment loans with
customers in the counties of McDonough, Adams, Pike, and Schuyler, Illinois and
Marion, Missouri. The loan portfolio includes a concentration of loans to
agricultural and agricultural-related industries amounting to approximately
$15,105,000 and $12,200,000 as of December 31, 1995 and 1994, respectively.
Generally those loans are collateralized by assets of those entities. The
loans are expected to be repaid from cash flows or from proceeds from the sale
of selected assets of the borrowers. Credit losses arising from lending
transactions with agricultural entities compare favorably with the Omni Bank's
credit loss experience on the loan portfolio as a whole.
(Continued)
F - 135
213
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In the normal course of business, loans are made to executive officers,
directors, and principal stockholders of Country and Omni Bank and to parties
which Country or its directors, executive officers and stockholders have the
ability to significantly influence its management or operations (related
parties). In the opinion of management, the terms of these loans, including
interest rates and collateral, are similar to those prevailing for comparable
transactions with other customers and do not involve more than a normal risk of
collectibility. Changes in such loans during the year ended December 31, 1995
follow:
Balance at the beginning of year $ 1,100,000
New loans, extensions and modifications 505,000
Repayments (391,000)
--------------
Balance at end of year $ 1,214,000
==============
NOTE 5. ALLOWANCE FOR LOAN LOSSES
An analysis of activity in the allowance for loan losses follows:
Years Ended
December 31,
-----------------------
1995 1994
------------ ---------
Balance at beginning of year $ 329,251 $ 326,565
Provision for loan losses 40,200 15,800
Recoveries 100,306 25,335
Loans charged off (49,331) (38,449)
------------ ---------
Balance at end of year $ 420,426 $ 329,251
============ =========
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment consisted of:
December 31,
------------------------
1995 1994
------------ ----------
Land $ 478,740 $ 226,570
Buildings 2,222,818 971,608
Furniture and equipment 2,043,089 1,541,117
Construction in Progress - 481,504
------------ ----------
4,744,647 3,220,799
Less accumulated depreciation 996,259 733,944
------------ ----------
$ 3,748,388 $2,486,855
============ ==========
(Continued)
F - 136
214
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. DEPOSITS
A maturity distribution of time certificates of deposit in denominations of
$100,000 or more was as follows:
December 31,
-------------------------
1995 1994
----------- ----------
3 months or less $ 3,650,267 $ 200,597
Over 3 months through 6 months 1,459,803 508,533
Over 6 months through 12 months 3,563,272 2,744,571
Over 12 months 1,389,404 605,816
----------- ----------
$10,062,746 $4,059,517
=========== ==========
NOTE 8. LONG TERM BORROWINGS
Long term borrowings are summarized as follows:
December 31,
-------------------------
1995 1994
-------------------------
Advances from the Federal Home Loan Bank,
interest quarterly at 6.04%, balance due December 26, 2001
collateralized with a blanket lien on all
qualifying mortgage loans held by the Bank $ 2,000,000 $ -
Debentures, interest quarterly at 8.5%, due at various dates in
September and October 1998 700,000 875,000
----------- ----------
$ 2,700,000 $ 875,000
=========== ==========
NOTE 9. SHORT TERM BORROWINGS
Short term borrowings include a note payable to a third party lender of
$3,450,000 and securities sold under agreements to repurchase of $100,000.
Average and maximum balances and rates on notes payable and securities sold
under agreements to repurchase were as follows:
Years ended December 31,
--------------------------
1995 1994
----------- -----------
Maximum month end balance $ 3,550,000 $ 1,487,500
Average month end balance 2,639,317 2,550,073
Weighted average interest rate for the year 8.47% 9.00%
Weighted average interest rate at year end 8.26% 9.00%
(Continued)
F - 137
215
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The note payable of $3,450,000 contains certain covenants which limit the
amounts of dividends paid, the purchase of other banks and/or businesses, the
purchase of investments not in the ordinary course of business, the changes in
capital structure and the guarantees of other liabilities and obligations. In
addition, Country must maintain certain financial ratios. Country was in
compliance with all covenants as of the year ended December 31, 1995.
NOTE 10. STOCKHOLDERS' EQUITY
The Company's common stock has a $1 par value. There were 50,000 shares
authorized and 26,225 shares issued and outstanding at December 31, 1995 and
1994.
Terms of the preferred stock are as follows:
Series 1: 450 shares of $295 par value, voting, Series 1 preferred stock are
authorized and 383 shares were issued and outstanding at December 31, 1995 and
1994. Dividends are cumulative at 8.5% and noncumulative at an additional
1.5%.
Series 2: 5,000 shares of $295 par value, voting, Series 2 preferred stock are
authorized and 683 shares were issued and outstanding at December 31, 1995 and
1994. Dividends are noncumulative.
NOTE 11. INCOME TAXES
Income taxes (benefits) consisted of:
Years ended December 31,
------------------------
1995 1994
---------- -----------
Federal:
Current $ 40,771 $ (179,153)
Deferred (43,289) 132,323
-------- ----------
$ (2,518) $ (46,830)
======== ==========
Country's income tax (benefits) differed from the statutory federal rate of 34%
as follows:
Years ended December 31,
------------------------
1995 1994
---------- -----------
Expected income taxes (benefit) $ 70,067 $ (28,535)
Income tax effect of:
Interest earned on tax free investments and loans (22,217) (22,396)
Nondeductible interest expense incurred to carry tax-free
investments and loans 1,865 1,826
Other (52,233) 2,275
-------- ---------
$ (2,518) $ (46,830)
======== =========
(Continued)
F - 138
216
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The net deferred income tax liability in the accompanying balance sheets
includes the following amounts of deferred tax assets and liabilities:
December 31,
-------------------------
1995 1994
------------ -----------
Deferred tax liability $ (325,630) $ (335,566)
Deferred tax asset 45,832 52,042
---------- ----------
Net deferred tax liability $ (279,798) $ (283,524)
========== ==========
The tax effects of principal temporary differences are shown in the following
table:
December 31,
-------------------------
1995 1994
------------ -----------
Allowance for loan losses $ (72,590) $ (84,898)
Premises and equipment basis (213,477) (183,552)
Securities available for sale (39,563) -
Net operating loss carryforwards 22,796 52,042
Other 23,036 (67,116)
---------- ----------
$(279,798) $(283,524)
========== ==========
Net operating loss carryforwards of approximately $67,000 are available to
offset future taxable income. The carryforwards expire in the years 2002
through 2009.
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107, "Disclosures about Fair
Value of Financial Instruments" (Statement No. 107), requires disclosure of
fair value information about financial instruments, whether or not recognized
in the balance sheet, for which it is practicable to estimate that value. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
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 Country.
The following methods and assumptions were used by Country in estimating the
fair value of its financial instruments:
Cash and due from banks
The carrying amounts reported in the balance sheet for cash and due from banks
approximate their fair values.
(Continued)
F - 139
217
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Federal funds sold
The stated carrying amounts of federal funds sold approximate their fair
values.
Securities
Fair values for 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. The carrying amount of accrued
interest receivable approximates its fair value.
Loans
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
fixed-rate loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to
borrowers with similar credit quality. The carrying amount of accrued interest
receivable approximates its fair value.
Off-balance-sheet instruments
Fair values for Country's off-balance-sheet instruments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing. The
fair value of these items is not material.
Deposit liabilities
The fair values for demand deposits equal their carrying amounts, which
represents the amount payable on demand. The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. 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
to a schedule of aggregated expected monthly maturities on time deposits. The
carrying amount of accrued interest payable approximates its fair value.
Long term and short term borrowings
Rates currently available to Country for debt with similar terms and remaining
maturities are used to estimate fair value of existing debt.
(Continued)
F - 140
218
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The estimated fair values of Country's financial instruments were as follows:
December 31, 1995
------------------------
Carrying Fair
Amount Value
----------- -----------
Financial Assets:
Cash and due from banks $ 2,214,864 $ 2,214,864
Federal funds sold 10,045,000 10,045,000
Securities 22,629,861 22,629,861
Loans 56,177,110 56,213,470
Financial Liabilities:
Deposits 86,546,471 86,586,498
Short term borrowings 3,550,000 3,550,000
Long term borrowings 2,700,000 2,700,000
In addition, other assets and liabilities of Country that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not
recognized in financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the earnings potential of
loan servicing rights, the trained work force, customer goodwill and similar
items.
NOTE 13. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
In the normal course of business, there are outstanding various contingent
liabilities such as claims and legal actions, which are not reflected in the
consolidated financial statements. In the opinion of management, no material
losses are anticipated as a result of these actions or claims.
Omni 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. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
contractual amounts of those instruments reflect the extent of involvement in
particular classes of financial instruments.
Country'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 written, is represented by the contractual amount of those
instruments. Omni Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. At
December 31, 1995, loan commitments, including standby letters of credit,
approximated $ 9,975,700, substantially all of which are variable rate
commitments. Country does not anticipate any material losses as a result of
these commitments.
Country has employment agreements with its executive officers and certain other
management personnel. These agreements generally continue until terminated by
the executive or Country and provide for continued salary and benefits to the
executive under certain circumstances. The agreements provide the employees
with additional rights after a change of control of Country occurs.
(Continued)
F - 141
219
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Country does not engage in the use of interest rate swaps, or futures, forwards
or option contracts.
NOTE 14. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The primary source of funds for Country is dividends from Omni Bank. Certain
regulatory requirements restrict the amount of dividends that may be paid by
Omni Bank to Country. As a practical matter, dividend payments are restricted
to maintain prudent capital levels.
Condensed financial information for Country Bancshares, Inc. follows:
BALANCE SHEETS (PARENT COMPANY ONLY) December 31,
-------------------------
ASSETS 1995 1994
----------- -----------
Cash and due from banks $ 9,345 $ 215,505
Investment in subsidiary 6,576,251 4,355,343
Income tax receivable 90,184 42,695
---------- ----------
$6,675,780 $4,613,543
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Short term borrowings $3,450,000 $1,462,500
Long term borrowings 700,000 875,000
Accrued interest payable and other liabilities 63,520 73,486
---------- ----------
4,213,520 2,410,986
---------- ----------
Stockholders' Equity
Preferred stock 314,470 314,470
Common stock 26,225 26,225
Surplus 1,057,776 1,057,776
Retained earnings 1,001,385 804,086
Unrealized gain on securities available for sale 62,404 -
---------- ----------
2,462,260 2,202,557
---------- ----------
$6,675,780 $4,613,543
========== ==========
(Continued)
F - 142
220
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INCOME STATEMENTS (PARENT COMPANY ONLY) Years Ended December 31,
------------------------
1995 1994
--------- ----------
Dividends from subsidiary $ 282,132 $ 237,423
Amortization of negative goodwill 19,640 19,640
--------- ---------
Total income 301,772 257,063
--------- ---------
Interest expense 317,970 213,244
Amortization of organizational costs 26,136 13,333
Other expenses 32,238 970
--------- ---------
Total expenses 376,344 227,547
--------- ---------
Income (loss) before income tax benefit and equity in
undistributed earnings of subsidiary (74,572) 29,516
Income tax benefit 124,666 61,041
--------- ---------
Income before equity in undistributed earnings of subsidiary 50,094 90,557
Equity in undistributed earnings (loss) of subsidiary 158,504 (127,654)
--------- ---------
Net income (loss) $ 208,598 $ (37,097)
========= =========
(Continued)
F - 143
221
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) Years Ended December 31,
----------------------------
1995 1994
----------- ----------
Cash Flows from Operating Activities
Net income (loss) $ 208,598 $ (37,097)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Undistributed earnings of subsidiary (158,504) 127,654
Amortization of negative goodwill (19,640) (19,640)
Amortization of organizational costs 26,136 13,333
Change in assets and liabilities:
(Increase) decrease in other assets (48,159) 13,021
Increase (decrease) in other liabilities (15,792) 4,946
----------- ----------
Net cash (used in) provided by operating activities (7,361) 102,217
----------- ----------
Cash Flows from Investing Activities
Organizational costs incurred in merger - (85,398)
Investment in subsidiary (2,000,000) 43,377
----------- ----------
Net cash (used in) investing activities (2,000,000) (42,021)
----------- ----------
Cash Flows from Financing Activities
Dividends paid (11,299) -
Proceeds from issuance of common stock - 100,082
Proceeds from issuance of preferred stock - 201,485
Proceeds on short-term borrowings 2,000,000 -
Payments on short-term borrowings (12,500) (25,000)
Payments on long-term borrowings (175,000) (125,000)
----------- ----------
Net cash provided by financing activities 1,801,201 151,567
----------- ----------
Net (decrease) increase in cash and due from banks (206,160) 211,763
Cash and due from banks:
Beginning of year 215,505 3,742
----------- ----------
End of year $ 9,345 $ 215,505
=========== ==========
Supplemental Schedule of Noncash Investing and Financing Activities
Change in unrealized gain on securities available for sale $ 101,967 $ -
=========== ==========
Increase in deferred taxes attributable to the unrealized
gain on securities available for sale $ (39,563) $ -
=========== ==========
(Continued)
F - 144
222
COUNTRY BANCSHARES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. SUBSEQUENT EVENTS
On March 21, 1996, Country entered into an Agreement and Plan of Merger
pursuant to which Country agreed to be merged with CBI Acquisition Corporation,
a wholly-owned subsidiary of UnionBancorp, Inc., with Country being the
surviving corporation.
F - 145
223
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE AS OF
WHICH INFORMATION IS SET FORTH HEREIN. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF
SUCH INFORMATION.
________________________
TABLE OF CONTENTS
Page
Prospectus Summary.................................
Unaudited Pro Forma Combined Condensed.............
Financial Statements..............................
Investment Considerations..........................
Use of Proceeds....................................
Capitalization.....................................
Dilution...........................................
Market for Common Stock and
Dividends.........................................
The Acquisitions...................................
Selected Consolidated Financial
Data..............................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of the Company.........................
Business...........................................
Management.........................................
Beneficial Ownership of Common Stock...............
Supervision and Regulation.........................
Description of Capital Stock of the Company........
Shares Eligible for Future Sale....................
Underwriting.......................................
Legal Opinions.....................................
Experts............................................
Additional Information.............................
Index to Financial Statements and Financial Information F-1
________________________
UNTIL __________, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
1,100,000 SHARES
UNIONBANCORP, INC.
[UNIONBANCORP, INC. LOGO]
COMMON STOCK
---------------
PROSPECTUS
---------------
HOEFER & ARNETT
INCORPORATED
_________, 1996
================================================================================
224
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the Common Stock being registered, other than
underwriting discounts and commissions. All amounts shown are estimates,
except the Commission's registration fee, the NASD filing fee and the Nasdaq
application fee.
Commission registration fee.................................. $5,017
NASD filing fee.............................................. 1,955
Nasdaq application fee....................................... 19,757
Printing and mailing expenses................................ 100,000
Fees and expenses of Company counsel......................... 165,000
Accounting and related expenses.............................. 95,000
Blue Sky fees and expenses................................... 15,000
Miscellaneous................................................ 98,271
Total..................................................... $500,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with the General Corporation Law of the State of Delaware
(being Chapter 1 of Title 8 of the Delaware Code), Articles VIII and XIII of
the Registrant's Restated Certificate of Incorporation, as amended, provide as
follows:
ARTICLE VIII:
The Company shall, to the full extent permitted by Section 145 of the
General Corporation Law of the State of Delaware, as amended from time to time,
indemnify all persons who it may indemnify pursuant thereto.
ARTICLE XIII:
No director of the Company shall be personally liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty by such
directors as a director; provided, however, that this Article XIII shall not
eliminate or limit the liability of a director to the extent provided by
applicable law (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit. No
amendment to or repeal of this Article XIII shall apply to or have any effect
on the liability or alleged liability of any director of the Company for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company has not issued any securities in the past three years except
with respect to the three-for-one stock split in the form of a stock dividend
effected in May, 1996, and with respect to the acquisitions of Prairie and
LaSalle Collections. With respect to the stock split, the Company had 710,577
issued and outstanding shares of Common Stock prior to such event and 2,131,731
issued and outstanding shares immediately following the May 20, 1996 effective
date for the stock split. In connection with the Prairie Acquisition, the
Company issued 710,576 shares of Common Stock and 2,762.24 shares of Series A
Preferred Stock to the holders of shares of Prairie Common Stock, and issued
857 shares of Series B Preferred Stock to the holders of Prairie's Series A
Preferred
II-1
225
Stock electing to receive securities in lieu of cash. See "The Acquisitions --
Prairie Bancorp, Inc. -- Consideration for Prairie Common and Preferred Stock."
The Company also issued 9,090 shares of Common Stock to the sole stockholder
of LaSalle Collections in connection with the Company's acquisition of LaSalle
Collections. The Company believes all of the securities issued in
connection with the acquisitions of Prairie and LaSalle Collections were issued
in transactions exempt from the registration requirements of the Securities Act
of 1933 pursuant to Section 4(2) thereof and Regulation D promulgated
thereunder.
ITEM 16. EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1.1 Form of Underwriting Agreement with Hoefer & Arnett, Incorporated
3.1 Restated Certificate of Incorporation of UnionBancorp, Inc., as
amended
3.2 Bylaws of UnionBancorp, Inc.
4.1 Articles IV, VI, VIII, X XI, XII, XIII and XIV of UnionBancorp,
Inc.'s Restated Certificate of Incorporation, as amended
4.2 Articles III, IV, VII, IX and XII of UnionBancorp, Inc.'s Bylaws
4.3 Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock of UnionBancorp, Inc.
4.4 Certificate of Designation, Preferences and Rights of Series B
Preferred Stock of UnionBancorp, Inc.
4.5 Certificate of Designation, Preferences and Rights of Series C
Junior Participating Preferred Stock
4.6 Specimen Common Stock Certificate of UnionBancorp, Inc.
4.7 Rights Agreement between UnionBancorp, Inc. and Harris Trust and
Savings Bank, dated August 5, 1996
5.1 Opinion of Barack, Ferrazzano, Kirschbaum & Perlman regarding
legality of securities being registered
10.1 Employment Agreement dated January 1, 1992, between UnionBank,
UnionBancorp, Inc. and R. Scott Grigsby, as amended on October 1,
1993, April 4, 1996 and August 5, 1996
10.2 Employment Agreement dated March 1, 1994, among UnionBank,
UnionBancorp, Inc. and Wayne L. Bismark, as amended on April 4,
1996
10.3 Employment Agreement dated January 1, 1992, between UnionBancorp,
Inc. and Charles J. Grako, as amended on October 1, 1993, April 4,
1996 and August 5, 1996
10.4 Employment Agreement dated January 1, 1992, by and among
UnionBank, UnionBancorp, Inc. and Everett J. Solon, as amended on
October 1, 1993, April 11, 1996 and August 5, 1996
10.5 Employment Agreement dated June 3, 1996, between UnionBancorp, Inc.
and John M. Daw
10.6 Employment Agreement dated March 4, 1996, between UnionBank,
UnionBancorp, Inc. and Jimmie D. Lansford, as amended on April 4,
1996
II-2
226
10.7 Agreement and Plan of Merger dated January 22, 1996, as amended,
among UnionBancorp, Inc., Prairie Acquisition Corporation and Prairie
Bancorp, Inc.
10.8 Agreement and Plan of Merger dated March 21, 1996, among
UnionBancorp, Inc., CBI Acquisition Corporation and Country Bancshares,
Inc.
10.9 Standstill Agreements dated August 6, 1996, between UnionBancorp,
Inc. and each of Wayne W. Whalen and Dennis J. McDonnell
10.10 Registration Agreement dated August 6, 1996, between UnionBancorp,
Inc. and each of Wayne W. Whalen and Dennis J. McDonnell
10.11 Loan Agreement between UnionBancorp, Inc. and LaSalle National Bank
dated August 2, 1996
10.12 UnionBancorp, Inc. Employee Stock Ownership Plan
10.13 UnionBancorp, Inc. 1993 Stock Option Plan, as amended
21.1 Subsidiaries of UnionBancorp, Inc.
23.1 Consent of Barack, Ferrazzano, Kirschbaum & Perlman (included in
opinion filed as Exhibit 5.1)
23.2 Consents of McGladrey & Pullen, LLP
23.3 Consent of Robert J. Doty
23.4 Consent of Scott C. Sullivan
24.1 Power of Attorney (included on the signature page of this
Registration Statement)
27.1 Financial Data Schedule
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
227
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Ottawa, State of
Illinois, on August 5, 1996.
UNIONBANCORP, INC.
By:
--------------------------------------
R. Scott Grigsby
Chairman of the Board, President and
Chief Executive Officer
By:
--------------------------------------
Charles J. Grako
Executive Vice President and Chief
Financial Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints R. Scott Grigsby and Charles J. Grako, and each
of them, his true and lawful attorney-in-fact and agent, each with full power
of substitution and re-substitution, for him and in his name, place and stead,
in any and all capacities to sign any or all amendments (including
post-effective amendments) to this Registration Statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, 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 he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or any of them, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by each of the following persons in the
capacities indicated on August 5, 1996.
SIGNATURE TITLE
- --------- -----
Chairman of the Board of Directors,
- -------------------- President and Chief Executive Officer
R. Scott Grigsby
- -------------------- Director
Richard J. Berry
- -------------------- Director
Walter E. Breipohl
- -------------------- Director
L. Paul Broadus
II-4
228
SIGNATURE TITLE
--------- -----
- --------------------
John Michael Daw Director
- --------------------
Jimmie D. Lansford Director
- --------------------
Lawrence J. McGrogan Director
- --------------------
C. Robert Myers Director
- --------------------
I. J. Reinhardt, Jr. Director
- --------------------
H. Dean Reynolds Director
- --------------------
John A. Trainor Director
Executive Vice
- -------------------- President and Chief
Charles J. Grako Financial Officer
II-5