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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, 1998
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 8, 1999, the Registrant had issued and outstanding 4,262,359 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 8, 1999, was $32,272,085.*
* Based on the last reported price $14.50 of an actual transaction in the
Registrant's Common Stock on March 8, 1999, 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 1998 Annual Report to Stockholders (the "1998
Annual Report") are incorporated by reference into Part II of this Form 10-K.
Certain portions of the Proxy Statement for the 1999 Annual Meeting of
Stockholders (the "1999 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> <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 Consolidated Financial Data................................................ 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation.................................... 12
Item 7A. Quantitative and Qualitative Disclosure about Market Risk........................... 12
Item 8. Financial Statements and Supplementary Data......................................... 12
Item 9 Changes in and Disagreements on Accounting and Financial Disclosure ................ 13
Part III
Item 10. Directors and Executive Officers of the Registrant.................................. 13
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..................................................................... 14
</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 four bank subsidiaries (the
"Banks"). The Banks serve communities throughout Central and Northern Illinois
through twenty-six locations, including its newest branch opened in Quincy,
Illinois during the first quarter of 1999. 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 Union Financial Services, Inc., an
insurance/brokerage agency with its headquarters located in Peru, Illinois. The
Banks and the three non-bank subsidiaries are collectively referred to as the
"Subsidiaries." At December 31, 1998, the Company had consolidated assets of
approximately $627.2 million, deposits of approximately $517.6 million and
stockholders' equity of approximately $57.1 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
other banking subsidiary is UnionBank/Northwest, an Illinois state bank with its
main office located in Hanover, Illinois ("UnionBank/Northwest").
During 1998, the Company, through its wholly-owned subsidiary
UnionFinancial Services, Inc., acquired the Mercier Insurance Agency, an
insurance/brokerage firm. Also, during the first quarter of 1998, UnionData
Corp, Inc., a wholly-owned electronic data processing subsidiary of the Company,
acquired Sainet, an Internet Service Provider. Both of these endeavors are a
part of the transformation of the Company's internal structure that is intended
to create a much more efficient organization capable of generating sustained
revenue and earnings growth. In addition, during 1998 the Company sold its 81.7%
ownership of the outstanding stock of the Bank of Ladd, an Illinois state bank
with its main office located in Ladd, Illinois ("Ladd"). The Company also sold
Credit Recovery, Inc., a small collection agency subsidiary acquired in 1996.
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
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presence of the Company within the region's banking industry. Because of the
reputations of the Company and its executive officers in the banking industry,
the Company believes that it will be an attractive alternative to future sellers
of community banks and thrifts. The Company believes that it can successfully
manage these community-based institutions to increase their profitability by
expanding cross-selling efforts and emphasizing those products and services
offering the highest return on investment.
The Company's operating strategy is to provide customers with the business
sophistication and breadth of products of a regional financial services company,
while retaining the special attention to personal service and the local appeal
of a community bank. Decentralized decision making authority vested in the
presidents and senior officers of the Banks allows for rapid response time and
flexibility in dealing with customer requests and credit needs. The
participation of the Company's directors, officers and employees in area civic
and service organizations demonstrates the Company's continuing commitment to
the communities it serves. Management believes that these qualities distinguish
the Company from its competitors and will allow the Company to compete
successfully in its market area against larger regional and out-of-state
institutions.
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, as well as into
additional areas of Northern and Western Illinois.
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, a
full line of insurance and investment opportunities through UnionFinancial
Services, MasterCard and Visa credit cards, and a debit card program inaugurated
in 1994. An 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.
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
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for deposits by offering customers personal attention, professional service and
competitive interest rates.
EMPLOYEES
At December 31, 1998, the Company employed 338 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 the Federal Reserve, 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 applicable statutes, regulations and regulatory 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 is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiaries. It does not describe
all of the statutes, regulations and regulatory policies that apply to the
Company and its subsidiaries, nor does it restate all of the requirements of the
statutes, regulations and regulatory policies that are described. As such, the
following is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of the Company
and its subsidiaries.
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION. Legislation has been introduced 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. 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 Company and the
Bank.
THE COMPANY
GENERAL. The Company (as the sole shareholder of UnionBank), Prairie (as
the sole shareholder of UnionBank/Central and UnionBank/Northwest) and Country
(as the sole shareholder of UnionBank/West) are bank holding companies. As bank
holding companies, the Company, Prairie and Country are registered with, and are
subject to regulation by, the Federal Reserve under the Bank Holding Company
Act, as amended (the "BHCA"). In
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accordance with Federal Reserve policy, the Company, Prairie and Country are
expected to act as a source of financial strength to their bank subsidiaries and
to commit resources to support their bank subsidiaries in circumstances where
the Company, Prairie or Country might not otherwise do so. Under the BHCA, the
Company, Prairie and Country are subject to periodic examination by the Federal
Reserve. The Company, Prairie and Country are also required to file with the
Federal Reserve periodic reports of their respective operations and such
additional information as the Federal Reserve 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 Federal Reserve approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after the acquisition, it would own or control more than 5% of the
shares of the other bank or bank holding company (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 Federal Reserve 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 Federal Reserve 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) and state laws 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 generally prohibits 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. This general prohibition is subject to
a number of exceptions. The principal exception allows bank holding companies to
engage in, and to own shares of companies engaged in, certain businesses found
by the Federal Reserve to be "so closely related to banking ... as to be a
proper incident thereto." Under current regulations of the Federal Reserve, the
Company, Prairie and Country and their non-bank subsidiaries are permitted to
engage in a variety of banking-related businesses, including 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 any person or company from acquiring "control"
of a bank or a bank holding company without prior notice to the appropriate
federal bank regulator. "Control" is defined in certain cases as the 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 Federal Reserve 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 Federal Reserve'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 a minimum requirement of 4% 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).
Total capital consists primarily of Tier 1 capital plus certain other debt
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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. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking organizations.
For example, the Federal Reserve'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, 1998, the Company, Prairie and Country each had
regulatory capital in excess of the Federal Reserve's minimum requirements, as
follows:
<TABLE>
<CAPTION>
Risk-Based Leverage
Capital Ratio Capital Ratio
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<S> <C> <C>
Company 12.23% 7.66%
Prairie 14.96% 8.76%
Country 15.22% 9.35%
</TABLE>
DIVIDENDS. The Delaware General Corporation Law (the "DGCL") allows the
Company to pay dividends only out of its surplus (as defined and computed in
accordance with the provisions of 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, as amended, prohibits an Illinois corporation, such as Prairie
or Country, from paying a dividend if, after giving effect to the dividend: (i)
the corporation would be insolvent; or (ii) the net assets of the corporation
would be less than zero; or (iii) the net assets of the corporation would be
less than the maximum amount then payable to shareholders of the corporation who
would have preferential distribution rights if the corporation were liquidated.
Additionally, the Federal Reserve has issued a policy statement with regard
to the payment of cash dividends by bank holding companies. The policy statement
provides 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. The Federal Reserve also
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.
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
GENERAL. All of the Bank Subsidiaries are Illinois-chartered banks, the
deposit accounts of which are insured by the FDIC's Bank Insurance Fund ("BIF").
All of the Bank Subsidiaries are also members of the Federal Reserve System
("member banks"). As Illinois-chartered, FDIC-insured member banks, the Bank
Subsidiaries are subject to the examination, supervision, reporting and
enforcement requirements of the Commissioner, as the chartering authority for
Illinois banks, the Federal Reserve, as the primary federal regulator of member
banks, and the FDIC, as administrator of the BIF.
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DEPOSIT INSURANCE. As FDIC-insured institutions, the Bank Subsidiaries are
required to pay deposit insurance premium assessments to the FDIC. The FDIC has
adopted a risk-based assessment system under which 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, 1998, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 1999, 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 (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe
or unsound condition to continue operations or (iii) 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 Bank Subsidiaries.
FICO ASSESSMENTS. Since 1987, a portion of the deposit insurance
assessments paid by members of the FDIC's Savings Association Insurance Fund
("SAIF") has been used to cover interest payments due on the outstanding
obligations of the Financing Corporation ("FICO"). FICO was created in 1987 to
finance the recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. As a result of federal
legislation enacted in 1996, beginning as of January 1, 1997, both SAIF members
and BIF members became subject to assessments to cover the interest payments on
outstanding FICO obligations. These 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
final 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, 1998, the FICO assessment rate for
SAIF members ranged between approximately 0.061% of deposits and approximately
0.063% of deposits, while the FICO assessment rate for BIF members ranged
between approximately 0.012% of deposits and approximately 0.013% of deposits.
SUPERVISORY ASSESSMENTS. All Illinois banks are required to pay supervisory
assessments to the Commissioner to fund the operations of the Commissioner. The
amount of the assessment is calculated based on the institution's total assets,
including consolidated subsidiaries, as reported to the Commissioner. During the
year ended December 31, 1998, the Bank Subsidiaries paid supervisory assessments
to the Commissioner totaling $83,665.
CAPITAL REQUIREMENTS. The Federal Reserve has established the following
minimum capital standards for state-chartered Federal Reserve System member
banks, such as the Bank Subsidiaries: a leverage requirement consisting of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated
banks with a minimum requirement of at least 4% 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 Federal Reserve'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, the regulations of the
Federal Reserve 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, 1998, none of the Bank Subsidiaries was
required by the Federal Reserve to increase its capital to an amount in excess
of the minimum regulatory requirement. As of December 31, 1998, each of the Bank
Subsidiaries exceeded its minimum regulatory capital requirements, as follows:
<TABLE>
<CAPTION>
Risk-Based Leverage
Capital Ratio Capital Ratio
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<S> <C> <C>
UnionBank 11.03% 7.32%
UnionBank/West 15.30% 9.41%
UnionBank/Central 14.38% 8.61%
UnionBank/Northwest 17.79% 9.40%
</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," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators' corrective
powers include: requiring the institution to submit a capital restoration plan;
limiting the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions between the
institution and its 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. As of December 31, 1998, each of the Bank Subsidiaries was well
capitalized, as defined by Federal Reserve regulations.
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. Because the Bank Subsidiaries are
all directly or indirectly wholly-owned by the Company, the Bank Subsidiaries
are deemed to be commonly controlled.
DIVIDENDS. Under the Illinois Banking Act, Illinois-chartered banks may not
pay, without prior regulatory approval, dividends in excess of their net
profits.
The Federal Reserve Act also imposes limitations on the amount of dividends
that may be paid by state member banks, such as the Bank Subsidiaries.
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 Federal Reserve 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 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 Bank Subsidiaries exceeded its minimum capital requirements under
applicable guidelines as of December 31, 1998. As of December 31, 1998,
approximately $1.8 million was available to be paid as dividends to the Company
by the Bank Subsidiaries. Notwithstanding the availability of funds for
dividends, however, the Federal Reserve may prohibit the payment of any
dividends by the Bank if the Federal Reserve determines such payment would
constitute an unsafe or unsound practice.
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INSIDER TRANSACTIONS. The Bank Subsidiaries are subject to certain
restrictions imposed by federal law 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 Bank
Subsidiaries 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 Bank Subsidiaries 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 addition, in October 1998, the federal banking regulators issued
safety and soundness standards for achieving Year 2000 compliance, including
standards for developing and managing Year 2000 project plans, testing
remediation efforts and planning for contingencies.
In general, the safety and soundness 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. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
BRANCHING AUTHORITY. Illinois banks, such as the Bank Subsidiaries, have
the authority under Illinois law to establish branches anywhere in the State of
Illinois, subject to receipt of all required regulatory approvals.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act"), both state and national banks are allowed 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 new 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
allowed 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 involving an Illinois bank that has been in existence and continuous
operation for fewer 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. These restrictions have not had, and are not
currently expected to have, a material impact on the operations of the Bank
Subsidiaries.
8
<PAGE>
FEDERAL RESERVE SYSTEM. Federal Reserve regulations, as presently in
effect, require depository institutions to maintain non-interest earning
reserves against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $46.5 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $46.5 million, the reserve
requirement is $1.395 million plus 10% of the aggregate amount of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Bank Subsidiaries are in compliance with the foregoing requirements.
INSURANCE SUBSIDIARY
UnionBank is the sole shareholder of UnionFinancial Services, Inc. ("UFS"),
an Illinois corporation licensed as a general insurance agency by the Illinois
Department of Insurance (the "Department"). UFS is subject to supervision and
regulation by the Department with regard to compliance with the laws and
regulations governing insurance agents and by the Commissioner and the Federal
Reserve with regard to compliance with banking laws and regulations applicable
to subsidiaries of Illinois-chartered member banks.
THE TRUST COMPANY
The Company is the sole shareholder of UnionTrust Corporation (the "Trust
Company"), an Illinois corporation which conducts a full service trust business
in the State of Illinois pursuant to a certificate of authority issued to it be
the Commissioner under the Illinois Corporate Fiduciaries Act (the "Fiduciaries
Act"). The Fiduciaries Act requires the Trust Company, among other things, to
maintain a minimum level of capital, as determined by the Commissioner, and to
obtain the approval of the Commissioner before opening branch offices or
acquiring another trust company. The Trust Company is subject to periodic
examination by the Commissioner and the Commissioner has the authority to take
action against it to enforce compliance with the laws applicable to its
operations. The Trust Company is also subject to supervision and regulation by
the Federal Reserve under the BHCA.
ITEM 2. PROPERTIES
At December 31, 1998, the Company operated 25 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 UnionTrust
Corporation and are not subject to any mortgage or material encumbrance. The
Company believes that its current facilities are adequate for its existing
business. During the first quarter of 1999, the Company opened a branch located
in Quincy, Illinois.
<TABLE>
<CAPTION>
AFFILIATE MARKETS SERVED PROPERTY/TYPE LOCATION
--------- -------------- -----------------------
<S> <C> <C>
The Company Administrative Office: Ottawa, IL
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 Counties Eight banking offices located in
markets served.
UnionBank/Northwest Jo Davies County Main Office: Hanover, IL
Two banking offices located in
markets served.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AFFILIATE MARKETS SERVED PROPERTY/TYPE LOCATION
--------- -------------- -----------------------
<S> <C> <C>
UnionData Corp, Inc. LaSalle, Kendall, Main Office: Streator, IL
DeKalb, McDonough, Adams Additional office located in
and Pike Counties Macomb, IL
UnionFinancial Services, Inc. LaSalle and Adams Main Office: Peru, IL
Counties Additional offices located in
Mendota, Spring Valley, and
Quincy, IL
UnionTrust Corporation LaSalle County Main Office: Ottawa, IL
Additional offices located in
Streator, Princeton and Macomb
</TABLE>
In addition to the banking locations listed above, the Banks own 24
automatic teller machines, some of which are housed within a banking office and
some of which are independently located.
At December 31, 1998, the properties and equipment of the Company had an
aggregate net book value of approximately $13.9 million.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries are involved in any pending
legal proceedings other than routine legal proceedings occurring in the normal
course of business, which, in the opinion of management, in the aggregate, are
not material to the Company's consolidated financial condition. ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no items submitted to a vote of security holders in the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was held by approximately 630 stockholders of
record as of March 8, 1999, 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.
10
<PAGE>
<TABLE>
<CAPTION>
STOCK SALES(1)
------------------- CASH
HIGH LOW DIVIDENDS(1)
--------- --------- -----------------
<S> <C> <C> <C>
1996
First Quarter............................... $11.33 $10.00 $0.033
Second Quarter.............................. 2.00 10.67 0.033
Third Quarter............................... 2.00 11.00 0.035
Fourth Quarter.............................. 4.50 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
1998
First Quarter................................ 21.13 18.13 0.035
Second Quarter............................... 21.00 18.50 0.035
Third Quarter................................ 18.88 13.75 0.035
Fourth Quarter............................... 17.00 11.75 0.040
</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.
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 partial consideration for the
11
<PAGE>
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. Also, as partial consideration for the acquisition of
the Mercier Insurance Agency, which was consummated on October 30, 1998, the
Company issued 123,529 shares of Common Stock. The Company believes all of the
securities issued in connection with the acquisitions of Prairie, Credit
Recovery, Mercier, 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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Selected consolidated financial data for the five years ended December 31,
1998, consisting of data captioned "Selected Consolidated Financial and Other
Data for the Company and Subsidiaries" on page F-1 of the Company's 1998 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 2 of the Company's 1998 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operation" is incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to pages 9 through 12 of the Company's 1998 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, 1998 and the related Consolidated Statements of Income,
Stockholders' Equity and Cash Flows for the year ended December 31, 1998,
together with the related notes and the report of Crowe Chizek & Company LLP,
independent auditors, on pages 30 to 65 of the Company's 1998 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 the related Consolidated Statements of Income,
Stockholders' Equity and Cash Flows for the year ended December 31, 1996,
together with the related notes and the report of McGladrey & Pullen, LLP,
independent auditors, on pages 32 to 65 of the Company's 1998 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 1999 Proxy Statement
under the caption "Election of Directors" and on pages 4 through 7 of the 1999
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 1999 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 1999 Proxy Statement,
the names and ages of the executive officers of the Company as of December 31,
1998, 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, 54, 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, 45, 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 8 and 9 of the 1999 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 1999 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 page 13 of the 1999 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 1998.
(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 24, 1999.
UnionBancorp, Inc.
By: /s/ R. SCOTT GRIGSBY By: /s/ CHARLES J. GRAKOR.
------------------------------- -------------------------------
Scott Grigsby Charles J. Grako
Chairman and Executive Vice President and
Principal Executive Officer Principal Financial and
Accounting Officer
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 24, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- ------
<S> <C>
/s/ R. SCOTT GRIGSBY
- ------------------------------
R. Scott Grigsby Chairman of the Board, President and
Chief Executive Officer
/s/ RICHARD J. BERRY
- ------------------------------
Richard J. Berry Director
/s/ WALTER E. BREIPOHL
- ------------------------------
Walter E. Breipohl Director
/s/ L. PAUL BROADUS
- ------------------------------
L. Paul Broadus Director
/s/ JOHN MICHAEL DAW
- ------------------------------
John Michael Daw Director
/s/ ROBERT J. DOTY
- ------------------------------
Robert J. Doty Director
/s/ JIMMIE D. LANSFORD
- ------------------------------
Jimmie D. Lansford Director
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
/s/ LAWRENCE J. MCGROGAN
- ------------------------------
Lawrence J. McGrogan Director
/s/ I. J. REINHARDT, JR.
- ------------------------------
I. J. Reinhardt, Jr. Director
/s/ H. DEAN REYNOLDS
- ------------------------------
H. Dean Reynolds Director
/s/ SCOTT C. SULLIVAN
- ------------------------------
Scott C. Sullivan Director
/s/ JOHN A. SHINKLE
- ------------------------------
John A. Shinkle Director
/s/ JOHN A. TRAINOR
- ------------------------------
John A. Trainor Director
/s/ CHARLES J. GRAKO
- ------------------------------
Charles J. Grako Executive Vice President and Chief Financial and
Accounting Officer
</TABLE>
16
<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 Exhibit 3.1 to the
UnionBancorp, Inc., as amended Registration 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 Exhibit 4.3 to the
Series A Convertible Registration Statement on Form
Preferred Stock of S-1 filed by the Company on
UnionBancorp, Inc. August 19, 1996 (SEC File No.
33-9891), as amended
4.2 Certificate of Designation, Incorporated by reference from
Preferences and Rights of Exhibit 4.4 to the
Series B Preferred Stock of Registration Statement on Form
UnionBancorp, Inc. S-1 filed by the 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 Exhibit 4.5 to the
Series C Junior Participating Registration Statement on Form
Preferred Stock S-1 filed by the Company on
August 19, 1996 (SEC File No.
33-9891), as amended
</TABLE>
17
<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 Incorporated by reference from
Certificate of UnionBancorp, Exhibit 4.6 to the
Inc. 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 Exhibit 4.7 to the
Trust and Savings Bank, dated Registration Statement on Form
August 5, 1996 S-1 filed by the 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 Exhibit 10.1 to the
UnionBank, UnionBancorp, Inc. Registration Statement on Form
and R. Scott Grigsby, as S-1 filed by the Company on
amended on October 1, 1993, August 19, 1996 (SEC File No.
April 4, 1996 and August 5, 33-9891), as amended
1996
10.2 Employment Agreement dated Incorporated by reference from
March 1, 1994, among Exhibit 10.2 to the
UnionBank, UnionBancorp, Inc. Registration Statement on Form
and Wayne L. Bismark, as S-1 filed by the Company on
amended on April 4, 1996 August 19, 1996 (SEC File No.
33-9891), as amended
10.3 Employment Agreement dated Incorporated by reference from
January 1, 1992, between Exhibit 10.3 to the
UnionBancorp, Inc. and Registration Statement on Form
Charles J. Grako, as amended S-1 filed by the Company on
on October 1, 1993, April 4, August 19, 1996 (SEC File No.
1996 and August 5, 1996 33-9891), as amended
10.4 Employment Agreement dated Incorporated by reference from
January 1, 1992, by and among Exhibit 10.4 to the
UnionBank, UnionBancorp, Inc. Registration Statement on Form
</TABLE>
<PAGE>
18
<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT HEREIN BY FILED SEQUENTIAL
NO. DESCRIPTION REFERENCE TO HEREWITH PAGE NO.
-- ----------- ------------ --------- --------
<S> <C> <C> <C> <C>
and Everett J. Solon, as S-1 filed by the Company on
amended on October 1, 1993, August 19, 1996 (SEC File No.
April 11, 1996 and August 5, 33-9891), as amended
1996
10.5 Employment Agreement dated Incorporated by reference from
June 3, 1996, between Exhibit 10.5 to the
UnionBancorp, Inc. and John Registration Statement on Form
M. Daw S-1 filed by the Company on
August 19, 1996 (SEC File No.
33-9891), as amended
10.6 Employment Agreement dated Incorporated by reference from
March 4, 1996, between Exhibit 10.6 to the
UnionBank, UnionBancorp, Inc. Registration Statement on Form
and Jimmie D. Lansford, as S-1 filed by the Company on
amended on April 4, 1996 August 19, 1996 (SEC File No.
33-9891), as amended
10.7 Standstill Agreements dated Incorporated by reference from
August 6, 1996, between Exhibit 10.9 to the
UnionBancorp, Inc. and each Registration Statement on Form
of Wayne W. Whalen and Dennis S-1 filed by the Company on
J. McDonnell August 19, 1996 (SEC File No.
33-9891), as amended
10.8 Registration Agreement dated Incorporated by reference from
August 6, 1996, between Exhibit 10.10 to the
UnionBancorp, Inc. and each Registration Statement on Form
of Wayne W. Whalen and Dennis S-1 filed by the Company on
J. McDonnell August 19, 1996 (SEC File No.
33-9891), as amended
10.9 Loan Agreement between Incorporated by reference from
UnionBancorp, Inc. and Exhibit 10.11 to the
LaSalle National Bank dated Registration Statement on Form
August 2, 1996 S-1 filed by the Company on
August 19, 1996 (SEC File No.
33-9891), as amended
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT HEREIN BY FILED SEQUENTIAL
NO. DESCRIPTION REFERENCE TO HEREWITH PAGE NO.
-- ----------- ------------ --------- --------
<S> <C> <C> <C> <C>
10.10 UnionBancorp, Inc. Employee Incorporated by reference from
Stock 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
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 1998 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 1999 Proxy Statement (as Incorporated by reference from
incorporated by reference the Schedule 14A filed by the
into this Form 10-K) Company on March 17, 1999 (SEC
File No. 0-28846)
</TABLE>
20
<PAGE>
UNIONBANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Interest income $ 47,720 $ 46,039 $ 31,037 $ 21,368 $ 18,627
Interest expense 25,258 24,435 17,003 11,249 8,706
---------- ---------- ---------- ---------- ----------
Net interest income 22,462 21,604 14,034 10,119 9,921
Provision for loan losses 1,635 1,079 1,178 684 660
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 20,827 20,525 12,856 9,435 9,261
Noninterest income 8,071 5,182 3,222 2,570 2,283
Noninterest expense 20,733 18,764 12,248 8,771 8,247
---------- ---------- ---------- ---------- ----------
Net income before income taxes and minority interest 8,165 6,943 3,830 3,234 3,297
Minority interest 53 73 27 -- --
Provision for income taxes 2,723 2,105 969 881 703
---------- ---------- ---------- ---------- ----------
Net income $ 5,389 $ 4,765 $ 2,834 $ 2,353 $ 2,594
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income on common stock $ 5,130 $ 4,506 $ 2,729 $ 2,353 $ 2,594
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER SHARE DATA (1)
Basic earnings per common shares (2) $ 1.23 $ 1.09 $ 1.00 $ 1.10 $ 1.22
Diluted earnings per common shares (2) $ 1.22 $ 1.08 $ 0.99 $ 1.09 $ 1.21
Cash dividends on common stock 0.15 0.18 0.14 0.13 0.12
Dividend payout ratio for common stock 12.34% 12.83% 11.58% 12.06% 9.57%
Year-end book value per common share $ 13.28 $ 12.35 $ 11.20 $ 11.01 $ 9.21
Basic weighted average common shares outstanding (2) 4,157,745 4,125,902 2,730,600 2,131,737 2,131,737
Diluted weighted average common shares outstanding (2) 4,210,739 4,167,764 2,756,806 2,165,428 2,150,073
Period-end common shares outstanding 4,262,359 4,135,830 4,114,801 2,131,737 2,131,737
BALANCE SHEET DATA
Investments and federal funds sold $ 176,069 $ 202,142 $ 233,822 $ 95,182 $ 86,460
Total loans 398,388 370,985 346,496 180,819 161,134
Allowance for loan losses 3,858 3,188 3,068 2,014 1,704
Total assets 627,194 625,460 642,024 303,533 272,038
Total deposits 517,638 527,747 543,744 261,727 232,334
Stockholders' equity 57,091 51,581 46,583 22,975 19,629
EARNINGS PERFORMANCE DATA
Return on average total assets 0.84% 0.77% 0.66% 0.83% 0.98%
Return on average stockholders' equity 9.98 9.78 9.32 10.83 13.29
Return on average total assets, including mandatory
redeemable preferred stock 0.84 0.77 0.66 N/A N/A
Return on average equity, including mandatory
redeemable preferred stock 9.83 9.61 9.21 N/A N/A
Net interest margin ratio 4.01 3.95 3.72 4.12 4.38
Efficiency ratio (3) 63.49 65.29 66.70 68.35 66.17
ASSET QUALITY RATIOS
Nonperforming assets to total assets 0.46% 0.49% 0.44% 0.95% 0.87%
Nonperforming loans to total loans 0.65 0.74 0.65 1.22 0.90
Net loan charge-offs to average loans 0.20 0.27 0.58 0.22 0.49
Allowance for loan losses to total loans 0.97 0.86 0.89 1.11 1.06
Allowance for loan losses to nonperforming loans 148.50 116.91 135.75 90.93 117.44
CAPITAL RATIOS
Average equity to average assets 8.44% 8.00% 7.14% 7.67% 7.38%
Total capital to risk adjusted assets 12.23 11.86 10.87 12.35 12.28
Tier 1 leverage ratio 7.66 6.76 7.76 7.95 7.68
</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 amortization of intangibles 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 gains and losses and gain on sale of
subsidiaries.
<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 UnionBancorp, Inc. (the "Company") for the
three years ended December 31, 1998. 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 Securities 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," or "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 effect 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). 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, 1998,
the Company had total assets of $627,194,000, net loans of $394,530,000, total
deposits of $517,638,000, and total stockholders' equity of $57,091,000. Total
assets have increased by .3% from year-end 1997 or a $1,734,000 increase. The
increase in assets is primarily related to deposit growth and the October 30,
1998 acquisition of Mercier Insurance Agency L.P. which was recorded using the
purchase method of accounting (see Note 2 of the consolidated financial
statements). This growth was offset by various divestitures which were
2
<PAGE>
consummated during the fourth quarter of 1998. On November 30, 1998, the Company
sold its 81.7% interest in Bank of Ladd, one of its subsidiary banks. At the
date of sale, the Bank of Ladd had approximately $33,782,000 in total assets and
$29,619,000 in total liabilities. In addition, on December 17, 1998, the Company
sold a UnionBank/West branch location. At the date of sale, the branch had
approximately $3,467,000 in total assets and $10,009,000 in total liabilities.
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. In addition, 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 the reduction of the
organization from nine bank subsidiaries to five bank subsidiaries.
RESULTS OF OPERATIONS
NET INCOME
Net income was $5,389,000 for the year ended December 31, 1998 compared with net
income of $4,765,000 for the year ended December 31, 1997, an increase of
$624,000 or 13.1%. The increase in earnings per share in 1998 compared with 1997
was primarily attributed to the sustained growth in core noninterest income
coupled with the continued growth in net interest income driven by the loan
portfolio and the various nonrecurring transactions previously discussed.
Net income was $4,765,000 for the year ended December 31, 1997 compared with net
income of $2,834,000 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 growth in the Company's loan 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 $22,462,000 for 1998, an increase of $858,000 or 4.0%,
compared with net interest income of $21,604,000 for 1997. The Company's average
total interest-earning assets increased from $571,626,000 for 1997 to
$590,008,000 for 1998 representing a 3.2% increase resulting primarily from the
growth attributed to efforts to increase market share during 1998. The net
interest margin (tax equivalent basis) increased to 4.01% at December 31, 1998
from
3
<PAGE>
3.95% at December 31, 1997. The interest rates on average earning assets (tax
equivalent basis) increased to 8.29% in 1998 from 8.22% in 1997, while rates on
average interest-bearing liabilities increased to 4.87% in 1998 from 4.83% in
1997.
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 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.
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, 1998, 1997, and 1996. 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,
-------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
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 $ 1,568 $ 142 9.06% $ 353 $ 28 7.93%
Securities (1)
Taxable 149,807 9,016 6.02% 173,190 10,838 6.26%
Nontaxable (2) 42,131 3,225 7.65% 32,618 2,566 7.87%
-------- ------- ----------- -------- ------- -----------
Total securities (tax equivalent) 191,938 12,241 6.38% 205,808 13,404 6.51%
-------- ------- ----------- -------- ------- -----------
Federal funds sold 5,942 333 5.60% 6,845 381 5.56%
-------- ------- ----------- -------- ------- -----------
Loans (3)(4)
Commercial 109,685 10,377 9.46% 97,407 9,274 9.52%
Real estate 239,780 20,632 8.60% 216,911 18,693 8.62%
Installment and other 41,095 3,892 9.47% 44,302 4,124 9.31%
Fees on loans -- 1,276 --% -- 1,092 --
-------- ------- ----------- -------- ------- -----------
Net loans (tax equivalent) 390,560 36,177 9.26% 358,620 33,183 9.25%
-------- ------- ----------- -------- ------- -----------
Total interest-earning assets 590,008 48,893 8.29% 571,626 46,996 8.22%
-------- ------- ----------- -------- ------- -----------
NON-INTEREST-EARNING ASSETS
Cash and cash equivalents 17,436 17,248
Premises and equipment, net 14,680 14,397
Other assets 17,208 16,245
-------- --------
Total non-interest-earning assets 49,324 47,890
-------- --------
Total assets $639,332 $619,516
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $ 56,668 1,353 2.39% $ 55,883 1,396 2.50%
Money market accounts 29,300 1,040 3.55% 31,433 1,028 3.27%
Savings deposits 61,740 1,848 2.99% 62,316 1,758 2.82%
Time $100,000 and over 106,187 5,809 5.47% 81,612 4,622 5.66%
Other time deposits 215,478 12,288 5.70% 231,766 12,860 5.55%
Federal funds purchased and
repurchase agreements 16,773 953 5.68% 20,683 1,171 5.66%
Advances from FHLB 21,727 1,226 5.64% 8,783 543 6.18%
Notes payable 11,024 741 6.72% 13,247 1,057 7.98%
-------- ------- ----------- -------- ------- -----------
Total interest-bearing liabilities 518,897 25,258 4.87% 505,723 24,435 4.83%
-------- ------- ----------- -------- ------- -----------
NON-INTEREST-BEARING LIABILITIES
Non-interest-bearing deposits 59,885 57,623
Other liabilities 6,569 6,596
-------- --------
Stockholders' equity 53,981 49,574
-------- --------
Total liabilities and stockholders' equity $639,332 $619,516
-------- --------
-------- --------
Net interest income (tax equivalent) $ 23,635 $22,561
-------- -------
-------- -------
Net interest income (tax equivalent) to
total earning assets 4.01% 3.95%
Interest-bearing liabilities to earning assets 87.95% 88.47
-------- --------
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1996
--------------------------------
Interest
Average Income/ Average
Balance Expense Rate
------- ------- -----
<S> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Interest-earning deposits $ 66 $ 4 6.06%
Securities (1)
Taxable 122,653 7,316 5.96%
Nontaxable (2) 26,994 2,051 7.60%
-------- ------- -----------
Total securities (tax equivalent) 149,647 9,367 6.26%
-------- ------- -----------
Federal funds sold 5,637 298 5.29%
-------- ------- -----------
Loans (3)(4)
Commercial 72,210 6,793 9.41%
Real estate 138,721 11,684 8.42%
Installment and other 33,047 3,062 9.27%
Fees on loans -- 641 --
-------- ------- -----------
Net loans (tax equivalent) 243,978 22,180 9.09%
-------- ------- -----------
Total interest-earning assets 399,328 31,849 7.98%
-------- ------- -----------
NON-INTEREST-EARNING ASSETS
Cash and cash equivalents 14,430
Premises and equipment, net 9,261
Other assets 7,674
--------
Total non-interest-earning assets 31,365
--------
Total assets $ 430,693
--------
--------
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $ 40,755 $ 1,055 2.59%
Money market accounts 25,333 804 3.17%
Savings deposits 41,664 1,224 2.94%
Time $100,000 and over 22,955 1,433 6.24%
Other time deposits 194,957 10,723 5.50%
Federal funds purchased and
repurchase agreements 16,388 861 5.25%
Advances from FHLB 3,427 213 6.21%
Notes payable 8,364 690 8.25%
-------- ------- -----------
Total interest-bearing liabilities 353,843 17,003 4.80%
-------- ------- -----------
NON-INTEREST-BEARING LIABILITIES
Non-interest-bearing deposits 41,395
Other liabilities 4,693
------
Total non-interest-bearing liabilities 46,088
------
Stockholders' equity 30,762
------
Total liabilities and stockholders' equity $ 430,693
------
------
Net interest income (tax equivalent) $14,846
-------
-------
Net interest income (tax equivalent) to
total earning assets 3.72%
Interest-bearing liabilities to earning assets 88.61%
------
</TABLE>
- ----------------------------------------------
(1) Average balance and average rate on securities classified as
available-for-sale are 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,
-----------------------------------------------------------------------------
1998 Compared to 1997 1997 Compared to 1996
----------------------------------- ----------------------------------
Change Due to Change Due to
----------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
------- ----- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest-earning deposits $ 109 $ 5 $ 114 $ 23 $ 1 $ 24
Investment securities:
Taxable (1,437) (385) (1,822) 3,147 375 3,522
Non-taxable 732 (73) 659 440 75 515
Federal funds sold (50) 2 (48) 67 16 83
Loans 2,958 36 2,994 10,829 174 11,003
------- ----- ------- ------- ----- -------
Total interest income 2,312 (415) 1,897 14,506 641 15,147
------- ----- ------- ------- ----- -------
INTEREST EXPENSE:
NOW accounts 19 (62) (43) 379 (38) 341
Money market accounts (73) 85 12 199 25 224
Savings deposits (16) 106 90 584 (50) 534
Time, $100,000 and over 1,347 (160) 1,187 3,334 (145) 3,189
Other time (915) 343 (572) 2,042 95 2,137
Federal funds purchased and
repurchase agreements (222) 4 (218) 239 71 310
Advances from FHLB 734 (51) 683 331 (1) 330
Notes payable (213) (103) (316) 391 (24) 367
------- ----- ------- ------- ----- -------
Total interest expense 661 162 823 7,499 (67) 7,432
------- ----- ------- ------- ----- -------
Net interest margin $ 1,651 $(577) $ 1,074 $ 7,007 $ 708 $ 7,715
------- ----- ------- ------- ----- -------
------- ----- ------- ------- ----- -------
</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 1998 provision for loan losses was $1,635,000 compared with $1,079,000 in
1997. Net charge-offs in 1998 were approximately $789,000. The provision for
loan losses of $1,635,000 was made to bring the allowance for loan losses to the
level management deemed adequate as of December 31, 1998.
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.
NONINTEREST INCOME
The following table shows the Company's noninterest income:
NONINTEREST INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Service charges $2,251 $1,854 $1,286
Merchant fee income 833 670 524
Trust income 590 516 393
Mortgage banking operations 1,518 751 425
Securities gains, net 56 193 20
Insurance commissions and fees 317 -- --
Gain on sale of subsidiaries, net 820 -- --
Other noninterest income 1,686 1,198 574
------ ------ ------
Total noninterest income $8,071 $5,182 $3,222
------ ------ ------
------ ------ ------
</TABLE>
Noninterest income totaled $8,071,000 for the year ended December 31, 1998, as
compared to $5,182,000 for the same timeframe in 1997. Exclusive of net security
gains, which totaled $56,000 during 1998 as compared to net securities gains of
$193,000 in 1997, noninterest income increased by $3,026,000 or a 60.7%
improvement. All categories of operating income contributed to the increase with
the majority of the increase related to the growth in mortgage banking income,
service charge income, and insurance commissions along with the $820,000 net
gain relating to the divestitures recorded during the year. Specifically,
mortgage banking income increased $767,000 during the year due to gains on sales
of loans, which was the result of increased loan originations due to
refinancings because of lower interest rates. These operations increased by over
102% from the prior year as the Company originated and sold in excess of $100
million of loans during the year. This growth was due to the low interest rate
environment and aggressive sales force. Service charges on deposit accounts, one
of the major components of noninterest income, consist of fees on both
interest-bearing and non-interest-bearing deposit accounts as well as charges
for items such as insufficient funds, overdrafts, and
7
<PAGE>
stop payment requests. The increase in service charge income to $2,251,000 for
the year ended December 31, 1998 from $1,854,000 for the year ended December 31,
1997 was related to increases in deposit account balances and increases in the
service charge schedule during 1998.
Noninterest income for 1997 was $5,182,000, an increase of $1,960,000 or 60.8%
compared with $3,222,000 for 1996. 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 non-interest and interest-bearing accounts. Specifically, service
charges increased on demand deposit accounts, the largest component of
non-interest-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 Company, through its wholly owned subsidiary UnionTrust Corporation,
provides trust services to its customers by acting as executor, administrator,
trustee, or agent and in various other fiduciary capacities for client accounts.
Total assets under management at December 31, 1998 and 1997 were approximately
$143,574,000 and $110,641,000, respectively. Trust income, which is
predominately comprised of assessed fees based on the market value of managed
client portfolios, increased by $74,000 during 1998 and $123,000 during 1997.
In 1998, the Company acquired Mercier Insurance Agency L.P. The insurance agency
provides a full range of insurance and brokerage services to its customers. The
$317,000 in income is attributable to policies sold and brokerage services
provided.
NONINTEREST EXPENSE
The following table shows the Company's noninterest expense:
NONINTEREST EXPENSE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Salaries and employee benefits $10,557 $ 9,231 $ 6,469
Occupancy expense, net 1,520 1,532 899
Furniture and equipment expenses 1,788 1,599 977
Supplies and printing 563 602 395
Telephone 576 472 277
Amortization of intangible assets 940 903 392
Other noninterest expense 4,789 4,425 2,839
------- ------- -------
Total noninterest expense $20,733 $18,764 $12,248
------- ------- -------
------- ------- -------
</TABLE>
8
<PAGE>
Noninterest expense was $20,733,000 in 1998, an increase of $1,969,000 or 10.5%
compared with noninterest expense of $18,764,000 for 1997. The increase was
reflected in several categories of noninterest expense. The increase in salaries
and employee benefits accounted for a majority of the increase and primarily was
directly related to merit increases along with incentive payments relating to
the mortgage banking operations. The increase in furniture and equipment
expenses was largely related to the standardization of computer equipment in
1997 for the acquired entities. The increase in the other expense category was
primarily associated with consulting fees, of which a significant portion of the
expense was related to outsourcing the internal audit function, beginning in the
second quarter of 1998. This increase was offset by a reduced increase in
salaries and employee benefits as the Company reallocated the internal audit
department to assist in other areas, coupled by the cost associated with the
acquisition and divestitures recorded during the year.
Noninterest expense was $18,764,000 in 1997; an increase of $6,516,000 or 53.2%
compared with $12,248,000 for 1996. The increase 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.
INCOME TAXES
The Company recorded income tax expense of $2,723,000, $2,105,000, and $969,000
for the years ended December 31, 1998, 1997, and 1996, respectively, and
effective tax rates were 33.6%, 30.6%, and 25.5%, 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 1998 and 1997 as
compared to $105,000 paid in 1996. The reason for this increase was the
preferred stock being outstanding for the entire year in 1998 and 1997, 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).
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.
9
<PAGE>
The objective of monitoring and managing the interest rate risk position of the
balance sheet is to contribute to earnings and to minimize fluctuations in net
interest income. The potential for earnings to be affected by changes in
interest rates is inherent in a financial institution. Interest rate sensitivity
is the relationship between changes in market interest rates and changes in net
interest income due to the repricing characteristics of assets and liabilities.
An asset sensitive position in a given period will result in more assets being
subject to repricing; therefore, as interest rates rise, such a position will
have a positive effect on net interest income. Conversely, in a liability
sensitive position, where liabilities reprice more quickly than assets in a
given period, a rise in interest rates will have an adverse effect on net
interest income. 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, 1998. The table was
prepared assuming loans prepay at varying degrees, based on type, maturity, and
rate. All of 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, 1998
---------------------------------------------------------------------------------
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
Interest-bearing balances $ 1,834 $ -- $ -- $ -- $ -- $ 1,834
Federal funds sold 450 -- -- -- -- 450
Securities 63,612 4,688 31,432 34,234 41,653 175,619
Loans 108,974 37,760 49,232 158,783 43,639 398,388
--------- -------- -------- -------- ------- --------
Total interest-earning assets $ 174,870 $ 42,448 $ 80,664 $193,017 $85,292 $576,291
--------- -------- -------- -------- ------- --------
--------- -------- -------- -------- ------- --------
INTEREST-BEARING LIABILITIES
NOW accounts $ 55,742 $ -- $ -- $ -- $ -- $ 55,742
Money market accounts 31,934 -- -- -- -- 31,934
Savings 57,185 -- -- -- -- 57,185
Time, $100,000 and over 42,264 26,056 30,033 33,882 -- 132,235
Other time 44,828 23,694 56,311 48,203 279 173,315
--------- -------- -------- -------- ------- --------
Total interest-bearing deposits 231,953 49,750 86,344 82,085 279 450,411
Federal funds and repurchase agreements 10,068 2,128 1,673 986 -- 14,855
Advances from FHLB -- 4,500 1,000 13,408 4,300 23,208
Notes payable 7,000 -- -- -- -- 7,000
--------- -------- -------- -------- ------- --------
Total interest-bearing liabilities $ 249,021 $ 56,378 $ 89,017 $ 96,479 $ 4,579 $495,474
--------- -------- -------- -------- ------- --------
--------- -------- -------- -------- ------- --------
Period interest sensitivity gap $ (74,151) $(13,930) $ (8,353) $ 96,538 $80,713 $ 80,817
Cumulative interest sensitivity gap (74,151) (88,081) (96,434) 104 80,817
Cumulative gap as a percent of total assets 11.46% 13.61% 14.90% 0.01% 12.47%
Cumulative interest-sensitive assets as a percent
of cumulative interest-sensitive liabilities 70.22% 71.16% 75.55% 100.00% 116.29%
</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 asset 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, 1998, the Banks held approximately
$31,111,000 (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 interest income in the event of hypothetical changes in interest rates.
This analysis assesses the risk of changes in net interest income in the event
of a sudden and sustained 1.0% to 2.0% increase or decrease in market interest
rates. The assumption in this table is that liabilities will reprice faster than
assets due to market constraints and management's assessment of their assets and
liabilities. The tables below present the Company's projected changes in net
interest income for 1998 and 1997 for the various rate shock levels.
<TABLE>
<CAPTION>
December 31, 1998 Net Interest Income
- ----------------- ------------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
+200 bp $ 20,811 $ (652) (3.04)%
+100 bp 21,155 (308) (1.43)
Base 21,463 - -
-100 bp 21,542 80 .37
-200 bp 20,882 (580) (2.70)
</TABLE>
Based upon the Company's model at December 31, 1998, the effect of an immediate
200 basis point increase in interest rates would decrease the Company's net
interest income by 3.04% or approximately $652,000. The effect of an immediate
200 basis point decrease in rates would reduce the Company's net interest income
by 2.70% or approximately $580,000. The reason for this is even though the
preceding table shows the Company as having a negative gap, certain core
deposits may not reprice when rates decrease depending on market conditions.
This causes the decline in net interest income.
<TABLE>
<CAPTION>
December 31, 1997 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 interest income
by 8.95% or approximately $1,696,000.
12
<PAGE>
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 1998 is primarily due to
management's restructuring of the balance sheet to increase the net interest
margin. The following table describes the composition of loans by major
categories outstanding.
LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Aggregate Principal Amount
---------------------------------------------------------------------
December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial $ 74,481 $ 62,936 $ 60,152 $ 38,298 $ 36,802
Agricultural 41,821 39,431 43,500 17,079 14,391
Real estate:
Commercial mortgages 99,872 72,730 63,254 44,393 36,727
Construction 13,935 14,393 13,549 7,437 5,047
Agricultural 35,790 27,955 29,185 10,229 12,169
1-4 family mortgages 96,921 109,411 91,697 36,637 33,623
Installment 32,714 41,210 42,320 24,072 19,765
Other 2,884 3,076 3,354 2,681 2,641
--------- --------- --------- --------- ---------
398,418 371,142 347,011 180,826 161,165
Unearned income (30) (157) (515) (7) (31)
--------- --------- --------- --------- ---------
Total loans 398,388 370,985 346,496 180,819 161,134
Allowance for loan losses (3,858) (3,188) (3,068) (2,014) (1,704)
--------- --------- --------- --------- ---------
Loans, net $ 394,530 $ 367,797 $ 343,428 $ 178,805 $ 159,430
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Aggregate Principal Amount
---------------------------------------------------------------------
December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Percentage of Total Loan Portfolio
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial 18.69% 16.96% 17.33% 21.18% 22.84%
Agricultural 10.50 10.62 12.54 9.45 8.93
Real estate:
Commercial mortgages 25.07 19.60 18.23 24.55 22.79
Construction 3.50 3.88 3.90 4.11 3.13
Agricultural 8.98 7.53 8.41 5.66 7.55
1-4 family mortgages 24.33 29.48 26.42 20.26 20.86
Installment 8.21 11.10 12.20 13.31 12.26
Other loans .72 0.83 0.97 1.48 1.64
--------- --------- --------- --------- ---------
Gross loans 100.00% 100.00% 100.00% 100.00% 100.00%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
13
<PAGE>
As of December 31, 1998 and 1997, commitments of the Banks under standby letters
of credit and unused lines of credit totaled approximately $92,893 and $72,980,
respectively.
Stated loan maturities (including rate loans reset to market interest rates) of
the total loan portfolio, net of unearned income, at December 31, 1998 were as
follows:
STATED LOAN MATURITIES (1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Within 1 to 5 After 5
1 Year Years Years Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Commercial $ 41,582 $ 23,647 $ 9,252 $ 74,481
Agricultural 30,844 9,538 1,439 41,821
Real estate 56,786 69,352 120,380 246,518
Installment 11,005 22,886 1,677 35,568
-------- -------- -------- --------
Total $140,217 $125,423 $132,748 $398,388
-------- -------- -------- --------
-------- -------- -------- --------
</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, 1998 were as follows:
LOAN REPRICING
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Within 1 to 5 After 5
1 Year Years Years Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fixed rate $ 97,494 $ 70,417 $ 30,360 $198,271
Variable rate 98,059 88,083 12,488 198,630
Impaired and not accruing
and nonaccrual 412 284 791 1,487
-------- -------- -------- --------
Total $195,965 $158,784 $ 43,639 $398,388
-------- -------- -------- --------
-------- -------- -------- --------
</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 were 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,
------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual and impaired loans not
accruing $1,487 $1,714 $1,774 $1,127 $ 891
Impaired and other loans 90 days past
due and still accruing interest 1,111 1,013 486 1,088 560
------ ------ ------ ------ ------
Total nonperforming loans 2,598 2,727 2,260 2,215 1,451
Other real estate owned 201 215 363 441 672
Other nonperforming assets (1) 100 100 192 240 240
------ ------ ------ ------ ------
Total nonperforming assets $2,899 $3,042 $2,815 $2,896 $2,363
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Nonperforming loans to total loans 0.65% 0.74% 0.65% 1.22% 0.90%
Nonperforming assets to total loans 0.73 0.82 0.81 1.60 1.47
Nonperforming assets to total assets 0.46 0.49 0.44 0.95 0.87
</TABLE>
- ------------------------
(1) Represents a single municipal security in default status.
15
<PAGE>
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 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.
Under Statement of Financial Accounting Standards No. 114 and No. 118, 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, 1998:
OTHER REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Number Net Book
of Carrying
Parcels Value
------- -----
<S> <C> <C>
Developed property 5 $183
Vacant land or unsold lots 1 18
------- -----
Total real estate 6 $201
------- -----
------- -----
</TABLE>
16
<PAGE>
ALLOWANCE FOR LOAN LOSSES
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions; the type of loan being made; the creditworthiness of the
borrower over the term of the loan; and in the case of a collateralized loan,
the quality of the collateral for such loan. The allowance for loan losses
represents the Company's estimate of the allowance necessary to provide for
possible losses 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. On a monthly basis, management of each of the
subsidiary banks meets to review the adequacy of the allowance for loan losses.
Commercial credits are graded by the loan officers and the Company's Loan Review
Officer validates the officers' grades. In the event that the Loan Review
Officer downgrades the loan, it is included in the allowance analysis at the
lower grade. The grading system is in compliance with the regulatory
classifications and the allowance is allocated to the loans based on the
regulatory grading, except in instances where there are known differences (i.e.,
collateral value is nominal, etc.). 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. The analysis of the
allowance for loan losses is comprised of three components: specific credit
allocation, general portfolio allocation, and subjective determined allocation.
Once these three components of the allowance are calculated, management
calculates a historical component for each loan category based on the past five
years of loan history and the Company's evaluation of qualitative factors
including future economic and industry outlooks. The unallocated portion of the
allowance is determined based on current economic conditions and trends in the
portfolio including delinquencies and impairments, as well as changes in the
composition of the portfolio. Commitments to extend credit and standby letters
of credit are reviewed to determine whether credit risk exists. The
determination by the Company of the appropriate level of its allowance for loan
losses was $3,858,000 at December 31, 1998.
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 composition
of the loan portfolio did not significantly change in 1998. There was a slight
shift in the composition of the real estate loan portfolio from 1-4 family
mortgage loans to commercial real estate loans. The methodology used to
determine the adequacy of the allowance for loan losses is consistent with prior
years and there were no reallocations. Despite the decrease in nonperforming
loans and net charge-offs in 1998, the Company increased the provision for loan
losses in 1998 in order to maintain the allowance for loan losses at a level
deemed appropriate by management due to the growth in the loan portfolio and the
slight shift in the composition of the portfolio. 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,
------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 3,188 $ 3,068 $ 2,014 $ 1,704 $ 1,787
Charge-offs:
Commercial 428 262 967 114 413
Real estate mortgages 169 386 181 173 371
Installment and other loans 435 559 366 250 240
--------- -------- -------- -------- --------
Total charge-offs 1,032 1,207 1,514 537 1,024
--------- -------- -------- -------- --------
Recoveries:
Commercial 98 47 41 70 142
Real estate mortgages 37 88 -- 56 83
Installment and other loans 108 113 57 37 56
--------- -------- -------- -------- --------
Total recoveries 243 248 98 163 281
--------- -------- -------- -------- --------
Net charge-offs 789 959 1,416 374 743
--------- -------- -------- -------- --------
Provision for loan losses 1,635 1,079 1,178 684 660
Allowance associated with the
Acquisitions (divestitures) (176) -- 1,292 -- --
--------- -------- -------- -------- --------
Ending balance $ 3,858 $ 3,188 $ 3,068 $ 2,014 $ 1,704
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Period end total loans, net of
unearned interest $ 398,388 $370,985 $346,496 $180,819 $161,134
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Average loans $ 390,560 $358,620 $243,978 $173,004 $152,186
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Ratio of net charge-offs to
average loans 0.20% 0.27% 0.58% 0.22% 0.49%
Ratio of provision for loan losses
to average loans 0.42 0.30 0.48 0.40 0.43
Ratio of allowance for loan losses
to ending total loans 0.97 0.86 0.89 1.11 1.06
Ratio of allowance for loan losses
to total nonperforming loans 148.99 116.91 135.75 90.93 117.44
Ratio of allowance at end of period
to average loans 0.99 0.89 1.26 1.16 1.12
</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,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ----------------- ------------------- ------------------
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 $1,213 29.19% $ 962 27.58% $ 776 29.87% $ 800 30.62% 327 31.76%
Real estate 1,245 61.87 1,052 60.49 758 56.97 388 54.59 325 54.34
Installment and other loans 443 8.94 482 11.93 517 13.16 235 14.79 194 13.90
Unallocated 957 -- 692 -- 1,017 -- 591 -- 858 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $3,858 100.00% $3,188 100.00% $3,068 100.00% $2,014 100.00% $1,704 100.00%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
SECURITIES ACTIVITIES
The Company's securities portfolio, which represented 30.5% of the Company's
earning asset base as of December 31, 1998, 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 $41,847,000 at
December 31, 1998 compared to $37,170,000 at December 31, 1997. The fair value
of securities held-to-maturity was $43,073,000 at December 31, 1998 and
$37,840,000 at December 31, 1997.
Securities available-for-sale, carried at fair value, were $133,772,000 at
December 31, 1998 compared to $163,568,000 at December 31, 1997.
The consolidated securities portfolio includes 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 table describes the composition of securities by major category
and maturity.
SECURITIES PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ----------------------
% of % of % of
Amount Portfolio Amount Portfolio Amount Portfolio
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
States and political subdivisions $ 41,847 23.83% $ 37,170 18.52% $ 35,017 15.66%
-------- ----- -------- ----- -------- -----
Total $ 41,847 23.83% $ 37,170 18.52% $ 35,017 15.66%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
AVAILABLE-FOR-SALE
U.S. Treasury $ 6,891 3.92% $ 19,163 9.55% $ 26,518 11.86%
U.S. government agencies
and corporations 49,330 28.09 59,315 29.54 53,554 23.96
U.S. government agency
mortgage backed securities 31,005 17.66 22,695 11.31 49,454 22.12
Collateralized mortgage
obligations 43,208 24.60 58,300 29.04 58,820 26.31
Corporate bonds 100 .06 100 0.05 192 0.09
Other securities 3,238 1.84 3,995 1.99 -- --
-------- ----- -------- ----- -------- -----
Total $133,772 76.17% $163,568 81.48% $188,538 84.34%
-------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- -----
</TABLE>
20
<PAGE>
The following table sets forth the contractual, callable or estimated maturities
and yields of the securities portfolio as of December 31, 1998. 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) $ 5,701 7.21% $14,702 7.07% $ 20,379 6.76% $ 1,065 7.11% $ 41,847
------- ---- ------- ---- -------- ---- ------- ---- --------
------- ---- ------- ---- -------- ---- ------- ---- --------
AVAILABLE-FOR-SALE
U.S. Treasury $ 253 6.15% $ 6,638 5.91% $ -- -% $ -- -% $ 6,891
U.S. government
agencies and
corporations 37,911 6.00 11,419 6.19 -- -- -- -- 49,330
U.S. government
agency mortgage
backed securities 9,590 5.16 1,206 5.76 7,975 5.91 12,234 5.91 31,005
Collateralized
mortgage obligations 43,039 4.91 169 8.03 -- -- -- -- 43,208
Corporate bonds -- -- 100 -- -- -- -- -- 100
Equity securities 3,238 -- -- -- -- -- -- -- 3,238
------- ------- -------- ------- --------
Total $94,031 $ 19,532 $ 7,975 $ 12,234 $133,772
------- ---------- ------- ---------- --------
------- ---------- ------- ---------- --------
</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 $529,258,000 for 1998, representing an
increase of $8,625,000 or 1.7% compared with the average balance of total
deposits for the year ended December 31, 1997. The increase in deposits was
primarily due to the growth attributed to efforts to increase market share in
1998, which help offset the Bank of Ladd and UnionBank/West branch divestitures.
21
<PAGE>
The following table sets forth certain information regarding the Banks' average
deposits.
AVERAGE DEPOSITS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ------------------------------- -------------------------------
% 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>
Non-interest-bearing
demand deposits $ 59,885 11.32% --% $ 57,623 11.07% --% $ 41,395 11.28% --%
Savings accounts 61,740 11.67 2.99 62,316 11.97 2.82 41,664 11.35 2.94
Interest-bearing
demand deposits 85,968 16.24 2.78 87,316 16.77 2.78 66,088 18.00 2.84
Time, less than $100,000 215,478 40.71 5.47 231,766 44.51 5.55 194,957 53.12 5.51
Time, $100,000 or more 106,187 20.06 5.70 81,612 15.68 5.66 22,955 6.25 6.24
-------- ------ ------ -------- ------ ------ -------- ------ ------
Total deposits $529,258 100.00% 4.22% $520,633 100.00% 4.16% $367,059 100.00% 4.16%
-------- ------ ------ -------- ------ ------ -------- ------ ------
-------- ------ ------ -------- ------ ------ -------- ------ ------
</TABLE>
As of December 31, 1998, non-brokered time deposits over $100,000 represented
25.5% of total deposits, compared with 15.2% of total deposits as of December
31, 1997. 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, 1998.
TIME DEPOSITS OF $100,000 OR MORE
(DOLLARS IN THOUSANDS)
MATURITY RANGE
<TABLE>
<S> <C>
Three months or less $ 42,264
Over three months through six months 26,056
Over six months through twelve months 30,033
Over twelve months 33,882
--------
Total $132,235
--------
--------
</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,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Return on average assets .84% 0.77% 0.66%
Return on average equity 9.98 9.78 9.32
Average equity to average assets 8.44 8.00 7.14
Dividend payout ratio for common stock 12.34 12.83 11.58
</TABLE>
The increase in the return on average assets and return on average equity ratios
is primarily related to increased profitability caused by the sustained growth
in core noninterest income, coupled with the continued growth in net interest
income driven by the loan portfolio, and various nonrecurring transactions.
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 federal 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 $2.6 million
for 1998, $7.8 million for 1997, and $5.5 million for 1996. Net cash used by
investing activities, consisting primarily of loan and investing funding, was
$35.8 million for 1998. For the year ended December 31, 1997, net cash provided
by investing activities was $9.3 million. For the year ended December 31, 1996,
net cash used in investing activities was $9.6 million. Net cash provided by
financing activities for 1998 was $35.0 million and consisted primarily of
increases in deposits and Federal Home Loan Bank advances. Net cash used by
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.
The Banks' investment securities portfolios, federal funds sold, and cash and
due from bank deposit balances serve as the primary sources of liquidity for the
Company. At December 31, 1998, 26.7% of the Banks' interest-bearing liabilities
were in the form of time deposits of $100,000 and over. Substantially all of
such large deposits were obtained from the Banks' market areas and none of such
deposits are brokered deposits. Management believes these deposits to be a
stable source of funds. However, if a large number of these time deposits
matured at approximately the same time and were not renewed, the Banks'
liquidity could be adversely affected. Currently, the maturities of the Banks'
large time deposits are spread throughout the year, with 32.0% maturing in the
first quarter of 1999, 19.7% maturing in the second quarter of 1999, 22.7%
maturing in the third and fourth quarters of 1999, and the remaining 25.6%
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, 1998 in the
principal amount of $7,000,000 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.
The Company's principal source of funds for repayment of the indebtedness is
dividends from the Banks. At December 31, 1998, approximately $1,847,000 was
available for dividends without regulatory approval.
CAPITAL RESOURCES
The Banks are expected to meet a minimum risk-based capital to risk-weighted
assets ratio of 8%, of which at least one-half (or 4%) must be in the form of
Tier 1 (core) capital. The remaining one-half (or 4%) may be in the form of Tier
1 (core) or Tier 2 (supplementary) capital. The amount of loan loss allowance
that may be included in capital is limited to 1.25% of risk-weighted assets. The
ratio of Tier 1 (core) and the combined amount of Tier 1 (core) and Tier 2
(supplementary) capital to risk-weighted assets for the Company is 11.02% and
12.23%, respectively, at December 31, 1998. 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
1998 1997 1996 Ratios Ratios
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 47,297 $ 41,180 $ 36,242
Tier 2 risk-based capital 5,215 4,545 4,425
Total capital 52,512 45,725 40,667
Risk-weighted assets 429,325 385,685 374,028
Capital ratios
Tier 1 risk-based capital 11.02% 10.68% 9.69% 4.00% 6.00%
Tier 2 risk-based capital 12.23 11.86 10.87 8.00 10.00
Leverage ratio 7.66 6.64 7.76 4.00 5.00
</TABLE>
As of December 31, 1998, the Tier 2 risk-based capital was comprised of
$3,858,000 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
Statement of Financial Accounting Standards (Statement) No. 133 on derivatives
will, in 2000, require all derivatives to be recorded at fair value in the
balance sheet, with changes in fair value charged or credited to income. If
derivatives are documented and effective as hedges, the change in the derivative
fair value will be offset by an equal change in the fair value of the hedged
item. Under the new standard, securities held-to-maturity can no longer be
hedged, except for changes in the issuer's creditworthiness. Therefore, upon
adoption of Statement
25
<PAGE>
No. 133, companies will have another one-time window of opportunity to
reclassify held-to-maturity securities to either trading or available-for-sale,
provided certain criteria are met. This Statement may be adopted early at the
start of a calendar quarter. Since the Company has no significant derivative
instruments or hedging activities, adoption of Statement No. 133 is not expected
to have a material impact on the Company's financial statements. Management has
not decided whether to adopt Statement No. 133 early.
Statement No. 134 on mortgage banking will, in 1999, allow mortgage loans that
are securitized to be classified as trading; available-for-sale; or, in certain
circumstances, held-to-maturity. Currently, these must be classified as trading.
Since the Company has not securitized mortgage loans, Statement No. 134 is not
expected to affect the Company.
American Institute of Certified Public Accountants Statement of Position 98-1,
effective in 1999, sets the accounting requirement to capitalize costs incurred
to develop or obtain software that is to be used solely to meet internal needs.
Costs to capitalize are those direct costs incurred after the preliminary
project stage, up to the date when all testing has been completed and the
software is substantially ready for use. All training costs, research and
development costs, costs incurred to convert data, and all other general and
administrative costs are to be expensed as incurred. The capitalized cost of
internal-use software is amortized over its useful life and reviewed for
impairment using the criteria in Statement No. 121. Statement of Position 98-1
is not expected to have a material impact on the Company.
American Institute of Certified Public Accountants Statement of Position 98-5,
also effective in 1999, requires all start-up, pre-opening, and organization
costs to be expensed as incurred. Any such costs previously capitalized for
financial reporting purposes must be written off to income at the start of the
year. Statement of Position 98-5 is not expected to have a material impact on
the Company.
The Financial Accounting Standards Board continues to study several issues,
including recording all financial instruments at fair value and abolishing
pooling-of-interests accounting. Also, it is likely that APB 25's measurement
for stock option plans will be limited to employees and not to nonemployees such
as directors, thereby causing compensation expense to be required for 1999
awards of stock options to outside directors.
YEAR 2000 COMPLIANCE
The federal banking regulators recently issued guidelines establishing minimum
safety and soundness standards for achieving Year 2000 compliance. The
guidelines, which took effect October 15, 1998 and apply to all FDIC-insured
depository institutions, establish standards for developing and managing Year
2000 project plans, testing remediation efforts and planning for contingencies.
The guidelines previously issued by the agencies under the auspices of the
Federal Financial Institutions Examination Council (the "FFIEC") are not
intended to replace or supplant the FFIEC guidelines which will continue to
apply to all federally insured depository institutions.
26
<PAGE>
The guidelines were issued under section 39 of the Federal Deposit Insurance Act
(the "FDIA"), as amended, which requires the federal banking regulators to
establish standards for the safe and sound operation of federally insured
depository institutions. Under section 39 of the FDIA, if an institution fails
to meet any of the standards established in the guidelines, the institution's
primary federal regulator may require the institution to submit a plan for
achieving compliance. If an institution fails to submit an acceptable compliance
plan, or fails in any material respect to implement a compliance plan that has
been accepted by its primary federal regulator, the regulator is required to
issue an order directing the institution to cure the deficiency. Such an order
is enforceable in court in the same manner as a cease and desist order. Until
the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth or require the institution to take any
action the regulator deems appropriate under the circumstances. In addition to
the enforcement procedures established in section 39 of the FDIA, noncompliance
with the standards established by the guidelines may also be grounds for other
enforcement action by the federal banking regulators, including cease and desist
orders and civil money penalty assessments.
The year 2000 has posed a unique set of challenges to those industries reliant
on information technology. As a result of methods employed by early programmers,
many software applications and operational programs may be unable to distinguish
the year 2000 from the year 1900. If not effectively addressed, this problem
could result in the production of inaccurate data, or, in the worst cases, the
inability of the systems to continue to function altogether. Financial
institutions are particularly vulnerable due to the industry's dependence on
electronic data processing systems. In 1997, the Company started the process of
identifying the hardware and software issues related to the year 2000 and the
potential for those issues to adversely affect the Company's operations and
those of its subsidiaries.
As discussed in the 1997 Annual Report to Stockholders, the Company has spent
considerable time and resources regarding the impact of the Year 2000 issue with
respect to its computer systems and applications as well as to its general
operations, customers, and suppliers. The Company has developed a strategic plan
for Year 2000 compliance which is being administered by a committee comprised of
individuals from all functional areas of the Company as well as being reviewed
by senior management and the Board of Directors. The plan follows guidelines set
forth by the FFIEC.
The status of each of the five phases of the FFIEC Year 2000 plan are:
1. Awareness 100% complete
2. Assessment 100% complete
3. Renovation 100% complete
4. Validation 85% complete
5. Implementation 80% complete
The 15% of validation which remains to be completed consists of two issues. The
core processing system of a non-bank subsidiary, which was upgraded in January
1999 to a version documented and tested by the vendor as being Year 2000
compliant, must be tested. The on-line communication between the Banks and
outside correspondents, which is being conducted
27
<PAGE>
pursuant to the testing schedules provided by the correspondents, is expected to
be completed by March 31, 1999.
The 20% of implementation which remains to be completed consists of two issues.
The software utilized for mortgage originations, which will be upgraded during
the first quarter of 1999 to a version documented and tested by the vendor as
being Year 2000 compliant, must be tested. A legacy system for ACH originations,
which is being replaced during the first quarter of 1999 by a new system that is
documented and tested by the vendor as being Year 2000 compliant, must be
tested.
While the Company will incur some expenses during the next two years, the
Company has not identified any situations at this time that will require
material cost expenditures to become fully compliant. It is impossible at this
time to quantify the estimated future costs due to possible business disruption
caused by vendors, suppliers, customers, or even the possible loss of electric
power or phone service; however, such cost could be substantial.
The Company is committed to achieving compliance, by focusing not only on its
own data processing systems, but also in assisting its customers needs as well.
Management has taken steps to educate and assist its customers with
identification of Year 2000 compliance problems. In addition, management has
proposed policy and procedure changes to help identify potential risks to the
Company and to gain an understanding of how its customers are managing the risks
associated with the Year 2000 issue. The Company has assessed the impact, if
any, the Year 2000 will have on its credit risk and loan underwriting. In
connection with potential credit risk related to the Year 2000 issue, the
Company has contacted its commercial loan customers regarding their level of
preparedness for the Year 2000. The corporate loan review officer maintains a
current list of all customers that pose a potential liability to the Company due
to the Year 2000 issue and regularly updates the Board of Directors.
Further, the Company has analyzed its liquidity position and how it could be
affected by the Year 2000 issue. A plan has been developed that addresses
liquidity issues that may arise. Overall, the Company feels that there are
adequate sources available and that the costs associated with such sources will
not have a material impact on the profits of the Company.
The Company has developed contingency plans for various Year 2000 problems and
continues to revise those plans based on testing results and vendor
notifications.
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
28
<PAGE>
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.
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
UnionBancorp, Inc.
Ottawa, Illinois
We have audited the accompanying consolidated balance sheets of UnionBancorp,
Inc. and Subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years 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 audits. The 1996
consolidated financial statements were audited by other auditors whose report
dated February 5, 1997 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1998 and 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, 1998 and 1997 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 5, 1999
30
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 24,613 $ 22,826
Federal funds sold 450 1,404
Securities available-for-sale 133,772 163,568
Securities held-to-maturity (fair value of $43,073 in 1998
and $37,840 in 1997) 41,847 37,170
Loans 398,388 370,985
Allowance for loan losses (3,858) (3,188)
--------- ---------
Net loans 394,530 367,797
Premises and equipment, net 13,853 14,631
Intangible assets, net 9,099 9,898
Other assets 9,030 8,166
--------- ---------
TOTAL ASSETS $ 627,194 $ 625,460
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 67,227 $ 62,095
Interest bearing 450,411 465,652
--------- ---------
Total deposits 517,638 527,747
Federal funds purchased and securities sold under
agreements to repurchase 14,855 11,761
Advances from the Federal Home Loan Bank 23,208 16,455
Notes payable 7,000 10,261
Other liabilities 6,545 6,154
--------- ---------
TOTAL LIABILITIES 569,246 572,378
--------- ---------
Minority interest in subsidiaries -- 644
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;
4,533,622 and 4,407,093 shares outstanding in 1998
and 1997, respectively 4,534 4,407
Surplus 21,471 19,705
Retained earnings 31,262 26,765
Accumulated other comprehensive income 31 856
Unearned compensation under stock option plans (185) (130)
--------- ---------
57,613 52,103
Treasury stock, at cost; 271,263 shares in 1998 and 1997 (522) (522)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 57,091 51,581
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 627,194 $ 625,460
--------- ---------
--------- ---------
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
31
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest income
Loans and fees on loans $36,102 $33,098 $22,138
Securities
Taxable 9,156 10,838 7,039
Exempt from federal income taxes 2,129 1,694 1,574
Federal funds sold and other 333 409 286
------- ------- -------
TOTAL INTEREST INCOME 47,720 46,039 31,037
------- ------- -------
Interest expense
Deposits 22,338 21,664 15,239
Federal funds purchased and securities sold under agreements
to repurchase 953 1,171 861
Advances from the Federal Home Loan Bank 1,226 543 213
Notes payable 741 1,057 690
------- ------- -------
TOTAL INTEREST EXPENSE 25,258 24,435 17,003
------- ------- -------
NET INTEREST INCOME 22,462 21,604 14,034
Provision for loan losses 1,635 1,079 1,178
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 20,827 20,525 12,856
------- ------- -------
Noninterest income
Service charges 2,251 1,854 1,286
Merchant fee income 833 670 524
Trust income 590 516 393
Mortgage banking income 1,518 751 425
Insurance commissions and fees 317 -- --
Securities gains, net 56 193 20
Gain on sale of subsidiaries 820 -- --
Other income 1,686 1,198 574
------- ------- -------
8,071 5,182 3,222
------- ------- -------
Noninterest expenses
Salaries and employee benefits 10,557 9,231 6,469
Occupancy expense, net 1,520 1,532 899
Furniture and equipment expense 1,788 1,599 977
Supplies and printing 563 602 395
Telephone 576 472 277
Amortization of intangible assets 940 903 392
Other expenses 4,789 4,425 2,839
------- ------- -------
20,733 18,764 12,248
------- ------- -------
8,165 6,943 3,830
Minority interest 53 73 27
------- ------- -------
INCOME BEFORE INCOME TAXES 8,112 6,870 3,803
Income taxes 2,723 2,105 969
------- ------- -------
NET INCOME 5,389 4,765 2,834
Preferred stock dividends 259 259 105
------- ------- -------
NET INCOME FOR COMMON STOCKHOLDERS $ 5,130 $ 4,506 $ 2,729
------- ------- -------
------- ------- -------
BASIC EARNINGS PER COMMON SHARE $ 1.23 $ 1.09 $ 1.00
------- ------- -------
------- ------- -------
DILUTED EARNINGS PER COMMON SHARE $ 1.22 $ 1.08 $ .99
------- ------- -------
------- ------- -------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
32
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
UNEARNED
SERIES A ACCUMULATED COMPENSATION
CONVERTIBLE OTHER UNDER
PREFERRED COMMON RETAINED COMPREHENSIVE STOCK TREASURY
STOCK STOCK SURPLUS EARNINGS INCOME OPTION PLANS STOCK TOTAL
----------- -------- --------- --------- ------------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1996 $ -- $ 2,400 $ 1,074 $ 20,568 $ 2 $ (48) $ (521) $ 23,475
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 -- -- -- (316) -- -- -- (316)
Preferred stock dividends -- -- -- (105) -- -- -- (105)
Stock issued for
acquisitions (2,765 shares
of Series A preferred
stock and 719,666 shares
of common stock) 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
Redemption of
qualifying directors'
stock -- -- -- -- -- -- (1) (1)
Comprehensive income
Net income -- -- -- 2,834 -- -- -- 2,834
Net decrease in fair value of
securities classified as
available-for-sale, net of
income taxes and reclassi-
fication adjustments -- -- -- -- (76) -- -- (76)
------------
Total comprehensive
income 2,758
----------- -------- --------- --------- ------------- ------------- -------- ------------
Balance,
December 31, 1996 500 4,386 19,403 22,981 (74) (91) (522) 46,583
Issuance of 19,829 shares
of common stock -- 20 214 -- -- -- -- 234
Common stock dividend -- -- -- (722) -- -- -- (722)
Preferred stock dividends -- -- -- (259) -- -- -- (259)
Issuance of non-
qualifying stock
options -- -- 81 -- -- (81) -- --
Exercise of stock options
(1,200 shares) -- 1 7 -- -- -- -- 8
Amortization of un-
earned compensation
under stock option plans -- -- -- -- -- 42 -- 42
Comprehensive income
Net income -- -- -- 4,765 -- -- -- 4,765
Net increase in fair value of
securities classified as
available-for-sale, net of
income taxes and reclass-
ification adjustments -- -- -- -- 930 -- -- 930
Total comprehensive ------------
income 5,695
----------- -------- --------- --------- ------------- ------------- -------- ------------
Balance,
December 31, 1997 500 4,407 19,705 26,765 856 (130) (522) 51,581
</TABLE>
(Continued)
33
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
UNEARNED
SERIES A ACCUMULATED COMPENSATION
CONVERTIBLE OTHER UNDER
PREFERRED COMMON RETAINED COMPREHENSIVE STOCK TREASURY
STOCK STOCK SURPLUS EARNINGS INCOME OPTION PLANS STOCK TOTAL
---------- --------- --------- -------- ------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 $ 500 $ 4,407 $ 19,705 $ 26,765 $ 856 $ (130) $ (522) $ 51,581
Common stock dividends -- -- -- (633) -- -- -- (633)
Issuance of 123,529 shares
of common stock -- 124 1,621 -- -- -- -- 1,745
Preferred stock dividends -- -- -- (259) -- -- -- (259)
Issuance of non-
qualifying stock
options -- -- 120 -- -- (120) -- --
Exercise of stock options
(3,000 shares) -- 3 25 -- -- -- -- 28
Amortization of un-
earned compensation
under stock option plans -- -- -- -- -- 65 -- 65
Comprehensive income
Net income -- -- -- 5,389 -- -- -- 5,389
Net decrease in fair value of
securities classified as
available-for-sale, net of
income taxes and reclass-
ification adjustments -- -- -- -- (825) -- -- (825)
Total comprehensive
income 4,564
---------- --------- --------- -------- ------------- ------------ --------- ----------
Balance,
December 31, 1998 $ 500 $ 4,534 $ 21,471 $ 31,262 $ 31 $ (185) $ (522) $ 57,091
---------- --------- --------- -------- ------------- ------------ --------- ----------
---------- --------- --------- -------- ------------- ------------ --------- ----------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
34
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,389 $ 4,765 $ 2,834
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 1,679 1,474 849
Amortization of intangible assets 940 903 392
Amortization of unearned compensation under stock
option plans 65 42 26
Amortization of bond premiums, net 126 254 543
Provision for loan losses 1,635 1,079 1,178
Provision for deferred income taxes (44) 287 (45)
Securities gains, net (56) (193) (20)
Gain on sale of subsidiaries, net (820) -- --
Gain on sale of land and equipment (143) (76) --
Gain on sale of real estate acquired in settlement of loans (4) (51) (134)
Gain on sale of loans (1,313) (546) (262)
Net loans originated for sale (4,507) (527) 552
Minority interest in net income of subsidiary 53 73 27
Change in assets and liabilities
(Increase) decrease in other assets 134 (165) 9
Increase (decrease) in other liabilities (516) 509 (449)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,618 7,828 5,500
Cash flows from investing activities
Securities
Held-to-maturity
Proceeds from calls, maturities, and paydowns 6,333 3,108 4,429
Purchases (13,208) (5,367) (5,247)
Available-for-sale
Proceeds from maturities and paydowns 69,447 30,071 20,455
Proceeds from sales 7,453 28,773 24,620
Purchases (58,782) (29,550) (19,708)
Net decrease in federal funds sold (818) 8,863 167
Net increase in loans (42,838) (24,831) (21,841)
Purchase of premises and equipment (2,205) (2,630) (1,314)
Proceeds from sale of real estate acquired in settlement of loans 420 655 575
Proceeds from sale of land and equipment 832 181 3
Bank and bank holding company acquisitions and sales, net of
cash and cash equivalents received (2,470) -- (11,748)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (35,836) 9,273 (9,609)
</TABLE>
35
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Cash flows from financing activities
Net increase (decrease) in deposits $ 27,827 $(15,997) $ 1,747
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 3,705 (10,056) 2,481
Net increase (decrease) in advances from the
Federal Home Loan Bank 7,598 6,434 (4,000)
Payments on notes payable (3,261) (3,685) (13,802)
Proceeds from notes payable -- 766 18,686
Dividends on common stock (633) (722) (316)
Dividends on preferred stock (259) (259) (53)
Proceeds from exercise of stock options 28 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 35,005 (23,511) 17,178
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,787 (6,410) 13,069
Cash and cash equivalents
Beginning of year 22,826 29,236 16,167
-------- -------- --------
End of year $ 24,613 $ 22,826 $ 29,236
-------- -------- --------
-------- -------- --------
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 25,591 $ 24,547 $ 16,569
Income taxes 2,387 1,966 921
</TABLE>
36
<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 bank holding company organized under the
laws of the state of Delaware. Through its commercial bank and 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. These services include demand, time, and savings deposits;
lending; mortgage banking; insurance products; and trust services. 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; its
bank subsidiaries, UnionBank, UnionBank/West, UnionBank/Central,
UnionBank/Northwest; and its nonbank subsidiaries, Union Data Corp., Inc. and
Union Trust Corporation. In addition, UnionBank has a nonbank subsidiary,
UnionFinancial Services, Inc. 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. In preparing the financial statements, management makes
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.
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.
(Continued)
37
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
Securities available-for-sale are carried at fair value with unrealized gains or
losses, net of the related deferred income tax effect, reported in other
comprehensive income.
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 (usually 90
days). 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.
The amount of impairment is the excess of the capitalized mortgage servicing
rights over fair value. Any impairment of a grouping is reported as a valuation
allowance. At December 31, 1998 and 1997, the Company had $727 and $192,
respectively, of mortgage servicing rights assets which are included in other
assets. There was no such valuation allowance recorded at year-end 1998 or 1997.
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.
Mortgage loans are charged off after being delinquent 180 days unless the
collateral is sufficient to pay off the debt when liquidated.
(Continued)
38
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
Consumer loans are charged off after 120 days of delinquency. The allowance is
an amount that management believes will be adequate to absorb losses on existing
loans 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.
Depreciation is computed on the 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.
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.
(Continued)
39
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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 under stock options and Series A converted preferred 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 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,
(Continued)
40
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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 $1,000 per share (plus any
accrued but unpaid dividends) but will be entitled to an aggregate payment
of 1,000 times the payment made per share of Common Stock. Each share of
Series C Preferred Stock will have 1,000 votes, voting together with the
Common Stock. Finally, in the event of any merger, consolidation, or other
transaction in which outstanding shares of Common Stock are converted or
exchanged, each share of Series C Preferred Stock will be entitled to
receive 1,000 times the amount received per share of Common Stock. These
rights are protected by customary antidilution provisions.
(Continued)
41
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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 banks to the
holding company or by the holding company to stockholders.
(Continued)
42
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company retroactively adopted the provisions of
Statement of Financial Accounting Standards No. 130 which requires comprehensive
income to be reported for all periods. Comprehensive income includes both net
income and other comprehensive income elements, including the change in
unrealized gains and losses on securities available-for-sale, net of tax.
FUTURE ACCOUNTING CHANGES
Beginning January 1, 2000, a new accounting standard will require all
derivatives to be recorded at fair value. Unless designated as hedges, changes
in these fair values will be recorded in the income statement. Fair value
changes involving hedges will generally be recorded by offsetting gains and
losses on the hedge and on the hedged item, even if the fair value of the hedged
item is not otherwise recorded. This is not expected to have a material effect
but will depend on derivative holdings when this standard is first adopted.
Mortgage loans originated in mortgage banking are converted into securities on
occasion. A new accounting standard for 1999 will allow classifying these
securities as available-for-sale, trading, or held-to-maturity, instead of the
current requirement to classify as trading. This is not expected to have a
material effect but the effect will vary depending on the level and designation
of securitizations as well as on market price movements.
NOTE 2. BUSINESS ACQUISITIONS AND DIVESTITURES
1998
On October 30, 1998, the Company acquired Mercier Insurance Agency L.P.
("Mercier"), an insurance agency located in Spring Valley, Illinois. At the date
of acquisition, Mercier had approximately $1,729 of total assets and $1,005 of
liabilities. In conjunction with the acquisition, the Company issued 123,529
shares of Common Stock valued at $1,745 and paid cash of $1,000. The total
acquisition cost of $2,745 resulted in goodwill of $2,021. This transaction was
recorded using the purchase method of accounting. As such, the results of
operations of Mercier are excluded from the consolidated statements of income
for the periods prior to the acquisition date. The effects of this transaction
are not material, and therefore, details of the previously separate entity have
not been included.
On November 30, 1998, the Company sold its 81.7% interest in one of its
subsidiary banks, Bank of Ladd. At the date of sale, Bank of Ladd had
approximately $33,782 in total assets and $29,619 in total liabilities. Earnings
through November 30, 1998 approximated $291,000 and the sales price was $4,781.
(Continued)
43
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
On December 17, 1998, the Company sold a UnionBank/West branch location. At the
date of sale, the branch had approximately $3,467 in total assets and $10,009 in
total liabilities. The sales price was $5,881.
1996
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.
These 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 consolidated results of operations which follow assume
the acquisitions had occurred as of January 1, 1996. In addition to combining
the historical results of operations of the companies, the pro forma
calculations include purchase accounting adjustments related to the acquisitions
and interest on borrowed funds.
Unaudited pro forma consolidated results of operations for the year ended
December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Net interest income $ 17,965
-----------
-----------
Net income 3,088
-----------
-----------
Earnings per common share $ 0.68
-----------
-----------
</TABLE>
(Continued)
44
<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
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
December 31, 1998
U.S. Treasury $ 6,753 $ 138 $ - $ 6,891
U.S. government agencies and
corporations 49,203 222 (95) 49,330
U.S. government mortgage-backed
securities 31,111 52 (158) 31,005
Collateralized mortgage obligations 43,315 474 (581) 43,208
Corporate bonds 100 - - 100
Other 3,238 - - 3,238
------------ ----------- ----------- ------------
$ 133,720 $ 886 $ (834) $ 133,772
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
December 31, 1997
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
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
HELD-TO-MATURITY
December 31, 1998
States and political subdivisions $ 41,847 $ 1,245 $ (19) $ 43,073
----------- ----------- ----------
------------ ----------- ----------- ------------
December 31, 1997
States and political subdivisions $ 37,170 $ 805 $ (135) $ 37,840
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
(Continued)
45
<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, 1998, 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 $ 4,967 $ 5,035 $ 33,666 $ 33,778
Due after one year through five years 13,776 14,120 21,374 21,539
Due after five years through ten years 21,109 21,831 1,016 1,004
Due after ten years 1,995 2,087 - -
U.S. government mortgage-backed
securities - - 31,111 31,005
Collateralized mortgage obligations - - 43,315 43,208
Equity securities - - 3,238 3,238
----------- ----------- ------------ ------------
$ 41,847 $ 43,073 $ 133,720 $ 133,772
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
As of December 31, 1998, the Company held U.S. government agency structured
notes and callable securities carried at fair values of $2,123 and $46,706,
respectively. The amortized cost of these securities was $2,200 and $46,502,
respectively, as of December 31, 1998.
Securities with carrying values of approximately $123,000 and $125,000 at
December 31, 1998 and 1997, respectively, were pledged to secure public deposits
and securities sold under agreements to repurchase and for other purposes as
required or permitted by law.
Realized gains and losses from the sale of securities available-for-sale follow:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Proceeds $ 7,453 $ 28,773 $ 24,620
Realized gains 79 287 137
Realized losses (23) (94) (117)
</TABLE>
(Continued)
46
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 4. LOANS
The major classifications of loans follow:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
Commercial $ 116,302 $ 102,367
Real estate 246,518 224,489
Installment 32,714 41,210
Other 2,884 3,076
------------ ------------
398,418 371,142
------------ ------------
Less:
Unearned interest 30 157
Allowance for loan losses 3,858 3,188
------------ ------------
3,888 3,345
------------ ------------
$ 394,530 $ 367,797
----------- ------------
----------- ------------
</TABLE>
Included in real estate loans are $8,269 and $3,235 of loans held for sale at
December 31, 1998 and 1997, respectively. In addition, there are $786 of Small
Business Administration loans held for sale at December 31, 1998.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans were
$114,316 and $66,535 at December 31, 1998 and 1997, respectively.
The following table presents data on impaired loans:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Year-end impaired loans for which an allowance
has been provided $ 432 $ 1,714 $ 14
Year-end impaired loans for which no allowance
has been provided 1,105 - 1,080
---------- --------- --------
Total loans determined to be impaired $ 1,537 $ 1,714 $ 1,094
---------- --------- --------
---------- --------- --------
Allowance for loan loss for impaired loans included
in the allowance for loan losses $ 289 $ 286 $ 2
---------- --------- --------
---------- --------- --------
Average recorded investment in impaired loans $ 1,817 $ 2,375 $ 947
---------- --------- --------
---------- --------- --------
Interest income recognized from impaired loans $ 94 $ 6 $ -
---------- --------- --------
---------- --------- --------
Cash basis interest income recognized from impaired loans $ - $ - $ -
---------- --------- --------
---------- --------- --------
</TABLE>
(Continued)
47
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT 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 $77,611 and $67,386
as of December 31, 1998 and 1997, respectively. In addition, the Company has a
concentration of commercial real estate loans of approximately $99,872 and
$72,730 as of December 31, 1998 and 1997, 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, 1998 follow:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1997 $ 5,483
New loans, extensions, and modifications 9,826
Repayments (2,660)
-----------
Balance at December 31, 1998 $ 12,649
-----------
-----------
</TABLE>
NOTE 5. ALLOWANCE FOR LOAN LOSSES
An analysis of activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 3,188 $ 3,068 $ 2,014
Balance acquired (divested) (176) - 1,292
Provision for loan losses 1,635 1,079 1,178
Recoveries 243 248 98
Loans charged off (1,032) (1,207) (1,514)
----------- ----------- -----------
Balance at end of year $ 3,858 $ 3,188 $ 3,068
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(Continued)
48
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment consisted of:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---- ----
<S> <C> <C>
Land $ 1,017 $ 1,645
Buildings 11,901 12,774
Furniture and equipment 12,483 11,889
----------- -----------
25,401 26,308
Less accumulated depreciation 11,548 11,677
----------- -----------
$ 13,853 $ 14,631
----------- -----------
----------- -----------
</TABLE>
NOTE 7. DEPOSITS
Deposit account balances by type are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
Non-interest-bearing demand deposits $ 67,227 $ 62,095
Savings, NOW, and money market accounts 144,861 148,095
Time deposits of $100 or more 132,235 80,139
Other time deposits 173,315 237,418
------------ ------------
$ 517,638 $ 527,747
------------ ------------
------------ ------------
</TABLE>
At December 31, 1998, the scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1999 $ 221,244
2000 55,689
2001 13,030
2002 2,476
2003 and thereafter 13,111
---------------
$ 305,550
---------------
---------------
</TABLE>
(Continued)
49
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
A maturity distribution of time certificates of deposit in denominations of $100
or more was as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---- ----
<S> <C> <C>
3 months or less $ 42,264 $ 30,327
Over 3 months through 6 months 26,056 13,680
Over 6 months through 12 months 30,033 18,738
Over 12 months 33,882 17,394
------------ -----------
$ 132,235 $ 80,139
------------ -----------
------------ -----------
</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,
---------------------
1998 1997
---- ----
<S> <C> <C>
Federal funds purchased $ 4,000 $ -
Securities sold under agreements to repurchase 10,855 11,761
----------- -----------
$ 14,855 $ 11,761
------------ -----------
------------ -----------
</TABLE>
Federal funds purchased and securities sold under agreement to repurchase
generally mature within one to ninety days from the transaction date.
At December 31, 1998, the scheduled maturities of advances from the Federal Home
Loan Bank are as follows:
<TABLE>
<CAPTION>
Average
Year Interest rate Amount
---- ------------- ------
<S> <C> <C>
1999 4.85% $ 1,000
2001 5.57 4,058
2002 5.51 8,350
Thereafter 5.48 9,800
-----------
$ 23,208
</TABLE>
Where required, the FHLB advances are secured by unspecified mortgage loans.
(Continued)
50
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
Notes payable consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Line of credit loan ($10,000) to LaSalle National Bank; interest due
quarterly at LIBOR (6.7382% at December 31, 1998); balance due on September
1, 1999; secured by 100% of the stock of the subsidiary banks. $ 7,000 $10,000
Revolving credit loan ($5,000) to LaSalle National Bank; interest due
quarterly at prime rate (7.75% at December 31, 1998); balance due at
September 1, 1999; secured by 100% of the stock of the subsidiary banks. - -
Mortgage note payable to an individual, secured by land. The note bore
imputed interest at 8% and payments of principal and interest were due
over three years in amounts of $50,000, $50,000, and $250,000. - 261
------------- ------------
$ 7,000 $ 10,261
------------- ------------
------------- ------------
</TABLE>
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, 1998.
Information concerning borrowed funds is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
FEDERAL FUNDS PURCHASED
Maximum month-end balance during the year $ 6,050 $ 11,200 $ 11,288
Average balance during the year $ 1,312 $ 2,451 $ 2,448
Weighted average interest rate for the year 6.53% 6.58% 5.26%
Weighted average interest rate at year end 6.00% -% 7.50%
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Maximum month-end balance during the year $ 23,844 $ 11,861 $ 32,310
Average balance during the year $ 15,461 $ 18,232 $ 20,239
Weighted average interest rate for the year 5.61% 5.53% 5.70%
Weighted average interest rate at year end 5.25% 5.80% 5.79%
ADVANCES FROM THE FEDERAL HOME LOAN BANK
Maximum month-end balance during the year $ 25,955 $ 22,895 $ 15,422
Average balance during the year $ 21,727 $ 8,783 $ 13,294
Weighted average interest rate for the year 5.64% 6.18% 5.29%
Weighted average interest rate at year end 5.48% 5.78% 6.03%
</TABLE>
(Continued)
51
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NOTES PAYABLE
Maximum month-end balance during the year $ 12,130 $ 17,419 $ 25,320
Average balance during the year $ 11,024 $ 13,247 $ 8,364
Weighted average interest rate for the year 7.14% 7.98% 8.25%
Weighted average interest rate at year end 6.74% 7.40% 8.25%
</TABLE>
NOTE 9. INCOME TAXES
Income taxes consisted of:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal
Current $ 2,547 $ 1,818 $ 918
Deferred (138) 12 (24)
----------- ----------- -----------
2,409 1,830 894
State
Current 220 - 96
Deferred 94 275 (21)
----------- ----------- -----------
314 275 75
----------- ----------- -----------
$ 2,723 $ 2,105 $ 969
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Company's income tax expense differed from the statutory federal rate of 34%
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected income taxes $ 2,758 $ 2,336 $ 1,293
Income tax effect of
Interest earned on tax-free investments and loans (768) (632) (535)
Nondeductible interest expense incurred to
carry tax-free investments and loans 115 87 90
Nondeductible amortization 659 199 67
State income taxes, net of federal tax benefit 252 220 50
Gain on sale of subsidiaries, net (157) - -
Other (136) (105) 4
----------- ----------- -----------
$ 2,723 $ 2,105 $ 969
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(Continued)
52
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
The significant components of deferred income tax assets and liabilities
consisted of:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 1,033 $ 492
Deferred compensation 25 33
----------- -----------
TOTAL DEFERRED TAX ASSETS 1,058 525
Deferred tax liabilities
Depreciation (546) (486)
Purchase accounting adjustments (360) (444)
Securities available-for-sale (20) (856)
Other (893) (380)
----------- -----------
TOTAL DEFERRED TAX LIABILITIES (1,819) (2,166)
----------- -----------
Net deferred tax liabilities $ (761) $ (1,641)
----------- -----------
----------- -----------
</TABLE>
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,
1998, 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 $355, $272, and $252 for the
years ended December 31, 1998, 1997, and 1996, respectively.
Effective January 1, 1998, the Company established a 401(k) salary reduction
plan (the "401(k) 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 401(k) plan. The Company contributes at
its discretion. Contributions to the 401(k) plan are expensed currently and
approximated $145 for the year ended December 31, 1998. Prior to January 1,
1998, Prairie maintained a 401(k) salary reduction plan covering substantially
all employees. UnionBancorp,
(Continued)
53
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
Inc. maintained Prairie's plan after the acquisitions and contributed at its
discretion until the plan was merged with the Company's 401(k) plan on January
1, 1998. Contributions to the plans were expensed 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.
A summary of the status of the Option Plan as of December 31, 1998, 1997, and
1996 and changes during the years ending on those dates is presented below.
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------
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 137,878 $ 7.81 104,478 $ 6.87 68,400 $ 6.24
Granted 65,000 16.65 34,600 10.65 41,250 7.99
Exercised (3,000) 5.04 (1,200) 6.75 (1,398) 6.97
Forfeited - - - - (3,774) 8.65
---------- --------- ---------- ------- ---------- -------
Outstanding at end of year 199,878 10.73 137,878 7.81 104,478 6.87
---------- ---------- ----------
---------- ---------- ----------
Options exercisable at
year-end 71,895 7.12 50,570 6.58 41,727 6.48
---------- ---------- ----------
---------- ---------- ----------
Weighted-average fair value
of options granted during
the year $ 6.93 $ 5.31 $ 3.32
--------- ------- -------
--------- ------- -------
</TABLE>
(Continued)
54
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
Options outstanding at year end 1998 were as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------------------------------
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Number Life Number PRICE
--------------- ------ ----------- ------ --------
<S> <C> <C> <C> <C>
$ 5.04 - $ 8.33 88,803 7 years 58,785 $ 6.43
9.67 - 13.00 46,075 9 years 13,110 10.20
13.88 - 18.50 65,000 10 years - -
------------ ------------ ----------- ---------
Outstanding at year end 199,878 8.4 years 71,895 $ 7.12
------------ ------------ ----------- ---------
------------ ------------ ----------- ---------
</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 $65, $42, and $26,
for the years ended December 31, 1998, 1997, and 1996, respectively. Had the
compensation cost for all of the stock-based compensation plans been determined
based on the grant date using the estimated fair value under FAS 123, reported
income and earnings per common share would have been reduced to the pro forma
amounts shown below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income for common stockholders
As reported $ 5,130 $ 4,506 $ 2,729
Pro forma 5,000 4,450 2,699
Basic earnings per common share
As reported 1.23 1.09 1.00
Pro forma 1.20 1.08 0.99
Diluted earnings per common share
As reported 1.22 1.08 0.99
Pro forma 1.19 1.07 0.98
</TABLE>
The fair value of the options granted in 1998, 1997, and 1996 is estimated at
$6.93, $5.31, and $3.32 as of the date of grant using the Black Scholes options
value model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield .92% 1.34% 1.74%
Risk-free interest rate 4.60% 6.36% 5.23%
Assumed forfeiture rate - - -
Average life 6 6 6
Expected volatility of stock price 27.78% 24.04% N/A
555
</TABLE>
(Continued)
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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). The Convertible Preferred Stock is antidilutive for
all years presented and has not been included in the diluted earnings per share
calculation.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income available to common stockholders $ 5,130 $ 4,506 $ 2,729
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding 4,158 4,126 2,731
----------- ----------- -----------
----------- ----------- -----------
BASIC EARNINGS PER SHARE $ 1.23 $ 1.09 $ 1.00
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding 4,158 4,126 2,731
Add: dilutive effect of assumed exercised stock
options 53 42 26
----------- ----------- -----------
Weighted average common and dilutive
potential shares outstanding 4,211 4,168 2,757
----------- ----------- -----------
----------- ----------- -----------
DILUTED EARNINGS PER SHARE $ 1.22 $ 1.08 $ .99
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 13. REGULATORY MATTERS
The Company and the 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.
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, 1998, that the Company
and the Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the corresponding
regulatory agency categorized the Banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the Banks'
categories.
(Continued)
56
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
<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, 1998
Total capital
(to risk-weighted assets)
UnionBancorp, Inc. $ 52,512 12.23% $ 34,346 8.00% $ 42,933 10.00%
UnionBank 29,207 11.03 21,193 8.00 26,491 10.00
UnionBank/Central 9,338 14.38 5,196 8.00 6,495 10.00
UnionBank/West 12,569 15.30 6,574 8.00 8,217 10.00
Tier I capital
(to risk-weighted assets)
UnionBancorp, Inc. $ 47,297 11.02% $ 17,173 4.00% $ 25,760 6.00%
UnionBank 26,797 10.12 10,596 4.00 15,895 6.00
UnionBank/Central 8,815 13.57 2,598 4.00 3,897 6.00
UnionBank/West 11,775 14.33 3,287 4.00 4,930 6.00
Tier I leverage ratio
(to average assets)
UnionBancorp, Inc. $ 47,297 7.66% $ 24,703 4.00% $ 30,879 5.00%
UnionBank 26,797 7.32 14,636 4.00 18,295 5.00
UnionBank/Central 8,815 8.61 4,095 4.00 5,119 5.00
UnionBank/West 11,775 9.41 5,007 4.00 6,259 5.00
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)
57
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT 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.
DEPOSITS
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)
58
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT 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,
-----------------------------------------------------------
1998 1997
----------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 24,613 $ 24,613 $ 22,826 $ 22,826
Federal funds sold 450 450 1,404 1,404
Securities 175,619 176,845 200,738 201,408
Loans 394,530 395,776 367,797 368,180
Accrued interest receivable 6,549 6,549 6,730 6,730
Financial liabilities
Deposits 517,638 518,518 527,747 527,762
Federal funds purchased and
securities sold under
agreements to repurchase 14,855 14,855 11,761 11,761
Advances from the Federal
Home Loan Bank 23,208 23,208 16,455 16,455
Notes payable 7,000 7,000 10,261 10,261
Accrued interest payable 3,486 3,486 3,819 3,819
</TABLE>
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
(Continued)
59
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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. These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet. The
contractual amounts of these 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> <C>
Commitments to extend credit
and standby letters of credit
December 31, 1998 $ 49,747 $ 43,146 $ 92,893 6.50 - 18.00%
December 31, 1997 $ 57,440 $ 15,540 $ 72,980 8.00 - 18.00%
</TABLE>
The Company also had a firm commitment from the secondary market to purchase
approximately $8,269 of mortgage loans held for sale at December 31, 1998.
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.
Collateral held varies, but may include accounts receivable; inventory;
property, plant, and equipment; and income producing commercial properties.
(Continued)
60
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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.
Condensed financial information for UnionBancorp, Inc. follows:
BALANCE SHEETS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
December 31,
----------------
ASSETS 1998 1997
---- ----
<S> <C> <C>
Cash and cash equivalents $ 1,554 $ 633
Investment in subsidiaries 63,591 61,715
Premises and equipment 515 431
Other assets 384 278
----------- -----------
$ 66,044 $ 63,057
----------- -----------
----------- -----------
</TABLE>
(Continued)
61
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities
Notes payable $ 7,000 $ 10,000
Other liabilities 1,096 619
----------- -----------
8,096 10,619
Mandatory redeemable preferred stock 857 857
----------- -----------
Stockholders' equity 57,091 51,581
----------- -----------
$ 66,044 $ 63,057
----------- -----------
</TABLE>
INCOME STATEMENTS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividends from subsidiaries $ 3,851 $ 6,244 $ 1,227
Management fees and other 282 369 977
Gain on sale of subsidiaries 1,580 - -
Interest expense 708 991 690
Other expenses 3,119 2,589 1,768
Income tax benefit (1,156) (1,321) (545)
Equity in undistributed earnings of subsidiaries 2,347 411 2,543
----------- ----------- -----------
NET INCOME 5,389 4,765 2,834
Less dividends on preferred stock 259 259 105
----------- ----------- -----------
NET INCOME ON COMMON STOCK $ 5,130 $ 4,506 $ 2,729
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(Continued)
62
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,389 $ 4,765 $ 2,834
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 107 90 53
Undistributed earnings of subsidiaries (2,347) (411) (2,543)
Amortization of deferred compensation -
stock options 65 42 26
Gain on sale of subsidiaries (1,580) - -
(Increase) decrease in other assets (106) 7 (145)
Increase (decrease) in other liabilities 477 472 7
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 2,005 4,965 232
----------- ----------- -----------
Cash flows from investing activities
Purchases of premises and equipment (191) (185) (237)
Bank holding company acquisitions and sales 2,971 - (16,939)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 2,780 (185) (17,176)
----------- ----------- -----------
Cash flows from financing activities
Net increase (decrease) in notes payable (3,000) (3,180) 4,884
Dividend paid on common stock (633) (722) (316)
Dividends paid on preferred stock (259) (259) (53)
Redemption of qualifying directors' shares
and exercise of stock options 28 8 (1)
Proceeds from issuance of common stock,
net of cost - - 12,436
Net Cash Provided By (used in)
Financing Activities (3,864) (4,153) 16,950
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 921 627 6
Cash and cash equivalents
Beginning of year 633 6 -
----------- ----------- -----------
End of year $ 1,554 $ 633 $ 6
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(Continued)
63
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 17. OTHER COMPREHENSIVE INCOME
Changes in other comprehensive income components and related taxes are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Change in unrealized gains (losses) on
securities available-for-sale $ (1,350) $ 1,773 $ (105)
Reclassification adjustment for gains
recognized in income (56) (193) (20)
----------- ----------- -----------
Net unrealized gains (losses) (1,406) 1,580 (125)
Tax expense (benefit) 581 (650) 49
----------- ----------- -----------
Other comprehensive income $ (825) $ 930 $ (76)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 18. SEGMENT INFORMATION
The reportable segments are determined by the products and services offered,
primarily distinguished between banking and other operations. Loans,
investments, and deposits provide the revenues in the banking segment, and
mortgage banking, insurance, trust and holding company services are categorized
as other segments. Prior to 1998, the Company did not offer insurance services.
The accounting policies used are the same as those described in the summary of
significant accounting policies. Segment performance is evaluated using net
interest income. Information reported internally for performance assessment
follows.
<TABLE>
<CAPTION>
Banking Other Consolidated
Segment Segments Totals
------- -------- ------------
<S> <C> <C> <C>
1998
Net interest income (loss) $ 23,186 $ (724) $ 22,462
Other revenue 4,834 3,237 8,071
Other expense 15,438 2,729 18,167
Noncash items
Depreciation 1,460 219 1,679
Provision for loan loss 1,635 - 1,635
Goodwill and other intangibles 877 63 940
Segment profit 8,610 (498) 8,112
Segment assets 618,156 9,038 627,194
</TABLE>
(Continued)
64
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Banking Other Consolidated
Segment Segments Totals
------- -------- ------------
<S> <C> <C> <C>
1997
Net interest income $ 22,549 $ (945) $ 21,604
Other revenue 3,915 1,267 5,182
Other expense 14,857 1,603 16,460
Noncash items
Depreciation 1,340 134 1,474
Provision for loan loss 1,079 - 1,079
Goodwill and other intangibles 864 39 903
Segment profit 8,324 (1,454) 6,870
Segment assets 623,875 1,585 625,460
1996
Net interest income $ 14,777 $ (743) $ 14,034
Other revenue 3,234 - 3,234
Other expense 10,669 377 11,046
Noncash items
Depreciation 683 166 849
Provision for loan loss 1,178 - 1,178
Goodwill and other intangibles 341 51 392
Segment profit 5,140 (1,337) 3,803
Segment assets 641,387 637 642,024
</TABLE>
65
<PAGE>
Exhibit 21.1
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.
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.
Union Financial Services, Inc., an Illinois corporation located in Ottawa,
Illinois.
<PAGE>
Exhibit 23.1
The Board of Directors
UnionBancorp,Inc.
We consent to the incorporation by reference of our report included herein,
dated February 5, 1999, relating to the consolidated financial statements of
UnionBancorp, Inc. (the "Company") as of December 31, 1998 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 8, 1996.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 23, 1999
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the Annual Report on Form
10-K under the Securities Exchange Act of 1934 of UnionBancorp, Inc. for the
year ended December 31, 1998 of our report on the 1996 financial statements
dated February 5, 1997.
/s/ McGladrey & Pullen, LLP
- ----------------------------
/McGladrey & Pullen, LLP/
Champaign, Illinois
March 20, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 24,613
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 133,772
<INVESTMENTS-CARRYING> 41,847
<INVESTMENTS-MARKET> 43,073
<LOANS> 398,388
<ALLOWANCE> 3,858
<TOTAL-ASSETS> 627,194
<DEPOSITS> 517,638
<SHORT-TERM> 21,855
<LIABILITIES-OTHER> 6,545
<LONG-TERM> 23,208
857
500
<COMMON> 4,534
<OTHER-SE> 52,057
<TOTAL-LIABILITIES-AND-EQUITY> 627,194
<INTEREST-LOAN> 36,102
<INTEREST-INVEST> 11,285
<INTEREST-OTHER> 333
<INTEREST-TOTAL> 47,720
<INTEREST-DEPOSIT> 22,338
<INTEREST-EXPENSE> 25,258
<INTEREST-INCOME-NET> 22,462
<LOAN-LOSSES> 1,635
<SECURITIES-GAINS> 56
<EXPENSE-OTHER> 20,733
<INCOME-PRETAX> 8,112
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,389
<EPS-PRIMARY> $1.23
<EPS-DILUTED> $1.22
<YIELD-ACTUAL> 8.29
<LOANS-NON> 1,487
<LOANS-PAST> 1,111
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,188
<CHARGE-OFFS> 1,032
<RECOVERIES> 243
<ALLOWANCE-CLOSE> 3,858
<ALLOWANCE-DOMESTIC> 3,858
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 957
</TABLE>
