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.
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.
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
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.
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
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.
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 ------------- -------------
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.
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").
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 ------------- -------------
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
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
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.
ITEM 2.
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.
ITEM 3.
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.
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.
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 ---- --- --------- 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
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
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.
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.
ITEM 7.
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
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:
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.
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.
- ---------------------------------------------- (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.
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.
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.
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.
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
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
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.
LOAN PORTFOLIO (DOLLARS IN THOUSANDS)
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:
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.
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:
- ------------------------ (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:
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.
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)
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.
The following table describes the composition of securities by major category and maturity.
SECURITIES PORTFOLIO (DOLLARS IN THOUSANDS)
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)
- ------------------ (1) Rates on obligations of states and political subdivisions have been adjusted to tax equivalent yields using a 34% income tax rate
DEPOSIT ACTIVITIES. Deposits are attracted through the offering of a broad variety of deposit instruments, including checking accounts, money market accounts, regular savings accounts, term certificate accounts (including "jumbo" certificates in denominations of $100,000 or more), and retirement savings plans. The Company's average balance of total deposits was $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.
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 ==========
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
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.
The following table sets forth an analysis of the Company's capital ratios:
RISK-BASED CAPITAL RATIOS (DOLLARS IN THOUSANDS)
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.
ITEM 7A.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
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
See Accompanying Notes to Consolidated Financial Statements.
See Accompanying Notes to Consolidated Financial Statements.
See Accompanying Notes to Consolidated Financial Statements.
See Accompanying Notes to Consolidated Financial Statements.
See Accompanying Notes to Consolidated Financial Statements.
See Accompanying Notes to Consolidated Financial Statements.
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.
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.
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.
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.
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.
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
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.
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.
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.
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:
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)
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:
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.
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 ======== ========
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 ======= =======
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 ======== ========
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.
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.
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:
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 ======= ======= =======
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:
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 ======== ========
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.
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.
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.
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.
UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) - --------------------------------------------------------------------------------
NOTE 13. EARNINGS PER SHARE (Continued)
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.
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.
UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) - --------------------------------------------------------------------------------
NOTE 14. REGULATORY MATTERS (Continued)
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.
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.
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:
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.
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 =========== ===========
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)
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) ======= ======= =======
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.
UNIONBANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) - --------------------------------------------------------------------------------
NOTE 20. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
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.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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.
ITEM 11.
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.
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.
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.
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.
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
UNIONBANCORP, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K