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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, 2004
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, 2005, the Registrant had issued and outstanding 4,059,110 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, 2004, the last business
day of the Registrant's most recently completed second quarter, was
$34,085,163.*
* Based on the last reported price of $19.46 of an actual transaction in
the Registrant's Common Stock on June 30, 2004, 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. Shares of Common Stock held by
any executive officer or director of the Registrant and any person who
beneficially owns 5% or more of the outstanding Common Stock have been
excluded from the foregoing computation because such persons may be
deemed to be affiliates; provided, 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 Proxy Statement for the 2005 Annual Meeting of
Stockholders (the "2005 Proxy Statement") are incorporated by reference into
Part III of this Form 10-K.
As used in this report, the terms "we," "us," "our," "UnionBancorp" and the
"Company" mean UnionBancorp, Inc. and its subsidiary, unless the context
indicates another meaning, and the term "Common Stock" means our common stock,
par value $1.00 per share.
UNIONBANCORP, INC.
Form 10-K Index
Page
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PART I
Item 1. Business .................................................... 1
A. The Company
B. Supervision and Regulation
C. Executive Officers
Item 2. Properties ................................................... 12
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, Related Stockholder
Matters and Issuer Purchases of Equity Securities....... 13
Item 6. Selected Consolidated Financial Data.......................... 14
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition................................. 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 40
Item 8. Financial Statements and Supplementary Data................... 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ............................... 80
Item 9A. Controls and Procedures....................................... 80
Item 9B. Other Information............................................. 80
PART III
Item 10. Directors and Executive Officers of the Registrant............ 80
Item 11. Executive Compensation........................................ 80
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters......................... 80
Item 13. Certain Relationships and Related Transactions................ 81
Item 14. Principal Accountant Fees and Services........................ 81
Item 15. Exhibits and Financial Statement Schedules.................... 81
PART I
Item 1. Business
THE COMPANY
General
The Company, a Delaware corporation, is a regional financial services
organization based in Ottawa, Illinois, encompassing one bank subsidiary.
Together, the Company's sales and service centers serve customers at twenty-two
locations from the far western suburbs of the Chicago metropolitan area across
central and northern Illinois, and offer banking, trust, insurance, investment
and electronic services and products.
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 its subsidiary 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 was 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 and were intended to create a
means for sustained revenue and earnings growth. In addition, during 1998, the
Company sold its 81.7% ownership interest in 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. Also during 2001, in
order to create a flatter, more efficient organizational structure, UnionData
Corp, Inc. collapsed its charter and was, subsequently, absorbed by UnionBancorp
as its Information Technology division.
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,
1.
the process has alleviated many intra-company transactions, financial reporting
functions and loan participations, while creating a flatter organizational
structure.
The sale of the Company's Merchant Point of Sale (POS) product was completed in
May of 2003. 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.
The Company completed phase two of the charter consolidation initiative during
the first quarter of 2004 when UnionBank/Northwest and UnionBank/West were
successfully merged into UnionBank and Prairie and Country were dissolved.
In the third quarter of 2004, the Company completed the sale of five western
Illinois sales and service centers, which included Carthage, Macomb, Paloma,
Quincy and Rushville, selling $40.2 million in net loans and $88.6 million in
deposits to First Bankers Trust Company of Quincy. The transaction, which
effectively exited the Company from the western Illinois market, yielded a net
gain on sale (after impairment of intangible assets, taxes and applicable
expenses) of approximately $1.8 million and reduced the Company's net footings
by $40.9 million.
During the fourth quarter of 2004, the Company completed the final phase of its
charter consolidation initiative when UnionFinancial Services & Trust Company
was merged into UnionBank, thus successfully creating a one-bank holding
company.
Operations
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-two 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 obtain 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 enhance the
Company's ability 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. 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 Illinois.
UnionBank offers a wide range of commercial and retail lending services to
businesses 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. UnionBank makes direct and indirect installment loans to consumers and
commercial customers, originates and services residential mortgages and handles
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.
UnionBank also offers 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.
UnionBank's financial services division 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 nine Illinois counties, the Company's market area is highly competitive
with numerous 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
UnionBank conduct business. The financial services industry is also likely to
become more competitive as further technological advances enable more companies
to provide financial services. These technological advances may diminish the
importance of depository institutions and other financial intermediaries in the
transfer of funds between parties.
Employees
At December 31, 2004, the Company employed 272.5 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
3.
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, is a bank holding
company. As a bank holding company, the Company is registered with, and is
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 is expected to act as a source of financial strength to UnionBank and to
commit resources to support the UnionBank in circumstances where the Company
might not do so absent such policy. Under the BHCA, the Company is subject to
periodic examination by the Federal Reserve and is required to file with the
Federal Reserve periodic reports of operations and such additional information
as the Federal Reserve may require. The Company is 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
4.
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 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 is permitted to
engage in a variety of banking-related businesses, including the operation of a
thrift, consumer finance or equipment leasing business, the operation of a
computer service bureau (including software development), and its operation of
mortgage banking and brokerage businesses. 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 by 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.
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.
5.
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%
or more 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 by the 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, 2004, the Company 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 14.3% 9.5%
Dividends. The Company is organized under the Delaware General Corporation Law
(the "DGCL"). The DGCL allows the Company to pay dividends only out of its
surplus (as defined and computed in accordance with the provisions of the DGCL)
or if the Company has no such surplus, out of its net profits for the fiscal
year in which the dividend is declared and/or the preceding fiscal year.
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.
6.
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.
UnionBank
UnionBank is an Illinois-chartered bank, the deposit accounts of which are
insured by the FDIC's Bank Insurance Fund ("BIF"). UnionBank is also a member of
the Federal Reserve System ("member banks"). As an Illinois-chartered,
FDIC-insured member bank, UnionBank is subject to the examination, supervision,
reporting and enforcement requirements of the Commissioner, as the chartering
authority for Illinois banks, (the "Commissioner"), the Federal Reserve, as the
primary federal regulator of member banks, and the FDIC, as administrator of the
BIF.
Deposit Insurance. As an FDIC-insured institution, UnionBank is 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, 2004, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2005, the Company expects that BIF assessment rates will continue to
range from 0% of deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe
or unsound condition to continue operations or (iii) has violated any applicable
law, regulation, order, or any condition imposed in writing by, or written
agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of insurance,
if the institution has no tangible capital. Management of the Company is not
aware of any activity or condition that could result in termination of the
deposit insurance of UnionBank.
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, 2004, the FICO assessment rate for both SAIF and BIF
members ranged between approximately 0.0146% of deposits and approximately
0.0154% of deposits. During the year ended December 31, 2004, UnionBank paid
FICO assessments totaling $108,522.
7.
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, 2004, UnionBank paid supervisory assessments to the
Commissioner totaling $125,486.
Capital Requirements. The Federal Reserve has established the following minimum
capital standards for state-chartered Federal Reserve System member banks, such
as UnionBank: 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, 2004, UnionBank was not required by the
Federal Reserve to increase its capital to an amount in excess of the minimum
regulatory requirement. As of December 31, 2004, UnionBank exceeded its minimum
regulatory capital requirements, as follows:
Risk-Based Leverage
Capital Ratio Capital Ratio
------------- -------------
UnionBank 16.0% 10.7%
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, 2004, UnionBank 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.
8.
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 UnionBank. 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 such bank's calendar
year-to-date net income plus such 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, UnionBank
exceeded its minimum capital requirements under applicable guidelines and had
approximately $5.4 million available to be paid as dividends to the Company as
of December 31, 2004. Notwithstanding the availability of funds for dividends,
however, the Federal Reserve may prohibit the payment of any dividends by
UnionBank if the Federal Reserve determines such payment would constitute an
unsafe or unsound practice.
Insider Transactions. UnionBank is subject to certain restrictions imposed by
federal law on extensions of credit to the Company, on investments in the stock
or other securities of the Company and the acceptance of the stock or other
securities of the Company as collateral for loans. Certain limitations and
reporting requirements are also placed on extensions of credit by UnionBank to
its directors and officers, to directors and officers of the Company, 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 a principal stockholder of the Company may obtain
credit from the banks with which UnionBank maintains a correspondent
relationship.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines, which establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings.
In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with
any of the standards set forth in the guidelines, the institution's primary
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 UnionBank, have the authority under
Illinois law to establish branches anywhere in the State of Illinois, subject to
receipt of all required regulatory approvals.
9.
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
"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 $7 million of net transaction accounts, there is no
reserve;
o for net transaction accounts totaling over $7 million and up to
and including $47.6 million, a reserve of 3%; and
o for net transaction accounts totaling in excess of $47.6 million,
a reserve requirement of $1.218 million plus 10% against that
portion of the total transaction accounts greater than $47.6
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 UnionBank's interest earning assets.
10.
Financial Services Division
UnionBank is licensed as a general insurance agency by the Illinois Department
of Insurance (the "Department"). UnionBank 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.
UnionBank, 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 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.
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 2005 Proxy Statement, the names
and ages of the executive officers of the Company as of December 31, 2004, as
well as the offices of the Company and the Subsidiary held by these officers on
that date, and principal occupations for the past five years are set forth
below.
Rick R. Clary, 43, was named President and Chief Operating Officer of
UnionBank in the fourth quarter of 2003. In January of 2004, after being named
President, Mr. Clary joined the Board of Directors of UnionBank. Mr. Clary
previously served as the Regional Bank President of the Company's Central Region
and as Chief Operating Officer from 1997 to 2003. Prior to the merger of
UnionBank and UnionBank/Central, he served as President and Chief Executive
Officer of UnionBank/Central and as a member of their Board of Directors from
1996 to 1997. 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. in August, 1996.
Jimmie D. Lansford, 65, was promoted from Senior Vice President to
Executive Vice President in the fourth quarter of 2000 and continued to serve as
the Director of Organizational Development & Planning, a position he held since
1996, until his retirement on December 31, 2004. Mr. Lansford previously served
as a member of the Board of Directors of UnionBancorp, Inc. from 1988-2002,
UnionBank/Northwest from 2000-2002, and served two terms as a member of the
Board of Directors of UnionBank from 1987-1998 and as Chairman of the Board from
2000-2003. In addition to his vast array of in-house responsibilities, he was
active in the local community college where he served on the Board of Trustees
and was 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, 38, 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.
11.
Dewey R. Yaeger, 64, 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. He
currently serves as a member of the Board of Directors for UnionBancorp and is
the Chairman of the UnionBank Board of Directors. Mr. Yaeger previously served
as the President and Chief Executive Officer of Castle Bank, N.A. headquartered
in DeKalb, Illinois from 1997 to 2003.
Item 2. Properties
At December 31, 2004, the Company operated twenty-two offices in Illinois. The
principal offices of the Company are located in Ottawa, Illinois. All of the
Company's offices are owned by UnionBank and are not subject to any mortgage or
material encumbrance, with the exception of two offices that are leased and are
located in LaSalle County. The Company believes that its current facilities are
adequate for its existing business.
AFFILIATE MARKETS SERVED PROPERTY/TYPE LOCATION
- --------- -------------- ----------------------
The Company Administrative Office: Ottawa, IL
UnionBank Bureau, DeKalb, Grundy, Jo Main Office: Streator, IL
Daviess, Kane, Kendall,
LaSalle, Livingston and Eighteen banking offices
Whiteside Counties and four non-banking offices
located in markets served.
In addition to the banking locations listed above, UnionBank owns twenty-two
automated teller machines, some of which are housed within banking offices and
some of which are independently located.
At December 31, 2004, the properties and equipment of the Company had an
aggregate net book value of approximately $13.5 million.
Item 3. Legal Proceedings
Neither the Company nor any of its subsidiaries are involved in any pending
legal proceedings other than routine legal proceedings occurring in the normal
course of business, which, in the opinion of management, in the aggregate, are
not material to the Company's consolidated financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
There were no items submitted to a vote of security holders in the fourth
quarter of the fiscal year ended December 31, 2004.
12.
PART II
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
The Company's Common Stock was held by approximately 504 stockholders of record
as of March 1, 2005, and is traded on The Nasdaq Stock Market under the symbol
"UBCD." The table below indicates the high and low sales prices of the Common
Stock as reported by Nasdaq for transactions of which the Company is aware, and
the dividends declared per share for the Common Stock during the periods
indicated. Because the Company is not aware of the price at which certain
private transactions in the Common Stock have occurred, the prices shown may not
necessarily represent the complete range of prices at which transactions in the
Common Stock have occurred during such periods.
Stock Sales
-----------------------------------------
Cash
High Low Dividends
----------- ------------- -------------
2003
First Quarter.................................$ 16.86 $ 15.15 $ 0.08
Second Quarter................................ 20.48 16.05 0.09
Third Quarter................................. 22.52 19.25 0.09
Fourth Quarter................................ 24.04 20.00 0.09
2004
First Quarter.................................$ 22.23 $ 21.00 $ 0.09
Second Quarter................................ 23.00 19.25 0.10
Third Quarter................................. 20.88 19.20 0.10
Fourth Quarter................................ 21.94 20.29 0.10
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 UnionBank. 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. UnionBank's 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
UnionBank, as well as the general economic conditions and other relevant factors
affecting the Company and its subsidiaries. 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.
13.
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 Company has not made any repurchases of common stock during the fourth
quarter of 2004.
Item 6. Selected Consolidated Financial Data
The following table presents selected consolidated financial data for the five
years ended December 31, 2004:
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Statement of Income Data
Interest income $ 34,912 $ 41,086 $ 45,509 $ 53,829 $ 54,208
Interest expense 13,250 15,961 20,186 29,385 30,685
----------- ----------- ----------- ----------- -----------
Net interest income 21,662 25,125 25,323 24,444 23,523
Provision for loan losses 1,924 8,236 3,574 4,161 4,858
----------- ----------- ----------- ----------- -----------
Net interest income after provision 19,738 16,889 21,749 20,283 18,665
for loan losses
Noninterest income 14,102 13,719 12,455 11,920 11,140
Noninterest expense 26,981 28,607 29,026 26,212 25,885
----------- ----------- ----------- ----------- -----------
Income before income taxes 6,859 2,001 5,178 5,991 3,920
Provision (benefit) for income taxes 2,056 (129) 1,134 1,537 1,017
----------- ----------- ----------- ----------- -----------
Net income $ 4,803 $ 2,130 $ 4,044 $ 4,454 $ 2,903
Net income on common stock $ 4,596 $ 1,937 $ 3,787 $ 4,197 $ 2,644
=========== =========== =========== =========== ===========
Per Share Data
Basic earnings per common share $ 1.14 $ 0.48 $ 0.95 $ 1.06 $ 0.66
Diluted earnings per common share 1.12 0.48 0.94 1.05 0.66
Cash dividends on common stock 0.40 0.35 0.31 0.27 0.24
Dividend payout ratio for common stock 35.10% 74.39% 32.59% 25.59% 35.93%
Book value per common stock $ 17.30 $ 16.77 $ 16.97 $ 15.91 $ 14.76
Basic weighted average common shares 4,033,608 3,997,464 3,979,750 3,974,205 3,979,895
outstanding
Diluted weighted average common share 4,109,999 4,069,220 4,027,441 4,008,867 4,006,793
outstanding
Period-end common shares outstanding 4,032,144 4,026,850 3,980,946 3,979,056 3,965,548
Balance Sheet Data
Securities $ 191,661 $ 252,248 $ 227,229 $ 186,282 $ 192,719
Loans 419,275 476,812 483,229 504,968 505,094
Allowance for loan losses 9,732 9,011 6,450 6,295 6,414
Total assets 669,546 793,422 791,616 784,307 758,733
Total deposits 512,477 638,032 641,958 612,144 636,003
Stockholders' equity 70,247 68,047 68,064 63,814 59,035
Earnings Performance Data
Return on average total assets 0.65% 0.28% 0.53% 0.59% 0.40%
Return on average stockholders' equity 7.06 3.16 6.11 7.04 5.09
Return on average total assets, including mandatory
redeemable preferred stock 0.65 0.28 0.53 0.59 0.40
Return on average equity, including mandatory
redeemable preferred stock 7.06 3.16 6.03 6.95 5.01
Net interest margin ratio 3.34 3.65 3.74 3.64 3.67
Efficiency ratio (1) 82.90 72.25 71.73 68.14 69.49
Asset Quality Ratios
Nonperforming assets to total end of period assets 0.69% 1.10% 0.80% 1.44% 1.10%
Nonperforming loans to total end of period loans 1.00 1.78 0.99 1.76 1.56
Net loan charge-offs to total average loans 0.23 1.18 0.70 0.85 0.44
Allowance for loan losses to total loans 2.32 1.89 1.33 1.25 1.27
Allowance for loan losses to nonperforming loans 231.60 106.30 135.50 70.93 81.41
Capital Ratios
Average equity to average assets 9.27% 8.87% 8.71% 8.37% 7.90%
Total capital to risk adjusted assets 14.30 12.15 11.84 11.66 10.99
Tier 1 leverage ratio 9.54 7.60 7.48 7.54 6.90
(1) Calculated as noninterest expense less amortization of intangibles and
expenses related to other real estate owned divided by the sum of net
interest income before provisions for loan losses and total noninterest
income excluding securities gains and losses and gains on sale of assets.
14.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following discussion provides an analysis of the Company's results of
operations and financial condition of UnionBancorp, Inc. for the three years
ended December 31, 2004. Management's discussion and analysis (MD&A) 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 fully
diluted basis. All financial information is in thousands (000's), except per
share data.
15.
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 1933, 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 U.S. generally
accepted accounting principles 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 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 represent an estimation
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 specific loans,
including estimating the amount and timing of future cash flows and collateral
16.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
values. The Company's historical loss experience is updated quarterly. The
allocated component of the allowance for loan losses also includes consideration
of concentrations and changes in portfolio mix and volume and other qualitative
factors.
There are many factors affecting the allowance for loan losses; some are
quantitative while others require qualitative judgment. The process for
determining the allowance (which management believes adequately considers all of
the potential factors which might possibly result in credit losses) includes
subjective elements and, therefore, may be susceptible to significant change. To
the extent actual outcomes differs from management estimates, additional
provision for credit losses could be required that could adversely affect the
Company's earnings or financial position in future periods.
Mortgage Servicing Rights: We recognize as a separate asset the rights to
service mortgage loans for others. Mortgage servicing rights that are retained
when mortgage loans are sold are recorded by allocating the previous carrying
amount of the sold loan between the servicing rights retained and the loans that
are sold. This allocation is based upon the relative fair values of the mortgage
servicing rights and the loans sold.
The mortgage servicing rights asset is amortized over the projected period of,
and in proportion to, the estimated amount of net servicing income. Amortization
of the mortgage servicing rights asset will reduce the amount of income that is
recorded in the respective period from the servicing of the mortgage loans.
As of each reporting period, we evaluate the fair value of our remaining
mortgage servicing rights assets. The amount by which the carrying amount of
mortgage servicing rights exceeds the new estimate of fair value is charged
against earnings for the period. Rather than directly reducing the carrying
amount of the mortgage servicing rights asset, a valuation allowance is
established for the same amount as the charge against earnings. In subsequent
reporting periods, depending upon current estimates of fair value, the valuation
allowance may be reversed. The reversal is limited to the remaining amount of
the valuation allowance and will result in an increase in recorded earnings.
Judgments and assumptions that are most critical to the application of this
accounting policy are the appropriate risk-weighted discount rates used to
determine the present value of estimated net future cash flows, prepayment
speeds that will determine the amount and period of servicing revenue that is
expected to be earned, estimated costs to service the loans, and estimated
interest earned on amounts collected for real estate tax and property insurance
premiums that are held in escrow until payment is due. These assumptions are
based upon actual performance of the underlying loans and the general market
consensus regarding changes in mortgage and other interest rates. For example,
declining mortgage interest rates typically result in accelerated mortgage
prepayments, which tend to shorten the life and reduce the value of the
servicing rights asset.
If different assumptions and conditions were to prevail, materially different
amortization and valuation allowances than those that were recorded may be
required. Since, as described above, so many factors can affect the value of
mortgage servicing rights, it is difficult to predict, with any degree of
certainty, the effect on income if different conditions or assumptions were to
prevail.
General
UnionBancorp, Inc. 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
banking operations of its bank subsidiary, but also derives revenue from the
Financial Services Division of its bank subsidiary. The Company provides a full
17.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
range of services to individual and corporate customers located in the north
central and 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 UnionBank are subject to regulations of
certain regulatory agencies and undergo periodic examinations by those
regulatory agencies.
Fourth Quarter
The Company completed the merger of UnionFinancial Services & Trust Company into
UnionBank early in the fourth quarter. This action was the final step in the
Company's efforts to consolidate its entities into a single bank charter.
The Company incurred approximately $300 in nonrecurring expenses largely related
to the write-down of one of the Company's sales and service center buildings in
association with its anticipated closing. The impact to earnings, net of taxes,
was approximately $0.05 per diluted share.
Third Quarter
The Company completed the sale of five of its western Illinois branch offices
("West") on September 10, 2004, selling $40,226 in loans and $88,600 in deposits
to First Bankers Trust Company of Quincy. The transaction, which effectively
exited the Company from the western Illinois market, yielded a net gain on sale
(after allocating a portion of the intangible assets and goodwill, taxes and
applicable expenses) of approximately $1,800 or $0.44 per diluted share.
Second Quarter
The Company completed the sale of its Blandinsville branch office
("Blandinsville") that resulted in a net gain on the sale. The impact to
earnings, net of taxes, was approximately $0.07 per diluted share.
First Quarter
On March 19, 2004 UnionBank/West and UnionBank/Northwest, stand-alone bank
subsidiaries, were merged into the Company's flagship bank, UnionBank.
Consolidation of these entities was 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. Since
UnionBank/West and UnionBank/Northwest were under common control, the merger was
accounted for at UnionBank/West's and UnionBank/Northwest's carrying amount
which had no impact on the Company's consolidated financial statements. In
conjunction with the merger, Prairie and Country were dissolved.
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
Additionally, during the first quarter of 2004, the Board of Directors of
UnionBancorp, Inc., in a continuing effort to enhance shareholder value,
approved the payment of an 11.1% increase in the quarterly cash dividend to
$0.10 from $0.09 on the Company's common stock.
Finally, during the first quarter of 2004, in an effort to divest of high risk
low profit margin product lines, the Company sold its credit card portfolio.
Total outstanding balances sold approximated $1,900. The impact to earnings, net
of taxes, was approximately $0.04 per diluted share.
Results of Operations
Net Income
2004 compared to 2003. Net income equaled $4,803 or $1.12 per diluted
share for the year ended December 31, 2004 as compared to net income of $2,130
or $0.48 per diluted share for the year ended December 31, 2003. This represents
a 125.5% increase in net income and a 133.3% increase in diluted per share
earnings in the current fiscal year over fiscal 2003.
The Company's annual results were positively impacted by the net gain on sale
(after allocating a portion of the intangible assets and goodwill, taxes and
applicable expenses) and volume related decreases in most noninterest expense
categories as a result of the sale of West. Also contributing to the improvement
in net income was a decrease in the provision for loan losses and gains taken in
as a result of the sale of its credit card portfolio and one additional branch
office. These positive variances were partially offset by decreases in mortgage
banking revenue due to the slowdown in refinancing opportunities and volume
related decreases in net interest income and other fee based revenue due to the
sale of West.
Return on average assets was 0.65% for the year ended December 31, 2004 compared
to 0.28% for the same period in 2003. Return on average stockholders' equity was
7.06% for the year ended December 31, 2004 compared to 3.16% for the same period
in 2003.
2003 compared to 2002. Net income equaled $2,130 or $0.48 per diluted
share for the year ended December 31, 2003 as compared 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 in
fiscal 2003 as compared to fiscal 2002.
The Company's annual results were adversely impacted by a $4,662 increase in the
provision for loan losses in 2003 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 in
which the Company operates.
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.
19.
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.
2004 compared to 2003. Net interest income, on a tax equivalent basis,
was $22,378 for the year ended December 31, 2004, compared with $26,066 earned
during the same period in 2003. This represented a decrease of $3,688 or 14.1%.
The decrease in net interest income is attributable to the year-over-year
reduction of income earned on interest earning assets totaling $6,334 exceeding
the year-over-year reduction of interest expense paid on interest bearing
liabilities totaling $2,647.
The $6,334 reduction in interest income resulted from decreases of $3,756
related to rate and $2,578 due to volume. The majority of the change in interest
income was related to a 60 basis point decline in yields earned on average loans
as competitive pricing on new and refinanced loans put downward pressure on loan
yields. Also contributing to the decrease was a decline in average loan balances
due to the sale of West.
The $2,647 reduction in interest expense resulted from decreases of $1,633
associated with rate and $1,013 associated with volume. The majority of the
change was attributable to a reduction in rates paid on time deposits due to the
repricing of maturing time deposits at a lower rate. Also contributing to the
decrease was a decline in average loan balances due to the sale of West. The net
interest margin decreased 31 basis points to 3.34% for the year ended December
31, 2004 from 3.65% during the same period in 2003. 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 relative lower interest rate environment, put downward pressure on
loan yields.
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 was 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
20.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
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.
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 2004, 2003 and
2002. 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.
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------
2004 2003 2002
----------------------------- ----------------------------- -----------------------------
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 $ 137 $ 2 1.46% $ 237 $ 5 2.11% $ 1,573 $ 28 1.78%
Securities (1)
Taxable 192,835 5,925 3.06 196,195 6,805 3.47 167,895 7,350 4.38
Nontaxable (2) 26,066 1,848 7.07 31,239 2,323 7.44 34,866 2,579 7.40
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total securities (tax
equivalent) 218,901 7,773 3.54 227,434 9,128 4.01 202,761 9,929 4.90
-------- -------- -------- -------- -------- -------- -------- -------- --------
Federal funds sold 3,433 48 1.39 4,442 50 1.13 9,079 147 1.62
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loans (3)(4)
Commercial 130,436 7,467 5.71 133,543 8,148 6.10 140,937 9,707 6.89
Real estate 286,280 17,499 6.10 303,777 20,373 6.71 297,318 21,796 7.33
Installment and other 30,889 2,840 9.17 45,023 4,259 9.46 52,105 4,868 9.34
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross loans (tax
equivalent) 447,605 27,806 6.20 482,343 32,780 6.80 490,360 36,371 7.42
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets 670,076 35,629 5.30 714,456 41,963 5.87 703,773 46,475 6.60
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 21,497 21,735 19,551
Premises and equipment, net 15,533 14,923 13,727
Other assets 24,879 30,604 22,888
-------- -------- --------
Total non-interest-earning
assets 61,909 67,262 56,166
-------- -------- --------
Total assets $731,985 $781,718 $759,939
======== ======== ========
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
2004 2003 2002
----------------------------- ----------------------------- -----------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- -------- -------- -------- -------- -------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 57,887 $ 319 0.55% $ 53,917 $ 295 0.55% $ 48,350 $ 472 0.98%
Money market accounts 94,074 1,166 1.24 109,700 1,544 1.41 87,633 1,767 2.02
Savings deposits 47,337 265 0.56 49,334 373 0.76 50,444 622 1.23
Time $100,000 and over 148,701 3,836 2.57 157,824 4,703 2.98 151,438 5,815 3.84
Other time deposits 156,198 4,323 2.76 174,921 5,538 3.17 210,990 8,470 4.01
Federal funds purchased and
repurchase agreements 5,099 98 1.92 6,776 122 1.80 4,794 170 3.55
Advances from FHLB 70,359 2,887 4.09 70,019 2,997 4.28 51,611 2,514 4.87
Notes payable 8,033 356 4.43 7,912 325 4.11 9,040 356 3.94
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 587,688 13,250 2.25 630,403 15,897 2.52 614,300 20,186 3.29
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest-bearing liabilities
Non-interest-bearing deposits 71,912 74,855 72,253
Other liabilities 4,503 7,084 7,201
-------- -------- --------
Total non-interest-bearing
liabilities 76,415 81,939 79,454
-------- -------- --------
Stockholders' equity 67,882 69,376 66,185
-------- -------- --------
Total liabilities and
stockholders' equity $731,985 $781,718 $759,939
======== ======== ========
Net interest income (tax
equivalent) $ 22,378 $ 26,066 $ 26,289
======== ======== ========
Net interest income (tax
equivalent) to total
earning assets 3.34% 3.65% 3.74%
======== ======== ========
Interest-bearing liabilities
to earning assets 87.70% 88.24% 87.29%
======== ======== ========
- ----------------------------------------------
(1) Average balance and average rate on securities classified as
available-for-sale are based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances.
(4) Overdraft loans are excluded in the average balances.
The Company's net interest income is affected by changes in the amount and mix
of interest-earning assets and interest-bearing liabilities, referred to as
"volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as "rate change." The following table reflects the
changes in net interest income stemming from changes in interest rates and from
asset and liability volume, including mix. 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,
--------------------------------------------------------------------------------
2004 Compared to 2003 2003 Compared to 2002
-------------------------------------- --------------------------------------
Change Due to Change Due to
-------------------------------------- --------------------------------------
Volume Rate Net Volume Rate Net
---------- ---------- ---------- ---------- ---------- ----------
Interest income:
Interest-earning deposits $ (2) $ (1) $ (3) $ (27) $ 4 $ (23)
Investment securities:
Taxable (112) (771) (883) 1,124 (1,669) (545)
Nontaxable (217) (255) (472) 2 (258) (256)
Federal funds sold (12) 10 (2) (61) (36) (97)
Loans (2,235) (2,739) (4,974) (587) (3,004) (3,591)
---------- ---------- ---------- ---------- ---------- ----------
Total interest income (2,578) (3,756) (6,334) 451 (4,963) (4,512)
---------- ---------- ---------- ---------- ---------- ----------
22.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
For the Years Ended December 31,
--------------------------------------------------------------------------------
2004 Compared to 2003 2003 Compared to 2002
-------------------------------------- --------------------------------------
Change Due to Change Due to
-------------------------------------- --------------------------------------
Volume Rate Net Volume Rate Net
---------- ---------- ---------- ---------- ---------- ----------
Interest expense:
NOW accounts 24 (--) 24 49 (226) (177)
Money market accounts (205) (173) (378) 384 (607) (223)
Savings deposits (14) (94) (108) (14) (235) (249)
Time, $100,000 and over (256) (611) (867) 237 (1,349) (1,112)
Other time (550) (665) (1,215) (1,318) (1,614) (2,932)
Federal funds purchased and
repurchase agreements (32) 8 (24) 55 (103) (48)
Advances from FHLB 15 (125) (110) 815 (332) 483
Notes payable 5 27 32 (46) 15 (31)
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense (1,013) (1,633) (2,646) 162 (4,451) (4,289)
---------- ---------- ---------- ---------- ---------- ----------
Net interest income $ (1,565) $ (2,123) $ (3,688) $ 289 $ (512) $ (223)
========== ========== ========== ========== ========== ==========
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, impaired 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.
2004 compared to 2003. The 2004 provision for loan losses charged to
operating expense totaled $1,924, a decrease of $6,312 in comparison to the
$8,236 recorded during the same period for 2003. The decrease in the provision
for loan losses was due to an improvement in nonperforming and action/watch list
loans from year-end 2003 to year-end 2004, as well as resolutions, either
through charge-off of nonbankable assets or through successful workout
strategies that were executed throughout 2004. The Company's 2003 provisions
were largely attributable to the deterioration of two impaired commercial
credits identified in the Company's 10-Q report filed for the quarter ended June
20, 2003. As a result of the deterioration of these two loan relationships, the
Company specifically provided $3,500 to its allowance for loan losses during the
third quarter of 2003 for the losses incurred on these two credits. Net
charge-offs for the year ended December 31, 2004 were $1,029 compared with
$5,675 in the same period of 2003. Annualized net charge-offs decreased to 0.23%
of average loans for 2004 compared to 1.18% in the same period in 2003.
Management remains watchful of credit quality issues and believes that issues
within the portfolio are reflective of the challenging economic environment
experienced over the past few years. Should the economic climate deteriorate
from current levels, borrowers may experience difficulty, and the level of
nonperforming loans, charge-offs and delinquencies could rise and require
further increases in the provision for loan losses.
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 in 2002. 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
$3,500 to its allowance for loan losses during the third quarter of 2003 for the
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
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. This
agricultural 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 in which the Company
operates. 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.
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 services 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,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Service charges $ 2,866 $ 3,090 $ 2,812
Merchant fee income 56 560 1,185
Trust income 740 701 775
Mortgage banking income 2,020 3,947 2,843
Insurance commissions and fees 2,234 2,318 2,188
Bank owned life insurance (BOLI) 573 681 12
Securities gains (losses), net 123 281 407
Gain on sale of assets 4,263 -- --
Other income 1,227 2,141 2,233
---------- ---------- ----------
Total noninterest income $ 14,102 $ 13,719 $ 12,455
========== ========== ==========
24.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
2004 compared to 2003. Noninterest income totaled $14,102 for the year
ended December 31, 2004, as compared to $13,719 for the same timeframe in 2003.
This represented an increase of $383 or 2.8% in 2004 over the prior period.
Excluding net securities gains and the gains on sale of West, the Company's
credit card portfolio and Blandinsville, noninterest income shows a
year-over-year decrease of $3,722 or 27.7%. As a percentage of total income (net
interest income plus noninterest income), noninterest income, exclusive of
securities gains and gain on sale of five western Illinois branch locations,
decreased to 31.0% in 2004 versus 34.8% for 2003.
Excluding net securities gains and gains on sale of West, Blandinsville and the
credit card portfolio, the majority of the change to noninterest income was
related to a $1,927 decline in mortgage banking income. Mortgage banking income,
which includes gains generated from the sale of loans and net servicing revenue
(after amortization of mortgage servicing rights), was lower in 2004 due to a
decrease in mortgage origination volume partially offset by an increase in
revenue generated by the servicing rights portfolio due to the slowdown in
refinancing activity.
Also contributing to the change was a decrease in merchant fee income due to the
sale of the credit card portfolio and volume related decreases in service
charges, nsf fees, and other fee based revenue related to the sale of West. The
remaining categories remained relatively stable with only slight year-over-year
changes.
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% in 2003 over the prior period.
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% in 2003 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 in 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
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.
25.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
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:
NONINTEREST EXPENSE
(Dollars in Thousands)
Years Ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Salaries and employee benefits $ 15,410 $ 16,020 $ 15,284
Occupancy expense, net 2,461 2,138 1,868
Furniture and equipment expenses 2,215 2,094 1,820
Marketing 615 709 656
Supplies and printing 435 541 525
Telephone 546 874 1,074
Other real estate expense 8 178 919
Amortization of intangible assets 337 247 245
Other expense 4,954 5,806 6,635
---------- ---------- ----------
Total noninterest expense $ 26,981 $ 28,607 $ 29,026
========== ========== ==========
2004 compared to 2003. Noninterest expense totaled $26,981 for the year
ended December 31, 2004, as compared to $28,607 for the same timeframe in 2003.
This represented a decrease of $1,626 or 5.7% in 2004 from 2003. A majority of
the savings in noninterest expense was due to $724 in cost savings associated
with the divestiture of the credit card portfolio (included in other expenses)
and a $610 decline in salaries and employee benefits expense due to the sale of
West and other reductions in staffing levels. Also contributing to the change
were decreases in telephone costs related to the reduction of the number of data
lines utilized in the Company's infrastructure and savings in other real estate
expense related to the resolution of certain other real estate properties.
These cost savings were partially offset by increases in occupancy and equipment
expense related to a full year of expenses from our Yorkville branch that was
opened in December of 2003 and the write-down of one of the Company's sales and
service center buildings in association with its anticipated closing. The
remaining categories remained relatively stable with only slight year-over-year
changes.
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% in 2003 from 2002. 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.
26.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
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,
---------------------------------------
2004 2003 2002
---------- ---------- ----------
Income before income taxes $ 6,859 $ 2,001 $ 5,178
Applicable income taxes 2,056 (129) 1,134
Effective tax rates 30.0% (6.45%) 21.9%
Income tax expense for the periods included benefits for tax-exempt income,
tax-advantaged investments and general business tax credits offset by the effect
of nondeductible expenses. The Company's effective tax rate was lower than
statutory rates due to several factors. First, the Company derives interest
income from municipal securities and loans, which are exempt from federal tax
and certain U.S. government agency securities, which are exempt from Illinois
state tax. Second, the level of tax-exempt income has increased as a percentage
of taxable income. And, finally, the Company has reduced tax expense through
various tax planning initiatives.
Preferred Stock Dividends. The Company paid $207 of preferred stock
dividends in 2004, $193 of preferred stock dividends in 2003 and $257 of
preferred stock dividends in 2002.
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
UnionBank depends, to a substantial extent, on "rate differentials," i.e., the
differences between the income UnionBank receives 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 UnionBank, 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 rates. The interest rates
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 2004 and 2003 for the
various rate shock levels.
December 31, 2004 Net Interest Income
- ----------------- --------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $ 21,070 $ 996 4.96%
+100 bp 20,635 560 2.79
Base 20,074 -- --
-100 bp 19,048 (1,026) (5.11)
Based on the Company's model at December 31, 2004, the effect of an immediate
200 basis point increase in interest rates would increase the Company's net
interest income by 4.96% or approximately $996. The effect of an immediate 100
basis point decrease in rates would decrease the Company's net interest income
27.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
by $1,026 or 5.11%. For the year ended December 31, 2004, the Company did not
present an immediate 200 basis point decrease in its Asset Liability model due
to the abnormally low prevailing interest rate environment.
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 year ended December 31, 2003, the Company did not
present an immediate 200 basis point decrease in its Asset Liability model due
to the abnormally low prevailing interest rate environment.
Financial Condition
General. As of December 31, 2004, the Company had total assets of
$669,546, gross loans of $419,275, total deposits of $512,477, and total
stockholders' equity of $70,247. Total assets as of December 31, 2004 decreased
by $123,876 or 15.6% from year-end 2003. Total gross loans as of December 31,
2004 decreased $57,537 or 12.1% from year-end 2003. Approximately $40,400 or
70.2% of this reduction was related to the sale of West and Blandinsville. Total
deposits as of December 31, 2004 decreased by $125,555 or 19.7% from year-end
2003. Approximately $88,600 or 70.6% of this reduction was related to the sale
of West and Blandinsville.
Loans and Asset Quality. The Company offers a broad range of products,
including granting agribusiness, commercial, residential, and installment loans,
designed to meet the credit needs of its borrowers. The Company's loans are
diversified by borrower and industry group.
The following table describes the composition of loans by major categories
outstanding:
(Dollars in Thousands)
LOAN PORTFOLIO
Aggregate Principal Amount
--------------------------------------------------------------------
December 31,
----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Commercial $ 91,941 $ 105,767 $ 100,189 $ 107,382 $ 117,534
Agricultural 28,718 33,766 36,467 40,563 38,479
Real estate:
Commercial mortgages 129,597 134,985 147,253 150,878 134,942
Construction 38,882 30,674 24,486 23,676 19,322
Agricultural 30,601 37,092 34,688 34,611 39,658
1-4 family mortgages 77,566 94,163 87,411 94,368 99,237
Installment 21,502 37,415 49,949 50,961 53,276
Other 468 2,950 2,786 2,529 2,646
---------- ---------- ---------- ---------- ----------
Total loans 419,275 476,812 483,229 504,968 505,094
Allowance for loan losses (9,732) (9,011) (6,450) (6,295) (6,414)
---------- ---------- ---------- ---------- ----------
Loans, net $ 409,543 $ 467,801 $ 476,779 $ 498,673 $ 498,680
========== ========== ========== ========== ==========
28.
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,
----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Commercial 21.93% 22.18% 20.73% 21.27% 23.27%
Agricultural 6.85 7.08 7.55 8.03 7.62
Real estate:
Commercial mortgages 30.91 28.31 30.47 29.88 26.72
Construction 9.27 6.43 5.07 4.69 3.83
Agricultural 7.30 7.78 7.18 6.85 7.85
1-4 family mortgages 18.50 19.75 18.08 18.69 19.65
Installment 5.13 7.85 10.34 10.09 10.55
Other loans 0.11 0.62 0.58 0.50 0.51
---------- ---------- ---------- ---------- ----------
Gross loans 100.00% 100.00% 100.00% 100.00% 100.00%
========== ========== ========== ========== ==========
As of December 31, 2004 and 2003, commitments of UnionBank (and its
predecessors) under standby letters of credit and unused lines of credit totaled
approximately $94,345 and $100,169, respectively.
Stated loan maturities (including rate loans reset to market interest rates) of
the total loan portfolio, net of unearned income, at December 31, 2004 were as
follows:
STATED LOAN MATURITIES (1)
(Dollars in Thousands)
Within 1 to 5 After 5
1 Year Years Years Total
---------- ---------- ---------- ----------
Commercial $ 66,163 $ 24,130 $ 1,648 $ 91,941
Agricultural 21,332 7,034 352 28,718
Real estate 133,730 122,367 20,549 276,646
Installment 8,681 13,182 107 21,970
---------- ---------- ---------- ----------
Total $ 229,906 $ 166,713 $ 22,656 $ 419,275
========== ========== ========== ==========
- -------------------------
(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.
29.
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, 2004 were as follows:
LOAN REPRICING
(Dollars in Thousands)
Within 1 to 5 After 5
1 Year Years Years Total
---------- ---------- ---------- ----------
Fixed rate $ 69,806 $ 65,405 $ 18,826 $ 154,037
Variable rate 158,938 100,271 2,380 261,589
Nonaccrual 1,162 1,037 1,450 3,649
---------- ---------- ---------- ----------
Total $ 229,906 $ 166,713 $ 22,656 $ 419,275
========== ========== ========== ==========
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. UnionBank makes a
determination as to collectibility on a case-by-case basis. UnionBank considers
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.
30.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
The following table sets forth a summary of nonperforming assets:
NONPERFORMING ASSETS
(Dollars in Thousands)
December 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Nonaccrual loans $ 3,649 $ 8,149 $ 3,931 $ 7,259 $ 5,777
Loans 90 days past due and still accruing interest 553 328 829 1,616 2,102
---------- ---------- ---------- ---------- ----------
Total nonperforming loans 4,202 8,477 4,760 8,875 7,879
Other real estate owned 420 227 1,557 1,886 467
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 4,622 $ 8,704 $ 6,317 $ 10,761 $ 8,346
========== ========== ========== ========== ==========
Nonperforming loans to total loans 1.00% 1.78% 0.99% 1.76% 1.56%
Nonperforming assets to total loans 1.10 1.83 1.31 2.13 1.65
Nonperforming assets to total assets 0.69 1.10 0.80 1.44 1.10
The level of nonperforming loans at December 31, 2004 decreased to $4,202 versus
the $8,477 that existed as of December 31, 2003. The level of nonperforming
loans to total end of period loans was 1.00% at December 31, 2004, as compared
to 1.78% at December 31, 2003. The reserve coverage ratio (allowance to
nonperforming loans) was reported at 231.6% as of December 31, 2004 as compared
to 106.30% as of December 31, 2003.
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 $7,782 at December 31, 2004 as compared to $5,086 at December 31, 2003.
The classification of these loans, however, does not imply that management
expects losses on each of these loans. Rather, management believes that a higher
level of scrutiny and close monitoring is prudent under the circumstances. Such
classifications relate to specific concerns for each individual borrower and do
not relate to any concentration risk common to all loans in this group.
The following table sets forth a summary of other real estate owned and other
collateral acquired at December 31, 2004:
OTHER REAL ESTATE OWNED
(Dollars in Thousands)
Number Net Book
of Carrying
Parcels Value
---------- ----------
Developed property 4 $ 420
Vacant land or unsold lots -- --
---------- ----------
Total other real estate owned 4 $ 420
========== ==========
Allowance for Loan Losses. At December 31, 2004, the allowance for loan
losses was $9,732 or 2.32% of total loans as compared to $9,011 or 1.89% at
December 31, 2003. 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
31.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
the loans in its portfolio, 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 computed 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) 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 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 2003. The
methodology used to determine the adequacy of the allowance for loan losses is
consistent with prior years, and there were no reallocations.
Management remains watchful of credit quality issues and believes that issues
within the portfolio are reflective of the challenging economic environment
experienced over the past few years. Should the economic climate deteriorate
from current levels, borrowers may experience difficulty, and the level of
nonperforming loans, charge-offs and delinquencies could rise and require
further increases in the provision.
32.
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,
--------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Beginning balance $ 9,011 $ 6,450 $ 6,295 $ 6,414 $ 3,691
Charge-offs:
Commercial 1,497 4,791 2,561 3,202 1,663
Real estate mortgages 389 626 683 977 144
Installment and other loans 578 812 634 496 444
-------- -------- -------- -------- --------
Total charge-offs 2,464 6,229 3,878 4,675 2,251
-------- -------- -------- -------- --------
Recoveries:
Commercial 1,021 415 354 312 37
Real estate mortgages 230 46 41 10 3
Installment and other loans 184 93 64 73 76
-------- -------- -------- -------- --------
Total recoveries 1,435 554 459 395 116
-------- -------- -------- -------- --------
Net charge-offs 1,029 5,675 3,419 4,280 2,135
-------- -------- -------- -------- --------
Provision for loan losses 1,924 8,236 3,574 4,161 4,858
Reduction due to sale of loans 174 -- -- -- --
Ending balance $ 9,732 $ 9,011 $ 6,450 $ 6,295 $ 6,414
======== ======== ======== ======== ========
Period end total loans $419,275 $476,812 $483,229 $504,968 $505,094
======== ======== ======== ======== ========
Average loans $447,605 $482,343 $490,360 $504,648 $485,489
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans 0.23% 1.18% 0.70% 0.85% 0.44%
Ratio of provision for loan losses
to average loans 0.43 1.71 0.73 0.82 1.00
Ratio of allowance for loan losses
to ending total loans 2.32 1.89 1.33 1.25 1.27
Ratio of allowance for loan losses
to total nonperforming loans 231.60 106.30 135.50 70.93 81.41
Ratio of allowance at end of period
to average loans 2.17 1.87 1.32 1.25 1.32
33.
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,
---------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- ------------------- ------------------- ------------------- -------------------
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 $ 6,035 28.78% $ 4,935 29.26% $ 2,863 28.28% $ 3,499 29.30% $ 3,903 30.89%
Real estate 3,311 65.98 2,846 62.27 2,110 60.80 1,786 60.11 1,412 58.05
Installment and
other loans 386 5.24 593 8.47 719 10.92 537 10.59 511 11.06
Unallocated -- -- 637 -- 758 -- 473 -- 588 --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 9,732 100.00% $ 9,011 100.00% $ 6,450 100.00% $ 6,295 100.00% $ 6,414 100.00%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
In years prior to 2004, management considered the unallocated portion of the
allowance necessary to allow for inherent subjective reserves that are needed
based on general economic conditions and specific economic factors. In 2004
management included the subjective portion of the allowance as a part of the
allocation process to the respective loan categories. Management does not deem
this process to be a change in methodology, but rather a refinement in their
loan loss calculation. Management believes that there would be no change in the
balance of the allowance for loan losses if this approach was used in all of the
years presented.
Securities Activities. The Company's consolidated securities portfolio,
which represented 32.7% of the Company's average earning asset base as of
December 31, 2004, as compared to 31.8% as of December 31, 2003, 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. Securities classified as available-for-sale, carried at fair
value, were $191,661 at December 31, 2004 compared to $252,248 at December 31,
2003. The Company does not have any securities classified as trading or
held-to-maturity.
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 describes the composition of securities by major category
and maturity:
SECURITIES PORTFOLIO
(Dollars in Thousands)
December 31,
-----------------------------------------------------------------------
2004 2003 2002
--------------------- --------------------- ---------------------
% of % of % of
Amount Portfolio Amount Portfolio Amount Portfolio
--------- --------- --------- --------- --------- ---------
Available-for-Sale
U.S. Treasury $ -- --% $ -- --% $ 1,025 0.45%
U.S. government agencies
and corporations 20,924 10.92 30,270 12.00 46,817 20.60
U.S. government agency
mortgage backed securities 117,500 61.30 158,305 62.76 113,579 49.98
States and political
subdivisions 24,647 12.86 29,723 11.78 34,589 15.22
Collateralized mortgage
obligations 2,486 1.30 5,972 2.37 3,889 1.71
Corporate bonds 8,239 4.30 10,598 4.20 10,480 4.62
Other securities 17,865 9.32 17,380 6.89 16,850 7.42
--------- --------- --------- --------- --------- ---------
Total $ 191,661 100.00% $ 252,248 100.00% $ 227,229 100.00%
========= ========= ========= ========= ========= =========
The following table sets forth the contractual, callable or estimated maturities
and yields of the debt securities portfolio as of December 31, 2004. 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 8,754 4.081 12,170 3.830 -- -- -- -- 20,924
U.S. government
agency mortgage
backed securities 19,078 2.949 68,859 3.193 1,271 5.902 28,292 4.121 117,500
States and political
subdivisions (1) 6,907 4.874 15,151 4.750 2,589 5.088 -- -- 24,647
Collateralized
mortgage obligations -- -- 347 3.280 -- -- 2,139 3.441 2,486
Corporate bonds 1,034 5.463 7,205 5.642 -- -- -- 8,239
--------- --------- --------- --------- ---------
Total $ 35,773 $ 103,732 $ 3,860 $ 30,431 $ 173,796
========= ========= ========= ========= =========
- ---------------
(1) Rates on obligations of states and political subdivisions have been adjusted
to tax equivalent yields using a 34% income tax rate
Deposit Activities. Deposits are attracted through the offering of a
broad variety of deposit instruments, including checking accounts, money market
accounts, regular savings accounts, term certificate accounts (including "jumbo"
certificates in denominations of $100,000 or more), and retirement savings
plans. The Company's average balance of total deposits was $576,109 for 2004,
representing a decrease of $44,442 or 7.2% compared with the average balance of
total deposits for 2003.
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 certain information regarding UnionBank's average
deposits:
AVERAGE DEPOSITS
(Dollars in Thousands)
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------- ------------------------------- -------------------------------
% 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 $ 71,912 12.48% --% $ 74,855 12.06% --% 72,253 11.63% --%
Savings accounts 47,337 8.22 0.56 49,334 7.95 0.76 50,444 8.12 1.23
Interest-bearing
demand deposits 151,961 26.38 0.98 163,617 26.37 1.12 135,983 21.89 1.65
Time, less than $100,000 156,198 27.11 2.76 174,921 28.19 3.17 210,990 33.98 4.01
Time, $100,000 or more 148,701 25.81 2.57 157,824 25.43 2.98 151,438 24.38 3.84
--------- --------- ------ --------- --------- ------ --------- --------- ------
Total deposits $ 576,109 100.00% 1.72% $ 620,551 100.00% 2.01% $ 621,108 100.00% 2.76%
========= ========= ====== ========= ========= ====== ========= ========= ======
As of December 31, 2004, average time deposits over $100,000 represented 25.8%
of total average deposits, compared with 25.4% of total average deposits as of
December 31, 2003. The Company's large denomination time deposits are generally
from customers within the local market areas of its subsidiary bank 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, 2004:
TIME DEPOSITS OF $100,000 OR MORE
(Dollars in Thousands)
Maturity Range
Three months or less $ 36,318
Over three months through six months 17,065
Over six months through twelve months 38,247
Over twelve months 42,519
------------
Total $ 134,149
============
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,
----------------------------------
2004 2003 2002
---- ---- ----
Return on average assets 0.65% 0.28% 0.53%
Return on average equity 7.06 3.16 6.11
Average equity to average assets 9.27 8.87 8.71
Dividend payout ratio for common stock 36.42 74.39 32.59
36.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
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
increase in cash and cash equivalents of $604 from December 31, 2003 to December
31, 2004.
During 2004, the Company experienced net cash outflows of $26,095 in financing
activities primarily due to a decrease in deposits related to the sale of West
and Blandinsville. In contrast, net cash inflows (1) of $9,810 were provided by
operating activities due to proceeds from net loans sales and net income, and
(2) of $16,889 were provided by investing activities due to proceeds from sales
and maturities of, and paydowns from securities partially offset by cash
generated from the sale of West.
UnionBank's securities portfolio, federal funds sold, and cash and due from bank
deposit balances serve as the primary sources of liquidity for the Company. At
December 31, 2004, 22.6% of UnionBank's 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,
UnionBank's liquidity could be adversely affected. Currently, the maturities of
UnionBank's large time deposits are spread throughout the year, with 27.1%
maturing in the first quarter of 2005, 12.7% maturing in the second quarter of
2005, 28.5% maturing in the third and fourth quarters of 2005, and the remaining
31.7% maturing thereafter. UnionBank monitors those maturities in an effort to
minimize any adverse effect on liquidity.
The Company's borrowings included notes payable at December 31, 2004 in the
principal amount of $6,275 payable to the Company's principal correspondent bank
and $354 payable to individuals related to the purchase of the Howard Marshall
Agency. The note to the Company's principal correspondent bank is renewable
annually, requires quarterly interest payments, and is collateralized by the
Company's stock in the Bank. The note related to the purchase of the Howard
Marshall Agency requires monthly principal and interest payments.
37.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
The Company's principal source of funds for repayment of the indebtedness is
dividends from UnionBank. At December 31, 2004, approximately $5,400 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, 2004:
Payments Due by Period
------------------------------------------------------------------------
Within 1 After
Contractural Obligations Year 1-3 Years 4-5 Years 5 Years Total
------------ ------------ ------------ ------------ ------------
Short-term debt $ 6,275 $ -- $ -- $ -- $ 6,275
Long-term debt -- -- 354 -- 354
Series B Mandatory redeemable
preferred stock -- 831 -- -- 831
FHLB Advances 16,900 18,500 18,300 8,200 61,900
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations $ 23,175 $ 19,331 $ 18,654 $ 8,200 $ 69,360
============ ============ ============ ============ ============
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 $ 67,860 $ 4,774 $ 4,674 $ 12,707 $ 90,015
Standby letters of credit 3,293 1,038 -- -- 4,331
------------ ------------ ------------ ------------ ------------
Total commercial commitments $ 71,153 $ 5,812 $ 4,674 $ 12,707 $ 94,346
============ ============ ============ ============ ============
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, 2004 was $70,247, an increase of $2,200 or 3.2%, from December
31, 2003. The stockholders' equity increase was largely the result of earnings
for 2004 less dividends paid to shareholders and a decrease in accumulated other
comprehensive income. Average equity as a percentage of average assets was 9.3%
at December 31, 2004, compared to 8.9% at December 31, 2003. Book value per
common share equaled $17.30 at December 31, 2004, an increase from $16.77
reported at the end of 2003.
Stock Repurchase Programs
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 an 18 month
period. On September 23, 2004, the Board of Directors extended the Company's
stock repurchase program through May 2, 2006. Under the terms of the plan, the
Company is able to repurchase, from time to time, up to 5% of its outstanding
shares of common stock in the open market or in private transactions. Purchases
are dependent upon market conditions and the availability of shares. The
extension of the repurchase program enables the Company to optimize its 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. As
December 31, 2004, the Company has repurchased 18,500 shares at a weighted
average cost of $18.62.
38.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Share Data)
================================================================================
Capital Measurements
UnionBank is 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 13.0% and
14.3%, respectively, at December 31, 2004. The Company is currently, and expects
to continue to be, in compliance with these guidelines.
As of December 31, 2004, the Tier 2 risk-based capital was comprised of $6,067
in allowance for loan losses (limited to 1.25% of risk-weighted assets). 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
2004 2003 2002 Ratios Ratios
---------- ---------- ---------- ---------- ----------
Tier 1 risk-based capital $ 63,347 $ 59,851 $ 58,755
Tier 2 risk-based capital 6,067 7,790 7,281
---------- ---------- ----------
Total capital 69,414 67,641 66,036
Risk-weighted assets 485,325 556,729 557,620
Capital ratios
Tier 1 risk-based capital 13.0% 10.8% 10.5% 4.0% 6.0%
Tier 2 risk-based capital 14.3 12.2 11.8 8.0 10.0
Leverage ratio 9.5 7.7 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.
39.
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...................................................41
Consolidated Balance Sheets (December 31, 2004 and 2003) .....................42
Consolidated Statements of Income
(For the years ended December 31, 2004, 2003 and 2002)...............43
Consolidated Statements of Stockholders' Equity
(For the years ended December 31, 2004, 2003 and 2002)...............44
Consolidated Statements of Cash Flows
(For the years ended December 31, 2004, 2003 and 2002)...............46
Notes ......................................................................48
Supplementary Data
The Supplementary Financial Information required to be included in this Item 8
is hereby incorporated by reference by Note 20 to the Notes to Consolidated
Financial Statements contained herein.
40.
[GRAPHIC OMITTED]
Crowe Chizek and Company LLC
Member Horwath International
Report of Independent Registered Public Accounting Firm
UnionBancorp, Inc.
Ottawa, Illinois
We have audited the accompanying balance sheets of UnionBancorp, Inc. as of
December 31, 2004 and 2003, and the related statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in
all material respects, the financial position of UnionBancorp, Inc. at December
31, 2004 and 2003, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles.
/s/ CROWE CHIZEK AND COMPANY LLC
Crowe Chizek and Company LLC
Oak Brook, Illinois
February 18, 2005
41.
UNIONBANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003 (In Thousands, Except Share and Per Share Data)
2004 2003
- ---------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 22,802 $ 22,198
Securities available-for-sale 191,661 252,248
Loans 419,275 476,812
Allowance for loan losses (9,732) (9,011)
---------- ----------
Net loans 409,543 467,801
Cash value of life insurance 14,953 14,379
Mortgage servicing rights 2,772 2,775
Premises and equipment, net 13,463 16,576
Goodwill 6,963 7,642
Intangible assets, net 703 1,232
Other real estate 420 227
Other assets 6,266 8,344
---------- ----------
Total assets $ 669,546 $ 793,422
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 55,800 $ 89,424
Interest-bearing 456,677 548,608
---------- ----------
Total deposits 512,477 638,032
Federal funds purchased and securities sold under
agreements to repurchase 12,722 1,533
Federal Home Loan Bank advances 61,900 72,450
Notes payable 6,629 7,873
Series B mandatory redeemable preferred stock 831 831
Other liabilities 4,740 4,656
---------- ----------
Total liabilities 599,299 725,375
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;
4,640,907 and 4,627,613 shares issued in 2004 and 2003 4,641 4,628
Surplus 22,632 22,484
Retained earnings 46,592 43,609
Accumulated other comprehensive income 1,351 2,141
Unearned compensation under stock option plans -- (2)
---------- ----------
75,716 73,360
Treasury stock, at cost, 608,763 shares at December 31, 2004
and 600,763 shares at December 31, 2003 (5,469) (5,313)
---------- ----------
Total stockholders' equity 70,247 68,047
---------- ----------
Total liabilities and stockholders' equity $ 669,546 $ 793,422
========== ==========
See Accompanying Notes to Consolidated Financial Statements.
42.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2004, 2003, and 2002 (In Thousands, Except Per Share
Data)
2004 2003 2002
- -------------------------------------------------------------------------------------------
Interest income
Loans $ 27,718 $ 32,693 $ 36,283
Securities
Taxable 5,925 6,805 7,377
Exempt from federal income taxes 1,221 1,533 1,702
Federal funds sold and other 48 55 147
---------- ---------- ----------
Total interest income 34,912 41,086 45,509
Interest expense
Deposits 9,909 12,453 17,145
Federal funds purchased and securities sold
under agreements to repurchase 98 122 170
Advances from the Federal Home Loan Bank 2,887 2,997 2,514
Series B Mandatory Redeemable 50 64 --
Notes payable and other 306 325 357
---------- ---------- ----------
Total interest expense 13,250 15,961 20,186
---------- ---------- ----------
Net interest income 21,662 25,125 25,323
Provision for loan losses 1,924 8,236 3,574
---------- ---------- ----------
Net interest income after provision for loan losses 19,738 16,889 21,749
Noninterest income
Service charges 2,866 3,090 2,812
Merchant fee income 56 560 1,185
Trust income 740 701 775
Mortgage banking income 2,020 3,947 2,843
Insurance and brokerage commissions and fees 2,234 2,318 2,188
Bank Owned Life Insurance (BOLI) 573 681 12
Securities gains, net 123 281 407
Gain on sale of other assets 4,263 -- --
Other income 1,227 2,141 2,233
---------- ---------- ----------
14,102 13,719 12,455
Noninterest expenses
Salaries and employee benefits 15,410 16,020 15,284
Occupancy, net 2,461 2,138 1,868
Furniture and equipment 2,215 2,094 1,820
Marketing 615 709 656
Supplies and printing 435 541 525
Telephone 546 874 1,074
Other real estate owned 8 178 919
Amortization of intangible assets 337 247 245
Other 4,954 5,806 6,635
---------- ---------- ----------
26,981 28,607 29,026
---------- ---------- ----------
Income before income taxes 6,859 2,001 5,178
Income taxes 2,056 (129) 1,134
---------- ---------- ----------
Net income 4,803 2,130 4,044
Preferred stock dividends 207 193 257
---------- ---------- ----------
Net income for common stockholders $ 4,596 $ 1,937 $ 3,787
========== ========== ==========
Basic earnings per common share $ 1.14 $ 0.48 $ 0.95
========== ========== ==========
Diluted earnings per common share $ 1.12 $ 0.48 $ 0.94
========== ========== ==========
Dividends per share $ 0.40 $ 0.36 $ 0.31
========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
43.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2004, 2003, and 2002 (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, 2002 $ 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
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
(Continued)
44.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2004, 2003, and 2002 (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, 2003 $ 500 $ 4,628 $ 22,484 $ 43,609 $ 2,141 $ (2) $ (5,313) $ 68,047
Common stock dividends -- -- -- (1,613) -- -- -- (1,613)
Preferred stock dividends -- -- -- (207) -- -- -- (207)
Exercise of stock options
(13,294 shares) -- 13 148 -- -- -- -- 161
Amortization of un-
earned compensation
under stock option plans -- -- -- -- -- 2 -- 2
Purchase of 8,000 shares
of treasury stock -- -- -- -- -- -- (156) (156)
Comprehensive income
Net income -- -- -- 4,803 -- -- -- 4,803
Net decrease in fair value-
of securities classified as
available-for-sale, net of
income taxes and reclassi-
fication adjustments -- -- -- -- (790) -- -- (790)
----------
Total comprehensive
income 4,013
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance,
December 31, 2004 $ 500 $ 4,641 $ 22,632 $ 46,592 $ 1,351 $ -- $ (5,469) $ 70,247
========== ========== ========== ========== ========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
45.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003, and 2002 (In Thousands)
2004 2003 2002
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 4,803 $ 2,130 $ 4,044
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 2,455 1,685 1,501
Amortization of intangible assets 337 247 245
Amortization of mortgage servicing rights 722 1,732 955
Amortization of unearned compensation under
stock option plans 2 21 45
Amortization of bond premiums, net 1,739 1,719 1,437
Federal Home Loan Bank stock dividend (350) (325) (196)
Provision for loan losses 1,924 8,236 3,574
Provision for deferred income taxes 464 (616) 73
Securities gains, net (123) (281) (407)
Gain on sale of assets, net (4,263) -- --
Gain (Loss) on sale of real estate acquired in
settlement of loans (44) 168 376
Gain on sale of loans (1,877) (4,727) (2,909)
Proceeds from sale of loans held for sale 86,828 205,272 157,815
Origination of loans held for sale (83,273) (196,907) (157,303)
Change in assets and liabilities
(Increase) decrease in other assets (140) (3,778) (442)
Increase (decrease) in other liabilities 606 (730) (827)
---------- ---------- ----------
Net cash provided by operating activities 9,810 13,846 7,981
Cash flows from investing activities
Securities available for sale
Proceeds from maturities and paydowns 104,192 64,500 76,218
Proceeds from sales 19,584 72,398 19,640
Purchases (66,070) (164,690) (134,977)
Net decrease in loans 11,745 (3,106) 18,268
Purchase of premises and equipment (2,197) (4,186) (3,105)
Purchase of bank-owned life insurance, net -- 73 (11,462)
Proceeds from sale of real estate acquired in
settlement of loans 470 1,372 2,401
Sale of branches (50,835)
Acquisition of insurance agency, net of debt assumed (150) --
---------- ---------- ----------
Net cash provided by (used in) investing activities 16,889 (33,789) (33,017)
(Continued)
46.
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003, and 2002 (In Thousands)
2004 2003 2002
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in deposits $ (24,419) $ (3,926) $ 29,814
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 11,189 (2,055) 959
Net increase (decrease) in advances from the
Federal Home Loan Bank (10,550) 10,700 9,000
Payments on notes payable (1,000) (550) (1,000)
Proceeds from notes payable 500 148 --
Dividends on common stock (1,613) (1,441) (1,234)
Dividends on preferred stock (207) (193) (257)
Proceeds from exercise of stock options 161 685 17
Purchase of treasury stock (156) (189) --
---------- ---------- ----------
Net cash provided by (used in) financing activities (26,095) 3,179 37,299
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 604 (16,764) 12,263
Cash and cash equivalents
Beginning of year 22,198 38,962 26,699
---------- ---------- ----------
End of year $ 22,802 $ 22,198 $ 38,962
========== ========== ==========
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 13,219 $ 16,453 $ 21,205
Income taxes 346 1,850 474
Transfers from loans to other real estate owned 619 210 2,449
See Accompanying Notes to Consolidated Financial Statements.
47.
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 subsidiary UnionBank 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
UnionBank. Intercompany balances and transactions have been eliminated in
consolidation.
The accompanying financial statements have been prepared in conformity with U.
S. generally accepted accounting principles 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,
deferred taxes, 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 UnionBank, 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, Federal Home Loan
Bank advances, Bank owned life insurance 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. Declines in the fair value of securities below their
cost that are other than temporary are reflected as realized losses. In
estimating other-than-temporary losses, management considers: (1) the length of
time and extent that fair value has been less than cost, (2) the financial
condition and near term prospects of the issuer, and (3)
(Continued)
48.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
the Company's ability and intent to hold the security for a period sufficient to
allow for any anticipated recovery in fair value.
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, 2004 and 2003, 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. Interest income is accrued on the unpaid principal
balance.
Interest income on mortgage and commercial loans is discontinued at the time the
loan is 90 days delinquent unless the loan is well-secured and in the process of
collection. Consumer and credit card loans are typically charged off no later
than 120 days past due. Past due status is based on the contractual terms of the
loan. 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.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or market, as determined by outstanding
commitments from investors. Net unrealized losses, if any, are recorded as a
valuation allowance and charged to earnings.
Mortgage loans held for sale are generally sold with servicing rights retained.
The carrying value of mortgage loans sold is reduced by the cost allocated to
the servicing right. Gains and losses on sales of
(Continued)
49.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(Continued)
mortgage loans are based on the difference between the selling price and the
carrying value of the related loan sold.
The allowance for loan losses is a valuation allowance for probable incurred
credit losses. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. Management estimates the
allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
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.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and commercial real estate loans
by either the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price, or the fair
value of the collateral if the loan is collateral dependent. Large groups of
smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual consumer and
residential loans 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.
(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)
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 $37.0 million and $36.4
million with an approximate cash surrender value of $15.0 million and $14.4
million at December 31, 2004 and 2003, respectively.
Goodwill and other intangible assets
- ------------------------------------
Goodwill results from business acquisitions and represents the excess of the
purchase price over the fair value of acquired tangible assets and liabilities
and identifiable intangible assets. Goodwill is assessed at least annually for
impairment and any such impairment will be recognized in the period identified.
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 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.
(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)
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 convertible preferred shares using the
treasury stock method.
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:
2004 2003 2002
---------- ---------- ----------
Net income as reported for common stockholders $ 4,596 $ 1,937 $ 3,787
Deduct: stock-based compensation expense
determined under fair value based method 96 95 131
---------- ---------- ----------
Pro forma net income $ 4,500 $ 1,842 $ 3,656
========== ========== ==========
Basic earnings per common share as reported $ 1.14 $ 0.48 $ 0.95
Pro forma basic earnings per common share 1.12 0.46 0.92
Diluted earnings per common share as reported 1.12 0.48 0.94
Pro forma diluted earnings per common share 1.09 0.45 0.91
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2004 2003 2002
-------- -------- --------
Fair value $ 4.74 $ 4.93 $ 3.92
Risk-free interest rate 3.32% 2.27% 3.72%
Expected option life 5 5 6
Expected stock price volatility 24.58% 26.04% 26.99%
Dividend yield 1.90% 1.65% 2.03%
(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)
Stockholders' Equity:
- ---------------------
Preferred stock
- ---------------
The Company's Certificate of Incorporation authorizes its Board of Directors to
fix or alter the rights, preferences, privileges, and restrictions of 200,000
shares of preferred stock.
The Company has the following classes of preferred stock issued or authorized:
Series A Convertible Preferred Stock: The Company has authorized 2,765
shares of Series A Convertible Preferred Stock. There were 2,762.24 shares
of Series A Convertible Preferred Stock issued at December 31, 2004 and
2003. 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 172,140 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, 2004 and 2003. 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 August 6, 2006. 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 2004.
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
(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)
balance sheet presentation for the 2003 year. In addition, the dividends in
the fourth quarter of 2003 were reclassified to interest expense.
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, 2004 and 2003. 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)
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)
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
- ------------------------------------
FAS 123, Revised, requires all public companies to record compensation cost for
stock options provided to employees in return for employee service. The cost is
measured at the fair value of the options when granted, and this cost is
expensed over the employee service period, which is normally the vesting period
of the options. This will apply to awards granted or modified after the first
quarter or year beginning after June 15, 2005. Compensation cost will also be
recorded for prior option grants that vest after the date of adoption. The
effect of the results of operations will depend on the level of future option
grants and the calculation of the fair value of the options granted at such
future date, as well as the vesting periods provided, and so cannot currently be
predicted. Existing options that will vest after adoption date are expected to
result in additional compensation expense of approximately $36,000 during the
balance of 2005, $45,000 in 2006, $24,000 in 2007, and $12,000 in 2008. There
will be no significant effect on financial position as total equity will not
change.
FAS 153 modifies an exception from fair value measurement of nonmonetary
exchanges. Exchanges that are not expected to result in the significant changes
in cash flows of the reporting entity are not measured at fair value. This
supersedes the prior exemption from fair value measurement for exchange of
similar productive assets, and applies for fiscal years beginning after June 15,
2005.
SOP 03-1 clarifies the meaning of other-than-temporary impairment and its
application to investments classified as either available-for-sale or
held-to-maturity under SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities," and investments accounted for under the cost method or the
equity method. The recognition and measurement guidance for which the consensus
was reached is to be applied to other-than-temporary impairment evaluations. In
September 2004, the Financial Accounting Standards Board ("FASB") issued a final
FASB Staff Position, FSP EITF Issue 03-1-1, which has delayed the effective date
for the measurement and recognition guidance of EITF 03-1. The comment period is
currently open related to this staff position. The implementation date is
unknown until further guidance is issued by the FASB. We are currently
evaluating the impact of adopting EITF 03-1.
SOP 03-3 requires that valuation allowance for loans acquired in a transfer,
including in a business combination, reflect only losses incurred after
acquisition and should not be recorded at acquisition. It applies to any loan
acquired in a transfer that showed evidence of credit quality deterioration
since it was made.
(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)
The effect of these other new standards on the Company's financial position and
results of operations is not expected to be material upon and after adoption.
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.
On May 3, 2004, the Company sold the deposits and premises of a UnionBank/West
branch location. At the date of sale, the branch had approximately $12,535 in
deposits, $1,720 in loans, and $336 in fixed assets. The sale price was $440.
On September 10, 2004, the Company completed the sale of five branch offices
located in western Illinois. Per the terms of the agreement announced on May 24,
2004, First Bankers Trust Company of Quincy, Illinois acquired the physical
assets, $88,600 in deposits, and $40,226 of the net loan portfolio of
UnionBank's Quincy, Macomb, Paloma, Carthage and Rushville, Illinois offices.
This transaction effectively exited UnionBank from the western Illinois
marketplace. The sales price was approximately $4.4 million. The Company also
allocated $679 of goodwill to the sale of these branches as well as amortized
the remaining core deposit intangible assigned to the deposits sold of $192. At
the date of sale the branch had the following assets and liabilities:
Cash and cash equivalents $ 675
Loans 40,226
Premises and equipment 2,495
Other assets 235
Deposits (88,600)
Other liabilities (296)
(Continued)
56.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 2. Business Acquisitions and Divestitures (Continued)
On October 20, 2004, the Company completed the merger of UnionFinancial Services
& Trust Company into UnionBank. UnionFinancial was a stand-alone financial
services company that offers a full line of insurance, brokerage trust and asset
management services.
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, 2004
U.S. government agencies $ 20,924 $ 144 $ (26)
States and political subdivisions 24,647 879 (6)
U.S. government agency mortgage-backed
securities 117,500 1,205 (318)
Collateralized mortgage obligations 2,486 -- (26)
Equity securities 17,865 39 (9)
Corporate 8,239 323 --
------------ ------------ ------------
$ 191,661 $ 2,590 $ (385)
============ ============ ============
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)
============ ============ ============
At December 31, 2004, approximately 35% 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,
-------------------------------------
2004 2003 2002
---------- ---------- ----------
Proceeds $ 19,584 $ 72,398 $ 19,640
Realized gains 166 281 409
Realized losses (43) -- (2)
(Continued)
57.
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,
2004, by contractual maturity, are shown below. Securities not due at a single
maturity date, primarily mortgage-backed securities, collateralized mortgage
obligations, and equity securities are shown separately.
Fair Value
- ----------
Due in one year or less $ 16,695
Due after one year through five years 34,526
Due after five years through ten years 2,589
U.S. government agency mortgage-backed securities 117,500
Collateralized mortgage obligations 2,486
Equity securities 17,865
------------
$ 191,661
============
As of December 31, 2004, the Company held callable securities carried at a fair
value of $111,446. The amortized cost of these securities was $110,619 as of
December 31, 2004.
Securities with carrying values of approximately $151,000 and $179,000 at
December 31, 2004 and 2003, respectively, were pledged to secure public deposits
and securities sold under agreements to repurchase and for other purposes as
required or permitted by law. At year end 2004 and 2003, there were no holdings
of securities of any one issuer, other than the U.S. Government and it agencies
of U.S. Government Sponsored entities, in an amount greater than 10% of
stockholder's equity.
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 and other equity
securities 3,835 (40) 103 -- 3,938 (40)
---------- ---------- ---------- ---------- ---------- ----------
Total temporarily impaired $ 59,128 $ (437) $ 4,454 $ (43) $ 63,582 $ (480)
========== ========== ========== ========== ========== ==========
(Continued)
58.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 3. Securities (Continued)
Securities with unrealized losses at year-end 2004 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 $ 900 $ (1) $ 563 $ (5) $ 1,463 $ (6)
U.S. government agency
mortgage-backed securities 36,430 (288) 11,297 (56) 47,727 (344)
Collateralized mortgage
obligations and other equity
securities 3,963 (10) 2,074 (25) 6,037 (35)
---------- ---------- ---------- ---------- ---------- ----------
Total temporarily impaired $ 41,293 $ (299) $ 13,934 $ (86) $ 55,227 $ (385)
========== ========== ========== ========== ========== ==========
The Company evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic and market concerns warrant
such evaluation. Consideration is given to the length of time and the extent to
which the fair value has been less than cost, the financial condition and
near-term prospects of the issuer, and the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value. In analyzing an issuer's financial
condition, the Company may consider whether the securities are issued by the
federal government or its agencies, whether downgrades by bond rating agencies
have occurred, and the results of reviews of the issuer's financial condition.
The unrealized losses on all securities have not been recognized into income
because the securities are of high credit quality and management has the intent
and ability to hold for the foreseeable future and the decline in fair value is
largely due to increases in market interest rates.
Note 4. Loans
The major classifications of loans follow:
December 31,
----------------------------
2004 2003
------------ ------------
Commercial $ 120,659 $ 139,533
Commercial real estate 129,597 134,985
Real estate 145,307 158,002
Real estate loans held for sale 1,742 3,927
Installment 21,502 37,415
Other 468 2,950
------------ ------------
$ 419,275 $ 476,812
============ ============
(Continued)
59.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 4. Loans (Continued)
An analysis of activity in the allowance for loan losses follows:
Years Ended December 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Balance at beginning of year $ 9,011 $ 6,450 $ 6,295
Provision for loan losses 1,924 8,236 3,574
Reduction due to sale of loans (174) -- --
Recoveries 1,435 554 459
Loans charged off (2,464) (6,229) (3,878)
---------- ---------- ----------
Balance at end of year $ 9,732 $ 9,011 $ 6,450
========== ========== ==========
The following table presents data on impaired loans:
December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Year-end impaired loans for which an allowance
has been provided $ 10,950 $ 10,212 $ 7,925
Year-end impaired loans for which no allowance
has been provided 818 2,682 --
---------- ---------- ----------
Total loans determined to be impaired $ 11,768 $ 12,894 $ 7,925
========== ========== ==========
Allowance for loan loss for impaired loans included
in the allowance for loan losses $ 3,113 $ 3,386 $ 1,811
========== ========== ==========
Average recorded investment in impaired loans $ 12,100 $ 11,039 $ 8,651
========== ========== ==========
Interest income recognized from impaired loans $ 553 $ 694 $ 228
========== ========== ==========
Cash basis interest income recognized from impaired loans $ 24 $ 138 $ 120
========== ========== ==========
The Company has approximately $553 and $328 of loans past due 90 days and still
accruing interest at December 31, 2004 and 2003.
The Company and its subsidiary conducts 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 $59,215 and $70,858
as of December 31, 2004 and 2003, respectively.
In the normal course of business, loans are made to executive officers,
directors, and principal stockholders of the Company and its subsidiaries and to
parties that the Company or its directors, executive officers, and stockholders
have the ability to significantly influence (related parties). Changes in such
loans during the year ended December 31, 2004 follow:
(Continued)
60.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 4. Loan (Continued)
Balance at December 31, 2003 $ 24,284
New loans, extensions, and modifications 27,290
Repayments (25,674)
Change in classification (2,211)
----------
Balance at December 31, 2004 $ 23,689
==========
Note 5. Loan Servicing
The following summarizes the secondary mortgage market activities:
Years Ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Proceeds from sales of mortgage loans $ 86,828 $ 205,272 $ 157,815
========== ========== ==========
Gain on sales of mortgage loans $ 1,877 $ 4,727 $ 2,909
========== ========== ==========
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,
-----------------------
2004 2003
---------- ----------
Federal Home Loan Mortgage Corporation $ 2,586 $ 3,783
Federal National Mortgage Association 313,241 302,774
Small Business Administration 1,576 3,504
Other 8,649 9,084
---------- ----------
$ 326,052 $ 319,145
========== ==========
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $1,608 and $1,477 at December 31, 2004 and 2003,
respectively.
Following is an analysis of the changes in originated mortgage servicing rights:
Years Ended December 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Balance at beginning of year $ 2,775 $ 2,640 $ 2,102
Originated mortgage servicing rights 719 1,867 1,493
Amortization (722) (1,732) (955)
---------- ---------- ----------
Balance at end of year $ 2,772 $ 2,775 $ 2,640
========== ========== ==========
The fair value of capitalized mortgage servicing rights was $2.7 million at year
end 2004 and 2003. Fair value was determined using discount rates ranging from
8.5% to 18.5%, prepayment speeds ranging from 21% to 22%, depending on the
stratification of the specific right.
(Continued)
61.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 5. Loan Servicing (Continued)
Estimated amortization expense for each of the next five years:
2005 $720
2006 $715
2007 $710
2008 $705
2009 $700
Loans held for sale, which are included in real estate loans, are summarized as
follows:
December 31,
-----------------------
2004 2003
---------- ----------
Secured by one-to-four-family residences $ 1,742 $ 3,529
Small Business Administration loans 0 398
---------- ----------
$ 1,742 $ 3,927
========== ==========
Note 6. Premises and Equipment
Premises and equipment consisted of:
December 31,
-----------------------
2004 2003
---------- ----------
Land $ 3,069 $ 2,425
Buildings 11,290 15,727
Furniture and equipment 16,288 16,105
Construction in process 248 --
---------- ----------
30,895 34,257
Less accumulated depreciation 17,432 17,681
---------- ----------
$ 13,463 $ 16,576
========== ==========
Note 7. Goodwill and Intangible Assets
Goodwill
The change in balance for goodwill during the year is as follows:
2004 2003
---------- ----------
Beginning of year $ 7,642 $ 7,642
Amount allocated to branch sales (679) --
---------- ----------
End of year $ 6,963 $ 7,642
========== ==========
(Continued)
62.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 7. Goodwill and Intangible Assets (Continued)
Acquired Intangible Assets
Acquired intangible assets were as follows as of year end:
2004 2003
--------------------------- ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------ ------------ ------------ ------------
Amortized intangible assets:
Core deposit intangibles $ 1,089 $ 911 $ 2,106 $ 1,532
Other customer relationship intangibles 745 220 745 87
------------ ------------ ------------ ------------
Total $ 1,834 $ 1,131 $ 2,851 $ 1,619
============ ============ ============ ============
Aggregate amortization expense was $280, $247, and $245 for 2004, 2003, and
2002.
Estimated amortization expense for subsequent years:
2005 $ 174
2006 126
2007 60
2008 60
2009 60
Thereafter 222
Note 8. Deposits
Deposit account balances by type are summarized as follows:
December 31,
-----------------------
2004 2003
---------- ----------
Non-interest-bearing demand deposits $ 55,800 $ 89,424
Savings, NOW, and money market accounts 179,740 203,536
Time deposits of $100 or more 134,149 163,252
Other time deposits 142,788 181,820
---------- ----------
$ 512,477 $ 638,032
========== ==========
(Continued)
63.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 8. Deposits (Continued)
At December 31, 2004, the scheduled maturities of time deposits are as follows:
Year Amount
---- ------------
2005 $ 162,077
2006 59,218
2007 27,578
2008 15,144
2009 9,777
Thereafter 3,143
------------
$ 276,937
============
Time certificates of deposit in denominations of $100 or more mature as follows:
December 31,
-----------------------
2004 2003
---------- ----------
3 months or less $ 36,318 $ 68,381
Over 3 months through 6 months 17,065 38,155
Over 6 months through 12 months 38,247 26,160
Over 12 months 42,519 30,556
---------- ----------
$ 134,149 $ 163,252
========== ==========
Note 9. Borrowed Funds
Borrowed funds include federal funds purchased and securities sold under
agreements to repurchase, advances from the Federal Home Loan Bank, and notes
payable to third parties.
A summary of short-term borrowings follows:
December 31,
-----------------------
2004 2003
---------- ----------
Federal funds purchased $ 11,700 $ --
Securities sold under agreements to repurchase 1,022 1,533
---------- ----------
$ 12,722 $ 1,533
========== ==========
Federal funds purchased and securities sold under agreement to repurchase
generally mature within one day to five years from the transaction date.
(Continued)
64.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 9. Borrowed Funds (Continued)
At December 31, 2004, $15.0 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 $51.4
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 $41,091. The scheduled maturities of
advances from the Federal Home Loan Bank at December 31, 2004 are as follows:
Average
Year Interest Rate Amount
---- ------------- -----------
2005 4.13% $ 16,900
2006 5.03 8,300
2007 3.29 10,200
2008 2.96 13,300
2009 3.78 5,000
Thereafter 4.67 8,200
-----------
3.91 $ 61,900
===========
Notes payable consisted of the following at December 31, 2004 and 2003:
2004 2003
--------- ---------
Line of credit loan ($2,500) from LaSalle National
Bank; interest due quarterly at the higher of (1)
180-day LIBOR plus 1.75% or (2) 4%; $500 payment
due April; 1, 2005 and balance due on October 1,
2005; secured by 100% of the stock of UnionBank. $ 2,000 $ 3,000
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, 2005; secured by 100% of
the stock of UnionBank. 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. 354 598
--------- ---------
$ 6,629 $ 7,873
========= =========
(Continued)
65.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 9. 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,
changes in capital structure, and guarantees of other liabilities and
obligations. In addition, the Company must maintain certain financial ratios.
The Company was in compliance with all covenants for the year ended December 31,
2004.
Information concerning borrowed funds is as follows:
Years Ended December 31,
-----------------------------------------
2004 2003 2002
---------- ---------- ----------
Federal Funds Purchased
Maximum month-end balance during the year $ 11,700 $ 6,600 $ 10,000
Average balance during the year 1,935 2,155 904
Weighted average interest rate for the year 1.71% 0.95% 2.00%
Weighted average interest rate at year end 1.71% N/A N/A
Securities Sold Under Agreements to Repurchase
Maximum month-end balance during the year $ 15,210 $ 17,355 $ 4,680
Average balance during the year 3,164 4,621 4,126
Weighted average interest rate for the year 2.04% 2.19% 2.62%
Weighted average interest rate at year end 3.59% 1.52% 2.20%
Advances from the Federal Home Loan Bank
Maximum month-end balance during the year $ 74,700 $ 77,450 $ 62,100
Average balance during the year 70,359 70,018 51,938
Weighted average interest rate for the year 4.10% 4.28% 4.87%
Weighted average interest rate at year end 4.03% 4.21% 4.43%
Notes Payable
Maximum month-end balance during the year $ 7,882 $ 8,275 $ 9,275
Average balance during the year 7,347 7,898 9,023
Weighted average interest rate for the year 4.18% 4.06% 3.80%
Weighted average interest rate at year end 3.33% 3.46% 4.00%
(Continued)
66.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 10. Income Taxes
Income taxes consisted of:
Years Ended December 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Federal
Current $ 1,243 $ 419 $ 969
Deferred 438 (535) 52
---------- ---------- ----------
1,681 (116) 1,021
State
Current 349 68 92
Deferred 26 (81) 21
---------- ---------- ----------
375 (13) 113
---------- ---------- ----------
$ 2,056 $ (129) $ 1,134
========== ========== ==========
The Company's income tax expense differed from the statutory federal rate of 34%
as follows:
Years Ended December 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Expected income taxes $ 2,332 $ 680 $ 1,761
Income tax effect of
Interest earned on tax-free investments and loans (471) (577) (635)
Nondeductible interest expense incurred to
carry tax-free investments and loans 37 48 68
Nondeductible amortization 117 -- --
State income taxes, net of federal tax benefit 241 (14) 78
Increase in CSV of officers' life insurance (195) (223) (55)
Other (5) (43) (83)
---------- ---------- ----------
$ 2,056 $ (129) $ 1,134
========== ========== ==========
The significant components of deferred income tax assets and liabilities
consisted of:
December 31,
-----------------------
2004 2003
---------- ----------
Deferred tax assets
Allowance for loan losses $ 3,781 $ 3,445
Deferred compensation, other 131 368
Deferred tax credits -- 210
---------- ----------
Total deferred tax assets 3,912 4,023
(Continued)
67.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 10. Income Taxes (Continued)
December 31,
------------------------
2004 2003
---------- ----------
Deferred tax liabilities
Depreciation $ (602) $ (750)
Basis adjustments arising from acquisitions (1,174) (744)
Mortgage servicing rights (1,076) (1,017)
Securities available-for-sale (854) (1,355)
Federal Home Loan Bank dividend received in stock (416) (315)
Other (378) (467)
---------- ----------
Total deferred tax liabilities (4,500) (4,648)
---------- ----------
Net deferred tax liabilities $ (588) $ (625)
========== ==========
Note 11. Benefit Plans
The Company's Employee Stock Ownership Plan ("the Plan") covers all full-time
employees who have completed six months of service and have attained the minimum
age of twenty and one-half years. Vesting in the Plan is based on years of
continuous service. A participant is fully vested after seven years of credited
service. As of December 31, 2004, the Plan owned 463,481 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
$269, $262, and $385 for the years ended December 31, 2004, 2003, and 2002.
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 $339, $344, and $301 for the years ended December 31, 2004, 2003,
and 2002.
Note 12. Stock Option Plans
In April 1993, the Company adopted the UnionBancorp 1993 Stock Option Plan ("the
1993 Option Plan). Under the 1993 Option Plan, nonqualified options, incentive
stock options, and/or stock appreciation rights may be granted to employees and
outside directors of the Company and its subsidiaries to purchase the Company's
common stock at an exercise price to be determined by the 1993 Option Plan's
administrative committee. Pursuant to the 1993 Option Plan, 600,000 shares of
the Company's unissued common stock have been reserved and are available for
issuance upon the exercise of options and rights granted under the 1993 Option
Plan. The options have an exercise period of ten years from the date of grant.
The 1993 Stock Option Plan was terminated on April 12, 2003.
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)
68.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 12. 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, 2004, 2003, and
2002 and changes during the years ended on those dates is presented below.
2004 2003 2002
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning
of year 304,648 $ 13.41 362,519 $ 12.66 270,735 $ 11.78
Granted 20,000 21.75 20,000 23.29 106,824 14.59
Exercised (13,294) 9.12 (56,404) 10.54 (1,890) 8.64
Forfeited (10,923) 15.58 (21,467) 14.19 (13,150) 16.36
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at end of year 300,431 14.08 304,648 13.41 362,519 12.66
========== ========== ==========
Options exercisable at year end 200,152 $ 12.75 181,556 $ 11.90 198,135 $ 10.55
========== ========== ========== ========== ========== ==========
Weighted-average fair
value of options granted
during the year $ 4.74 $ 4.93 $ 3.92
========== ========== ==========
Options outstanding at year-end 2004 were as follows:
Outstanding Exercisable
------------------------------ ------------------------
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Number Life Number Price
--------------- ------------ ----------- ----------- ---------
$ 6.25 - $ 9.75 47,990 1.4 years 45,470 $ 8.18
11.25 - 13.00 73,518 5.4 years 55,865 11.62
13.88 - 18.50 138,923 5.9 years 94,817 15.16
21.75 - 23.29 40,000 9.5 years 4,000 23.29
------------ ----------- ----------- ---------
300,431 5.5 years 200,152 $ 12.75
============ =========== =========== =========
(Continued)
69.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 12. 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 $2, $21, and $45 for
the years ended December 31, 2004, 2003, and 2002.
Note 13. Earnings Per Share
A reconciliation of the numerators and denominators for earnings per common
share computations for the years ended December 31 is presented below (shares in
thousands). The Convertible Preferred Stock is antidilutive for all years
presented and has not been included in the diluted earnings per share
calculation. In addition, options to purchase 40,000 shares and 20,000 shares of
common stock were outstanding at December 31, 2004 and December 31, 2003
respectively 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.
2004 2003 2002
-------- -------- --------
Basic earnings per share
Net income available to common stockholders $ 4,596 $ 1,937 $ 3,787
======== ======== ========
Weighted average common shares outstanding 4,034 4,000 3,980
======== ======== ========
Basic earnings per share $ 1.14 $ 0.48 $ 0.95
======== ======== ========
Weighted average common shares outstanding 4,034 4,000 3,980
Add dilutive effect of assumed exercised stock
options 76 69 48
-------- -------- --------
Weighted average common and dilutive
potential shares outstanding 4,110 4,069 4,028
======== ======== ========
Diluted earnings per share $ 1.12 $ 0.48 $ 0.94
======== ======== ========
Note 14. Regulatory Matters
The Company and UnionBank 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
UnionBank 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, UnionBank and UnionBank/West and
UnionBank/Northwest in March of 2004 and UnionBank and UnionFinancial Services &
Trust Company in October of 2004.
(Continued)
70.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 14. Regulatory Matters (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Company and UnionBank 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, 2004, that the Company
and UnionBank meets all of the capital adequacy requirements to which they are
subject.
As of December 31, 2004, the most recent notification from the corresponding
regulatory agency categorized UnionBank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
UnionBank 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 UnionBank's
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, 2004
Total capital (to risk-
weighted assets)
UnionBancorp, Inc. $ 69,414 14.3% $ 38,826 8.0% $ 48,533 10.0%
UnionBank 77,523 16.0 38,854 8.0 48,567 10.0
Tier I capital (to risk-
weighted assets)
UnionBancorp, Inc. $ 63,347 13.0 19,413 4.0 29,120 6.0
UnionBank 71,452 14.7 19,427 4.0 29,140 6.0
Tier I leverage ratio (to
average assets)
UnionBancorp, Inc. $ 63,347 9.5 26,560 4.0 33,200 5.0
UnionBank 71,452 10.7 26,646 4.0 33,307 5.0
(Continued)
71.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 14. Regulatory Matters (Continued)
To Be Well
Capitalized Under
To Be Adequately Prompt Corrective
Actual Capitalized Action Provisions
----------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------
As of December 31, 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
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,
2004, UnionBank had $5.4 million of retained earnings available for dividends
under these regulations.
Note 15. Fair Value of Financial Instruments
The methods and assumptions used to estimate fair value are described as
follows:
The carrying amount is the estimated fair value for cash and due from banks,
federal funds sold, short-term borrowings, Federal Home Loan Bank stock, accrued
interest receivable and payable, demand deposits, short-term debt, and variable
rate loans or deposits that reprice frequently and fully. Security fair values
are based on market prices or dealer quotes and, if no such information is
available, on the rate and term of the security and information about the
issuer. For fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, the fair value is based on
discounted cash flows using current market rates applied to the estimated life
and credit risk. Fair values for impaired loans are estimated using discounted
cash flow analysis or underlying collateral values. The fair value of loans held
for sale is based on market quotes. The fair value of debt 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)
72.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 15. Fair Value of Financial Instruments (Continued)
The estimated fair values of the Company's financial instruments were as
follows:
December 31,
-------------------------------------------------------------
2004 2003
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets
Cash and cash equivalents $ 22,802 $ 22,802 $ 22,198 $ 22,198
Securities 191,661 191,661 252,248 252,248
Loans 409,543 412,728 467,801 470,055
Accrued interest receivable 4,151 4,151 5,440 5,440
Financial liabilities
Deposits 512,477 502,805 638,032 638,794
Federal funds purchased and
securities sold under
agreements to repurchase 12,722 12,722 1,533 1,533
Advances from the Federal
Home Loan Bank 61,900 61,669 72,450 74,032
Series B mandatorily redeemable
preferred stock 831 831 831 831
Notes payable 6,629 6,629 7,873 7,873
Accrued interest payable 2,474 2,474 2,443 2,443
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the earnings potential of the trust operations, the trained work force, customer
goodwill, and similar items.
Note 16. Commitments, Contingencies, and Credit Risk
In the normal course of business, there are 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.
UnionBank is party 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)
73.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 16. Commitments, Contingencies, and Credit Risk (Continued)
UnionBank'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. UnionBank uses the same credit policies in making commitments and
conditional obligations as it does 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, 2004 $ 4,331 $ 64,787 $ 25,228 $ 94,346 2.25% - 18.00%
December 31, 2003 $ 3,752 $ 67,624 $ 28,793 $ 100,169 3.00% - 12.50%
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, UnionBank
evaluates 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 UnionBank 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 17. Condensed Financial Information - Parent Company Only
The primary source of funds for the Company is dividends from its subsidiaries.
By regulation, UnionBank is 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)
74.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 17. Condensed Financial Information - Parent Company Only (Continued)
Condensed financial information for UnionBancorp, Inc. follows:
Balance Sheets (Parent Company Only)
December 31,
------------------------
ASSETS 2004 2003
---------- ----------
Cash and cash equivalents $ 463 $ 928
Investment in subsidiaries 78,352 75,507
Other assets 100 1,250
---------- ----------
$ 78,915 $ 77,685
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
-----------------------
Liabilities 2004 2003
---------- ----------
Notes payable $ 6,275 $ 7,275
Mandatory redeemable preferred stock 831 831
Other liabilities 1,562 1,532
---------- ----------
8,668 9,638
Stockholders' equity 70,247 68,047
---------- ----------
$ 78,915 $ 77,685
========== ==========
Income Statements (Parent Company Only)
Years Ended December 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Dividends from subsidiaries $ 3,395 $ 4,358 $ 3,842
Other income 1,206 2,120 2,037
Interest expense 334 382 347
Other expenses 3,442 5,417 5,435
Income tax benefit (1,077) (1,462) (1,455)
Equity in undistributed earnings of subsidiaries 2,901 (11) 2,492
---------- ---------- ----------
Net income 4,803 2,130 4,044
Less dividends on preferred stock 207 193 257
---------- ---------- ----------
Net income on common stock $ 4,596 $ 1,937 $ 3,787
========== ========== ==========
(Continued)
75.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 17. Condensed Financial Information - Parent Company Only (Continued)
Statements of Cash Flows (Parent Company Only)
Years Ended December 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Cash flows from operating activities
Net income $ 4,803 $ 2,130 $ 4,044
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 186 264 345
Undistributed earnings of subsidiaries (2,901) 11 (2,492)
Amortization of deferred compensation -
stock options 2 21 45
Decrease (increase) in other assets 514 (161) 137
Increase in other liabilities 196 472 140
---------- ---------- ----------
Net cash provided by operating activities 2,800 2,737 2,219
Cash flows from investing activities
Purchases of premises and equipment 223 70 27
Investment in subsidiaries (673) -- --
---------- ---------- ----------
Net cash provided by financing activities (450) 70 27
Cash flows from financing activities
Net decrease in notes payable $ (1,000) $ (1,000) $ (1,000)
Dividend paid on common stock (1,613) (1,441) (1,234)
Dividends paid on preferred stock (207) (193) (257)
Proceeds from exercise of stock options 161 685 17
Purchase of treasury stock (156) (189) --
---------- ---------- ----------
Net cash used in financing activities (2,815) (2,138) (2,474)
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents (465) 669 (228)
Cash and cash equivalents
Beginning of year 928 259 487
---------- ---------- ----------
End of year $ 463 $ 928 $ 259
========== ========== ==========
(Continued)
76.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 18. Other Comprehensive Income
Changes in other comprehensive income components and related taxes are as
follows:
Years Ended December 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Change in unrealized gains on
securities available-for-sale $ (1,167) $ (1,386) $ 3,069
Reclassification adjustment for (gains)
losses recognized in income (123) (281) (407)
---------- ---------- ----------
Net unrealized gains (1,290) (1,667) 2,662
Tax expense (500) (637) 1,027
---------- ---------- ----------
Other comprehensive income $ (790) $ (1,030) $ 1,635
========== ========== ==========
Note 19. 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
---------- ---------- ---------- ---------- ----------
2004
- ----
Net interest income $ 19,381 $ 2,603 $ 9 $ (331) $ 21,662
Other revenue 8,971 2,111 3,019 1 14,102
Other expense 16,336 2,102 3,699 2,052 24,189
Segment profit 8,145 2,511 (933) (2,864) 6,859
Noncash items
Depreciation 1,956 100 211 188 2,455
Provision for loan loss 1,924 -- -- -- 1,924
Amortization of intangibles 286 -- 51 -- 337
Goodwill 5,143 -- 1,820 -- 6,963
Segment assets 611,001 55,301 5,388 (2,144) 669,546
(Continued)
77.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 19. Segment Information (Continued)
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
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
(Continued)
78.
UNIONBANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 20. Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2004 Year Ended December 31, 2003
Three Months Ended Three Months Ended
-------------------------------------------------- ----------------------------------------------------
Dec. 31(A) Sep. 30(B) June 30 March 31 (C)Dec. 31 (C)Sep. 30 June 30 March 31
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest income $ 8,056 $ 8,505 $ 8,843 $ 9,508 $ 9,591 $ 10,274 $ 10,381 $ 10,840
Total interest expense 3,089 3,142 3,312 3,707 (3,847) (3,775) (4,080) (4,259)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 4,967 5,363 5,531 5,801 5,744 6,499 6,301 6,581
Provision for loan losses 300 374 500 750 2,011 4,356 1,257 612
Noninterest income 1,093 6,895 3,190 2,924 2,774 3,259 4,087 3,599
Noninterest expense 5,459 7,514 7,029 6,979 7,260 7,161 7,169 7,017
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes 301 4,370 1,192 996 (753) (1,759) 1,962 2,551
Income tax expense
(benefit) (172) 1,753 279 196 (499) (890) 516 744
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
473 2,617 913 800 (254) (869) 1,446 1,807
Preferred stock dividend 52 52 52 52 -- 65 64 64
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) for
common stockholders $ 421 $ 2,565 $ 861 $ 748 $ (254) $ (934) $ 1,382 $ 1,743
========== ========== ========== ========== ========== ========== ========== ==========
Basic earnings (loss)
per share $ 0.10 $ 0.64 $ 0.21 $ 0.19 $ (0.07) $ (0.23) $ 0.34 $ 0.44
========== ========== ========== ========== ========== ========== ========== ==========
Diluted earnings (loss)
per share $ 0.10 $ 0.62 $ 0.21 $ 0.18 $ (0.06) $ (0.23) $ 0.34 $ 0.43
========== ========== ========== ========== ========== ========== ========== ==========
(A) The net income for the quarter was impacted by the sale of 5 branches in
the western Illinois region with a pretax gain of $4.2 million.
(B) A reclassification was made to the third quarter information to allocate a
portion of the allowance for loan losses to the loans sold as part of the
branch sales during the quarter. This reclassification had no impact on the
balance sheet or income, as noninterest income was increased by $174 and
the provision for loan losses was increased by $174.
(C) 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.
(Continued)
79.
Item 9. Changes in and Disagreements with Accountants 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, 2004. 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 control over
financial reporting during the quarter ended December 31, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information beginning on page 2 of the Company's 2005 Proxy Statement under
the caption "Election of Directors", on page 9 of the 2005 Proxy Statement under
the caption "Section 16(a) Beneficial Ownership Compliance," on page 16 under
the caption "Audit Committee Financial Expert" and on page 6 under the caption
"Code of Ethics" is incorporated herein by reference.
The Audit Committee of the Company's Board of Directors is an "audit committee"
for purposes of section 3(a)(58)(A) of the Securities Exchange Act of 1934. The
members of the Audit Committee are Messrs. I. J. Reinhardt, Jr., Walter E.
Breipohl and Robert J. Doty.
Item 11. Executive Compensation
The information on pages 6, 10 through 13 of the 2005 Proxy Statement under the
caption "Compensation of Directors" and "Executive Compensation" is incorporated
herein reference, excluding however the information contained under the
sub-headings "Board Compensation Committee Report on Executive Compensation" and
"Stockholder Return Performance Presentation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information on pages 7 through 9 of the 2005 Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management" and on
page 7 under the caption "Existing Equity Compensation Plans" is incorporated
herein by reference.
(Continued)
80.
Item 13. Certain Relationships and Related Transactions
The information on pages 11 and 14 of the 2005 Proxy Statement under the caption
"Executive Compensation-Employment Agreements and other Arrangements" and
"Transactions with Management" is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information on page 14 of the 2005 Proxy Statement under the caption
"Accountant Fees" is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Index to Financial Statements
The index to Financial Statements is contained in Item 8, appearing on
page 40 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 herein by reference.
(b) 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.
(c) Financial Statement Schedules
The response to this portion of Item 15 is submitted as a separate
section of this report.
(Continued)
81.
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 29, 2005.
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 29, 2005
/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
Exhibits
3.1 Restated Certificate of Incorporation of the Company [incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form S-1
filed by the Company on August 19, 1996 (File No. 33-9891)].
3.2 Bylaws of the Company [incorporated by reference from Exhibit 3.2 to
the Registration Statement on Form S-1 filed by the Company on August
19, 1996 (File No. 33-9891)].
4.1 Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock of the Company [incorporated by reference
from Exhibit 4.3 to the Registration Statement on Form S-1 filed by the
Company on August 19, 1996 (File No. 33-9891)].
4.2 Certificate of Designation, Preferences and Rights of Series B
Preferred Stock of the Company [incorporated by reference from Exhibit
4.4 to the Registration Statement on Form S-1 filed by the Company on
August 19, 1996 (File No. 33-9891)].
4.3 Specimen Common Stock Certificate of the Company [incorporated by
reference from Exhibit 4.6 to the Registration Statement on Form S-1
filed by the Company on August 19, 1996 (File No. 33-9891)].
4.4 Rights Agreement between the Company and Harris Trust and Savings Bank,
dated August 5, 1996 [incorporated by reference from Exhibit 4.7 to the
Registration Statement on Form S-1 filed by the Company on August 19,
1996 (File No. 33-9891)]
10.1 Registration Agreement dated August 6, 1996, between the Company and
each of Wayne W. Whalen and Dennis J. McDonnell [incorporated by
reference from Exhibit 10.10 to the Registration Statement on Form S-1
filed by the Company on August 19, 1996 (File No. 33-9891)].
10.2 Loan Agreement between the Company and LaSalle National Bank dated
August 2, 1996 [incorporated by reference from Exhibit 10.11 to the
Registration Statement on Form S-1 filed by the Company on August 19,
1996 (File No. 33-9891)].
10.3 UnionBancorp, Inc. Employee Stock Ownership Plan [incorporated by
reference from Exhibit 10.12 to the Registration Statement on Form S-1
filed by the Company on August 19, 1996 (File No. 33-9891)].
10.4 UnionBancorp, Inc. 1993 Stock Option Plan, as amended [incorporated by
reference from Exhibit 10.13 to the Registration Statement on Form S-1
filed by the Company on August 19, 1996 (File No. 33-9891)].
10.5 UnionBancorp, Inc. 1999 Nonqualified Stock Option Plan [incorporated by
reference from Exhibit 10.1 to the registration statement on Form S-8
filed by the Company on December 10, 1999 (File No. 333-92549)].
10.6 UnionBancorp, Inc. 2000 Incentive Compensation Plan [incorporated by
reference from Exhibit 10.1 to UnionBancorp's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001 as filed with the SEC on
November 13, 2001].
10.7 Employment Agreement between UnionBancorp, Inc. and Paul R. Tingley
dated August 22, 2001 [incorporated by reference from Exhibit 10.2 to
UnionBancorp's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 as filed with the SEC on November 13, 2001].
10.8 Charles J. Grako Severance Arrangement [incorporated by reference from
Exhibit 10.8 to UnionBancorp's Annual Report on Form 10-K for the year
ended December 31, 2003 as filed with the SEC on March 24, 2004].
10.9 UnionBancorp, Inc. 2003 Stock Option Plan [incorporated by reference
from UnionBancorp's 2003 Proxy Statement].
21.1 Subsidiaries of UnionBancorp, Inc.
23.1 Consent of Crowe, Chizek and Company LLC.
31.1. Certification of Dewey R. Yaeger, the Company's Principal Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Kurt R. Stevenson, the Company's Principal Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
* This certification is not "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or incorporated by
reference into any filing under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended.
CORPORATE DIRECTORY
Dennis J. McDonnell Heather M. Hammitt Robert J. Doty
Chairman and Director, UnionBancorp, Inc. Vice President and Director, UnionBancorp, Inc.
Chairman and Managing Member Director of Human Resources Farm Management
McDonnell Investment Management, LLC UnionBancorp, Inc.
I. J. Reinhardt, Jr.
Dewey R. Yaeger Brian M. Petzold Director, UnionBancorp, Inc.
President, Chief Executive Officer and Chief Technology Officer General Manager and Director
Director UnionBancorp, Inc. St. Louis Beverage Co.
UnionBancorp, Inc.
Rodney G. Hewitt John A. Shinkle
Kurt R. Stevenson Risk Management Officer Director, UnionBancorp, Inc.
Senior Vice President and UnionBancorp, Inc. Executive Vice President and Director
Chief Financial Officer Synovus Securities, Inc.
UnionBancorp, Inc. Suzanne Fechter
Secretary/Treasurer Scott C. Sullivan
Robert L. Davidson UnionBancorp, Inc. Director, UnionBancorp, Inc.
Senior Vice President and Attorney
Chief Investment Officer Richard J. Berry Williams & McCarthy
UnionBancorp, Inc. Director, UnionBancorp, Inc.
Attorney John A. Trainor
Rick R. Clary Myers, Berry, O'Conor & Kuzma Ltd. Director, UnionBancorp, Inc.
Vice President and President
Chief Operating Officer Walter E. Breipohl Trainor Grain & Supply Co.
UnionBancorp, Inc. Director, UnionBancorp, Inc.
Real Estate Broker-Developer
Kaszynski-Breipohl Realtors-Developers
CORPORATE INFORMATION
Corporate Office: Corporate Counsel: Transfer Agent:
UnionBancorp, Inc. Reinhart Boerner Van Deuren s.c. Computershare Investor Services
321 West Main Street 1000 North Water Street 2 North LaSalle Street
Ottawa, IL 61350 Milwaukee, WI 53202 Chicago, IL 60602
815-431-2720 Telephone
815-431-0685 Fax Independent Auditors: For additional information about
Crowe Chizek and Company LLC UnionBancorp, Inc., please visit
One Mid America Plaza our website: www.ubcd.com
Oak Brook, IL 60522