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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number: 0-28846
UNIONBANCORP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3145350
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) number)
122 WEST MADISON STREET, OTTAWA, ILLINOIS 61350
(Address of principal executive offices) (Zip Code)
(815) 433-7030
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Exchange Class On Which Registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($1.00 PAR VALUE)
(Title of Class)
PREFERRED PURCHASE RIGHTS
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
As of March 9, 1998, the Registrant had issued and outstanding 4,135,830
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant as of March 9, 1998,
was $48,040,710.*
* Based on the last reported price ($19.75) of an actual transaction in
the Registrant's Common Stock on March 9, 1998, and reports of
beneficial ownership filed by directors and executive officers of the
Registrant and by beneficial owners of more than 5% of the outstanding
shares of Common Stock of the Registrant; however, such determination of
shares owned by affiliates does not constitute an admission of affiliate
status or beneficial interest in shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's 1997 Annual Report to Stockholders (the
"1997 Annual Report") are incorporated by reference into Part II of this Form
10-K.
Certain portions of the Proxy Statement for the 1998 Annual Meeting of
Stockholders (the "1998 Proxy Statement") are incorporated by reference into
Part III of this Form 10-K.
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UNIONBANCORP, INC.
Form 10-K Annual Report
Table of Contents
Part I
<TABLE>
<CAPTION>
<S> <C>
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . 1
A. The Company
B. Regulation and Supervision
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 10
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . 10
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. . . . 12
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . 12
Item 9 Changes in and Disagreements on Accounting and Financial
Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Part III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . 12
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 13
Item 12. Security Ownership of Certain Beneficial Owners and Management. . 13
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . 13
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
GENERAL
The Company, a Delaware corporation, is a regional financial services
company based in Ottawa, Illinois, which has five bank subsidiaries (the
"Banks"). The Banks serve communities throughout Central and Northern
Illinois through twenty-seven locations. The Company also has three non-bank
subsidiaries, UnionData Corp., Inc. ("UnionData"), which provides data
processing services; UnionTrust Corporation ("UnionTrust", formerly known as
Union Corporation), a trust company which also serves as an owner and lessor
of banking offices to certain of the Banks; and Credit Recovery, Inc.
("Credit Recovery," formerly known as LaSalle County Collections, Inc.), a
debt collection agency located in Ottawa, Illinois. The Banks and the three
non-bank subsidiaries are collectively referred to as the "Subsidiaries." At
December 31, 1997, the Company had consolidated assets of approximately
$625.5 million, deposits of approximately $527.7 million and stockholders'
equity of approximately $51.6 million.
HISTORICAL
The Company was originally formed in 1982 as the bank holding company
for UnionBank, an Illinois state bank with its main office located in
Streator, Illinois ("UnionBank"). In 1984, UnionBank/Sandwich, an Illinois
state bank with its main office located in Sandwich, Illinois ("Sandwich"),
became a subsidiary of the Company. In 1991, the Ottawa National Bank,
Ottawa, Illinois, was acquired and merged into UnionBank.
During 1996, the Company acquired all of the issued and outstanding
capital stock of Prairie Bancorp, Inc. ("Prairie"), a multi-bank holding
company with six bank subsidiaries located in the Illinois communities of
Carthage, Hanover, Ladd, Manlius, Tampico and Tiskilwa, and also acquired
Country Bancshares, Inc. ("Country"), a one-bank holding company with an
Illinois bank subsidiary located in Macomb, Illinois.
In 1997, the Company acquired the remaining minority stock ownership
interests in and consolidated the operations of certain of the Banks. Also
in 1997, Sandwich was merged with and into UnionBank; Tampico National Bank
and The First National Bank of Manlius were merged with and into Tiskilwa
State Bank under the name "UnionBank/Central"; and the Farmers State Bank of
Ferris was merged with and into Omni Bank under the name "UnionBank/West."
The Company's two other banking subsidiaries are UnionBank/Northwest an
Illinois state bank with its main office located in Hanover, Illinois
("UnionBank/Northwest"), and the Bank of Ladd, an Illinois state bank with
its main office located in Ladd, Illinois ("Ladd"). Ladd, of which 81.7% is
owned by the Company, and UnionBank/Northwest, are both subsidiaries of
Prairie.
OPERATIONS
The Company's strategic plan contemplates an increase in profitability
and stockholder value through a significant expansion of the Company's market
area, substantial growth in its asset size and improved operational
efficiencies. In 1993, the Company began implementing this plan by
realigning its management structure through the redefinition of certain
officers' duties and functions, hiring additional experienced senior
executives and developing among its employees an aggressive sales culture.
The acquisitions of Prairie and Country significantly increased the presence
of the Company within the region's banking industry. Because of the
reputations of the Company and its executive officers in the banking
industry, the Company believes that it will be an attractive alternative to
future sellers of community banks and thrifts. The Company believes that it
can successfully manage these community-based institutions to increase their
profitability by expanding cross-selling efforts and emphasizing those
products and services offering the highest return on investment.
The Company's operating strategy is to provide customers with the
business sophistication and breadth of products of a regional financial
services company, while retaining the special attention to personal service
and the
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local appeal of a community bank. Decentralized decision making authority
vested in the presidents and senior officers of the Banks allows for rapid
response time and flexibility in dealing with customer requests and credit
needs. The participation of the Company's directors, officers and employees
in area civic and service organizations demonstrates the Company's continuing
commitment to the communities it serves. Management believes that these
qualities distinguish the Company from its competitors and will allow the
Company to compete successfully in its market area against larger regional
and out-of-state institutions.
The Company serves the banking needs of LaSalle and contiguous counties
located in north central Illinois (LaSalle and portions of Livingston,
Grundy, Bureau, Kane, Kendall and DeKalb Counties) through the Banks. The
Company has recently expanded its lending and deposit gathering activities
from north central Illinois into certain of the counties surrounding the
Chicago metropolitan area, including Kane and Kendall Counties.
The Banks provide a range of commercial and retail lending services to
corporations, partnerships and individuals, including, but not limited to,
commercial business loans, commercial and residential real estate
construction and mortgage loans, loan participations, consumer loans,
revolving lines of credit and letters of credit. The Banks make direct and
indirect installment loans to consumers and commercial customers, and
originate and service residential mortgages and handle the secondary
marketing of those mortgages. Agricultural loans also play a role in the
Company's overall lending portfolio, although most of this lending activity
is based in the north central portion of the Company's market area.
The Company has centralized the lending policies of the Banks as part of
the process of integrating the operations of acquired banks into this
organization. It is anticipated that the lending policies of any banks
acquired in the future would also be centralized, although the Company
strives to have its bank subsidiaries retain their local focus.
The Company also provides a variety of additional services and financial
products, including trust and asset management services through UnionTrust,
MasterCard and Visa credit cards, and a debit card program inaugurated in
1994. A new automated payment option called Direct Payment, which is an
efficient, electronic payment alternative to paper checks, is offered through
UnionData. The Company also conducts all of its own data processing for the
Banks through UnionData.
Credit Recovery, a collection agency acquired by the Company in 1996,
serves the principal market area of Ottawa, Illinois, and surrounding
communities, and has been providing services to certain of the Banks prior to
its acquisition. The Company intends to expand the market area of Credit
Recovery and to utilize its services with respect to the collection needs of
the other Bank Subsidiaries.
COMPETITION
The Company's market area is highly competitive. Within the twelve
Illinois counties served by the Company's banking offices, many commercial
banks, savings and loan associations and credit unions currently operate
offices. In addition, many other financial institutions based in surrounding
communities and in Chicago, Illinois, actively compete for customers within
the Company's market area. The Company also faces competition from finance
companies, insurance companies, mortgage companies, securities brokerage
firms, money market funds, loan production offices and other providers of
financial services.
The Company competes for loans principally through the range and quality
of the services it provides and through competitive interest rates and loan
fees. The Company believes that its long-standing presence in the communities
its serves and personal service philosophy enhance its ability to compete
favorably in attracting and retaining individual and business customers. The
Company actively solicits deposit-related customers and competes for deposits
by offering customers personal attention, professional service and
competitive interest rates.
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EMPLOYEES
At December 31, 1997, the Company employed 299 full-time equivalent
employees. The Company places high priority on staff development which
involves extensive training, including customer service training. New
employees are selected on the basis of both technical skills and customer
service capabilities. None of the Company's employees are covered by a
collective bargaining agreement with the Company. The Company offers a
variety of employee benefits and management considers its employee relations
to be excellent.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of the Company can be affected not only by management decisions
and general economic conditions, but also by the requirements of applicable
state and federal statutes and regulations and the policies of various
governmental regulatory authorities including, but not limited to, the FRB,
the Federal Deposit Insurance Corporation (the "FDIC"), the Illinois
Commissioner of Banks and Real Estate (the "Commissioner"), the Internal
Revenue Service and state taxing authorities and the Securities and Exchange
Commission (the "SEC"). The effect of such statutes, regulations and policies
can be significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiaries, regulate, among other
things, the scope of business, investments, reserves against deposits,
capital levels relative to operations, the nature and amount of collateral
for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and its subsidiaries establishes a comprehensive framework for their
respective operations and is intended primarily for the protection of the
FDIC's deposit insurance funds and the depositors, rather than the
shareholders, of financial institutions.
The following references to material statutes and regulations affecting
the Company and its subsidiaries are brief summaries thereof and do not
purport to be complete, and are qualified in their entirety by reference to
such statutes and regulations. Any change in applicable law or regulations
may have a material effect on the business of the Company and its
subsidiaries.
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION. Legislation is pending in the Congress that would
allow bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. The expanded powers generally would be available to a bank
holding company only if the bank holding company and its bank subsidiaries
remain well-capitalized and well-managed. Additionally, the pending
legislation would eliminate the federal thrift charter and merge the FDIC's
Bank Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF").
At this time, the Company is unable to predict whether the proposed
legislation will be enacted and, therefore, is unable to predict the impact
such legislation may have on the operations of the Company and its
subsidiaries.
THE COMPANY
GENERAL. The Company, as the sole stockholder of UnionBank, Prairie, as
the sole or controlling stockholder of UnionBank/Central, UnionBank/Northwest
and Ladd, and Country as the sole stockholder of UnionBank/West, are each
bank holding companies. As bank holding companies, the Company, Prairie and
Country are registered with, and are subject to regulation by, the FRB under
the Bank Holding Company Act, as amended ("BHCA"). In accordance with FRB
policy, the Company, Prairie and Country are expected to act as a source of
financial strength to their respective bank subsidiaries and to commit
resources to support their respective
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bank subsidiaries in circumstances where the Company, Prairie or Country
might not do so absent such policy. Under the BHCA, the Company, Prairie and
Country are subject to periodic examination by the FRB and are required to
file with the FRB periodic reports of their respective operations and such
additional information as the FRB may require. The Company, Prairie and
Country are also subject to regulation by the Commissioner under the Illinois
Bank Holding Company Act, as amended.
INVESTMENTS AND ACTIVITIES. Under the BHCA, a bank holding company must
obtain FRB approval before: (i) acquiring, directly or indirectly, ownership
or control of any voting shares of another bank or bank holding company if,
after such acquisition, it would own or control more than 5% of such shares
(unless it already owns or controls the majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank; or (iii)
merging or consolidating with another bank holding company. Subject to
certain conditions (including certain deposit concentration limits
established by the BHCA), the FRB may allow a bank holding company to acquire
banks located in any state of the United States without regard to whether the
acquisition is prohibited by the law of the state in which the target bank is
located. In approving interstate acquisitions, however, the FRB is required
to give effect to applicable state law limitations on the aggregate amount of
deposits that may be held by the acquiring bank holding company and its
insured depository institution affiliates in the state in which the target
bank is located (provided that those limits do not discriminate against
out-of-state depository institutions or their holding companies) or which
require that the target bank have been in existence for a minimum period of
time (not to exceed five years) before being acquired by an out-of-state bank
holding company.
The BHCA also prohibits, with certain exceptions, the Company, Prairie
and Country from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any company which is not a bank and from
engaging in any business other than that of banking, managing and controlling
banks or furnishing services to banks and their subsidiaries. The principal
exception to this prohibition allows bank holding companies to engage in, and
to own shares of companies engaged in, certain businesses found by the FRB to
be "so closely related to banking ... as to be a proper incident thereto."
Under current regulations of the FRB, the Company and its non-bank
subsidiaries are permitted to engage in, among other activities, such
banking-related businesses as the operation of a thrift, sales and consumer
finance, equipment leasing, the operation of a computer service bureau,
including software development, and mortgage banking and brokerage. The BHCA
generally does not place territorial restrictions on the domestic activities
of non-bank subsidiaries of bank holding companies.
Federal law also prohibits acquisition of "control" of a bank, such as
one of the Banks, or bank holding company, such as the Company, Prairie or
Country, without prior notice to certain federal bank regulators. "Control"
is defined in certain cases as acquisition of 10% of the outstanding shares
of a bank or bank holding company.
CAPITAL REQUIREMENTS. Bank holding companies are required to maintain
minimum levels of capital in accordance with FRB capital adequacy guidelines.
If capital falls below minimum guideline levels, a bank holding company,
among other things, may be denied approval to acquire or establish additional
banks or non-bank businesses.
The FRB's capital guidelines establish the following minimum regulatory
capital requirements for bank holding companies: a risk-based requirement
expressed as a percentage of total risk-weighted assets, and a leverage
requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1
capital. The leverage requirement consists of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly rated companies, with
minimum requirements of 4% to 5% for all others. For purposes of these
capital standards, Tier 1 capital consists primarily of permanent
stockholders' equity less intangible assets (other than certain mortgage
servicing rights and purchased credit card relationships) and total capital
means Tier 1 capital plus certain other debt and equity instruments which do
not qualify as Tier 1 capital and a portion of the company's allowance for
loan and lease losses.
The risk-based and leverage standards described above are minimum
requirements, and higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking organizations.
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For example, the FRB's capital guidelines contemplate that additional capital
may be required to take adequate account of, among other things, interest
rate risk, or the risks posed by concentrations of credit, nontraditional
activities or securities trading activities. Further, any banking
organization experiencing or anticipating significant growth would be
expected to maintain capital ratios, including tangible capital positions
(I.E., Tier 1 capital less all intangible assets), well above the minimum
levels.
As of December 31, 1997, the Company, Prairie and Country each had
regulatory capital in excess of the FRB's minimum requirements, as follows:
<TABLE>
<CAPTION>
Risk-Based Leverage
Capital Ratio Capital Ratio
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<S> <C> <C>
Company 11.86% 6.64%
Prairie 17.36% 8.86%
Country 13.91% 7.64%
</TABLE>
DIVIDENDS. The FRB has issued a policy statement with regard to the
payment of cash dividends by bank holding companies. In the policy
statement, the FRB expressed its view that a bank holding company should not
pay cash dividends which exceed its net income or which can only be funded in
ways that weaken the bank holding company's financial health, such as by
borrowing. Additionally, the FRB possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy
actions that represent unsafe or unsound practices or violations of
applicable statutes and regulations. Among these powers is the ability to
proscribe the payment of dividends by banks and bank holding companies.
In addition to the restrictions on dividends that may be imposed by the
FRB, the Delaware General Corporation Law (the "DGCL") permits the Company to
pay dividends only out of its surplus (as defined and computed in accordance
with the DGCL), or if the Company has no such surplus, out of its net profits
for the fiscal year in which the dividend is declared and/or the preceding
fiscal year. Further, the Illinois Business Corporation Act prohibits an
Illinois corporation, such as Prairie or Country, from paying a dividend if,
after giving effect to the dividend, the corporation would be insolvent or
the net assets of the corporation would be less than zero or less than the
maximum amount then payable to shareholders of the corporation who would have
preferential distribution rights if the corporation were liquidated.
FEDERAL SECURITIES REGULATION. The Company's common stock is registered
with the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Consequently, the Company is subject to the information,
proxy solicitation, insider trading and other restrictions and requirements
of the SEC under the Exchange Act.
THE BANK SUBSIDIARIES
GENERAL. All of the Banks are Illinois-chartered banks, the deposit
accounts of which are insured by the BIF of the FDIC. All of the Banks other
than Ladd are also members of the Federal Reserve System ("member bank") and,
thus, are subject to the examination, supervision, reporting and enforcement
requirements of the Commissioner, as the chartering authority for Illinois
banks, the FRB, as the primary federal regulator of member banks, and the
FDIC, as administrator of the BIF. Ladd is subject to the examination,
supervision, reporting and enforcement requirements of the Commissioner, as
the chartering authority for Illinois banks, and the FDIC, as the
administrator of the BIF and the primary federal regulator of state-chartered
banks that are not member banks.
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DEPOSIT INSURANCE. As FDIC-insured institutions, the Banks are required
to pay deposit insurance premium assessments to the FDIC. The FDIC has
adopted a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their respective levels of capital and results of
supervisory evaluations. Institutions classified as well-capitalized (as
defined by the FDIC) and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized (as defined by the
FDIC) and considered of substantial supervisory concern pay the highest
premium. Risk classification of all insured institutions is made by the FDIC
for each semi-annual assessment period.
During the year ended December 31, 1997, BIF assessments ranged from 0%
of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 1998, BIF assessment rates will continue to range from
0% of deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written
agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of
insurance if the institution has no tangible capital. Management of the
Company is not aware of any activity or condition that could result in
termination of the deposit insurance of any of the Banks.
FICO ASSESSMENTS. Since 1987, a portion of the deposit insurance
assessments paid by SAIF members has been used to cover interest payments due
on the outstanding obligations of the FICO, the entity created to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. Pursuant to federal legislation enacted
September 30, 1996, commencing January 1, 1997, both SAIF members and BIF
members became subject to assessments to cover the interest payments on
outstanding FICO obligations. Such FICO assessments are in addition to
amounts assessed by the FDIC for deposit insurance. Until January 1, 2000,
the FICO assessments made against BIF members may not exceed 20% of the
amount of the FICO assessments made against SAIF members. Between January 1,
2000 and the maturity of the outstanding FICO obligations in 2019, BIF
members and SAIF members will share the cost of the interest on the FICO
bonds on a PRO RATA basis. During the year ended December 31, 1997, the FICO
assessment rate for SAIF members was approximately 0.063% of deposits while
the FICO assessment rate for BIF members was approximately 0.013% of deposits.
COMMISSIONER ASSESSMENTS. All Illinois banks are required to pay
supervisory fees to the Commissioner to fund the operations of the
Commissioner. The amount of such supervisory fees is based upon each
institution's total assets, including consolidated subsidiaries, as reported
to the Commissioner. During the year ended December 31, 1997 the Banks paid
supervisory fees to the Commissioner totaling $38,981.
CAPITAL REQUIREMENTS. Under federal regulations, the Banks are subject
to the following minimum capital standards: a leverage requirement
consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the
most highly-rated banks with minimum requirements of 4% to 5% for all others,
and a risk-based capital requirement consisting of a minimum ratio of total
capital to total risk-weighted assets of 8%, at least one-half of which must
be Tier 1 capital. For purposes of these capital standards, Tier 1 capital
and total capital consist of substantially the same components as Tier 1
capital and total capital under the FRB's capital guidelines for bank holding
companies (SEE "--The Company--Capital Requirements").
The capital requirements described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual institutions. For example,
federal regulations provide that additional capital may be required to take
adequate account of, among other things, interest rate risk or the risks
posed by concentrations of credit, nontraditional activities or securities
trading activities.
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During the year ended December 31, 1997, none of the Banks were required
by its primary federal regulator to increase its capital to an amount in
excess of the minimum regulatory requirements. As of December 31, 1997, each
of the Banks exceeded its minimum regulatory capital requirements, as follows:
<TABLE>
<CAPTION>
Risk-Based Leverage
Capital Ratio Capital Ratio
------------- -------------
<S> <C> <C>
UnionBank 12.05% 8.16%
UnionBank/West 14.09% 7.10%
UnionBank/Central 17.24% 8.39%
UnionBank/Northwest 23.22% 9.54%
Bank of Ladd 18.83% 9.24%
</TABLE>
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Depending upon the capital category to which an
institution is assigned, the regulators' corrective powers include:
requiring the submission of a capital restoration plan; placing limits on
asset growth and restrictions on activities; requiring the institution to
issue additional capital stock (including additional voting stock) or to be
acquired; restricting transactions with affiliates; restricting the interest
rate the institution may pay on deposits; ordering a new election of
directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits
from correspondent banks; requiring the institution to divest certain
subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
Additionally, institutions insured by the FDIC may be liable for any
loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with the default of commonly controlled FDIC insured depository
institutions or any assistance provided by the FDIC to commonly controlled
FDIC insured depository institutions in danger of default.
DIVIDENDS. Under the Illinois Banking Act, Illinois-chartered banks may
not pay dividends in excess of their adjusted profits.
The Federal Reserve Act also imposes limitations on the amount of
dividends that may be paid by a state member bank, such as UnionBank,
UnionBank/West, UnionBank/Central and UnionBank/Northwest. Generally, a
member bank may pay dividends out of its undivided profits, in such amounts
and at such times as the bank's board of directors deems prudent. Without
prior FRB approval, however, a state member bank may not pay dividends in any
calendar year which, in the aggregate, exceed the bank's calendar
year-to-date net income plus the bank's adjusted retained net income for the
two preceding calendar years.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant
to applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described
above, each of the Banks exceeded its minimum capital requirements under
applicable guidelines as of December 31, 1997. As of December 31, 1997,
approximately $7.9 million was available to be paid as dividends to the
Company by the Banks. Notwithstanding the availability of funds for
dividends, however, the federal banking regulators may prohibit the payment
of any dividends by the Banks if such payment is deemed to constitute an
unsafe or unsound practice.
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INSIDER TRANSACTIONS. The Banks are subject to certain restrictions
imposed by the Federal Reserve Act on extensions of credit to the Company and
its subsidiaries, on investments in the stock or other securities of the
Company and its subsidiaries and the acceptance of the stock or other
securities of the Company or its subsidiaries as collateral for loans.
Certain limitations and reporting requirements are also placed on extensions
of credit by the Banks to their respective directors and officers, to
directors and officers of the Company and its subsidiaries, to principal
stockholders of the Company, and to "related interests" of such directors,
officers and principal stockholders. In addition, federal law and
regulations may affect the terms upon which any person becoming a director or
officer of the Company or one of its subsidiaries or a principal stockholder
of the Company may obtain credit from banks with which one of the Banks
maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have
adopted guidelines which establish operational and managerial standards to
promote the safety and soundness of federally insured depository
institutions. The guidelines set forth standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, asset quality and earnings. In general, the guidelines prescribe
the goals to be achieved in each area, and each institution is responsible
for establishing its own procedures to achieve those goals. If an
institution fails to comply with any of the standards set forth in the
guidelines, the institution's primary federal regulator may require the
institution to submit a plan for achieving and maintaining compliance. The
preamble to the guidelines states that the agencies expect to require a
compliance plan from an institution whose failure to meet one or more of the
guidelines is of such severity that it could threaten the safety and
soundness of the institution. Failure to submit an acceptable plan, or
failure to comply with a plan that has been accepted by the appropriate
federal regulator, would constitute grounds for further enforcement action.
BRANCHING AUTHORITY. Illinois banks, such as the Banks, have the
authority under Illinois law to establish branches anywhere in the State of
Illinois, subject to receipt of all required regulatory approvals.
Effective June 1, 1997 (or earlier if expressly authorized by applicable
state law), the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") allows banks to establish interstate branch
networks through acquisitions of other banks, subject to certain conditions,
including certain limitations on the aggregate amount of deposits that may be
held by the surviving bank and all of its insured depository institution
affiliates. The establishment of DE NOVO interstate branches or the
acquisition of individual branches of a bank in another state (rather than
the acquisition of an out-of-state bank in its entirety) is allowed by the
Riegle-Neal Act only if specifically authorized by state law. The
legislation allows individual states to "opt-out" of certain provisions of
the Riegle-Neal Act by enacting appropriate legislation prior to June 1,
1997. Illinois has enacted legislation permitting interstate mergers
beginning on June 1, 1997, subject to certain conditions, including a
prohibition against interstate mergers unless any Illinois bank involved has
been in existence and continuous operation for more than five years.
STATE BANK ACTIVITIES. Under federal law and FDIC regulations, FDIC
insured state banks are prohibited, subject to certain exceptions, from
making or retaining equity investments of a type, or in an amount, that are
not permissible for a national bank. Federal law and FDIC regulations also
prohibit FDIC insured state banks and their subsidiaries, subject to certain
exceptions, from engaging as principal in any activity that is not permitted
for a national bank or its subsidiary, respectively, unless the bank meets,
and continues to meet, its minimum regulatory capital requirements and the
FDIC determines the activity would not pose a significant risk to the deposit
insurance fund of which the bank is a member. Impermissible investments and
activities must be divested or discontinued within certain time frames set by
the FDIC. These restrictions have not had, and are not currently expected to
have, a material impact on the operations of the Bank Subsidiaries.
FEDERAL RESERVE SYSTEM. Pursuant to regulations promulgated by the
Board of Governors of the Federal Reserve System (the "FRB"), as presently in
effect, require depository institutions to maintain non-interest earning
reserves against their transaction accounts (primarily NOW and regular
checking accounts), as follows: for transaction accounts aggregating $47.8
million or less, the reserve requirement is 3% of total transaction accounts;
and for transaction accounts aggregating in excess of $47.8 million, the
reserve requirement is $1.434 million plus 10% of the aggregate amount of
total transaction accounts in excess of $47.8 million. The first $4.7
million of
8
<PAGE>
otherwise reservable balances are exempted from the reserve requirements.
These reserve requirements are subject to annual adjustment by the FRB. The
Bank Subsidiaries are in compliance with the foregoing requirements.
ITEM 2. PROPERTIES
At December 31, 1997, the Company operated 27 banking offices in
Illinois. The principal offices of the Company are located in Ottawa,
Illinois. All of the Company's offices are owned by either one of the Banks
or by Union Corporation and are not subject to any mortgage or material
encumbrance. The Company believes that its current facilities are adequate
for its existing business.
<TABLE>
<CAPTION>
AFFILIATE MARKETS SERVED PROPERTY/TYPE LOCATION
- --------- -------------- ----------------------
<S> <C> <C>
The Company Administrative Office: Ottawa
UnionBank LaSalle, Grundy, Main Office: Streator, IL
Livingston, Kane, Eleven banking offices located
Kendall and DeKalb in markets served.
Counties
UnionBank/Central Bureau and LaSalle Main Office: Princeton, IL
Counties Five banking offices located in
markets served.
UnionBank/West McDonough, Adams, Main Office: Macomb, IL
Hancock and Pike Eight banking offices located
Counties in markets served.
UnionBank/Northwest Jo Davies County Main Office: Hanover, IL
Two banking offices located in
markets served.
Bank of Ladd Bureau and LaSalle Main Office, Ladd, IL
Counties
UnionData Corp, LaSalle, Kendall, Main Office: Streator, IL
Inc. DeKalb, McDonough, Additional office located in
Adams and Pike Counties Macomb, IL
Credit Recovery, LaSalle, DeKalb, Main Office: Ottawa, IL
Inc. Kendall, McDonough and
Bureau Counties
UnionTrust LaSalle County Main Office: Ottawa, IL
Corporation
</TABLE>
In addition to the banking locations listed above, the Banks own 20
automatic teller machines, some of which are housed within a banking office
and some of which are independently located.
At December 31, 1997, the properties and equipment of the Company had an
aggregate net book value of approximately $14.6 million.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries are involved in any
pending legal proceedings other than routine legal proceedings occurring in
the normal course of business, which, in the opinion of management, in the
aggregate, are not material to the Company's consolidated financial condition.
9
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no items submitted to a vote of security holders in the
fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was held by approximately 647 stockholders of
record as of March 9, 1998, and is traded on the Nasdaq Stock Market under
the symbol "UBCD." The table below indicates the high and low sales prices
of the Common Stock for transactions of which the Company is aware, and the
dividends declared per share for the Common Stock during the periods
indicated. Because the Company is not aware of the price at which certain
private transactions in the Common Stock have occurred, the prices shown may
not necessarily represent the complete range of prices at which transactions
in the Common Stock have occurred during such periods.
<TABLE>
<CAPTION>
STOCK SALES(1)
--------------------
CASH
HIGH LOW DIVIDENDS(1)
-------- -------- ------------
<S> <C> <C> <C>
1995
First Quarter . . . . . . . $ 7.67 $ 7.67 $ 0.033
Second Quarter . . . . . . . 8.83 8.33 0.033
Third Quarter . . . . . . . 8.83 8.83 0.033
Fourth Quarter . . . . . . . 9.00 8.83 0.033
1996
First Quarter . . . . . . . 11.33 10.00 0.033
Second Quarter . . . . . . . 12.00 10.67 0.033
Third Quarter . . . . . . . 12.00 11.00 0.035
Fourth Quarter . . . . . . 14.50 11.50 0.035
1997
First Quarter . . . . . . 14.50 12.50 0.035
Second Quarter . . . . . . . 14.13 12.00 0.035
Third Quarter . . . . . . . 17.38 13.38 0.035
Fourth Quarter . . . . . . . 21.88 17.06 0.035
</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 acquisition of Prairie in
1996, preferential dividends were required to be paid or accrued quarterly
with respect to the outstanding shares of Preferred Stock. The ability of
the Company to pay dividends in the future will be primarily dependent upon
its receipt of dividends from the Banks. In determining cash dividends, the
Board of Directors considers the earnings, capital requirements, debt and
dividend servicing requirements, financial ratio guidelines it has
established, financial condition of the Company and other relevant factors.
The Banks' ability to pay dividends to the Company and the Company's ability
to pay dividends to its stockholders are also subject to certain regulatory
restrictions.
10
<PAGE>
The Company has paid regular cash dividends on the Common Stock since it
commenced operations in 1982. There can be no assurance, however, that any
such dividends will be paid by the Company or that such dividends will not be
reduced or eliminated in the future. The timing and amount of dividends will
depend upon the earnings, capital requirements and financial condition of the
Company and the Banks as well as the general economic conditions and other
relevant factors affecting the Company and the Banks. The Company entered
into a new loan agreement in connection with the 1996 acquisition of Prairie
and Country, replacing the Company's prior loan agreement. The new loan
agreement contains no direct prohibitions against the payment by the Company
of dividends, but indirectly restricts such dividends through the required
maintenance of minimum capital ratios. In addition, the terms of the Series
A Preferred Stock, and the Series B Preferred Stock issued to certain of
Prairie's preferred stockholders, prohibit the payment of dividends by the
Company on the Common Stock during any period for which dividends on the
respective series of Preferred Stock are in arrears.
Except in connection with stock dividends and stock splits, and as
described herein, the Company has not issued any securities in the past three
years which were not registered for sale under the Securities Act of 1933, as
amended. As consideration for the acquisition of Credit Recovery,
consummated on August 1, 1996, the Company issued 9,090 shares of Common
Stock to the sole stockholder of Credit Recovery. As partial consideration
for the acquisition of Prairie, which was consummated on August 6, 1996, the
Company issued 710,576 shares of Common Stock and 2,762.24 shares of Series A
Preferred Stock to the holders of shares of Prairie Common Stock, and issued
857 shares of Series B Preferred Stock to the holders of Prairie's Series A
Preferred Stock electing to receive securities in lieu of cash. The Company
also issued an aggregate of 19,829 shares of its Common Stock during 1997 in
connection with the acquisition of minority interests of certain of the Bank
Subsidiaries. The Company believes all of the securities issued in
connection with the acquisitions of Prairie, Credit Recovery and minority
interests in the Bank Subsidiaries were issued in transactions exempt from
the registration requirements of the Securities Act of 1933 pursuant to
Section 4(2) thereof and Regulation D promulgated thereunder.
11
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Selected consolidated financial data for the five years ended December
31, 1997, consisting of data captioned "Selected Consolidated Financial and
Other Data for the Company and Subsidiaries" on page F-1 of the Company's
1997 Annual Report to Stockholders filed as an exhibit hereto is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information beginning on page 1 of the Company's 1997 Annual Report
to Stockholders under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operation" is incorporated by reference.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to pages 9 through 12 of the Company's 1997 Annual
Report to Stockholders under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operation," which is
incorporated by reference pursuant to Item 7 above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Balance Sheets of the Company and Subsidiaries as of
December 31, 1997 and the related Consolidated Statements of Income,
Stockholders' Equity and Cash Flows for the year ended December 31, 1997,
together with the related notes and the report of Crowe Chizek & Company LLP,
independent auditors, on pages 27 to 60 of the Company's 1997 Annual Report
to Stockholders filed as an exhibit hereto, is incorporated herein by
reference.
The Consolidated Balance Sheets of the Company and Subsidiaries as of
December 31, 1996 and 1995 and the related Consolidated Statements of Income,
Stockholders' Equity and Cash Flows for each of the years in the two-year
period ended December 31, 1996, together with the related notes and the
report of McGladrey & Pullen, LLP, independent auditors, on pages 27 to 60 of
the Company's 1997 Annual Report to Stockholders filed as an exhibit hereto,
is incorporated herein by reference.
12
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Reference is made to the Form 8-K filed by the Company with the SEC on
March 25, 1997.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information beginning on page 2 of the Company's 1998 Proxy
Statement under the caption "Election of Directors" and on pages 4 through 7
of the 1998 Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners and Management" is incorporated by reference. The
information regarding executive officers not provided in the 1998 Proxy
Statement is noted below.
EXECUTIVE OFFICERS
The term of office for the executive officers of the Company is from the
date of election until the next annual organizational meeting of the Board of
Directors. In addition to the information provided in the 1998 Proxy
Statement, the names and ages of the executive officers of the Company as of
December 31, 1997, as well as the offices of the Company and the Subsidiaries
held by these officers on that date, and principal occupations for the past
five years are set forth below.
WAYNE L. BISMARK, 53, is the Executive Vice President and Chief Credit
Officer of the Company. Mr. Bismark joined the Company in 1994. Prior to
joining the Company, Mr. Bismark had been employed since 1983 in the
Financial Institutions Division of the LaSalle National Bank in Chicago,
Illinois. He is responsible for the overall performance of the Company's
lending activities. Mr. Bismark has worked in the banking industry for almost
25 years, with extensive experience in lending and product sales at both the
wholesale and retail levels. Mr. Bismark serves as a director of a local
social service agency and is active in many civic organizations. He is also
active in regional economic development associations and professional banking
organizations.
CHARLES J. GRAKO, 44, has been the Executive Vice President and Chief
Financial Officer of the Company since 1990. He also serves as Secretary of
the Company and Assistant Secretary of UnionBank. Mr. Grako is a Certified
Public Accountant and has spent the majority of his career in the banking
industry. He first joined the Company as Controller in 1986.
ITEM 11. EXECUTIVE COMPENSATION
The information on pages 7 through 9 of the 1998 Proxy Statement under
the caption "Executive Compensation" is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information on pages 4 through 7 of the 1998 Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners" is incorporated
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information on pages 11 and 12 of the 1998 Proxy Statement under the
caption "Transactions with Management" is incorporated by reference.
13
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements
N/A
(a)(2) Financial Statement Schedules
N/A
(a)(3) Schedule of Exhibits
The Exhibit Index which immediately follows the signature pages to
this Form 10-K is incorporated by reference.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of 1997.
(c) Exhibits
The exhibits required to be filed with this Form 10-K are included
with this Form 10-K and are located immediately following the Exhibit Index
to this Form 10-K.
(d) Financial Data Schedule
Exhibit 27.1
14
<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 [ ], 1998.
UnionBancorp, Inc.
By: /s/ R. Scott Grigsby By: /s/ Charles J. Grako
---------------------------- ----------------------------
R. Scott Grigsby Charles J. Grako
Chairman and Executive Vice President and
Principal Executive Officer Principal Financial and
Accounting Officer
Date: March [ ], 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March [ ], 1998.
Signature Title
--------- -----
- -------------------------------
R. Scott Grigsby Chairman of the Board, President and
Chief Executive Officer
- -------------------------------
Richard J. Berry Director
- -------------------------------
Walter E. Breipohl Director
- -------------------------------
L. Paul Broadus Director
- -------------------------------
John Michael Daw Director
- -------------------------------
Robert J. Doty Director
- -------------------------------
Jimmie D. Lansford Director
- -------------------------------
Lawrence J. McGrogan Director
<PAGE>
Signature Title
--------- -----
- -------------------------------
I. J. Reinhardt, Jr. Director
- -------------------------------
H. Dean Reynolds Director
- -------------------------------
Scott C. Sullivan Director
- -------------------------------
John A. Shinkle Director
- -------------------------------
John A. Trainor Director
- -------------------------------
Charles J. Grako Executive Vice President and Chief
Financial and Accounting Officer
<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 on Form S-1 filed by the
Company on August 19, 1996 (SEC File
No. 33-9891), as amended
3.2 Bylaws of UnionBancorp, Inc. Incorporated by reference from
Exhibit 3.2 to the Registration
Statement on Form S-1 filed by the
Company on August 19, 1996 (SEC File
No. 33-9891), as amended
4.1 Certificate of Designation, Incorporated by reference from
Preferences and Rights of Series A Exhibit 4.3 to the Registration
Convertible Preferred Stock of Statement on Form S-1 filed by the
UnionBancorp, Inc. Company on August 19, 1996 (SEC File
No. 33-9891), as amended
4.2 Certificate of Designation, Incorporated by reference from
Preferences and Rights of Series B Exhibit 4.4 to the Registration
Preferred Stock of UnionBancorp, Statement on Form S-1 filed by the
Inc. Company on August 19, 1996 (SEC File
No. 33-9891), as amended
4.3 Certificate of Designation, Incorporated by reference from
Preferences and Rights of Series C Exhibit 4.5 to the Registration
Junior Participating Preferred Statement on Form S-1 filed by the
Stock Company on August 19, 1996 (SEC File
No. 33-9891), as amended
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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 on Form S-1 filed by the
Company on August 19, 1996 (SEC File
No. 33-9891), as amended
4.5 Rights Agreement between Incorporated by reference from
UnionBancorp, Inc. and Harris Trust Exhibit 4.7 to the Registration
and Savings Bank, dated August 5, Statement on Form S-1 filed by the
1996 Company on August 19, 1996 (SEC File
No. 33-9891), as amended
10.1 Employment Agreement dated Incorporated by reference from
January 1, 1992, between UnionBank, Exhibit 10.1 to the Registration
UnionBancorp, Inc. and R. Scott Statement on Form S-1 filed by the
Grigsby, as amended on October 1, Company on August 19, 1996 (SEC File
1993, April 4, 1996 and August 5, No. 33-9891), as amended
1996
10.2 Employment Agreement dated March 1, Incorporated by reference from
1994, among UnionBank, Exhibit 10.2 to the Registration
UnionBancorp, Inc. and Wayne L. Statement on Form S-1 filed by the
Bismark, as amended on April 4, Company on August 19, 1996 (SEC File
1996 No. 33-9891), as amended
10.3 Employment Agreement dated Incorporated by reference from
January 1, 1992, between Exhibit 10.3 to the Registration
UnionBancorp, Inc. and Charles J. Statement on Form S-1 filed by the
Grako, as amended on October 1, Company on August 19, 1996 (SEC File
1993, April 4, 1996 and August 5, No. 33-9891), as amended
1996
10.4 Employment Agreement dated Incorporated by reference from
January 1, 1992, by and among Exhibit 10.4 to the Registration
UnionBank, UnionBancorp, Inc. and Statement on Form S-1 filed by the
Everett J. Solon, as amended on Company on August 19, 1996 (SEC File
October 1, 1993, April 11, 1996 and No. 33-9891), as amended
August 5, 1996
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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 on Form S-1 filed by the
Company on August 19, 1996 (SEC File
No. 33-9891), as amended
10.6 Employment Agreement dated March 4, Incorporated by reference from
1996, between UnionBank, Exhibit 10.6 to the Registration
UnionBancorp, Inc. and Jimmie D. Statement on Form S-1 filed by the
Lansford, as amended on April 4, Company on August 19, 1996 (SEC File
1996 No. 33-9891), as amended
10.7 Standstill Agreements dated August Incorporated by reference from
6, 1996, between UnionBancorp, Inc. Exhibit 10.9 to the Registration
and each of Wayne W. Whalen and Statement on Form S-1 filed by the
Dennis J. McDonnell Company on August 19, 1996 (SEC File
No. 33-9891), as amended
10.8 Registration Agreement dated August Incorporated by reference from
6, 1996, between UnionBancorp, Inc. Exhibit 10.10 to the Registration
and each of Wayne W. Whalen and Statement on Form S-1 filed by the
Dennis J. McDonnell Company on August 19, 1996 (SEC File
No. 33-9891), as amended
10.9 Loan Agreement between Incorporated by reference from
UnionBancorp, Inc. and LaSalle Exhibit 10.11 to the Registration
National Bank dated August 2, 1996 Statement on Form S-1 filed by the
Company on August 19, 1996 (SEC File
No. 33-9891), as amended
10.10 UnionBancorp, Inc. Employee Stock Incorporated by reference from
Ownership Plan Exhibit 10.12 to the Registration
Statement on Form S-1 filed by the
Company on August 19, 1996 (SEC File
No. 33-9891), as amended
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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 on Form S-1 filed by the
Company on August 19, 1996 (SEC File
No. 33-9891), as amended
13.1 1997 Annual Report to Stockholders *
(as incorporated by reference into
this Form 10-K)
21.1 Subsidiaries of UnionBancorp, Inc. *
23.1 Consent of Crowe, Chizek and *
Company LLP
23.2 Consent of McGladrey & Pullen, LLP *
27.1 Financial Data Schedule *
99.1 1998 Proxy Statement (as Incorporated by reference from the
incorporated by reference into this Schedule 14A filed by the Company on
Form 10-K) March 16, 1998 (SEC File No. 0-
28846)
</TABLE>
<PAGE>
UNIONBANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION> Years Ended December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ----------- ----------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Interest income $ 46,039 $ 31,037 $ 21,368 $ 18,627 $ 18,604
Interest expense 24,435 17,003 11,249 8,706 8,798
---------- ---------- ---------- ---------- ----------
Net interest income 21,604 14,034 10,119 9,921 9,806
Provision for loan losses 1,079 1,178 684 660 1,268
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 20,525 12,856 9,435 9,261 8,538
Noninterest income 5,182 3,222 2,570 2,283 2,512
Noninterest expense 18,764 12,248 8,771 8,247 7,841
---------- ---------- ---------- ---------- ----------
Net income before income taxes and minority interest 6,943 3,830 3,234 3,297 3,209
Minority interest 73 27 - - -
Provision for income taxes 2,105 969 881 703 747
---------- ---------- ---------- ---------- ----------
Net income $ 4,765 $ 2,834 $ 2,353 $ 2,594 $ 2,462
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income on common stock $ 4,506 $ 2,729 $ 2,353 $ 2,594 $ 2,462
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER SHARE DATA (1)
Basic earnings per common shares (2) $ 1.090 $ 1.000 $ 1.100 $ 1.220 $ 1.150
Diluted earnings per common shares (2) $ 1.080 $ 0.990 $ 1.090 $ 1.210 $ 1.150
Cash dividends on common stock 0.175 0.140 0.130 0.120 0.090
Dividend payout ratio for common stock 12.830% 11.580% 12.060% 9.570% 7.780%
Year end book value per common share $ 12.350 $ 11.200 $ 11.010 $ 9.210 $ 8.920
Basic weighted average common shares outstanding (2) 4,125,902 2,730,600 2,131,737 2,131,737 2,132,760
Diluted weighted average common shares outstanding (2) 4,167,764 2,756,806 2,165,428 2,150,073 2,132,760
Period end common shares outstanding 4,135,830 4,114,801 2,131,737 2,131,737 2,132,760
BALANCE SHEET DATA
Investments and federal funds sold $ 202,142 $ 233,822 $ 95,182 $ 86,460 $ 95,098
Total loans 370,985 346,496 180,819 161,134 148,371
Allowance for loan losses 3,188 3,068 2,014 1,704 1,787
Total assets 625,460 642,024 303,533 272,038 266,666
Total deposits 527,747 543,744 261,727 232,334 237,455
Stockholders' equity 51,581 46,583 23,475 19,629 19,026
EARNINGS PERFORMANCE DATA
Return on average total assets 0.77% 0.66% 0.83% 0.98% 0.97%
Return on average stockholders' equity 9.78 9.32 10.83 13.29 13.88
Return on average total assets, including mandatory
redeemable preferred stock .77 .66 N/A N/A N/A
Return on average equity, including mandatory
redeemable preferred stock 9.61 9.21 N/A N/A N/A
Net interest margin ratio 3.95 3.72 4.12 4.38 4.46
Efficiency ratio (3) 65.29 66.70 68.35 66.17 65.81
ASSET QUALITY RATIOS
Nonperforming assets to total assets 0.49% 0.44% 0.95% 0.87% 1.64%
Nonperforming loans to total loans 0.74 0.65 1.22 0.90 2.06
Net loan charge-offs to average loans 0.27 0.58 0.22 0.49 0.71
Allowance for loan losses to total loans 0.86 0.89 1.11 1.06 1.20
Allowance for loan losses to non-performing loans 116.95 135.75 90.93 117.44 58.61
CAPITAL RATIOS
Average equity to average assets 8.00% 7.14% 7.67% 7.38% 6.98%
Total capital to risk adjusted assets 11.86 10.87 12.35 12.28 10.97
Tier 1 leverage ratio 6.76 7.76 7.95 7.68 7.00
</TABLE>
- ---------------------------------------
(1) Restated to reflect the three-for-one stock split which took effect May 20,
1996.
(2) Restated in accordance with Statement of Financial Accounting Standards No.
128 which took effect December 31, 1997.
(3) Calculated as noninterest expense less amorization of intagibles and
expenses related to other real estate owned divided by the sum of net
interest income before provisions for loan losses and total noninterest
income excluding securities gain and losses.
1.
<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, 1997. This discussion should be read in conjunction with "Selected
Consolidated Financial Data", the consolidated financial statements of the
Company, and the accompanying notes thereto.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This report, including the Letter to the Stockholders, contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1993 as amended and Section 21E of the Securites Act of 1934 as amended.
The Company intends such forward- looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995 and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are generally identified by the use of words
"believe," "expect," "intend," "anticipate," "estimate," "project," or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse affect on the operations and future prospects of the Company
and the subsidiaries include, but are not limited to, changes in: interest
rates; general economic conditions; legislative/regulatory changes; monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board; the quality and composition of the loan or
securities portfolios; demand for loan products; deposit flows; competition;
demand for financial services in the Company's market areas; and accounting
principles, policies; and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company
and its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
GENERAL
The Company derives substantially all of its revenues and income from the
operations of its banking subsidiaries. The Banks provide a full range of
commercial and consumer banking services to businesses and individuals,
primarily in north central and west central Illinois. As of December 31, 1997,
the Company had total assets of $625,460,000, net loans of $367,797,000, total
deposits of $527,747,000, and total stockholders' equity $51,581,000. Total
assets have decreased by 2.58% from year-end 1996 or a $16,564,000 reduction.
This is the result of the Company's continuing initiative to restructure the
balance sheet while expanding the net interest margin.
During the third quarter of 1996, the Company more than doubled its total
assets, primarily through the acquisitions of Prairie Bancorp, Inc. ("Prairie")
and Country Bancshares, Inc. ("Country"). The Prairie and Country acquisitions
(the "Acquisitions") increased the organization to nine bank subsidiaries with
27 locations in 13 Illinois counties. The Acquisitions were funded in part by a
public offering in October of 1996 of 1,265,000 shares of Common
2.
<PAGE>
Stock. Net proceeds of the offering to the Company were $12,436,000. In
addition, in conjunction with the acquisitions, the Company issued 2,762.24 of
the 2,765 authorized shares of Series A Convertible Preferred Stock, which were
valued at $500,000. The no par value stock earns cumulative dividends of $75
per share per year payable in four equal quarterly payments. Also, the Company
issued 857 of the 1,092 authorized shares of Series B Preferred Stock, which
were valued at $859,000. The no par value stock earns cumulative dividends of
$60 per share per year, payable in four equal quarterly payments.
During the fourth quarter of 1997, in conjunction with the reorganization and
simplification of the corporate structure, the Company successfully consummated
the merger of some of the affiliate banks into regional banking centers. This
resulted in UnionBank, UnionBank/Central and UnionBank/West being formed, and
reducing the organization from nine bank subsidiaries to five bank subsidiaries.
RESULTS OF OPERATIONS
NET INCOME
Net income was $4,765,000 ($1.08 per "diluted" common share) for the year ended
December 31, 1997, compared with net income of $2,834,000 ($.99 per "diluted"
common share) for the year ended December 31, 1996, an increase of $1,931,000 or
68.1%. The increase in earnings per share in 1997 compared with 1996 was
primarily attributed to a full year of earnings from the banks acquired as part
of the Acquisitions, which were consummated during the third quarter of 1996,
and internal growth in the Company's loan portfolio.
Net income was $2,834,000 ($.99 per common share "diluted" basis) for the year
ended December 31, 1996, compared with net income of $2,353,000 ($1.09 per
common share "diluted" basis) for the year ended December 31, 1995, an increase
of $481,000 or 20.4%. The increase in earnings in 1996 compared with 1995 was
primarily attributed to three months of earnings from the banks acquired as part
of the Acquisitions, which were consummated during the third quarter of 1996,
and internal growth in the Company's loan and deposit portfolio.
NET INTEREST INCOME
Net interest income is the difference between income earned on interest-earning
assets and the interest expense incurred on interest-bearing liabilities. The
net yield on total interest-earning assets, also referred to as interest rate
margin or net interest margin, represents net interest income divided by average
interest-earning assets. The Company's principal interest-earning assets are
loans, securities, and federal funds sold.
Net interest income was $21,604,000 for 1997, an increase of $7,570,000 or
53.9%, compared with net interest income of $14,034,000 for 1996. The Company's
average total interest-earning assets increased from $399,328,000 for 1996 to
$571,626,000 for 1997 representing a 43.2% increase resulting primarily from the
growth attributed to the Acquisitions during 1996. The net interest margin (tax
equivalent basis) increased to 3.95% at December 31, 1997 from 3.72% at December
31, 1996. The interest rates on average earning assets (tax equivalent basis)
increased to 8.22% in 1997 from 7.98% in 1996, while rates on average
interest-bearing liabilities remained relatively unchanged by increasing to
4.83% in 1997 from 4.80% in 1996. The increase in the
3.
<PAGE>
yield on average earning assets was primarily driven by a change in the asset
mix of the earning assets by shifting the emphasis toward loans which have a
higher yield than securities. The nominal increase in the average rates paid on
interest-bearing liabilities primarily resulted from increases in the interest
rates on time deposits reflecting pressures in the marketplace for deposits.
Net interest income was $14,034,000 for 1996, an increase of $3,915,000 or
38.7%, compared with net interest income of $10,119,000 for 1995. The Company's
average total interest-earning assets increased from $262,879,000 for 1995 to
$399,328,000 for 1996, representing a 51.9% increase resulting primarily from
the growth attributed to the Acquisitions during 1996. The net interest margin
(tax equivalent basis) declined to 3.72% at December 31, 1996 from 4.12% at
December 31, 1995. The interest rates on average earning assets (tax equivalent
basis) declined to 7.98% in 1996 from 8.46% in 1995, while rates on average
interest-bearing liabilities decreased to 4.80% in 1996 from 4.90% in 1995.
The decrease in the yield on average earning assets primarily resulted from a
change in the mix of the earning assets resulting from the Acquisitions, which
brought about a higher level of earning assets in lower yielding securities. In
addition, during 1996 there was an overall decrease in market rates of interest.
The nominal decrease in the average rates paid on interest-bearing liabilities
primarily resulted from interest rates on time deposits reflecting the decrease
in market rates of interest.
The following table sets forth for each category of interest-earning assets and
interest-bearing liabilities the average amounts outstanding, the interest
earned or paid on such amounts, and the average rate paid for the years ended
December 31, 1997, 1996, and 1995. The table also sets forth the average rate
earned on all interest-earning assets, the average rate paid on all
interest-bearing liabilities, and the net yield on average interest-earning
assets for the same period.
4.
<PAGE>
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------
1997 1996
---------------------------- ----------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Interest-earning deposits $ 353 $ 28 7.98% $ 66 $ 4 5.92%
Securities (1)
Taxable 173,190 10,838 6.26% 122,653 7,316 5.96%
Non-taxable (2) 32,618 2,566 7.87% 26,994 2,051 7.60%
-------- ------- ----- -------- ------- -----
Total securities (tax equivalent) 205,808 13,404 6.51% 149,647 9,367 6.26%
-------- ------- ----- -------- ------- -----
Federal funds sold 6,845 381 5.56% 5,637 298 5.29%
-------- ------- ----- -------- ------- -----
Loans (3)(4)
Commercial 97,407 9,274 9.52% 72,210 6,793 9.41%
Real estate 216,911 18,693 8.62% 138,721 11,684 8.42%
Installment and other 44,302 4,124 9.31% 33,047 3,062 9.27%
Fees on loans - 1,092 - - 641 -
-------- ------- ----- -------- ------- -----
Net loans (tax equivalent) 358,620 33,183 9.25% 243,978 22,180 9.09%
-------- ------- ----- -------- ------- -----
Total interest-earning assets 571,626 46,996 8.22% 399,328 31,849 7.98%
-------- ------- ----- -------- ------- -----
Noninterest-earning assets
Cash and cash equivalents 17,248 14,430
Premises and equipment, net 14,397 9,261
Other assets 16,245 7,674
------ ------
Total nonearning assets 47,890 31,365
------ ------
Total assets $619,516 $430,693
-------- --------
-------- --------
LIABILITIES
NOW accounts $ 55,883 1,396 2.50% $ 40,755 $ 1,055 2.59%
Money market accounts 31,433 1,028 3.27% 25,333 804 3.17%
Savings deposits 62,316 1,758 2.82% 41,664 1,224 2.94%
Time $100,000 and over 81,612 4,622 5.66% 22,955 1,433 6.24%
Other time deposits 231,766 12,860 5.55% 194,957 10,723 5.50%
Federal funds purchased and
repurchase agreements 20,683 1,171 5.66% 16,388 861 5.25%
Advances from FHLB 8,783 543 6.18% 3,427 213 6.21%
Notes payable 13,247 1,057 7.98% 8,364 690 8.25%
-------- ------- ----- -------- ------- -----
Total interest-bearing liabilities 505,723 24,435 4.83% 353,843 17,003 4.80%
-------- ------- ----- -------- ------- -----
Noninterest-bearing liabilities
Noninterest-bearing deposits 57,623 41,395
Other liabilities 6,596 4,693
-------- --------
Total noninterest-bearing liabilities 64,219 46,088
-------- --------
Stockholders' equity 49,574 30,762
-------- --------
Total liabilities and stockholders' equity $619,516 $430,693
-------- --------
-------- --------
Net interest income (tax equivalent) $22,561 $14,846
------- -------
------- -------
Net interest income (tax equivalent) to
total earning assets 3.95% 3.72%
Interest-bearing liabilities to earning assets 88.47% 89.14%
-------- --------
<CAPTION>
For the Years Ended December 31,
-------------------------------
1995
-------------------------------
Interest
Average Income/ Average
Balance Expense Rate
------- ------- ----
<S> <C> <C> <C>
ASSETS
Interest-earning assets
Interest-earning deposits $ 27 $ 2 5.85%
Securities (1)
Taxable 62,808 3,636 5.79%
Non-taxable (2) 24,463 1,919 7.84%
-------- ------- -----
Total securities (tax equivalent) 87,271 5,555 6.37%
Federal funds sold 2,577 156 6.05%
Loans (3)(4)
Commercial 55,431 5,524 9.97%
Real estate 94,050 8,380 8.91%
Installment and other 23,523 2,103 8.94%
Fees on loans - 362 -
-------- ------- -----
Net loans (tax equivalent) 173,004 16,369 9.57%
-------- ------- -----
Total interest-earning assets 262,879 22,082 8.46%
-------- ------- -----
Noninterest-earning assets
Cash and cash equivalents 10,763
Premises and equipment, net 6,042
Other assets 3,707
--------
Total nonearning assets 20,512
--------
Total assets $283,391
--------
--------
LIABILITIES
NOW accounts $ 31,097 $ 843 2.71%
Money market accounts 19,691 584 2.97%
Savings deposits 23,146 611 2.64%
Time $100,000 and over 12,040 687 5.71%
Other time deposits 129,147 7,534 5.84%
Federal funds purchased and
repurchase agreements 9,825 567 5.77%
Advances from FHLB - - -
Notes payable 4,696 423 9.00%
-------- ------- -----
Total interest-bearing liabilities 229,642 11,249 4.90%
-------- ------- -----
Noninterest-bearing liabilities
Noninterest-bearing deposits 29,950
Other liabilities 2,071
--------
Total noninterest-bearing liabilities 32,021
--------
Stockholders' equity 21,728
--------
Total liabilities and stockholders' equity $283,391
--------
--------
Net interest income (tax equivalent) $10,833
-------
-------
Net interest income (tax equivalent) to
total earning assets 4.12%
Interest-bearing liabilities to earning assets 87.99%
--------
</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.
(3) Overdraft loans are excluded in the average balances.
5.
<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
"volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as "rate change." The following table reflects the
changes in net interest income stemming from changes in interest rates and from
asset and liability volume, including mix. The change in interest attributable
to both rate and volume has been allocated to the changes in the rate and the
volume on a pro rata basis.
RATE/VOLUME ANALYSIS OF
NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------------------
1997 Compared to 1996 1996 Compared to 1995
------------------------------------- --------------------------------------
Change Due to Change Due to
------------------------------------- --------------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest-earning deposits $ 23 $ 1 $ 24 $ 2 $ - $ 2
Investment securities:
Taxable 3,147 375 3,522 3,567 113 3,680
Non-taxable 440 75 515 194 (62) 132
Federal funds sold 67 16 83 164 (22) 142
Loans 10,829 174 11,003 6,492 (681) 5,811
------ ------- --------- -------- -------- --------
Total interest income 14,506 641 15,147 10,419 (652) 9,767
------ ------- --------- -------- -------- --------
INTEREST EXPENSE:
NOW accounts 379 (38) 341 251 (39) 212
Money market accounts 199 25 224 177 43 220
Savings deposits 584 (50) 534 538 75 613
Time, $100,000 and over 3,334 (145) 3,189 677 69 746
Other time 2,042 95 2,137 3,632 (443) 3,189
Federal funds purchased and
repurchase agreements 239 71 310 348 (54) 294
Advances from FHLB 331 (1) 330 - 213 213
Notes payable 391 (24) 367 340 (73) 267
------ ------- --------- -------- -------- --------
Total interest expense 7,499 (67) 7,432 5,963 (209) 5,754
------ ------- --------- -------- -------- --------
Net interest margin $ 7,007 $ 708 $ 7,715 $ 4,456 $ (443) $ 4,013
------ ------- --------- -------- -------- --------
------ ------- --------- -------- -------- --------
</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 impaired and other nonperforming loans, historical loss
experience, results of examinations by regulatory agencies, an internal asset
quality review process, the market value of collateral, the estimate of
discounted cash flows, the strength and availability of guaranties,
concentrations of credits, and other factors.
6.
<PAGE>
The 1997 provision for loan losses was $1,079,000 compared with $1,178,000 in
1996. Net charge-offs in 1997 were approximately $959,000. The provision for
loan losses of $1,079,000 was made to bring the allowance for loan losses to the
level management deemed adequate as of December 31, 1997.
The 1996 provision for loan losses was $1,178,000 compared with $684,000 in
1995. Net charge-offs in 1996 were approximately $1,416,000. Approximately
$690,000 of the net charge-offs related to a single borrower which management
had previously identified as a problem credit. The provision for loan losses of
$1,178,000 was made to bring the allowance for loan losses to the level
management deemed adequate as of December 31, 1996.
NONINTEREST INCOME
The following table shows the Company's noninterest income:
NONINTEREST INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service charges $ 1,854 $ 1,286 $ 952
Merchant fee income 670 524 418
Trust income 516 393 330
Mortgage banking operations 751 425 425
Securities gains, net 193 20 98
Other noninterest income 1,198 574 347
-------- -------- --------
Total noninterest income $ 5,182 $ 3,222 $ 2,570
-------- -------- --------
-------- -------- --------
</TABLE>
Noninterest income is generated primarily from fees associated with noninterest
and interest-bearing deposit accounts. Noninterest income for 1997 was
$5,182,000, an increase of $1,960,000 or 60.8% compared with noninterest income
of $3,222,000 for 1996. Noninterest income for 1996 was $3,222,000, an increase
of $652,000 or 25.4% compared with $2,570,000 for 1995. These increases were
primarily from internal deposit growth including the purchase of the deposits of
additional bank subsidiaries during the third quarter of 1996, and the increased
number and balance of noninterest and interest-bearing accounts. Specifically,
service charges increased on demand deposit accounts, the largest component of
noninterest-bearing deposit accounts, and charges grew for items such as
insufficient funds and overdrafts, primarily on transactional deposit products
such as demand, NOW, and money market accounts. The increase in service charge
income to $1,854,000 for the year ended December 31, 1997, from $1,286,000 for
the year ended December 31, 1996, was related to increases in deposit account
balances and increases in the service charge schedule during 1997. The increase
of $334,000 from 1995 to $1,286,000 in 1996 was related to increases in deposit
account balances and increases in the service charge schedule during 1996.
Merchant fee income is derived from the Company's credit card
7.
<PAGE>
operations and is comprised primarily of merchant fees (65% of total merchant
fee income), interchange fees (19% of total merchant fee income), and annual
fees (4% of total merchant fee income). Total merchant fee income has continued
to increase as the Company adds new merchants to its customer list and as credit
card activity has grown. Other noninterest income is primarily derived from
fee-based banking services such as loan servicing fees and sales of traveler's
checks and money orders.
The Company, through the Banks, provides trust services to its customers by
acting as executor, administrator, trustee, agent, and in various other
fiduciary capacities for client accounts. Total assets under management at
December 31, 1997 and 1996 were approximately $110,641,000 and $106,801,000,
respectively. Trust income, which is predominately comprised of assessed fees
based on the market value of managed client portfolios, increased by $123,000
during 1997 and $63,000 during 1996.
A significant contribution to the Company's noninterest income was also made by
its mortgage banking operations. During 1997, loan sales increased by $4
million due to increased originations. In addition, during 1995, the Company
implemented a program in connection with the SBA which guarantees repayment on
portions of loans if a borrower defaults. Revenues from both of these
operations are a substantial component of noninterest income and include
commissions and fees for third party loan servicing, origination, and other fees
received at closing and realized gains on the sale of loans into the secondary
market.
NONINTEREST EXPENSE
The following table shows the Company's noninterest expense:
NONINTEREST EXPENSE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Salaries and employee benefits $ 9,231 $ 6,469 $ 4,451
Occupancy expense, net 1,532 899 665
Furniture and equipment expenses 1,599 977 584
Supplies and printing 602 395 270
Telephone 472 277 179
Postage 404 298 208
FDIC deposit assessment 63 8 271
Amortization of intangible assets 903 392 120
Other noninterest expense 3,958 2,533 2,023
--------- --------- --------
Total noninterest expense $ 18,764 $ 12,248 $ 8,771
--------- --------- --------
--------- --------- --------
</TABLE>
Noninterest expense was $18,764,000 in 1997; an increase of $6,516,000 or 53.2%
compared with noninterest expense of $12,248,000 for 1996. The $6,516,000
increase in noninterest expense
8.
<PAGE>
during 1997 was reflected in all categories of noninterest expense. The
increases were primarily the result of a full year of incremental costs linked
to the acquired subsidiaries.
Noninterest expense was $12,248,000 in 1996, an increase of $3,477,000 or 39.6%
compared with noninterest expense of $8,771,000 for 1995. The $3,477,000
increase in noninterest expense during 1996 was attributable primarily to an
increase of $2,018,000 in salaries and employee benefits as a result of
acquiring additional subsidiaries; a $272,000 increase in amortization of
intangibles due to the Acquisitions, offset by a reduction in the FDIC
assessment of $263,000; and an increase in other expenses primarily related to
the acquisitions.
Deposits held by the Banks are insured by the Bank Insurance Fund of the Federal
Deposit Insurance Corporation ("FDIC"), and as FDIC-insured institutions, the
Banks are required to pay deposit insurance premium assessments to the FDIC.
The amount an institution pays for FDIC deposit insurance coverage is determined
in accordance with a risk-based assessment system under which each insured
depository institution is placed into one of nine categories and assessed
insurance premiums based upon its level of capital and the results of
supervisory evaluations. Changes in the deposit insurance assessment rate have
significantly reduced the cost of deposit insurance for the Banks during 1996
and 1997 as compared to 1995
INCOME TAXES
The Company recorded income tax expense of $2,105,000, $969,000, and $881,000
for the years ended December 31, 1997, 1996, and 1995, respectively, and
effective tax rates were 30.6%, 25.5%, and 27.2%, respectively, for such
periods. The Company's effective tax rate is lower than statutory rates because
the Company derives interest income from municipal securities, which are exempt
from federal tax.
PREFERRED STOCK DIVIDENDS
The Company paid $259,000 of preferred stock dividends in 1997 as compared to
$105,000 paid in 1996. The reason for this increase was the preferred stock
being outstanding for the entire year, as compared to only a portion of 1996.
INTEREST RATE SENSITIVITY MANAGEMENT
The business of the Company and the composition of its balance sheet consist of
investments in interest-earning assets (primarily loans and securities) which
are primarily funded by interest-bearing liabilities (deposits and borrowings).
Other than loans held for sale, all of the financial instruments of the Company
are for other than trading purposes. Such financial instruments have varying
levels of sensitivity to changes in market rates of interest. The operating
income and net income of the Banks depend, to a substantial extent, on "rate
differentials," i.e., the differences between the income the Banks receive from
loans, securities, and other earning assets and the interest expense they pay to
obtain deposits and other liabilities. These rates are highly sensitive to many
factors that are beyond the control of the Banks, including general economic
conditions and the policies of various governmental and regulatory authorities.
The objective of monitoring and managing the interest rate risk position of the
balance sheet is to contribute to earnings and to minimize fluctuations in net
interest income. The potential for
9.
<PAGE>
earnings to be affected by changes in interest rates is inherent in a financial
institution. Interest rate sensitivity is the relationship between changes in
market interest rates and changes in net interest income due to the repricing
characteristics of assets and liabilities. An asset sensitive position in a
given period will result in more assets being subject to repricing; therefore,
as interest rates rise, such a position will have a positive effect on net
interest income. Conversely, in a liability sensitive position, where
liabilities reprice more quickly than assets in a given period, a rise in
interest rates will have an adverse effect on net interest income. The
Company's exposure to interest rate risk is managed primarily through the
Company's strategy of selecting the types and terms of interest-earning assets
and interest-bearing liabilities which generate favorable earnings, while
limiting the potential negative effects of changes in market interest rates.
Since the Company's primary source of interest-bearing liabilities is customer
deposits, the Company's ability to manage the types and terms of such deposits
may be somewhat limited by customer maturity preferences in the market areas in
which the Company operates. The rates, terms, and interest rate indices of the
Company's interest-earning assets result primarily from the Company's strategy
of investing in loans and securities (a substantial portion of which have
adjustable rate terms) which permit the Company to limit its exposure to
interest rate risk, together with credit risk, while at the same time achieving
a positive interest rate spread.
One method of analyzing interest rate risk is to evaluate the balance of the
Company's interest rate sensitivity position. A mix of assets and liabilities
that are roughly equal in volume, term, and repricing represents a matched
interest rate sensitivity position. Any excess of assets or liabilities in a
particular period results in an interest rate sensitivity gap. The following
table presents the interest rate sensitivity for the Company's interest-earning
assets and interest-bearing liabilities at December 31, 1997. The table was
prepared assuming loans prepay at varying degrees, based on type, maturity, and
rate. All the NOW accounts, money market accounts, and savings accounts reprice
in three months or less, and certificates of deposit have been included based on
contractual maturity.
10.
<PAGE>
INTEREST RATE-SENSITIVE ASSETS AND LIABILITIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------
3 months 3 months to 6 months 1 year to Over
or less 6 months to 1 year 5 years 5 years Total
------- -------- --------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Federal funds sold $ 1,404 $ - $ - $ - $ - $ 1,404
Securities 89,581 14,863 28,439 42,145 25,710 200,738
Loans 104,544 38,595 54,823 138,476 34,547 370,985
--------- --------- --------- --------- -------- ---------
Total interest-earning assets $ 195,529 $ 53,458 $ 83,262 $ 180,621 $ 60,257 $ 573,127
--------- --------- --------- --------- -------- ---------
--------- --------- --------- --------- -------- ---------
INTEREST-BEARING LIABILITIES
NOW accounts $ 56,138 $ - $ - $ - $ - $ 56,138
Money market accounts 33,160 - - - - 33,160
Savings 58,797 - - - - 58,797
Time, $100,000 and over 30,327 13,680 18,738 17,394 - 80,139
Other time 50,951 50,349 82,553 53,518 46 237,417
--------- --------- --------- --------- -------- ---------
Total interest-bearing deposits 229,373 64,029 101,291 70,912 46 465,651
Federal funds and repurchase agreements 4,642 3,940 1,661 1,518 - 11,761
Advances from FHLB - 300 10,660 2,350 3,145 16,455
Notes payable 10,000 - - 261 - 10,261
--------- --------- --------- --------- -------- ---------
Total interest-bearing liabilities $ 244,015 $ 68,269 $ 113,612 $ 75,041 $ 3,191 $ 504,128
--------- --------- --------- --------- -------- ---------
--------- --------- --------- --------- -------- ---------
Period interest sensitivity gap $ (48,486) $ (14,811) $ (30,350) $ 105,580 $ 57,066 $ 68,999
Cumulative interest sensitivity gap (48,486) (63,297) (93,647) 11,933 68,999
Cumulative gap as a percent of total assets (7.75)% (10.12)% (14.97)% 1.91% 11.03%
Cumulative interest-sensitive assets as a
percent of cumulative interest-sensitive
liabilities 80.13% 79.73% 78.01% 102.38% 113.69%
</TABLE>
The Company undertakes this interest rate-sensitivity analysis to monitor the
potential risk to future earnings from the impact of possible future changes in
interest rates on currently existing net assets or net liability positions.
However, this type of analysis is as of a point-in-time, when in fact, the
Company's interest rate sensitivity can quickly change as market conditions,
customer needs, and management strategies change. Thus, interest rate changes
do not affect all categories of assets and liabilities equally or at the same
time. Pursuant to its investment policy, the Company does not purchase
off-balance-sheet derivative financial instruments.
The preceding table does not necessarily indicate the impact of general interest
rate movements on the Company's net interest income because the repricing of
certain assets and liabilities is discretionary and is subject to competitive
and other pressures. As of December 31, 1997, the Banks held approximately
$22,695,000 (at amortized cost) in mortgage-backed securities. Although the
mortgage-backed securities have various stated maturities, it is not uncommon
for mortgage-backed securities to prepay outstanding principal prior to stated
maturities. As a result, assets and liabilities indicated as repricing within
the same period may, in fact, reprice at different times and at different rate
levels.
11.
<PAGE>
In addition to the aforementioned interest rate-sensitivity analysis, the
Company also measures its overall interest rate sensitivity through a net
interest income analysis. The net interest income analysis measures the change
in net income in the event of hypothetical changes in interest rates. This
analysis assesses the risk of changes in net interest in the event of sudden and
sustained 1.0% to 2.0% increases and decreases in market interest rates. The
assumption in this table are that assets will reprice faster than liabilities
due to market constraints and management's assessment of their assets and
liabilities. The table below presents the Company's projected changes in net
interest income for the various rate shock levels at December 31, 1997.
<TABLE>
<CAPTION>
Net Interest Income
-----------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
+200 bp $ 19,362 $ 412 2.17%
+100 bp 19,178 228 1.20
Base 18,950 - -
-100 bp 18,501 (449) (2.37)
-200 bp 17,254 (1,696) (8.95)
</TABLE>
Based upon the Company's model at December 31, 1997, the effect of an immediate
200 basis point increase in interest rates would increase the Company's net
interest income by 2.17% or approximately $412,000. The effect of an immediate
200 basis point decrease in rates would reduce the Company's net income by 8.95%
or approximately $1,696.
12.
<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, to the addition of new loan products, and to the
Acquisitions. The growth in the loan portfolio in 1997 is primarily due to
management's restructuring of the balance sheet to increase the net interest
margin. The following table describes the composition of loans by major
categories outstanding.
<TABLE>
<CAPTION>
LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
Aggregate Principal Amount
----------------------------------------------------------------------
December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commercial $ 62,936 $ 60,152 $ 38,298 $ 36,802 $ 37,129
Agricultural 39,431 43,500 17,079 14,391 14,702
Real estate:
Commercial mortgages 72,730 63,254 44,393 36,727 32,744
Construction 14,393 13,549 7,437 5,047 3,018
Agricultural 27,955 29,185 10,229 12,169 12,606
1-4 family mortgages 109,411 91,697 36,637 33,623 27,505
Installment 41,210 42,320 24,072 19,765 18,262
Other 3,076 3,354 2,681 2,641 2,511
---------- ---------- ---------- ---------- ----------
371,142 347,011 180,826 161,165 148,477
Unearned income (157) (515) (7) (31) (106)
---------- ---------- ---------- ---------- ----------
Total loans 370,985 346,496 180,819 161,134 148,371
Allowance for loan losses (3,188) (3,068) (2,014) (1,704) (1,787)
---------- ---------- ---------- ---------- ----------
Loans, net $ 367,797 $ 343,428 $ 178,805 $ 159,430 $ 146,584
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
<CAPTION>
Percentage of Total Loan Portfolio
----------------------------------------------------------------------
Commercial 16.96% 17.33% 21.18% 22.84% 25.01%
Agricultural 10.62 12.54 9.45 8.93 9.90
Real estate:
Commercial mortgages 19.60 18.23 24.55 22.79 22.05
Construction 3.88 3.90 4.11 3.13 2.03
Agricultural 7.53 8.41 5.66 7.55 8.49
1-4 family mortgages 29.48 26.42 20.26 20.86 18.53
Installment 11.10 12.20 13.31 12.26 12.30
Other loans 0.83 0.97 1.48 1.64 1.69
---------- ---------- ---------- ---------- ----------
Gross loans 100.00% 100.00% 100.00% 100.00% 100.00%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
13.
<PAGE>
As of December 31, 1997 and 1996, commitments of the Banks under standby letters
of credit and unused lines of credit totaled approximately $72,980,000 and
$59,854,000, respectively.
Stated loan maturities (including rate loans reset to market interest rates) of
the total loan portfolio, net of unearned income, at December 31, 1997 were as
follows:
STATED LOAN MATURITIES (1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Within One One Year to After Five
Year Five Years Years Total
---- ---------- ----- -----
<S> <C> <C> <C> <C>
Commercial $ 35,779 $ 20,764 $ 6,393 $ 62,936
Agricultural 28,796 9,899 736 39,431
Real estate 57,933 66,232 100,324 224,489
Installment 16,826 26,508 795 44,129
--------- --------- --------- ---------
Total $ 139,334 $ 123,403 $ 108,248 $ 370,985
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ---------------------
(1) Maturities based upon contractual maturity dates
The maturities presented above are based upon contractual maturities. Many of
these loans are made on a short-term basis with the possibility of renewal at
time of maturity. All loans, however, are reviewed on a continuous basis for
creditworthiness.
Rate sensitivities of the total loan portfolio, net of unearned income, at
December 31, 1997 were as follows:
LOAN REPRICING
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Within One One Year to After Five
Year Five Years Years Total
---- ---------- ----- -----
<S> <C> <C> <C> <C>
Fixed rate $ 101,424 $ 81,663 $ 25,503 $ 208,590
Variable rate 96,078 55,569 9,034 160,681
Impaired and nonaccrual 460 1,244 10 1,714
--------- --------- --------- ---------
Total $ 197,962 $ 138,476 $ 34,547 $ 370,985
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
14.
<PAGE>
NONPERFORMING ASSETS
The Company's financial statements are prepared on the accrual basis of
accounting, including the recognition of interest income on its loan portfolio,
unless a loan is placed on nonaccrual status. Loans are placed on nonaccrual
status when there are serious doubts regarding the collectibility of all
principal and interest due under the terms of the loans. Amounts received on
nonaccrual loans generally are applied first to principal and then to interest
after all principal has been collected. It is the policy of the Company not to
renegotiate the terms of a loan because of a delinquent status. Rather, a loan
is generally transferred to nonaccrual status if it is not in the process of
collection and is delinquent in payment of either principal or interest beyond
90 days. Loans which are 90 days delinquent but are well secured and in the
process of collection are not included in nonperforming assets
The Company defines impaired loans to include all commercial loans and mortgage
loans secured by commercial properties or five-plus family residences that are
in nonaccrual status or restructured after January 1, 1995.
Other nonperforming assets consist of real estate acquired through loan
foreclosures or other workout situations and other assets acquired through
repossessions. The following table summarizes nonperforming assets by category.
NONPERFORMING ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nonaccrual and impaired loans not
accruing $ 1,714 $ 1,774 $ 1,127 $ 891 $ 1,671
Impaired and other loans 90 days past
due and still accruing interest 1,013 486 1,088 560 1,378
-------- -------- -------- -------- --------
Total nonperforming loans 2,727 2,260 2,215 1,451 3,049
Other real estate owned 215 363 441 672 1,096
Other nonperforming assets (1) 100 192 240 240 240
-------- -------- -------- -------- --------
Total nonperforming assets $ 3,042 $ 2,815 $ 2,896 $ 2,363 $ 4,385
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Nonperforming loans to total loans 0.74% 0.65% 1.22% 0.90% 2.06%
Nonperforming assets to total loans 0.82 0.81 1.60 1.47 2.96
Nonperforming assets to total assets 0.49 0.44 0.95 0.87 1.64
</TABLE>
- ------------------------
(1) Represents a single municipal security in default status.
The classification of a loan as impaired or nonaccrual does not necessarily
indicate that the principal is uncollectible, in whole or in part. The Banks
make a determination as to
15.
<PAGE>
collectibility on a case-by-case basis. The Banks consider both the adequacy of
the collateral and the other resources of the borrower in determining the steps
to be taken to collect impaired or nonaccrual loans. The final determination as
to the steps taken is made based upon the specific facts of each situation.
Alternatives that are typically considered to collect impaired or nonaccrual
loans are foreclosure, collection under guarantees, loan restructuring, or
judicial collection actions.
Each of the Company's loans is assigned a rating based upon an internally
developed grading system. A separate credit administration department also
reviews grade assignments on an ongoing basis. Management continuously monitors
nonperforming, impaired, and past due loans to prevent further deterioration of
these loans. Management is not aware of any material loans classified for
regulatory purposes as loss, doubtful, substandard, or special mention that have
been excluded from classification under nonperforming assets or impaired loans.
Management further believes that credits classified as nonperforming assets or
impaired loans include any material loans as to which any doubts exist as to
their collectibility in accordance with the contractual terms of the loan
agreement.
During 1997, the Company implemented a loan review function which is separate
from the lending function and is responsible for the review of new and existing
loans. Potential problem credits are monitored by the loan review function and
are submitted for review to the loan committee and audit committee members.
The Company adopted Statements of Financial Accounting Standards No. 114 and No.
118 for impaired loans effective January 1, 1995. Under these standards, the
Company defined loans that will be individually evaluated for impairment to
include commercial loans and mortgages secured by commercial properties or
five-plus family residences. All other smaller balance homogeneous loans are
evaluated for impairment in total.
The following table sets forth a summary of other real estate owned and other
collateral acquired at December 31, 1997:
OTHER REAL ESTATE OWNED
<TABLE>
<CAPTION>
Number Net Book
of Carrying
Parcels Value
------- --------
<S> <C> <C>
Developed property 2 $ 205
Vacant land or unsold lots 1 10
------- --------
Total real estate 3 $ 215
------- --------
------- --------
</TABLE>
ALLOWANCE FOR LOAN LOSSES
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions; the type of loan being made; the creditworthiness of the
borrower over the term of the loan; and in the case of a
16.
<PAGE>
collaterlized loan, the quality of the collateral for such loan. The allowance
for loan losses represents the Company's estimate of the allowance necessary to
provide for losses incurred in the loan portfolio. In making this
determination, the Company analyzes the ultimate collectibility of the loans in
its portfolio, incorporating feedback provided by internal loan staff, the loan
review function and information provided by examinations performed by regulatory
agencies. The Company makes an ongoing evaluation as to the adequacy of the
allowance for loan losses. To establish the appropriate level of the allowance,
a sample of loans (including impaired and nonperforming loans) are reviewed and
classified as to potential loss exposure. Specific allowances are then
established for those loans with identified loss exposure (based on discounted
collateral value and cash flows), and an additional allowance is maintained
based upon the size, quality, and concentration characteristics of the remaining
loan portfolio using both historical quantitative trends and the Company's
evaluation of qualitative factors including future economic and industry
outlooks. Commitments to extend credit and standby letters of credit are
reviewed to determine if credit risk exists. The determination by the Company
of the appropriate level of its allowance for loan losses was $3,188,000 at
December 31, 1997.
The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. These estimates are reviewed monthly, and as
adjustments, either positive or negative, become necessary, a corresponding
increase or decrease is made in the provision for loan losses. The following
table presents a detailed analysis of the Company's allowance for loan losses.
17.
<PAGE>
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 3,068 $ 2,014 $ 1,704 $ 1,787 $ 1,586
Charge-offs:
Commercial 262 967 114 413 577
Real estate mortgages 386 181 173 371 445
Installment and other loans 559 366 250 240 257
--------- --------- --------- --------- ---------
Total charge-offs 1,207 1,514 537 1,024 1,279
--------- --------- --------- --------- ---------
Recoveries:
Commercial 47 41 70 142 144
Real estate mortgages 88 - 56 83 2
Installment and other loans 113 57 37 56 66
--------- --------- --------- --------- ---------
Total recoveries 248 98 163 281 212
--------- --------- --------- --------- ---------
Net charge-offs 959 1,416 374 743 1,067
--------- --------- --------- --------- ---------
Provision for loan losses 1,079 1,178 684 660 1,268
Allowance associated with the
Acquisitions - 1,292 - - -
--------- --------- --------- --------- ---------
Ending balance $ 3,188 $ 3,068 $ 2,014 $ 1,704 $ 1,787
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Period end total loans, net of
unearned interest $ 370,985 $ 346,496 $ 180,819 $ 161,134 $ 148,371
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Average loans $ 358,620 $ 243,978 $ 173,004 $ 152,186 $ 150,455
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of net charge-offs to
average loans 0.27% 0.58% 0.22% 0.49% 0.71%
Ratio of provision for loan losses
to average loans 0.30 0.48 0.40 0.43 0.84
Ratio of allowance for loan losses
to ending total loans 0.86 0.89 1.11 1.06 1.20
Ratio of allowance for loan losses
to total nonperforming loans 116.91 135.75 90.93 117.44 58.61
Ratio of allowance at end of period
to average loans 0.89 1.26 1.16 1.12 1.19
</TABLE>
18.
<PAGE>
The following table sets forth an allocation of the allowance for loan losses
among the various loan categories.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
Loan Loan Loan Loan Loan
Category Category Category Category Category
to Gross to Gross to Gross to Gross To Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 962 27.58% $ 776 29.87% $ 800 30.62% 327 31.79% $ 336 34.91%
Real estate 1,052 60.49 758 56.97 388 54.59 325 54.34 288 51.10
Installment and
other loans 482 11.93 517 13.16 235 14.79 194 13.90 173 13.99
Unallocated 692 - 1,017 - 591 - 858 - 990 -
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 3,188 100.00% $ 3,068 100.00% $ 2,014 100.00% $ 1,704 100.00% $ 1,787 100.00%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
SECURITIES ACTIVITIES
The Company's securities portfolio, which represented 35.2% of the Company's
earning asset base as of December 31, 1997, is managed to minimize interest rate
risk, maintain sufficient liquidity, and maximize return. Investment securities
which are classified as held-to-maturity are purchased with the intention to
hold them to maturity. Securities classified as held-to-maturity are carried at
historical cost. The Company's financial planning anticipates income streams
based on normal maturity and reinvestment. Securities classified as
available-for-sale are purchased with the intent to provide liquidity and to
increase returns. The securities classified as available-for-sale are carried
at fair value. The Company does not have any securities classified as trading.
Securities held-to-maturity, carried at amortized cost, were $37,170,000 at
December 31, 1997 compared to $35,017,000 at December 31, 1996. The fair value
of securities held-to-maturity were $37,840,000 at December 31, 1997 and
$35,322,000 at December 31, 1996.
Securities available-for-sale, carried at fair value, were $163,568,000 at
December 31, 1997 compared to $188,538,000 at December 31, 1996.
The consolidated securities portfolio include several callable agency
debentures, adjustable rate mortgage pass-throughs, and collateralized mortgage
obligations with implied calls. The exposure of capital to market valuation
adjustments existing at the time of the Prairie acquisition has been reduced by
the reduction in relative size of the portfolio, the shortening of the average
life of the securities by the passage of time, and the sale of floating rate
securities with lower lifetime caps or reset limits. In addition, some of the
callable securities that have been purchased have shorter final maturities which
also reduces the sensitivity of the Economic Value of Equity (EVE) to changes in
the level of interest rates.
19.
<PAGE>
The following tables describe the composition of securities by major category
and maturity.
SECURITIES PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ -----------------------
% 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
States and political subdivisions 37,170 18.52 35,017 15.66 26,660 28.69
Collateralized mortgage
obligations - - - - 9 0.01
Corporate bonds - - - - 240 0.26
--------- ------ --------- ----- -------- -----
Total $ 37,170 18.52% $ 35,017 15.66% $ 29,026 31.24%
--------- ------ --------- ----- -------- -----
--------- ------ --------- ----- -------- -----
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ -----------------------
% of % of % of
AVAILABLE-FOR-SALE Amount Portfolio Amount Portfolio Amount Portfolio
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 19,163 9.55% $ 26,518 11.86% $ 18,279 19.67%
U.S. government agencies
and corporations 59,315 29.54 53,554 23.96 36,987 39.81
U.S. government agency
mortgage backed securities 22,695 11.31 49,454 22.12 6,084 6.55
States and political subdivisions - - - - 913 0.98
Collateralized mortgage
obligations 58,300 29.04 58,820 26.31 106 0.11
Corporate bonds 100 0.05 192 0.09 1,522 1.64
Other securities 3,995 1.99 - - - -
--------- ------ --------- ----- -------- -----
Total $ 163,568 81.48% $ 188,538 84.34% $ 63,891 68.76%
--------- ------ --------- ----- -------- -----
--------- ------ --------- ----- -------- -----
</TABLE>
20.
<PAGE>
The following tables set forth the contractual or estimated maturities and
yields of the securities portfolio as of December 31, 1997. Mortgage backed
and collateralized mortgage obligation securities are included at estimated
maturity.
MATURITY REPRICING SCHEDULE
(DOLLARS IN THOUSANDS)
<TABLE>
<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>
HELD-TO-MATURITY
States and political
Subdivisions (1) $ 5,591 7.65% $15,473 7.47% $14,903 8.22% $1,203 8.60% $37,170
------- ----- ------- ----- ------- ----- ------ ----- -------
------- ----- ------- ----- ------- ----- ------ ----- -------
</TABLE>
<TABLE>
<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 $13,373 5.41% $5,790 6.16% $0 0.00% $0 0.00% $19,163
U.S. government
agencies and
corporations 28,788 6.04 19,537 6.35 10,990 6.73 0 0.00 59,315
U.S. government
agency mortgage
backed securities 18,106 7.01 687 7.50 955 9.14 2,947 8.22 22,695
Collateralized
mortgage obligations 58,048 5.61 252 7.90 - - - - 58,300
Corporate bonds - - 100 - - - - - 100
Equity securities - - - - - - 3,995 - 3,995
-------- ------- ------- ------ --------
Total $118,315 $26,366 $11,945 $6,942 $163,568
-------- ------- ------- ------ --------
-------- ------- ------- ------ --------
</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 $520,633,000 for 1997, representing an
increase of $153,574,000 or 41.8% compared with the average balance of total
deposits for the year ended December 31, 1996. The increases in deposits were
primarily due to the Acquisitions.
21.
<PAGE>
The following table sets forth certain information regarding the Bank's average
deposits.
AVERAGE DEPOSITS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ----------------------------
% Average % Average % Average
Average of Rate Average of Rate Average of Rate
Amount Total Paid Amount Total Paid Amount Total Paid
------ ----- ---- ------ ----- ---- ------ ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
demand deposits $57,623 11.07% -% $41,395 11.28% -% $29,950 12.22% -%
Savings accounts 62,316 11.97 2.82 41,664 11.35 2.94 23,146 9.45 2.64
Interest-bearing
demand deposits 87,316 16.77 2.78 66,088 18.00 2.84 50,788 20.72 2.81
Time, less than
$100,000 231,766 44.51 5.55 194,957 53.12 5.51 129,147 52.70 5.84
Time, $100,000
or more 81,612 15.68 5.66 22,955 6.25 6.24 12,040 4.91 5.71
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits $520,633 100.00% 4.16% $367,059 100.00% 4.16% $245,071 100.00% 4.19%
-------- ------ ---- -------- ------ ---- -------- ------ ----
-------- ------ ---- -------- ------ ---- -------- ------ ----
</TABLE>
As of December 31, 1997, non-brokered time deposits over $100,000 represented
15.2% of total deposits, compared with 13.7% of total deposits as of December
31, 1996. The Banks do not have and do not solicit brokered deposits.
The following table sets forth the remaining maturities for time deposits of
$100,000 or more at December 31, 1997.
TIME DEPOSITS OF $100,000 OR MORE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MATURITY RANGE
<S> <C>
Three months or less $ 30,327
Over three months through six months 13,680
Over six months through twelve months 18,738
Over twelve months 17,394
-----------
Total $ 80,139
-----------
-----------
</TABLE>
22.
<PAGE>
RETURN ON EQUITY AND ASSETS
The following table presents various ratios for the Company.
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Return on average assets 0.77% 0.66% 0.83%
Return on average equity 9.78 9.32 10.83
Average equity to average assets 8.00 7.14 7.67
Dividend payout ratio for common stock 12.83 11.58 12.06
</TABLE>
The increase in the return on average assets and return on average equity ratios
is primarily related to increased profitability caused by the improvement in the
net interest margin. This improvement is reflective of the Company's initiative
to restructure the balance sheet by shifting the earning asset mix toward higher
yielding loans at the subsidiary banks acquired in 1996.
LIQUIDITY
The Company manages its liquidity position with the objective of maintaining
sufficient funds to respond to the needs of depositors and borrowers and to take
advantage of earnings enhancement opportunities. In addition to the normal
inflow of funds from core-deposit growth together with repayments and maturities
of loans and investments, the Company utilizes other short-term funding sources
such as securities sold under agreements to repurchase, overnight funds
purchased from correspondent banks, and the acceptance of short-term deposits
from public entities and Federal Home Loan Bank advances.
The Company monitors and manages its liquidity position on several bases, which
vary depending upon the time period. As the time period is expanded, other data
is factored in, including estimated loan funding requirements, estimated loan
payoffs, investment portfolio maturities or calls, and anticipated depository
buildups or runoffs.
The Company classifies the majority of its investment securities as
available-for-sale, thereby maintaining significant liquidity. The Company's
liquidity position is further enhanced by structuring its loan portfolio
interest payments as monthly and by the significant representation of retail
credit and residential mortgage loans in the Company's loan portfolio, resulting
in a steady stream of loan repayments. In managing its investment portfolio,
the Company provides for staggered maturities so that cash flows are provided as
such investments mature.
23.
<PAGE>
The Company's cash flows are composed of three classifications: cash flows from
operating activities, cash flows from investing activities, and cash flows from
financing activities. Net cash provided by operating activities was $7.8
million for 1997, $5.5 million for 1996, and $3.7 million for 1995. Net cash
provided by investing activities, consisting primarily of loan and investing
funding, was $9.3 million for 1997. For the year ended December 31, 1996, net
cash used in investing activities was $9.6 million. For the year ended December
31, 1995 , net cash used in investing activities was $27.3 million. Net cash
used in financing activities for 1997 was $23.5 million, consisting primarily of
decreases in deposits and securities sold under agreements to repurchase. Net
cash provided by financing activities for 1996 was $17.2 million and was
directly related to the proceeds from issuance of common stock. Net cash
provided by financing activities for 1995 was $26.8 million.
The Bank's investment securities portfolios, including federal funds sold, and
its cash and due from bank deposit balances serve as the primary sources of
liquidity for the Company. At December 31, 1997, 15.9% of the Bank's
interest-bearing liabilities were in the form of time deposits of $100,000 and
over. Substantially all of such large deposits were obtained from the Bank's
market areas and none of such deposits are brokered deposits. Management
believes these deposits to be a stable source of funds. However, if a large
number of these time deposits matured at approximately the same time and were
not renewed, the Banks' liquidity could be adversely affected. Currently, the
maturities of the Banks' large time deposits are spread throughout the year,
with 37.8% maturing in the first quarter of 1998, 17.1% maturing in the second
quarter of 1998, 23.4% maturing in the third and fourth quarter of 1998, and the
remaining 21.7% maturing thereafter. The Banks monitor those maturities in an
effort to minimize any adverse effect on liquidity.
The Company's borrowings included notes payable at December 31, 1997 in the
principal amount of $10,000,000 payable to the Company's principal correspondent
bank. The Company incurred this debt in connection with the Acquisitions and in
the acquisition of Ottawa National Bank in 1991. The note is renewable
annually, requires quarterly interest payments, and is collateralized by the
Company's stock in the Banks. In addition, the Company has a $261,000 mortgage
note payable for a parcel of real estate. Payments on this note are due over 3
years.
The Company's principal source of funds for repayment of the indebtedness is
dividends from the Banks. At December 31, 1997, approximately $7,982,000 was
available for dividends without regulatory approval.
CAPITAL RESOURCES
The Banks are expected to meet a minimum risk-based capital to risk-weighted
assets ratio of 8%, of which at least one-half (or 4%) must be in the form of
Tier 1 (core) capital. The remaining one-half (or 4%) may be in the form of
Tier 1 (core) or Tier 2 (supplementary) capital. The amount of loan loss
allowance that may be included in capital is limited to 1.25% of risk-weighted
asses. The ratio of Tier 1 (core) and the combined amount of Tier 1 (core) and
Tier 2 (supplementary) capital to risk-weighted assets for the Company is 10.68%
and 11.86%, respectively, at December 31,1997. The Banks are currently, and
expect to continue to be, in compliance with these guidelines.
24.
<PAGE>
The Board of Governors of the Federal Reserve Bank ("FRB") has announced a
policy known as the "source of strength doctrine" that requires a bank holding
company to serve as a source of financial and managerial strength for its
subsidiary banks. The FRB has interpreted this requirement to require that a
bank holding company, such as the Company, stand ready to use available
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity. The FRB has stated that it would
generally view a failure to assist a troubled or failing subsidiary bank in
these circumstances as an unsound or unsafe banking practice or a violation of
the FRB's Regulation Y or both, justifying a cease and desist order or other
enforcement action, particularly if appropriate resources are available to the
bank holding company on a reasonable basis.
The following table sets forth an analysis of the Company's capital ratios:
RISK-BASED CAPITAL RATIOS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, Minimum Well
------------------------------------- Capital Capitalized
1997 1996 1995 Ratios Ratios
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 41,180 $ 36,242 $ 22,530
Tier 2 risk-based capital 4,545 4,425 2,014
Total capital 45,725 40,667 24,544
Risk-weighted assets 385,685 374,028 198,731
Capital ratios
Tier 1 risk-based capital 10.68% 9.69% 11.34% 4.00% 6.00%
Tier 2 risk-based capital 11.86 10.87 12.35 8.00 10.00
Leverage ratio 6.64 7.76 7.95 4.00 5.00
</TABLE>
As of December 31, 1997, the Tier 2 risk-based capital was comprised of
$3,188,000 in allowance for loan losses, $857,000 of Mandatory Redeemable Series
B Preferred Stock, and $500,000 of Series A Convertible Preferred Stock. The
Series A Preferred Stock is convertible into common stock, subject to certain
adjustments intended to offset the amount of losses incurred by the Company upon
the post-closing sale of certain securities acquired in conjunction with the
1996 acquisition of Prairie.
ACCOUNTING MATTERS
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
25.
<PAGE>
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 requires that
public business enterprises report financial and descriptive information about
reportable operating segments and report selected information about operating
segments in interim financial reports issued to shareholders. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years is to be
restated.
YEAR 2000 COMPLIANCE
A critical issue facing the financial institution industry is concern over a
computer systems ability to process year-date data beyond the year 1999. Except
in recently introduced Year 2000 compliant programs, computer programmers
consistently have abbreviated dates by eliminating the first two digits of the
year, with the assumption that these two digits would always be 19. Unless
corrected, this situation is expected to cause widespread problems on January 1,
2000, when computer systems may recognize this date as January 1, 1900 and
process data incorrectly or stop processing altogether. This issue could affect
a variety of the Company's systems from its data processing system which records
loan and deposit information to other ancillary systems such as alarms and
locking devices. Management has considered this issue internally and receives
periodic correspondence from its data processor regarding their plans to be Year
2000 compliant. Management does not anticipate that the Company will incur
material operating expenses or be required to invest heavily in computer system
improvements to be Year 2000 compliant. Nevertheless, if not properly
addressed, these issues could result in interruptions in the Company's business
and have a material adverse effect on the Company's results of operations.
The Company has a Year 2000 committee, comprised of members of UnionBancorp,
Inc. which has already taken steps regarding this issue. UnionData (a
subsidiary company), has completed a survey of all core processing systems and
support systems. This survey included contact with each hardware and software
vendor. As of December 31, 1997, all core processing systems were documented as
being year 2000 compliant. Three vendors of non core processing subsystems have
notified UnionBancorp, Inc. that their systems will be upgraded to year 2000
compliance by year end 1998.
IMPACT OF INFLATION, CHANGING PRICES, AND MONETARY POLICIES
The financial statements and related financial data concerning the Company have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary effect of inflation on the
operations of the Company is reflected in increased operating costs. Unlike
most industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, changes in interest
rates have a more significant effect on the performance of a financial
institution than do the effects of changes in the general rate of inflation and
changes in prices. Interest rates do not necessarily move in the same direction
or in the same magnitude as the prices of goods and services. Interest rates
are highly sensitive to many factors which are beyond the control of the
Company, including the influence of domestic and foreign economic conditions and
the monetary and fiscal policies of the United States government and federal
agencies, particularly the FRB.
26.
<PAGE>
[Logo]
CROWE CHIZEK
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
UnionBancorp, Inc.
Ottawa, Illinois
We have audited the accompanying consolidated balance sheet of UnionBancorp,
Inc. and Subsidiaries as of December 31, 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The accompanying
consolidated financial statements of the Company as of December 31, 1996, and
for the two years then ended, were audited by other auditors whose report dated
February 5, 1997 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
UnionBancorp, Inc. and Subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 6, 1998
27.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 22,826 $ 29,236
Federal funds sold 1,404 10,267
Securities available-for-sale 163,568 188,538
Securities held-to-maturity (fair value of $37,840 in 1997
and $35,322 in 1996) 37,170 35,017
Loans 370,985 346,496
Allowance for loan losses (3,188) (3,068)
--------- ---------
Net loans 367,797 343,428
Premises and equipment, net 14,631 13,580
Intangible assets, net 9,898 10,801
Other assets 8,166 11,157
---------- ----------
TOTAL ASSETS $ 625,460 $ 642,024
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing $ 62,095 $ 65,864
Interest bearing 465,652 477,880
--------- ---------
Total deposits 527,747 543,744
Federal funds purchased and securities sold
under agreements to repurchase 11,761 21,817
Advances from the Federal Home Loan Bank 16,455 10,021
Notes payable 10,261 13,180
Other liabilities 6,154 5,027
--------- ---------
TOTAL LIABILITIES 572,378 593,789
--------- ---------
Minority interest in subsidiaries 644 795
Mandatory redeemable preferred stock, Series B, no par value;
1,092 shares authorized; 857 shares issued and outstanding 857 857
--------- ---------
Stockholders' equity
Preferred stock; 200,000 shares authorized; none issued - -
Series A convertible preferred stock; 2,765 shares authorized,
2,762.24 shares outstanding (aggregate liquidation preference of $2,762) 500 500
Series C preferred stock; 4,500 shares authorized; none issued - -
Common stock, $1 par value; 10,000,000 shares authorized;
4,407,093 and 4,386,064 shares outstanding in 1997
and 1996, respectively 4,407 4,386
Surplus 19,705 19,403
Retained earnings 26,765 22,981
Unrealized gain (loss) on securities available for sale, net of tax 856 (74)
Unearned compensation under stock option plans (130) (91)
--------- ---------
52,103 47,105
Treasury stock, at cost; 271,263 and 271,263 shares
in 1997 and 1996, respectively (522) (522)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 51,581 46,583
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 625,460 $ 642,024
---------- ----------
---------- ----------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
28.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans and fees on loans $ 33,098 $ 22,138 $ 16,322
Securities
Taxable 10,838 7,039 3,486
Exempt from federal income taxes 1,694 1,574 1,404
Federal funds sold and other 409 286 156
---------- ---------- ----------
TOTAL INTEREST INCOME 46,039 31,037 21,368
---------- ---------- ----------
Interest expense
Deposits 21,664 15,239 10,257
Federal funds purchased and securities sold
under agreements to repurchase 1,171 861 523
Advances from the Federal Home Loan Bank 543 213 -
Notes payable 1,057 690 469
---------- ---------- ----------
TOTAL INTEREST EXPENSE 24,435 17,003 11,249
---------- ---------- ----------
NET INTEREST INCOME 21,604 14,034 10,119
Provision for loan losses 1,079 1,178 684
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 20,525 12,856 9,435
---------- ---------- ----------
Noninterest income
Service charges 1,854 1,286 952
Merchant fee income 670 524 418
Trust income 516 393 330
Mortgage banking income 751 425 425
Securities gains, net 193 20 98
Other income 1,198 574 347
---------- ---------- ----------
5,182 3,222 2,570
---------- ---------- ----------
Noninterest expenses
Salaries and employee benefits 9,231 6,469 4,451
Occupancy expense, net 1,532 899 665
Furniture and equipment expense 1,599 977 584
FDIC insurance assessment 63 8 271
Supplies and printing 602 395 270
Telephone 472 277 179
Postage 404 298 208
Amortization of intangible assets 903 392 120
Other expenses 3,958 2,533 2,023
---------- ---------- ----------
18,764 12,248 8,771
---------- ---------- ----------
6,943 3,830 3,234
Minority interest 73 27 -
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 6,870 3,803 3,234
Income taxes 2,105 969 881
---------- ---------- ----------
NET INCOME 4,765 2,834 2,353
Preferred stock dividends 259 105 -
---------- ---------- ----------
NET INCOME FOR COMMON STOCKHOLDERS $ 4,506 $ 2,729 $ 2,353
---------- ---------- ----------
---------- ---------- ----------
BASIC EARNINGS PER COMMON SHARE $ 1.09 $ 1.00 $ 1.10
---------- ---------- ----------
---------- ---------- ----------
DILUTED EARNINGS PER COMMON SHARE 1.08 .99 1.09
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
29.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Unrealized Unearned
Series A Gain (Loss) Compen-
Convertible on Securities sation Under
Preferred Common Retained Available- Stock Option Treasury
Stock Stock Surplus Earnings for-Sale Plans Stock Total
----------- --------- -------- -------- ------------ ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1994 $ - $ 2,400 $ 1,007 $ 18,499 $ (1,757) $ - $ (521) $ 19,628
Net income - - - 2,353 - - - 2,353
Common stock dividend,
$.13 per share - - - (284) - - - (284)
Issuance of non-
qualifying stock
options - - 67 - - (67) - -
Amortization of un-
earned compensation
under stock
option plans - - - - - 19 - 19
Change in unrealized
gain (loss) on securities
available-for-sale - - - - 1,759 - - 1,759
-------- --------- --------- --------- ------- ------- ------- ---------
Balance,
December 31, 1995 - 2,400 1,074 20,568 2 (48) (521 ) 23,475
Net income - - - 2,834 - - - 2,834
Issuance of 1,266,398
shares of common stock - 1,266 12,221 - - - - 13,487
Cost to raise capital - - (1,051) - - - - (1,051)
Common stock dividend,
$.14 per share - - - (316) - - - (316)
Preferred stock dividends - - - (105) - - - (105)
Stock issued for
acquisitions 500 720 7,090 - - - - 8,310
Issuance of non-
qualifying stock
options - - 69 - - (69) - -
Amortization of un-
earned compensation
under stock option plans - - - - - 26 - 26
Change in unrealized
gain (loss) on securities
available-for-sale - - - - (76) - - (76)
Redemption of
qualifying directors'
stock - - - - - - (1) (1)
-------- --------- --------- --------- ------- ------- ------- --------
Balance,
December 31, 1996 500 4,386 19,403 22,981 (74) (91) (522) 46,583
Net income - - - 4,765 - - - 4,765
Issuance of common stock - 20 214 - - - - 234
Common stock dividend,
$17.5 per share - - - (722) - - - (722)
Preferred stock dividends - - - (259) - - - (259)
Issuance of non-
qualifying stock
options - - 81 - - (81) - -
Exercise of stock options - 1 7 - - - - 8
Amortization of un-
earned compensation
under stock option plans - - - - - 42 - 42
Change in unrealized
gain (loss) on securities
available-for-sale - - - - 930 - - 930
-------- --------- --------- --------- ------- ------- ------- ---------
Balance,
December 31, 1997 $ 500 $ 4,407 $ 19,705 $ 26,765 $ 856 $ (130) $ (522) $ 51,581
-------- --------- --------- --------- ------- ------- ------- ---------
-------- --------- --------- --------- ------- ------- ------- ---------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
30.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,765 $ 2,834 $ 2,353
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 1,474 849 526
Amortization of intangible assets 903 392 120
Amortization of unearned compensation under
stock option plans 42 26 19
Amortization of bond premiums, net 254 543 448
Provision for loan losses 1,079 1,178 684
Provision for deferred income taxes 287 (45) (138)
Securities gains, net (193) (20) (98)
Gain on sale of equipment (76) - (37)
Loss on sale of real estate acquired in
settlement of loans (51) (134) (33)
Gain on sale of loans (546) (262) (288)
Proceeds from sales of loans held for sale 25,097 21,355 14,899
Origination of loans held for sale (25,624) (20,803) (14,673)
Minority interest in net income of subsidiary 73 27 -
Change in assets and liabilities
(Increase) decrease in other assets (165) 9 (666)
Increase (decrease) in other liabilities 509 (449) 539
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,828 5,500 3,655
Cash flows from investing activities
Securities
Held-to-maturity
Proceeds from calls, maturities, and paydowns 3,108 4,429 3,858
Purchases (5,367) (5,247) (4,300)
Available-for-sale
Proceeds from maturities and paydowns 30,071 20,455 6,230
Proceeds from sales 28,773 24,620 17,318
Purchases (29,550) (19,708) (28,240)
Net (increase) decrease in federal funds sold 8,863 167 (1,065)
Net increase in loans (24,831) (21,841) (20,533)
Purchase of premises and equipment (2,630) (1,314) (1,430)
Proceeds from sale of real estate acquired in
settlement of loans 655 575 800
Proceeds from sale of equipment 181 3 59
Bank and bank holding company acquisitions, net
of cash and cash equivalent received - (11,748) -
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,273 (9,609) (27,303)
</TABLE>
(Continued)
31.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities
Net increase (decrease) in deposits $ (15,997) $ 1,747 $ 29,394
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (10,056) 2,481 (1,613)
Net increase (decrease) in advances from the
Federal Home Loan Bank 6,434 (4,000) -
Payments on notes payable (3,685) (13,802) (680)
Proceeds from notes payable 766 18,686 -
Dividends on common stock (722) (316) (284)
Dividends on preferred stock (259) (53) -
Proceeds from exercise of stock options 8 - -
Redemption of qualifying directors' stock - (1) -
Proceeds from issuance of common stock, net
of costs to raise capital - 12,436 -
--------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (23,511) 17,178 26,817
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,410) 13,069 3,169
Cash and cash equivalents
Beginning of year 29,236 16,167 12,998
--------- -------- --------
End of year $ 22,826 $ 29,236 $ 16,167
--------- -------- --------
--------- -------- --------
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 24,547 $ 16,569 $ 10,925
Income taxes 1,966 921 994
</TABLE>
(Continued)
32.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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.
33.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UnionBancorp, Inc. (the "Company") is a multi-bank holding company with three
nonbank subsidiaries. The Company provides a full range of banking services to
individual and corporate customers in the north central and west central
Illinois areas. The Company is subject to competition from other financial
institutions and nonfinancial institutions providing financial services.
Additionally, the Company and its bank subsidiaries (the "Banks") are subject to
regulations of certain regulatory agencies and undergo periodic examinations by
those regulatory agencies.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. During 1997, the Company merged some of its banking
subsidiaries to form UnionBank, UnionBank/West, and Union Bank/Central. In
addition, the Company has two other banks, the Bank of Ladd and Hanover State
Bank. All significant intercompany balances and transactions have been
eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and with general practice in the
banking industry. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The allowance for loan losses, fair values of financial
instruments, and status of contingencies are particularly subject to change.
Assets held in an agency or fiduciary capacity, other than trust cash on deposit
with the Banks, are not assets of the Company and, accordingly, are not included
in the accompanying consolidated financial statements.
SECURITIES
Securities classified as held-to-maturity are those debt securities which the
Company has the ability and management has the intent to hold to maturity.
These securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed using the interest method over their contractual
lives.
(Continued)
34.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Securities classified as available-for-sale are those debt securities which the
Company intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale
would be based on various factors, including significant movements in interest
rates, changes in the maturity mix of the Company's assets and liabilities,
liquidity needs, regulatory capital considerations, and other similar factors.
Securities available-for-sale are carried at fair value. Unrealized gains or
losses are reported as increases or decreases in stockholders' equity, net of
the related deferred income tax effect.
Interest income, adjusted for amortization of premiums and accretion of
discounts is included in earnings. Gains or losses from the sale of securities
are determined using the specific identification method.
LOANS
Loans are stated at the principal amount outstanding, net of unearned discount
and the allowance for loan losses. Unearned discount on certain installment
loans is credited to income over the term of the loan using the interest method.
For all other loans, interest is credited to income as earned using the simple
interest method applied to the daily balances of the principal amount
outstanding.
The accrual of interest on loans is discontinued when, in management's opinion,
the borrower may be unable to meet payments as they become due. When the
accrual of interest is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received and the principal is considered fully collectible.
The Banks originate certain loans for sale in the secondary market. These loans
are recorded at the lower of aggregate cost or market value until they are sold.
Net unrealized losses are recognized in a valuation allowance by charges to
income. Gains or losses on sales of loans held for sale are computed using the
specific-identification method and are reflected in income at the time of sale.
MORTGAGE SERVICING RIGHTS
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market rate.
For purposes of measuring impairment, the rights are stratified based on the
following predominant risk characteristics of the underlying loans: weighted
average maturity and weighted average rate. The amount of impairment is the
excess of the capitalized mortgage servicing rights for a stratum over its fair
value. At December 31, 1997 and 1996, the Company had $192 and $33,
respectively, of mortgage servicing rights assets which are included in other
assets.
(Continued)
35.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. This
evaluation also takes into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay. While management uses the best information available to make
its evaluation, future adjustments to the allowance may be necessary if there
are significant changes in economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Banks' allowance for loan losses and may require the Banks to make additions
to the allowance based on their judgment about information available to them at
the time of their examination.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Loans
are evaluated for impairment when payments are delayed, typically 90 days or
more, or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Deprecation is computed on the accelerated and straight-line methods over the
estimated useful lives of the assets.
INTANGIBLE ASSETS
The excess of the purchase price over the fair value of assets acquired for
acquisition transactions accounted for as purchases is recorded as an intangible
asset. Fair value adjustments for identifiable tangible assets are accreted and
amortized over the lives of the respective assets. Core deposit intangibles are
amortized on a straight line basis over ten years. Goodwill is amortized on a
straight line basis over fifteen years.
(Continued)
36.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
INCOME TAXES
Income tax expense is the sum of the current year income tax due or refundable
and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities, computed
using enacted tax rates. A valuation allowance, if needed, reduces deferred tax
assets to the amount expected to be realized.
EARNINGS PER SHARE
Basic earnings per share is based on weighted-average common shares outstanding.
Diluted earnings per share assumes the issuance of any dilutive potential common
shares using the treasury stock method. The accounting standard for computing
earnings per share was revised for 1997, and all earnings per share previously
reported are restated to follow the new standard.
PREFERRED STOCK
Terms of each class of preferred stock are as follows:
PREFERRED STOCK: The Company's Certificate of Incorporation authorizes its
Board of Directors to fix or alter the rights, preferences, privileges, and
restrictions of 200,000 shares of Preferred Stock, including the dividend
rights, original issue price, conversion rights, voting rights, terms of
redemption, liquidation preferences, and sinking fund terms thereof, and
the number of shares of each series subsequent to the issuance of shares of
such series (but not below the number of shares outstanding). The Board of
Directors has also fixed the rights, preferences, privileges, and
restrictions with respect to 2,765 shares of Series A Preferred Stock,
1,092 shares of Series B Preferred Stock, and 4,500 shares of Series C
Preferred Stock, as described below.
SERIES A CONVERTIBLE PREFERRED STOCK: The Company has issued 2,762.24 of
the 2,765 authorized shares of Series A Convertible Preferred Stock.
Preferential cumulative cash dividends are payable quarterly at an annual
rate of $75.00 per share. Dividends accrue on each share of Series A
Preferred Stock from the date of issuance and from day to day, thereafter,
whether or not earned or declared. The shares of Series A Preferred Stock
are convertible into the number of shares of Common Stock that results from
multiplying $1,000 by the number of shares of Series A Preferred Stock,
subtracting from this product such realized after-tax loss of specified
securities obtained in the acquisition of Prairie Bancorp, Inc. and
dividing this result by the conversion price (1.075 times the Common Stock
per share book value). Series A Preferred Stock is not redeemable for
cash. Holders of shares of Series A Preferred Stock are not entitled to
vote except: (i) as required by law; (ii) to approve the authorization or
issuance of any shares of any class or series of stock which ranks senior
or on a parity with the Series A Preferred Stock in respect of dividends
and distributions upon the dissolution, liquidation, or winding up of the
Company; (iii) during any period of time when two dividend payments on
shares of Series A Preferred Stock have accrued but have not been paid;
(iv) upon conversion of the shares of Series A
(Continued)
37.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Preferred Stock into shares of Common Stock; or (v) if the holders of
Common Stock vote on a proposal to merge or otherwise enter into a
transaction with a third party pursuant to which the Company is not the
surviving entity. On dissolution, winding up, or liquidation of the
Company, voluntary or otherwise, holders of Series A Preferred Stock will
be entitled to receive, out of the assets of the Company available for
distribution to stockholders, the amount of $1,000 per share, plus any
accrued but unpaid dividends, before any payment or distribution may be
made on shares of Common Stock or any other securities issued by the
Company which rank junior to the Series A Preferred Stock.
SERIES B MANDATORY REDEEMABLE PREFERRED STOCK: The Company has issued 857
of the 1,092 authorized shares of Series B Mandatory Redeemable Preferred
Stock. Preferential cumulative cash dividends are payable quarterly at an
annual rate of $60.00 per share. Dividends accrue on each share of Series
B Preferred Stock from the date of issuance and from day to day,
thereafter, whether or not earned or declared. Each original holder of
Series B Preferred Stock (or upon such holder's deaths, their respective
executors or personal representatives) will have the option, exercisable at
their sole discretion, to sell, and the Company will be obligated to
redeem, such holder's shares of Series B Preferred Stock upon the earlier
to occur of the death of the respective original holder of Series B
Preferred Stock or ten years after the original issuance date of the Series
B Preferred Stock. The per share price payable by the Company for such
shares of Series B Preferred Stock will be equal to $1,000 per share, plus
any accrued but unpaid dividends. Notwithstanding the foregoing, the
Company will not be obligated to redeem for cash any shares of Series B
Preferred Stock if such redemption would cause it to be in violation of any
statute, rule, or regulation or agreement to which it is a party relating
to minimum capital requirements, provided that the Company is required to
use its best efforts promptly to remedy any such violation and shall
promptly complete the redemption of such shares after such violation has
been cured. Holders of shares of Series B Preferred Stock are not entitled
to vote except as required by law. On dissolution, wind up, or liquidation
of the Company, voluntary or otherwise, holders of Series B Preferred Stock
will be entitled to receive, out of the assets of the Company available for
distribution to stockholders, the amount of $1,000 per share, plus any
accrued but unpaid dividends, before any payment or distribution may be
made on shares of Common Stock or any other securities issued by the
Company which rank junior to the Series B Preferred Stock.
SERIES C JUNIOR PARTICIPATING PREFERRED STOCK: The Company has authorized
4,500 shares of Series C Junior Participating Preferred Stock. The Series
C Preferred Stock is only issuable upon exercise of rights issued pursuant
to the Company's Stockholder Rights Plan. Each share of Series C Junior
Participating Preferred Stock is entitled to, when, as and if declared, a
minimum preferential quarterly dividend payment of $3.00 per share but will
be entitled to an aggregate dividend of 1,000 times the dividend declared
per share of Common Stock. In the event of liquidation, dissolution, or
winding up of the Company, the holders of the Series C Preferred Stock will
be entitled to a minimum preferential payment of $1000 per share (plus any
accrued but unpaid dividends) but will be entitled to an aggregate payment
of 1,000 times the payment made per share of Common Stock. Each share of
Series C Preferred Stock will have 1,000 votes, voting together with the
Common
(CONTINUED)
38.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Stock. Finally, in the event of any merger, consolidation, or other
transaction in which outstanding shares of Common Stock are converted or
exchanged, each share of Series C Preferred Stock will be entitled to
receive 1,000 times the amount received per share of Common Stock. These
rights are protected by customary antidilution provisions.
STOCKHOLDER RIGHTS PLAN: On July 17, 1996, the Company declared a dividend
of one preferred share purchase right (a "Right") for each outstanding
share of Common Stock. Each Right entitles the registered holder to
purchase from the Company one one-thousandth of a share of Series C Junior
Participating Preferred Stock, no par value, of the Company at a price of
$50.00 per one one-thousandth of a share of Preferred Stock (the "Purchase
Price"), subject to adjustment. The description and terms of the Rights
are set forth in a Rights Agreement dated as of August 5, 1996, as the same
may be amended from time to time (the "Rights Agreement"), between the
Company and Harris Trust and Savings Bank, as Rights Agent.
The Rights are not exercisable until the earlier to occur of: (i) 10 days
after a person or group ("Acquiring Person") has acquired beneficial
ownership of 15% or more of the outstanding shares of Common Stock or (ii)
10 business days (or such later date as determined by the Board of
Directors) following the commencement of a tender offer or exchange offer
(the "Distribution Date"). Unless extended, the Rights will expire on
August 4, 2006.
In the event that any person(s) becomes an Acquiring Person, each holder of
a Right, other than Rights beneficially owned by the Acquiring Person
(which will thereupon become void), will thereafter have the right to
receive upon exercise of a Right that number of shares of Common Stock
having a market value of two times the exercise price of the Right.
In the event that, after a person or group has become an Acquiring Person,
the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are
sold, proper provisions will be made so that each holder of a Right (other
than Rights beneficially owned by an Acquiring Person which will have
become void) will thereafter have the right to receive upon the exercise of
a Right that number of shares of common stock of the person with whom the
Company has engaged in the foregoing transaction (or its parent) that at
the time of such transaction have a market value of two times the exercise
price of the Right.
At any time prior to the time an Acquiring Person becomes such, the Board
of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $.01 per Right.
DIVIDEND RESTRICTION
Banking regulations require the maintenance of certain capital levels and may
limit the amount of dividends which may be paid by the subsidiary bank to the
holding company or by the holding company to stockholders.
(CONTINUED)
39.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
RECLASSIFICATIONS
Certain items in the financial statements, as of and for the years ended
December 31, 1996 and 1995 have been reclassified, with no effect on net income,
to conform with the current year presentation.
FUTURE ACCOUNTING CHANGES
New accounting standards have been issued which will require future reporting of
comprehensive income (net income plus changes in holding gains and losses on
securities available-for-sale) and may require redetermination of industry
segment financial information.
NOTE 2. BUSINESS ACQUISITIONS
On August 1, 1996, the Company acquired Credit Recovery Inc. (formerly LaSalle
County Collections, Inc.) ("CRI"), a collection agency located in Ottawa,
Illinois. The purchase price of $177 included the issuance of 9,090 shares of
Common Stock, valued at $11.08 per share, and payment of $77 in cash. The
Company recognized an intangible asset of $170 for the excess of purchase price
over total assets acquired.
On August 6, 1996, the Company acquired six additional bank subsidiaries through
the purchase of Prairie Bancorp, Inc. ("Prairie"), a multi-bank holding company
headquartered in Princeton, Illinois. At the date of acquisition, Prairie had
approximately $226,756 in total assets and $189,271 in total deposits. In
conjunction with the acquisition, the Company issued 2,762.24 of the 2,765
authorized shares of Series A Convertible Preferred Stock, which were valued at
$500. In addition, the Company issued 857 of the 1,092 authorized shares of
Series B Preferred Stock, which were valued at $857 and 710,576 shares of Common
Stock valued at $7,710. The total acquisition cost of $14,302 resulted in
goodwill of $2,749 and core deposit intangible estimated at $1,857.
On September 25, 1996, the Company acquired an additional bank subsidiary
through the purchase of Country Bancshares, Inc. ("Country"). At the date of
acquisition, Country had approximately $109,040 in total assets and $90,999 in
total deposits. The cash purchase price of $11,627 resulted in goodwill of
$4,842 and core deposit intangible estimated at $632.
All acquisitions were recorded using the purchase method of accounting. As
such, the results of operations of the acquired entities are excluded from the
consolidated statements of income for the periods prior to the respective
acquisition dates.
The unaudited pro forma results of operations which follow assume the
acquisitions had occurred at the beginning of the respective periods. In
addition to combining the historical results of operations of the companies, the
pro forma calculations include purchase accounting adjustments related to the
acquisitions and interest on borrowed funds.
(CONTINUED)
40.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Unaudited pro forma consolidated results of operations for the periods ending
December 31, 1996 and 1995 as though Prairie and Country had been acquired as of
January 1, 1995 follow:
<TABLE>
<CAPTION>
Years ended
December 31,
------------------
1996 1995
-------- -------
<S> <C> <C>
Net interest income $ 17,965 $17,538
-------- -------
-------- -------
Net income 3,088 2,833
-------- -------
-------- -------
Earnings per common share $ 0.68 $ 0.61
-------- -------
-------- -------
</TABLE>
The effects of the acquisition of "CRI" are not material and therefore have not
been included in the above analysis. The pro forma results of operations are
not necessarily indicative of the actual results of operations that would have
occurred had the purchases actually been made at the beginning of the respective
periods or of results which may occur in the future.
In 1997, the Company acquired additional minority interest shares, which
resulted in additional goodwill of $82 being recorded.
(CONTINUED)
41.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 3. SECURITIES
Amortized costs and fair values of securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
AVAILABLE-FOR-SALE Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 19,071 $ 98 $ (6) $ 19,163
U.S. government agencies and
corporations 59,341 173 (199) 59,315
U.S. government mortgage-backed
securities 21,797 907 (9) 22,695
Collateralized mortgage obligations 57,800 528 (28) 58,300
Corporate bonds 100 - - 100
Other 4,001 - (6) 3,995
--------- ------- -------- ---------
$ 162,110 $ 1,706 $ (248) $ 163,568
--------- ------- -------- ---------
--------- ------- -------- ---------
AVAILABLE-FOR-SALE
December 31, 1996
U.S. Treasury $ 26,528 $ 107 $ (117) $ 26,518
U.S. government agencies and
corporations 53,905 184 (535) 53,554
U.S. government mortgage-backed
securities 49,266 293 (105) 49,454
Collateralized mortgage obligations 58,744 219 (143) 58,820
Corporate bonds 192 - - 192
Other 25 - (25) -
--------- ------- -------- ---------
$ 188,660 $ 803 $ (925) $ 188,538
--------- ------- -------- ---------
--------- ------- -------- ---------
HELD-TO-MATURITY
December 31, 1997
States and political subdivisions $ 37,170 $ 805 $ (135) $ 37,840
--------- ------- -------- ---------
--------- ------- -------- ---------
December 31, 1996
States and political subdivisions $ 35,017 $ 496 $ (191) $ 35,322
--------- ------- -------- ---------
--------- ------- -------- ---------
</TABLE>
(CONTINUED)
42.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
The amortized cost and fair value of securities classified as held-to-maturity
and available-for-sale at December 31, 1997, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities, because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<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 $ 5,240 $ 5,255 $ 21,842 $ 21,837
Due after one year through five years 13,867 14,035 27,564 27,583
Due after five years through ten years 15,571 15,500 29,106 29,158
Due after ten years 2,492 3,050 - -
U.S. government mortgage-backed securities - - 21,797 22,695
Collateralized mortgage obligations - - 57,800 58,300
Equity securities - - 4,001 3,995
-------- -------- --------- ---------
$ 37,170 $ 37,840 $ 162,110 $ 163,568
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>
As of December 31, 1997, the Company held U.S. government agency structured
notes and callable securities carried at fair values of $37,641 and $8,830,
respectively. The amortized cost of these securities was $39,453 and $8,841,
respectively, as of December 31, 1997.
Securities with carrying values of approximately $125,000 and $132,000 at
December 31,1997 and 1996, respectively, were pledged to secure public deposits,
securities sold under agreements to repurchase and advances from the Federal
Home Loan Bank, and for other purposes as required or permitted by law.
In connection with the 1996 acquisitions and in order to maintain the Company's
interest rate risk, the Company elected to transfer certain securities
held-to-maturity with an amortized cost of $2,242 and a fair value of $2,004 to
available-for-sale. In addition, certain securities available-for-sale with an
amortized cost of $395 and a fair value of $402 were transferred to
held-to-maturity.
Realized gains and losses from the sale of securities available-for-sale follow:
<TABLE>
<CAPTION>
Years Ended
--------December 31,-------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Proceeds $28,773 $24,620 $6,230
Realized gains 287 137 172
Realized losses (94) (117) (74)
</TABLE>
Included in the 1997 realized losses is a $92 writedown of a corporate bond
during 1997. The security is reported at amortized cost of $100, net of a loss
allowance of $200.
(CONTINUED)
43.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 4. LOANS
The major classifications of loans follow:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
Commercial $ 102,367 $ 95,929
Real estate 224,489 203,732
Installment 41,210 41,303
Other 3,076 6,047
---------- ---------
371,142 347,011
---------- ---------
Less:
Unearned interest 157 515
Allowance for loan losses 3,188 3,068
---------- ---------
3,345 3,583
---------- ---------
$ 367,797 $ 343,428
---------- ---------
---------- ---------
</TABLE>
Included in real estate loans are $3,235 and $2,162 of loans held for sale at
December 31, 1997 and 1996, respectively.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans were
$66,535 and $49,778 at December 31, 1997 and 1996, respectively.
The following table presents data on impaired loans:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Year-end impaired loans for which an allowance has been provided $1,714 $ 14 $733
Year-end impaired loans for which no allowance has been provided - 1,080 -
------ ------ ----
Total loans determined to be impaired $1,714 $1,094 $733
------ ------ ----
------ ------ ----
Allowance for loan loss for impaired loans included
in the allowance for loan losses $ 286 $ 2 $500
------ ------ ----
------ ------ ----
Average recorded investment in impaired loans $2,375 $ 947 $423
------ ------ ----
------ ------ ----
Interest income recognized from impaired loans $ 6 $ - $ -
------ ------ ----
------ ------ ----
Cash basis interest income recognized from impaired loans $ - $ - $ -
------ ------ ----
------ ------ ----
</TABLE>
(Continued)
44.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
The Company and its subsidiaries conduct most of their business activities,
including granting agribusiness, commercial, residential, and installment loans
with customers in north central and west central Illinois. The Banks' loan
portfolios include a concentration of loans to agricultural and
agricultural-related industries amounting to approximately $67,386 and $61,978
as of December 31, 1997 and 1996, respectively. In addition, the Company has a
concentration of commercial real estate loans of approximately $72,730 and
$63,254 as of December 31, 1997 and 1996, respectively. Credit losses arising
from lending transactions with agricultural entities compare favorably with the
Banks' credit loss experience on the loan portfolio as a whole.
In the normal course of business, loans are made to executive officers,
directors, and principal stockholders of the Company and its subsidiaries, and
to parties which the Company or its directors, executive officers, and
stockholders have the ability to significantly influence (related parties). In
the opinion of management, the terms of these loans, including interest rates
and collateral, are similar to those prevailing for comparable transactions with
other customers and do not involve more than a normal risk of collectibility.
Changes in such loans during the year ended December 31, 1997 follow:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1996 $ 6,372
New loans, extensions, and modifications 6,622
Repayments (7,801)
----------
Balance at December 31, 1997 $ 5,193
----------
----------
</TABLE>
(Continued)
45.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 5. ALLOWANCE FOR LOAN LOSSES
An analysis of activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 3,068 $ 2,014 $ 1,704
Balance acquired - 1,292 -
Provision for loan losses 1,079 1,178 684
Recoveries 248 98 163
Loans charged off (1,207) (1,514) (537)
------- ------- -------
Balance at end of year $ 3,188 $ 3,068 $ 2,014
------- ------- -------
------- ------- -------
</TABLE>
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment consisted of:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
------- -------
<S> <C> <C>
Land $ 1,645 $ 1,325
Buildings 12,774 10,893
Furniture and equipment 11,889 10,457
------- -------
26,308 22,675
Less accumulated depreciation 11,677 9,095
------- -------
$14,631 $13,580
------- -------
------- -------
</TABLE>
NOTE 7. DEPOSITS
Deposit account balances by type are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Non-interest-bearing demand deposits $ 62,095 $ 65,864
Savings, NOW, and money market accounts 148,095 159,614
Time deposits of $100 or more 80,139 74,485
Other time deposits 237,418 243,781
-------- --------
$527,747 $543,744
-------- --------
-------- --------
</TABLE>
(Continued)
46.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
At December 31, 1997, the scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
Year Amount
-------------------------------------
<S> <C>
1998 $ 246,738
1999 43,122
2000 20,532
2001 2,666
2002 and thereafter 4,499
------------
$ 317,557
------------
------------
</TABLE>
A maturity distribution of time certificates of deposit in denominations of $100
or more was as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
-------- ---------
<S> <C> <C>
3 months or less $ 30,327 $ 33,810
Over 3 months through 6 months 13,680 17,047
Over 6 months through 12 months 18,738 8,694
Over 12 months 17,394 14,934
-------- --------
$ 80,139 $ 74,485
-------- --------
-------- --------
</TABLE>
NOTE 8. BORROWED FUNDS
Borrowed funds include federal funds purchased and securities sold under
agreements to repurchase, advances from the Federal Home Loan Bank, and notes
payable to third parties.
A summary of short-term borrowings follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
-------- ---------
<S> <C> <C>
Federal funds purchased $ - $ 800
Securities sold under agreements to repurchase 11,761 21,017
------- -------
$11,761 $21,817
------- -------
------- -------
</TABLE>
Federal funds purchased and securities sold under agreement to repurchase
generally mature within one to ninety days from the transaction date.
(Continued)
47.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
At December 31, 1997, the scheduled maturities of advances from the Federal Home
Loan Bank were as follows:
<TABLE>
<CAPTION>
Year Amount
------------------------------------
<S> <C>
1998 $ 2,960
2001 2,000
2002 and thereafter 11,495
-----------
$ 16,455
-----------
-----------
</TABLE>
Where required, the FHLB advances are secured by mortgage-backed securities
held by the respective banks (Note 3), and one of the Bank's maintains a
collateral pledge agreement covering secured advances whereby the Bank has
agreed to at all times keep on hand, free of all other pledges, liens, and
encumbrances, first mortgages on improved residential property (not more than
90 days delinquent) aggregating no less than 167% of the outstanding secured
advances from the Federal Home Loan Bank.
Notes payable consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Note payable to LaSalle National Bank; interest
due quarterly at LIBOR plus 125 basis points
(7.375% at December 31, 1997); balance due on
September 1, 1998; secured by 100% of the stock
of the subsidiary banks. $10,000 $ -
$1,000,000 line of credit to LaSalle
National Bank; interest due quarterly at prime
rate (8.50% at December 31, 1997); balance due
at September 1, 1998; secured by 100% of stock
of subsidiary banks. - -
Mortgage note payable to an individual, secured
by land. The note bears inputed interest at 8%
and payments of principal and interest are due
over the next three years in amounts of $50,000,
$50,000, and $250,000. 261 -
Note payable to LaSalle National Bank; interest
due quarterly at a prime rate (8.25% at
December 31, 1996); balance of all unpaid
principal and accrued interest due
August 2, 1997. - 13,180
------- -------
$10,261 $13,180
------- -------
------- -------
</TABLE>
(Continued)
48.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
The note payable agreements contain certain covenants which limit the amount
of dividends paid, the purchase of other banks and/or businesses, the
purchase of investments not in the ordinary course of business, the changes
in capital structure, and the guarantees of other liabilities and
obligations. In addition, the Company must maintain certain financial
ratios. The Company was in compliance with all covenants for the year ended
December 31, 1997.
Information concerning borrowed funds is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
FEDERAL FUNDS PURCHASED
Maximum month-end balance during the year $11,200 $11,288 $ -
Average balance during the year 2,451 2,448 -
Weighted average interest rate for the year 6.58% 5.26% -%
Weighted average interest rate at year end - 7.50% -%
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Maximum month-end balance during the year $11,861 $32,310 $15,511
Average balance during the year 18,232 20,239 9,260
Weighted average interest rate for the year 5.53% 5.70% 5.73%
Weighted average interest rate at year end 5.80% 5.79% 5.49%
ADVANCES FROM THE FEDERAL HOME LOAN BANK
Maximum month-end balance during the year $22,895 $15,422 $ -
Average balance during the year 8,783 13,294 -
Weighted average interest rate for the year 6.18% 5.29% -%
Weighted average interest rate at year end 5.78% 6.03% -%
NOTES PAYABLE
Maximum month-end balance during the year $17,419 $25,320 $ 4,946
Average balance during the year 13,247 8,364 4,696
Weighted average interest rate for the year 7.98% 8.25% 9.00%
Weighted average interest rate at year end 7.40% 8.25% 9.16%
</TABLE>
NOTE 9. INCOME TAXES
Income taxes consisted of:
<TABLE>
<CAPTION>
Years ended
December 31,
--------------------------------------
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Federal
Current $ 1,818 $ 918 $ 879
Deferred 252 (24) (134)
------ ----- -----
2,070 894 745
State
Current - 96 140
Deferred 35 (21) (4)
------ ----- -----
35 75 136
------ ----- -----
$2,105 $ 969 $ 881
------ ----- -----
------ ----- -----
</TABLE>
(Continued)
49.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
The Company's income tax expense differed from the statutory federal rate of 34%
as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
------------------------------------
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Expected income taxes $2,336 $1,293 $1,100
Income tax effect of
Interest earned on tax free investments and loans (632) (535) (472)
Nondeductible interest expense incurred to
carry tax-free investments and loans 87 90 63
Nondeductible amortization 199 67 23
State income taxes, net of federal tax benefit 220 50 90
Other (105) 4 77
------ ---- ----
$2,105 $ 969 $ 881
------ ---- ----
------ ---- ----
</TABLE>
The significant components of deferred income tax assets and liabilities:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
----------------------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 492 $ 446
Deferred compensation 33 25
Other intangible assets 482 577
Securities available-for-sale - 48
Other - 39
------- ------
TOTAL DEFERRED TAX ASSETS 1,007 1,135
Deferred tax liabilities
Depreciation (486) (532)
Core deposit intangible (926) (1,053)
Securities available-for-sale (856) -
Other (380) -
------- ------
TOTAL DEFERRED TAX LIABILITIES (2,648) (1,585)
------- ------
Net deferred tax liabilities $(1,641) $ (450)
------- ------
------- ------
</TABLE>
(Continued)
50.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 10. BENEFIT PLANS
The Company's Employee Stock Ownership Plan (the "Plan") covers all full-time
employees who have completed six months of service and have attained the minimum
age of twenty and one-half years. Vesting in the Plan is based on years of
continuous service. A participant is fully vested after seven years of credited
service.
The Plan owns 439,368 shares of the Company's common stock. At December
31,1997, all shares held by the Plan were allocated to plan participants.
The Plan operated as a leveraged employee stock ownership plan until April
1996, when the outstanding debt of the Plan was retired. Principal and
interest on the loan had been required to be paid in quarterly installments.
Company contributions, when aggregated with the Plan's dividend and interest
earnings, have been, at a minimum, equal to the amount required by the Plan
to pay the principal and interest on the loan, plus the sum required to
purchase allocated shares from terminated participants. The Company expenses
all cash contributions made to the Plan. Contributions were $272, $252, and
$237 for the years ended December 31, 1997, 1996, and 1995, respectively.
Prairie Bancorp, Inc. maintained a 401(k) salary reduction plan covering
substantially all employees. Eligible employees may elect to make tax
deferred contributions within a specified range of their compensation as
defined in the plan. UnionBancorp, Inc. maintained their plan after the
acquisitions and contributed at its discretion. Contributions to the plan
are expensed currently and approximated $93 and $23 for the years ended
December 31, 1997 and 1996, respectively.
NOTE 11. STOCK OPTION PLAN
In April 1993, the Company adopted the UnionBancorp 1993 Stock Option Plan
(the "Option Plan"). Under the Option Plan, nonqualified options, incentive
stock options, and/or stock appreciation rights may be granted to employees
and outside directors of the Company and its subsidiaries to purchase the
Company's Common Stock at an exercise price to be determined by the Option
Plan's administrative committee. Pursuant to the Option Plan, 600,000 shares
of the Company's unissued Common Stock have been reserved and are available
for issuance upon the exercise of options and rights granted under the Option
Plan.
(Continued)
51.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
A summary of the status of the Option Plan as of December 31, 1997, 1996, and
1995 and changes during the years ending on those dates is presented below.
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 104,478 $ 6.87 68,400 $ 6.24 38,100 $ 5.87
Granted 34,600 10.65 41,250 7.99 30,300 6.70
Exercised (1,200) 6.75 (1,398) 6.97 - -
Forfeited - - (3,774) 8.65 - -
------- ------- ------- ------- ------ -------
Outstanding at end of year 137,878 104,478 6.87 68,400 6.24
------- ------- ------
------- ------- ------
Options exercisable at year-end 50,570 41,727 6.48 21,300 6.11
------- ------- ------
------- ------- ------
Weighted-average fair value of
options granted during the year 5.31 3.32 2.79
------- ------- -------
------- ------- -------
</TABLE>
Grants under the Option Plan are accounted for following APB Opinion No. 25 and
related interpretations. Accordingly, no compensation cost has been recognized
for incentive stock option grants under the Option Plan. Compensation cost
charged to income for nonqualified stock option grants was $42, $26, and $19 for
the years ended December 31, 1997, 1996, and 1995, respectively. Had
compensation cost for all of the stock-based compensation plans been determined
based on the grant date using the estimated fair value, reported income, and
earnings per common share would have been reduced to the pro forma amounts shown
below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Net income for common stockholders
As reported $4,506 $2,729 $2,353
Pro forma 4,450 2,699 2,342
Basic earnings per common share
As reported 1.09 1.00 1.10
Pro forma 1.08 0.99 1.10
Diluted earnings per common stock
As reported 1.08 .99 1.09
Pro forma 1.07 .98 1.08
</TABLE>
(Continued)
52.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
The fair value of the options granted in 1997, 1996, and 1995 is estimated at
$5.31, $3.36, and $2.79 or the date of grant using the Black Scholes options
value model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividend yield 1.34% 1.74% 2.01%
Risk free interest rate 6.36% 5.23% 6.19%
Assumed forfeiture rate - - -
Average life 6 6 6
</TABLE>
NOTE 12. EARNINGS PER SHARE
A reconciliation of the numerators and denominators for earnings per common
share computations for the years ended December 31 is presented below (dollars
and shares in thousands).
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
BASIC EARNINGS PER SHARE
Net income available to common stockholders $4,506 $2,729
------ ------
------ ------
Weighted average common shares outstanding 4,126 2,731
------ ------
------ ------
BASIC EARNINGS PER SHARE $1.09 $1.00
------ ------
------ ------
EARNINGS PER SHARE ASSUMING DILUTION
Net income (loss) available to common stockholders $4,506 $2,729
------ ------
------ ------
Weighted average common shares outstanding 4,126 2,731
Add: dilutive effect of assumed exercised
Stock options 42 26
------ ------
Weighted average common and dilutive
potential shares outstanding 4,168 2,757
------ ------
------ ------
Diluted earnings per share $ 1.08 $ .99
------ ------
------ ------
</TABLE>
NOTE 13. REGULATORY MATTERS
The Company and the subsidiary Banks are subject to regulatory capital
requirements administered by the federal banking agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Banks must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices.
(Continued)
53.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios of
total and Tier I capital to risk-weighted assets and of Tier I capital to
average assets. Management believes, as of December 31, 1997, that the Company
and the subsidiary Banks meet all capital adequacy requirements to which they
are subject.
As of December 31, 1997, the most recent notification from the corresponding
regulatory agency categorized the subsidiary Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes have changed the Bank's categories.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
To Be Adequately Prompt Corrective
Actual Capitalized Action Provisions
-----------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total capital
(to risk-weighted assets)
UnionBancorp, Inc. $45,725 11.86% $30,855 8.00% $38,569 10.00%
UnionBank 27,633 12.05 18,342 8.00 22,927 10.00
UnionBank/Central 8,542 17.24 3,964 8.00 4,956 10.00
UnionBank/West 11,069 14.09 6,284 8.00 7,854 10.00
Tier I capital
(to risk-weighted assets)
UnionBancorp, Inc. $41,180 10.68% $15,427 4.00% $23,141 6.00%
UnionBank 25,790 11.25 9,171 4.00 13,756 6.00
UnionBank/Central 8,116 16.38 1,982 4.00 2,973 6.00
UnionBank/West 10,430 13.28 3,142 4.00 4,713 6.00
Tier I leverage ratio
(to average assets)
UnionBancorp, Inc. $41,180 6.64% $24,781 4.00% $30,976 5.00%
UnionBank 25,790 8.16 12,647 4.00 15,808 5.00
UnionBank/Central 8,116 8.39 3,870 4.00 4,838 5.00
UnionBank/West 10,430 7.10 5,872 4.00 7,340 5.00
</TABLE>
(Continued)
54.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, may not be realized in
immediate settlement of the instrument.
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents approximate their fair values.
FEDERAL FUNDS SOLD
The stated carrying amounts of federal funds sold approximate their fair values.
SECURITIES: Fair values for securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. The carrying amount of accrued
interest receivable approximates its fair value.
LOANS
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
fixed-rate loans are estimated using discounted cash flow analyses, applying the
interest rates currently offered to borrowers for loans of similar credit
quality and comparable payment terms. The carrying amount of accrued interest
receivable approximates its fair value.
DEPOSIT LIABILITIES
The fair values disclosed for demand deposits equal their carrying amounts,
which represents the amount payable on demand. The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits. The
carrying amount of accrued interest payable approximates its fair value.
(Continued)
55.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
BORROWED FUNDS
The stated carrying amounts of federal funds purchased and securities sold under
agreements to repurchase, advances from the Federal Home Loan Bank, and notes
payable approximate their fair values based on rates and terms currently
available for borrowings with similar terms and maturities. The mortgage
payable is calculated using discounted cash flows that apply interest rates
being currently offered to borrowers of similar credit quality and comparable
payment terms.
OFF-BALANCE-SHEET INSTRUMENTS
Fair values for the Company's off-balance-sheet instruments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing. The
fair values of these items are not material
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1997 1996
----------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 22,826 $ 22,826 $ 29,236 $ 29,236
Federal funds sold 1,404 1,404 10,267 10,267
Securities 200,738 201,408 223,555 223,860
Loans 367,797 368,180 348,428 348,043
Accrued interest receivable 6,730 6,730 6,501 6,501
Financial liabilities
Deposits 527,747 527,762 543,744 545,433
Federal funds purchased and
securities sold under agreement
to repurchase 11,761 11,761 21,817 21,817
Advances from the Federal Home
Loan Bank 16,455 16,455 10,021 10,021
Notes payable 10,261 10,261 13,180 13,180
Accrued interest payable 3,819 3,819 3,931 3,931
</TABLE>
(Continued)
56.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the earnings potential of the trust operations, the trained work force, customer
goodwill, and similar items.
NOTE 15. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
In the normal course of business, there are outstanding various contingent
liabilities such as claims and legal actions, which are not reflected in the
consolidated financial statements. In the opinion of management, no material
losses are anticipated as a result of these actions or claims.
The Banks are parties to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
contractual amounts of those instruments reflect the extent of involvement in
particular classes of financial instruments.
The Bank's exposure to credit loss, in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit written, is represented by the contractual amount of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments. Financial
instruments whose contract amounts represent credit risk are as follows:
<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
December 31, 1997 $58,103 $14,877 $72,980 8.00 - 10.95%
December 31, 1996 49,712 10,142 59,854 6.25 - 14.00%
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. For commitments to extend credit, the Banks
evaluate each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained is based on management's credit evaluation of the
customer.
(Continued)
57.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Collateral held varies, but may include accounts receivable; inventory;
property, plant, and equipment; and income producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loan commitments to customers. The standby letters of
credit are unsecured.
The Company has employment agreements with its executive officers and certain
other management personnel. These agreements generally continue until
terminated by the executive or the Company and provide for continued salary and
benefits to the executive under certain circumstances. The agreements provide
the employees with additional rights after a change of control of the Company
occurs.
The Company does not engage in the use of interest rate swaps or futures,
forwards, or option contracts.
NOTE 16. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The primary source of funds for the Company is dividends from its subsidiaries.
By regulation, the Banks are prohibited from paying dividends that would reduce
regulatory capital below a specific percentage of assets without regulatory
approval. As a practical matter, dividend payments are restricted to maintain
prudent capital levels.
(Continued)
58.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Condensed financial information for UnionBancorp, Inc. follows:
BALANCE SHEETS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
December 31,
-----------------------
ASSETS 1997 1996
-----------------------
<S> <C> <C>
Cash and cash equivalents $ 633 $ 6
Investment in subsidiaries 61,715 60,092
Premises and equipment 431 336
Other assets 278 285
-------- --------
$ 63,057 $ 60,719
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes payable $ 10,000 $ 13,180
Other liabilities 619 99
-------- --------
10,619 13,279
-------- --------
Mandatory redeemable preferred stock 857 857
-------- --------
Stockholders' equity 51,581 46,583
-------- --------
$ 63,057 $ 60,719
-------- --------
-------- --------
</TABLE>
INCOME STATEMENTS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
Years ended
December 31,
--------------------------------
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Dividends from subsidiaries $6,244 $1,227 $1,532
Management fees and other 369 977 981
Interest expense 991 690 422
Other expenses 2,589 1,768 1,275
Income tax benefit (1,321) (545) (217)
Equity in undistributed earnings of
subsidiaries 411 2,543 1,320
------ ------ ------
NET INCOME 4,765 2,834 2,353
Less dividends on preferred stock 259 105 -
------ ------ ------
NET INCOME ON COMMON STOCK $4,506 $2,729 $2,353
------ ------ ------
------ ------ ------
</TABLE>
(Continued)
59.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
Years ended
December 31,
--------------------------------
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 4,765 $ 2,834 $ 2,353
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation 90 53 17
Undistributed earnings of subsidiaries (411) (2,543) (1,320)
Amortization of deferred compensation -
stock options 42 26 19
Change in assets and liabilities
(Increase) decrease in other assets 7 (145) 474
Increase (decrease) in other liabilities 472 18 (134)
------- ------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 4,965 243 1,409
------- ------- -------
Cash Flows from Investing Activities
Investment in subsidiary - (11) (400)
Purchases of premises and equipment (185) (237) (51)
Purchase price paid for acquisitions - (16,939) -
------- ------- -------
NET CASH (USED IN) FINANCING ACTIVITIES (185) (17,187) (451)
------- ------- -------
Cash Flows from Financing Activities
Net increase (decrease) in notes payable (3,180) 4,884 (680)
Dividend paid on common stock (722) (316) (284)
Dividends paid on preferred stock (259) (53) -
Redemption of qualifying directors' shares
and exercise of stock options 8 (1) -
Proceeds from issuance of common stock,
net of cost - 12,436 -
------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (4,153) 16,950 (964)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 627 6 (6)
Cash and cash equivalents
Beginning of year 6 - 6
------- ------- -------
End of year $ 633 $ 6 $ -
------- ------- -------
------- ------- -------
</TABLE>
60.
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
UnionBank, an Illinois state bank with its main office located Streator,
Illinois.
UnionBank/West, an Illinois state bank with its main office located in Macomb,
Illinois.
UnionBank/Central, an Illinois state bank with its main office located in
Princeton, Illinois.
UnionBank/Northwest, an Illinois state bank with its main office located in
Hanover, Illinois.
Bank of Ladd, an Illinois state bank with its main office located in Ladd,
Illinois.
Prairie Bancorp, Inc., an Illinois corporaton located in Streator, Illinois.
Country Bancshares, Inc., an Illinois corporation located in Streator,
Illinois.
UnionData Corp., Inc., an Illinois corporation located in Streator, Illinois.
UnionTrust Corporation, an Illinois corporation located in Ottawa, Illinois.
Credit Recovery, Inc., an Illinois corporation located in Ottawa, Illinois.
<PAGE>
[LETTERHEAD OF CROWE, CHIZEK & COMPANY LLP]
The Board of Directors
UnionBancorp, Inc.
We consent to the incorporation by reference of our report included herein,
dated February 6, 1998, relating to the consolidated financial statements of
UnionBancorp, Inc. (the "Company") as of December 31, 1997 and for the year
then ended in the Registration Statement on Form S-8 filed by the Company
with the Securities and Exchange Commission on November 18, 1996.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 31, 1998
<PAGE>
[LETTERHEAD OF MCGLADREY & PULLEN, LLP]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-16359), of our report, dated February 5, 1997,
on the consolidated balance sheets of UnionBancorp, Inc. and subsidiaries as
of December 31, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the two years in the
period ending December 31, 1996, which was included in the Annual Report on
Form 10-K for the year ended 1997.
McGLADREY & PULLEN, LLP
Champaign, Illinois
March 27, 1998
