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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13D OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File Number: 0-28846
UNIONBANCORP, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 36-3145350
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
321 WEST MAIN STREET OTTAWA, ILLINOIS 61350
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(Address of principal executive offices including zip code)
(815) 431-2720
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(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 WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK ($1.00 PAR VALUE)
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(Title of Class)
PREFERRED PURCHASE RIGHTS
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(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. [ ]
As of March 2, 2001, the Registrant had issued and outstanding 3,967,548 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 2, 2001, was $23,590,768.*
* Based on the last reported price $12.25 of an actual transaction in the
Registrant's Common Stock on March 2, 2001, 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 2000 Annual Report to Stockholders (the "2000
Annual Report") are incorporated by reference into Part II of this Form 10-K.
Certain portions of the Proxy Statement for the 2001 Annual Meeting of
Stockholders (the "2001 Proxy Statement") are incorporated by reference into
Part III of this Form 10-K.
UNIONBANCORP, INC.
FORM 10-K INDEX
PAGE
PART I
Item 1. Description of Business.................................. 1
A. The Company
B. Regulation and Supervision
Item 2. Properties............................................... 12
Item 3. Legal Proceedings........................................ 13
Item 4. Submission of Matters to a Vote of Security Holders...... 13
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.......................... 13
Item 6. Selected Consolidated Financial Data..................... 14
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition................... 15
Item 7A. Quantitative and Qualitative Disclosure about Market
Risk................................................. 37
Item 8. Financial Statements and Supplementary Data.............. 37
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................. 74
PART III
Item 10. Directors and Executive Officers of the Registrant....... 74
Item 11. Executive Compensation................................... 75
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 75
Item 13. Certain Relationships and Related Transactions........... 75
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................... 75
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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. 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 UnionFinancial 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, 2000, the Company had consolidated assets of approximately $758.7
million, deposits of approximately $636.0 million and stockholders' equity of
approximately $59.0 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.
1
OPERATIONS
The Company's strategic plan contemplates an increase in profitability
and stockholder value through a significant expansion of the Company's market
area, substantial growth in its asset size and improved operational
efficiencies. In 1993, the Company began implementing this plan by realigning
its management structure through the redefinition of certain officers' duties
and functions, hiring additional experienced senior executives and developing
among its employees an aggressive sales culture. The acquisitions of Prairie and
Country significantly increased the presence of the Company within the region's
banking industry. Because of the reputations of the Company and its executive
officers in the banking industry, the Company believes that it will be an
attractive alternative to future sellers of community banks and thrifts. The
Company believes that it can successfully manage these community-based
institutions to increase their profitability by expanding cross-selling efforts
and emphasizing those products and services offering the highest return on
investment.
The Company's operating strategy is to provide customers with the
business sophistication and breadth of products of a regional financial services
company, while retaining the special attention to personal service and the 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.
2
COMPETITION
The Company's market area is highly competitive. Within the thirteen
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 it serves and personal service philosophy enhance its ability to
compete favorably in attracting and retaining individual and business customers.
The Company actively solicits deposit-related customers and competes for
deposits by offering customers personal attention, professional service and
competitive interest rates.
Under the Gramm-Leach-Bliley Act of 1999, effective March 11, 2000,
securities firms and insurance companies that elect to become financial holding
companies may acquire banks and other financial institutions. The
Gramm-Leach-Bliley Act may significantly change the competitive environment in
which the Company and the Bank conduct business. The financial services industry
is also likely to become more competitive as further technological advances
enable more companies to provide financial services. These technological
advances may diminish the importance of depository institutions and other
financial intermediaries in the transfer of funds between parties.
EMPLOYEES
At December 31, 2000, the Company employed 350 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 Illinois Commissioner of Banks and Real
Estate (the "Commissioner"), the Board of Governors of the Federal Reserve
System (the "Federal Reserve"), the Federal Deposit Insurance Corporation (the
"FDIC"), 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
3
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
On November 12, 1999, President Clinton signed legislation that will
allow bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. Under the Gramm-Leach-Bliley Act (the "Act"), a bank holding company
that elects to become a financial holding company may engage in any activity
that the Federal Reserve, in consultation with the Secretary of the Treasury,
determines by regulation or order is (i) financial in nature, (ii) incidental to
any such financial activity, or (iii) complementary to any such financial
activity and does not pose a substantial risk to the safety or soundness of
depository institutions or the financial system generally. The Act specifies
certain activities that are deemed to be financial in nature, including lending,
exchanging, transferring, investing for others, or safeguarding money or
securities; underwriting and selling insurance; providing financial, investment,
or economic advisory services; underwriting, dealing in or making a market in,
securities; and any activity currently permitted for bank holding companies by
the Federal Reserve under section 4(c)(8) of the Bank Holding Company Act. A
bank holding company may elect to be treated as a financial holding company only
if all depository institution subsidiaries of the holding company are
well-capitalized, well-managed and have at least a satisfactory rating under the
Community Reinvestment Act.
National banks are also authorized by the Act to engage, through
"financial subsidiaries," in any activity that is permissible for a financial
holding company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve, determines is financial in
nature or incidental to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate investment activities
(unless otherwise permitted by law), (iii) insurance company portfolio
investments and (iv) merchant banking. The authority of a national bank to
invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). The Act provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that apply
to national bank investments in financial subsidiaries.
At this time, it is not possible to predict the impact the Act may have
on the Company. Various bank regulatory agencies have just begun issuing
regulations as mandated by the Act. The Federal Reserve has issued an interim
rule that sets forth procedures by which bank holding companies may become
financial holding companies, the criteria necessary for such a conversion, and
the Federal Reserve's enforcement powers should a holding company fail to
maintain compliance with the criteria. The Office of the Comptroller of the
Currency has issued a final rule discussing the procedures by which national
banks may establish financial subsidiaries as well as the qualifications and
safeguards that will be required. In addition, in February, 2000, all federal
bank regulatory agencies jointly issued a proposed rule that would implement the
financial privacy provisions of the Act.
4
THE COMPANY
GENERAL. The Company, as the sole shareholder of UnionBank, Prairie, as
the sole or controlling shareholder of UnionBank/Northwest and UnionBank/Central
and Country, as the sole shareholder of UnionBank/West, are each bank holding
companies. As bank holding companies, the Company, Prairie and Country are
registered with, and are subject to regulation by, the Federal Reserve under the
Bank Holding Company Act, as amended (the "BHCA"). In accordance with Federal
Reserve policy, the Company, Prairie and Country are expected to act as a source
of financial strength to their respective bank subsidiaries and to commit
resources to support their respective bank subsidiaries in circumstances where
the Company, Prairie or Country might not do so absent such policy. Under the
BHCA, the Company, Prairie and Country are subject to periodic examination by
the Federal Reserve and are 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 and its 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 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
5
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 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.
6
As of December 31, 2000, the Company, Prairie and Country each had
regulatory capital in excess of the Federal Reserve's minimum requirements, as
follows:
Risk-Based Leverage
Capital Ratio Capital Ratio
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Company 10.99% 6.90%
Prairie 13.17% 8.22%
Country 12.29% 8.07%
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 Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company
is subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
THE BANKS
All of the Banks are Illinois-chartered banks, the deposit accounts of
which are insured by the FDIC's Bank Insurance Fund ("BIF"). The Banks are also
members of the Federal Reserve System ("member banks"). As Illinois-chartered,
FDIC-insured member banks, the Banks 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.
7
DEPOSIT INSURANCE. As FDIC-insured institutions, the Banks are required
to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums based upon
their respective levels of capital and results of supervisory evaluations.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
During the year ended December 31, 2000, BIF assessments ranged from 0%
of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 2001, 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 the Banks.
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. 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, 2000, the FICO assessment rate for
SAIF members ranged between approximately 0.058% of deposits and approximately
0.061% of deposits, while the FICO assessment rate for BIF members ranged
between approximately 0.0116% of deposits and approximately 0.0122% of deposits.
During the year ended December 31, 2000, the Banks paid FICO assessments
totaling $72,678.
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, 2000, the Banks paid
supervisory assessments to the Commissioner totaling $108,639.
CAPITAL REQUIREMENTS. The Federal Reserve has established the following
minimum capital standards for state-chartered Federal Reserve System member
banks, such as the Banks: 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").
8
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.
During the year ended December 31, 2000, none of the Banks was required
by the Federal Reserve to increase its capital to an amount in excess of the
minimum regulatory requirement. As of December 31, 2000, each of the Banks
exceeded its minimum regulatory capital requirements, as follows:
Risk-Based Leverage
Capital Ratio Capital Ratio
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UnionBank 11.38% 7.52%
UnionBank/ Central 12.61% 7.92%
UnionBank/ West 12.52% 8.10%
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, 2000, each of the Banks 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.
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 Banks. 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
9
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described above,
each of the Banks exceeded its minimum capital requirements under applicable
guidelines as of December 31, 2000. As of December 31, 2000, approximately $7.3
million was available to be paid as dividends to the Company by the Banks.
Notwithstanding the availability of funds for dividends, however, the Federal
Reserve may prohibit the payment of any dividends by the Banks if the Federal
Reserve determines such payment would constitute an unsafe or unsound practice.
INSIDER TRANSACTIONS. The Banks 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 Banks to
their respective directors and officers, to directors and officers of the
Company and its subsidiaries, to principal stockholders of the Company, and to
"related interests" of such directors, officers and principal stockholders. In
addition, federal law and regulations may affect the terms upon which any person
becoming a director or officer of the Company or one of its subsidiaries or a
principal stockholder of the Company may obtain credit from banks with which one
of the Banks maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have
adopted guidelines which establish operational and managerial standards to
promote the safety and soundness of federally insured depository institutions.
The guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings. Since the fourth quarter of 1998, and through the first quarter of
2000, the federal banking regulators have 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 Banks, 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
10
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 Banks.
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 $44.3 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $44.3 million, the reserve
requirement is $1.329 million plus 10% of the aggregate amount of total
transaction accounts in excess of $44.3 million. The first $5.0 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Banks 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 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.
11
ITEM 2. PROPERTIES
At December 31, 2000, the Company operated 26 banking offices in
Illinois. The principal offices of the Company are located in Ottawa, Illinois.
All of the Company's offices are owned either by 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.
AFFILIATE MARKETS SERVED PROPERTY/TYPE LOCATION
- --------- -------------- ----------------------
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, Pike, and Eight banking offices located
Schuyler Counties in markets served.
UnionBank/Northwest Jo Davies County Main Office: Hanover, IL
Two banking offices located in
markets served.
UnionData Corp, Inc. LaSalle and Main Office: Streator, IL
McDonough Counties Additional office located in
Macomb, IL
UnionFinancial LaSalle and Adams Main Office: Peru, IL
Services, Inc. Counties Additional offices located in
Mendota, Spring Valley, Quincy
and Rushville, IL
UnionTrust Corporation Bureau, LaSalle and Main Office: Ottawa, IL
McDonough Counties Additional offices located in
Peru, Streator, Princeton and
Quincy, IL
In addition to the banking locations listed above, the Banks own 29
automatic teller machines, some of which are housed within a banking office and
some of which are independently located.
At December 31, 2000, the properties and equipment of the Company had
an aggregate net book value of approximately $12.0 million.
12
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 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was held by approximately 615 stockholders
of record as of March 2, 2001, and is traded on The Nasdaq Stock Market under
the symbol "UBCD." The table below indicates the high and low sales prices of
the Common Stock for transactions of which the Company is aware, and the
dividends declared per share for the Common Stock during the periods indicated.
Because the Company is not aware of the price at which certain private
transactions in the Common Stock have occurred, the prices shown may not
necessarily represent the complete range of prices at which transactions in the
Common Stock have occurred during such periods.
STOCK SALES
-----------
CASH
HIGH LOW DIVIDENDS
---- --- ---------
1999
First Quarter.................... 17.00 13.75 0.040
Second Quarter................... 16.50 12.50 0.040
Third Quarter.................... 18.13 14.50 0.050
Fourth Quarter.................. 18.00 12.50 0.050
2000
First Quarter.................... 14.50 10.63 0.060
Second Quarter................... 15.00 9.50 0.060
Third Quarter.................... 11.25 10.00 0.060
Fourth Quarter................... 11.50 9.94 0.060
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
13
reduced or eliminated in the future. The timing and amount of dividends will
depend upon the earnings, capital requirements and financial condition of the
Company and the Banks, as well as the general economic conditions and other
relevant factors affecting the Company and the Banks. The Company entered into a
new loan agreement in connection with the 1996 acquisition of Prairie and
Country, replacing the Company's prior loan agreement. The new loan agreement
contains no direct prohibitions against the payment by the Company of dividends,
but indirectly restricts such dividends through the required maintenance of
minimum capital ratios. In addition, the terms of the Series A Preferred Stock,
and the Series B Preferred Stock issued to certain of Prairie's preferred
stockholders prohibit the payment of dividends by the Company on the Common
Stock during any period for which dividends on the respective series of
Preferred Stock are in arrears.
Except in connection with stock dividends and stock splits, and as
described herein, the Company has not issued any securities in the past three
years which were not registered for sale under the Securities Act of 1933, as
amended. As consideration for the acquisition of Credit Recovery, consummated on
August 1, 1996, the Company issued 9,090 shares of Common Stock to the sole
stockholder of Credit Recovery. As partial consideration for the acquisition of
Prairie, which was consummated on August 6, 1996, the Company issued 710,576
shares of Common Stock and 2,762.24 shares of Series A Preferred Stock to the
holders of shares of Prairie Common Stock, and issued 857 shares of Series B
Preferred Stock to the holders of Prairie's Series A Preferred Stock electing to
receive securities in lieu of cash. The Company also issued an aggregate of
19,829 shares of its Common Stock during 1997 in connection with the acquisition
of minority interests of certain of the Banks 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
Banks 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, 2000, consisting of data captioned "Selected Consolidated Financial Data" on
page 16 of the Company's 2000 Annual Report to Stockholders filed as an exhibit
hereto is incorporated herein by reference.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion provides additional information regarding the
operations and financial condition of UnionBancorp, Inc. (the "Company") for the
three years ended December 31, 2000. This discussion should be read in
conjunction with "Selected Consolidated Financial Data," the consolidated
financial statements of the Company, and the accompanying notes thereto. All
numbers presented are in thousands (000's).
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; the Company's
implementation of new technologies; the Company's ability to develop and
maintain secure and reliable electronic systems; 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 most of its revenues and income from the operations
of its banking subsidiaries (the Banks), but also derives revenue from its
nonbank subsidiaries, UnionFinancial Services Inc., UnionData Corp, Inc., and
UnionTrust Corporation. The Banks provide a full range of commercial and
consumer banking services to businesses and individuals, primarily in north
central and west central Illinois, while the nonbanks provide insurance,
brokerage, asset management, trust and data processing service to the same
regions.
As of December 31, 2000, the Company had total assets of $758,773, net
loans of $498,680, total deposits of $636,003, and total stockholders' equity of
$59,035. Total assets increased by 7.8% from year-end 1999 or a $54,656
increase. Total net loans increased by 6.4% from year-end 1999 or a $29,976
increase. This loan growth was primarily funded by a $41,805 or 7.0% increase in
deposits. The increases in both loans and deposits reflect increased market
share and expansion of the Company's delivery channels.
There were a number of significant items during 2000 that helped to
shape the Company's performance. During the fourth quarter of 2000, the Company
provided $2,900 to its allowance for loan losses. This measure was influenced by
a single non-performing commercial credit. This provision increased the
allowance for loan losses as a percent of average loans to 1.27%. Also during
15
the fourth quarter there was a nonrecurring pre-tax charge of $340 for the
buyout of two senior manager employment contracts. Finally, in the fourth
quarter, the Company completed the sale of its internet-based technology titled
"InterNetStation" to eKiosk.com for shares of stock in that company.
InterNetStation is a proprietary system used by travelers to configure publicly
accessible internet portals to functionally resemble their personal or corporate
computers. The system permits a highly efficient and cost effective means for
securely accessing electronic messages. In agreement with the terms of the sale,
the Company received a small equity interest in eKiosk.com, currently equal to
approximately 3% of eKiosk's outstanding common stock. The net gain on sale of
InterNetStation was $180.
During the third quarter, the Company completed the sale of
approximately $2,700 in deposits from its UnionBank/West Camp Point branch. The
consummation of this transaction had a minimal after-tax, net gain on sale and
was a result of the Company's strategic initiative to analyze its distribution
network to improve operating efficiencies and reduce noninterest expense.
During the first quarter, the Company announced that it had purchased 99,000 or
2.5% of its own shares in a privately negotiated transaction for a purchase
price of $1,274. The Company's board of directors believed that the Company's
stock was undervalued by the market and decided to take advantage of this
opportunity based on the general level of financial service sector stocks and
the opportunity it created for the Company to purchase stock at an attractive
price to earnings multiple. Also during the first quarter, there was a
nonrecurring pre-tax charge of $474 for the expense associated with the
resignation of the organization's former chief executive officer.
RESULTS OF OPERATIONS
NET INCOME. Net income equaled $2,903 or $0.66 per fully diluted share
for the year ended December 31, 2000 compared with net income of $5,507 or $1.27
per fully diluted share for the year ended December 31, 1999. This represents a
48.0% decrease in per share earnings and a 47.3% decrease in net income.
The decrease in net income was primarily the result of several factors
including an increased provision for loan losses, significant compression in the
net interest margin and specific strategic initiatives undertaken that had a net
adverse effect on earnings. These items included a $3,336 additional provision
for loan loss as compared to 1999, $814 in executive severance packages and
related expenses, $150 in the elimination of executive corporate vehicles and
other one time expenses, $180 related to the net gain on sale of InterNetStation
to eKiosk.com, $438 related to the gain on sale of UnionBank/West's Camp Point
branch, and $232 in impairment of intangible assets. Exclusive of these
nonrecurring items, core net income equaled $5,346 or $1.27 per fully diluted
share. This represents no change in per share earnings and a 2.9% decrease in
net income. Management believes that these core results are more indicative of
the underlying performance of the Company.
Return on average assets was 0.40% for the period compared to the 0.83%
for the same period in 1999. Cash return on average assets for the period was
0.54%. Return on average stockholders' equity was 5.09% for the period compared
to 9.83% for the same period in 1999. Return on average tangible equity capital
for the period equaled 7.79%.
In addition to the traditional measurement of net income, the Company
also calculates cash earnings which exclude the after-tax effect of purchase
accounting adjustments and the effect such adjustments had on profitability.
Cash earnings per share, cash return on average assets and cash return on
average equity capital are detailed as follows:
16
For the Year Ended December 31, 2000
-----------------------------------------
Reported Cash
Earnings Goodwill Other Earnings
-------- -------- -------- --------
Income before income taxes $ 3,920 $ 647 $ 590 $ 5,157
Income taxes 1,017 -- 229 1,246
-------- -------- -------- --------
Net income 2,903 647 361 3,911
Preferred stock dividends 259 -- -- 259
-------- -------- -------- --------
Net income for common stockholders $ 2,644 $ 647 $ 361 $ 3,652
======== ======== ======== ========
Diluted earnings per common share $ 0.66 $ 0.16 $ 0.09 $ 0.91
======== ======== ======== ========
Return on average total assets 0.40% 0.54%
Return on average stockholders' equity 5.09% 6.86%
Net income was $5,507 for the year ended December 31, 1999 compared
with net income of $5,389 for the year ended December 31, 1998, an increase of
$118 or 2.2%. The increase in earnings per share in 1999 compared with 1998 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.
NET INTEREST INCOME. Net interest income is the difference between
income earned on interest-earning assets and the interest expense incurred for
the funding sources used to finance these assets. Changes in net interest income
generally occur due to fluctuations in the volume of earning assets and paying
liabilities and rates earned and paid, respectively, on those assets and
liabilities. The net yield on total interest-earning assets, also referred to as
net interest margin, represents net interest income divided by average
interest-earning assets. Net interest margin measures how efficiently the
Company uses its earning assets and underlying capital.
The Company's long term objective is to manage those assets and
liabilities to provide the largest possible amount of income while balancing
interest rate, credit, liquidity and capital risks. For purposes of this
discussion, both net interest income and margin have been adjusted to a fully
tax equivalent basis for certain tax-exempt securities and loans.
Net interest income was $24,682 for the year ended December 31, 2000,
compared with net interest income of $24,802 earned during the same period in
1999. This represented a decrease of $120 and was primarily attributable to a
rise in the cost of funds due to interest rate increases and increased
competition for deposits. This was partially offset by an increase in rates on
loans where the increase in interest rates on loans of 16 basis points, as well
as an overall tightening of loan underwriting standards, contributed to slower
than expected loan growth.
The year over year decrease resulted from higher interest income of
$5,668 offset by higher interest expense of $5,788. Further breaking down the
change, approximately 48% was related to an increase in volume and 52% was
related to a decrease in rate. The increase in interest income resulted from
$4,784 associated with volume and $884 associated with rate. The majority of the
improvement in interest income was related to a $46,923 increase in the volume
of average loans. The change in interest expense resulted from increases of
$2,947 associated with volume and $2,841 associated with rate. The majority of
the change was associated with total time deposit increases of $52,868 in volume
and 60 basis points in the cost of funds.
17
The net interest margin on a tax equivalent basis for the period
decreased 36 basis points to 3.67% as compared to the prior year's 4.03%. The
compression in the net interest margin was largely related to the Company's
increasing cost of funds due to the rising interest rate environment as the
Company's cost of funding earning-assets increased faster than the yields on
earning-assets. Specifically, yields on interest-earning assets increased 17
basis points to 8.24% as compared to the prior year's 8.07%. In contrast, rates
paid on interest-bearing liabilities increased 60 basis points to 5.20% as
compared to the prior year's 4.60%.
Net interest income was $24,802 for 1999, an increase of $1,167 or
4.9%, compared with net interest income of $23,635 for 1998. The Company's
average total interest-earning assets increased from $590,008 for 1998 to
$615,730 for 1999 representing a 4.4% increase resulting primarily from the
growth attributed to efforts to increase market share during 1999. The net
interest margin increased to 4.03% at December 31, 1999 from 4.01% at December
31, 1998. The interest rates on average earning assets decreased to 8.07% in
1999 from 8.29% in 1998, while rates on average interest-bearing liabilities
decreased to 4.60% in 1999 from 4.87% in 1998.
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 during 2000,
1999 and 1998. 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.
18
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
For the Years Ended December 31,
--------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- --------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- ------- ----- -------- ------- ----- -------- ------- -----
ASSETS
INTEREST-EARNING ASSETS
Interest-earning deposits $ 2,248 $ 133 5.92% $ 1,801 $ 92 5.11% $ 1,568 $ 142 9.06%
Securities (1)
Taxable 138,643 8,514 6.14 133,156 8,060 6.05 149,807 9,016 6.02
Nontaxable (2) 41,320 3,081 7.46 40,963 3,034 7.41 42,131 3,225 7.65
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total securities (tax equivalent) 179,963 11,595 6.44 174,119 11,094 6.37 191,938 12,241 6.38
-------- ------- ----- -------- ------- ----- -------- ------- -----
Federal funds sold 4,224 290 6.87 1,244 73 5.87 5,942 333 5.60
-------- ------- ----- -------- ------- ----- -------- ------- -----
Loans (3)(4)
Commercial 144,706 13,282 9.18 128,008 11,343 8.86 109,685 10,377 9.46
Real estate 288,651 24,929 8.64 269,840 22,181 8.22 239,780 20,632 8.60
Installment and other 52,132 5,138 9.86 40,718 3,681 9.04 41,095 3,892 9.47
Fees on loans -- -- -- -- 1,235 -- -- 1,276 --
-------- ------- ----- -------- ------- ----- -------- ------- -----
Net loans (tax equivalent) 485,489 43,349 8.93 438,566 38,440 8.76 390,560 36,177 9.26
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning assets 671,924 55,367 8.24 615,730 49,699 8.07 590,008 48,893 8.29
-------- ------- ----- -------- ------- ----- -------- ------- -----
NON-INTEREST-EARNING ASSETS
Cash and cash equivalents 21,358 20,801 17,436
Premises and equipment, net 12,700 13,729 14,680
Other assets 15,471 15,090 17,208
-------- -------- --------
Total non-interest-earning assets 49,529 49,620 49,324
-------- -------- --------
Total assets $721,453 $665,350 $639,332
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $ 53,764 1,249 2.32% $ 55,888 1,281 2.29% $ 56,668 1,353 2.39%
Money market accounts 39,407 1,629 4.13 33,864 1,189 3.51 29,300 1,040 3.55
Savings deposits 48,476 1,239 2.56 57,242 1,543 2.70 61,740 1,848 2.99
Time $100,000 and over 179,183 10,088 5.63 128,090 6,569 5.13 106,187 5,809 5.47
Other time deposits 217,693 13,049 5.99 215,918 11,430 5.29 215,478 12,288 5.70
Federal funds purchased and
repurchase agreements 3,571 233 6.52 13,050 679 5.20 16,773 953 5.68
Advances from FHLB 37,665 2,366 6.28 27,636 1,526 5.52 21,727 1,226 5.64
Notes payable 10,413 832 7.99 9,530 680 7.14 11,024 741 6.72
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing liabilities 590,172 30,685 5.20 541,216 24,897 4.60 518,897 25,258 4.87
-------- ------- ----- -------- ------- ----- -------- ------- -----
NON-INTEREST-BEARING LIABILITIES
Non-interest-bearing deposits 66,720 61,458 59,885
Other liabilities 7,575 6,656 6,569
-------- -------- --------
Total non-interest-bearing liabilities 74,295 68,114 66,454
-------- -------- --------
Stockholders' equity 56,986 56,020 53,981
-------- -------- --------
Total liabilities and stockholders'
equity $721,453 $665,350 $639,332
======== ======== ========
Net interest income (tax equivalent) $24,682 $24,802 $23,635
======= ======= =======
Net interest income (tax equivalent)
to total earning assets 3.67% 4.03% 4.01%
===== ===== =====
Interest-bearing liabilities to
earning assets 87.83% 87.90% 87.95%
======== ======== ========
- ----------------------------------------------
(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.
(4) Overdraft loans are excluded in the average balances.
19
The Company's net interest income is affected by changes in the amount
and mix of interest-earning assets and interest-bearing liabilities, referred to
as "volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as "rate change." The following table reflects the
changes in net interest income stemming from changes in interest rates and from
asset and liability volume, including mix. The change in interest attributable
to both rate and volume has been allocated to the changes in the rate and the
volume on a pro rata basis.
RATE/VOLUME ANALYSIS OF
NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
For the Years Ended December 31,
--------------------------------------------------------------
2000 Compared to 1999 1999 Compared to 1998
----------------------------- -----------------------------
Change Due to Change Due to
----------------------------- -----------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
INTEREST INCOME:
Interest-earning deposits $ 25 $ 16 $ 41 $ 19 $ (69) $ (50)
Investment securities:
Taxable 344 110 454 (1,001) 45 (956)
Nontaxable 20 27 47 (127) (64) (191)
Federal funds sold 203 14 217 (275) 15 (260)
Loans 4,192 717 4,910 4,286 (2,023) 2,263
------- ------- ------- ------- ------- -------
Total interest income 4,784 884 5,668 2,902 (2,096) 806
------- ------- ------- ------- ------- -------
INTEREST EXPENSE:
NOW accounts (49) 17 (32) (18) (54) (72)
Money market accounts 211 229 440 161 (12) 149
Savings deposits (227) (77) (304) (131) (174) (305)
Time, $100,000 and over 2,826 693 3,519 1,139 (379) 760
Other time 95 1,524 1,619 25 (883) (858)
Federal funds purchased and
repurchase agreements (586) 140 (446) (198) (76) (274)
Advances from FHLB 611 229 840 327 (27) 300
Notes payable 66 86 152 (105) 44 (61)
------- ------- ------- ------- ------- -------
Total interest expense 2,947 2,841 5,788 1,200 (1,561) (361)
------- ------- ------- ------- ------- -------
Net interest margin $ 1,837 $(1,957) $ (120) $ 1,702 $ (535) $ 1,167
======= ======= ======= ======= ======= =======
20
PROVISION FOR LOAN LOSSES. The amount of the provision for loan losses
is based on management's 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.
The 2000 provision for loan losses totaled $4,858 compared with $1,522
in 1999. The increase was primarily influenced by a single non-performing
commercial credit discussed in the Nonperforming Assets section. In addition to
this credit, there were a number of other loans identified in the fourth quarter
that had deteriorating conditions. In reaching the decision to provide a larger
provision, management also considered several other factors, including an
increase in non-performing loans, general concerns over asset quality and an
increase in charge-offs during the first three quarters of 2000. Net charge-offs
in 2000 were approximately $2,135 compared with $1,689 in 1999. Along with other
financial institutions, management shares a concern for the softening of the
economy in 2001, which may lead to an increase in problem assets and loans in
the financial industry generally.
The 1999 provision for loan losses was $1,522 compared with $1,635 in
1998. Net charge-offs in 1999 were approximately $1,689. The provision for loan
losses of $1,522 was made to bring the allowance for loan losses to the level
management deemed adequate as of December 31, 1999.
NONINTEREST INCOME. The following table shows the Company's noninterest
income:
NONINTEREST INCOME
(DOLLARS IN THOUSANDS)
Years Ended December 31,
-------------------------------
2000 1999 1998
-------- -------- --------
Service charges $ 2,683 $ 2,259 $ 2,251
Merchant fee income 1,110 1,116 833
Trust income 744 711 590
Mortgage banking income 1,278 1,301 1,518
Insurance commissions and fees 2,862 2,595 317
Securities gains (losses), net (29) 45 56
Gain on sale of subsidiaries and
branch locations 438 -- 820
Other income 2,054 1,461 1,686
-------- -------- --------
Total noninterest income $ 11,140 $ 9,488 $ 8,071
======== ======== ========
Noninterest income consists of a wide variety of fee generating
services viewed as traditional banking services as well as revenues earned by
the Company's insurance/brokerage, trust and data processing services.
Noninterest income totaled $11,140 for the year ended December 31, 2000, as
compared to $9,488 for the same timeframe in 1999. This represented an increase
of $1,652 or 17.4%.
Exclusive of the approximate $438 gain on sale of UnionBank/West's Camp
Point branch and $315 gross gain on sale of InterNetStation to eKiosk.com, which
is included in other income, core noninterest income totaled $10,387. This
represented an $899 or 9.5% increase over 1999. As a percentage of total income
(net interest income plus noninterest income), noninterest income, exclusive of
the gains, increased to 30.6% versus the 28.6% that existed at 1999.
21
A majority of the increase in core noninterest income was related to
service charge income. Service charges consist of fees on both interest bearing
and noninterest bearing deposit accounts as well as charges for items such as
insufficient funds and overdrafts. Approximately 65% of the increase was due to
higher overdraft and insufficient fund fees. The remaining increase was
primarily related to an increase in service charges due to higher transaction
volume in business checking accounts.
Also contributing to the improvement in noninterest income were
increases related to insurance/brokerage commissions and fees, internet service
provider (ISP), and trust management income. The $267 insurance and brokerage
fees increase was largely related to a general hardening of the insurance market
and increased volume due to the employment of more brokerage producers. The $163
improvement in the internet service provider (ISP), included in other
noninterest income, was due to a 530 or 25.2% increase in ISP customers to a
level of 2,630. The Company also 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, 2000 and 1999 were approximately $145,788 and $145,582,
respectively. Trust income, which is predominately comprised of assessed fees
based on the market value of managed client portfolios, increased by $33 during
2000.
These improvements were offset by minor decreases in merchant fee
income and mortgage banking operations. Specifically, mortgage banking declined
$23 as rising interest rates resulted in a reduction in the rate of mortgage
refinancing and slower real estate activity in general.
Noninterest income totaled $9,488 for the year ended December 31, 1999,
as compared to $8,071 in 1998. This represented an increase of $1,417 or 17.56%.
As a percentage of total income, noninterest income increased to 28.6% versus
the 26.4% that existed at 1998.
The majority of the increase was related to insurance commissions and
fees and merchant fee income. The Company, through its wholly owned subsidiary
UnionFinancial Services Inc., provides a full range of insurance and brokerage
services to its customers. The $2,278 year over year increase was attributable
to a full year of policies sold and brokerage services provided. Merchant fee
income consists of transaction, processing, and rental fees related to the
Company's credit card portfolio and ancillary products. A majority of the $283
increase was due to higher interchange fees and merchant discounts related to
retail processing.
Total assets under management at December 31, 1999 and 1998 were
approximately $145,582 and $143,574, respectively. Trust income, which is
predominately comprised of assessed fees based on the market value of managed
client portfolios, increased by $121 during 1999.
Service charges consist of fees on both interest bearing and
noninterest bearing deposit accounts as well as charges for items such as
insufficient funds and overdrafts. The increase of $8 was due to higher volumes
of business checking accounts and the resulting higher service charges offset by
lower overdraft and insufficient fund fees.
These improvements were offset by a $217 decline in mortgage banking
income, as rising interest rates resulted in a reduction in the rate of mortgage
refinancing and slower real estate activity in general.
22
NONINTEREST EXPENSE. The following table shows the Company's
noninterest expense:
NONINTEREST EXPENSE
(DOLLARS IN THOUSANDS)
Years Ended December 31,
---------------------------------
2000 1999 1998
------- ------- -------
Salaries and employee benefits $13,468 $12,244 $10,557
Occupancy expense, net 1,753 1,594 1,520
Furniture and equipment expenses 1,803 1,888 1,788
Supplies and printing 573 538 563
Telephone 749 677 576
Amortization of intangible assets 1,310 897 940
Other expense 6,229 5,759 4,789
------- ------- -------
Total noninterest expense $25,885 $23,597 $20,733
======= ======= =======
Noninterest expense totaled $25,885 for the year ended December 31,
2000, as compared to $23,597 for the same timeframe in 1999. This represented an
increase of $2,288 or 9.7%. During 2000, the Company engaged in a number of
strategic initiatives that had an effect on noninterest expense levels. These
items included $814 in executive severance package and related expenses, $150 in
the elimination of executive corporate vehicles and other one time expenses,
$135 related to expenses associated with the sale of InterNetStation, and $232
in impairment of intangible assets. Exclusive of these nonrecurring items, core
noninterest expense totaled $24,554, representing a $957 or 4.1% increase over
1999 levels.
Salaries and employee benefits accounted for $410 or 42.8% of the core
increase. This increase was primarily due to regular merit increases, basic
incentive compensation, and a full year of expenses related to the initial
staffing and related compensations costs of new banking centers opened in 1999.
Also contributing to the change in noninterest expense were increases
of $159 related to occupancy expense and $72 related to telephone expense where
both were associated with operational costs of new banking centers in 1999.
Based upon past experience, new banking centers may require 12 to 18 months to
achieve breakeven levels due to the substantial initial costs for staffing,
promotion and operations incurred during the first several months. As a result,
other expenses during 2000 reflected a significant portion of these expenses. It
is anticipated that other expenses will not increase materially in the future
due to expenses associated with the new banking centers.
The remaining core increase was primarily attributable to $290 related
to amortization of intangible assets from the Rushville branch in December of
1999 and advertising and promotion campaigns targeted in markets for
UnionFinancial Services, Inc. and the new banking centers.
Noninterest expense was $23,597 in 1999, an increase of $2,864 or 13.8%
compared with noninterest expense of $20,733 for 1998. Salaries and employee
benefits accounted for $1,687 or 58.9% of the increase. The increase in salaries
and employee benefits expense for 1999 was primarily due to the UnionFinancial
Services acquisition in 1998 and the new locations which became operational in
1999. Approximately 89% or $1,501 of the increase was related to a full year of
UnionFinancial Services salary and commission costs. The remaining variance was
due to regular merit increases, basic incentive compensation, and the initial
staffing and related compensation costs of two new banking centers.
The 4.9% increase in occupancy expense was largely related to
operational costs of two new banking centers and a full year of UnionFinancial
Services. Furniture and equipment costs increased 5.6% due to higher equipment
23
depreciation expense as a result of purchases of furniture and equipment for the
additional branches established in 1999 and a full year of operations of
UnionFinancial Services.
Approximately 49.2% or $412,000 of the increase in other expense was
primarily associated with a full year of expense related to UnionFinancial
Services. The remaining variance was primarily attributable to advertising and
promotion campaigns targeted in markets for UnionFinancial Services and the new
banking centers and interchange fee expense due to increased debit and credit
card activity.
APPLICABLE INCOME TAXES. The following table shows the Company's income
before income taxes, as well as applicable income taxes and the effective tax
rate for each of the past three years.
Years Ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Income before income taxes $ 3,920 $ 8,021 $ 8,112
Applicable income taxes 1,017 2,514 2,723
Effective tax rates 25.9% 31.3% 33.6%
Tax expense for all three years included benefits for tax-exempt income,
tax-advantaged investments and general business tax credits offset by the effect
of nondeductible expenses, including goodwill. The Company's effective tax rate
was lower than statutory rates because the Company derives interest income from
municipal securities and loans, which are exempt from federal tax and certain
U.S. government agency securities, which are exempt from Illinois state tax.
PREFERRED STOCK DIVIDENDS. The Company paid $259 of preferred stock
dividends in 2000, 1999, and 1998.
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.
The Company 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 100 to 200 basis point 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 interest rate scenarios are used for
analytical purposes and do not necessarily represent management's view of future
market movements. The tables below present the Company's projected changes in
net interest income for 2000 and 1999 for the various rate shock levels.
December 31, 2000 Net Interest Income
- ----------------- --------------------------------------------
Amount Change Change
--------- --------- --------
(Dollars in Thousands)
+200 bp $ 24,188 $ (1,485) (5.78)%
+100 bp 24,783 (890) (3.47)
Base 25,673 -- --
-100 bp 26,338 665 2.59
-200 bp 26,227 554 2.16
24
Based upon the Company's model at December 31, 2000, the effect of an
immediate 200 basis point increase in interest rates would decrease the
Company's net interest income by 5.78% or approximately $1,485. The effect of an
immediate 200 basis point decrease in rates would increase the Company's net
interest income by 2.16% or approximately $554.
December 31, 2000 Net Interest Income
- ----------------- --------------------------------------------
Amount Change Change
--------- --------- --------
(Dollars in Thousands)
+200 bp $ 24,241 $ (1,405) (5.48)%
+100 bp 24,870 (776) (3.03)
Base 25,646 -- --
-100 bp 26,178 532 2.07
-200 bp 25,647 1 0.00
Based upon the Company's model at December 31, 1999, the effect of an
immediate 200 basis point increase in interest rates would decrease the
Company's net interest income by 5.48% or approximately $1,405. The effect of an
immediate 200 basis point decrease in rates would reduce the Company's net
interest income by 0.00% or approximately $1.
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 underlying growth, as well as loan demand
resulting from ongoing market liquidity conditions, and the addition of new loan
products. Much of this growth has been concentrated in commercial and commercial
real estate segments. The following table describes the composition of loans by
major categories outstanding.
25
LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
Aggregate Principal Amount
-------------------------------------------------------------
December 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Commercial $ 117,534 $ 103,842 $ 74,481 $ 62,936 $ 60,152
Agricultural 38,479 38,328 41,821 39,431 43,500
Real estate:
Commercial mortgages 134,942 126,645 99,872 72,730 63,254
Construction 19,322 15,786 13,935 14,393 13,549
Agricultural 39,658 38,847 35,790 27,955 29,185
1-4 family mortgages 99,237 102,695 96,921 109,411 91,697
Installment 53,276 43,644 32,714 41,210 42,320
Other 2,646 2,615 2,884 3,076 3,354
--------- --------- --------- --------- ---------
505,094 472,402 398,418 371,142 347,011
Unearned income 0 (7) (30) (157) (515)
--------- --------- --------- --------- ---------
Total loans 505,094 472,395 398,388 370,985 346,496
Allowance for loan losses (6,414) (3,691) (3,858) (3,188) (3,068)
--------- --------- --------- --------- ---------
Loans, net $ 498,680 $ 468,704 $ 394,530 $ 367,797 $ 343,428
========= ========= ========= ========= =========
Aggregate Principal Amount
-------------------------------------------------------------
December 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Percentage of Total Loan Portfolio
-------------------------------------------------------------
Commercial 23.27% 21.98% 18.69% 16.96% 17.33%
Agricultural 7.62 8.11 10.50 10.62 12.54
Real estate:
Commercial mortgages 26.72 26.81 25.07 19.60 18.23
Construction 3.83 3.34 3.50 3.88 3.90
Agricultural 7.85 8.22 8.98 7.53 8.41
1-4 family mortgages 19.65 21.74 24.33 29.48 26.42
Installment 10.55 9.24 8.21 11.10 12.20
Other loans 0.51 0.56 0.72 0.83 0.97
--------- --------- --------- --------- ---------
Gross loans 100.00% 100.00% 100.00% 100.00% 100.00%
========= ========= ========= ========= =========
As of December 31, 2000 and 1999, commitments of the Banks under
standby letters of credit and unused lines of credit totaled approximately
$42,717 and $52,508, respectively.
Stated loan maturities (including rate loans reset to market interest
rates) of the total loan portfolio, net of unearned income, at December 31, 2000
were as follows:
26
STATED LOAN MATURITIES (1)
(DOLLARS IN THOUSANDS)
Within 1 to 5 After 5
1 Year Years Years Total
-------- -------- -------- --------
Commercial $ 62,593 $ 38,221 $ 16,720 $117,534
Agricultural 25,658 10,746 2,075 38,479
Real estate 61,492 83,856 147,811 293,159
Installment 16,924 38,806 192 55,922
-------- -------- -------- --------
Total $166,667 $171,629 $166,798 $505,094
======== ======== ======== ========
- --------------------
(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, 2000 were as follows:
LOAN REPRICING
(DOLLARS IN THOUSANDS)
Within 1 to 5 After 5
1 Year Years Years Total
-------- -------- -------- --------
Fixed rate $ 73,190 $ 37,480 $162,405 $273,075
Variable rate 90,957 132,751 2,534 226,242
Impaired and not accruing
and nonaccrual 2,520 1,398 1,859 5,777
-------- -------- -------- --------
Total $166,667 $171,629 $166,798 $505,094
======== ======== ======== ========
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. Other non-performing assets consist of real estate acquired through loan
foreclosures or other workout situations and other assets acquired through
repossessions.
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 that are in nonaccrual status or were restructured.
All other smaller balance homogeneous loans are evaluated for impairment in
total.
27
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.
The Company has a loan review function which is separate from the
lending function and is responsible for the review of new and existing loans.
Potential problem credits are monitored by the loan review function and are
submitted for review to the loan committee and audit committee members.
The following table sets forth a summary of nonperforming assets at
December 31, 2000:
NONPERFORMING ASSETS
(DOLLARS IN THOUSANDS)
December 31,
------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Nonaccrual and impaired loans not
accruing $5,777 $2,949 $1,487 $1,714 $1,774
Impaired and other loans 90 days past
due and still accruing interest 2,102 566 1,111 1,013 486
------ ------ ------ ------ ------
Total nonperforming loans 7,879 3,515 2,598 2,727 2,260
Other real estate owned 467 523 201 215 363
Other nonperforming assets (1) 0 -- 100 100 192
------ ------ ------ ------ ------
Total nonperforming assets $8,346 $4,038 $2,899 $3,042 $2,815
====== ====== ====== ====== ======
Nonperforming loans to total loans 1.56% 0.74% 0.65% 0.74% 0.65%
Nonperforming assets to total loans 1.65 0.85 0.73 0.82 0.81
Nonperforming assets to total assets 1.10 0.57 0.46 0.49 0.44
- ------------------------
(1) Represents a single municipal security in default status.
Nonperforming loans totaled $7,879 at year end 2000 as compared to
$3,515 at year end 1999, increasing as a percentage of total loans to 1.56% in
2000 from 0.74% in 1999. Of this increase, $2,052 or 47% was attributable to a
single non-performing commercial credit. Throughout the first three quarters of
2000, the Company had been extending additional funds on this commercial credit,
but during the third quarter the loan began to deteriorate and was appropriately
recognized as a troubled credit. In late November and early December, the
Company continued to review this credit and determined that an addition to the
allowance was required. In addition to this credit, there were a number of other
loans identified in the fourth quarter that had deteriorating conditions.
The following table sets forth a summary of other real estate owned and
other collateral acquired at December 31, 2000:
28
OTHER REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
Number Net Book
of Carrying
Parcels Value
------- -------
Developed property 22 $ 467
======= =======
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 probable 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. The specific allocation includes a detailed
review of the credit in accordance with SFAS 114 and 118 and an allocation is
made based on this analysis. The general portfolio allocation consists of an
assigned reserve percentage based on loans by major category. The subjective
portion is determined based on the past five years of loan history and the
Company's evaluation of qualitative factors including future economic and
industry outlooks. In addition, the subjective portion of the allowance is
influenced by 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 $6,414 at
December 31, 2000.
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 2000. The
methodology used to determine the adequacy of the allowance for loan losses is
consistent with prior years and there were no reallocations. Along with other
financial institutions, management shares a concern for the softening of the
economy in 2001, which may lead to an increase in problem assets and loans in
the financial industry generally. The following table presents a detailed
analysis of the Company's allowance for loan losses.
29
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
December 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Beginning balance $ 3,691 $ 3,858 $ 3,188 $ 3,068 $ 2,014
Charge-offs:
Commercial 1,663 1,186 428 262 967
Real estate mortgages 144 346 169 386 181
Installment and other loans 444 340 435 559 366
--------- --------- --------- --------- ---------
Total charge-offs 2,251 1,872 1,032 1,207 1,514
--------- --------- --------- --------- ---------
Recoveries:
Commercial 37 79 98 47 41
Real estate mortgages 3 22 37 88 --
Installment and other loans 76 82 108 113 57
--------- --------- --------- --------- ---------
Total recoveries 116 183 243 248 98
--------- --------- --------- --------- ---------
Net charge-offs 2,135 1,689 789 959 1,416
--------- --------- --------- --------- ---------
Provision for loan losses 4,858 1,522 1,635 1,079 1,178
Allowance associated with the
Acquisitions (divestitures) -- -- (176) -- 1,292
--------- --------- --------- --------- ---------
Ending balance $ 6,414 $ 3,691 $ 3,858 $ 3,188 $ 3,068
========= ========= ========= ========= =========
Period end total loans, net of
unearned interest $ 505,094 $ 472,395 $ 398,388 $ 370,985 $ 346,496
========= ========= ========= ========= =========
Average loans $ 485,489 $ 440,284 $ 390,560 $ 358,620 $ 243,978
========= ========= ========= ========= =========
Ratio of net charge-offs to
average loans 0.44% 0.38% 0.20% 0.27% 0.58%
Ratio of provision for loan losses
to average loans 1.00 0.35 0.42 0.30 0.48
Ratio of allowance for loan losses
to ending total loans 1.27 0.78 0.97 0.86 0.89
Ratio of allowance for loan losses
to total nonperforming loans 81.41 105.01 148.99 116.91 135.75
Ratio of allowance at end of period
to average loans 1.32 0.84 0.99 0.89 1.26
30
The following table sets forth an allocation of the allowance for loan
losses among the various loan categories.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
December 31,
-------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- --------------- --------------- --------------- ---------------
Loan Loan Loan Loan Loan
Category Category Category Category Category
to Gross to Gross to Gross to Gross to Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Commercial $ 3,903 22.58% $ 1,114 30.09% $ 1,213 29.19% $ 962 27.58% $ 776 29.87%
Real estate 1,412 58.04 1,290 60.11 1,245 61.87 1,052 60.49 758 56.97
Installment and other loans 511 19.38 393 9.80 443 8.94 482 11.93 517 13.16
Unallocated 588 -- 894 -- 957 -- 692 -- 1,017 --
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total $ 6,414 100.00% $ 3,691 100.00% $ 3,858 100.00% $ 3,188 100.00% $ 3,068 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
SECURITIES ACTIVITIES. The Company's securities portfolio, which
represented 26.8% of the Company's average earning asset base as of December 31,
2000, is managed to minimize interest rate risk, maintain sufficient liquidity,
and maximize return. The Company's financial planning anticipates income streams
based on normal maturity and reinvestment. Securities classified as
available-for-sale are carried at fair value and are purchased with the intent
to provide liquidity and to increase returns. The Company does not have any
securities classified as trading. Securities available-for-sale, carried at fair
value, were $189,719 at December 31, 2000 compared to $173,893 at December 31,
1999.
On July 1, 1999, the Company adopted Statement No. 133, which allows
the Company a one-time reclassification of securities held-to-maturity to
available-for-sale or trading. The Company transferred securities with an
amortized cost of $44,350 previously classified as held-to-maturity to
available-for-sale upon adoption. The unrealized gain on the securities
transferred was $106 on July 1, 1999 and the Company's equity increased by $65
as a result of the transfer.
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.
31
The following table describes the composition of securities by major
category and maturity.
SECURITIES PORTFOLIO
(DOLLARS IN THOUSANDS)
December 31,
----------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
% of % of % of
Amount Portfolio Amount Portfolio Amount Portfolio
---------- --------- ---------- --------- ---------- ---------
HELD-TO-MATURITY
States and political subdivisions $ -- --% $ -- --% $ 41,847 23.83%
---------- --------- ---------- --------- ---------- ---------
Total $ -- --% $ -- --% $ 41,847 23.83%
========== ========= ========== ========= ========== =========
AVAILABLE-FOR-SALE
U.S. Treasury $ 4,255 2.24% $ 5,461 3.14% $ 6,891 3.92%
U.S. government agencies
and corporations 70,936 37.40 56,305 32.38 49,330 28.09
U.S. government agency
mortgage backed securities 34,505 18.19 29,962 17.23 31,005 17.66
States and political
Subdivisions 43,413 22.88 42,820 24.62 -- --
Collateralized mortgage
obligations 32,297 17.02 35,481 20.40 43,208 24.60
Corporate bonds -- -- -- -- 100 0.06
Other securities 4,313 2.27 3,864 2.23 3,238 1.84
---------- --------- ---------- --------- ---------- ---------
Total $ 189,719 100.00% $ 173,893 100.00% $ 133,772 76.17%
========== ========= ========== ========= ========== =========
The following table sets forth the contractual, callable or estimated
maturities and yields of the securities portfolio as of December 31, 2000.
Mortgage backed and collateralized mortgage obligation securities are included
at estimated maturity.
MATURITY SCHEDULE
(DOLLARS IN THOUSANDS)
Maturing
----------------------------------------------------------------------------------------------------
After 1 but After 5 but
Within 1 Year Within 5 Years Within 10 Years After 10 Years
------------------ ------------------ ---------------- ---------------- Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount
-------- ----- -------- ----- -------- ----- -------- ----- --------
AVAILABLE-FOR-SALE
U.S. Treasury $ 3,250 5.631% $ 1,005 4.842% $ -- --% $ -- --% $ 4,255
U.S. government
agencies and
corporations 24,958 6.549 43,758 6.201 2,220 6.282 -- -- 70,936
U.S. government
agency mortgage
backed securities 4 9.223 128 7.966 13,400 6.061 20,973 6.964 34,505
States and political
Subdivisions (1) 3,776 5.345 16,043 4.810 20,437 5.097 3,157 5.704 43,413
Collateralized
mortgage obligations -- -- -- -- 8,884 -- 23,413 5.294 32,297
Equity securities 3,998 -- 315 -- -- -- -- -- 4,313
-------- -------- -------- -------- --------
Total $ 35,986 $ 61,249 $ 44,941 $ 47,543 $189,719
======== ======== ======== ======== ========
- ------------------
(1) Rates on obligations of states and political subdivisions have been adjusted
to tax equivalent yields using a 34% income tax rate
32
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 $605,243 for 2000,
representing an increase of $52,785 or 9.6% compared with the average balance of
total deposits for 1999. The increase in deposits was primarily due to the
growth attributed to increased market share in 2000.
The following table sets forth certain information regarding the Banks'
average deposits.
AVERAGE DEPOSITS
(DOLLARS IN THOUSANDS)
For the Years Ended December 31,
---------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- --------------------------- --------------------------
% Average % Average % Average
Average of Rate Average of Rate Average of Rate
Amount Total Paid Amount Total Paid Amount Total Paid
-------- ------ ------ -------- ------- ------ -------- ------ ------
Non-interest-bearing
demand deposits $ 66,720 11.02% --% 61,458 11.12% --% $ 59,885 11.32% --%
Savings accounts 48,476 8.01 2.56 57,240 10.36 2.70 61,740 11.67 2.99
Interest-bearing
demand deposits 93,171 15.39 3.09 89,752 16.25 2.75 85,968 16.24 2.78
Time, less than $100,000 179,183 29.61 5.63 215,918 39.08 5.29 215,478 40.71 5.47
Time, $100,000 or more 217,693 35.97 5.99 128,090 23.19 5.13 106,187 20.06 5.70
-------- ------ ------ -------- ------- ------ -------- ------ ------
Total deposits $605,243 100.00% 4.50 $552,458 100.00% 3.98% $529,258 100.00% 4.22%
======== ====== ====== ======== ======= ====== ======== ====== ======
As of December 31, 2000, nonbrokered time deposits over $100,000
represented 29.2% of total deposits, compared with 23.2% of total deposits as of
December 31, 1999. The Company's large denomination time deposits are generally
from customers within the local market areas of its subsidiary banks and provide
a greater degree of stability than is typically associated with this source of
funds.
The following table sets forth the remaining maturities for time
deposits of $100,000 or more at December 31, 2000.
TIME DEPOSITS OF $100,000 OR MORE
(DOLLARS IN THOUSANDS)
MATURITY RANGE
Three months or less $ 70,515
Over three months through six months 47,427
Over six months through twelve months 59,851
Over twelve months 30,579
----------
Total $ 208,372
==========
33
RETURN ON EQUITY AND ASSETS. The following table presents various
ratios for the Company.
RETURN ON EQUITY AND ASSETS
For the Years Ended
December 31,
--------------------------------
2000 1999 1998
------ ------ ------
Return on average assets 0.40% 0.83% 0.84%
Return on average equity 5.09 9.83 9.98
Average equity to average assets 7.90 8.42 8.44
Dividend payout ratio for common stock 35.93 14.65 12.34
The decrease in the return on average assets and return on average
equity ratios in 2000 was principally related to the nonrecurring items
discussed in the analysis above which resulted in a 47.3% decrease in net
income, coupled with average assets and equity growing at a faster pace than the
net income necessary to increase these performance ratios.
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 brokered time deposits, 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 all of its 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.
The Company's cash flows are comprised of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Cash flows used in operating and investing
activities, offset by those provided by financing activities, resulted in a net
increase in cash and cash equivalents of $2,816 from December 31, 1999 to
December 31, 2000.
Net cash used in operating activities was $2,354 for 2000. Net cash
provided by operating activities was $3,792 for 1999 and $2,618 for 1998. Net
cash used by investing activities, consisting primarily of loan and investing
funding, was $45,644 for 2000, $47,010 for 1999, and $35,836 for 1998. Net cash
provided by financing activities, consisting primarily of increases in deposits
and Federal Home Loan Bank advances, was $46,106 for 2000, $45,810 for 1999, and
$35,005 for 1998.
The Banks' 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, 2000, 30.2% of the Banks' interest-bearing liabilities
were in the form of time deposits of $100,000 and over. Management believes
these deposits to be a stable source of funds. However, if a large number of
34
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 33.8%
maturing in the first quarter of 2001, 22.8% maturing in the second quarter of
2001, 28.7% maturing in the third and fourth quarters of 2001, and the remaining
14.7% maturing thereafter. The Banks monitor those maturities in an effort to
minimize any adverse effect on liquidity.
The Company's borrowings included notes payable at December 31, 2000 in
the principal amount of $10,275 payable to the Company's principal correspondent
bank. The Company incurred approximately $1,274 of this debt in connection with
the repurchase of 99,000 shares during the first quarter of 2000. The remaining
balance was related to previous bank acquisitions. 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, 2000, approximately
$7,265 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 125% 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 9.64%
and 10.99%, respectively, at December 31, 2000. The Banks are currently, and
expect to continue to be, in compliance with these guidelines.
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.
35
The following table sets forth an analysis of the Company's capital
ratios:
RISK-BASED CAPITAL RATIOS
(DOLLARS IN THOUSANDS)
December 31, Minimum Well
-------------------------------------- Capital Capitalized
2000 1999 1998 Ratios Ratios
---------- ---------- ---------- ---------- ----------
Tier 1 risk-based capital $ 51,835 $ 50,115 $ 47,297
Tier 2 risk-based capital 7,245 4,548 5,215
Total capital 59,080 54,663 52,512
Risk-weighted assets 537,549 494,953 429,325
Capital ratios
Tier 1 risk-based capital 9.64% 10.13% 11.02% 4.00% 6.00%
Tier 2 risk-based capital 10.99 11.04 12.23 8.00 10.00
Leverage ratio 6.90 7.20 7.66 4.00 5.00
As of December 31, 2000, the Tier 2 risk-based capital was comprised of
$6,414 in allowance for loan losses and $831 of Mandatory Redeemable Series B
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.
IMPACT OF INFLATION, CHANGING PRICES, AND MONETARY POLICIES. The
financial statements and related financial data concerning the Company have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary effect of inflation on the
operations of the Company is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, changes in interest rates have
a more significant effect on the performance of a financial institution than do
the effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Interest rates are highly
sensitive to many factors which are beyond the control of the Company, including
the influence of domestic and foreign economic conditions and the monetary and
fiscal policies of the United States government and federal agencies,
particularly the FRB.
36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Item 7 for a discussion regarding the quantitative
and qualitative disclosures about risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Independent Auditors Report...................................................38
Consolidated Balance Sheets (December 31, 2000 and 1999) .....................39
Consolidated Balance Statements of Income
(For the years December 31, 2000, 1999 and 1998).....................40
Consolidated Statements of Stockholders
(For the years December 31, 2000, 1999 and 1998).....................41
Consolidated Statements of Cash Flows
(For the years December 31, 2000, 1999 and 1998).....................43
Notes ......................................................................45
37
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
UnionBancorp, Inc.
We have audited the accompanying consolidated balance sheets of UnionBancorp,
Inc. and Subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of UnionBancorp, Inc.
and Subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 6, 2001
38
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE DATA)
2000 1999
- ------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 30,021 $ 27,205
Federal funds sold 3,000 25
Securities available-for-sale 189,719 173,893
Loans 505,094 472,395
Allowance for loan losses (6,414) (3,691)
--------- ---------
Net loans 498,680 468,704
Premises and equipment, net 11,953 13,446
Intangible assets, net 9,552 10,862
Mortgage servicing rights 1,423 1,201
Other assets 14,385 8,741
--------- ---------
TOTAL ASSETS $ 758,733 $ 704,077
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 72,956 $ 67,634
Interest-bearing 563,047 526,564
--------- ---------
Total deposits 636,003 594,198
Federal funds purchased and securities sold under
agreements to repurchase 525 5,308
Advances from the Federal Home Loan Bank 43,408 32,733
Notes payable 10,275 9,500
Other liabilities 8,656 5,140
--------- ---------
TOTAL LIABILITIES 698,867 646,879
--------- ---------
Mandatory redeemable preferred stock, Series B, no par value;
1,092 shares authorized; 831 shares issued and outstanding 831 857
--------- ---------
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;
4,555,811 and 4,538,572 shares outstanding in 2000
and 1999, respectively 4,556 4,539
Surplus 21,734 21,608
Retained earnings 37,437 35,743
Accumulated other comprehensive income (loss) 61 (1,995)
Unearned compensation under stock option plans (129) (204)
--------- ---------
64,159 60,191
Treasury stock, at cost; 590,263 and 491,263 shares in 2000 and 1999 (5,124) (3,850)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 59,035 56,341
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 758,733 $ 704,077
========= =========
See Accompanying Notes to Consolidated Financial Statements.
39
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998
- -------------------------------------------------------------------------------------------
Interest income
Loans $ 43,237 $ 38,323 $ 36,102
Securities
Taxable 8,649 8,151 9,156
Exempt from federal income taxes 2,033 2,002 2,129
Federal funds sold and other 289 73 333
--------- --------- ---------
TOTAL INTEREST INCOME 54,208 48,549 47,720
Interest expense
Deposits 27,254 22,012 22,338
Federal funds purchased and securities sold under
agreements to repurchase 233 679 953
Advances from the Federal Home Loan Bank 2,366 1,526 1,226
Notes payable 832 680 741
--------- --------- ---------
TOTAL INTEREST EXPENSE 30,685 24,897 25,258
--------- --------- ---------
NET INTEREST INCOME 23,523 23,652 22,462
Provision for loan losses 4,858 1,522 1,635
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 18,665 22,130 20,827
Noninterest income
Service charges 2,683 2,259 2,251
Merchant fee income 1,110 1,116 833
Trust income 744 711 590
Mortgage banking income 1,278 1,301 1,518
Insurance commissions and fees 2,862 2,595 317
Securities gains (losses), net (29) 45 56
Gain on sale of subsidiaries and branch locations 438 -- 820
Other income 2,054 1,461 1,686
--------- --------- ---------
11,140 9,488 8,071
Noninterest expenses
Salaries and employee benefits 13,468 12,244 10,557
Occupancy expense, net 1,753 1,594 1,520
Furniture and equipment expense 1,803 1,888 1,788
Supplies and printing 573 538 563
Telephone 749 677 576
Amortization of intangible assets 1,310 897 940
Other expenses 6,229 5,759 4,789
--------- --------- ---------
25,885 23,597 20,733
--------- --------- ---------
3,920 8,021 8,165
Minority interest -- -- 53
--------- --------- ---------
INCOME BEFORE INCOME TAXES 3,920 8,021 8,112
Income taxes 1,017 2,514 2,723
--------- --------- ---------
NET INCOME 2,903 5,507 5,389
Preferred stock dividends 259 259 259
--------- --------- ---------
NET INCOME FOR COMMON STOCKHOLDERS $ 2,644 $ 5,248 $ 5,130
========= ========= =========
BASIC EARNINGS PER COMMON SHARE $ 0.66 $ 1.28 $ 1.23
========= ========= =========
DILUTED EARNINGS PER COMMON SHARE $ 0.66 $ 1.27 $ 1.22
========= ========= =========
See Accompanying Notes to Consolidated Financial Statements.
40
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
- -----------------------------------------------------------------------------------------------------------------------------
Unearned
Series A Accumulated Compensation
Convertible Other Under Stock
Preferred Common Retained Comprehensive Option Treasury
Stock Stock Surplus Earnings Income (Loss) Plans Stock Total
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
January 1, 1998 $ 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 reclassi-
fication adjustments -- -- -- -- (825) -- -- (825)
--------
Total comprehensive
income 4,564
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 1998 500 4,534 21,471 31,262 31 (185) (522) 57,091
Common stock dividends -- -- -- (767) -- -- -- (767)
Preferred stock dividends -- -- -- (259) -- -- -- (259)
Issuance of non-
qualifying stock options -- -- 98 -- -- (98) -- --
Exercise of stock options
(4,950 shares) -- 5 39 -- -- 1 -- 45
Amortization of un-
earned compensation
under stock option plans -- -- -- -- -- 78 -- 78
Purchase 220,000 shares
of treasury stock -- -- -- -- -- -- (3,328) (3,328)
Comprehensive income
Net income -- -- -- 5,507 -- -- -- 5,507
Effect of transfer of
securities held-to-
maturity to available-for-
sale, net of income taxes -- -- -- -- 65 -- -- 65
Net decrease in fair value of
securities classified as
available-for-sale, net of
income taxes and reclassi-
fication adjustments -- -- -- -- (2,091) -- -- (2,091)
--------
Total comprehensive
income 3,481
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 1999 $ 500 $ 4,539 $ 21,608 $ 35,743 $ (1,995) $ (204) $ (3,850) $ 56,341
======== ======== ======== ======== ======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
41
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------------------
Unearned
Series A Accumulated Compensation
Convertible Other Under Stock
Preferred Common Retained Comprehensive Option Treasury
Stock Stock Surplus Earnings Income (Loss) Plans Stock Total
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 1999 $ 500 $ 4,539 $ 21,608 $ 35,743 $ (1,995) $ (204) $ (3,850) $ 56,341
Common stock dividends -- -- -- (950) -- -- -- (950)
Preferred stock dividends -- -- -- (259) -- -- -- (259)
Exercise of stock options
(17,239 shares) -- 17 126 -- -- -- -- 143
Amortization of un-
earned compensation
under stock option plans -- -- -- -- -- 75 -- 75
Purchase 99,000 shares
of treasury stock -- -- -- -- -- -- (1,274) (1,274)
Comprehensive income
Net income -- -- -- 2,903 -- -- -- 2,903
Net increase in fair value
of securities classified as
available-for-sale, net of
income taxes and reclassi-
fication adjustments -- -- -- -- 2,056 -- -- 2,056
--------
Total comprehensive
income -- -- -- -- -- -- -- 4,959
-------- -------- -------- -------- -------- --------- -------- --------
Balance,
December 31, 2000 $ 500 $ 4,556 $ 21,734 $ 37,437 $ 61 $ (129) $ (5,124) $ 59,035
======== ======== ======== ======== ======== ========= ======== ========
See Accompanying Notes to Consolidated Financial Statements.
42
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS)
2000 1999 1998
- --------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 2,903 $ 5,507 $ 5,389
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 1,564 1,650 1,679
Amortization of intangible assets 1,310 897 940
Amortization of unearned compensation under
stock option plans 75 78 65
Amortization of bond premiums, net 54 (127) 126
FHLB stock dividend (61) -- --
Provision for loan losses 4,858 1,522 1,635
Provision for deferred income taxes (1,017) (255) (44)
Securities gains or losses, net 29 (45) (56)
Gain on sale of subsidiaries, net (438) -- (820)
Gain on sale of land and equipment -- -- (143)
Gain on sale of real estate acquired in
settlement of loans (28) (39) (4)
Gain on sale of loans (788) (944) (1,313)
Net loans originated for sale (10) (5,015) (4,507)
Minority interest in net income of subsidiary -- -- 53
Change in assets and liabilities
(Increase) decrease in other assets (9,641) 430 134
Increase (decrease) in other liabilities 3,516 133 (516)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,326 3,792 2,618
Cash flows from investing activities
Securities
Held-to-maturity
Proceeds from calls, maturities, and paydowns -- 1,167 6,333
Purchases -- (2,773) (13,208)
Available-for-sale
Proceeds from maturities and paydowns 33,506 38,027 69,447
Proceeds from sales 4,483 5,655 7,453
Purchases (50,480) (43,487) (58,782)
Net increase (decrease) in federal funds sold 2,975 (425) (818)
Net increase in loans (35,093) (70,467) (42,838)
Purchase of premises and equipment (233) (1,140) (2,205)
Proceeds from sale of real estate acquired in
settlement of loans 1,141 445 420
Proceeds from sale of land and equipment -- -- 832
Bank and bank holding company acquisitions and sales,
net of cash and cash equivalents received (1,915) 25,988 (2,470)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (45,616) (47,010) (35,836)
See Accompanying Notes to Consolidated Financial Statements.
43
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS)
2000 1999 1998
- -------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase in deposits $ 41,805 $ 47,641 $ 27,827
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (4,783) (9,547) 3,705
Net increase in advances from the
Federal Home Loan Bank 10,675 9,525 7,598
Payments on notes payable -- -- (3,261)
Proceeds from notes payable 775 2,500 --
Dividends on common stock (950) (767) (633)
Dividends on preferred stock (259) (259) (259)
Redemption of preferred stock (26) -- --
Proceeds from exercise of stock options 143 45 28
Purchase of treasury stock (1,274) (3,328) --
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 46,106 45,810 35,005
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,816 2,592 1,787
Cash and cash equivalents
Beginning of year 27,205 24,613 22,826
-------- -------- --------
End of year $ 30,021 $ 27,205 $ 24,613
======== ======== ========
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 29,035 $ 24,284 $ 25,591
Income taxes 2,809 3,190 2,387
See Accompanying Notes to Consolidated Financial Statements.
44
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; brokerage services; 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, UnionData Corp, Inc. and
UnionTrust Corporation. In addition, UnionBank has a nonbank subsidiary,
UnionFinancial Services, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying 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 income 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 available-for-sale are those debt securities that the
Company intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities, liquidity
needs, regulatory capital considerations, and other similar factors. Securities
available-for-sale are carried at fair value with unrealized gains or losses,
net of the related deferred income tax effect, reported in other comprehensive
income.
45
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
(Continued)
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 that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are reported at the principal balance
outstanding, net of unearned interest, deferred loan fees and costs, and an
allowance for loan losses. Loans held for sale are reported at the lower of cost
or market, on an aggregate basis.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income is not
reported when full loan repayment is in doubt, typically when the loan is
impaired or payments are past due over 90 days. Payments received on such loans
are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation allowance for probable incurred
credit losses, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
using past loan loss experience, the nature and volume of the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed.
A loan is impaired 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.
46
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
(Continued)
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. 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.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Provisions for depreciation and amortization, included in
operating expenses, are computed on the straight-line method over the estimated
useful lives of the assets. The cost of maintenance and repairs is charged to
income as incurred; significant improvements are capitalized.
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
Deferred tax assets and liabilities are recognized for temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. Deferred taxes are recognized for the estimated taxes
ultimately payable or recoverable based on enacted tax laws. Changes in enacted
tax rates and laws are reflected in the financial statements in the periods they
occur.
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.
47
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
(Continued)
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.
The Company has the following classes of preferred stock issued or authorized:
Series A Convertible Preferred Stock: The Company has issued 2,762.24
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
99,769 common shares. Series A Preferred Stock is not redeemable for cash.
On dissolution, winding up, or liquidation of the Company, voluntary or
otherwise, holders of Series A Preferred Stock will be entitled to
receive, out of the assets of the Company available for distribution to
stockholders, the amount of $1,000 per share, plus any accrued but unpaid
dividends, before any payment or distribution may be made on shares of
Common Stock or any other securities issued by the Company that rank
junior to the Series A Preferred Stock.
Series B Mandatory Redeemable Preferred Stock: The Company has issued
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. 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 that rank junior to the Series B Preferred Stock.
48
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
(Continued)
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.
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 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. 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 that may be paid by the subsidiary banks to the
holding company or by the holding company to stockholders.
49
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
(Continued)
LOSS CONTINGENCIES
Loss contingencies, including claims and legal actions arising in the ordinary
course of business, are recorded as liabilities when the likelihood of loss is
probable and an amount or range of loss can be reasonably estimated. Management
does not believe there now are such matters that will have a material effect on
the financial statements.
COMPREHENSIVE INCOME
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.
NOTE 2. BUSINESS ACQUISITIONS AND DIVESTITURES
2000
On August 24, 2000, the Company sold the deposits and premises of a
UnionBank/West branch location. At the date of sale, the branch had
approximately $2,659 in deposits and $162 in fixed assets. The sales price was
$600.
1999
On December 10, 1999, the Company acquired the Rushville branch of Associated
Bank Illinois, National Association. At the date of purchase, the branch had
deposits of $28,900, premises and equipment of $103, and loans of $4. The total
acquired cost of $2,800 resulted in goodwill of $2,700. This transaction was
recorded using the purchase method of accounting. As such, the results of
operations are excluded from the consolidated statements of income for periods
prior to the acquisition date.
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, pro forma information has not been included.
50
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 2. BUSINESS ACQUISITIONS AND DIVESTITURES (CONTINUED)
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.
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.
NOTE 3. SECURITIES
Amortized costs and fair values of securities are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
AVAILABLE-FOR-SALE
December 31, 2000
U.S. Treasury $ 4,261 $ 1 $ (7) $ 4,255
U.S. government agencies 70,967 313 (344) 70,936
States and political subdivisions 42,771 734 (92) 43,413
U.S. government agency mortgage-
backed securities 34,626 79 (200) 34,505
Collateralized mortgage obligations 32,681 204 (588) 32,297
Equity securities 4,313 -- -- 4,313
--------- --------- --------- ---------
$ 189,619 $ 1,331 $ (1,231) $ 189,719
========= ========= ========= =========
At December 31, 2000, approximately 93% of the fair value of equity securities
consists of Federal Home Loan Bank stock and Federal Reserve Bank stock.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
AVAILABLE-FOR-SALE
December 31, 1999
U.S. Treasury $ 5,519 $ 7 $ (65) $ 5,461
U.S. government agencies 57,797 3 (1,495) 56,305
States and political subdivisions 43,245 260 (685) 42,820
U.S. government agency mortgage-
backed securities 30,888 4 (930) 29,962
Collateralized mortgage obligations 35,837 30 (386) 35,481
Equity securities 3,864 -- -- 3,864
--------- --------- --------- ---------
$ 177,150 $ 304 $ (3,561) $ 173,893
========= ========= ========= =========
51
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 3. SECURITIES (Continued)
The amortized cost and fair value of securities classified as available-for-sale
at December 31, 2000, 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.
Amortized Fair
Cost Value
-------- --------
Due in one year or less $ 31,966 $ 31,983
Due after one year through five years 60,703 60,806
Due after five years through ten years 22,248 22,658
Due after ten years 3,082 3,157
U.S. government agency mortgage-backed securities 34,626 34,505
Collateralized mortgage obligations 32,681 32,297
Equity securities 4,313 4,313
-------- --------
$189,619 $189,719
======== ========
As of December 31, 2000, the Company held U.S. government agency structured
notes and callable securities carried at fair values of $899 and $32,057,
respectively. The amortized cost of these securities was $1,000 and $32,009,
respectively, as of December 31, 2000.
Securities with carrying values of approximately $167,000 and $144,000 at
December 31, 2000 and 1999, respectively, were pledged to secure public deposits
and securities sold under agreements to repurchase and for other purposes as
required or permitted by law.
Effective July 1, 1999, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. As permitted by SFAS No. 133, the Company
reclassified all of its securities held-to-maturity to securities
available-for-sale. The securities that were reclassified had a book value of
$44,350 and a fair value of $44,456 at July 1, 1999.
Realized gains and losses from the sale of securities available-for-sale follow:
Years Ended December 31,
----------------------------------
2000 1999 1998
------- ------- -------
Proceeds $ 4,483 $ 5,655 $ 7,453
Realized gains -- 45 79
Realized losses (29) -- (23)
52
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 4. LOANS
The major classifications of loans follow:
December 31,
------------------------
2000 1999
-------- --------
Commercial $156,013 $142,170
Commercial real estate 134,942 126,645
Real estate 158,217 157,328
Installment 53,276 43,644
Other 2,646 2,608
-------- --------
$505,094 $472,395
======== ========
The following table presents data on impaired loans:
December 31,
------------------------
2000 1999 1998
------ ------ ------
Year-end impaired loans for which an allowance
has been provided $3,125 $1,063 $ 432
Year-end impaired loans for which no allowance
has been provided 3,134 1,886 1,105
------ ------ ------
Total loans determined to be impaired $6,259 $2,949 $1,537
====== ====== ======
Allowance for loan loss for impaired loans included
in the allowance for loan losses $1,699 $ 422 $ 289
====== ====== ======
Average recorded investment in impaired loans $3,290 $2,991 $1,817
====== ====== ======
Interest income recognized from impaired loans $ 32 $ 3 $ 94
====== ====== ======
Cash basis interest income recognized from impaired loans $ -- $ -- $ --
====== ====== ======
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 $78,137 and $77,175
as of December 31, 2000 and 1999, respectively.
53
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 4. LOANS (Continued)
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 that 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, 2000 follow:
Balance at December 31, 1999 $ 15,297
New loans, extensions, and modifications 31,476
Repayments (20,014)
Change in classification (398)
---------
Balance at December 31, 2000 $ 26,361
=========
NOTE 5. LOAN SERVICING
The following summarizes the secondary mortgage market activities:
Years Ended December 31,
---------------------------
2000 1999 1998
------- ------- -------
Proceeds from sale of mortgage loans $51,387 $60,145 $80,241
======= ======= =======
Gain on sale of mortgage loans $ 788 $ 944 $ 1,313
======= ======= =======
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid principal balances of these loans are
summarized as follows:
December 31,
---------------------
2000 1999
-------- --------
Federal Home Loan Mortgage Corporation $ 19,004 $ 21,971
Federal National Mortgage Association 158,656 126,493
Small Business Administration 10,293 8,901
Other 3,360 1,884
-------- --------
$191,313 $159,249
======== ========
54
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 5. LOAN SERVICING (Continued)
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $761 and $590 at December 31, 2000 and 1999,
respectively.
Following is an analysis of the changes in originated mortgage servicing rights:
Years Ended December 31,
-----------------------------
2000 1999 1998
------- ------- -------
Balance at beginning of year $ 1,201 $ 727 $ 192
Originated mortgage servicing rights 402 594 652
Amortization (180) (120) (117)
------- ------- -------
Balance at end of year $ 1,423 $ 1,201 $ 727
======= ======= =======
Loans held for sale, which are included in real estate loans, are summarized as
follows:
December 31,
-------------------
2000 1999
------- -------
Secured by one-to-four-family residences $ 1,444 $ 1,460
Small Business Administration loans 1,936 1,122
Unrealized loss -- --
------- -------
$ 3,380 $ 2,582
======= =======
55
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 6. ALLOWANCE FOR LOAN LOSSES
An analysis of activity in the allowance for loan losses follows:
Years Ended December 31,
-----------------------------
2000 1999 1998
------- ------- -------
Balance at beginning of year $ 3,691 $ 3,858 $ 3,188
Balance acquired (divested) -- -- (176)
Provision for loan losses 4,858 1,522 1,635
Recoveries 116 183 243
Loans charged off (2,251) (1,872) (1,032)
------- ------- -------
Balance at end of year $ 6,414 $ 3,691 $ 3,858
======= ======= =======
NOTE 7. PREMISES AND EQUIPMENT
Premises and equipment consisted of:
December 31,
---------------------
2000 1999
-------- --------
Land $ 1,032 $ 1,122
Buildings 12,879 13,245
Furniture and equipment 12,088 12,558
-------- --------
25,999 26,925
Less accumulated depreciation 14,046 13,479
-------- --------
$ 11,953 $ 13,446
======== ========
NOTE 8. DEPOSITS
Deposit account balances by type are summarized as follows:
December 31,
---------------------
2000 1999
-------- --------
Non-interest-bearing demand deposits $ 72,956 $ 67,634
Savings, NOW, and money market accounts 135,025 148,597
Time deposits of $100 or more 208,372 149,993
Other time deposits 219,650 227,974
-------- --------
$636,003 $594,198
======== ========
56
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 8. DEPOSITS (Continued)
At December 31, 2000, the scheduled maturities of time deposits are as follows:
Year Amount
---- ---------
2001 $ 349,965
2002 57,189
2003 15,755
2004 1,591
2005 and thereafter 3,522
---------
$ 428,022
=========
Time certificates of deposit in denominations of $100 or more mature as follows:
December 31,
----------------------
2000 1999
--------- ---------
3 months or less $ 70,515 $ 48,618
Over 3 months through 6 months 47,427 48,289
Over 6 months through 12 months 59,851 36,359
Over 12 months 30,579 16,727
--------- ---------
$ 208,372 $ 149,993
========= =========
NOTE 9. BORROWED FUNDS
Borrowed funds include federal funds purchased and securities sold under
agreements to repurchase, advances from the Federal Home Loan Bank, and notes
payable to third parties.
A summary of short-term borrowings follows:
December 31,
----------------------
2000 1999
--------- ---------
Federal funds purchased $ -- $ 3,000
Securities sold under agreements
to repurchase 525 2,308
--------- ---------
$ 525 $ 5,308
========= =========
Federal funds purchased and securities sold under agreement to repurchase
generally mature within one to ninety days from the transaction date.
57
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 9. BORROWED FUNDS
At December 31, 2000, $17 million of Federal Home Loan Bank advances have
various call provisions. The Company maintains a collateral pledge agreement
covering secured advances whereby the Company had specifically pledged $77,184
million of first mortgage loans on improved residential property free of all
other pledges, liens, and encumbrances (not more than 90 days delinquent). The
scheduled maturities of advances from the Federal Home Loan Bank at December 31,
2000 are as follows:
Average
Year Interest Rate Amount
---- ------------- ----------
2001 6.56% $ 26,258
2002 6.74 4,350
2004 5.63 6,500
2005 and Thereafter 6.46 6,300
---------
$ 43,408
=========
Notes payable consisted of the following at December 31, 2000 and 1999:
2000 1999
-------- --------
Line of credit loan ($6,000) to LaSalle
National Bank; interest due quarterly at
the 30, 60, 90, or 180 day LIBOR plus 1.25%,
or the prime rate (7.99% at December 31, 2000);
balance due on October 1, 2001; secured by 100%
of the stock of the subsidiary banks. $ 6,000 $ 7,000
Revolving credit loan ($10,000) to LaSalle
National Bank; interest due quarterly at
the 30, 60, 90, or 180 day LIBOR plus 1.25%,
or the prime rate (8.01% at December 31, 2000);
balance due at October 1, 2001; secured by 100%
of the stock of the subsidiary banks. 4,275 2,500
-------- --------
$ 10,275 $ 9,500
======== ========
The note payable agreements contain certain covenants that 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 or had obtained appropriate waivers for all covenants for the
year ended December 31, 2000.
58
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 9. BORROWED FUNDS (Continued)
Information concerning borrowed funds is as follows:
Years Ended December 31,
-------------------------------------
2000 1999 1998
-------- -------- --------
FEDERAL FUNDS PURCHASED
Maximum month-end balance during the year $ 11,999 $ 13,000 $ 6,050
Average balance during the year $ 1,640 $ 4,178 $ 1,312
Weighted average interest rate for the year 7.17% 5.33% 6.53%
Weighted average interest rate at year end N/A 6.00% 6.00%
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Maximum month-end balance during the year $ 7,344 $ 22,830 $ 23,844
Average balance during the year $ 1,931 $ 8,872 $ 15,461
Weighted average interest rate for the year 5.96% 5.22% 5.61%
Weighted average interest rate at year end 6.06% 5.78% 5.25%
ADVANCES FROM THE FEDERAL HOME LOAN BANK
Maximum month-end balance during the year $ 43,408 $ 33,733 $ 25,955
Average balance during the year $ 37,326 $ 27,636 $ 21,727
Weighted average interest rate for the year 6.34% 5.52% 5.64%
Weighted average interest rate at year end 6.43% 5.74% 5.48%
NOTES PAYABLE
Maximum month-end balance during the year $ 10,775 $ 10,000 $ 12,130
Average balance during the year $ 10,348 $ 9,530 $ 11,024
Weighted average interest rate for the year 8.04% 7.14% 7.14%
Weighted average interest rate at year end 8.00% 7.20% 6.74%
NOTE 10. INCOME TAXES
Income taxes consisted of:
Years Ended December 31,
-----------------------------------
2000 1999 1998
------- ------- -------
Federal
Current $ 1,827 $ 2,394 $ 2,547
Deferred (828) 5 (138)
------- ------- -------
999 2,399 2,409
State
Current 207 375 220
Deferred (189) (260) 94
------- ------- -------
18 115 314
------- ------- -------
$ 1,017 $ 2,514 $ 2,723
======= ======= =======
59
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 10. INCOME TAXES
The Company's income tax expense differed from the statutory federal rate of 34%
as follows:
Years Ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Expected income taxes $ 1,333 $ 2,727 $ 2,758
Income tax effect of
Interest earned on tax-free investments and loans (763) (757) (768)
Nondeductible interest expense incurred to
carry tax-free investments and loans 130 112 115
Nondeductible amortization 227 164 659
State income taxes, net of federal tax benefit 2 245 252
Gain on sale of subsidiaries, net -- -- (157)
Other 88 23 (136)
-------- -------- --------
$ 1,017 $ 2,514 $ 2,723
======== ======== ========
The significant components of deferred income tax assets and liabilities
consisted of:
December 31,
--------------------
2000 1999
-------- --------
Deferred tax assets
Allowance for loan losses $ 2,492 $ 1,210
Deferred compensation, other 263 20
Securities available-for-sale -- 1,262
-------- --------
TOTAL DEFERRED TAX ASSETS 2,755 2,492
Deferred tax liabilities
Depreciation (537) (573)
Basis adjustments arising from acquisitions (523) (396)
Securities available-for-sale (39) --
Other (1,164) (747)
-------- --------
TOTAL DEFERRED TAX LIABILITIES (2,263) (1,716)
-------- --------
Net deferred tax assets (liabilities) $ 492 $ 776
======== ========
60
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 11. 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 503,665 shares of the Company's Common Stock. All shares
held by the Plan are allocated to plan participants. The Company expenses all
cash contributions made to the Plan. Contributions were $280, $512, and $355 for
the years ended December 31, 2000, 1999, and 1998, 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 $132 for each of the years ended December 31, 2000 and 1999 and
$145 for the year ended December 31, 1998.
NOTE 12. STOCK OPTION PLANS
In April 1993, the Company adopted the UnionBancorp 1993 Stock Option Plan ("the
1993 Option Plan"). Under the 1993 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 1993 Option Plan's
administrative committee. Pursuant to the 1993 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 1993 Option
Plan. The options have an exercise period of ten years from the date of grant.
In 1999, the Company adopted the UnionBancorp, Inc. non-qualified Stock Option
Plan ("the 1999 Option Plan"). Under the 1999 Option Plan, nonqualified options
may be granted to employees and eligible directors of the Company and its
subsidiaries to purchase the Company's Common Stock at 100% of the fair market
value on the date the option is granted. The Company has authorized 50,000
shares for issuance under the 1999 Option Plan. During 1999, 40,750 of these
shares were granted and are exercisable in three years. The options have an
exercise period of ten years from the date of grant.
61
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 12. STOCK OPTION PLANS (Continued)
A summary of the status of the option plans as of December 31, 2000, 1999, and
1998 and changes during the years ended on those dates is presented below.
2000 1999 1998
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning
of year 310,678 $ 12.22 199,878 $ 10.73 137,878 $ 7.81
Granted -- -- 116,250 14.53 65,000 16.65
Exercised (17,239) 7.93 (4,950) 5.88 (3,000) 5.04
Forfeited (42,178) 15.18 (500) 15.00 -- --
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at end of year 251,261 310,678 12.22 199,878 10.73
========== ========== ==========
Options exercisable at
year end 122,791 $ 9.69 110,212 $ 8.69 71,895 $ 7.12
========== ========== ========== ========== ========== ==========
Weighted-average fair value
of options granted during
the year N/A $ 6.04 $ 6.93
========== ========== ==========
Options outstanding at year-end 2000 were as follows:
Outstanding Exercisable
---------------------- ----------------------
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Number Life Number Price
--------------- --------- --------- --------- ---------
$ 5.04 - $ 8.33 68,211 4 years 62,961 $ 6.41
9.67 - 13.00 35,500 6 years 23,580 10.16
13.88 - 18.50 147,550 8 years 36,250 15.07
--------- --------- --------- ---------
Outstanding at year end 251,261 6.5 years 122,791 $ 9.69
========= ========= ========= =========
Grants under the option plans 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 plans. Compensation cost
charged to income for nonqualified stock option grants was $75, $78, and $65,
for the years ended December 31, 2000, 1999, and 1998, respectively.
62
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 12. STOCK OPTION PLANS (Continued)
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 SFAS No.
123, reported income and earnings per common share would have been reduced to
the pro forma amounts shown below:
2000 1999 1998
--------- --------- ---------
Net income for common stockholders
As reported $ 2,644 $ 5,248 $ 5,130
Pro forma 2,449 4,991 5,000
Basic earnings per common share
As reported .66 1.28 1.23
Pro forma .62 1.22 1.20
Diluted earnings per common share
As reported .66 1.27 1.22
Pro forma .61 1.21 1.19
There were no stock options granted in 2000. The fair value of the options
granted in 1999 and 1998 is estimated at $6.04, and $6.93, as of the date of
grant using the Black Scholes options value model with the following
assumptions:
2000 1999 1998
--------- --------- ---------
Dividend yield -- 1.23% .92%
Risk-free interest rate -- 5.50% 4.60%
Assumed forfeiture rate -- -- --
Average life -- 7 6
Expected volatility of stock price -- 28.69% 27.78%
NOTE 13. 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 (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. In addition, options to purchase 152,650 shares of common stock
were outstanding at December 31, 2000 but were not included in the computation
of diluted earnings per share because the exercise price was greater than the
average market price and, therefore, were antidilutive.
63
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 13. EARNINGS PER SHARE (Continued)
2000 1999 1998
--------- --------- ---------
BASIC EARNINGS PER SHARE
Net income available to common stockholders $ 2,644 $ 5,248 $ 5,130
========= ========= =========
Weighted average common shares outstanding 3,980 4,085 4,158
========= ========= =========
BASIC EARNINGS PER SHARE $ 0.66 $ 1.28 $ 1.23
========= ========= =========
Weighted average common shares outstanding 3,980 4,085 4,158
Add: dilutive effect of assumed exercised stock options 27 48 53
--------- --------- ---------
Weighted average common and dilutive
potential shares outstanding 4,007 4,133 4,211
========= ========= =========
DILUTED EARNINGS PER SHARE $ 0.66 $ 1.27 $ 1.22
========= ========= =========
NOTE 14. 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, 2000, that the Company
and the Banks meet all capital adequacy requirements to which they are subject.
64
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 14. REGULATORY MATTERS (Continued)
As of December 31, 2000, 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.
To Be Well
Capitalized Under
To Be Adequately Prompt Corrective
Actual Capitalized Action Provisions
-------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
--------- -------- --------- -------- --------- --------
As of December 31, 2000
Total capital
(to risk-weighted assets)
UnionBancorp, Inc. $ 59,080 10.99% $ 43,004 8.00% $ 53,755 10.00%
UnionBank 35,864 11.38 25,202 8.00 31,503 10.00
UnionBank/Central 10,843 12.61 6,878 8.00 8,598 10.00
UnionBank/West 14,319 12.52 9,150 8.00 11,437 10.00
Tier I capital
(to risk-weighted assets)
UnionBancorp, Inc. $ 51,835 9.64% $ 21,502 4.00% $ 32,253 6.00%
UnionBank 31,926 10.13 12,601 4.00 18,902 6.00
UnionBank/Central 10,242 11.91 3,439 4.00 5,158 6.00
UnionBank/West 13,532 11.83 4,575 4.00 6,862 6.00
Tier I leverage ratio
(to average assets)
UnionBancorp, Inc. $ 51,835 6.90% $ 30,063 4.00% $ 37,580 5.00%
UnionBank 31,926 7.52 16,977 4.00 21,222 5.00
UnionBank/Central 10,242 7.92 5,171 4.00 6,464 5.00
UnionBank/West 13,532 8.10 6,679 4.00 8,349 5.00
65
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 14. REGULATORY MATTERS (Continued)
To Be Well
Capitalized Under
To Be Adequately Prompt Corrective
Actual Capitalized Action Provisions
-------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
--------- -------- --------- -------- --------- --------
As of December 31, 1999
Total capital
(to risk-weighted assets)
UnionBancorp, Inc. $ 54,663 11.04% $ 39,596 8.00% $ 49,495 10.00%
UnionBank 33,606 11.13 24,163 8.00 30,204 10.00
UnionBank/Central 10,108 13.67 5,914 8.00 7,392 10.00
UnionBank/West 13,178 13.05 8,077 8.00 10,096 10.00
Tier I capital
(to risk-weighted assets)
UnionBancorp, Inc. $ 50,115 10.13% $ 19,798 4.00% $ 29,697 6.00%
UnionBank 31,175 10.32 12,082 4.00 18,122 6.00
UnionBank/Central 9,595 12.98 2,957 4.00 4,435 6.00
UnionBank/West 12,576 12.46 4,038 4.00 6,058 6.00
Tier I leverage ratio
(to average assets)
UnionBancorp, Inc. $ 50,115 7.20% $ 27,834 4.00% $ 34,793 5.00%
UnionBank 31,175 7.88 15,823 4.00 19,778 5.00
UnionBank/Central 9,595 8.37 4,583 4.00 5,729 5.00
UnionBank/West 12,576 7.61 6,606 4.00 8,258 5.00
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate fair value are described as
follows:
The carrying amount is the estimated fair value for cash and due from banks,
federal funds sold, short-term borrowings, Federal Home Loan Bank stock, accrued
interest receivable and payable, demand deposits, short-term debt, and variable
rate loans or deposits that reprice frequently and fully. Security fair values
are based on market prices or dealer quotes and, if no such information is
available, on the rate and term of the security and information about the
issuer. For fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, the fair value is based on
discounted cash flows using current market rates applied to the estimated life
and credit risk. Fair values for impaired loans are estimated using discounted
cash flow analysis or underlying collateral values. The fair value of loans held
for sale is based on market quotes. The fair value of debt is based on current
rates for similar financing. The fair value of off-balance-sheet items is based
on the current fees or cost that would be charged to enter into or terminate
such arrangements.
66
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Company's financial instruments were as
follows:
December 31,
-----------------------------------------
2000 1999
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Financial assets
Cash and cash equivalents $ 30,021 $ 30,021 $ 27,205 $ 27,205
Federal funds sold 3,000 3,000 25 25
Securities 189,719 189,719 173,893 173,893
Loans 498,680 494,758 468,704 468,570
Accrued interest receivable 8,024 8,024 6,560 6,560
Financial liabilities
Deposits 636,003 635,805 594,198 594,632
Federal funds purchased and
securities sold under
agreements to repurchase 525 525 5,308 5,308
Advances from the Federal
Home Loan Bank 43,408 43,498 32,733 32,625
Notes payable 10,275 10,275 9,500 9,500
Accrued interest payable 5,749 5,749 4,099 4,099
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the earnings potential of the trust operations, the trained work force, customer
goodwill, and similar items.
NOTE 16. 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.
67
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 16. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (Continued)
The contractual amounts of these instruments reflect the extent of involvement
in particular classes of financial instruments.
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit written is represented by the contractual amount of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments. Financial
instruments whose contract amounts represent credit risk are as follows:
Range of Rates
Standby Letters Variable Rate Fixed Rate Total on Fixed Rate
of Credit Commitments Commitments Commitments Commitments
--------- ----------- ----------- ----------- -----------
Commitments to extend credit
and standby letters of credit
December 31, 2000 $ 2,917 $ 14,497 $ 25,303 $ 42,717 6.75% - 18.00%
December 31, 1999 $ 2,004 $ 19,074 $ 31,430 $ 52,508 6.00% - 18.00%
The Company also had a firm commitment from the secondary market to purchase
approximately $1,444 of mortgage loans held for sale at December 31, 2000.
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.
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.
68
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 17. 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)
December 31,
---------------------------
ASSETS 2000 1999
----------- ------------
Cash and cash equivalents $ 327 $ 497
Investment in subsidiaries 69,905 65,836
Premises and equipment 293 497
Other assets 340 386
----------- -----------
$ 70,865 $ 67,216
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
---------------------------
Liabilities 2000 1999
----------- ------------
Notes payable $ 10,275 $ 9,500
Other liabilities 724 518
----------- -----------
10,999 10,018
Mandatory redeemable preferred stock 831 857
Stockholders' equity 59,035 56,341
----------- -----------
$ 70,865 $ 67,216
=========== ===========
69
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 17. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
INCOME STATEMENTS (PARENT COMPANY ONLY)
Years Ended December 31,
-----------------------------
2000 1999 1998
------- ------- -------
Dividends from subsidiaries $ 3,429 $ 3,346 $ 3,851
Management fees and other 21 38 282
Gain on sale of subsidiaries -- -- 1,580
Interest expense 827 670 708
Other expenses 3,299 2,791 3,119
Income tax benefit (1,564) (1,297) (1,156)
Equity in undistributed earnings of subsidiaries 2,015 4,287 2,347
------- ------- -------
NET INCOME 2,903 5,507 5,389
Less dividends on preferred stock 259 259 259
------- ------- -------
NET INCOME ON COMMON STOCK $ 2,644 $ 5,248 $ 5,130
======= ======= =======
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
Years Ended December 31,
-----------------------------
2000 1999 1998
------- ------- -------
Cash flows from operating activities
Net income $ 2,903 $ 5,507 $ 5,389
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 101 121 107
Undistributed earnings of subsidiaries (2,015) (4,287) (2,347)
Amortization of deferred compensation -
stock options 75 78 65
Gain on sale of subsidiaries -- -- (1,580)
Loss on sale of assets 116 -- --
(Increase) decrease in other assets 22 (1) (106)
Increase (decrease) in other liabilities 206 (563) 477
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,408 855 2,005
------- ------- -------
Cash flows from investing activities
Purchases of premises and equipment (13) (103) (191)
Bank holding company acquisitions and sales -- -- 2,971
------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (13) (103) 2,780
------- ------- -------
70
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 17. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
Years Ended December 31,
-----------------------------
2000 1999 1998
------- ------- -------
Cash flows from financing activities
Net increase (decrease) in notes payable $ 775 $ 2,500 $(3,000)
Dividend paid on common stock (950) (767) (633)
Dividends paid on preferred stock (259) (259) (259)
Redemption of qualifying directors' shares
and exercise of stock options 143 45 28
Purchase of treasury stock (1,274) (3,328) --
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,565) (1,809) (3,864)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (170) (1,057) 921
Cash and cash equivalents
Beginning of year 497 1,554 633
------- ------- -------
End of year $ 327 $ 497 $ 1,554
======= ======= =======
NOTE 18. OTHER COMPREHENSIVE INCOME (LOSS)
Changes in other comprehensive income (loss) components and related taxes are as
follows:
Years Ended December 31,
----------------------------
2000 1999 1998
------- ------- -------
Change in unrealized gains (losses) on
securities available-for-sale $ 3,328 $(3,370) $(1,350)
Reclassification adjustment for (gains)
losses recognized in income 29 (45) (56)
Reclassification adjustment for unrealized
gains on securities held-to-maturity
transferred to available-for-sale -- 106 --
------- ------- -------
Net unrealized gains (losses) 3,357 (3,309) (1,406)
Tax expense 1,301 1,283 581
------- ------- -------
Other comprehensive income (loss) $ 2,056 $(2,026) $ (825)
======= ======= =======
71
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 19. 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.
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.
Banking Other Consolidated
Segment Segments Totals
-------- -------- --------
2000
- ----
Net interest income (loss) $ 24,259 $ (736) $ 23,523
Other revenue 6,335 4,805 11,140
Other expense 21,433 4,452 25,885
Segment profit 4,303 (383) 3,920
Noncash items
Depreciation 948 616 1,564
Provision for loan loss 4,858 -- 4,858
Amortization of goodwill and other intangibles 1,138 172 1,310
Segment assets 749,859 8,874 758,733
1999
- ----
Net interest income (loss) $ 24,319 $ (667) $ 23,652
Other revenue 5,850 3,638 9,488
Other expense 19,507 4,090 23,597
Segment profit 9,140 (1,119) 8,021
Noncash items
Depreciation 953 697 1,650
Provision for loan loss 1,522 -- 1,522
Amortization of goodwill and other intangibles 702 195 897
Segment assets 695,795 8,212 704,007
1998
- ----
Net interest income (loss) $ 23,186 $ (724) $ 22,462
Other revenue 4,834 3,237 8,071
Other expense 17,722 3,011 20,733
Segment profit 8,610 (498) 8,112
Noncash items
Depreciation 1,460 219 1,679
Provision for loan loss 1,635 -- 1,635
Amortization of goodwill and other intangibles 877 63 940
Segment assets 618,156 9,038 627,194
72
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 20. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
Year Ended December 31, 2000 Year Ended December 31, 1999
-------------------------------------------- --------------------------------------------
Three Months Ended Three Months Ended
-------------------------------------------- --------------------------------------------
Dec. 31 Sep. 30 June 30 March 31 Dec. 31 Sep. 30 June 30 March 31
-------- -------- -------- -------- -------- -------- -------- --------
Total interest income $ 14,137 $ 13,848 $ 13,290 $ 12,933 $ 12,725 $ 12,379 $ 11,900 $ 11,545
Total interest expense (8,518) (7,991) (7,308) (6,868) (6,665) (6,441) (6,067) (5,724)
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income 5,619 5,857 5,982 6,065 6,060 5,938 5,833 5,821
Provision for loan losses 2,859 753 653 593 598 323 303 298
Noninterest income 2,806 3,015 2,541 2,778 2,414 2,506 2,268 2,300
Noninterest expense 6,525 6,202 6,306 6,852 6,050 6,013 5,819 5,715
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes (959) 1,917 1,564 1,398 1,826 2,108 1,979 2,108
Income tax expense
(benefit) (527) 668 476 400 566 662 616 670
-------- -------- -------- -------- -------- -------- -------- --------
(432) 1,249 1,088 998 1,260 1,446 1,363 1,438
Preferred stock dividend 65 64 65 65 65 64 65 65
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) for
common stockholders $ (497) $ 1,185 $ 1,023 $ 933 $ 1,195 $ 1,382 $ 1,298 $ 1,373
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings (loss)
per share $ (0.13) $ 0.30 $ 0.26 $ 0.23 $ 0.29 $ 0.34 $ 0.32 $ 0.33
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss)
per share $ (0.13) $ 0.30 $ 0.26 $ 0.23 $ 0.29 $ 0.34 $ 0.32 $ 0.32
======== ======== ======== ======== ======== ======== ======== ========
The net loss for the three months ended December 31, 2000 is due to the increase
in the provision for loan losses, which was primarily the result of one
identified problem loan and the increase in noninterest expense because of
employee severance packages. The net income for the three months ended March 31,
2000 is lower due to increased noninterest expenses related to the resignation
of the Company's Chief Executive Officer.
73
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information beginning on page 2 of the Company's 2001 Proxy
Statement under the caption "Election of Directors" and on pages 4 through 6 of
the 2001 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 2001 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 2001 Proxy
Statement, the names and ages of the executive officers of the Company as of
December 31, 2000, 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.
CHARLES J. GRAKO, 47, has been the President of the Company since 1999
and in 2000 earned the distinction of Chief Executive Officer. Prior to becoming
President, Mr. Grako served as Executive Vice President and had been the
Company's Chief Financial Officer since 1990. Mr. Grako is a member of the Board
of Directors of UnionBancorp and is the Chairman of the Board for
UnionBank/Central, UnionBank/West, and UnionData Corp, Inc. He also serves as
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.
JIMMIE D. LANSFORD, 61, was promoted from Senior Vice President to
Executive Vice President in the fourth quarter of 2000 and continues to serve as
the Director of Organizational Development & Planning, a position he has held
since 1996. A member of the Board of Directors since 1988, Mr. Lansford
currently sits on the UnionBancorp and UnionBank/Northwest Boards and acts as
Chairman of the Board for UnionBank. In addition to his vast array of in-house
responsibilities, he is active in the local community college where he also
serves as the Chairman of the Board of Trustees. Prior to his tenure with the
Company, Mr. Lansford was the Chief Executive Officer of St. Mary's Hospital in
Streator, Illinois.
GAYLON E. MARTIN, 54, is the newest addition to the executive team,
joining the Company in January of 2001 as Senior Vice President and Chief Credit
Officer. A seasoned veteran of the industry, Mr. Martin began his career in 1972
and has since gone on to fill several key management slots including serving as
the Chief Executive Officer of Farmers National Bank of Geneseo and, most
recently, as President and Managing Officer of Norwest/Wells Fargo of Geneseo.
KURT R. STEVENSON, 34, was named Vice President & Chief Financial
Officer in the summer of 2000, filling the vacancy created by Mr. Grako's new
appointment. Also in 2000, Mr. Stevenson was named to the Board of Directors of
UnionFinancial Services, Inc. Before stepping into his new role, he had been
acting as the Company's Vice President & Controller since 1996 and had served in
various operational capacities since joining the organization. He first started
employment with the Ottawa National Bank in 1987 and, subsequently, began work
with the Company following the acquisition in 1991.
74
ITEM 11. EXECUTIVE COMPENSATION
The information on pages 7 through 9 of the 2001 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 6 of the 2001 Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners and Management" is
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information on page 11 of the 2001 Proxy Statement under the
caption "Transactions with Management" is incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements
See page 42.
(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
(1) On November 15, 2000, the Company filed a Form 8-K, under Item
5 "Other Information," reporting the sale of internet-based
technology "InterNetStation" to eKiosk.com Corporation
("eKiosk") for a small equity interest in eKiosk.
(2) On December 27, 2000, the Company filed a Form 8-K, under Item
5 "Other Information," reporting that the Company had issued a
press release regarding an additional provision for loan loss
during the fourth quarter, 2000.
(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.
75
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 16, 2001.
UNIONBANCORP, INC.
By: /s/ CHARLES J. GRAKO
--------------------------------------
Charles J. Grako
President and Principal Executive
Officer
By: /s/ KURT R. STEVENSON
--------------------------------------
Kurt R. Stevenson
Vice President and 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 16, 2001.
/s/ RICHARD J. BERRY /s/ DENNIS J. MCDONNELL
- ----------------------------------- -----------------------------------
Richard J. Berry Dennis J. McDonnell
Director Director
/s/ WALTER E. BREIPOHL /s/ LAWRENCE J. MCGROGAN
- ----------------------------------- -----------------------------------
Walter E. Breipohl Lawrence J. McGrogan
Director Director
/s/ L. PAUL BROADUS /s/ I.J. REINHARDT, JR.
- ----------------------------------- -----------------------------------
L. Paul Broadus I.J. Reinhardt, Jr.
Director Director
/s/ ROBERT J. DOTY /s/ SCOTT C. SULLIVAN
- ----------------------------------- -----------------------------------
Robert J. Doty Scott C. Sullivan
Director Director
/s/ CHARLES J. GRAKO /s/ JOHN A. SHINKLE
- ----------------------------------- -----------------------------------
Charles J. Grako John A. Shinkle
Director Director
/s/ JIMMIE D. LANSFORD /s/ JOHN A. TRAINOR
- ----------------------------------- -----------------------------------
Jimmie D. Lansford John A. Trainor
Director Director
76
UNIONBANCORP, INC.
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
INCORPORATED
EXHIBIT HEREIN BY FILED
NO. DESCRIPTION REFERENCE TO HEREWITH
--- ----------- ------------ --------
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
77
INCORPORATED
EXHIBIT HEREIN BY FILED
NO. DESCRIPTION REFERENCE TO HEREWITH
--- ----------- ------------ --------
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 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
10.2 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
10.3 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
10.4 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
78
INCORPORATED
EXHIBIT HEREIN BY FILED
NO. DESCRIPTION REFERENCE TO HEREWITH
--- ----------- ------------ --------
13.1 2000 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
99.1 2001 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, 2001 (SEC
File No. 0-28846)
79