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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, 2003
Commission File Number: 0-28846
UNIONBANCORP, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 36-3145350
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
321 West Main Street Ottawa, Illinois 61350
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(Address of principal executive offices, including zip code)
(815) 431-2720
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Exchange Class which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($1.00 par value)
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(Title of Class)
Preferred Purchase Rights
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
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 1, 2004, the Registrant had issued and outstanding
4,034,500 shares of the Registrant's Common Stock. The aggregate market value of
the voting stock held by non-affiliates of the Registrant as of June 30, 2003,
the last business day of the Registrant's most recently completed second
quarter, was $35,946,060.*
* Based on the last reported price $20.00 of an actual transaction in the
Registrant's Common Stock on June 30, 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 2003 Annual Report to Stockholders
(the "2003 Annual Report") are incorporated by reference into Part II of this
Form 10-K.
Certain portions of the Proxy Statement for the 2004 Annual Meeting of
Stockholders (the "2004 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.................................................... 11
Item 3. Legal Proceedings............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders........... 12
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters............................. 12
Item 6. Selected Consolidated Financial Data.......................... 14
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition................................. 14
Item 7A. Quantitative and Qualitative Disclosure about Market Risk..... 42
Item 8. Financial Statements and Supplementary Data................... 42
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ............................... 81
Item 9A. Controls and Procedures....................................... 81
PART III
Item 10. Directors and Executive Officers of the Registrant............ 81
Item 11. Executive Compensation........................................ 82
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 82
Item 13. Certain Relationships and Related Transactions................ 82
Item 14. Principal Accountant Fees and Services........................ 82
Item 15. Exhibits, Financial Statement Schedules and Reports
On Form 8-K............................................. 83
PART I
Item 1. Description of Business
General
The Company, a Delaware corporation, is a regional financial services
organization based in Ottawa, Illinois, encompassing three bank subsidiaries
(the "Banks") and one non-bank subsidiary, UnionFinancial Services & Trust
Company ("UnionFinancial"). Together, these entities serve customers in
twenty-five bank locations and one non-bank location from the far Western
suburbs of the Chicago metropolitan area across Central and Northern Illinois to
the Mississippi River in Western Illinois, with banking, trust, insurance,
investment and 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 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.
In March of 2003, the Company completed phase one of a two-phase bank charter
consolidation initiative. UnionBank/Central was successfully merged into the
existing UnionBank in an effort to streamline backroom processes, enhance
efficiencies and achieve greater economies of scales. Seamless to our customers,
the process has alleviated many intra-company transactions, financial reporting
functions and loan participations, while creating a flatter organizational
structure. UnionBank/Northwest and UnionBank/West are slated to merge into
UnionBank during the first quarter of 2004.
The sale of the Company's Merchant Point of Sale (POS) product was completed in
May of 2003. This action was initiated to more effectively reallocate capital
and to more effectively mitigate risk to the Company. Under the agreement, the
Company will still be able to offer the product and will share in revenues via
referral fees and a revenue sharing agreement based on the activity merchants
experience.
In June of 2003, the Company entered into an arrangement to sell its book of ISP
customers to a local Internet Service Provider (ISP). This action came as a
result of the Company's decision to focus its Information Technology division
more heavily on core business initiatives, while continuing to ensure that
customers are receiving the highest level of service possible.
The Company's newest branch facility in Yorkville, Illinois, one of the fastest
growing Chicago suburbs, officially opened for business in December of 2003. The
facility is located in the new Yorkville Marketplace development at the
intersection of Routes 34 and 47, the most highly trafficked intersection in
Kendall County. The 6,500 square foot branch is a full-service bank that offers
retail banking services, mortgage lending, asset management and business banking
with extended hours for customer convenience.
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 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 and investment 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.
2.
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.
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.
3.
Employees
At December 31, 2003, the Company employed 373 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
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/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
4.
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, consumer
finance, equipment leasing, the operation of a computer service bureau
(including software development), and mortgage banking and brokerage. The BHCA
generally does not place territorial restrictions on the domestic activities of
non-bank subsidiaries of bank holding companies.
In November, 1999, the Gramm-Leach-Bliley Act ("GLB Act") was signed into law.
Under the GLB Act, bank holding companies that meet certain standards and elect
to become "financial holding companies" are permitted to engage in a wider range
of activities than those permitted to bank holding companies, including
securities and insurance activities. Specifically, a bank holding company that
elects to become a financial holding company may engage in any activity that the
Federal Reserve Board, in consultation with the Secretary of the Treasury,
determines is (i) financial in nature or incidental thereto, or (ii)
complementary to any such financial-in-nature activity, provided that such
complementary activity does not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally. A bank
holding company may elect to become a financial holding company only if each of
its depository institution subsidiaries is well-capitalized, well-managed, and
has a Community Reinvestment Act rating of "satisfactory" or better at their
most recent examination.
The GLB Act specifies many activities that are financial in nature, including
lending, exchanging, transferring, investing for others, or safeguarding money
or securities; underwriting and selling insurance; providing financial,
investment or economic advisory services; underwriting, dealing in, or making a
market in securities; and those activities currently permitted for bank holding
companies that are so closely related to banking or managing or controlling
banks, as to be a proper incident thereto.
5.
The GLB Act changed federal laws to facilitate affiliation between banks and
entities engaged in securities and insurance activities. The law also
established a system of functional regulation under which banking activities,
securities activities, and insurance activities conducted by financial holding
companies and their subsidiaries and affiliates will be separately regulated by
banking, securities, and insurance regulators, respectively.
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, 2003, 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 12.2% 7.7%
Prairie 18.1% 11.7%
Country 13.2% 7.7%
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
6.
its net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.
Further, the Illinois Business Corporation Act, as amended, prohibits an
Illinois corporation, such as Prairie or Country, from paying a dividend if,
after giving effect to the dividend: (i) the corporation would be insolvent; or
(ii) the net assets of the corporation would be less than zero; or (iii) the net
assets of the corporation would be less than the maximum amount then payable to
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, 2003, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2004, 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,
7.
if the institution has no tangible capital. Management of the Company is not
aware of any activity or condition that could result in termination of the
deposit insurance of the Banks.
FICO Assessments. Since 1987, a portion of the deposit insurance assessments
paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has
been used to cover interest payments due on the outstanding obligations of the
Financing Corporation ("FICO"). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. As a result of federal legislation enacted in
1996, beginning as of January 1, 1997, both SAIF members and BIF members became
subject to assessments to cover the interest payments on outstanding FICO
obligations. These FICO assessments are in addition to amounts assessed by the
FDIC for deposit insurance. Between January 1, 2000 and the final maturity of
the outstanding FICO obligations in 2019, BIF members and SAIF members will
share the cost of the interest on the FICO bonds on a pro rata basis. During the
year ended December 31, 2003, the FICO assessment rate for both SAIF members
ranged between approximately 0.0152% of deposits and approximately 0.0168% of
deposits. During the year ended December 31, 2003, the Banks paid FICO
assessments totaling $98,149.
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, 2003, the Banks paid supervisory assessments to the
Commissioner totaling $112,370.
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, 2003, 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, 2003, each of the Banks exceeded its
minimum regulatory capital requirements, as follows:
Risk-Based Leverage
Capital Ratio Capital Ratio
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UnionBank 12.8% 8.8%
UnionBank/ West 13.2% 7.3%
8.
Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators' corrective
powers include: requiring the institution to submit a capital restoration plan;
limiting the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions between the
institution and its affiliates; restricting the interest rate the institution
may pay on deposits; ordering a new election of directors of the institution;
requiring that senior executive officers or directors be dismissed; prohibiting
the institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution. As of December 31, 2003, 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
dividends in excess of their net profits then on hand, after deducting losses
and bad debts. 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 $5.2 million available to be paid as dividends to the Company by
the Banks as of December 31, 2003. 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.
9.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines, which establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
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. Illinois law permits interstate mergers,
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.
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. Certain states permit out-of-state banks
to establish de novo branches or acquire branches from another bank. Illinois
law currently does not permit out-of-state banks to establish branches in
Illinois in this manner, but Illinois-chartered banks may branch into other
states in this manner if the law of the state in which the branch will be
established or acquired so authorizes and does not require a reciprocal
provision under Illinois law.
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.
The GLB Act also authorizes insured state banks to engage in financial
activities, through subsidiaries, similar to the activities permitted for
financial holding companies. If a state bank wants to establish a subsidiary
engaged in financial activities, it must meet certain criteria, including that
it and all of its affiliated insured depository institutions are
well-capitalized and have a Community Reinvestment Act rating of at least
10.
"satisfactory" and that it is well-managed. There are capital deduction and
financial statement requirements and financial and operational safeguards that
apply to subsidiaries engaged in financial activities. Such a subsidiary is
considered to be an affiliate of the bank and there are limitations on certain
transactions between a bank and a subsidiary engaged in financial activities of
the same type that apply to transactions with a bank's holding company and its
subsidiaries.
Reserve Requirement. 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:
o for the first $6.6 million of net transaction accounts, there is no
reserve;
o for net transaction accounts totaling over $6.6 million and up to
$45.5 million, a reserve of 3%; and
o for net transaction accounts totaling in excess of $45.5 million, a
reserve requirement of $1.164 million plus 10% against that portion
of the total transaction accounts greater than $45.4 million
The dollar amounts and percentages reported here are all subject to adjustment
by the Federal Reserve. The effect of maintaining the required non-interest
earning reserves is to reduce the Banks' interest earning assets.
Financial Services Subsidiary
UnionBank is the sole stockholder of UnionFinancial Services & Trust Company
("UnionFinancial"), an Illinois corporation licensed as a general insurance
agency by the Illinois Department of Insurance (the "Department").
UnionFinancial is subject to supervision and regulation by the Department with
regard to compliance with the laws and regulations governing insurance agents
and by the Commissioner and the Federal Reserve with regard to compliance with
banking laws and regulations applicable to subsidiaries of Illinois-chartered
member banks.
UnionFinancial, through its 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 UnionFinancial, among other
things, to maintain a minimum level of capital, as determined by the
Commissioner, and to obtain the approval of the Commissioner before opening
branch offices for conducting trust activities 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.
Item 2. Properties
At December 31, 2003, the Company operated twenty-five banking offices and one
non-bank office in Illinois. The principal offices of the Company are located in
Ottawa, Illinois. All of the Company's offices are owned by one of the Banks and
are not subject to any mortgage or material encumbrance, with the exception of
six offices that are leased located in LaSalle and Adams counties. The Company
believes that its current facilities are adequate for its existing business.
11.
AFFILIATE MARKETS SERVED PROPERTY/TYPE LOCATION
- --------- -------------- ----------------------
The Company Administrative Office: Ottawa, IL
UnionBank Bureau, DeKalb, Grundy, Main Office: Streator, IL
Kane, Kendall, LaSalle,
Livingston, Madison and Seventeen banking offices located in
Whiteside Counties markets served.
UnionBank/West Adams, Hancock, Main Office: Macomb, IL
McDonough, 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 Counties Offices located in Clayton, Mendota,
Ottawa, Princeton, Quincy, Rushville,
Sandwich and Streator IL.
In addition to the banking locations listed above, the Banks own thirty-two
automated teller machines, some of which are housed within banking offices and
some of which are independently located.
At December 31, 2003, the properties and equipment of the Company had an
aggregate net book value of approximately $16.6 million.
Item 3. Legal Proceedings
Neither the Company nor any of its subsidiaries are involved in any pending
legal proceedings other than routine legal proceedings occurring in the normal
course of business, which, in the opinion of management, in the aggregate, are
not material to the Company's consolidated financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
There were no items submitted to a vote of security holders in the fourth
quarter of 2003.
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder
Matters
The Company's Common Stock was held by approximately 595 stockholders of record
as of March 1, 2004, 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.
12.
Stock Sales
---------------------
Cash
High Low Dividends
--------- --------- ---------
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
2003
First Quarter ........................... $ 16.86 $ 15.15 $ 0.080
Second Quarter .......................... 20.48 16.05 0.090
Third Quarter ........................... 22.52 19.25 0.090
Fourth Quarter .......................... 24.04 20.00 0.090
The holders of the Common Stock are entitled to receive dividends as declared by
the Board of Directors of the Company, which considers payment of dividends
quarterly. Upon the consummation of the acquisition of Prairie in 1996,
preferential dividends were required to be paid or accrued quarterly, with
respect to the outstanding shares of Preferred Stock. The ability of the Company
to pay dividends in the future will be primarily dependent upon its receipt of
dividends from the Banks. In determining cash dividends, the board of directors
considers the earnings, capital requirements, debt and dividend servicing
requirements, financial ratio guidelines it has established, financial condition
of the Company and other relevant factors. The Banks' ability to pay dividends
to the Company and the Company's ability to pay dividends to its stockholders
are also subject to certain regulatory restrictions.
The Company has paid regular cash dividends on the Common Stock since it
commenced operations in 1982. There can be no assurance, however, that any such
dividends will be paid by the Company or that such dividends will not be reduced
or eliminated in the future. The timing and amount of dividends will depend upon
the earnings, capital requirements and financial condition of the Company and
the Banks, as well as the general economic conditions and other relevant factors
affecting the Company and the Banks. 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 2004 Proxy Statement under the caption "Existing Equity
Compensation Plans" on page 6 is incorporated by reference.
13.
Item 6. Selected Consolidated Financial Data
Selected consolidated financial data for the five years ended December 31, 2003,
consisting of data captioned "Selected Consolidated Financial Data" on page 6 of
the Company's 2003 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, 2003. 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.
14.
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.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. By their nature, changes in these assumptions and
estimates could significantly affect the Company's financial position or results
of operations. Actual results could differ from those estimates. Discussed below
are those critical accounting policies that are of particular significance to
the Company.
Allowance for Loan Losses: The allowance for loan losses represents management's
estimate of probable credit losses inherent in the loan and lease portfolio.
Estimating the amount of the allowance for loan losses requires significant
judgment and the use of estimates related to the amount and timing of expected
future cash flows on impaired loans, estimated losses on pools of homogeneous
loans based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant change.
The loan portfolio also represents the largest asset type on the consolidated
balance sheet. Loan losses are charged off against the allowance, while
recoveries of amounts previously charged off are credited to the allowance. A
provision for loan losses is charged to operations based on management's
periodic evaluation of the factors previously mentioned, as well as other
pertinent factors.
The allowance for loan losses consists of an allocated component and an
unallocated component. The components of the allowance for loan losses represent
an estimation done pursuant to either Statement of Financial Accounting
Standards No. (SFAS) 5, Accounting for Contingencies, or SFAS 114, Accounting by
Creditors for Impairment of a Loan. The allocated component of the allowance for
loan losses reflects expected losses resulting from analyses developed through
specific credit allocations for individual loans and historical loss experience
for each loan category. The specific credit allocations are based on regular
analyses of all loans over a fixed-dollar amount where the internal credit
rating is at or below a predetermined classification. These analyses involve a
high degree of judgment in estimating the amount of loss associated with
15.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
specific loans, including estimating the amount and timing of future cash flows
and collateral values. The historical loan loss element is determined
statistically using a loss migration analysis that examines loss experience .
The loss migration analysis is performed quarterly and loss factors are updated
regularly based on actual experience. The allocated component of the allowance
for loan losses also includes consideration of concentrations and changes in
portfolio mix and volume.
The unallocated portion of the allowance reflects management's estimate of
probable inherent but undetected losses within the portfolio due to
uncertainties in economic conditions, delays in obtaining information, including
unfavorable information about a borrower's financial condition, the difficulty
in identifying triggering events that correlate perfectly to subsequent loss
rates, and risk factors that have not yet manifested themselves in loss
allocation factors. In addition, the unallocated allowance includes a component
that accounts for the inherent imprecision in loan loss models. Uncertainty
surrounding the strength and timing of economic cycles also affects estimates of
loss. The historical losses used in the migration analysis may not be
representative of actual unrealized losses inherent in the portfolio.
There are many factors affecting the allowance for loan losses; some are
quantitative while others require qualitative judgment. Although management
believes its process for determining the allowance adequately considers all of
the potential factors that could potentially result in credit losses, the
process includes subjective elements and may be susceptible to significant
change. To the extent actual outcomes differ from management estimates,
additional provision for credit losses could be required that could adversely
affect earnings or financial position in future periods.
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.
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.
16.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Fourth Quarter
During the fourth quarter, the Company announced the appointment of Dewey R.
Yaeger to the position of President and Chief Executive Officer of UnionBancorp,
Inc. Mr. Yaeger first joined the Company in April 2003 as a Senior Vice
President and Chief Credit Officer and brings with him a proven track record of
high quality performance in his 40 plus year banking career.
The Company has filed applications with the Federal Reserve Bank and the
Illinois Office of Banks and Real Estate to merge UnionBank/West and
UnionBank/Northwest, stand-alone bank subsidiaries, 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 of
2004. Since UnionBank/West and UnionBank/Northwest are under common control, the
merger will be accounted for at the carrying amount which will have no impact on
the consolidated financial statements.
The Company's newest branch facility in Yorkville, Illinois, one of the fastest
growing Chicago suburbs, officially opened for business in December of 2003.
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 financial services including banking, trust, insurance and investment
products. The facility is located in the new Yorkville Marketplace development
at the intersection of Routes 34 and 47.
Second Quarter
On May 2, 2003, the Board of Directors approved a stock repurchase plan whereby
the Company may repurchase from time to time up to 5% of its outstanding shares
of common stock in the open market or in private transactions over the next 18
months. Purchases will be dependent upon market conditions and the availability
of shares. The repurchase program optimizes the use of capital relative to other
investment alternatives and benefits both the Company and the shareholders by
enhancing earnings per share and return on equity. To date, the Company has
repurchased 10,500 shares at a weighted average cost of $17.92.
Also during the second quarter, the Company made strategic divestitures that
resulted in the net gain on the sale of the Company's Internet Service Provider
(ISP) and Merchant Point of Sale (POS) product lines. The impact to earnings,
net of taxes, was approximately $0.04 per diluted share.
First Quarter
On March 28, 2003 UnionBank/Central, a stand-alone bank subsidiary, was merged
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
17.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
base. Since UnionBank/Central was under common control, the merger was accounted
for at UnionBank/Central's carrying amount which had no impact on the
consolidated financial statements.
Results of Operations
Net Income
2003 compared to 2002. Net income equaled $2,130 or $0.48 per diluted
share for the year ended December 31, 2003. This compares to net income of
$4,044 or $0.94 per diluted share for the year ended December 31, 2002. This
represents a 47.3% decrease in net income and a 48.9% decrease in per share
earnings.
The Company's annual results were adversely impacted by a $4,662 increase in the
provision for loan losses as compared to 2002. This increase during the year was
primarily due to the deterioration of two impaired commercial credits identified
in the Company's June 30, 2003 Form 10-Q, downgrades of various other credits,
and the lingering effects of the soft economy within several markets that the
Company is currently operating.
Positively contributing to earnings were increases in operating performance of
the mortgage banking division and other fee based revenue product-lines and a
decrease in costs associated with other real estate owned ("OREO"). These
improvements were partially offset by operating losses at UnionFinancial and an
increase in salaries and employee benefits incurred to support the growing level
of business activity and continued investments in the Company.
Return on average assets was 0.28% for the year ended December 31, 2003 compared
to 0.53% for the same period in 2002. Return on average stockholders' equity was
3.16% for the year ended December 31, 2003 compared to 6.11% for the same period
in 2002.
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 year ended December 31, 2002 compared
to 0.59% for the same period in 2001. Return on average stockholders' equity was
6.11% for the year ended December 31, 2002 compared to 7.04% for the same period
in 2001.
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Net Interest Income/ Margin
Net interest income is the difference between income earned on interest-earning
assets and the interest expense incurred for the funding sources used to finance
these assets. Changes in net interest income generally occur due to fluctuations
in the volume of earning assets and paying liabilities and rates earned and
paid, respectively, on those assets and liabilities. The net yield on total
interest-earning assets, also referred to as net interest margin, represents net
interest income divided by average interest-earning assets. Net interest margin
measures how efficiently the Company uses its earning assets and underlying
capital.
The Company's long-term objective is to manage those assets and liabilities to
provide the largest possible amount of income while balancing interest rate,
credit, liquidity and capital risks. For purposes of this discussion, both net
interest income and margin have been adjusted to a fully tax equivalent basis
for certain tax-exempt securities and loans.
2003 compared to 2002. Net interest income, on a tax equivalent basis,
was $26,066 for the year ended December 31, 2003, compared with $26,289 earned
during the same period in 2002. This represented a decrease of $223 or 0.1%. The
decrease in net interest income is attributable to the year-over-year reduction
of income earned on interest earning assets totaling $4,512 exceeding the
year-over-year reduction of interest expense paid on interest bearing
liabilities totaling $4,289.
The $4,512 reduction in interest income resulted from a decrease of $4,963
related to rate, partially offset by an increase of $451 due to volume. The
majority of the change in interest income was related to a 62 basis point
decline in yields earned on average loans as competitive pricing on new and
refinanced loans, as well as the repricing of variable rate loans in a lower
interest rate environment, put downward pressure on loan yields. Also adversely
contributing to the change was a shift in the earning-asset mix away from higher
yielding loans to lower yielding investments. The $4,289 reduction in interest
expense resulted from decreases of $4,451 associated with rate partially offset
by an increase of $162 associated with volume. The majority of the change was
attributable to an 86 basis point reduction in rates paid on time deposits due
to the repricing dynamics of maturing time deposits, as well as certain steps
taken during this period to more favorably manage the mix of funding sources
available to the Company.
The net interest margin decreased 9 basis points to 3.65% for the year ended
December 31, 2003 from 3.74% during the same period in 2002. The decline
resulted primarily from a decrease in yields earned on average loans as
competitive pricing on new and refinanced loans, as well as the repricing of
variable rate loans in a lower interest rate environment, put downward pressure
on loan yields. The expectation of continued low interest rates is likely to
maintain pressure on margins for 2004.
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
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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%.
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 2003, 2002 and
2001. 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.
20.
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,
------------------------------------------------------------------------------------------
2003 2002 2001
---------------------------- ---------------------------- ----------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- ------ -------- -------- ------ -------- -------- ------
ASSETS
Interest-earning assets
Interest-earning deposits $ 237 $ 5 2.11% $ 1,573 $ 28 1.78% $ 1,130 $ 53 4.69%
Securities (1)
Taxable 196,195 6,805 3.47 167,895 7,350 4.38 152,650 8,602 5.64
Nontaxable (2) 31,239 2,323 7.44 34,866 2,579 7.40 39,884 2,988 7.49
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total securities (tax equivalent) 227,434 9,128 4.01 202,761 9,929 4.90 192,534 11,590 6.02
-------- -------- ----- -------- -------- ----- -------- -------- -----
Federal funds sold 4,442 50 1.13 9,079 147 1.62 4,640 143 3.08
-------- -------- ----- -------- -------- ----- -------- -------- -----
Loans (3)(4)
Commercial 133,543 8,148 6.10 140,937 9,707 6.89 148,598 12,365 8.32
Real estate 303,777 20,373 6.71 297,318 21,796 7.33 300,066 25,167 8.39
Installment and other 45,023 4,259 9.46 52,105 4,868 9.34 55,984 5,628 10.05
-------- -------- ----- -------- -------- ----- -------- -------- -----
Gross loans (tax equivalent) 482,343 32,780 6.80 490,360 36,371 7.42 504,648 43,160 8.55
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total interest-earning assets 714,456 41,963 5.87 703,773 46,475 6.60 702,952 54,946 7.82
-------- -------- ----- -------- -------- ----- -------- -------- -----
Noninterest-earning assets
Cash and cash equivalents 21,735 19,551 19,539
Premises and equipment, net 14,923 13,727 11,913
Other assets 30,604 22,888 21,169
-------- -------- --------
Total non-interest-earning assets 67,262 56,166 52,621
-------- -------- --------
Total assets $781,718 $759,939 $755,573
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 53,917 $ 295 0.55% $ 48,350 $ 472 0.98% $ 45,526 $ 843 1.85%
Money market accounts 109,700 1,544 1.41 87,633 1,767 2.02 53,282 1,514 2.84
Savings deposits 49,334 373 0.76 50,444 622 1.23 46,921 989 2.11
Time $100,000 and over 157,824 4,703 2.98 151,438 5,815 3.84 179,427 9,581 5.34
Other time deposits 174,921 5,538 3.17 210,990 8,470 4.01 224,474 12,752 5.68
Federal funds purchased and
repurchase agreements 6,776 122 1.80 4,794 170 3.55 2,475 80 3.23
Advances from FHLB 70,019 2,997 4.28 51,611 2,514 4.87 54,064 3,030 5.60
Notes payable 7,912 325 4.11 9,040 356 3.94 9,719 596 6.13
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total interest-bearing liabilities 630,403 15,897 2.52 614,300 20,186 3.29 615,888 29,385 4.77
-------- -------- ----- -------- -------- ----- -------- -------- -----
Noninterest-bearing liabilities
Non-interest-bearing deposits 74,855 72,253 67,577
Other liabilities 7,084 7,201 8,857
-------- -------- --------
Total non-interest-bearing
liabilities 81,939 79,454 76,434
-------- -------- --------
Stockholders' equity 69,376 66,185 63,251
-------- -------- --------
Total liabilities and stockholders'
equity $781,718 $759,939 $755,573
======== ======== ========
Net interest income (tax equivalent) $ 26,066 $ 26,289 $ 25,561
======== ======== ========
Net interest income (tax equivalent)
to total earning assets 3.65% 3.74% 3.64%
===== ===== =====
Interest-bearing liabilities to
earning assets 88.24% 87.29% 87.61%
======== ======== ========
- -----------------------------------
(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.
21.
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,
--------------------------------------------------------------------
2003 Compared to 2002 2002 Compared to 2001
-------------------------------- --------------------------------
Change Due to Change Due to
-------------------------------- --------------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
Interest income:
Interest-earning deposits $ (27) $ 4 $ (23) $ 16 $ (41) $ (25)
Investment securities:
Taxable 1,124 (1,669) (545) 801 (2,053) (1,252)
Nontaxable 2 (258) (256) (212) (197) (409)
Federal funds sold (61) (36) (97) 93 (89) 4
Loans (587) (3,004) (3,591) (1,198) (5,591) (6,789)
-------- -------- -------- -------- -------- --------
Total interest income 451 (4,963) (4,512) (500) (7,971) (8,471)
-------- -------- -------- -------- -------- --------
Interest expense:
NOW accounts 49 (226) (177) 49 (420) (371)
Money market accounts 384 (607) (223) 778 (525) 253
Savings deposits (14) (235) (249) 70 (437) (367)
Time, $100,000 and over 237 (1,349) (1,112) (1,345) (2,421) (3,766)
Other time (1,318) (1,614) (2,932) (727) (3,555) (4,282)
Federal funds purchased and
repurchase agreements 55 (103) (48) 81 9 90
Advances from FHLB 815 (332) 483 (133) (383) (516)
Notes payable (46) 15 (31) (39) (201) (240)
-------- -------- -------- -------- -------- --------
Total interest expense 162 (4,451) (4,289) (1,266) (7,933) (9,199)
-------- -------- -------- -------- -------- --------
Net interest income $ 289 $ (512) $ (223) $ 766 $ (38) $ 728
======== ======== ======== ======== ======== ========
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.
2003 compared to 2002. The 2003 provision for loan losses charged to
operating expense totaled $8,236, an increase of $4,662 in comparison to the
$3,574 recorded during the same period a year ago. The Company's provisions were
largely attributable to the deterioration of two impaired commercial credits
identified in the Company's June 30, 2003 Form 10-Q. As a result of the
deterioration of these two loan relationships, the Company specifically provided
22.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
$3,500 to its allowance for loan losses during the third quarter of 2003 for the
losses incurred on these two credits. The action comes as a result of
management's ongoing workout analysis of these two commercial loan relationships
and their current financial status and trends. Primary elements of the debtor
corporations filed bankruptcy reorganization proceedings in early September. In
both instances, these credits were worth substantially more as ongoing entities
than the liquidation of their assets. During the third quarter, the $3,778 loan
to a chain of retail convenience outlets was placed on non-accrual. The second
credit, a $2,521 loan to a company which conducted business in the agricultural
field was placed on nonaccrual status in the second quarter of 2003. The company
essentially ceased operations during the third quarter of 2003 resulting in
$1,897 of the outstanding loan balance being charged off.
In addition, the Company provided $2,000 to its allowance for loan losses during
the fourth quarter of 2003 after an ongoing review of the overall credit quality
in the loan portfolio noted a continued deterioration in several seasoned
credits during the quarter, downgrades of various other credits, and lingering
effects of the soft economy within several markets that the Company is currently
operating. 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.
Net charge-offs for the year ended December 31, 2003 were $5,675 compared with
$3,419 in the same period of 2002. Annualized net charge-offs increased to 1.18%
of average loans for 2003 compared to 0.70% in the same period in 2002. The
increased level of net charge-offs, as compared to 2002, 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.
Management remains watchful of credit quality issues and believes that current
issues within the portfolio are reflective of a challenging economic
environment. 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. While management currently
believes its allowance for loan losses is adequate, the Company is continually
reviewing its policies and procedures regarding identification and
classification of impaired loans and its asset review process.
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
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.
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Net charge-offs in 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.
Noninterest Income. Noninterest income consists of a wide variety of
fee-based revenues from bank-related service charges on deposits and mortgage
revenues. Also included in this category are revenues generated by the Company's
insurance, brokerage, trust and asset management as well as increases in cash
surrender value on bank-owned life insurance. The following table summarizes the
Company's noninterest income:
NONINTEREST INCOME
(Dollars in Thousands)
Years Ended December 31,
------------------------------
2003 2002 2001
-------- -------- --------
Service charges $ 3,090 $ 2,812 $ 2,748
Merchant fee income 560 1,185 1,095
Trust income 701 775 687
Mortgage banking income 3,947 2,843 2,096
Insurance commissions and fees 2,318 2,188 2,407
Securities gains (losses), net 281 407 798
Other income 2,822 2,245 2,089
-------- -------- --------
Total noninterest income $ 13,719 $ 12,455 $ 11,920
======== ======== ========
2003 compared to 2002. Noninterest income totaled $13,719 for the year
ended December 31, 2003, as compared to $12,455 for the same timeframe in 2002.
This represented an increase of $1,264 or 10.1%. Excluding net securities gains
of $281 in 2003 and $407 in 2002, noninterest income shows a year-over-year
increase of $1,390 or 11.5%. As a percentage of total income (net interest
income plus noninterest income), noninterest income, exclusive of securities
gains, increased to 34.8% versus 31.9% for 2002.
The majority of the change to noninterest income was related to a $1,104
improvement in mortgage banking income. Mortgage banking income includes gains
generated from the sale of loans and net servicing revenue (after amortization
of mortgage servicing rights). Originations for 2003 grew to $241,864 from
$183,481 for the same period of 2002. Net gains on mortgage activities were
higher in 2003 due to higher mortgage origination volume and lower interest
rates. Offsetting these gains, were noncash amortization charges in the carrying
value of our mortgage servicing rights asset. These charges were due to
increased refinancing activity, driven by the declining interest rate
environment.
Also contributing to the improvement were increases in service charges
reflecting higher volumes of items drawn on customer accounts with insufficient
funds, insurance and commissions income largely due to increased brokerage
activity and revenue generated from incremental investments in bank-owned life
24.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
insurance (included in other income). Offsetting these improvements were
decreases in merchant fee income and ISP income due to the divestiture of these
product lines in the second quarter of 2003. The remaining categories remained
relatively stable with only slight year-over-year changes.
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.
Noninterest Expense. Noninterest expense is comprised primarily of
compensation and employee benefits, occupancy and other operating expense. The
following table summarizes the Company's noninterest expense:
25.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
(Dollars in Thousands)
Years Ended December 31,
------------------------------
2003 2002 2001
-------- -------- --------
Salaries and employee benefits $ 16,020 $ 15,284 $ 13,700
Occupancy expense, net 2,138 1,868 1,751
Furniture and equipment expenses 2,094 1,820 1,632
Supplies and printing 541 525 608
Telephone 874 1,074 773
Other real estate expense 178 919 162
Amortization of intangible assets 247 245 945
Other expense 6,515 7,291 6,641
-------- -------- --------
Total noninterest expense $ 28,607 $ 29,026 $ 26,212
======== ======== ========
2003 compared to 2002. Noninterest expense totaled $28,607 for the year
ended December 31, 2003, as compared to $29,026 for the same timeframe in 2002.
This represented a decrease of $419 or 1.4%.
A majority of the decrease in noninterest expense was due to a $741 decrease in
other real estate owned expense due to the resolution of foreclosed assets
during the year. Also contributing to the change were decreases of $581 decrease
in merchant expense due to the divestiture of the POS product line in the second
quarter of 2003 (included in other expenses) and $200 in telephone expense.
These decreases were partially offset by a $736 increase in salary and employee
benefits related to variable commission expense resulting from higher production
volume from the mortgage banking and financial services business lines. These
areas of the Company operate at a lower gross profit margin and historically
generate significant levels of noninterest income but also incur considerable
noninterest expense. The remaining categories remained relatively stable with
only slight year-over-year changes.
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
26.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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.
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,
--------------------------------
2003 2002 2001
-------- -------- --------
Income before income taxes $ 2,001 $ 5,178 $ 5,991
Applicable income taxes (129) 1,134 1,537
Effective tax rates -- 21.9% 25.7%
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 $193 of preferred stock
dividends in 2003 and $257 of preferred stock dividends in 2002 and 2001.
Interest Rate Sensitivity Management
The business of the Company and the composition of its balance sheet consist of
investments in interest-earning assets (primarily loans and securities) which
are primarily funded by interest-bearing liabilities (deposits and borrowings).
All of the financial instruments of the Company are for other than trading
purposes. Such financial instruments have varying levels of sensitivity to
changes in market rates of interest. The operating income and net income of the
Banks depend, to a substantial extent, on "rate differentials," i.e., the
differences between the income the Banks receive from loans, securities, and
other earning assets and the interest expense they pay to obtain deposits and
other liabilities. These rates are highly sensitive to many factors that are
beyond the control of the Banks, including general economic conditions and the
policies of various governmental and regulatory authorities.
The Company measures its overall interest rate sensitivity through a net
interest income analysis. The net interest income analysis measures the change
in net interest income in the event of hypothetical changes in interest rates.
This analysis assesses the risk of changes in net interest income in the event
of a sudden and sustained 100 to 200 basis point increase in market interest
rates or a 100 basis point decrease in market interest rates. 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 2003 and 2002 for the
various rate shock levels.
27.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
December 31, 2003 Net Interest Income
- ----------------- -----------------------------------
Amount Change Change
-------- -------- --------
(Dollars in Thousands)
+200 bp $ 22,270 $ (420) (1.85)%
+100 bp 22,512 (178) (0.79)
Base 22,690 -- --
-100 bp 22,570 (120) (0.53)
Based on the Company's model at December 31, 2003, the effect of an immediate
200 basis point increase in interest rates would decrease the Company's net
interest income by 1.85% or approximately $420. The effect of an immediate 100
basis point decrease in rates would decrease the Company's net interest income
by $120 or 0.53%. For the December 31, 2003 reporting cycle, the Company has
suppressed an immediate 200 basis point decrease in its Asset Liability model
due to the abnormally low prevailing interest rate environment.
Net interest income would be adversely affected initially by a significant
increase in interest rates due to the recent desire by investors to commit funds
to short-term deposits, or transactional accounts that are immediately subject
to changes in interest rates. The Company has correspondingly kept its
investments shorter in terms of final maturity, but many of the variable rate
investments, such as adjustable rate mortgages, are not subject immediately to a
change in interest rates. Subsequent to the initial adverse impact of higher
interest rates, principal payments on amortizing securities and maturities of
non-amortizing securities will allow reinvestment at the new higher level of
interest rates. Also the adjustable rate securities will ultimately have coupons
adjusted to the higher level of interest rates to also beneficially impact net
interest income. If interest rates stay at higher levels, the Company would
ultimately reprice a greater amount of assets than liabilities adjusting to the
higher level of interest rates.
Additionally, net interest income would be adversely impacted by a decline in
interest rates due to the explicit or implicit options in assets it holds. The
Company earns a higher yield on callable agency securities due to the additional
interest paid by the issuer to retain the right to call a security should
interest rates decline. Likewise, a borrower with a fixed rate mortgage or other
type of loan retains the option to prepay the mortgage or loan should interest
rates decline. The reinvestment by the Company in a lower yielding asset
available at the lower level of interest rates adversely impacts net interest
income.
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.
28.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Financial Condition
General. As of December 31, 2003, the Company had total assets of
$793,422, gross loans of $476,812, total deposits of $638,032, and total
stockholders' equity of $68,047. Total assets increased by $1,806 or 0.2% from
year-end 2002. Total gross loans decreased $6,417 or 1.3% from year-end 2002 and
reflected tighter underwriting standards, an overall softening of loan demand,
and normal paydowns. Total deposits decreased by $3,926 or 0.6% from year-end
2002.
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.
The following table describes the composition of loans by major categories
outstanding.
(Dollars in Thousands)
LOAN PORTFOLIO
Aggregate Principal Amount
------------------------------------------------------------------
December 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Commercial $ 105,767 $ 100,189 $ 107,382 $ 117,534 $ 103,842
Agricultural 33,766 36,467 40,563 38,479 38,328
Real estate:
Commercial mortgages 134,985 147,253 150,878 134,942 126,645
Construction 30,674 24,486 23,676 19,322 15,786
Agricultural 37,092 34,688 34,611 39,658 38,847
1-4 family mortgages 94,163 87,411 94,368 99,237 102,695
Installment 37,415 49,949 50,961 53,276 43,644
Other 2,950 2,786 2,529 2,646 2,615
---------- ---------- ---------- ---------- ----------
476,812 483,229 504,968 505,094 472,402
Unearned income -- -- -- -- (7)
---------- ---------- ---------- ---------- ----------
Total loans 476,812 483,229 504,968 505,094 472,395
Allowance for loan losses (9,011) (6,450) (6,295) (6,414) (3,691)
---------- ---------- ---------- ---------- ----------
Loans, net $ 467,801 $ 476,779 $ 498,673 $ 498,680 $ 468,704
========== ========== ========== ========== ==========
29.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Aggregate Principal Amount
------------------------------------------------------------------
Percentage of Total Loan Portfolio
------------------------------------------------------------------
December 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Commercial 22.18% 20.73% 21.27% 23.27% 21.98%
Agricultural 7.08 7.55 8.03 7.62 8.11
Real estate:
Commercial mortgages 28.31 30.47 29.88 26.72 26.81
Construction 6.43 5.07 4.69 3.83 3.34
Agricultural 7.78 7.18 6.85 7.85 8.22
1-4 family mortgages 19.75 18.08 18.69 19.65 21.74
Installment 7.85 10.34 10.09 10.55 9.24
Other loans 0.62 0.58 0.50 0.51 0.56
---------- ---------- ---------- ---------- ----------
Gross loans 100.00% 100.00% 100.00% 100.00% 100.00%
========== ========== ========== ========== ==========
As of December 31, 2003 and 2002, commitments of the Banks under standby letters
of credit and unused lines of credit totaled approximately $100,169 and
$104,560, respectively.
Stated loan maturities (including rate loans reset to market interest rates) of
the total loan portfolio, net of unearned income, at December 31, 2003 were as
follows:
STATED LOAN MATURITIES (1)
(Dollars in Thousands)
Within 1 to 5 After 5
1 Year Years Years Total
---------- ---------- ---------- ----------
Commercial $ 72,572 $ 30,440 $ 2,755 $ 105,767
Agricultural 25,702 7,543 521 33,766
Real estate 139,811 135,530 21,573 296,914
Installment 17,310 23,008 47 40,365
---------- ---------- ---------- ----------
Total $ 255,395 $ 196,521 $ 24,896 $ 476,812
========== ========== ========== ==========
- --------------------
(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.
30.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Rate sensitivities of the total loan portfolio, net of unearned income, at
December 31, 2003 were as follows:
LOAN REPRICING
(Dollars in Thousands)
Within 1 to 5 After 5
1 Year Years Years Total
---------- ---------- ---------- ----------
Fixed rate $ 79,596 $ 84,182 $ 15,283 $ 179,061
Variable rate 174,326 110,813 4,463 289,602
Nonaccrual 1,472 1,525 5,152 8,149
---------- ---------- ---------- ----------
Total $ 255,394 $ 196,520 $ 24,898 $ 476,812
========== ========== ========== ==========
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.
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. 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.
The level of nonperforming loans at December 31, 2003 increased to $8,477 versus
the $4,760 that existed as of December 31, 2002. The level of nonperforming
loans to total end of period loans was 1.78% at December 31, 2003, as compared
to 0.99% at December 31, 2002. The reserve coverage ratio (allowance to
nonperforming loans) was reported at 106.30% as of December 31, 2003 as compared
to 135.50% as of December 31, 2002.
As previously discussed in the Provision for Loan Loss Section of the MD&A, the
Company increased its provision for loan losses during 2003. The action
primarily comes as a result of management's ongoing workout analysis of the two
31.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
previously mentioned commercial loan relationships and their current financial
status and trends. Primary elements of the debtor corporations filed bankruptcy
reorganization proceedings in early September. In both instances, these credits
were worth substantially more as ongoing entities than the liquidation of their
assets. During the third quarter, the $3,778 loan to a chain of retail
convenience outlets was placed on non-accrual. The second credit, a $2,521 loan
to a company which conducted business in the agricultural field was placed on
nonaccrual status in the second quarter of 2003. The company essentially ceased
operations during the third quarter of 2003 resulting in $1,897 of the
outstanding loan balance being charged off.
The $1,330 decrease in other real estate owned, when compared to December 31,
2002, was primarily related to the sale of a single hotel property that was
placed in other real estate owned in the fourth quarter of 2001.
Other Potential Problem Loans. The Company has other potential problem
loans that are currently performing and do not meet the criteria for impairment,
but where some concern exists. Excluding nonperforming loans and loans that
management has classified as impaired, these other potential problem loans
totaled $5,086 at December 31, 2003 as compared to $3,725 at December 31, 2002.
The classification of these 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 nonperforming assets at December 31,
2003:
NONPERFORMING ASSETS
(Dollars in Thousands)
December 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Nonaccrual loans $ 8,149 $ 3,931 $ 7,259 $ 5,777 $ 2,949
Loans 90 days past due and still accruing interest 328 829 1,616 2,102 566
-------- -------- -------- -------- --------
Total nonperforming loans 8,477 4,760 8,875 7,879 3,515
Other real estate owned 227 1,557 1,886 467 523
-------- -------- -------- -------- --------
Total nonperforming assets $ 8,704 $ 6,317 $ 10,761 $ 8,346 $ 4,038
======== ======== ======== ======== ========
Nonperforming loans to total loans 1.78% 0.99% 1.76% 1.56% 0.74%
Nonperforming assets to total loans 1.83 1.31 2.13 1.65 0.85
Nonperforming assets to total assets 1.10 0.80 1.44 1.10 0.57
The following table sets forth a summary of other real estate owned and other
collateral acquired at December 31, 2003:
OTHER REAL ESTATE OWNED
(Dollars in Thousands)
Number Net Book
of Carrying
Parcels Value
-------- --------
Developed property 2 $ 227
Vacant land or unsold lots -- --
-------- --------
Total other real estate owned 2 $ 227
======== ========
32.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Allowance for Loan Losses. In originating loans, the Company recognizes
that credit losses will be experienced and the risk of loss will vary with,
among other things, general economic conditions; the type of loan being made;
the creditworthiness of the borrower over the term of the loan; and, in the case
of a collateralized loan, the quality of the collateral for such a loan. The
allowance for loan losses represents the Company's estimate of the allowance
necessary to provide for probable 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 reviews 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.
Based on an estimation done pursuant to the requirements of Financial Accounting
Standards Board ("FASB") Statement No. 5, "Accounting for Contingencies," and
FASB Statements Nos. 114 and 118, "Accounting by Creditors for Impairment of a
Loan," the analysis of the allowance for loan losses consists of three
components: (i) specific credit allocation established for expected losses
resulting from analysis developed through specific credit allocations on
individual loans for which the recorded investment in the loan exceeds its fair
value; (ii) general portfolio allocation based on historical loan loss
experience for each loan category; and (iii) unallocated subjective reserves
based on general economic conditions as well as specific economic factors in the
markets in which the Company operates.
The specific credit allocation component of the allowance for loan losses is
based on a regular analysis of loans over a fixed-dollar amount where the
internal credit rating is at or below a predetermined classification. The fair
value of the loan is determined based on either the present value of expected
future cash flows discounted at the loan's effective interest rate, the market
price of the loan, or, if the loan is collateral dependent, the fair value of
the underlying collateral less cost of sale.
The general portfolio allocation component of the allowance for loan losses is
determined statistically using a loss migration analysis that examines
historical loan loss experience. The loss migration analysis is performed
quarterly and loss factors are updated regularly based on actual experience. The
general portfolio allocation element of the allowance for loan losses also
includes consideration of the amounts necessary for concentrations and changes
in portfolio mix and volume.
The unallocated allowance recognizes estimated probable inherent but undetected
losses in the loan portfolio. The decrease in the unallocated allowance in 2003
relative to the allocated allowance and to the 2002 unallocated allowance
reflects a refinement in the overall allowance calculation process as more of
the total balance is being allocated to particular loan categories.
The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. These estimates are reviewed monthly, and as
adjustments, either positive or negative, become necessary, a corresponding
increase or decrease is made in the provision for loan losses. The composition
of the loan portfolio has not significantly changed since year-end 2002. The
methodology used to determine the adequacy of the allowance for loan losses is
consistent with prior years, and there were no reallocations.
33.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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. 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, 2003, the allowance for loan losses was $9,011 or 1.89% of total
loans as compared to $6,450 or 1.33% at December 31, 2002. The change from
December 31, 2002 is due to the increase in impaired loans previously discussed
and as a result, additional provisions have been made to the allowance for loan
losses.
34.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The following table presents a detailed analysis of the Company's allowance for
loan losses.
ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
December 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Beginning balance $ 6,450 $ 6,295 $ 6,414 $ 3,691 $ 3,858
Charge-offs:
Commercial 4,791 2,561 3,202 1,663 1,186
Real estate mortgages 626 683 977 144 346
Installment and other loans 812 634 496 444 340
---------- ---------- ---------- ---------- ----------
Total charge-offs 6,229 3,878 4,675 2,251 1,872
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial 415 354 312 37 79
Real estate mortgages 46 41 10 3 22
Installment and other loans 93 64 73 76 82
---------- ---------- ---------- ---------- ----------
Total recoveries 554 459 395 116 183
---------- ---------- ---------- ---------- ----------
Net charge-offs 5,675 3,419 4,280 2,135 1,689
---------- ---------- ---------- ---------- ----------
Provision for loan losses 8,236 3,574 4,161 4,858 1,522
Ending balance $ 9,011 $ 6,450 $ 6,295 $ 6,414 $ 3,691
========== ========== ========== ========== ==========
Period end total loans, net of
unearned interest $ 476,812 $ 483,229 $ 504,968 $ 505,094 $ 472,395
========== ========== ========== ========== ==========
Average loans $ 482,343 $ 490,360 $ 504,648 $ 485,489 $ 440,284
========== ========== ========== ========== ==========
Ratio of net charge-offs to
average loans 1.18% 0.70% 0.85% 0.44% 0.38%
Ratio of provision for loan losses
to average loans 1.71 0.73 0.82 1.00 0.35
Ratio of allowance for loan losses
to ending total loans 1.89 1.33 1.25 1.27 0.78
Ratio of allowance for loan losses
to total nonperforming loans 106.30 135.50 70.93 81.41 105.01
Ratio of allowance at end of period
to average loans 1.87 1.32 1.25 1.32 0.84
35.
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,
-----------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------- ------------------- ------------------- ------------------- -------------------
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 $ 4,935 58.93% $ 2,863 28.28% $ 3,499 29.30% $ 3,903 30.89% $ 1,114 30.09%
Real estate 2,846 33.99 2,110 60.80 1,786 60.11 1,412 58.05 1,290 60.11
Installment and other
loans 593 7.08 719 10.92 537 10.59 511 11.06 393 9.80
Unallocated 637 -- 758 -- 473 -- 588 -- 894 --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 9,011 100.00% $ 6,450 100.00% $ 6,295 100.00% $ 6,414 100.00% $ 3,691 100.00%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Securities Activities. The Company's consolidated securities portfolio,
which represented 31.8% of the Company's average earning asset base as of
December 31, 2003, as compared to 28.8% in the same period of 2002, is managed
to minimize interest rate risk, maintain sufficient liquidity, and maximize
return. The portfolio includes several callable agency debentures, adjustable
rate mortgage pass-throughs, and collateralized mortgage obligations. Corporate
bonds consist of investment grade obligations of public corporations. Equity
securities consist of Federal Reserve stock, Federal Home Loan Bank stock, and
trust preferred stock. The Company's financial planning anticipates income
streams generated by the securities portfolio based on normal maturity and
reinvestment.
The exposure of capital to market valuation adjustments 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. In addition, some of the callable
securities that have been purchased have shorter final maturities, which also
reduce the sensitivity of the Economic Value of Equity (EVE) to changes in the
level of interest rates. Securities classified as available-for-sale, carried at
fair value, were $252,248 at December 31, 2003 compared to $227,229 at December
31, 2002. The Company does not have any securities classified as trading or
held-to-maturity.
36.
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,
-----------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- ---------------------
% of % of % of
Amount Portfolio Amount Portfolio Amount Portfolio
--------- --------- --------- --------- --------- ---------
Available-for-Sale
U.S. Treasury $ -- --% $ 1,025 0.45% $ 1,036 0.56%
U.S. government agencies
and corporations 30,270 12.00 46,817 20.60 43,400 23.30
U.S. government agency
mortgage backed securities 158,305 62.76 113,579 49.98 86,278 46.32
States and political
Subdivisions 29,723 11.78 34,589 15.22 37,344 20.05
Collateralized mortgage
obligations 5,972 2.37 3,889 1.71 12,366 6.64
Corporate bonds 10,598 4.20 10,480 4.62 -- --
Other securities 17,380 6.89 16,850 7.42 5,858 3.13
--------- --------- --------- --------- --------- ---------
Total $ 252,248 100.00% $ 227,229 100.00% $ 186,282 100.00%
========= ========= ========= ========= ========= =========
The following table sets forth the contractual, callable or estimated maturities
and yields of the securities portfolio as of December 31, 2003. Mortgage backed
and collateralized mortgage obligation securities are included at estimated
maturity.
MATURITY SCHEDULE
(Dollars in Thousands)
Maturing
------------------------------------------------------------------------------------------------
After 1 but After 5 but
Within 1 Year Within 5 Years Within 10 Years After 10 Years Total
------------------- ------------------- ------------------- ------------------- --------
Amount Yield Amount Yield Amount Yield Amount Yield Amount
-------- -------- -------- -------- -------- -------- -------- -------- --------
Available-for-Sale
U.S. Treasury $ -- --% $ -- --% $ -- --% $ -- --% $ --
U.S. government
agencies and
corporations -- -- 29,263 3.750 1,007 6.040 -- -- 30,270
U.S. government
agency mortgage
backed securities -- -- -- -- -- -- 158,305 3.420 158,305
States and political
Subdivisions (1) 3,129 6.130 14,047 5.900 10,492 5.910 2,055 7.640 29,723
Collateralized
mortgage obligations -- -- -- -- -- -- 5,972 3.650 5,972
Corporate Bonds 2,070 6.850 8,528 5.620 -- -- -- 10,598
Equity securities -- -- -- -- -- -- 17,380 4.570 17,380
-------- -------- -------- -------- --------
Total $ 5,199 $ 51,838 $ 11,499 $183,712 $252,248
======== ======== ======== ======== ========
- ---------------
(1) Rates on obligations of states and political subdivisions have been
adjusted to tax equivalent yields using a 34% income tax rate
37.
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 $620,551 for 2003,
representing a decrease of $557 or 0.1% compared with the average balance of
total deposits for 2002.
The following table sets forth certain information regarding the Banks' average
deposits.
AVERAGE DEPOSITS
(Dollars in Thousands)
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------- ------------------------------- -------------------------------
% 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 $ 74,855 12.06% --% 72,253 11.63% --% $ 67,577 10.95% --%
Savings accounts 49,334 7.95 0.76 50,444 8.12 1.23 46,921 7.60 2.11
Interest-bearing
demand deposits 163,617 26.37 1.12 135,983 21.89 1.65 98,808 16.01 2.38
Time, less than $100,000 174,921 28.19 3.17 210,990 33.98 4.01 224,474 36.37 5.68
Time, $100,000 or more 157,824 25.43 2.98 151,438 24.38 3.84 179,427 29.07 5.34
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total deposits $620,551 100.00% 2.01% $621,108 100.00% 2.76% $617,207 100.00% 4.16%
======== ======== ======== ======== ======== ======== ======== ======== ========
As of December 31, 2003, average time deposits over $100,000 represented 25.4%
of total average deposits, compared with 24.4% of total average deposits as of
December 31, 2002. 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, 2003.
TIME DEPOSITS OF $100,000 OR MORE
(Dollars in Thousands)
Maturity Range
Three months or less $ 68,381
Over three months through six months 38,155
Over six months through twelve months 26,160
Over twelve months 30,556
----------
Total $ 163,252
==========
38.
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,
--------------------------
2003 2002 2001
------ ------ ------
Return on average assets 0.28% 0.53% 0.59%
Return on average equity 3.16 6.11 7.04
Average equity to average assets 8.87 8.71 8.37
Dividend payout ratio for common stock 74.39 32.59 25.59
Liquidity
The Company manages its liquidity position with the objective of maintaining
sufficient funds to respond to the needs of depositors and borrowers and to take
advantage of earnings enhancement opportunities. In addition to the normal
inflow of funds from core-deposit growth together with repayments and maturities
of loans and investments, the Company utilizes other short-term funding sources
such as brokered time deposits, securities sold under agreements to repurchase,
overnight federal funds purchased from correspondent banks and the acceptance of
short-term deposits from public entities, and Federal Home Loan Bank advances.
The Company monitors and manages its liquidity position on several bases, which
vary depending upon the time period. As the time period is expanded, other data
is factored in, including estimated loan funding requirements, estimated loan
payoffs, investment portfolio maturities or calls, and anticipated depository
buildups or runoffs.
The Company classifies all of its securities as available-for-sale, thereby
maintaining significant liquidity. The Company's liquidity position is further
enhanced by structuring its loan portfolio interest payments as monthly and by
the significant representation of retail credit and residential mortgage loans
in the Company's loan portfolio, resulting in a steady stream of loan
repayments. In managing its investment portfolio, the Company provides for
staggered maturities so that cash flows are provided as such investments mature.
The Company's cash flows are comprised of three classifications: cash flows from
operating activities, cash flows from investing activities, and cash flows from
financing activities. Cash flows used in investing activities offset by those
provided by operating activities and financing activities, resulted in a net
decrease in cash and cash equivalents of $16,764 from December 31, 2002 to
December 31, 2003.
During 2003, the Company experienced net cash outflows of $33,789 in investing
activities primarily due to purchases of securities. In contrast, net cash
inflows were provided by $13,846 in operating activities due to proceeds from
net loans sales and net income; and $3,179 in financing activities due to an
increase in FHLB advances partially offset by a net decrease in deposits.
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, 2003, 25.6% 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 41.9% maturing in the
first quarter of 2004, 23.4% maturing in the second quarter of 2004, 16.0%
39.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
maturing in the third and fourth quarters of 2004, and the remaining 18.7%
maturing thereafter. The Banks monitor those maturities in an effort to minimize
any adverse effect on liquidity.
The Company's borrowings included notes payable at December 31, 2003 in the
principal amount of $7,275 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, 2003, approximately $5,200 was
available for dividends without regulatory approval.
Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet
Financial Instruments
The Company has entered into contractual obligations and commitments and
off-balance sheet financial instruments. The following tables summarize the
Company's contractual cash obligations and other commitments and off-balance
sheet instruments as of December 31, 2003.
Payments Due by Period
---------------------------------------------------------
Within 1 After
Contractural Obligations Year 1-3 Years 4-5 Years 5 Years Total
--------- --------- --------- --------- ---------
Long-term debt $ 7,275 $ -- $ -- $ -- $ 7,275
FHLB Advances 20,550 25,200 18,500 8,200 72,450
--------- --------- --------- --------- ---------
Total contractual cash obligations $ 27,825 $ 25,200 $ 18,500 $ 8,200 $ 79,725
========= ========= ========= ========= =========
Amount of Commitment Expiration per Period
---------------------------------------------------------
Within 1 After
Off-Balance Sheet Financial Instruments Year 1-3 Years 4-5 Years 5 Years Total
--------- --------- --------- --------- ---------
Lines of credit $ 62,308 $ 11,405 $ 3,924 $ 18,780 $ 96,417
Standby letters of credit 3,538 78 136 -- 3,752
--------- --------- --------- --------- ---------
Total commercial commitments $ 65,846 $ 11,483 $ 4,060 $ 18,780 $ 100,169
========= ========= ========= ========= =========
Capital Resources
Stockholders' Equity
The Company is committed to managing capital for maximum shareholder benefit and
maintaining strong protection for depositors and creditors. Stockholders' equity
at December 31, 2003 was $68,047, a decrease of $17 or 0.1%, from December 31,
2002. The stockholders' equity decrease was largely the result of earnings for
2003 less dividends paid to shareholders and a $1,030 decrease in accumulated
other comprehensive income. Average equity as a percentage of average assets was
8.9% at December 31, 2003, compared to 8.7% at December 31, 2002. Book value per
common share equaled $16.77 at December 31, 2003, a slight decrease from $16.97
at the end of 2002.
Stock Repurchase
On May 2, 2003, the Board of Directors approved a stock repurchase plan whereby
the Company may repurchase from time to time up to 5% of its outstanding shares
of common stock in the open market or in private transactions over the next 18
months. Purchases will be dependent upon market conditions and the availability
of shares. The repurchase program optimizes the use of capital relative to other
40.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
investment alternatives and benefits both the Company and the shareholders by
enhancing earnings per share and return on equity. To date, the Company has
repurchased 10,500 shares at a weighted average cost of $17.92.
Capital Measurements
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 was 10.75% and
12.15%, respectively, at December 31, 2003. The Company is currently, and
expects to continue to be, in compliance with these guidelines.
As of December 31, 2003, the Tier 2 risk-based capital was comprised of $6,959
in allowance for loan losses (limited to 1.25% of risk-weighted assets) 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.
The following table sets forth an analysis of the Company's capital ratios:
RISK-BASED CAPITAL RATIOS
(Dollars in Thousands)
December 31, Minimum Well
-------------------------------- Capital Capitalized
2003 2002 2001 Ratios Ratios
-------- -------- -------- -------- --------
Tier 1 risk-based capital $ 59,851 $ 58,755 $ 55,911
Tier 2 risk-based capital 7,790 7,281 7,126
Total capital 67,641 66,036 63,037
Risk-weighted assets 556,729 557,620 540,626
Capital ratios
Tier 1 risk-based capital 10.8% 10.5% 10.3% 4.0% 6.0%
Tier 2 risk-based capital 12.2 11.8 11.7 8.0 10.0
Leverage ratio 7.7 7.5 7.5 4.0 5.0
Impact of Inflation, Changing Prices, and Monetary Policies
The financial statements and related financial data concerning the Company have
been prepared in accordance with accounting principles generally accepted in the
United States of America 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.
41.
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...................................................43
Consolidated Balance Sheets (December 31, 2003 and 2002) .....................44
Consolidated Statements of Income
(For the years December 31, 2003, 2002 and 2001).....................45
Consolidated Statements of Stockholders' Equity
(For the years December 31, 2003, 2002 and 2001).....................46
Consolidated Statements of Cash Flows
(For the years December 31, 2003, 2002 and 2001).....................48
Notes.........................................................................50
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.
42.
[COMPANY LOGO OMITTED] Crowe
Crowe Chizek and Company LLC
Member Horwath International
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, 2003 and 2002, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2003. 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 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 LLC
Oak Brook, Illinois
January 23, 2004
43.
UNIONBANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002 (In Thousands, Except Share and Per Share Data)
2003 2002
- -------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 22,198 $ 38,962
Securities available-for-sale 252,248 227,229
Loans 476,812 483,229
Allowance for loan losses (9,011) (6,450)
---------- ----------
Net loans 467,801 476,779
Cash value of life insurance 14,379 13,776
Mortgage servicing rights 2,775 2,640
Premises and equipment, net 16,576 14,055
Goodwill 7,642 7,642
Intangible assets, net 1,232 873
Other real estate 227 1,557
Other assets 8,344 8,103
---------- ----------
Total assets $ 793,422 $ 791,616
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 89,424 $ 90,606
Interest-bearing 548,608 551,352
---------- ----------
Total deposits 638,032 641,958
Federal funds purchased and securities sold under
agreements to repurchase 1,533 3,588
Federal Home Loan Bank advances 72,450 61,750
Notes payable 7,873 8,275
Series B mandatory redeemable preferred stock 831 --
Other liabilities 4,656 7,150
---------- ----------
Total liabilities 725,375 722,721
Series B mandatory redeemable preferred stock -- 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;
4,627,613 and 4,571,209 shares issued in 2003 and 2002 4,628 4,571
Surplus 22,484 21,856
Retained earnings 43,609 43,113
Accumulated other comprehensive income 2,141 3,171
Unearned compensation under stock option plans (2) (23)
---------- ----------
73,360 73,188
Treasury stock, at cost, 600,763 shares at December 31, 2003
and 590,263 shares at December 31, 2002 (5,313) (5,124)
---------- ----------
Total stockholders' equity 68,047 68,064
---------- ----------
Total liabilities and stockholders' equity $ 793,422 $ 791,616
========== ==========
See Accompanying Notes to Consolidated Financial Statements.
44.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2003, 2002, and 2001 (In Thousands, Except Per Share Data)
2003 2002 2001
- -------------------------------------------------------------------------------------
Interest income
Loans $ 32,693 $ 36,283 $ 43,059
Securities
Taxable 6,805 7,377 8,655
Exempt from federal income taxes 1,533 1,702 1,972
Federal funds sold and other 55 147 143
-------- -------- --------
Total interest income 41,086 45,509 53,829
Interest expense
Deposits 12,453 17,145 25,680
Federal funds purchased and securities sold
under agreements to repurchase 122 170 80
Advances from the Federal Home Loan Bank 2,997 2,514 3,030
Notes payable and other 389 357 595
-------- -------- --------
Total interest expense 15,961 20,186 29,385
-------- -------- --------
Net interest income 25,125 25,323 24,444
Provision for loan losses 8,236 3,574 4,161
-------- -------- --------
Net interest income after provision for loan losses 16,889 21,749 20,283
Noninterest income
Service charges 3,090 2,812 2,748
Merchant fee income 560 1,185 1,095
Trust income 701 775 687
Mortgage banking income 3,947 2,843 2,096
Insurance and brokerage commissions and fees 2,318 2,188 2,407
Securities gains, net 281 407 798
Other income 2,822 2,245 2,089
-------- -------- --------
13,719 12,455 11,920
Noninterest expenses
Salaries and employee benefits 16,020 15,284 13,700
Occupancy, net 2,138 1,868 1,751
Furniture and equipment 2,094 1,820 1,632
Supplies and printing 541 525 608
Telephone 874 1,074 773
Other real estate owned 178 919 162
Amortization of intangible assets 247 245 945
Other 6,515 7,291 6,641
-------- -------- --------
28,607 29,026 26,212
-------- -------- --------
Income before income taxes 2,001 5,178 5,991
Income taxes (129) 1,134 1,537
-------- -------- --------
Net income 2,130 4,044 4,454
Preferred stock dividends 193 257 257
-------- -------- --------
Net income for common stockholders $ 1,937 $ 3,787 $ 4,197
======== ======== ========
Basic earnings per common share $ 0.48 $ 0.95 $ 1.06
======== ======== ========
Diluted earnings per common share $ 0.48 $ 0.94 $ 1.05
======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
45.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002, and 2001 (In Thousands, Except Share Data)
- ----------------------------------------------------------------------------------------------------------------------------
Unearned
Series A Accumulated Compensation
Convertible Other Under
Preferred Common Retained Comprehensive Stock Treasury
Stock Stock Surplus Earnings Income Option Plans Stock Total
-------- -------- -------- -------- -------- -------- -------- --------
Balance
January 1, 2001 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
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
(Continued)
46.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002, and 2001 (In Thousands, Except Share Data)
- ----------------------------------------------------------------------------------------------------------------------------
Unearned
Series A Accumulated Compensation
Convertible Other Under
Preferred Common Retained Comprehensive Stock Treasury
Stock Stock Surplus Earnings Income Option Plans Stock Total
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 2002 $ 500 $ 4,571 $ 21,856 $ 43,113 $ 3,171 $ (23) $ (5,124) $ 68,064
Common stock dividends -- -- -- (1,441) -- -- -- (1,441)
Preferred stock dividends -- -- -- (193) -- -- -- (193)
Exercise of stock options
(56,404 shares) -- 57 628 -- -- -- -- 685
Amortization of un-
earned compensation
under stock option plans -- -- -- -- -- 21 -- 21
Purchase of 10,500 shares
of treasury stock -- -- -- -- -- -- (189) (189)
Comprehensive income
Net income -- -- -- 2,130 -- -- 2,130
Net decrease in fair value-
of securities classified as
available-for-sale, net of
income taxes and reclassi-
fication adjustments -- -- -- -- (1,030) -- -- (1,030)
--------
Total comprehensive
income 1,100
-------- -------- -------- -------- -------- -------- -------- --------
Balance,
December 31, 2003 $ 500 $ 4,628 $ 22,484 $ 43,609 $ 2,141 $ (2) $ (5,313) $ 68,047
======== ======== ======== ======== ======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
47.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002, and 2001 (In Thousands)
2003 2002 2001
- --------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 2,130 $ 4,044 $ 4,454
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 1,685 1,501 1,356
Amortization of intangible assets 247 245 945
Amortization of mortgage servicing rights (1,732) (955) (609)
Amortization of unearned compensation under
stock option plans 21 45 61
Amortization of bond premiums, net 1,719 1,437 644
Federal Home Loan Bank stock dividend (325) (196) (203)
Provision for loan losses 8,236 3,574 4,161
Provision for deferred income taxes (616) 73 344
Securities gains, net (281) (407) (798)
Loss on sale of real estate acquired in
settlement of loans 168 376 26
Gain on sale of loans (4,727) (2,909) (1,961)
Net loans originated for sale 8,365 512 (1,712)
Change in assets and liabilities
(Increase) decrease in other assets (314) 1,468 (178)
Decrease in other liabilities (730) (827) (3,062)
---------- ---------- ----------
Net cash provided by operating activities 13,846 7,981 3,468
Cash flows from investing activities
Securities
Proceeds from maturities and paydowns 64,500 76,218 129,934
Proceeds from sales 72,398 19,640 21,582
Purchases (164,690) (134,977) (145,321)
Net (decrease) increase in loans (3,106) 18,268 (481)
Purchase of premises and equipment (4,186) (3,105) (1,854)
Purchase of bank-owned life insurance, net 73 (11,462) --
Proceeds from sale of real estate acquired in
settlement of loans 1,372 2,401 974
Acquisition of insurance agency, net of debt assumed (150) -- --
---------- ---------- ----------
Net cash provided by (used in) investing activities (33,789) (33,017) 4,834
(Continued)
48.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002, and 2001 (In Thousands)
2003 2002 2001
- --------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in deposits $ (3,926) $ 29,814 $ (23,859)
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (2,055) 959 2,104
Net increase in advances from the
Federal Home Loan Bank 10,700 9,000 9,342
Payments on notes payable (550) (1,000) (1,000)
Proceeds from notes payable 148 -- --
Dividends on common stock (1,441) (1,234) (1,074)
Dividends on preferred stock (193) (257) (257)
Proceeds from exercise of stock options 685 17 120
Purchase of treasury stock (189) -- --
---------- ---------- ----------
Net cash provided by (used in) financing activities 3,179 37,299 (14,624)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (16,764) 12,263 (6,322)
Cash and cash equivalents
Beginning of year 38,962 26,699 33,021
---------- ---------- ----------
End of year $ 22,198 $ 38,962 $ 26,699
========== ========== ==========
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 16,453 $ 21,205 $ 31,180
Income taxes 1,850 474 1,082
Transfers from loans to other real estate owned 210 2,449 2,359
See Accompanying Notes to Consolidated Financial Statements.
49.
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, and UnionBank/Northwest.
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 based on available
information that affects 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, and actual results could differ. 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)
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)
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. Securities are written down to fair value when a
decline in fair value is not temporary.
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, 2003 and 2002, the Company had no material
derivative instruments.
Loan commitments and related financial instruments
- --------------------------------------------------
Financial instruments include off-balance-sheet credit instruments such as
commitments to make loans and commercial 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.
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 originated and intended for sale in the
secondary market are reported at the lower of cost or market, on an aggregate
basis. Net unrealized losses, if any, are recorded as a valuation allowance and
charged to earnings.
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.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
(Continued)
51.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. 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. Large groups of smaller
balance homogeneous loans, such as consumer and residential real estate loans,
are collectively evaluated for impairment, and accordingly, they are not
separately identified for impairment disclosures.
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, to the extent that fair value is
less than the capitalized amount for a grouping.
Foreclosed assets
- -----------------
Assets acquired through or instead of loan foreclosure are initially recorded at
fair value when acquired, establishing a new cost basis. If fair value declines,
a valuation allowance is recorded through expense. Costs after acquisition are
expensed.
Premises and equipment
- ----------------------
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation. Building and related components are depreciated using
the straight-line method with useful lives ranging from 15 to 39 years.
Furniture, fixtures, and equipment are depreciated using the straight-line (or
accelerated) method with useful lives ranging from 3 to 10 years. 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 company-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 36.4 million and $36.1
million with an approximate cash surrender value of $14.1 million and $13.8
million at December 31, 2003 and 2002, respectively.
(Continued)
52.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
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 2003 and 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
ten years.
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.
(Continued)
53.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
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 price 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.
2003 2002 2001
---------- ---------- ----------
Net income as reported for common stockholders $ 1,937 $ 3,787 $ 4,197
Deduct: stock-based compensation expense
determined under fair value based method 95 131 135
---------- ---------- ----------
Pro forma net income $ 1,842 $ 3,656 $ 4,062
========== ========== ==========
Basic earnings per common share as reported $ 0.48 $ 0.95 $ 1.06
Pro forma basic earnings per common share 0.46 0.92 1.02
Diluted earnings per common share as reported 0.48 0.94 1.05
Pro forma diluted earnings per common share 0.45 0.91 1.01
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2003 2002 2001
---------- ---------- ----------
Fair value $ 4.93 $ 3.92 $ 3.98
Risk-free interest rate 2.27% 3.72% 4.90%
Expected option life 5 6 7
Expected stock price volatility 26.04% 26.99% 29.58%
Dividend yield 1.65% 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.
(Continued)
54.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
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, 2003 and
2002. 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. Upon 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, 2003 and 2002. Preferential cumulative cash dividends are
payable quarterly at an annual rate of $60.00 per share. Dividends accrue
on each share of Series B Preferred Stock from the date of issuance and
from day to day, thereafter, whether or not earned or declared. Each
original holder of Series B Preferred Stock (or upon such holder's death,
their executor 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. Upon 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.
The Company adopted FASB Statement 150, Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equities, during
the fourth quarter of 2003.
Statement 150 requires reporting mandatorily redeemable shares as
liabilities, as well as obligations not in the form of shares to repurchase
shares that may require cash payment and some obligations that may be
settled by issuing a variable number of equity shares. To comply with this
statement, the Company reclassified 831 shares of Series B mandatory
redeemable preferred stock into liabilities for balance sheet presentation
for the 2003 year. In addition, the dividends in the fourth quarter of 2003
were reclassified to interest expense.
(Continued)
55.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Series C Junior Participating Preferred Stock: The Company has authorized
4,500 shares of Series C Junior Participating Preferred Stock. There were
no shares issued at December 31, 2003 and 2002. 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) and will be entitled to an aggregate payment
of 1,000 times the payment made per share of common stock. Each share of
Series C Preferred Stock will have 1,000 votes, voting together with the
common stock. Finally, in the event of any merger, consolidation, or other
transaction in which outstanding shares of common stock are converted or
exchanged, each share of Series C Preferred Stock will be entitled to
receive 1,000 times the amount received per share of common stock. These
rights are protected by customary antidilution provisions.
Stockholder rights plan
- -----------------------
On July 17, 1996, the Company declared a dividend of one preferred share
purchase right (a "Right") for each outstanding share of common stock. Each
Right entitles the registered holder to purchase from the Company one
one-thousandth of a share of Series C Junior Participating Preferred Stock, no
par value, of the Company at a price of $50.00 per one one-thousandth of a share
of preferred stock ("the Purchase Price"), subject to adjustment.
The Rights are not exercisable until the earlier to occur of: (i) 10 days after
a person or group ("Acquiring Person") has acquired beneficial ownership of 15%
or more of the outstanding shares of common stock or (ii) 10 business days (or
such later date as determined by the Board of Directors) following the
commencement of a tender offer or exchange offer ("the Distribution Date").
Unless extended, the Rights will expire on August 4, 2006. At any time prior to
the time an Acquiring Person becomes such, the Board of Directors of the Company
may redeem the Rights in whole, but not in part, at a price of $.01 per Right.
Dividend restriction
- --------------------
Banking regulations require the maintenance of certain capital levels and may
limit the amount of dividends that may be paid by the subsidiary banks to the
holding company or by the holding company to stockholders.
Fair value of financial instruments
- -----------------------------------
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in a separate note.
Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
(Continued)
56.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
Loss contingencies
- ------------------
Loss contingencies, including claims and legal actions arising in the ordinary
course of business, are recorded as liabilities when the likelihood of loss is
probable and an amount or range of loss can be reasonably estimated. Management
does not believe there now are such matters that will have a material effect on
the financial statements.
Comprehensive income
- --------------------
Comprehensive income includes both net income and other comprehensive income
elements, including the change in unrealized gains and losses on securities
available-for-sale, net of tax.
Adoption of new accounting standards
- ------------------------------------
During 2003, the Company adopted FASB Statement 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities; FASB Statement 132 (revised
2003), Employers' Disclosures About Pensions and Other Postretirement Benefits;
FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees; and FASB Interpretation 46, Consolidation of Variable Interest
Entities. Adoption of these new standards did not materially affect the
Company's operating results or financial condition.
Operating segments
- ------------------
Internal financial information is primarily reported and aggregated in the
following lines of business: banking, mortgage banking, financial services, and
other.
Reclassifications
- -----------------
Certain items in the financial statements as of and for the years ended December
31, 2002 and 2001 have been reclassified, with no effect on net income, to
conform with the current year presentation.
Note 2. Business Acquisitions and Divestitures
On May 22, 2003, the Company sold its Internet Service Provider ("ISP") product
line. The Company sold the related assets of the product line, subscriber
accounts, and the "sainet.net" and "udnet.net" domains for approximately $364.
The Company recorded a gain of approximately $237 on the sale.
On October 31, 2003, the Company purchased the assets of the Howard Marshall
Agency including Walnut Street Securities. The Company purchased the customer
lists of Howard Marshall and Walnut Street for a total of $580 and fixed assets
totaling $20. In addition, an additional $125 can be paid on the fifth
anniversary of the closing date if certain performance criteria are met. This
acquisition was incorporated into UnionFinancial Services & Trust Company.
(Continued)
57.
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, 2003
U.S. government agencies $ 30,270 $ 403 $ --
States and political subdivisions 29,723 1,473 (42)
U.S. government agency mortgage-backed
securities 158,305 1,392 (398)
Collateralized mortgage obligations 5,972 65 (40)
Equity securities 17,380 23 --
Corporate 10,598 620 --
---------- ---------- ----------
$ 252,248 $ 3,976 $ (480)
========== ========== ==========
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)
========== ========== ==========
At December 31, 2003, approximately 34% 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,
-------------------------------------
2003 2002 2001
---------- ---------- ----------
Proceeds $ 72,398 $ 19,640 $ 21,582
Realized gains 281 409 798
Realized losses -- (2) --
(Continued)
58.
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,
2003, 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 $ 27,601
Due after one year through five years 36,271
Due after five years through ten years 6,077
Due after ten years 642
U.S. government agency mortgage-backed securities 158,305
Collateralized mortgage obligations 5,972
Equity securities 17,380
----------
$ 252,248
==========
As of December 31, 2003, the Company held callable securities carried at a fair
value of $30,270. The amortized cost of these securities was $29,867 as of
December 31, 2003.
Securities with carrying values of approximately $179,000 and $174,000 at
December 31, 2003 and 2002, respectively, were pledged to secure public deposits
and securities sold under agreements to repurchase and for other purposes as
required or permitted by law.
Securities with unrealized losses at year-end 2003 not recognized in income are
as follows:
Less than 12 Months 12 Months or More Total
----------------------- ----------------------- -----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
- ------------------------- ---------- ---------- ---------- ---------- ---------- ----------
State and political
subdivisions $ 593 $ (20) $ 875 $ (22) $ 1,468 $ (42)
U.S. government agency
mortgage-backed securities 54,700 (377) 3,476 (21) 58,176 (398)
Collateralized mortgage
obligations 3,835 (40) 103 -- 3,938 (40)
---------- ---------- ---------- ---------- ---------- ----------
Total temporarily impaired $ 59,128 $ (437) $ 4,454 $ (43) $ 63,582 $ (480)
========== ========== ========== ========== ========== ==========
Unrealized losses on securities have not been recognized into income because
management has the intent and ability to hold them for the foreseeable future,
and the decline in fair value is largely due to market interest rates. The fair
value is expected to recover as securities approach their maturity date.
(Continued)
59.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 4. Loans
The major classifications of loans follow:
December 31,
--------------------
2003 2002
-------- --------
Commercial $139,533 $136,656
Commercial real estate 134,985 147,253
Real estate 158,002 139,020
Real estate loans held for sale 3,927 7,565
Installment 37,415 49,949
Other 2,950 2,786
-------- --------
$476,812 $483,229
======== ========
The following table presents data on impaired loans:
December 31,
------------------------------
2003 2002 2001
-------- -------- --------
Year-end impaired loans for which an allowance
has been provided $ 10,212 $ 7,925 $ 6,419
Year-end impaired loans for which no allowance
has been provided 2,682 -- 840
-------- -------- --------
Total loans determined to be impaired $ 12,894 $ 7,925 $ 7,259
======== ======== ========
Allowance for loan loss for impaired loans included
in the allowance for loan losses $ 3,386 $ 1,811 $ 1,235
======== ======== ========
Average recorded investment in impaired loans $ 11,039 $ 8,651 $ 8,184
======== ======== ========
Interest income recognized from impaired loans $ 694 $ 228 $ --
======== ======== ========
Cash basis interest income recognized from impaired loans $ 138 $ 120 $ --
======== ======== ========
The Company has approximately $328 and $829 of loans past due 90 days and still
accruing interest at December 31, 2003 and 2002.
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 $70,858 and $71,155
as of December 31, 2003 and 2002, respectively.
(Continued)
60.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 4. Loans (Continued)
In the normal course of business, loans are made to executive officers,
directors, and principal stockholders of the Company and its subsidiaries and to
parties that the Company or its directors, executive officers, and stockholders
have the ability to significantly influence (related parties). Changes in such
loans during the year ended December 31, 2003 follow:
Balance at December 31, 2002 $ 36,509
New loans, extensions, and modifications 21,531
Repayments (23,828)
Change in classification (9,928)
---------
Balance at December 31, 2003 $ 24,284
=========
Note 5. Loan Servicing
The following summarizes the secondary mortgage market activities:
Years Ended December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Proceeds from sales of mortgage loans $ 205,272 $ 157,815 $ 137,393
========== ========== ==========
Gain on sales of mortgage loans $ 4,727 $ 2,909 $ 1,961
========== ========== ==========
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,
-----------------------
2003 2002
---------- ----------
Federal Home Loan Mortgage Corporation $ 3,783 $ 7,430
Federal National Mortgage Association 302,774 279,746
Small Business Administration 3,504 5,324
Other 9,084 3,321
---------- ----------
$ 319,145 $ 295,821
========== ==========
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $1,477 and $1,252 at December 31, 2003 and 2002,
respectively.
(Continued)
61.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 5. Loan Servicing (Continued)
Following is an analysis of the changes in originated mortgage servicing rights:
Years Ended December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Balance at beginning of year $ 2,640 $ 2,102 $ 1,423
Originated mortgage servicing rights 1,867 1,493 1,288
Amortization (1,732) (955) (609)
---------- ---------- ----------
Balance at end of year $ 2,775 $ 2,640 $ 2,102
========== ========== ==========
Loans held for sale, which are included in real estate loans, are summarized as
follows:
December 31,
-----------------------
2003 2002
---------- ----------
Secured by one-to-four-family residences $ 3,529 $ 7,495
Small Business Administration loans 398 70
---------- ----------
$ 3,927 $ 7,565
========== ==========
Note 6. Allowance for Loan Losses
An analysis of activity in the allowance for loan losses follows:
Years Ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Balance at beginning of year $ 6,450 $ 6,295 $ 6,414
Provision for loan losses 8,236 3,574 4,161
Recoveries 554 459 395
Loans charged off (6,229) (3,878) (4,675)
---------- ---------- ----------
Balance at end of year $ 9,011 $ 6,450 $ 6,295
========== ========== ==========
(Continued)
62.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 7. Premises and Equipment
Premises and equipment consisted of:
December 31,
-----------------------
2003 2002
---------- ----------
Land $ 2,425 $ 1,760
Buildings 15,727 12,823
Furniture and equipment 16,105 14,220
Construction in process -- 724
---------- ----------
34,257 29,527
Less accumulated depreciation 17,681 15,472
---------- ----------
$ 16,576 $ 14,055
========== ==========
Note 8. Goodwill and Intangible Assets
Goodwill is no longer amortized starting in 2002. The effect of not amortizing
goodwill is summarized as follows:
2003 2002 2001
---------- ---------- ----------
Reported net income $ 1,937 $ 3,787 $ 4,197
Add back: goodwill amortization, net of tax -- -- 558
---------- ---------- ----------
Adjusted net income $ 1,937 $ 3,787 $ 4,755
========== ========== ==========
Basic earnings per share:
Reported net income $ 0.48 $ 0.95 $ 1.06
Goodwill amortization -- -- 0.14
---------- ---------- ----------
Adjusted net income $ 0.48 $ 0.95 $ 1.20
========== ========== ==========
Diluted earnings per share:
Reported net income $ 0.48 $ 0.94 $ 1.05
Goodwill amortization -- -- 0.14
---------- ---------- ----------
Adjusted net income $ 0.48 $ 0.94 $ 1.19
========== ========== ==========
(Continued)
63.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 8. Goodwill and Intangible Assets (Continued)
Acquired Intangible Assets
Acquired intangible assets were as follows as of year end:
2003 2002
---- ----
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------- ---------- ---------- ----------
Amortized intangible assets:
Core deposit intangibles $ 2,106 $ 1,532 $ 2,106 $ 1,351
Other customer relationship intangibles 745 87 165 47
---------- ---------- ---------- ----------
Total $ 2,851 $ 1,619 $ 2,271 $ 1,398
========== ========== ========== ==========
Aggregate amortization expense was $247, $245, and $255 for 2003, 2002, and
2001.
Estimated amortization expense for subsequent years:
2004 $ 295
2005 295
2006 202
2007 72
2008 62
Thereafter 280
Note 9. Deposits
Deposit account balances by type are summarized as follows:
December 31,
-----------------------
2003 2002
---------- ----------
Non-interest-bearing demand deposits $ 89,424 $ 90,606
Savings, NOW, and money market accounts 203,536 202,681
Time deposits of $100 or more 163,252 152,395
Other time deposits 181,820 196,276
---------- ----------
$ 638,032 $ 641,958
========== ==========
(Continued)
64.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 9. Deposits (Continued)
At December 31, 2003, the scheduled maturities of time deposits are as follows:
Year Amount
---- ----------
2004 $ 262,193
2005 39,054
2006 19,305
2007 8,211
2008 14,347
Thereafter 1,962
----------
$ 345,072
==========
Time certificates of deposit in denominations of $100 or more mature as follows:
December 31,
-----------------------
2003 2002
---------- ----------
3 months or less $ 68,381 $ 43,223
Over 3 months through 6 months 38,155 36,679
Over 6 months through 12 months 26,160 27,458
Over 12 months 30,556 45,035
---------- ----------
$ 163,252 $ 152,395
========== ==========
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,
-----------------------
2003 2002
---------- ----------
Securities sold under agreements to repurchase $ 1,533 $ 3,588
========== ==========
Federal funds purchased and securities sold under agreement to repurchase
generally mature within one to ninety days from the transaction date.
(Continued)
65.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 10. Borrowed Funds (Continued)
At December 31, 2003, $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 $66.1
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) and securities carried at $33,140. The scheduled maturities of
advances from the Federal Home Loan Bank at December 31, 2003 are as follows:
Average
Year Interest Rate Amount
---- ------------- ----------
2004 4.60% $ 20,550
2005 4.13 16,900
2006 5.03 8,300
2007 3.68 5,200
2008 2.96 13,300
Thereafter 4.67 8,200
----------
$ 72,450
==========
Notes payable consisted of the following at December 31, 2003 and 2002:
2003 2002
-------- --------
Line of credit loan ($3,000) 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, 2004;
secured by 100% of the stock of the subsidiary banks. $ 3,000 $ 4,000
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,
2004; secured by 100% of the stock of the subsidiary banks. 4,275 4,275
Three promissory notes to individuals related to the purchase
of the Howard Marshall Agency. The original amounts of
the notes were $376, $45, and $29. These notes were all
entered into on November 1, 2003 and all carry an interest
rate of 5%. The notes require monthly installment payments
of principal and interest. 598 --
-------- --------
$ 7,873 $ 8,275
======== ========
(Continued)
66.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 10. Borrowed Funds (Continued)
The note payable agreements with LaSalle National Bank 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, 2003.
Information concerning borrowed funds is as follows:
Years Ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Federal Funds Purchased
Maximum month-end balance during the year $ 6,600 $ 10,000 $ 2,900
Average balance during the year 2,155 904 1,160
Weighted average interest rate for the year 0.95% 2.00% 3.48%
Weighted average interest rate at year end N/A N/A 2.00%
Securities Sold Under Agreements to Repurchase
Maximum month-end balance during the year $ 17,355 $ 4,680 $ 5,793
Average balance during the year 4,621 4,126 1,315
Weighted average interest rate for the year 2.19% 2.62% 3.04%
Weighted average interest rate at year end 1.52% 2.20% 3.69%
Advances from the Federal Home Loan Bank
Maximum month-end balance during the year $ 77,450 $ 62,100 $ 66,408
Average balance during the year 70,018 51,938 54,064
Weighted average interest rate for the year 4.28% 4.87% 5.60%
Weighted average interest rate at year end 4.21% 4.43% 3.76%
Notes Payable
Maximum month-end balance during the year $ 8,275 $ 9,275 $ 10,275
Average balance during the year 7,898 9,023 9,719
Weighted average interest rate for the year 4.06% 3.80% 6.13%
Weighted average interest rate at year end 3.46% 4.00% 4.11%
(Continued)
67.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 11. Income Taxes
Income taxes consisted of:
Years Ended December 31,
-------------------------------------
2003 2002 2001
---------- ---------- ----------
Federal
Current $ 419 $ 969 $ 1,219
Deferred (535) 52 279
---------- ---------- ----------
(116) 1,021 1,498
State
Current 68 92 (26)
Deferred (81) 21 65
---------- ---------- ----------
(13) 113 39
---------- ---------- ----------
$ (129) $ 1,134 $ 1,537
========== ========== ==========
The Company's income tax expense differed from the statutory federal rate of 34%
as follows:
Years Ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Expected income taxes $ 680 $ 1,761 $ 2,037
Income tax effect of
Interest earned on tax-free investments and loans (577) (635) (736)
Nondeductible interest expense incurred to
carry tax-free investments and loans 48 68 120
Nondeductible amortization -- -- 131
State income taxes, net of federal tax benefit (14) 78 36
Increase in CSV of officers' life insurance (223) (55) (34)
Other (43) (83) (17)
---------- ---------- ----------
$ (129) $ 1,134 $ 1,537
========== ========== ==========
The significant components of deferred income tax assets and liabilities
consisted of:
December 31,
-----------------------
2003 2002
---------- ----------
Deferred tax assets
Allowance for loan losses $ 3,445 $ 2,513
Deferred compensation, other 368 384
Deferred tax credits 210 --
---------- ----------
Total deferred tax assets 4,023 2,897
(Continued)
68.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 11. Income Taxes (Continued)
December 31,
------------------------
2003 2002
---------- ----------
Deferred tax liabilities
Depreciation $ (750) $ (442)
Basis adjustments arising from acquisitions (744) (704)
Mortgage servicing rights (1,017) (1,023)
Securities available-for-sale (1,355) (2,005)
Federal Home Loan Bank dividend received in stock (315) (219)
Other (467) (395)
---------- ----------
Total deferred tax liabilities (4,648) (4,788)
---------- ----------
Net deferred tax liabilities $ (625) $ (1,891)
========== ==========
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 $262, $385, and $335 for
the years ended December 31, 2003, 2002, and 2001.
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 $344, $301, and $149 for the years ended December 31, 2003, 2002,
and 2001.
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. non-qualified Stock Option
Plan ("the 1999 Option Plan"). Under the 1999 Option Plan, nonqualified options
may be granted to employees and eligible directors of the Company and its
subsidiaries to purchase the Company's common stock at 100% of the fair market
value on the date the option is granted. The Company has authorized 50,000
shares for issuance under the 1999 Option Plan. During 1999, 40,750 of these
shares were granted and are 100% fully vested. The options have an exercise
period of ten years from the date of grant.
(Continued)
69.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 13. Stock Option Plans (Continued)
In April 2003, the Company adopted the UnionBancorp 2003 Stock Option Plan ("the
2003 Option Plan"). Under the 2003 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 2003 Option Plan's
administrative committee. Pursuant to the 2003 Option Plan, 200,000 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 2003 Option
Plan. 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, 2003, 2002, and
2001 and changes during the years ended on those dates is presented below.
2003 2002 2001
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
Outstanding at beginning
of year 362,519 $ 12.66 270,735 $ 11.78 251,261 $ 11.55
Granted 20,000 23.29 106,824 14.59 57,882 11.75
Exercised (56,404) 10.54 (1,890) 8.64 (13,508) 8.38
Forfeited (21,467) 14.19 (13,150) 16.36 (24,900) 16.29
-------- -------- -------- -------- -------- --------
Outstanding at end of year 304,648 13.41 362,519 12.66 270,735 11.78
======== ======== ========
Options exercisable at year end 181,556 $ 11.90 198,135 $ 10.55 160,720 $ 10.17
======== ======== ======== ======== ======== ========
Weighted-average fair
value of options granted
during the year $ 4.93 $ 3.92 $ 3.98
======== ======== ========
Options outstanding at year-end 2003 were as follows:
Outstanding Exercisable
------------------------ ------------------------
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Number Life Number Price
------------------- ---------- ---------- ---------- ----------
$ 5.04 - $ 8.33 35,940 1.6 years 34,620 $ 6.76
9.67 - 13.00 95,118 5.2 years 63,487 10.01
13.88 - 18.50 153,590 6.6 years 83,449 15.38
23.29 20,000 5.0 years -- 23.29
---------- ---------- ---------- ----------
304,648 5.5 years 181,556 $ 11.90
========== ========== ========== ==========
(Continued)
70.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 13. Stock Option Plans (Continued)
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 $21, $45, and $61 for
the years ended December 31, 2003, 2002, and 2001.
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 20,000 shares of common stock were
outstanding at December 31, 2003 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.
2003 2002 2001
-------- -------- --------
Basic earnings per share
Net income available to common stockholders $ 1,937 $ 3,787 $ 4,197
======== ======== ========
Weighted average common shares outstanding 4,000 3,980 3,974
======== ======== ========
Basic earnings per share $ 0.48 $ 0.95 $ 1.06
======== ======== ========
Weighted average common shares outstanding 4,000 3,980 3,974
Add dilutive effect of assumed exercised stock
options 69 48 35
-------- -------- --------
Weighted average common and dilutive
potential shares outstanding 4,069 4,028 4,009
======== ======== ========
Diluted earnings per share $ 0.48 $ 0.94 $ 1.05
======== ======== ========
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.
Upon receiving regulatory approval, the Company merged UnionBank and
UnionBank/Central in March of 2003. During 2003, the Company also filed the
required application with the appropriate regulatory agency for approval to
merge UnionBank, UnionBank/West, and UnionBank/Northwest. This merger is
anticipated to become effective in late March 2004.
(Continued)
71.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 15. Regulatory Matters (Continued)
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, 2003, that the Company
and the Banks meet all of the capital adequacy requirements to which they are
subject.
As of December 31, 2003, 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, 2003
Total capital (to risk-
weighted assets)
UnionBancorp, Inc. $ 67,639 12.2% $ 44,526 8.0% $ 55,657 10.0%
UnionBank 56,314 12.8 35,125 8.0 43,906 10.0
UnionBank/West 13,292 13.2 8,059 8.0 10,074 10.0
Tier I capital (to risk-
weighted assets)
UnionBancorp, Inc. $ 59,851 10.8 22,263 4.0 33,394 6.0
UnionBank 52,325 11.9 17,562 4.0 26,344 6.0
UnionBank/West 12,033 11.9 4,030 4.0 6,044 6.0
Tier I leverage ratio (to
average assets)
UnionBancorp, Inc. $ 59,851 7.7 31,269 4.0 39,086 5.0
UnionBank 52,325 8.8 23,665 4.0 29,581 5.0
UnionBank/West 12,033 7.3 6,594 4.0 8,243 5.0
(Continued)
72.
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, 2002
Total capital (to risk-
weighted assets)
UnionBancorp, Inc. $ 66,036 11.8% $ 44,610 8.0% $ 55,762 10.0%
UnionBank 41,393 12.7 26,113 8.0 32,642 10.0
UnionBank/Central 12,488 14.1 7,092 8.0 8,866 10.0
UnionBank/West 16,544 13.2 10,031 8.0 12,539 10.0
Tier I capital (to risk-
weighted assets)
UnionBancorp, Inc. $ 58,755 10.5% $ 22,305 4.0% $ 33,457 6.0%
UnionBank 37,676 11.5 13,057 4.0 19,585 6.0
UnionBank/Central 11,380 12.8 3,546 4.0 5,319 6.0
UnionBank/West 15,284 12.2 5,016 4.0 7,523 6.0
Tier I leverage ratio (to
average assets)
UnionBancorp, Inc. $ 58,755 7.5% $ 30,438 4.0% $ 38,048 5.0%
UnionBank 37,676 8.3 17,478 4.0 21,847 5.0
UnionBank/Central 11,380 8.2 5,441 4.0 6,801 5.0
UnionBank/West 15,284 8.8 6,587 4.0 8,234 5.0
The Company's ability to pay dividends is dependent on the subsidiary banks,
which are restricted by various laws and regulations. These regulations pose no
practical restrictions to paying dividends at historical levels. At December 31,
2003 the subsidiary banks had $5.2 million of retained earnings available for
dividends under these regulations.
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 and redeemable stock
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)
73.
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,
-------------------------------------------------
2003 2002
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial assets
Cash and cash equivalents $ 22,198 $ 22,198 $ 38,962 $ 38,962
Securities 252,248 252,248 227,229 227,229
Loans 467,801 470,055 476,779 479,497
Accrued interest receivable 5,440 5,440 6,211 6,211
Financial liabilities
Deposits 638,032 638,794 641,958 642,270
Federal funds purchased and
securities sold under
agreements to repurchase 1,533 1,533 3,588 3,588
Advances from the Federal
Home Loan Bank 72,450 74,032 61,750 64,072
Series B mandatorily redeemable
preferred stock 831 831 -- --
Notes payable 7,873 7,873 8,275 8,275
Accrued interest payable 2,443 2,443 2,935 2,935
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)
74.
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, 2003 $ 3,752 $ 67,624 $ 28,793 $ 96,417 3.00% - 12.50%
December 31, 2002 $ 1,421 $ 56,959 $ 46,180 $ 103,139 4.50% - 9.00%
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. For commitments to extend credit, the Banks
evaluate each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained is based on management's credit evaluation of the customer.
Collateral held varies, but may include accounts receivable; inventory;
property, plant, and equipment; and income producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loan commitments to customers. The standby letters of
credit are unsecured.
The Company has employment agreements with certain 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.
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.
(Continued)
75.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 18. Condensed Financial Information - Parent Company Only (Continued)
Condensed financial information for UnionBancorp, Inc. follows:
Balance Sheets (Parent Company Only)
December 31,
-----------------------
ASSETS 2003 2002
---------- ----------
Cash and cash equivalents $ 928 $ 259
Investment in subsidiaries 75,507 76,548
Premises and equipment 636 830
Other assets 614 453
---------- ----------
$ 77,685 $ 78,090
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
-----------------------
Liabilities 2003 2002
---------- ----------
Notes payable $ 7,275 $ 8,275
Mandatory redeemable preferred stock 831 --
Other liabilities 1,532 920
---------- ----------
9,638 9,195
Mandatory redeemable preferred stock -- 831
Stockholders' equity 68,047 68,064
---------- ----------
$ 77,685 $ 78,090
========== ==========
Income Statements (Parent Company Only)
Years Ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Dividends from subsidiaries $ 4,358 $ 3,842 $ 3,523
Other income 2,120 2,037 1,796
Interest expense 382 347 592
Other expenses 5,417 5,435 4,491
Income tax benefit (1,462) (1,455) (1,161)
Equity in undistributed earnings of subsidiaries (11) 2,492 3,057
---------- ---------- ----------
Net income 2,130 4,044 4,454
Less dividends on preferred stock 193 257 257
---------- ---------- ----------
Net income on common stock $ 1,937 $ 3,787 $ 4,197
========== ========== ==========
(Continued)
76.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 18. Condensed Financial Information - Parent Company Only (Continued)
Statements of Cash Flows (Parent Company Only)
Years Ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Cash flows from operating activities
Net income $ 2,130 $ 4,044 $ 4,454
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 264 345 405
Undistributed earnings of subsidiaries 11 (2,492) (3,057)
Amortization of deferred compensation -
stock options 21 45 61
Decrease (increase) in other assets (161) 137 250
Increase in other liabilities 472 140 56
---------- ---------- ----------
Net cash provided by operating activities 2,737 2,219 2,169
Cash flows from investing activities
Purchases of premises and equipment 70 27 (643)
Investment in subsidiaries -- -- 845
---------- ---------- ----------
Net cash provided by financing activities 70 27 202
Years Ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Cash flows from financing activities
Net decrease in notes payable $ (1,000) $ (1,000) $ (1,000)
Dividend paid on common stock (1,441) (1,234) (1,074)
Dividends paid on preferred stock (193) (257) (257)
Proceeds from exercise of stock options 685 17 120
Purchase of treasury stock (189) -- --
---------- ---------- ----------
Net cash used in financing activities (2,138) (2,474) (2,211)
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 669 (228) 160
Cash and cash equivalents
Beginning of year 259 487 327
---------- ---------- ----------
End of year $ 928 $ 259 $ 487
========== ========== ==========
(Continued)
77.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 19. Other Comprehensive Income
Changes in other comprehensive income components and related taxes are as
follows:
Years Ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Change in unrealized gains on
securities available-for-sale $ (1,386) $ 3,069 $ 3,199
Reclassification adjustment for (gains)
losses recognized in income (281) (407) (798)
---------- ---------- ----------
Net unrealized gains (1,667) 2,662 2,401
Tax expense (637) 1,027 926
---------- ---------- ----------
Other comprehensive income $ (1,030) $ 1,635 $ 1,475
========== ========== ==========
Note 20. Segment Information
The reportable segments are determined by the products and services offered,
primarily distinguished between banking, mortgage banking, financial services,
and other operations. Loans, investments, and deposits provide the revenues in
the banking segment; insurance, brokerage, and trust in the financial services
segment; and holding company services are categorized as other.
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 Mortgage Financial Other Consolidated
Segment Banking Services Segments Totals
---------- ---------- ---------- ---------- ----------
2003
- ----
Net interest income $ 25,143 $ 379 $ (20) $ (377) $ 25,125
Other revenue 5,043 4,914 3,192 570 13,719
Other expense 17,377 3,201 4,155 3,874 28,607
Segment profit 4,655 320 (627) (2,218) 2,130
Noncash items
Depreciation 1,144 99 179 263 1,685
Provision for loan loss 8,081 -- -- -- 8,081
Amortization of intangibles 206 -- 41 -- 247
Goodwill 5,822 -- 1,820 -- 7,642
Segment assets 781,189 2,620 8,394 1,219 793,422
(Continued)
78.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 20. Segment Information (Continued)
Banking Mortgage Financial Other Consolidated
Segment Banking Services Segments Totals
---------- ---------- ---------- ---------- ----------
2002
- ----
Net interest income 25,310 362 (7) (342) 25,323
Other revenue 5,213 3,628 3,082 532 12,455
Other expense 17,282 2,610 3,733 5,401 29,026
Segment profit 6,380 343 (415) (2,264) 4,044
Noncash items
Depreciation 914 78 164 345 1,501
Provision for loan loss 3,574 -- -- -- 3,574
Amortization of goodwill and
and intangibles 206 -- 39 -- 245
Goodwill 5,822 -- 1,820 -- 7,642
Segment assets 783,043 2,640 5,068 865 791,616
2001
- ----
Net interest income 24,727 273 9 (565) 24,444
Other revenue 3,442 2,663 3,268 2,547 11,920
Other expense 17,527 2,081 3,420 3,184 26,212
Segment profit 7,298 132 192 (1,631) 5,991
Noncash items
Depreciation 885 20 133 318 1,356
Provision for loan loss 4,161 -- -- -- 4,161
Amortization of goodwill and
other intangibles 809 -- 157 (21) 945
Goodwill 5,822 -- 1,820 -- 7,642
Segment assets 738,981 2,102 5,637 1,587 748,307
(Continued)
79.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 21. Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2003 Year Ended December 31, 2002
Three Months Ended Three Months Ended
------------------------------------------------- --------------------------------------------------
(A)Dec. 31 (A)Sep. 30 June 30 March 31 (A)Dec. 31 (B)Sep. 30 (A)(B)June 30 (B)March 31
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Total interest income $ 9,591 $ 10,274 $ 10,381 $ 10,840 $ 11,189 $ 11,238 $ 11,352 $ 11,730
Total interest expense (3,847) (3,775) (4,080) (4,259) (4,634) (4,879) (5,161) (5,512)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 5,744 6,499 6,301 6,581 6,555 6,359 6,191 6,218
Provision for loan losses 2,011 4,356 1,257 612 518 519 2,018 519
Noninterest income 2,774 3,259 4,087 3,599 3,554 3,060 2,838 3,003
Noninterest expense 7,260 7,161 7,169 7,017 7,824 7,387 6,952 6,863
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes (753) (1,759) 1,962 2,551 1,767 1,513 59 1,839
Income tax expense
(benefit) (499) (890) 516 744 459 335 (198) 538
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(254) (869) 1,446 1,807 1,308 1,178 257 1,301
Preferred stock dividend -- 65 64 64 64 65 64 64
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) for
common stockholders $ (254) $ (934) $ 1,382 $ 1,743 $ 1,244 $ 1,113 $ 193 $ 1,237
========== ========== ========== ========== ========== ========== ========== ==========
Basic earnings (loss)
per share $ (0.07) $ (.23) $ .34 $ .44 $ .34 $ .27 $ .04 $ .30
========== ========== ========== ========== ========== ========== ========== ==========
Diluted earnings (loss)
per share $ (0.06) $ (.23) $ .34 $ .43 $ .33 $ .27 $ .04 $ .30
========== ========== ========== ========== ========== ========== ========== ==========
(A) The net income for the quarter was impacted by an 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) These amounts have been adjusted to reflect the adoption of SFAS No. 147 as
of January 1, 2002.
(Continued)
80.
Item 9. Changes in and Disagreements on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
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
as of December 31, 2003. 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 during the
quarter ended December 31, 2003. There were no significant deficiencies or
material weaknesses identified in the evaluation and, therefore, no corrective
actions were taken.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information beginning on page 2 of the Company's 2004 Proxy Statement under
the caption "Election of Directors", pages 6 through 8 of the 2004 Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management", on page 15 under the caption "Audit Committee Financial Expert" and
on page 5 under the caption "Code of Ethics" is incorporated by reference. The
information regarding executive officers not provided in the 2004 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 2004 Proxy Statement, the names
and ages of the executive officers of the Company as of December 31, 2003, 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.
Rick R. Clary, 42, was named President and Chief Operating Officer of
UnionBank in the fourth quarter of 2003. Mr. Clary previously served as the
Regional Bank President of the Company's Central Region and as Chief Operating
Officer. Prior to the merger, he served as President & Chief Executive Officer
of UnionBank/Central and as a member of their Board of Directors. In January of
2004, after being named President, Mr. Clary joined the Board of Directors of
UnionBank. Mr. Clary began employment with the Bank of Ladd in 1992 and became
employed with UnionBancorp as a result of the acquisition of Prairie Bancorp,
Inc.
Jimmie D. Lansford, 64, 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. Mr. Lansford was previously a member of the UnionBank/Northwest and
(Continued)
81.
holding company Boards of Directors and served 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
and is a past Chairman. Prior to his tenure with the Company, Mr. Lansford was
the Chief Executive Officer of St. Mary's Hospital in Streator, Illinois.
Kurt R. Stevenson, 37, was promoted to Senior Vice President and Chief
Financial Officer in the fourth quarter of 2003, after having served as the
Company's Vice President and Chief Financial Officer since 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
and 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.
Dewey R. Yaeger, 63, was named President and Chief Executive Officer of
UnionBancorp, Inc. in the fourth quarter of 2003. Mr. Yaeger first joined the
Company in April of 2003 as a Senior Vice President and Chief Credit Officer and
had been acting in an interim capacity as President and Chief Executive Officer
since September of 2003. He currently serves as a member of the Boards of
Directors for UnionBancorp, UnionBank, UnionBank/West and UnionFinancial
Services & Trust Company. Mr. Yaeger previously served as the President and
Chief Executive Officer of Castle Bank, N.A. headquartered in DeKalb, Illinois.
Item 11. Executive Compensation
The information on pages 9 through 11 of the 2004 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 6 through 8 of the 2004 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 14 of the 2004 Proxy Statement under the caption
"Transactions with Management" is incorporated by reference.
Item 14. Principal Accountant Fees and Services
The information on page 14 of the 2004 Proxy Statement under the caption
"Accountant Fees" is incorporated by reference.
(Continued)
82.
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 42 of this Form 10-K.
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not required or applicable,
or the required information is shown in the Consolidated Financial
Statements or the notes thereto.
(a)(3) Schedule of Exhibits
The Exhibit Index which immediately follows the signature pages to this
Form 10-K is incorporated by reference.
(b) Reports on Form 8-K
Registrant filed a Form 8-K on October 7, 2003 related to an
announcement of an increase in its loan loss provision for two impaired
commercial credits.
Registrant filed a Form 8-K on November 13, 2003 in connection with its
third quarter 2003 earnings announcement.
Registrant filed a Form 8-K on December 30, 2003 to announce its plan
to provide approximately $1.9 million to its loan loss during this
fourth quarter of 2003.
(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.
(Continued)
83.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 24, 2004.
UNIONBANCORP, INC.
By: /s/ DEWEY R. YAEGER
-------------------------------------
Dewey R. Yaeger
President and Principal Executive
Officer
By: /s/ KURT R. STEVENSON
-------------------------------------
Kurt R. Stevenson
Senior 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 24, 2004.
/s/ RICHARD J. BERRY /s/ I. J. REINHARDT, JR.
- ----------------------------------- -----------------------------------
Richard J. Berry I. J. Reinhardt, Jr.
Director Director
/s/ WALTER E. BREIPOHL /s/ JOHN A. SHINKLE
- ----------------------------------- -----------------------------------
Walter E. Breipohl John A. Shinkle
Director Director
/s/ ROBERT J. DOTY /s/ SCOTT C. SULLIVAN
- ----------------------------------- -----------------------------------
Robert J. Doty Scott C. Sullivan
Director Director
/s/ DENNIS J. MCDONNELL /s/ JOHN A. TRAINOR
- ----------------------------------- -----------------------------------
Dennis J. McDonnell John A. Trainor
Director Director
/s/ DEWEY R. YAEGER
-----------------------------------
Dewey R. Yaeger
Director
UNIONBANCORP, INC.
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
Incorporated
Exhibit Herein By Filed
No. Description Reference To Herewith
--- ----------- ------------ --------
3.1 Restated Certificate of Incorporated by reference
Incorporation of from Exhibit 3.1 to the
UnionBancorp, Inc., as Registration Statement on
amended Form S-1 filed by the
Company on August 19,
1996 (SEC File No. 33-
9891), as amended
3.2 Bylaws of Incorporated by reference
UnionBancorp, Inc. from Exhibit 3.2 to the
Registration Statement on
Form S-1 filed by the
Company on August 19,
1996 (SEC File No. 33-
9891), as amended
4.1 Certificate of Incorporated by reference
Designation, Preferences from Exhibit 4.3 to the
and Rights of Series A Registration Statement on
Convertible Preferred Form S-1 filed by the
Stock of UnionBancorp, Company on August 19,
Inc. 1996 (SEC File No. 33-
9891), as amended
4.2 Certificate of Incorporated by reference
Designation, Preferences from Exhibit 4.4 to the
and Rights of Series B Registration Statement on
Preferred Stock of Form S-1 filed by the
UnionBancorp, Inc. Company on August 19,
1996 (SEC File No. 33-
9891), as amended
Exhibit Herein By Filed
No. Description Reference To Herewith
--- ----------- ------------ --------
4.4 Specimen Common Incorporated by reference
Stock Certificate of from Exhibit 4.6 to the
UnionBancorp, Inc. Registration Statement on
Form S-1 filed by the
Company on August 19,
1996 (SEC File No. 33-
9891), as amended
4.5 Rights Agreement Incorporated by reference
between UnionBancorp, from Exhibit 4.7 to the
Inc. and Harris Trust and Registration Statement on
Savings Bank, dated Form S-1 filed by the
August 5, 1996 Company on August 19,
1996 (SEC File No. 33-
9891), as amended
10.1 Registration Agreement Incorporated by reference
dated August 6, 1996, from Exhibit 10.10 to the
between UnionBancorp, Registration Statement on
Inc. and each of Wayne Form S-1 filed by the
W. Whalen and Dennis J. Company on August 19,
McDonnell 1996 (SEC File No. 33-
9891), as amended
10.2 Loan Agreement Incorporated by reference
between UnionBancorp, from Exhibit 10.11 to the
Inc. and LaSalle National Registration Statement on
Bank dated August 2, Form S-1 filed by the
1996 Company on August 19,
1996 (SEC File No. 33-
9891), as amended
10.3 UnionBancorp, Inc. Incorporated by reference
Employee Stock from Exhibit 10.12 to the
Ownership Plan Registration Statement on
Form S-1 filed by the
Company on August 19,
1996 (SEC File No. 33-
9891), as amended
Exhibit Herein By Filed
No. Description Reference To Herewith
--- ----------- ------------ --------
10.4 UnionBancorp, Inc. 1993 Incorporated by reference
Stock Option Plan, as from Exhibit 10.13 to the
amended Registration Statement on
Form S-1 filed by the
Company on August 19,
1996 (SEC File No. 33-
9891), as amended
10.5 UnionBancorp, Inc. 1999 Incorporated by reference
Nonqualified Stock from Exhibit 10.1 to the
Option Plan registration statement on
Form S-8 filed by the
Company on December 10,
1999 (SEC File No. 333-
92549)
10.6 UnionBancorp, Inc. 2000 Incorporated by reference
Incentive Compensation from Exhibit 10.1 to
Plan UnionBancorp's Quarterly
Report on Form 10-Q for the
quarter ended September 30,
2001 as filed with the SEC
on November 13, 2001
10.7 Employment Agreement Incorporated by reference
between UnionBancorp, from Exhibit 10.2 to
Inc. and Paul R. Tingley UnionBancorp's Quarterly
dated August 22, 2001 Report on Form 10-Q for the
quarter ended September 30,
2001 as filed with the SEC
on November 13, 2001
10.8 Charles J. Grako *
Severance Arrangement
10.9 UnionBancorp, Inc. 2003 Incorporated by reference
Stock Option Plan from UnionBancorp's 2003
Proxy Statement.
Exhibit Herein By Filed
No. Description Reference To Herewith
--- ----------- ------------ --------
13.1 Portions of the 2003 *
Annual Report to
Stockholders (as
incorporated by
reference into this Form
10-K)
14 Code of Ethics *
21.1 Subsidiaries of *
UnionBancorp, Inc.
23.1 Consent of Crowe, *
Chizek and Company
LLC
31.1 Certification of Dewey *
R. Yaeger required by
Rule 13a-14(a)
31.2 Certification of Kurt R. *
Stevenson required by
Rule 13a-14(a)
32.1 Certification Pursuant to *
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002, from the
Company's President
and Principal Executive
Officer
32.2 Certification Pursuant to *
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002, from the
Company's Senior Vice
President and Principal
Financial and
Accounting Officer
Exhibit Herein By Filed
No. Description Reference To Herewith
--- ----------- ------------ --------
99.1 Portions of the 2004 Incorporated by reference
Proxy Statement (as from the Schedule 14A filed
incorporated by by the Company on March
reference into this Form 24, 2004 (SEC File No. 0-
10-K) 28846)
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