-----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, N7Avx63zNEV/C7F8J33EEp3zKofYPvsUeLkGviV1aP5U+fV+vW6OX8z+uwSoj/dh W/3IOXvevSg1kJE/Jkdfdw== 0001047469-98-012509.txt : 19980401 0001047469-98-012509.hdr.sgml : 19980401 ACCESSION NUMBER: 0001047469-98-012509 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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: SEC FILE NUMBER: 000-28846 FILM NUMBER: 98580080 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, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 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) 433-7030 (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 9, 1998, the Registrant had issued and outstanding 4,135,830 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 9, 1998, was $48,040,710.* * Based on the last reported price ($19.75) of an actual transaction in the Registrant's Common Stock on March 9, 1998, 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 1997 Annual Report to Stockholders (the "1997 Annual Report") are incorporated by reference into Part II of this Form 10-K. Certain portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders (the "1998 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 7A. Quantitative and Qualitative Disclosures about Market Risk. . . . 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 regional financial services company based in Ottawa, Illinois, which has five bank subsidiaries (the "Banks"). The Banks serve communities throughout Central and Northern Illinois through twenty-seven locations. The Company also has three non-bank subsidiaries, UnionData Corp., Inc. ("UnionData"), which provides data processing services; UnionTrust Corporation ("UnionTrust", formerly known as Union Corporation), a trust company which also serves as an owner and lessor of banking offices to certain of the Banks; and Credit Recovery, Inc. ("Credit Recovery," formerly known as LaSalle County Collections, Inc.), 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, 1997, the Company had consolidated assets of approximately $625.5 million, deposits of approximately $527.7 million and stockholders' equity of approximately $51.6 million. HISTORICAL The Company was originally formed in 1982 as the bank holding company for UnionBank, an Illinois state bank with its main office located in Streator, Illinois ("UnionBank"). In 1984, UnionBank/Sandwich, an Illinois state bank with its main office located in Sandwich, Illinois ("Sandwich"), became a subsidiary of the Company. In 1991, the Ottawa National Bank, Ottawa, Illinois, was acquired and merged into UnionBank. 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 with an Illinois bank subsidiary located in Macomb, Illinois. In 1997, the Company acquired the remaining minority stock ownership interests in and consolidated the operations of certain of the Banks. Also in 1997, Sandwich was merged with and into UnionBank; Tampico National Bank and The First National Bank of Manlius were merged with and into Tiskilwa State Bank under the name "UnionBank/Central"; and the Farmers State Bank of Ferris was merged with and into Omni Bank under the name "UnionBank/West." The Company's two other banking subsidiaries are UnionBank/Northwest an Illinois state bank with its main office located in Hanover, Illinois ("UnionBank/Northwest"), and the Bank of Ladd, an Illinois state bank with its main office located in Ladd, Illinois ("Ladd"). Ladd, of which 81.7% is owned by the Company, and UnionBank/Northwest, are both subsidiaries of Prairie. OPERATIONS 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 significantly increased 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 1 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. The Company serves the banking needs of LaSalle and contiguous counties located in north central Illinois (LaSalle and portions of Livingston, Grundy, Bureau, Kane, Kendall and DeKalb Counties) through the 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 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 Banks as part of the process of integrating the operations of acquired banks into this organization. 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 UnionTrust, 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 Banks through UnionData. Credit Recovery, a collection agency acquired by the Company in 1996, serves the principal market area of Ottawa, Illinois, and surrounding communities, and has been providing services to certain of the Banks prior to its acquisition. The Company intends to expand the market area of Credit Recovery 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 twelve 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. 2 EMPLOYEES At December 31, 1997, the Company employed 299 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 can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities including, but not limited to, the FRB, the Federal Deposit Insurance Corporation (the "FDIC"), the Illinois Commissioner of Banks and Real Estate (the "Commissioner"), the Internal Revenue Service and state taxing authorities and the 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 its 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 its 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 shareholders, of financial institutions. The following references to material statutes and regulations affecting the Company and its 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 its subsidiaries. RECENT REGULATORY DEVELOPMENTS PENDING LEGISLATION. Legislation is pending in the Congress that would allow bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in securities and insurance activities. The expanded powers generally would be available to a bank holding company only if the bank holding company and its bank subsidiaries remain well-capitalized and well-managed. Additionally, the pending legislation would eliminate the federal thrift charter and merge the FDIC's Bank Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF"). At this time, the Company is unable to predict whether the proposed legislation will be enacted and, therefore, is unable to predict the impact such legislation may have on the operations of the Company and its subsidiaries. THE COMPANY GENERAL. The Company, as the sole stockholder of UnionBank, Prairie, as the sole or controlling stockholder of UnionBank/Central, UnionBank/Northwest and Ladd, and Country as the sole stockholder of UnionBank/West, are each bank holding companies. As bank holding companies, the Company, Prairie and Country are registered with, and are subject to regulation by, the FRB under the Bank Holding Company Act, as amended ("BHCA"). In accordance with FRB policy, the Company, Prairie and Country are expected to act as a source of financial strength to their respective bank subsidiaries and to commit resources to support their respective 3 bank subsidiaries in circumstances where the Company, Prairie or Country might not do so absent such policy. Under the BHCA, the Company, Prairie and Country are subject to periodic examination by the FRB and are required to file with the FRB periodic reports of their respective operations and such additional information as the FRB may require. The Company, Prairie and Country are also subject to regulation by the Commissioner under the Illinois Bank Holding Company Act, as amended. 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 (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) 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, the Company, Prairie and Country 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 domestic activities of non-bank subsidiaries of bank holding companies. Federal law also prohibits acquisition of "control" of a bank, such as one of the Banks, or bank holding company, such as the Company, Prairie or Country, without prior notice to certain federal bank regulators. "Control" is defined in certain cases as acquisition of 10% of the outstanding shares of a bank or bank holding company. 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 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%, at least one-half of which 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 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. 4 For example, the FRB's capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (I.E., Tier 1 capital less all intangible assets), well above the minimum levels. As of December 31, 1997, the Company, Prairie and Country each had regulatory capital in excess of the FRB's minimum requirements, as follows:
Risk-Based Leverage Capital Ratio Capital Ratio ------------- ------------- Company 11.86% 6.64% Prairie 17.36% 8.86% Country 13.91% 7.64%
DIVIDENDS. The FRB has issued a policy statement with regard to 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 which exceed its net income or which can only be funded in ways that weaken the bank holding company's financial health, such as by 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 that may be imposed by the FRB, the Delaware General Corporation Law (the "DGCL") permits the Company to pay dividends only out of its surplus (as defined and computed in accordance with the DGCL), 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. Further, the Illinois Business Corporation Act prohibits an Illinois corporation, such as Prairie or Country, from paying a dividend 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 shareholders 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 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. THE BANK SUBSIDIARIES GENERAL. All of the Banks are Illinois-chartered banks, the deposit accounts of which are insured by the BIF of the FDIC. All of the Banks other than Ladd are also members of the Federal Reserve System ("member bank") and, thus, are subject to the examination, supervision, reporting and enforcement requirements of the Commissioner, as the chartering authority for Illinois banks, the FRB, as the primary federal regulator of member banks, and the FDIC, as administrator of the BIF. Ladd is subject to the examination, supervision, reporting and enforcement requirements of the Commissioner, as the chartering authority for Illinois banks, and the FDIC, as the administrator of the BIF and the primary federal regulator of state-chartered banks that are not member banks. 5 DEPOSIT INSURANCE. As FDIC-insured institutions, the Banks are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. During the year ended December 31, 1997, BIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 1998, BIF assessment rates 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 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 Banks. 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 Federal Savings and Loan Insurance Corporation, the SAIF's predecessor insurance fund. Pursuant to federal legislation enacted September 30, 1996, commencing January 1, 1997, both SAIF members and BIF members became subject to assessments to cover the interest payments on outstanding FICO obligations. Such FICO assessments are 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. 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. During the year ended December 31, 1997, the FICO assessment rate for SAIF members was approximately 0.063% of deposits while the FICO assessment rate for BIF members was approximately 0.013% of deposits. COMMISSIONER ASSESSMENTS. All Illinois banks are required to pay supervisory fees to the Commissioner to fund the operations of the Commissioner. The amount of such supervisory fees is based upon each institution's total assets, including consolidated subsidiaries, as reported to the Commissioner. During the year ended December 31, 1997 the Banks paid supervisory fees to the Commissioner totaling $38,981. CAPITAL REQUIREMENTS. Under federal regulations, the Banks 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 and total 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, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. 6 During the year ended December 31, 1997, none of the Banks were required by its primary federal regulator to increase its capital to an amount in excess of the minimum regulatory requirements. As of December 31, 1997, each of the Banks exceeded its minimum regulatory capital requirements, as follows:
Risk-Based Leverage Capital Ratio Capital Ratio ------------- ------------- UnionBank 12.05% 8.16% UnionBank/West 14.09% 7.10% UnionBank/Central 17.24% 8.39% UnionBank/Northwest 23.22% 9.54% Bank of Ladd 18.83% 9.24%
Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. Additionally, institutions insured by the FDIC may be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of commonly controlled FDIC insured depository institutions or any assistance provided by the FDIC to commonly controlled FDIC insured depository institutions in danger of default. DIVIDENDS. Under the Illinois Banking Act, Illinois-chartered banks may not pay dividends in excess of their adjusted profits. The Federal Reserve Act also imposes limitations on the amount of dividends that may be paid by a state member bank, such as UnionBank, UnionBank/West, UnionBank/Central and UnionBank/Northwest. Generally, a member 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 FRB approval, however, a state member bank may not pay dividends in any calendar year which, in the aggregate, exceed the bank's calendar year-to-date net income plus the bank's adjusted retained net income for the two preceding calendar 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 Banks exceeded its minimum capital requirements under applicable guidelines as of December 31, 1997. As of December 31, 1997, approximately $7.9 million was available to be paid as dividends to the Company by the Banks. Notwithstanding the availability of funds for dividends, however, the federal banking regulators may prohibit the payment of any dividends by the Banks if such payment is deemed to constitute an unsafe or unsound practice. 7 INSIDER TRANSACTIONS. The Banks are subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Banks to their respective directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company, and to "related interests" of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal stockholder of the Company may obtain credit from banks with which one of the Banks maintains a correspondent relationship. SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have adopted guidelines which establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth 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 whose failure to meet one or more of the guidelines is of such severity that it could threaten the safety and soundness of the institution. Failure to submit an acceptable plan, or failure to comply with a plan that has been accepted by the appropriate federal regulator, would constitute grounds for further enforcement action. BRANCHING AUTHORITY. Illinois banks, such as the Banks, have the authority under Illinois law to establish branches anywhere in the State of Illinois, subject to receipt of all required regulatory approvals. 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 mergers beginning on June 1, 1997, subject to certain conditions, including a prohibition against interstate mergers unless any Illinois bank involved has been in existence and continuous operation for more than five years. STATE BANK ACTIVITIES. Under federal law and FDIC regulations, 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 and FDIC regulations also prohibit 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. Pursuant to regulations promulgated by the Board of Governors of the Federal Reserve System (the "FRB"), 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 $47.8 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $47.8 million, the reserve requirement is $1.434 million plus 10% of the aggregate amount of total transaction accounts in excess of $47.8 million. The first $4.7 million of 8 otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the FRB. The Bank Subsidiaries are in compliance with the foregoing requirements. ITEM 2. PROPERTIES At December 31, 1997, 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 either one of the Banks or by Union Corporation and are not subject to any mortgage or material encumbrance. The Company believes that its current facilities are adequate for its existing business.
AFFILIATE MARKETS SERVED PROPERTY/TYPE LOCATION - --------- -------------- ---------------------- The Company Administrative Office: Ottawa UnionBank LaSalle, Grundy, Main Office: Streator, IL Livingston, Kane, Eleven banking offices located Kendall and DeKalb in markets served. Counties UnionBank/Central Bureau and LaSalle Main Office: Princeton, IL Counties Five banking offices located in markets served. UnionBank/West McDonough, Adams, Main Office: Macomb, IL Hancock and Pike Eight banking offices located Counties in markets served. UnionBank/Northwest Jo Davies County Main Office: Hanover, IL Two banking offices located in markets served. Bank of Ladd Bureau and LaSalle Main Office, Ladd, IL Counties UnionData Corp, LaSalle, Kendall, Main Office: Streator, IL Inc. DeKalb, McDonough, Additional office located in Adams and Pike Counties Macomb, IL Credit Recovery, LaSalle, DeKalb, Main Office: Ottawa, IL Inc. Kendall, McDonough and Bureau Counties UnionTrust LaSalle County Main Office: Ottawa, IL Corporation
In addition to the banking locations listed above, the Banks own 20 automatic teller machines, some of which are housed within a banking office and some of which are independently located. At December 31, 1997, the properties and equipment of the Company had an aggregate net book value of approximately $14.6 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. 9 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 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock was held by approximately 647 stockholders of record as of March 9, 1998, 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 declared per share for the Common Stock during the periods indicated. 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) -------- -------- ------------ 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 1997 First Quarter . . . . . . 14.50 12.50 0.035 Second Quarter . . . . . . . 14.13 12.00 0.035 Third Quarter . . . . . . . 17.38 13.38 0.035 Fourth Quarter . . . . . . . 21.88 17.06 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 acquisition of Prairie in 1996, 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. 10 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 1996 acquisition of Prairie and Country, 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 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. Except in connection with stock dividends and stock splits, and as described herein, the Company has not issued any securities in the past three years which were not registered for sale under the Securities Act of 1933, as amended. As consideration for the acquisition of Credit Recovery, consummated on August 1, 1996, the Company issued 9,090 shares of Common Stock to the sole stockholder of Credit Recovery. As partial consideration for the acquisition of Prairie, which was consummated on August 6, 1996, the Company issued 710,576 shares of Common Stock and 2,762.24 shares of Series A Preferred Stock to the holders of shares of Prairie Common Stock, and issued 857 shares of Series B Preferred Stock to the holders of Prairie's Series A Preferred Stock electing to receive securities in lieu of cash. The Company also issued an aggregate of 19,829 shares of its Common Stock during 1997 in connection with the acquisition of minority interests of certain of the Bank Subsidiaries. The Company believes all of the securities issued in connection with the acquisitions of Prairie, Credit Recovery and minority interests in the Bank Subsidiaries were issued in transactions exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof and Regulation D promulgated thereunder. 11 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Selected consolidated financial data for the five years ended December 31, 1997, consisting of data captioned "Selected Consolidated Financial and Other Data for the Company and Subsidiaries" on page F-1 of the Company's 1997 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 1997 Annual Report to Stockholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation" is incorporated by reference. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to pages 9 through 12 of the Company's 1997 Annual Report to Stockholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation," which is incorporated by reference pursuant to Item 7 above. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Balance Sheets of the Company and Subsidiaries as of December 31, 1997 and the related Consolidated Statements of Income, Stockholders' Equity and Cash Flows for the year ended December 31, 1997, together with the related notes and the report of Crowe Chizek & Company LLP, independent auditors, on pages 27 to 60 of the Company's 1997 Annual Report to Stockholders filed as an exhibit hereto, is incorporated herein by reference. 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 two-year period ended December 31, 1996, together with the related notes and the report of McGladrey & Pullen, LLP, independent auditors, on pages 27 to 60 of the Company's 1997 Annual Report to Stockholders filed as an exhibit hereto, is incorporated herein by reference. 12 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 1998 Proxy Statement under the caption "Election of Directors" and on pages 4 through 7 of the 1998 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 1998 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 1998 Proxy Statement, the names and ages of the executive officers of the Company as of December 31, 1997, 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, 53, 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, 44, has been the Executive Vice President and Chief Financial Officer of the Company since 1990. He also serves as Secretary of the Company and Assistant Secretary of UnionBank. 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. ITEM 11. EXECUTIVE COMPENSATION The information on pages 7 through 9 of the 1998 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 1998 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 1998 Proxy Statement under the caption "Transactions with Management" is incorporated by reference. 13 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 1997. (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 [ ], 1998. 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 [ ], 1998 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 [ ], 1998. Signature Title --------- ----- - ------------------------------- R. Scott Grigsby Chairman of the Board, President and Chief Executive Officer - ------------------------------- Richard J. Berry Director - ------------------------------- Walter E. Breipohl Director - ------------------------------- L. Paul Broadus Director - ------------------------------- John Michael Daw Director - ------------------------------- Robert J. Doty Director - ------------------------------- Jimmie D. Lansford Director - ------------------------------- Lawrence J. McGrogan Director Signature Title --------- ----- - ------------------------------- I. J. Reinhardt, Jr. Director - ------------------------------- H. Dean Reynolds Director - ------------------------------- Scott C. Sullivan Director - ------------------------------- John A. Shinkle Director - ------------------------------- John A. Trainor Director - ------------------------------- 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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 on Form S-1 filed by the Company on August 19, 1996 (SEC File No. 33-9891), as amended 13.1 1997 Annual Report to Stockholders * (as incorporated by reference into this Form 10-K) 21.1 Subsidiaries of UnionBancorp, Inc. * 23.1 Consent of Crowe, Chizek and * Company LLP 23.2 Consent of McGladrey & Pullen, LLP * 27.1 Financial Data Schedule * 99.1 1998 Proxy Statement (as Incorporated by reference from the incorporated by reference into this Schedule 14A filed by the Company on Form 10-K) March 16, 1998 (SEC File No. 0- 28846)
EX-13 2 EXHIBIT 13 UNIONBANCORP, INC. SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31, ------------------------------------------------------------ 1997 1996 1995 1994 1993 ---------- ---------- ---------- ----------- ---------- (Dollars in Thousands, Except Per Share Data) STATEMENT OF INCOME DATA Interest income $ 46,039 $ 31,037 $ 21,368 $ 18,627 $ 18,604 Interest expense 24,435 17,003 11,249 8,706 8,798 ---------- ---------- ---------- ---------- ---------- Net interest income 21,604 14,034 10,119 9,921 9,806 Provision for loan losses 1,079 1,178 684 660 1,268 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 20,525 12,856 9,435 9,261 8,538 Noninterest income 5,182 3,222 2,570 2,283 2,512 Noninterest expense 18,764 12,248 8,771 8,247 7,841 ---------- ---------- ---------- ---------- ---------- Net income before income taxes and minority interest 6,943 3,830 3,234 3,297 3,209 Minority interest 73 27 - - - Provision for income taxes 2,105 969 881 703 747 ---------- ---------- ---------- ---------- ---------- Net income $ 4,765 $ 2,834 $ 2,353 $ 2,594 $ 2,462 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income on common stock $ 4,506 $ 2,729 $ 2,353 $ 2,594 $ 2,462 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- PER SHARE DATA (1) Basic earnings per common shares (2) $ 1.090 $ 1.000 $ 1.100 $ 1.220 $ 1.150 Diluted earnings per common shares (2) $ 1.080 $ 0.990 $ 1.090 $ 1.210 $ 1.150 Cash dividends on common stock 0.175 0.140 0.130 0.120 0.090 Dividend payout ratio for common stock 12.830% 11.580% 12.060% 9.570% 7.780% Year end book value per common share $ 12.350 $ 11.200 $ 11.010 $ 9.210 $ 8.920 Basic weighted average common shares outstanding (2) 4,125,902 2,730,600 2,131,737 2,131,737 2,132,760 Diluted weighted average common shares outstanding (2) 4,167,764 2,756,806 2,165,428 2,150,073 2,132,760 Period end common shares outstanding 4,135,830 4,114,801 2,131,737 2,131,737 2,132,760 BALANCE SHEET DATA Investments and federal funds sold $ 202,142 $ 233,822 $ 95,182 $ 86,460 $ 95,098 Total loans 370,985 346,496 180,819 161,134 148,371 Allowance for loan losses 3,188 3,068 2,014 1,704 1,787 Total assets 625,460 642,024 303,533 272,038 266,666 Total deposits 527,747 543,744 261,727 232,334 237,455 Stockholders' equity 51,581 46,583 23,475 19,629 19,026 EARNINGS PERFORMANCE DATA Return on average total assets 0.77% 0.66% 0.83% 0.98% 0.97% Return on average stockholders' equity 9.78 9.32 10.83 13.29 13.88 Return on average total assets, including mandatory redeemable preferred stock .77 .66 N/A N/A N/A Return on average equity, including mandatory redeemable preferred stock 9.61 9.21 N/A N/A N/A Net interest margin ratio 3.95 3.72 4.12 4.38 4.46 Efficiency ratio (3) 65.29 66.70 68.35 66.17 65.81 ASSET QUALITY RATIOS Nonperforming assets to total assets 0.49% 0.44% 0.95% 0.87% 1.64% Nonperforming loans to total loans 0.74 0.65 1.22 0.90 2.06 Net loan charge-offs to average loans 0.27 0.58 0.22 0.49 0.71 Allowance for loan losses to total loans 0.86 0.89 1.11 1.06 1.20 Allowance for loan losses to non-performing loans 116.95 135.75 90.93 117.44 58.61 CAPITAL RATIOS Average equity to average assets 8.00% 7.14% 7.67% 7.38% 6.98% Total capital to risk adjusted assets 11.86 10.87 12.35 12.28 10.97 Tier 1 leverage ratio 6.76 7.76 7.95 7.68 7.00
- --------------------------------------- (1) Restated to reflect the three-for-one stock split which took effect May 20, 1996. (2) Restated in accordance with Statement of Financial Accounting Standards No. 128 which took effect December 31, 1997. (3) Calculated as noninterest expense less amorization of intagibles and expenses related to other real estate owned divided by the sum of net interest income before provisions for loan losses and total noninterest income excluding securities gain and losses. 1. 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, 1997. This discussion should be read in conjunction with "Selected Consolidated Financial Data", the consolidated financial statements of the Company, and the accompanying notes thereto. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report, including the Letter to the Stockholders, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1993 as amended and Section 21E of the Securites 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 Litigation 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 identified by the use of 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 changes; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality and composition of the loan or securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company's market areas; 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 Securities and Exchange Commission. GENERAL The Company derives substantially all of its revenues and income from the operations of its banking subsidiaries. The Banks 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, 1997, the Company had total assets of $625,460,000, net loans of $367,797,000, total deposits of $527,747,000, and total stockholders' equity $51,581,000. Total assets have decreased by 2.58% from year-end 1996 or a $16,564,000 reduction. This is the result of the Company's continuing initiative to restructure the balance sheet while expanding the net interest margin. During the third quarter of 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 2. Stock. Net proceeds of the offering to the Company were $12,436,000. In addition, in conjunction with the acquisitions, the Company issued 2,762.24 of the 2,765 authorized shares of Series A Convertible Preferred Stock, which were valued at $500,000. The no par value stock earns cumulative dividends of $75 per share per year payable in four equal quarterly payments. Also, the Company issued 857 of the 1,092 authorized shares of Series B Preferred Stock, which were valued at $859,000. The no par value stock earns cumulative dividends of $60 per share per year, payable in four equal quarterly payments. During the fourth quarter of 1997, in conjunction with the reorganization and simplification of the corporate structure, the Company successfully consummated the merger of some of the affiliate banks into regional banking centers. This resulted in UnionBank, UnionBank/Central and UnionBank/West being formed, and reducing the organization from nine bank subsidiaries to five bank subsidiaries. RESULTS OF OPERATIONS NET INCOME Net income was $4,765,000 ($1.08 per "diluted" common share) for the year ended December 31, 1997, compared with net income of $2,834,000 ($.99 per "diluted" common share) for the year ended December 31, 1996, an increase of $1,931,000 or 68.1%. The increase in earnings per share in 1997 compared with 1996 was primarily attributed to a full year of earnings from the banks acquired as part of the Acquisitions, which were consummated during the third quarter of 1996, and internal growth in the Company's loan portfolio. Net income was $2,834,000 ($.99 per common share "diluted" basis) for the year ended December 31, 1996, compared with net income of $2,353,000 ($1.09 per common share "diluted" basis) 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 attributed to three months of earnings from the banks acquired as part of the Acquisitions, which were consummated during the third quarter of 1996, and internal growth in the Company's loan and deposit portfolio. 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, securities, and federal funds sold. Net interest income was $21,604,000 for 1997, an increase of $7,570,000 or 53.9%, compared with net interest income of $14,034,000 for 1996. The Company's average total interest-earning assets increased from $399,328,000 for 1996 to $571,626,000 for 1997 representing a 43.2% increase resulting primarily from the growth attributed to the Acquisitions during 1996. The net interest margin (tax equivalent basis) increased to 3.95% at December 31, 1997 from 3.72% at December 31, 1996. The interest rates on average earning assets (tax equivalent basis) increased to 8.22% in 1997 from 7.98% in 1996, while rates on average interest-bearing liabilities remained relatively unchanged by increasing to 4.83% in 1997 from 4.80% in 1996. The increase in the 3. yield on average earning assets was primarily driven by a change in the asset mix of the earning assets by shifting the emphasis toward loans which have a higher yield than securities. The nominal increase in the average rates paid on interest-bearing liabilities primarily resulted from increases in the interest rates on time deposits reflecting pressures in the marketplace for deposits. 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. The Company's average total interest-earning assets increased from $262,879,000 for 1995 to $399,328,000 for 1996, representing a 51.9% increase resulting primarily from the growth attributed to the Acquisitions during 1996. The net interest margin (tax equivalent basis) declined to 3.72% at December 31, 1996 from 4.12% at December 31, 1995. The interest rates on average earning assets (tax equivalent basis) declined to 7.98% 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 about a higher level of earning assets in lower yielding securities. In addition, during 1996 there was an overall decrease in 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, 1997, 1996, and 1995. 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. 4. AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME (Dollars in thousands)
For the Years Ended December 31, ---------------------------------------------------------- 1997 1996 ---------------------------- ---------------------------- Interest Interest Average Income/ Average Average Income/ Average Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ASSETS Interest-earning assets Interest-earning deposits $ 353 $ 28 7.98% $ 66 $ 4 5.92% Securities (1) Taxable 173,190 10,838 6.26% 122,653 7,316 5.96% Non-taxable (2) 32,618 2,566 7.87% 26,994 2,051 7.60% -------- ------- ----- -------- ------- ----- Total securities (tax equivalent) 205,808 13,404 6.51% 149,647 9,367 6.26% -------- ------- ----- -------- ------- ----- Federal funds sold 6,845 381 5.56% 5,637 298 5.29% -------- ------- ----- -------- ------- ----- Loans (3)(4) Commercial 97,407 9,274 9.52% 72,210 6,793 9.41% Real estate 216,911 18,693 8.62% 138,721 11,684 8.42% Installment and other 44,302 4,124 9.31% 33,047 3,062 9.27% Fees on loans - 1,092 - - 641 - -------- ------- ----- -------- ------- ----- Net loans (tax equivalent) 358,620 33,183 9.25% 243,978 22,180 9.09% -------- ------- ----- -------- ------- ----- Total interest-earning assets 571,626 46,996 8.22% 399,328 31,849 7.98% -------- ------- ----- -------- ------- ----- Noninterest-earning assets Cash and cash equivalents 17,248 14,430 Premises and equipment, net 14,397 9,261 Other assets 16,245 7,674 ------ ------ Total nonearning assets 47,890 31,365 ------ ------ Total assets $619,516 $430,693 -------- -------- -------- -------- LIABILITIES NOW accounts $ 55,883 1,396 2.50% $ 40,755 $ 1,055 2.59% Money market accounts 31,433 1,028 3.27% 25,333 804 3.17% Savings deposits 62,316 1,758 2.82% 41,664 1,224 2.94% Time $100,000 and over 81,612 4,622 5.66% 22,955 1,433 6.24% Other time deposits 231,766 12,860 5.55% 194,957 10,723 5.50% Federal funds purchased and repurchase agreements 20,683 1,171 5.66% 16,388 861 5.25% Advances from FHLB 8,783 543 6.18% 3,427 213 6.21% Notes payable 13,247 1,057 7.98% 8,364 690 8.25% -------- ------- ----- -------- ------- ----- Total interest-bearing liabilities 505,723 24,435 4.83% 353,843 17,003 4.80% -------- ------- ----- -------- ------- ----- Noninterest-bearing liabilities Noninterest-bearing deposits 57,623 41,395 Other liabilities 6,596 4,693 -------- -------- Total noninterest-bearing liabilities 64,219 46,088 -------- -------- Stockholders' equity 49,574 30,762 -------- -------- Total liabilities and stockholders' equity $619,516 $430,693 -------- -------- -------- -------- Net interest income (tax equivalent) $22,561 $14,846 ------- ------- ------- ------- Net interest income (tax equivalent) to total earning assets 3.95% 3.72% Interest-bearing liabilities to earning assets 88.47% 89.14% -------- -------- For the Years Ended December 31, ------------------------------- 1995 ------------------------------- Interest Average Income/ Average Balance Expense Rate ------- ------- ---- ASSETS Interest-earning assets Interest-earning deposits $ 27 $ 2 5.85% Securities (1) Taxable 62,808 3,636 5.79% Non-taxable (2) 24,463 1,919 7.84% -------- ------- ----- Total securities (tax equivalent) 87,271 5,555 6.37% Federal funds sold 2,577 156 6.05% Loans (3)(4) Commercial 55,431 5,524 9.97% Real estate 94,050 8,380 8.91% Installment and other 23,523 2,103 8.94% Fees on loans - 362 - -------- ------- ----- Net loans (tax equivalent) 173,004 16,369 9.57% -------- ------- ----- Total interest-earning assets 262,879 22,082 8.46% -------- ------- ----- Noninterest-earning assets Cash and cash equivalents 10,763 Premises and equipment, net 6,042 Other assets 3,707 -------- Total nonearning assets 20,512 -------- Total assets $283,391 -------- -------- LIABILITIES NOW accounts $ 31,097 $ 843 2.71% Money market accounts 19,691 584 2.97% Savings deposits 23,146 611 2.64% Time $100,000 and over 12,040 687 5.71% Other time deposits 129,147 7,534 5.84% Federal funds purchased and repurchase agreements 9,825 567 5.77% Advances from FHLB - - - Notes payable 4,696 423 9.00% -------- ------- ----- Total interest-bearing liabilities 229,642 11,249 4.90% -------- ------- ----- Noninterest-bearing liabilities Noninterest-bearing deposits 29,950 Other liabilities 2,071 -------- Total noninterest-bearing liabilities 32,021 -------- Stockholders' equity 21,728 -------- Total liabilities and stockholders' equity $283,391 -------- -------- Net interest income (tax equivalent) $10,833 ------- ------- Net interest income (tax equivalent) to total earning assets 4.12% Interest-bearing liabilities to earning assets 87.99% --------
- ---------------------------- (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. (3) Overdraft loans are excluded in the average balances. 5. 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 "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 "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, ---------------------------------------------------------------------------------- 1997 Compared to 1996 1996 Compared to 1995 ------------------------------------- -------------------------------------- Change Due to Change Due to ------------------------------------- -------------------------------------- Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- INTEREST INCOME: Interest-earning deposits $ 23 $ 1 $ 24 $ 2 $ - $ 2 Investment securities: Taxable 3,147 375 3,522 3,567 113 3,680 Non-taxable 440 75 515 194 (62) 132 Federal funds sold 67 16 83 164 (22) 142 Loans 10,829 174 11,003 6,492 (681) 5,811 ------ ------- --------- -------- -------- -------- Total interest income 14,506 641 15,147 10,419 (652) 9,767 ------ ------- --------- -------- -------- -------- INTEREST EXPENSE: NOW accounts 379 (38) 341 251 (39) 212 Money market accounts 199 25 224 177 43 220 Savings deposits 584 (50) 534 538 75 613 Time, $100,000 and over 3,334 (145) 3,189 677 69 746 Other time 2,042 95 2,137 3,632 (443) 3,189 Federal funds purchased and repurchase agreements 239 71 310 348 (54) 294 Advances from FHLB 331 (1) 330 - 213 213 Notes payable 391 (24) 367 340 (73) 267 ------ ------- --------- -------- -------- -------- Total interest expense 7,499 (67) 7,432 5,963 (209) 5,754 ------ ------- --------- -------- -------- -------- Net interest margin $ 7,007 $ 708 $ 7,715 $ 4,456 $ (443) $ 4,013 ------ ------- --------- -------- -------- -------- ------ ------- --------- -------- -------- --------
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 impaired and other nonperforming loans, historical loss experience, results of examinations by regulatory agencies, an internal asset quality review process, the market value of collateral, the estimate of discounted cash flows, the strength and availability of guaranties, concentrations of credits, and other factors. 6. The 1997 provision for loan losses was $1,079,000 compared with $1,178,000 in 1996. Net charge-offs in 1997 were approximately $959,000. The provision for loan losses of $1,079,000 was made to bring the allowance for loan losses to the level management deemed adequate as of December 31, 1997. The 1996 provision for loan losses was $1,178,000 compared with $684,000 in 1995. Net charge-offs in 1996 were approximately $1,416,000. Approximately $690,000 of the net charge-offs related to a single borrower 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 losses to the level management deemed adequate as of December 31, 1996. NONINTEREST INCOME The following table shows the Company's noninterest income: NONINTEREST INCOME (DOLLARS IN THOUSANDS)
Years Ended December 31, -------------------------------------- 1997 1996 1995 -------- -------- -------- Service charges $ 1,854 $ 1,286 $ 952 Merchant fee income 670 524 418 Trust income 516 393 330 Mortgage banking operations 751 425 425 Securities gains, net 193 20 98 Other noninterest income 1,198 574 347 -------- -------- -------- Total noninterest income $ 5,182 $ 3,222 $ 2,570 -------- -------- -------- -------- -------- --------
Noninterest income is generated primarily from fees associated with noninterest and interest-bearing deposit accounts. Noninterest income for 1997 was $5,182,000, an increase of $1,960,000 or 60.8% compared with noninterest income of $3,222,000 for 1996. Noninterest income for 1996 was $3,222,000, an increase of $652,000 or 25.4% compared with $2,570,000 for 1995. These increases were primarily from internal deposit growth including the purchase of the deposits of additional bank subsidiaries during the third quarter of 1996, and the increased number and balance of noninterest and interest-bearing accounts. 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 $1,854,000 for the year ended December 31, 1997, from $1,286,000 for the year ended December 31, 1996, was related to increases in deposit account balances and increases in the service charge schedule during 1997. The increase of $334,000 from 1995 to $1,286,000 in 1996 was related to increases in deposit account balances and increases in the service charge schedule during 1996. Merchant fee income is derived from the Company's credit card 7. operations and is comprised primarily of merchant fees (65% of total merchant fee income), interchange fees (19% of total merchant fee income), and annual fees (4% of total merchant fee income). 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 traveler's 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, 1997 and 1996 were approximately $110,641,000 and $106,801,000, respectively. Trust income, which is predominately comprised of assessed fees based on the market value of managed client portfolios, increased by $123,000 during 1997 and $63,000 during 1996. A significant contribution to the Company's noninterest income was also made by its mortgage banking operations. During 1997, loan sales increased by $4 million due to increased originations. 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, --------------------------------------- 1997 1996 1995 --------- --------- -------- Salaries and employee benefits $ 9,231 $ 6,469 $ 4,451 Occupancy expense, net 1,532 899 665 Furniture and equipment expenses 1,599 977 584 Supplies and printing 602 395 270 Telephone 472 277 179 Postage 404 298 208 FDIC deposit assessment 63 8 271 Amortization of intangible assets 903 392 120 Other noninterest expense 3,958 2,533 2,023 --------- --------- -------- Total noninterest expense $ 18,764 $ 12,248 $ 8,771 --------- --------- -------- --------- --------- --------
Noninterest expense was $18,764,000 in 1997; an increase of $6,516,000 or 53.2% compared with noninterest expense of $12,248,000 for 1996. The $6,516,000 increase in noninterest expense 8. during 1997 was reflected in all categories of noninterest expense. The increases were primarily the result of a full year of incremental costs linked to the acquired subsidiaries. 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. The $3,477,000 increase in noninterest expense during 1996 was attributable primarily to an increase of $2,018,000 in salaries and employee benefits as a result of acquiring additional subsidiaries; a $272,000 increase in amortization of intangibles due to the Acquisitions, offset by a reduction in the FDIC assessment of $263,000; and an increase in other expenses primarily related to the acquisitions. Deposits held by the Banks are insured by the Bank Insurance Fund 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 during 1996 and 1997 as compared to 1995 INCOME TAXES The Company recorded income tax expense of $2,105,000, $969,000, and $881,000 for the years ended December 31, 1997, 1996, and 1995, respectively, and effective tax rates were 30.6%, 25.5%, and 27.2%, respectively, for such periods. The Company's effective tax rate is lower than statutory rates because the Company derives interest income from municipal securities, which are exempt from federal tax. PREFERRED STOCK DIVIDENDS The Company paid $259,000 of preferred stock dividends in 1997 as compared to $105,000 paid in 1996. The reason for this increase was the preferred stock being outstanding for the entire year, as compared to only a portion of 1996. INTEREST RATE SENSITIVITY MANAGEMENT The business of the Company and the composition of its balance sheet consist of investments in interest-earning assets (primarily loans and securities) which are primarily funded by interest-bearing liabilities (deposits and borrowings). Other than loans held for sale, all of the financial instruments of the Company are for other than trading purposes. Such financial instruments have varying levels of sensitivity to changes in market rates of interest. 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 that 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 9. 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. The Company's exposure to interest rate risk is managed primarily through the Company's strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities which generate favorable earnings, while limiting the potential negative effects of changes in market interest rates. Since the Company's primary source of interest-bearing liabilities is customer deposits, the Company's ability to manage the types and terms of such deposits may be somewhat limited by customer maturity preferences in the market areas in which the Company operates. The rates, terms, and interest rate indices of the Company's interest-earning assets result primarily from the Company's strategy of investing in loans and securities (a substantial portion of which have adjustable rate terms) which permit the Company to limit its exposure to interest rate risk, together with credit risk, while at the same time achieving a positive interest rate spread. 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, 1997. The table was prepared assuming loans prepay at varying degrees, based on type, maturity, and rate. All the NOW accounts, money market accounts, and savings accounts reprice in three months or less, and certificates of deposit have been included based on contractual maturity. 10. INTEREST RATE-SENSITIVE ASSETS AND LIABILITIES (DOLLARS IN THOUSANDS)
December 31, 1997 -------------------------------------------------------------------------- 3 months 3 months to 6 months 1 year to Over or less 6 months to 1 year 5 years 5 years Total ------- -------- --------- ------- ------- ----- INTEREST-EARNING ASSETS Federal funds sold $ 1,404 $ - $ - $ - $ - $ 1,404 Securities 89,581 14,863 28,439 42,145 25,710 200,738 Loans 104,544 38,595 54,823 138,476 34,547 370,985 --------- --------- --------- --------- -------- --------- Total interest-earning assets $ 195,529 $ 53,458 $ 83,262 $ 180,621 $ 60,257 $ 573,127 --------- --------- --------- --------- -------- --------- --------- --------- --------- --------- -------- --------- INTEREST-BEARING LIABILITIES NOW accounts $ 56,138 $ - $ - $ - $ - $ 56,138 Money market accounts 33,160 - - - - 33,160 Savings 58,797 - - - - 58,797 Time, $100,000 and over 30,327 13,680 18,738 17,394 - 80,139 Other time 50,951 50,349 82,553 53,518 46 237,417 --------- --------- --------- --------- -------- --------- Total interest-bearing deposits 229,373 64,029 101,291 70,912 46 465,651 Federal funds and repurchase agreements 4,642 3,940 1,661 1,518 - 11,761 Advances from FHLB - 300 10,660 2,350 3,145 16,455 Notes payable 10,000 - - 261 - 10,261 --------- --------- --------- --------- -------- --------- Total interest-bearing liabilities $ 244,015 $ 68,269 $ 113,612 $ 75,041 $ 3,191 $ 504,128 --------- --------- --------- --------- -------- --------- --------- --------- --------- --------- -------- --------- Period interest sensitivity gap $ (48,486) $ (14,811) $ (30,350) $ 105,580 $ 57,066 $ 68,999 Cumulative interest sensitivity gap (48,486) (63,297) (93,647) 11,933 68,999 Cumulative gap as a percent of total assets (7.75)% (10.12)% (14.97)% 1.91% 11.03% Cumulative interest-sensitive assets as a percent of cumulative interest-sensitive liabilities 80.13% 79.73% 78.01% 102.38% 113.69%
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 off-balance-sheet 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, 1997, the Banks held approximately $22,695,000 (at amortized cost) 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. 11. In addition to the aforementioned interest rate-sensitivity analysis, the Company also measures its overall interest rate sensitivity through a net interest income analysis. The net interest income analysis measures the change in net income in the event of hypothetical changes in interest rates. This analysis assesses the risk of changes in net interest in the event of sudden and sustained 1.0% to 2.0% increases and decreases in market interest rates. The assumption in this table are that assets will reprice faster than liabilities due to market constraints and management's assessment of their assets and liabilities. The table below presents the Company's projected changes in net interest income for the various rate shock levels at December 31, 1997.
Net Interest Income ----------------------------- Amount Change Change ------ ------ ------ (Dollars in Thousands) +200 bp $ 19,362 $ 412 2.17% +100 bp 19,178 228 1.20 Base 18,950 - - -100 bp 18,501 (449) (2.37) -200 bp 17,254 (1,696) (8.95)
Based upon the Company's model at December 31, 1997, the effect of an immediate 200 basis point increase in interest rates would increase the Company's net interest income by 2.17% or approximately $412,000. The effect of an immediate 200 basis point decrease in rates would reduce the Company's net income by 8.95% or approximately $1,696. 12. 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, to the addition of new loan products, and to the Acquisitions. The growth in the loan portfolio in 1997 is primarily due to management's restructuring of the balance sheet to increase the net interest margin. The following table describes the composition of loans by major categories outstanding.
LOAN PORTFOLIO (DOLLARS IN THOUSANDS) Aggregate Principal Amount ---------------------------------------------------------------------- December 31, ---------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- Commercial $ 62,936 $ 60,152 $ 38,298 $ 36,802 $ 37,129 Agricultural 39,431 43,500 17,079 14,391 14,702 Real estate: Commercial mortgages 72,730 63,254 44,393 36,727 32,744 Construction 14,393 13,549 7,437 5,047 3,018 Agricultural 27,955 29,185 10,229 12,169 12,606 1-4 family mortgages 109,411 91,697 36,637 33,623 27,505 Installment 41,210 42,320 24,072 19,765 18,262 Other 3,076 3,354 2,681 2,641 2,511 ---------- ---------- ---------- ---------- ---------- 371,142 347,011 180,826 161,165 148,477 Unearned income (157) (515) (7) (31) (106) ---------- ---------- ---------- ---------- ---------- Total loans 370,985 346,496 180,819 161,134 148,371 Allowance for loan losses (3,188) (3,068) (2,014) (1,704) (1,787) ---------- ---------- ---------- ---------- ---------- Loans, net $ 367,797 $ 343,428 $ 178,805 $ 159,430 $ 146,584 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Percentage of Total Loan Portfolio ---------------------------------------------------------------------- Commercial 16.96% 17.33% 21.18% 22.84% 25.01% Agricultural 10.62 12.54 9.45 8.93 9.90 Real estate: Commercial mortgages 19.60 18.23 24.55 22.79 22.05 Construction 3.88 3.90 4.11 3.13 2.03 Agricultural 7.53 8.41 5.66 7.55 8.49 1-4 family mortgages 29.48 26.42 20.26 20.86 18.53 Installment 11.10 12.20 13.31 12.26 12.30 Other loans 0.83 0.97 1.48 1.64 1.69 ---------- ---------- ---------- ---------- ---------- Gross loans 100.00% 100.00% 100.00% 100.00% 100.00% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
13. As of December 31, 1997 and 1996, commitments of the Banks under standby letters of credit and unused lines of credit totaled approximately $72,980,000 and $59,854,000, respectively. Stated loan maturities (including rate loans reset to market interest rates) of the total loan portfolio, net of unearned income, at December 31, 1997 were as follows: STATED LOAN MATURITIES (1) (DOLLARS IN THOUSANDS)
Within One One Year to After Five Year Five Years Years Total ---- ---------- ----- ----- Commercial $ 35,779 $ 20,764 $ 6,393 $ 62,936 Agricultural 28,796 9,899 736 39,431 Real estate 57,933 66,232 100,324 224,489 Installment 16,826 26,508 795 44,129 --------- --------- --------- --------- Total $ 139,334 $ 123,403 $ 108,248 $ 370,985 --------- --------- --------- --------- --------- --------- --------- ---------
- --------------------- (1) Maturities based upon contractual maturity dates 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. Rate sensitivities of the total loan portfolio, net of unearned income, at December 31, 1997 were as follows: LOAN REPRICING (DOLLARS IN THOUSANDS)
Within One One Year to After Five Year Five Years Years Total ---- ---------- ----- ----- Fixed rate $ 101,424 $ 81,663 $ 25,503 $ 208,590 Variable rate 96,078 55,569 9,034 160,681 Impaired and nonaccrual 460 1,244 10 1,714 --------- --------- --------- --------- Total $ 197,962 $ 138,476 $ 34,547 $ 370,985 --------- --------- --------- --------- --------- --------- --------- ---------
14. 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 nonaccrual status when there are serious doubts regarding the collectibility of all principal and interest due under the terms of the loans. 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 The Company defines impaired loans to include all commercial loans and mortgage loans secured by commercial properties or five-plus family residences that are in nonaccrual status or restructured after January 1, 1995. 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, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Nonaccrual and impaired loans not accruing $ 1,714 $ 1,774 $ 1,127 $ 891 $ 1,671 Impaired and other loans 90 days past due and still accruing interest 1,013 486 1,088 560 1,378 -------- -------- -------- -------- -------- Total nonperforming loans 2,727 2,260 2,215 1,451 3,049 Other real estate owned 215 363 441 672 1,096 Other nonperforming assets (1) 100 192 240 240 240 -------- -------- -------- -------- -------- Total nonperforming assets $ 3,042 $ 2,815 $ 2,896 $ 2,363 $ 4,385 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Nonperforming loans to total loans 0.74% 0.65% 1.22% 0.90% 2.06% Nonperforming assets to total loans 0.82 0.81 1.60 1.47 2.96 Nonperforming assets to total assets 0.49 0.44 0.95 0.87 1.64
- ------------------------ (1) Represents a single municipal security in default status. The classification of a loan as impaired or nonaccrual does not necessarily indicate that the principal is uncollectible, in whole or in part. The Banks make a determination as to 15. collectibility 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 impaired or 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 impaired or 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. During 1997, the Company implemented a loan review function which is separate from the lending function and is responsible for the review of new and existing loans. Potential problem credits are monitored by the loan review function and are submitted for review to the loan committee and audit committee members. The Company adopted Statements of Financial Accounting Standards No. 114 and No. 118 for impaired loans effective January 1, 1995. Under these standards, the Company defined loans that will be individually evaluated for impairment to include commercial loans and mortgages secured by commercial properties or five-plus family residences. All other smaller balance homogeneous loans are evaluated for impairment in total. The following table sets forth a summary of other real estate owned and other collateral acquired at December 31, 1997: OTHER REAL ESTATE OWNED
Number Net Book of Carrying Parcels Value ------- -------- Developed property 2 $ 205 Vacant land or unsold lots 1 10 ------- -------- Total real estate 3 $ 215 ------- -------- ------- --------
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 16. collaterlized 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, the loan review function and information 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, a sample of loans (including impaired and nonperforming loans) are reviewed and classified as to potential loss exposure. Specific allowances are then established for those loans with identified loss exposure (based on discounted collateral value and cash flows), 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 $3,188,000 at December 31, 1997. 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. 17. ALLOWANCE FOR LOAN LOSSES (DOLLARS IN THOUSANDS)
December 31, --------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Beginning balance $ 3,068 $ 2,014 $ 1,704 $ 1,787 $ 1,586 Charge-offs: Commercial 262 967 114 413 577 Real estate mortgages 386 181 173 371 445 Installment and other loans 559 366 250 240 257 --------- --------- --------- --------- --------- Total charge-offs 1,207 1,514 537 1,024 1,279 --------- --------- --------- --------- --------- Recoveries: Commercial 47 41 70 142 144 Real estate mortgages 88 - 56 83 2 Installment and other loans 113 57 37 56 66 --------- --------- --------- --------- --------- Total recoveries 248 98 163 281 212 --------- --------- --------- --------- --------- Net charge-offs 959 1,416 374 743 1,067 --------- --------- --------- --------- --------- Provision for loan losses 1,079 1,178 684 660 1,268 Allowance associated with the Acquisitions - 1,292 - - - --------- --------- --------- --------- --------- Ending balance $ 3,188 $ 3,068 $ 2,014 $ 1,704 $ 1,787 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Period end total loans, net of unearned interest $ 370,985 $ 346,496 $ 180,819 $ 161,134 $ 148,371 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Average loans $ 358,620 $ 243,978 $ 173,004 $ 152,186 $ 150,455 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of net charge-offs to average loans 0.27% 0.58% 0.22% 0.49% 0.71% Ratio of provision for loan losses to average loans 0.30 0.48 0.40 0.43 0.84 Ratio of allowance for loan losses to ending total loans 0.86 0.89 1.11 1.06 1.20 Ratio of allowance for loan losses to total nonperforming loans 116.91 135.75 90.93 117.44 58.61 Ratio of allowance at end of period to average loans 0.89 1.26 1.16 1.12 1.19
18. The following table sets forth an allocation of the allowance for loan losses among the various loan categories. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (DOLLARS IN THOUSANDS)
December 31, ------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 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 $ 962 27.58% $ 776 29.87% $ 800 30.62% 327 31.79% $ 336 34.91% Real estate 1,052 60.49 758 56.97 388 54.59 325 54.34 288 51.10 Installment and other loans 482 11.93 517 13.16 235 14.79 194 13.90 173 13.99 Unallocated 692 - 1,017 - 591 - 858 - 990 - ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total $ 3,188 100.00% $ 3,068 100.00% $ 2,014 100.00% $ 1,704 100.00% $ 1,787 100.00% ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
SECURITIES ACTIVITIES The Company's securities portfolio, which represented 35.2% of the Company's earning asset base as of December 31, 1997, 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 intention 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. 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 $37,170,000 at December 31, 1997 compared to $35,017,000 at December 31, 1996. The fair value of securities held-to-maturity were $37,840,000 at December 31, 1997 and $35,322,000 at December 31, 1996. Securities available-for-sale, carried at fair value, were $163,568,000 at December 31, 1997 compared to $188,538,000 at December 31, 1996. The consolidated securities portfolio include 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 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. 19. The following tables describe the composition of securities by major category and maturity. SECURITIES PORTFOLIO (DOLLARS IN THOUSANDS)
December 31, ------------------------------------------------------------------------------------ 1997 1996 1995 ------------------------ ------------------------ ----------------------- % 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 States and political subdivisions 37,170 18.52 35,017 15.66 26,660 28.69 Collateralized mortgage obligations - - - - 9 0.01 Corporate bonds - - - - 240 0.26 --------- ------ --------- ----- -------- ----- Total $ 37,170 18.52% $ 35,017 15.66% $ 29,026 31.24% --------- ------ --------- ----- -------- ----- --------- ------ --------- ----- -------- -----
December 31, ------------------------------------------------------------------------------------ 1997 1996 1995 ------------------------ ------------------------ ----------------------- % of % of % of AVAILABLE-FOR-SALE Amount Portfolio Amount Portfolio Amount Portfolio ------ --------- ------ --------- ------ --------- U.S. Treasury $ 19,163 9.55% $ 26,518 11.86% $ 18,279 19.67% U.S. government agencies and corporations 59,315 29.54 53,554 23.96 36,987 39.81 U.S. government agency mortgage backed securities 22,695 11.31 49,454 22.12 6,084 6.55 States and political subdivisions - - - - 913 0.98 Collateralized mortgage obligations 58,300 29.04 58,820 26.31 106 0.11 Corporate bonds 100 0.05 192 0.09 1,522 1.64 Other securities 3,995 1.99 - - - - --------- ------ --------- ----- -------- ----- Total $ 163,568 81.48% $ 188,538 84.34% $ 63,891 68.76% --------- ------ --------- ----- -------- ----- --------- ------ --------- ----- -------- -----
20. The following tables set forth the contractual or estimated maturities and yields of the securities portfolio as of December 31, 1997. Mortgage backed and collateralized mortgage obligation securities are included at estimated maturity. 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 Subdivisions (1) $ 5,591 7.65% $15,473 7.47% $14,903 8.22% $1,203 8.60% $37,170 ------- ----- ------- ----- ------- ----- ------ ----- ------- ------- ----- ------- ----- ------- ----- ------ ----- -------
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 $13,373 5.41% $5,790 6.16% $0 0.00% $0 0.00% $19,163 U.S. government agencies and corporations 28,788 6.04 19,537 6.35 10,990 6.73 0 0.00 59,315 U.S. government agency mortgage backed securities 18,106 7.01 687 7.50 955 9.14 2,947 8.22 22,695 Collateralized mortgage obligations 58,048 5.61 252 7.90 - - - - 58,300 Corporate bonds - - 100 - - - - - 100 Equity securities - - - - - - 3,995 - 3,995 -------- ------- ------- ------ -------- Total $118,315 $26,366 $11,945 $6,942 $163,568 -------- ------- ------- ------ -------- -------- ------- ------- ------ --------
- --------------- (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 $520,633,000 for 1997, representing an increase of $153,574,000 or 41.8% compared with the average balance of total deposits for the year ended December 31, 1996. The increases in deposits were primarily due to the Acquisitions. 21. The following table sets forth certain information regarding the Bank's average deposits. AVERAGE DEPOSITS (DOLLARS IN THOUSANDS)
For the years ended December 31, ---------------------------------------------------------------------------------------- 1997 1996 1995 --------------------------- --------------------------- ---------------------------- % Average % Average % Average Average of Rate Average of Rate Average of Rate Amount Total Paid Amount Total Paid Amount Total Paid ------ ----- ---- ------ ----- ---- ------ ----- ---- Non-interest-bearing demand deposits $57,623 11.07% -% $41,395 11.28% -% $29,950 12.22% -% Savings accounts 62,316 11.97 2.82 41,664 11.35 2.94 23,146 9.45 2.64 Interest-bearing demand deposits 87,316 16.77 2.78 66,088 18.00 2.84 50,788 20.72 2.81 Time, less than $100,000 231,766 44.51 5.55 194,957 53.12 5.51 129,147 52.70 5.84 Time, $100,000 or more 81,612 15.68 5.66 22,955 6.25 6.24 12,040 4.91 5.71 -------- ------ ---- -------- ------ ---- -------- ------ ---- Total deposits $520,633 100.00% 4.16% $367,059 100.00% 4.16% $245,071 100.00% 4.19% -------- ------ ---- -------- ------ ---- -------- ------ ---- -------- ------ ---- -------- ------ ---- -------- ------ ----
As of December 31, 1997, non-brokered time deposits over $100,000 represented 15.2% of total deposits, compared with 13.7% of total deposits as of December 31, 1996. 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, 1997. TIME DEPOSITS OF $100,000 OR MORE (DOLLARS IN THOUSANDS)
MATURITY RANGE Three months or less $ 30,327 Over three months through six months 13,680 Over six months through twelve months 18,738 Over twelve months 17,394 ----------- Total $ 80,139 ----------- -----------
22. 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, ------------------------- 1997 1996 1995 ----- ----- ----- Return on average assets 0.77% 0.66% 0.83% Return on average equity 9.78 9.32 10.83 Average equity to average assets 8.00 7.14 7.67 Dividend payout ratio for common stock 12.83 11.58 12.06
The increase in the return on average assets and return on average equity ratios is primarily related to increased profitability caused by the improvement in the net interest margin. This improvement is reflective of the Company's initiative to restructure the balance sheet by shifting the earning asset mix toward higher yielding loans at the subsidiary banks acquired in 1996. 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 and Federal Home Loan Bank advances. 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. 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 its loan portfolio interest payments as monthly and 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. 23. 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 $7.8 million for 1997, $5.5 million for 1996, and $3.7 million for 1995. Net cash provided by investing activities, consisting primarily of loan and investing funding, was $9.3 million for 1997. For the year ended December 31, 1996, net cash used in investing activities was $9.6 million. For the year ended December 31, 1995 , net cash used in investing activities was $27.3 million. Net cash used in financing activities for 1997 was $23.5 million, consisting primarily of decreases in deposits and securities sold under agreements to repurchase. 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 for 1995 was $26.8 million. The Bank's 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, 1997, 15.9% of the Bank's interest-bearing liabilities were in the form of time deposits of $100,000 and over. Substantially all of such large deposits were obtained from the Bank's 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 37.8% maturing in the first quarter of 1998, 17.1% maturing in the second quarter of 1998, 23.4% maturing in the third and fourth quarter of 1998, and the remaining 21.7% maturing thereafter. The Banks monitor those maturities in an effort to minimize any adverse effect on liquidity. The Company's borrowings included notes payable at December 31, 1997 in the principal amount of $10,000,000 payable to the Company's principal correspondent bank. The Company incurred this debt in connection with the Acquisitions and in the acquisition of Ottawa National Bank in 1991. The note is renewable annually, requires quarterly interest payments, and is collateralized by the Company's stock in the Banks. In addition, the Company has a $261,000 mortgage note payable for a parcel of real estate. Payments on this note are due over 3 years. The Company's principal source of funds for repayment of the indebtedness is dividends from the Banks. At December 31, 1997, approximately $7,982,000 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 asses. 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 Company is 10.68% and 11.86%, respectively, at December 31,1997. The Banks are currently, and expect to continue to be, in compliance with these guidelines. 24. The Board of Governors of the Federal Reserve Bank ("FRB") has announced a policy known as the "source of strength doctrine" that requires a bank holding company to serve as a source of financial and managerial strength for its subsidiary banks. The FRB has interpreted this requirement to require that a bank holding company, such as the Company, stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. The FRB has stated that it would generally view a failure to assist a troubled or failing subsidiary bank in these circumstances as an unsound or unsafe banking practice or a violation of the FRB's Regulation Y or both, justifying a cease and desist order or other enforcement action, particularly if appropriate resources are available to the bank holding company on a reasonable basis. The following table sets forth an analysis of the Company's capital ratios: RISK-BASED CAPITAL RATIOS (DOLLARS IN THOUSANDS)
December 31, Minimum Well ------------------------------------- Capital Capitalized 1997 1996 1995 Ratios Ratios ---- ---- ---- ------ ------ Tier 1 risk-based capital $ 41,180 $ 36,242 $ 22,530 Tier 2 risk-based capital 4,545 4,425 2,014 Total capital 45,725 40,667 24,544 Risk-weighted assets 385,685 374,028 198,731 Capital ratios Tier 1 risk-based capital 10.68% 9.69% 11.34% 4.00% 6.00% Tier 2 risk-based capital 11.86 10.87 12.35 8.00 10.00 Leverage ratio 6.64 7.76 7.95 4.00 5.00
As of December 31, 1997, the Tier 2 risk-based capital was comprised of $3,188,000 in allowance for loan losses, $857,000 of Mandatory Redeemable Series B Preferred Stock, and $500,000 of Series A Convertible Preferred Stock. The Series A Preferred Stock is convertible into common stock, subject to certain adjustments intended to offset the amount of losses incurred by the Company upon the post-closing sale of certain securities acquired in conjunction with the 1996 acquisition of Prairie. ACCOUNTING MATTERS NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. 25. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 requires that public business enterprises report financial and descriptive information about reportable operating segments and report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. YEAR 2000 COMPLIANCE A critical issue facing the financial institution industry is concern over a computer systems ability to process year-date data beyond the year 1999. Except in recently introduced Year 2000 compliant programs, computer programmers consistently have abbreviated dates by eliminating the first two digits of the year, with the assumption that these two digits would always be 19. Unless corrected, this situation is expected to cause widespread problems on January 1, 2000, when computer systems may recognize this date as January 1, 1900 and process data incorrectly or stop processing altogether. This issue could affect a variety of the Company's systems from its data processing system which records loan and deposit information to other ancillary systems such as alarms and locking devices. Management has considered this issue internally and receives periodic correspondence from its data processor regarding their plans to be Year 2000 compliant. Management does not anticipate that the Company will incur material operating expenses or be required to invest heavily in computer system improvements to be Year 2000 compliant. Nevertheless, if not properly addressed, these issues could result in interruptions in the Company's business and have a material adverse effect on the Company's results of operations. The Company has a Year 2000 committee, comprised of members of UnionBancorp, Inc. which has already taken steps regarding this issue. UnionData (a subsidiary company), has completed a survey of all core processing systems and support systems. This survey included contact with each hardware and software vendor. As of December 31, 1997, all core processing systems were documented as being year 2000 compliant. Three vendors of non core processing subsystems have notified UnionBancorp, Inc. that their systems will be upgraded to year 2000 compliance by year end 1998. 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. 26. [Logo] CROWE CHIZEK INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors UnionBancorp, Inc. Ottawa, Illinois We have audited the accompanying consolidated balance sheet of UnionBancorp, Inc. and Subsidiaries as of December 31, 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The accompanying consolidated financial statements of the Company as of December 31, 1996, and for the two years then ended, were audited by other auditors whose report dated February 5, 1997 expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1997 consolidated financial statements referred to above present fairly, in all material respects, the financial position of UnionBancorp, Inc. and Subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP Oak Brook, Illinois February 6, 1998 27. UNIONBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
1997 1996 - -------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 22,826 $ 29,236 Federal funds sold 1,404 10,267 Securities available-for-sale 163,568 188,538 Securities held-to-maturity (fair value of $37,840 in 1997 and $35,322 in 1996) 37,170 35,017 Loans 370,985 346,496 Allowance for loan losses (3,188) (3,068) --------- --------- Net loans 367,797 343,428 Premises and equipment, net 14,631 13,580 Intangible assets, net 9,898 10,801 Other assets 8,166 11,157 ---------- ---------- TOTAL ASSETS $ 625,460 $ 642,024 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Noninterest bearing $ 62,095 $ 65,864 Interest bearing 465,652 477,880 --------- --------- Total deposits 527,747 543,744 Federal funds purchased and securities sold under agreements to repurchase 11,761 21,817 Advances from the Federal Home Loan Bank 16,455 10,021 Notes payable 10,261 13,180 Other liabilities 6,154 5,027 --------- --------- TOTAL LIABILITIES 572,378 593,789 --------- --------- Minority interest in subsidiaries 644 795 Mandatory redeemable preferred stock, Series B, no par value; 1,092 shares authorized; 857 shares issued and outstanding 857 857 --------- --------- Stockholders' equity Preferred stock; 200,000 shares authorized; none issued - - Series A convertible preferred stock; 2,765 shares authorized, 2,762.24 shares outstanding (aggregate liquidation preference of $2,762) 500 500 Series C preferred stock; 4,500 shares authorized; none issued - - Common stock, $1 par value; 10,000,000 shares authorized; 4,407,093 and 4,386,064 shares outstanding in 1997 and 1996, respectively 4,407 4,386 Surplus 19,705 19,403 Retained earnings 26,765 22,981 Unrealized gain (loss) on securities available for sale, net of tax 856 (74) Unearned compensation under stock option plans (130) (91) --------- --------- 52,103 47,105 Treasury stock, at cost; 271,263 and 271,263 shares in 1997 and 1996, respectively (522) (522) --------- --------- TOTAL STOCKHOLDERS' EQUITY 51,581 46,583 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 625,460 $ 642,024 ---------- ---------- ---------- ----------
See Accompanying Notes to Consolidated Financial Statements. 28. UNIONBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS, EXCEPT SHARE DATA)
1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Interest income Loans and fees on loans $ 33,098 $ 22,138 $ 16,322 Securities Taxable 10,838 7,039 3,486 Exempt from federal income taxes 1,694 1,574 1,404 Federal funds sold and other 409 286 156 ---------- ---------- ---------- TOTAL INTEREST INCOME 46,039 31,037 21,368 ---------- ---------- ---------- Interest expense Deposits 21,664 15,239 10,257 Federal funds purchased and securities sold under agreements to repurchase 1,171 861 523 Advances from the Federal Home Loan Bank 543 213 - Notes payable 1,057 690 469 ---------- ---------- ---------- TOTAL INTEREST EXPENSE 24,435 17,003 11,249 ---------- ---------- ---------- NET INTEREST INCOME 21,604 14,034 10,119 Provision for loan losses 1,079 1,178 684 ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 20,525 12,856 9,435 ---------- ---------- ---------- Noninterest income Service charges 1,854 1,286 952 Merchant fee income 670 524 418 Trust income 516 393 330 Mortgage banking income 751 425 425 Securities gains, net 193 20 98 Other income 1,198 574 347 ---------- ---------- ---------- 5,182 3,222 2,570 ---------- ---------- ---------- Noninterest expenses Salaries and employee benefits 9,231 6,469 4,451 Occupancy expense, net 1,532 899 665 Furniture and equipment expense 1,599 977 584 FDIC insurance assessment 63 8 271 Supplies and printing 602 395 270 Telephone 472 277 179 Postage 404 298 208 Amortization of intangible assets 903 392 120 Other expenses 3,958 2,533 2,023 ---------- ---------- ---------- 18,764 12,248 8,771 ---------- ---------- ---------- 6,943 3,830 3,234 Minority interest 73 27 - ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 6,870 3,803 3,234 Income taxes 2,105 969 881 ---------- ---------- ---------- NET INCOME 4,765 2,834 2,353 Preferred stock dividends 259 105 - ---------- ---------- ---------- NET INCOME FOR COMMON STOCKHOLDERS $ 4,506 $ 2,729 $ 2,353 ---------- ---------- ---------- ---------- ---------- ---------- BASIC EARNINGS PER COMMON SHARE $ 1.09 $ 1.00 $ 1.10 ---------- ---------- ---------- ---------- ---------- ---------- DILUTED EARNINGS PER COMMON SHARE 1.08 .99 1.09 ---------- ---------- ---------- ---------- ---------- ----------
See Accompanying Notes to Consolidated Financial Statements. 29. UNIONBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS, EXCEPT SHARE DATA)
Unrealized Unearned Series A Gain (Loss) Compen- Convertible on Securities sation Under Preferred Common Retained Available- Stock Option Treasury Stock Stock Surplus Earnings for-Sale Plans Stock Total ----------- --------- -------- -------- ------------ ------------ -------- ----- Balance, December 31, 1994 $ - $ 2,400 $ 1,007 $ 18,499 $ (1,757) $ - $ (521) $ 19,628 Net income - - - 2,353 - - - 2,353 Common stock dividend, $.13 per share - - - (284) - - - (284) Issuance of non- qualifying stock options - - 67 - - (67) - - Amortization of un- earned compensation under stock option plans - - - - - 19 - 19 Change in unrealized gain (loss) on securities available-for-sale - - - - 1,759 - - 1,759 -------- --------- --------- --------- ------- ------- ------- --------- Balance, December 31, 1995 - 2,400 1,074 20,568 2 (48) (521 ) 23,475 Net income - - - 2,834 - - - 2,834 Issuance of 1,266,398 shares of common stock - 1,266 12,221 - - - - 13,487 Cost to raise capital - - (1,051) - - - - (1,051) Common stock dividend, $.14 per share - - - (316) - - - (316) Preferred stock dividends - - - (105) - - - (105) Stock issued for acquisitions 500 720 7,090 - - - - 8,310 Issuance of non- qualifying stock options - - 69 - - (69) - - Amortization of un- earned compensation under stock option plans - - - - - 26 - 26 Change in unrealized gain (loss) on securities available-for-sale - - - - (76) - - (76) Redemption of qualifying directors' stock - - - - - - (1) (1) -------- --------- --------- --------- ------- ------- ------- -------- Balance, December 31, 1996 500 4,386 19,403 22,981 (74) (91) (522) 46,583 Net income - - - 4,765 - - - 4,765 Issuance of common stock - 20 214 - - - - 234 Common stock dividend, $17.5 per share - - - (722) - - - (722) Preferred stock dividends - - - (259) - - - (259) Issuance of non- qualifying stock options - - 81 - - (81) - - Exercise of stock options - 1 7 - - - - 8 Amortization of un- earned compensation under stock option plans - - - - - 42 - 42 Change in unrealized gain (loss) on securities available-for-sale - - - - 930 - - 930 -------- --------- --------- --------- ------- ------- ------- --------- Balance, December 31, 1997 $ 500 $ 4,407 $ 19,705 $ 26,765 $ 856 $ (130) $ (522) $ 51,581 -------- --------- --------- --------- ------- ------- ------- --------- -------- --------- --------- --------- ------- ------- ------- ---------
See Accompanying Notes to Consolidated Financial Statements. 30. UNIONBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income $ 4,765 $ 2,834 $ 2,353 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 1,474 849 526 Amortization of intangible assets 903 392 120 Amortization of unearned compensation under stock option plans 42 26 19 Amortization of bond premiums, net 254 543 448 Provision for loan losses 1,079 1,178 684 Provision for deferred income taxes 287 (45) (138) Securities gains, net (193) (20) (98) Gain on sale of equipment (76) - (37) Loss on sale of real estate acquired in settlement of loans (51) (134) (33) Gain on sale of loans (546) (262) (288) Proceeds from sales of loans held for sale 25,097 21,355 14,899 Origination of loans held for sale (25,624) (20,803) (14,673) Minority interest in net income of subsidiary 73 27 - Change in assets and liabilities (Increase) decrease in other assets (165) 9 (666) Increase (decrease) in other liabilities 509 (449) 539 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,828 5,500 3,655 Cash flows from investing activities Securities Held-to-maturity Proceeds from calls, maturities, and paydowns 3,108 4,429 3,858 Purchases (5,367) (5,247) (4,300) Available-for-sale Proceeds from maturities and paydowns 30,071 20,455 6,230 Proceeds from sales 28,773 24,620 17,318 Purchases (29,550) (19,708) (28,240) Net (increase) decrease in federal funds sold 8,863 167 (1,065) Net increase in loans (24,831) (21,841) (20,533) Purchase of premises and equipment (2,630) (1,314) (1,430) Proceeds from sale of real estate acquired in settlement of loans 655 575 800 Proceeds from sale of equipment 181 3 59 Bank and bank holding company acquisitions, net of cash and cash equivalent received - (11,748) - --------- --------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,273 (9,609) (27,303)
(Continued) 31. UNIONBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
1997 1996 1995 - ---------------------------------------------------------------------------------------------------- Cash flows from financing activities Net increase (decrease) in deposits $ (15,997) $ 1,747 $ 29,394 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase (10,056) 2,481 (1,613) Net increase (decrease) in advances from the Federal Home Loan Bank 6,434 (4,000) - Payments on notes payable (3,685) (13,802) (680) Proceeds from notes payable 766 18,686 - Dividends on common stock (722) (316) (284) Dividends on preferred stock (259) (53) - Proceeds from exercise of stock options 8 - - Redemption of qualifying directors' stock - (1) - Proceeds from issuance of common stock, net of costs to raise capital - 12,436 - --------- -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (23,511) 17,178 26,817 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,410) 13,069 3,169 Cash and cash equivalents Beginning of year 29,236 16,167 12,998 --------- -------- -------- End of year $ 22,826 $ 29,236 $ 16,167 --------- -------- -------- --------- -------- -------- Supplemental disclosures of cash flow information Cash payments for Interest $ 24,547 $ 16,569 $ 10,925 Income taxes 1,966 921 994
(Continued) 32. UNIONBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
1997 1996 1995 - ---------------------------------------------------------------------------------------------------- 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. 33. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) - -------------------------------------------------------------------------------- NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT 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. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its subsidiaries. During 1997, the Company merged some of its banking subsidiaries to form UnionBank, UnionBank/West, and Union Bank/Central. In addition, the Company has two other banks, the Bank of Ladd and Hanover State Bank. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and with general practice in the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The allowance for loan losses, fair values of financial instruments, and status of contingencies are particularly subject to change. 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. SECURITIES Securities classified as held-to-maturity are those debt securities which the Company has the ability and management has the intent to hold to maturity. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed using the interest method over their contractual lives. (Continued) 34. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) - -------------------------------------------------------------------------------- Securities classified as available-for-sale are those debt securities which the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available-for-sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in stockholders' equity, net of the related deferred income tax effect. Interest income, adjusted for amortization of premiums and accretion of discounts is included in earnings. 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 discount and the allowance for loan losses. Unearned discount on certain installment loans is credited to income over the term of the loan using the interest method. For all other loans, interest is credited to income as earned using the simple interest method applied to the daily balances of the principal amount 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 value 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. 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 its fair value. At December 31, 1997 and 1996, the Company had $192 and $33, respectively, of mortgage servicing rights assets which are included in other assets. (Continued) 35. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) - -------------------------------------------------------------------------------- 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 possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. 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 examination. Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that all principal and interest amounts will not be collected according to the original terms of the loan. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation. Deprecation is computed on the accelerated and straight-line methods over the estimated useful lives of the assets. INTANGIBLE ASSETS The excess of the purchase price over the fair value of assets acquired for acquisition transactions accounted for as purchases is recorded as an intangible asset. Fair value adjustments for identifiable tangible assets are accreted and amortized over the lives of the respective 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) 36. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) - -------------------------------------------------------------------------------- INCOME TAXES Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. EARNINGS PER SHARE Basic earnings per share is based on weighted-average common shares outstanding. Diluted earnings per share assumes the issuance of any dilutive potential common shares using the treasury stock method. The accounting standard for computing earnings per share was revised for 1997, and all earnings per share previously reported are restated to follow the new standard. 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 also 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. 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 (Continued) 37. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) - -------------------------------------------------------------------------------- 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 of 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, wind 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. 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 $1000 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 (CONTINUED) 38. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) - -------------------------------------------------------------------------------- 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. 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. DIVIDEND RESTRICTION Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends which may be paid by the subsidiary bank to the holding company or by the holding company to stockholders. (CONTINUED) 39. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) - -------------------------------------------------------------------------------- RECLASSIFICATIONS Certain items in the financial statements, as of and for the years ended December 31, 1996 and 1995 have been reclassified, with no effect on net income, to conform with the current year presentation. FUTURE ACCOUNTING CHANGES New accounting standards have been issued which will require future reporting of comprehensive income (net income plus changes in holding gains and losses on securities available-for-sale) and may require redetermination of industry segment financial information. NOTE 2. BUSINESS ACQUISITIONS On August 1, 1996, the Company acquired Credit Recovery Inc. (formerly LaSalle County Collections, Inc.) ("CRI"), 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. 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. (CONTINUED) 40. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) - -------------------------------------------------------------------------------- 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 $ 0.68 $ 0.61 -------- ------- -------- -------
The effects of the acquisition of "CRI" 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. In 1997, the Company acquired additional minority interest shares, which resulted in additional goodwill of $82 being recorded. (CONTINUED) 41. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) - -------------------------------------------------------------------------------- NOTE 3. SECURITIES Amortized costs and fair values of securities are summarized as follows:
Gross Gross AVAILABLE-FOR-SALE Amortized Unrealized Unrealized Fair December 31, 1997 Cost Gains Losses Value ------------------------------------------------------ U.S. Treasury $ 19,071 $ 98 $ (6) $ 19,163 U.S. government agencies and corporations 59,341 173 (199) 59,315 U.S. government mortgage-backed securities 21,797 907 (9) 22,695 Collateralized mortgage obligations 57,800 528 (28) 58,300 Corporate bonds 100 - - 100 Other 4,001 - (6) 3,995 --------- ------- -------- --------- $ 162,110 $ 1,706 $ (248) $ 163,568 --------- ------- -------- --------- --------- ------- -------- --------- 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 --------- ------- -------- --------- --------- ------- -------- --------- HELD-TO-MATURITY December 31, 1997 States and political subdivisions $ 37,170 $ 805 $ (135) $ 37,840 --------- ------- -------- --------- --------- ------- -------- --------- December 31, 1996 States and political subdivisions $ 35,017 $ 496 $ (191) $ 35,322 --------- ------- -------- --------- --------- ------- -------- ---------
(CONTINUED) 42. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) - -------------------------------------------------------------------------------- The amortized cost and fair value of securities classified as held-to-maturity and available-for-sale at December 31, 1997, 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 $ 5,240 $ 5,255 $ 21,842 $ 21,837 Due after one year through five years 13,867 14,035 27,564 27,583 Due after five years through ten years 15,571 15,500 29,106 29,158 Due after ten years 2,492 3,050 - - U.S. government mortgage-backed securities - - 21,797 22,695 Collateralized mortgage obligations - - 57,800 58,300 Equity securities - - 4,001 3,995 -------- -------- --------- --------- $ 37,170 $ 37,840 $ 162,110 $ 163,568 -------- -------- --------- --------- -------- -------- --------- ---------
As of December 31, 1997, the Company held U.S. government agency structured notes and callable securities carried at fair values of $37,641 and $8,830, respectively. The amortized cost of these securities was $39,453 and $8,841, respectively, as of December 31, 1997. Securities with carrying values of approximately $125,000 and $132,000 at December 31,1997 and 1996, 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. In connection with the 1996 acquisitions and in order to maintain the Company's interest rate risk, 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. Realized gains and losses from the sale of securities available-for-sale follow:
Years Ended --------December 31,------- 1997 1996 1995 ------- ------- ------ Proceeds $28,773 $24,620 $6,230 Realized gains 287 137 172 Realized losses (94) (117) (74)
Included in the 1997 realized losses is a $92 writedown of a corporate bond during 1997. The security is reported at amortized cost of $100, net of a loss allowance of $200. (CONTINUED) 43. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- NOTE 4. LOANS The major classifications of loans follow:
December 31, ------------------------- 1997 1996 ----------- ---------- Commercial $ 102,367 $ 95,929 Real estate 224,489 203,732 Installment 41,210 41,303 Other 3,076 6,047 ---------- --------- 371,142 347,011 ---------- --------- Less: Unearned interest 157 515 Allowance for loan losses 3,188 3,068 ---------- --------- 3,345 3,583 ---------- --------- $ 367,797 $ 343,428 ---------- --------- ---------- ---------
Included in real estate loans are $3,235 and $2,162 of loans held for sale at December 31, 1997 and 1996, respectively. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $66,535 and $49,778 at December 31, 1997 and 1996, respectively. The following table presents data on impaired loans:
December 31, ------------------------------- 1997 1996 1995 ------ ------ ----- Year-end impaired loans for which an allowance has been provided $1,714 $ 14 $733 Year-end impaired loans for which no allowance has been provided - 1,080 - ------ ------ ---- Total loans determined to be impaired $1,714 $1,094 $733 ------ ------ ---- ------ ------ ---- Allowance for loan loss for impaired loans included in the allowance for loan losses $ 286 $ 2 $500 ------ ------ ---- ------ ------ ---- Average recorded investment in impaired loans $2,375 $ 947 $423 ------ ------ ---- ------ ------ ---- Interest income recognized from impaired loans $ 6 $ - $ - ------ ------ ---- ------ ------ ---- Cash basis interest income recognized from impaired loans $ - $ - $ - ------ ------ ---- ------ ------ ----
(Continued) 44. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- 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 $67,386 and $61,978 as of December 31, 1997 and 1996, respectively. In addition, the Company has a concentration of commercial real estate loans of approximately $72,730 and $63,254 as of December 31, 1997 and 1996, respectively. 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, and principal stockholders of the Company and its subsidiaries, and to parties which the Company or its directors, executive officers, and stockholders have the ability to significantly influence (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, 1997 follow:
Balance at December 31, 1996 $ 6,372 New loans, extensions, and modifications 6,622 Repayments (7,801) ---------- Balance at December 31, 1997 $ 5,193 ---------- ----------
(Continued) 45. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- NOTE 5. ALLOWANCE FOR LOAN LOSSES An analysis of activity in the allowance for loan losses follows:
Years Ended December 31, --------------------------------- 1997 1996 1995 ------- ------- ------- Balance at beginning of year $ 3,068 $ 2,014 $ 1,704 Balance acquired - 1,292 - Provision for loan losses 1,079 1,178 684 Recoveries 248 98 163 Loans charged off (1,207) (1,514) (537) ------- ------- ------- Balance at end of year $ 3,188 $ 3,068 $ 2,014 ------- ------- ------- ------- ------- -------
NOTE 6. PREMISES AND EQUIPMENT Premises and equipment consisted of:
December 31, ---------------------- 1997 1996 ------- ------- Land $ 1,645 $ 1,325 Buildings 12,774 10,893 Furniture and equipment 11,889 10,457 ------- ------- 26,308 22,675 Less accumulated depreciation 11,677 9,095 ------- ------- $14,631 $13,580 ------- ------- ------- -------
NOTE 7. DEPOSITS Deposit account balances by type are summarized as follows:
December 31, ----------------------- 1997 1996 -------- -------- Non-interest-bearing demand deposits $ 62,095 $ 65,864 Savings, NOW, and money market accounts 148,095 159,614 Time deposits of $100 or more 80,139 74,485 Other time deposits 237,418 243,781 -------- -------- $527,747 $543,744 -------- -------- -------- --------
(Continued) 46. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- At December 31, 1997, the scheduled maturities of time deposits are as follows:
Year Amount ------------------------------------- 1998 $ 246,738 1999 43,122 2000 20,532 2001 2,666 2002 and thereafter 4,499 ------------ $ 317,557 ------------ ------------
A maturity distribution of time certificates of deposit in denominations of $100 or more was as follows:
December 31, ------------------------ 1997 1996 -------- --------- 3 months or less $ 30,327 $ 33,810 Over 3 months through 6 months 13,680 17,047 Over 6 months through 12 months 18,738 8,694 Over 12 months 17,394 14,934 -------- -------- $ 80,139 $ 74,485 -------- -------- -------- --------
NOTE 8. 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 third parties. A summary of short-term borrowings follows:
December 31, ------------------------ 1997 1996 -------- --------- Federal funds purchased $ - $ 800 Securities sold under agreements to repurchase 11,761 21,017 ------- ------- $11,761 $21,817 ------- ------- ------- -------
Federal funds purchased and securities sold under agreement to repurchase generally mature within one to ninety days from the transaction date. (Continued) 47. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- At December 31, 1997, the scheduled maturities of advances from the Federal Home Loan Bank were as follows:
Year Amount ------------------------------------ 1998 $ 2,960 2001 2,000 2002 and thereafter 11,495 ----------- $ 16,455 ----------- -----------
Where required, the FHLB advances are secured by mortgage-backed securities held by the respective banks (Note 3), and one of the Bank's maintains a collateral pledge agreement covering secured advances whereby the Bank has agreed to at all times keep on hand, free of all other pledges, liens, and encumbrances, first mortgages on improved residential property (not more than 90 days delinquent) aggregating no less than 167% of the outstanding secured advances from the Federal Home Loan Bank. Notes payable consisted of the following at December 31, 1997 and 1996:
1997 1996 ---- ---- Note payable to LaSalle National Bank; interest due quarterly at LIBOR plus 125 basis points (7.375% at December 31, 1997); balance due on September 1, 1998; secured by 100% of the stock of the subsidiary banks. $10,000 $ - $1,000,000 line of credit to LaSalle National Bank; interest due quarterly at prime rate (8.50% at December 31, 1997); balance due at September 1, 1998; secured by 100% of stock of subsidiary banks. - - Mortgage note payable to an individual, secured by land. The note bears inputed interest at 8% and payments of principal and interest are due over the next three years in amounts of $50,000, $50,000, and $250,000. 261 - Note payable to LaSalle National Bank; interest due quarterly at a prime rate (8.25% at December 31, 1996); balance of all unpaid principal and accrued interest due August 2, 1997. - 13,180 ------- ------- $10,261 $13,180 ------- ------- ------- -------
(Continued) 48. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- The note payable agreements contain certain covenants which limit the amount 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, 1997. Information concerning borrowed funds is as follows:
Years Ended December 31, ------------------------------------- 1997 1996 1995 ------------------------------------- FEDERAL FUNDS PURCHASED Maximum month-end balance during the year $11,200 $11,288 $ - Average balance during the year 2,451 2,448 - Weighted average interest rate for the year 6.58% 5.26% -% Weighted average interest rate at year end - 7.50% -% SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Maximum month-end balance during the year $11,861 $32,310 $15,511 Average balance during the year 18,232 20,239 9,260 Weighted average interest rate for the year 5.53% 5.70% 5.73% Weighted average interest rate at year end 5.80% 5.79% 5.49% ADVANCES FROM THE FEDERAL HOME LOAN BANK Maximum month-end balance during the year $22,895 $15,422 $ - Average balance during the year 8,783 13,294 - Weighted average interest rate for the year 6.18% 5.29% -% Weighted average interest rate at year end 5.78% 6.03% -% NOTES PAYABLE Maximum month-end balance during the year $17,419 $25,320 $ 4,946 Average balance during the year 13,247 8,364 4,696 Weighted average interest rate for the year 7.98% 8.25% 9.00% Weighted average interest rate at year end 7.40% 8.25% 9.16%
NOTE 9. INCOME TAXES Income taxes consisted of:
Years ended December 31, -------------------------------------- 1997 1996 1995 -------------------------------------- Federal Current $ 1,818 $ 918 $ 879 Deferred 252 (24) (134) ------ ----- ----- 2,070 894 745 State Current - 96 140 Deferred 35 (21) (4) ------ ----- ----- 35 75 136 ------ ----- ----- $2,105 $ 969 $ 881 ------ ----- ----- ------ ----- -----
(Continued) 49. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- The Company's income tax expense differed from the statutory federal rate of 34% as follows:
Years ended December 31, ------------------------------------ 1997 1996 1995 ------------------------------------ Expected income taxes $2,336 $1,293 $1,100 Income tax effect of Interest earned on tax free investments and loans (632) (535) (472) Nondeductible interest expense incurred to carry tax-free investments and loans 87 90 63 Nondeductible amortization 199 67 23 State income taxes, net of federal tax benefit 220 50 90 Other (105) 4 77 ------ ---- ---- $2,105 $ 969 $ 881 ------ ---- ---- ------ ---- ----
The significant components of deferred income tax assets and liabilities:
December 31, ---------------------- 1997 1996 ---------------------- Deferred tax assets Allowance for loan losses $ 492 $ 446 Deferred compensation 33 25 Other intangible assets 482 577 Securities available-for-sale - 48 Other - 39 ------- ------ TOTAL DEFERRED TAX ASSETS 1,007 1,135 Deferred tax liabilities Depreciation (486) (532) Core deposit intangible (926) (1,053) Securities available-for-sale (856) - Other (380) - ------- ------ TOTAL DEFERRED TAX LIABILITIES (2,648) (1,585) ------- ------ Net deferred tax liabilities $(1,641) $ (450) ------- ------ ------- ------
(Continued) 50. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- NOTE 10. BENEFIT PLANS 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 439,368 shares of the Company's common stock. At December 31,1997, 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. 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 $272, $252, and $237 for the years ended December 31, 1997, 1996, and 1995, respectively. Prairie Bancorp, Inc. maintained a 401(k) salary reduction plan covering substantially all employees. Eligible employees may elect to make tax deferred contributions within a specified range of their compensation as defined in the plan. UnionBancorp, Inc. maintained their plan after the acquisitions and contributed at its discretion. Contributions to the plan are expensed currently and approximated $93 and $23 for the years ended December 31, 1997 and 1996, respectively. NOTE 11. 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. (Continued) 51. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- A summary of the status of the Option Plan as of December 31, 1997, 1996, and 1995 and changes during the years ending on those dates is presented below.
1997 1996 1995 ----------------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------------------------------------------------------------------------------- Outstanding at beginning of year 104,478 $ 6.87 68,400 $ 6.24 38,100 $ 5.87 Granted 34,600 10.65 41,250 7.99 30,300 6.70 Exercised (1,200) 6.75 (1,398) 6.97 - - Forfeited - - (3,774) 8.65 - - ------- ------- ------- ------- ------ ------- Outstanding at end of year 137,878 104,478 6.87 68,400 6.24 ------- ------- ------ ------- ------- ------ Options exercisable at year-end 50,570 41,727 6.48 21,300 6.11 ------- ------- ------ ------- ------- ------ Weighted-average fair value of options granted during the year 5.31 3.32 2.79 ------- ------- ------- ------- ------- -------
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 $42, $26, and $19 for the years ended December 31, 1997, 1996, and 1995, respectively. Had compensation cost for all of the stock-based compensation plans been determined based on the grant date using the estimated fair value, reported income, and earnings per common share would have been reduced to the pro forma amounts shown below:
1997 1996 1995 -------------------------------- Net income for common stockholders As reported $4,506 $2,729 $2,353 Pro forma 4,450 2,699 2,342 Basic earnings per common share As reported 1.09 1.00 1.10 Pro forma 1.08 0.99 1.10 Diluted earnings per common stock As reported 1.08 .99 1.09 Pro forma 1.07 .98 1.08
(Continued) 52. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- The fair value of the options granted in 1997, 1996, and 1995 is estimated at $5.31, $3.36, and $2.79 or the date of grant using the Black Scholes options value model with the following assumptions:
1997 1996 1995 ---- ---- ---- Dividend yield 1.34% 1.74% 2.01% Risk free interest rate 6.36% 5.23% 6.19% Assumed forfeiture rate - - - Average life 6 6 6
NOTE 12. EARNINGS PER SHARE A reconciliation of the numerators and denominators for earnings per common share computations for the years ended December 31 is presented below (dollars and shares in thousands).
1997 1996 ---- ---- BASIC EARNINGS PER SHARE Net income available to common stockholders $4,506 $2,729 ------ ------ ------ ------ Weighted average common shares outstanding 4,126 2,731 ------ ------ ------ ------ BASIC EARNINGS PER SHARE $1.09 $1.00 ------ ------ ------ ------ EARNINGS PER SHARE ASSUMING DILUTION Net income (loss) available to common stockholders $4,506 $2,729 ------ ------ ------ ------ Weighted average common shares outstanding 4,126 2,731 Add: dilutive effect of assumed exercised Stock options 42 26 ------ ------ Weighted average common and dilutive potential shares outstanding 4,168 2,757 ------ ------ ------ ------ Diluted earnings per share $ 1.08 $ .99 ------ ------ ------ ------
NOTE 13. REGULATORY MATTERS The Company and the subsidiary Banks are subject to regulatory capital requirements administered by the federal banking agencies. 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. (Continued) 53. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of December 31, 1997, that the Company and the subsidiary Banks meet all capital adequacy requirements to which they are subject. As of December 31, 1997, the most recent notification from the corresponding regulatory agency categorized the subsidiary 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 Bank's categories.
To Be Well Capitalized Under To Be Adequately Prompt Corrective Actual Capitalized Action Provisions ----------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ----------------------------------------------------------------------------------- As of December 31, 1997 Total capital (to risk-weighted assets) UnionBancorp, Inc. $45,725 11.86% $30,855 8.00% $38,569 10.00% UnionBank 27,633 12.05 18,342 8.00 22,927 10.00 UnionBank/Central 8,542 17.24 3,964 8.00 4,956 10.00 UnionBank/West 11,069 14.09 6,284 8.00 7,854 10.00 Tier I capital (to risk-weighted assets) UnionBancorp, Inc. $41,180 10.68% $15,427 4.00% $23,141 6.00% UnionBank 25,790 11.25 9,171 4.00 13,756 6.00 UnionBank/Central 8,116 16.38 1,982 4.00 2,973 6.00 UnionBank/West 10,430 13.28 3,142 4.00 4,713 6.00 Tier I leverage ratio (to average assets) UnionBancorp, Inc. $41,180 6.64% $24,781 4.00% $30,976 5.00% UnionBank 25,790 8.16 12,647 4.00 15,808 5.00 UnionBank/Central 8,116 8.39 3,870 4.00 4,838 5.00 UnionBank/West 10,430 7.10 5,872 4.00 7,340 5.00
(Continued) 54. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments. 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, may not be realized in immediate settlement of the instrument. CASH AND CASH EQUIVALENTS The carrying amounts reported in the consolidated 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, applying the interest rates currently offered to borrowers for loans of similar credit quality and comparable payment terms. The carrying amount of accrued interest receivable approximates its fair value. DEPOSIT LIABILITIES The fair values disclosed 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) 55. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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. The mortgage payable is calculated using discounted cash flows that apply interest rates being currently offered to borrowers of similar credit quality and comparable payment terms. 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 values of these items are not material The estimated fair values of the Company's financial instruments were as follows:
December 31, ---------------------------------------------------- 1997 1996 ---------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Financial assets Cash and cash equivalents $ 22,826 $ 22,826 $ 29,236 $ 29,236 Federal funds sold 1,404 1,404 10,267 10,267 Securities 200,738 201,408 223,555 223,860 Loans 367,797 368,180 348,428 348,043 Accrued interest receivable 6,730 6,730 6,501 6,501 Financial liabilities Deposits 527,747 527,762 543,744 545,433 Federal funds purchased and securities sold under agreement to repurchase 11,761 11,761 21,817 21,817 Advances from the Federal Home Loan Bank 16,455 16,455 10,021 10,021 Notes payable 10,261 10,261 13,180 13,180 Accrued interest payable 3,819 3,819 3,931 3,931
(Continued) 56. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 Bank's exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit 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 are as 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 December 31, 1997 $58,103 $14,877 $72,980 8.00 - 10.95% December 31, 1996 49,712 10,142 59,854 6.25 - 14.00%
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. For commitments to extend credit, the Banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the customer. (Continued) 57. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- 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 loan commitments 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) 58. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- Condensed financial information for UnionBancorp, Inc. follows: BALANCE SHEETS (PARENT COMPANY ONLY)
December 31, ----------------------- ASSETS 1997 1996 ----------------------- Cash and cash equivalents $ 633 $ 6 Investment in subsidiaries 61,715 60,092 Premises and equipment 431 336 Other assets 278 285 -------- -------- $ 63,057 $ 60,719 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Notes payable $ 10,000 $ 13,180 Other liabilities 619 99 -------- -------- 10,619 13,279 -------- -------- Mandatory redeemable preferred stock 857 857 -------- -------- Stockholders' equity 51,581 46,583 -------- -------- $ 63,057 $ 60,719 -------- -------- -------- --------
INCOME STATEMENTS (PARENT COMPANY ONLY)
Years ended December 31, -------------------------------- 1997 1996 1995 -------------------------------- Dividends from subsidiaries $6,244 $1,227 $1,532 Management fees and other 369 977 981 Interest expense 991 690 422 Other expenses 2,589 1,768 1,275 Income tax benefit (1,321) (545) (217) Equity in undistributed earnings of subsidiaries 411 2,543 1,320 ------ ------ ------ NET INCOME 4,765 2,834 2,353 Less dividends on preferred stock 259 105 - ------ ------ ------ NET INCOME ON COMMON STOCK $4,506 $2,729 $2,353 ------ ------ ------ ------ ------ ------
(Continued) 59. UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
Years ended December 31, -------------------------------- 1997 1996 1995 -------------------------------- Cash Flows from Operating Activities Net income $ 4,765 $ 2,834 $ 2,353 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 90 53 17 Undistributed earnings of subsidiaries (411) (2,543) (1,320) Amortization of deferred compensation - stock options 42 26 19 Change in assets and liabilities (Increase) decrease in other assets 7 (145) 474 Increase (decrease) in other liabilities 472 18 (134) ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,965 243 1,409 ------- ------- ------- Cash Flows from Investing Activities Investment in subsidiary - (11) (400) Purchases of premises and equipment (185) (237) (51) Purchase price paid for acquisitions - (16,939) - ------- ------- ------- NET CASH (USED IN) FINANCING ACTIVITIES (185) (17,187) (451) ------- ------- ------- Cash Flows from Financing Activities Net increase (decrease) in notes payable (3,180) 4,884 (680) Dividend paid on common stock (722) (316) (284) Dividends paid on preferred stock (259) (53) - Redemption of qualifying directors' shares and exercise of stock options 8 (1) - Proceeds from issuance of common stock, net of cost - 12,436 - ------- ------- ------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,153) 16,950 (964) ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 627 6 (6) Cash and cash equivalents Beginning of year 6 - 6 ------- ------- ------- End of year $ 633 $ 6 $ - ------- ------- ------- ------- ------- -------
60. EX-21.1 3 EXHIBIT 21.1 SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT UnionBank, an Illinois state bank with its main office located Streator, Illinois. UnionBank/West, an Illinois state bank with its main office located in Macomb, Illinois. UnionBank/Central, an Illinois state bank with its main office located in Princeton, Illinois. UnionBank/Northwest, an Illinois state bank with its main office located in Hanover, Illinois. Bank of Ladd, an Illinois state bank with its main office located in Ladd, Illinois. Prairie Bancorp, Inc., an Illinois corporaton located in Streator, Illinois. Country Bancshares, Inc., an Illinois corporation located in Streator, Illinois. UnionData Corp., Inc., an Illinois corporation located in Streator, Illinois. UnionTrust Corporation, an Illinois corporation located in Ottawa, Illinois. Credit Recovery, Inc., an Illinois corporation located in Ottawa, Illinois. EX-23.1 4 EXHIBIT 23.1 CONSENT [LETTERHEAD OF CROWE, CHIZEK & COMPANY LLP] The Board of Directors UnionBancorp, Inc. We consent to the incorporation by reference of our report included herein, dated February 6, 1998, relating to the consolidated financial statements of UnionBancorp, Inc. (the "Company") as of December 31, 1997 and for the year then ended in the Registration Statement on Form S-8 filed by the Company with the Securities and Exchange Commission on November 18, 1996. Crowe, Chizek and Company LLP Oak Brook, Illinois March 31, 1998 EX-23.2 5 EXHIBIT 23.2 CONSENT [LETTERHEAD OF MCGLADREY & PULLEN, LLP] CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-16359), of our report, dated February 5, 1997, on the 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 two years in the period ending December 31, 1996, which was included in the Annual Report on Form 10-K for the year ended 1997. McGLADREY & PULLEN, LLP Champaign, Illinois March 27, 1998 -----END PRIVACY-ENHANCED MESSAGE-----