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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, 2002
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)
(Title of Class)
Preferred Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X].
As of March 3, 2003, the Registrant had issued and outstanding 3,986,046
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 3, 2003, was
$28,428,632.*
* Based on the last reported price $16.43 of an actual transaction in the
Registrant's Common Stock on March 3, 2003, 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 2002 Annual Report to Stockholders
(the "2002 Annual Report") are incorporated by reference into Part II of this
Form 10-K.
Certain portions of the Proxy Statement for the 2003 Annual Meeting of
Stockholders (the "2003 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............................................ 12
Item 7A. Quantitative and Qualitative Disclosure about Market Risk............ 37
Item 8. Financial Statements and Supplementary Data.......................... 37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .......................................... 73
PART III
Item 10. Directors and Executive Officers of the Registrant................... 73
Item 11. Executive Compensation............................................... 74
Item 12. Security Ownership of Certain Beneficial Owners and Management....... 74
Item 13. Certain Relationships and Related Transactions....................... 74
Item 14. Controls and Procedures...............................................74
Item 15. Exhibits, Financial Statement Schedules and Reports
On Form 8-K.....................................................74
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-four 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 electronic
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-five
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 interstate 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 home banking and 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, and future action stemming from the Act, is expected to
continue to significantly change the competitive environment in which the
Company and the Banks 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, 2002, the Company employed 356 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 programs and 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
3.
of supervision and regulation applicable to the Company and its subsidiaries
establishes a comprehensive framework for their respective operations and is
intended primarily for the protection of the FDIC's deposit insurance funds and
the depositors, rather than the shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiaries. It does not describe
all of the statutes, regulations and regulatory policies that apply to the
Company and its subsidiaries, nor does it restate all of the requirements of the
statutes, regulations and regulatory policies that are described. As such, the
following is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of the Company
and its subsidiaries.
The Company
General. The Company, as the sole stockholder of UnionBank; Prairie, as
the sole 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
4.
(including software development), and mortgage banking and brokerage. The BHCA
generally does not place territorial restrictions on the domestic activities of
non-bank subsidiaries of bank holding companies.
Federal law also prohibits any person or company from acquiring
"control" of a bank or bank holding company without prior notice to the
appropriate federal bank regulator. "Control" is defined in certain cases as the
acquisition of 10% of the outstanding shares of a bank or bank holding company.
Capital Requirements. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: a risk-based
requirement expressed as a percentage of total risk-weighted assets, and a
leverage requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, at least one-half of which must be Tier 1 capital. The leverage
requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated companies, with a minimum requirement of 4% for all
others. For purposes of these capital standards, Tier 1 capital consists
primarily of permanent stockholders' equity less intangible assets (other than
certain mortgage servicing rights and purchased credit card relationships).
Total capital consists primarily of Tier 1 capital plus certain other debt and
equity instruments which do not qualify as Tier 1 capital and a portion of the
company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking organizations.
For example, the Federal Reserve's capital guidelines contemplate that
additional capital may be required to take adequate account of, among other
things, interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any banking
organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e., Tier 1
capital less all intangible assets), well above the minimum levels.
As of December 31, 2002, 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 11.84% 7.48%
Prairie 14.82% 8.76%
Country 12.77% 8.50%
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.
5.
Further, the Illinois Business Corporation Act, as amended, prohibits an
Illinois corporation, such as Prairie or Country, from paying a dividend if,
after giving effect to the dividend: (i) the corporation would be insolvent; or
(ii) the net assets of the corporation would be less than zero; or (iii) the net
assets of the corporation would be less than the maximum amount then payable to
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, 2002, BIF assessments ranged from 0%
of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 2003, 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.
6.
FICO Assessments. Since 1987, a portion of the deposit insurance
assessments paid by members of the FDIC's Savings Association Insurance Fund
("SAIF") has been used to cover interest payments due on the outstanding
obligations of the Financing Corporation ("FICO"). FICO was created in 1987 to
finance the recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. As a result of federal
legislation enacted in 1996, beginning as of January 1, 1997, both SAIF members
and BIF members became subject to assessments to cover the interest payments on
outstanding FICO obligations. These FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. Between January 1, 2000 and the
final maturity of the outstanding FICO obligations in 2019, BIF members and SAIF
members will share the cost of the interest on the FICO bonds on a pro rata
basis. During the year ended December 31, 2002, the FICO assessment rate for
SAIF members ranged between approximately 0.0170% of deposits and approximately
0.0182% of deposits, while the FICO assessment rate for BIF members ranged
between approximately 0.0170% of deposits and approximately 0.0182% of deposits.
During the year ended December 31, 2002, the Banks paid FICO assessments
totaling $105,677.
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, 2002, the Banks paid
supervisory assessments to the Commissioner totaling $111,353.
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, 2002, 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, 2002, each of the Banks
exceeded its minimum regulatory capital requirements, as follows:
Risk-Based Leverage
Capital Ratio Capital Ratio
------------- -------------
UnionBank 12.68% 8.30%
UnionBank/ Central 14.09% 8.23%
UnionBank/ West 13.19% 8.80%
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,"
7.
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators' corrective
powers include: requiring the institution to submit a capital restoration plan;
limiting the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions between the
institution and its affiliates; restricting the interest rate the institution
may pay on deposits; ordering a new election of directors of the institution;
requiring that senior executive officers or directors be dismissed; prohibiting
the institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution. As of December 31, 2002, 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 $7.2 million available to be paid as dividends
to the Company by the Banks as of December 31, 2002. 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.
8.
In general, the safety and soundness guidelines prescribe the goals to
be achieved in each area, and each institution is responsible for establishing
its own procedures to achieve those goals. If an institution fails to comply
with any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching Authority. Illinois banks, such as the Banks, have the
authority under Illinois law to establish branches anywhere in the State of
Illinois, subject to receipt of all required regulatory approvals.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act"), both state and national banks are allowed to
establish interstate branch networks through acquisitions of other banks,
subject to certain conditions, including certain limitations on the aggregate
amount of deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of new interstate branches
or the acquisition of individual branches of a bank in another state (rather
than the acquisition of an out-of-state bank in its entirety) is allowed by the
Riegle-Neal Act only if specifically authorized by state law. The legislation
allowed individual states to "opt-out" of certain provisions of the Riegle-Neal
Act by enacting appropriate legislation prior to June 1, 1997. Illinois has
enacted legislation permitting interstate mergers beginning on June 1, 1997,
subject to certain conditions, including a prohibition against interstate
mergers involving an Illinois bank that has been in existence and continuous
operation for fewer than five years.
State Bank Activities. Under federal law and FDIC regulations, FDIC
insured state banks are prohibited, subject to certain exceptions, from making
or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also prohibit
FDIC insured state banks and their subsidiaries, subject to certain exceptions,
from engaging as principal in any activity that is not permitted for a national
bank or its subsidiary, respectively, unless the bank meets, and continues to
meet, its minimum regulatory capital requirements and the FDIC determines the
activity would not pose a significant risk to the deposit insurance fund of
which the bank is a member. These restrictions have not had, and are not
currently expected to have, a material impact on the operations of the Banks.
Federal Reserve System. Federal Reserve regulations, as presently in
effect, require depository institutions to maintain non-interest earning
reserves against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $42.1 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $42.1 million, the reserve
requirement is $1.263 million plus 10% of the aggregate amount of total
transaction accounts in excess of $421million. The first $6.0 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Banks are in compliance with the foregoing requirements.
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
9.
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.
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, 2002, the Company operated twenty-four 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, Eleven banking offices located in
Livingston and Madison markets served.
Counties
UnionBank/Central Bureau, LaSalle, and Main Office: Princeton, IL
Whiteside Counties Five banking offices located in
markets served.
UnionBank/West Adams, Hancock, McDonough, Main Office: Macomb, IL
Pike and Schuyler Counties Six banking offices located in
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 Offices located in Clayton,
Counties Mendota, Ottawa, Princeton, Quincy,
Rushville, Sandwich and Streator IL.
In addition to the banking locations listed above, the Banks own
twenty-nine automated teller machines, some of which are housed within banking
offices and some of which are independently located.
At December 31, 2002, the properties and equipment of the Company had an
aggregate net book value of approximately $14.1 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 2002.
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
The Company's Common Stock was held by approximately 1,033 stockholders
of record as of March 3, 2003, 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
--------- --------- ---------
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
2002
First Quarter...................... 15.00 13.73 0.070
Second Quarter..................... 15.70 14.25 0.080
Third Quarter...................... 15.95 14.56 0.080
Fourth Quarter..................... 16.01 14.75 0.080
The holders of the Common Stock are entitled to receive dividends as
declared by the Board of Directors of the Company, which considers payment of
dividends quarterly. Upon the consummation of the acquisition of Prairie in
1996, preferential dividends were required to be paid or accrued quarterly, with
respect to the outstanding shares of Preferred Stock. The ability of the Company
to pay dividends in the future will be primarily dependent upon its receipt of
dividends from the Banks. In determining cash dividends, the Board of Directors
considers the earnings, capital requirements, debt and dividend servicing
requirements, financial ratio guidelines it has established, financial condition
of the Company and other relevant factors. The Banks' ability to pay dividends
to the Company and the Company's ability to pay dividends to its stockholders
are also subject to certain regulatory restrictions.
The Company has paid regular cash dividends on the Common Stock since it
commenced operations in 1982. There can be no assurance, however, that any such
dividends will be paid by the Company or that such dividends will not be reduced
or eliminated in the future. The timing and amount of dividends will depend upon
11.
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.
The information from the 2003 Proxy Statement under the caption
"Existing Equity Compensation Plans" on pages 5 through 6 is incorporated by
reference.
Item 6. Selected Consolidated Financial Data
Selected consolidated financial data for the five years ended December
31, 2002, consisting of data captioned "Selected Consolidated Financial Data" on
page 10 of the Company's 2002 Annual Report to Stockholders filed as an exhibit
hereto, is incorporated herein by reference.
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, 2002. 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.
12.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except 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
UnionBancorp, Inc. (the "Company") is a bank holding company organized
under the laws of the state of Delaware. 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 ("UnionFinancial"). The Company provides a full range
of 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; asset management; and trust services. The Company is subject to
competition from other financial institutions, including banks, thrifts and
credits unions, as well as nonfinancial institutions providing financial
services. Additionally, the Company and the Banks are subject to regulations of
certain regulatory agencies and undergo periodic examinations by those
regulatory agencies.
The Company has filed applications with the Federal Reserve Bank and the
Illinois Office of Banks and Real Estate to merge UnionBank/Central, a
stand-alone bank subsidiary, into the Company's flagship bank, UnionBank.
Consolidation of these entities is expected to provide several benefits to the
organization including an improved utilization of personnel as a result of the
consolidation of various backroom functions, which will result in a reduction in
duplicated job functions and a lessening of various administrative and
operational tasks. Simplified financial reporting, the elimination of
inter-company banking transactions and a flatter, more efficient management
structure will improve the Company's workflow, while an increased legal lending
limit and additional product and service offerings in our cross-over markets
will be advantageous to our existing and future customer base. The transaction
is expected to be consummated late in the first quarter or early in the second
quarter of 2003. Since UnionBank/Central is under common control, the merger
will be accounted for at UnionBank/Central's carrying amount which will have no
impact on the consolidated financial statements.
The Company is also in the process of constructing a new branch facility
in Yorkville, Illinois, one of the fastest growing Chicago suburbs. Aimed at
providing one-stop financial shopping to our customers, the Yorkville site will
deliver convenience and financial security by offering our full line of
13.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
financial services including banking, trust, internet, insurance and investment
products. The facility is slated to open in the third quarter of 2003 and will
be located in the new Yorkville Marketplace development at Routes 34 and 47.
Results of Operations
Net Income
2002 compared to 2001. Net income equaled $4,044 or $0.94 per diluted
share for the year ended December 31, 2002. This compares to net income of
$4,454 or $1.05 per diluted share for the year ended December 31, 2001. This
represents a 9.2% decrease in net income and a 10.5% decrease in per share
earnings.
The Company's annual results were adversely impacted by several factors.
These include costs associated with other real estate owned ("OREO"), as the
Company recorded a valuation allowance on one OREO property, in addition to
other losses on the sale and general operating expenses incurred on OREO;
increases in other operating expenses incurred to support the growing level of
business activity and continued investments in the Company; and a decrease in
the gains on sale of securities. Offsetting these factors were increases in net
interest income, revenue generated from the mortgage banking division, and
reductions in the provision for loan losses and income taxes.
Also contributing to the change in earnings was the Company's adoption
of SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 147
"Acquisitions of Certain Financial Institutions." The adoption of these
accounting standards allowed the Company to cease the amortization of goodwill
related to various acquisitions.
Return on average assets was 0.53% for the period compared to 0.59% for
the same period in 2001. Return on average stockholders' equity was 6.11% for
the period compared to 7.04% for the same period in 2001.
2001 compared to 2000. Net income equaled $4,454 or $1.05 per diluted
share for the year ended December 31, 2001 compared with net income of $2,903 or
$0.66 per 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.
The 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 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 year ended December 31, 2001
compared to 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.
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
14.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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.
2002 compared to 2001. Net interest income, on a tax equivalent basis,
was $26,289 for the year ended December 31, 2002, compared with $25,561 earned
during the same period in 2001. This represented an increase of $728 or 2.9%.
The improvement in net interest income is attributable to the year-over-year
reduction of interest expense paid on interest bearing liabilities totaling
$9,199 exceeding the year-over-year reduction of interest income earned on
interest earning assets totaling $8,471. Also contributing to the increase in
net interest income was a shift in the funding mix from higher costing time
deposits and other wholesale sources to lower costing core deposits (DDA, Now,
IMMIA and Savings).
The $8,471 change in interest income resulted from decreases of $500
associated with volume and $7,971 related to rate. The majority of the decrease
in interest income was related to a 113 basis point decline in yields earned on
average loans. Also contributing was a shift in the earning-asset mix from
higher yielding loans to lower yielding investments. The $9,199 change in
interest expense resulted from decreases of $1,266 associated with volume and
$7,933 associated with rate. The majority of the decrease was attributable to a
159 basis point reduction in the rates paid on total time deposits, primarily
located in expensive wholesale funding sources. This was a deliberate strategy
aimed at reducing the Company's reliance on these higher-cost funding sources
and to reduce interest rate risk.
Despite a difficult rate environment, the Company's net interest margin
improved in 2002. The net interest margin on a tax equivalent basis for the
period increased 10 basis points to 3.74% as compared to the prior year's 3.64%.
Lower funding costs, a result of actively reducing funding rates simultaneously
with Federal Reserve Board actions, were principally responsible for the margin
increase. Also, a decrease in loan balances and an increase in noninterest
bearing sources, allowed management to reduce the Company's reliance on
high-rate brokered deposits and retail time deposits. These actions were
partially offset by narrower loan spreads, due to competitive pressures, overall
tightening of loan underwriting standards which resulted in slower than expected
loan growth and the cost of carrying a higher level of nonperforming loans.
Specifically, yields on interest-earning assets decreased 122 basis points to
6.60% as compared to the prior year's 7.82%. In contrast, rates paid on
interest-bearing liabilities decreased 148 basis points to 3.29% as compared to
the prior year's 4.77%.
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
15.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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.
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%.
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 2002,
2001 and 2000. 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. 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.
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,
--------------------------------------------------------------------
2002 2001
-------------------------------- --------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
---------- --------- --------- ---------- --------- ---------
ASSETS
Interest-earning assets
Interest-earning deposits $ 1,573 $ 28 1.78% $ 1,130 $ 53 4.69%
Securities (1)
Taxable 167,895 7,350 4.38 152,650 8,602 5.64
Nontaxable (2) 34,866 2,579 7.40 39,884 2,988 7.49
---------- --------- --------- ---------- --------- ---------
Total securities (tax equivalent) 202,761 9,929 4.90 192,534 11,590 6.02
---------- --------- --------- ---------- --------- ---------
Federal funds sold 9,079 147 1.62 4,640 143 3.08
---------- --------- --------- ---------- --------- ---------
Loans (3)(4)
Commercial 140,937 9,707 6.89 148,598 12,365 8.32
Real estate 297,318 21,796 7.33 300,066 25,167 8.39
Installment and other 52,105 4,868 9.34 55,984 5,628 10.05
---------- --------- --------- ---------- --------- ---------
Gross loans (tax equivalent) 490,360 36,371 7.42 504,648 43,160 8.55
---------- --------- --------- ---------- --------- ---------
Total interest-earning assets 703,773 46,475 6.60 702,952 54,946 7.82
---------- --------- --------- ---------- --------- ---------
Noninterest-earning assets
Cash and cash equivalents 19,551 19,539
Premises and equipment, net 13,727 11,913
Other assets 22,888 21,169
---------- ----------
Total non-interest-earning assets 56,166 52,621
---------- ----------
Total assets $ 759,939 $ 755,573
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 48,350 $ 472 0.98% $ 45,526 $ 843 1.85%
Money market accounts 87,633 1,767 2.02 53,282 1,514 2.84
Savings deposits 50,444 622 1.23 46,921 989 2.11
Time $100,000 and over 151,438 5,815 3.84 179,427 9,581 5.34
Other time deposits 210,990 8,470 4.01 224,474 12,752 5.68
Federal funds purchased and
repurchase agreements 4,794 170 3.55 2,475 80 3.23
Advances from FHLB 51,611 2,514 4.87 54,064 3,030 5.60
Notes payable 9,040 356 3.94 9,719 596 6.13
---------- --------- --------- ---------- --------- ---------
Total interest-bearing liabilities 614,300 20,186 3.29 615,888 29,385 4.77
---------- --------- --------- ---------- --------- ---------
Noninterest-bearing liabilities
Non-interest-bearing deposits 72,253 67,577
Other liabilities 7,201 8,857
---------- ----------
Total non-interest-bearing liabilities 79,454 76,434
---------- ----------
Stockholders' equity 66,185 63,251
---------- ----------
Total liabilities and stockholders' equity $ 759,939 $ 755,573
========== ==========
Net interest income (tax equivalent) $ 26,289 $ 25,561
========= =========
Net interest income (tax equivalent) to
total earning assets 3.74% 3.64%
========= =========
Interest-bearing liabilities to earning assets 87.29% 87.61%
========== ==========
For the Years Ended December 31,
--------------------------------
2000
--------------------------------
Interest
Average Income/ Average
Balance Expense Rate
---------- --------- ---------
ASSETS
Interest-earning assets
Interest-earning deposits $ 2,248 $ 133 5.92%
Securities (1)
Taxable 138,643 8,514 6.14
Nontaxable (2) 41,320 3,081 7.46
---------- --------- ---------
Total securities (tax equivalent) 179,963 11,595 6.44
---------- --------- ---------
Federal funds sold 4,224 290 6.87
---------- --------- ---------
Loans (3)(4)
Commercial 144,706 13,282 9.18
Real estate 288,651 24,929 8.64
Installment and other 52,132 5,138 9.86
---------- --------- ---------
Gross loans (tax equivalent) 485,489 43,349 8.93
---------- --------- ---------
Total interest-earning assets 671,924 55,367 8.24
---------- --------- ---------
Noninterest-earning assets
Cash and cash equivalents 21,358
Premises and equipment, net 12,700
Other assets 15,471
----------
Total non-interest-earning assets 49,529
----------
Total assets $ 721,453
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 53,764 $ 1,249 2.32%
Money market accounts 39,407 1,629 4.13
Savings deposits 48,476 1,239 2.56
Time $100,000 and over 179,183 10,088 5.63
Other time deposits 217,693 13,049 5.99
Federal funds purchased and
repurchase agreements 3,571 233 6.52
Advances from FHLB 37,665 2,366 6.28
Notes payable 10,413 832 7.99
---------- --------- ---------
Total interest-bearing liabilities 590,172 30,685 5.20
---------- --------- ---------
Noninterest-bearing liabilities
Non-interest-bearing deposits 66,720
Other liabilities 7,575
----------
Total non-interest-bearing liabilities 74,295
----------
Stockholders' equity 56,986
----------
Total liabilities and stockholders' equity $ 721,453
==========
Net interest income (tax equivalent) $ 24,682
=========
Net interest income (tax equivalent) to
total earning assets 3.67%
=========
Interest-bearing liabilities to earning assets 87.83%
==========
- -------------------------
(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,
--------------------------------------------------------------
2002 Compared to 2001 2001 Compared to 2000
Change Due to Change Due to
----------------------------- -----------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
Interest income:
Interest-earning deposits $ 16 $ (41) $ (25) $ (56) $ (24) $ (80)
Investment securities:
Taxable 801 (2,053) (1,252) 816 (728) 88
Nontaxable (212) (197) (409) (37) (56) (93)
Federal funds sold 93 (89) 4 26 (173) (147)
Loans (1,198) (5,591) (6,789) 1,684 (1,873) (189)
------- ------- ------- ------- ------- -------
Total interest income (500) (7,971) (8,471) 2,433 (2,854) (421)
------- ------- ------- ------- ------- -------
Interest expense:
NOW accounts 49 (420) (371) (175) (231) (406)
Money market accounts 778 (525) 253 478 (593) (115)
Savings deposits 70 (437) (367) (39) (211) (250)
Time, $100,000 and over (1,345) (2,421) (3,766) 14 (521) (507)
Other time (727) (3,555) (4,282) 396 (693) (297)
Federal funds purchased and
repurchase agreements 81 9 90 (58) (95) (153)
Advances from FHLB (133) (383) (516) 942 (278) 664
Notes payable (39) (201) (240) (53) (183) (236)
------- ------- ------- ------- ------- -------
Total interest expense (1,266) (7,933) (9,199) 1,505 (2,805) (1,300)
------- ------- ------- ------- ------- -------
Net interest income $ 766 $ (38) $ 728 $ 928 $ (49) $ 879
======= ======= ======= ======= ======= =======
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
loans, other nonperforming loans, other identified potential problem loans,
historical loss experience, results of examinations by regulatory agencies,
results of the independent asset quality review process, the market value of
collateral, the estimate of discounted cash flows, the strength and availability
of guarantees, concentrations of credits, and various other factors, including
concentration of credit risk in various industries and current economic
conditions.
2002 compared to 2001. The 2002 provision for loan losses charged to
operating expense totaled $3,574, a decrease of $587 in comparison to the $4,161
recorded during the same period a year ago. The Company's year to date
provisions are a continued response to the deterioration of several seasoned
credits that surfaced and have been reserved for, downgrades of various other
credits and the continued softening of the economy. In addition, management also
considered several factors surrounding credit-quality, including the level of
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
nonperforming loans, the number of customers filing for bankruptcy, and net
charge-offs and delinquencies. In some cases, problem loans had been previously
identified; however, the loss incurred was greater than anticipated because of a
soft commercial real estate market in specific industries and additional losses
in the manufacturing, travel, and technology sectors. The provision is
consistent with the Company's practice of focusing on early identification of
problem credits, an assessment of probable incurred losses and quick remediation
where possible.
Net charge-offs in 2002 were $3,419 compared with $4,280 in 2001.
Annualized net charge-offs decreased to 0.70% of average loans for 2002 compared
to 0.85% in the same period in 2001. The high, though reduced level of net
charge-offs compared to 2001, resulted from the impact of the weak economic
climate and greater scrutiny by management in identifying problem credits for
our watch list. As these credits continued to deteriorate, management actively
sought methods of improving problem credits or recognized the need to charge-off
non-bankable assets. In some cases, problem loans had been previously
identified; however, the loss incurred was greater than anticipated. Other
factors included an increase in the number of bankruptcies due to the soft
commercial real estate market in specific industries and additional losses in
the manufacturing, travel, and technology sectors.
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. 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 to limit credit exposure.
2001 compared to 2000. The 2001 provision for loan losses charged to
operating expense totaled $4,161, a decrease of $697 in comparison to 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.
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.
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Noninterest Income. The following table shows the Company's noninterest
income:
NONINTEREST INCOME
(Dollars in Thousands)
Years Ended December 31,
----------------------------------
2002 2001 2000
--------- --------- ---------
Service charges $ 2,812 $ 2,748 $ 2,683
Merchant fee income 1,185 1,095 1,110
Trust income 775 687 744
Mortgage banking income 2,843 2,096 1,278
Insurance commissions and fees 2,188 2,407 2,862
Securities gains (losses), net 407 798 (29)
Other income 2,245 2,089 2,492
--------- --------- ---------
Total noninterest income $ 12,455 $ 11,920 $ 11,140
========= ========= =========
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.
2002 compared to 2001. Noninterest income totaled $12,455 for the year
ended December 31, 2002, as compared to $11,920 for the same timeframe in 2001.
This represented an increase of $535 or 4.5%. Exclusive of net securities gains
of $407 in 2002 and $798 in 2001, core noninterest income shows a year-over-year
increase of $926 or 8.3%. As a percentage of total income (net interest income
plus noninterest income), core noninterest income, exclusive of securities
gains, increased to 31.9% versus 31.0% for 2001.
A majority of the increase in core noninterest income was related to a
$747 improvement in mortgage banking income. Mortgage banking income includes
fees generated from net servicing (after amortization of mortgage servicing
rights) and the gains realized from the sale of loans. The Company's mortgage
loan production increased 11% to a level of $183,481 as declining interest rates
resulted in increases in the rate of mortgage refinancing and residential real
estate activity. Offsetting the improvement in mortgage loan production, and
subsequent gains on the sale of these loans, was a decrease in net servicing due
to increasing pre-payment speeds driven by the declining interest rate
environment.
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 revenue generated
from investments in bank-owned life insurance.
These improvements were offset by lower than anticipated insurance,
asset management and brokerage fees (included in insurance commissions and
fees). Insurance fees declined largely due to the hardening of the overall
insurance market, which has resulted in clients shopping business to other
vendors. Asset management and brokerage fees generally follow the amount of
total assets under management and conditions in the equity and credit markets.
The remaining categories remained relatively stable with only slight
year-over-year changes.
20.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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%. Several factors impacted the
year-over-year change. First, as interest rates declined during 2001, the market
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
increased year-over-year by $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 servicing and the gains realized from the sale of these
loans. The Company's mortgage loan production more than doubled to $165,515
during 2001, compared to 2000, as declining interest rates resulted in increases
in the rate of mortgage refinancing and residential real estate activity. Net
mortgage servicing rights decreased due to increasing pre-payment speeds driven
by declining interest rates. 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.
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Noninterest Expense. The following table shows the Company's noninterest
expense:
NONINTEREST EXPENSE
(Dollars in Thousands)
Years Ended December 31,
----------------------------------
2002 2001 2000
--------- --------- ---------
Salaries and employee benefits $ 15,284 $ 13,700 $ 13,468
Occupancy expense, net 1,868 1,751 1,753
Furniture and equipment expenses 1,820 1,632 1,803
Supplies and printing 525 608 573
Telephone 1,074 773 749
Other real estate owned expense 919 162 116
Amortization of intangible assets 245 945 1,310
Other expense 7,291 6,641 6,113
--------- --------- ---------
Total noninterest expense $ 29,026 $ 26,212 $ 25,885
========= ========= =========
2002 compared to 2001. Noninterest expense totaled $29,026 for the year
ended December 31, 2002, as compared to $26,212 for the same timeframe in 2001.
This represented an increase of $2,814 or 10.7%.
A majority of the increase in noninterest expense was attributable to a
$1,584 rise in salaries and benefits, as we invested in our own future through
the recruitment and retention of high-quality, seasoned industry professionals
to fill existing vacancies and increased the Company's annual contribution to
employee's 401k plan. In addition, a higher concentration of salary expenditures
is also currently being realized by our mortgage banking division and financial
services division. These divisions, with lower gross profit margins,
historically produce significant noninterest income, but also incur considerable
noninterest expense. Also contributing to the increase were $757 in costs
associated with OREO assets, as the Company recorded a valuation allowance on
one property, in addition to other losses on sale and general operating expenses
incurred on OREO.
Other reasons for the increase in other expenses were due to the
write-down of other assets and fees related to the work-out and collection of
nonperforming loans. Additionally, furniture and equipment expense and telephone
expense increased due to investments in technology which were incurred to
improve the Company's network infrastructure.
These increases were partially offset by decreases in supplies and
printing and amortization of intangible assets due to the adoption of SFAS No.
142, "Goodwill and Other Intangible Assets" and SFAS No. 147, "Acquisitions of
Certain Financial Institutions." The adoption of these accounting standards
allowed the Company to cease the amortization of goodwill related to its
acquisitions. The effect of this adoption increased earnings by $690 for the
twelve months ended December 31, 2002.
2001 compared to 2000. Noninterest expense totaled $26,212 for the year
ended December 31, 2002, 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
22.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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
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.
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,
2002 2001 2000
--------- --------- ---------
Income before income taxes $ 5,178 $ 5,991 $ 3,920
Applicable income taxes 1,134 1,537 1,017
Effective tax rates 21.9% 25.7% 25.9%
Income tax expense for the periods included benefits for tax-exempt
income, tax-advantaged investments and general business tax credits offset by
the effect of nondeductible expenses. The Company's effective tax rate was lower
than statutory rates due to several factors. First, 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. Second, the level of tax-exempt income has increased as a percentage
of taxable income. And, finally, the Company has reduced tax expense through
various tax planning initiatives.
Preferred Stock Dividends. The Company paid $257 of preferred stock
dividends in 2002 and 2001 and $259 in 2000.
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.
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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 assets will reprice faster
than liabilities, due to market constraints and management's structuring 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 2002 and 2001 for the various rate shock levels.
December 31, 2002 Net Interest Income
- ----------------- ---------------------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $ 26,146 $ 822 3.25%
+100 bp 25,857 533 2.10
Base 25,324 - -
-100 bp 24,587 (737) (2.91)
-200 bp 23,796 (1,528) (6.03)
Based on the Company's model at December 31, 2002, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by 3.25% or approximately $822. The effect of an
immediate 200 basis point decrease in rates would reduce the Company's net
interest income by 6.03% or approximately $1,528.
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% 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.
Financial Condition
General. As of December 31, 2002, the Company had total assets of
$791,616, gross loans of $483,229, total deposits of $641,958, and total
stockholders' equity of $68,064. Total assets increased by $43,309 or 5.8% from
year-end 2001. Total gross loans decreased $21,739 or 4.3% from year-end 2001
and reflected tighter underwriting standards, an overall softening of loan
demand, and normal paydowns. In contrast, total deposits increased by $29,814 or
4.9% from year-end 2001, largely related to growth in lower costing
interest-bearing deposits (Now, IMMIA and Savings) and noninterest-bearing
deposits.
24.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Loans and Asset Quality. The Company offers a broad range of products,
including granting agribusiness, commercial, residential, and installment loans,
designed to meet the credit needs of its borrowers. The Company's loans are
diversified by borrower and industry group. The following table describes the
composition of loans by major categories outstanding.
(Dollars in Thousands)
LOAN PORTFOLIO
Aggregate Principal Amount
---------------------------------------------------------
December 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Commercial $ 100,189 $ 107,382 $ 117,534 $ 103,842 $ 74,481
Agricultural 36,467 40,563 38,479 38,328 41,821
Real estate:
Commercial mortgages 147,253 150,878 134,942 126,645 99,872
Construction 24,486 23,676 19,322 15,786 13,935
Agricultural 34,688 34,611 39,658 38,847 35,790
1-4 family mortgages 87,411 94,368 99,237 102,695 96,921
Installment 49,949 50,961 53,276 43,644 32,714
Other 2,786 2,529 2,646 2,615 2,884
--------- --------- --------- --------- ---------
483,229 504,968 505,094 472,402 398,418
Unearned income - - - (7) (30)
--------- --------- --------- --------- ---------
Total loans 483,229 504,968 505,094 472,395 398,388
Allowance for loan losses (6,450) (6,295) (6,414) (3,691) (3,858)
--------- --------- --------- --------- ---------
Loans, net $ 476,779 $ 498,673 $ 498,680 $ 468,704 $ 394,530
========= ========= ========= ========= =========
Aggregate Principal Amount
---------------------------------------------------------
Percentage of Total Loan Portfolio
---------------------------------------------------------
December 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Commercial 20.73% 21.27% 23.27% 21.98% 18.69%
Agricultural 7.55 8.03 7.62 8.11 10.50
Real estate:
Commercial mortgages 30.47 29.88 26.72 26.81 25.07
Construction 5.07 4.69 3.83 3.34 3.50
Agricultural 7.18 6.85 7.85 8.22 8.98
1-4 family mortgages 18.08 18.69 19.65 21.74 24.33
Installment 10.34 10.09 10.55 9.24 8.21
Other loans 0.58 0.50 0.51 0.56 0.72
--------- --------- --------- --------- ---------
Gross loans 100.00% 100.00% 100.00% 100.00% 100.00%
========= ========= ========= ========= =========
As of December 31, 2002 and 2001, commitments of the Banks under standby
letters of credit and unused lines of credit totaled approximately $104,560 and
$94,454, respectively.
25.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Stated loan maturities (including rate loans reset to market interest
rates) of the total loan portfolio, net of unearned income, at December 31, 2002
were as follows:
STATED LOAN MATURITIES (1)
(Dollars in Thousands)
Within 1 to 5 After 5
1 Year Years Years Total
---------- --------- ---------- ---------
Commercial $ 67,085 $ 29,163 $ 3,941 $ 100,189
Agricultural 27,456 8,545 466 36,467
Real estate 135,847 140,136 17,855 293,838
Installment 21,358 31,097 280 52,735
---------- --------- ---------- ---------
Total $ 251,746 $ 208,941 $ 22,542 $ 483,229
========== ========= ========== =========
- --------------------
(1) Maturities based upon contractual maturity dates
The maturities presented above are based upon contractual maturities.
Many of these loans are made on a short-term basis with the possibility of
renewal at time of maturity. All loans, however, are reviewed on a continuous
basis for creditworthiness.
Rate sensitivities of the total loan portfolio, net of unearned income,
at December 31, 2002 were as follows:
LOAN REPRICING
(Dollars in Thousands)
Within 1 to 5 After 5
1 Year Years Years Total
---------- ---------- --------- ---------
Fixed rate $ 97,020 $ 76,295 $ 19,496 $ 192,811
Variable rate 153,346 131,571 1,570 286,487
Impaired and not accruing
and nonaccrual 1,380 1,075 1,476 3,931
---------- ---------- --------- ---------
Total $ 251,746 $ 208,941 $ 22,542 $ 483,229
========== ========== ========= =========
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.
26.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The classification of a loan as 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 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 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. 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.
Due largely to tighter underwriting standards and an overall heightened
commitment to asset quality, the level of nonperforming loans at December 31,
2002 decreased to $4,760 versus the $8,875 that existed as of December 31, 2001.
The year-over-year decrease in nonperforming loans was due to various actions
taken during the year to proactively address these problem loans. Additionally,
the Company experienced a substantial improvement in the level of nonperforming
loans to total loans, which totaled 0.99% as of December 31, 2002 compared to
1.76% at December 31, 2001. The reserve coverage ratio (allowance to
nonperforming loans) also improved significantly to 135.5%, as of December 31,
2002, from the lower ratio of 70.93% at December 31, 2001.
The following table sets forth a summary of nonperforming assets at
December 31, 2002:
NONPERFORMING ASSETS
(Dollars in Thousands)
December 31,
---------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Nonaccrual loans $ 3,931 $ 7,259 $ 5,777 $ 2,949 $ 1,487
Loans 90 days past due and still accruing 829 1,616 2,102 566 1,111
------- ------- ------- ------- -------
Total nonperforming loans 4,760 8,875 7,879 3,515 2,598
Other real estate owned 1,557 1,886 467 523 201
Other nonperforming assets (1) - - - - 100
------- ------- ------- ------- -------
Total nonperforming assets $ 6,317 $10,761 $ 8,346 $ 4,038 $ 2,899
======= ======= ======= ======= =======
Nonperforming loans to total loans 0.99% 1.76% 1.56% 0.74% 0.65%
Nonperforming assets to total loans 1.31 2.13 1.65 0.85 0.73
Nonperforming assets to total assets 0.80 1.44 1.10 0.57 0.46
- ------------------------
(1) Represents a single municipal security in default status.
Other Potential Problem Loans. The Company has other potential problem
loans that are currently performing, but where some concerns exist as to the
ability of the borrower to comply with present loan repayment terms. Excluding
nonperforming loans, these loans totaled $3,725 that management has classified
as impaired at December 31, 2002. Management considers these loans to be
impaired due to declining financial performance. The classification of these
27.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
loans, however, does not imply that management expects losses on each of these
loans, but believes that a higher level of scrutiny and close monitoring is
prudent under the circumstances. Such classifications relate to specific
concerns for each individual borrower and do not relate to any concentration
risk common to all loans in this group.
The following table sets forth a summary of other real estate owned and
other collateral acquired at December 31, 2002:
OTHER REAL ESTATE OWNED
(Dollars in Thousands)
Number Net Book
of Carrying
Parcels Value
---------- ----------
Developed property 2 $ 1,415
Vacant land or unsold lots 13 142
---------- ----------
Total other real estate owned 15 $ 1,557
========== ==========
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 incurred 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 quarterly 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 economic and industry
conditions. 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
28.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
of the loan portfolio did not significantly change in 2002. 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
many of its peers throughout the financial community. 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, 2002, the allowance for loan losses was $6,450 or 1.33%
of total loans as compared to $6,295 or 1.25% at December 31, 2001. Several
factors impacted the year-over-year change. In the fourth quarter of 2001, the
Company increased the allowance by $2,890, and, in the second quarter of 2002,
the Company increased the allowance by $1,652. These increases were due to the
deterioration in overall credit quality and the impact of various identified
seasoned credits. These increases were offset by net charge-offs, largely the
result of several credits which were identified in previous quarters as
requiring the status of watch list with specific allocations. These problem
credits continued to deteriorate and were identified by management as
non-bankable assets, and, subsequently, charged off.
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 presents a detailed analysis of the Company's
allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
December 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Beginning balance $ 6,295 $ 6,414 $ 3,691 $ 3,858 $ 3,188
Charge-offs:
Commercial 2,561 3,202 1,663 1,186 428
Real estate mortgages 683 977 144 346 169
Installment and other loans 634 496 444 340 435
--------- --------- --------- --------- ---------
Total charge-offs 3,878 4,675 2,251 1,872 1,032
--------- --------- --------- --------- ---------
Recoveries:
Commercial 354 312 37 79 98
Real estate mortgages 41 10 3 22 37
Installment and other loans 64 73 76 82 108
--------- --------- --------- --------- ---------
Total recoveries 459 395 116 183 243
--------- --------- --------- --------- ---------
Net charge-offs 3,419 4,280 2,135 1,689 789
--------- --------- --------- --------- ---------
Provision for loan losses 3,574 4,161 4,858 1,522 1,635
Allowance associated with the
Acquisitions (divestitures) - - - - (176)
--------- --------- --------- --------- ---------
Ending balance $ 6,450 $ 6,295 $ 6,414 $ 3,691 $ 3,858
========= ========= ========= ========= =========
Period end total loans, net of
unearned interest $ 483,229 $ 504,968 $ 505,094 $ 472,395 $ 398,388
========= ========= ========= ========= =========
Average loans $ 490,360 $ 504,648 $ 485,489 $ 440,284 $ 390,560
========= ========= ========= ========= =========
Ratio of net charge-offs to
average loans 0.70% 0.85% 0.44% 0.38% 0.20%
Ratio of provision for loan losses
to average loans 0.73 0.82 1.00 0.35 0.42
Ratio of allowance for loan losses
to ending total loans 1.33 1.25 1.27 0.78 0.97
Ratio of allowance for loan losses
to total nonperforming loans 135.50 70.93 81.41 105.01 148.99
Ratio of allowance at end of period
to average loans 1.32 1.25 1.32 0.84 0.99
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 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,
----------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ---------------- ----------------
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 $2,863 28.28% $3,499 29.30% $3,903 30.89% $1,114 30.09% $1,213 29.19%
Real estate 2,110 60.80 1,786 60.11 1,412 58.05 1,290 60.11 1,245 61.87
Installment and other loans 719 10.92 537 10.59 511 11.06 393 9.80 443 8.94
Unallocated 758 - 473 - 588 - 894 - 957 -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $6,450 100.00% $6,295 100.00% $6,414 100.00% $3,691 100.00% $3,858 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Securities Activities. The Company's securities portfolio, which
represented 28.8% of the Company's average earning asset base as of December 31,
2002, is managed to minimize interest rate risk, maintain sufficient liquidity,
and maximize return. The portfolio includes several callable agency debentures,
fixed and adjustable rate mortgage pass-throughs, preferred trust securities and
collateralized mortgage obligations with stated or implied calls. Corporate
bonds consist of investment grade obligations of public corporations. Other
securities consist of Federal Reserve stock, Federal Home Loan Bank stock, and
SBA pooled securities. The Company's financial planning anticipates income
streams generated by the securities portfolio based on normal maturity or
projected prepayment and reinvestment. Securities classified as
available-for-sale, carried at fair value, were $227,229 at December 31, 2002
compared to $186,282 at December 31, 2001. The Company does not have any
securities classified as trading or held-to-maturity.
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 or had interest rate
exposure not consistent with offsetting exposure of funding sources. In
addition, some of the callable securities that have been purchased have shorter
final maturities, which also reduces the sensitivity of the Economic Value of
Equity (EVE) to changes in the level of interest rates.
31.
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,
---------------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
% of % of % of
Amount Portfolio Amount Portfolio Amount Portfolio
-------- --------- -------- --------- -------- ---------
Available-for-Sale
U.S. Treasury $ 1,025 0.45% $ 1,036 0.56% $ 4,255 2.24%
U.S. government agencies
and corporations 46,817 20.60 43,400 23.30 70,936 37.40
U.S. government agency
mortgage backed securities 113,579 49.98 86,278 46.32 34,505 18.19
States and political
Subdivisions 34,589 15.22 37,344 20.05 43,413 22.88
Collateralized mortgage
obligations 3,889 1.71 12,366 6.64 32,297 17.02
Corporate 10,480 4.62 - - - -
Equity securities 16,850 7.42 5,858 3.13 4,313 2.27
-------- ------ -------- ------ -------- ------
Total $227,229 100.00% $186,282 100.00% $189,719 100.00%
======== ====== ======== ====== ======== ======
The following table sets forth the contractual, callable or estimated
maturities and yields of the securities portfolio as of December 31, 2002.
Mortgage backed and collateralized mortgage obligation securities are included
at estimated maturity.
MATURITY SCHEDULE
(Dollars in Thousands)
Maturing
---------------------------------------------------------------------------------------------------------
After 1 Year but After 5 Years 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 $ 1,025 4.85% $ - -% $ - -% $ - -% $ 1,025
U.S. government
agencies and
corporations 1,534 7.38 44,238 4.37 1,045 6.04 - - 46,817
U.S. government
agency mortgage
backed securities - - - - - - 113,579 4.05 113,579
States and political
Subdivisions (1) 2,043 7.00 16,071 7.37 12,638 7.37 3,837 7.74 34,589
Collateralized
Mortgage obligations - - - - - - 3,889 3.44 3,889
Corporate - - 9,633 5.97 847 4.60 - - 10,480
Equity securities - - - - - - 16,850 2.52 16,850
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total $ 4,602 $ 69,942 $ 14,530 $ 138,155 $ 227,229
========= ========= ========= ========= =========
- ------------------
(1) Rates on obligations of states and political subdivisions have been
adjusted to tax equivalent yields using a 34% income tax rate
32.
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 $621,108 for 2002,
representing an increase of $3,901 or 0.6% compared with the average balance of
total deposits for 2001.
The following table sets forth certain information regarding the Banks'
average deposits.
AVERAGE DEPOSITS
(Dollars in Thousands)
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ----------------------------- -----------------------------
% 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 $ 72,253 11.63% -% 67,577 10.95% -% $ 66,720 11.02% -%
Savings accounts 50,444 8.12 1.23 46,921 7.60 2.11 48,476 8.01 2.56
Interest-bearing
demand deposits 135,983 21.89 1.65 98,808 16.01 2.38 93,171 15.39 3.09
Time, less than $100,000 210,990 33.98 4.01 224,474 36.37 5.68 179,183 29.61 5.63
Time, $100,000 or more 151,438 24.38 3.84 179,427 29.07 5.34 217,693 35.97 5.99
--------- ------- ------- --------- ------- ------- --------- ------- -------
Total deposits $ 621,108 100.00% 2.76% $ 617,207 100.00% 4.16% $ 605,243 100.00% 4.50%
========= ======= ======= ========= ======= ======= ========= ======= =======
As of December 31, 2002, average time deposits over $100,000 represented
18.9% of total average deposits, compared with 29.1% of total average deposits
as of December 31, 2001. 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
brokered deposit customers with limited business relationships.
The following table sets forth the remaining maturities for time
deposits of $100,000 or more at December 31, 2002.
TIME DEPOSITS OF $100,000 OR MORE
(Dollars in Thousands)
Maturity Range
Three months or less $ 43,223
Over three months through six months 36,679
Over six months through twelve months 27,458
Over twelve months 45,035
---------
Total $ 152,395
=========
33.
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,
-----------------------------
2002 2001 2000
------ ------ ------
Return on average assets 0.53% 0.59% 0.40%
Return on average equity 6.11 7.04 5.09
Average equity to average assets 8.71 8.37 7.90
Dividend payout ratio for common stock 32.59 25.59 35.93
The increase in the return on average assets and return on average
equity ratios in 2002 was principally related to the items discussed in the
analysis above.
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
increase in cash and cash equivalents of $12,263 from December 31, 2001 to
December 31, 2002.
Net cash provided by operating activities was $7,981 for 2002, $3,468
for 2001, and $10,521 for 2000. Net cash used by investing activities,
consisting primarily of loan and investing funding, was $33,017 and $50,836 for
2002 and 2000, respectively. Net cash provided by investing activities was
$4,834 for 2001. Net cash provided financing activities, consisting primarily of
increases in deposits and Federal Home Loan Bank advances, was $37,299 and
$46,106 for 2002 and 2000, respectively. Net cash used in financing activities,
consisting primarily of decreases in deposits partially offset by Federal Home
Loan Bank advances, was $14,624 for 2001.
34.
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, 2002, 27.6% 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 28.4%
maturing in the first quarter of 2003, 24.1% maturing in the second quarter of
2003, 18.0% maturing in the third and fourth quarters of 2003, and the remaining
29.5% 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, 2002 in
the principal amount of $8,275 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, 2002, approximately
$7,200 was available for dividends without regulatory approval.
Contractual Obligations and Commitments
Payments Due by Period
--------------------------------------------------------------------
Within 1 After
Year 1-3 Years 4-5 Years 5 Years Total
----------- ----------- ----------- ----------- -----------
Long-term debt $ 8,275 $ - $ - $ - $ 8,275
FHLB Advances 5,000 43,650 5,100 8,000 61,750
----------- ----------- ----------- ----------- -----------
Total contractual cash obligations $ 13,275 $ 43,650 $ 5,100 $ 8,000 $ 70,025
=========== =========== =========== =========== ===========
Amount of Commitment Expiration per Period
--------------------------------------------------------------------
Within 1 After
Year 1-3 Years 4-5 Years 5 Years Total
----------- ----------- ----------- ----------- -----------
Lines of credit $ 73,304 $ 9,475 $ 4,096 $ 16,264 $ 103,139
Standby letters of credit 1,300 121 - - 1,421
----------- ----------- ----------- ----------- -----------
Total commercial commitments $ 74,604 $ 9,596 $ 4,096 $ 16,264 $ 104,560
=========== =========== =========== =========== ===========
Capital Resources
The Banks are expected to meet a minimum risk-based capital to
risk-weighted assets ratio of 8%, of which at least one-half (or 4%) must be in
the form of Tier 1 (core) capital. The remaining one-half (or 4%) may be in the
form of Tier 1 (core) or Tier 2 (supplementary) capital. The amount of loan loss
allowance that may be included in capital is limited to 1.25% of risk-weighted
assets. The ratio of Tier 1 (core) and the combined amount of Tier 1 (core) and
Tier 2 (supplementary) capital to risk-weighted assets for the Company is 10.54%
and 11.84%, respectively, at December 31, 2002. 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
35.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity. The FRB has stated that it would
generally view a failure to assist a troubled or failing subsidiary bank in
these circumstances as an unsound or unsafe banking practice or a violation of
the FRB's Regulation Y or both, justifying a cease and desist order or other
enforcement action, particularly if appropriate resources are available to the
bank holding company on a reasonable basis.
The following table sets forth an analysis of the Company's capital
ratios:
RISK-BASED CAPITAL RATIOS
(Dollars in Thousands)
Minimum Well
December 31, Capital Capitalized
2002 2001 2000 Ratios Ratios
---------- ---------- ---------- ---------- ----------
Tier 1 risk-based capital $ 58,755 $ 55,911 $ 51,835
Tier 2 risk-based capital 7,281 7,126 7,245
Total capital 66,036 63,037 59,080
Risk-weighted assets 557,620 540,626 537,549
Capital ratios
Tier 1 risk-based capital 10.54% 10.34% 9.64% 4.00% 6.00%
Tier 2 risk-based capital 11.84 11.66 10.99 8.00 10.00
Leverage ratio 7.48 7.54 6.90 4.00 5.00
As of December 31, 2002, the Tier 2 risk-based capital was comprised of
$6,450 in allowance for loan losses and $831 of Mandatory Redeemable Series B
Preferred Stock. The Series A Preferred Stock is convertible into common stock,
subject to certain adjustments intended to offset the amount of losses incurred
by the Company upon the post-closing sale of certain securities acquired in
conjunction with the 1996 acquisition of Prairie.
Impact of Inflation, Changing Prices, and Monetary Policies. The
financial statements and related financial data concerning the Company have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary effect of inflation on the
operations of the Company is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, changes in interest rates have
a more significant effect on the performance of a financial institution than do
the effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Interest rates are highly
sensitive to many factors which are beyond the control of the Company, including
the influence of domestic and foreign economic conditions and the monetary and
fiscal policies of the United States government and federal agencies,
particularly the FRB.
36.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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...................................................38
Consolidated Balance Sheets (December 31, 2002 and 2001) .....................39
Consolidated Statements of Income
(For the years December 31, 2002, 2001 and 2000)......................40
Consolidated Statements of Stockholders' Equity
(For the years December 31, 2002, 2001 and 2000)......................41
Consolidated Statements of Cash Flows
(For the years December 31, 2002, 2001 and 2000)......................43
Notes .......................................................................45
Supplementary Data
The Supplementary Financial Information required to be included in this
Item 8 is hereby incorporated by reference by Note 21 to the Notes to
Consolidated Financial Statements contained herein.
37.
[CROWE CHIZEK LOGO]
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
UnionBancorp, Inc.
We have audited the accompanying consolidated balance sheets of UnionBancorp,
Inc. as of December 31, 2002 and 2001, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2002. 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
As disclosed in Note 1, during 2002, the Company adopted new accounting guidance
for goodwill and intangible assets.
/s/ CROWE, CHIZEK AND COMPANY LLP
Oak Brook, Illinois
January 24, 2003
38.
UNIONBANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001 (In Thousands, Except Share and Per Share Data)
2002 2001
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 38,962 $ 26,699
Securities available-for-sale 227,229 186,282
Loans 483,229 504,968
Allowance for loan losses (6,450) (6,295)
------------ ------------
Net loans 476,779 498,673
Cash value of life insurance 13,776 2,153
Mortgage servicing rights 2,640 2,102
Premises and equipment, net 14,055 12,451
Goodwill 7,642 7,642
Intangible assets, net 873 975
Other real estate 1,557 1,885
Other assets 8,103 9,445
------------ ------------
Total assets $ 791,616 $ 748,307
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 90,606 $ 73,138
Interest-bearing 551,352 539,006
------------ ------------
Total deposits 641,958 612,144
Federal funds purchased and securities sold under
agreements to repurchase 3,588 2,629
Federal Home Loan Bank advances 61,750 52,750
Notes payable 8,275 9,275
Other liabilities 7,150 6,864
------------ ------------
Total liabilities 722,721 683,662
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, $1 par value, 10,000,000 shares authorized;
4,571,209 and 4,569,319 shares issued in 2002 and 2001 4,571 4,569
Surplus 21,856 21,841
Retained earnings 43,113 40,560
Accumulated other comprehensive income 3,171 1,536
Unearned compensation under stock option plans (23) (68)
------------ ------------
73,188 68,938
Treasury stock, at cost (590,263 shares in 2002 and 2001) (5,124) (5,124)
------------ ------------
Total stockholders' equity 68,064 63,814
------------ ------------
Total liabilities and stockholders' equity $ 791,616 $ 748,307
============ ============
See Accompanying Notes to Consolidated Financial Statements.
39.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2002, 2001, and 2000 (In Thousands, Except Per Share Data)
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Interest income
Loans $ 36,283 $ 43,059 $ 43,237
Securities
Taxable 7,377 8,655 8,649
Exempt from federal income taxes 1,702 1,972 2,033
Federal funds sold and other 147 143 289
---------- ---------- ----------
Total interest income 45,509 53,829 54,208
Interest expense
Deposits 17,145 25,680 27,254
Federal funds purchased and securities sold
under agreements to repurchase 170 80 233
Advances from the Federal Home Loan Bank 2,514 3,030 2,366
Notes payable 357 595 832
---------- ---------- ----------
Total interest expense 20,186 29,385 30,685
---------- ---------- ----------
Net interest income 25,323 24,444 23,523
Provision for loan losses 3,574 4,161 4,858
---------- ---------- ----------
Net interest income after provision for loan losses 21,749 20,283 18,665
Noninterest income
Service charges 2,812 2,748 2,683
Merchant fee income 1,185 1,095 1,110
Trust income 775 687 744
Mortgage banking income 2,843 2,096 1,278
Insurance commissions and fees 2,188 2,407 2,862
Securities gains (losses), net 407 798 (29)
Other income 2,245 2,089 2,492
---------- ---------- ----------
12,455 11,920 11,140
Noninterest expenses
Salaries and employee benefits 15,284 13,700 13,468
Occupancy expense, net 1,868 1,751 1,753
Furniture and equipment expense 1,820 1,632 1,803
Supplies and printing 525 608 573
Telephone 1,074 773 749
Other real estate owned expense 919 162 116
Amortization of intangible assets 245 945 1,310
Other expenses 7,291 6,641 6,113
---------- ---------- ----------
29,026 26,212 25,885
---------- ---------- ----------
Income before income taxes 5,178 5,991 3,920
Income taxes 1,134 1,537 1,017
---------- ---------- ----------
Net income 4,044 4,454 2,903
Preferred stock dividends 257 257 259
---------- ---------- ----------
Net income for common stockholders $ 3,787 $ 4,197 $ 2,644
========== ========== ==========
Basic earnings per common share $ 0.95 $ 1.06 $ 0.66
========== ========== ==========
Diluted earnings per common share $ 0.94 $ 1.05 $ 0.66
========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
40.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2002, 2001, and 2000 (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, 2000 $ 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
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
(Continued)
41.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2002, 2001, and 2000 (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, 2001 $ 500 $ 4,569 $ 21,841 $ 40,560 $ 1,536 $ (68) $ (5,124) $ 63,814
Common stock dividends - - - (1,234) - - - (1,234)
Preferred stock dividends - - - (257) - - - (257)
Exercise of stock options
(1,890 shares) - 2 15 - - - - 17
Amortization of un-
earned compensation
under stock option plans - - - - - 45 - 45
Comprehensive income
Net income - - - 4,044 - - - 4,044
Net increase in fair value
of securities classified as
available-for-sale, net of
income taxes and reclassi-
fication adjustments - - - - 1,635 - - 1,635
Total comprehensive
income 5,679
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 2002 $ 500 $ 4,571 $ 21,856 $ 43,113 $ 3,171 $ (23) $ (5,124) $ 68,064
======== ======== ======== ======== ======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
42.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001, and 2000 (In Thousands)
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 4,044 $ 4,454 $ 2,903
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 1,501 1,356 1,564
Amortization of intangible assets 245 945 1,310
Amortization of mortgage servicing rights (955) (609) (180)
Amortization of unearned compensation under
stock option plans 45 61 75
Amortization of bond premiums, net 1,437 644 54
FHLB stock dividend (196) (203) (61)
Provision for loan losses 3,574 4,161 4,858
Provision for deferred income taxes 73 344 (1,017)
Securities (gains) or losses, net (407) (798) 29
Gain on sale of subsidiaries, net - - (438)
(Gain) loss on sale of real estate acquired in
settlement of loans 376 26 (28)
Gain on sale of loans (2,909) (1,961) (788)
Net loans originated for sale 512 (1,712) (10)
Change in assets and liabilities
(Increase) decrease in other assets 1,468 (178) (1,266)
Increase (decrease) in other liabilities (827) (3,062) 3,516
----------- ----------- -----------
Net cash provided by operating activities 7,981 3,468 10,521
Cash flows from investing activities
Securities
Proceeds from maturities and paydowns 76,218 129,934 33,506
Proceeds from sales 19,640 21,582 4,483
Purchases (134,977) (145,321) (50,480)
Net (decrease) increase in loans 18,268 (481) (35,093)
Purchase of premises and equipment (3,105) (1,854) (233)
Purchase of bank-owned life insurance (11,462) - (2,245)
Proceeds from sale of real estate acquired in
settlement of loans 2,401 974 1,141
Bank and bank holding company acquisitions and
sales, net of cash and cash equivalents received - - (1,915)
----------- ----------- -----------
Net cash provided by (used in) investing activities (33,017) 4,834 (50,836)
(Continued)
43.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001, and 2000 (In Thousands)
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in deposits $ 29,814 $ (23,859) $ 41,805
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 959 2,104 (4,783)
Net increase in advances from the
Federal Home Loan Bank 9,000 9,342 10,675
Payments on notes payable (1,000) (1,000) (500)
Proceeds from notes payable - - 1,275
Dividends on common stock (1,234) (1,074) (950)
Dividends on preferred stock (257) (257) (259)
Redemption of preferred stock - - (26)
Proceeds from exercise of stock options 17 120 143
Purchase of treasury stock - - (1,274)
----------- ----------- -----------
Net cash provided by (used in) financing activities 37,299 (14,624) 46,106
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 12,263 (6,322) 5,791
Cash and cash equivalents
Beginning of year 26,699 33,021 27,230
----------- ----------- -----------
End of year $ 38,962 $ 26,699 $ 33,021
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 21,205 $ 31,180 $ 29,035
Income taxes 474 1,082 2,809
Transfers from loans to other real estate owned 2,449 2,359 1,057
See Accompanying Notes to Consolidated Financial Statements.
44.
UNIONBANCORP, INC.
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 areas of Illinois. 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,
value of mortgage servicing rights, 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.
(Continued)
45.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting
Policies (Continued)
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.
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. At December 31, 2002 and 2001, the Company had no material
derivative instruments.
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 on mortgage
and commercial loans is discontinued at the time the loan is 90 days delinquent
unless the credit is well-secured and in process of collection. Consumer loans
are typically charged off no later than 180 days past due. In all cases, loans
are placed on nonaccrual or charged off at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
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.
(Continued)
46.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting
Policies (Continued)
Mortgage servicing rights
- -------------------------
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.
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. At December 31, 2002 there is
a $325,000 valuation allowance against foreclosed assets. 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.
Company-owned life insurance
- ----------------------------
The Company has invested in bank-owned life insurance policies, for which the
Company is also the beneficiary, on certain members of management. Company-owned
life insurance is recorded at its cash surrender value or the amount that can be
realized. These policies have an aggregate face value of approximately $34.5
million and $3.7 million with an approximate cash surrender value of $13.8
million and $2.2 million at December 31, 2002 and 2001, respectively.
Goodwill and other intangible assets
- ------------------------------------
Goodwill results from prior business acquisitions and represents the excess of
the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. Upon adopting new accounting
guidance on January 1, 2002 and October 1, 2002, the Company ceased amortizing
goodwill. Goodwill is assessed at least annually for impairment and any such
impairment will be recognized in the period identified. The effect on net income
of ceasing goodwill amortization in 2002 was $690,000.
Other intangible assets consist of core deposit and acquired customer
relationship intangible assets arising from whole bank, branch, and insurance
company acquisitions. They are initially measured at fair value and then are
amortized on an accelerated method over their estimated useful lives, which is
10 years.
(Continued)
47.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting
Policies (Continued)
Long-term assets
- ----------------
Premises and equipment, core deposit, and other intangible assets, and other
long-term assets are reviewed for impairment when events indicate their carrying
amount may not be recoverable from future undiscounted cash flows. If impaired,
the assets are recorded at fair value.
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.
Stock compensation
- ------------------
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise plan equal to or greater than the
market price of the underlying common stock at date of grant. The following
table illustrates the effect on net income and earnings per share if expense was
measured using the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation.
2002 2001 2000
---- ---- ----
Net income as reported for common stockholders $ 3,787 $ 4,197 $ 2,644
Deduct: stock-based compensation expense
determined under fair value based method 131 135 142
---------- ---------- ----------
Pro forma net income $ 3,656 $ 4,062 $ 2,502
========== ========== ==========
(Continued)
48.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting
Policies (Continued)
2002 2001 2000
---- ---- ----
Basic earnings per common share as reported $ 0.95 $ 1.06 $ .66
Pro forma basic earnings per common share 0.92 1.02 .63
Diluted earnings per common share as reported 0.94 1.05 .66
Pro forma diluted earnings per common share 0.91 1.01 .62
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2002 2001
---- ----
Fair value $ 3.92 $ 3.98
Risk-free interest rate 3.72% 4.90%
Expected option life 6 7
Expected stock price volatility 26.99% 29.58%
Dividend yield 2.03% 2.03%
Stockholders' Equity:
- ---------------------
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, 2002 and
2001. 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, 2002 and 2001. 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
(Continued)
49.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting
Policies (Continued)
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.
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, 2002 and 2001. 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.
(Continued)
50.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting
Policies (Continued)
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.
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.
Newly issued but not yet effective accounting standards
- -------------------------------------------------------
New accounting standards on asset retirement obligations, restructuring
activities and exit costs, operating leases, and early extinguishment of debt
were issued in 2002. Management determined that when the new accounting
standards are adopted in 2003, they will not have a material impact on the
Company's financial condition or results of operations.
Reclassifications
- -----------------
Certain items in the financial statements as of and for the years ended December
31, 2001 and 2000 have been reclassified, with no effect on net income, to
conform with the current year presentation.
Note 2. Business Acquisitions and Divestitures
On August 24, 2000, the Company sold the deposits and premises of a
UnionBank/West branch location. At the date of sale, the branch had
approximately $2,659 in deposits and $162 in fixed assets. The sale price was
$600.
(Continued)
51.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 3. Securities
The fair value of securities available-for-sale and the related gross unrealized
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, 2002
U.S. Treasury $ 1,025 $ 23 $ -
U.S. government agencies 46,817 838 (1)
States and political subdivisions 34,589 1,527 (17)
U.S. government agency mortgage-backed
securities 113,579 2,399 (142)
Collateralized mortgage obligations 3,889 152 (1)
Equity securities 16,850 - (58)
Corporate 10,480 443 -
----------- ---------- ----------
$ 227,229 $ 5,382 $ (219)
=========== ========== ==========
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)
=========== ========== ==========
At December 31, 2002, approximately 32% 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,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Proceeds $ 19,640 $ 21,582 $ 4,483
Realized gains 409 798 -
Realized losses (2) - (29)
(Continued)
52.
UNIONBANCORP, INC.
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,
2002, by contractual maturity, are shown below. Securities not due at a single
maturity date, primarily mortgage-backed securities and collateralized mortgage
obligations, are shown separately.
Fair Value
----------
Due in one year or less $ 4,602
Due after one year through five years 69,942
Due after five years through ten years 14,530
Due after ten years 3,837
U.S. government agency mortgage-backed securities 113,579
Collateralized mortgage obligations 3,889
Equity securities 16,850
----------
$ 227,229
==========
As of December 31, 2002, the Company held callable securities carried at a fair
value of $46,865. The amortized cost of these securities was $45,980 as of
December 31, 2002.
Securities with carrying values of approximately $174,000 and $149,000 at
December 31, 2002 and 2001, 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,
----------------------------
2002 2001
------------ ------------
Commercial $ 136,656 $ 147,945
Commercial real estate 147,253 150,878
Real estate 139,020 145,602
Real estate loans held for sale 7,565 7,053
Installment 49,949 50,961
Other 2,786 2,529
------------ ------------
$ 483,229 $ 504,968
============ ============
(Continued)
53.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 4. Loans (Continued)
The following table presents data on impaired loans:
December 31,
----------------------------------
2002 2001 2000
---------- --------- --------
Year-end impaired loans for which an allowance
has been provided $ 7,925 $ 6,419 $ 3,125
Year-end impaired loans for which no allowance
has been provided - 840 3,134
---------- --------- --------
Total loans determined to be impaired $ 7,925 $ 7,259 $ 6,259
========== ========= ========
Allowance for loan loss for impaired loans included
in the allowance for loan losses $ 1,811 $ 1,235 $ 1,699
========== ========= ========
Average recorded investment in impaired loans $ 8,651 $ 8,184 $ 3,290
========== ========= ========
Interest income recognized from impaired loans $ 228 $ - $ 32
========== ========= ========
Cash basis interest income recognized from impaired loans $ 120 $ - $ -
========== ========= ========
The Company has approximately $829 and $1,616 of loans past due 90 days and
still accruing interest at December 31, 2002 and 2001.
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 $71,155 and $75,174
as of December 31, 2002 and 2001, 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). Changes in such
loans during the year ended December 31, 2002 follow:
Balance at December 31, 2001 $ 34,429
New loans, extensions, and modifications 32,778
Repayments (30,953)
Change in classification 255
-----------
Balance at December 31, 2002 $ 36,509
===========
Note 5. Loan Servicing
The following summarizes the secondary mortgage market activities:
Years Ended December 31,
---------------------------------------------
2002 2001 2000
------------ ------------ ------------
Proceeds from sales of mortgage loans $ 157,815 $ 137,393 $ 51,387
============ ============ ============
Gain on sales of mortgage loans $ 2,909 $ 1,961 $ 788
============ ============ ============
(Continued)
54.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 5. Loan Servicing (Continued)
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,
----------------------------
2002 2001
------------ ------------
Federal Home Loan Mortgage Corporation $ 7,430 $ 12,274
Federal National Mortgage Association 279,746 229,210
Small Business Administration 5,324 8,134
Other 3,321 3,450
------------ ------------
$ 295,821 $ 253,068
============ ============
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $1,252 and $1,016 at December 31, 2002 and 2001,
respectively.
Following is an analysis of the changes in originated mortgage servicing rights:
Years Ended December 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Balance at beginning of year $ 2,102 $ 1,423 $ 1,201
Originated mortgage servicing rights 1,493 1,288 402
Amortization (955) (609) (180)
---------- ---------- ----------
Balance at end of year $ 2,640 $ 2,102 $ 1,423
========== ========== ==========
Loans held for sale, which are included in real estate loans, are summarized as
follows:
December 31,
------------------------
2002 2001
---------- ----------
Secured by one-to-four-family residences $ 7,495 $ 5,334
Small Business Administration loans 70 1,719
---------- ----------
$ 7,565 $ 7,053
========== ==========
(Continued)
55.
UNIONBANCORP, INC.
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,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Balance at beginning of year $ 6,295 $ 6,414 $ 3,691
Provision for loan losses 3,574 4,161 4,858
Recoveries 459 395 116
Loans charged off (3,878) (4,675) (2,251)
---------- ---------- ----------
Balance at end of year $ 6,450 $ 6,295 $ 6,414
========== ========== ==========
Note 7. Premises and Equipment
Premises and equipment consisted of:
December 31,
--------------------------
2002 2001
----------- -----------
Land $ 1,760 $ 1,032
Buildings 12,823 13,238
Furniture and equipment 14,220 13,478
Construction in process 724 -
----------- -----------
29,527 27,748
Less accumulated depreciation 15,472 15,297
----------- -----------
$ 14,055 $ 12,451
=========== ===========
The Company is in the process of constructing a new branch facility in
Yorkville, Illinois. The new facility will be a branch of UnionBank and is
scheduled to open in the third quarter of 2003. The estimated costs to be
incurred in 2003 to complete the facility are approximately $1.8 million.
(Continued)
56.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 8. Goodwill and Intangible Assets
Goodwill is no longer amortized starting in 2002. The effect of not amortizing
goodwill is summarized as follows:
2002 2001 2000
---------- ---------- ----------
Reported net income $ 3,787 $ 4,197 $ 2,644
Add back: goodwill amortization, net of tax - 558 840
---------- ---------- ----------
Adjusted net income $ 3,787 $ 4,755 $ 3,484
========== ========== ==========
Basic earnings per share:
Reported net income $ 0.95 $ 1.06 $ 0.66
Goodwill amortization - 0.14 0.22
---------- ---------- ----------
Adjusted net income $ 0.95 $ 1.20 $ 0.88
========== ========== ==========
Diluted earnings per share:
Reported net income $ 0.94 $ 1.05 $ 0.66
Goodwill amortization - 0.14 0.21
---------- ---------- ----------
Adjusted net income $ 0.94 $ 1.19 $ 0.87
========== ========== ==========
Acquired Intangible Assets
Acquired intangible assets were as follows as of year-end:
2002 2001
---- ----
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized intangible assets:
Core deposit intangibles $ 2,106 $ 1,351 $ 2,106 $ 1,145
Other customer relationship
intangibles 165 47 22 8
---------- ---------- ---------- ----------
Total $ 2,271 $ 1,398 $ 2,128 $ 1,153
========== ========== ========== ==========
Aggregate amortization expense was $245, $255, and $339 for 2002, 2001, and
2000, respectively.
Estimated amortization expense for subsequent years:
2003 $ 237
2004 237
2005 237
2006 144
2007 14
Thereafter 4
(Continued)
57.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 9. Deposits
Deposit account balances by type are summarized as follows:
December 31,
----------------------------
2002 2001
------------ ------------
Non-interest-bearing demand deposits $ 90,606 $ 73,138
Savings, NOW, and money market accounts 202,681 149,599
Time deposits of $100 or more 152,395 150,481
Other time deposits 196,276 238,926
------------ ------------
$ 641,958 $ 612,144
============ ============
At December 31, 2002, the scheduled maturities of time deposits are as follows:
Year Amount
---- ------
2003 $ 218,653
2004 101,949
2005 15,488
2006 3,404
2007 7,211
Thereafter 1,966
------------
$ 348,671
============
Time certificates of deposit in denominations of $100 or more mature as follows:
December 31,
----------------------------
2002 2001
------------ ------------
3 months or less $ 43,223 $ 44,049
Over 3 months through 6 months 36,679 45,715
Over 6 months through 12 months 27,458 22,606
Over 12 months 45,035 38,111
------------ ------------
$ 152,395 $ 150,481
============ ============
(Continued)
58.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 10. 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,
------------------------
2002 2001
---------- ----------
Federal funds purchased $ - $ 200
Securities sold under agreements to repurchase 3,588 2,429
---------- ----------
$ 3,588 $ 2,629
========== ==========
Federal funds purchased and securities sold under agreement to repurchase
generally mature within one to ninety days from the transaction date.
At December 31, 2002, $20 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 $65.3
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, 2002 are as follows:
Average
Year Interest Rate Amount
---- ------------- ------
2003 3.32% $ 5,000
2004 4.64 20,250
2005 4.24 16,100
2006 5.38 7,300
2007 3.42 5,100
Thereafter 4.68 8,000
-----------
$ 61,750
===========
Notes payable consisted of the following at December 31, 2002 and 2001:
2002 2001
---------- ----------
Line of credit loan ($5,000) from LaSalle
National Bank; interest due quarterly at the
higher of (1) 180-day LIBOR plus 1.75% or (2)
4%; balance due on October 1, 2003; secured
by 100% of the stock of the subsidiary banks. $ 4,000 $ 5,000
---------- ----------
Revolving credit loan ($10,000) from LaSalle
National Bank; interest due quarterly at the
higher of (1) 180-day LIBOR plus 1.75% or (2)
4%; balance due on October 1, 2003; secured
by 100% of the stock of the subsidiary banks. 4,275 4,275
---------- ----------
$ 8,275 $ 9,275
========== ==========
(Continued)
59.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 10. Borrowed Funds (Continued)
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, 2002.
Information concerning borrowed funds is as follows:
Years Ended December 31,
----------------------------------------
2002 2001 2000
---------- ---------- ----------
Federal Funds Purchased
Maximum month-end balance during the year $ 10,000 $ 2,900 $ 11,999
Average balance during the year 904 1,160 1,640
Weighted average interest rate for the year 2.00% 3.48% 7.17%
Weighted average interest rate at year end N/A 2.00% N/A
Securities Sold Under Agreements to Repurchase
Maximum month-end balance during the year $ 4,680 $ 5,793 $ 7,344
Average balance during the year 4,126 1,315 1,931
Weighted average interest rate for the year 2.62% 3.04% 5.96%
Weighted average interest rate at year end 2.20 3.69 6.06
Advances from the Federal Home Loan Bank
Maximum month-end balance during the year $ 62,100 $ 66,408 $ 43,408
Average balance during the year 51,938 54,064 37,326
Weighted average interest rate for the year 4.87% 5.60% 6.34%
Weighted average interest rate at year end 4.43 3.76 6.43
Notes Payable
Maximum month-end balance during the year $ 9,275 $ 10,275 $ 10,775
Average balance during the year 9,023 9,719 10,348
Weighted average interest rate for the year 3.80% 6.13% 8.04%
Weighted average interest rate at year end 4.00 4.11 8.00
Note 11. Income Taxes
Income taxes consisted of:
Years Ended December 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Federal
Current $ 969 $ 1,219 $ 1,827
Deferred 52 279 (828)
---------- ---------- ----------
1,021 1,498 999
State
Current 92 (26) 207
Deferred 21 65 (189)
---------- ---------- ----------
113 39 18
---------- ---------- ----------
$ 1,134 $ 1,537 $ 1,017
========== ========== ==========
(Continued)
60.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 11. Income Taxes (Continued)
The Company's income tax expense differed from the statutory federal rate of 34%
as follows:
Years Ended December 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Expected income taxes $ 1,761 $ 2,037 $ 1,333
Income tax effect of
Interest earned on tax-free investments and loans (635) (736) (763)
Nondeductible interest expense incurred to
carry tax-free investments and loans 68 120 130
Nondeductible amortization - 131 227
State income taxes, net of federal tax benefit 78 36 2
Other (138) (51) 88
---------- ---------- ----------
$ 1,134 $ 1,537 $ 1,017
========== ========== ==========
The significant components of deferred income tax assets and liabilities
consisted of:
December 31,
------------------------
2002 2001
---------- ----------
Deferred tax assets
Allowance for loan losses $ 2,513 $ 2,446
Deferred compensation, other 384 236
---------- ----------
Total deferred tax assets 2,897 2,682
Deferred tax liabilities
Depreciation (442) (527)
Basis adjustments arising from acquisitions (704) (495)
Mortgage servicing rights (1,023) (814)
Securities available-for-sale (2,005) (965)
Other (614) (659)
---------- ----------
Total deferred tax liabilities (4,788) (3,460)
---------- ----------
Net deferred tax liabilities $ (1,891) $ (778)
========== ==========
Note 12. 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 $385, $335, and $280 for
the years ended December 31, 2002, 2001, and 2000, respectively.
(Continued)
61.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 12. 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 $301, $149, and $132 for the years ended December 31, 2002, 2001,
and 2000, respectively.
Note 13. 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. nonqualified 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, 2002, 2001, and
2000 and changes during the years ended on those dates is presented below.
2002 2001 2000
--------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------
Outstanding at beginning
of year 264,615 $ 11.78 245,141 $ 11.55 310,678 $ 12.22
Granted 106,824 14.59 57,882 11.75 - -
Exercised (1,890) 8.64 (13,508) 8.38 (17,239) 7.94
Forfeited (9,000) 16.36 (24,900) 16.29 (48,298) 14.62
--------- ---------- --------- ------- --------- ---------
Outstanding at end of year 360,549 12.66 264,615 11.78 245,141 11.55
========= ========= =========
Options exercisable at
year end 158,255 $ 10.55 135,170 $ 10.17 122,791 $ 9.69
========= ========== ========= ======= ========= =========
Weighted-average fair
value of options granted
during the year $ 3.92 $ 3.98 N/A
========== ======= =========
(Continued)
62.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 13. Stock Option Plans (Continued)
Options outstanding at year-end 2002 were as follows:
------Outstanding------ -----Exercisable-----
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Number Life Number Price
--------------- ------ ---- ------ -----
$ 5.04 - $ 8.33 58,800 2 years 58,800 $ 6.44
9.67 - 13.00 107,725 6 years 45,885 10.14
13.88 - 18.50 194,024 8 years 53,570 15.43
------- --------- ------- ---------
360,549 6.3 years 158,255 $ 10.55
======= ========= ======= =========
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 $45, $61, and $75 for
the years ended December 31, 2002, 2001, and 2000, respectively.
Note 14. 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 149,926 shares of common stock
were outstanding at December 31, 2002 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.
2002 2001 2000
---------- ---------- ----------
Basic earnings per share
Net income available to common stockholders $ 3,787 $ 4,197 $ 2,644
========== ========== ==========
Weighted average common shares outstanding 3,980 3,974 3,980
========== ========== ==========
Basic earnings per share $ 0.95 $ 1.06 $ 0.66
========== ========== ==========
Weighted average common shares outstanding 3,980 3,974 3,980
Add dilutive effect of assumed exercised stock
options 48 35 27
---------- ---------- ----------
Weighted average common and dilutive
potential shares outstanding 4,028 4,009 4,007
========== ========== ==========
Diluted earnings per share $ 0.94 $ 1.05 $ 0.66
========== ========== ==========
(Continued)
63.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 15. 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.
In December of 2002, the Company filed the required application with the
appropriate regulatory agency for approval to merge UnionBank and
UnionBank/Central. The Company believes that the application will be approved,
and the merger of the two banks is scheduled for March 31, 2003.
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, 2002, that the Company
and the Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from the corresponding
regulatory agency categorized the Banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the Banks'
categories.
To Be Well
Capitalized Under
To Be Adequately Prompt Corrective
Actual Capitalized Action Provisions
----------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------
As of December 31, 2002
Total capital (to risk-
weighted assets)
UnionBancorp, Inc. $ 66,036 11.84% $ 44,610 8.00% $ 55,762 10.00%
UnionBank 41,393 12.68 26,113 8.00 32,642 10.00
UnionBank/Central 12,488 14.09 7,092 8.00 8,866 10.00
UnionBank/West 16,544 13.19 10,031 8.00 12,539 10.00
Tier I capital (to risk-
weighted assets)
UnionBancorp, Inc. $ 58,755 10.54% $ 22,305 4.00% $ 33,457 6.00%
UnionBank 37,676 11.54 13,057 4.00 19,585 6.00
UnionBank/Central 11,380 12.84 3,546 4.00 5,319 6.00
UnionBank/West 15,284 12.19 5,016 4.00 7,523 6.00
Tier I leverage ratio (to
average assets)
UnionBancorp, Inc. $ 58,755 7.48% $ 30,438 4.00% $ 38,048 5.00%
UnionBank 37,676 8.30 17,478 4.00 21,847 5.00
UnionBank/Central 11,380 8.23 5,441 4.00 6,801 5.00
UnionBank/West 15,284 8.80 6,587 4.00 8,234 5.00
(Continued)
64.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 15. 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
Note 16. 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.
(Continued)
65.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 16. Fair Value of Financial Instruments (Continued)
The estimated fair values of the Company's financial instruments were as
follows:
December 31,
--------------------------------------------------------------
2002 2001
--------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets
Cash and cash equivalents $ 38,962 $ 38,962 $ 26,699 $ 26,699
Securities 227,229 227,229 186,282 186,282
Loans 476,779 479,497 498,673 497,284
Accrued interest receivable 6,211 6,211 7,039 7,039
Financial liabilities
Deposits 641,958 642,270 612,144 618,866
Federal funds purchased and
securities sold under
agreements to repurchase 3,588 3,588 2,629 2,629
Advances from the Federal
Home Loan Bank 61,750 64,072 52,750 52,307
Notes payable 8,275 8,275 9,275 9,275
Accrued interest payable 2,935 2,935 3,954 3,954
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the earnings potential of the trust operations, the trained work force, customer
goodwill, and similar items.
Note 17. Commitments, Contingencies, and Credit Risk
In the normal course of business, there are various contingent liabilities
outstanding, 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.
(Continued)
66.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 17. Commitments, Contingencies, and Credit Risk (Continued)
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, 2002 $ 1,421 $ 56,959 $ 46,180 $ 103,139 4.50% - 9.00%
December 31, 2001 $ 2,858 $ 55,807 $ 35,790 $ 91,597 5.50% - 7.99%
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)
67.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 18. 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 2002 2001
----------- -----------
Cash and cash equivalents $ 259 $ 487
Investment in subsidiaries 76,548 72,421
Premises and equipment 830 1,202
Other assets 453 590
----------- -----------
$ 78,090 $ 74,700
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
--------------------------
Liabilities 2002 2001
----------- -----------
Notes payable $ 8,275 $ 9,275
Other liabilities 920 780
9,195 10,055
Mandatory redeemable preferred stock 831 831
Stockholders' equity 68,064 63,814
----------- -----------
$ 78,090 $ 74,700
=========== ===========
(Continued)
68.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 18. Condensed Financial Information - Parent Company Only (Continued)
Income Statements (Parent Company Only)
Years Ended December 31,
--------------------------------------
2002 2001 2000
--------------------------------------
Dividends from subsidiaries $ 3,842 $ 3,523 $ 3,429
Other income 2,037 1,796 21
Interest expense 347 592 827
Other expenses 5,435 4,491 3,299
Income tax benefit (1,455) (1,161) (1,564)
Equity in undistributed earnings of subsidiaries 2,492 3,057 2,015
---------- ---------- ----------
Net income 4,044 4,454 2,903
Less dividends on preferred stock 257 257 259
---------- ---------- ----------
Net income on common stock $ 3,787 $ 4,197 $ 2,644
========== ========== ==========
Statements of Cash Flows (Parent Company Only)
Years Ended December 31,
--------------------------------------
2002 2001 2000
--------------------------------------
Cash flows from operating activities
Net income $ 4,044 $ 4,454 $ 2,903
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 345 405 101
Undistributed earnings of subsidiaries (2,492) (3,057) (2,015)
Amortization of deferred compensation -
stock options 45 61 75
Loss on sale of assets - - 116
Decrease in other assets 137 250 22
Increase in other liabilities 140 56 206
---------- ---------- ----------
Net cash provided by operating activities 2,219 2,169 1,408
Cash flows from investing activities
Purchases of premises and equipment 27 (643) (13)
Investment in subsidiaries - 845 -
---------- ---------- ----------
Net cash provided by (used in) financing
activities 27 202 (13)
(Continued)
69.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 18. Condensed Financial Information - Parent Company Only (Continued)
Years Ended December 31,
--------------------------------------
2002 2001 2000
--------------------------------------
Cash flows from financing activities
Net increase (decrease) in notes payable $ (1,000) $ (1,000) $ 775
Dividend paid on common stock (1,234) (1,074) (950)
Dividends paid on preferred stock (257) (257) (259)
Proceeds from exercise of stock options 17 120 143
Purchase of treasury stock - - (1,274)
---------- ---------- ----------
Net cash used in financing activities (2,474) (2,211) (1,565)
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents (228) 160 (170)
Cash and cash equivalents
Beginning of year 487 327 497
---------- ---------- ----------
End of year $ 259 $ 487 $ 327
========== ========== ==========
Note 19. Other Comprehensive Income
Changes in other comprehensive income components and related taxes
are as follows:
Years Ended December 31,
--------------------------------------
2002 2001 2000
--------------------------------------
Change in unrealized gains on
securities available-for-sale $ 3,069 $ 3,199 $ 3,328
Reclassification adjustment for (gains)
losses recognized in income (407) (798) 29
---------- ---------- ----------
Net unrealized gains 2,662 2,401 3,357
Tax expense 1,027 926 1,301
---------- ---------- ----------
Other comprehensive income $ 1,635 $ 1,475 $ 2,056
========== ========== ==========
(Continued)
70.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 20. 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, brokerage, 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
------- -------- ------
2002
Net interest income (loss) $ 25,672 $ (349) $ 25,323
Other revenue 8,841 3,614 12,455
Other expense 19,892 9,134 29,026
Segment profit 6,464 (2,420) 4,044
Noncash items
Depreciation 992 509 1,501
Provision for loan loss 3,574 - 3,574
Amortization of goodwill and other intangibles 191 39 230
Goodwill 5,822 1,820 7,642
Segment assets 785,683 5,933 791,616
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
Goodwill 5,822 1,820 7,642
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
Goodwill 6,377 1,975 8,352
Segment assets 749,859 8,874 758,733
(Continued)
71.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 21. Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2002 Year Ended December 31, 2001
Three Months Ended Three Months Ended
---------------------------------------------- ---------------------------------------
Dec. 31 (C)Sep. 30 (A)(C)June 30 (C)March 31 (B)Dec. 31 Sep. 30 June 30 March 31
-------- --------- ------------- ----------- ---------- -------- ------- --------
Total interest income $ 11,189 $11,238 $11,352 $11,730 $12,498 $13,236 $13,923 $14,172
Total interest expense (4,634) (4,879) (5,161) (5,512) (6,136) (7,070) (7,816) (8,363)
-------- --------- --------- ------- ------- ------- ------- -------
Net interest income 6,555 6,359 6,191 6,218 6,362 6,166 6,107 5,809
Provision for loan losses 518 519 2,018 519 2,890 596 366 309
Noninterest income 3,554 3,060 2,838 3,003 3,045 3,045 3,018 2,812
Noninterest expense 7,824 7,387 6,952 6,863 7,075 6,531 6,476 6,130
-------- --------- --------- ------- ------- ------- ------- -------
Income (loss) before
income taxes 1,767 1,513 59 1,839 (558) 2,084 2,283 2,182
Income tax expense
(benefit) 459 335 (198) 538 (424) 616 698 647
-------- --------- --------- ------- ------- ------- ------- -------
1,308 1,178 257 1,301 (134) 1,468 1,585 1,535
Preferred stock dividend 64 65 64 64 63 64 65 65
-------- --------- --------- ------- ------- ------- ------- -------
Net income (loss) for
common stockholders $ 1,244 $ 1,113 $ 193 $ 1,237 $ (197) $ 1,404 $ 1,520 $ 1,470
======== ========= ========= ======= ======= ======= ======= =======
Basic earnings (loss)
per share $ .34 $ .27 $ .04 $ .30 $ (0.04) $ 0.35 $ 0.38 $ 0.37
======== ========= ========= ======= ======= ======= ======= =======
Diluted earnings (loss)
per share $ .33 $ .27 $ .04 $ .30 $ (0.05) $ 0.35 $ 0.38 $ 0.37
======== ========= ========= ======= ======= ======= ======= =======
(A) The net income for the quarter is down due to the increase in the provision
for loan losses, which was influenced by deterioration in the overall
credit quality and the impact of various identified credits.
(B) 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.
(c) These amounts have been adjusted to reflect the adoption of SFAS No. 147 as
of January 1, 2002.
(Continued)
72.
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 2003 Proxy
Statement under the caption "Election of Directors" and on pages 11 through 12
of the 2003 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 2003 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 2003 Proxy Statement,
the names and ages of the executive officers of the Company as of December 31,
2002, 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, 49, 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, 63, 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 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, 56, joined 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. Mr. Martin will retire effective April 22,
2003.
Kurt R. Stevenson, 36, was named Vice President & Chief Financial
Officer in June of 2000. 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. In 2002, Mr.
Stevenson was also named Cashier of UnionBank, in addition to his corporate
responsibilities. He first started employment with the Ottawa National Bank in
1987 and, subsequently, began work with the Company following the acquisition in
1991.
73.
Item 11. Executive Compensation
The information on pages 13 through 15 of the 2003 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 11 through 12 of the 2003 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 18 of the 2003 Proxy Statement under the caption
"Transactions with Management" is incorporated by reference.
Item 14. Controls and Procedures
Within the 90 days prior to the date of this report, the Company's Chief
Executive Officer and Chief Financial Officer carried out an evaluation, with
the participation of other members of management as they deemed appropriate, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures as contemplated by Exchange Act Rule 13a-14. Based upon,
and as of the date of that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective, in all material respects, in timely alerting them to
material information relating to the Company (and its consolidated subsidiaries)
required to be included in the periodic reports the Company is required to file
and submit to the SEC under the Exchange Act.
There were no significant changes to the Company's internal controls or
in other factors that could significantly affect these internal controls
subsequent to the date the Company carried out its evaluation of its internal
controls. There were no significant deficiencies or material weaknesses
identified in the evaluation and, therefore, no corrective actions were taken.
Item 15. 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 37 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.
74.
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits required to be filed with this Form 10-K are included with
this Form 10-K and are located immediately following the Exhibit Index
to this Form 10-K.
75.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 17, 2003.
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 17, 2003.
/S/ Richard J. Berry /S/ Dennis J. McDonnell
- ------------------------------------ --------------------------------------
Richard J. Berry Dennis J. McDonnell
Director Director
/S/ Walter E. Breipohl /S/ I.J. Reinhardt, Jr.
- ------------------------------------ --------------------------------------
Walter E. Breipohl I.J. Reinhardt, Jr.
Director Director
/S/ Robert J. Doty /S/ John A. Shinkle
- ------------------------------------ --------------------------------------
Robert J. Doty John A. Shinkle
Director Director
/S/ Charles J. Grako /S/ Scott C. Sullivan
- ------------------------------------ --------------------------------------
Charles J. Grako Scott C. Sullivan
Director Director
/S/ John A. Trainor
--------------------------------------
John A. Trainor
Director
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
--------------------------------------------
I, Charles J. Grako, President and Principal Executive Officer, certify that:
1) I have reviewed this annual report on Form 10-K of UnionBancorp, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 17, 2003
Charles J. Grako
President and Principal Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
--------------------------------------------
I, Kurt R. Stevenson, Vice President and Principal Financial and Accounting
Officer, certify that:
1) I have reviewed this annual report on Form 10-K of UnionBancorp, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 17, 2003
Kurt R. Stevenson
Vice President and Principal Financial and Accounting Officer
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 Incorporated by
of Incorporation of reference from Exhibit
UnionBancorp, Inc., 3.1 to the
as amended Registration Statement
on Form S-1 filed by
the Company on August
19, 1996 (SEC File No.
33-9891), as amended
3.2 Bylaws of Incorporated by
UnionBancorp, Inc. reference from Exhibit
3.2 to the
Registration Statement
on Form S-1 filed by
the Company on August
19, 1996 (SEC File No.
33-9891), as amended
4.1 Certificate of Incorporated by
Designation, reference from Exhibit
Preferences and 4.3 to the
Rights of Series A Registration Statement
Convertible Preferred on Form S-1 filed by
Stock of the Company on August
UnionBancorp, Inc. 19, 1996 (SEC File No.
33-9891), as amended
4.2 Certificate of Incorporated by
Designation, reference from Exhibit
Preferences and 4.4 to the
Rights of Series B Registration Statement
Preferred Stock of on Form S-1 filed by
UnionBancorp, Inc. the Company on August
19, 1996 (SEC File No.
33-9891), as amended
4.3 Certificate of Incorporated by
Designation, reference from Exhibit
Preferences and 4.5 to the
Rights of Series C Registration Statement
Junior Participating on Form S-1 filed by
Preferred Stock the 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 Stock Incorporated by
Certificate of reference from Exhibit
UnionBancorp, Inc. 4.6 to the
Registration Statement
on Form S-1 filed by
the Company on August
19, 1996 (SEC File No.
33-9891), as amended
4.5 Rights Agreement Incorporated by
between UnionBancorp, reference from Exhibit
Inc. and Harris Trust 4.7 to the
and Savings Bank, Registration Statement
dated August 5, 1996 on Form S-1 filed by
the Company on August
19, 1996 (SEC File No.
33-9891), as amended
10.1 Registration Incorporated by
Agreement dated reference from Exhibit
August 6, 1996, 10.10 to the
between UnionBancorp, Registration Statement
Inc. and each of on Form S-1 filed by
Wayne W. Whalen and the Company on August
Dennis J. McDonnell 19, 1996 (SEC File No.
33-9891), as amended
10.2 Loan Agreement Incorporated by
between UnionBancorp, reference from Exhibit
Inc. and LaSalle 10.11 to the
National Bank dated Registration Statement
August 2, 1996 on Form S-1 filed by
the Company on August
19, 1996 (SEC File No.
33-9891), as amended
10.3 UnionBancorp, Inc. Incorporated by
Employee Stock reference from Exhibit
Ownership Plan 10.12 to the
Registration Statement
on Form S-1 filed by
the Company on August
19, 1996 (SEC File No.
33-9891), as amended
10.4 UnionBancorp, Inc. Incorporated by
1993 Stock Option reference from Exhibit
Plan, as amended 10.13 to the
Registration Statement
on Form S-1 filed by
the Company on August
19, 1996 (SEC File No.
33-9891), as amended
Incorporated
Exhibit Herein By Filed
No. Description Reference To Herewith
--- ----------- ------------ --------
10.5 UnionBancorp, Inc. Incorporated by
1999 Nonqualified reference from Exhibit
Stock Option Plan 10.1 to the
registration statement
on Form S-8 filed by
the Company on December
10, 1999 (SEC File No.
333-92549)
10.6 UnionBancorp, Inc. Incorporated by
2000 Incentive reference from Exhibit
Compensation Plan 10.1 to UnionBancorp's
Quarterly Report on Form
10-Q for the quarter ended
September 30, 2001 as
filed with the SEC on
November 13, 2001
10.7 Employment Agreement Incorporated by
between UnionBancorp, reference from Exhibit
Inc. and Paul R. 10.2 to UnionBancorp's
Tingley dated August Quarterly Report on
22, 2001 Form 10-Q for the
quarter ended
September 30, 2001 as
filed with the SEC on
November 13, 2001
13.1 Portions of the 2002 *
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
Incorporated
Exhibit Herein By Filed
No. Description Reference To Herewith
--- ----------- ------------ --------
99.1 Portions of the 2003 Incorporated by
Proxy Statement (as reference from the
incorporated by Schedule 14A filed by
reference into this the Company on March
Form 10-K) 17, 2003 (SEC File No.
0-28846)
99.2 906 Certification of *
Chief Executive
Officer
99.3 906 Certification of *
Chief Financial
Officer