<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number: 0-28846
UNIONBANCORP, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3145350
- ------------------------------ ----------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
122 WEST MADISON STREET, OTTAWA, ILLINOIS 61350
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(815) 434-3900
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Exchange Class On Which Registered
- ----------------------- -----------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($1.00 PAR VALUE)
--------------------------------
(Title of Class)
PREFERRED PURCHASE RIGHTS
--------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No
--- ---
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [/X/]
As of March 11, 1997, the Registrant had issued and outstanding 4,116,001 shares
of the Registrant's Common Stock. The aggregate market value of the voting
stock held by non-affiliates of the Registrant as of March 7, 1997, was
$33,807,849.*
* Based on the last reported price ($12.75) of an actual transaction in the
Registrant's Common Stock on March 7, 1997, and reports of beneficial
ownership filed by directors and executive officers of the Registrant and
by beneficial owners of more than 5% of the outstanding shares of Common
Stock of the Registrant; however, such determination of shares owned by
affiliates does not constitute an admission of affiliate status or
beneficial interest in shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's 1996 Annual Report to Stockholders (the "1996
Annual Report") are incorporated by reference into Part II of this Form 10-K.
Certain portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders (the "1997 Proxy Statement") are incorporated by reference into
Part III of this Form 10-K.
<PAGE>
UNIONBANCORP, INC.
Form 10-K Annual Report
Table of Contents
Part I
Item 1. Description of Business. . . . . . . . . . . . . . . . . . . . 1
A. The Company
B. Regulation and Supervision
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 10
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters. . . . . . . . . . . . . . . . . 10
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . 12
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . 12
Item 9 Changes in and Disagreements on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . 12
Part III
Item 10. Directors and Executive Officers of the Registrant . . . . . . 12
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . 13
Item 12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . . . . 13
Item 13. Certain Relationships and Related Transactions . . . . . . . . 13
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . 13
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
GENERAL
The Company, a Delaware corporation, is a multi-bank holding company which
owns all of the issued and outstanding capital stock of UnionBank, an Illinois
bank located in Streator, Illinois, and UnionBank/Sandwich, an Illinois bank
located in Sandwich, Illinois. During 1996, the Company acquired all of the
issued and outstanding capital stock of Prairie Bancorp, Inc. ("Prairie"), a
multi-bank holding company with six bank subsidiaries located in the Illinois
communities of Carthage, Hanover, Ladd, Manlius, Tampico and Tiskilwa, and also
acquired Country Bancshares, Inc. ("Country"), a one-bank holding company having
an Illinois bank subsidiary located in Macomb, Illinois (UnionBank,
UnionBank/Sandwich and the bank subsidiaries of Prairie and Country are
sometimes collectively referred to as the "Banks"). The Company also has three
non-bank subsidiaries, UnionData Corp. ("UnionData"), which provides data
processing services, Union Corporation ("Union Corporation"), which primarily
serves as an owner and lessor of banking offices to certain of the Banks, and
LaSalle County Collections, Inc. ("LaSalle"), a debt collection agency located
in Ottawa, Illinois. The Banks and the three non-bank subsidiaries are
collectively referred to as the "Subsidiaries." At December 31, 1996, the
Company had consolidated assets of approximately $642.0 million, deposits of
approximately $543.7 million and stockholders' equity of approximately $46.5
million.
The Company's strategic plan contemplates an increase in profitability and
stockholder value through a significant expansion of the Company's market area,
substantial growth in its asset size and improved operational efficiencies. In
1993, the Company began implementing this plan by realigning its management
structure through the redefinition of certain officers' duties and functions,
hiring additional experienced senior executives and developing among its
employees an aggressive sales culture. The acquisitions of Prairie and Country
are expected to increase significantly the presence of the Company within the
region's banking industry. Because of the reputations of the Company and its
executive officers in the banking industry, the Company believes that it will be
an attractive alternative to future sellers of community banks and thrifts. The
Company believes that it can successfully manage these community-based
institutions to increase their profitability by expanding cross-selling efforts
and emphasizing those products and services offering the highest return on
investment.
The Company's operating strategy is to provide customers with the business
sophistication and breadth of products of a regional financial services company,
while retaining the special attention to personal service and the local appeal
of a community bank. Decentralized decision making authority vested in the
presidents and senior officers of the Banks allows for rapid response time and
flexibility in dealing with customer requests and credit needs. The
participation of the Company's directors, officers and employees in area civic
and service organizations demonstrates the Company's continuing commitment to
the communities it serves. Management believes that these qualities distinguish
the Company from its competitors and will allow the Company to compete
successfully in its market area against larger regional and out-of-state
institutions.
Prior to the acquisitions of Prairie and Country, the Company served the
banking needs of LaSalle and contiguous counties located in north central
Illinois (LaSalle and portions of Livingston, Grundy, Bureau, Kendall, DeKalb
and Kane Counties) through the Union Banks. The Company has recently expanded
its lending and deposit gathering activities from north central Illinois into
certain of the counties surrounding the Chicago metropolitan area, including
Kane and Kendall Counties.
The Banks provide a range of commercial and retail lending services to
corporations, partnerships and individuals, including, but not limited to,
commercial business loans, commercial and residential real estate construction
and mortgage loans, loan participations, consumer loans, revolving lines of
credit and letters of credit. The Banks make direct and indirect installment
loans to consumers and commercial customers, and originate and service
residential mortgages and handle the secondary marketing of those mortgages.
Agricultural loans also play
1
<PAGE>
a role in the Company's overall lending portfolio, although most of this lending
activity is based in the north central portion of the Company's market area.
The Company has centralized the lending policies of the Prairie and Country
bank subsidiaries as part of the process of integrating the operations of these
banks into that of the Union Banks following the Prairie and Country
acquisitions. It is anticipated that the lending policies of any banks acquired
in the future would also be centralized, although the Company strives to have
its bank subsidiaries retain their local focus.
The Company also provides a variety of additional services and financial
products, including trust and asset management services through its Investment
Management and Trust Division, which is operated through UnionBank/Streator,
MasterCard and Visa credit cards, and a debit card program inaugurated in 1994.
A new automated payment option called Direct Payment, which is an efficient,
electronic payment alternative to paper checks, is offered through UnionData.
The Company also conducts all of its own data processing for the Union Banks
through UnionData, and is integrating the Prairie and Country data processing
systems into UnionData as well.
LaSalle, a collection agency recently acquired by the Company, serves the
principal market area of Ottawa, Illinois, and surrounding communities, and has
been providing services to the UnionBanks prior to its acquisition. The Company
intends to expand the market area of LaSalle Collections and to utilize its
services with respect to the collection needs of the other Bank Subsidiaries.
COMPETITION
The Company's market area is highly competitive. Within the 10 Illinois
counties served by the Company's banking offices, many commercial banks, savings
and loan associations and credit unions currently operate offices. In addition,
many other financial institutions based in surrounding communities and in
Chicago, Illinois, actively compete for customers within the Company's market
area. The Company also faces competition from finance companies, insurance
companies, mortgage companies, securities brokerage firms, money market funds,
loan production offices and other providers of financial services.
The Company competes for loans principally through the range and quality of
the services it provides and through competitive interest rates and loan fees.
The Company believes that its long-standing presence in the communities its
serves and personal service philosophy enhance its ability to compete favorably
in attracting and retaining individual and business customers. The Company
actively solicits deposit-related customers and competes for deposits by
offering customers personal attention, professional service and competitive
interest rates.
EMPLOYEES
At December 31, 1996, the Company employed 289 full-time equivalent
employees. The Company places high priority on staff development which involves
extensive training, including customer service training. New employees are
selected on the basis of both technical skills and customer service
capabilities. None of the Company's employees are covered by a collective
bargaining agreement with the Company. The Company offers a variety of employee
benefits and management considers its employee relations to be excellent.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result the growth and earnings
performance of the Company and the Bank Subsidiaries can be affected not only by
management decisions and general economic conditions, but also by the policies
of various governmental regulatory authorities including, but not limited to,
the FRB, the Office of the Comptroller of the Currency (the "OCC"), the FDIC,
the Illinois Commissioner, the Internal Revenue Service and state taxing
authorities and the
2
<PAGE>
Securities and Exchange Commission (the "SEC"). The effect of such statutes,
regulations and policies can be significant, and cannot be predicted with a high
degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and the Bank Subsidiaries, regulate, among
other things, the scope of business, investments, reserves against deposits,
capital levels relative to operations, the nature and amount of collateral for
loans, the establishment of branches, mergers, consolidations and dividends. The
system of supervision and regulation applicable to the Company and the Bank
Subsidiaries establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds and the depositors, rather than the stockholders, of financial
institutions.
The following references to material statutes and regulations affecting the
Company and the Bank Subsidiaries are brief summaries thereof and do not purport
to be complete and are qualified in their entirety by reference to such statutes
and regulations. Any change in applicable law or regulations may have a
material effect on the business of the Company and the Bank Subsidiaries.
RECENT REGULATORY DEVELOPMENTS
On September 30, 1996, President Clinton signed into law the "Economic
Growth and Regulatory Paperwork Reduction Act of 1996" (the "Regulatory
Reduction Act"). Subtitle G of the Regulatory Reduction Act consists of the
"Deposit Insurance Funds Act of 1996" (the "DIFA"). The DIFA provides for a
one-time special assessment on each depository institution holding deposits
subject to assessment by the FDIC for the Savings Association Insurance Fund
(the "SAIF") in an amount which, in the aggregate, will increase the designated
reserve ratio of the SAIF (I.E., the ratio of the insurance reserves of the SAIF
to total SAIF-insured deposits) to 1.25% on October 1, 1996. Subject to certain
exceptions, the special assessment was payable in full on November 27, 1996.
None of the Banks Subsidiaries holds any SAIF-assessable deposits and,
therefore, none of the Bank Subsidiaries was subject to the special assessment.
Prior to the enactment of the DIFA, a substantial amount of the SAIF
assessment revenue was used to pay the interest due on bonds issued by the
Financing Corporation ("FICO"), the entity created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation (the
"FSLIC"), the SAIF's predecessor insurance fund. Pursuant to the DIFA, the
interest due on outstanding FICO bonds will be covered by assessments against
both SAIF and Bank Insurance Fund ("BIF") member institutions beginning January
1, 1997. Between January 1, 1997 and December 31, 1999, FICO assessments
against BIF-member institutions cannot exceed 20% of the FICO assessments
charged SAIF-member institutions. From January 1, 2000 until the FICO bonds
mature in 2019, FICO assessments will be shared by all FDIC-insured institutions
on a PRO RATA basis. It has been estimated that the FICO assessments for the
period January 1, 1997 through December 31, 1999 will be approximately 0.013% of
deposits for BIF members versus approximately 0.064% of deposits for SAIF
members, and will be less than 0.025% of deposits thereafter.
The DIFA also provides for a merger of the BIF and the SAIF on January 1,
1999, provided there are no state or federally chartered, FDIC-insured savings
associations existing on that date. To facilitate the merger of the BIF and the
SAIF, the DIFA directs the Treasury Department to conduct a study on the
development of a common charter and to submit a report, along with appropriate
legislative recommendations, to the Congress by March 31, 1997.
In addition to the DIFA, the Regulatory Reduction Act includes a number of
statutory changes designed to eliminate duplicative, redundant or unnecessary
regulatory requirements. Among other things, the Regulatory Reduction Act
establishes streamlined notice procedures for the commencement of new nonbanking
activities by bank holding companies, eliminates the need for national banks to
obtain OCC approval to establish off-site ATMs, excludes ATM closures and
certain branch office relocations from the prior notice requirements applicable
to branch closings, significantly expands the authority of well-capitalized and
well-managed national banks to invest in office premises without prior
regulatory approval and establishes time frames within which the FDIC must act
on applications by state banks to engage in activities which, although permitted
for state banks under applicable state
3
<PAGE>
law, are not permissible activities for national banks. The Regulatory
Reduction Act also clarifies the liability of a financial institution, when
acting as a lender or in a fiduciary capacity, under the federal environmental
laws. Although the full impact of the Regulatory Reduction Act on the operations
of the Company and the Bank cannot be determined at this time, management
believes that the legislation may reduce compliance costs to some extent and
allow the Company and the Bank somewhat greater operating flexibility.
THE COMPANY
GENERAL
The Company, as the sole stockholder of the Union Banks; Prairie, as the
sole or controlling stockholder of each of the Prairie Banks; and Country, as
the sole stockholder of Omni Bank, are each bank holding companies. As bank
holding companies, each of the Company, Prairie and Country are registered with,
and subject to regulation by, the FRB under the BHCA. Under FRB policy, a bank
holding company is expected to act as a source of financial strength to its bank
subsidiaries and to commit resources to support its bank subsidiaries in
circumstances where the holding company might not do so absent such policy.
Under the BHCA, a bank holding company is subject to periodic examination by the
FRB and is required to file periodic reports of its operations and such
additional information as the FRB may require. The Company, Prairie and Country
are also subject to the requirements of the Illinois Bank Holding Company Act.
INVESTMENTS AND ACTIVITIES
Under the BHCA, a bank holding company must obtain FRB approval before:
(i) acquiring, directly or indirectly, ownership or control of any voting shares
of another bank or bank holding company if, after such acquisition, it would own
or control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank; or (iii) merging or consolidating with another bank holding
company. Subject to certain conditions (including certain deposit concentration
limits established by the BHCA), the FRB may allow a bank holding company to
acquire banks located in any state of the United States without regard to
whether the acquisition is prohibited by the law of the state in which the
target bank is located. In approving interstate acquisitions, however, the FRB
is required to give effect to applicable state law limitations on the aggregate
amount of deposits that may be held by the acquiring bank holding company and
its insured depository institution affiliates in the state in which the target
bank is located or which require that the target bank have been in existence for
a minimum period of time (not to exceed five years) before being acquired by an
out-of-state bank holding company.
The BHCA also prohibits, with certain exceptions, a bank holding company
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank and from engaging in any
business other than that of banking, managing and controlling banks or
furnishing services to banks and their subsidiaries. The principal exception to
this prohibition allows bank holding companies to engage in, and to own shares
of companies engaged in, certain businesses found by the FRB to be "so closely
related to banking . . . as to be a proper incident thereto." Under current
regulations of the FRB, the Company and its non-bank subsidiaries are permitted
to engage in, among other activities, such banking-related businesses as the
operation of a thrift, sales and consumer finance, equipment leasing, the
operation of a computer service bureau, including software development, and
mortgage banking and brokerage. The BHCA generally does not place territorial
restrictions on the activities of non-bank subsidiaries of bank holding
companies.
CAPITAL REQUIREMENTS
Bank holding companies are required to maintain minimum levels of capital
in accordance with FRB capital adequacy guidelines. If capital falls below
minimum guideline levels, a bank holding company, among other things, may be
denied approval to acquire or establish additional banks or non-bank businesses.
The FRB's capital guidelines establish the following minimum regulatory
capital requirements for bank holding companies: a risk-based requirement
expressed as a percentage of total risk-weighted assets, and a leverage
4
<PAGE>
requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, of which at least one-half must be Tier 1 capital. The leverage
requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated companies, with minimum requirements of 4% to 5% for
all others. For purposes of these capital standards, Tier 1 capital consists
primarily of permanent stockholders' equity less intangible assets (other than
certain mortgage servicing rights and purchased credit card relationships) and
total capital means Tier 1 capital plus certain other debt and equity
instruments which do not qualify as Tier 1 capital and a portion of the
company's allowance for loan and lease losses.
The risk-based and leverage standards presently described above are minimum
requirements, and higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking organizations.
Further, any banking organization experiencing or anticipating significant
growth would be expected to maintain capital ratios, including tangible capital
positions (I.E., Tier 1 capital less all intangible assets), well above the
minimum levels.
Under the FRB's guidelines, the capital standards described above generally
apply on a consolidated basis to bank holding companies that, like the Company
and Prairie, have more than $150 million in total consolidated assets and on a
bank-only basis to bank holding companies that, like Country, have less than
$150 million in total consolidated assets. As of December 31, 1996, each of the
Company and Prairie had regulatory capital, calculated on a consolidated basis,
in excess of the FRB's minimum requirements, as set forth below.
Leverage Risk-Based
Ratio Ratio
----- -----
Company . . . . . . . . . . . 7.76% 10.87%
Prairie . . . . . . . . . . . 6.86% 15.91%
DIVIDENDS
The FRB has issued a policy statement on the payment of cash dividends by
bank holding companies. In the policy statement, the FRB expressed its view
that a bank holding company should not pay cash dividends exceeding its net
income or which can only be funded through methods which would weaken the bank
holding company's financial health, such as borrowing. Additionally, the FRB
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to proscribe the payment of dividends by banks and bank
holding companies.
In addition to the restrictions on dividends imposed by the FRB, the DGCL
only permits the Company to pay dividends out of its surplus, or if the Company
has no such surplus, out of its net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. Under the Illinois
Business Corporation Act, as amended, an Illinois corporation such as Prairie or
Country is prohibited from paying dividends if, after giving effect to the
dividend, the corporation would be insolvent or the net assets of the
corporation would be less than zero or less than the maximum amount then payable
to stockholders of the corporation who would have preferential distribution
rights if the corporation were liquidated.
FEDERAL SECURITIES REGULATION
The Company's common stock is registered with the SEC under the Securities
Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Consequently, the Company is subject to the information,
proxy solicitation, insider trading and other restrictions and requirements of
the SEC under the Exchange Act.
5
<PAGE>
THE BANK SUBSIDIARIES
GENERAL
Each of the Ferris Bank, the Hanover Bank, the Ladd Bank, the Tiskilwa Bank
and Omni Bank (collectively the "State Banks") is an Illinois-chartered bank,
the deposit accounts of which are insured by the BIF. As BIF-insured and
Illinois-chartered banks, the State Banks are subject to the examination,
supervision, reporting and enforcement requirements of the FDIC, as
administrator of the BIF, and the Illinois Commissioner, as the chartering
authority for Illinois banks.
The Union Banks are Illinois-chartered banks, the deposit accounts of which
are insured by the BIF, and are also members of the Federal Reserve System
("member banks"). As Illinois-chartered and FDIC-insured member banks, the
Union Banks are subject to the examination, supervision, reporting and
enforcement requirements of the Illinois Commissioner, as the chartering
authority for Illinois banks, the FRB, as the primary federal regulator of its
member banks, and the FDIC, as administrator of the BIF.
The Manlius Bank and Tampico Bank (collectively the "National Banks") are
national banks, chartered by the OCC under the National Bank Act. The deposit
accounts of the National Banks are insured by the BIF, and each of the National
Banks is a member of the Federal Reserve System. As BIF-insured national banks,
the National Banks are subject to the examination, supervision, reporting and
enforcement requirements of the OCC, as the chartering authority for national
banks, and the FDIC, as administrator of the BIF.
DEPOSIT INSURANCE
As FDIC-insured institutions, the Bank Subsidiaries are required to pay
deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which each insured depository institution is
placed into one of nine categories and assessed insurance premiums based upon
its level of capital and the results of supervisory evaluations. Institutions
classified as well-capitalized (as defined by the FDIC) and considered healthy
are assessed at the lowest rate while institutions that are less than adequately
capitalized (as defined by the FDIC) and considered of substantial supervisory
concern are assessed at the highest rate. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
During the year ended December 31, 1996, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. The FDIC has announced that for the semi-annual
assessment period beginning January 1, 1997, BIF assessments will continue to
range from 0% of deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order or any condition imposed in writing by, or included in a
written agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of insurance
if the institution has no tangible capital. Management of the Company is not
aware of any activity or condition that could result in termination of the
deposit insurance of any of the Bank Subsidiaries.
FICO ASSESSMENTS
Since 1987, a portion of the deposit insurance assessments paid by SAIF
members has been used to cover interest payments due on the outstanding
obligations of the FICO, the entity created to finance the recapitalization of
the FSLIC, the SAIF's predecessor insurance fund. Pursuant to federal
legislation enacted September 30, 1996, commencing January 1, 1997, both SAIF
members and BIF members will be subject to assessments to cover the interest
payment on outstanding FICO obligations. Such FICO assessments will be in
addition to amounts assessed by the FDIC for deposit insurance. Until January
1, 2000, the FICO assessments made against BIF members may not exceed 20% of the
amount of the FICO assessments made against SAIF members. It is estimated that
SAIF members will pay FICO assessments equal to 0.064% of deposits while BIF
members will pay FICO assessments
6
<PAGE>
equal to 0.013% of deposits. Between January 1, 2000 and the maturity of the
outstanding FICO obligations in 2019, BIF members and SAIF members will share
the cost of the interest on the FICO bonds on a PRO RATA basis. It is estimated
that FICO assessments during this period will be less than 0.025% of deposits.
CAPITAL REQUIREMENTS
Under federal regulations, the Bank Subsidiaries are subject to the
following minimum capital standards: a leverage requirement consisting of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated
banks with minimum requirements of 4% to 5% for all others, and a risk-based
capital requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital.
For purposes of these capital standards, Tier 1 capital and total capital
consist of substantially the same components as Tier 1 capital under the FRB's
capital guidelines for bank holding companies (SEE "-- the Company -- Capital
Requirements").
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, federal regulations
provide that additional capital may be required to take adequate account of
interest rate risk or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities.
None of the Bank Subsidiaries has been required by its primary federal
regulator to increase its capital to an amount in excess of the minimum
regulatory requirement. As of December 31, 1996, each of the Bank Subsidiaries
exceeded its minimum regulatory capital requirements, as set forth below:
LEVERAGE RISK-BASED
RATIO RATIO
----- -----
UnionBank/Streator . . . . . 9.10% 14.31%
UnionBank/Sandwich . . . . . 7.33% 11.16%
Ferris Bank . . . . . . . . . 6.33% 16.33%
Hanover Bank . . . . . . . . 8.71% 24.29%
Ladd Bank . . . . . . . . . . 6.85% 16.06%
Manlius Bank . . . . . . . . 6.66% 16.30%
Tampico Bank . . . . . . . . 7.69% 19.41%
Tiskilwa Bank . . . . . . . . 7.37% 18.46%
Omni Bank . . . . . . . . . . 6.22% 10.19%
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Depending upon the capital category to which an institution
is assigned, the regulators' corrective powers include: requiring the
submission of a capital restoration plan; placing limits on asset growth and
restrictions on activities; requiring the institution to issue additional
capital stock (including additional voting stock) or to be acquired; restricting
transactions with affiliates; restricting the interest rate the institution may
pay on deposits; ordering a new election of directors of the institution;
requiring that senior executive officers or directors be dismissed; prohibiting
the institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution.
7
<PAGE>
Additionally, institutions insured by the FDIC may be liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with the default of commonly controlled FDIC insured depository institutions or
any assistance provided by the FDIC to commonly controlled FDIC insured
depository institutions in danger of default.
DIVIDENDS
Under the Illinois Banking Act, Illinois-chartered banks may not pay,
without prior regulatory approval, dividends in excess of their net profits.
Federal law also imposes limitations on the amount of dividends that may be paid
by member banks, such as the Union Banks, or national banks, such as the
National Banks. Generally, a member bank or a national bank may pay dividends
out of its undivided profits, in such amounts and at such times as the bank's
board of directors deems prudent. Without prior regulatory approval, however,
neither a state member bank nor a national bank may pay dividends which exceed
the bank's year-to-date net income plus the bank's adjusted retained net income
for the two preceding years.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described above,
each of the Bank Subsidiaries exceeded its minimum capital requirements under
applicable guidelines as of December 31, 1996. As of December 31, 1996,
approximately $5.7 million was available to be paid as dividends to the Company
by the Bank Subsidiaries. Notwithstanding the availability of funds for
dividends, however, the federal bank regulators may prohibit the payment of any
dividends by the Bank Subsidiaries if the they determine such payment would
constitute an unsafe or unsound practice.
INSIDER TRANSACTIONS
The Bank Subsidiaries are subject to certain restrictions imposed by the
Federal Reserve Act on any extensions of credit to the Company, Prairie, Country
and their subsidiaries, on investments in the stock or other securities of the
Company, Prairie, Country and their subsidiaries and the acceptance of the stock
or other securities of the Company, Prairie, Country and their subsidiaries as
collateral for loans. Certain limitations and reporting requirements are also
placed on extensions of credit by the Bank Subsidiaries to their respective
directors and officers, to directors and officers of the Company, Prairie,
Country and their subsidiaries, to principal stockholders of the Company,
Prairie and Country, and to "related interests" of such directors, officers and
principal stockholders. In addition, such legislation and regulations may
affect the terms upon which any person becoming a director or officer of the
Company, Prairie, Country or one of their subsidiaries or a principal
stockholder of the Company, Prairie or Country may obtain credit from banks with
which one of the Bank Subsidiaries maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS
The federal banking regulators have promulgated guidelines establishing
operational and managerial standards to promote the safety and soundness of
federally insured depository institutions. The guidelines establish standards
for internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, asset quality and earnings. In general, the
guidelines prescribe the goals to be achieved in each area and each institution
is responsible for establishing its own procedures to achieve those goals. If
an institution fails to comply with any of the standards set forth in the
guidelines, the institution's primary federal regulator may require the
institution to submit a plan for achieving and maintaining compliance. The
preamble to the guidelines states that the agencies expect to require a
compliance plan from an institution where the failure to meet one or more of the
standards is of such severity that it could threaten the safe and sound
operation of the institution. Failure to submit an acceptable compliance plan,
or failure to adhere to a compliance plan that has been accepted by the
appropriate regulator, constitutes grounds for further enforcement action.
8
<PAGE>
BRANCHING AUTHORITY
Illinois-chartered banks, such as the Union Banks and the State Banks, have
the authority under Illinois law to establish branches anywhere in the state of
Illinois, subject to receipt of all required regulatory approvals. Federal law
grants the same branching authority to the National Banks. Effective June 1,
1997 (or earlier if expressly authorized by applicable state law), the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act") allows banks to establish interstate branch networks through
acquisitions of other banks, subject to certain conditions, including certain
limitations on the aggregate amount of deposits that may be held by the
surviving bank and all of its insured depository institution affiliates. The
establishment of DE NOVO interstate branches or the acquisition of individual
branches of a bank in another state (rather than the acquisition of an
out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if
specifically authorized by state law. The legislation allows individual states
to "opt-out" of certain provisions of the Riegle-Neal Act by enacting
appropriate legislation prior to June 1, 1997. Illinois has enacted legislation
permitting interstate bank mergers beginning on June 1, 1997.
STATE BANK ACTIVITIES
Under federal law, as implemented by final regulations adopted by the FDIC,
FDIC insured state banks are prohibited, subject to certain exceptions, from
making or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary, respectively, unless the
bank meets, and continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible investments
and activities must be divested or discontinued within certain time frames set
by the FDIC. These restrictions have not had, and are not currently expected to
have, a material impact on the operations of the Bank Subsidiaries.
FEDERAL RESERVE SYSTEM
FRB regulations, as presently in effect, require depository institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts), as follows: for transaction
accounts aggregating $49.3 million or less, the reserve requirement is 3% of
total transaction accounts; and for transaction accounts aggregating in excess
of $49.3 million, the reserve requirement is $1.479 million plus 10% of the
aggregate amount of total transaction accounts in excess of $49.3 million. The
first $4.4 million of otherwise reservable balances are exempted from the
reserve requirements. These reserve requirements are subject to annual
adjustment by the FRB. Each of the Bank Subsidiaries is in compliance with the
foregoing requirements.
ITEM 2. PROPERTIES
At December 31, 1996, the Company operated 27 banking offices in Illinois.
The principal offices of the Company are located in Ottawa, Illinois. All of
the Company's offices are owned by one of the Banks and are not subject to any
mortgage or material encumbrance. The Company believes that its current
facilities are adequate for its existing business.
<TABLE>
<CAPTION>
AFFILIATE MARKETS SERVED PROPERTY/TYPE LOCATION
--------- -------------- ----------------------
<S> <C> <C>
The Company Administrative Office: Ottawa
UnionBank LaSalle, Grundy and Livingston Counties Main Office: Streator, IL
Nine banking offices located in markets served.
UnionBank/Sandwich Kendall, DeKalb and LaSection alle Main Office: Sandwich, IL
counties One banking office located in Plano, IL
<CAPTION>
9
<PAGE>
<S> <C> <C>
UnionData Corp, Inc. LaSalle, Kendall, DeKalb, McDonough, Main Office: Streator, IL
Adams, and Pike Counties Additional office located in Macomb, IL
First National Bank of Manlius Bureau County Main Office: Manlius, IL
Two banking offices located in Princeton, IL
Farmers State Bank of Ferris Hancock County Main Office, Carthage, IL
One banking office located in Ferris, IL
Hanover State Bank Jo Davies County Main Office: Carthage, IL
One banking office located in Elizabeth, IL
LaSalle County Collections, Inc. LaSalle, DeKalb, Kendall, McDonough and Main Office: Ottawa, IL
Bureau Counties
Bank of Ladd Bureau and LaSalle Counties Main Office: Ladd, IL
Omni Bank McDonough, Adams and Pike Counties Main Office: Macomb, IL
Six banking offices located in market served.
Tampico National Bank Whiteside and Bureau Counties Main Office: Tampico, IL
Tiskilwa State Bank Bureau County Main Office: Tiskilwa, IL
Union Corporation LaSalle County Main Office: Ottawa, IL
</TABLE>
In addition to the banking locations listed above, the Bank Affiliates own
17 automatic teller machines, some of which are housed within a banking office
and some of which are independently located.
At December 31, 1996, the properties and equipment of the Company had an
aggregate net book value of approximately $13.6 million.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries are involved in any pending
legal proceedings other than routine legal proceedings occurring in the normal
course of business, which, in the opinion of management, in the aggregate, are
not material to the Company's consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no items submitted to a vote of security holders in the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was held by approximately 614 stockholders of
record as of March 11, 1997, and is traded on the Nasdaq Stock Market under the
symbol "UBCD." The table below indicates the high and low sales prices of the
Common Stock for transactions of which the Company is aware, and the dividends
10
<PAGE>
declared per share for the Common Stock during the periods indicated, in each
case adjusted for the three-for-one stock split which took effect on May 20,
1996. Because the Company is not aware of the price at which certain private
transactions in the Common Stock have occurred, the prices shown may not
necessarily represent the complete range of prices at which transactions in the
Common Stock have occurred during such periods.
<TABLE>
<CAPTION>
STOCK SALES(1)
---------------------- CASH
HIGH LOW DIVIDENDS(1)
------ ----- -----------
<S> <C> <C> <C>
1994
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . $6.75 $6.75 $0.026
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.75 6.75 0.030
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.50 6.75 0.030
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.67 7.50 0.030
1995
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.67 7.67 0.033
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.83 8.33 0.033
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.83 8.83 0.033
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.00 8.83 0.033
1996
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.33 10.00 0.033
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.00 10.67 0.033
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.00 11.00 0.035
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.50 11.50 0.035
</TABLE>
(1) Restated to reflect the three-for-one stock split which took effect on May
20, 1996.
The holders of the Common Stock are entitled to receive dividends as
declared by the Board of Directors of the Company, which considers payment of
dividends quarterly. Upon the consummation of the Prairie Acquisition,
preferential dividends were required to be paid or accrued quarterly with
respect to the outstanding shares of Preferred Stock. The ability of the
Company to pay dividends in the future will be primarily dependent upon its
receipt of dividends from the Banks. In determining cash dividends, the Board
of Directors considers the earnings, capital requirements, debt and dividend
servicing requirements, financial ratio guidelines it has established, financial
condition of the Company and other relevant factors. The Banks' ability to pay
dividends to the Company and the Company's ability to pay dividends to its
stockholders are also subject to certain regulatory restrictions.
The Company has paid regular cash dividends on the Common Stock since it
commenced operations in 1982. There can be no assurance, however, that any such
dividends will be paid by the Company or that such dividends will not be reduced
or eliminated in the future. The timing and amount of dividends will depend
upon the earnings, capital requirements and financial condition of the Company
and the Banks as well as the general economic conditions and other relevant
factors affecting the Company and the Banks. The Company entered into a new
loan agreement in connection with the Acquisitions replacing the Company's prior
loan agreement. The new loan agreement contains no direct prohibitions against
the payment by the Company of dividends, but indirectly restricts such dividends
through the required maintenance of minimum capital ratios. In addition, the
terms of the Series A Preferred Stock, and the Company's newly authorized Series
B Preferred Stock issued to certain of Prairie's preferred stockholders,
prohibit the payment of dividends by the Company on the Common Stock during any
period for which dividends on the respective series of Preferred Stock are in
arrears.
11
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Selected consolidated financial data for the five years ended December 31,
1996, consisting of data captioned "Selected Consolidated Financial and Other
Data for the Company and Subsidiaries" on page F-1 of the Company's 1996 Annual
Report to Stockholders filed as an exhibit hereto is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information beginning on page 1 of the Company's 1996 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operation" is incorporated by reference.
This report contains certain forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such forward-
looking statements to be covered by the safe harbor provisions for forward-
looking statements contained in the Private Securities Reform Act of 1995, and
is including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse affect on the operations
and future prospects of the Company and the subsidiaries include, but are not
limited to, changes in: interest rates, general economic conditions,
legislative/regulatory provisions, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the SEC.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Balance Sheets of the Company and Subsidiaries as of
December 31, 1996 and 1995 and the related Consolidated Statements of Income,
Stockholders' Equity and Cash Flows for each of the years in the three-year
period ended December 31, 1996, together with the related notes and the report
of McGladrey & Pullen, LLP, independent auditors, on pages 1 to 37 of the
Company's 1996 Annual Report to Stockholders filed as an exhibit hereto, is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Reference is made to the Form 8-K filed by the Company with the SEC on
March 25, 1997.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information beginning on page 2 of the Company's 1997 Proxy
Statement under the caption "Election of Directors" and on pages 4 through 7 of
the 1997 Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners and Management" is incorporated by reference. The information
regarding executive officers not provided in the 1997 Proxy Statement is noted
below.
EXECUTIVE OFFICERS
The term of office for the executive officers of the Company is from the
date of election until the next annual organizational meeting of the Board of
Directors. In addition to the information provided in the 1997 Proxy Statement,
the names and ages of the executive officers of the Company as of December 31,
1996, as well as the offices of the Company and the Subsidiaries held by these
officers on that date, and principal occupations for the past five years are set
forth below.
WAYNE L. BISMARK, 52, is the Executive Vice President and Chief Credit
Officer of the Company. Mr. Bismark joined the Company in 1994. Prior to
joining the Company, Mr. Bismark had been employed since 1983 in the Financial
Institutions Division of the LaSalle National Bank in Chicago, Illinois. He is
responsible for the overall performance of the Company's lending activities.
Mr. Bismark has worked in the banking industry for almost 25 years, with
extensive experience in lending and product sales at both the wholesale and
retail levels. Mr. Bismark serves as a director of a local social service
agency and is active in many civic organizations. He is also active in regional
economic development associations and professional banking organizations.
CHARLES J. GRAKO, 43, has been the Executive Vice President and Chief
Financial Officer of the Company since 1990. He also serves as Secretary of the
Company and UnionBank/Streator, and as a director of
12
<PAGE>
UnionBank/Sandwich. Mr. Grako is a Certified Public Accountant and has spent
the majority of his career in the banking industry. He first joined the Company
as Controller in 1986.
ROBERT B. PENNINGTON, 43, is the President of UnionBank/Sandwich, a
position he has held since 1981. Mr. Pennington has spent over 20 years in the
financial services industry after beginning his career as a supervisor in the
consumer loan business with Household Finance Company. Mr. Pennington currently
serves as a director of UnionBank/Sandwich. He has been active in community and
civic activities, including serving as President of the Sandwich Chamber of
Commerce and as a member of various economic development committees. He was a
charter member and the first president of the Sandwich Jaycees and the Sandwich
Kiwanis Club.
EVERETT J. SOLON, 44, is the President of UnionBank/Streator. Mr. Solon
has been with the Company for 14 years during which time much of his work has
focused on agricultural lending, farm management and marketing. He became
president of UnionBank/Streator in 1994. Mr. Solon has been active in community
activities, especially in the field of education. He has served for many years
as a director of the Streator Township High School District. He has also worked
as a director and instructor for the Illinois Bankers Association School of
Banking. He has served on the Board of Directors of UnionBank/Streator since
1994.
ITEM 11. EXECUTIVE COMPENSATION
The information on pages 7 through 9 of the 1997 Proxy Statement under the
caption "Executive Compensation" is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information on pages 4 through 7 of the 1997 Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners" is incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information on pages 11 and 12 of the 1997 Proxy Statement under
the caption "Transactions with Management" is incorporated by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements
N/A
(a)(2) Financial Statement Schedules
N/A
(a)(3) Schedule of Exhibits
The Exhibit Index which immediately follows the signature pages to
this Form 10-K is incorporated by reference.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of 1996.
13
<PAGE>
(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
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 25, 1997.
UnionBancorp, Inc.
By: /s/ R. Scott Grigsby By: /s/ Charles J. Grako
------------------------------ ------------------------------
R. Scott Grigsby Charles J. Grako
Chairman and Executive Vice President and
Principal Executive Officer Principal Financial and
Accounting Officer
Date: March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 20, 1997.
Signature Title
--------- -----
/s/ R. Scott Grigsby
- -----------------------------------
R. Scott Grigsby Chairman of the Board, President
and Chief Executive Officer
/s/ Richard J. Berry
- -----------------------------------
Richard J. Berry Director
/s/ Walter E. Breipohl
- -----------------------------------
Walter E. Breipohl Director
/s/ L. Paul Broadus
- -----------------------------------
L. Paul Broadus Director
/s/ John Michael Daw
- -----------------------------------
John Michael Daw Director
/s/
- -----------------------------------
Robert J. Doty Director
/s/ Jimmie D. Lansford
- -----------------------------------
Jimmie D. Lansford Director
/s/ Lawrence J. McGrogan
- -----------------------------------
Lawrence J. McGrogan Director
<PAGE>
/s/
- -----------------------------------
I. J. Reinhardt, Jr. Director
/s/
- -----------------------------------
H. Dean Reynolds Director
/s/
- -----------------------------------
Scott C. Sullivan Director
/s/
- -----------------------------------
John A. Shinkle Director
/s/
- -----------------------------------
John A. Trainor Director
/s/ Charles J. Grako
- -----------------------------------
Charles J. Grako Executive Vice President and Chief
Financial and Accounting Officer
<PAGE>
UNIONBANCORP, INC.
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT HEREIN BY FILED SEQUENTIAL
NO. DESCRIPTION REFERENCE TO HEREWITH PAGE NO.
--- ----------- ------------ -------- --------
<S> <C> <C> <C> <C>
3.1 Restated Certificate of Incorporated by reference from
Incorporation of UnionBancorp, Exhibit 3.1 to the Registration
Inc., as amended Statement or Form S-1 filed by the
Company on August 19, 1996 (SEC File
No. 33-9891), as amended
3.2 Bylaws of UnionBancorp, Inc. Incorporated by reference from
Exhibit 3.2 to the Registration
Statement or Form S-1 filed by the
Company on August 19, 1996 (SEC File
No. 33-9891), as amended
4.1 Certificate of Designation, Incorporated by reference from
Preferences and Rights of Series A Exhibit 4.3 to the Registration
Convertible Preferred Stock of Statement or Form S-1 filed by the
UnionBancorp, Inc. Company on August 19, 1996 (SEC File
No. 33-9891), as amended
4.2 Certificate of Designation, Incorporated by reference from
Preferences and Rights of Series B Exhibit 4.4 to the Registration
Preferred Stock of UnionBancorp, Statement or Form S-1 filed by the
Inc. Company on August 19, 1996 (SEC File
No. 33-9891), as amended
4.3 Certificate of Designation, Incorporated by reference from
Preferences and Rights of Series C Exhibit 4.5 to the Registration
Junior Participating Preferred Statement or Form S-1 filed by the
Stock Company on August 19, 1996 (SEC File
No. 33-9891), as amended
<CAPTION>
<PAGE>
INCORPORATED
EXHIBIT HEREIN BY FILED SEQUENTIAL
NO. DESCRIPTION REFERENCE TO HEREWITH PAGE NO.
--- ----------- ------------ -------- --------
<S> <C> <C> <C> <C>
4.4 Specimen Common Stock Certificate Incorporated by reference from
of UnionBancorp, Inc. Exhibit 4.6 to the Registration
Statement or Form S-1 filed by the
Company on August 19, 1996 (SEC File
No. 33-9891), as amended
4.5 Rights Agreement between Incorporated by reference from
UnionBancorp, Inc. and Harris Trust Exhibit 4.7 to the Registration
and Savings Bank, dated August 5, Statement or Form S-1 filed by the
1996 Company on August 19, 1996 (SEC File
No. 33-9891), as amended
10.1 Employment Agreement dated Incorporated by reference from
January 1, 1992, between UnionBank, Exhibit 10.1 to the Registration
UnionBancorp, Inc. and R. Scott Statement or Form S-1 filed by the
Grigsby, as amended on October 1, Company on August 19, 1996 (SEC File
1993, April 4, 1996 and August 5, No. 33-9891), as amended
1996
10.2 Employment Agreement dated March 1, Incorporated by reference from
1994, among UnionBank, Exhibit 10.2 to the Registration
UnionBancorp, Inc. and Wayne L. Statement or Form S-1 filed by the
Bismark, as amended on April 4, Company on August 19, 1996 (SEC File
1996 No. 33-9891), as amended
10.3 Employment Agreement dated Incorporated by reference from
January 1, 1992, between Exhibit 10.3 to the Registration
UnionBancorp, Inc. and Charles J. Statement or Form S-1 filed by the
Grako, as amended on October 1, Company on August 19, 1996 (SEC File
1993, April 4, 1996 and August 5, No. 33-9891), as amended
1996
10.4 Employment Agreement dated Incorporated by reference from
January 1, 1992, by and among Exhibit 10.4 to the Registration
UnionBank, UnionBancorp, Inc. and Statement or Form S-1 filed by the
Everett J. Solon, as amended on Company on August 19, 1996 (SEC File
October 1, 1993, April 11, 1996 and No. 33-9891), as amended
August 5, 1996
<CAPTION>
<PAGE>
INCORPORATED
EXHIBIT HEREIN BY FILED SEQUENTIAL
NO. DESCRIPTION REFERENCE TO HEREWITH PAGE NO.
--- ----------- ------------ -------- --------
<S> <C> <C> <C> <C>
10.5 Employment Agreement dated June 3, Incorporated by reference from
1996, between UnionBancorp, Inc. Exhibit 10.5 to the Registration
and John M. Daw Statement or Form S-1 filed by the
Company on August 19, 1996 (SEC File
No. 33-9891), as amended
10.6 Employment Agreement dated March 4, Incorporated by reference from
1996, between UnionBank, Exhibit 10.6 to the Registration
UnionBancorp, Inc. and Jimmie D. Statement or Form S-1 filed by the
Lansford, as amended on April 4, Company on August 19, 1996 (SEC File
1996 No. 33-9891), as amended
10.7 Standstill Agreements dated August Incorporated by reference from
6, 1996, between UnionBancorp, Inc. Exhibit 10.9 to the Registration
and each of Wayne W. Whalen and Statement or Form S-1 filed by the
Dennis J. McDonnell Company on August 19, 1996 (SEC File
No. 33-9891), as amended
10.8 Registration Agreement dated August Incorporated by reference from
6, 1996, between UnionBancorp, Inc. Exhibit 10.10 to the Registration
and each of Wayne W. Whalen and Statement or Form S-1 filed by the
Dennis J. McDonnell Company on August 19, 1996 (SEC File
No. 33-9891), as amended
10.9 Loan Agreement between Incorporated by reference from
UnionBancorp, Inc. and LaSalle Exhibit 10.11 to the Registration
National Bank dated August 2, 1996 Statement or Form S-1 filed by the
Company on August 19, 1996 (SEC File
No. 33-9891), as amended
10.10 UnionBancorp, Inc. Employee Stock Incorporated by reference from
Ownership Plan Exhibit 10.12 to the Registration
Statement or Form S-1 filed by the
Company on August 19, 1996 (SEC File
No. 33-9891), as amended
<CAPTION>
<PAGE>
INCORPORATED
EXHIBIT HEREIN BY FILED SEQUENTIAL
NO. DESCRIPTION REFERENCE TO HEREWITH PAGE NO.
--- ----------- ------------ -------- --------
<S> <C> <C> <C> <C>
10.11 UnionBancorp, Inc. 1993 Stock Incorporated by reference from
Option Plan, as amended Exhibit 10.13 to the Registration
Statement or Form S-1 filed by the
Company on August 19, 1996 (SEC File
No. 33-9891), as amended
13.1 1996 Annual Report to Stockholders
(as incorporated by reference into
this Form 10-K) *
21.1 Subsidiaries of UnionBancorp, Inc. *
23.2 Consents of McGladrey & Pullen, LLP *
27.1 Financial Data Schedule *
99.1 1996 Proxy Statement *
</TABLE>
<PAGE>
UNIONBANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
<PAGE>
UNIONBANCORP, INC.
AND SUBSIDIARIES
CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of stockholders' equity 4 and 5
Consolidated statements of cash flows 6 - 8
Notes to consolidated financial statements 9 - 37
- --------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
UNIONBANCORP, INC.
OTTAWA, ILLINOIS
We have audited the accompanying consolidated balance sheets of UNIONBANCORP,
INC. AND SUBSIDIARIES as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of UNIONBANCORP, INC.
AND SUBSIDIARIES as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Champaign, Illinois
February 5, 1997
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 29,236 $ 16,167
Federal funds sold 10,267 2,265
Securities held to maturity (fair value of $35,322 in 1996 and $29,186 in 1995) 35,017 29,026
Securities available for sale 188,538 63,891
Loans, net of allowance for loan losses of $3,068 in 1996 and $2,014 in 1995 343,428 178,805
Premises and equipment 13,580 6,571
Intangible assets 10,801 943
Other assets 11,157 5,865
--------------------------
TOTAL ASSETS $ 642,024 $ 303,533
--------------------------
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 65,864 $ 35,688
Interest bearing 477,880 226,039
--------------------------
TOTAL DEPOSITS 543,744 261,727
Federal funds purchased and securities
sold under agreements to repurchase 21,817 11,505
Advances from the Federal Home Loan Bank 10,021 -
Notes payable 13,180 4,346
Other liabilities 5,027 2,480
--------------------------
TOTAL LIABILITIES 593,789 280,058
--------------------------
Minority interest in subsidiaries 795 -
--------------------------
Mandatory redeemable preferred stock, Series B, no par value; 1,092 shares
authorized; 857 shares issued and outstanding 857 -
--------------------------
Stockholders' Equity
Preferred stock - -
Series A convertible preferred stock 500 -
Series C preferred stock - -
Common stock, $1 par value; 10,000,000 shares authorized; 4,386,064 and 4,386 2,400
2,400,000 shares issued in 1996 and 1995, respectively 19,403 1,074
Surplus 22,981 20,568
Retained earnings (74) 2
Unrealized gain (loss) on securities available for sale (91) (48)
Deferred compensation - stock options --------------------------
47,105 23,996
Less treasury stock, at cost; 271,263 and 268,263 shares
in 1996 and 1995, respectively 522 521
--------------------------
TOTAL STOCKHOLDERS' EQUITY 46,583 23,475
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 642,024 $ 303,533
--------------------------
--------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans and fees on loans $ 22,138 $ 16,322 $ 13,419
Securities:
U.S. Treasury securities 959 1,062 1,571
U.S. Government agencies and corporations 3,146 2,202 1,796
States and political subdivisions 1,574 1,404 1,397
Collateralized mortgage obligations 1,467 10 10
U.S. Government agency mortgage backed securities 1,327 - -
Other securities 140 212 396
Federal funds sold 286 156 38
-----------------------------------------
TOTAL INTEREST INCOME 31,037 21,368 18,627
-----------------------------------------
Interest expense:
Deposits 15,239 10,257 8,093
Federal funds purchased and securities
sold under agreements to repurchase 861 523 234
Advances from the Federal Home Loan Bank 213 - -
Notes payable 690 469 379
-----------------------------------------
TOTAL INTEREST EXPENSE 17,003 11,249 8,706
-----------------------------------------
NET INTEREST INCOME 14,034 10,119 9,921
Provision for loan losses 1,178 684 660
-----------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,856 9,435 9,261
-----------------------------------------
Noninterest income:
Service charges 1,286 952 895
Merchant fee income 524 418 357
Trust income 393 330 301
Gain on sale of loans 262 288 130
Securities gains, net 20 98 118
Other noninterest income 737 484 482
-----------------------------------------
3,222 2,570 2,283
-----------------------------------------
Noninterest expenses:
Salaries and employee benefits 6,469 4,451 3,868
Occupancy expense, net 899 665 574
Furniture and equipment expense 977 584 560
FDIC deposit assessment 8 271 526
Amortization of intangible assets 392 120 162
Other noninterest expenses 3,503 2,680 2,557
-----------------------------------------
12,248 8,771 8,247
-----------------------------------------
3,830 3,234 3,297
Minority interest 27 - -
-----------------------------------------
INCOME BEFORE INCOME TAXES 3,803 3,234 3,297
Income taxes 969 881 703
-----------------------------------------
NET INCOME 2,834 2,353 2,594
Preferred stock dividends 105 - -
-----------------------------------------
NET INCOME ON COMMON STOCK $ 2,729 $ 2,353 $ 2,594
-----------------------------------------
-----------------------------------------
EARNINGS PER COMMON SHARE $ 0.98 $ 1.09 $ 1.22
-----------------------------------------
-----------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,773,769 2,148,897 2,132,712
-----------------------------------------
-----------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series A Convertible
Common Stock Preferred Stock Preferred Stock
-------------------------------------------------------------------------
Shares Dollars Shares Dollars Shares Dollars
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993, as restated 2,400,000 $ 2,400 - $ - - $ -
Effect of adoption of change in method
of accounting for securities - - - - - -
Net income - - - - - -
Cash dividends, $.12 per share - - - - - -
Issuance of 1,977 shares of treasury
stock - - - - - -
Redemption of qualifying directors
stock - - - - -
Change in unrealized gain (loss) on
securities available for sale - - - - - -
-------------------------------------------------------------------------
Balance, December 31, 1994 2,400,000 2,400 - - - -
Net income - - - - - -
Cash dividends, $.13 per share
Issuance of nonqualifying stock options - - - - - -
Amortization of unearned compensa-
tion on nonqualifying stock options - - - - - -
Change in unrealized gain (loss) on
securities available for sale - - - - - -
-------------------------------------------------------------------------
Balance, December 31, 1995 2,400,000 2,400 - - - -
Net income - - - - - -
Issuance of common stock 1,266,398 1,266 - - - -
Cost to raise capital - - - - - -
Cash dividends, $.14 per share
Dividends on preferred stock - - - - -
Stock issued for acquisitions 719,666 720 - - 2,762.24 500
Issuance of nonqualifying stock options - - - - - -
Amortization of unearned compensa-
tion on nonqualifying stock options - - - - - -
Change in unrealized gain (loss) on
securities available for sale - - - - - -
Redemption of qualifying directors
stock - - - - - -
-------------------------------------------------------------------------
Balance, December 31, 1996 4,386,064 $ 4,386 - $ - 2,762.24 $ 500
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) Deferred
Series C on Compen-
Preferred Stock Securities sation - Treasury Stock
----------------- Retained Available Stock ---------------
Shares Dollars Surplus Earnings for Sale Options Shares Dollars Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993, as restated - $ - $ 996 $ 16,153 $ - $ - 267,240 $ (524) $ 19,025
Effect of adoption of change in method
of accounting for securities - - - - 831 - - - 831
Net income - - - 2,594 - - - - 2,594
Cash dividends, $.12 per share - - - (248) - - - - (248)
Issuance of 1,977 shares of treasury
stock - - 11 - - - (1,977) 4 15
Redemption of qualifying directors
stock - - - - - - 3,000 (1) (1)
Change in unrealized gain (loss) on
securities available for sale - - - - (2,588) - - - (2,588)
------------------------------------------------------------------------------------------
Balance, December 31, 1994 - - 1,007 18,499 (1,757) - 268,263 (521) 19,628
Net income - - - 2,353 - - - - 2,353
Cash dividends, $.13 per share - - (284) - - (284)
Issuance of nonqualifying stock options - - 67 - - (67) - - -
Amortization of unearned compensa-
tion on nonqualifying stock options - - - - - 19 - - 19
Change in unrealized gain (loss) on
securities available for sale - - - - 1,759 - - - 1,759
------------------------------------------------------------------------------------------
Balance, December 31, 1995 - - 1,074 20,568 2 (48) 268,263 (521) 23,475
Net income - - - 2,834 - - - - 2,834
Issuance of common stock - - 12,221 - - - - - 13,487
Cost to raise capital - - (1,051) - - - - - (1,051)
Cash dividends, $.14 per share - - - (316) - - - - (316)
Dividends on preferred stock - - - (105) - - - - (105)
Stock issued for acquisitions - - 7,090 - - - - - 8,310
Issuance of nonqualifying stock options - - 69 - - (69) - - -
Amortization of unearned compensa-
tion on nonqualifying stock options - - 26 - - - - - 26
Change in unrealized gain (loss) on
securities available for sale - - - - (76) - - - (76)
Redemption of qualifying directors
stock - - - - - - 3,000 (1) (1)
------------------------------------------------------------------------------------------
Balance, December 31, 1996 - $ - $ 19,403 $ 22,981 $ (74) $ (91) 271,263 $ (522) $ 46,583
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 2,834 $ 2,353 $ 2,594
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 849 526 529
Amortization of intangible assets 392 120 162
Amortization of deferred compensation - stock options 26 19 -
Amortization of bond premiums, net 543 448 640
Provision for loan losses 1,178 684 660
Provision for deferred income taxes (45) (138) (32)
Gain on sales of securities (20) (98) (118)
Gain on sale of equipment - (37) (2)
(Gain) loss on sale of real estate acquired in
settlement of loans (134) (33) 65
Gain on sale of loans (262) (288) (130)
Proceeds from sales of loans held for resale 21,355 14,899 9,289
Origination of loans held for resale (20,803) (14,673) (9,159)
Minority interest in net income of subsidiary 27 - -
Change in assets and liabilities:
(Increase) decrease in other assets 9 (666) 12
Increase (decrease) in other liabilities (449) 539 346
-----------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,500 3,655 4,856
-----------------------------------------
Cash Flows from Investing Activities
Securities:
Held to maturity:
Proceeds from calls, maturities and paydowns 4,429 3,858 1,279
Purchases (5,247) (4,300) (6,197)
Available for sale:
Proceeds from maturities and paydowns 20,455 6,230 6,621
Proceeds from sales 24,620 17,318 21,562
Purchases (19,708) (28,240) (27,357)
Net (increase) decrease in federal funds sold 167 (1,065) 8,900
Net increase in loans (21,841) (20,533) (14,024)
Purchases of premises and equipment (1,314) (1,430) (1,201)
Proceeds from sale of real estate acquired in
settlement of loans 575 800 727
Proceeds from sale of equipment 3 59 40
Bank and bank holding company acquisitions, net
of cash and cash equivalents received (11,748) - -
-----------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (9,609) (27,303) (9,650)
-----------------------------------------
</TABLE>
(Continued)
6
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts $ 7,784 $ 11,656 $( 6,853)
Net increase in time deposits (6,037) 17,738 1,732
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 2,481 (1,613) 9,976
Net decrease in advances from the Federal Home Loan Bank (4,000) - -
Payments on notes payable (13,802) (680) (254)
Proceeds from notes payable 18,686
Dividends paid on common stock (316) (284) (248)
Dividends paid on preferred stock (53) - -
Proceeds from issuance of treasury stock - - 15
Redemption of qualifying directors' stock (1) - (1)
Proceeds from issuance of common stock, net of costs
to raise capital 12,436 - -
------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,178 26,817 4,367
------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
DUE FROM BANKS 13,069 3,169 (427)
Cash and cash equivalents:
Beginning of year 16,167 12,998 13,425
------------------------------------------
End of year $ 29,236 $ 16,167 $ 12,998
------------------------------------------
------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest - depositors $ 15,232 $ 9,978 $ 7,912
------------------------------------------
------------------------------------------
- federal funds and repurchase agreements $ 437 $ 371 $ 171
------------------------------------------
------------------------------------------
- notes payable $ 690 $ 576 $ 357
------------------------------------------
------------------------------------------
- FHLB advances $ 210 $ - $ -
------------------------------------------
------------------------------------------
Income taxes $ 921 $ 994 $ 833
------------------------------------------
------------------------------------------
</TABLE>
(Continued)
7
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Schedule of Noncash Investing
and Financing Activities
Transfer of loans to real estate acquired in settlement of loans $ 316 $ 535 $ 519
-----------------------------------------
-----------------------------------------
Change in unrealized gain (loss) on securities
available for sale $ (125) $ 2,873 $ (2,870)
-----------------------------------------
-----------------------------------------
Increase (decrease) in deferred taxes attributable to the
unrealized gain (loss) on securities available for sale $ 49 $ (1,115) $ 1,114
-----------------------------------------
-----------------------------------------
Unrealized gain on securities available for sale attributable
to minority interest $ 8 $ - $ -
-----------------------------------------
-----------------------------------------
Issuance of nonqualifying stock options $ 69 $ 67 $ -
-----------------------------------------
-----------------------------------------
Preferred stock dividends declared not paid $ 52 $ - $ -
-----------------------------------------
-----------------------------------------
Assets acquired:
Cash and cash equivalents $ 5,191 $ - $ -
Federal funds sold 8,169 - -
Securities 155,824 - -
Loans, net 144,566 - -
Premises and equipment 6,547 - -
Intangible assets 10,250 - -
Other assets 5,426 - -
Liabilities assumed:
Demand deposits, NOW accounts and savings accounts (101,134) - -
Time deposits (179,136) - -
Federal funds purchased and securities sold under
agreements to repurchase (7,831) - -
Advances from the Federal Home Loan Bank (14,021) - -
Notes payable (3,950) - -
Deferred taxes (534) - -
Other liabilities (2,501) - -
Minority interest in subsidiaries (760) - -
-----------------------------------------
$ 26,106 $ - $ -
-----------------------------------------
-----------------------------------------
Value of common stock issued $ 7,810 $ - $ -
-----------------------------------------
-----------------------------------------
Value of mandatory redeemable preferred stock issued $ 857 $ - $ -
-----------------------------------------
-----------------------------------------
Value of convertible preferred stock issued $ 500 $ - $ -
-----------------------------------------
-----------------------------------------
Purchase price paid $ 16,939 $ - $ -
-----------------------------------------
-----------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
8
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
UnionBancorp, Inc. (the "Company") is a multi-bank holding company with three
nonbank subsidiaries. The Company provides a full range of banking services
to individual and corporate customers in the north central and west central
Illinois areas. The Company is subject to competition from other financial
institutions and nonfinancial institutions providing financial services.
Additionally, the Company and its bank subsidiaries (the "Banks") are subject
to regulations of certain regulatory agencies and undergo periodic
examinations by those regulatory agencies.
The significant accounting and reporting policies for UnionBancorp, Inc. and
its subsidiaries follow:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, UnionBank, UnionBank/Sandwich , Prairie Acquisition Corp.,
Country Bancshares, Inc., LaSalle County Collections, Inc., UnionData Corp.,
Inc. and Union Corporation. Prairie Acquisition Corp. ("Prairie") is a
multi-bank holding company for banks located in the Illinois communities of
Ferris, Hanover, Ladd, Manlius, Tampico and Tiskilwa, with additional
branches in Carthage, Elizabeth and Princeton. Country Bancshares, Inc.,
("Country") is a one-bank holding company headquartered in Hull, Illinois
with offices in the Illinois communities of Macomb, Hull, Paloma, East
Hannibal, Camp Point and Blandinsville. All material intercompany accounts
and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and reporting practices prescribed
for the banking industry.
In preparing the consolidated financial statements, Company management is
required to make estimates and assumptions which significantly affect the
amounts reported in the consolidated financial statements. Significant
estimates which are particularly susceptible to change in a short period of
time include the determination of the allowance for loan losses and valuation
of real estate and other properties acquired in connection with foreclosures
or in satisfaction of amounts due from borrowers on loans. Actual results
could differ from those estimates.
Assets held in an agency or fiduciary capacity, other than trust cash on
deposit with the Banks, are not assets of the Company and, accordingly, are
not included in the accompanying consolidated financial statements.
(Continued)
9
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY
Securities classified as held to maturity are those debt securities the
Company has both the intent and ability to hold to maturity regardless of
changes in market conditions, liquidity needs or changes in general economic
conditions. These securities are carried at cost adjusted for amortization of
premium and accretion of discount, computed using the interest method over
their contractual lives.
SECURITIES AVAILABLE FOR SALE
Securities classified as available for sale are those debt securities that
the Company intends to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Company's
assets and liabilities, liquidity needs, regulatory capital considerations,
and other similar factors. Securities available for sale are carried at fair
value. The difference between fair value and cost, adjusted for amortization
of premium and accretion of discounts, results in an unrealized gain or loss.
Unrealized gains or losses are reported as increases or decreases in
stockholders' equity, net of the related deferred tax effect. Gains or losses
from the sale of securities are determined using the specific identification
method.
LOANS
Loans are stated at the principal amount outstanding, net of unearned
interest and the allowance for loan losses.
Unearned interest on certain installment loans is credited to income over the
term of the loan using the interest method. For all other loans, interest is
credited to income as earned using the simple interest method applied to the
daily balances of the principal outstanding.
The accrual of interest on loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
the accrual of interest is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received and the principal is considered fully collectible.
The Banks originate certain loans for sale in the secondary market. These
loans are recorded at the lower of aggregate cost or market until they are
sold. Net unrealized losses are recognized in a valuation allowance by
charges to income. Gains or losses on sales of loans held for sale are
computed using the specific-identification method and are reflected in income
at the time of sale.
(Continued)
10
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
MORTGAGE SERVICING RIGHTS
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
rate. For purposes of measuring impairment, the rights are stratified based
on the following predominant risk characteristics of the underlying loans:
weighted average maturity and weighted average rate. The amount of impairment
is the excess of the capitalized mortgage servicing rights for a stratum over
their fair value.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be
adequate to absorb losses on existing loans that may become uncollectible,
based on evaluation of the collectibility of loans and prior loss experience.
The evaluation also takes into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality, review of
specific problem loans and current economic conditions that may affect the
borrowers' ability to pay. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions. In
addition, regulatory agencies, as an integral part of their examination
process, periodically review the Banks' allowance for loan losses, and may
require the Banks to make additions to the allowance based on their judgment
about information available to them at the time of their examinations.
The allowance for loan losses related to impaired loans that are identified
for evaluation is based on discounted cash flows using the loan's effective
interest rate or the fair value, less selling costs, of the collateral for
collateral dependent loans.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the accelerated and straight-line methods over
the estimated useful lives of the assets.
INTANGIBLE ASSETS
Fair value adjustments for identifiable tangible assets are accreted and
amortized over the lives of the respective assets. The excess of the purchase
price over the fair value of assets acquired for transactions accounted for
as purchases are recorded as intangible assets. Core deposit intangibles are
amortized on a straight line basis over ten years. Goodwill is amortized on a
straight line basis over fifteen years.
(Continued)
11
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
DEFERRED INCOME TAXES
Deferred taxes are provided using the liability method. Deferred tax assets
are recognized for deductible temporary differences and operating loss and
tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the financial statement carrying amounts of assets and liabilities
and their respective tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
EARNINGS PER SHARE
Earnings per share are calculated on the weighted average number of shares
outstanding, including common stock equivalents, during the year. Shares held
by the employee stock ownership plan are considered to be outstanding shares
regardless of whether they are allocated to participants or held as
unallocated shares. All share amounts in the consolidated financial
statements have been restated to reflect the three-for-one stock split which
took effect May 20, 1996.
PREFERRED STOCK
Terms of each class of preferred stock are as follows:
PREFERRED STOCK: The Company's Certificate of Incorporation authorizes its
Board of Directors to fix or alter the rights, preferences, privileges and
restrictions of 200,000 shares of Preferred Stock, including the dividend
rights, original issue price, conversion rights, voting rights, terms of
redemption, liquidation preferences and sinking fund terms thereof, and the
number of shares of each series subsequent to the issuance of shares of such
series (but not below the number of shares outstanding). The Board of
Directors has fixed the rights, preferences, privileges and restrictions with
respect to 2,765 shares of Series A Preferred Stock, 1,092 shares of Series B
Preferred Stock, and 4,500 shares of Series C Preferred Stock, as described
below.
(Continued)
12
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
SERIES A CONVERTIBLE PREFERRED STOCK: The Company has issued 2,762.24 of the
2,765 authorized shares of Series A Convertible Preferred Stock. Preferential
cumulative cash dividends are payable quarterly at an annual rate of $75.00
per share. Dividends accrue on each share of Series A Preferred Stock from
the date of issuance and from day to day, thereafter, whether or not earned
or declared. The shares of Series A Preferred Stock are convertible into the
number of shares of Common Stock that results from multiplying $1,000 by the
number of shares of Series A Preferred Stock, subtracting from this product
such realized after-tax loss of specified securities obtained in the
acquisition of Prairie Bancorp, Inc. and dividing this result by the
conversion price (1.075 times the Common Stock per share book value). Series
A Preferred Stock is not redeemable for cash. Holders of shares of Series A
Preferred Stock are not entitled to vote except: (i) as required by law;
(ii) to approve the authorization or issuance of any shares of any class or
series of stock which ranks senior or on a parity with the Series A Preferred
Stock in respect of dividends and distributions upon the dissolution,
liquidation or winding up of the Company; (iii) during any period of time
when two dividend payments on shares of Series A Preferred Stock have accrued
but have not been paid; (iv) upon conversion of the shares of Series A
Preferred Stock into shares of Common Stock; or (v) if the holders of Common
Stock vote on a proposal to merge or otherwise enter into a transaction with
a third party pursuant to which the Company is not the surviving entity. On
dissolution, winding up or liquidation of the Company, voluntary or
otherwise, holders of Series A Preferred Stock will be entitled to receive,
out of the assets of the Company available for distribution to stockholders,
the amount of $1,000 per share, plus any accrued but unpaid dividends, before
any payment or distribution may be made on shares of Common Stock or any
other securities issued by the Company which rank junior to the Series A
Preferred Stock.
SERIES B MANDATORY REDEEMABLE PREFERRED STOCK: The Company has issued 857 of
the 1,092 authorized shares Series B Mandatory Redeemable Preferred Stock.
Preferential cumulative cash dividends are payable quarterly at an annual
rate of $60.00 per share. Dividends accrue on each share of Series B
Preferred Stock from the date of issuance and from day to day, thereafter,
whether or not earned or declared. Each original holder of Series B Preferred
Stock (or upon such holder's deaths, their respective executors or personal
representatives) will have the option, exercisable at their sole discretion,
to sell, and the Company will be obligated to redeem, such holder's shares of
Series B Preferred Stock upon the earlier to occur of the death of the
respective original holder of Series B Preferred Stock or ten years after the
original issuance date of the Series B Preferred Stock. The per share price
payable by the Company for such shares of Series B Preferred Stock will be
equal to $1,000 per share, plus any accrued but unpaid dividends.
Notwithstanding the foregoing, the Company will not be obligated to redeem
for cash any shares of Series B Preferred Stock if such redemption would
cause it to be in violation of any statute, rule, or regulation or agreement
to which it is a party relating to minimum capital requirements, provided
that the Company is required to use its best efforts promptly to remedy any
such violation and shall promptly complete the redemption of such shares
after such violation has been cured. Holders of shares of Series B Preferred
Stock are not entitled to vote except as required by law. On dissolution,
winding up or liquidation of the Company, voluntary or otherwise, holders of
Series B Preferred Stock will be entitled to receive, out of the assets of
the Company available for distribution to stockholders, the amount of $1,000
per share, plus any accrued but unpaid dividends, before any payment or
distribution may be made on shares of Common Stock or any other securities
issued by the Company which rank junior to the Series B Preferred Stock.
(Continued)
13
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
SERIES C JUNIOR PARTICIPATING PREFERRED STOCK: The Company has authorized
4,500 shares of Series C Junior Participating Preferred Stock. The Series C
Preferred Stock is only issuable upon exercise of rights issued pursuant to
the Company's Stockholder Rights Plan. Each share of Series C Junior
Participating Preferred Stock is entitled to, when, as and if declared, a
minimum preferential quarterly dividend payment of $3.00 per share but will
be entitled to an aggregate dividend of 1,000 times the dividend declared per
share of Common Stock. In the event of liquidation, dissolution or winding up
of the Company, the holders of the Series C Preferred Stock will be entitled
to a minimum preferential payment of $100 per share (plus any accrued but
unpaid dividends) but will be entitled to an aggregate payment of 1,000 times
the payment made per share of Common Stock. Each share of Series C Preferred
Stock will have 1,000 votes, voting together with the Common Stock. Finally,
in the event of any merger, consolidation or other transaction in which
outstanding shares of Common Stock are converted or exchanged, each share of
Series C Preferred Stock will be entitled to receive 1,000 times the amount
received per share of Common Stock. These rights are protected by customary
antidilution provisions.
STOCKHOLDER RIGHTS PLAN: On July 17, 1996, the Company declared a dividend of
one preferred share purchase right (a "Right") for each outstanding share of
Common Stock. Each Right entitles the registered holder to purchase from the
Company one one-thousandth of a share of Series C Junior Participating
Preferred Stock, no par value, of the Company at a price of $50.00 per one
one-thousandth of a share of Preferred Stock (the "Purchase Price"), subject
to adjustment. The description and terms of the Rights are set forth in a
Rights Agreement dated as of August 5, 1996, as the same may be amended from
time to time (the "Rights Agreement"), between the Company and Harris Trust
and Savings Bank, as Rights Agent.
The Rights are not exercisable until the earlier to occur of: (i) 10 days
after a person or group ("Acquiring Person") has acquired beneficial
ownership of 15% or more of the outstanding shares of Common Stock or (ii) 10
business days (or such later date as determined by the Board of Directors)
following the commencement of a tender offer or exchange offer (the
"Distribution Date"). Unless extended, the Rights will expire on August 4,
2006.
In the event that any person(s) becomes an Acquiring Person, each holder of a
Right, other than Rights beneficially owned by the Acquiring Person (which
will thereupon become void), will thereafter have the right to receive upon
exercise of a Right that number of shares of Common Stock having a market
value of two times the exercise price of the Right.
In the event that, after a person or group has become an Acquiring Person,
the Company is acquired in a merger or other business combination transaction
or 50% or more of its consolidated assets or earning power are sold, proper
provisions will be made so that each holder of a Right (other than Rights
beneficially owned by an Acquiring Person which will have become void) will
thereafter have the right to receive upon the exercise of a Right that number
of shares of common stock of the person with whom the Company has engaged in
the foregoing transaction (or its parent) that at the time of such
transaction have a market value of two times the exercise price of the Right.
(Continued)
14
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
At any time prior to the time an Acquiring Person becomes such, the Board of
Directors of the Company may redeem the Rights in whole, but not in part, at
a price of $.01 per Right.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT
OF LIABILITIES
In June 1996, the Financial Accounting Standards Board issued Statement
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" (Statement No. 125). Statement No. 125
distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings. A transfer of financial assets in which the
transferor surrenders control over those assets is accounted for as a sale to
the extent that consideration other than beneficial interest in the
transferred assets is received in exchange. Statement No. 125 also
establishes standards on the initial recognition and measurement of servicing
assets and other retained interests and servicing liabilities, and their
subsequent measurement.
Statement No. 125 requires that debtors reclassify financial assets pledged
as collateral and that secured parties recognize those assets and their
obligation to return them in certain circumstances in which the secured party
has taken control of those assets. In addition, Statement No. 125 requires
that a liability be derecognized only if the debtor is relieved of its
obligation through payment to the creditor or by being legally released from
being the primary obligor under the liability either judicially or by the
creditor.
Statement No. 125 is effective for transactions occurring after December 31,
1996, except for transactions relating to secured borrowings and collateral
for which the effective date is December 31, 1997. The Company believes the
adoption of Statement No. 125 will not have a material impact on its
consolidated financial statements.
NOTE 2. BUSINESS ACQUISITIONS
On August 1, 1996, the Company acquired LaSalle County Collections, Inc.
("LaSalle"), a collection agency located in Ottawa, Illinois. The purchase
price of $177 included the issuance of 9,090 shares of Common Stock, valued
at $11.08 per share, and payment of $77 in cash. The Company recognized an
intangible asset of $170 for the excess of purchase price over total assets
acquired.
On August 6, 1996, the Company acquired six additional bank subsidiaries
through the purchase of Prairie Bancorp, Inc. ("Prairie"), a multi-bank
holding company headquartered in Princeton, Illinois. At the date of
acquisition, Prairie had approximately $226,756 in total assets and $189,271
in total deposits. In conjunction with the acquisition, the Company issued
2,762.24 of the 2,765 authorized shares of Series A Convertible Preferred
Stock, which were valued at $500. In addition, the Company issued 857 of the
1,092 authorized shares of Series B Preferred Stock, which were valued at
$857 and 710,576 shares of Common Stock valued at $7,710. The total
acquisition cost of $14,302 resulted in goodwill of $2,749 and core deposit
intangible estimated at $1,857.
(Continued)
15
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
On September 25, 1996, the Company acquired an additional bank subsidiary
through the purchase of Country Bancshares, Inc. ("Country"). At the date of
acquisition, Country had approximately $109,040 in total assets and $90,999
in total deposits. The cash purchase price of $11,627 resulted in goodwill of
$4,842 and core deposit intangible estimated at $632.
All acquisitions were recorded using the purchase method of accounting. As
such, the results of operations of the acquired entities are excluded from
the consolidated statements of income for the periods prior to the respective
acquisition dates.
The unaudited pro forma results of operations which follow assume the
acquisitions had occurred at the beginning of the respective periods. In
addition to combining the historical results of operations of the companies,
the pro forma calculations include purchase accounting adjustments related to
the acquisitions and interest on borrowed funds.
Unaudited pro forma consolidated results of operations for the periods ending
December 31, 1996 and 1995 as though Prairie and Country had been acquired as
of January 1, 1995 follow:
Years ended December 31,
-------------------------
1996 1995
-------------------------
Net interest income $17,965 $17,538
-------------------------
-------------------------
Net income 3,088 2,833
-------------------------
-------------------------
Earnings per common share $ 0.69 $ 0.62
-------------------------
-------------------------
The effects of the acquisition of LaSalle are not material and therefore have
not been included in the above analysis.
The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the purchases
actually been made at the beginning of the respective periods, or of results
which may occur in the future.
NOTE 3. CASH AND CASH EQUIVALENTS
Certain of the Banks are required to maintain legal reserves composed of
funds on deposit with the Federal Reserve Bank and cash on hand. The required
balances as of December 31, 1996 and 1995, were $2,273 and $1,973,
respectively.
(Continued)
16
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
NOTE 4. SECURITIES
Amortized costs and fair values of securities are summarized as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY Gross Gross
December 31, 1996 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------
<S> <C> <C> <C> <C>
States and political subdivisions $ 35,017 $ 496 $ 191 $ 35,322
-------------------------------------------------------
-------------------------------------------------------
December 31, 1995
U.S. Treasury $ 117 $ - $ - $ 117
U.S. Government agencies and
corporations 2,000 121 1,879
States and political subdivisions 26,660 496 215 26,941
Collateralized mortgage obligations 9 - - 9
Corporate bonds 240 - - 240
-------------------------------------------------------
$ 29,026 $ 496 $ 336 $ 29,186
-------------------------------------------------------
-------------------------------------------------------
AVAILABLE FOR SALE
December 31, 1996
U.S. Treasury $ 26,528 $ 107 $ 117 $ 26,518
U.S. Government agencies and
corporations 53,905 184 535 53,554
U.S. Government mortgage backed
securities 49,266 293 105 49,454
Collateralized mortgage obligations 58,744 219 143 58,820
Corporate bonds 192 - - 192
Other 25 - 25 -
-------------------------------------------------------
$ 188,660 $ 803 $ 925 $188,538
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
(Continued)
17
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVAILABLE FOR SALE Gross Gross
December 31, 1995 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $18,330 $ 24 $ 75 $18,279
U.S. Government agencies and
corporations 36,909 303 225 36,987
U.S. Government mortgage backed
securities 6,111 30 58 6,083
Collateralized mortgage obligations 107 - 1 106
States and political subdivisions 893 20 - 913
Other 1,538 10 25 1,523
----------------------------------------------------
$63,888 $ 387 $ 384 $63,891
----------------------------------------------------
----------------------------------------------------
</TABLE>
The amortized cost and fair value of securities classified as held to
maturity and available for sale at December 31, 1996, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
----------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 3,007 $ 3,019 $ 8,277 $ 8,230
Due after one year through five years 16,162 16,245 38,519 38,527
Due after five years through ten years 12,322 12,444 33,854 33,507
Due after ten years 3,526 3,614 - -
U.S. Government mortgage backed
securities 49,266 49,454 - -
Collateralized mortgage obligations - - 58,744 58,820
----------------------------------------------------
$35,017 $35,322 $188,660 $188,538
----------------------------------------------------
----------------------------------------------------
</TABLE>
Securities with carrying values of approximately $131,997 and $50,338 at
December 31, 1996 and 1995, respectively, were pledged to secure public
deposits, securities sold under agreements to repurchase and advances from
the Federal Home Loan Bank, and for other purposes as required or permitted
by law.
The Company elected to transfer certain securities held to maturity with an
amortized cost of $2,242 and a fair value of $2,004 to available for sale. In
addition, certain securities available for sale with an amortized cost of
$395 and a fair value of $402 were transferred to held to maturity.
These transfers were made in connection with the 1996 acquisitions to
maintain the Company's interest rate risk.
(Continued)
18
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
Realized gains and losses from securities available for sale follow:
Years Ended December 31,
------------------------------
1996 1995 1994
------------------------------
Gross gains $ 137 $ 172 $ 229
Gross losses (117) (74) (111)
------------------------------
NET GAIN $ 20 $ 98 $ 118
------------------------------
------------------------------
The Company adopted Financial Accounting Standards Board Statement No. 115
(Statement No. 115), "Accounting for Certain Investments in Debt and Equity
Securities" as of January 1, 1994. The effect of adopting Statement No. 115
on the accompanying balance sheet as of January 1, 1994 was an increase in
stockholders' equity of $831, net of the related income tax effect of $527,
to recognize the net unrealized gain in securities available for sale at that
date.
NOTE 5. LOANS
The major classifications of loans follow:
December 31,
------------------------------
1996 1995
------------------------------
Commercial $ 95,929 $ 53,226
Real estate 203,732 100,506
Installment 41,303 24,166
Other 6,047 2,928
------------------------------
347,011 180,826
------------------------------
Less:
Unearned interest 515 7
Allowance for loan losses 3,068 2,014
------------------------------
3,583 2,021
------------------------------
$ 343,428 $ 178,805
------------------------------
------------------------------
The Company's opinion as to the ultimate collectibility of these loans is
subject to estimates regarding future cash flows from operations and the value
of property, real and personal, pledged as collateral. These estimates are
affected by changing economic conditions and the economic prospects of
borrowers.
(Continued)
19
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
The following table presents data on impaired loans:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
--------------------------
<S> <C> <C>
Impaired loans for which an allowance has been provided $ 14 $ 733
Impaired loans for which no allowance has been provided 1,080 -
--------------------------
Total loans determined to be impaired $ 1,094 $ 733
--------------------------
--------------------------
Allowance for loan loss for impaired loans included
in the allowance for loan losses $ 2 $ 500
--------------------------
--------------------------
Average recorded investment in impaired loans $ 947 $ 423
--------------------------
--------------------------
Interest income recognized from impaired loans $ - $ -
--------------------------
--------------------------
Cash basis interest income recognized from impaired loans $ - $ -
--------------------------
--------------------------
</TABLE>
Loans on which the accrual of interest had been discontinued or reduced
amounted to $1,061 at December 31, 1994, which had the effect of reducing
interest income approximately $167 for the year ended December 31, 1994.
The Company and its subsidiaries conduct most of their business activities,
including granting agribusiness, commercial, residential and installment
loans with customers in north central and west central Illinois. The Banks'
loan portfolios include a concentration of loans to agricultural and
agricultural-related industries amounting to approximately $61,978 and
$27,308 as of December 31, 1996 and 1995, respectively. In addition, the
Company has a concentration of commercial real estate loans of approximately
$63,254 and $44,393 as of December 31, 1996 and 1995, respectively. Generally
those loans are collateralized by assets of those entities. The loans are
expected to be repaid from cash flows or from proceeds from the sale of
selected assets of the borrowers. Credit losses arising from lending
transactions with agricultural entities compare favorably with the Banks'
credit loss experience on the loan portfolio as a whole.
In the normal course of business, loans are made to executive officers,
directors, principal stockholders of the Company and its subsidiaries and to
parties which the Company or its directors, executive officers and
stockholders have the ability to significantly influence its management or
operations (related parties). In the opinion of management, the terms of
these loans, including interest rates and collateral, are similar to those
prevailing for comparable transactions with other customers and do not
involve more than a normal risk of collectibility. Changes in such loans
during the year ended December 31, 1996 follow:
Balance at December 31, 1995 $ 11,338
Balance acquired 2,379
New loans, extensions and modifications 5,877
Repayments (10,075)
-------------
Balance at December 31, 1996 $ 9,519
-------------
-------------
(Continued)
20
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans were
$49,778 and $47,777 at December 31, 1996 and 1995, respectively.
NOTE 6. ALLOWANCE FOR LOAN LOSSES
An analysis of activity in the allowance for loan losses follows:
Years Ended December 31,
--------------------------------------
1996 1995 1994
--------------------------------------
Balance at beginning of year $ 2,014 $ 1,704 $ 1,787
Balance acquired 1,292 - -
Provision for loan losses 1,178 684 660
Recoveries 98 163 281
Loans charged off (1,514) (537) (1,024)
--------------------------------------
Balance at end of year $ 3,068 $ 2,014 $ 1,704
--------------------------------------
--------------------------------------
NOTE 7. PREMISES AND EQUIPMENT
Premises and equipment consisted of:
December 31,
---------------------------
1996 1995
---------------------------
Land $ 1,325 $ 747
Buildings 10,893 6,022
Furniture and equipment 10,457 5,586
---------------------------
22,675 12,355
Less accumulated depreciation 9,095 5,784
---------------------------
$ 13,580 $ 6,571
---------------------------
---------------------------
(Continued)
21
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
NOTE 8. DEPOSITS
Deposit account balances by type are summarized as follows:
December 31,
---------------------------
1996 1995
---------------------------
Demand deposits $ 65,864 $ 35,688
Savings, NOW and money market accounts 159,614 80,872
Time deposits of $100 or more 74,485 23,652
Other time deposits 243,781 121,515
---------------------------
$ 543,744 $ 261,727
---------------------------
---------------------------
At December 31, 1996, the scheduled maturities of time deposits were as follows:
Year Amount
- --------------------------------------------------------------------------------
1997 $ 221,179
1998 66,865
1999 22,986
2000 4,156
2001 and thereafter 3,080
---------------
$ 318,266
---------------
---------------
A maturity distribution of time certificates of deposit in denominations of
$100 or more was as follows:
December 31,
---------------------------
1996 1995
---------------------------
3 months or less $ 33,810 $ 6,024
Over 3 months through 6 months 17,047 3,128
Over 6 months through 12 months 8,694 5,013
Over 12 months 14,934 9,487
---------------------------
$ 74,485 $ 23,652
---------------------------
---------------------------
(Continued)
22
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
NOTE 9. BORROWED FUNDS
Borrowed funds include federal funds purchased and securities sold under
agreements to repurchase, advances from the Federal Home Loan Bank, and notes
payable to a third party lender.
A summary of short-term borrowings follows:
December 31,
---------------------------
1996 1995
---------------------------
Federal funds purchased $ 800 $ -
Securities sold under agreements to repurchase 21,017 11,505
---------------------------
$ 21,817 $ 11,505
---------------------------
---------------------------
Federal Funds purchased and securities sold under agreement to repurchase
generally mature within one to four days from the transaction date.
At December 31, 1996, the scheduled maturities of advances from the Federal
Home Loan Bank were as follows:
Year Amount
- -------------------------------------------------------------------------------
1997 $ 1,566
1998 2,960
1999 -
2000 -
2001 and thereafter 5,495
--------------
$ 10,021
--------------
--------------
Notes payable of $13,180 at December 31, 1996 consisted of advances on a
$26,000 line of credit note issued by LaSalle National Bank. Interest is
payable quarterly based on agreed upon currency rates, an effective rate of
8.25% (Prime Rate) at December 31, 1996. All unpaid principal and accrued
interest is due August 2, 1997.
The notes payable agreement contains certain covenants which limit the
amounts of dividends paid, the purchase of other banks and/or businesses, the
purchase of investments not in the ordinary course of business, the changes
in capital structure and the guarantees of other liabilities and obligations.
In addition, the Company must maintain certain financial ratios. The Company
was in compliance with all covenants for the year ended December 31, 1996.
(Continued)
23
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
Information concerning borrowed funds is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
FEDERAL FUNDS PURCHASED
Maximum month-end balance during the year $ 11,288 $ - $ -
Average balance during the year 2,448 - -
Weighted average interest rate for the year 5.26% - -
Weighted average interest rate at year end 7.50% - -
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Maximum month-end balance during the year $ 32,310 $ 15,511 $ 11,563
Average balance during the year 20,239 9,260 5,511
Weighted average interest rate for the year 5.70% 5.73% 3.80%
Weighted average interest rate at year end 5.79% 5.49% 4.87%
ADVANCES FROM THE FEDERAL HOME LOAN BANK
Maximum month-end balance during the year $ 15,422 $ - $ -
Average balance during the year 13,294 - -
Weighted average interest rate for the year 5.29% - -
Weighted average interest rate at year end 6.03% - -
NOTES PAYABLE
Maximum month-end balance during the year $ 25,320 $ 4,946 $ 5,186
Average balance during the year 8,364 4,696 5,135
Weighted average interest rate for the year 8.25% 9.00% 7.22%
Weighted average interest rate at year end 8.25% 9.16% 8.50%
</TABLE>
(Continued)
24
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
NOTE 10. INCOME TAXES
Income taxes consisted of:
Years Ended December 31,
--------------------------------------
1996 1995 1994
--------------------------------------
Federal:
Current $ 918 $ 879 $ 684
Deferred (24) (134) (31)
--------------------------------------
894 745 653
--------------------------------------
State:
Current 96 140 51
Deferred (21) (4) (1)
--------------------------------------
75 136 50
--------------------------------------
$ 969 $ 881 $ 703
--------------------------------------
--------------------------------------
The Company's income tax expense differed from the statutory federal rate
of 34% as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Expected income taxes $ 1,293 $ 1,100 $ 1,121
Income tax effect of:
Interest earned on tax free investments
and loans (535) (472) (465)
Nondeductible interest expense incurred to
carry tax-free investments and loans 90 63 49
Tax-exempt dividends - - (9)
Nondeductible amortization 67 23 23
State income taxes, net of federal tax benefit 50 90 33
Other 4 77 (49)
-------------------------------------------
$ 969 $ 881 $ 703
-------------------------------------------
-------------------------------------------
</TABLE>
(Continued)
25
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
The significant components of deferred income tax assets and liabilities:
December 31,
------------------------
1996 1995
------------------------
Deferred tax assets:
Allowance for loan losses $ 446 $ 447
Deferred compensation 25 26
Other intangible assets 577 -
Securities available for sale 48 -
Other 39 -
------------------------
TOTAL DEFERRED TAX ASSETS 1,135 473
------------------------
Deferred tax liabilities:
Premises and equipment (532) (312)
Core deposit intangible (1,053) (152)
Securities available for sale - (1)
Other - (18)
------------------------
TOTAL DEFERRED TAX LIABILITIES (1,585) (483)
------------------------
Net deferred tax liabilities $ (450) $ (10)
------------------------
------------------------
NOTE 11. EMPLOYEE STOCK OWNERSHIP PLAN
The Company's Employee Stock Ownership Plan (the "Plan") covers all full-time
employees who have completed six months of service and have attained the
minimum age of twenty and one-half years. Vesting in the Plan is based on
years of continuous service. A participant is fully vested after seven years
of credited service.
The Plan owns 450,945 shares of the Company's common stock. At December 31,
1996, all shares held by the Plan were allocated to Plan participants. The
Plan operated as a leveraged employee stock ownership plan until April 1996
when the outstanding debt of the Plan was retired. Principal and interest on
the loan had been required to be paid in quarterly installments.
(Continued)
26
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
Company contributions, when aggregated with the Plan's dividend and interest
earnings, have been, at a minimum, equal to the amount required by the Plan
to pay the principal and interest on the loan, plus the sum required to
purchase allocated shares from terminated participants. The Company expenses
all cash contributions made to the Plan. Contributions were $252, $237 and
$251 for the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 12. STOCK OPTION PLAN
In April 1993, the Company adopted the UnionBancorp 1993 Stock Option Plan
(the "Option Plan"). Under the Option Plan, nonqualified options, incentive
stock options, and/or stock appreciation rights may be granted to employees
and outside directors of the Company and its subsidiaries to purchase the
Company's Common Stock at an exercise price to be determined by the Option
Plan's administrative committee. Pursuant to the Option Plan, 600,000 shares
of the Company's unissued Common Stock have been reserved and are available
for issuance upon the exercise of options and rights granted under the Option
Plan.
A summary of the status of the Option Plan as of December 31, 1996, 1995 and
1994 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- ------------- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 68,400 $ 6.24 38,100 $ 5.87 - $ -
Granted 41,250 7.99 30,300 6.70 38,100 5.87
Exercised (1,398) 6.97 - - - -
Forfeited (2,058) 8.65 - - - -
---------- ---------- ----------
Outstanding at end
of year 106,194 6.87 68,400 6.24 38,100 5.87
---------- ---------- ----------
---------- ---------- ----------
Options exercisable
at year-end 41,727 6.48 21,300 6.11 7,620 5.87
---------- ---------- ----------
---------- ---------- ----------
Weighted-average fair
value of options
granted during the
year 3.32 2.79 N/A
---------- ----------
---------- ----------
</TABLE>
(Continued)
27
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
Grants under the Option Plan are accounted for following APB Opinion No. 25
and related interpretations. Accordingly, no compensation cost has been
recognized for incentive stock option grants under the Option Plan.
Compensation cost charged to income for nonqualified stock option grants was
$26, $19, and $0 for the years ended December 31, 1996, 1995 and 1994,
respectively. Had compensation cost for all of the stock-based compensation
plans been determined based on the grant date, fair values of awards (the
method described by Statement No. 123), reported income and earnings per
common share would have been reduced to the pro forma amounts shown below:
1996 1995
----------------------------
Net income on common stock:
As reported $ 2,729 $ 2,353
Pro forma 2,685 2,336
Earnings per common share:
As reported 0.98 1.09
Pro forma 0.97 1.09
NOTE 13. REGULATORY MATTERS
The Company and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Banks must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company and the Banks' capital amounts and classification are
also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the table below) of Total and Tier I capital (as defined by the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1996, that the Company and the Banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996, the most recent notification from the corresponding
regulatory agency categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes have changed the Banks' categories.
(Continued)
28
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total capital
(to Risk Weighted Assets)
UnionBancorp, Inc. $ 40,667 10.87% $ 29,922 8.00% N/A
UnionBank 26,442 14.31% 14,785 8.00% $ 18,481 10.00%
UnionBank/Sandwich 3,003 11.16% 2,153 8.00% 2,691 10.00%
Farmers State Bank of Ferris 3,136 16.33% 1,536 8.00% 1,920 10.00%
Bank of Ladd 2,916 16.06% 1,456 8.00% 1,816 10.00%
Hanover State Bank 2,244 24.29% 739 8.00% 924 10.00%
First National Bank of Manlius 4,270 16.30% 2,095 8.00% 2,619 10.00%
Tampico National Bank 1,406 19.41% 580 8.00% 724 10.00%
Tiskilwa State Bank 1,820 18.46% 789 8.00% 986 10.00%
Omni Bank 6,799 10.19% 5,340 8.00% 6,675 10.00%
Tier I capital
(to Risk Weighted Assets)
UnionBancorp, Inc. 36,242 9.69% 14,961 4.00% N/A
UnionBank 24,833 13.44% 7,392 4.00% 11,089 6.00%
UnionBank/Sandwich 2,765 10.28% 1,076 4.00% 1,615 6.00%
Farmers State Bank of Ferris 3,009 15.67% 768 4.00% 1,152 6.00%
Bank of Ladd 2,769 15.25% 726 4.00% 1,089 6.00%
Hanover State Bank 2,164 23.42% 370 4.00% 554 6.00%
First National Bank of Manlius 4,036 15.41% 1,048 4.00% 1,572 6.00%
Tampico National Bank 1,353 18.67% 290 4.00% 435 6.00%
Tiskilwa State Bank 1,751 17.76% 394 4.00% 592 6.00%
Omni Bank 6,287 9.42% 2,670 4.00% 4,005 6.00%
Tier I leverage ratio
(to Average Assets)
UnionBancorp, Inc. 36,242 7.76% 18,676 4.00% N/A
UnionBank 24,833 9.10% 10,886 4.00% 13,645 5.00%
UnionBank/Sandwich 2,765 7.33% 1,510 4.00% 1,887 5.00%
Farmers State Bank of Ferris 3,009 6.33% 1,091 4.00% 2,377 5.00%
Bank of Ladd 2,769 6.85% 1,618 4.00% 2,022 5.00%
Hanover State Bank 2,164 8.71% 994 4.00% 1,242 5.00%
First National Bank of Manlius 4,036 6.66% 2,425 4.00% 3,032 5.00%
Tampico National Bank 1,353 7.69% 704 4.00% 880 5.00%
Tiskilwa State Bank 1,751 7.37% 950 4.00% 1,187 5.00%
Omni Bank 6,287 6.22% 4,043 4.00% 5,054 5.00%
</TABLE>
(Continued)
29
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Following is a summary of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the balance sheet for cash and cash equivalents
approximate their fair values.
FEDERAL FUNDS SOLD
The stated carrying amounts of federal funds sold approximate their fair values.
SECURITIES
Fair values for securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments. The carrying amount of accrued
interest receivable approximates its fair value.
LOANS
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
fixed-rate loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
with similar credit quality. The carrying amount of accrued interest receivable
approximates its fair value.
DEPOSIT LIABILITIES
The fair values for demand deposits equal their carrying amounts, which
represents the amount payable on demand. The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits. The
carrying amount of accrued interest payable approximates its fair value.
(Continued)
30
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
BORROWED FUNDS
The stated carrying amounts of federal funds purchased and securities sold under
agreements to repurchase, advances from the Federal Home Loan Bank, and notes
payable approximate their fair values based on rates and terms currently
available for borrowings with similar terms and maturities.
OFF-BALANCE-SHEET INSTRUMENTS
Fair values for the Company's off-balance-sheet instruments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing. The
fair value of these items is not material.
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1996 1995
--------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 29,236 $ 29,236 $ 16,167 $ 16,167
Federal funds sold 10,267 10,267 2,265 2,265
Securities 223,555 223,860 92,917 93,077
Loans 348,428 348,043 178,805 178,928
Accrued interest receivable 6,501 6,501 3,826 3,826
Financial Liabilities:
Deposits 543,744 545,433 261,727 262,491
Federal funds purchased and securities
sold under agreement to repurchase 21,817 21,817 11,505 11,505
Advances from the Federal
Home Loan Bank 10,021 10,021 - -
Notes payable 13,180 13,180 4,346 4,346
Accrued interest payable 3,931 3,931 2,231 2,231
</TABLE>
(Continued)
31
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the earnings potential of the trust operations, the trained work force, customer
goodwill and similar items.
NOTE 15. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
In the normal course of business, there are outstanding various contingent
liabilities such as claims and legal actions, which are not reflected in the
consolidated financial statements. In the opinion of management, no material
losses are anticipated as a result of these actions or claims.
The Banks are parties to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
contractual amounts of those instruments reflect the extent of involvement in
particular classes of financial instruments.
The Banks' exposure to credit loss, in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit written, is represented by the contractual amount of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments. Financial
instruments whose contract amounts represent credit risk at follows:
<TABLE>
<CAPTION>
Range of Rates
Variable Rate Fixed Rate Total on Fixed Rate
Commitments Commitments Commitments Commitments
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit and
standby letters of credit
at December 31, 1996 $ 49,712 $ 10,142 $ 59,854 6.25 - 14.00%
at December 31, 1995 40,686 3,111 43,797 6.25 - 11.25%
</TABLE>
(Continued)
32
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses an may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. For commitments to extend credit, the Banks
evaluate each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Banks upon extension of
credit, is based on management's credit evaluation. Collateral held varies, but
may include accounts receivable; inventory; property, plant, and equipment; and
income producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loans to customers. The standby letters of credit are
unsecured.
The Company has employment agreements with its executive officers and certain
other management personnel. These agreements generally continue until
terminated by the executive or the Company and provide for continued salary and
benefits to the executive under certain circumstances. The agreements provide
the employees with additional rights after a change of control of the Company
occurs.
The Company does not engage in the use of interest rate swaps, or futures,
forwards or option contracts.
NOTE 16. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The primary source of funds for the Company is dividends from its subsidiaries.
By regulation, the Banks are prohibited from paying dividends that would reduce
regulatory capital below a specific percentage of assets without regulatory
approval. As a practical matter, dividend payments are restricted to maintain
prudent capital levels.
(Continued)
33
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Condensed financial information for UnionBancorp, Inc. follows:
<TABLE>
<CAPTION>
BALANCE SHEETS (PARENT COMPANY ONLY) December 31,
-------------------------------
ASSETS 1996 1995
-------------------------------
<S> <C> <C>
Cash and cash equivalents $ 6 $ -
Investment in subsidiaries 60,092 27,558
Premises and equipment 336 152
Intangible assets 52 76
Other assets 233 76
-------------------------------
$ 60,719 $ 27,862
-------------------------------
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes payable $ 13,180 $ 4,346
Other liabilities 99 41
-------------------------------
13,279 4,387
-------------------------------
Mandatory redeemable preferred stock, Series B, no par value; 1,092
shares authorized; 857 shares issued and outstanding 857 -
-------------------------------
Stockholders' Equity
Preferred stock - -
Series A convertible preferred stock 500 -
Series C preferred stock - -
Common stock, $1 par value; 10,000,000 shares authorized;
4,386,064 and 2,400,000 issued in 1996 and 1995, respectively 4,386 2,400
Surplus 19,403 1,074
Retained earnings 22,981 20,568
Unrealized gain (loss) on securities available for sale (74) 2
Deferred compensation - stock options (91) (48)
-------------------------------
47,105 23,996
Less treasury stock, at cost; 271,263 and 268,263 shares
in 1996 and 1995, respectively 522 521
-------------------------------
46,583 23,475
-------------------------------
$ 60,719 $ 27,862
-------------------------------
-------------------------------
</TABLE>
(Continued)
34
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME STATEMENTS (PARENT COMPANY ONLY) Years Ended December 31,
-----------------------------------------
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Dividends from subsidiaries $ 1,227 $ 1,532 $ 1,149
Management fees and other 977 981 652
-----------------------------------------
TOTAL INCOME 2,204 2,513 1,801
-----------------------------------------
Interest expense 690 422 371
Other expenses 1,768 1,275 883
-----------------------------------------
TOTAL EXPENSES 2,458 1,697 1,254
-----------------------------------------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT
EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARIES (254) 816 547
Income tax benefit (545) (217) (251)
-----------------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES 291 1,033 798
Equity in undistributed earnings of subsidiaries 2,543 1,320 1,796
-----------------------------------------
NET INCOME 2,834 2,353 2,594
Less dividends on preferred stock 105 - -
-----------------------------------------
NET INCOME ON COMMON STOCK $ 2,729 $ 2,353 $ 2,594
-----------------------------------------
-----------------------------------------
</TABLE>
(Continued)
35
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) Years Ended December 31,
-----------------------------------------
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 2,834 $ 2,353 $ 2,594
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 53 17 10
Undistributed earnings of subsidiaries (2,543) (1,320) (1,796)
Amortization of intangible assets 24 24 24
Amortization of deferred compensation -
stock options 26 19 -
Provision for deferred income taxes (27) 12 -
Change in assets and liabilities:
(Increase) decrease in other assets (142) 438 225
Increase (decrease) in other liabilities 18 (134) 30
-----------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 243 1,409 1,087
-----------------------------------------
Cash Flows from Investing Activities
Investment in subsidiary (11) (400) (500)
Purchases of premises and equipment (237) (51) (123)
Purchase price paid for acquisitions (16,939) - -
-----------------------------------------
NET CASH (USED IN) FINANCING ACTIVITIES (17,187) (451) (623)
-----------------------------------------
Cash Flows from Financing Activities
Net increase (decrease) in notes payable 4,884 (680) (254)
Dividends paid on common stock (316) (284) (248)
Dividends paid on preferred stock (53) - -
Proceeds from issuance of treasury stock - - 15
Redemption of qualifying directors' shares (1) - (1)
Proceeds from issuance of common stock, net of cost
to raise capital 12,436 - -
-----------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 16,950 (964) (488)
-----------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 6 (6) (24)
Cash and Cash Equivalents:
Beginning of year - 6 30
-----------------------------------------
End of year $ 6 $ - $ 6
-----------------------------------------
-----------------------------------------
</TABLE>
36
<PAGE>
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Supplemental Schedule of Noncash Investing
and Financing Activities
Change in unrealized gain (loss) on securities
available for sale $ (76) $ 1,759 $ (1,757)
-----------------------------------------
-----------------------------------------
Preferred stock dividends declared not paid $ 52 $ - $ -
-----------------------------------------
-----------------------------------------
Issuance of nonqualifying stock options $ 69 $ 67 $ -
-----------------------------------------
-----------------------------------------
Notes payable assumed in acquisition of subsidiary $ 3,950 $ - $ $ -
-----------------------------------------
-----------------------------------------
</TABLE>
NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31, September 30,
1996 1996
----------------------------
<S> <C> <C>
Interest income $ 11,554 $ 8,205
Interest expense 6,586 4,567
----------------------------
NET INTEREST INCOME 4,968 3,638
Provision for loan losses 482 196
----------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,486 3,442
Noninterest income 1,096 801
Noninterest expense 4,339 3,148
----------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 1,243 1,095
Minority interest 18 9
----------------------------
INCOME BEFORE INCOME TAXES 1,225 1,086
Income taxes 307 282
----------------------------
NET INCOME $ 918 $ 804
----------------------------
----------------------------
Earnings per common share $ 0.21 $ 0.29
----------------------------
----------------------------
</TABLE>
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
The following discussion provides additional information regarding the
operations and financial condition of the Company for the three years ended
December 31, 1996. This discussion should be read in conjunction with "Selected
Consolidated Financial Data," the consolidated financial statements of the
Company and the accompanying notes thereto.
GENERAL
The Company derives substantially all of its revenues and income from the
operations of its banking subsidiaries, the Banks, which provide a full range of
commercial and consumer banking services to businesses and individuals,
primarily in north central and west central Illinois. As of December 31, 1996,
the Company had total assets of $642,024,000, net loans of $343,428,000, total
deposits of $543,744,000 and total stockholders' equity of $46,583,000. During
1996, the Company more than doubled its total assets, primarily through the
acquisitions of Prairie Bancorp, Inc. ("Prairie") and Country Bancshares, Inc.
("Country"). The Prairie and Country acquisitions (the "Acquisitions")
increased the organization to nine bank subsidiaries with 27 locations in 13
Illinois counties. The Acquisitions were funded in part by a public offering in
October of 1996 of 1,265,000 shares of Common Stock. Net proceeds of the
offering to the Company were $12,436,000. As a result of the Acquisitions,
internal loan and deposit portfolio growth, and a relatively stable net interest
margin, the Company reported net income of $2,834,000 for the year ended
December 31, 1996, compared with net income of $2,353,000 for the year ended
December 31, 1995.
RESULTS OF OPERATIONS
NET INCOME
Net income was $2,834,000 ($.98 per share) for the year ended December 31,
1996, compared with net income of $2,353,000 ($1.09 per share) for the year
ended December 31, 1995, an increase of $481,000 or 20.4%. The increase in
earnings in 1996 compared with 1995 was primarily attributable to the
Acquisitions and internal growth in the Company's loan and deposit portfolios.
Net income was $2,594,000 for 1994 ($1.22 per share). The $241,000 (9.3%)
decrease in earnings for 1995 compared to 1994 was primarily attributable to
start-up costs related to the opening of two new banking facilities during that
year.
NET INTEREST INCOME
Net interest income is the difference between income earned on
interest-earning assets and the interest expense incurred on interest-bearing
liabilities. The net yield on total interest-earning assets, also referred to
as interest rate margin or net interest margin, represents net interest income
divided by average interest-earning assets. The Company's principal
interest-earning assets are loans, investment securities and federal funds sold.
1
<PAGE>
Net interest income was $14,034,000 for 1996, an increase of $3,915,000 or
38.7%, compared with net interest income of $10,119,000 for 1995, which
represented an increase of $198,000 or 2.0% compared with net interest income of
$9,921,000 for 1994. The Company's average total interest-earning assets
increased from $261,001,000 for 1995 to $396,926,000 for 1996, representing a
52.1% increase resulting primarily from the growth attributed to the
Acquisitions during 1996. The net interest margin declined to 3.74% at December
31, 1996 from 4.15% at December 31, 1995. The interest rates on average earning
assets decreased to 8.02% in 1996, from 8.46% in 1995, while rates on average
interest bearing liabilities decreased to 4.80% in 1996 from 4.90% in 1995. The
decrease in the yield on average earning assets primarily resulted from a change
in the mix of the earning assets resulting from the Acquisitions, which brought
a higher level of earning assets in lower yielding securities. In addition,
during 1996 there was an overall decrease in the market rates of interest. The
nominal decrease in the average rates paid on interest bearing liabilities
primarily resulted from interest rates on time deposits reflecting the decrease
in market rates of interest.
The following table sets forth for each category of interest-earning assets
and interest-bearing liabilities the average amounts outstanding, the interest
earned or paid on such amounts and the average rate paid for the years ended
December 31, 1996, 1995 and 1994. The table also sets forth the average rate
earned on all interest-earning assets, the average rate paid on all
interest-bearing liabilities and the net yield on average interest-earning
assets for the same period.
2
<PAGE>
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------
1996 1995
------------------------------------ ------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
ASSETS ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest earning deposits $ 66 $ 4 5.92% $ 27 $ 2 5.85%
Investment securities(1):
Taxable 122,653 7,316 5.96% 62,808 3,636 5.79%
Non-taxable(2) 26,994 2,051 7.60% 24,463 1,919 7.84%
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities (tax equivalent) 149,647 9,367 6.26% 87,271 5,555 6.37%
---------- ---------- ---------- ---------- ---------- ----------
Federal funds sold 5,637 298 5.29% 2,577 156 6.05%
---------- ---------- ---------- ---------- ---------- ----------
Loans:(3)(4)
Commercial 72,210 6,793 9.41% 55,431 5,524 9.97%
Real estate 138,721 11,684 8.42% 94,050 8,380 8.91%
Installment and other 33,047 3,062 9.27% 23,523 2,103 8.94%
Fees on loans - 641 - - 362 -
Less: Allowance for loan losses (2,402) - - (1,878) - -
---------- ---------- ---------- ---------- ---------- ----------
Net loans (tax equivalent) 241,576 22,180 9.18% 171,126 16,36 9.57%
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 396,926 31,849 8.02% 261,001 22,082 8.46%
---------- ---------- ---------- ---------- ---------- ----------
NONEARNING ASSETS:
Cash and cash equivalents 14,430 10,763
Premises and equipment, net 9,261 6,042
Other assets 10,076 5,585
---------- ----------
Total nonearning assets 33,767 22,390
---------- ----------
Total assets $ 430,693 $ 283,391
---------- ----------
---------- ----------
LIABILITIES
NOW accounts $ 40,755 $ 1,055 2.59% $ 31,097 $ 843 2.71%
Money market accounts 25,333 804 3.17% 19,691 584 2.97%
Savings deposits 41,664 1,224 2.94% 23,146 611 2.64%
Time, $100,000 and over 22,955 1,433 6.24% 12,040 687 5.71%
Other time deposits 194,957 10,723 5.50% 129,147 7,534 5.84%
Federal funds purchased and repurchase agreements 16,388 861 5.25% 9,825 567 5.77%
Advances from FHLB 3,427 213 6.21% - - -
Notes payable 8,364 690 8.25% 4,696 423 9.00%
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 353,843 17,003 4.80% 229,642 11,249 4.90%
---------- ---------- ---------- ---------- ---------- ----------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits 41,395 29,950
Other liabilities 4,693 2,071
---------- ----------
Total noninterest-bearing liabilities 46,088 32,021
---------- ----------
Stockholders' equity 30,762 21,728
Total liabilities and stockholders' equity $ 430,693 $ 283,391
---------- ----------
---------- ----------
Net interest income (tax equivalent) $ 14,846 $ 10,833
---------- ----------
---------- ----------
Net interest income (tax equivalent) to total
earning assets 3.74% 4.15%
Interest bearing liabilities to earning assets 89.14% 87.99%
- ------------------------------------------------------------------ ----------
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1994
------------------------------------
Interest
Average Income/ Average
Balance Expense Rate
ASSETS ---------- ---------- ----------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest earning deposits $ - $ - -
Investment securities(1):
Taxable 68,946 3,937 5.71%
Non-taxable(2) 22,818 1,869 8.19%
---------- ---------- ----------
Total investment securities (tax equivalent) 91,764 5,806 6.33%
---------- ---------- ----------
Federal funds sold 629 38 6.04%
---------- ---------- ----------
Loans:(3)(4)
Commercial 57,093 5,074 8.89%
Real estate 78,262 6,522 8.33%
Installment and other 16,831 1,552 9.22%
Fees on loans - 339 -
Less: Allowance for loan losses (1,731) - -
---------- ---------- ----------
Net loans (tax equivalent) 150,455 13,487 8.96%
---------- ---------- ----------
Total interest-earning assets 242,848 19,331 7.96%
---------- ---------- ----------
NONEARNING ASSETS:
Cash and cash equivalents 10,867
Premises and equipment, net 5,282
Other assets 5,637
----------
Total nonearning assets 21,786
----------
Total assets $ 264,634
----------
----------
LIABILITIES
NOW accounts $ 27,187 $ 627 2.31%
Money market accounts 22,108 590 2.67%
Savings deposits 26,288 723 2.75%
Time, $100,000 and over 15,912 755 4.74%
Other time deposits 112,094 5,398 4.82%
Federal funds purchased and repurchase agreements 4,574 242 5.29%
Advances from FHLB - - -
Notes payable 5,135 371 7.22%
---------- ---------- ----------
Total interest-bearing liabilities $ 213,298 $ 8,706 4.08%
---------- ---------- ----------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits 29,622
Other liabilities 2,194
----------
Total noninterest-bearing liabilities 31,816
----------
Stockholders' equity 19,520
Total liabilities and stockholders' equity $ 264,634
----------
----------
Net interest income (tax equivalent) $ 10,625
----------
----------
Net interest income (tax equivalent) to total
earning assets 4.38%
Interest bearing liabilities to earning assets 87.83%
----------
</TABLE>
(1) Average balance and average rate on securities classified as available for
sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory Federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances.
(4) Overdraft loans are excluded in the average balances.
3
<PAGE>
The Company's net interest income is affected by changes in the amount and
mix of interest-earning assets and interest-bearing liabilities, referred to as
a "volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as a "rate change." The following table reflects the
changes in net interest income stemming from changes in interest rates and from
asset and liability volume, including mix. The change in interest attributable
to both rate and volume has been allocated to the changes in the rate and the
volume on a pro rata basis.
RATE/VOLUME ANALYSIS OF
NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------------------------
1996 Compared to 1995 1995 Compared to 1994
-------------------------------------- ---------------------------------------
Change Due to Change Due to
-------------------------------------- ---------------------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest earning deposits $ 2 $ - $ 2 $ - $ 2 $ 2
Investment securities:
Taxable 3,567 113 3,680 (354) 53 (301)
Non-taxable 194 (62) 132 131 (81) 50
Federal funds sold 164 (22) 142 118 - 118
Loans 6,492 (681) 5,811 1,936 946 2,882
-------- -------- -------- --------- -------- ----------
Total interest income $ 10,419 $ (652) $ 9,767 $ 1,831 $ 920 $ 2,751
-------- -------- -------- --------- -------- ----------
INTEREST EXPENSE:
NOW accounts $ 251 $ (39) $ 212 $ 97 $ 119 $ 216
Money market accounts 177 43 220 (68) 62 (6)
Savings deposits 538 75 613 (84) (28) (112)
Time, $100,000 and over 677 69 746 (203) 135 (68)
Other time 3,632 (443) 3,189 894 1,242 2,136
Federal funds purchased and
repurchase agreements 348 (54) 294 301 24 325
Advances from FHLB - 213 213 - - -
Notes payable 340 (73) 267 (34) 86 52
-------- -------- -------- --------- -------- ----------
Total interest expense $ 5,963 $ (209) $ 5,754 $ 903 $ 1,640 $ 2,543
-------- -------- -------- --------- -------- ----------
Net interest margin $ 4,456 $ (443) $ 4,013 $ 928 $ (720) $ 208
-------- -------- -------- --------- -------- ----------
-------- -------- -------- --------- -------- ----------
</TABLE>
PROVISION FOR LOAN LOSSES
The amount of the provision for loan losses is based on monthly evaluations
of the loan portfolio, with particular attention directed toward nonperforming
and other potential problem loans. During these evaluations, consideration is
also given to such factors as management's evaluation of specific loans, the
level and composition of nonperforming loans, historical loss experience,
results of examinations by regulatory agencies, an internal asset review
process, the market value of collateral, the strength and availability of
guaranties, concentrations of credits and other judgmental factors.
4
<PAGE>
The 1996 provision for loan losses was $1,178,000 compared with $684,000 in
1995 and $660,000 in 1994. Net charge-offs in 1996 were approximately
$1,416,000. Approximately $690,000 of the net charge-offs related to a single
borrower for which management had previously identified as a problem credit.
The provision for loan losses of $1,178,000 was made to bring the allowance for
loan loss to the level management deemed adequate as of December 31, 1996. The
increase in the provision for loan losses during 1996 versus 1995 was related to
the increase in the ratio of net charge-offs to average loans, which was
primarily caused by the credit described above, coupled by the Company's
decision to make additional provisions to the allowance to compensate for growth
in the loan portfolio and to maintain the allowance for loan losses at what
management believes to be an adequate level. The 3.6% increase in the 1995
provision for loan losses when compared with 1994 was primarily a result of a
$19,685,000, or 12.2% increase in loans outstanding which was partially offset
by a $369,000 or 49.7% decrease in net charge-offs.
NONINTEREST INCOME
The following table shows the Company's noninterest income:
NONINTEREST INCOME
(DOLLARS IN THOUSANDS)
Year Ended
December 31,
1996 1995 1994
-------------- --------------- --------------
Service charges $ 1,286 $ 952 $ 895
Merchant fee income 524 418 357
Trust income 393 330 301
Gain on sale of loans 262 288 130
Securities gains, net 20 98 118
Other noninterest income 737 484 482
-------------- --------------- ---------------
Total noninterest income $ 3,222 $ 2,570 $ 2,283
-------------- --------------- ---------------
-------------- --------------- ---------------
Noninterest income is generated primarily from fees associated with
noninterest and interest-bearing accounts. Noninterest income for 1996 was
$3,222,000, an increase of $652,000 or 25.4% compared with noninterest income of
$2,570,000 for 1995, an increase of $287,000 or 12.6% compared with noninterest
income of $2,283,000 for 1994. Internal growth as well as the purchase of
additional bank subsidiaries during 1996, increased the number and balance of
noninterest and interest-bearing accounts, resulting in increased noninterest
income. Specifically, service charges increased on demand deposit accounts, the
largest component of noninterest bearing deposit accounts, and charges grew for
items such as insufficient funds and overdrafts, primarily on transactional
deposit products such as demand, NOW and Money Market accounts. The increase in
service charge income to $1,286,000 for the year ended December 31, 1996, from
$952,000 and $895,000 for the years ended December 31, 1995, and 1994,
respectively, was related to increases in deposit account balances and increases
in the service charge schedule during those periods. Merchant fee income is
derived from the Company's credit card operations, comprised primarily of
merchant fees (62% of total merchant fees), interchange fees (19% of total
merchant fees) and annual fees (6% of total merchant fees). Total merchant fee
income has continued to increase as the Company adds new merchants to its
customer list and as credit card activity has grown. Other noninterest income
is primarily derived from fee-based banking services such as loan servicing
fees, and sales of travelers checks and money orders.
The Company, through the Banks, provides trust services to its customers by
acting as executor, administrator, trustee, agent and in various other fiduciary
capacities for client accounts. Total assets under management at December 31,
1996, were approximately $106,801,000. Trust income, which is predominately
comprised of fees assessed based on the market value of managed client
portfolios, increased by $63,000 during 1996 and increased by $29,000 during
1995.
5
<PAGE>
A significant contribution to the Company's noninterest income was also
made by its residential real estate mortgage and origination, sales and
servicing operations. In addition, during 1995 the Company implemented a
program in connection with the SBA which guarantees repayment on portions of
loans if a borrower defaults. Revenues from both of these operations are a
substantial component of noninterest income and include commissions and fees for
third party loan servicing, origination and other fees received at closing and
realized gains on the sale of loans into the secondary market.
NONINTEREST EXPENSE
The following table shows the Company's noninterest expense:
NONINTEREST EXPENSE
(DOLLARS IN THOUSANDS)
Year Ended
December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
Salaries and employee benefits $ 6,469 $ 4,451 $ 3,868
Occupancy expense, net 899 665 574
Furniture and equipment expenses 977 584 560
FDIC deposit assessment 8 271 526
Amortization of intangible assets 392 120 162
Other noninterest expense 3,503 2,680 2,557
------------ ------------ ------------
Total noninterest expense $ 12,248 $ 8,771 $ 8,247
------------ ------------ ------------
------------ ------------ ------------
Noninterest expense was $12,248,000 in 1996, an increase of $3,477,000 or
39.6% compared with noninterest expense of $8,771,000 for 1995, an increase of
$524,000 or 6.4% compared with noninterest expense of $8,247,000 for 1994. The
$3,477,000 increase in noninterest expense during 1996 was attributed primarily
to an increase of $2,018,000 in salaries and employee benefits as a result of
acquiring additional subsidiaries, $272,000 increase in amortization expense due
to intangibles in connection with the Acquisitions and $823,000 in other
noninterest expense. The increase in other nonoperating expenses was attributed
to approximately $467,000 in noninterest expense from the Prairie acquisition
and approximately $249,000 from the acquisitions of Country and LaSalle County
Collections, Inc. ("LaSalle"), a small collection agency. No individual
significant balances were included in those totals. The increase in noninterest
expense for 1995 from 1994 was attributable to a 15.1%, or $583,000, increase in
salaries and employee benefits and a 10.1%, or $115,000, increase in occupancy
and equipment expenses, due primarily to the opening of two banking facilities
during 1995.
Deposits held by the Banks are insured by the Bank Insurance Fund ("BIF")
of the Federal Deposit Insurance Corporation ("FDIC"), and as FDIC-insured
institutions, the Banks are required to pay deposit insurance premium
assessments to the FDIC. The amount an institution pays for FDIC deposit
insurance coverage is determined in accordance with a risk-based assessment
system under which each insured depository institution is placed into one of
nine categories and assessed insurance premiums based upon its level of capital
and the results of supervisory evaluations. Changes in the deposit insurance
assessment rate have significantly reduced the cost of deposit insurance for the
Banks.
INCOME TAXES
The Company recorded income tax expense of $969,000, $881,000 and $703,000
for the years ended December 31, 1996, 1995 and 1994, respectively, and
effective tax rates were 25.5%, 27.2% and 21.3%, respectively, for such periods.
The Company's effective tax rate is lower than statutory rates because the
Company derives a significant amount of interest income from municipal
securities, which are exempt from federal tax.
6
<PAGE>
INTEREST RATE SENSITIVITY MANAGEMENT
The operating income and net income of the Banks depend, to a substantial
extent, on "rate differentials," I.E., the differences between the income the
Banks receive from loans, securities and other earning assets, and the interest
expense they pay to obtain deposits and other liabilities. These rates are
highly sensitive to many factors which are beyond the control of the Banks,
including general economic conditions and the policies of various governmental
and regulatory authorities.
The objective of monitoring and managing the interest rate risk position of
the balance sheet is to contribute to earnings and to minimize fluctuations in
net interest income. The potential for earnings to be affected by changes in
interest rates is inherent in a financial institution. Interest rate
sensitivity is the relationship between changes in market interest rates and
changes in net interest income due to the repricing characteristics of assets
and liabilities. An asset sensitive position in a given period will result in
more assets being subject to repricing; therefore, as interest rates rise, such
a position will have a positive effect on net interest income. Conversely, in a
liability sensitive position, where liabilities reprice more quickly than assets
in a given period, a rise in interest rates will have an adverse effect on net
interest income.
One method of analyzing interest rate risk is to evaluate the balance of
the Company's interest rate sensitivity position. A mix of assets and
liabilities that are roughly equal in volume, term and repricing represents a
matched interest rate sensitivity position. Any excess of assets or liabilities
in a particular period results in an interest rate sensitivity gap. The
following table presents the interest rate sensitivity for the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1996:
INTEREST RATE-SENSITIVE ASSETS AND LIABILITIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------------------------------------------------
3 months 3 months to 6 months 1 year to
or less 6 months to 1 year 5 years Over 5 years Total
------------ -------------- ------------ ----------- -------------- ------------
<S> <S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Investment securities $ 73,774 $ 8,358 $ 28,963 $ 58,313 $ 54,147 $ 223,555
Loans 96,020 31,700 41,009 124,574 53,193 346,496
---------- ---------- ---------- ---------- ----------- ----------
Total interest-earning
assets $ 169,794 $ 40,058 $ 69,972 $ 182,887 $ 107,340 $ 570,051
---------- ---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ---------- ----------- ----------
INTEREST-BEARING LIABILITIES
NOW accounts $ 53,721 $ - $ - $ - $ - $ 53,721
Money market accounts 33,720 - - - - 33,720
Savings 72,173 - - - 72,173
Time, $100,000 and over 33,810 17,047 8,694 14,934 - 74,485
Other time 57,354 43,873 55,843 82,649 4,062 243,781
---------- ---------- ---------- ---------- ----------- ----------
Total interest-bearing
deposits $ 250,778 $ 60,920 $ 64,537 $ 97,583 $ 4,062 $ 477,880
Federal funds and
repurchase agreements 13,528 3,267 1,850 2,923 249 21,817
Advances from FHLB - 1,000 566 6,155 2,300 10,021
Notes payable 13,180 - - - - 13,180
---------- ---------- ---------- ---------- ----------- ----------
Total interest-bearing
liabilities $ 277,486 $ 65,187 $ 66,953 $ 106,661 $ 6,611 $ 522,898
---------- ---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ---------- ----------- ----------
Period interest sensitivity
gap $ (107,692) $ (25,129) $ 3,019 $ 76,226 $ 100,729 $ 47,153
Cumulative interest
sensitivity $ (107,692) $ (132,821) $ (129,802) $ (53,576) $ 47,153 $ 47,153
Cumulative gap as a percent
of total assets (16.77)% (20.69)% (20.22)% (8.34)% 7.34% 7.34%
Cumulative interest-sensitive
assets as a percent of
cumulative interest-
sensitive liabilities 61.19% 61.24% 68.31% 89.62% 109.02% 109.02%
</TABLE>
7
<PAGE>
The cumulative rate-sensitive gap position at one year was a
liability-sensitive position of $129,802,000 or negative 20.2% which indicates
that the Company was in a liability interest rate-sensitive position at December
31, 1996. Accordingly, the Company's earnings could experience a significant
negative impact from increases in interest rates. The Company prefers to
maintain a balanced mix of rate-sensitive assets and liabilities, making each
side of the balance sheet approximately equally flexible in reacting to changes
in market interest rates. This targeted balance was altered during 1996,
principally as a result of the acquisitions. Management intends to return to
this close matching position by restructuring the mix of the assets and
liabilities, primarily associated with the acquisition growth. It is important
to note that in the total for rate-sensitive liabilities are $125,894 in savings
and NOW accounts. While these accounts are immediately repriceable, the rates
paid on these deposit accounts will not change in direct correlation with
changes in the general level of short-term interest rates.
The Company undertakes this interest rate-sensitivity analysis to monitor
the potential risk to future earnings from the impact of possible future changes
in interest rates on currently existing net assets or net liability positions.
However, this type of analysis is as of a point-in-time, when in fact the
Company's interest rate sensitivity can quickly change as market conditions,
customer needs and management strategies change. Thus, interest rate changes do
not affect all categories of assets and liabilities equally or at the same time.
Pursuant to its investment policy, the Company does not purchase derivative
financial instruments.
The preceding table does not necessarily indicate the impact of general
interest rate movements on the Company's net interest income because the
repricing of certain assets and liabilities is discretionary and is subject to
competitive and other pressures. As of December 31, 1996, the Banks held
approximately $49,454,000 in mortgage-backed securities. Although the
mortgage-backed securities have various stated maturities, it is not uncommon
for mortgage-backed securities to prepay outstanding principal prior to stated
maturities. As a result, assets and liabilities indicated as repricing within
the same period may, in fact, reprice at different times and at different rate
levels.
8
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
LOANS AND ASSET QUALITY
The Company's loans are diversified by borrower and industry group. Loan
growth has occurred every year over the past five years and can be attributed to
increased loan demand, the addition of new loan products and to the
Acquisitions. The following table describes the composition of loans by major
categories outstanding.
LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Aggregate Principal Amount
----------------------------------------------------------------------
December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commercial $ 60,152 $ 38,298 $ 36,802 $ 37,129 $ 36,087
Agricultural
Real estate:
Commercial
mortgages 63,254 44,393 36,727 32,744 30,783
Construction 13,549 7,437 5,047 3,018 3,150
Agricultural 29,185 10,229 12,169 12,606 11,689
1-4 family
mortgages 91,697 36,637 33,623 27,505 28,076
Installment 42,320 24,072 19,765 18,262 20,906
Other 3,354 2,681 2,641 2,511 2,043
------------ ------------ ------------ ------------ ------------
347,011 180,826 161,165 148,477 146,855
Unearned discount (515) (7) (31) (106) (286)
------------ ------------ ------------ ------------ ------------
Total loans 346,496 180,819 161,134 148,371 146,569
Allowance for loan
losses (3,068) (2,014) (1,704) (1,787) (1,586)
------------ ------------ ------------ ------------ ------------
Loans, net $ 343,428 $ 178,805 $ 159,430 $ 146,584 $ 144,983
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Percentage of Total Loan Portfolio
------------------------------------------------------------------------
Commercial 17.33% 21.18% 22.84% 25.01% 24.57%
Agricultural 12.54% 9.45% 8.93% 9.90% 9.62%
Real estate:
Commercial
mortgages 18.23% 24.55% 22.79% 22.05% 20.96%
Construction 3.90% 4.11% 3.13% 2.03% 2.14%
Agricultural 8.41% 5.66% 7.55% 8.49% 7.96%
1-4 family mortgages 26.42% 20.26% 20.86% 18.53% 19.12%
Installment 12.20% 13.31% 12.26% 12.30% 14.24%
Other loans 0.97% 1.48% 1.64% 1.69% 1.39%
------------ ------------ ------------ ------------ ------------
Gross Loans 100.00% 100.00% 100.00% 100.00% 100.00%
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
As of December 31, 1996 and 1995, commitments of the Banks under standby
letters of credit and unused lines of credit totaled approximately $59,854,000
and $43,797,000, respectively.
9
<PAGE>
Stated loan maturities (including variable rate loans reset to market
interest rates) of the total loan portfolio, net of unearned income, at December
31, 1996 were as follows:
STATED LOAN MATURITIES(1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Within One One Year to After Five
Year Five Years Years Total
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Commercial $ 23,155 $ 19,974 $ 20,007 $ 63,136
Agricultural 23,722 6,363 2,708 32,793
Real estate 40,164 69,705 93,863 203,732
Installment 18,770 25,359 2,706 46,835
-------------- --------------- -------------- --------------
Total $ 105,811 $ 121,401 $ 119,284 $ 346,496
-------------- --------------- -------------- --------------
-------------- --------------- -------------- --------------
</TABLE>
__________________
(1) Maturities based upon contractual maturity dates
Rate sensitivities of the total loan portfolio, net of unearned income, at
December 31, 1996 were as follows:
LOAN REPRICING
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Within One One Year to After Five
Year Five Years Years Total
-------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Fixed rate $ 79,239 $ 89,200 $ 29,641 $ 198,080
Variable rate 101,948 42,419 2,275 146,642
Nonaccrual 1,070 690 14 1,774
-------------- --------------- -------------- --------------
Total $ 182,257 $ 132,309 $ 31,930 $ 346,496
-------------- --------------- -------------- --------------
-------------- --------------- -------------- --------------
</TABLE>
The maturities presented above are based upon contractual maturities. Many
of these loans are made on a short-term basis with the possibility of renewal at
time of maturity. All loans, however, are reviewed on a continuous basis for
creditworthiness.
NONPERFORMING ASSETS
The Company's financial statements are prepared on the accrual basis of
accounting, including the recognition of interest income on its loan portfolio,
unless a loan is placed on nonaccrual status. Loans are placed on a nonaccrual
status when there are serious doubts regarding the collectibility of all
principal and interest due under the terms of the loan. Amounts received on
nonaccrual loans generally are applied first to principal and then to interest
after all principal has been collected. It is the policy of the Company not to
renegotiate the terms of a loan because of a delinquent status. Rather, a loan
is generally transferred to nonaccrual status if it is not in the process of
collection and is delinquent in payment of either principal or interest beyond
90 days. Loans which are 90 days delinquent but are well secured and in the
process of collection are not included in nonperforming assets.
10
<PAGE>
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)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 1,774 $ 1,127 $ 891 $ 1,671 $ 2,148
Loans 90 days past due and still
accruing interest 486 1,088 560 1,378 1,258
---------- ----------- ----------- ------------ ----------
Total nonperforming loans 2,260 2,215 1,451 3,049 3,406
Other real estate owned 363 441 672 1,096 664
Other nonperforming assets (1) 192 240 240 240 -
---------- ----------- ----------- ------------ ----------
Total nonperforming assets $ 2,815 $ 2,896 $ 2,363 $ 4,385 $ 4,070
---------- ----------- ----------- ------------ ----------
---------- ----------- ----------- ------------ ----------
Nonperforming loans to total loans 0.65% 1.22% 0.90% 2.06% 2.32%
Nonperforming assets to total loans 0.81% 1.60% 1.47% 2.96% 2.77%
Nonperforming assets to total assets 0.44% 0.95% 0.87% 1.64% 1.64%
</TABLE>
____________________________
(1) Represents a single municipal security in default status.
The classification of a loan as nonaccrual does not necessarily indicate
that the principal is uncollectible, in whole or in part. A determination as to
collectibility is made by the Banks on a case-by-case basis. The Banks consider
both the adequacy of the collateral and the other resources of the borrower in
determining the steps to be taken to collect nonaccrual loans. The final
determination as to the steps taken is made based upon the specific facts of
each situation. Alternatives that are typically considered to collect
nonaccrual loans are foreclosure, collection under guarantees, loan
restructuring or judicial collection actions.
Each of the Company's loans is assigned a rating based upon an internally
developed grading system. A separate credit administration department also
reviews grade assignments on an ongoing basis. Management continuously monitors
nonperforming, impaired and past due loans to prevent further deterioration of
these loans. Management is not aware of any material loans classified for
regulatory purposes as loss, doubtful, substandard, or special mention, that
have been excluded from classification under nonperforming assets or impaired
loans. Management further believes that credits classified as nonperforming
assets or impaired loans include any material loans as to which any doubts exist
as to their collectibility in accordance with the contractual terms of the loan
agreement.
On January 1, 1995, the Company adopted guidelines for impaired loans
required by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by Statement No. 118, "Accounting by Creditors for Impairment of a Loan
- - Income Recognition and Disclosures." The adoption of SFAS 114 did not
significantly impact the comparability of the allowance related tables of the
Company.
11
<PAGE>
The following table sets forth a summary of other real estate owned and
other collateral acquired at December 31, 1996:
OTHER REAL ESTATE OWNED
Number of Net Book
Description Parcels Carrying Value
- ----------- --------- --------------
Developed property 6 $ 336
Vacant land or unsold lots 1 27
--------- --------------
Total real estate 7 $ 363
--------- --------------
--------- --------------
ALLOWANCE FOR LOAN LOSSES
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the quality of the collateral for such loan. The allowance for loan losses
represents the Company's estimate of the allowance necessary to provide for
losses incurred in the loan portfolio. In making this determination, the
Company analyzes the ultimate collectibility of the loans in its portfolio,
incorporating feedback provided by internal loan staff and provided by
examinations performed by regulatory agencies. The Company makes an ongoing
evaluation as to the adequacy of the allowance for loan losses. To establish
the appropriate level of the allowance, all loans (including nonperforming
loans) are reviewed and classified as to potential loss exposure. Specific
allowances are then established for those loans, with identified loss exposure,
and an additional allowance is maintained based upon the size, quality and
concentration characteristics of the remaining loan portfolio using both
historical quantitative trends and the Company's evaluation of qualitative
factors including future economic and industry outlooks. Commitments to extend
credit and standby letters of credit are reviewed to determine if credit risk
exists. The determination by the Company of the appropriate level of its
allowance for loan losses was $3,068,000 at December 31, 1996.
The allowance for loan losses is based on estimates and ultimate losses
will vary from current estimates. These estimates are reviewed monthly and as
adjustments, either positive or negative, become necessary a corresponding
increase or decrease is made in the provision for loan losses. The following
table presents a detailed analysis of the Company's allowance for loan losses.
12
<PAGE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
December 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 2,014 $ 1,704 $ 1,787 $ 1,586 $ 1,384
------------ ------------ ------------ ------------ ------------
Charge-offs:
Commercial 967 114 413 577 381
Real estate mortgages 181 173 371 445 613
Installment and other loans 366 250 240 257 307
------------ ------------ ------------ ------------ ------------
Total charge-offs 1,514 537 1,024 1,279 1,301
------------ ------------ ------------ ------------ ------------
Recoveries:
Commercial 41 70 142 144 95
Real estate mortgages - 56 83 2 39
Installment and other loans 57 37 56 66 72
------------ ------------ ------------ ------------ ------------
Total recoveries 98 163 281 212 206
------------ ------------ ------------ ------------ ------------
Net charge-offs 1,416 374 743 1,067 1,095
------------ ------------ ------------ ------------ ------------
Provision for loan losses 1,178 684 660 1,268 1,297
------------ ------------ ------------ ------------ ------------
Allowance associated with the
acquisitions 1,292 - - - -
------------ ------------ ------------ ------------ ------------
Ending balance $3,068 $2,014 $1,704 $1,787 $1,586
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Period end total loans, net of
unearned interest $346,496 $180,819 $161,134 $148,371 $146,569
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Average loans $243,978 $173,004 $152,186 $150,455 $140,945
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Ratio of net charge-offs to average
loans 0.58% 0.22% 0.49% 0.71% 0.78%
Ratio of provision for loan losses to
average loans 0.48% 0.40% 0.43% 0.84% 0.92%
Ratio of allowance for loan losses to
ending total loans 0.89% 1.11% 1.06% 1.20% 1.08%
Ratio of allowance for loan losses to
total nonperforming loans 135.75% 90.93% 117.44% 58.61% 46.56%
Ratio of allowance for loan losses to
total nonperforming assets (1) 108.99% 75.83% 80.26% 43.11% 38.97%
Ratio of allowance at end of period
to average loans 1.26% 1.16% 1.12% 1.19% 1.13%
</TABLE>
- ------------------------------
(1) Excludes a single municipal security in default status in the amount of
$192,000 in 1996, and $240,000 in 1995, 1994 and 1993.
13
<PAGE>
The following table sets forth an allocation of the allowance for loan
losses among the various loan categories. The Company believes that any
allocation of the allowance for loan losses into categories lends an appearance
of precision which does not exist. The allowance is utilized as a single
unallocated allowance available for all loans. The following allocation table
should not be interpreted as an indication of the specific amounts or the
relative proportion of future charges to the allowance.
<TABLE>
<CAPTION>
ALLOWANCE OF THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
December 31,
-----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- ------------------- ------------------- ------------------- -------------------
Loan Loan Loan Loan Loan
Category Category Category Category Category
to Gross to Gross to Gross to Gross to Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 776 29.87% $ 800 29.43% $ 327 31.89% $ 336 35.03% $ 320 35.22%
Real estate 758 56.97% 388 55.59% 325 53.74% 288 50.97% 239 49.43%
Installment and other
loans 517 13.16% 235 13.36% 194 12.63% 173 12.24% 191 13.83%
Unallocated 1,017 - 591 1.62% 858 1.74% 990 1.76% 836 1.53%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 3,068 100.00% $ 2,014 100.00% $ 1,704 100.00% $ 1,787 100.00% $ 1,586 100.01%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
INVESTMENT ACTIVITIES
The Company's investment portfolio, which represented 39.2% of the
Company's earning asset base as of December 31, 1996, is managed to minimize
interest rate risk, maintain sufficient liquidity and maximize return.
Investment securities which are classified as held-to-maturity are purchased
with the intent and ability of the Company to hold them to maturity. Securities
classified as held-to-maturity are carried at historical cost. The Company's
financial planning anticipates income streams based on normal maturity and
reinvestment. Investment securities classified as available-for-sale are
purchased with the intent to provide liquidity and to increase returns. The
securities classified as available-for-sale are carried at fair value. The
Company does not have any securities classified as trading.
Securities held-to-maturity, carried at amortized cost, were $35,017,000
at December 31, 1996, compared to $29,026,000 at December 31, 1995, and
$28,667,000 at December 31, 1994. The change in the unrealized position was due
to interest rate movements during the periods. There was a net unrealized gain
on securities held-to-maturity of $305,000 at December 31, 1996, compared with a
net unrealized gain of $160,000 at December 31, 1995 and an unrealized loss of
$1,500,000 at December 31, 1994.
Securities available-for-sale, carried at fair value, were $188,538,000 at
December 31, 1996, compared with $63,891,000 at December 31, 1995, and
$56,593,000 at December 31, 1994.
The consolidated investment portfolio consists of several callable agency
debentures, adjustable rate mortgage pass-throughs and collateralized mortgage
obligations with implied calls. The exposure of capital to market valuation
adjustments existing at the time of the Prairie acquisition prior periods has
been reduced by the reduction in relative size of the portfolio, the shortening
of the average life of the securities by the passage of time, and the sale of
floating rate securities with lower lifetime caps or reset limits. In addition,
some of the callable securities that have been purchased have shorter final
maturities which also reduces the sensitivity of the Economic Value of Equity
(EVE) to changes in the level of interest rates.
14
<PAGE>
The following tables describe the composition of investments by major
category and maturity.
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO
(DOLLARS IN THOUSANDS)
December 31,
-------------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- --------------------------
% of % of % of
HELD TO MATURITY Amount Portfolio Amount Portfolio Amount Portfolio
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ - - $ 117 0.13% $ - -
U.S. government agencies
and corporations - - 2,000 2.15% 3,000 3.52%
States and political subdivisions 35,017 15.66% 26,660 28.69% 25,402 29.79
Collateralized mortgage
obligations - - 9 0.01% 25 0.03%
Corporate bonds - - 240 0.26% 240 0.28%
--------- --------- --------- --------- --------- ---------
Total $ 35,017 15.66% $ 29,026 31.24% $ 28,667 33.62%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<CAPTION>
December 31,
------------------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ ------------------------
% of % of % of
AVAILABLE FOR SALE Amount Portfolio Amount Portfolio Amount Portfolio
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 26,518 11.86% $ 18,279 19.67% $ 24,416 28.64%
U.S. government agencies
and corporations 53,554 23.96% 36,987 39.81% 19,672 23.07%
U.S. government agency
mortgage backed securities 49,454 22.12% 6,084 6.55% 8,232 9.66%
States and political subdivisions - - 913 0.98% 885 1.04%
Collateralized mortgage
obligations 58,820 26.31% 106 0.11% 165 0.19%
Corporate bonds 192 0.09% 1,522 1.64% 3,223 3.78%
--------- --------- --------- --------- --------- ---------
Total $ 188,538 84.34% $ 63,891 68.76% $ 56,593 66.38%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
15
<PAGE>
The following tables set forth the maturities and yields of the investment
portfolio as of December 31, 1996.
<TABLE>
<CAPTION>
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
--------- ------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
States and
political sub-
divisions (1) $ 3,113 7.85% $ 16,975 7.52% $ 10,534 8.17% $ 4,395 8.50% $ 35,017
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
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
--------- --------- --------- -------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR
SALE
U.S. Treasury $ 7,218 5.33% $ 19,300 5.65% $ - - $ - - $ 26,518
U.S. govern-
ment agen-
cies and
corporations 1,000 6.22% 18,124 5.78% 34,430 6.61% - - 53,554
U.S. govern-
ment agency
mortgage
backed
securities 41,630 6.29% 3,606 5.17% 318 5.27% 3,900 7.64% 49,454
Collateralized
mortgage
obligations 58,134 5.94% 275 5.64% 319 6.14% 92 5.59% 58,820
Corporate
bonds - - - - 192 - - - 192
--------- --------- --------- --------- ---------
Total $107,982 $ 41,305 $ 35,259 $ 3,992 $188,538
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Rates on obligations of States and political subdivisions have been
adjusted to tax equivalent yields using a 34% income tax rate
DEPOSIT ACTIVITIES
Deposits are attracted through the offering of a broad variety of deposit
instruments, including checking accounts, money market accounts, regular savings
accounts, term certificate accounts (including "jumbo" certificates in
denominations of $100,000 or more), and retirement savings plans. The Company's
average balance of total deposits was $367,059,000 for 1996, representing an
increase of $121,988,000 or 49.8% compared with the average balance of total
deposits for the year ended December 31, 1995. The Company's average balance of
total deposits was $245,071,000 for the year ended December 31, 1995, an
increase of $11,860,000 or 5.09% compared with the average balance of total
deposits outstanding for 1994 of $233,211,000. The increases in deposits were
primarily due to the Acquisitions.
16
<PAGE>
The following table sets forth certain information regarding the Banks'
average deposits.
<TABLE>
<CAPTION>
AVERAGE DEPOSITS
(DOLLARS IN THOUSANDS)
For the Years Ended December 31,
----------------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------- ----------------------------------- ----------------------------------
Average Percent of Average Average Percent of Average Average Percent of Average
Amount Total Rate Paid Amount Total Rate Paid Amount Total Rate Paid
--------- ---------- --------- ---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 41,395 11.28% - $ 29,950 12.22% - $ 29,622 12.70% -
Savings accounts 41,664 11.35% 2.94% 23,146 9.45% 2.64% 26,288 11.27% 2.75%
Interest-bearing
demand deposits 66,088 18.00% 2.84% 50,788 20.72% 2.81% 49,295 21.14% 2.47%
Time, less than $100,000 194,957 53.12% 5.51% 129,147 52.70% 5.84% 112,094 48.07% 4.82%
Time, $100,000 or more 22,955 6.25% 6.24% 12,040 4.91% 5.71% 15,912 6.82% 4.74%
--------- ---------- --------- ---------- ---------- --------- ---------- ---------- ---------
Total deposits $ 367,059 100.00% 4.16% $ 245,071 100.00% 4.19% $ 233,211 100.00% 3.47%
--------- ---------- --------- ---------- ---------- --------- ---------- ---------- ---------
--------- ---------- --------- ---------- ---------- --------- ---------- ---------- ---------
</TABLE>
17
<PAGE>
As of December 31, 1996, non-brokered time deposits over $100,000
represented 13.7% of total deposits, compared with 9.0% of total deposits as of
December 31, 1995, and 9.4% as of December 31, 1994. The Banks do not have and
do not solicit brokered deposits.
The following table sets forth the remaining maturities for time deposits
of $100,000 or more at December 31, 1996.
TIME DEPOSITS OF $100,000 OR MORE
(DOLLARS IN THOUSANDS)
MATURITY RANGE
Three months or less $ 33,810
Over three months through six months 17,047
Over six months through twelve months 8,694
Over twelve months 14,934
-------------
Total $ 74,485
-------------
-------------
RETURN ON EQUITY AND ASSETS
The following table presents various ratios for the Company.
RETURN ON EQUITY AND ASSETS
For the Years Ended December 31,
-------------------------------
1996 1995 1994
---------- ------- ----------
Return on average assets 0.66% 0.83% 0.98%
Return on average equity 9.21% 10.83% 13.29%
Average equity to average assets 7.14% 7.67% 7.38%
Dividend payout ratio for common stock 11.58% 12.06% 9.57%
The decrease in the return on average assets and return on average equity
ratios are primarily related to reduced profitability caused by the contraction
in the net interest margin associated with the Acquisitions. Management
continues to pursue plans to improve the net interest margin by increasing the
earning asset mix toward higher yielding loans at the newly acquired banks.
LIQUIDITY
The Company manages its liquidity position with the objective of
maintaining sufficient funds to respond to the needs of depositors and borrowers
and to take advantage of earnings enhancement opportunities. In addition to the
normal inflow of funds from core-deposit growth, together with repayments and
maturities of loans and investments, the Company utilizes other short-term
funding sources such as securities sold under agreements to repurchase,
overnight funds purchased from correspondent banks and the acceptance of
short-term deposits from public entities.
The Company monitors and manages its liquidity position on several bases,
which vary depending upon the time period. As the time period is expanded,
other data is factored in, including estimated loan funding requirements,
estimated loan payoffs, investment portfolio maturities or calls, and
anticipated depository buildups or runoffs.
18
<PAGE>
The Company classifies the majority of its investment securities as
available-for-sale, thereby maintaining significant liquidity. The Company's
liquidity position is further enhanced by structuring the maturity of its loan
portfolio interest payments as monthly, and also by the significant
representation of retail credit and residential mortgage loans in the Company's
loan portfolio, resulting in a steady stream of loan repayments. In managing
its investment portfolio, the Company provides for staggered maturities so that
cash flows are provided as such investments mature.
The Company's cash flows are composed of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities. Net cash provided by operating activities was $5.5
million for 1996, $3.7 million for the year ended December 31, 1995 and $4.9
million for the year ended December 31, 1994. Net cash used in investing
activities, consisting primarily of loan and investment funding, was $9.6
million for 1996, and $27.3 million and $9.7 million for the years ended
December 31, 1995 and 1994, respectively. Net cash provided by financing
activities for 1996 was $17.2 million and was directly related to the proceeds
from issuance of common stock. Net cash provided by financing activities,
consisting primarily of growth in deposits and securities sold under agreements
to repurchase, was $26.8 million and $4.4 million for the periods ended December
31, 1995 and 1994, respectively.
The Banks' investment securities portfolios, including federal funds sold,
and its cash and due from bank deposit balances serve as the primary sources of
liquidity for the Company. At December 31, 1996, 14.2% of the Banks'
interest-bearing liabilities were in the form of time deposits of $100,000 and
over. Substantially all of such large deposits were obtained from the Banks'
market areas and none of such deposits are brokered deposits. Management
believes these deposits to be a stable source of funds. However, if a large
number of these time deposits matured at approximately the same time and were
not renewed, the Banks' liquidity could be adversely affected. Currently, the
maturities of the Banks' large time deposits are spread throughout the year,
with 45.4% maturing in the first quarter of 1997, 22.9% maturing in the second
quarter of 1997, 11.7% maturing in the third and fourth quarter of 1997, and the
remaining 20% maturing thereafter. The Banks monitor those maturities in an
effort to minimize any adverse effect on liquidity.
The Company's short term bank borrowings at December 31, 1996 consisted of
notes payable in the principal amount of $13,180,000 payable to the Company's
principal correspondent bank. The Company incurred this debt in the
Acquisitions and in the acquisition of Ottawa National Bank in 1991. The notes
are renewable annually, require quarterly interest payments and are
collateralized by the Company's stock in the Banks.
The Company's principal source of funds for repayment of the indebtedness
is dividends from the Banks. At December 31, 1996 approximately $5,697,000 was
available for dividends without regulatory approval.
CAPITAL RESOURCES
The Banks are expected to meet a minimum risk-based capital to
risk-weighted assets ratio of 8%, of which at least one-half (or 4%) must be in
the form of Tier 1 (core) capital. The remaining one-half (or 4%) may be in the
form of Tier 1 (core) or Tier 2 (supplementary) capital. The amount of loan
loss allowance that may be included in capital is limited to 1.25% of
risk-weighted assets. The ratio of Tier 1 (core) and the combined amount of
Tier 1 (core) and Tier 2 (supplementary) capital to risk-weighted assets for the
Banks were 9.70% and 10.89%, respectively, at December 31, 1996, and 11.34% and
12.35%, respectively, at December 31, 1995. The Banks are currently, and expect
to continue to be, in compliance with these guidelines.
The Board of Governors of the FRB has announced a policy known as the
"source of strength doctrine" that requires a bank holding company to serve as a
source of financial and managerial strength for its subsidiary banks. The FRB
has interpreted this requirement to require that a bank holding company, such as
the Company, stand ready to use available resources to provide adequate capital
funds to its subsidiary banks during periods of financial stress or adversity.
The FRB has stated that it would generally view a failure to assist a troubled
or failing subsidiary bank in these circumstances as an unsound or unsafe
banking practice or a violation of the FRB's Regulation Y or both, justifying a
cease and desist order or other enforcement action, particularly if appropriate
resources are available to the bank holding company on a reasonable basis.
19
<PAGE>
The following table sets forth an analysis of the Company's capital ratios:
RISK-BASED CAPITAL RATIOS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, Minimum Well-
----------------------------------------- Capital Capitalized
1996 1995 1994 Ratios Ratios
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 36,242 $ 22,530 $ 20,322
Tier 2 risk-based capital 4,425 2,014 1,704
Total capital 40,667 24,544 22,026
Risk-weighted assets 374,028 198,731 179,307
Capital ratios:
Tier 1 risk-based capital 9.69% 11.34% 11.33% 4.00% 6.00%
Tier 2 risk-based capital 10.87% 12.35% 12.28% 8.00% 10.00%
Leverage ratio 7.76% 7.95% 7.68% 3.00% 5.00%
</TABLE>
ACCOUNTING MATTERS
In June 1996, the Financial Accounting Standards Board issued Statement No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" (SFAS No. 125). SFAS No. 125 distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. A transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interest in the transferred assets is
received in exchange. SFAS No. 125 also establishes standards on the initial
recognition and measurement of servicing assets and other retained interests and
servicing liabilities, and their subsequent measurement.
SFAS No. 125 requires that debtors reclassify financial assets pledged as
collateral and that secured parties recognize those assets and their obligation
to return them in certain circumstances in which the secured party has taken
control of those assets. In addition, SFAS No. 125 requires that a liability be
derecognized only if the debtor is relieved of its obligation through payment to
the creditor or by being legally released from being the primary obligor under
the liability either judicially or by the creditor.
SFAS No. 125 is effective for transactions occurring after December 31,
1996, except for transactions relating to secured borrowings and collateral for
which the effective date is December 31, 1997. The Company believes the
adoption of SFAS No. 125 will not have a material impact on its consolidated
financial statements.
IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES
The financial statements and related financial data concerning the Company
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. The primary effect of
inflation on the operations of the Company is reflected in increased operating
costs. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
changes in interest rates have a more significant effect on the performance of a
financial institution than do the effects of changes in the general rate of
inflation and changes in prices. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services.
Interest rates are highly sensitive to many factors which are beyond the control
of the Company, including the influence of domestic and foreign economic
conditions and the monetary and fiscal policies of the United States government
and federal agencies, particularly the FRB.
20
<PAGE>
UNIONBANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
1996 (2) 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Interest income $ 31,037 $ 21,368 $ 18,627 $ 18,604 $ 20,127
Interest expense 17,003 11,249 8,706 8,798 10,482
----------- ----------- ----------- ----------- -----------
Net interest income 14,034 10,119 9,921 9,806 9,645
Provision for loan losses 1,178 684 660 1,268 1,297
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses 12,856 9,435 9,261 8,538 8,348
Noninterest income 3,222 2,570 2,283 2,512 1,893
Noninterest expense 12,248 8,771 8,247 7,841 7,335
----------- ----------- ----------- ----------- -----------
Net income before income taxes and minority interest 3,830 3,234 3,297 3,209 2,906
Minority interest 27 - - - -
Provision for income taxes 969 881 703 747 595
----------- ----------- ----------- ----------- -----------
Net income $ 2,834 $ 2,353 $ 2,594 $ 2,462 $ 2,311
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income on common stock $ 2,729 $ 2,353 $ 2,594 $ 2,462 $ 2,311
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
PER SHARE DATA (1)
Earnings per common shares $ 0.98 $ 1.09 $ 1.22 $ 1.15 $ 1.08
Cash dividends on common stock 0.14 0.13 0.12 0.09 0.07
Dividend payout ratio for common stock 11.58% 12.06% 9.57% 7.78% 6.13%
Book value per common share $ 11.20 $ 11.01 $ 9.21 $ 8.92 $ 7.83
Weighted average common shares outstanding 2,773,769 2,148,897 2,132,712 2,132,760 2,132,760
Period end common shares outstanding 4,114,801 2,131,737 2,131,737 2,132,760 2,132,760
BALANCE SHEET DATA
Investments and Federal funds sold $ 233,822 $ 95,182 $ 86,460 $ 95,098 $ 83,057
Total loans 346,496 180,819 161,134 148,371 146,569
Allowance for loan losses 3,068 2,014 1,704 1,787 1,586
Total assets 642,024 303,533 272,038 266,666 249,121
Total deposits 543,744 261,727 232,334 237,455 222,513
Stockholders' equity 46,583 23,475 19,629 19,026 16,702
EARNINGS PERFORMANCE DATA
Return on average total assets 0.66% 0.83% 0.98% 0.97% 0.95%
Return on average stockholders' equity 9.21 10.83 13.29 13.88 15.00
Net interest margin ratio 3.74 4.15 4.38 4.46 4.52
Efficiency ratio (3) 66.70 68.35 66.17 65.81 64.96
ASSET QUALITY RATIOS
Nonperforming assets to total assets 0.44% 0.95% 0.87% 1.64% 1.64%
Nonperforming loans to total loans 0.65 1.22 0.90 2.06 2.32
Net loan charge-offs to average loans 0.58 0.22 0.49 0.71 0.78
Allowance for loan losses to total loans 0.89 1.11 1.06 1.20 1.08
Allowance for loan losses to nonperforming loans 135.75 90.93 117.44 58.61 46.56
CAPITAL RATIOS
Average equity to average assets 7.14% 7.67% 7.38% 6.98% 6.34%
Total capital to risk adjusted assets 10.87 12.35 12.28 10.97 10.23
Tier 1 leverage ratio 7.76 7.95 7.68 7.00 6.33
- --------------------------------------------------
</TABLE>
(1) Restated to reflect the three-for-one stock split which took effect May 20,
1996.
(2) Includes results of operations of acquisitions from date of acquisition.
(3) Calculated as noninterest expense less amortization of intangibles and
expenses related to other real estate owned divided by the sum of net
interest income before provision for loan losses and total noninterest
income excluding securities gains and losses.
<PAGE>
UNIONBANCORP, INC.
LIST OF SUBSIDIARIES
1. UnionBank, an Illinois state bank with its main office located in Streator,
Illinois
2. UnionBank/Sandwich, an Illinois state bank with its main office located in
Sandwich, Illinois
3. Prairie Acquisition Corporation, an Illinois corporation, and its
subsidiaries:
a. Farmers State Bank of Ferris, an Illinois state bank with its
main office located in Carthage, Illinois
b. Hanover State Bank, an Illinois state bank with its main office
located in Hanover, Illinois
c. Bank of Ladd, an Illinois state bank with its main office located
in Ladd, Illinois
d. First National Bank of Manlius, a national bank with its main
office located in Manlius, Illinois
e. Tampico National Bank, a national bank with its main office
located in Tampico, Illinois
f. Tiskilwa State Bank, an Illinois state bank with its main office
located in Tiskilwa, Illinois
5. Country Bancshares, Inc., an Illinois corporation and its subsidiary:
Omni Bank, an Illinois state bank with its main office in Macomb,
Illinois
6. UnionData Corp, Inc., a Delaware corporation
7. Union Corporation, an Illinois corporation
8. LaSalle County Collections, Inc., an Illinois corporation
<PAGE>
[LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement pertaining to the 1993 Stock Option Plan of UnionBancorp, Inc., of
our report dated February 5, 1997, with respect to the consolidated financial
statements of UnionBancorp, Inc. incorporated by reference in the Annual
Report (Form 10-K) for the year ended December 31, 1996.
/s/ McGladrey & Pullen, LLP
- ---------------------------
Champaign, Illinois
March 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 29,236
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,267
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 188,538<F1>
<INVESTMENTS-CARRYING> 29,026
<INVESTMENTS-MARKET> 29,186
<LOANS> 346,496<F2>
<ALLOWANCE> 3,068
<TOTAL-ASSETS> 642,024
<DEPOSITS> 543,744
<SHORT-TERM> 45,018<F3>
<LIABILITIES-OTHER> 5,027
<LONG-TERM> 0
857
500
<COMMON> 4,386
<OTHER-SE> 41,697
<TOTAL-LIABILITIES-AND-EQUITY> 642,024
<INTEREST-LOAN> 22,138
<INTEREST-INVEST> 8,613
<INTEREST-OTHER> 286
<INTEREST-TOTAL> 31,037
<INTEREST-DEPOSIT> 15,239
<INTEREST-EXPENSE> 17,003
<INTEREST-INCOME-NET> 14,034
<LOAN-LOSSES> 1,178
<SECURITIES-GAINS> 20
<EXPENSE-OTHER> 12,248
<INCOME-PRETAX> 3,803
<INCOME-PRE-EXTRAORDINARY> 3,803
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,834
<EPS-PRIMARY> .98
<EPS-DILUTED> .98
<YIELD-ACTUAL> 8.02
<LOANS-NON> 1,774
<LOANS-PAST> 486
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,014
<CHARGE-OFFS> 1,514
<RECOVERIES> 98
<ALLOWANCE-CLOSE> 3,068
<ALLOWANCE-DOMESTIC> 3,068
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Fair Value
<F2>Less Unearned Interest
<F3>Includes Repos & FHLB & Other Short term Borrowings
</FN>
</TABLE>
<PAGE>
[LOGO]
UNIONBANCORP, INC.
March 18, 1997
Dear Fellow Stockholder:
You are cordially invited to attend UnionBancorp, Inc.'s Annual Meeting of
Stockholders at the Pitstick Pavilion, 3307 North Route 23, Ottawa, Illinois, on
Friday, April 25, 1997, at 10:00 a.m. At the meeting, I will report to you on
the progress of our Company and respond to your comments or questions.
Moreover, several of our management people will be available to talk
individually with you about our record of achievement and plans for the future.
Your Board of Directors has nominated five persons to serve as Class II
directors on the Board of Directors. Their names appear in the enclosed proxy
material. All five of the nominees are incumbent directors. We recommend that
you vote your shares for the nominees.
We encourage you to attend the meeting in person. Because it is important
that your shares be represented at the meeting, please sign and return the
enclosed proxy, whether or not you plan to attend the meeting.
We look forward with pleasure to seeing and visiting with you at the
meeting.
With best personal wishes,
R. Scott Grigsby
Chairman of the Board
and President
<PAGE>
[LOGO]
UNIONBANCORP, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 25, 1997
------------------------------------------------------------
TO HOLDERS OF COMMON STOCK:
The Annual Meeting of Stockholders of UnionBancorp, Inc., a Delaware
corporation (the "Company"), will be held at the Pitstick Pavilion, 3307 North
Route 23, Ottawa, Illinois, on Friday, April 25, 1997, at 10:00 a.m., local
time, for the purpose of considering and voting upon the following matters:
1. to elect five (5) Class II directors.
2. to transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors is not aware of any other business to come before
the meeting. Only those stockholders of record as of the close of business on
March 11, 1997, shall be entitled to notice of the meeting and to vote at the
meeting and any adjournments or postponements thereof.
By Order of the Board of Directors
R. Scott Grigsby
Chairman of the Board and President
Ottawa, Illinois
March 18, 1997
PLEASE SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE
AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN
PERSON. IT IS HOPED THAT YOU WILL BE ABLE TO ATTEND THE MEETING, AND IF YOU DO
YOU MAY VOTE YOUR STOCK IN PERSON IF YOU WISH. THE PROXY MAY BE REVOKED AT ANY
TIME PRIOR TO ITS EXERCISE.
<PAGE>
UNIONBANCORP, INC.
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of UnionBancorp, Inc. (the "Company") of proxies to be
voted at the Annual Meeting of Stockholders to be held at the Pitstick Pavilion,
3307 North Route 23, Ottawa, Illinois, on Friday, April 25, 1997, at 10:00 a.m.,
local time, or at any adjournments or postponements thereof.
The Company, a Delaware corporation, is a multi-bank holding company which
owns all of the issued and outstanding capital stock of UnionBank, an Illinois
bank located in Streator, Illinois, and UnionBank/Sandwich, an Illinois bank
located in Sandwich, Illinois. During 1996, the Company acquired all of the
issued and outstanding capital stock of Prairie Bancorp, Inc. ("Prairie"), a
multi-bank holding company with six bank subsidiaries located in the Illinois
communities of Carthage, Hanover, Ladd, Manlius, Tampico and Tiskilwa, and also
acquired Country Bancshares, Inc. ("Country"), a one-bank holding company having
an Illinois bank subsidiary located in Macomb, Illinois (UnionBank,
UnionBank/Sandwich and the bank subsidiaries of Prairie and Country are
sometimes collectively referred to as the "Banks").
The Company also has three non-bank subsidiaries, UnionData Corp.
("UnionData"), which provides data processing services, Union Corporation
("Union Corporation"), which primarily serves as an owner and lessor of banking
offices to certain of the Banks, and LaSalle County Collections, Inc.
("LaSalle"), a debt collection agency located in Ottawa, Illinois. The Banks
and the three non-bank subsidiaries are collectively referred to as the
"Subsidiaries."
The Proxy Statement and the accompanying Notice of Meeting and proxy are
first being mailed to holders of shares of common stock, par value $1.00 per
share, (the "Common Stock"), on or about March 18, 1997. The 1996 Annual Report
of the Company, including financial statements, is enclosed.
VOTING RIGHTS AND PROXY INFORMATION
The Board of Directors has fixed the close of business on March 11, 1997,
as the record date for the determination of stockholders entitled to notice of,
and to vote at, the annual meeting. The transfer books of the Company will not
be closed. The Board of Directors hopes that all stockholders can be
represented at the annual meeting. Whether or not you expect to be present,
please sign and mail your proxy in the enclosed self-addressed, stamped envelope
to UnionBancorp, Inc., 122 West Madison Street, Ottawa, Illinois 61350,
Attention: Ms. Debra M. Tombaugh, Vice President/Director of Investor
Relations. Stockholders giving proxies retain the right to revoke them at any
time before they are voted by written notice of revocation to the Secretary of
the Company, and stockholders present at the meeting may revoke their proxy and
vote in person.
On March 11, 1997, the Company had 4,116,001 issued and outstanding shares
of Common Stock. For the election of directors and for all other matters to be
voted upon at the annual meeting, each share of Common Stock is entitled to one
vote. A majority of the outstanding shares of the Common Stock must be present
in person or represented by proxy to constitute a quorum for purposes of the
annual meeting. Abstentions and broker non-votes will be counted for purposes
of determining a quorum. Directors will be elected by a plurality of the votes
present in person or represented by proxy at the meeting and entitled to vote.
In all other matters, the affirmative vote of the majority of shares of Common
Stock present in person or represented by proxy at the annual meeting and
entitled to vote on the subject matter shall be required to constitute
stockholder approval. Abstentions will be treated as votes against a proposal
and broker non-votes will have no effect on the vote.
<PAGE>
ELECTION OF DIRECTORS
The Company has a staggered Board of Directors divided into three classes.
One class is elected annually to serve for three years. Stockholders will be
entitled at the annual meeting to be held on April 25, 1997, to elect five Class
II directors for terms of three years or until their successors are elected and
qualified. Each of the nominees for election as Class II directors are
incumbent directors.
The proxy provides instructions for voting for all director nominees or for
withholding authority to vote for one or more director nominees. Unless
instructed to the contrary, the persons acting under the proxy solicited hereby
will vote for the nominees listed below. In the event, however, that any
nominee shall be unable to serve, which is not now contemplated, the proxy
holders reserve the right to vote at the annual meeting for a substitute
nominee.
INFORMATION ABOUT DIRECTORS AND NOMINEES
Set forth below is information concerning the nominees for election and for
the other directors whose terms of office will continue after the meeting,
including the age, year first elected a director and business experience of each
during the previous five years, as of March 11, 1997. Unless otherwise
indicated, each person has held the positions shown for at least five years.
The five nominees, if elected at the annual meeting, will serve as Class II
directors for three year terms expiring in 2000. THE BOARD OF DIRECTORS
RECOMMENDS THAT YOU VOTE YOUR SHARES FOR ALL FIVE NOMINEES.
NOMINEES
NAME POSITION WITH THE COMPANY
(AGE) DIRECTOR SINCE AND PRINCIPAL OCCUPATION
- ----- -------------- -------------------------
CLASS II
(TERM EXPIRES 2000)
L. Paul Broadus 1986 Director of the Company;
(Age 62) Founder and President, Broadus
Oil Company
John Michael Daw 1991 Director and Senior
(Age 49) Agriculture Representative
(since 1996) of the Company;
President, Farmers Grain
Service (1969-1996)
Robert J. Doty 1996 Director of the Company,
(Age 69) Chairman of Prairie (1989-
1996); Consultant, Farm
Management
Jimmie D. Lansford 1988 Director and Senior Vice
(Age 57) President, Organizational
Development and Planning
(since 1996) of the Company;
Chief Executive Officer, St.
Mary's Hospital (1987-1996)
I. J. Reinhardt, Jr. 1991 Director of the Company;
(Age 59) Director and General Manager,
St. Louis Beverage Company
2
<PAGE>
CONTINUING DIRECTORS
NAME POSITION WITH THE COMPANY AND
(AGE) DIRECTOR SINCE PRINCIPAL OCCUPATION
- ----- -------------- -----------------------------
CLASS III
(TERM EXPIRES 1998)
R. Scott Grigsby 1983 Chairman of the Board,
(Age 45) President and Chief Executive
Officer of the Company
H. Dean Reynolds 1981 Director of the Company; Owner
(Age 68) (1966-1995) and Consultant
(1996-present), Reynolds-West
& Associates, Inc.
John A. Shinkle 1997 Director and Senior Vice
(Age 45) President, Synovus Securities,
Inc. (1986-present)
Scott C. Sullivan 1996 Director of the Company;
(Age 42) Attorney, Williams &
McCarthy); Director of Prairie
(1995-1996)
CLASS I
(TERM EXPIRES 1999)
Richard J. Berry 1985 Director of the Company;
(Age 44) Attorney; Myers, Daugherity,
Berry, O'Connor & Kuzma, Ltd.
Walter E. Breipohl 1993 Director of the Company; Co-
(Age 43) Owner, Kaszynski/Breipohl
Realtors/Developers
Lawrence J. McGrogan 1987 Director of the Company;
(Age 59) Owner, Handy Foods, Inc.
John A. Trainor 1985 Director of the Company;
(Age 66) Owner, Trainor Grain & Supply
Company, Inc.
All of the Company's directors will hold office for the terms indicated, or
until their respective successors are duly elected and qualified. There are no
arrangements or understandings between the Company and any other person pursuant
to which any director has been selected, except that Messrs. Doty and Sullivan
were appointed to the Board pursuant to the terms of the agreement regarding the
acquisition of Prairie. No member of the Board of Directors is related to any
other member of the Board of Directors.
BOARD COMMITTEES AND MEETINGS
Meetings of the Company's Board of Directors are generally held on a
monthly basis. The Board of Directors met 11 times during 1996. During 1996,
all directors attended at least 75 percent of the meetings of the Board and the
committees on which they served. The Board of Directors of the Company has
standing executive, audit, compensation and marketing committees.
The Executive Committee is comprised of Messrs. Broadus (Chair), Berry,
Grigsby, McGrogan and Trainor. The Executive Committee meets on an as needed
basis and exercises the power of the Board of Directors between Board meetings.
This committee met four times in 1996.
The Audit Committee recommends independent auditors to the Board, reviews
the results of the auditors' services, reviews with management and the internal
auditor the systems of internal control and internal audit reports
3
<PAGE>
and assures that the books and records of the Company are kept in accordance
with applicable accounting principles and standards. The members of the Audit
Committee are Messrs. Reynolds (Chair), Breiphohl and Reinhardt. Mr. Grigsby
serves as an EX OFFICIO member of this committee. During 1996, the Audit
Committee met four times.
The Compensation Committee establishes compensation and benefits for the
Chief Executive Officer and reviews and recommends compensation and benefits for
the other officers and employees of the Company and the Subsidiaries. The
Committee also administers and oversees the Company's stock-based incentive
compensation plans. The members of the Compensation Committee are Messrs.
McGrogan (Chair), Breiphol and Broadus. Mr. Grigsby also serves as an EX
OFFICIO member of this committee. The Compensation Committee met four times in
1996.
The Marketing Committee develops long term goals and policies with respect
to marketing the Company and the Subsidiaries, and reviews strategies and plans
developed by the management of the respective entities for consistency with
Company policies and objectives. The members of the Marketing Committee are
Messrs. Breiphol (Chair), Grigsby and Reinhardt. The Marketing Committee met
four times in 1996.
COMPENSATION OF DIRECTORS
Through October, 1996, each of the Company's directors was paid a fee of
$100 for each Board meeting attended and $100 for each committee meeting
attended. Beginning in November, 1996, Board meeting fees were increased to
$500. Each of the Company's directors also receives an annual grant of options
to purchase shares of Common Stock under the Company's Stock Option Plan.
Through 1996, such grants have generally been made with an exercise price equal
to 75% of the most recently appraised per share fair market value of the Common
Stock on the date of grant, and become exercisable in equal portions over five
years. For the fiscal year ended December 31, 1996, each director was granted
options to purchase between 1,800 and 3,000 shares of Common Stock at a price of
$7.25 per share. Beginning in 1997, the Stock Option Plan provides for annual
formula grants to each of the Company's directors of options to purchase up to
3,000 shares of Common Stock with an exercise price of 75% of the then current
market price of the Common Stock on the date of the grant. Such options also
will become exercisable over five years.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Corporation's Common Stock at March 11, 1997, by
each person known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Stock, by each director or nominee, by each executive
officer named in the Summary Compensation Table, and by all directors and
executive officers of the Company as a group.
4
<PAGE>
NAME OF INDIVIDUAL OR AMOUNT AND NATURE OF PERCENT
NUMBER OF INDIVIDUALS IN GROUP BENEFICIAL OWNERSHIP(1)(2) OF CLASS
------------------------------ -------------------------- --------
5% STOCKHOLDERS
UnionBank/Streator, as Trustee for 450,918(3) 11.0%
the UnionBancorp, Inc. Employee
Stock Ownership Plan ("ESOP")
201 East Main Street
Streator, Illinois 61364
Dennis J. McDonnell 355,288(4) 8.6%
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Wayne H. Whalen 355,288(4) 8.6%
333 W. Wacker Drive, Suite 2100
Chicago, Illinois 60606
DIRECTORS AND NOMINEES
Richard J. Berry 33,714(5) *
Walter E. Breipohl 12,914 *
L. Paul Broadus 19,099 *
John Michael Daw 18,990 *
Robert Doty 1,000 *
R. Scott Grigsby 778,169(6) 18.9%
Jimmie D. Lansford 15,614 *
Lawrence J. McGrogan 22,738(7) *
I.J. Reinhradt, Jr. 25,800(8) *
H. Dean Reynolds 26,875(9) *
John A. Shinkle 3,964(10) *
Scott Sullivan 5,000 *
John A. Trainor 21,588(11) *
OTHER NAMED EXECUTIVE OFFICERS
Charles J. Grako 24,826(12) *
Wayne L. Bismark 12,588(13) *
All directors and executive officers as
a group (15 persons) 1,075,973(14) 26.0%
- -------------------------------
* Indicates less than one percent.
(1) The information contained in this column is based upon information
furnished to the Company by the persons named above and the members of the
designated group and reflects the three-for-one stock split in the form of
a stock dividend which took effect on May 20, 1996. Amounts reported
include shares held directly as well as shares which are held in retirement
accounts and shares held by certain members of the named individuals'
families or held by trusts of which the named individual is a trustee or
substantial beneficiary, with respect to which shares the respective
individual may be deemed to have sole or shared voting and/or investment
power. The nature of beneficial ownership for shares shown in this column
is sole voting and investment power, except as set forth in the footnotes
below. Inclusion of shares shall not constitute an admission of beneficial
ownership or voting and investment power over included shares.
5
<PAGE>
(2) Amounts shown include interests in a general partnership held by Messrs.
Berry, Broadus, Breipohl, Grigsby, Daw, Lansford, McGrogan, Shinkle and
Trainor which holds an aggregate of 32,400 shares of Common Stock
representing 3,564 shares by each director. Mr. Grako also has an interest
in the partnership amounting to 324 shares. Voting and investment power
over shares held in this partnership is shared. The information also
includes shares presently obtainable through the exercise of options to
purchase shares of Common Stock granted under the Company's Stock Option
Plan as follows: Mr. Berry - 2,250 shares; Mr. Breipohl - 2,250 shares;
Mr. Broadus - 1,950 shares; Mr. Daw - 2,250 shares; Mr. Grigsby - 6,464
shares; Mr. Lansford - 2,250 shares; Mr. McGrogan - 2,250 shares;
Mr. Reinhardt - 1,950 shares; Mr. Reynolds - 1,950 shares; Mr. Trainor -
2,250 shares; Mr. Grako - 2,472 shares; and Mr. Bismark - 852 shares.
Option holders have the sole power to exercise their respective options and
would also be entitled to exercise sole voting and investment power over
the shares issued upon the exercise of such options.
(3) All of the shares held by the ESOP are allocated to particular
participants' accounts and over which shares the ESOP trustee has shared
voting and no investment power over such shares.
(4) As reported to the Securities and Exchange Commission on a Schedule 13D
dated October 9, 1996. Pursuant to the terms of an agreement executed by
the Company and these individuals in connection with the Company's
acquisition of Prairie, the President of the Company has a limited proxy
with respect to such shares until August 6, 2000.
(5) Includes 13,800 shares held jointly by Mr. Berry and his spouse, 3,000
shares held individually by Mr. Berry's spouse and 11,100 shares held in
trusts for which Mr. Berry is a co-trustee, over all of which shares Mr.
Berry has shared voting and investment power.
(6) Includes 710,576 shares over which Mr. Grigsby, as President of the
Company, is entitled to exercise a limited proxy pursuant to an agreement
entered into between the Company and Messrs. McDonnell and Whalen in
connection with the Company's acquisition of Prairie. Also includes 17,853
shares held by Mr. Grigsby jointly with his spouse, over which shares Mr.
Grigsby has shared voting and investment power, 205 shares held solely by
Mr. Grigsby's spouse, over which shares Mr. Grigsby has no voting or
investment power, and 34,807 shares allocated to Mr. Grigsby under the
Company's ESOP. Excludes the remaining 418,506 shares held by the ESOP but
allocated to other participants' accounts. Mr. Grigsby, as trustee of the
ESOP, has shared voting power over such shares.
(7) Includes 11,040 shares held by Mr. McGrogan jointly with his spouse, over
which shares Mr. McGrogan has shared voting and investment power, and also
includes 1,884 shares owned solely by his spouse, over which shares Mr.
McGrogan has no voting or investment power.
(8) Includes 6,000 shares held by Mr. Reinhardt jointly with his spouse and
15,000 shares held in a retirement account, over all of which shares Mr.
Reinhardt has shared voting and investment power.
(9) Includes 1,200 shares held by a relative of Mr. Reynolds, over which shares
Mr. Reynolds has shared voting and investment power.
(10) Includes 400 shares held by members of Mr. Shinkle's family. Mr. Shinkle
has no voting or investment power over 100 of such shares and has shared
voting and investment power over the remaining 300 shares.
(11) Includes 1,200 shares held solely by Mr. Trainor's spouse, over which
shares Mr. Trainor has no voting or investment power.
(12) Includes 17,730 shares allocated to Mr. Grako under the ESOP.
(13) Includes 2,252 shares allocated to Mr. Bismark under the ESOP.
(14) Includes 710,576 shares over which Mr. Grigsby, as President of the
Company, is entitled to exercise a limited proxy pursuant to an agreement
entered into between the Company and Messrs. McDonnell and Whalen in
connection with the Prairie acquisition.
6
<PAGE>
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's executive officers, directors and persons who own more than 10% of the
Company's Common Stock file reports of ownership and changes in ownership with
the Securities and Exchange Commission. Such persons are also required to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on the Company's review of the copies of such forms, and, if appropriate,
representations made to the Company by any such reporting person concerning
whether a Form 5 was required to be filed for 1996, the Company is not aware
that any of its directors, executive officers or 10% stockholders failed to
comply with the filing requirements of Section 16(a) during the period
commencing January 1, 1996 through December 31, 1996.
VOTING AGREEMENTS
Pursuant to the terms of a Standstill Agreement entered into between the
Company and Messrs. McDonnell and Whalen, the President of the Company has sole
voting power with respect to all 710,566 shares of Common Stock held by such
persons in any election of directors of the Company. The proxy will further
pertain to any additional shares of Common Stock obtained by either party. The
proxy expires on August 6, 2000.
EXECUTIVE COMPENSATION
CASH COMPENSATION
The following table shows the compensation earned for the last three fiscal
years by the Chief Executive Officer and those executive officers of the Company
(including those employed by the Subsidiaries) whose 1996 salary and bonus
exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------------------------------
(a) (b) (c) (d) (g) (i)
SECURITIES ALL OTHER
NAME AND UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS (#)(1) ($)(2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
R. Scott Grigsby 1996 $149,100 $32,000 5,550 $15,597
Chairman of the Board, 1995 142,000 12,800 3,036 21,832
President and Chief Executive Officer 1994 127,952 23,725 6,900 24,855
- -----------------------------------------------------------------------------------------------------------------------------------
Charles J. Grako 1996 $ 99,225 $11,000 2,100 $17,439
Executive Vice President and 1995 94,500 7,675 1,080 14,929
Chief Financial Officer 1994 71,459 9,000 2,700 13,810
- -----------------------------------------------------------------------------------------------------------------------------------
Wayne L. Bismark 1996 $ 99,225 $11,000 2,100 $ 9,525
Executive Vice President and 1995 94,500 7,675 1,080 12,895
Chief Credit Officer 1994 75,000 7,500 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
(1) Options vest at a rate of 20% per year on or about each anniversary of the
date of grant.
7
<PAGE>
(2) Amounts represent the dollar value of allocations under the Company's ESOP
for Messrs. Grigsby and Grako and, with respect to Messrs. Grako and
Bismark, fees for services provided to the Company's Board of Directors and
directors' fees for serving on the Boards of various Subsidiaries of $6,075
and $9,525, respectively. Such amounts also include payments of $2,901 and
$2,034 for premiums for split dollar life insurance policies for Messrs.
Grigsby and Grako, respectively, for each year.
STOCK OPTION INFORMATION
The following table sets forth certain information concerning the number
and value of stock options granted in the last fiscal year to the
individuals named above in the Summary Compensation Table:
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
- -----------------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
FOR OPTION TERM
- -----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% OF TOTAL
OPTIONS OPTIONS GRANTED
GRANTED TO EMPLOYEES IN EXERCISE OR BASE PRICE EXPIRATION
NAME (#)(1) FISCAL YEAR ($/Sh) DATE 5%($) 10%($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R. Scott Grigsby 3,000 24% $9.66 02/23/06 $18,225 $46,185
2,550 19% $7.25 02/23/06 11,625 29,464
- -----------------------------------------------------------------------------------------------------------------------------------
Charles J. Graco 2,100 17% $9.66 02/23/06 $12,758 $32,330
- -----------------------------------------------------------------------------------------------------------------------------------
Wayne L. Bismark 2,100 17% $9.66 02/23/06 $12,758 $32,330
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Options vest at a rate of 20% per year on or about each anniversary of the
date of grant.
(2) Represents non-qualified options granted for service on the Board of
Directors.
The following table sets forth certain information concerning the
exercisable and nonexercisable stock options at December 31, 1996 held by the
individuals named in the Summary Compensation Table:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION VALUES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING UNEXERCISED VALUE OF UNEXERCISABLE IN-
ON VALUE OPTIONS AT FY-END THE- MONEY OPTIONS
NAME EXERCISED REALIZED (#)(d) AT FY-END ($)(e)
(#)(a) (#)(b) ($)(c) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R. Scott Gingsby -- $-- 6,464 9,022 $55,796 $61,933
- ------------------------------------------------------------------------------------------------------------------------------
Charles J. Grako -- -- 2,472 3,408 $17,253 $20,499
- ------------------------------------------------------------------------------------------------------------------------------
Wayne L. Bismark -- -- 852 2,328 $4,698 $12,129
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
EMPLOYMENT AGREEMENTS
The Company and certain of the Subsidiaries have entered into three-year
employment agreements with Messrs. Grigsby, Bismark and Grako. Unless earlier
terminated by the Company (or the Subsidiary, if applicable) or the respective
employee, the employment term under each agreement extends for an additional
year on each anniversary of the agreement. Each agreement specifies a minimum
annual salary for the initial year of the agreement and provides for an
automatic minimum four percent annual increase for each subsequent year. Each
agreement also provides that the respective employee is entitled to participate
in any executive bonus plan and other incentive compensation or benefit plan
established by the Company or the applicable Subsidiary.
Each agreement is terminable by the employee upon thirty days' prior
written notice and automatically terminates upon the death or disability of the
employee. The Company may terminate each agreement at any time for "cause"
without incurring any additional obligations. Each agreement provides severance
benefits in the event the employee is terminated without cause or
"constructively discharged," as defined in each agreement. The severance
benefits are equal to the salary and benefits the terminated employee would have
received through the end of the normal term of the agreement. If any of the
employment agreements are terminated in connection with a "change in control,"
as defined in each agreement, the employee is entitled to receive severance
compensation equal to three times his annual salary and other compensation at
the rates then in effect at the time of termination. The terminated employee in
such case will also be entitled to continuation of participation in other
benefit plans for the remaining term of his agreement. In addition, each
officer would be entitled to receive other benefits for such periods. The
employment agreements also require the Company to provide each employee with
indemnification insurance and indemnification for any expenses arising out of
each person's employment with the Company or the applicable Subsidiary.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, the members of the Compensation Committee were Messrs.
McGrogan, Breiphol and Broadus. None of these individuals was an officer or
employee of the Company or any of the Subsidiaries during 1996, and none of
these individuals is a former officer or employee of the Company or any of the
Subsidiaries.
THE INCORPORATION BY REFERENCE OF THIS PROXY STATEMENT INTO ANY DOCUMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY SHALL NOT BE
DEEMED TO INCLUDE THE FOLLOWING REPORT UNLESS SUCH REPORT IS SPECIFICALLY STATED
TO BE INCORPORATED BY REFERENCE INTO SUCH DOCUMENT.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors of the Company is
composed of three outside directors and is responsible for recommendations to
the Board of Directors of the Company for compensation of executive officers of
the Subsidiaries and the Company. In determining compensation, the following
factors are generally taken into consideration:
1. The performance of the executive officers in achieving the short and
long term goals of the Company.
2. Payment of compensation commensurate with the ability and expertise of
the executive officers.
3. Attempt to structure compensation packages so that they are
competitive with similar companies.
The committee considers the foregoing factors, as well as others, in determining
compensation. There is no assigned weight given to any of these factors.
9
<PAGE>
Additionally, the Compensation Committee considers various benefits, such
as the ESOP and the Stock Option Plan, together with perquisites in determining
compensation. The committee believes that the benefits provided through the
stock based plans more closely tie the compensation of the officers to the
interests of the stockholders and provide significant additional performance
incentives for the officers which directly benefit the stockholders through an
increase in the stock value.
Annually, the Compensation Committee evaluates four primary areas of
performance in determining Mr. Grigsby's level of compensation. These areas
are: long-range strategic planning and implementation; Company financial
performance; Company compliance with regulatory requirements and relations with
regulatory agencies; and effectiveness of managing relationships with
stockholders and the Board of Directors. When evaluating the financial
performance of the Company, the committee considers profitability, asset growth
and risk management. The primary evaluation criteria are considered to be
essential to the long-term viability of the Company and are given equal weight
in the evaluation. Finally, the committee reviews compensation packages of peer
institutions, as well as compensation surveys provided by independent third
parties, to ensure that Mr. Grigsby's compensation is competitive and
commensurate with his level of performance.
The 1996 compensation of Mr. Grigsby was based upon the factors described
above and his substantial experience and length of service with the
organization. During 1996, Mr. Grigsby successfully headed the Company's
acquisition program, which included planning and analysis, contacting a number
of financial institutions and investment bankers, acquiring Prairie, Country and
LaSalle and initiating the consolidation of the operations of the Banks. The
Compensation Committee also considered the continuing additional duties required
in completing the Company's initial public offering and becoming a publicly
traded institution. Mr. Grigsby serves on the Compensation Committee EX
OFFICIO, but did not participate in any decisions pertaining to his
compensation.
Members of the Compensation Committee are Messrs. McGrogan (Chair),
Breipohl and Broadus.
THE INCORPORATION BY REFERENCE OF THIS PROXY STATEMENT INTO ANY DOCUMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY SHALL NOT BE
DEEMED TO INCLUDE THE FOLLOWING PERFORMANCE GRAPH AND RELATED INFORMATION UNLESS
SUCH GRAPH AND RELATED INFORMATION ARE SPECIFICALLY STATED TO BE INCORPORATED
BY REFERENCE INTO SUCH DOCUMENT.
STOCKHOLDER RETURN PERFORMANCE PRESENTATION
The following graph shows a comparison of cumulative total returns for the
Company, the Nasdaq Stock Market (US Companies) and an index of Nasdaq Bank
Stocks for the period commencing January 10, 1996, the date the Company's shares
were first quoted on the OTC Bulletin Board. The Common Stock of the Company was
first listed for quotation on the Nasdaq Stock Market on October 1, 1996, and
prior to such date was quoted on the OTC Bulletin Board. The graph was prepared
at the Company's request by Research Holdings Limited, San Francisco,
California.
10
<PAGE>
COMPARISON OF CUMULATIVE TOTAL RETURN*
(ASSUMES $100 INVESTED ON JANUARY 10, 1996)
[GRAPH]
*TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS
- -------------------------------------------------------------------------------
Cumulative Total Return
- -------------------------------------------------------------------------------
1/10/96 12/31/96
- -------------------------------------------------------------------------------
UnionBancorp Inc. $100 $147
Nasdaq Stock Market - US $100 $131
Nasdaq Bank Index $100 $135
- -------------------------------------------------------------------------------
TRANSACTIONS WITH MANAGEMENT
Certain directors and executive officers of the Company (including their
affiliates, families and companies in which they are principal owners, officers
or directors) were loan customers of, and had other transactions with, the
Company and the Subsidiaries in the ordinary course of business. Such loans and
lines of credit were made in the ordinary course of business on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for transactions with other persons and did not involve more than the
normal risk of collectibility or present other unfavorable features. During
1996, the Company and the Subsidiaries paid
11
<PAGE>
approximately $86,200 to the law firm of Myers, Daugherity, Berry, O'Connor &
Kuzma, Ltd. for legal services. Richard J. Berry, a director of the Company, is
a principal of that firm. Additionally, the Company paid premiums of
approximately $75,700 in 1996 to American Bankers Professional Fidelity
Insurance Company, Ltd. ("ABFIC") for a Blanket Bond Insurance Policy. R. Scott
Grigsby, the Company's Chairman and President, is a director of ABFIC.
Management believes such legal services and insurance were obtained on terms no
less favorable than would have been obtained from unaffiliated third-parties.
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
For inclusion in the Company's Proxy Statement and form of proxy relating
to the 1998 Annual Meeting of Stockholders, stockholder proposals must be
received by the Company on or before November 18, 1997. In order to be
presented at such meeting, notice of the proposal must be received by the
Company on or before November 18, 1997, and must otherwise comply with the
Company's bylaws.
OTHER MATTERS
Management does not intend to present any other business at the meeting and
knows of no other matters which will be presented. However, if any other matters
come before the meeting, it is the intention of the persons named in the
accompanying proxy to vote in accordance with their best judgment on those
matters.
Your proxy is solicited by the Board of Directors and the cost of
solicitation will be paid by the Company. In addition to the solicitation of
proxies by use of the mails, officers, directors and regular employees of the
Company or the Subsidiaries, acting on the Company's behalf, may solicit proxies
by telephone, telegraph or personal interview. The Company will, at its
expense, upon the receipt of a request from brokers and other custodians,
nominees and fiduciaries, forward proxy soliciting material to the beneficial
owners of shares held of record by such persons.
FAILURE TO INDICATE CHOICE
If any stockholder fails to indicate a choice with respect to any of the
proposals on the proxy included herewith, the shares of such stockholder shall
be voted FOR the nominees listed under proposal 1.
By Order of the Board of Directors
R. Scott Grigsby
Chairman of the Board and President
Ottawa, Illinois
March 18, 1997
ALL STOCKHOLDERS ARE URGED TO SIGN
AND MAIL THEIR PROXIES PROMPTLY
12
<PAGE>
PROXY PROXY
UNIONBANCORP, INC.
Proxy is Solicited By the Board of Directors
For the Annual Meeting of Stockholders -- April 25, 1997
The undersigned hereby appoints John Michael Daw and R. Scott Grigsby,
or either of them acting in the absence of the others, with power of
substitution, attorneys and proxies, for and in the name and place of the
undersigned, to vote the number of shares of Common Stock that the
undersigned would be entitled to vote if then personally present at the
Annual Meeting of the Stockholders of UnionBancorp, Inc., to be held at the
Pitstick Pavilion, Route 23 North, Ottawa, Illinois, on Friday, April 25,
1997, at 10:00 a.m., local time, or any adjournments or postponements
thereof, upon the matters set forth in the Notice of Annual Meeting and Proxy
Statement (receipt of which is hereby acknowledged) as designated on the
reverse side, and in their discretion, the proxies are authorized to vote
upon such other business as may come before the meeting:
/ / Check here for address change. / / Check here if you plan to attend the
meeting.
New Address:_______________________
___________________________________
___________________________________
(Continued and to be signed on reverse side.)
<PAGE>
UNIONBANCORP, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY /X/
FOR WITHHOLD FOR ALL
ALL ALL EXCEPT
1. Election of Directors: / / / / / /
L. Paul Broadus, John Michael Daw,
Robert J. Doty, Jimmie D. Lansford ___________________________
and I.J. Reinhardt, Jr.
The Board of Directors recommends a vote FOR all nominees.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH SPECIFICATION MADE. IF NO CHOICES
ARE INDICATED, THIS PROXY WILL BE VOTED FOR ALL NOMINEES.
Note: Please sign exactly as your name(s) appears. For joint accounts, each
owner should sign. When signing as executor, administrator, attorney, trustee
or guardian, etc., please give your full title.
Dated:___________________________________, 1997
Signature(s)__________________________________
__________________________________
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
