-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OHyZZutrXck0Cm19ojkn2UvA3az3o1ZdQp1nUM9iRbyQ5hx5HcPf8NYmnNReqC2t v60RmjsmFoseiQr2XhLNBg== 0000912057-97-011133.txt : 19970401 0000912057-97-011133.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011133 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIONBANCORP INC CENTRAL INDEX KEY: 0001019650 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 363145350 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-28846 FILM NUMBER: 97569045 BUSINESS ADDRESS: STREET 1: 122 W MADISON ST CITY: OTTAWA STATE: IL ZIP: 61350 BUSINESS PHONE: 8154343900 MAIL ADDRESS: STREET 1: 122 WEST MADISON STREET CITY: OTTAWA STATE: IL ZIP: 61350 10-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission File Number: 0-28846 UNIONBANCORP, INC. ---------------------------------------------------- (Exact name of Registrant as specified in its charter) DELAWARE 36-3145350 - ------------------------------ ---------------------------- (State or other jurisdiction (I.R.S. Employer Identification of incorporation or organization) Number) 122 WEST MADISON STREET, OTTAWA, ILLINOIS 61350 ------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (815) 434-3900 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Exchange Class On Which Registered - ----------------------- ----------------------- NONE NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK ($1.00 PAR VALUE) -------------------------------- (Title of Class) PREFERRED PURCHASE RIGHTS -------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [/X/] As of March 11, 1997, the Registrant had issued and outstanding 4,116,001 shares of the Registrant's Common Stock. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 7, 1997, was $33,807,849.* * Based on the last reported price ($12.75) of an actual transaction in the Registrant's Common Stock on March 7, 1997, and reports of beneficial ownership filed by directors and executive officers of the Registrant and by beneficial owners of more than 5% of the outstanding shares of Common Stock of the Registrant; however, such determination of shares owned by affiliates does not constitute an admission of affiliate status or beneficial interest in shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Company's 1996 Annual Report to Stockholders (the "1996 Annual Report") are incorporated by reference into Part II of this Form 10-K. Certain portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders (the "1997 Proxy Statement") are incorporated by reference into Part III of this Form 10-K. UNIONBANCORP, INC. Form 10-K Annual Report Table of Contents Part I Item 1. Description of Business. . . . . . . . . . . . . . . . . . . . 1 A. The Company B. Regulation and Supervision Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 10 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 10 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . . . . . . . 10 Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . 12 Item 8. Financial Statements and Supplementary Data. . . . . . . . . . 12 Item 9 Changes in and Disagreements on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . 12 Part III Item 10. Directors and Executive Officers of the Registrant . . . . . . 12 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . 13 Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . . . . 13 Item 13. Certain Relationships and Related Transactions . . . . . . . . 13 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . 13 PART I ITEM 1. DESCRIPTION OF BUSINESS THE COMPANY GENERAL The Company, a Delaware corporation, is a multi-bank holding company which owns all of the issued and outstanding capital stock of UnionBank, an Illinois bank located in Streator, Illinois, and UnionBank/Sandwich, an Illinois bank located in Sandwich, Illinois. During 1996, the Company acquired all of the issued and outstanding capital stock of Prairie Bancorp, Inc. ("Prairie"), a multi-bank holding company with six bank subsidiaries located in the Illinois communities of Carthage, Hanover, Ladd, Manlius, Tampico and Tiskilwa, and also acquired Country Bancshares, Inc. ("Country"), a one-bank holding company having an Illinois bank subsidiary located in Macomb, Illinois (UnionBank, UnionBank/Sandwich and the bank subsidiaries of Prairie and Country are sometimes collectively referred to as the "Banks"). The Company also has three non-bank subsidiaries, UnionData Corp. ("UnionData"), which provides data processing services, Union Corporation ("Union Corporation"), which primarily serves as an owner and lessor of banking offices to certain of the Banks, and LaSalle County Collections, Inc. ("LaSalle"), a debt collection agency located in Ottawa, Illinois. The Banks and the three non-bank subsidiaries are collectively referred to as the "Subsidiaries." At December 31, 1996, the Company had consolidated assets of approximately $642.0 million, deposits of approximately $543.7 million and stockholders' equity of approximately $46.5 million. 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 Banks allows for rapid response time and flexibility in dealing with customer requests and credit needs. The participation of the Company's directors, officers and employees in area civic and 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. Prior to the acquisitions of Prairie and Country, 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 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 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 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. Agricultural loans also play 1 a role in the Company's overall lending portfolio, although most of this lending activity is based in the north central portion of the Company's market area. The Company has centralized the lending policies of the Prairie and Country bank subsidiaries as part of the process of integrating the operations of these banks into that of the Union Banks following the Prairie and Country acquisitions. It is anticipated that the lending policies of any banks acquired in the future would also be centralized, although the Company strives to have its bank subsidiaries retain their local focus. The Company also provides a variety of additional services and financial products, including trust and asset management services through its Investment Management and Trust Division, which is operated through UnionBank/Streator, MasterCard and Visa credit cards, and a debit card program inaugurated in 1994. A new automated payment option called Direct Payment, which is an efficient, electronic payment alternative to paper checks, is offered through UnionData. The Company also conducts all of its own data processing for the Union Banks through UnionData, and is integrating the Prairie and Country data processing systems into UnionData as well. LaSalle, a collection agency recently acquired by the Company, serves the principal market area of Ottawa, Illinois, and surrounding communities, and has been providing services to the UnionBanks prior to its acquisition. The Company intends to expand the market area of LaSalle Collections and to utilize its services with respect to the collection needs of the other Bank Subsidiaries. COMPETITION The Company's market area is highly competitive. Within the 10 Illinois counties served by the Company's banking offices, many commercial banks, savings and loan associations and 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. 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 December 31, 1996, the Company employed 289 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. SUPERVISION AND REGULATION GENERAL Financial institutions and their holding companies are extensively regulated under federal and state law. As a result 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 2 Securities and Exchange Commission (the "SEC"). 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 September 30, 1996, President Clinton signed into law the "Economic Growth and Regulatory Paperwork Reduction Act of 1996" (the "Regulatory Reduction Act"). Subtitle G of the Regulatory Reduction Act consists of the "Deposit Insurance Funds Act of 1996" (the "DIFA"). The DIFA provides for a one-time special assessment on each depository institution holding deposits subject to assessment by the FDIC for the Savings Association Insurance Fund (the "SAIF") in an amount which, in the aggregate, will increase the designated reserve ratio of the SAIF (I.E., the ratio of the insurance reserves of the SAIF to total SAIF-insured deposits) to 1.25% on October 1, 1996. Subject to certain exceptions, the special assessment was payable in full on November 27, 1996. None of the Banks Subsidiaries holds any SAIF-assessable deposits and, therefore, none of the Bank Subsidiaries was subject to the special assessment. Prior to the enactment of the DIFA, a substantial amount of the SAIF assessment revenue was used to pay the interest due on bonds issued by the Financing Corporation ("FICO"), the entity created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation (the "FSLIC"), the SAIF's predecessor insurance fund. Pursuant to the DIFA, the interest due on outstanding FICO bonds will be covered by assessments against both SAIF and Bank Insurance Fund ("BIF") member institutions beginning January 1, 1997. Between January 1, 1997 and December 31, 1999, FICO assessments against BIF-member institutions cannot exceed 20% of the FICO assessments charged SAIF-member institutions. From January 1, 2000 until the FICO bonds mature in 2019, FICO assessments will be shared by all FDIC-insured institutions on a PRO RATA basis. It has been estimated that the FICO assessments for the period January 1, 1997 through December 31, 1999 will be approximately 0.013% of deposits for BIF members versus approximately 0.064% of deposits for SAIF members, and will be less than 0.025% of deposits thereafter. The DIFA also provides for a merger of the BIF and the SAIF on January 1, 1999, provided there are no state or federally chartered, FDIC-insured savings associations existing on that date. To facilitate the merger of the BIF and the SAIF, the DIFA directs the Treasury Department to conduct a study on the development of a common charter and to submit a report, along with appropriate legislative recommendations, to the Congress by March 31, 1997. In addition to the DIFA, the Regulatory Reduction Act includes a number of statutory changes designed to eliminate duplicative, redundant or unnecessary regulatory requirements. Among other things, the Regulatory Reduction Act establishes streamlined notice procedures for the commencement of new nonbanking activities by bank holding companies, eliminates the need for national banks to obtain OCC approval to establish off-site ATMs, excludes ATM closures and certain branch office relocations from the prior notice requirements applicable to branch closings, significantly expands the authority of well-capitalized and well-managed national banks to invest in office premises without prior regulatory approval and establishes time frames within which the FDIC must act on applications by state banks to engage in activities which, although permitted for state banks under applicable state 3 law, are not permissible activities for national banks. The Regulatory Reduction Act also clarifies the liability of a financial institution, when acting as a lender or in a fiduciary capacity, under the federal environmental laws. Although the full impact of the Regulatory Reduction Act on the operations of the Company and the Bank cannot be determined at this time, management believes that the legislation may reduce compliance costs to some extent and allow the Company and the Bank somewhat greater operating flexibility. THE COMPANY 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 (iii) merging or consolidating with another bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the FRB may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the FRB is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located or which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. The BHCA also prohibits, with certain exceptions, 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. The principal exception to this prohibition allows bank holding companies to engage in, and to 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, the Company and its non-bank subsidiaries are permitted to engage in, among other activities, such banking-related businesses as 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. The BHCA generally does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. CAPITAL REQUIREMENTS Bank holding companies are required to maintain minimum levels of capital in accordance with FRB capital adequacy guidelines. 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. 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 4 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. 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. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders' equity less intangible assets (other than certain mortgage servicing rights and purchased credit card relationships) and total capital means Tier 1 capital plus certain other debt and equity instruments which do not qualify as Tier 1 capital and a portion of the company's allowance for loan and lease losses. The risk-based and leverage standards presently described above are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking 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. Under the FRB's guidelines, the capital standards described above generally apply on a consolidated basis to bank holding companies that, like the Company and Prairie, have more than $150 million in total consolidated assets and on a bank-only basis to bank holding companies that, like Country, have less than $150 million in total consolidated assets. As of December 31, 1996, each of the Company and Prairie had regulatory capital, calculated on a consolidated basis, in excess of the FRB's minimum requirements, as set forth below. Leverage Risk-Based Ratio Ratio ----- ----- Company . . . . . . . . . . . 7.76% 10.87% Prairie . . . . . . . . . . . 6.86% 15.91% 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 should not pay cash dividends exceeding its net income or which can 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. FEDERAL SECURITIES REGULATION The Company's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. 5 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 ("member banks"). 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 to the FDIC. The FDIC has adopted 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. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. During the year ended December 31, 1996, BIF assessments ranged from 0% of deposits to 0.27% of deposits. The FDIC has announced that for the semi-annual assessment period beginning January 1, 1997, BIF assessments will continue to range from 0% of deposits to 0.27% of deposits. 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 of the Bank Subsidiaries. FICO ASSESSMENTS Since 1987, a portion of the deposit insurance assessments paid by SAIF members has been used to cover interest payments due on the outstanding obligations of the FICO, the entity created to finance the recapitalization of the FSLIC, the SAIF's predecessor insurance fund. Pursuant to federal legislation enacted September 30, 1996, commencing January 1, 1997, both SAIF members and BIF members will be subject to assessments to cover the interest payment on outstanding FICO obligations. Such FICO assessments will be in addition to amounts assessed by the FDIC for deposit insurance. Until January 1, 2000, the FICO assessments made against BIF members may not exceed 20% of the amount of the FICO assessments made against SAIF members. It is estimated that SAIF members will pay FICO assessments equal to 0.064% of deposits while BIF members will pay FICO assessments 6 equal to 0.013% of deposits. Between January 1, 2000 and the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a PRO RATA basis. It is estimated that FICO assessments during this period will be less than 0.025% of deposits. 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. For purposes of these capital standards, Tier 1 capital and total capital consist of substantially the same components as Tier 1 capital under the FRB's capital guidelines for bank holding companies (SEE "-- the Company -- Capital Requirements"). 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 interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. 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 December 31, 1996, each of the Bank Subsidiaries exceeded its minimum regulatory capital requirements, as set forth below: LEVERAGE RISK-BASED RATIO RATIO ----- ----- UnionBank/Streator . . . . . 9.10% 14.31% UnionBank/Sandwich . . . . . 7.33% 11.16% Ferris Bank . . . . . . . . . 6.33% 16.33% Hanover Bank . . . . . . . . 8.71% 24.29% Ladd Bank . . . . . . . . . . 6.85% 16.06% Manlius Bank . . . . . . . . 6.66% 16.30% Tampico Bank . . . . . . . . 7.69% 19.41% Tiskilwa Bank . . . . . . . . 7.37% 18.46% Omni Bank . . . . . . . . . . 6.22% 10.19% 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. 7 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 net profits. Federal law also imposes limitations on the amount of dividends that may be paid by member banks, such as the Union Banks, or national banks, such as the National Banks. Generally, a member bank or a national bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank's board of directors deems prudent. Without prior regulatory approval, however, neither a state member bank nor a national bank may pay dividends which exceed the bank's year-to-date net income plus the bank's adjusted retained net income 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, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, each of the Bank Subsidiaries exceeded its minimum capital requirements under applicable guidelines as of December 31, 1996. As of December 31, 1996, approximately $5.7 million was available to be paid as dividends to the Company by the Bank Subsidiaries. Notwithstanding the availability of funds for dividends, however, the federal bank regulators may prohibit the payment of any dividends by the Bank Subsidiaries if the they determine such payment would constitute an unsafe or unsound practice. 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 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, Prairie or Country may obtain credit from banks with which one of the Bank Subsidiaries maintains a correspondent relationship. SAFETY AND SOUNDNESS STANDARDS The federal banking regulators have promulgated guidelines establishing operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. 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. 8 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. FEDERAL RESERVE SYSTEM FRB regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating $49.3 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $49.3 million, the reserve requirement is $1.479 million plus 10% of the aggregate amount of total transaction accounts in excess of $49.3 million. The first $4.4 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the FRB. Each of the Bank Subsidiaries is in compliance with the foregoing requirements. ITEM 2. PROPERTIES At December 31, 1996, the Company operated 27 banking offices in Illinois. The principal offices of the Company are located in Ottawa, Illinois. All of the Company's offices are owned by one of the Banks and are not subject to any mortgage or material encumbrance. The Company believes that its current facilities are adequate for its existing business.
AFFILIATE MARKETS SERVED PROPERTY/TYPE LOCATION --------- -------------- ---------------------- The Company Administrative Office: Ottawa UnionBank LaSalle, Grundy and Livingston Counties Main Office: Streator, IL Nine banking offices located in markets served. UnionBank/Sandwich Kendall, DeKalb and LaSection alle Main Office: Sandwich, IL counties One banking office located in Plano, IL 9 UnionData Corp, Inc. LaSalle, Kendall, DeKalb, McDonough, Main Office: Streator, IL Adams, and Pike Counties Additional office located in Macomb, IL First National Bank of Manlius Bureau County Main Office: Manlius, IL Two banking offices located in Princeton, IL Farmers State Bank of Ferris Hancock County Main Office, Carthage, IL One banking office located in Ferris, IL Hanover State Bank Jo Davies County Main Office: Carthage, IL One banking office located in Elizabeth, IL LaSalle County Collections, Inc. LaSalle, DeKalb, Kendall, McDonough and Main Office: Ottawa, IL Bureau Counties Bank of Ladd Bureau and LaSalle Counties Main Office: Ladd, IL Omni Bank McDonough, Adams and Pike Counties Main Office: Macomb, IL Six banking offices located in market served. Tampico National Bank Whiteside and Bureau Counties Main Office: Tampico, IL Tiskilwa State Bank Bureau County Main Office: Tiskilwa, IL Union Corporation LaSalle County Main Office: Ottawa, IL
In addition to the banking locations listed above, the Bank Affiliates own 17 automatic teller machines, some of which are housed within a banking office and some of which are independently located. At December 31, 1996, the properties and equipment of the Company had an aggregate net book value of approximately $13.6 million. ITEM 3. LEGAL PROCEEDINGS Neither the Company nor any of its 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no items submitted to a vote of security holders in the fourth quarter of 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock was held by approximately 614 stockholders of record as of March 11, 1997, and is traded on the Nasdaq Stock Market under the symbol "UBCD." 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 10 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.
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 10.00 0.033 Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.00 10.67 0.033 Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.00 11.00 0.035 Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.50 11.50 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 were required to be paid or accrued quarterly with respect to the outstanding shares of Preferred Stock. The ability of the Company to pay dividends in the future will be primarily dependent upon its receipt of dividends from the Banks. 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 Banks' ability to pay dividends to the Company and the Company's ability to pay dividends to its stockholders are also subject to certain regulatory restrictions. The Company has paid regular cash dividends on the Common Stock since it commenced operations in 1982. 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 Banks as well as the general economic conditions and other relevant factors affecting the Company and the Banks. 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, 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. 11 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Selected consolidated financial data for the five years ended December 31, 1996, consisting of data captioned "Selected Consolidated Financial and Other Data for the Company and Subsidiaries" on page F-1 of the Company's 1996 Annual Report to Stockholders filed as an exhibit hereto is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information beginning on page 1 of the Company's 1996 Annual Report to Stockholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation" is incorporated by reference. This report contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward- looking statements to be covered by the safe harbor provisions for forward- looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company and the subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory provisions, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the SEC. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Balance Sheets of the Company and Subsidiaries as of December 31, 1996 and 1995 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, 1996, together with the related notes and the report of McGladrey & Pullen, LLP, independent auditors, on pages 1 to 37 of the Company's 1996 Annual Report to Stockholders filed as an exhibit hereto, is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Reference is made to the Form 8-K filed by the Company with the SEC on March 25, 1997. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information beginning on page 2 of the Company's 1997 Proxy Statement under the caption "Election of Directors" and on pages 4 through 7 of the 1997 Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management" is incorporated by reference. The information regarding executive officers not provided in the 1997 Proxy Statement is noted below. EXECUTIVE OFFICERS The term of office for the executive officers of the Company is from the date of election until the next annual organizational meeting of the Board of Directors. In addition to the information provided in the 1997 Proxy Statement, the names and ages of the executive officers of the Company as of December 31, 1996, as well as the offices of the Company and the Subsidiaries held by these officers on that date, and principal occupations for the past five years are set forth below. WAYNE L. BISMARK, 52, 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, 43, 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 12 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, 43, 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, 44, 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 served on the Board of Directors of UnionBank/Streator since 1994. ITEM 11. EXECUTIVE COMPENSATION The information on pages 7 through 9 of the 1997 Proxy Statement under the caption "Executive Compensation" is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information on pages 4 through 7 of the 1997 Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners" is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information on pages 11 and 12 of the 1997 Proxy Statement under the caption "Transactions with Management" is incorporated by reference. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Index to Financial Statements N/A (a)(2) Financial Statement Schedules N/A (a)(3) Schedule of Exhibits The Exhibit Index which immediately follows the signature pages to this Form 10-K is incorporated by reference. (b) Reports on Form 8-K The Company did not file any Current Reports on Form 8-K during the fourth quarter of 1996. 13 (c) Exhibits The exhibits required to be filed with this Form 10-K are included with this Form 10-K and are located immediately following the Exhibit Index to this Form 10-K. (d) Financial Data Schedule Exhibit 27.1 14 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 25, 1997. UnionBancorp, Inc. By: /s/ R. Scott Grigsby By: /s/ Charles J. Grako ------------------------------ ------------------------------ R. Scott Grigsby Charles J. Grako Chairman and Executive Vice President and Principal Executive Officer Principal Financial and Accounting Officer Date: March 25, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 20, 1997. Signature Title --------- ----- /s/ R. Scott Grigsby - ----------------------------------- R. Scott Grigsby Chairman of the Board, President and Chief Executive Officer /s/ Richard J. Berry - ----------------------------------- Richard J. Berry Director /s/ Walter E. Breipohl - ----------------------------------- Walter E. Breipohl Director /s/ L. Paul Broadus - ----------------------------------- L. Paul Broadus Director /s/ John Michael Daw - ----------------------------------- John Michael Daw Director /s/ - ----------------------------------- Robert J. Doty Director /s/ Jimmie D. Lansford - ----------------------------------- Jimmie D. Lansford Director /s/ Lawrence J. McGrogan - ----------------------------------- Lawrence J. McGrogan Director /s/ - ----------------------------------- I. J. Reinhardt, Jr. Director /s/ - ----------------------------------- H. Dean Reynolds Director /s/ - ----------------------------------- Scott C. Sullivan Director /s/ - ----------------------------------- John A. Shinkle Director /s/ - ----------------------------------- John A. Trainor Director /s/ Charles J. Grako - ----------------------------------- Charles J. Grako Executive Vice President and Chief Financial and Accounting Officer UNIONBANCORP, INC. EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
INCORPORATED EXHIBIT HEREIN BY FILED SEQUENTIAL NO. DESCRIPTION REFERENCE TO HEREWITH PAGE NO. --- ----------- ------------ -------- -------- 3.1 Restated Certificate of Incorporated by reference from Incorporation of UnionBancorp, Exhibit 3.1 to the Registration Inc., as amended Statement or Form S-1 filed by the Company on August 19, 1996 (SEC File No. 33-9891), as amended 3.2 Bylaws of UnionBancorp, Inc. Incorporated by reference from Exhibit 3.2 to the Registration Statement or Form S-1 filed by the Company on August 19, 1996 (SEC File No. 33-9891), as amended 4.1 Certificate of Designation, Incorporated by reference from Preferences and Rights of Series A Exhibit 4.3 to the Registration Convertible Preferred Stock of Statement or Form S-1 filed by the UnionBancorp, Inc. Company on August 19, 1996 (SEC File No. 33-9891), as amended 4.2 Certificate of Designation, Incorporated by reference from Preferences and Rights of Series B Exhibit 4.4 to the Registration Preferred Stock of UnionBancorp, Statement or Form S-1 filed by the Inc. Company on August 19, 1996 (SEC File No. 33-9891), as amended 4.3 Certificate of Designation, Incorporated by reference from Preferences and Rights of Series C Exhibit 4.5 to the Registration Junior Participating Preferred Statement or Form S-1 filed by the Stock Company on August 19, 1996 (SEC File No. 33-9891), as amended INCORPORATED EXHIBIT HEREIN BY FILED SEQUENTIAL NO. DESCRIPTION REFERENCE TO HEREWITH PAGE NO. --- ----------- ------------ -------- -------- 4.4 Specimen Common Stock Certificate Incorporated by reference from of UnionBancorp, Inc. Exhibit 4.6 to the Registration Statement or Form S-1 filed by the Company on August 19, 1996 (SEC File No. 33-9891), as amended 4.5 Rights Agreement between Incorporated by reference from UnionBancorp, Inc. and Harris Trust Exhibit 4.7 to the Registration and Savings Bank, dated August 5, Statement or Form S-1 filed by the 1996 Company on August 19, 1996 (SEC File No. 33-9891), as amended 10.1 Employment Agreement dated Incorporated by reference from January 1, 1992, between UnionBank, Exhibit 10.1 to the Registration UnionBancorp, Inc. and R. Scott Statement or Form S-1 filed by the Grigsby, as amended on October 1, Company on August 19, 1996 (SEC File 1993, April 4, 1996 and August 5, No. 33-9891), as amended 1996 10.2 Employment Agreement dated March 1, Incorporated by reference from 1994, among UnionBank, Exhibit 10.2 to the Registration UnionBancorp, Inc. and Wayne L. Statement or Form S-1 filed by the Bismark, as amended on April 4, Company on August 19, 1996 (SEC File 1996 No. 33-9891), as amended 10.3 Employment Agreement dated Incorporated by reference from January 1, 1992, between Exhibit 10.3 to the Registration UnionBancorp, Inc. and Charles J. Statement or Form S-1 filed by the Grako, as amended on October 1, Company on August 19, 1996 (SEC File 1993, April 4, 1996 and August 5, No. 33-9891), as amended 1996 10.4 Employment Agreement dated Incorporated by reference from January 1, 1992, by and among Exhibit 10.4 to the Registration UnionBank, UnionBancorp, Inc. and Statement or Form S-1 filed by the Everett J. Solon, as amended on Company on August 19, 1996 (SEC File October 1, 1993, April 11, 1996 and No. 33-9891), as amended August 5, 1996 INCORPORATED EXHIBIT HEREIN BY FILED SEQUENTIAL NO. DESCRIPTION REFERENCE TO HEREWITH PAGE NO. --- ----------- ------------ -------- -------- 10.5 Employment Agreement dated June 3, Incorporated by reference from 1996, between UnionBancorp, Inc. Exhibit 10.5 to the Registration and John M. Daw Statement or Form S-1 filed by the Company on August 19, 1996 (SEC File No. 33-9891), as amended 10.6 Employment Agreement dated March 4, Incorporated by reference from 1996, between UnionBank, Exhibit 10.6 to the Registration UnionBancorp, Inc. and Jimmie D. Statement or Form S-1 filed by the Lansford, as amended on April 4, Company on August 19, 1996 (SEC File 1996 No. 33-9891), as amended 10.7 Standstill Agreements dated August Incorporated by reference from 6, 1996, between UnionBancorp, Inc. Exhibit 10.9 to the Registration and each of Wayne W. Whalen and Statement or Form S-1 filed by the Dennis J. McDonnell Company on August 19, 1996 (SEC File No. 33-9891), as amended 10.8 Registration Agreement dated August Incorporated by reference from 6, 1996, between UnionBancorp, Inc. Exhibit 10.10 to the Registration and each of Wayne W. Whalen and Statement or Form S-1 filed by the Dennis J. McDonnell Company on August 19, 1996 (SEC File No. 33-9891), as amended 10.9 Loan Agreement between Incorporated by reference from UnionBancorp, Inc. and LaSalle Exhibit 10.11 to the Registration National Bank dated August 2, 1996 Statement or Form S-1 filed by the Company on August 19, 1996 (SEC File No. 33-9891), as amended 10.10 UnionBancorp, Inc. Employee Stock Incorporated by reference from Ownership Plan Exhibit 10.12 to the Registration Statement or Form S-1 filed by the Company on August 19, 1996 (SEC File No. 33-9891), as amended INCORPORATED EXHIBIT HEREIN BY FILED SEQUENTIAL NO. DESCRIPTION REFERENCE TO HEREWITH PAGE NO. --- ----------- ------------ -------- -------- 10.11 UnionBancorp, Inc. 1993 Stock Incorporated by reference from Option Plan, as amended Exhibit 10.13 to the Registration Statement or Form S-1 filed by the Company on August 19, 1996 (SEC File No. 33-9891), as amended 13.1 1996 Annual Report to Stockholders (as incorporated by reference into this Form 10-K) * 21.1 Subsidiaries of UnionBancorp, Inc. * 23.2 Consents of McGladrey & Pullen, LLP * 27.1 Financial Data Schedule * 99.1 1996 Proxy Statement *
EX-13.1 2 1996 ANNUAL REPORT TO STOCKHOLDERS UNIONBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 UNIONBANCORP, INC. AND SUBSIDIARIES CONTENTS - -------------------------------------------------------------------------------- INDEPENDENT AUDITOR'S REPORT 1 - -------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets 2 Consolidated statements of income 3 Consolidated statements of stockholders' equity 4 and 5 Consolidated statements of cash flows 6 - 8 Notes to consolidated financial statements 9 - 37 - -------------------------------------------------------------------------------- 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Champaign, Illinois February 5, 1997 UNIONBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 - --------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 29,236 $ 16,167 Federal funds sold 10,267 2,265 Securities held to maturity (fair value of $35,322 in 1996 and $29,186 in 1995) 35,017 29,026 Securities available for sale 188,538 63,891 Loans, net of allowance for loan losses of $3,068 in 1996 and $2,014 in 1995 343,428 178,805 Premises and equipment 13,580 6,571 Intangible assets 10,801 943 Other assets 11,157 5,865 -------------------------- TOTAL ASSETS $ 642,024 $ 303,533 -------------------------- -------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits: Noninterest bearing $ 65,864 $ 35,688 Interest bearing 477,880 226,039 -------------------------- TOTAL DEPOSITS 543,744 261,727 Federal funds purchased and securities sold under agreements to repurchase 21,817 11,505 Advances from the Federal Home Loan Bank 10,021 - Notes payable 13,180 4,346 Other liabilities 5,027 2,480 -------------------------- TOTAL LIABILITIES 593,789 280,058 -------------------------- Minority interest in subsidiaries 795 - -------------------------- Mandatory redeemable preferred stock, Series B, no par value; 1,092 shares authorized; 857 shares issued and outstanding 857 - -------------------------- Stockholders' Equity Preferred stock - - Series A convertible preferred stock 500 - Series C preferred stock - - Common stock, $1 par value; 10,000,000 shares authorized; 4,386,064 and 4,386 2,400 2,400,000 shares issued in 1996 and 1995, respectively 19,403 1,074 Surplus 22,981 20,568 Retained earnings (74) 2 Unrealized gain (loss) on securities available for sale (91) (48) Deferred compensation - stock options -------------------------- 47,105 23,996 Less treasury stock, at cost; 271,263 and 268,263 shares in 1996 and 1995, respectively 522 521 -------------------------- TOTAL STOCKHOLDERS' EQUITY 46,583 23,475 -------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 642,024 $ 303,533 -------------------------- --------------------------
See Accompanying Notes to Consolidated Financial Statements. 2 UNIONBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- Interest income: Loans and fees on loans $ 22,138 $ 16,322 $ 13,419 Securities: U.S. Treasury securities 959 1,062 1,571 U.S. Government agencies and corporations 3,146 2,202 1,796 States and political subdivisions 1,574 1,404 1,397 Collateralized mortgage obligations 1,467 10 10 U.S. Government agency mortgage backed securities 1,327 - - Other securities 140 212 396 Federal funds sold 286 156 38 ----------------------------------------- TOTAL INTEREST INCOME 31,037 21,368 18,627 ----------------------------------------- Interest expense: Deposits 15,239 10,257 8,093 Federal funds purchased and securities sold under agreements to repurchase 861 523 234 Advances from the Federal Home Loan Bank 213 - - Notes payable 690 469 379 ----------------------------------------- TOTAL INTEREST EXPENSE 17,003 11,249 8,706 ----------------------------------------- NET INTEREST INCOME 14,034 10,119 9,921 Provision for loan losses 1,178 684 660 ----------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,856 9,435 9,261 ----------------------------------------- Noninterest income: Service charges 1,286 952 895 Merchant fee income 524 418 357 Trust income 393 330 301 Gain on sale of loans 262 288 130 Securities gains, net 20 98 118 Other noninterest income 737 484 482 ----------------------------------------- 3,222 2,570 2,283 ----------------------------------------- Noninterest expenses: Salaries and employee benefits 6,469 4,451 3,868 Occupancy expense, net 899 665 574 Furniture and equipment expense 977 584 560 FDIC deposit assessment 8 271 526 Amortization of intangible assets 392 120 162 Other noninterest expenses 3,503 2,680 2,557 ----------------------------------------- 12,248 8,771 8,247 ----------------------------------------- 3,830 3,234 3,297 Minority interest 27 - - ----------------------------------------- INCOME BEFORE INCOME TAXES 3,803 3,234 3,297 Income taxes 969 881 703 ----------------------------------------- NET INCOME 2,834 2,353 2,594 Preferred stock dividends 105 - - ----------------------------------------- NET INCOME ON COMMON STOCK $ 2,729 $ 2,353 $ 2,594 ----------------------------------------- ----------------------------------------- EARNINGS PER COMMON SHARE $ 0.98 $ 1.09 $ 1.22 ----------------------------------------- ----------------------------------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,773,769 2,148,897 2,132,712 ----------------------------------------- -----------------------------------------
See Accompanying Notes to Consolidated Financial Statements. 3 UNIONBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - --------------------------------------------------------------------------------
Series A Convertible Common Stock Preferred Stock Preferred Stock ------------------------------------------------------------------------- Shares Dollars Shares Dollars Shares Dollars ------------------------------------------------------------------------- Balance, December 31, 1993, as restated 2,400,000 $ 2,400 - $ - - $ - Effect of adoption of change in method of accounting for securities - - - - - - Net income - - - - - - Cash dividends, $.12 per share - - - - - - Issuance of 1,977 shares of treasury stock - - - - - - Redemption of qualifying directors stock - - - - - Change in unrealized gain (loss) on securities available for sale - - - - - - ------------------------------------------------------------------------- Balance, December 31, 1994 2,400,000 2,400 - - - - Net income - - - - - - Cash dividends, $.13 per share Issuance of nonqualifying stock options - - - - - - Amortization of unearned compensa- tion on nonqualifying stock options - - - - - - Change in unrealized gain (loss) on securities available for sale - - - - - - ------------------------------------------------------------------------- Balance, December 31, 1995 2,400,000 2,400 - - - - Net income - - - - - - Issuance of common stock 1,266,398 1,266 - - - - Cost to raise capital - - - - - - Cash dividends, $.14 per share Dividends on preferred stock - - - - - Stock issued for acquisitions 719,666 720 - - 2,762.24 500 Issuance of nonqualifying stock options - - - - - - Amortization of unearned compensa- tion on nonqualifying stock options - - - - - - Change in unrealized gain (loss) on securities available for sale - - - - - - Redemption of qualifying directors stock - - - - - - ------------------------------------------------------------------------- Balance, December 31, 1996 4,386,064 $ 4,386 - $ - 2,762.24 $ 500 ------------------------------------------------------------------------- -------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements. 4
Unrealized Gain (Loss) Deferred Series C on Compen- Preferred Stock Securities sation - Treasury Stock ----------------- Retained Available Stock --------------- Shares Dollars Surplus Earnings for Sale Options Shares Dollars Total ------------------------------------------------------------------------------------------- Balance, December 31, 1993, as restated - $ - $ 996 $ 16,153 $ - $ - 267,240 $ (524) $ 19,025 Effect of adoption of change in method of accounting for securities - - - - 831 - - - 831 Net income - - - 2,594 - - - - 2,594 Cash dividends, $.12 per share - - - (248) - - - - (248) Issuance of 1,977 shares of treasury stock - - 11 - - - (1,977) 4 15 Redemption of qualifying directors stock - - - - - - 3,000 (1) (1) Change in unrealized gain (loss) on securities available for sale - - - - (2,588) - - - (2,588) ------------------------------------------------------------------------------------------ Balance, December 31, 1994 - - 1,007 18,499 (1,757) - 268,263 (521) 19,628 Net income - - - 2,353 - - - - 2,353 Cash dividends, $.13 per share - - (284) - - (284) Issuance of nonqualifying stock options - - 67 - - (67) - - - Amortization of unearned compensa- tion on nonqualifying stock options - - - - - 19 - - 19 Change in unrealized gain (loss) on securities available for sale - - - - 1,759 - - - 1,759 ------------------------------------------------------------------------------------------ Balance, December 31, 1995 - - 1,074 20,568 2 (48) 268,263 (521) 23,475 Net income - - - 2,834 - - - - 2,834 Issuance of common stock - - 12,221 - - - - - 13,487 Cost to raise capital - - (1,051) - - - - - (1,051) Cash dividends, $.14 per share - - - (316) - - - - (316) Dividends on preferred stock - - - (105) - - - - (105) Stock issued for acquisitions - - 7,090 - - - - - 8,310 Issuance of nonqualifying stock options - - 69 - - (69) - - - Amortization of unearned compensa- tion on nonqualifying stock options - - 26 - - - - - 26 Change in unrealized gain (loss) on securities available for sale - - - - (76) - - - (76) Redemption of qualifying directors stock - - - - - - 3,000 (1) (1) ------------------------------------------------------------------------------------------ Balance, December 31, 1996 - $ - $ 19,403 $ 22,981 $ (74) $ (91) 271,263 $ (522) $ 46,583 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------
5 UNIONBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
1996 1995 1994 - ----------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income $ 2,834 $ 2,353 $ 2,594 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 849 526 529 Amortization of intangible assets 392 120 162 Amortization of deferred compensation - stock options 26 19 - Amortization of bond premiums, net 543 448 640 Provision for loan losses 1,178 684 660 Provision for deferred income taxes (45) (138) (32) Gain on sales of securities (20) (98) (118) Gain on sale of equipment - (37) (2) (Gain) loss on sale of real estate acquired in settlement of loans (134) (33) 65 Gain on sale of loans (262) (288) (130) Proceeds from sales of loans held for resale 21,355 14,899 9,289 Origination of loans held for resale (20,803) (14,673) (9,159) Minority interest in net income of subsidiary 27 - - Change in assets and liabilities: (Increase) decrease in other assets 9 (666) 12 Increase (decrease) in other liabilities (449) 539 346 ----------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,500 3,655 4,856 ----------------------------------------- Cash Flows from Investing Activities Securities: Held to maturity: Proceeds from calls, maturities and paydowns 4,429 3,858 1,279 Purchases (5,247) (4,300) (6,197) Available for sale: Proceeds from maturities and paydowns 20,455 6,230 6,621 Proceeds from sales 24,620 17,318 21,562 Purchases (19,708) (28,240) (27,357) Net (increase) decrease in federal funds sold 167 (1,065) 8,900 Net increase in loans (21,841) (20,533) (14,024) Purchases of premises and equipment (1,314) (1,430) (1,201) Proceeds from sale of real estate acquired in settlement of loans 575 800 727 Proceeds from sale of equipment 3 59 40 Bank and bank holding company acquisitions, net of cash and cash equivalents received (11,748) - - ----------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (9,609) (27,303) (9,650) -----------------------------------------
(Continued) 6 UNIONBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
1996 1995 1994 - ------------------------------------------------------------------------------------------------------ Cash Flows from Financing Activities Net increase (decrease) in demand deposits, NOW accounts and savings accounts $ 7,784 $ 11,656 $( 6,853) Net increase in time deposits (6,037) 17,738 1,732 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 2,481 (1,613) 9,976 Net decrease in advances from the Federal Home Loan Bank (4,000) - - Payments on notes payable (13,802) (680) (254) Proceeds from notes payable 18,686 Dividends paid on common stock (316) (284) (248) Dividends paid on preferred stock (53) - - Proceeds from issuance of treasury stock - - 15 Redemption of qualifying directors' stock (1) - (1) Proceeds from issuance of common stock, net of costs to raise capital 12,436 - - ------------------------------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 17,178 26,817 4,367 ------------------------------------------ NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 13,069 3,169 (427) Cash and cash equivalents: Beginning of year 16,167 12,998 13,425 ------------------------------------------ End of year $ 29,236 $ 16,167 $ 12,998 ------------------------------------------ ------------------------------------------ Supplemental Disclosures of Cash Flow Information Cash payments for: Interest - depositors $ 15,232 $ 9,978 $ 7,912 ------------------------------------------ ------------------------------------------ - federal funds and repurchase agreements $ 437 $ 371 $ 171 ------------------------------------------ ------------------------------------------ - notes payable $ 690 $ 576 $ 357 ------------------------------------------ ------------------------------------------ - FHLB advances $ 210 $ - $ - ------------------------------------------ ------------------------------------------ Income taxes $ 921 $ 994 $ 833 ------------------------------------------ ------------------------------------------
(Continued) 7 UNIONBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- Supplemental Schedule of Noncash Investing and Financing Activities Transfer of loans to real estate acquired in settlement of loans $ 316 $ 535 $ 519 ----------------------------------------- ----------------------------------------- Change in unrealized gain (loss) on securities available for sale $ (125) $ 2,873 $ (2,870) ----------------------------------------- ----------------------------------------- Increase (decrease) in deferred taxes attributable to the unrealized gain (loss) on securities available for sale $ 49 $ (1,115) $ 1,114 ----------------------------------------- ----------------------------------------- Unrealized gain on securities available for sale attributable to minority interest $ 8 $ - $ - ----------------------------------------- ----------------------------------------- Issuance of nonqualifying stock options $ 69 $ 67 $ - ----------------------------------------- ----------------------------------------- Preferred stock dividends declared not paid $ 52 $ - $ - ----------------------------------------- ----------------------------------------- Assets acquired: Cash and cash equivalents $ 5,191 $ - $ - Federal funds sold 8,169 - - Securities 155,824 - - Loans, net 144,566 - - Premises and equipment 6,547 - - Intangible assets 10,250 - - Other assets 5,426 - - Liabilities assumed: Demand deposits, NOW accounts and savings accounts (101,134) - - Time deposits (179,136) - - Federal funds purchased and securities sold under agreements to repurchase (7,831) - - Advances from the Federal Home Loan Bank (14,021) - - Notes payable (3,950) - - Deferred taxes (534) - - Other liabilities (2,501) - - Minority interest in subsidiaries (760) - - ----------------------------------------- $ 26,106 $ - $ - ----------------------------------------- ----------------------------------------- Value of common stock issued $ 7,810 $ - $ - ----------------------------------------- ----------------------------------------- Value of mandatory redeemable preferred stock issued $ 857 $ - $ - ----------------------------------------- ----------------------------------------- Value of convertible preferred stock issued $ 500 $ - $ - ----------------------------------------- ----------------------------------------- Purchase price paid $ 16,939 $ - $ - ----------------------------------------- -----------------------------------------
See Accompanying Notes to Consolidated Financial Statements. 8 UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- NOTE 1. ACCOUNTING POLICIES UnionBancorp, Inc. (the "Company") is a multi-bank holding company with three nonbank subsidiaries. The Company provides a full range of banking services to individual and corporate customers in the north central and west central Illinois areas. The Company is subject to competition from other financial institutions and nonfinancial institutions providing financial services. Additionally, the Company and its bank subsidiaries (the "Banks") are subject to regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies. The significant accounting and reporting policies for UnionBancorp, Inc. and its subsidiaries follow: BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its subsidiaries, UnionBank, UnionBank/Sandwich , Prairie Acquisition Corp., Country Bancshares, Inc., LaSalle County Collections, Inc., UnionData Corp., Inc. and Union Corporation. Prairie Acquisition Corp. ("Prairie") is a multi-bank holding company for banks located in the Illinois communities of Ferris, Hanover, Ladd, Manlius, Tampico and Tiskilwa, with additional branches in Carthage, Elizabeth and Princeton. Country Bancshares, Inc., ("Country") is a one-bank holding company headquartered in Hull, Illinois with offices in the Illinois communities of Macomb, Hull, Paloma, East Hannibal, Camp Point and Blandinsville. All material intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and reporting practices prescribed for the banking industry. 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 Banks, are not assets of the Company and, accordingly, are not included in the accompanying consolidated financial statements. (Continued) 9 UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- 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. 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 accrual of interest on loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When the accrual of interest is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received and the principal is considered fully collectible. The Banks originate certain loans for sale in the secondary market. These loans are recorded at the lower of aggregate cost or market until they are sold. Net unrealized losses are recognized in a valuation allowance by charges to income. Gains or losses on sales of loans held for sale are computed using the specific-identification method and are reflected in income at the time of sale. (Continued) 10 UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- MORTGAGE SERVICING RIGHTS The cost of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market rate. For purposes of measuring impairment, the rights are stratified based on the following predominant risk characteristics of the underlying loans: weighted average maturity and weighted average rate. The amount of impairment is the excess of the capitalized mortgage servicing rights for a stratum over their fair value. 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 Banks' allowance for loan losses, and may require the Banks to make additions to the allowance based on their judgment about information available to them at the time of their examinations. The allowance for loan losses related to impaired loans that are identified for evaluation is based on discounted cash flows using the loan's effective interest rate or the fair value, less selling costs, of the collateral for collateral dependent loans. 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 Fair value adjustments for identifiable tangible assets are accreted and amortized over the lives of the respective assets. The excess of the purchase price over the fair value of assets acquired for transactions accounted for as purchases are recorded as intangible assets. Core deposit intangibles are amortized on a straight line basis over ten years. Goodwill is amortized on a straight line basis over fifteen years. (Continued) 11 UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- DEFERRED INCOME TAXES Deferred taxes are provided using the 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. EARNINGS PER SHARE Earnings per share are calculated on the weighted average number of shares outstanding, including common stock equivalents, 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. All share amounts in the consolidated financial statements have been restated to reflect the three-for-one stock split which took effect May 20, 1996. PREFERRED STOCK Terms of each class of preferred stock are as follows: PREFERRED STOCK: The Company's Certificate of Incorporation authorizes its Board of Directors to fix or alter the rights, preferences, privileges and restrictions of 200,000 shares 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 of each series subsequent to the issuance of shares of such series (but not below the number of shares outstanding). The Board of Directors has fixed the rights, preferences, privileges and restrictions with respect to 2,765 shares of Series A Preferred Stock, 1,092 shares of Series B Preferred Stock, and 4,500 shares of Series C Preferred Stock, as described below. (Continued) 12 UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- SERIES A CONVERTIBLE PREFERRED STOCK: The Company has issued 2,762.24 of the 2,765 authorized shares of Series A Convertible Preferred Stock. Preferential cumulative cash dividends are payable quarterly at an annual rate of $75.00 per share. Dividends accrue on each share of Series A Preferred Stock from the date of issuance and from day to day, thereafter, whether or not earned or declared. 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 shares of Series A Preferred Stock, subtracting from this product such realized after-tax loss of specified securities obtained in the acquisition of Prairie Bancorp, Inc. and dividing this result by the conversion price (1.075 times the Common Stock per share book value). Series A Preferred Stock is not redeemable for cash. 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. On dissolution, winding up or liquidation of the Company, voluntary or otherwise, holders of Series A 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 Series A Preferred Stock. SERIES B MANDATORY REDEEMABLE PREFERRED STOCK: The Company has issued 857 of the 1,092 authorized shares Series B Mandatory Redeemable Preferred Stock. Preferential cumulative cash dividends are payable quarterly at an annual rate of $60.00 per share. Dividends accrue on each share of Series B Preferred Stock from the date of issuance and from day to day, thereafter, whether or not earned or declared. Each original holder of Series B Preferred Stock (or upon such holder's 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. Holders of shares of Series B Preferred Stock are not entitled to vote except as required by law. On dissolution, winding up or liquidation of the Company, voluntary or otherwise, holders of Series B 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 Series B Preferred Stock. (Continued) 13 UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- SERIES C JUNIOR PARTICIPATING PREFERRED STOCK: The Company has authorized 4,500 shares of Series C Junior Participating Preferred Stock. The Series C Preferred Stock is only issuable upon exercise of rights issued pursuant to the Company's Stockholder Rights Plan. Each share of Series C Junior Participating Preferred Stock is entitled to, when, as and if declared, a minimum preferential quarterly dividend payment of $3.00 per share but will be entitled to an aggregate dividend of 1,000 times the dividend declared per share of Common Stock. In the event of liquidation, dissolution or winding up of the Company, the holders of the Series C Preferred Stock will be entitled to a minimum preferential payment of $100 per share (plus any accrued but unpaid dividends) but will be entitled to an aggregate payment of 1,000 times the payment made per share of Common Stock. Each share of Series C Preferred Stock will have 1,000 votes, voting together with the Common Stock. Finally, in the event of any merger, consolidation or other transaction in which outstanding shares of Common Stock are converted or exchanged, each share of Series C Preferred Stock will be entitled to receive 1,000 times the amount received per share of Common Stock. These rights are protected by customary antidilution provisions. STOCKHOLDER RIGHTS PLAN: On July 17, 1996, the Company declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series C Junior Participating Preferred Stock, no par value, of the Company at a price of $50.00 per one one-thousandth of a share of Preferred Stock (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement dated as of August 5, 1996, as the same may be amended from time to time (the "Rights Agreement"), between the Company and Harris Trust and Savings Bank, as Rights Agent. The Rights are not exercisable until the earlier to occur of: (i) 10 days after a person or group ("Acquiring Person") has acquired beneficial ownership of 15% or more of the outstanding shares of Common Stock or (ii) 10 business days (or such later date as determined by the Board of Directors) following the commencement of a tender offer or exchange offer (the "Distribution Date"). Unless extended, the Rights will expire on August 4, 2006. In the event that any person(s) becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter have the right to receive upon exercise of a Right that number of shares of Common Stock having a market value of two times the exercise price of the Right. In the event that, after a person or group has become an Acquiring Person, the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, proper provisions will be made so that each holder of a Right (other than Rights beneficially owned by an Acquiring Person which will have become void) will thereafter have the right to receive upon the exercise of a Right that number of shares of common stock of the person with whom the Company has engaged in the foregoing transaction (or its parent) that at the time of such transaction have a market value of two times the exercise price of the Right. (Continued) 14 UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- At any time prior to the time an Acquiring Person becomes such, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES In June 1996, the Financial Accounting Standards Board issued Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" (Statement No. 125). Statement No. 125 distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. A transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interest in the transferred assets is received in exchange. Statement No. 125 also establishes standards on the initial recognition and measurement of servicing assets and other retained interests and servicing liabilities, and their subsequent measurement. Statement No. 125 requires that debtors reclassify financial assets pledged as collateral and that secured parties recognize those assets and their obligation to return them in certain circumstances in which the secured party has taken control of those assets. In addition, Statement No. 125 requires that a liability be derecognized only if the debtor is relieved of its obligation through payment to the creditor or by being legally released from being the primary obligor under the liability either judicially or by the creditor. Statement No. 125 is effective for transactions occurring after December 31, 1996, except for transactions relating to secured borrowings and collateral for which the effective date is December 31, 1997. The Company believes the adoption of Statement No. 125 will not have a material impact on its consolidated financial statements. NOTE 2. BUSINESS ACQUISITIONS On August 1, 1996, the Company acquired LaSalle County Collections, Inc. ("LaSalle"), a collection agency located in Ottawa, Illinois. The purchase price of $177 included the issuance of 9,090 shares of Common Stock, valued at $11.08 per share, and payment of $77 in cash. The Company recognized an intangible asset of $170 for the excess of purchase price over total assets acquired. 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. At the date of acquisition, Prairie had approximately $226,756 in total assets and $189,271 in total deposits. In conjunction with the acquisition, the Company issued 2,762.24 of the 2,765 authorized shares of Series A Convertible Preferred Stock, which were valued at $500. In addition, the Company issued 857 of the 1,092 authorized shares of Series B Preferred Stock, which were valued at $857 and 710,576 shares of Common Stock valued at $7,710. The total acquisition cost of $14,302 resulted in goodwill of $2,749 and core deposit intangible estimated at $1,857. (Continued) 15 UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- On September 25, 1996, the Company acquired an additional bank subsidiary through the purchase of Country Bancshares, Inc. ("Country"). At the date of acquisition, Country had approximately $109,040 in total assets and $90,999 in total deposits. The cash purchase price of $11,627 resulted in goodwill of $4,842 and core deposit intangible estimated at $632. All acquisitions were recorded using the purchase method of accounting. As such, the results of operations of the acquired entities are excluded from the consolidated statements of income for the periods prior to the respective acquisition dates. The unaudited pro forma results of operations which follow assume the acquisitions had occurred at the beginning of the respective periods. In addition to combining the historical results of operations of the companies, the pro forma calculations include purchase accounting adjustments related to the acquisitions and interest on borrowed funds. Unaudited pro forma consolidated results of operations for the periods ending December 31, 1996 and 1995 as though Prairie and Country had been acquired as of January 1, 1995 follow: Years ended December 31, ------------------------- 1996 1995 ------------------------- Net interest income $17,965 $17,538 ------------------------- ------------------------- Net income 3,088 2,833 ------------------------- ------------------------- Earnings per common share $ 0.69 $ 0.62 ------------------------- ------------------------- The effects of the acquisition of LaSalle are not material and therefore have not been included in the above analysis. The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the purchases actually been made at the beginning of the respective periods, or of results which may occur in the future. NOTE 3. CASH AND CASH EQUIVALENTS Certain of the 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, 1996 and 1995, were $2,273 and $1,973, respectively. (Continued) 16 UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- NOTE 4. SECURITIES Amortized costs and fair values of securities are summarized as follows:
HELD TO MATURITY Gross Gross December 31, 1996 Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------- States and political subdivisions $ 35,017 $ 496 $ 191 $ 35,322 ------------------------------------------------------- ------------------------------------------------------- December 31, 1995 U.S. Treasury $ 117 $ - $ - $ 117 U.S. Government agencies and corporations 2,000 121 1,879 States and political subdivisions 26,660 496 215 26,941 Collateralized mortgage obligations 9 - - 9 Corporate bonds 240 - - 240 ------------------------------------------------------- $ 29,026 $ 496 $ 336 $ 29,186 ------------------------------------------------------- ------------------------------------------------------- AVAILABLE FOR SALE December 31, 1996 U.S. Treasury $ 26,528 $ 107 $ 117 $ 26,518 U.S. Government agencies and corporations 53,905 184 535 53,554 U.S. Government mortgage backed securities 49,266 293 105 49,454 Collateralized mortgage obligations 58,744 219 143 58,820 Corporate bonds 192 - - 192 Other 25 - 25 - ------------------------------------------------------- $ 188,660 $ 803 $ 925 $188,538 ------------------------------------------------------- -------------------------------------------------------
(Continued) 17 UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------
AVAILABLE FOR SALE Gross Gross December 31, 1995 Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------------------------------------------------- U.S. Treasury $18,330 $ 24 $ 75 $18,279 U.S. Government agencies and corporations 36,909 303 225 36,987 U.S. Government mortgage backed securities 6,111 30 58 6,083 Collateralized mortgage obligations 107 - 1 106 States and political subdivisions 893 20 - 913 Other 1,538 10 25 1,523 ---------------------------------------------------- $63,888 $ 387 $ 384 $63,891 ---------------------------------------------------- ----------------------------------------------------
The amortized cost and fair value of securities classified as held to maturity and available for sale at December 31, 1996, 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 Available for Sale ---------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value Due in one year or less $ 3,007 $ 3,019 $ 8,277 $ 8,230 Due after one year through five years 16,162 16,245 38,519 38,527 Due after five years through ten years 12,322 12,444 33,854 33,507 Due after ten years 3,526 3,614 - - U.S. Government mortgage backed securities 49,266 49,454 - - Collateralized mortgage obligations - - 58,744 58,820 ---------------------------------------------------- $35,017 $35,322 $188,660 $188,538 ---------------------------------------------------- ----------------------------------------------------
Securities with carrying values of approximately $131,997 and $50,338 at December 31, 1996 and 1995, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and advances from the Federal Home Loan Bank, and for other purposes as required or permitted by law. The Company elected to transfer certain securities held to maturity with an amortized cost of $2,242 and a fair value of $2,004 to available for sale. In addition, certain securities available for sale with an amortized cost of $395 and a fair value of $402 were transferred to held to maturity. These transfers were made in connection with the 1996 acquisitions to maintain the Company's interest rate risk. (Continued) 18 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- Realized gains and losses from securities available for sale follow: Years Ended December 31, ------------------------------ 1996 1995 1994 ------------------------------ Gross gains $ 137 $ 172 $ 229 Gross losses (117) (74) (111) ------------------------------ NET GAIN $ 20 $ 98 $ 118 ------------------------------ ------------------------------ 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, net of the related income tax effect of $527, to recognize the net unrealized gain in securities available for sale at that date. NOTE 5. LOANS The major classifications of loans follow: December 31, ------------------------------ 1996 1995 ------------------------------ Commercial $ 95,929 $ 53,226 Real estate 203,732 100,506 Installment 41,303 24,166 Other 6,047 2,928 ------------------------------ 347,011 180,826 ------------------------------ Less: Unearned interest 515 7 Allowance for loan losses 3,068 2,014 ------------------------------ 3,583 2,021 ------------------------------ $ 343,428 $ 178,805 ------------------------------ ------------------------------ 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. (Continued) 19 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- The following table presents data on impaired loans:
December 31, -------------------------- 1996 1995 -------------------------- Impaired loans for which an allowance has been provided $ 14 $ 733 Impaired loans for which no allowance has been provided 1,080 - -------------------------- Total loans determined to be impaired $ 1,094 $ 733 -------------------------- -------------------------- Allowance for loan loss for impaired loans included in the allowance for loan losses $ 2 $ 500 -------------------------- -------------------------- Average recorded investment in impaired loans $ 947 $ 423 -------------------------- -------------------------- Interest income recognized from impaired loans $ - $ - -------------------------- -------------------------- Cash basis interest income recognized from impaired loans $ - $ - -------------------------- --------------------------
Loans on which the accrual of interest had been discontinued or reduced amounted to $1,061 at December 31, 1994, which had the effect of reducing interest income approximately $167 for the year ended December 31, 1994. The Company and its subsidiaries conduct most of their business activities, including granting agribusiness, commercial, residential and installment loans with customers in north central and west central Illinois. The Banks' loan portfolios include a concentration of loans to agricultural and agricultural-related industries amounting to approximately $61,978 and $27,308 as of December 31, 1996 and 1995, respectively. In addition, the Company has a concentration of commercial real estate loans of approximately $63,254 and $44,393 as of December 31, 1996 and 1995, 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 Banks' credit loss experience on the loan portfolio as a whole. In the normal course of business, loans are made to executive officers, directors, 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, 1996 follow: Balance at December 31, 1995 $ 11,338 Balance acquired 2,379 New loans, extensions and modifications 5,877 Repayments (10,075) ------------- Balance at December 31, 1996 $ 9,519 ------------- ------------- (Continued) 20 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $49,778 and $47,777 at December 31, 1996 and 1995, respectively. NOTE 6. ALLOWANCE FOR LOAN LOSSES An analysis of activity in the allowance for loan losses follows: Years Ended December 31, -------------------------------------- 1996 1995 1994 -------------------------------------- Balance at beginning of year $ 2,014 $ 1,704 $ 1,787 Balance acquired 1,292 - - Provision for loan losses 1,178 684 660 Recoveries 98 163 281 Loans charged off (1,514) (537) (1,024) -------------------------------------- Balance at end of year $ 3,068 $ 2,014 $ 1,704 -------------------------------------- -------------------------------------- NOTE 7. PREMISES AND EQUIPMENT Premises and equipment consisted of: December 31, --------------------------- 1996 1995 --------------------------- Land $ 1,325 $ 747 Buildings 10,893 6,022 Furniture and equipment 10,457 5,586 --------------------------- 22,675 12,355 Less accumulated depreciation 9,095 5,784 --------------------------- $ 13,580 $ 6,571 --------------------------- --------------------------- (Continued) 21 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- NOTE 8. DEPOSITS Deposit account balances by type are summarized as follows: December 31, --------------------------- 1996 1995 --------------------------- Demand deposits $ 65,864 $ 35,688 Savings, NOW and money market accounts 159,614 80,872 Time deposits of $100 or more 74,485 23,652 Other time deposits 243,781 121,515 --------------------------- $ 543,744 $ 261,727 --------------------------- --------------------------- At December 31, 1996, the scheduled maturities of time deposits were as follows: Year Amount - -------------------------------------------------------------------------------- 1997 $ 221,179 1998 66,865 1999 22,986 2000 4,156 2001 and thereafter 3,080 --------------- $ 318,266 --------------- --------------- A maturity distribution of time certificates of deposit in denominations of $100 or more was as follows: December 31, --------------------------- 1996 1995 --------------------------- 3 months or less $ 33,810 $ 6,024 Over 3 months through 6 months 17,047 3,128 Over 6 months through 12 months 8,694 5,013 Over 12 months 14,934 9,487 --------------------------- $ 74,485 $ 23,652 --------------------------- --------------------------- (Continued) 22 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- NOTE 9. BORROWED FUNDS Borrowed funds include federal funds purchased and securities sold under agreements to repurchase, advances from the Federal Home Loan Bank, and notes payable to a third party lender. A summary of short-term borrowings follows: December 31, --------------------------- 1996 1995 --------------------------- Federal funds purchased $ 800 $ - Securities sold under agreements to repurchase 21,017 11,505 --------------------------- $ 21,817 $ 11,505 --------------------------- --------------------------- Federal Funds purchased and securities sold under agreement to repurchase generally mature within one to four days from the transaction date. At December 31, 1996, the scheduled maturities of advances from the Federal Home Loan Bank were as follows: Year Amount - ------------------------------------------------------------------------------- 1997 $ 1,566 1998 2,960 1999 - 2000 - 2001 and thereafter 5,495 -------------- $ 10,021 -------------- -------------- Notes payable of $13,180 at December 31, 1996 consisted of advances on a $26,000 line of credit note issued by LaSalle National Bank. Interest is payable quarterly based on agreed upon currency rates, an effective rate of 8.25% (Prime Rate) at December 31, 1996. All unpaid principal and accrued interest is due August 2, 1997. The notes payable agreement 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, 1996. (Continued) 23 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- Information concerning borrowed funds is as follows:
Years Ended December 31, ------------------------------------------ 1996 1995 1994 ------------------------------------------ FEDERAL FUNDS PURCHASED Maximum month-end balance during the year $ 11,288 $ - $ - Average balance during the year 2,448 - - Weighted average interest rate for the year 5.26% - - Weighted average interest rate at year end 7.50% - - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Maximum month-end balance during the year $ 32,310 $ 15,511 $ 11,563 Average balance during the year 20,239 9,260 5,511 Weighted average interest rate for the year 5.70% 5.73% 3.80% Weighted average interest rate at year end 5.79% 5.49% 4.87% ADVANCES FROM THE FEDERAL HOME LOAN BANK Maximum month-end balance during the year $ 15,422 $ - $ - Average balance during the year 13,294 - - Weighted average interest rate for the year 5.29% - - Weighted average interest rate at year end 6.03% - - NOTES PAYABLE Maximum month-end balance during the year $ 25,320 $ 4,946 $ 5,186 Average balance during the year 8,364 4,696 5,135 Weighted average interest rate for the year 8.25% 9.00% 7.22% Weighted average interest rate at year end 8.25% 9.16% 8.50%
(Continued) 24 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- NOTE 10. INCOME TAXES Income taxes consisted of: Years Ended December 31, -------------------------------------- 1996 1995 1994 -------------------------------------- Federal: Current $ 918 $ 879 $ 684 Deferred (24) (134) (31) -------------------------------------- 894 745 653 -------------------------------------- State: Current 96 140 51 Deferred (21) (4) (1) -------------------------------------- 75 136 50 -------------------------------------- $ 969 $ 881 $ 703 -------------------------------------- -------------------------------------- The Company's income tax expense differed from the statutory federal rate of 34% as follows:
Years Ended December 31, ------------------------------------------- 1996 1995 1994 ------------------------------------------- Expected income taxes $ 1,293 $ 1,100 $ 1,121 Income tax effect of: Interest earned on tax free investments and loans (535) (472) (465) Nondeductible interest expense incurred to carry tax-free investments and loans 90 63 49 Tax-exempt dividends - - (9) Nondeductible amortization 67 23 23 State income taxes, net of federal tax benefit 50 90 33 Other 4 77 (49) ------------------------------------------- $ 969 $ 881 $ 703 ------------------------------------------- -------------------------------------------
(Continued) 25 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- The significant components of deferred income tax assets and liabilities: December 31, ------------------------ 1996 1995 ------------------------ Deferred tax assets: Allowance for loan losses $ 446 $ 447 Deferred compensation 25 26 Other intangible assets 577 - Securities available for sale 48 - Other 39 - ------------------------ TOTAL DEFERRED TAX ASSETS 1,135 473 ------------------------ Deferred tax liabilities: Premises and equipment (532) (312) Core deposit intangible (1,053) (152) Securities available for sale - (1) Other - (18) ------------------------ TOTAL DEFERRED TAX LIABILITIES (1,585) (483) ------------------------ Net deferred tax liabilities $ (450) $ (10) ------------------------ ------------------------ NOTE 11. EMPLOYEE STOCK OWNERSHIP PLAN The Company's Employee Stock Ownership Plan (the "Plan") 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 Plan is based on years of continuous service. A participant is fully vested after seven years of credited service. The Plan owns 450,945 shares of the Company's common stock. At December 31, 1996, all shares held by the Plan were allocated to Plan participants. The Plan operated as a leveraged employee stock ownership plan until April 1996 when the outstanding debt of the Plan was retired. Principal and interest on the loan had been required to be paid in quarterly installments. (Continued) 26 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- Company contributions, when aggregated with the Plan's dividend and interest earnings, have been, at a minimum, equal to the amount required by the Plan 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 Plan. Contributions were $252, $237 and $251 for the years ended December 31, 1996, 1995 and 1994, respectively. NOTE 12. STOCK OPTION PLAN In April 1993, the Company adopted the UnionBancorp 1993 Stock Option Plan (the "Option Plan"). Under the Option Plan, nonqualified 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 status of the Option Plan as of December 31, 1996, 1995 and 1994 and changes during the years ending on those dates is presented below:
1996 1995 1994 --------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Fixed Options Shares Price Shares Price Shares Price - ------------- --------------------------------------------------------------------------- Outstanding at beginning of year 68,400 $ 6.24 38,100 $ 5.87 - $ - Granted 41,250 7.99 30,300 6.70 38,100 5.87 Exercised (1,398) 6.97 - - - - Forfeited (2,058) 8.65 - - - - ---------- ---------- ---------- Outstanding at end of year 106,194 6.87 68,400 6.24 38,100 5.87 ---------- ---------- ---------- ---------- ---------- ---------- Options exercisable at year-end 41,727 6.48 21,300 6.11 7,620 5.87 ---------- ---------- ---------- ---------- ---------- ---------- Weighted-average fair value of options granted during the year 3.32 2.79 N/A ---------- ---------- ---------- ----------
(Continued) 27 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- Grants under the Option Plan are accounted for following APB Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for incentive stock option grants under the Option Plan. Compensation cost charged to income for nonqualified stock option grants was $26, $19, and $0 for the years ended December 31, 1996, 1995 and 1994, respectively. Had compensation cost for all of the stock-based compensation plans been determined based on the grant date, fair values of awards (the method described by Statement No. 123), reported income and earnings per common share would have been reduced to the pro forma amounts shown below: 1996 1995 ---------------------------- Net income on common stock: As reported $ 2,729 $ 2,353 Pro forma 2,685 2,336 Earnings per common share: As reported 0.98 1.09 Pro forma 0.97 1.09 NOTE 13. REGULATORY MATTERS The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined by the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Company and the Banks meet all capital adequacy requirements to which they are subject. As of December 31, 1996, the most recent notification from the corresponding regulatory agency categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Banks' categories. (Continued) 28 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - --------------------------------------------------------------------------------
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------------------------------------- As of December 31, 1996 Total capital (to Risk Weighted Assets) UnionBancorp, Inc. $ 40,667 10.87% $ 29,922 8.00% N/A UnionBank 26,442 14.31% 14,785 8.00% $ 18,481 10.00% UnionBank/Sandwich 3,003 11.16% 2,153 8.00% 2,691 10.00% Farmers State Bank of Ferris 3,136 16.33% 1,536 8.00% 1,920 10.00% Bank of Ladd 2,916 16.06% 1,456 8.00% 1,816 10.00% Hanover State Bank 2,244 24.29% 739 8.00% 924 10.00% First National Bank of Manlius 4,270 16.30% 2,095 8.00% 2,619 10.00% Tampico National Bank 1,406 19.41% 580 8.00% 724 10.00% Tiskilwa State Bank 1,820 18.46% 789 8.00% 986 10.00% Omni Bank 6,799 10.19% 5,340 8.00% 6,675 10.00% Tier I capital (to Risk Weighted Assets) UnionBancorp, Inc. 36,242 9.69% 14,961 4.00% N/A UnionBank 24,833 13.44% 7,392 4.00% 11,089 6.00% UnionBank/Sandwich 2,765 10.28% 1,076 4.00% 1,615 6.00% Farmers State Bank of Ferris 3,009 15.67% 768 4.00% 1,152 6.00% Bank of Ladd 2,769 15.25% 726 4.00% 1,089 6.00% Hanover State Bank 2,164 23.42% 370 4.00% 554 6.00% First National Bank of Manlius 4,036 15.41% 1,048 4.00% 1,572 6.00% Tampico National Bank 1,353 18.67% 290 4.00% 435 6.00% Tiskilwa State Bank 1,751 17.76% 394 4.00% 592 6.00% Omni Bank 6,287 9.42% 2,670 4.00% 4,005 6.00% Tier I leverage ratio (to Average Assets) UnionBancorp, Inc. 36,242 7.76% 18,676 4.00% N/A UnionBank 24,833 9.10% 10,886 4.00% 13,645 5.00% UnionBank/Sandwich 2,765 7.33% 1,510 4.00% 1,887 5.00% Farmers State Bank of Ferris 3,009 6.33% 1,091 4.00% 2,377 5.00% Bank of Ladd 2,769 6.85% 1,618 4.00% 2,022 5.00% Hanover State Bank 2,164 8.71% 994 4.00% 1,242 5.00% First National Bank of Manlius 4,036 6.66% 2,425 4.00% 3,032 5.00% Tampico National Bank 1,353 7.69% 704 4.00% 880 5.00% Tiskilwa State Bank 1,751 7.37% 950 4.00% 1,187 5.00% Omni Bank 6,287 6.22% 4,043 4.00% 5,054 5.00%
(Continued) 29 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS Following is a summary 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. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: CASH AND CASH EQUIVALENTS The carrying amounts reported in the balance sheet for cash and cash equivalents 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. 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. (Continued) 30 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- BORROWED FUNDS The stated carrying amounts of federal funds purchased and securities sold under agreements to repurchase, advances from the Federal Home Loan Bank, and notes payable approximate their fair values based on rates and terms currently available for borrowings with similar terms and maturities. 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. The estimated fair values of the Company's financial instruments were as follows:
December 31, -------------------------------------------------------- 1996 1995 -------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------------------------------------------------------- Financial Assets: Cash and cash equivalents $ 29,236 $ 29,236 $ 16,167 $ 16,167 Federal funds sold 10,267 10,267 2,265 2,265 Securities 223,555 223,860 92,917 93,077 Loans 348,428 348,043 178,805 178,928 Accrued interest receivable 6,501 6,501 3,826 3,826 Financial Liabilities: Deposits 543,744 545,433 261,727 262,491 Federal funds purchased and securities sold under agreement to repurchase 21,817 21,817 11,505 11,505 Advances from the Federal Home Loan Bank 10,021 10,021 - - Notes payable 13,180 13,180 4,346 4,346 Accrued interest payable 3,931 3,931 2,231 2,231
(Continued) 31 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- 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 15. 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. The 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 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. The Banks' 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 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 follows:
Range of Rates Variable Rate Fixed Rate Total on Fixed Rate Commitments Commitments Commitments Commitments ---------------------------------------------------------------- Commitments to extend credit and standby letters of credit at December 31, 1996 $ 49,712 $ 10,142 $ 59,854 6.25 - 14.00% at December 31, 1995 40,686 3,111 43,797 6.25 - 11.25%
(Continued) 32 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses an may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. For commitments to extend credit, the Banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include accounts receivable; inventory; property, plant, and equipment; and income producing commercial properties. Standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The standby letters of credit are unsecured. 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 16. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY The primary source of funds for the Company is dividends from its subsidiaries. By regulation, the Banks are prohibited from paying dividends that would reduce regulatory capital below a specific percentage of assets without regulatory approval. As a practical matter, dividend payments are restricted to maintain prudent capital levels. (Continued) 33 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- Condensed financial information for UnionBancorp, Inc. follows:
BALANCE SHEETS (PARENT COMPANY ONLY) December 31, ------------------------------- ASSETS 1996 1995 ------------------------------- Cash and cash equivalents $ 6 $ - Investment in subsidiaries 60,092 27,558 Premises and equipment 336 152 Intangible assets 52 76 Other assets 233 76 ------------------------------- $ 60,719 $ 27,862 ------------------------------- ------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Notes payable $ 13,180 $ 4,346 Other liabilities 99 41 ------------------------------- 13,279 4,387 ------------------------------- Mandatory redeemable preferred stock, Series B, no par value; 1,092 shares authorized; 857 shares issued and outstanding 857 - ------------------------------- Stockholders' Equity Preferred stock - - Series A convertible preferred stock 500 - Series C preferred stock - - Common stock, $1 par value; 10,000,000 shares authorized; 4,386,064 and 2,400,000 issued in 1996 and 1995, respectively 4,386 2,400 Surplus 19,403 1,074 Retained earnings 22,981 20,568 Unrealized gain (loss) on securities available for sale (74) 2 Deferred compensation - stock options (91) (48) ------------------------------- 47,105 23,996 Less treasury stock, at cost; 271,263 and 268,263 shares in 1996 and 1995, respectively 522 521 ------------------------------- 46,583 23,475 ------------------------------- $ 60,719 $ 27,862 ------------------------------- -------------------------------
(Continued) 34 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - --------------------------------------------------------------------------------
INCOME STATEMENTS (PARENT COMPANY ONLY) Years Ended December 31, ----------------------------------------- 1996 1995 1994 ----------------------------------------- Dividends from subsidiaries $ 1,227 $ 1,532 $ 1,149 Management fees and other 977 981 652 ----------------------------------------- TOTAL INCOME 2,204 2,513 1,801 ----------------------------------------- Interest expense 690 422 371 Other expenses 1,768 1,275 883 ----------------------------------------- TOTAL EXPENSES 2,458 1,697 1,254 ----------------------------------------- INCOME (LOSS) BEFORE INCOME TAX BENEFIT EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES (254) 816 547 Income tax benefit (545) (217) (251) ----------------------------------------- INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 291 1,033 798 Equity in undistributed earnings of subsidiaries 2,543 1,320 1,796 ----------------------------------------- NET INCOME 2,834 2,353 2,594 Less dividends on preferred stock 105 - - ----------------------------------------- NET INCOME ON COMMON STOCK $ 2,729 $ 2,353 $ 2,594 ----------------------------------------- -----------------------------------------
(Continued) 35 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) Years Ended December 31, ----------------------------------------- 1996 1995 1994 ----------------------------------------- Cash Flows from Operating Activities Net income $ 2,834 $ 2,353 $ 2,594 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 53 17 10 Undistributed earnings of subsidiaries (2,543) (1,320) (1,796) Amortization of intangible assets 24 24 24 Amortization of deferred compensation - stock options 26 19 - Provision for deferred income taxes (27) 12 - Change in assets and liabilities: (Increase) decrease in other assets (142) 438 225 Increase (decrease) in other liabilities 18 (134) 30 ----------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 243 1,409 1,087 ----------------------------------------- Cash Flows from Investing Activities Investment in subsidiary (11) (400) (500) Purchases of premises and equipment (237) (51) (123) Purchase price paid for acquisitions (16,939) - - ----------------------------------------- NET CASH (USED IN) FINANCING ACTIVITIES (17,187) (451) (623) ----------------------------------------- Cash Flows from Financing Activities Net increase (decrease) in notes payable 4,884 (680) (254) Dividends paid on common stock (316) (284) (248) Dividends paid on preferred stock (53) - - Proceeds from issuance of treasury stock - - 15 Redemption of qualifying directors' shares (1) - (1) Proceeds from issuance of common stock, net of cost to raise capital 12,436 - - ----------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 16,950 (964) (488) ----------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6 (6) (24) Cash and Cash Equivalents: Beginning of year - 6 30 ----------------------------------------- End of year $ 6 $ - $ 6 ----------------------------------------- -----------------------------------------
36 UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- Supplemental Schedule of Noncash Investing and Financing Activities Change in unrealized gain (loss) on securities available for sale $ (76) $ 1,759 $ (1,757) ----------------------------------------- ----------------------------------------- Preferred stock dividends declared not paid $ 52 $ - $ - ----------------------------------------- ----------------------------------------- Issuance of nonqualifying stock options $ 69 $ 67 $ - ----------------------------------------- ----------------------------------------- Notes payable assumed in acquisition of subsidiary $ 3,950 $ - $ $ - ----------------------------------------- -----------------------------------------
NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Three Months Ended December 31, September 30, 1996 1996 ---------------------------- Interest income $ 11,554 $ 8,205 Interest expense 6,586 4,567 ---------------------------- NET INTEREST INCOME 4,968 3,638 Provision for loan losses 482 196 ---------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,486 3,442 Noninterest income 1,096 801 Noninterest expense 4,339 3,148 ---------------------------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 1,243 1,095 Minority interest 18 9 ---------------------------- INCOME BEFORE INCOME TAXES 1,225 1,086 Income taxes 307 282 ---------------------------- NET INCOME $ 918 $ 804 ---------------------------- ---------------------------- Earnings per common share $ 0.21 $ 0.29 ---------------------------- ----------------------------
37 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 three years ended December 31, 1996. This discussion should be read in conjunction with "Selected Consolidated Financial Data," the consolidated financial statements of the Company and the accompanying notes thereto. GENERAL The Company derives substantially all of its revenues and income from the operations of its banking subsidiaries, the Banks, which provide a full range of commercial and consumer banking services to businesses and individuals, primarily in north central and west central Illinois. As of December 31, 1996, the Company had total assets of $642,024,000, net loans of $343,428,000, total deposits of $543,744,000 and total stockholders' equity of $46,583,000. During 1996, the Company more than doubled its total assets, primarily through the acquisitions of Prairie Bancorp, Inc. ("Prairie") and Country Bancshares, Inc. ("Country"). The Prairie and Country acquisitions (the "Acquisitions") increased the organization to nine bank subsidiaries with 27 locations in 13 Illinois counties. The Acquisitions were funded in part by a public offering in October of 1996 of 1,265,000 shares of Common Stock. Net proceeds of the offering to the Company were $12,436,000. As a result of the Acquisitions, internal loan and deposit portfolio growth, and a relatively stable net interest margin, the Company reported net income of $2,834,000 for the year ended December 31, 1996, compared with net income of $2,353,000 for the year ended December 31, 1995. RESULTS OF OPERATIONS NET INCOME Net income was $2,834,000 ($.98 per share) for the year ended December 31, 1996, compared with net income of $2,353,000 ($1.09 per share) for the year ended December 31, 1995, an increase of $481,000 or 20.4%. The increase in earnings in 1996 compared with 1995 was primarily attributable to the Acquisitions and internal growth in the Company's loan and deposit portfolios. Net income was $2,594,000 for 1994 ($1.22 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. 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. 1 Net interest income was $14,034,000 for 1996, an increase of $3,915,000 or 38.7%, compared with net interest income of $10,119,000 for 1995, which represented an increase of $198,000 or 2.0% compared with net interest income of $9,921,000 for 1994. The Company's average total interest-earning assets increased from $261,001,000 for 1995 to $396,926,000 for 1996, representing a 52.1% increase resulting primarily from the growth attributed to the Acquisitions during 1996. The net interest margin declined to 3.74% at December 31, 1996 from 4.15% at December 31, 1995. The interest rates on average earning assets decreased to 8.02% in 1996, from 8.46% in 1995, while rates on average interest bearing liabilities decreased to 4.80% in 1996 from 4.90% in 1995. The decrease in the yield on average earning assets primarily resulted from a change in the mix of the earning assets resulting from the Acquisitions, which brought a higher level of earning assets in lower yielding securities. In addition, during 1996 there was an overall decrease in the market rates of interest. The nominal decrease in the average rates paid on interest bearing liabilities primarily resulted from interest rates on time deposits reflecting the decrease 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 years ended December 31, 1996, 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 and the net yield on average interest-earning assets for the same period. 2 AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME (DOLLARS IN THOUSANDS)
For the Years Ended December 31, --------------------------------------------------------------------------- 1996 1995 ------------------------------------ ------------------------------------ Interest Interest Average Income/ Average Average Income/ Average Balance Expense Rate Balance Expense Rate ASSETS ---------- ---------- ---------- ---------- ---------- ---------- INTEREST-EARNING ASSETS: Interest earning deposits $ 66 $ 4 5.92% $ 27 $ 2 5.85% Investment securities(1): Taxable 122,653 7,316 5.96% 62,808 3,636 5.79% Non-taxable(2) 26,994 2,051 7.60% 24,463 1,919 7.84% ---------- ---------- ---------- ---------- ---------- ---------- Total investment securities (tax equivalent) 149,647 9,367 6.26% 87,271 5,555 6.37% ---------- ---------- ---------- ---------- ---------- ---------- Federal funds sold 5,637 298 5.29% 2,577 156 6.05% ---------- ---------- ---------- ---------- ---------- ---------- Loans:(3)(4) Commercial 72,210 6,793 9.41% 55,431 5,524 9.97% Real estate 138,721 11,684 8.42% 94,050 8,380 8.91% Installment and other 33,047 3,062 9.27% 23,523 2,103 8.94% Fees on loans - 641 - - 362 - Less: Allowance for loan losses (2,402) - - (1,878) - - ---------- ---------- ---------- ---------- ---------- ---------- Net loans (tax equivalent) 241,576 22,180 9.18% 171,126 16,36 9.57% ---------- ---------- ---------- ---------- ---------- ---------- Total interest-earning assets 396,926 31,849 8.02% 261,001 22,082 8.46% ---------- ---------- ---------- ---------- ---------- ---------- NONEARNING ASSETS: Cash and cash equivalents 14,430 10,763 Premises and equipment, net 9,261 6,042 Other assets 10,076 5,585 ---------- ---------- Total nonearning assets 33,767 22,390 ---------- ---------- Total assets $ 430,693 $ 283,391 ---------- ---------- ---------- ---------- LIABILITIES NOW accounts $ 40,755 $ 1,055 2.59% $ 31,097 $ 843 2.71% Money market accounts 25,333 804 3.17% 19,691 584 2.97% Savings deposits 41,664 1,224 2.94% 23,146 611 2.64% Time, $100,000 and over 22,955 1,433 6.24% 12,040 687 5.71% Other time deposits 194,957 10,723 5.50% 129,147 7,534 5.84% Federal funds purchased and repurchase agreements 16,388 861 5.25% 9,825 567 5.77% Advances from FHLB 3,427 213 6.21% - - - Notes payable 8,364 690 8.25% 4,696 423 9.00% ---------- ---------- ---------- ---------- ---------- ---------- Total interest-bearing liabilities 353,843 17,003 4.80% 229,642 11,249 4.90% ---------- ---------- ---------- ---------- ---------- ---------- NONINTEREST-BEARING LIABILITIES: Noninterest-bearing deposits 41,395 29,950 Other liabilities 4,693 2,071 ---------- ---------- Total noninterest-bearing liabilities 46,088 32,021 ---------- ---------- Stockholders' equity 30,762 21,728 Total liabilities and stockholders' equity $ 430,693 $ 283,391 ---------- ---------- ---------- ---------- Net interest income (tax equivalent) $ 14,846 $ 10,833 ---------- ---------- ---------- ---------- Net interest income (tax equivalent) to total earning assets 3.74% 4.15% Interest bearing liabilities to earning assets 89.14% 87.99% - ------------------------------------------------------------------ ----------
For the Years Ended December 31, ------------------------------------ 1994 ------------------------------------ Interest Average Income/ Average Balance Expense Rate ASSETS ---------- ---------- ---------- INTEREST-EARNING ASSETS: Interest earning deposits $ - $ - - Investment securities(1): Taxable 68,946 3,937 5.71% Non-taxable(2) 22,818 1,869 8.19% ---------- ---------- ---------- Total investment securities (tax equivalent) 91,764 5,806 6.33% ---------- ---------- ---------- Federal funds sold 629 38 6.04% ---------- ---------- ---------- Loans:(3)(4) Commercial 57,093 5,074 8.89% Real estate 78,262 6,522 8.33% Installment and other 16,831 1,552 9.22% Fees on loans - 339 - Less: Allowance for loan losses (1,731) - - ---------- ---------- ---------- Net loans (tax equivalent) 150,455 13,487 8.96% ---------- ---------- ---------- Total interest-earning assets 242,848 19,331 7.96% ---------- ---------- ---------- NONEARNING ASSETS: Cash and cash equivalents 10,867 Premises and equipment, net 5,282 Other assets 5,637 ---------- Total nonearning assets 21,786 ---------- Total assets $ 264,634 ---------- ---------- LIABILITIES NOW accounts $ 27,187 $ 627 2.31% Money market accounts 22,108 590 2.67% Savings deposits 26,288 723 2.75% Time, $100,000 and over 15,912 755 4.74% Other time deposits 112,094 5,398 4.82% Federal funds purchased and repurchase agreements 4,574 242 5.29% Advances from FHLB - - - Notes payable 5,135 371 7.22% ---------- ---------- ---------- Total interest-bearing liabilities $ 213,298 $ 8,706 4.08% ---------- ---------- ---------- NONINTEREST-BEARING LIABILITIES: Noninterest-bearing deposits 29,622 Other liabilities 2,194 ---------- Total noninterest-bearing liabilities 31,816 ---------- Stockholders' equity 19,520 Total liabilities and stockholders' equity $ 264,634 ---------- ---------- Net interest income (tax equivalent) $ 10,625 ---------- ---------- Net interest income (tax equivalent) to total earning assets 4.38% Interest bearing liabilities to earning assets 87.83% ----------
(1) Average balance and average rate on securities classified as available for sale is based on historical amortized cost balances. (2) Interest income and average rate on non-taxable securities are reflected on a tax equivalent basis based upon a statutory Federal income tax rate of 34%. (3) Nonaccrual loans are included in the average balances. (4) Overdraft loans are excluded in the average balances. 3 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)
For the Years Ended December 31, ----------------------------------------------------------------------------------- 1996 Compared to 1995 1995 Compared to 1994 -------------------------------------- --------------------------------------- Change Due to Change Due to -------------------------------------- --------------------------------------- Volume Rate Net Volume Rate Net -------- -------- -------- --------- -------- ---------- INTEREST INCOME: Interest earning deposits $ 2 $ - $ 2 $ - $ 2 $ 2 Investment securities: Taxable 3,567 113 3,680 (354) 53 (301) Non-taxable 194 (62) 132 131 (81) 50 Federal funds sold 164 (22) 142 118 - 118 Loans 6,492 (681) 5,811 1,936 946 2,882 -------- -------- -------- --------- -------- ---------- Total interest income $ 10,419 $ (652) $ 9,767 $ 1,831 $ 920 $ 2,751 -------- -------- -------- --------- -------- ---------- INTEREST EXPENSE: NOW accounts $ 251 $ (39) $ 212 $ 97 $ 119 $ 216 Money market accounts 177 43 220 (68) 62 (6) Savings deposits 538 75 613 (84) (28) (112) Time, $100,000 and over 677 69 746 (203) 135 (68) Other time 3,632 (443) 3,189 894 1,242 2,136 Federal funds purchased and repurchase agreements 348 (54) 294 301 24 325 Advances from FHLB - 213 213 - - - Notes payable 340 (73) 267 (34) 86 52 -------- -------- -------- --------- -------- ---------- Total interest expense $ 5,963 $ (209) $ 5,754 $ 903 $ 1,640 $ 2,543 -------- -------- -------- --------- -------- ---------- Net interest margin $ 4,456 $ (443) $ 4,013 $ 928 $ (720) $ 208 -------- -------- -------- --------- -------- ---------- -------- -------- -------- --------- -------- ----------
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. 4 The 1996 provision for loan losses was $1,178,000 compared with $684,000 in 1995 and $660,000 in 1994. Net charge-offs in 1996 were approximately $1,416,000. Approximately $690,000 of the net charge-offs related to a single borrower for which management had previously identified as a problem credit. The provision for loan losses of $1,178,000 was made to bring the allowance for loan loss to the level management deemed adequate as of December 31, 1996. The increase in the provision for loan losses during 1996 versus 1995 was related to the increase in the ratio of net charge-offs to average loans, which was primarily caused by the credit described above, coupled by the Company's decision to make 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. 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. NONINTEREST INCOME The following table shows the Company's noninterest income: NONINTEREST INCOME (DOLLARS IN THOUSANDS) Year Ended December 31, 1996 1995 1994 -------------- --------------- -------------- Service charges $ 1,286 $ 952 $ 895 Merchant fee income 524 418 357 Trust income 393 330 301 Gain on sale of loans 262 288 130 Securities gains, net 20 98 118 Other noninterest income 737 484 482 -------------- --------------- --------------- Total noninterest income $ 3,222 $ 2,570 $ 2,283 -------------- --------------- --------------- -------------- --------------- --------------- Noninterest income is generated primarily from fees associated with noninterest and interest-bearing accounts. Noninterest income for 1996 was $3,222,000, an increase of $652,000 or 25.4% compared with noninterest income of $2,570,000 for 1995, an increase of $287,000 or 12.6% compared with noninterest income of $2,283,000 for 1994. Internal growth as well as the purchase of additional bank subsidiaries 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 $1,286,000 for the year ended December 31, 1996, from $952,000 and $895,000 for the years ended December 31, 1995, and 1994, 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 (62% of total merchant fees), interchange fees (19% of total merchant fees) and annual fees (6% 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 the Banks, 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 December 31, 1996, were approximately $106,801,000. Trust income, which is predominately comprised of fees assessed based on the market value of managed client portfolios, increased by $63,000 during 1996 and increased by $29,000 during 1995. 5 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. NONINTEREST EXPENSE The following table shows the Company's noninterest expense: NONINTEREST EXPENSE (DOLLARS IN THOUSANDS) Year Ended December 31, ------------------------------------------ 1996 1995 1994 ------------ ------------ ------------ Salaries and employee benefits $ 6,469 $ 4,451 $ 3,868 Occupancy expense, net 899 665 574 Furniture and equipment expenses 977 584 560 FDIC deposit assessment 8 271 526 Amortization of intangible assets 392 120 162 Other noninterest expense 3,503 2,680 2,557 ------------ ------------ ------------ Total noninterest expense $ 12,248 $ 8,771 $ 8,247 ------------ ------------ ------------ ------------ ------------ ------------ Noninterest expense was $12,248,000 in 1996, an increase of $3,477,000 or 39.6% compared with noninterest expense of $8,771,000 for 1995, an increase of $524,000 or 6.4% compared with noninterest expense of $8,247,000 for 1994. The $3,477,000 increase in noninterest expense during 1996 was attributed primarily to an increase of $2,018,000 in salaries and employee benefits as a result of acquiring additional subsidiaries, $272,000 increase in amortization expense due to intangibles in connection with the Acquisitions and $823,000 in other noninterest expense. The increase in other nonoperating expenses was attributed to approximately $467,000 in noninterest expense from the Prairie acquisition and approximately $249,000 from the acquisitions of Country and LaSalle County Collections, Inc. ("LaSalle"), a small collection agency. No individual significant balances were included in those totals. 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 Banks are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC"), and as FDIC-insured institutions, the 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. Changes in the deposit insurance assessment rate have significantly reduced the cost of deposit insurance for the Banks. INCOME TAXES The Company recorded income tax expense of $969,000, $881,000 and $703,000 for the years ended December 31, 1996, 1995 and 1994, respectively, and effective tax rates were 25.5%, 27.2% and 21.3%, respectively, for such 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. 6 INTEREST RATE SENSITIVITY MANAGEMENT The operating income and net income of the Banks depend, to a substantial extent, on "rate differentials," I.E., the differences between the income the 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 Banks, including general economic conditions and the policies of various governmental and regulatory authorities. 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 December 31, 1996: INTEREST RATE-SENSITIVE ASSETS AND LIABILITIES (DOLLARS IN THOUSANDS)
December 31, 1996 ------------------------------------------------------------------------------------------------------ 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 Investment securities $ 73,774 $ 8,358 $ 28,963 $ 58,313 $ 54,147 $ 223,555 Loans 96,020 31,700 41,009 124,574 53,193 346,496 ---------- ---------- ---------- ---------- ----------- ---------- Total interest-earning assets $ 169,794 $ 40,058 $ 69,972 $ 182,887 $ 107,340 $ 570,051 ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- INTEREST-BEARING LIABILITIES NOW accounts $ 53,721 $ - $ - $ - $ - $ 53,721 Money market accounts 33,720 - - - - 33,720 Savings 72,173 - - - 72,173 Time, $100,000 and over 33,810 17,047 8,694 14,934 - 74,485 Other time 57,354 43,873 55,843 82,649 4,062 243,781 ---------- ---------- ---------- ---------- ----------- ---------- Total interest-bearing deposits $ 250,778 $ 60,920 $ 64,537 $ 97,583 $ 4,062 $ 477,880 Federal funds and repurchase agreements 13,528 3,267 1,850 2,923 249 21,817 Advances from FHLB - 1,000 566 6,155 2,300 10,021 Notes payable 13,180 - - - - 13,180 ---------- ---------- ---------- ---------- ----------- ---------- Total interest-bearing liabilities $ 277,486 $ 65,187 $ 66,953 $ 106,661 $ 6,611 $ 522,898 ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- Period interest sensitivity gap $ (107,692) $ (25,129) $ 3,019 $ 76,226 $ 100,729 $ 47,153 Cumulative interest sensitivity $ (107,692) $ (132,821) $ (129,802) $ (53,576) $ 47,153 $ 47,153 Cumulative gap as a percent of total assets (16.77)% (20.69)% (20.22)% (8.34)% 7.34% 7.34% Cumulative interest-sensitive assets as a percent of cumulative interest- sensitive liabilities 61.19% 61.24% 68.31% 89.62% 109.02% 109.02%
7 The cumulative rate-sensitive gap position at one year was a liability-sensitive position of $129,802,000 or negative 20.2% which indicates that the Company was in a liability interest rate-sensitive position at December 31, 1996. Accordingly, the Company's earnings could experience a significant negative impact from increases in interest rates. The Company prefers to maintain a balanced mix of rate-sensitive assets and liabilities, making each side of the balance sheet approximately equally flexible in reacting to changes in market interest rates. This targeted balance was altered during 1996, principally as a result of the acquisitions. Management intends to return to this close matching position by restructuring the mix of the assets and liabilities, primarily associated with the acquisition growth. It is important to note that in the total for rate-sensitive liabilities are $125,894 in savings and NOW accounts. While these accounts are immediately repriceable, the rates paid on these deposit accounts will not change in direct correlation with changes in the general level of short-term 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. 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 December 31, 1996, the Banks held approximately $49,454,000 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. 8 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 increased loan demand, the addition of new loan products and to the Acquisitions. The following table describes the composition of loans by major categories outstanding. LOAN PORTFOLIO (DOLLARS IN THOUSANDS)
Aggregate Principal Amount ---------------------------------------------------------------------- December 31, ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Commercial $ 60,152 $ 38,298 $ 36,802 $ 37,129 $ 36,087 Agricultural Real estate: Commercial mortgages 63,254 44,393 36,727 32,744 30,783 Construction 13,549 7,437 5,047 3,018 3,150 Agricultural 29,185 10,229 12,169 12,606 11,689 1-4 family mortgages 91,697 36,637 33,623 27,505 28,076 Installment 42,320 24,072 19,765 18,262 20,906 Other 3,354 2,681 2,641 2,511 2,043 ------------ ------------ ------------ ------------ ------------ 347,011 180,826 161,165 148,477 146,855 Unearned discount (515) (7) (31) (106) (286) ------------ ------------ ------------ ------------ ------------ Total loans 346,496 180,819 161,134 148,371 146,569 Allowance for loan losses (3,068) (2,014) (1,704) (1,787) (1,586) ------------ ------------ ------------ ------------ ------------ Loans, net $ 343,428 $ 178,805 $ 159,430 $ 146,584 $ 144,983 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Percentage of Total Loan Portfolio ------------------------------------------------------------------------ Commercial 17.33% 21.18% 22.84% 25.01% 24.57% Agricultural 12.54% 9.45% 8.93% 9.90% 9.62% Real estate: Commercial mortgages 18.23% 24.55% 22.79% 22.05% 20.96% Construction 3.90% 4.11% 3.13% 2.03% 2.14% Agricultural 8.41% 5.66% 7.55% 8.49% 7.96% 1-4 family mortgages 26.42% 20.26% 20.86% 18.53% 19.12% Installment 12.20% 13.31% 12.26% 12.30% 14.24% Other loans 0.97% 1.48% 1.64% 1.69% 1.39% ------------ ------------ ------------ ------------ ------------ Gross Loans 100.00% 100.00% 100.00% 100.00% 100.00% ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
As of December 31, 1996 and 1995, commitments of the Banks under standby letters of credit and unused lines of credit totaled approximately $59,854,000 and $43,797,000, respectively. 9 Stated loan maturities (including variable rate loans reset to market interest rates) of the total loan portfolio, net of unearned income, at December 31, 1996 were as follows: STATED LOAN MATURITIES(1) (DOLLARS IN THOUSANDS)
Within One One Year to After Five Year Five Years Years Total -------------- --------------- -------------- -------------- Commercial $ 23,155 $ 19,974 $ 20,007 $ 63,136 Agricultural 23,722 6,363 2,708 32,793 Real estate 40,164 69,705 93,863 203,732 Installment 18,770 25,359 2,706 46,835 -------------- --------------- -------------- -------------- Total $ 105,811 $ 121,401 $ 119,284 $ 346,496 -------------- --------------- -------------- -------------- -------------- --------------- -------------- --------------
__________________ (1) Maturities based upon contractual maturity dates Rate sensitivities of the total loan portfolio, net of unearned income, at December 31, 1996 were as follows: LOAN REPRICING (DOLLARS IN THOUSANDS)
Within One One Year to After Five Year Five Years Years Total -------------- --------------- -------------- ---------------- Fixed rate $ 79,239 $ 89,200 $ 29,641 $ 198,080 Variable rate 101,948 42,419 2,275 146,642 Nonaccrual 1,070 690 14 1,774 -------------- --------------- -------------- -------------- Total $ 182,257 $ 132,309 $ 31,930 $ 346,496 -------------- --------------- -------------- -------------- -------------- --------------- -------------- --------------
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 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 Company 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. 10 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. NONPERFORMING ASSETS (DOLLARS IN THOUSANDS)
December 31, ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Nonaccrual loans $ 1,774 $ 1,127 $ 891 $ 1,671 $ 2,148 Loans 90 days past due and still accruing interest 486 1,088 560 1,378 1,258 ---------- ----------- ----------- ------------ ---------- Total nonperforming loans 2,260 2,215 1,451 3,049 3,406 Other real estate owned 363 441 672 1,096 664 Other nonperforming assets (1) 192 240 240 240 - ---------- ----------- ----------- ------------ ---------- Total nonperforming assets $ 2,815 $ 2,896 $ 2,363 $ 4,385 $ 4,070 ---------- ----------- ----------- ------------ ---------- ---------- ----------- ----------- ------------ ---------- Nonperforming loans to total loans 0.65% 1.22% 0.90% 2.06% 2.32% Nonperforming assets to total loans 0.81% 1.60% 1.47% 2.96% 2.77% Nonperforming assets to total assets 0.44% 0.95% 0.87% 1.64% 1.64%
____________________________ (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 Banks on a case-by-case basis. The 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. 11 The following table sets forth a summary of other real estate owned and other collateral acquired at December 31, 1996: OTHER REAL ESTATE OWNED Number of Net Book Description Parcels Carrying Value - ----------- --------- -------------- Developed property 6 $ 336 Vacant land or unsold lots 1 27 --------- -------------- Total real estate 7 $ 363 --------- -------------- --------- -------------- 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) are reviewed and classified as to potential loss exposure. Specific allowances are then established for those loans, 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. Commitments to extend credit and standby letters of credit are reviewed to determine if credit risk exists. The determination by the Company of the appropriate level of its allowance for loan losses was $3,068,000 at December 31, 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. 12
ALLOWANCE FOR LOAN LOSSES (DOLLARS IN THOUSANDS) December 31, ------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ------------ Beginning balance $ 2,014 $ 1,704 $ 1,787 $ 1,586 $ 1,384 ------------ ------------ ------------ ------------ ------------ Charge-offs: Commercial 967 114 413 577 381 Real estate mortgages 181 173 371 445 613 Installment and other loans 366 250 240 257 307 ------------ ------------ ------------ ------------ ------------ Total charge-offs 1,514 537 1,024 1,279 1,301 ------------ ------------ ------------ ------------ ------------ Recoveries: Commercial 41 70 142 144 95 Real estate mortgages - 56 83 2 39 Installment and other loans 57 37 56 66 72 ------------ ------------ ------------ ------------ ------------ Total recoveries 98 163 281 212 206 ------------ ------------ ------------ ------------ ------------ Net charge-offs 1,416 374 743 1,067 1,095 ------------ ------------ ------------ ------------ ------------ Provision for loan losses 1,178 684 660 1,268 1,297 ------------ ------------ ------------ ------------ ------------ Allowance associated with the acquisitions 1,292 - - - - ------------ ------------ ------------ ------------ ------------ Ending balance $3,068 $2,014 $1,704 $1,787 $1,586 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Period end total loans, net of unearned interest $346,496 $180,819 $161,134 $148,371 $146,569 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Average loans $243,978 $173,004 $152,186 $150,455 $140,945 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Ratio of net charge-offs to average loans 0.58% 0.22% 0.49% 0.71% 0.78% Ratio of provision for loan losses to average loans 0.48% 0.40% 0.43% 0.84% 0.92% Ratio of allowance for loan losses to ending total loans 0.89% 1.11% 1.06% 1.20% 1.08% Ratio of allowance for loan losses to total nonperforming loans 135.75% 90.93% 117.44% 58.61% 46.56% Ratio of allowance for loan losses to total nonperforming assets (1) 108.99% 75.83% 80.26% 43.11% 38.97% Ratio of allowance at end of period to average loans 1.26% 1.16% 1.12% 1.19% 1.13%
- ------------------------------ (1) Excludes a single municipal security in default status in the amount of $192,000 in 1996, and $240,000 in 1995, 1994 and 1993. 13 The following table sets forth an allocation of the allowance for loan losses among the various loan categories. 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.
ALLOWANCE OF THE ALLOWANCE FOR LOAN LOSSES (DOLLARS IN THOUSANDS) December 31, ----------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------------- ------------------- ------------------- ------------------- ------------------- Loan Loan Loan Loan Loan Category Category Category Category Category to Gross to Gross to Gross to Gross to Gross Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Commercial $ 776 29.87% $ 800 29.43% $ 327 31.89% $ 336 35.03% $ 320 35.22% Real estate 758 56.97% 388 55.59% 325 53.74% 288 50.97% 239 49.43% Installment and other loans 517 13.16% 235 13.36% 194 12.63% 173 12.24% 191 13.83% Unallocated 1,017 - 591 1.62% 858 1.74% 990 1.76% 836 1.53% -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total $ 3,068 100.00% $ 2,014 100.00% $ 1,704 100.00% $ 1,787 100.00% $ 1,586 100.01% -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
INVESTMENT ACTIVITIES The Company's investment portfolio, which represented 39.2% of the Company's earning asset base as of December 31, 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 $35,017,000 at December 31, 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 a net unrealized gain on securities held-to-maturity of $305,000 at December 31, 1996, compared with a net 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 $188,538,000 at December 31, 1996, compared with $63,891,000 at December 31, 1995, and $56,593,000 at December 31, 1994. The consolidated investment portfolio consists of several callable agency debentures, adjustable rate mortgage pass-throughs and collateralized mortgage obligations with implied calls. The exposure of capital to market valuation adjustments existing at the time of the Prairie acquisition prior periods has been reduced by the reduction in relative size of the portfolio, the shortening of the average life of the securities by the passage of time, and the sale of floating rate securities with lower lifetime caps or reset limits. In addition, some of the callable securities that have been purchased have shorter final maturities which also reduces the sensitivity of the Economic Value of Equity (EVE) to changes in the level of interest rates. 14 The following tables describe the composition of investments by major category and maturity.
INVESTMENT PORTFOLIO (DOLLARS IN THOUSANDS) December 31, ------------------------------------------------------------------------------------- 1996 1995 1994 ------------------------- ------------------------- -------------------------- % of % of % of HELD TO MATURITY Amount Portfolio Amount Portfolio Amount Portfolio --------- --------- --------- --------- --------- --------- U.S. Treasury $ - - $ 117 0.13% $ - - U.S. government agencies and corporations - - 2,000 2.15% 3,000 3.52% States and political subdivisions 35,017 15.66% 26,660 28.69% 25,402 29.79 Collateralized mortgage obligations - - 9 0.01% 25 0.03% Corporate bonds - - 240 0.26% 240 0.28% --------- --------- --------- --------- --------- --------- Total $ 35,017 15.66% $ 29,026 31.24% $ 28,667 33.62% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- December 31, ------------------------------------------------------------------------------------ 1996 1995 1994 ------------------------ ------------------------ ------------------------ % of % of % of AVAILABLE FOR SALE Amount Portfolio Amount Portfolio Amount Portfolio --------- --------- --------- --------- --------- --------- U.S. Treasury $ 26,518 11.86% $ 18,279 19.67% $ 24,416 28.64% U.S. government agencies and corporations 53,554 23.96% 36,987 39.81% 19,672 23.07% U.S. government agency mortgage backed securities 49,454 22.12% 6,084 6.55% 8,232 9.66% States and political subdivisions - - 913 0.98% 885 1.04% Collateralized mortgage obligations 58,820 26.31% 106 0.11% 165 0.19% Corporate bonds 192 0.09% 1,522 1.64% 3,223 3.78% --------- --------- --------- --------- --------- --------- Total $ 188,538 84.34% $ 63,891 68.76% $ 56,593 66.38% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
15 The following tables set forth the maturities and yields of the investment portfolio as of December 31, 1996.
MATURITY REPRICING SCHEDULE (DOLLARS IN THOUSANDS) Maturing or Repricing --------------------------------------------------------------------------------------------------------- After 1 But After 5 But Within 1 Year Within 5 Years Within 10 Years After 10 Years Total --------------------- --------------------- --------------------- --------------------- --------- Amount Yield Amount Yield Amount Yield Amount Yield Amount --------- ------- --------- ------- --------- ------- --------- ------- --------- HELD TO MATURITY States and political sub- divisions (1) $ 3,113 7.85% $ 16,975 7.52% $ 10,534 8.17% $ 4,395 8.50% $ 35,017 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Maturing or Repricing -------------------------------------------------------------------------------------------------------- After 1 But After 5 But Within 1 Year Within 5 Years Within 10 Years After 10 Years Total ---------------------- --------------------- --------------------- ---------------------- --------- Amount Yield Amount Yield Amount Yield Amount Yield Amount --------- --------- --------- -------- --------- ------- --------- ------- --------- AVAILABLE FOR SALE U.S. Treasury $ 7,218 5.33% $ 19,300 5.65% $ - - $ - - $ 26,518 U.S. govern- ment agen- cies and corporations 1,000 6.22% 18,124 5.78% 34,430 6.61% - - 53,554 U.S. govern- ment agency mortgage backed securities 41,630 6.29% 3,606 5.17% 318 5.27% 3,900 7.64% 49,454 Collateralized mortgage obligations 58,134 5.94% 275 5.64% 319 6.14% 92 5.59% 58,820 Corporate bonds - - - - 192 - - - 192 --------- --------- --------- --------- --------- Total $107,982 $ 41,305 $ 35,259 $ 3,992 $188,538 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------------ (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 $367,059,000 for 1996, representing an increase of $121,988,000 or 49.8% 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 5.09% compared with the average balance of total deposits outstanding for 1994 of $233,211,000. The increases in deposits were primarily due to the Acquisitions. 16 The following table sets forth certain information regarding the Banks' average deposits.
AVERAGE DEPOSITS (DOLLARS IN THOUSANDS) For the Years Ended December 31, ---------------------------------------------------------------------------------------------------------- 1996 1995 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 $ 41,395 11.28% - $ 29,950 12.22% - $ 29,622 12.70% - Savings accounts 41,664 11.35% 2.94% 23,146 9.45% 2.64% 26,288 11.27% 2.75% Interest-bearing demand deposits 66,088 18.00% 2.84% 50,788 20.72% 2.81% 49,295 21.14% 2.47% Time, less than $100,000 194,957 53.12% 5.51% 129,147 52.70% 5.84% 112,094 48.07% 4.82% Time, $100,000 or more 22,955 6.25% 6.24% 12,040 4.91% 5.71% 15,912 6.82% 4.74% --------- ---------- --------- ---------- ---------- --------- ---------- ---------- --------- Total deposits $ 367,059 100.00% 4.16% $ 245,071 100.00% 4.19% $ 233,211 100.00% 3.47% --------- ---------- --------- ---------- ---------- --------- ---------- ---------- --------- --------- ---------- --------- ---------- ---------- --------- ---------- ---------- ---------
17 As of December 31, 1996, non-brokered time deposits over $100,000 represented 13.7% of total deposits, compared with 9.0% of total deposits as of December 31, 1995, and 9.4% as of December 31, 1994. The 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 December 31, 1996. TIME DEPOSITS OF $100,000 OR MORE (DOLLARS IN THOUSANDS) MATURITY RANGE Three months or less $ 33,810 Over three months through six months 17,047 Over six months through twelve months 8,694 Over twelve months 14,934 ------------- Total $ 74,485 ------------- ------------- RETURN ON EQUITY AND ASSETS The following table presents various ratios for the Company. RETURN ON EQUITY AND ASSETS For the Years Ended December 31, ------------------------------- 1996 1995 1994 ---------- ------- ---------- Return on average assets 0.66% 0.83% 0.98% Return on average equity 9.21% 10.83% 13.29% Average equity to average assets 7.14% 7.67% 7.38% Dividend payout ratio for common stock 11.58% 12.06% 9.57% The decrease in the return on average assets and return on average equity ratios are primarily related to reduced profitability caused by the contraction in the net interest margin associated with the Acquisitions. Management continues to pursue plans to improve the net interest margin by increasing the earning asset mix toward higher yielding loans at the newly acquired banks. LIQUIDITY The Company manages its liquidity position with the objective of maintaining sufficient funds to respond to the needs of depositors and borrowers and to take advantage of earnings enhancement opportunities. In addition to the normal inflow of funds from core-deposit growth, together with repayments and maturities of loans and investments, the Company utilizes other short-term funding sources such as securities sold under agreements to repurchase, overnight funds purchased from correspondent banks and the acceptance of short-term deposits from public entities. The Company monitors and manages its liquidity position on several bases, which vary depending upon the time period. As the time period is expanded, other data is factored in, including estimated loan funding requirements, estimated loan payoffs, investment portfolio maturities or calls, and anticipated depository buildups or runoffs. 18 The Company classifies the majority of its investment securities as available-for-sale, thereby maintaining significant liquidity. The Company's liquidity position is further enhanced by structuring the maturity of its loan portfolio interest payments as monthly, and also by the significant representation of retail credit and residential mortgage loans in the Company's loan portfolio, resulting in a steady stream of loan repayments. In managing its investment portfolio, the Company provides for staggered maturities so that cash flows are provided as such investments mature. The Company's cash flows are composed of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash provided by operating activities was $5.5 million for 1996, $3.7 million for the year ended December 31, 1995 and $4.9 million for the year ended December 31, 1994. Net cash used in investing activities, consisting primarily of loan and investment funding, was $9.6 million for 1996, and $27.3 million and $9.7 million for the years ended December 31, 1995 and 1994, respectively. Net cash provided by financing activities for 1996 was $17.2 million and was directly related to the proceeds from issuance of common stock. Net cash provided by financing activities, consisting primarily of growth in deposits and securities sold under agreements to repurchase, was $26.8 million and $4.4 million for the periods ended December 31, 1995 and 1994, respectively. The 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 December 31, 1996, 14.2% of the 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 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 Banks' liquidity could be adversely affected. Currently, the maturities of the Banks' large time deposits are spread throughout the year, with 45.4% maturing in the first quarter of 1997, 22.9% maturing in the second quarter of 1997, 11.7% maturing in the third and fourth quarter of 1997, and the remaining 20% maturing thereafter. The Banks monitor those maturities in an effort to minimize any adverse effect on liquidity. The Company's short term bank borrowings at December 31, 1996 consisted of notes payable in the principal amount of $13,180,000 payable to the Company's principal correspondent bank. The Company incurred this debt in the Acquisitions and in the acquisition of Ottawa National Bank in 1991. The notes are renewable annually, require quarterly interest payments and are collateralized by the Company's stock in the Banks. The Company's principal source of funds for repayment of the indebtedness is dividends from the Banks. At December 31, 1996 approximately $5,697,000 was available for dividends without regulatory approval. CAPITAL RESOURCES The 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 Banks were 9.70% and 10.89%, respectively, at December 31, 1996, and 11.34% and 12.35%, respectively, at December 31, 1995. The Banks are currently, and expect to continue to be, in compliance with these 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. 19 The following table sets forth an analysis of the Company's capital ratios: RISK-BASED CAPITAL RATIOS (DOLLARS IN THOUSANDS)
December 31, Minimum Well- ----------------------------------------- Capital Capitalized 1996 1995 1994 Ratios Ratios ----------- ----------- ----------- ---------- ----------- Tier 1 risk-based capital $ 36,242 $ 22,530 $ 20,322 Tier 2 risk-based capital 4,425 2,014 1,704 Total capital 40,667 24,544 22,026 Risk-weighted assets 374,028 198,731 179,307 Capital ratios: Tier 1 risk-based capital 9.69% 11.34% 11.33% 4.00% 6.00% Tier 2 risk-based capital 10.87% 12.35% 12.28% 8.00% 10.00% Leverage ratio 7.76% 7.95% 7.68% 3.00% 5.00%
ACCOUNTING MATTERS In June 1996, the Financial Accounting Standards Board issued Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" (SFAS No. 125). SFAS No. 125 distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. A transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interest in the transferred assets is received in exchange. SFAS No. 125 also establishes standards on the initial recognition and measurement of servicing assets and other retained interests and servicing liabilities, and their subsequent measurement. SFAS No. 125 requires that debtors reclassify financial assets pledged as collateral and that secured parties recognize those assets and their obligation to return them in certain circumstances in which the secured party has taken control of those assets. In addition, SFAS No. 125 requires that a liability be derecognized only if the debtor is relieved of its obligation through payment to the creditor or by being legally released from being the primary obligor under the liability either judicially or by the creditor. SFAS No. 125 is effective for transactions occurring after December 31, 1996, except for transactions relating to secured borrowings and collateral for which the effective date is December 31, 1997. The Company believes the adoption of SFAS No. 125 will not have a material impact on its consolidated financial statements. IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES The financial statements and related financial data concerning the Company 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. 20 UNIONBANCORP, INC. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31, 1996 (2) 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- (Dollars in Thousands, Except Per Share Data) STATEMENT OF INCOME DATA Interest income $ 31,037 $ 21,368 $ 18,627 $ 18,604 $ 20,127 Interest expense 17,003 11,249 8,706 8,798 10,482 ----------- ----------- ----------- ----------- ----------- Net interest income 14,034 10,119 9,921 9,806 9,645 Provision for loan losses 1,178 684 660 1,268 1,297 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 12,856 9,435 9,261 8,538 8,348 Noninterest income 3,222 2,570 2,283 2,512 1,893 Noninterest expense 12,248 8,771 8,247 7,841 7,335 ----------- ----------- ----------- ----------- ----------- Net income before income taxes and minority interest 3,830 3,234 3,297 3,209 2,906 Minority interest 27 - - - - Provision for income taxes 969 881 703 747 595 ----------- ----------- ----------- ----------- ----------- Net income $ 2,834 $ 2,353 $ 2,594 $ 2,462 $ 2,311 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income on common stock $ 2,729 $ 2,353 $ 2,594 $ 2,462 $ 2,311 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- PER SHARE DATA (1) Earnings per common shares $ 0.98 $ 1.09 $ 1.22 $ 1.15 $ 1.08 Cash dividends on common stock 0.14 0.13 0.12 0.09 0.07 Dividend payout ratio for common stock 11.58% 12.06% 9.57% 7.78% 6.13% Book value per common share $ 11.20 $ 11.01 $ 9.21 $ 8.92 $ 7.83 Weighted average common shares outstanding 2,773,769 2,148,897 2,132,712 2,132,760 2,132,760 Period end common shares outstanding 4,114,801 2,131,737 2,131,737 2,132,760 2,132,760 BALANCE SHEET DATA Investments and Federal funds sold $ 233,822 $ 95,182 $ 86,460 $ 95,098 $ 83,057 Total loans 346,496 180,819 161,134 148,371 146,569 Allowance for loan losses 3,068 2,014 1,704 1,787 1,586 Total assets 642,024 303,533 272,038 266,666 249,121 Total deposits 543,744 261,727 232,334 237,455 222,513 Stockholders' equity 46,583 23,475 19,629 19,026 16,702 EARNINGS PERFORMANCE DATA Return on average total assets 0.66% 0.83% 0.98% 0.97% 0.95% Return on average stockholders' equity 9.21 10.83 13.29 13.88 15.00 Net interest margin ratio 3.74 4.15 4.38 4.46 4.52 Efficiency ratio (3) 66.70 68.35 66.17 65.81 64.96 ASSET QUALITY RATIOS Nonperforming assets to total assets 0.44% 0.95% 0.87% 1.64% 1.64% Nonperforming loans to total loans 0.65 1.22 0.90 2.06 2.32 Net loan charge-offs to average loans 0.58 0.22 0.49 0.71 0.78 Allowance for loan losses to total loans 0.89 1.11 1.06 1.20 1.08 Allowance for loan losses to nonperforming loans 135.75 90.93 117.44 58.61 46.56 CAPITAL RATIOS Average equity to average assets 7.14% 7.67% 7.38% 6.98% 6.34% Total capital to risk adjusted assets 10.87 12.35 12.28 10.97 10.23 Tier 1 leverage ratio 7.76 7.95 7.68 7.00 6.33 - --------------------------------------------------
(1) Restated to reflect the three-for-one stock split which took effect May 20, 1996. (2) Includes results of operations of acquisitions from date of acquisition. (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. EX-21.1 3 EXHIBIT 21.1 UNIONBANCORP, INC. LIST OF SUBSIDIARIES 1. UnionBank, an Illinois state bank with its main office located in Streator, Illinois 2. UnionBank/Sandwich, an Illinois state bank with its main office located in Sandwich, Illinois 3. Prairie Acquisition Corporation, an Illinois corporation, and its subsidiaries: a. Farmers State Bank of Ferris, an Illinois state bank with its main office located in Carthage, Illinois b. Hanover State Bank, an Illinois state bank with its main office located in Hanover, Illinois c. Bank of Ladd, an Illinois state bank with its main office located in Ladd, Illinois d. First National Bank of Manlius, a national bank with its main office located in Manlius, Illinois e. Tampico National Bank, a national bank with its main office located in Tampico, Illinois f. Tiskilwa State Bank, an Illinois state bank with its main office located in Tiskilwa, Illinois 5. Country Bancshares, Inc., an Illinois corporation and its subsidiary: Omni Bank, an Illinois state bank with its main office in Macomb, Illinois 6. UnionData Corp, Inc., a Delaware corporation 7. Union Corporation, an Illinois corporation 8. LaSalle County Collections, Inc., an Illinois corporation EX-23.2 4 EX. 23.2 CONSENT OF IND. AUD. MCGLADREY & PULLEN [LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement pertaining to the 1993 Stock Option Plan of UnionBancorp, Inc., of our report dated February 5, 1997, with respect to the consolidated financial statements of UnionBancorp, Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ McGladrey & Pullen, LLP - --------------------------- Champaign, Illinois March 24, 1997 EX-27 5 EXHIBIT 27
9 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 29,236 0 10,267 0 188,538 29,026 29,186 346,496 3,068 642,024 543,744 45,018 5,027 0 857 500 4,386 41,697 642,024 22,138 8,613 286 31,037 15,239 17,003 14,034 1,178 20 12,248 3,803 3,803 0 0 2,834 .98 .98 8.02 1,774 486 0 0 2,014 1,514 98 3,068 3,068 0 0 Fair Value Less Unearned Interest Includes Repos & FHLB & Other Short term Borrowings
EX-99.1 6 EXHIBIT 99.1 [LOGO] UNIONBANCORP, INC. March 18, 1997 Dear Fellow Stockholder: You are cordially invited to attend UnionBancorp, Inc.'s Annual Meeting of Stockholders at the Pitstick Pavilion, 3307 North Route 23, Ottawa, Illinois, on Friday, April 25, 1997, at 10:00 a.m. At the meeting, I will report to you on the progress of our Company and respond to your comments or questions. Moreover, several of our management people will be available to talk individually with you about our record of achievement and plans for the future. Your Board of Directors has nominated five persons to serve as Class II directors on the Board of Directors. Their names appear in the enclosed proxy material. All five of the nominees are incumbent directors. We recommend that you vote your shares for the nominees. We encourage you to attend the meeting in person. Because it is important that your shares be represented at the meeting, please sign and return the enclosed proxy, whether or not you plan to attend the meeting. We look forward with pleasure to seeing and visiting with you at the meeting. With best personal wishes, R. Scott Grigsby Chairman of the Board and President [LOGO] UNIONBANCORP, INC. NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 25, 1997 ------------------------------------------------------------ TO HOLDERS OF COMMON STOCK: The Annual Meeting of Stockholders of UnionBancorp, Inc., a Delaware corporation (the "Company"), will be held at the Pitstick Pavilion, 3307 North Route 23, Ottawa, Illinois, on Friday, April 25, 1997, at 10:00 a.m., local time, for the purpose of considering and voting upon the following matters: 1. to elect five (5) Class II directors. 2. to transact such other business as may properly come before the meeting or any adjournments or postponements thereof. The Board of Directors is not aware of any other business to come before the meeting. Only those stockholders of record as of the close of business on March 11, 1997, shall be entitled to notice of the meeting and to vote at the meeting and any adjournments or postponements thereof. By Order of the Board of Directors R. Scott Grigsby Chairman of the Board and President Ottawa, Illinois March 18, 1997 PLEASE SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. IT IS HOPED THAT YOU WILL BE ABLE TO ATTEND THE MEETING, AND IF YOU DO YOU MAY VOTE YOUR STOCK IN PERSON IF YOU WISH. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE. UNIONBANCORP, INC. PROXY STATEMENT This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of UnionBancorp, Inc. (the "Company") of proxies to be voted at the Annual Meeting of Stockholders to be held at the Pitstick Pavilion, 3307 North Route 23, Ottawa, Illinois, on Friday, April 25, 1997, at 10:00 a.m., local time, or at any adjournments or postponements thereof. The Company, a Delaware corporation, is a multi-bank holding company which owns all of the issued and outstanding capital stock of UnionBank, an Illinois bank located in Streator, Illinois, and UnionBank/Sandwich, an Illinois bank located in Sandwich, Illinois. During 1996, the Company acquired all of the issued and outstanding capital stock of Prairie Bancorp, Inc. ("Prairie"), a multi-bank holding company with six bank subsidiaries located in the Illinois communities of Carthage, Hanover, Ladd, Manlius, Tampico and Tiskilwa, and also acquired Country Bancshares, Inc. ("Country"), a one-bank holding company having an Illinois bank subsidiary located in Macomb, Illinois (UnionBank, UnionBank/Sandwich and the bank subsidiaries of Prairie and Country are sometimes collectively referred to as the "Banks"). The Company also has three non-bank subsidiaries, UnionData Corp. ("UnionData"), which provides data processing services, Union Corporation ("Union Corporation"), which primarily serves as an owner and lessor of banking offices to certain of the Banks, and LaSalle County Collections, Inc. ("LaSalle"), a debt collection agency located in Ottawa, Illinois. The Banks and the three non-bank subsidiaries are collectively referred to as the "Subsidiaries." The Proxy Statement and the accompanying Notice of Meeting and proxy are first being mailed to holders of shares of common stock, par value $1.00 per share, (the "Common Stock"), on or about March 18, 1997. The 1996 Annual Report of the Company, including financial statements, is enclosed. VOTING RIGHTS AND PROXY INFORMATION The Board of Directors has fixed the close of business on March 11, 1997, as the record date for the determination of stockholders entitled to notice of, and to vote at, the annual meeting. The transfer books of the Company will not be closed. The Board of Directors hopes that all stockholders can be represented at the annual meeting. Whether or not you expect to be present, please sign and mail your proxy in the enclosed self-addressed, stamped envelope to UnionBancorp, Inc., 122 West Madison Street, Ottawa, Illinois 61350, Attention: Ms. Debra M. Tombaugh, Vice President/Director of Investor Relations. Stockholders giving proxies retain the right to revoke them at any time before they are voted by written notice of revocation to the Secretary of the Company, and stockholders present at the meeting may revoke their proxy and vote in person. On March 11, 1997, the Company had 4,116,001 issued and outstanding shares of Common Stock. For the election of directors and for all other matters to be voted upon at the annual meeting, each share of Common Stock is entitled to one vote. A majority of the outstanding shares of the Common Stock must be present in person or represented by proxy to constitute a quorum for purposes of the annual meeting. Abstentions and broker non-votes will be counted for purposes of determining a quorum. Directors will be elected by a plurality of the votes present in person or represented by proxy at the meeting and entitled to vote. In all other matters, the affirmative vote of the majority of shares of Common Stock present in person or represented by proxy at the annual meeting and entitled to vote on the subject matter shall be required to constitute stockholder approval. Abstentions will be treated as votes against a proposal and broker non-votes will have no effect on the vote. ELECTION OF DIRECTORS The Company has a staggered Board of Directors divided into three classes. One class is elected annually to serve for three years. Stockholders will be entitled at the annual meeting to be held on April 25, 1997, to elect five Class II directors for terms of three years or until their successors are elected and qualified. Each of the nominees for election as Class II directors are incumbent directors. The proxy provides instructions for voting for all director nominees or for withholding authority to vote for one or more director nominees. Unless instructed to the contrary, the persons acting under the proxy solicited hereby will vote for the nominees listed below. In the event, however, that any nominee shall be unable to serve, which is not now contemplated, the proxy holders reserve the right to vote at the annual meeting for a substitute nominee. INFORMATION ABOUT DIRECTORS AND NOMINEES Set forth below is information concerning the nominees for election and for the other directors whose terms of office will continue after the meeting, including the age, year first elected a director and business experience of each during the previous five years, as of March 11, 1997. Unless otherwise indicated, each person has held the positions shown for at least five years. The five nominees, if elected at the annual meeting, will serve as Class II directors for three year terms expiring in 2000. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE YOUR SHARES FOR ALL FIVE NOMINEES. NOMINEES NAME POSITION WITH THE COMPANY (AGE) DIRECTOR SINCE AND PRINCIPAL OCCUPATION - ----- -------------- ------------------------- CLASS II (TERM EXPIRES 2000) L. Paul Broadus 1986 Director of the Company; (Age 62) Founder and President, Broadus Oil Company John Michael Daw 1991 Director and Senior (Age 49) Agriculture Representative (since 1996) of the Company; President, Farmers Grain Service (1969-1996) Robert J. Doty 1996 Director of the Company, (Age 69) Chairman of Prairie (1989- 1996); Consultant, Farm Management Jimmie D. Lansford 1988 Director and Senior Vice (Age 57) President, Organizational Development and Planning (since 1996) of the Company; Chief Executive Officer, St. Mary's Hospital (1987-1996) I. J. Reinhardt, Jr. 1991 Director of the Company; (Age 59) Director and General Manager, St. Louis Beverage Company 2 CONTINUING DIRECTORS NAME POSITION WITH THE COMPANY AND (AGE) DIRECTOR SINCE PRINCIPAL OCCUPATION - ----- -------------- ----------------------------- CLASS III (TERM EXPIRES 1998) R. Scott Grigsby 1983 Chairman of the Board, (Age 45) President and Chief Executive Officer of the Company H. Dean Reynolds 1981 Director of the Company; Owner (Age 68) (1966-1995) and Consultant (1996-present), Reynolds-West & Associates, Inc. John A. Shinkle 1997 Director and Senior Vice (Age 45) President, Synovus Securities, Inc. (1986-present) Scott C. Sullivan 1996 Director of the Company; (Age 42) Attorney, Williams & McCarthy); Director of Prairie (1995-1996) CLASS I (TERM EXPIRES 1999) Richard J. Berry 1985 Director of the Company; (Age 44) Attorney; Myers, Daugherity, Berry, O'Connor & Kuzma, Ltd. Walter E. Breipohl 1993 Director of the Company; Co- (Age 43) Owner, Kaszynski/Breipohl Realtors/Developers Lawrence J. McGrogan 1987 Director of the Company; (Age 59) Owner, Handy Foods, Inc. John A. Trainor 1985 Director of the Company; (Age 66) Owner, Trainor Grain & Supply Company, Inc. All of the Company's directors will hold office for the terms indicated, or until their respective successors are duly elected and qualified. There are no arrangements or understandings between the Company and any other person pursuant to which any director has been selected, except that Messrs. Doty and Sullivan were appointed to the Board pursuant to the terms of the agreement regarding the acquisition of Prairie. No member of the Board of Directors is related to any other member of the Board of Directors. BOARD COMMITTEES AND MEETINGS Meetings of the Company's Board of Directors are generally held on a monthly basis. The Board of Directors met 11 times during 1996. During 1996, all directors attended at least 75 percent of the meetings of the Board and the committees on which they served. The Board of Directors of the Company has standing executive, audit, compensation and marketing committees. The Executive Committee is comprised of Messrs. Broadus (Chair), Berry, Grigsby, McGrogan and Trainor. The Executive Committee meets on an as needed basis and exercises the power of the Board of Directors between Board meetings. This committee met four times in 1996. The Audit Committee recommends independent auditors to the Board, reviews the results of the auditors' services, reviews with management and the internal auditor the systems of internal control and internal audit reports 3 and assures that the books and records of the Company are kept in accordance with applicable accounting principles and standards. The members of the Audit Committee are Messrs. Reynolds (Chair), Breiphohl and Reinhardt. Mr. Grigsby serves as an EX OFFICIO member of this committee. During 1996, the Audit Committee met four times. The Compensation Committee establishes compensation and benefits for the Chief Executive Officer and reviews and recommends compensation and benefits for the other officers and employees of the Company and the Subsidiaries. The Committee also administers and oversees the Company's stock-based incentive compensation plans. The members of the Compensation Committee are Messrs. McGrogan (Chair), Breiphol and Broadus. Mr. Grigsby also serves as an EX OFFICIO member of this committee. The Compensation Committee met four times in 1996. The Marketing Committee develops long term goals and policies with respect to marketing the Company and the Subsidiaries, and reviews strategies and plans developed by the management of the respective entities for consistency with Company policies and objectives. The members of the Marketing Committee are Messrs. Breiphol (Chair), Grigsby and Reinhardt. The Marketing Committee met four times in 1996. COMPENSATION OF DIRECTORS Through October, 1996, each of the Company's directors was paid a fee of $100 for each Board meeting attended and $100 for each committee meeting attended. Beginning in November, 1996, Board meeting fees were increased to $500. 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. Through 1996, such grants have generally been 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. For the fiscal year ended December 31, 1996, each director was granted options to purchase between 1,800 and 3,000 shares of Common Stock at a price of $7.25 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. Such options also will become exercisable over five years. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information with respect to the beneficial ownership of the Corporation's Common Stock at March 11, 1997, by each person known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock, by each director or nominee, by each executive officer named in the Summary Compensation Table, and by all directors and executive officers of the Company as a group. 4 NAME OF INDIVIDUAL OR AMOUNT AND NATURE OF PERCENT NUMBER OF INDIVIDUALS IN GROUP BENEFICIAL OWNERSHIP(1)(2) OF CLASS ------------------------------ -------------------------- -------- 5% STOCKHOLDERS UnionBank/Streator, as Trustee for 450,918(3) 11.0% the UnionBancorp, Inc. Employee Stock Ownership Plan ("ESOP") 201 East Main Street Streator, Illinois 61364 Dennis J. McDonnell 355,288(4) 8.6% One Parkview Plaza Oakbrook Terrace, Illinois 60181 Wayne H. Whalen 355,288(4) 8.6% 333 W. Wacker Drive, Suite 2100 Chicago, Illinois 60606 DIRECTORS AND NOMINEES Richard J. Berry 33,714(5) * Walter E. Breipohl 12,914 * L. Paul Broadus 19,099 * John Michael Daw 18,990 * Robert Doty 1,000 * R. Scott Grigsby 778,169(6) 18.9% Jimmie D. Lansford 15,614 * Lawrence J. McGrogan 22,738(7) * I.J. Reinhradt, Jr. 25,800(8) * H. Dean Reynolds 26,875(9) * John A. Shinkle 3,964(10) * Scott Sullivan 5,000 * John A. Trainor 21,588(11) * OTHER NAMED EXECUTIVE OFFICERS Charles J. Grako 24,826(12) * Wayne L. Bismark 12,588(13) * All directors and executive officers as a group (15 persons) 1,075,973(14) 26.0% - ------------------------------- * Indicates less than one percent. (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 accounts 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. 5 (2) Amounts shown include interests in a general partnership held by Messrs. Berry, Broadus, Breipohl, Grigsby, Daw, Lansford, McGrogan, Shinkle and Trainor which holds an aggregate of 32,400 shares of Common Stock representing 3,564 shares by each director. Mr. Grako also has an interest in the partnership amounting to 324 shares. Voting and investment power over shares held in this partnership is shared. 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 - 2,250 shares; Mr. Breipohl - 2,250 shares; Mr. Broadus - 1,950 shares; Mr. Daw - 2,250 shares; Mr. Grigsby - 6,464 shares; Mr. Lansford - 2,250 shares; Mr. McGrogan - 2,250 shares; Mr. Reinhardt - 1,950 shares; Mr. Reynolds - 1,950 shares; Mr. Trainor - 2,250 shares; Mr. Grako - 2,472 shares; and Mr. Bismark - 852 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) All of the shares held by the ESOP are allocated to particular participants' accounts and over which shares the ESOP trustee has shared voting and no investment power over such shares. (4) As reported to the Securities and Exchange Commission on a Schedule 13D dated October 9, 1996. Pursuant to the terms of an agreement executed by the Company and these individuals in connection with the Company's acquisition of Prairie, 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 11,100 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 an agreement entered into between the Company and Messrs. McDonnell and Whalen in connection with the Company's acquisition of Prairie. Also includes 17,853 shares held by Mr. Grigsby jointly with his spouse, over which shares Mr. Grigsby has shared voting and investment power, 205 shares held solely by Mr. Grigsby's spouse, over which shares Mr. Grigsby has no voting or investment power, and 34,807 shares allocated to Mr. Grigsby under the Company's ESOP. Excludes the remaining 418,506 shares held by the ESOP but allocated to other participants' accounts. Mr. Grigsby, as trustee of the ESOP, has shared voting power over such shares. (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 6,000 shares held by Mr. Reinhardt jointly with his spouse and 15,000 shares held in a retirement account, over all of which shares Mr. Reinhardt has shared voting and investment power. (9) Includes 1,200 shares held by a relative of Mr. Reynolds, over which shares Mr. Reynolds has shared voting and investment power. (10) Includes 400 shares held by members of Mr. Shinkle's family. Mr. Shinkle has no voting or investment power over 100 of such shares and has shared voting and investment power over the remaining 300 shares. (11) Includes 1,200 shares held solely by Mr. Trainor's spouse, over which shares Mr. Trainor has no voting or investment power. (12) Includes 17,730 shares allocated to Mr. Grako under the ESOP. (13) Includes 2,252 shares allocated to Mr. Bismark under the ESOP. (14) Includes 710,576 shares over which Mr. Grigsby, as President of the Company, is entitled to exercise a limited proxy pursuant to an agreement entered into between the Company and Messrs. McDonnell and Whalen in connection with the Prairie acquisition. 6 Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's executive officers, directors and persons who own more than 10% of the Company's Common Stock file reports of ownership and changes in ownership with the Securities and Exchange Commission. Such persons are also required to furnish the Company with copies of all Section 16(a) forms they file. Based solely on the Company's review of the copies of such forms, and, if appropriate, representations made to the Company by any such reporting person concerning whether a Form 5 was required to be filed for 1996, the Company is not aware that any of its directors, executive officers or 10% stockholders failed to comply with the filing requirements of Section 16(a) during the period commencing January 1, 1996 through December 31, 1996. VOTING AGREEMENTS Pursuant to the terms of a Standstill Agreement entered into between the Company and Messrs. McDonnell and Whalen, the President of the Company has sole voting power with respect to all 710,566 shares of Common Stock held by such persons in any election of directors of the Company. The proxy will further pertain to any additional shares of Common Stock obtained by either party. The proxy expires on August 6, 2000. EXECUTIVE COMPENSATION CASH COMPENSATION The following table shows the compensation earned for the last three fiscal years by the Chief Executive Officer and those executive officers of the Company (including those employed by the Subsidiaries) whose 1996 salary and bonus exceeded $100,000: SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------------- LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------------------------------------- (a) (b) (c) (d) (g) (i) SECURITIES ALL OTHER NAME AND UNDERLYING COMPENSATION PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS (#)(1) ($)(2) - ----------------------------------------------------------------------------------------------------------------------------------- R. Scott Grigsby 1996 $149,100 $32,000 5,550 $15,597 Chairman of the Board, 1995 142,000 12,800 3,036 21,832 President and Chief Executive Officer 1994 127,952 23,725 6,900 24,855 - ----------------------------------------------------------------------------------------------------------------------------------- Charles J. Grako 1996 $ 99,225 $11,000 2,100 $17,439 Executive Vice President and 1995 94,500 7,675 1,080 14,929 Chief Financial Officer 1994 71,459 9,000 2,700 13,810 - ----------------------------------------------------------------------------------------------------------------------------------- Wayne L. Bismark 1996 $ 99,225 $11,000 2,100 $ 9,525 Executive Vice President and 1995 94,500 7,675 1,080 12,895 Chief Credit Officer 1994 75,000 7,500 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
- ------------- (1) Options vest at a rate of 20% per year on or about each anniversary of the date of grant. 7 (2) Amounts represent the dollar value of allocations under the Company's ESOP for Messrs. Grigsby and Grako and, with respect to Messrs. Grako and Bismark, fees for services provided to the Company's Board of Directors and directors' fees for serving on the Boards of various Subsidiaries of $6,075 and $9,525, respectively. Such amounts also include payments of $2,901 and $2,034 for premiums for split dollar life insurance policies for Messrs. Grigsby and Grako, respectively, for each year. STOCK OPTION INFORMATION The following table sets forth certain information concerning the number and value of stock options granted in the last fiscal year to the individuals named above in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR - ----------------------------------------------------------------------------------------------------------------------------------- INDIVIDUAL GRANTS - ----------------------------------------------------------------------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM - ----------------------------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) % OF TOTAL OPTIONS OPTIONS GRANTED GRANTED TO EMPLOYEES IN EXERCISE OR BASE PRICE EXPIRATION NAME (#)(1) FISCAL YEAR ($/Sh) DATE 5%($) 10%($) - ----------------------------------------------------------------------------------------------------------------------------------- R. Scott Grigsby 3,000 24% $9.66 02/23/06 $18,225 $46,185 2,550 19% $7.25 02/23/06 11,625 29,464 - ----------------------------------------------------------------------------------------------------------------------------------- Charles J. Graco 2,100 17% $9.66 02/23/06 $12,758 $32,330 - ----------------------------------------------------------------------------------------------------------------------------------- Wayne L. Bismark 2,100 17% $9.66 02/23/06 $12,758 $32,330 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Options vest at a rate of 20% per year on or about each anniversary of the date of grant. (2) Represents non-qualified options granted for service on the Board of Directors. The following table sets forth certain information concerning the exercisable and nonexercisable stock options at December 31, 1996 held by the individuals named in the Summary Compensation Table: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
- ------------------------------------------------------------------------------------------------------------------------------ SHARES NUMBER OF SECURITIES ACQUIRED UNDERLYING UNEXERCISED VALUE OF UNEXERCISABLE IN- ON VALUE OPTIONS AT FY-END THE- MONEY OPTIONS NAME EXERCISED REALIZED (#)(d) AT FY-END ($)(e) (#)(a) (#)(b) ($)(c) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------------------------------------------------------------------------------------------------ R. Scott Gingsby -- $-- 6,464 9,022 $55,796 $61,933 - ------------------------------------------------------------------------------------------------------------------------------ Charles J. Grako -- -- 2,472 3,408 $17,253 $20,499 - ------------------------------------------------------------------------------------------------------------------------------ Wayne L. Bismark -- -- 852 2,328 $4,698 $12,129 - ------------------------------------------------------------------------------------------------------------------------------
8 EMPLOYMENT AGREEMENTS The Company and certain of the Subsidiaries have entered into three-year employment agreements with Messrs. Grigsby, Bismark and Grako. 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 are 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. 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. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1996, the members of the Compensation Committee were Messrs. McGrogan, Breiphol and Broadus. None of these individuals was an officer or employee of the Company or any of the Subsidiaries during 1996, and none of these individuals is a former officer or employee of the Company or any of the Subsidiaries. THE INCORPORATION BY REFERENCE OF THIS PROXY STATEMENT INTO ANY DOCUMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY SHALL NOT BE DEEMED TO INCLUDE THE FOLLOWING REPORT UNLESS SUCH REPORT IS SPECIFICALLY STATED TO BE INCORPORATED BY REFERENCE INTO SUCH DOCUMENT. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors of the Company is composed of three outside directors and is responsible for recommendations to the Board of Directors of the Company for compensation of executive officers of the Subsidiaries and the Company. In determining compensation, the following factors are generally taken into consideration: 1. The performance of the executive officers in achieving the short and long term goals of the Company. 2. Payment of compensation commensurate with the ability and expertise of the executive officers. 3. Attempt to structure compensation packages so that they are competitive with similar companies. The committee considers the foregoing factors, as well as others, in determining compensation. There is no assigned weight given to any of these factors. 9 Additionally, the Compensation Committee considers various benefits, such as the ESOP and the Stock Option Plan, together with perquisites in determining compensation. The committee believes that the benefits provided through the stock based plans more closely tie the compensation of the officers to the interests of the stockholders and provide significant additional performance incentives for the officers which directly benefit the stockholders through an increase in the stock value. Annually, the Compensation Committee evaluates four primary areas of performance in determining Mr. Grigsby's level of compensation. These areas are: long-range strategic planning and implementation; Company financial performance; Company compliance with regulatory requirements and relations with regulatory agencies; and effectiveness of managing relationships with stockholders and the Board of Directors. When evaluating the financial performance of the Company, the committee considers profitability, asset growth and risk management. The primary evaluation criteria are considered to be essential to the long-term viability of the Company and are given equal weight in the evaluation. Finally, the committee reviews compensation packages of peer institutions, as well as compensation surveys provided by independent third parties, to ensure that Mr. Grigsby's compensation is competitive and commensurate with his level of performance. The 1996 compensation of Mr. Grigsby was based upon the factors described above and his substantial experience and length of service with the organization. During 1996, Mr. Grigsby successfully headed the Company's acquisition program, which included planning and analysis, contacting a number of financial institutions and investment bankers, acquiring Prairie, Country and LaSalle and initiating the consolidation of the operations of the Banks. The Compensation Committee also considered the continuing additional duties required in completing the Company's initial public offering and becoming a publicly traded institution. Mr. Grigsby serves on the Compensation Committee EX OFFICIO, but did not participate in any decisions pertaining to his compensation. Members of the Compensation Committee are Messrs. McGrogan (Chair), Breipohl and Broadus. THE INCORPORATION BY REFERENCE OF THIS PROXY STATEMENT INTO ANY DOCUMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY SHALL NOT BE DEEMED TO INCLUDE THE FOLLOWING PERFORMANCE GRAPH AND RELATED INFORMATION UNLESS SUCH GRAPH AND RELATED INFORMATION ARE SPECIFICALLY STATED TO BE INCORPORATED BY REFERENCE INTO SUCH DOCUMENT. STOCKHOLDER RETURN PERFORMANCE PRESENTATION The following graph shows a comparison of cumulative total returns for the Company, the Nasdaq Stock Market (US Companies) and an index of Nasdaq Bank Stocks for the period commencing January 10, 1996, the date the Company's shares were first quoted on the OTC Bulletin Board. The Common Stock of the Company was first listed for quotation on the Nasdaq Stock Market on October 1, 1996, and prior to such date was quoted on the OTC Bulletin Board. The graph was prepared at the Company's request by Research Holdings Limited, San Francisco, California. 10 COMPARISON OF CUMULATIVE TOTAL RETURN* (ASSUMES $100 INVESTED ON JANUARY 10, 1996) [GRAPH] *TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS - ------------------------------------------------------------------------------- Cumulative Total Return - ------------------------------------------------------------------------------- 1/10/96 12/31/96 - ------------------------------------------------------------------------------- UnionBancorp Inc. $100 $147 Nasdaq Stock Market - US $100 $131 Nasdaq Bank Index $100 $135 - ------------------------------------------------------------------------------- TRANSACTIONS WITH MANAGEMENT Certain directors and executive officers of the Company (including their affiliates, families and companies in which they are principal owners, officers or directors) were loan customers of, and had other transactions with, the Company and the Subsidiaries in the ordinary course of business. Such loans and lines of credit were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features. During 1996, the Company and the Subsidiaries paid 11 approximately $86,200 to the law firm of Myers, Daugherity, Berry, O'Connor & Kuzma, Ltd. for legal services. Richard J. Berry, a director of the Company, is a principal of that firm. Additionally, the Company paid premiums of approximately $75,700 in 1996 to American Bankers Professional Fidelity Insurance Company, Ltd. ("ABFIC") for a Blanket Bond Insurance Policy. R. Scott Grigsby, the Company's Chairman and President, is a director of ABFIC. Management believes such legal services and insurance were obtained on terms no less favorable than would have been obtained from unaffiliated third-parties. STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING For inclusion in the Company's Proxy Statement and form of proxy relating to the 1998 Annual Meeting of Stockholders, stockholder proposals must be received by the Company on or before November 18, 1997. In order to be presented at such meeting, notice of the proposal must be received by the Company on or before November 18, 1997, and must otherwise comply with the Company's bylaws. OTHER MATTERS Management does not intend to present any other business at the meeting and knows of no other matters which will be presented. However, if any other matters come before the meeting, it is the intention of the persons named in the accompanying proxy to vote in accordance with their best judgment on those matters. Your proxy is solicited by the Board of Directors and the cost of solicitation will be paid by the Company. In addition to the solicitation of proxies by use of the mails, officers, directors and regular employees of the Company or the Subsidiaries, acting on the Company's behalf, may solicit proxies by telephone, telegraph or personal interview. The Company will, at its expense, upon the receipt of a request from brokers and other custodians, nominees and fiduciaries, forward proxy soliciting material to the beneficial owners of shares held of record by such persons. FAILURE TO INDICATE CHOICE If any stockholder fails to indicate a choice with respect to any of the proposals on the proxy included herewith, the shares of such stockholder shall be voted FOR the nominees listed under proposal 1. By Order of the Board of Directors R. Scott Grigsby Chairman of the Board and President Ottawa, Illinois March 18, 1997 ALL STOCKHOLDERS ARE URGED TO SIGN AND MAIL THEIR PROXIES PROMPTLY 12 PROXY PROXY UNIONBANCORP, INC. Proxy is Solicited By the Board of Directors For the Annual Meeting of Stockholders -- April 25, 1997 The undersigned hereby appoints John Michael Daw and R. Scott Grigsby, or either of them acting in the absence of the others, with power of substitution, attorneys and proxies, for and in the name and place of the undersigned, to vote the number of shares of Common Stock that the undersigned would be entitled to vote if then personally present at the Annual Meeting of the Stockholders of UnionBancorp, Inc., to be held at the Pitstick Pavilion, Route 23 North, Ottawa, Illinois, on Friday, April 25, 1997, at 10:00 a.m., local time, or any adjournments or postponements thereof, upon the matters set forth in the Notice of Annual Meeting and Proxy Statement (receipt of which is hereby acknowledged) as designated on the reverse side, and in their discretion, the proxies are authorized to vote upon such other business as may come before the meeting: / / Check here for address change. / / Check here if you plan to attend the meeting. New Address:_______________________ ___________________________________ ___________________________________ (Continued and to be signed on reverse side.) UNIONBANCORP, INC. PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY /X/ FOR WITHHOLD FOR ALL ALL ALL EXCEPT 1. Election of Directors: / / / / / / L. Paul Broadus, John Michael Daw, Robert J. Doty, Jimmie D. Lansford ___________________________ and I.J. Reinhardt, Jr. The Board of Directors recommends a vote FOR all nominees. THIS PROXY WILL BE VOTED IN ACCORDANCE WITH SPECIFICATION MADE. IF NO CHOICES ARE INDICATED, THIS PROXY WILL BE VOTED FOR ALL NOMINEES. Note: Please sign exactly as your name(s) appears. For joint accounts, each owner should sign. When signing as executor, administrator, attorney, trustee or guardian, etc., please give your full title. Dated:___________________________________, 1997 Signature(s)__________________________________ __________________________________ - ------------------------------------------------------------------------------- FOLD AND DETACH HERE -----END PRIVACY-ENHANCED MESSAGE-----