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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission File Number: 0-28846
UNIONBANCORP, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 36-3145350
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
321 West Main Street Ottawa, Illinois 61350
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(Address of principal executive offices including zip code)
(815) 431-2720
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Exchange Class which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($1.00 par value)
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(Title of Class)
Preferred Purchase Rights
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 1, 2002, the Registrant had issued and outstanding
3,979,056 shares of the Registrant's Common Stock. The aggregate market value of
the voting stock held by non-affiliates of the Registrant as of March 1, 2002,
was $25,759,354.*
* Based on the last reported price $14.40 of an actual transaction in the
Registrant's Common Stock on March 1, 2002, and reports of beneficial
ownership filed by directors and executive officers of the Registrant
and by beneficial owners of more than 5% of the outstanding shares of
Common Stock of the Registrant; however, such determination of shares
owned by affiliates does not constitute an admission of affiliate
status or beneficial interest in shares of the Registrant's Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's 2001 Annual Report to Stockholders
(the "2001 Annual Report") are incorporated by reference into Part II of this
Form 10-K.
Certain portions of the Proxy Statement for the 2002 Annual Meeting of
Stockholders (the "2002 Proxy Statement") are incorporated by reference into
Part III of this Form 10-K.
UNIONBANCORP, INC.
Form 10-K Index
Page
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PART I
Item 1. Description of Business........................................ 1
A. The Company
B. Regulation and Supervision
Item 2. Properties .................................................... 10
Item 3. Legal Proceedings.............................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............ 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters................................ 11
Item 6. Selected Consolidated Financial Data........................... 12
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition.................................... 13
Item 7A. Quantitative and Qualitative Disclosure about Market Risk...... 36
Item 8. Financial Statements and Supplementary Data.................... 36
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .................................. 70
PART III
Item 10. Directors and Executive Officers of the Registrant............. 70
Item 11. Executive Compensation......................................... 71
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 71
Item 13. Certain Relationships and Related Transactions................. 71
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 71
i
PART I
Item 1. Description of Business
General
The Company, a Delaware corporation, is a regional financial services
organization based in Ottawa, Illinois, encompassing four bank subsidiaries (the
"Banks") and one non-bank subsidiary, UnionFinancial Services & Trust Company
("UnionFinancial"). Together, these entities serve customers in twenty-five bank
locations and one non-bank location from the far Western suburbs of the Chicago
metropolitan area across Central and Northern Illinois to the Mississippi River
in Western Illinois, with banking, trust, insurance, investment and internet
offerings. The Banks and UnionFinancial are collectively referred to as the
"Subsidiaries."
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 a 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 were part
of a transformation of the Company's internal structure, intended to create a
means for 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.
During the fourth quarter of 2001, the Company completed the
integration between UnionFinancial Services, Inc. and UnionTrust Corporation.
The newly formed UnionFinancial Services & Trust Company is headquartered in
Peru, Illinois and offers a complete line of insurance, brokerage and trust
services. Also during 2001, in order to create a flatter, more efficient
organizational structure, UnionData Corp, Inc. collapsed its charter and was,
subsequently, absorbed by the holding company. It is now known as the
Information Technology division of UnionBancorp, Inc. Continuing its internet
and cash management offerings, the department placed a renewed emphasis on
improving the internal infrastructure of the organization, under the direction
of a three-year technology plan.
1.
Operations
The Company's strategic plan contemplates an increase in profitability
and stockholder value through an expansion of the Company's market area, a focus
on asset quality, an enhanced sales and service environment and improved
operational efficiencies, through the targeted use of technology. In the
mid-1990's, 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 retail culture. The acquisitions of Prairie and
Country significantly increased the presence of the Company within the region's
financial communities. Because of the reputations of the Company and its
executive officers in the financial services 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 establishment. In each of the Company's twenty-six
locations, customers have access to a wide range of products and services aimed
at meeting the demands of a diverse market base. Committed to the concept of one
stop financial shopping, customers can ascertain assistance on their banking,
trust, insurance, investment and internet needs from the Company's experienced
staff or enjoy the convenience of online services from the comfort of their own
homes. With its continued growth and evolution, the Company also remains rooted
in its strong presence in the communities it serves. The participation of the
Company's directors, officers and employees in area civic and service
organizations demonstrates this ongoing commitment. Management believes that,
together, these qualities distinguish the Company from its competitors and will
enable the Company to compete successfully in its market area against other
regional and out-of-state institutions.
Geographically, the Company serves the financial needs of contiguous
counties located in north central Illinois through the Banks. In recent years,
the Company has expanded its activities from north central Illinois into markets
surrounding the Chicago metropolitan area, as well as into additional areas of
Northern and Western Illinois.
The Banks offer a wide 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, 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 Banks also offer a full range of depository services including
traditional savings, checking and money market accounts, credit and debit cards,
as well as bill pay options, target those customers who seek the convenience of
electronic services.
UnionFinancial provides a variety of additional financial solutions,
namely trust and asset management alternatives, a full line of personal and
commercial insurance products and personalized investment options. The Company
continues to devote special attention to these financial services areas, as the
demands of customers steadily move towards non-traditional financial offerings.
2.
Competition
Spanning fifteen Illinois counties, the Company's market area is highly
competitive with commercial banks, savings and loan associations and credit
unions. In addition, financial institutions, based in surrounding communities
and in Chicago, 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, 2001, the Company employed 366 full-time equivalent
employees. The Company places high priority on staff development, which involves
extensive training on product offerings, customer service, management practices
and leadership skills. New employees are selected on the basis of both technical
skills and customer service capabilities. None of the Company's employees are
covered by a collective bargaining agreement with the Company. The Company
offers a variety of employee benefits, and management considers its employee
relations to be excellent.
SUPERVISION AND REGULATION
General
Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of the Company can be affected not only by management decisions and
general economic conditions, but also by the requirements of applicable state
and federal statutes and regulations and the policies of various governmental
regulatory authorities, including the Illinois Commissioner of Banks and Real
Estate (the "Commissioner"), the Board of Governors of the Federal Reserve
System (the "Federal Reserve"), the Federal Deposit Insurance Corporation (the
"FDIC"), the Internal Revenue Service and state taxing authorities and the
Securities and Exchange Commission (the "SEC"). The effect of applicable
statutes, regulations and regulatory policies can be significant, and cannot be
predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to
financial institutions, such as the Company and its subsidiaries, regulate,
among other things, the scope of business, investments, reserves against
deposits, capital levels relative to operations, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and its subsidiaries establishes a comprehensive framework for their respective
3.
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds and the depositors, rather than the shareholders, of financial
institutions.
The following is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiaries. It does not describe
all of the statutes, regulations and regulatory policies that apply to the
Company and its subsidiaries, nor does it restate all of the requirements of the
statutes, regulations and regulatory policies that are described. As such, the
following is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of the Company
and its subsidiaries.
The Company
General. The Company, as the sole stockholder of UnionBank; Prairie, as
the sole or controlling stockholder of UnionBank/Central and
UnionBank/Northwest; and Country, as the sole stockholder of UnionBank/West, are
each bank holding companies. As bank holding companies, the Company, Prairie and
Country are registered with, and are subject to regulation by, the 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.
4.
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, 2001, the Company, Prairie and Country each had
regulatory capital in excess of the Federal Reserve's minimum requirements, as
follows:
Risk-Based Leverage
Capital Ratio Capital Ratio
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Company 11.66% 7.54%
Prairie 14.41% 8.48%
Country 13.76% 9.41%
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
5.
(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
stockholders 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, 2001, BIF assessments ranged from 0%
of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 2002, 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
6.
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, 2001, the FICO assessment rate for
SAIF members ranged between approximately 0.0184% of deposits and approximately
0.0196% of deposits, while the FICO assessment rate for BIF members ranged
between approximately 0.0184% of deposits and approximately 0.0196% of deposits.
During the year ended December 31, 2001, the Banks paid FICO assessments
totaling $116,024.
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, 2001, the Banks paid
supervisory assessments to the Commissioner totaling $108,486.
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, 2001, 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, 2001, each of the Banks
exceeded its minimum regulatory capital requirements, as follows:
Risk-Based Leverage
Capital Ratio Capital Ratio
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UnionBank 12.40% 8.48%
UnionBank/ Central 13.78% 8.10%
UnionBank/ West 13.80% 9.44%
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;
7.
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, 2001, 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 and had approximately $8.3 million available to be paid as dividends
to the Company by the Banks as of December 31, 2001. 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.
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
8.
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 $42.8 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $42.8 million, the reserve
requirement is $1.284 million plus 10% of the aggregate amount of total
transaction accounts in excess of $42.8 million. The first $5.5 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.
Financial Services Subsidiary
UnionBank is the sole stockholder of UnionFinancial Services & Trust
Company ("UnionFinancial"), an Illinois corporation licensed as a general
insurance agency by the Illinois Department of Insurance (the "Department").
UnionFinancial 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.
9.
UnionFinancial's trust division 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 division, to maintain, among other
things, 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 division 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 division is also subject to supervision and regulation by
the Federal Reserve under the BHCA.
Item 2. Properties
At December 31, 2001, the Company operated twenty-five banking offices
and one non-bank office 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 UnionFinancial and are not subject to any mortgage or
material encumbrance, with the exception of three offices that are leased
located in LaSalle and Bureau counties. 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 DeKalb, Grundy, Kane, Main Office: Streator, IL
Kendall, LaSalle, Livingston Eleven banking offices located in
and Madison Counties markets Counties served.
UnionBank/Central Bureau, LaSalle, and Main Office: Princeton, IL
Whiteside Counties Five banking offices located in markets
served.
UnionBank/West Adams, Hancock, Main Office: Macomb, IL
McDonough, Pike and Seven banking offices located in
Schuyler Counties markets served.
UnionBank/Northwest Jo Daviess County Main Office: Hanover, IL
Two banking offices located in markets
served.
UnionFinancial Services Adams, Bureau, Kendall, Main Office: Peru, IL
& Trust Company LaSalle and Schuyler Counties Offices located in Mendota, Ottawa,
Princeton, Quincy, Rushville,
Sandwich and Streator IL.
In addition to the banking locations listed above, the Banks own
twenty-eight automated teller machines, some of which are housed within banking
offices and some of which are independently located.
At December 31, 2001, the properties and equipment of the Company had
an aggregate net book value of approximately $12.5 million.
10.
Item 3. Legal Proceedings
Neither the Company nor any of its subsidiaries are involved in any
pending legal proceedings other than routine legal proceedings occurring in the
normal course of business, which, in the opinion of management, in the
aggregate, are not material to the Company's consolidated financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
There were no items submitted to a vote of security holders in the
fourth quarter of 2001.
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
The Company's Common Stock was held by approximately 586 stockholders
of record as of March 1, 2002, 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
----- ----- ---------
2000
First Quarter................................. 14.50 10.63 0.060
Second Quarter................................ 15.00 9.50 0.060
Third Quarter................................. 11.25 10.00 0.060
Fourth Quarter................................ 11.50 9.94 0.060
2001
First Quarter................................. 14.00 10.00 0.060
Second Quarter................................ 14.00 11.50 0.070
Third Quarter................................. 15.50 13.10 0.070
Fourth Quarter................................ 14.50 13.50 0.070
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
11.
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. In 1996, the Company
entered into a new loan agreement in connection with the 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, 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.
Item 6. Selected Consolidated Financial Data
Selected consolidated financial data for the five years ended December
31, 2001, consisting of data captioned "Selected Consolidated Financial Data" on
page 14 of the Company's 2001 Annual Report to Stockholders filed as an exhibit
hereto, is incorporated herein by reference.
12.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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, 2001. This discussion should be read in
conjunction with "Selected Consolidated Financial Data," the consolidated
financial statements of the Company, and the accompanying notes thereto. Unless
otherwise stated, all earnings per share data included in this section and
throughout the remainder of this discussion are presented on a diluted basis.
All financial information is in thousands (000's), except per share data.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This report 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 such as "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.
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 subsidiary, UnionFinancial Services & Trust Company (the "Nonbank"). 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 Nonbank affiliate provides insurance, brokerage, asset
management and trust service to the same regions.
In October of 2001, the Company completed the integration of two of its
subsidiaries, UnionTrust Corporation and UnionFinancial Services, Inc. The
consolidated company was renamed UnionFinancial Services & Trust Company. This
initiative was completed in order to maximize growth and revenue opportunities
partially by eliminating confusion in the marketplace, provide a better
deployment of capital, and realize economies of scale. Also during October,
UnionData Corp, Inc. was merged into the Holding Company in order to provide a
flatter more efficient organizational structure.
13.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Results of Operations
Net Income. Net income equaled $4,454 or $1.05 per fully diluted share
for the year ended December 31, 2001 compared with net income of $2,903 or $0.66
per fully diluted share for the year ended December 31, 2000. This represents a
59.1% increase in per share earnings and a 53.4% increase in net income.
This annual earnings growth was driven by several factors. These
include the continued strong performance of the mortgage banking division which
yielded a record period in both volume and revenue generation, increased net
interest income largely related to the sustained interest rate cuts by the
Federal Reserve, gains on the sale of securities, and a decrease in the
provision for loan losses. These improvements were partially offset by an
increase in noninterest expense, incurred to support the growing levels of
business activities, and continued investments in the Company.
Return on average assets was 0.59% for the period compared to the 0.40%
for the same period in 2000. Return on average stockholders' equity was 7.04%
for the period compared to 5.09% for the same period in 2000. Return on average
tangible equity capital for the period equaled 8.99%.
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.
Management believes the reporting of cash earnings provides further insight into
the Company's operating performance. Cash earnings per diluted common share,
cash return on average assets, and cash return on average equity capital are
detailed as follows:
For the Year Ended December 31, 2001
--------------------------------------------
Reported Cash
Earnings Goodwill Other Earnings
-------- -------- -------- --------
Income before income taxes $ 5,991 $ 350 $ 595 $ 6,936
Income taxes 1,537 -- 231 1,768
-------- -------- -------- --------
Net income 4,454 350 364 5,168
Preferred stock dividends 257 -- -- 257
-------- -------- -------- --------
Net income for common stockholders $ 4,197 $ 350 $ 364 $ 4,911
======== ======== ======== ========
Diluted earnings per common share $ 1.05 $ 0.08 $ 0.09 $ 1.22
======== ======== ======== ========
Return on average total assets 0.59% 0.68%
Return on average stockholders' equity 7.04% 8.17%
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 in 2000 versus 1999 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 strategic items
included expenses incurred for executive severance packages, the elimination of
executive corporate vehicles and other one time expenses. Also during the year,
the Company sold the intellectual property rights for its InterNetStation
14.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
product and sold UnionBank/West's Camp Point branch, incurring a minimal
after-tax gain. Exclusive of these 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 year ended December 31, 2000
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%.
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.
2001 compared to 2000. Net interest income was $25,561 for the year
ended December 31, 2001, compared with $24,682 earned during the same period in
2000. This represented an increase of $879 or 3.6%. The improvement in net
interest income is attributable to the year-over-year reduction of interest
expense paid on interest bearing liabilities totaling $1,300 exceeding the
year-over-year reduction of interest income earned on interest-earning assets
totaling $421. The Company experienced a decline in the cost of funds due to
sustained interest rate cuts initiated by the Federal Reserve which was
partially offset by decreases in rates earned on loans due to competitive
pressures, overall tightening of loan underwriting standards, slower than
expected loan growth, and the cost of carrying a higher level of nonperforming
loans. The on-going reduction of interest rates positively impacted net interest
income as the Company's liability sensitive balance sheet repriced liabilities
downward at a faster pace than rates declined on interest earning assets. Also
contributing to the increase in net interest income was average loan growth of
$19,159, or 4.0%, over the same period in 2000.
The $421 decrease in interest income resulted from a $2,433 improvement
associated with volume offset by a $2,854 decline related to rate. The majority
of the decrease in interest income was related to a 38 basis point decline in
interest earned on average loans driven by the commercial loan portfolio, which
more than offset the $19,159 improvement in average loan volume. The growth in
average interest-earning assets was offset by the decline in yields earned on
interest-earning assets, as all categories of interest-earning assets were
impacted by the decline in market interest rates.
The $1,300 decrease in interest expense resulted from a $1,505
improvement associated with volume offset by a $2,805 decline associated with
rate. The majority of the decrease was attributable to a reduction in the rates
paid on total interest-bearing liabilities located in expensive wholesale
funding sources, including brokered deposits, which resulted in a 30 basis point
decrease in the cost of total time deposits. This was a deliberate strategy
aimed at reducing the Company's reliance on these higher-cost funding sources
and to reduce interest rate risk.
15.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The net interest margin on a tax equivalent basis for the period
decreased 3 basis points to 3.64% as compared to the prior year's 3.67%. The
Company's net interest margin was impacted by the decline in short-term interest
rates and the steepening of the yield curve. This was offset by narrower loan
spreads, due to competitive pressures, overall tightening of loan underwriting
standards, slower than expected loan growth, and the cost of carrying a higher
level of nonperforming loans. Specifically, yields on interest-earning assets
decreased 42 basis points to 7.82% as compared to the prior year's 8.24%. In
contrast, rates paid on interest-bearing liabilities decreased 43 basis points
to 4.77% as compared to the prior year's 5.20%.
2000 compared to 1999. 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%.
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 2001,
2000 and 1999. 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.
16.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Years Ended December 31,
-------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------ ------------------------------ -------------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- -------- -------- -------- -------- -------- -------- --------
ASSETS
Interest-earning assets
Interest-earning deposits $ 1,130 $ 53 4.69% $ 2,248 $ 133 5.92% $ 1,801 $ 92 5.11%
Securities (1)
Taxable 152,650 8,602 5.64 138,643 8,514 6.14 133,156 8,060 6.05
Nontaxable (2) 39,884 2,988 7.49 41,320 3,081 7.46 40,963 3,034 7.41
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total securities (tax
equivalent) 192,534 11,590 6.02 179,963 11,595 6.44 174,119 11,094 6.37
-------- -------- -------- -------- -------- -------- -------- -------- --------
Federal funds sold 4,640 143 3.08 4,224 290 6.87 1,244 73 5.87
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loans (3)(4)
Commercial 148,598 12,365 8.32 144,706 13,282 9.18 128,008 11,343 8.86
Real estate 300,066 25,167 8.39 288,651 24,929 8.64 269,840 22,181 8.22
Installment and other 55,984 5,628 10.05 52,132 5,138 9.86 40,718 3,681 9.04
Fees on loans -- -- -- -- -- -- -- 1,235 --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net loans (tax
equivalent) 504,648 43,160 8.55 485,489 43,349 8.93 438,566 38,440 8.76
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-
earning assets 702,952 54,946 7.82 671,924 55,367 8.24 615,730 49,699 8.07
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 19,539 21,358 20,801
Premises and equipment, net 11,913 12,700 13,729
Other assets 21,169 15,471 15,090
-------- -------- --------
Total non-interest-earning
assets 52,621 49,529 49,620
-------- -------- --------
Total assets $755,573 $721,453 $665,350
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities
NOW accounts $ 45,526 $ 843 1.85% $ 53,764 $ 1,249 2.32% $ 55,888 $ 1,281 2.29%
Money market accounts 53,282 1,514 2.84 39,407 1,629 4.13 33,864 1,189 3.51
Savings deposits 46,921 989 2.11 48,476 1,239 2.56 57,242 1,543 2.70
Time $100,000 and over 179,427 9,581 5.34 179,183 10,088 5.63 128,090 6,569 5.13
Other time deposits 224,474 12,752 5.68 217,693 13,049 5.99 215,918 11,430 5.29
Federal funds purchased and
repurchase agreements 2,475 80 3.23 3,571 233 6.52 13,050 679 5.20
Advances from FHLB 54,064 3,030 5.60 37,665 2,366 6.28 27,636 1,526 5.52
Notes payable 9,719 596 6.13 10,413 832 7.99 9,530 680 7.14
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 615,888 29,385 4.77 590,172 30,685 5.20 514,216 24,897 4.60
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest-bearing liabilities
Non-interest-bearing deposits 67,577 66,720 61,458
Other liabilities 8,857 7,575 6,656
-------- -------- --------
Total non-interest-bearing
liabilities 76,434 74,295 68,114
-------- -------- --------
Stockholders' equity 63,251 56,986 56,020
-------- -------- --------
Total liabilities and
stockholders' equity $755,573 $721,453 $665,350
======== ======== ========
Net interest income (tax
equivalent) $ 25,561 $ 24,682 $ 24,802
======== ======== ========
Net interest income (tax
equivalent) to total
earning assets 3.64% 3.67% 4.03%
======== ======== ========
Interest-bearing liabilities
to earning assets 87.61% 87.83% 87.90%
======== ======== ========
- -------------------------
(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.
17.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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. Any variance attributable jointly to
volume and rate changes is allocated to the volume and rate variances in
proportion to the relationship of the absolute dollar amount of the change in
each.
RATE/VOLUME ANALYSIS OF
NET INTEREST INCOME
For the Years Ended December 31,
--------------------------------------------------------------
2001 Compared to 2000 2000 Compared to 1999
----------------------------- -----------------------------
Change Due to Change Due to
----------------------------- -----------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
Interest income:
Interest-earning deposits $ (56) $ (24) $ (80) $ 25 $ 16 $ 41
Investment securities:
Taxable 816 (728) 88 344 110 454
Nontaxable (37) (56) (93) 20 27 47
Federal funds sold 26 (173) (147) 203 14 217
Loans 1,684 (1,873) (189) 4,192 717 4,910
------- ------- ------- ------- ------- -------
Total interest income 2,433 (2,854) (421) 4,784 884 5,668
------- ------- ------- ------- ------- -------
Interest expense:
NOW accounts (175) (231) (406) (49) 17 (32)
Money market accounts 478 (593) (115) 211 229 440
Savings deposits (39) (211) (250) (227) (77) (304)
Time, $100,000 and over 14 (521) (507) 2,826 693 3,519
Other time 396 (693) (297) 95 1,524 1,619
Federal funds purchased and
repurchase agreements (58) (95) (153) (586) 140 (446)
Advances from FHLB 942 (278) 664 611 229 840
Notes payable (53) (183) (236) 66 86 152
------- ------- ------- ------- ------- -------
Total interest expense 1,505 (2,805) (1,300) 2,947 2,841 5,788
------- ------- ------- ------- ------- -------
Net interest income $ 928 $ (49) $ 879 $ 1,837 $(1,957) $ (120)
======= ======= ======= ======= ======= =======
Provision for Loan Losses. The amount of the provision for loan losses
is based on management's 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, other nonperforming loans, other identified potential problem loans,
historical loss experience, results of examinations by regulatory agencies,
results of the independent 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 various other
factors, including concentration of credit risk in various industries and
current economic conditions.
2001 compared to 2000. The 2001 provision for loan losses charged to
operating expense totaled $4,161, a decrease of $697 over the $4,858 recorded
during the same period a year ago. The provision for loan losses increased the
allowance for loan losses in response to the gradual deterioration of various
seasoned loans, nonperforming loans, net charge-offs and delinquencies, coupled
with concerns over the economy's deteriorating economic impact, particularly in
light of the unprecedented events on and subsequent to September 11.
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Net charge-offs in 2001 were $4,280 compared with $2,135 in 2000.
Annualized net charge-offs increased to 0.85% of average loans for 2001 compared
to 0.44% in the same period in 2000. The increase in net charge-offs was largely
the result of several credits which were identified in 2000 as requiring the
status of watch list and specific allocation. During 2001, these credits
continued to deteriorate and management identified the credits as non-bankable
assets, which were charged off.
Along with other financial institutions, management remains watchful of
credit quality issues and believes that current issues within the portfolio are
reflective of a challenging economic environment and mirror problems faced by
peers throughout the financial community, especially in light of the events of
September 11, 2001. Should the economic climate continue to deteriorate,
borrowers may experience difficulty, and the level of nonperforming loans,
charge-offs, and delinquencies could rise and require further increases in the
provision. Management continues to monitor the loan portfolio and take action to
limit credit exposure.
2000 compared to 1999. The 2000 provision for loan losses charged to
operating expense totaled $4,858 compared with $1,522 in 1999. The increase was
primarily influenced by a single nonperforming commercial credit. 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 nonperforming 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.
Noninterest Income. The following table shows the Company's noninterest
income:
NONINTEREST INCOME
(Dollars in Thousands)
Years Ended December 31,
------------------------------------
2001 2000 1999
-------- -------- --------
Service charges $ 2,748 $ 2,683 $ 2,259
Merchant fee income 1,095 1,110 1,116
Trust income 687 744 711
Mortgage banking income 2,096 1,278 1,301
Insurance commissions and fees 2,407 2,862 2,595
Securities gains (losses), net 798 (29) 45
Other income 2,089 2,492 1,461
-------- -------- --------
Total noninterest income $ 11,920 $ 11,140 $ 9,488
======== ======== ========
Noninterest income consists of a wide variety of fee-based revenues
viewed as traditional banking services as well as revenues generated by the
Company's insurance, brokerage, trust, asset management and data processing
product lines.
2001 compared to 2000. Noninterest income totaled $11,920 for the year
ended December 31, 2001, as compared to $11,140 for the same timeframe in 2000.
This represented an increase of $780 or 7.0%. Two factors impacted the
year-over-year change. First, as interest rates declined during 2001, the market
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
value of some securities increased, and the Company took the opportunity to
liquidate those securities and either replace them with similar securities or
fund loan growth. Securities available-for-sale are held in a manner which
allows for their sale in response to changes in interest rates, liquidity needs,
balance sheet risk objectives or significant prepayment risk. The second factor
was, during 2000, the Company completed the sale of its UnionBank/West Camp
Point branch and the sale of its intellectual property rights for the
InterNetStation product.
Exclusive of $798 in net securities gain from 2001, and the $753 in the
gross gains on sale of UnionBank/West's Camp Point branch and the
InterNetStation intellectual property during 2000, core noninterest income shows
a year-over-year increase of $735 or 7.1%. As a percentage of total income (net
interest income plus noninterest income), core noninterest income, exclusive of
securities gains, gain on sale of the Camp Point branch and InterNetStation
intellectual property, increased to 31.3% versus 30.6% for 2000.
A majority of the increase in core noninterest income was related to an
$818 improvement in mortgage banking income. Mortgage banking income includes
fees generated from underwriting, originating and servicing of mortgage loans,
along with gains realized from the sale of these loans, net of servicing rights
amortization. The servicing right amortization increase was attributable to
increasing pre-payment speeds driven by declining interest rates. The Company's
mortgage loan production more than doubled to $165,515 during 2001, compared to
last year, as declining interest rates resulted in increases in the rate of
mortgage refinancing and residential real estate activity in general. Also
contributing to the improvement were marginal increases in fees associated with
overdraft fees reflecting an increase in returned check charges related to a
higher occurrence rate, prestige card transaction fees related to higher
transaction volume pushing interchange fees higher, and internet service
provider (ISP) due to an increase in the number of customers.
These improvements were offset by lower than anticipated trust, asset
management, and brokerage fees (included in insurance commissions and fees).
Trust, asset management, and brokerage fees generally follow the amount of total
assets under management, as well as conditions in the equity and credit markets,
as such fees on certain accounts are based on market value. The decrease in fees
during the year was due, in part, to the overall condition of equity and credit
markets since the beginning of the year, as well as to a slight decline in sales
related to certain customers' reluctance to commit new funds and shift existing
assets.
2000 compared to 1999. 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 the intellectual property rights for its InterNetStation product, 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
20.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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.
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 Expense. The following table shows the Company's
noninterest expense:
NONINTEREST EXPENSE
(Dollars in Thousands)
Years Ended December 31,
------------------------------------
2001 2000 1999
-------- -------- --------
Salaries and employee benefits $ 13,700 $ 13,468 $ 12,244
Occupancy expense, net 1,751 1,753 1,594
Furniture and equipment expenses 1,632 1,803 1,888
Supplies and printing 608 573 538
Telephone 773 749 677
Amortization of intangible assets 945 1,310 897
Other expense 6,803 6,229 5,759
-------- -------- --------
Total noninterest expense $ 26,212 $ 25,885 $ 23,597
======== ======== ========
2001 compared to 2000. Noninterest expense totaled $26,212 for the year
ended December 31, 2001, as compared to $25,885 for the same timeframe in 2000.
This represented an increase of $327 or 1.3%. As previously mentioned, 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 the intellectual property rights for its
InterNetStation product, and $232 in impairment of intangible assets. Exclusive
of these items, core noninterest expense shows a year-over-year increase of
$1,658 or 6.8% over 2000 levels.
A majority of the core change in expense for the year was reflective of
the salaries and employee benefits (exclusive of the year 2000 severance
expense) which increased $1,046 or 8.3% over the same timeframe in 2000. This
was due to regular merit increases, basic incentive compensation primarily
related to increased real estate production, new additions incurred to support
the growing levels of business activities, and an increase in the Company's
contributions to employee ESOP benefits.
Also contributing were increases in the other expense category largely
related to other real estate expense, debit card expense due to higher volume,
real estate appraisals due to growth in the volume of production, postage due to
the adoption of Regulation P, and legal fees largely related to nonperforming
loans and the internal reorganizations completed during the year. These
increases were offset by decreases in furniture and equipment expenses
reflecting lower depreciation of personal computer and peripheral equipment, and
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
marketing due to a shift in marketing strategy and the scaling back of certain
advertising programs. The combined categories of occupancy expense, supplies and
printing, and telephone remained relatively stable with only slight
year-over-year changes.
2000 compared to 1999. 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 packages 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
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 compensation 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.
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,
-------------------------------------
2001 2000 1999
------- ------- -------
Income before income taxes $ 5,991 $ 3,920 $ 8,021
Applicable income taxes 1,537 1,017 2,514
Effective tax rates 25.7% 25.9% 31.3%
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. In addition, the Company has reduced tax expense through
various tax planning initiatives.
Preferred Stock Dividends. The Company paid $257 of preferred stock
dividends in 2001, and $259 in 2000 and 1999.
22.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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, substantially, 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 2001 and 2000 for the various rate shock
levels.
December 31, 2001 Net Interest Income
- ----------------- ------------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $28,134 $ 851 3.12%
+100 bp 27,695 412 1.51
Base 27,283 -- --
-100 bp 26,900 (383) (1.40)
-200 bp 26,095 (1,188) (4.35)
Based on the Company's model at December 31, 2001, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by 3.12% or approximately $851. The effect of an
immediate 200 basis point decrease in rates would reduce the Company's net
interest income by 4.35% or approximately $1,188.
December 31, 2001 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 on 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 reduce the Company's net
interest income by 2.16% or approximately $554.
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Financial Condition
General. As of December 31, 2001, the Company had total assets of
$748,307, gross loans of $504,968, total deposits of $612,144, and total
stockholders' equity of $63,814. Total assets decreased by 1.37% from year-end
2000 or a $10,426 decrease. Total gross loans remained relatively unchanged,
showing a $126 or 0.01% decrease from year-end 2000 and reflected tighter
underwriting standards, an overall softening of loan demand, and normal
paydowns. Total deposits decreased by $23,859 or 3.75% from year-end 2000, which
was attributable to management's strategic plan to reduce the amount of state
and local, and some other non-core high-cost certificates of deposits.
Loans and Asset Quality. The Company's loans are diversified by
borrower and industry group. Loan growth has occurred four out of the last 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. Total gross loans remained relatively unchanged, showing a modest
decrease from year-end 2000 and reflected tighter underwriting standards, an
overall softening of loan demand, and normal paydowns. Over the past few years,
much of the growth has been concentrated in commercial and commercial real
estate segments.
The following table describes the composition of loans by major
categories outstanding.
(Dollars in Thousands)
LOAN PORTFOLIO
Aggregate Principal Amount
-------------------------------------------------------------
December 31,
-------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Commercial $ 107,382 $ 117,534 $ 103,842 $ 74,481 $ 62,936
Agricultural 40,563 38,479 38,328 41,821 39,431
Real estate:
Commercial mortgages 150,878 134,942 126,645 99,872 72,730
Construction 23,676 19,322 15,786 13,935 14,393
Agricultural 34,611 39,658 38,847 35,790 27,955
1-4 family mortgages 94,368 99,237 102,695 96,921 109,411
Installment 50,961 53,276 43,644 32,714 41,210
Other 2,529 2,646 2,615 2,884 3,076
--------- --------- --------- --------- ---------
504,968 505,094 472,402 398,418 371,142
Unearned income -- -- (7) (30) (157)
--------- --------- --------- --------- ---------
Total loans 504,968 505,094 472,395 398,388 370,985
Allowance for loan losses (6,295) (6,414) (3,691) (3,858) (3,188)
--------- --------- --------- --------- ---------
Loans, net $ 498,673 $ 498,680 $ 468,704 $ 394,530 $ 367,797
========= ========= ========= ========= =========
24.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Aggregate Principal Amount
-----------------------------------------------
December 31,
-----------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Percentage of Total Loan Portfolio
-----------------------------------------------
Commercial 21.27% 23.27% 21.98% 18.69% 16.96%
Agricultural 8.03 7.62 8.11 10.50 10.62
Real estate:
Commercial mortgages 29.88 26.72 26.81 25.07 19.60
Construction 4.69 3.83 3.34 3.50 3.88
Agricultural 6.85 7.85 8.22 8.98 7.53
1-4 family mortgages 18.69 19.65 21.74 24.33 29.48
Installment 10.09 10.55 9.24 8.21 11.10
Other loans 0.50 0.51 0.56 0.72 0.83
------ ------ ------ ------ ------
Gross loans 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
As of December 31, 2001 and 2000, commitments of the Banks under
standby letters of credit and unused lines of credit totaled approximately
$65,896 and $42,717, respectively.
Stated loan maturities (including rate loans reset to market interest
rates) of the total loan portfolio, net of unearned income, at December 31, 2001
were as follows:
STATED LOAN MATURITIES (1)
(Dollars in Thousands)
Within 1 to 5 After 5
1 Year Years Years Total
------ ----- ----- -----
Commercial $ 72,059 $ 29,861 $ 5,462 $107,382
Agricultural 30,765 9,400 398 40,563
Real estate 125,764 147,647 30,122 303,533
Installment 17,249 35,893 348 53,490
-------- -------- -------- --------
Total $245,837 $222,801 $ 36,330 $504,968
======== ======== ======== ========
- --------------------
(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.
25.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Rate sensitivities of the total loan portfolio, net of unearned income,
at December 31, 2001 were as follows:
LOAN REPRICING
(Dollars in Thousands)
Within 1 to 5 After 5
1 Year Years Years Total
------ ----- ----- -----
Fixed rate $ 93,681 $ 78,570 $ 30,273 $202,524
Variable rate 149,339 142,973 2,873 295,185
Impaired and not accruing
and nonaccrual 2,817 1,258 3,184 7,259
-------- -------- -------- --------
Total $245,837 $222,801 $ 36,330 $504,968
======== ======== ======== ========
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 nonperforming 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 has identified various loans which are now
current, but where some concerns exist as to the ability of the borrower to
comply with present loan repayment terms. These loans are not nonperforming, but
management believes a higher level of scrutiny and specific allocations of the
allowance are prudent under the circumstances.
26.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The Company has an independent 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 independent loan review
function and are submitted for review to the loan committee and audit committee
members.
Despite a diversified loan portfolio, the Company experienced credit
quality deterioration and saw a rise in the level of nonperforming loans during
the year. A weakening economy, among other factors, resulted in the level of
nonperforming assets increasing to $10,761 versus the $8,346 that existed as of
December 31, 2000. The level of nonperforming assets to total end of period
assets was 1.44% at December 31, 2001, as compared to 1.10% at December 31,
2000.
The following table sets forth a summary of nonperforming assets at
December 31, 2001:
NONPERFORMING ASSETS
(Dollars in Thousands)
December 31,
---------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Nonaccrual and impaired loans not
accruing $ 7,259 $ 5,777 $ 2,949 $ 1,487 $ 1,714
Impaired and other loans 90 days past
due and still accruing interest 1,616 2,102 566 1,111 1,013
------- ------- ------- ------- -------
Total nonperforming loans 8,875 7,879 3,515 2,598 2,727
Other real estate owned 1,886 467 523 201 215
Other nonperforming assets (1) -- -- -- 100 100
------- ------- ------- ------- -------
Total nonperforming assets $10,761 $ 8,346 $ 4,038 $ 2,899 $ 3,042
======= ======= ======= ======= =======
Nonperforming loans to total loans 1.76% 1.56% 0.74% 0.65% 0.74%
Nonperforming assets to total loans 2.13 1.65 0.85 0.73 0.82
Nonperforming assets to total assets 1.44 1.10 0.57 0.46 0.49
- --------------------
(1) Represents a single municipal security in default status.
The following table sets forth a summary of other real estate owned and
other collateral acquired at December 31, 2001:
OTHER REAL ESTATE OWNED
(Dollars in Thousands)
Number Net Book
of Carrying
Parcels Value
------- -----
Developed property 22 $ 1,886
======== ========
27.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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 a 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
independent 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 Loan Review function validates the officers'
grades. In the event that the Loan Review function 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 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 2001. 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 remains watchful of
credit quality issues and believes that current issues within the portfolio are
reflective of a challenging economic environment and mirror problems faced by
peers throughout the financial community, especially in light of the events of
September 11, 2001. Should the economic climate continue to deteriorate,
borrowers may experience difficulty, and the level of nonperforming loans,
charge-offs, and delinquencies could rise and require further increases in the
provision. Management continues to monitor the loan portfolio and take
appropriate action to proactively limit credit exposure.
At December 31, 2001, the allowance for loan losses assigned to
operations was $6,295 or 1.25% of outstanding loans compared with $6,414 or
1.27% at December 31, 2000. The decrease in the allowance was due to an
increased level of net charge-offs, largely the result of several credits which
were identified in 2000 as requiring the status of watch list and specific
allocation. In 2001, these credits deteriorated and management identified the
credits as non-bankable assets, which were charged off.
28.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The following table presents a detailed analysis of the Company's
allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
December 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Beginning balance $ 6,414 $ 3,691 $ 3,858 $ 3,188 $ 3,068
Charge-offs:
Commercial 3,202 1,663 1,186 428 262
Real estate mortgages 977 144 346 169 386
Installment and other loans 496 444 340 435 559
--------- --------- --------- --------- ---------
Total charge-offs 4,675 2,251 1,872 1,032 1,207
--------- --------- --------- --------- ---------
Recoveries:
Commercial 312 37 79 98 47
Real estate mortgages 10 3 22 37 88
Installment and other loans 73 76 82 108 113
--------- --------- --------- --------- ---------
Total recoveries 395 116 183 243 248
--------- --------- --------- --------- ---------
Net charge-offs 4,280 2,135 1,689 789 959
--------- --------- --------- --------- ---------
Provision for loan losses 4,161 4,858 1,522 1,635 1,079
Allowance associated with the
Acquisitions (divestitures) -- -- -- (176) --
--------- --------- --------- --------- ---------
Ending balance $ 6,295 $ 6,414 $ 3,691 $ 3,858 $ 3,188
========= ========= ========= ========= =========
Period end total loans, net of
unearned interest $ 504,968 $ 505,094 $ 472,395 $ 398,388 $ 370,985
========= ========= ========= ========= =========
Average loans $ 505,136 $ 485,489 $ 440,284 $ 390,560 $ 358,620
========= ========= ========= ========= =========
Ratio of net charge-offs to
average loans 0.85% 0.44% 0.38% 0.20% 0.27%
Ratio of provision for loan losses
to average loans 0.82 1.00 0.35 0.42 0.30
Ratio of allowance for loan losses
to ending total loans 1.25 1.27 0.78 0.97 0.86
Ratio of allowance for loan losses
to total nonperforming loans 70.93 81.41 105.01 148.99 116.91
Ratio of allowance at end of period
to average loans 1.25 1.32 0.84 0.99 0.89
29.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The following table sets forth an allocation of the allowance for loan
losses among the various loan categories.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
December 31,
--------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- ---------------- ---------------- ---------------- ----------------
Loan Loan Loan Loan Loan
Category Category Category Category Category
to Gross to Gross to Gross to Gross To Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial $3,499 29.30% $3,903 30.89% $1,114 30.09% $1,213 29.19% $ 962 27.58%
Real estate 1,786 60.11 1,412 58.05 1,290 60.11 1,245 61.87 1,052 60.49
Installment and other loans 537 10.59 511 11.06 393 9.80 443 8.94 482 11.93
Unallocated 473 -- 588 -- 894 -- 957 -- 692 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $6,295 100.00% $6,414 100.00% $3,691 100.00% $3,858 100.00% $3,188 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Securities Activities. The Company's securities portfolio, which
represented 27.4% of the Company's average earning asset base as of December 31,
2001, 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 $186,282 at December 31, 2001 compared to $189,719 at December 31,
2000.
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.
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.
30.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The following table describes the composition of securities by major
category and maturity.
SECURITIES PORTFOLIO
(Dollars in Thousands)
December 31,
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
% of % of % of
Amount Portfolio Amount Portfolio Amount Portfolio
-------- --------- -------- --------- -------- ---------
Available-for-Sale
U.S. Treasury $ 1,036 0.56% $ 4,255 2.24% $ 5,461 3.14%
U.S. government agencies
and corporations 43,400 23.30 70,936 37.40 56,305 32.38
U.S. government agency
mortgage backed securities 86,278 46.32 34,505 18.19 29,962 17.23
States and political
Subdivisions 37,344 20.05 43,413 22.88 42,820 24.62
Collateralized mortgage
obligations 12,366 6.64 32,297 17.02 35,481 20.40
Corporate bonds -- -- -- -- -- --
Other securities 5,858 3.14 4,313 2.27 3,864 2.23
-------- -------- -------- -------- -------- --------
Total $186,282 100.00% $189,719 100.00% $173,893 100.00%
======== ======== ======== ======== ======== ========
The following table sets forth the contractual, callable or estimated
maturities and yields of the securities portfolio as of December 31, 2001.
Mortgage backed and collateralized mortgage obligation securities are included
at estimated maturity.
MATURITY SCHEDULE
(Dollars in Thousands)
Maturing
----------------------------------------------------------------------------------
After 1 but After 5 but
Within 1 Year Within 5 Years Within 10 Years After 10 Years Total
------------- -------------- --------------- -------------- -----
Amount Yield Amount Yield Amount Yield Amount Yield Amount
------ ----- ------ ----- ------ ----- ------ ----- ------
Available-for-Sale
U.S. Treasury $ -- --% $ 1,036 4.843% $ -- --% $ -- --% $ 1,036
U.S. government
agencies and
corporations 31,418 5.60 11,982 5.797 -- -- -- 43,400
U.S. government
agency mortgage
backed securities 1 8.90 68,677 4.937 12,508 5.994 5,092 6.414 86,278
States and political
Subdivisions (1) 3,290 4.95 18,799 4.844 13,227 5.074 2,028 5.366 37,344
Collateralized
mortgage obligations -- -- -- 2,786 4.209 9,580 4.528 12,366
Equity securities 5,858 -- -- -- -- -- -- 5,858
-------- -------- -------- -------- --------
Total $ 40,567 $100,494 $ 28,521 $ 16,700 $186,282
======== ======== ======== ======== ========
- --------------------
(1) Rates on obligations of states and political subdivisions have been
adjusted to tax equivalent yields using a 34% income tax rate
31.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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 $617,207 for 2001,
representing an increase of $11,964 or 2.0% compared with the average balance of
total deposits for 2000. The increase in deposits was primarily due to the
growth attributed to increased market share in 2001.
The following table sets forth certain information regarding the Banks'
average deposits.
AVERAGE DEPOSITS
(Dollars in Thousands)
For the Years Ended December 31,
---------------------------------------------------------------------------------------
2001 2000 1999
--------------------------- --------------------------- ---------------------------
% Average % Average % Average
Average of Rate Average of Rate Average of Rate
Amount Total Paid Amount Total Paid Amount Total Paid
------ ----- ---- ------ ----- ---- ------ ----- ----
Non-interest-bearing
demand deposits $ 67,577 10.95% --% 66,720 11.02% --% $ 61,458 11.12% --%
Savings accounts 46,921 7.60 2.11 48,476 8.01 2.56 57,240 10.36 2.70
Interest-bearing
demand deposits 98,808 16.01 2.38 93,171 15.39 3.09 89,752 16.25 2.75
Time, less than $100,000 224,474 36.37 5.68 179,183 29.61 5.63 215,918 39.08 5.29
Time, $100,000 or more 179,427 29.07 5.34 217,693 35.97 5.99 128,090 23.19 5.13
--------- ------ ------ --------- ------ ------ --------- ------ ------
Total deposits $ 617,207 100.00% 4.16% $ 605,243 100.00% 4.50% $ 552,458 100.00% 3.98%
========= ====== ====== ========= ====== ====== ========= ====== ======
As of December 31, 2001, average non-brokered time deposits over
$100,000 represented 29.1% of total average deposits, compared with 29.6% of
total average deposits as of December 31, 2000. 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, 2001.
TIME DEPOSITS OF $100,000 OR MORE
(Dollars in Thousands)
Maturity Range
Three months or less $ 44,049
Over three months through six months 45,715
Over six months through twelve months 22,606
Over twelve months 38,111
----------
Total $ 150,481
==========
32.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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,
----------------------------
2001 2000 1999
---- ---- ----
Return on average assets 0.59% 0.40% 0.83%
Return on average equity 7.04 5.09 9.83
Average equity to average assets 8.37 7.90 8.42
Dividend payout ratio for common stock 25.59 35.93 14.65
The increase in the return on average assets and return on average
equity ratios in 2001 was principally related to the items discussed in the
analysis above which resulted in a 53.4% increase in net income.
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 provided by operating and investing
activities, offset by those used in financing activities, resulted in a net
decrease in cash and cash equivalents of $6,322 from December 31, 2000 to
December 31, 2001.
Net cash provided by operating activities was $3,468 for 2001, $8,276
for 2000, and $2,942 for 1999. Net cash provided by investing activities,
consisting primarily of loan and investing funding, was $4,834 for 2001. Net
cash used in investing activities was $48,591 for 2000, and $46,585 for 1999.
Net cash used in financing activities, consisting primarily of decreases in
deposits partially offset by an increase in Federal Home Loan Bank advances, was
$14,624 for 2001. Net cash provided by financing activities, consisting
primarily of increases in deposits and Federal Home Loan Bank advances, was
$46,106 for 2000 and $45,810 for 1999.
33.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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, 2001, 24.6% 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 29.3%
maturing in the first quarter of 2001, 30.4% maturing in the second quarter of
2001, 15.0% maturing in the third and fourth quarters of 2001, and the remaining
25.3% 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, 2001 in
the principal amount of $9,275 payable to the Company's principal correspondent
bank. 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, 2001, approximately
$8,252 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 10.34%
and 11.66%, respectively, at December 31, 2001. 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.
34.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The following table sets forth an analysis of the Company's capital
ratios:
RISK-BASED CAPITAL RATIOS
(Dollars in Thousands)
December 31, Minimum Well
-------------------------------- Capital Capitalized
2001 2000 1999 Ratios Ratios
---- ---- ---- ------ ------
Tier 1 risk-based capital $ 55,911 $ 51,835 $ 50,115
Tier 2 risk-based capital 7,126 7,245 4,548
Total capital 63,037 59,080 54,663
Risk-weighted assets 540,626 537,549 494,953
Capital ratios
Tier 1 risk-based capital 10.34% 9.64% 10.13% 4.00% 6.00%
Tier 2 risk-based capital 11.66 10.99 11.04 8.00 10.00
Leverage ratio 7.54 6.90 7.20 4.00 5.00
As of December 31, 2001, the Tier 2 risk-based capital was comprised of
$6,295 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.
35.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The discussion under the caption "Interest Rate Sensitivity Management"
contained in Item 7 of this Form 10-K is incorporated herein by this reference.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Independent Auditors Report..................................................37
Consolidated Balance Sheets (December 31, 2001 and 2000).....................38
Consolidated Statements of Income
(For the years December 31, 2001, 2000 and 1999)....................39
Consolidated Statements of Stockholders' Equity
(For the years December 31, 2001, 2000 and 1999)....................40
Consolidated Statements of Cash Flows
(For the years December 31, 2001, 2000 and 1999)....................42
Notes........................................................................44
Supplementary Data
The Supplementary Financial Information required to be included in this
Item 8 is hereby incorporated by reference by Note 20 to the Notes to
Consolidated Financial Statements contained herein.
36.
[GRAPHIC OMITTED]
CROWE CHIZEK
REPORT OF INDEPENDENT AUDITORS
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, 2001 and 2000 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
/s/ CROWE, CHIZEK AND COMPANY LLP
-----------------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 25, 2002
37.
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000 (In Thousands)
2001 2000
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 26,699 $ 33,021
Securities available-for-sale 186,282 189,719
Loans 504,968 505,094
Allowance for loan losses (6,295) (6,414)
--------- ---------
Net loans 498,673 498,680
Premises and equipment, net 12,451 11,953
Intangible assets, net 8,607 9,552
Mortgage servicing rights 2,102 1,423
Other assets 13,493 14,385
--------- ---------
Total assets $ 748,307 $ 758,733
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 73,138 $ 72,956
Interest-bearing 539,006 563,047
--------- ---------
Total deposits 612,144 636,003
Federal funds purchased and securities sold under
agreements to repurchase 2,629 525
Advances from the Federal Home Loan Bank 52,750 43,408
Notes payable 9,275 10,275
Other liabilities 6,864 8,656
--------- ---------
Total liabilities 683,662 698,867
--------- ---------
Series B mandatory redeemable preferred stock 831 831
--------- ---------
Stockholders' equity
Preferred stock -- --
Series A Convertible Preferred Stock (aggregate
liquidation preference of $2,762) 500 500
Series C Preferred Stock -- --
Common stock 4,569 4,556
Surplus 21,841 21,734
Retained earnings 40,560 37,437
Accumulated other comprehensive income 1,536 61
Unearned compensation under stock option plans (68) (129)
--------- ---------
68,938 64,159
Treasury stock, at cost (5,124) (5,124)
--------- ---------
Total stockholders' equity 63,814 59,035
--------- ---------
Total liabilities and stockholders' equity $ 748,307 $ 758,733
========= =========
See Accompanying Notes to Consolidated Financial Statements.
38.
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2001, 2000, and 1999 (In Thousands, Except Per Share
Data)
2001 2000 1999
- -------------------------------------------------------------------------------------
Interest income
Loans $ 43,059 $ 43,237 $ 38,323
Securities
Taxable 8,655 8,649 8,151
Exempt from federal income taxes 1,972 2,033 2,002
Federal funds sold and other 143 289 73
-------- -------- --------
Total interest income 53,829 54,208 48,549
Interest expense
Deposits 25,680 27,254 22,012
Federal funds purchased and securities sold
s under agreements to repurchase 80 233 679
Advances from the Federal Home Loan Bank 3,030 2,366 1,526
Notes payable 595 832 680
-------- -------- --------
Total interest expense 29,385 30,685 24,897
-------- -------- --------
Net interest income 24,444 23,523 23,652
Provision for loan losses 4,161 4,858 1,522
-------- -------- --------
Net interest income after provision for loan losses 20,283 18,665 22,130
Noninterest income
Service charges 2,748 2,683 2,259
Merchant fee income 1,095 1,110 1,116
Trust income 687 744 711
Mortgage banking income 2,096 1,278 1,301
Insurance commissions and fees 2,407 2,862 2,595
Securities gains (losses), net 798 (29) 45
Other income 2,089 2,492 1,461
-------- -------- --------
11,920 11,140 9,488
Noninterest expenses
Salaries and employee benefits 13,700 13,468 12,244
Occupancy expense, net 1,751 1,753 1,594
Furniture and equipment expense 1,632 1,803 1,888
Supplies and printing 608 573 538
Telephone 773 749 677
Amortization of intangible assets 945 1,310 897
Other expenses 6,803 6,229 5,759
-------- -------- --------
26,212 25,885 23,597
-------- -------- --------
Income before income taxes 5,991 3,920 8,021
Income taxes 1,537 1,017 2,514
-------- -------- --------
Net income 4,454 2,903 5,507
Preferred stock dividends 257 259 259
-------- -------- --------
Net income for common stockholders $ 4,197 $ 2,644 $ 5,248
======== ======== ========
Basic earnings per common share $ 1.06 $ 0.66 $ 1.28
======== ======== ========
Diluted earnings per common share $ 1.05 $ 0.66 $ 1.27
======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
39.
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000, and 1999 (In Thousands, Except Share Data)
- -------------------------------------------------------------------------------------------------------------------------------
Unearned
Series A Accumulated Compensation
Convertible Other Under
Preferred Common Retained Comprehensive Stock Treasury
Stock Stock Surplus Earnings Income (Loss) Option Plans Stock Total
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
January 1, 1999 $ 500 $ 4,534 $ 21,471 $ 31,262 $ 31 $ (185) $ (522) $ 57,091
Common stock dividends -- -- -- (767) -- -- -- (767)
Preferred stock dividends -- -- -- (259) -- -- -- (259)
Issuance of non-
qualifying stock options -- -- 98 -- -- (98) -- --
Exercise of stock options
(4,950 shares) -- 5 39 -- -- 1 -- 45
Amortization of un-
earned compensation
under stock option plan -- -- -- -- -- 78 -- 78
Purchase 220,000 shares
of treasury stock -- -- -- -- -- -- (3,328) (3,328)
Comprehensive income
Net income -- -- -- 5,507 -- -- -- 5,507
Effect of transfer of
securities held-to-
maturity to available-for-
sale, net of income taxes -- -- -- -- 65 -- -- 65
Net decrease in fair value of
securities classified as
available-for-sale, net of
income taxes and reclassi-
fication adjustments -- -- -- -- (2,091) -- -- (2,091)
--------
Total comprehensive
income 3,481
-------- -------- -------- -------- -------- -------- -------- --------
Balance
December 31, 1999 500 4,539 21,608 35,743 (1,995) (204) (3,850) 56,341
Common stock dividends -- -- -- (950) -- -- -- (950)
Preferred stock dividends -- -- -- (259) -- -- -- (259)
Exercise of stock options
(17,239 shares) -- 17 126 -- -- -- -- 143
Amortization of un-
earned compensation
under stock option plans -- -- -- -- -- 75 -- 75
Purchase 99,000 shares
of treasury stock -- -- -- -- -- -- (1,274) (1,274)
Comprehensive income
Net income -- -- -- 2,903 -- -- -- 2,903
Net increase in fair value
of securities classified as
available-for-sale, net of
income taxes and reclassi-
fication adjustments -- -- -- -- 2,056 -- -- 2,056
--------
Total comprehensive
income 4,959
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 2000 500 4,556 21,734 37,437 61 (129) (5,124) 59,035
(Continued)
40.
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000, and 1999 (In Thousands, Except Share Data)
- -------------------------------------------------------------------------------------------------------------------------------
Unearned
Series A Accumulated Compensation
Convertible Other Under
Preferred Common Retained Comprehensive Stock Treasury
Stock Stock Surplus Earnings Income (Loss) Option Plans Stock Total
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 2000 $ 500 $ 4,556 $ 21,734 $ 37,437 $ 61 $ (129) $ (5,124) $ 59,035
Common stock dividends -- -- -- (1,074) -- -- -- (1,074)
Preferred stock dividends -- -- -- (257) -- -- -- (257)
Exercise of stock options
(13,508 shares) -- 13 107 -- -- -- -- 120
Amortization of un-
earned compensation
under stock option plans -- -- -- -- -- 61 -- 61
Comprehensive income
Net income -- -- -- 4,454 -- -- -- 4,454
Net increase in fair value
of securities classified as
available-for-sale, net of
income taxes and reclassi-
fication adjustments -- -- -- -- 1,475 -- -- 1,475
--------
Total comprehensive
income 5,929
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 2001 $ 500 $ 4,569 $ 21,841 $ 40,560 $ 1,536 $ (68) $ (5,124) $ 63,814
======== ======== ======== ======== ======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
41.
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000, and 1999 (In Thousands)
2001 2000 1999
- -----------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 4,454 $ 2,903 $ 5,507
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 1,356 1,564 1,650
Amortization of intangible assets 945 1,310 897
Amortization of unearned compensation under
stock option plans 61 75 78
Amortization of bond premiums, net 644 54 (127)
FHLB stock dividend (203) (61) --
Provision for loan losses 4,161 4,858 1,522
Provision for deferred income taxes 39 (1,017) (255)
Securities (gains) or losses, net (798) 29 (45)
Gain on sale of subsidiaries, net -- (438) --
(Gain) loss on sale of real estate acquired in
settlement of loans 26 (28) (39)
Gain on sale of loans (1,961) (788) (944)
Net loans originated for sale (1,712) (10) (5,015)
Change in assets and liabilities
(Increase) decrease in other assets (787) (3,691) 430
Increase (decrease) in other liabilities (2,757) 3,516 (717)
--------- --------- ---------
Net cash provided by operating activities 3,468 8,276 2,942
Cash flows from investing activities
Securities
Held-to-maturity
Proceeds from calls, maturities, and paydowns -- -- 1,167
Purchases -- -- (2,773)
Available-for-sale
Proceeds from maturities and paydowns 129,934 33,506 38,027
Proceeds from sales 21,582 4,483 5,655
Purchases (145,321) (50,480) (43,487)
Net increase in loans (481) (35,093) (70,467)
Purchase of premises and equipment (1,854) (233) (1,140)
Proceeds from sale of real estate acquired in
settlement of loans 974 1,141 445
Bank and bank holding company acquisitions and
sales, net of cash and cash equivalents received -- (1,915) 25,988
--------- --------- ---------
Net cash provided by (used in) investing activities 4,834 (48,591) (46,585)
(Continued)
42.
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000, and 1999 (In Thousands)
2001 2000 1999
- --------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in deposits $(23,859) $ 41,805 $ 47,641
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 2,104 (4,783) (9,547)
Net increase in advances from the
Federal Home Loan Bank 9,342 10,675 9,525
Payments on notes payable (1,000) (500) (500)
Proceeds from notes payable -- 1,275 3,000
Dividends on common stock (1,074) (950) (767)
Dividends on preferred stock (257) (259) (259)
Redemption of preferred stock -- (26) --
Proceeds from exercise of stock options 120 143 45
Purchase of treasury stock -- (1,274) (3,328)
-------- -------- --------
Net cash provided by (used in) financing activities (14,624) 46,106 45,810
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (6,322) 5,791 2,167
Cash and cash equivalents
Beginning of year 33,021 27,230 25,063
-------- -------- --------
End of year $ 26,699 $ 33,021 $ 27,230
======== ======== ========
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 31,180 $ 29,035 $ 24,284
Income taxes 1,082 2,809 3,190
See Accompanying Notes to Consolidated Financial Statements.
43.
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. The Company provides a full range of banking
services to individual and corporate customers located 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 and
its subsidiaries UnionBank, UnionBank/West, UnionBank/Central, and
UnionBank/Northwest. Significant intercompany balances and transactions have
been eliminated in consolidation.
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America 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
and fair values of financial instruments 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.
Cash flows
- ----------
Cash and cash equivalents includes cash, deposits with other financial
institutions under 90 days, and federal funds sold. Loan disbursements and
collections, repurchase agreements, federal funds purchased and transactions in
deposit accounts are reported, net.
Securities
- ----------
Securities classified as available-for-sale are those 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. Securities such as Federal Home Loan Bank stock and Federal Reserve Bank
stock are carried at cost.
Interest income is reported net of amortization of premiums and accretion of
discounts. Gains or losses from the sale of securities are determined using the
specific identification method.
(Continued)
44.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Derivatives
- -----------
All derivative instruments are recorded at their fair values. If derivative
instruments are designated as hedges of fair values, both the change in the fair
value of the hedge and the hedged item are included in current earnings. Fair
value adjustments related to cash flow hedges are recorded in other
comprehensive income and reclassified to earnings when the hedge transaction is
reflected in earnings. Ineffective portions of hedges are reflected in earnings
as they occur.
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.
Mortgage servicing rights
- -------------------------
Servicing assets represent purchased rights and the allocated value of retained
servicing rights on loans sold. Servicing assets are expensed in proportion to,
and over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the assets, using groupings of the
underlying loans as to interest rates and then, secondarily, as to geographic
and prepayment characteristics. Fair value is determined using prices for
similar assets with similar characteristics, when available, or based upon
discounted cash flows using market-based assumptions. Any impairment of a
grouping is reported as a valuation allowance.
(Continued)
45.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Foreclosed assets
- -----------------
Assets acquired through or instead of loan foreclosure are initially recorded at
fair value when acquired, establishing a new cost basis. If fair value declines,
a valuation allowance is recorded through expense. Costs after acquisition are
expensed.
Premises and equipment
- ----------------------
Land is carried at cost. 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.
Repurchase agreements
- ---------------------
Substantially all repurchase agreement liabilities represent amounts advanced by
various customers. Securities are pledged to cover these liabilities, which are
not covered by federal deposit insurance.
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.
Financial instruments
- ---------------------
Financial instruments include off-balance-sheet credit instruments, such as
commitments to make loans and standby letters of credit, issued to meet customer
financing needs. The face amount for these items represents the exposure to
loss, before considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded.
(Continued)
46.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Stockholders' Equity:
- ---------------------
Common stock
- ------------
Common stock has a $1 par value and 10,000,000 shares authorized. There were
4,569,319 and 4,555,811 common shares issued at December 31, 2001 and 2000,
including 590,263 held in treasury at December 31, 2001 and 2000. Treasury stock
is carried at cost.
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 authorized 2,765
shares of Series A Convertible Preferred Stock. There were 2,762.24
shares of Series A Convertible Preferred Stock issued at December 31,
2001 and 2000. 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
authorized 1,092 shares of Series B Mandatory Redeemable Preferred
Stock. There were 831 shares of Series B Mandatory Redeemable Preferred
Stock issued at December 31, 2001 and 2000. 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.
(Continued)
47.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Series C Junior Participating Preferred Stock: The Company has
authorized 4,500 shares of Series C Junior Participating Preferred
Stock. There were no shares issued at December 31, 2001 and 2000. 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.
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.
(Continued)
48.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
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.
New accounting pronouncements
- -----------------------------
A new accounting standard requires all business combinations to be recorded
using the purchase method of accounting for any transaction initiated after June
30, 2001. Under the purchase method, all identifiable tangible and intangible
assets and liabilities of the acquired company must be recorded at fair value at
date of acquisition, and the excess of cost over fair value of net assets
acquired is recorded as goodwill. Identifiable intangible assets must be
separated from goodwill. Identifiable intangible assets with finite useful lives
will be amortized under the new standard, whereas goodwill, both amounts
previously recorded and future amounts purchased, will cease being amortized
starting in 2002. Annual impairment testing will be required for goodwill with
impairment being recorded if the carrying amount of goodwill exceeds its implied
fair value. A portion of the goodwill recorded by the Company is related to a
branch acquisition, the resulting unidentified intangible assets are accounted
for under SFAS 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions (excluded from the scope of SFAS 142) and will, therefore, continue
to be amortized to expense. Thus, adoption of this standard on January 1, 2002
will result in lower amortization expense of $518 during the year ending
December 31, 2002.
Reclassification
- ----------------
Certain items in the financial statements as of and for the years ended December
31, 2000 and 1999 have been reclassified, with no effect on net income, to
conform with the current year presentation.
Note 2. Business Acquisitions and Divestitures
2000
- ----
On August 24, 2000, the Company sold the deposits and premises of a
UnionBank/West branch location. At the date of sale, the branch had
approximately $2,659 in deposits and $162 in fixed assets. The sales price was
$600.
1999
- ----
On December 10, 1999, the Company acquired the Rushville branch of Associated
Bank Illinois, National Association. At the date of purchase, the branch had
deposits of $28,900, premises and equipment of $103, and loans of $4. The total
acquired cost of $2,800 resulted in goodwill of $2,700. This transaction was
recorded using the purchase method of accounting. As such, the results of
operations are excluded from the consolidated statements of income for periods
prior to the acquisition date.
(Continued)
49.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 3. Securities
The fair value of securities available-for-sale and the related gains and losses
recognized in accumulated other comprehensive income were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
-------- -------- --------
Available-for-sale
December 31, 2001
U.S. Treasury $ 1,036 $ 30 $ --
U.S. government agencies 43,400 727 (75)
States and political subdivisions 37,344 829 (77)
U.S. government agency mortgage-backed
securities 86,278 876 (154)
Collateralized mortgage obligations 12,366 345 --
Equity securities 5,858 -- --
-------- -------- --------
$186,282 $ 2,807 $ (306)
======== ======== ========
Available-for-sale
December 31, 2000
U.S. Treasury $ 4,255 $ 1 $ (7)
U.S. government agencies 70,936 313 (344)
States and political subdivisions 43,413 734 (92)
U.S. government agency mortgage-backed
securities 34,505 79 (200)
Collateralized mortgage obligations 32,297 204 (588)
Equity securities 4,313 -- --
-------- -------- --------
$189,719 $ 1,331 $ (1,231)
======== ======== ========
At December 31, 2001, approximately 87% of the fair value of equity securities
consists of Federal Home Loan Bank stock and Federal Reserve Bank stock.
Sales of securities available-for-sale were as follows:
Years Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Proceeds $ 21,582 $ 4,483 $ 5,655
Realized gains 798 -- 45
Realized losses -- (29) --
(Continued)
50.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 3. Securities (Continued)
The fair value of securities classified as available-for-sale at December 31,
2001, by contractual maturity, are shown below. Securities not due at a single
maturity date, primarily mortgage-backed securities and collateral and mortgage
obligations, are shown separately.
Fair Value
----------
Due in one year or less $ 34,708
Due after one year through five years 31,817
Due after five years through ten years 13,227
Due after ten years 2,028
U.S. government agency mortgage-backed securities 86,278
Collateralized mortgage obligations 12,366
Equity securities 5,858
----------
$ 186,282
==========
As of December 31, 2001, the Company held callable securities carried at a fair
value of $43,400. The amortized cost of these securities was $42,748, as of
December 31, 2001.
Securities with carrying values of approximately $149,000 and $167,000 at
December 31, 2001 and 2000, respectively, were pledged to secure public deposits
and securities sold under agreements to repurchase and for other purposes as
required or permitted by law.
Note 4. Loans
The major classifications of loans follow:
December 31,
------------------------
2001 2000
---------- ----------
Commercial $ 147,945 $ 156,013
Commercial real estate 150,878 134,942
Real estate 145,602 154,837
Real estate loans held for sale 7,053 3,380
Installment 50,961 53,276
Other 2,529 2,646
---------- ----------
$ 504,968 $ 505,094
========== ==========
(Continued)
51.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 4. Loans (Continued)
The following table presents data on impaired loans:
December 31,
------------------------
2001 2000 1999
------------------------
Year-end impaired loans for which an allowance
has been provided $6,419 $3,125 $1,063
Year-end impaired loans for which no allowance
has been provided 840 3,134 1,886
------ ------ ------
Total loans determined to be impaired $7,259 $6,259 $2,949
====== ====== ======
Allowance for loan loss for impaired loans included
in the allowance for loan losses $1,235 $1,699 $ 422
====== ====== ======
Average recorded investment in impaired loans $8,184 $3,290 $2,991
====== ====== ======
Interest income recognized from impaired loans $ -- $ 32 $ 3
====== ====== ======
Cash basis interest income recognized from impaired loans $ -- $ -- $ --
====== ====== ======
The Company and its subsidiaries conduct most of their business activities,
including granting agribusiness, commercial, residential, and installment loans,
with customers located 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 $75,174 and $78,137
as of December 31, 2001 and 2000, respectively.
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, 2001 follow:
Balance at December 31, 2000 $ 26,361
New loans, extensions, and modifications 33,456
Repayments (30,470)
Change in classification 5,082
----------
Balance at December 31, 2001 $ 34,429
==========
(Continued)
52.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 5. Loan Servicing
The following summarizes the secondary mortgage market activities:
Years Ended December 31,
----------------------------------
2001 2000 1999
-------- -------- --------
Proceeds from sale of mortgage loans $137,393 $ 51,387 $ 60,145
======== ======== ========
Gain on sale of mortgage loans $ 1,961 $ 788 $ 944
======== ======== ========
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,
-------------------------
2001 2000
--------- ---------
Federal Home Loan Mortgage Corporation $ 12,274 $ 19,004
Federal National Mortgage Association 229,210 158,656
Small Business Administration 8,134 10,293
Other 3,450 3,360
--------- ---------
$ 253,068 $ 191,313
========= =========
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $1,016 and $761 at December 31, 2001 and 2000,
respectively.
Following is an analysis of the changes in originated mortgage servicing rights:
Years Ended December 31,
---------------------------------
2001 2000 1999
------- ------- -------
Balance at beginning of year $ 1,423 $ 1,201 $ 727
Originated mortgage servicing rights 1,288 402 594
Amortization (609) (180) (120)
------- ------- -------
Balance at end of year $ 2,102 $ 1,423 $ 1,201
======= ======= =======
Loans held for sale, which are included in real estate loans, are summarized as
follows:
December 31,
----------------------
2001 2000
------- -------
Secured by one-to-four-family residences $ 5,334 $ 1,444
Small Business Administration loans 1,719 1,936
------- -------
$ 7,053 $ 3,380
======= =======
(Continued)
53.
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,
-----------------------------------
2001 2000 1999
------- ------- -------
Balance at beginning of year $ 6,414 $ 3,691 $ 3,858
Provision for loan losses 4,161 4,858 1,522
Recoveries 395 116 183
Loans charged off (4,675) (2,251) (1,872)
------- ------- -------
Balance at end of year $ 6,295 $ 6,414 $ 3,691
======= ======= =======
Note 7. Premises and Equipment
Premises and equipment consisted of:
December 31,
-------------------------
2001 2000
--------- ---------
Land $ 1,032 $ 1,032
Buildings 13,238 12,879
Furniture and equipment 13,478 12,088
--------- ---------
27,748 25,999
Less accumulated depreciation 15,297 14,046
--------- ---------
$ 12,451 $ 11,953
========= =========
Note 8. Deposits
Deposit account balances by type are summarized as follows:
December 31,
-------------------------
2001 2000
--------- ---------
Non-interest-bearing demand deposits $ 73,138 $ 72,956
Savings, NOW, and money market accounts 149,599 135,025
Time deposits of $100 or more 150,481 208,372
Other time deposits 238,926 219,650
--------- ---------
$ 612,144 $ 636,003
========= =========
(Continued)
54.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 8. Deposits (Continued)
At December 31, 2001, the scheduled maturities of time deposits are as follows:
Year Amount
---- ------
2002 $ 268,967
2003 59,556
2004 51,548
2005 5,159
2006 and thereafter 4,177
----------
$ 389,407
==========
Time certificates of deposit in denominations of $100 or more mature as follows:
December 31,
---------------------------
2001 2000
---------- ----------
3 months or less $ 44,049 $ 70,515
Over 3 months through 6 months 45,715 47,427
Over 6 months through 12 months 22,606 59,851
Over 12 months 38,111 30,579
---------- ----------
$ 150,481 $ 208,372
========== ==========
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,
---------------------------
2001 2000
---------- ----------
Federal funds purchased $ 200 $ --
Securities sold under agreements to repurchase 2,429 525
---------- ----------
$ 2,629 $ 525
========== ==========
Federal funds purchased and securities sold under agreement to repurchase
generally mature within one to ninety days from the transaction date.
(Continued)
55.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 9. Borrowed Funds (Continued)
At December 31, 2001, $18 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 $73,920
million of first mortgage loans on improved residential and mixed use farm
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, 2001 are as follows:
Average
Year Interest Rate Amount
---- ------------- ------
2002 3.01% $ 16,950
2003 4.77 2,000
2004 2.52 14,500
2005 6.18 4,000
2006 and Thereafter 5.02 15,300
---------
$ 52,750
=========
Notes payable consisted of the following at December 31, 2001 and 2000:
2001 2000
------- -------
Line of credit loan ($5,000) to LaSalle National Bank;
interest due quarterly at the 180-day LIBOR plus 1.50%;
balance due on October 1, 2002; secured by 100% of the
stock of the subsidiary banks. $ 5,000 $ 6,000
Revolving credit loan ($10,000) to LaSalle National Bank;
interest due quarterly at the 180-day LIBOR plus 1.50%;
balance due at October 1, 2002; secured by 100% of the
stock of the subsidiary banks. 4,275 4,275
------- -------
$ 9,275 $10,275
======= =======
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, 2001.
Information concerning borrowed funds is as follows:
Years Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Federal Funds Purchased
Maximum month-end balance during the year $ 2,900 $ 11,999 $ 13,000
Average balance during the year $ 1,160 $ 1,640 $ 4,178
Weighted average interest rate for the year 3.48% 7.17% 5.33%
Weighted average interest rate at year end 2.00% N/A 6.00%
(Continued)
56.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 9. Borrowed Funds (Continued)
Years Ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
Securities Sold Under Agreements to Repurchase
Maximum month-end balance during the year $ 5,793 $ 7,344 $ 22,830
Average balance during the year $ 1,315 $ 1,931 $ 8,872
Weighted average interest rate for the year 3.04% 5.96% 5.22%
Weighted average interest rate at year end 3.69% 6.06% 5.78%
Advances from the Federal Home Loan Bank
Maximum month-end balance during the year $ 66,408 $ 43,408 $ 33,733
Average balance during the year $ 54,064 $ 37,326 $ 27,636
Weighted average interest rate for the year 5.60% 6.34% 5.52%
Weighted average interest rate at year end 3.76% 6.43% 5.74%
Notes Payable
Maximum month-end balance during the year $ 10,275 $ 10,775 $ 10,000
Average balance during the year $ 9,719 $ 10,348 $ 9,530
Weighted average interest rate for the year 6.13% 8.04% 7.14%
Weighted average interest rate at year end 4.11% 8.00% 7.20%
Note 10. Income Taxes
Income taxes consisted of:
Years Ended December 31,
-------------------------------------
2001 2000 1999
------- ------- -------
Federal
Current $ 1,219 $ 1,827 $ 2,394
Deferred 279 (828) 5
------- ------- -------
1,498 999 2,399
State
Current (26) 207 375
Deferred 65 (189) (260)
------- ------- -------
39 18 115
------- ------- -------
$ 1,537 $ 1,017 $ 2,514
======= ======= =======
(Continued)
57.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 10. Income Taxes (Continued)
The Company's income tax expense differed from the statutory federal rate of 34%
as follows:
Years Ended December 31,
-----------------------------
2001 2000 1999
------- ------- -------
Expected income taxes $ 2,037 $ 1,333 $ 2,727
Income tax effect of
Interest earned on tax-free investments and loans (736) (763) (757)
Nondeductible interest expense incurred to
carry tax-free investments and loans 120 130 112
Nondeductible amortization 131 227 164
State income taxes, net of federal tax benefit 36 2 245
Other (51) 88 23
------- ------- -------
$ 1,537 $ 1,017 $ 2,514
======= ======= =======
The significant components of deferred income tax assets and liabilities
consisted of:
December 31,
--------------------
2001 2000
------- -------
Deferred tax assets
Allowance for loan losses $ 2,446 $ 2,492
Deferred compensation, other 236 263
------- -------
Total deferred tax assets 2,682 2,755
Deferred tax liabilities
Depreciation (527) (537)
Basis adjustments arising from acquisitions (495) (523)
Securities available-for-sale (965) (39)
Other (1,473) (1,164)
------- -------
Total deferred tax liabilities (3,460) (2,263)
------- -------
Net deferred tax assets (liabilities) $ (778) $ 492
======= =======
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 485,055 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 $335, $280, and $512 for
the years ended December 31, 2001, 2000, and 1999, respectively.
(Continued)
58.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 11. Benefit Plans (Continued)
Effective January 1, 1999, 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 $149 for the year ended December 31, 2001 and $132 for each of the
years ended December 31, 2000 and 1999.
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.
A summary of the status of the option plans as of December 31, 2001, 2000, and
1999 and changes during the years ended on those dates is presented below.
2001 2000 1999
---------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------
Outstanding at beginning
of year 245,141 $ 11.55 310,678 $ 12.22 199,878 $ 10.73
Granted 57,882 11.75 -- -- 116,250 14.53
Exercised (13,508) 8.38 (17,239) 7.93 (4,950) 5.88
Forfeited (24,900) 16.29 (48,298) 14.62 (500) 15.00
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at end of year 264,615 11.78 245,141 11.55 310,678 12.22
========== ========== ==========
Options exercisable at
year end 135,170 $ 10.17 122,791 $ 9.69 110,212 $ 8.69
========== ========== ========== ========== ========== ==========
Weighted-average fair
value of options granted
during the year $ 3.98 N/A $ 6.04
========== ========== ==========
(Continued)
59.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 12. Stock Option Plans (Continued)
Options outstanding at year-end 2001 were as follows:
-------Outstanding------ ------Exercisable------
----------- -----------
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Number Life Number Price
$ 5.04 - $ 8.33 59,940 3 years 59,940 $ 6.45
9.67 - 13.00 84,475 8 years 24,430 10.17
13.88 - 18.50 120,200 7 years 50,800 14.56
--------- --------- --------- ---------
264,615 6.2 years 135,170 $ 10.17
========= ========= ========= =========
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. The compensation cost
charged to income for nonqualified stock option grants was $61, $75, and $78 for
the years ended December 31, 2001, 2000, and 1999, respectively. Had the
compensation cost for all of the stock-based compensation plans been determined
based on the grant date using the estimated fair value under SFAS 123, reported
income and earnings per common share would have been reduced to the pro forma
amounts shown below:
2001 2000 1999
-------- -------- --------
Net income for common stockholders
As reported $ 4,197 $ 2,644 $ 5,248
Pro forma 4,005 2,449 4,991
Basic earnings per common share
As reported 1.06 .66 1.28
Pro forma 1.01 .62 1.22
Diluted earnings per common share
As reported 1.05 .66 1.27
Pro forma 1.00 .61 1.21
There were no stock options granted in 2000. The fair value of the options
granted in 2001 and 1999 is estimated at $3.99 and $6.04, respectively, as of
the date of grant using the Black Scholes options value model with the following
assumptions:
2001 2000 1999
-------- -------- --------
Dividend yield 2.03% -- 1.23%
Risk-free interest rate 4.90% -- 5.50%
Average life 7 -- 7
Expected volatility of stock price 29.58% -- 28.69%
(Continued)
60.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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 97,800 shares of common stock were
outstanding at December 31, 2001 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.
2001 2000 1999
------ ------ ------
Basic earnings per share
Net income available to common stockholders $4,197 $2,644 $5,248
====== ====== ======
Weighted average common shares outstanding 3,974 3,980 4,085
====== ====== ======
Basic earnings per share $ 1.06 $ 0.66 $ 1.28
====== ====== ======
Weighted average common shares outstanding 3,974 3,980 4,085
Add dilutive effect of assumed exercised stock
options 35 27 48
------ ------ ------
Weighted average common and dilutive
potential shares outstanding 4,009 4,007 4,133
====== ====== ======
Diluted earnings per share $ 1.05 $ 0.66 $ 1.27
====== ====== ======
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, 2001, that the Company
and the Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 2001, the most recent notification from the corresponding
regulatory agency categorized the Banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the Banks'
categories.
(Continued)
61.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 14. Regulatory Matters (Continued)
To Be Well
Capitalized Under
To Be Adequately Prompt Corrective
Actual Capitalized Action Provisions
----------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------
As of December 31, 2001
Total capital (to risk-
weighted assets)
UnionBancorp, Inc. $63,037 11.66% $43,250 8.00% $54,063 10.00%
UnionBank 39,937 12.40 25,763 8.00 32,204 10.00
UnionBank/Central 11,832 13.78 6,869 8.00 8,587 10.00
UnionBank/West 15,617 13.80 9,050 8.00 11,313 10.00
Tier I capital (to risk-
weighted assets)
UnionBancorp, Inc. $55,911 10.34% $21,625 4.00% $32,438 6.00%
UnionBank 36,183 11.24 12,882 4.00 19,323 6.00
UnionBank/Central 10,782 12.56 3,435 4.00 5,152 6.00
UnionBank/West 14,378 12.71 4,525 4.00 6,788 6.00
Tier I leverage ratio (to
average assets)
UnionBancorp, Inc. $55,911 7.54% $29,678 4.00% $37,097 5.00%
UnionBank 36,183 8.48 17,063 4.00 21,329 5.00
UnionBank/Central 10,782 8.10 5,326 4.00 6,658 5.00
UnionBank/West 14,378 9.44 6,090 4.00 7,613 5.00
As of December 31, 2000
Total capital (to risk-
weighted assets)
UnionBancorp, Inc. $59,080 10.99% $43,004 8.00% $53,755 10.00%
UnionBank 35,864 11.38 25,202 8.00 31,503 10.00
UnionBank/Central 10,843 12.61 6,878 8.00 8,598 10.00
UnionBank/West 14,319 12.52 9,150 8.00 11,437 10.00
Tier I capital (to risk-
weighted assets)
UnionBancorp, Inc. $51,835 9.64% $21,502 4.00% $32,253 6.00%
UnionBank 31,926 10.13 12,601 4.00 18,902 6.00
UnionBank/Central 10,242 11.91 3,439 4.00 5,158 6.00
UnionBank/West 13,532 11.83 4,575 4.00 6,862 6.00
Tier I leverage ratio (to
average assets)
UnionBancorp, Inc. $51,835 6.90% $30,063 4.00% $37,580 5.00%
UnionBank 31,926 7.52 16,977 4.00 21,222 5.00
UnionBank/Central 10,242 7.92 5,171 4.00 6,464 5.00
UnionBank/West 13,532 8.10 6,679 4.00 8,349 5.00
(Continued)
62.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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.
The estimated fair values of the Company's financial instruments were as
follows:
December 31,
-----------------------------------------
2001 2000
-----------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Financial assets
Cash and cash equivalents $ 26,699 $ 26,699 $ 33,021 $ 33,021
Securities 186,282 186,282 189,719 189,719
Loans 498,673 497,284 498,680 494,758
Accrued interest receivable 7,039 7,039 8,024 8,024
Financial liabilities
Deposits 612,144 618,866 636,003 635,805
Federal funds purchased and
securities sold under
agreements to repurchase 2,629 2,629 525 525
Advances from the Federal
Home Loan Bank 52,750 52,307 43,408 43,498
Notes payable 9,275 9,275 10,275 10,275
Accrued interest payable 3,954 3,954 5,749 5,749
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.
(Continued)
63.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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.
The contractual amounts of these instruments reflect the extent of involvement
in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit written is represented by the contractual amount of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance-sheet instruments. Financial
instruments whose contract amounts represent credit risk are as follows:
Standby Range of Rates
Letters Variable Rate Fixed Rate Total on Fixed Rate
of Credit Commitments Commitments Commitments Commitments
--------- ----------- ----------- ----------- -----------
Commitments to extend
credit and standby
letters of credit
December 31, 2001 $ 2,858 $51,161 $14,735 $65,896 5.50% - 7.99%
December 31, 2000 $ 2,917 $14,497 $25,303 $42,717 6.75% - 18.00%
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.
(Continued)
64.
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 2001 2000
----------------------
Cash and cash equivalents $ 487 $ 327
Investment in subsidiaries 72,421 69,905
Premises and equipment 1,202 293
Other assets 590 340
------- -------
$74,700 $70,865
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
----------------------
Liabilities 2001 2000
----------------------
Notes payable $ 9,275 $10,275
Other liabilities 780 724
------- -------
10,055 10,999
Mandatory redeemable preferred stock 831 831
Stockholders' equity 63,814 59,035
------- -------
$74,700 $70,865
======= =======
(Continued)
65.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 17. Condensed Financial Information - Parent Company Only (Continued)
Income Statements (Parent Company Only)
Years Ended December 31,
-----------------------------
2001 2000 1999
-----------------------------
Dividends from subsidiaries $ 3,523 $ 3,429 $ 3,346
Management fees and other 1,796 21 38
Interest expense 592 827 670
Other expenses 4,491 3,299 2,791
Income tax benefit (1,161) (1,564) (1,297)
Equity in undistributed earnings of subsidiaries 3,057 2,015 4,287
------- ------- -------
Net income 4,454 2,903 5,507
Less dividends on preferred stock 257 259 259
------- ------- -------
Net income on common stock $ 4,197 $ 2,644 $ 5,248
======= ======= =======
Statements of Cash Flows (Parent Company Only)
Years Ended December 31,
-----------------------------
2001 2000 1999
-----------------------------
Cash flows from operating activities
Net income $ 4,454 $ 2,903 $ 5,507
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 405 101 121
Undistributed earnings of subsidiaries (3,057) (2,015) (4,287)
Amortization of deferred compensation -
stock options 61 75 78
Loss on sale of assets -- 116 --
(Increase) decrease in other assets 250 22 (1)
Increase (decrease) in other liabilities 56 206 (563)
------- ------- -------
Net cash provided by operating activities 2,169 1,408 855
Cash flows from investing activities
Purchases of premises and equipment (643) (13) (103)
Investment in subsidiaries 845 -- --
------- ------- -------
Net cash provided by (used in) financing
activities 202 (13) (103)
(Continued)
66.
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,
------------------------------
2001 2000 1999
------------------------------
Cash flows from financing activities
Net increase (decrease) in notes payable $(1,000) $ 775 $ 2,500
Dividend paid on common stock (1,074) (950) (767)
Dividends paid on preferred stock (257) (259) (259)
Proceeds from exercise of stock options 120 143 45
Purchase of treasury stock -- (1,274) (3,328)
------- ------- -------
Net cash used in financing activities (2,211) (1,565) (1,809)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 160 (170) (1,057)
Cash and cash equivalents
Beginning of year 327 497 1,554
------- ------- -------
End of year $ 487 $ 327 $ 497
======= ======= =======
Note 18. Other Comprehensive Income (Loss)
Changes in other comprehensive income (loss) components and related taxes are as
follows:
Years Ended December 31,
------------------------------
2001 2000 1999
------------------------------
Change in unrealized gains (losses) on
securities available-for-sale $ 3,199 $ 3,328 $(3,370)
Reclassification adjustment for (gains)
losses recognized in income (798) 29 (45)
Reclassification adjustment for unrealized
gains on securities held-to-maturity
transferred to available-for-sale -- -- 106
------- ------- -------
Net unrealized gains (losses) 2,401 3,357 (3,309)
Tax expense 926 1,301 1,283
------- ------- -------
Other comprehensive income (loss) $ 1,475 $ 2,056 $(2,026)
======= ======= =======
(Continued)
67.
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, deposits, and mortgage banking provide the revenues in the banking
segment, and insurance, trust, and holding company services are categorized as
other segments.
The accounting policies used are the same as those described in the summary of
significant accounting policies. Segment performance is evaluated using net
interest income. Information reported internally for performance assessment
follows.
Banking Other Consolidated
Segment Segments Totals
-------- -------- --------
2001
- ----
Net interest income (loss) $ 25,000 $ (556) $ 24,444
Other revenue 6,105 5,815 11,920
Other expense 19,608 6,604 26,212
Segment profit 7,430 (1,439) 5,991
Noncash items
Depreciation 905 451 1,356
Provision for loan loss 4,161 -- 4,161
Amortization of goodwill and other intangibles 809 136 945
Segment assets 741,083 7,224 748,307
2000
- ----
Net interest income (loss) $ 24,259 $ (736) $ 23,523
Other revenue 6,335 4,805 11,140
Other expense 21,433 4,452 25,885
Segment profit 4,303 (383) 3,920
Noncash items
Depreciation 948 616 1,564
Provision for loan loss 4,858 -- 4,858
Amortization of goodwill and other intangibles 1,138 172 1,310
Segment assets 749,859 8,874 758,733
1999
- ----
Net interest income (loss) $ 24,319 $ (667) $ 23,652
Other revenue 5,850 3,638 --
Other expense 19,507 4,090 23,597
Segment profit 9,140 (1,119) 8,021
Noncash items
Depreciation 953 697 1,650
Provision for loan loss 1,522 -- 1,522
Amortization of goodwill and other intangibles 702 195 897
Segment assets 695,795 8,212 704,007
(Continued)
68.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 20. Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2001 Year Ended December 31, 2000
Three Months Ended Three Months Ended
--------------------------------------------- ----------------------------------------------
(A)Dec. 31 Sep. 30 June 30 March 31 (B)Dec. 31 Sep. 30 June 30 (C)March 31
-------- -------- -------- -------- -------- -------- -------- --------
Total interest income $ 12,498 $ 13,236 $ 13,923 $ 14,172 $ 14,137 $ 13,848 $ 13,290 $ 12,933
Total interest expense (6,136) (7,070) (7,816) (8,363) (8,518) (7,991) (7,308) (6,868)
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income 6,362 6,166 6,107 5,809 5,619 5,857 5,982 6,065
Provision for loan losses 2,890 596 366 309 2,859 753 653 593
Noninterest income 3,045 3,045 3,018 2,812 2,806 3,015 2,541 2,778
Noninterest expense 7,075 6,531 6,476 6,130 6,525 6,202 6,306 6,852
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes (558) 2,084 2,283 2,182 (959) 1,917 1,564 1,398
Income tax expense
(benefit) (424) 616 698 647 (527) 668 476 400
-------- -------- -------- -------- -------- -------- -------- --------
(134) 1,468 1,585 1,535 (432) 1,249 1,088 998
Preferred stock dividend 63 64 65 65 65 64 65 65
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) for
common stockholders $ (197) $ 1,404 $ 1,520 $ 1,470 $ (497) $ 1,185 $ 1,023 $ 933
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings (loss)
per share $ (0.04) $ 0.35 $ 0.38 $ 0.37 $ (0.13) $ 0.30 $ 0.26 $ 0.23
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss)
per share $ (0.05) $ 0.35 $ 0.38 $ 0.37 $ (0.13) $ 0.30 $ 0.26 $ 0.23
======== ======== ======== ======== ======== ======== ======== ========
(A) The net loss for the three months ended December 31, 2001 is due to the
increase in the provision for loan losses, which was influenced by
deterioration in overall credit quality and the impact of various
identified credits. In addition, during the three months ended December 31,
2001, the Company also instituted various tax planning strategies to reduce
tax expense.
(B) 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.
(C) 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.
69.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information beginning on page 2 of the Company's 2002 Proxy
Statement under the caption "Election of Directors" and on pages 4 through 6 of
the 2002 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 2002 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 2002 Proxy
Statement, the names and ages of the executive officers of the Company as of
December 31, 2001, 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, 48, 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 and UnionBank/West. 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, 62, 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 serves on
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, 55, 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.
In 2001, Mr. Martin was also named to the Board of Directors of UnionBank/West.
Kurt R. Stevenson, 35, 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 and 2001, Mr. Stevenson served on the Board of
Directors of UnionFinancial Services, Inc., prior to its integration with
UnionTrust Corporation. 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.
70.
Item 11. Executive Compensation
The information on pages 6 through 8 of the 2002 Proxy Statement under
the caption "Executive Compensation" is incorporated by reference, excluding
however the information contained under the sub-heading "Board Compensation
Committee Report on Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information on pages 4 through 6 of the 2002 Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners and Management" is
incorporated by reference.
Item 13. Certain Relationships and Related Transactions
The information on page 11 of the 2002 Proxy Statement under the
caption "Transactions with Management" is incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Index to Financial Statements
The index to Financial Statements is contained in Item 8, appearing on
page 36 of this Form 10-K.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not required or applicable,
or the required information is shown in the Consolidated Financial
Statements or the notes thereto.
(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 December 28, 2001, 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, 2001.
(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.
71.
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 15, 2002.
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 15, 2002.
/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
Incorporated
Exhibit Herein By Filed
No. Description Reference To Herewith
--- ----------- ------------ --------
3.1 Restated Certificate of Incorporated by reference
Incorporation of from Exhibit 3.1 to the
UnionBancorp, Inc., as Registration Statement on
amended Form S-1 filed by the
Company on August 19, 1996
1996 (SEC File No. 33-
9891), as amended
3.2 Bylaws of Incorporated by reference
UnionBancorp, Inc. from Exhibit 3.2 to the
Registration Statement on
Form S-1 filed by the
Company on August 19,
1996 (SEC File No. 33-
9891), as amended
4.1 Certificate of Incorporated by reference
Designation, Preferences from Exhibit 4.3 to the
and Rights of Series A Registration Statement on
Convertible Preferred Form S-1 filed by the
Stock of UnionBancorp, Company on August 19,
Inc. 1996 (SEC File No. 33-
9891), as amended
4.2 Certificate of Incorporated by reference
Designation, Preferences from Exhibit 4.4 to the
and Rights of Series B Registration Statement on
Preferred Stock of Form S-1 filed by the
UnionBancorp, Inc. Company on August 19,
1996 (SEC File No. 33-
9891), as amended
4.3 Certificate of Incorporated by reference
Designation, Preferences from Exhibit 4.5 to the
and Rights of Series C Registration Statement on
Junior Participating Form S-1 filed by the
Preferred Stock Company on August 19,
1996 (SEC File No. 33-
9891), as amended
Incorporated
Exhibit Herein By Filed
No. Description Reference To Herewith
--- ----------- ------------ --------
4.4 Specimen Common Incorporated by reference
Stock Certificate of from Exhibit 4.6 to the
UnionBancorp, Inc. Registration Statement on
Form S-1 filed by the
Company on August 19,
1996 (SEC File No. 33-
9891), as amended
4.5 Rights Agreement Incorporated by reference
between UnionBancorp, from Exhibit 4.7 to the
Inc. and Harris Trust and Registration Statement on
Savings Bank, dated Form S-1 filed by the
August 5, 1996 Company on August 19,
1996 (SEC File No. 33-
9891), as amended
10.1 Registration Agreement Incorporated by reference
dated August 6, 1996, from Exhibit 10.10 to the
between UnionBancorp, Registration Statement on
Inc. and each of Wayne Form S-1 filed by the
W. Whalen and Dennis Company on August 19,
J. McDonnell 1996 (SEC File No. 33-
9891), as amended
10.2 Loan Agreement Incorporated by reference
between UnionBancorp, from Exhibit 10.11 to the
Inc. and LaSalle Registration Statement on
National Bank dated Form S-1 filed by the
August 2, 1996 Company on August 19,
1996 (SEC File No. 33-
9891), as amended
10.3 UnionBancorp, Inc. Incorporated by reference
Employee Stock from Exhibit 10.12 to the
Ownership Plan Registration Statement on
Form S-1 filed by the
Company on August 19,
1996 (SEC File No. 33-
9891), as amended
10.4 UnionBancorp, Inc. 1993 Incorporated by reference
Stock Option Plan, as from Exhibit 10.13 to the
amended Registration Statement on
Form S-1 filed by the
Company on August 19,
1996 (SEC File No. 33-
9891), as amended
Incorporated
Exhibit Herein By Filed
No. Description Reference To Herewith
--- ----------- ------------ --------
10.5 UnionBancorp, Inc. 2000 Incorporated by reference
Incentive Compensation from Exhibit 10.1 to
Plan UnionBancorp's
Quarterly Report on Form
10-Q for the quarter
ended September 30,
2001 as filed with the
SEC on November 13,
2001
10.6 Employment Agreement Incorporated by reference
between UnionBancorp, from Exhibit 10.2 to
Inc. and Paul R. Tingley UnionBancorp's
dated August 22, 2001 Quarterly Report on Form
10-Q for the quarter
ended September 30,
2001 as filed with the
SEC on November 13,
2001
13.1 Portions of the 2001 *
Annual Report to
Stockholders (as
incorporated by
reference into this Form
10-K)
21.1 Subsidiaries of
UnionBancorp, Inc. *
23.1 Consent of Crowe, *
Chizek and Company
LLP
99.1 Portions of the 2002 Incorporated by reference
Proxy Statement (as from the Schedule 14A
incorporated by filed by the Company on
reference into this Form March 15, 2002 (SEC File
10-K) No. 0-28846)