UNIONBANCORP INC
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 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 (ISP). 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 three-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 that merchants experience.  In June of 2003, the Company entered into an arrangement to sell its book of ISP customers to a local 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 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 $1.7 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.  During the second quarter of 2005, the Company closed its Tiskilwa branch, due to declining transaction activity. The majority of customers have been retained and continue to bank at the nearby Princeton location.  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 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                                         2.   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.  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 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.                                         3.   Employees  At December 31, 2005, the Company employed 266 full-time equivalent employees. The Company places high priority on staff development, which involves extensive training on product offerings, customer service, management practices and leadership skills. New employees are selected on the basis of both technical skills and customer service capabilities. None of the Company's employees are covered by a collective bargaining agreement with the Company. The Company offers a variety of employee programs and benefits, and management considers its employee relations to be excellent.                             SUPERVISION AND REGULATION  General  Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities, including the Illinois Department of Financial and Professional Regulation (the "DFPR"), 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 subsidiary, 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 subsidiary 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 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 DFPR under the Illinois Bank Holding Company Act, as amended.                                         4.   Investments and Activities. Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of the shares of the other bank or bank holding company (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank; or (iii) merging or consolidating with another bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.  The BHCA also generally prohibits the Company 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 the 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 for 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                                         5.   companies and their subsidiaries and affiliates will be separately regulated by banking, securities, and insurance regulators, respectively.  Federal law also prohibits any person or company from acquiring "control" of a bank or bank holding company without prior notice to the appropriate federal bank regulator. "Control" is defined in certain cases as the acquisition of 10% 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, 2005, the Company had regulatory capital in excess of the Federal Reserve's minimum requirements, as follows:                                         Risk-Based               Leverage                                       Capital Ratio          Capital Ratio                                       -------------          -------------           Company                           5.3%                   5.0%  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                                         6.   possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.  Federal Securities Regulation. The Company's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.  UnionBank  UnionBank is an Illinois-chartered bank, the deposit accounts of which are insured by the FDIC. 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 DFPR, as the chartering authority for Illinois banks, the Federal Reserve, as the primary federal regulator of member banks, and the FDIC, as administrator of deposit insurance.  Deposit Insurance. As an FDIC-insured institution, UnionBank is required to pay deposit insurance premium assessments to the FDIC. Currently, UnionBank's deposit accounts are insured by the Bank Insurance Fund ("BIF"), but under the recently adopted Federal Deposit Insurance Reform Act of 2005 (the "FDIRA"), the BIF will be merged with the Savings Association Insurance Fund during 2006.  The FDIC currently has 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. Pursuant to the FDIRA, a new system for assessing insurance premiums based on risk will be adopted.  During the year ended December 31, 2005, BIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 2006, the Company expects that BIF assessment rates will continue to range from 0% of deposits to 0.27% of deposits. Assessments for subsequent periods will depend on the timetable for implementation of the FDIRA and the regulations adopted by the FDIC to implement the FDIRA. In addition to a new system for assessing insurance premiums based on risk, a number of other provisions of the FDIRA and the implementing regulations will impact future assessments. The FDIC will have flexibility to determine the level of reserves it will hold. Currently, the FDIC must hold reserves equal to 1.25 percent of insured deposits, but under the FDIRA, the FDIC will be able to set the reserve ratio annually between 1.15 percent and 1.50 percent. In addition, the FDIC will be required to pay dividends awarded on an historical basis to insured depository institutions whenever the reserve ratio exceeds 1.35 percent, although dividends may be suspended or limited if the FDIC determines there is a significant risk to the deposit insurance fund. Insured depository institutions also will receive a one-time credit which can be applied against the payment of future premiums.                                         7.   Until FDIRA is fully implemented, it is not possible for UnionBank to determine how these changes will impact the amount of deposit premiums it will pay in the future.  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, 2005, the FICO assessment rate for both SAIF and BIF members ranged between approximately 0.0134% of deposits and approximately 0.0144% of deposits. During the year ended December 31, 2005, UnionBank paid FICO assessments totaling $69,404.  Supervisory Assessments. All Illinois banks are required to pay supervisory assessments to the DFPR to fund the operations of the DFPR. The amount of the assessment is calculated based on the institution's total assets, including consolidated subsidiaries, as reported to the DFPR. During the year ended December 31, 2005, UnionBank paid supervisory assessments to the DFPR totaling $85,805.  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, 2005, 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, 2005, UnionBank exceeded its minimum regulatory capital requirements, as follows:                                         8.                                          Risk-Based              Leverage                                       Capital Ratio          Capital Ratio                                       -------------          -------------           UnionBank                        7.5%                   6.6%  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, 2005, 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.  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 $2.5 million available to be paid as dividends to the Company as of December 31, 2005. 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                                         9.   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.  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 although the laws of some of these states require a reciprocal provision under the law of the state where the bank establishing or acquiring the branch is chartered. Illinois law permits out-of-state banks to establish branches in Illinois in this manner, and 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 even if the law of such state requires 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.                                        10.   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 $7.8 million of net transaction accounts, there is                no reserve;           o    for net transaction accounts totaling over $7.8 million and up to                and including $48.3 million, a reserve of 3%; and           o    for net transaction accounts totaling in excess of $48.3 million,                a reserve requirement of $1.215 million plus 10% against that                portion of the total transaction accounts greater than $48.3                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.  Financial Services Division  UnionBank's financial services division 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 DFPR and the Federal Reserve with regard to compliance with banking laws and regulations applicable to Illinois-chartered member banks.  UnionBank, through its financial services 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 financial services division is subject to periodic examination by the DFPR and the DFPR 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 2006 Proxy Statement, the names and ages of the executive officers of the Company as of December 31, 2005, 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.          Robert L. Davidson, 60, was promoted to Executive Vice President, Chief Investment Officer and ALCO Manager in January of 2006. He had previously served as the Company's Senior Vice President, Chief Investment Officer and ALCO Manager since 2001 Mr. Davidson became employed with UnionBancorp in 1995 as the                                        11.   Investment Officer as a result of the acquisition of Prairie Bancorp and previously worked for Van Kampen Merritt Investment Advisory, Inc.          Kurt R. Stevenson, 39, was promoted to Senior Executive Vice President and Chief Financial Officer in January of 2006. He had previously served as the Company's Senior Vice President and Chief Financial Officer since 2003. Prior to that, Mr. Stevenson 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.          Scott A. Yeoman, 48, was named President and Chief Executive Officer of UnionBancorp, Inc. in June of 2005, following the announcement of the retirement of Dewey R. Yaeger at year end. Prior to joining the Company, Mr. Yeoman served as the President and Chief Executive Officer of Associated Bank Lakeshore, a subsidiary of Associated Banc Corp, in Manitowoc, Wisconsin from 1998 through 2004. Mr. Yeoman joined the organization with over 20 years of commercial banking experience.
An investment in the Company's common stock is subject to risks inherent to the Company's business. The material risk and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company's business operations. This report is qualified in its entirety by these risk factors. See also, "Special Note Regarding Forward-Looking Statements."  If any of the following risks actually occur, the Company's financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company's common stock could decline significantly, and you could lose all or part of your investment.  References to "we," "us," and "our" in this section refer to the Company and its subsidiary, unless otherwise specified or unless the context otherwise requires.  Risks Related to The Company's Business  We are subject to interest rate risk.  The Company's earnings and cash flows are largely dependent upon its net interest income. Interest rates are highly sensitive to many factors that are beyond the Company's control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Company's ability to originate loans and obtain deposits, (ii) the fair value of the Company's financial assets and liabilities, and (iii) the average duration of the Company's mortgage-backed securities                                        12.   portfolio and other interest-earning assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company's net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates pain on deposits and other borrowings.  Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the Company's results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Company's financial condition and results of operations. Also, the Company's interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on the Company's balance sheet. See Part II sections "Net Interest Income" and "Interest Rate Risk" in "Management's Discussion and Analysis of Financial Condition and Results of Operations," for further discussion related to the Company's management of interest rate risk.  We are subject to lending risk  As of December 31, 2005 approximately 80.0% of the Company's loan portfolio consisted of commercial, financial, and agricultural, real estate construction, and commercial real estate loans (collectively, "commercial loans"). Commercial loans are generally viewed as having more inherent risk of default than residential mortgage loans or retail loans. Also, the commercial loan balance per borrower is typically larger than that for residential mortgage loans and retail loans, inferring higher potential losses on an individual loan basis. Because the Company's loan portfolio contains a number of commercial loans with large balances, the deterioration of one or a few of these loans could cause a significant increase in nonperforming loans. An increase in nonperforming loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses, and in increase in loan charge offs, all of which could have a material adverse effect on the Company's financial condition and results of operations. See Part II "Loans" in "Management's Discussion and Analysis of Financial Condition and Results of Operations," for further discussion of credit risks related to different loan types.  We are subject to economic conditions of our geographic markets  The Company's success depends to a large degree on the general economic conditions of the geographic markets served by the Bank in the State of Illinois and, to a lesser extent, contiguous states. The local economic conditions on these areas have a significant impact on the generation of the Bank's commercial, real estate commercial, and real estate construction loans; the ability of borrowers to repay these loans; and the value of the collateral securing these loans. Adverse changes in the economic conditions of the north central Illinois and northwest Illinois counties in which we operate could also negatively impact the financial results of the Company's operations and have a negative effect on its profitability. For example, these factors could lead to reduced interest income and an increase in the provision for loan losses.  A portion of the loans in the Company's portfolio is secured by real estate. Most of these loans are secured by properties located in the north central and north west counties of Illinois. Negative conditions in the real estate markets where collateral for a mortgage loan is located could adversely affect the borrower's ability to repay the loan and the value of the collateral securing the loan. Real estate values are affected by various factors, including changes in general or regional economic conditions, supply and demand for properties and governmental rules or policies.                                        13.   Our allowance for loan losses may be insufficient  Managing the Company's reserve for loan losses is based upon, among other things, (1) historical experience, (2) an evaluation of local and national economic conditions, (3) regular reviews of delinquencies and loan portfolio quality, (4) current trends regarding the volume and severity of past due and problem loans, (5) the existence and effect of concentrations of credit and (6) results of regulatory examinations. Based upon such factors, management makes various assumptions and judgments about the ultimate collectibility of the respective loan portfolios. Although the Company believes that the reserve for loan losses is adequate, there can be no assurance that such reserve will prove sufficient to cover future losses. Future adjustments may be necessary if economic conditions change or adverse developments arise with respect to nonperforming or performing loans or if regulatory supervision changes. Material additions to the reserve for loan losses would result in a material decrease in the Company's net income, and possibly its capital, and could result in the inability to pay dividends, among other adverse consequences.  Acquisitions may disrupt our business and dilute stockholder value  The Company regularly evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. The Company seeks merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or have potential for improved profitability through financial management, economies of scale, or expanded services.  Acquiring other banks, businesses, or branches involves potential adverse impact to the Company's financial results and various other risks commonly associated with acquisitions, including, among other things:  o    Difficulty in estimating the value of the target company o    Payment of a premium over book and market values that may dilute the      Company's tangible book value and earnings per share in the short and long      term o    Potential exposure to unknown or contingent liabilities of the target      company o    Exposure to potential asset quality issues of the target company o    There may be volatility in reported income as goodwill impairment losses      could occur irregularly and in varying amounts o    Difficulty and expense of integrating the operations and personnel of the      target company o    Inability to realize the expected revenue increases, cost savings,      increases in geographic or product presence, and/or other projected      benefits o    Potential disruption to the Company's business o    Potential diversion of the Company's management's time and attention o    The possible loss of key employees and customers of the target company o    Potential changes in banking or tax laws or regulations that may affect the      target company  Details of the Company's recent acquisition activity is presented in Note 2, "Business Combinations," of the notes to consolidated financial statements within Part II, Item 8.                                        14.   Our information systems may experience an interruption of breach in security  The Company relies heavily on communications and information systems to conduct its business. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in the Company's customer relationship management, general ledger, deposit, loan, and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of its information systems, we cannot assure you that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of the Company's information systems could damage the Company's reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company's financial condition and results of operations.   Risks Associated With The Company's Industry  We operate in a highly regulated industry  The banking industry is heavily regulated. The banking business of the Company and the Bank are subject, in certain respects, to regulation by the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency, the IDFPR and the SEC. The Company's success depends not only on competitive factors but also on state and federal regulations affecting banks and bank holding companies. The regulations are primarily intended to protect depositors, not stockholders or other security holders. The ultimate effect of recent and proposed changes to the regulation of the financial institution industry cannot be predicted. Regulations now affecting the Company may be modified at any time, and there is no assurance that such modifications, if any, will not adversely affect the Company's business.  We operate in an industry that is significantly affected by general business and economic conditions  The Company's operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, and the strength of the U. S. economy and the local economies in which the Company operates, all of which are beyond the Company's control. A deterioration in economic conditions could result in an increase in loan delinquencies and nonperforming assets, decreases in loan collateral values, and a decrease in demand for the Company's products and services among other things, any of which could have a material adverse impact on the Company's financial condition and results of operations.
None.
At December 31, 2005, the Company operated twenty 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                                        15.   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      Seventeen banking offices and                   Whiteside Counties           three non-banking offices located                                                in markets served.  In addition to the banking locations listed above, UnionBank owns twenty automated teller machines, some of which are housed within banking offices and some of which are independently located.  At December 31, 2005, the properties and equipment of the Company had an aggregate net book value of approximately $13.9 million.
Neither the Company nor its subsidiary 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.
There were no items submitted to a vote of security holders in the fourth quarter of the fiscal year ended December 31, 2005.                                       PART II
The Company's Common Stock was held by approximately 417 stockholders of record as of March 1, 2006, 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.                                        16.                                                Stock Sales                                      --------------------------                                                                        Cash                                          High           Low          Dividends                                      -----------     ----------     -----------  2005    First Quarter..................   $     21.50     $    20.75     $      0.10    Second Quarter.................         22.00          20.26            0.11    Third Quarter..................         21.98          20.84            0.11    Fourth Quarter.................         22.00          20.25            0.11   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 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.  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.                                        17.   The following table provides information about purchases of the Company's common stock by the Company during 2005:    =================================================================================================                                            Total Number of Shares              Total Number     Average       Purchased as Part of      Maximum Number of Shares                of Shares     Price Paid   Publicly Announced Plans    that May Yet Be Purchased Period         Purchased     per Share           or Programs         Under the Plans or Programs =================================================================================================      10/01/05 -            --           --                          --                     164,307 10/31/05 ================================================================================================= 11/01/05 -        22,900       21.300                      22,900                     141,407 11/30/05 ================================================================================================= 12/01/05 -        32,500       21.181                      32,500                     108,907 12/31/05 ================================================================================================= Total   (1)       55,400       21.230                      55,400                     108,907 (2) =================================================================================================        (1)  Pursuant to the repurchase program that we originally announced on May           2, 2003 (the "Program"), the Company repurchased 55,400 shares at an           average price per share of $21.230 of our common stock during the           quarter ended December 31, 2005.       (2)  Our board of directors approved the repurchase by us of up to an           aggregate of 5% of the outstanding shares of our common stock pursuant           to the Program. The Program initially lasted for an eighteen month           period, but was extended by our board of directors on September 23,           2004 and June 16, 2005. Unless terminated earlier by resolution of our           board of directors, the Program will expire on the earlier of such           expiration date or when we have repurchased all shares authorized for           repurchase under the Program.                                        18.
The following table presents selected consolidated financial data for the five years ended December 31, 2005:                                                              2005            2004            2003             2002            2001                                                       ------------    ------------    ------------     ------------    ------------       Statement of Income Data    Interest income                                    $     34,697    $     34,912    $     41,086     $     45,509    $     53,829    Interest expense                                         13,712          13,250          15,961           20,186          29,385                                                       ------------    ------------    ------------     ------------    ------------    Net interest income                                      20,985          21,662          25,125           25,323          24,444    Provision for loan losses                                   250           1,924           8,236            3,574           4,161                                                       ------------    ------------    ------------     ------------    ------------    Net interest income after provision                      20,735          19,738          16,889           21,749          20,283      for loan losses    Noninterest income                                        7,602          14,102          13,719           12,455          11,920    Noninterest expense                                      22,965          26,981          28,607           29,026          26,212                                                       ------------    ------------    ------------     ------------    ------------    Income before income taxes                                5,372           6,859           2,001            5,178           5,991    Provision (benefit) for income taxes                      1,199           2,056            (129)           1,134           1,537                                                       ------------    ------------    ------------     ------------    ------------    Net income                                         $      4,173    $      4,803    $      2,130     $      4,044    $      4,454    Net income on common stock                         $      3,966    $      4,596    $      1,937     $      3,787    $      4,197                                                       ============    ============    ============     ============    ============  Per Share Data    Basic earnings per common share                    $       1.01    $       1.14    $       0.48     $       0.95    $       1.06    Diluted earnings per common share                          0.99            1.12            0.48             0.94            1.05    Cash dividends on common stock                             0.44            0.40            0.35             0.31            0.27    Dividend payout ratio for common stock                    43.39%          35.10%          74.39%           32.59%          25.59%    Book value per common stock                        $      17.23    $      17.30    $      16.77     $      16.97    $      15.91    Basic weighted average common shares                  3,943,741       4,033,608       3,997,464        3,979,750       3,974,205       outstanding    Diluted weighted average common share                 4,002,908       4,109,999       4,069,220        4,027,441       4,008,867       outstanding    Period-end common shares outstanding                  3,806,876       4,032,144       4,026,850        3,980,946       3,979,056  Balance Sheet Data    Securities                                         $    196,440    $    191,661    $    252,248     $    227,229    $    186,282    Loans                                                   417,525         419,275         476,812          483,229         504,968    Allowance for loan losses                                 8,362           9,732           9,011            6,450           6,295    Total assets                                            676,222         669,546         793,422          791,616         784,307    Total deposits                                          543,841         512,477         638,032          641,958         612,144    Stockholders' equity                                     66,075          70,247          68,047           68,064          63,814  Earnings Performance Data    Return on average total assets                             0.63%           0.65%           0.28%            0.53%           0.59%    Return on average stockholders' equity                     6.06            7.06            3.16             6.11            7.04    Net interest margin ratio                                  3.56            3.34            3.65             3.74            3.64    Efficiency ratio (1)                                      77.78           82.90           72.25            71.73           68.14  Asset Quality Ratios    Nonperforming assets to total end of period assets         0.62%           0.69%           1.10%            0.80%           1.44%    Nonperforming loans to total end of period loans           0.96            1.00            1.78             0.99            1.76    Net loan charge-offs to total average loans                0.39            0.23            1.18             0.70            0.85    Allowance for loan losses to total loans                   2.00            2.32            1.89             1.33            1.25    Allowance for loan losses to nonperforming loans         208.84          231.60          106.30           135.50           70.93  Capital Ratios    Average equity to average assets                          10.39%           9.27%           8.87%            8.71%           8.37%    Total capital to risk adjusted assets                     13.33           14.30           12.15            11.84           11.66    Tier 1 leverage ratio                                      9.03            9.54            7.60             7.48            7.54   (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.                                        19.
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, 2005. 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.                                        20.   UNIONBANCORP, INC. AND SUBSIDIARY 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," "project," "planned" or "potential" 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          Note 1 to our Consolidated Financial Statements for the year ended December 31, 2005 contains a summary of our significant accounting policies. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Our policy with respect to the methodologies used to determine the allowance for loan losses is our most critical accounting policy. The policy is important to the presentation of our financial condition and results of operations, and it involves a higher decree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in our results of operations or financial condition.          The following is a description of our critical accounting policy and an explanation of the methods and assumptions underlying its application.  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 is 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                                        21.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  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 markets in which the Company operates.  The specific credit allocation component of the allowances for loan losses is based on an analysis of individual loans and historical loss experience for each loan category. The specific credit allocations are based on regular analysis 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 values.  The general portfolio allocation component of the allowance for loan losses is determined statistically using a loss analysis that examines historical loan loss experience. The loss 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.  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.  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 range of services to individual and corporate customers located in the north central and northwest 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 incurred approximately $413 in nonrecurring expenses related to organizational restructuring severance costs, loss on sale of securities and other events. The impact to earnings, net of taxes, was approximately $0.05 per diluted share. The largest portion of this cost was related to severance costs. These were incurred as the Company strived to align our staffing levels with the current and anticipated future needs of the Company. As the Company has continued to develop into a flatter and more efficient management structure a reduction in redundant staffing positions was necessary to achieve the management structure needed to develop future growth.                                        22.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------      Second Quarter  On May 31, 2005, the Company closed its Tiskilwa branch due to declining transaction activity. On June 20, 2005, the Company announced the appointment of Scott A. Yeoman to the position of President and Chief Executive Officer of UnionBancorp, Inc. Additionally, the Company experienced a $251 reduction in state income taxes due to the receipt of a tax refund related to amended tax returns outstanding from prior years. The impact to earnings was approximately $0.06 per diluted share.  Results of Operations      Net Income          2005 compared to 2004. Net income equaled $4,173 or $0.99 per diluted share for the year ended December 31, 2005 as compared to net income of $4,803 or $1.12 per diluted share for the year ended December 31, 2004. This represents a 13.1% decrease in net income and an 11.6% decrease in diluted per share earnings in the current fiscal year over fiscal 2004.  The Company's annual results were lower in 2005 versus 2004 due to the $1,700 net gain on sale (after allocating a portion of the intangible assets and goodwill, taxes and applicable expenses) associated with the Company's divestiture of five western Illinois sales and service center locations recorded in the third quarter of 2004. Also contributing to the change were volume related decreases in net interest income and other fee based revenue largely related to the sale of the West region. Positively impacted earnings were decreases in the provision for loan losses due to continued improvement in asset quality levels and volume related decreases in noninterest expense categories due to the sale of the West region.  Return on average assets was 0.63% for the year ended December 31, 2005 compared to 0.65% for the same period in 2004. Return on average stockholders' equity was 6.06% for the year ended December 31, 2005 compared to 7.06% for the same period in 2004.          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 the West region. 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 the West region's branches.  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.                                        23.   UNIONBANCORP, INC. AND SUBSIDIARY 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.          2005 compared to 2004. Net interest income, on a tax equivalent basis, was $21,587 for the year ended December 31, 2005, compared with $22,376 earned during the same period in 2004. This represented a decrease of $789 or 3.5%. The decrease in net interest income is attributable to the year-over-year reduction of income earned on interest earning assets totaling $328 combined with the year-over-year increase of interest expense paid on interest bearing liabilities totaling $461.  The $328 reduction in interest income resulted from a decrease of $3,748 related to volume partially offset by $3,420 improvement due to rates. The majority of the change in interest income was related to a decline in the average loan balance caused by the sale of the West region as well as the loan portfolio declining due to normal paydowns, softening of loan demand, and exiting of high-balance, high-risk credits from portfolio. This loss in volume overcame a 44 basis point increase in yields earned on average loans.  The $461 increase in interest expense resulted from an increase of $2,055 associated with rate partially offset by a $1,594 decrease due to volume. The majority of the change was attributable to a 34 basis point increase in rates paid on deposits due to the higher interest rate environment. This increase was slightly offset by the lower expense caused by a decline in average deposit balances related to the sale of the West region's branches.  The net interest margin increased 22 basis points to 3.56% for the year ended December 31, 2005 from 3.34% during the same period in 2004. The increase resulted primarily from the result of the overall rising interest rate environment and a more disciplined approach to pricing.          2004 compared to 2003. Net interest income, on a tax equivalent basis, was $22,376 for the year ended December 31, 2004, compared with $26,066 earned during the same period in 2003. This represented a decrease of $3,690 or 14.2%. The decrease in net interest income is attributable to the year-over-year reduction of income earned on interest earning assets totaling $6,336 exceeding the year-over-year reduction of interest expense paid on interest bearing liabilities totaling $2,646.  The $6,336 reduction in interest income resulted from decreases of $3,756 related to rate and $2,580 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 the West region.  The $2,646 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                                        24.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  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 the West region.  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.  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.                                        25.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------                                AVERAGE BALANCE SHEET                        AND ANALYSIS OF NET INTEREST INCOME                                                                   For the Years Ended December 31,                               --------------------------------------------------------------------------------------------------                                            2005                             2004                             2003                               ------------------------------    ------------------------------    ------------------------------                                           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                  $    147    $      7      4.65%   $    137    $      2      1.46%   $    237    $      5      2.11%   Securities (1)     Taxable                    169,468       6,331      3.73     192,835       5,925      3.06     196,195       6,805      3.47     Nontaxable (2)              21,076       1,504      7.14      26,066       1,848      7.07      31,239       2,323      7.44                               --------    --------   -------    --------    --------   -------    --------    --------   ------- Total securities   (tax equivalent)             190,544       7,835      4.11     218,901       7,773      3.54     227,434       9,128      4.01                               --------    --------   -------    --------    --------   -------    --------    --------   ------- Federal funds sold               3,785         115      3.23       3,433          46      1.39       4,442          50      1.13                               --------    --------   -------    --------    --------   -------    --------    --------   -------     Loans (3)(4)       Commercial               117,571       8,131      6.92     130,436       7,467      5.71     133,543       8,148      6.10       Real estate              277,267      17,640      6.36     286,280      17,499      6.10     303,777      20,373      6.71     Installment and other       16,945       1,571      9.27      30,889       2,840      9.17      45,023       4,259      9.46                               --------    --------   -------    --------    --------   -------    --------    --------   -------         Gross loans           (tax equivalent)     411,783      27,342      6.64     447,605      27,806      6.20     482,343      32,780      6.80                               --------    --------   -------    --------    --------   -------    --------    --------   -------          Total interest-             earning assets     606,259      35,299      5.82     670,076      35,627      5.30     714,456      41,963      5.87                               --------    --------   -------    --------    --------   -------    --------    --------   -------  Noninterest-earning  assets   Cash and cash     equivalents                 18,874                            21,497                            21,735   Premises and     equipment, net              13,782                            15,533                            14,923   Other assets                  24,138                            24,879                            30,604                               --------                          --------                          --------     Total non-interest-         earning assets          56,794                            61,909                            67,262                               --------                          --------                          --------        Total assets            $663,053                          $731,985                          $781,718                               ========                          ========                          ========   LIABILITIES AND STOCKHOLDERS' EQUITY  Interest-bearing  liabilities   NOW accounts                $ 72,722    $    915      1.26%   $ 57,887    $    319      0.55%   $ 53,917    $    295      0.55%   Money market accounts         59,160       1,080      1.83      94,074       1,166      1.24     109,700       1,544      1.41   Savings deposits              42,122         212      0.50      47,337         265      0.56      49,334         373      0.76   Time $100,000 and over       148,238       4,522      3.05     148,701       3,836      2.57     157,824       4,703      2.98   Other time deposits          136,745       4,181      3.06     156,198       4,323      2.76     174,921       5,538      3.17   Federal funds purchased     and repurchase     agreements                   6,243         197      3.16       5,099          98      1.92       6,776         122      1.80   Advances from FHLB            54,571       2,128      3.91      70,359       2,887      4.09      70,019       2,997      4.28   Notes payable                  9,176         477      5.20       8,033         357      4.43       7,912         325      4.11                               --------    --------   -------    --------    --------   -------    --------    --------   -------     Total interest-bearing        liabilities             528,977      13,712      2.59     587,688      13,251      2.25     630,403      15,897      2.52                               --------    --------   -------    --------    --------   -------    --------    --------   ------- Noninterest-bearing  liabilities   Non-interest-bearing    deposits                     61,040                            71,912                            74,855   Other liabilities              4,133                             4,503                             7,084                               --------                          --------                          --------     Total non-interest-         bearing liabilities     65,173                            76,415                            81,939                               --------                          --------                          --------   Stockholders' equity          68,903                            67,882                            69,376                               --------                          --------                          --------    Total liabilities and     stockholders' equity      $663,053                          $731,985                          $781,718                               ========                          ========                          ========   Net interest income     (tax equivalent)                      $ 21,587                          $ 22,376                          $ 26,066                                           ========                          ========                          ========   Net interest income     (tax equivalent) to     total earning assets                                3.56%                             3.34%                             3.65%                                                      =======                           =======                           =======   Interest-bearing     liabilities to     earning assets               87.25%                            87.70%                            88.24%                               ========                          ========                          ========  - ------------------------------ (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                                        26.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  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,                                 --------------------------------------------------------------------------                                      2005 Compared to 2004                   2004 Compared to 2003                                 -----------------------------------    -----------------------------------                                          Change Due to                           Change Due to                                 -----------------------------------    -----------------------------------                                  Volume        Rate          Net        Volume        Rate          Net                                 ---------    ---------    ---------    ---------    ---------    ---------        Interest income:   Interest-earning deposits     $      --    $       5    $       5    $      (2)   $      (1)   $      (3)   Investment securities:      Taxable                         (778)       1,184          406         (110)        (770)        (880)      Nontaxable                      (310)         (34)        (344)        (219)        (256)        (475)   Federal funds sold                    5           65           69          (14)          10           (4)   Loans                            (2,664)       2,200         (464)      (2,235)      (2,739)      (4,974)                                 ---------    ---------    ---------    ---------    ---------    ---------       Total interest income         (3,748)       3,420         (328)      (2,580)      (3,756)      (6,336)                                 ---------    ---------    ---------    ---------    ---------    ---------  Interest expense:   NOW accounts                         99          497          596           24           --           24   Money market accounts              (524)         438          (86)        (205)        (173)        (378)   Savings deposits                    (27)         (26)         (53)         (14)         (94)        (108)   Time, $100,000 and over             (12)         698          686         (256)        (611)        (867)   Other time                         (576)         434         (142)        (550)        (665)      (1,215)   Federal funds purchased and     repurchase agreements              26           73           99          (32)           8          (24)   Advances from FHLB                 (634)        (125)        (759)          15         (125)        (110)   AG & Comm Participations             --           --           --           --           --           --   Notes payable                        54           66          120            5           27           32                                 ---------    ---------    ---------    ---------    ---------    ---------       Total interest expense        (1,594)       2,055          461       (1,013)      (1,633)      (2,646)                                 ---------    ---------    ---------    ---------    ---------    ---------          Net interest income     $  (2,154)   $   1,365    $    (789)   $  (1,567)   $  (2,123)   $  (3,690)                                 =========    =========    =========    =========    =========    =========           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.          2005 compared to 2004. The 2005 provision for loan losses charged to operating expense totaled $250, a decrease of $1,674 in comparison to the $1,924 recorded during the same period for 2004. The decrease in the provision for loan losses was due to the continued improvement in the management of the nonperforming and action/watch list loans from year-end 2004 to year-end 2005, including improved problem asset identification. Furthermore, this was positively impacted by loan resolutions, either through charge-off of nonbankable assets or through successful workout strategies that were executed throughout 2005. Net charge-offs for the year ended December 31, 2005 were                                        27.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  $1,620 compared with $1,029 in the same period of 2004. Annualized net charge-offs increased to 0.39% of average loans for 2005 compared to 0.23% in the same period in 2004.  Management remains watchful of credit quality issues. 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.          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.          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,                                            -------------------------------------                                               2005          2004         2003                                            ----------    ----------   ----------  Service charges                            $    1,996    $    2,866   $    3,090 Merchant fee income                                --            56          560 Trust income                                      811           740          701 Mortgage banking income                         1,350         2,020        3,947 Insurance commissions and fees                  1,818         2,234        2,318 Bank owned life insurance (BOLI)                  545           573          681 Securities gains (losses), net                    (79)          123          281 Gain on sale of assets                              4         4,263           -- Other income                                    1,157         1,227        2,141                                            ----------    ----------   ----------      Total noninterest income               $    7,602    $   14,102   $   13,719                                            ==========    ==========   ==========           2005 compared to 2004. Noninterest income totaled $7,602 for the year ended December 31, 2005, as compared to $14,102 for the same timeframe in 2004. This represented a decrease of $6,500 or 46.1% in 2005 over the prior period. Excluding net securities gains and the gains on sale of branches and the Company's credit card portfolio, noninterest income shows a year-over-year decrease of $2,039 or 21.0%.  Excluding net securities gains and gains on sale of the branches and the credit card portfolio, the decrease in noninterest income was related to a $670 decline in mortgage banking income, an $870 decrease in service charges and $416 decline                                        28.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  in insurance commissions. Decreases in service charges and other fee based revenue were largely due to volume associated with the sale of the West region's branches in 2004. The decrease in insurance commission fees was due to account retention issues and lower than anticipated new account production. The remaining categories remained relatively stable with only slight year-over-year changes.  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 2005 due to a decrease in mortgage origination volume slightly offset by an increase in revenue generated by the servicing rights portfolio due to the slowdown in refinancing activity.          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 the West region, the Company's credit card portfolio and Blandinsville, noninterest income shows a year-over-year decrease of $3,722 or 27.7%.  Excluding net securities gains and gains on sale of the West region, 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 the West region. The remaining categories remained relatively stable with only slight year-over-year changes.          Noninterest Expense. Noninterest expense is comprised primarily of compensation and employee benefits, occupancy and other operating expense. The following table summarizes the Company's noninterest expense:                                 NONINTEREST EXPENSE                              (Dollars in Thousands)                                                        Years Ended December 31,                                                   ------------------------------                                                     2005       2004       2003                                                   --------   --------   --------  Salaries and employee benefits                    $ 13,789   $ 15,410   $ 16,020 Occupancy expense, net                               1,571      2,461      2,138 Furniture and equipment expenses                     1,935      2,215      2,094 Marketing                                              496        615        709 Supplies and printing                                  359        435        541 Telephone                                              430        546        874 Other real estate expense                               59          8        178 Amortization of intangible assets                      170        337        247 Other expense                                        4,156      4,954      5,806                                                   --------   --------   --------      Total noninterest expense                     $ 22,965   $ 26,981   $ 28,607                                                   ========   ========   ========          2005 compared to 2004. Noninterest expense totaled $22,965 for the year ended December 31, 2005, as compared to $26,981 for the same timeframe in 2004. This represented a decrease of $4,016 or 14.9% in 2005 from 2004. Approximately                                        29.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  40% of the improvement in noninterest expense levels was due to $1,621 in cost savings from salaries and employee benefits expense related to the sale of the West region's branches. Also contributing to the change were volume related decreases in occupancy expense of $890, furniture and equipment of $280 and other expense of $798 related to the branch sales in 2004.          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 the West region 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.          Applicable Income Taxes. 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 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,                                         --------------------------------------                                            2005          2004          2003                                         ----------    ----------    ----------  Income before income taxes              $    5,372    $    6,859    $    2,001 Applicable income taxes                      1,199         2,056          (129) Effective tax rates                           22.3%         30.0%        (6.45%)          The Company recorded income tax expense of $1,199 and $2,056 for 2005 and 2004, respectively. Effective tax rates equaled 22.3% and 30.0% respectively, for such periods. During the second quarter of 2005, the Company recorded a $251 reduction in state income taxes due to the receipt of a tax refund related to amended tax returns outstanding from prior years. Excluding this refund, the effective tax rate would have been 27.0%.          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. Third, state income taxes were lower due to a refund from amended tax returns for prior years. Finally, the Company has reduced tax expense through various tax planning initiatives.          Preferred Stock Dividends. The Company paid $207 of preferred stock dividends in 2005, $207 of preferred stock dividends in 2004 and $193 of preferred stock dividends in 2003.  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).                                        30.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  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 to 200 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 2005 and 2004 for the various rate shock levels.  December 31, 2005                              Net Interest Income - -----------------            -------------------------------------------------                                Amount                Change            Change                              ---------             ---------          --------                                              (Dollars in Thousands)          +200 bp              $  23,043             $     959             4.34%         +100 bp                 22,629                   545             2.47         Base                    22,084                    --               --         -100 bp                 21,314                  (770)           (3.49)         -200 bp                 19,744                (2,340)          (10.59)  Based on the Company's model at December 31, 2005, the effect of an immediate 200 basis point increase in interest rates would increase the Company's net interest income by 4.34% or approximately $959. The effect of an immediate 200 basis point decrease in rates would decrease the Company's net interest income by $2,340 or 10.59%.  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)         -200 bp                 17,559                (2,516)          (12.53)  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. However, if this had been presented the impact of a 200 basis point reduction would have been a decrease of $2,516 or 12.53% to net interest income.  Financial Condition          General. As of December 31, 2005, the Company had total assets of $676,222, gross loans of $417,525, total deposits of $543,841, and total stockholders' equity of $66,075. Total assets as of December 31, 2005 increased by $6,676 or 1.0% from year-end 2004. Total gross loans as of December 31, 2005 decreased $1,750 or 0.4% from year-end 2004. Total deposits as of December 31, 2005 increased by $31,364 or 6.1% from year-end 2004.                                        31.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------          Loans and Asset Quality. The Company offers a broad range of products, including 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,                             ------------------------------------------------------------------                                2005          2004          2003          2002          2001                             ----------    ----------    ----------    ----------    ----------       Commercial                  $   91,537    $   91,941    $  105,767    $  100,189    $  107,382 Agricultural                    26,694        28,718        33,766        36,467        40,563 Real estate:    Commercial mortgages        126,503       129,597       134,985       147,253       150,878    Construction                 68,508        38,882        30,674        24,486        23,676    Agricultural                 33,033        30,601        37,092        34,688        34,611    1-4 family mortgages         57,920        77,566        94,163        87,411        94,368 Installment                     12,747        21,502        37,415        49,949        50,961 Other                              583           468         2,950         2,786         2,529                             ----------    ----------    ----------    ----------    ---------- Total loans                    417,525       419,275       476,812       483,229       504,968 Allowance for loan losses       (8,362)       (9,732)       (9,011)       (6,450)       (6,295)                             ----------    ----------    ----------    ----------    ----------     Loans, net               $  409,163    $  409,543    $  467,801    $  476,779    $  498,673                             ==========    ==========    ==========    ==========    ==========                                                     Aggregate Principal Amount                             ------------------------------------------------------------------                                               Percentage of Total Loan Portfolio                             ------------------------------------------------------------------                                                        December 31,                             ------------------------------------------------------------------                                2005          2004          2003          2002          2001                             ----------    ----------    ----------    ----------    ----------  Commercial                       21.92%        21.93%        22.18%        20.73%        21.27% Agricultural                      6.39          6.85          7.08          7.55          8.03 Real estate:    Commercial mortgages          30.31         30.91         28.31         30.47         29.88    Construction                  16.41          9.27          6.43          5.07          4.69    Agricultural                   7.91          7.30          7.78          7.18          6.85    1-4 family mortgages          13.87         18.50         19.75         18.08         18.69 Installment                       3.05          5.13          7.85         10.34         10.09 Other loans                       0.14          0.11          0.62          0.58          0.50                             ----------    ----------    ----------    ----------    ----------     Gross loans                  100.00%       100.00%       100.00%       100.00%       100.00%                             ==========    ==========    ==========    ==========    ==========   As of December 31, 2005 and 2004, commitments of UnionBank (and its predecessors) under standby letters of credit and unused lines of credit totaled approximately $87,510 and $94,346, respectively.                                        32.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Stated loan maturities (including rate loans reset to market interest rates) of the total loan portfolio, net of unearned income, at December 31, 2005 were as follows:                             STATED LOAN MATURITIES (1)                              (Dollars in Thousands)                                   Within       1 to 5      After 5                                  1 Year        Years       Years        Total                                ----------   ----------   ----------   ----------  Commercial                     $   76,006   $   14,475   $    1,056   $   91,537 Agricultural                       20,624        5,880          190       26,694 Real estate                       153,568      114,406       18,178      286,152 Installment                         6,036        7,010           96       13,142                                ----------   ----------   ----------   ----------      Total                      $  256,234   $  141,771   $   19,520   $  417,525                                ==========   ==========   ==========   ==========  - -------------------- (1)  Maturities based upon contractual maturity dates  The maturities presented above are based upon contractual maturities. Many of these loans are made on a short-term basis with the possibility of renewal at time of maturity. All loans, however, are reviewed on a continuous basis for creditworthiness.  Rate sensitivities of the total loan portfolio, net of unearned income, at December 31, 2005 were as follows:                                   LOAN REPRICING                              (Dollars in Thousands)                                   Within      1 to 5       After 5                                  1 Year       Years        Years        Total                                ----------   ----------   ----------   ----------  Fixed rate                     $   54,226   $   54,933   $   15,501   $  124,660 Variable rate                     201,334       86,135        2,314      289,783 Nonaccrual                            674          703        1,705        3,082                                ----------   ----------   ----------   ----------      Total                      $  256,234   $  141,771   $   19,520   $  417,525                                ==========   ==========   ==========   ==========          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                                        33.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect nonaccrual loans. The final determination as to the steps taken is made based upon the specific facts of each situation. Alternatives that are typically considered to collect nonaccrual loans are foreclosure, collection under guarantees, loan restructuring, or judicial collection actions.  Each of the Company's loans is assigned a rating based upon an internally developed grading system. A separate credit administration department also reviews grade assignments on an ongoing basis. Management continuously monitors nonperforming, impaired, and past due loans to prevent further deterioration of these loans. The Company has an independent loan review function which is separate from the lending function and is responsible for the review of new and existing loans.  The following table sets forth a summary of nonperforming assets:                                NONPERFORMING ASSETS                              (Dollars in Thousands)                                                                     December 31,                                        ------------------------------------------------------------------                                           2005          2004          2003          2002          2001                                        ----------    ----------    ----------    ----------    ----------       Nonaccrual loans                       $    3,082    $    3,649    $    8,149    $    3,931    $    7,259 Loans 90 days past due and still   accruing interest                           922           553           328           829         1,616                                        ----------    ----------    ----------    ----------    ----------    Total nonperforming loans                4,004         4,202         8,477         4,760         8,875 Other real estate owned                       203           420           227         1,557         1,886                                        ----------    ----------    ----------    ----------    ----------     Total nonperforming assets          $    4,207    $    4,622    $    8,704    $    6,317    $   10,761                                        ==========    ==========    ==========    ==========    ==========  Nonperforming loans to total loans           0.96%         1.00%         1.78%         0.99%         1.76% Nonperforming assets to total loans          1.01          1.10          1.83          1.31          2.13 Nonperforming assets to total assets         0.62          0.69          1.10          0.80          1.44   The level of nonperforming loans at December 31, 2005 decreased to $4,004 versus the $4,202 that existed as of December 31, 2004. The level of nonperforming loans to total end of period loans was 0.96% at December 31, 2005, as compared to 1.00% at December 31, 2004. The reserve coverage ratio (allowance to nonperforming loans) was reported at 208.84% as of December 31, 2005 as compared to 231.6% as of December 31, 2004.  Subsequent to December 31, 2005, a loan relationship that was classified as impaired as of year end paid off. The loan relationship had an outstanding balance of $4,400 and the Company's allowance for loan loss calculation had a specific reserve allocation of $1,500 on this relationship as of year end.          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 $2,879 at December 31, 2005 as compared to $4,570 at December 31, 2004. 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, 2005:                                        34.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------                               OTHER REAL ESTATE OWNED                              (Dollars in Thousands)                                                            Number       Net Book                                                             of         Carrying                                                           Parcels       Value                                                          ----------   ---------- Developed property                                                1   $       47 Vacant land or unsold lots                                        2          156                                                          ----------   ----------     Total other real estate owned                                 3   $      203                                                          ==========   ==========          Allowance for Loan Losses. At December 31, 2005, the allowance for loan losses was $8,362 or 2.00% of total loans as compared to $9,732 or 2.32% at December 31, 2004. In originating loans, the Company recognizes that credit losses will be experienced and the risk of loss will vary with, among other things: general economic conditions; the type of loan being made; the creditworthiness of the borrower over the term of the loan; and, in the case of a collateralized loan, the quality of the collateral for such a loan. The allowance for loan losses represents the Company's estimate of the allowance necessary to provide for probable incurred losses in the loan portfolio. In making this determination, the Company analyzes the ultimate collectibility of the loans in its portfolio, 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 analysis that examines historical loan loss experience. The loss 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.                                        35.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  The allowance for loan losses is based on estimates, and ultimate losses will vary from current estimates. These estimates are reviewed quarterly, 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. 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.  The following table presents a detailed analysis of the Company's allowance for loan losses:                              ALLOWANCE FOR LOAN LOSSES                              (Dollars in Thousands)                                                                      December 31,                                       ------------------------------------------------------------------                                          2005          2004          2003          2002          2001                                       ----------    ----------    ----------    ----------    ----------       Beginning balance                     $    9,732    $    9,011    $    6,450    $    6,295    $    6,414  Charge-offs:    Commercial                                342         1,497         4,791         2,561         3,202    Real estate mortgages                   1,611           389           626           683           977    Installment and other loans               367           578           812           634           496                                       ----------    ----------    ----------    ----------    ----------       Total charge-offs                    2,320         2,464         6,229         3,878         4,675                                       ----------    ----------    ----------    ----------    ----------  Recoveries:    Commercial                                394         1,021           415           354           312    Real estate mortgages                     208           230            46            41            10    Installment and other loans                98           184            93            64            73                                       ----------    ----------    ----------    ----------    ----------       Total recoveries                       700         1,435           554           459           395                                       ----------    ----------    ----------    ----------    ----------  Net charge-offs                            1,620         1,029         5,675         3,419         4,280                                       ----------    ----------    ----------    ----------    ---------- Provision for loan losses                    250         1,924         8,236         3,574         4,161 Reduction due to sale of loans                --           174            --            --            --  Ending balance                        $    8,362    $    9,732    $    9,011    $    6,450    $    6,295                                       ==========    ==========    ==========    ==========    ==========  Period end total loans                $  417,525    $  419,275    $  476,812    $  483,229    $  504,968                                       ==========    ==========    ==========    ==========    ==========  Average loans                         $  411,783    $  447,605    $  482,343    $  490,360    $  504,648                                       ==========    ==========    ==========    ==========    ==========  Ratio of net charge-offs to   average loans                             0.39%         0.23%         1.18%         0.70%         0.85% Ratio of provision for loan losses   to average loans                          0.06          0.43          1.71          0.73          0.82 Ratio of allowance for loan losses   to ending total loans                     2.00          2.32          1.89          1.33          1.25 Ratio of allowance for loan losses   to total nonperforming loans            208.84        231.60        106.30        135.50         70.93 Ratio of allowance at end of period   to average loans                          2.03          2.17          1.87          1.32          1.25                                         36.   UNIONBANCORP, INC. AND SUBSIDIARY 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,                    ---------------------------------------------------------------------------------------------------------------                           2005                   2004                   2003                   2002                   2001                    -------------------    -------------------    -------------------    -------------------    -------------------                                 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         $  7,386      28.32%   $  6,035      28.78%   $  4,935      29.26%   $  2,863      28.28%   $  3,499      29.30% Real estate             773      68.49       3,311      65.98       2,846      62.27       2,110      60.80       1,786      60.11 Installment and   other loans           203       3.19         386       5.24         593       8.47         719      10.92         537      10.59 Unallocated              --         --          --         --         637         --         758         --         473         --                    --------   --------    --------   --------    --------   --------    --------   --------    --------   --------    Total            $  8,362     100.00%   $  9,732     100.00%   $  9,011     100.00%   $  6,450     100.00%   $  6,295     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. Since 2004, management has 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 31.4% of the Company's average earning asset base as of December 31, 2005, as compared to 32.7% as of December 31, 2004, 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 $196,440 at December 31, 2005 compared to $191,661 at December 31, 2004. The Company does not have any securities classified as trading or held-to-maturity.                                        37.   UNIONBANCORP, INC. AND SUBSIDIARY 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,                                  -----------------------------------------------------------------------------------                                            2005                         2004                         2003                                  -------------------------    -------------------------    -------------------------                                                   % of                         % of                         % of                                    Amount       Portfolio       Amount       Portfolio       Amount       Portfolio                                  -----------   -----------    -----------   -----------    -----------   -----------        Available-for-Sale   U.S. government agencies     and corporations                  30,857         15.71         20,924         10.92         30,270         12.00   U.S. government agency     mortgage backed securities       101,022         51.42        117,500         61.30        158,305         62.76   States and political     subdivisions                      18,400          9.37         24,647         12.86         29,723         11.78   Collateralized mortgage     obligations                       20,938         10.66          2,486          1.30          5,972          2.37   Corporate bonds                      6,907          3.52          8,239          4.30         10,598          4.20   Other securities                    18,316          9.32         17,865          9.32         17,380          6.89                                  -----------   -----------    -----------   -----------    -----------   -----------       Total                       $   196,440        100.00%   $   191,661        100.00%   $   252,248        100.00%                                  ===========   ===========    ===========   ===========    ===========   ===========   The following table sets forth the contractual, callable or estimated maturities and yields of the debt securities portfolio as of December 31, 2005. 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. government   agencies and   corporations           $  3,737      4.114%   $ 24,247      4.090%   $  2,873      4.900%   $     --         --%   $ 30,857 U.S. government   agency mortgage   backed securities           221      7.952         911      5.939       6,253      5.276      93,637      4.138     101,022 States and political   subdivisions (1)          2,722      6.527       9,088      6.694       5,163      7.309       1,427      7.586      18,400 Collateralized   mortgage obligations         --         --         173      4.116          --         --      20,765      5.517      20,938 Corporate bonds                --         --       6,907      5.653          --         --          --                  6,907                          --------               --------               --------               --------               --------     Total                 $  6,680               $ 41,326               $ 14,289               $115,829               $178,124                          ========               ========               ========               ========               ========   - ------------------ (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 $520,027 for 2005, representing a decrease of $56,082 or 9.7% compared with the average balance of total deposits for 2004.                                        38.   UNIONBANCORP, INC. AND SUBSIDIARY 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,                        ------------------------------------------------------------------------------------------------------------                                      2005                                 2004                                2003                        ----------------------------------   ----------------------------------   ----------------------------------                                         %        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      $   61,040       11.74%         --%  $   71,912       12.48%         --%  $   74,855       12.06%         --% Savings accounts           42,122        8.10        0.50       47,337        8.22        0.56       49,334        7.95        0.76 Interest-bearing   demand deposits         131,882       25.36        1.51      151,961       26.38        0.98      163,617       26.37        1.12 Time, less than   $100,000                136,745       26.30        3.06      156,198       27.11        2.76      174,921       28.19        3.17 Time, $100,000   or more                 148,238       28.50        3.05      148,701       25.81        2.57      157,824       25.43        2.98                        ----------  ----------   ---------   ----------  ----------   ---------   ----------  ----------   ---------     Total deposits      $  520,027      100.00%       2.10%  $  576,109      100.00%       1.72%  $  620,551      100.00%       2.01%                        ==========  ==========   =========   ==========  ==========   =========   ==========  ==========   =========   As of December 31, 2005, average time deposits over $100,000 represented 28.5% of total average deposits, compared with 25.8% of total average deposits as of December 31, 2004. 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, 2005:                          TIME DEPOSITS OF $100,000 OR MORE                              (Dollars in Thousands)  Maturity Range      Three months or less                                              $   60,256     Over three months through six months                                  30,823     Over six months through twelve months                                 36,871     Over twelve months                                                    34,378                                                                       ----------          Total                                                         $  162,328                                                                       ==========          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,                                                    ----------------------------                                                    2005        2004        2003                                                    ----        ----        ----  Return on average assets                           0.63%       0.65%       0.28% Return on average equity                           6.06        7.06        3.16 Average equity to average assets                  10.39        9.27        8.87 Dividend payout ratio for common stock            43.39       36.42       74.39                                        39.   UNIONBANCORP, INC. AND SUBSIDIARY 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 $1,556 from December 31, 2004 to December 31, 2005.  During 2005, the Company experienced net cash inflows of $3,104 in financing activities primarily due to an increase in deposits and $8,735 from operating activities due to proceeds from net loans sales and net income. In contrast, net cash outflows of $10,283 were used in investing activities due to purchases of securities.  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, 2005, 33.4% 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 37.1% maturing in the first quarter of 2006, 19.0% maturing in the second quarter of 2006, 22.7% maturing in the third and fourth quarters of 2006, and the remaining 21.2% 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, 2005 in the principal amount of $9,200 payable to the Company's principal correspondent bank and $268 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.  The Company's principal source of funds for repayment of the indebtedness is dividends from UnionBank. At December 31, 2005, approximately $2,500 was available for dividends without regulatory approval.                                        40.   UNIONBANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  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, 2005:                                                                    Payments Due by Period                                            --------------------------------------------------------------                                             Within 1                                After Contractural Obligations                      Year      1-3 Years     4-5 Years    5 Years        Total                                            ----------   ----------   ----------   ----------   ----------       Short-term debt                            $    9,200   $       --   $       --   $       --   $    9,200 Long-term debt                                     --          268           --           --          268 Certificates of deposit                       227,895       65,303       15,057        2,750      311,005 Operating leases                                  107          214          172           13          506 Severance payments                                253           --           --           --          253 Series B Mandatory redeemable     preferred stock                                --          831           --           --          831 FHLB Advances                                   8,300       23,500       10,200        8,000       50,000                                            ----------   ----------   ----------   ----------   ----------     Total contractual cash obligations      $  245,755   $   90,116   $   25,429   $   10,763   $  372,063                                            ==========   ==========   ==========   ==========   ==========                                                         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                            $   58,741   $    2,451   $    1,670   $   16,582   $   79,444 Standby letters of credit                       7,444          622           --           --        8,066                                            ----------   ----------   ----------   ----------   ----------     Total commercial commitments            $   66,185   $    3,073   $    1,670   $   16,582   $   87,510                                            ==========   ==========   ==========   ==========   ==========   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, 2005 was $66,075, a decrease of $4,172 or 5.9%, from December 31, 2004. The stockholders' equity decrease was largely the result of the purchase of $5,739 in treasury stock and dividends paid to shareholders offset partially by 2005 net income. Average equity as a percentage of average assets was 10.39% at December 31, 2005, compared to 9.27% at December 31, 2004. Book value per common share equaled $17.23 at December 31, 2005, a decrease from $17.30 reported at the end of 2004.      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. On July 5, 2005, the Company announced the approval of a new program to commence at the conclusion of the previously authorized repurchase program. 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 of December 31, 2005, the Company has repurchased 268,754 shares at a weighted average cost of $21.35.                                        41.   UNIONBANCORP, INC. AND SUBSIDIARY 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 12.1% and 13.3%, respectively, at December 31, 2005. The Company is currently, and expects to continue to be, in compliance with these guidelines.  As of December 31, 2005, the Tier 2 risk-based capital was comprised of $6,266 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                                    2005          2004          2003        Ratios       Ratios                                 ----------    ----------    ----------   ----------   -----------       Tier 1 risk-based capital       $   60,546    $   63,347    $   59,851 Tier 2 risk-based capital            6,266         6,067         7,790                                 ----------    ----------    ---------- Total capital                       66,812        69,414        67,641 Risk-weighted assets               501,342       485,325       556,729 Capital ratios     Tier 1 risk-based capital         12.1%         13.0%         10.8%          4.0%          6.0%     Tier 2 risk-based capital         13.3          14.3          12.2           8.0          10.0     Leverage ratio                     9.0           9.5           7.7           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.                                        42.
The discussion under the caption "Interest Rate Sensitivity Management" contained in Item 7 of this Form 10-K is incorporated herein by this reference.
Index to Financial Statements  Report of Independent Registered Public Accounting Firm.......................44  Consolidated Balance Sheets (December 31, 2005 and 2004) .....................45  Consolidated Statements of Income         (For the years ended December 31, 2005, 2004 and 2003)................46  Consolidated Statements of Stockholders' Equity         (For the years ended December 31, 2005, 2004 and 2003)................47  Consolidated Statements of Cash Flows         (For the years ended December 31, 2005, 2004 and 2003)................49  Notes  .......................................................................51                                 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.                                        43.   [GRAPHIC OMITTED] Crowe(TM)          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, 2005 and 2004, and the related statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. 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, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, 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, 2006                                        44.   UNIONBANCORP, INC. CONSOLIDATED BALANCE SHEETS December 31, 2005 and 2004 (In Thousands, Except Share and Per Share Data)                                                                          2005          2004 - -------------------------------------------------------------------------------------------    ASSETS Cash and cash equivalents                                          $   24,358    $   22,802 Securities available-for-sale                                         196,440       191,661 Loans                                                                 417,525       419,275 Allowance for loan losses                                              (8,362)       (9,732)                                                                    ----------    ----------     Net loans                                                         409,163       409,543 Cash value of life insurance                                           15,498        14,953 Mortgage servicing rights                                               2,533         2,772 Premises and equipment, net                                            13,908        13,463 Goodwill                                                                6,963         6,963 Intangible assets, net                                                    533           703 Other real estate                                                         203           420 Other assets                                                            6,623         6,266                                                                    ----------    ----------      Total assets                                                   $  676,222    $  669,546                                                                    ==========    ==========  LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities     Deposits         Non-interest-bearing                                       $   57,832    $   55,800         Interest-bearing                                              486,009       456,677                                                                    ----------    ----------            Total deposits                                             543,841       512,477     Federal funds purchased and securities sold under       agreements to repurchase                                            612        12,722     Federal Home Loan Bank advances                                    50,000        61,900     Notes payable                                                       9,468         6,629     Series B mandatory redeemable preferred stock                         831           831     Other liabilities                                                   5,395         4,740                                                                    ----------    ----------         Total liabilities                                             610,147       599,299   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;      4,684,393 and 4,640,907 shares issued in 2005 and 2004             4,684         4,641     Surplus                                                            23,167        22,632     Retained earnings                                                  48,837        46,592     Accumulated other comprehensive income                                 95         1,351                                                                    ----------    ----------                                                                        77,283        75,716     Treasury stock, at cost, 877,517 shares at December 31, 2005       and 608,763 shares at December 31, 2004                         (11,208)       (5,469)                                                                    ----------    ----------         Total stockholders' equity                                     66,075        70,247                                                                    ----------    ----------             Total liabilities and stockholders' equity              $  676,222    $  669,546                                                                    ==========    ==========   See Accompanying Notes to Consolidated Financial Statements.                                        45.   UNIONBANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2005, 2004, and 2003 (In Thousands, Except Per Share Data)                                                              2005         2004         2003 - -------------------------------------------------------------------------------------------     Interest income    Loans                                              $   27,251    $   27,718   $   32,693    Securities       Taxable                                              6,331         5,925        6,805       Exempt from federal income taxes                       993         1,221        1,533    Federal funds sold and other                              122            48           55                                                       ----------    ----------   ----------       Total interest income                               34,697        34,912       41,086  Interest expense    Deposits                                               10,910         9,909       12,453    Federal funds purchased and securities sold      under agreements to repurchase                          197            98          122    Advances from the Federal Home Loan Bank                2,128         2,887        2,997    Series B Mandatory Redeemable preferred stock              50            50           64    Notes payable and other                                   427           306          325                                                       ----------    ----------   ----------       Total interest expense                              13,712        13,250       15,961                                                       ----------    ----------   ---------- Net interest income                                       20,985        21,662       25,125 Provision for loan losses                                    250         1,924        8,236                                                       ----------    ----------   ---------- Net interest income after provision for loan losses       20,735        19,738       16,889  Noninterest income    Service charges                                         1,996         2,866        3,090    Merchant fee income                                        --            56          560    Trust income                                              811           740          701    Mortgage banking income                                 1,350         2,020        3,947    Insurance and brokerage commissions and fees            1,818         2,234        2,318    Bank Owned Life Insurance (BOLI)                          545           573          681    Securities (losses) gains, net                            (79)          123          281    Gain on sale of other assets                                4         4,263           --    Other income                                            1,157         1,227        2,141                                                       ----------    ----------   ----------                                                            7,602        14,102       13,719 Noninterest expenses    Salaries and employee benefits                         13,789        15,410       16,020    Occupancy, net                                          1,571         2,461        2,138    Furniture and equipment                                 1,935         2,215        2,094    Marketing                                                 496           615          709    Supplies and printing                                     359           435          541    Telephone                                                 430           546          874    Other real estate owned                                    59             8          178    Amortization of intangible assets                         170           337          247    Other                                                   4,156         4,954        5,806                                                       ----------    ----------   ----------                                                           22,965        26,981       28,607                                                       ----------    ----------   ----------  Income before income taxes                                 5,372         6,859        2,001  Income taxes                                               1,199         2,056         (129)                                                       ----------    ----------   ----------  Net income                                            $    4,173    $    4,803   $    2,130 Preferred stock dividends                                    207           207          193                                                       ----------    ----------   ----------  Net income for common stockholders                    $    3,966    $    4,596   $    1,937                                                       ==========    ==========   ========== Basic earnings per common share                       $     1.01    $     1.14   $     0.48                                                       ==========    ==========   ========== Diluted earnings per common share                     $     0.99    $     1.12   $     0.48                                                       ==========    ==========   ========== Dividends per common share                            $     0.44    $     0.40   $     0.36                                                       ==========    ==========   ==========   See Accompanying Notes to Consolidated Financial Statements.                                        46.   UNIONBANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2005, 2004, and 2003 (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, 2003             $      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    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.  (Continued)                                        47.   UNIONBANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2005, 2004, and 2003 (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, 2004           $      500  $    4,641  $   22,632   $   46,592   $    1,351   $       --   $   (5,469)  $   70,247    Common stock dividends              --          --          --       (1,721)          --           --           --       (1,721)   Preferred stock dividends           --          --          --         (207)          --           --           --         (207)   Exercise of stock options     (43,486 shares)                   --          43         535           --           --           --           --          578   Purchase of 268,754 shares     of treasury stock                 --          --          --           --           --           --       (5,739)      (5,739) Comprehensive income   Net income                          --          --          --        4,173           --           --            --       4,173   Net decrease in fair value-     of securities classified as     available-for-sale, net of     income taxes and reclassi-     fication adjustments              --          --          --           --       (1,256)          --            --      (1,256)                                                                                                                        ----------     Total comprehensive       income                                                                                                                2,917                               ----------  ----------  ----------   ----------   ----------   ----------   ----------   ----------  Balance,   December 31, 2005           $      500  $    4,684  $   23,167   $   48,837   $       95   $       --   $  (11,208)  $   66,075                               ==========  ==========  ==========   ==========   ==========   ==========   ==========   ==========   See Accompanying Notes to Consolidated Financial Statements.                                        48.   UNIONBANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2005, 2004, and 2003 (In Thousands)                                                                    2005          2004          2003 - --------------------------------------------------------------------------------------------------     Cash flows from operating activities    Net income                                               $    4,173    $    4,803    $    2,130    Adjustments to reconcile net income to net cash      provided by operating activities       Depreciation                                               1,839         2,455         1,685       Amortization of intangible assets                            170           337           247       Amortization of mortgage servicing rights                    535           722         1,732       Amortization of unearned compensation under         stock option plans                                          --             2            21       Amortization of bond premiums, net                         1,114         1,739         1,719       Federal Home Loan Bank stock dividend                       (191)         (350)         (325)       Provision for loan losses                                    250         1,924         8,236       Provision for deferred income taxes                          702           464          (616)       Net change in BOLI                                          (545)         (574)         (530)       Net change in OREO                                          (655)         (619)         (210)       Securities losses/(gains), net                                79          (123)         (281)       Gain on sale of assets, net                                   (4)       (4,263)           --       Gain (loss) on sale of real estate acquired in         settlement of loans                                        (42)          (44)          168       Gain on sale of loans                                     (1,034)       (1,877)       (4,727)       Proceeds from sale of loans held for sale                 51,838        86,828       205,272       Origination of loans held for sale                       (50,378)      (83,273)     (196,907) Change in assets and liabilities          (Increase) decrease in other assets                      (679)        1,053        (3,038)          Increase (decrease) in other liabilities                1,563           606          (730)                                                             ----------    ----------    ----------            Net cash provided by operating activities             8,735         9,810        13,846  Cash flows from investing activities    Securities available for sale       Proceeds from maturities and paydowns                     56,414       104,192        64,500       Proceeds from sales                                       10,885        19,584        72,398       Purchases                                                (74,972)      (66,070)     (164,690)    Purchase of loans                                            (3,275)           --            --    Net decrease (increase)  in loans                             2,730        11,745        (3,106)    Purchase of premises and equipment                           (2,979)       (2,197)       (4,186)    Purchase of bank-owned life insurance, net                       --            --            73    Proceeds from sale of real estate acquired in      settlement of loans                                           914           470         1,372    Sale of branches                                                 --       (50,835)           --    Acquisition of insurance agency, net of debt assumed             --            --          (150)                                                             ----------    ----------    ----------       Net cash provided by (used in) investing activities      (10,283)       16,889       (33,789)   (Continued)                                        49.   UNIONBANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2005, 2004, and 2003 (In Thousands)                                                                   2005          2004          2003 - ---------------------------------------------------------------------------------------------------     Cash flows from financing activities    Net increase (decrease) in deposits                      $   31,364    $  (24,419)   $   (3,926)    Net increase (decrease) in federal funds purchased      and securities sold under agreements to repurchase        (12,110)       11,189        (2,055)    Net increase (decrease) in advances from the      Federal Home Loan Bank                                    (11,900)      (10,550)       10,700    Payments on notes payable                                    (2,586)       (1,000)         (550)    Proceeds from notes payable                                   5,425           500           148    Dividends on common stock                                    (1,721)       (1,613)       (1,441)    Dividends on preferred stock                                   (207)         (207)         (193)    Proceeds from exercise of stock options                         578           161           685    Purchase of treasury stock                                   (5,739)         (156)         (189)                                                             ----------    ----------    ----------       Net cash provided by (used in) financing activities        3,104       (26,095)        3,179                                                             ----------    ----------    ----------  Net increase (decrease) in cash and cash equivalents             1,556           604       (16,764)  Cash and cash equivalents    Beginning of year                                            22,802        22,198        38,962                                                             ----------    ----------    ----------     End of year                                              $   24,358    $   22,802    $   22,198                                                             ==========    ==========    ==========  Supplemental disclosures of cash flow information    Cash payments for       Interest                                              $   12,980    $   13,219    $   16,453       Income taxes                                                 862           346         1,850    Transfers from loans to other real estate owned                 675           619           210   See Accompanying Notes to Consolidated Financial Statements.                                        50.   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)                                        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)  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.  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 are 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 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 and confirms the loan balance to be uncollectible. 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  (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)  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)                                        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)  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.  Bank-owned life insurance - -------------------------  The Company has invested in bank-owned life insurance policies, for which the Company is also the beneficiary, on certain members of management. Bank-owned life insurance is recorded at its cash surrender value or the amount that can be realized. These policies have an aggregate face value of $36.2 million and $37.0 million with an approximate cash surrender value of $15.5 million and $15.0 million at December 31, 2005 and 2004, 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)                                        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)  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:                                                            2005         2004         2003                                                      ----------   ----------   ----------         Net income as reported for common stockholders   $    3,966   $    4,596   $    1,937     Deduct:  stock-based compensation expense       determined under fair value based method              106           96           95                                                      ----------   ----------   ----------      Pro forma net income                             $    3,860   $    4,500   $    1,842                                                      ==========   ==========   ==========       Basic earnings per common share as reported      $     1.01   $     1.14   $     0.48     Pro forma basic earnings per common share              0.98         1.12         0.46      Diluted earnings per common share as reported          0.99         1.12         0.48     Pro forma diluted earnings per common share            0.96         1.09         0.45   The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.                                           2005          2004          2003                                       ----------    ----------    ----------     Fair value                        $     4.94    $     4.74    $     4.93     Risk-free interest rate                 4.56%         3.32%         2.27%     Expected option life (years)               5             5             5     Expected stock price volatility        23.45%        24.58%        26.04%     Dividend yield                          1.92%         1.90%         1.65%  (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)  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, 2005 and     2004. 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, 2005 and 2004. 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.  (Continued)                                        56.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 1. Nature of Operations and Summary of Significant Accounting Policies (Continued)      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, 2005 and 2004. 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 bank 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)                                        57.   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 - ------------------------------------  SFAS 123R, "Accounting for Stock-Based Compensation, 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. The Securities and Exchange Commission in April 2005 amended the compliance dates for SFAS 123R from periods beginning after September 15, 2005 to those beginning after January 1, 2006. 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 $83,000 during the balance of 2006, $41,000 in 2007, $29,000 in 2008, and $29,000 in 2009. There will be no significant effect on financial position as total equity will not change.  In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, and issued FSP 115-1 with references to existing other-than-temporary impairment guidance, such as SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," SEC Staff Accounting Bulletin No. 59, "Accounting for Noncurrent Marketable Equity Securities," and APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." FSP FAS 115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made. FSP FAS 115-1 will be effective for other-than-temporary impairment analysis conducted in periods beginning after December 15, 2005.  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. 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.  (Continued)                                        58.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 1. Nature of Operations and Summary of Significant Accounting Policies (Continued)  Operating segments - ------------------  Internal financial information is primarily reported and aggregated in the following lines of business: banking, mortgage banking, financial services, and other.  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 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)  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.  On December 23,2005, the Company entered into an agreement to sell the deposits of their Mendota Illinois branch to First State Bank in Mendota. The Definitive Purchase and Assumption Agreement entered into calls for First State to assume approximately $10 million in deposits. The transaction is expected to be completed late in the first quarter of 2006.  (Continued)                                        59.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 3.  Securities  The fair value of securities available-for-sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:                                                                       Gross           Gross                                                     Fair         Unrealized      Unrealized                                                     Value          Gains           Losses                                                  ------------   ------------    ------------     Available-for-sale     December 31, 2005         U.S. government agencies                 $     30,857   $          8    $       (364)         States and political subdivisions              18,400            424             (16)         U.S. government agency mortgage-backed           securities                                  101,022            854            (675)         Collateralized mortgage obligations            20,938             21            (157)         Equity securities                              18,316             54             (49)         Corporate                                       6,907             62              (7)                                                  ------------   ------------    ------------                                                   $    196,440   $      1,423    $     (1,268)                                                  ============   ============    ============  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)                                                  ============   ============    ============   At December 31, 2005, 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,                                     --------------------------------------                                        2005          2004          2003                                     ----------    ----------    ----------      Proceeds                        $   10,885    $   19,584    $   72,398     Realized gains                          24           166           281     Realized losses                       (103)          (43)           --  (Continued)                                        60.   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, 2005, 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                                         $    6,460     Due after one year through five years                               40,241     Due after five years through ten years                               8,036     Due after ten years                                                  1,427     U.S. government agency mortgage-backed securities                  101,022     Collateralized mortgage obligations                                 20,938     Equity securities                                                   18,316                                                                     ----------                                                                     $  196,440                                                                     ==========  As of December 31, 2005, the Company held callable securities carried at a fair value of $47,091. The amortized cost of these securities was $47,095 as of December 31, 2005.  Securities with carrying values of approximately $132,000 and $151,000 at December 31, 2005 and 2004, 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 2005 and 2004, there were no holdings of securities of any one issuer, other than the U.S. Government agencies in an amount greater than 10% of stockholders' equity.  Securities with unrealized losses at year-end 2005 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 - -------------------------      ------------   ------------    ------------   ------------    ------------   ------------        U. S. government agencies      $     21,445   $       (260)   $      5,876   $       (104)   $     27,321   $       (364) State and political   subdivisions                          611             (5)            462            (11)          1,073            (16) U.S. government agency   mortgage-backed securities         36,194           (429)         13,929           (246)         50,123           (675) Collateralized mortgage   Obligations                        15,383           (157)             48             --          15,431           (157) Equity securities                     1,030             (7)             --             --           1,030             (7) Corporate                             1,822             (7)          3,708            (42)          5,530            (49)                                ------------   ------------    ------------   ------------    ------------   ------------  Total temporarily impaired     $     76,485   $       (865)   $     24,023   $       (403)   $    100,508   $     (1,268)                                ============   ============    ============   ============    ============   ============   (Continued)                                        61.   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 - -------------------------      ------------   ------------    ------------   ------------    ------------   ------------        U.S. government agencies       $      5,954   $        (26)   $         --   $         --    $      5,954   $        (26) State and political   subdivisions                          900             (1)            563             (5)          1,463             (6) U.S. government agency   mortgage-backed securities         30,476           (261)         11,297            (56)         41,773           (317) Collateralized mortgage   obligations                           222             (2)          2,074            (25)          2,296            (27) Equity securities                        --             --              --             --              --             -- Corporate                             3,741             (9)             --             --           3,741             (9)                                ------------   ------------    ------------   ------------    ------------   ------------  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,                                                      -----------------------                                                         2005         2004                                                      ----------   ----------      Commercial                                       $  118,231   $  120,659     Commercial real estate                              183,361      129,597     Real estate                                         101,287      145,307     Real estate loans held for sale                       1,316        1,742     Installment                                          12,747       21,502     Other                                                   583          468                                                      ----------   ----------                                                       $  417,525   $  419,275                                                      ==========   ==========  (Continued)                                        62.   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,                                                                      --------------------------------------                                                                         2005          2004          2003                                                                      ----------    ----------    ----------         Balance at beginning of year                                     $    9,732    $    9,011    $    6,450         Provision for loan losses                                           250         1,924         8,236         Reduction due to sale of loans                                       --          (174)           --         Recoveries                                                          700         1,435           554         Loans charged off                                                (2,320)       (2,464)       (6,229)                                                                      ----------    ----------    ----------      Balance at end of year                                           $    8,362    $    9,732    $    9,011                                                                      ==========    ==========    ==========  The following table presents data on impaired loans:                                                                                    December 31,                                                                      --------------------------------------                                                                         2005          2004          2003                                                                      ----------    ----------    ----------    Year-end impaired loans for which an allowance      has been provided                                               $   12,585    $   15,709    $   10,212    Year-end impaired loans for which no allowance      has been provided                                                      563           818         2,682                                                                      ----------    ----------    ----------     Total loans determined to be impaired                             $   13,148    $   16,527    $   12,894                                                                      ==========    ==========    ==========     Allowance for loan loss for impaired loans included      in the allowance for loan losses                                $    3,913    $    4,978    $    3,386                                                                      ==========    ==========    ==========    Average recorded investment in impaired loans                     $   14,839    $   17,088    $   11,039                                                                      ==========    ==========    ==========    Interest income recognized from impaired loans                    $    1,189    $      885    $      694                                                                      ==========    ==========    ==========    Cash basis interest income recognized from impaired loans         $      177    $       24    $      138                                                                      ==========    ==========    ==========   Nonperforming loans were as follows:                                                              December 31,                                                        -----------------------                                                           2005         2004                                                        ----------   ----------          Loans past due over 90 days still on accrual   $      922   $      553         Nonaccrual loans                                    3,082        3,649  Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.  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 northwest Illinois. The Bank's loan portfolios include a concentration of loans to agricultural and agricultural-related industries amounting to approximately $72,440 and $59,215 as of December 31, 2005 and 2004, respectively.  (Continued)                                        63.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 4.  Loan (Continued)  In the normal course of business, loans are made to executive officers, directors, and principal stockholders of the Company and its subsidiaries and to parties that the Company or its directors, executive officers, and stockholders have the ability to significantly influence (related parties). Changes in such loans during the year ended December 31, 2005 follow:           Balance at December 31, 2004                               $  23,689            New loans, extensions, and modifications                   23,841            Repayments                                                (24,885)            Change in classification                                     (101)                                                                    ---------          Balance at December 31, 2005                               $  22,544                                                                    =========   Note 5.  Loan Servicing  The following summarizes the secondary mortgage market activities:                                                     Years Ended December 31,                                             ------------------------------------                                                2005         2004         2003                                             ----------   ----------   ----------      Proceeds from sales of mortgage loans   $   51,838   $   86,828   $  205,272                                             ==========   ==========   ==========      Gain on sales of mortgage loans         $    1,034   $    1,877   $    4,727                                             ==========   ==========   ==========  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,                                                  -----------------------                                                     2005          2004                                                  ----------   ----------          Federal Home Loan Mortgage Corporation   $    1,706   $    2,586         Federal National Mortgage Association       289,974      313,241         Small Business Administration                 1,333        1,576         Other                                         9,229        8,649                                                  ----------   ----------                                                   $  302,242   $  326,052                                                  ==========   ==========  Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $1,348 and $1,608 at December 31, 2005 and 2004, respectively.  (Continued)                                        64.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 5.  Loan Servicing (Continued)  Following is an analysis of the changes in originated mortgage servicing rights:                                                    Years Ended December 31,                                            ------------------------------------                                               2005         2004         2003                                            ----------   ----------   ----------      Balance at beginning of year           $    2,772   $    2,775   $    2,640     Originated mortgage servicing rights          296          719        1,867     Amortization                                 (535)        (722)      (1,732)                                            ----------   ----------   ----------      Balance at end of year                 $    2,533   $    2,772   $    2,775                                            ==========   ==========   ==========  The fair value of capitalized mortgage servicing rights was $2.5 million and $2.7 million at December 31, 2005 and 2004, respectively. Fair value was determined using discount rates ranging from 9.5% to 15.5%, prepayment speeds ranging from 13.6% to 15.3%, depending on the stratification of the specific right.  Estimated amortization expense for each of the next five years:                    2005                                         $492                   2006                                         $450                   2007                                         $425                   2008                                         $400                   2009                                         $375  Loans held for sale, which are included in real estate loans, are summarized as follows:                                                                 December 31,                                                            -------------------                                                              2005       2004                                                            --------   --------      Secured by one-to-four-family residences               $  1,316   $  1,742                                                            ========   ========  Note 6.  Premises and Equipment  Premises and equipment consisted of:                                                                 December 31,                                                            --------------------                                                               2005       2004                                                            ---------  ---------      Land                                                   $   3,329  $   3,069     Buildings                                                 11,632     11,290     Furniture and equipment                                   17,728     16,288     Construction in process                                      132        248                                                            ---------  ---------                                                               32,821     30,895     Less accumulated depreciation                             18,913     17,432                                                            ---------  ---------                                                             $  13,908  $  13,463                                                            =========  =========  (Continued)                                        65.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 7.  Goodwill and Intangible Assets  Goodwill  The change in balance for goodwill during the year is as follows:                                                              2005        2004                                                          ---------   ---------      Beginning of year                                    $   6,963   $   7,642      Amount allocated to branch sales                             -        (679)                                                          ---------   ---------      End of year                                          $   6,963   $   6,963                                                          =========   =========   Acquired Intangible Assets  Acquired intangible assets were as follows as of year end:                                                                  2005                         2004                                                   ---------------------------   ---------------------------                                                      Gross                         Gross                                                     Carrying      Accumulated     Carrying     Accumulated                                                      Amount      Amortization      Amount      Amortization                                                   ------------   ------------   ------------   ------------          Amortized intangible assets:         Core deposit intangibles                  $      1,089   $      1,022   $      1,089   $        911         Other customer relationship intangibles            749            283            749            224                                                   ------------   ------------   ------------   ------------             Total                                  $      1,838   $      1,305   $      1,838   $      1,135                                                   ============   ============   ============   ============   Aggregate amortization expense was $170, $280, and $247 for 2005, 2004, and 2003.  Estimated amortization expense for subsequent years:                            2006                        $   126                           2007                             60                           2008                             60                           2009                             60                           2010                             60                           Thereafter                      164  (Continued)                                         66.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 8.  Deposits  Deposit account balances by type are summarized as follows:                                                                December 31,                                                         -----------------------                                                            2005          2004                                                         ----------    ---------      Non-interest-bearing demand deposits                $   57,832    $  55,800     Savings, NOW, and money market accounts                175,004      179,740     Time deposits of $100 or more                          162,328      134,149     Other time deposits                                    148,677      142,788                                                         ----------    ---------                                                          $  543,841    $ 512,477                                                         ==========    =========  At December 31, 2005, the scheduled maturities of time deposits are as follows:                   Year                                      Amount                  ----                                    ----------                   2006                                    $  227,895                  2007                                        48,121                  2008                                        17,182                  2009                                         9,030                  2010                                         6,027                  Thereafter                                   2,750                                                          ----------                                                           $  311,005                                                          ==========  Time certificates of deposit in denominations of $100 or more mature as follows:                                                               December 31,                                                       -----------------------                                                          2005          2004                                                       ----------    ---------      3 months or less                                  $   60,256    $  36,318     Over 3 months through 6 months                        30,823       17,065     Over 6 months through 12 months                       36,871       38,247     Over 12 months                                        34,378       42,519                                                       ----------    ---------                                                        $  162,328    $ 134,149                                                       ==========    =========  Deposits from principal officers, directors and their affiliates at year end 2005 and 2004 were $3,100 and $2,300.   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.  (Continued)                                        67.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 9.  Borrowed Funds (Continued)  A summary of short-term borrowings follows:                                                              December 31,                                                        -----------------------                                                           2005         2004                                                        ----------   ----------      Federal funds purchased                            $       --   $   11,700     Securities sold under agreements to repurchase            612        1,022                                                        ----------   ----------                                                         $      612   $   12,722                                                        ==========   ==========  Federal funds purchased and securities sold under agreement to repurchase generally mature within one day to five years from the transaction date.  At December 31, 2005, $11 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 $46.6 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 $17.5 million. The Company has one variable rate advance at a rate of 4.29% at year end 2005 and 2004. The remaining advances are at fixed rates ranging from 1.98% to 7.16%. The scheduled maturities of advances from the Federal Home Loan Bank at December 31, 2005 are as follows:                                                    2005                        2004                                       ------------------------    ------------------------                                        Average                     Average                                        Interest                    Interest          Year                            Rate         Amount         Rate         Amount          ----                         ----------    ----------    ----------    ----------               2005                                                           4.13%   $   16,900          2006                               4.98%   $    8,300          5.03         8,300          2007                               3.51        10,200          3.29        10,200          2008                               2.97        13,300          2.97        13,300          2009                               3.78         5,000          3.78         5,000          2010                               4.50         5,200            --            --          Thereafter                         4.68         8,000          4.67         8,200                                       ----------    ----------    ----------    ----------                                             3.93%   $   50,000          3.91%   $   61,900                                                     ==========                  ==========  Notes payable consisted of the following at December 31, 2005 and 2004:                                                                           2005          2004                                                                      ----------    ----------        Line of credit loan ($3,000) from LaSalle National Bank;     interest due quarterly at the higher of (1) 90-day LIBOR     plus 1.75% or (2) 4%; balance due on October 1, 2006;     secured by 100% of the stock of UnionBank.                       $    1,000    $    2,000   (Continued)                                        68.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 9.  Borrowed Funds (Continued)           Revolving credit loan ($10,000) from LaSalle National     Bank; interest due quarterly at the higher of (1) 90-day     LIBOR plus 1.75% or (2) 4%; balance due on October 1, 2006;     secured by 100% of the stock of UnionBank.                            8,200         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. These notes mature     on November 1, 2008.                                                    268           354                                                                      ----------    ----------                                                                       $    9,468    $    6,629                                                                      ==========    ==========   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, 2005.  Information concerning borrowed funds is as follows:                                                                   Years Ended December 31,                                                     --------------------------------------------                                                         2005            2004            2003                                                     ------------    ------------    ------------     Federal Funds Purchased       Maximum month-end balance during the year     $      8,600    $     11,700    $      6,600       Average balance during the year                      2,340           1,935           2,155       Weighted average interest rate for the year           3.34%           1.71%           0.95%       Weighted average interest rate at year end            4.50%           1.71%            N/A Securities Sold Under Agreements to Repurchase       Maximum month-end balance during the year     $     12,497    $     15,210    $     17,355       Average balance during the year                      3,903           3,164           4,621       Weighted average interest rate for the year           3.04%           2.04%           2.19%       Weighted average interest rate at year end            3.06%           3.59%           1.52% Advances from the Federal Home Loan Bank       Maximum month-end balance during the year     $     61,900    $     74,700    $     77,450       Average balance during the year                     54,472          70,359          70,018       Weighted average interest rate for the year           3.91%           4.10%           4.28%       Weighted average interest rate at year end            3.99%           4.03%           4.21% Notes Payable       Maximum month-end balance during the year     $     10,105    $      7,882    $      8,275       Average balance during the year                      8,345           7,347           7,898       Weighted average interest rate for the year           5.11%           4.18%           4.06%       Weighted average interest rate at year end            5.53%           3.33%           3.46%   (Continued)                                        69.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 10.  Income Taxes  Income taxes consisted of:                                                   Years Ended December 31,                                          --------------------------------------                                             2005          2004          2003                                          ----------    ----------    ----------         Federal            Current                       $    1,189    $    1,243    $      419            Deferred                              28           438          (535)                                          ----------    ----------    ----------                                               1,217         1,681          (116)         State            Current                              (20)          349            68            Deferred                               2            26           (81)                                          ----------    ----------    ----------                                                 (18)          375           (13)                                          ----------    ----------    ----------                                           $    1,199    $    2,056    $     (129)                                          ==========    ==========    ==========   The Company's income tax expense differed from the statutory federal rate of 34% as follows:                                                                        Years Ended December 31,                                                             --------------------------------------                                                                2005          2004          2003                                                             ----------    ----------    ----------         Expected income taxes                                   $    1,826    $    2,332    $      680     Income tax effect of         Interest earned on tax-free investments and loans         (397)         (471)         (577)         Nondeductible interest expense incurred to           carry tax-free investments and loans                      35            37            48         Nondeductible amortization                                  --           117            --         State income taxes, net of federal tax benefit             154           241           (14)         State income tax refund                                   (251)           --            --         Increase in CSV of officers' life insurance               (186)         (195)         (223)         Other                                                       17            (5)          (43)                                                             ----------    ----------    ----------                                                              $    1,199    $    2,056    $     (129)                                                             ==========    ==========    ==========   (Continued)                                        70.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 10.  Income Taxes (continued)  The significant components of deferred income tax assets and liabilities consisted of:                                                                       December 31,                                                             ------------------------                                                                2005           2004                                                             ----------    ----------        Deferred tax assets         Allowance for loan losses                           $    3,246    $    3,781         Deferred compensation, other                               209           131                                                             ----------    ----------         Total deferred tax assets                                3,455         3,912     Deferred tax liabilities         Depreciation                                        $     (430)   $     (602)         Basis adjustments arising from acquisitions             (1,147)       (1,174)         Mortgage servicing rights                                 (983)       (1,076)         Securities available-for-sale                              (60)         (854)         Federal Home Loan Bank dividend received in stock         (512)         (416)         Other                                                     (147)         (378)                                                             ----------    ----------            Total deferred tax liabilities                       (3,279)       (4,500)                                                             ----------    ----------                 Net deferred tax liabilities                 $      176    $     (588)                                                             ==========    ==========   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, 2005, the Plan owned 308,250 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 $223, $269, and $262 for the years ended December 31, 2005, 2004, and 2003.  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 $415, $339, and $344 for the years ended December 31, 2005, 2004, and 2003.  Note 12.  Stock Option Plans  In April 1993, the Company adopted the UnionBancorp 1993 Stock Option Plan ("the 1993 Option Plan"). A total of 490,206 shares were issued pursuant to stock options issued to employees and outside directors under this plan. The 1993 Stock Option Plan was terminated on April 12, 2003.  (Continued)                                        71.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 12.  Stock Option Plans (Continued)  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. There are 9,250 shares available to grant under this plan.  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. There are 110,000 shares available to grant under this plan.  A summary of the status of the option plans as of December 31, 2005, 2004 and 2003 and changes during the years ended on those dates is presented below.                                                    2005                       2004                      2003                                       ------------------------   ------------------------   ------------------------                                                      Weighted-                  Weighted-                 Weighted-                                                      Average                    Average                   Average                                                      Exercise                   Exercise                  Exercise                                         Shares        Price        Shares        Price        Shares        Price                                       ----------    ----------   ----------    ----------   ----------    ----------            Outstanding at beginning       of year                            300,431    $    14.08      304,648    $    13.41      362,519    $    12.66     Granted                               50,000         20.64       20,000         21.75       20,000         23.29     Exercised                            (43,486)        10.86      (13,294)         9.12      (56,404)        10.54     Forfeited                             (5,270)         7.64      (10,923)        15.58      (21,467)        14.19                                       ----------    ----------   ----------    ----------   ----------    ----------      Outstanding at end of year           301,675         15.74      300,431         14.08      304,648         13.41                                       ==========                 ==========                 ==========      Options exercisable at year end      187,511    $    13.78      200,152    $    12.75      181,556    $    11.90                                       ==========    ==========   ==========    ==========   ==========    ==========     Weighted-average fair        value of options granted        during the year                              $     4.94                 $     4.74                 $     4.93                                                     ==========                 ==========                 ==========   (Continued)                                        72.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 12.  Stock Option Plans (Continued)   Options outstanding at year-end 2005 were as follows:                                             Outstanding                  Exercisable                                   -------------------------     -----------------------                                                   Weighted                                                    Average                     Weighted                                                   Remaining                    Average        Range of                                  Contractual                   Exercise     Exercise Prices                 Number          Life         Number         Price     ---------------               ---------      ----------     ---------      --------        $  7.25  -  $ 9.75                 22,300       0.7 years        22,300      $   8.69     11.25  -   13.00                 62,681       4.5 years        54,855         11.63     13.88  -   18.50                126,694       5.0 years        98,356         15.04     21.75  -   23.29                 90,000       9.2 years        12,000         22.78                                   ---------      ----------     ---------      --------                                      301,675       5.8 years       187,511      $  13.78                                   =========      ==========     =========      ========   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 $0, $2, and $21 for the years ended December 31, 2005, 2004, and 2003.  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 60,000 shares and 40,000 shares of common stock were outstanding at December 31, 2005 and December 31, 2004 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.  (Continued)                                        73.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 13.  Earnings Per Share (Continued)                                                             2005       2004       2003                                                        --------   --------   --------        Basic earnings per share       Net income available to common stockholders      $  3,966   $  4,596   $  1,937                                                        ========   ========   ========        Weighted average common shares outstanding          3,944      4,034      4,000                                                        ========   ========   ========           Basic earnings per share                      $   1.01   $   1.14   $   0.48                                                        ========   ========   ========        Weighted average common shares outstanding          3,944      4,034      4,000       Add dilutive effect of assumed exercised stock         options                                              59         76         69                                                        --------   --------   --------        Weighted average common and dilutive         potential shares outstanding                      4,003      4,110      4,069                                                        ========   ========   ========           Diluted earnings per share                    $   0.99   $   1.12   $   0.48                                                        ========   ========   ========   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.  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, 2005, that the Company and UnionBank meets all of the capital adequacy requirements to which they are subject.  As of December 31, 2005, 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.  (Continued)                                        74.   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, 2005    Total capital (to risk-      weighted assets)       UnionBancorp, Inc.       $   66,812         13.3%   $   40,107          8.0%          N/A          N/A       UnionBank                    77,475         15.5        40,076          8.0        50,095         10.0    Tier I capital (to risk-      weighted assets)       UnionBancorp, Inc.       $   60,546         12.1        20,054          4.0           N/A          N/A       UnionBank                    71,214         14.2        20,038          4.0        30,057          6.0     Tier I leverage ratio (to      average assets)       UnionBancorp, Inc.       $   60,546          9.0        26,831          4.0           N/A          N/A       UnionBank                    71,214         10.6        26,816          4.0        33,520          5.0                                                                                               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%          N/A          N/A       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           N/A          N/A       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           N/A          N/A       UnionBank                    71,452         10.7        26,646          4.0        33,307          5.0   (Continued)                                        75.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 14.  Regulatory Matters (Continued)  The Company's ability to pay dividends is dependent on the subsidiary bank, which is restricted by various laws and regulations. These regulations pose no practical restrictions to paying dividends at historical levels. At December 31, 2005, UnionBank had $2.5 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.  The estimated fair values of the Company's financial instruments were as follows:                                                                 December 31,                                           -------------------------------------------------                                                     2005                      2004                                           -----------------------   -----------------------                                            Carrying      Fair        Carrying       Fair                                             Amount       Value        Amount        Value                                           ----------   ----------   ----------   ----------          Financial assets         Cash and cash equivalents         $   24,358   $   24,358   $   22,802   $   22,802         Securities                           196,440      196,440      191,661      191,661         Loans                                409,163      405,398      409,543      412,728         Accrued interest receivable            4,418        4,418        4,151        4,151     Financial liabilities         Deposits                             543,841      521,350      512,477      502,805         Federal funds purchased and           securities sold under           agreements to repurchase               612          612       12,722       12,722         Advances from the Federal           Home Loan Bank                      50,000       48,828       61,900       61,669         Series B mandatorily redeemable           preferred stock                        831          831          831          831         Notes payable                          9,468        9,468        6,629        6,629         Accrued interest payable               3,206        3,206        2,474        2,474   (Continued)                                        76.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 15.  Fair Value of Financial Instruments (Continued)  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.  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, 2005   $        8,066   $       58,667   $       20,777   $       87,510   2.25% - 18.00%     December 31, 2004   $        4,331   $       64,787   $       25,228   $       94,346   2.25% - 18.00%   Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. For commitments to extend credit, 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  (Continued)                                        77.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 16.  Commitments, Contingencies, and Credit Risk (Continued)  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.  The Company leases certain branch properties under operating leases. Rent expense was $190, $196, and $269 for 2005, 2004 and 2003. Rent commitments, before considering renewal options that generally are present, were as follows:                    2006                                $     107                   2007                                      107                   2008                                      107                   2009                                      107                   2010                                       65                   Thereafter                                 13                                                       ---------                         Total                         $     506                                                       =========   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)                                        78.   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                                                      2005          2004                                                          ----------   ----------  Cash and cash equivalents                                $      116   $      463 Investment in subsidiaries                                   76,744       78,352 Other assets                                                    100          100                                                          ----------   ----------                                                           $   76,960   $   78,915                                                          ==========   ==========   LIABILITIES AND STOCKHOLDERS' EQUITY                                                                December 31,                                                          ----------------------- LIABILITIES                                                  2005         2004                                                          ----------   ----------  Notes payable                                            $    9,200   $    6,275 Mandatory redeemable preferred stock                            831          831 Other liabilities                                               854        1,562                                                          ----------   ----------                                                              10,885        8,668  Stockholders' equity                                         66,075       70,247                                                          ----------   ----------                                                           $   76,960   $   78,915                                                          ==========   ==========   Income Statements (Parent Company Only)                                                                  Years Ended December 31,                                                        --------------------------------------                                                           2005          2004          2003                                                        ----------    ----------    ----------         Dividends from subsidiaries                        $    5,031    $    3,395    $    4,358     Other income                                                6         1,206         2,120     Interest expense                                          459           334           382     Other expenses                                            488         3,442         5,417     Income tax benefit                                       (436)       (1,077)       (1,462)     Equity in undistributed earnings of subsidiaries       (dividends in excess of earnings)                      (353)        2,901           (11)                                                        ----------    ----------    ----------      Net income                                              4,173         4,803         2,130      Less dividends on preferred stock                         207           207           193                                                        ----------    ----------    ----------      Net income on common stock                         $    3,966    $    4,596    $    1,937                                                        ==========    ==========    ==========   (Continued)                                        79.   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,                                                        --------------------------------------                                                           2005          2004          2003                                                        ----------    ----------    ----------     Cash flows from operating activities     Net income                                         $    4,173    $    4,803    $    2,130     Adjustments to reconcile net income to net       cash provided by operating activities         Depreciation                                           --           186           264         Undistributed earnings of subsidiaries                353        (2,901)           11         Amortization of deferred compensation -           stock options                                        --             2            21         Decrease (increase) in other assets                    (2)          514          (161)         Increase in other liabilities                        (708)          196           472                                                        ----------    ----------    ----------            Net cash provided by operating activities        3,816         2,800         2,737  Cash flows from investing activities     Purchases of premises and equipment                        --           223            70     Investment in subsidiaries                                 --          (673)           --                                                        ----------    ----------    ----------         Net cash provided by financing activities              --          (450)           70  Cash flows from financing activities     Net increase (decrease) in notes payable           $    2,925    $   (1,000)   $   (1,000)     Dividend paid on common stock                          (1,721)       (1,613)       (1,441)     Dividends paid on preferred stock                        (207)         (207)         (193)     Proceeds from exercise of stock options                   579           161           685     Purchase of treasury stock                             (5,739)         (156)         (189)                                                        ----------    ----------    ----------         Net cash used in financing activities              (4,163)       (2,815)       (2,138)                                                        ----------    ----------    ----------     Net increase (decrease) in cash and       cash equivalents                                       (347)         (465)          669  Cash and cash equivalents     Beginning of year                                         463           928           259                                                        ----------    ----------    ----------      End of year                                        $      116    $      463    $      928                                                        ==========    ==========    ==========   (Continued)                                        80.   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,                                                      --------------------------------------                                                         2005          2004          2003                                                      ----------    ----------    ----------         Change in unrealized gains on       securities available-for-sale                  $   (2,050)   $   (1,167)   $   (1,386)     Reclassification adjustment for losses (gains)        recognized in income                                  79          (123)         (281)                                                      ----------    ----------    ----------         Net unrealized gains                             (1,971)       (1,290)       (1,667)     Tax expense                                            (715)         (500)         (637)                                                      ----------    ----------    ----------      Other comprehensive income                       $   (1,256)   $     (790)   $   (1,030)                                                      ==========    ==========    ==========   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                                     ------------   ------------   ------------    ------------    ------------ 2005 - ----          Net interest income              $     21,192   $        267   $        (15)   $       (459)   $     20,985    Other revenue                           3,862          1,349          2,625            (234)          7,602    Other expense                          16,111            868          2,876           1,093          20,948    Noncash items       Depreciation                         1,497             86            158              98           1,839       Provision for loan loss                250             --             --              --             250       Amortization of intangibles            114             --             56              --             170    Segment profit (loss)                   7,082            662           (484)         (1,888)          4,173    Goodwill                                5,143             --          1,820              --           6,963    Segment assets                        668,273          4,368          3,723            (142)        676,222   (Continued)                                        81.   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                                     ------------   ------------   ------------    ------------    ------------ 2004 - ----          Net interest income              $     21,284   $        700   $          9    $       (331)   $     21,662    Other revenue                           9,012          2,070          3,019               1          14,102    Other expense                          16,833          1,605          3,699           2,052          24,189    Noncash items       Depreciation                         1,956            100            211             188           2,455       Provision for loan loss              1,924             --             --              --           1,924       Amortization of intangibles            286             --             51              --             337    Segment profit (loss)                   9,297          1,065           (933)         (2,570)          4,803    Goodwill                                5,143             --          1,820              --           6,963    Segment assets                        662,415          3,887          5,388          (2,144)        669,546  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    Noncash items       Depreciation                         1,144             99            179             263           1,685       Provision for loan loss              8,081             --             --              --           8,081       Amortization of intangibles            206             --             41              --             247    Segment profit (loss)                   4,655            320           (627)         (2,218)          2,130    Goodwill                                5,822             --          1,820              --           7,642    Segment assets                        781,189          2,620          8,394           1,219         793,422   (Continued)                                        82.   UNIONBANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) - --------------------------------------------------------------------------------  Note 20.  Quarterly Results of Operations (Unaudited)                                         Year Ended December 31, 2005                         Year Ended December 31, 2004                                           Three Months Ended                                   Three Months Ended                             -------------------------------------------------   --------------------------------------------------                             Dec. 31(A)    Sep. 30     June 30 (B)   March 31    Dec. 31(C)    Sep. 30(D)    June 30      March 31                             ----------   ----------   ----------   ----------   ----------    ----------   ----------   ----------          Total interest income       $    9,290   $    8,720   $    8,545   $    8,142   $    8,056    $    8,505   $    8,843   $    9,508 Total interest expense           3,886        3,504        3,265        3,057        3,089         3,142        3,312        3,707                             ----------   ----------   ----------   ----------   ----------    ----------   ----------   ---------- Net interest income              5,404        5,216        5,280        5,085        4,967         5,363        5,531        5,801  Provision for loan losses          100           50           --          100          300           374          500          750 Noninterest income               1,707        2,014        2,031        1,850        1,093         6,895        3,190        2,924 Noninterest expense              6,042        5,750        5,627        5,546        5,459         7,514        7,029        6,979                             ----------   ----------   ----------   ----------   ----------    ----------   ----------   ---------- Income (loss) before   income taxes                     969        1,430        1,684        1,289          301         4,370        1,192          996 Income tax expense   (benefit)                        203          369          302          325         (172)        1,753          279          196                             ----------   ----------   ----------   ----------   ----------    ----------   ----------   ----------                                    766        1,061        1,382          964          473         2,617          913          800 Preferred stock dividend            51           52           52           52           52            52           52           52                             ----------   ----------   ----------   ----------   ----------    ----------   ----------   ----------  Net income (loss) for   common stockholders       $      715   $    1,009   $    1,330   $      912   $      421    $    2,565   $      861   $      748                             ==========   ==========   ==========   ==========   ==========    ==========   ==========   ==========  Basic earnings (loss)   per share                 $     0.19   $     0.26   $     0.33   $     0.23   $     0.10    $     0.64   $     0.21   $     0.19                             ==========   ==========   ==========   ==========   ==========    ==========   ==========   ==========  Diluted earnings (loss)   per share                 $     0.18   $     0.26   $     0.33   $     0.22   $     0.10    $     0.62   $     0.21   $     0.18                             ==========   ==========   ==========   ==========   ==========    ==========   ==========   ==========   (A)  The net income for the quarter was impacted by nonrecurring expenses      primarily related to organizational restructuring. The impact to earnings      was a decrease of approximately $0.05 per diluted share.  (B)  The net income for the quarter was impacted by a reduction in state income      taxes related to the receipt of a tax refund related to amended returns      outstanding from prior years. The impact to earnings was an increase of      approximately $0.06 per diluted share.  (C)  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.  (D)  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.  (Continued)                                        83.
None.
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, 2005. 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, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
None.                                      PART III
The information beginning on page 2 of the Company's 2006 Proxy Statement under the caption "Election of Directors", on page 9 of the 2006 Proxy Statement under the caption "Section 16(a) Beneficial Ownership Compliance," on page 19 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.
The information on pages 6, 10 through 16 of the 2006 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."
The information on pages 7 through 9 of the 2006 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.                                        84.
The information on pages 12 and 17 of the 2006 Proxy Statement under the caption "Executive Compensation-Employment Agreements and other Arrangements" and on page 17 under the caption "Transactions with Management" is incorporated herein by reference.
The information on page 17 of the 2006 Proxy Statement under the caption "Accountant Fees" is incorporated herein by reference.
(a)(1)  Index to Financial Statements          The index to Financial Statements is contained in Item 8, appearing on         page 43 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.                                        85.                                      SIGNATURES  Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 24, 2006.                                  UNIONBANCORP, INC.                                  By: /s/ SCOTT A. YEOMAN                                     --------------------------------------------                                     Scott A. Yeoman                                     President and Principal Executive Officer                                  By: /s/ KURT R. STEVENSON                                     --------------------------------------------                                     Kurt R. Stevenson                                     Senior Executive Vice President and                                     Principal Financial and Accounting Officer  Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 24, 2006  /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/ SCOTT A. YEOMAN                                              -----------------------------------                                              Scott A. Yeoman                                              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. 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)].  10.5    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].   10.6    UnionBancorp, Inc. 2003 Stock Option Plan [incorporated by reference         from UnionBancorp's 2003 Proxy Statement].  10.7    Form of Stock Option Agreement  10.8    Employment Security Agreement - Scott A. Yeoman  10.9    Employment Security Agreement - Kurt R. Stevenson  21.1    Subsidiaries of UnionBancorp, Inc.  23.1    Consent of Crowe Chizek and Company LLC.  31.1.   Certification of Scott A. Yeoman, 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         Executive 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.    EX-21.1 2 ex21_1.txt EXHIBIT 21.1                                                                      EXHIBIT 21.1                            SUBSIDIARIES OF THE REGISTRANT   UnionBank, an Illinois state bank with its main office located in Streator, Illinois.    EX-23.1 3 ex23_1.txt EXHIBIT 23.1                                                                      Exhibit 23.1                                                                     ------------                      CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    We consent to the incorporation by reference in Registration Statement No. 333-16359 on Form S-8 of UnionBancorp, Inc. of our report dated February 18, 2006 with respect to the consolidated financial statements of UnionBancorp, Inc., which report appears in this Annual Report on Form 10-K of UnionBancorp, Inc. for the year ended December 31, 2005.                                             /s/ Crowe Chizek and Company LLC                                           Crowe Chizek and Company LLC  Oak Brook, Illinois March 21, 2006    EX-31.1 4 ex31_1.txt EXHIBIT 31.1                                                                      EXHIBIT 31.1               CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO                   SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002  I, Scott A. Yeoman, President and Principal Executive Officer, certify that:  1.   I have reviewed this annual report on Form 10-K of UnionBancorp, Inc.;  2.   Based on my knowledge, this report does not contain any untrue statement of      a material fact or omit to state a material fact necessary to make the      statements made, in light of the circumstances under which such statements      were made, not misleading with respect to the period covered by this      report;  3.   Based on my knowledge, the financial statements, and other financial      information included in this report, fairly present in all material      respects the financial condition, results of operations and cash flows of      the registrant as of, and for, the periods presented in this report;  4.   The registrant's other certifying officer and I are responsible for      establishing and maintaining disclosure controls and procedures (as defined      in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:            a)   Designed such disclosure controls and procedures, or caused such                disclosure controls and procedures to be designed under our                supervision, to ensure that material information relating to the                registrant, including its consolidated subsidiaries, is made                known to us by others within those entities, particularly during                the period in which this report is being prepared;            b)   Evaluated the effectiveness of the registrant's disclosure                controls and procedures and presented in this report our                conclusions about the effectiveness of the disclosure controls                and procedures, as of the end of the period covered by this                report based on such evaluation; and            c)   Disclosed in this report any change in the registrant's internal                control over financial reporting that occurred during the                registrant's most recent fiscal quarter that has materially                affected, or is reasonably likely to materially affect, the                registrant's internal control over financial reporting; and  5.   The registrant's other certifying officer and I have disclosed, based on      our most recent evaluation of internal control over financial reporting, to      the registrant's auditors and the audit committee of the registrant's board      of directors (or persons performing the equivalent functions):            a)   all significant deficiencies and material weaknesses in the                design or operation of internal control over financial reporting                which are reasonably likely to adversely affect the registrant's                ability to record, process, summarize and report financial                information; and            b)   any fraud, whether or not material, that involves management or                other employees who have a significant role in the registrant's                internal control over financial reporting.  Date:   March 24, 2006    /s/ SCOTT A. YEOMAN - ----------------------------------------- Scott A. Yeoman President and Principal Executive Officer    EX-31.2 5 ex31_2.txt EXHIBIT 31.2                                                                      EXHIBIT 31.2               CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO                   SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002   I, Kurt R. Stevenson, Senior Executive Vice President and Principal Financial and Accounting Officer, certify that:  1.   I have reviewed this annual report on Form 10-K of UnionBancorp, Inc.;  2.   Based on my knowledge, this report does not contain any untrue statement of      a material fact or omit to state a material fact necessary to make the      statements made, in light of the circumstances under which such statements      were made, not misleading with respect to the period covered by this      report;  3.   Based on my knowledge, the financial statements, and other financial      information included in this report, fairly present in all material      respects the financial condition, results of operations and cash flows of      the registrant as of, and for, the periods presented in this report;  4.   The registrant's other certifying officer and I are responsible for      establishing and maintaining disclosure controls and procedures (as defined      in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:            a)   Designed such disclosure controls and procedures, or caused such                disclosure controls and procedures to be designed under our                supervision, to ensure that material information relating to the                registrant, including its consolidated subsidiaries, is made                known to us by others within those entities, particularly during                the period in which this report is being prepared;            b)   Evaluated the effectiveness of the registrant's disclosure                controls and procedures and presented in this report our                conclusions about the effectiveness of the disclosure controls                and procedures, as of the end of the period covered by this                report based on such evaluation; and            c)   Disclosed in this report any change in the registrant's internal                control over financial reporting that occurred during the                registrant's most recent fiscal quarter that has materially                affected, or is reasonably likely to materially affect, the                registrant's internal control over financial reporting; and  5.   The registrant's other certifying officer and I have disclosed, based on      our most recent evaluation of internal control over financial reporting, to      the registrant's auditors and the audit committee of the registrant's board      of directors (or persons performing the equivalent functions):            a)   all significant deficiencies and material weaknesses in the                design or operation of internal control over financial reporting                which are reasonably likely to adversely affect the registrant's                ability to record, process, summarize and report financial                information; and            b)   any fraud, whether or not material, that involves management or                other employees who have a significant role in the registrant's                internal control over financial reporting.  Date:   March 24, 2006    /s/ KURT R. STEVENSON - ------------------------------------------ Kurt R. Stevenson Senior Executive Vice President and Principal Financial and Accounting Officer    EX-32.1 6 ex32_1.txt EXHIBIT 32.1                                                                      EXHIBIT 32.1   The following certification is provided by the undersigned President and Principal Executive Officer of UnionBancorp, Inc. on the basis of such officer's knowledge and belief for the sole purpose of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                    CERTIFICATION                                   -------------  In connection with the Annual Report of UnionBancorp, Inc. (the "Company") on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on March 24, 2006 (the "Report"), I, Scott A. Yeoman, President and Principal Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:            (1)  The Report fully complies with the requirements of Section 13(a)                of the Securities Exchange Act of 1934, as amended; and            (2)  The information contained in the Report fairly presents, in all                material respects, the financial condition and results of                operations of the Company.                                  /s/ SCOTT A. YEOMAN                                ------------------------------------------------                                Name: Scott A. Yeoman                                Title: President and Principal Executive Officer                                Date: March 24, 2006    EX-32.2 7 ex32_2.txt EXHIBIT 32.2                                                                      EXHIBIT 32.2   The following certification is provided by the undersigned Senior Executive Vice President and Principal Financial and Accounting Officer of UnionBancorp, Inc. on the basis of such officer's knowledge and belief for the sole purpose of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                    CERTIFICATION                                   -------------  In connection with the Annual Report of UnionBancorp, Inc. (the "Company") on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on March 24, 2006 (the "Report"), I, Kurt R. Stevenson, Senior Executive Vice President and Principal Financial and Accounting Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:            (1)  The Report fully complies with the requirements of Section 13(a)                of the Securities Exchange Act of 1934, as amended; and            (2)  The information contained in the Report fairly presents, in all                material respects, the financial condition and results of                operations of the Company.                                       /s/ KURT R. STEVENSON                                     --------------------------------------------                                     Name: Kurt R. Stevenson                                     Title: Senior Executive Vice President and                                     Principal Financial and Accounting Officer                                     Date: March 24, 2006    -----END PRIVACY-ENHANCED MESSAGE-----