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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
COMMISSION FILE NUMBER: 0-28846
UNIONBANCORP, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3145350
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
321 WEST MAIN STREET OTTAWA, ILLINOIS 61350
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(Address of principal executive offices including zip code)
(815) 431-2720
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EXCHANGE CLASS WHICH REGISTERED
- --------------------------------------------------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK ($1.00 PAR VALUE)
------------------------------
(Title of Class)
PREFERRED PURCHASE RIGHTS
-------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Shares outstanding at May 14, 2001
- ----------------------------- ----------------------------------
Common Stock, Par Value $1.00 3,970,074
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UNIONBANCORP, INC.
FORM 10-Q INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
o Consolidated Balance Sheets............................... 1
o Consolidated Statements of Income......................... 2
o Consolidated Statements of Cash Flows..................... 3
o Notes to Unaudited Consolidated Financial Statements...... 4
Item 2. Management's Discussion and Analysis of Results of Operations
And Financial Condition...................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 21
Item 2. Changes in Securities........................................... 21
Item 3. Defaults Upon Senior Securities................................. 21
Item 4. Submission of Matters to a Vote of Security Holders............. 21
Item 5. Other Information............................................... 21
Item 6. Exhibits and Reports on Form 8-K................................ 21
SIGNATURES................................................................ 22
i
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND DECEMBER 31, 2000 (IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
March 31, December 31,
2001 2000
--------- ---------
ASSETS
Cash and cash equivalents $ 20,374 $ 33,021
Securities available-for-sale 200,881 189,719
Loans 502,912 505,094
Allowance for loan losses (6,491) (6,414)
--------- ---------
Net loans 496,421 498,680
Premises and equipment, net 11,799 11,953
Intangible assets, net 9,304 9,552
Mortgage servicing rights 1,542 1,423
Other assets 12,303 14,385
--------- ---------
TOTAL ASSETS $ 752,624 $ 758,733
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 64,248 $ 72,956
Interest-bearing 552,524 563,047
--------- ---------
Total deposits 616,772 636,003
Federal funds purchased and securities sold
under agreements to repurchase 529 525
Advances from the Federal Home Loan Bank 55,408 43,408
Notes payable 9,775 10,275
Other liabilities 7,630 8,656
--------- ---------
TOTAL LIABILITIES 690,114 698,867
--------- ---------
Mandatory redeemable preferred stock, Series B, no par value;
1,092 shares authorized; 831 shares issued and outstanding 831 831
--------- ---------
Stockholders' equity
Preferred stock; 200,000 shares authorized; none issued -- --
Series A convertible preferred stock; 2,765 shares authorized,
2,762.24 shares outstanding (aggregate liquidation preference of $2,762) 500 500
Series C preferred stock; 4,500 shares authorized; none issued -- --
Common stock, $1 par value; 10,000,000 shares authorized;
4,560,337 shares at March 31, 2001 and 4,555,811
shares at December 31, 2000 4,560 4,556
Surplus 21,767 21,734
Retained earnings 38,670 37,437
Accumulated other comprehensive income 1,418 61
Unearned compensation under stock option plans (112) (129)
--------- ---------
66,803 64,159
Treasury stock, at cost; 590,263 shares (5,124) (5,124)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 61,679 59,035
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 752,624 $ 758,733
========= =========
See Accompanying Notes to Unaudited Financial Statements
1.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
--------------------
2001 2000
-------- --------
Interest income
Loans $ 11,254 $ 10,277
Securities
Taxable 2,349 2,142
Exempt from federal income taxes 504 493
Federal funds sold and other 65 21
-------- --------
TOTAL INTEREST INCOME 14,172 12,933
-------- --------
Interest expense
Deposits 7,400 6,134
Federal funds purchased and securities sold
under agreements to repurchase 13 58
Advances from the Federal Home Loan Bank 744 492
Notes payable 206 184
-------- --------
TOTAL INTEREST EXPENSE 8,363 6,868
-------- --------
NET INTEREST INCOME 5,809 6,065
Provision for loan losses 309 593
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,500 5,472
-------- --------
Noninterest income
Service charges 644 632
Merchant fee income 257 275
Trust income 172 188
Mortgage banking income 443 306
Insurance commissions and fees 671 961
Securities gains, net 82 --
Other income 543 416
-------- --------
2,812 2,778
-------- --------
Noninterest expenses
Salaries and employee benefits 3,166 3,828
Occupancy expense, net 479 426
Furniture and equipment expense 406 447
Supplies and printing 167 132
Telephone 188 189
Amortization of intangible assets 248 276
Other expenses 1,476 1,554
-------- --------
6,130 6,852
-------- --------
INCOME BEFORE INCOME TAXES 2,182 1,398
Income taxes 647 400
-------- --------
NET INCOME 1,535 998
Preferred stock dividends 65 65
-------- --------
NET INCOME FOR COMMON STOCKHOLDERS $ 1,470 $ 933
======== ========
BASIC EARNINGS PER COMMON SHARE $ 0.37 $ 0.23
======== ========
DILUTED EARNINGS PER COMMON SHARE $ 0.37 $ 0.23
======== ========
Comprehensive income (loss) $ 2,892 $ (23)
======== ========
See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (IN THOUSANDS)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
--------------------
2001 2000
-------- --------
Cash flows from operating activities
Net income $ 1,535 $ 998
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 318 381
Amortization of intangible assets 248 276
Amortization of unearned compensation under stock option plans 17 21
Amortization of bond premiums, net 35 9
Provision for loan losses 309 593
Securities (gains) losses, net (82) --
(Gain) loss on sale of equipment (1) 41
Loss on sale of real estate acquired in settlement of loans 51 13
Gain on sale of loans (365) (182)
Proceeds from sales of loans held for sale 26,387 11,228
Origination of loans held for sale (23,323) (9,917)
Change in assets and liabilities
(Increase) decrease in other assets 1,126 (882)
Increase (decrease) in other liabilities (1,026) 1,693
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,229 4,272
Cash flows from investing activities
Securities
Available-for-sale
Proceeds from maturities and paydowns 24,231 2,798
Purchases (33,109) (1,876)
Net increase in loans (1,071) (7,050)
Purchase of premises and equipment (167) (107)
Proceeds from sale of real estate acquired in settlement of loans 227 382
Proceeds from sale of equipment 4 --
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (9,885) (5,853)
Cash flows from financing activities
Net increase (decrease) in deposits $(19,231) $ 1,942
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 4 (3,103)
Increase (decrease) in advances from the
Federal Home Loan Bank 12,000 (1,000)
Payments on notes payable (500) --
Proceeds from notes payable -- 1,275
Dividends on common stock (238) (237)
Dividends on preferred stock (65) (65)
Proceeds from exercise of stock options 39 19
Purchase of treasury stock -- (1,274)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (7,991) (2,443)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (12,647) (4,024)
Cash and cash equivalents
Beginning of period 33,021 27,230
-------- --------
End of period $ 20,374 $ 23,206
======== ========
See Accompanying Notes to Unaudited Financial Statements
3.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements of
UnionBancorp, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles and with the rules and regulations of
the Securities and Exchange Commission for interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all normal and recurring adjustments which are
necessary to fairly present the results for the interim periods presented have
been included. The preparation of financial statements requires management to
make estimates and assumptions that affect the recorded amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
For further information with respect to significant accounting policies followed
by the Company in the preparation of its consolidated financial statements,
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 2000. The annualized results of the three month period ended March 31, 2001
are not necessarily indicative of the results expected for the year ending
December 31, 2001.
NOTE 2. EARNINGS PER SHARE
For purposes of share calculations, the Company had 3,968 shares of common stock
outstanding at March 31, 2001 and 4,035 shares outstanding at March 31, 2000.
Basic earnings per share for the three months ended March 31, 2001 and 2000 were
computed by dividing net income by the weighted average number of shares
outstanding. Diluted earnings per share for the three months ended March 31,
2001 and 2000 were computed by dividing net income by the weighted average
number of shares outstanding, adjusted for the dilutive effect of the stock
options. Computations for basic and diluted earnings per share are provided
below:
BASIC EARNINGS PER COMMON SHARE Three Months Ended
March 31,
------------------
2001 2000
------- -------
Net income available to common stockholders $ 1,470 $ 933
======= =======
Weighted average common shares outstanding 3,968 4,035
======= =======
Basic Earnings Per Common Share $ 0.37 $ 0.23
======= =======
DILUTED EARNINGS PER COMMON SHARE Three Months Ended
March 31,
------------------
2001 2000
------- -------
Weighted average common shares outstanding 3,968 4,035
Add: dilutive effect of assumed exercised stock options 27 38
------- -------
Weighted average common and dilutive
Potential shares outstanding 3,995 4,073
======= =======
Diluted Earnings Per Common Share $ 0.37 $ 0.23
======= =======
4.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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Options to purchase 115,550 shares were outstanding at March 31, 2001. These
options were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market price of
the common stock and were, therefore, antidilutive.
NOTE 3. SECURITIES
The Company's securities portfolio, which represented 27.3% of the Company's
average earning asset base as of March 31, 2001, is managed to minimize interest
rate risk, maintain sufficient liquidity, and maximize return. The consolidated
securities portfolio includes several callable agency debentures, adjustable
rate mortgage pass-throughs, and collateralized mortgage obligations with
implied calls. The following table describes the amortized cost and fair value
of securities available-for-sale at March 31, 2001 and December 31, 2000:
March 31, 2001
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
U.S. treasury $ 2,258 $ 12 $ -- $ 2,270
U.S. government agencies 65,007 590 (61) 65,536
U.S. government mortgage-backed securities 42,859 1,379 (18) 44,220
States and political subdivisions 51,179 253 (65) 51,367
Collateralized mortgage obligations 32,151 321 (96) 32,376
Other 5,112 -- -- 5,112
--------- --------- --------- ---------
$ 198,566 $ 2,555 $ (240) $ 200,881
========= ========= ========= =========
December 31, 2000
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
U.S. treasury $ 4,261 $ 1 $ (7) $ 4,255
U.S. government agencies 70,967 313 (344) 70,936
U.S. government mortgage-backed securities 34,626 79 (200) 34,505
States and political subdivisions 42,771 734 (92) 43,413
Collateralized mortgage obligations 32,681 204 (588) 32,297
Other 4,313 -- -- 4,313
--------- --------- --------- ---------
$ 189,619 $ 1,331 $ (1,231) $ 189,719
========= ========= ========= =========
5.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 4. LOANS
The Company offers a broad range of products designed to meet the credit needs
of its borrowers. The following table describes the composition of loans by
major categories outstanding at March 31, 2001 and December 31, 2000:
March 31, 2001 December 31, 2000
------------------- -------------------
$ % $ %
--------- ------ --------- ------
Commercial $ 110,422 21.96% $ 117,534 23.27%
Agricultural 36,059 7.17 38,479 7.62
Real estate:
Commercial mortgages 139,588 27.75 134,942 26.72
Construction 18,882 3.76 19,322 3.83
Agricultural 39,277 7.81 39,658 7.85
1-4 family mortgages 101,858 20.25 99,237 19.65
Installment 54,288 10.79 53,276 10.55
Other 2,538 0.51 2,646 0.51
--------- ------ --------- ------
502,912 100.00% 505,094 100.00%
====== ======
Allowance for loan losses (6,491) (6,414)
--------- ---------
Loans, net $ 496,421 $ 498,680
========= =========
6.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 5. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses for the three months ended March
31, 2001 and 2000 are summarized below:
March 31,
------------------------
2001 2000
-------- --------
Beginning balance $ 6,414 $ 3,691
Charge-offs:
Commercial 136 116
Real estate mortgages 50 25
Installment and other loans 63 88
-------- --------
Total charge-offs 249 229
-------- --------
Recoveries:
Commercial 5 23
Real estate mortgages -- --
Installment and other loans 12 25
-------- --------
Total recoveries 17 48
-------- --------
Net charge-offs 232 181
-------- --------
Provision for loan losses 309 593
-------- --------
Ending balance $ 6,491 $ 4,103
======== ========
Period end total loans, net of
unearned interest $502,912 $477,524
======== ========
Average loans $506,121 $473,962
======== ========
Ratio of net charge-offs to
average loans 0.05% 0.04%
Ratio of provision for loan losses
to average loans 0.06 0.13
Ratio of allowance for loan losses
to ending total loans 1.29 0.86
Ratio of allowance for loan losses
to total non-performing loans 67.74 89.22
Ratio of allowance at end of period
to average loans 1.28 0.87
NOTE 6. CONTINGENT LIABILITIES AND OTHER MATTERS
Neither the Company nor any of its subsidiaries are involved in any pending
legal proceedings other than routine legal proceedings occurring in the normal
course of business, which, in the opinion of management, in the aggregate, are
not material to the Company's consolidated financial condition.
7.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 7. SEGMENT INFORMATION
The Company's operations are managed along two major operating segments: banking
and other. Loans, investments, deposits, and mortgage banking provide the
revenues in the banking segment. Insurance, brokerage, trust, data processing,
and holding company services are categorized as other segments. All
inter-segment services provided are charged at the same rates as those charged
to unaffiliated customers. Such services are included in the revenues and net
income of the respective segments and are eliminated to arrive at consolidated
totals.
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.
Three Months Ended
-------------------------------------
March 31, 2001
-------------------------------------
Banking Other Consolidated
Segment Segments Totals
------- -------- ------
Net interest income (loss) $ 5,995 $ (186) $ 5,809
Other revenue 1,818 994 2,812
Other expense 4,570 1,560 6,130
Segment profit (loss) 2,934 (752) 2,182
Noncash items
Depreciation 195 123 318
Provision for loan loss 309 -- 309
Goodwill and other intangibles 209 39 248
Segment assets 745,534 7,090 752,624
Three Months Ended
-------------------------------------
March 31, 2000
-------------------------------------
Banking Other Consolidated
Segment Segments Totals
------- -------- ------
Net interest income (loss) $ 6,085 $ (20) $ 6,065
Other revenue 1,499 1,279 2,778
Other expense 4,179 2,016 6,195
Segment profit (loss) 2,360 (962) 1,398
Noncash items
Depreciation 224 157 381
Provision for loan loss 593 -- 593
Goodwill and other intangibles 228 48 276
Segment assets 697,814 5,534 730,348
8.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
The following discussion provides an analysis of the Company's results of
operations and financial condition during the three months ended March 31, 2001
as compared to the same periods in 2000. Management's discussion and analysis
should be read in conjunction with the consolidated financial statements and
accompanying notes presented elsewhere in this report as well as the Company's
2000 Annual Report on Form 10-K. Annualized results of operations during the
three months ended March 31, 2001 are not necessarily indicative of results to
be expected for the full year of 2001.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report, including the Letter to the Stockholders, contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1993 as amended and Section 21E of the Securities Act of 1934 as amended.
The Company intends such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995 and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies, and
expectations of the Company, are generally identified by the use of words such
as "believe," "expect," "intend," "anticipate," "estimate," or "project" or
similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations and future prospects of
the Company and the subsidiaries include, but are not limited to, changes in:
interest rates; general economic conditions; legislative/regulatory changes;
monetary and fiscal policies of the U.S. government, including policies of the
U.S. Treasury and the Federal Reserve Board; the quality and composition of the
loan or securities portfolios; demand for loan products; deposit flows;
competition; demand for financial services in the Company's market areas; the
Company's implementation of new technologies; the Company's ability to develop
and maintain secure and reliable electronic systems; and accounting principles,
policies, and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. Further information concerning the Company and its business,
including additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the Securities and
Exchange Commission.
GENERAL
The Company derives most of its revenues and income from the operations of its
banking subsidiaries (the Banks), but also derives revenue from its nonbank
subsidiaries, UnionFinancial Services Inc., UnionData Corp, Inc., and UnionTrust
Corporation. The Banks provide a full range of commercial and consumer banking
services to businesses and individuals, primarily in north central and west
central Illinois, while the nonbanks provide insurance, brokerage, asset
management, trust and data processing service to the same regions.
RESULTS OF OPERATIONS
NET INCOME. Net income equaled $1,535 or $0.37 per fully diluted share for the
three months ended March 31, 2001 compared with net income of $998 or $0.23 per
fully diluted share for the same period in 2000. This represents a 60.9%
increase in per share earnings and a 53.8% increase in net income.
During the first quarter of 2000, the Company incurred a nonrecurring pre-tax
charge of $474 for the severance expense associated with the resignation of the
organization's former chief executive officer. Excluding the effect of these
expenditures (approximately $290, net of taxes), the Company's 2000 first
9.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
quarter core earnings would have equaled $1,288 or $0.30 per fully diluted
share. A comparison of first quarter 2001 to core first quarter 2000 represents
a 23.3% increase in per share earnings and a 19.2% increase in net income.
The quarter over quarter core increase in net income was primarily the result of
several factors including decreases in the provision for loan losses and
noninterest expense due to continuing efforts to manage operational expenses,
and improvement in mortgage banking revenue attributed to declining interest
rates and residential real estate activity in general.
Return on average assets was 0.82% for the period compared to the 0.57% for the
same period in 2000. Return on average stockholders' equity was 10.18% for the
period compared to 7.17% for the same period in 2000. Return on average tangible
equity capital for the period equaled 12.69% compared to 9.92% for the same
period in 2000.
CASH EARNINGS. In addition to the traditional measurement of net income, the
Company also calculates cash earnings which exclude the after-tax effect of
purchase accounting adjustments and the effect such adjustments had on
profitability. Management believes the reporting of cash earnings along with
GAAP earnings provides further insight into the Company's operating performance.
Cash earnings per share, cash return on average assets, and cash return on
average equity capital are detailed as follows:
For the Three Months Ended March 31, 2001
-----------------------------------------
Reported Cash
Earnings Goodwill Other Earnings
-------- -------- ------- --------
Income before income taxes $ 2,182 $ 90 $ 158 $ 2,430
Income taxes 647 -- 61 708
------- ------- ------- -------
Net income 1,535 90 97 1,722
Preferred stock dividends 65 -- -- 65
------- ------- ------- -------
Net income for common stockholders $ 1,470 $ 90 $ 97 $ 1,657
======= ======= ======= =======
Diluted earnings per common share $ 0.37 $ 0.02 $ 0.02 $ 0.41
======= ======= ======= =======
Return on average assets 0.82% 0.92%
Return on average equity 10.18% 11.42%
NET INTEREST INCOME. Net interest income is the difference between income earned
on interest-earning assets and the interest expense incurred for the funding
sources used to finance these assets. Changes in net interest income generally
occur due to fluctuations in the volume of earning assets and paying liabilities
and rates earned and paid, respectively, on those assets and liabilities. The
net yield on total interest-earning assets, also referred to as net interest
margin, represents net interest income divided by average interest-earning
assets. Net interest margin measures how efficiently the Company uses its
earning assets and underlying capital. The Company's long term objective is to
manage those assets and liabilities to provide the largest possible amount of
income while balancing interest rate, credit, liquidity and capital risks. For
purposes of this discussion, both net interest income and margin have been
adjusted to a fully tax equivalent basis for certain tax-exempt securities and
loans.
10.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Net interest income was $6,094 for the three months ended March 31, 2001,
compared with net interest income of $6,350 earned during the same period in
2000. This represented a decrease of $256 and was primarily attributable to a
rise in the cost of funds due to increased competition for deposits during 2000.
This was partially offset by an increase in rates earned on loans of 30 basis
points, as well as an overall tightening of loan underwriting standards which
contributed to slower than expected loan growth.
The quarter over quarter decrease resulted from higher interest income of $1,240
offset by higher interest expense of $1,495. Further breaking down the change,
approximately 33% was related to an increase in volume and 67% was related to a
decrease in rate. The change in interest income resulted from increases of
$1,003 associated with volume and $237 associated with rate. The majority of the
change in interest income was related to the increase of $32,159 in the volume
of average loans and 30 basis points in the rate earned on loans. The change in
interest expense resulted from increases of $750 associated with volume and $745
associated with rate. The majority of the change was associated with total time
deposit increases of $38,730 in volume and 80 basis points in the cost of funds.
During the first quarter of 2001, the net interest margin on a tax equivalent
basis decreased 38 basis points to 3.51% compared to 3.90% earned during the
same period in 2000. The compression in the net interest margin was largely
impacted by intense competition where competitive pressures have increased the
cost of funds while making it difficult to achieve commensurate increases in
loan yields. Deposits are the Company's primary source of funds. As the need for
lendable funds has grown, dependence on time deposits has increased and so has
the interest paid on time deposits. Specifically, yields on interest-earning
assets for the first quarter of 2001 increased 20 basis points to 8.32% as
compared to the prior year's quarter of 8.12%. In contrast, rates paid on
interest-bearing liabilities for the first quarter of 2001 increased 66 basis
points to 5.47% as compared to the prior year's quarter of 4.81%.
With a lower interest rate environment during the first quarter of 2001 sparking
a slow but steady recovery in the margin, the net interest margin increased 13
basis points to a level of 3.51% on a linked-quarter basis primarily fueled by a
decrease in total funding costs.
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 details each
category of average amounts outstanding for interest-earning assets and
interest-bearing liabilities, average rate earned on all interest-earning
assets, average rate paid on all interest-bearing liabilities, and the net yield
on average interest-earning assets for the same period. In addition, the table
reflects the changes in net interest income stemming from changes in interest
rates and from asset and liability volume, including mix. The change in interest
attributable to both rate and volume has been allocated to the changes in the
rate and the volume on a pro rata basis.
11.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended March 31,
-------------------------------------------------------------
2001 2000
----------------------------- -----------------------------
Interest Interest Change Due To:
Average Income/ Average Average Income/ Average --------------------------------
Balance Expense Rate Balance Expense Rate Volume Rate Net
-------- -------- ------- -------- -------- ------- -------- -------- --------
ASSETS
INTEREST-EARNING ASSETS
Interest-earning deposits $ 1,611 $ 20 5.03% $ 2,101 $ 26 4.98% $ (6) $ -- $ (6)
Securities (1)
Taxable 152,093 2,329 6.21 136,496 2,111 6.22 238 (20) 218
Non-taxable (2) 40,567 763 7.63 40,522 755 7.49 14 (6) 8
-------- -------- ----- -------- -------- ---- -------- -------- --------
Total securities (tax
equivalent) 192,660 3,092 6.51 177,018 2,866 6.51 252 (26) 226
-------- -------- ----- -------- -------- ---- -------- -------- --------
Federal funds sold 4,388 65 6.10 1,468 21 5.75 44 1 45
-------- -------- ----- -------- -------- ---- -------- -------- --------
Loans (3)(4)
Commercial 151,134 3,449 9.26 141,064 3,121 8.97 226 102 328
Real estate 299,067 6,413 8.70 284,842 6,005 8.55 302 106 408
Installment and other 55,920 1,418 10.28 48,056 1,179 9.95 185 54 239
-------- -------- ----- -------- -------- ---- -------- -------- --------
Net loans (tax
equivalent) 506,121 11,280 9.04 473,962 10,305 8.74 713 262 975
-------- -------- ----- -------- -------- ---- -------- -------- --------
Total interest-
earning assets 704,780 14,457 8.32 654,549 13,218 8.12 1,003 237 1,240
-------- -------- ----- -------- -------- ---- -------- -------- --------
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 19,679 22,828
Premises and equipment, net 11,818 13,257
Other assets 20,012 11,594
-------- --------
Total nonearning assets 51,509 47,679
-------- --------
Total assets $756,289 $702,228
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $ 41,986 251 2.42% $ 54,069 $ 312 2.32 $ (71) $ 10 (61)
Money market accounts 49,605 430 3.52 37,205 355 3.84 110 (35) 75
Savings deposits 44,892 268 2.42 51,289 324 2.54 (32) (17) (56)
Time deposits 422,792 6,451 6.19 384,062 5,143 5.39 548 760 1,308
Federal funds purchased and
repurchase agreements 1,359 13 3.88 4,360 58 5.35 (32) (13) (45)
Advances from FHLB 48,975 744 6.16 33,678 492 5.88 231 21 252
Notes payable 10,142 206 8.24 9,998 184 7.40 3 19 22
-------- -------- ----- -------- -------- ---- -------- -------- --------
Total interest-bearing
liabilities 619,751 8,363 5.47 574,661 6,868 4.81 750 745 1,495
-------- -------- ----- -------- -------- ---- -------- -------- --------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 66,989 65,027
Other liabilities 8,407 6,694
-------- --------
Total noninterest-bearing
liabilities 75,396 71,721
-------- --------
Stockholders' equity 61,142 55,846
-------- --------
Total liabilities and
stockholders' equity $756,289 $702,228
======== ========
Net interest income (tax
equivalent) $ 6,094 $ 6,350 $ 253 $ (508) $ (255)
======== ======== ======== ======== ========
Net interest income (tax
equivalent) to total earning
assets 3.51% 3.90%
===== ====
Interest-bearing liabilities to
earning assets 87.94% 87.79%
======== ========
- -------------------------
(1) Average balance and average rate on securities classified as
available-for-sale is 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.
12.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES. The amount of the provision for loan losses is based
on management's monthly evaluations of the loan portfolio, with particular
attention directed toward nonperforming and other potential problem loans.
During these evaluations, consideration is also given to such factors as
management's evaluation of specific loans, the level and composition of impaired
and other nonperforming loans, historical loss experience, results of
examinations by regulatory agencies, an internal asset quality review process,
the market value of collateral, the estimate of discounted cash flows, the
strength and availability of guaranties, concentrations of credits, and other
factors.
The provision for loan losses charged to operating expense for the first quarter
of 2001 totaled $309 compared with $593 in 2000. Net charge-offs for the first
quarter of 2001 were $232 compared with $181 in 2000. Along with other financial
institutions, management shares a concern for the possible continued softening
of the economy in 2001. Should the economic climate continue to deteriorate,
borrowers may experience difficulty, and the level of non-performing loans,
charge-offs, and delinquencies could rise and require further increases in the
provision.
NONINTEREST INCOME. The following table shows the Company's noninterest income:
Three Months Ended
March 31,
----------------------
2001 2000
------- -------
Service charges $ 644 $ 632
Merchant fee income 257 275
Trust income 172 188
Mortgage banking income 443 306
Insurance commissions and fees 671 961
Securities gains, net 82 --
Other income 543 416
------- -------
$ 2,812 $ 2,778
======= =======
Noninterest income consists of a wide variety of fee generating services viewed
as traditional banking services as well as nontraditional revenues earned by its
insurance/brokerage, trust, and data processing business segments. Noninterest
income totaled $2,812 for the quarter ended March 31, 2001 compared to $2,778
for the same time frame in 2000. Exclusive of net securities gains, noninterest
income decreased $48 or 1.7%. As a percentage of total income (net interest
income plus noninterest income), noninterest income increased to 32.6% versus
31.4% for the first quarter of 2000.
The majority of the increase was related to two factors. The first was a $137
improvement in mortgage banking income, as declining interest rates resulted in
increases in the rate of mortgage refinancing and residential real estate
activity in general during the first quarter of 2001. The second factor was $82
in gain on sale of securities, which was a result of the strategy to obtain call
protection by buying discount securities in the third quarter of 2000 that were
ultimately called during the first quarter of 2001 at a gain. Also contributing
to the improvement were increases in other income for fees associated with the
internet service provider (ISP), insurance coverage reimbursement, and prestige
card fees.
These improvements were offset by a decrease to insurance/ brokerage
commissions, and to a lesser extent, merchant and trust fee income. The Company,
through its wholly owned subsidiary UnionFinancial Services, provides a full
range of insurance and brokerage services to its customers. The $290 quarter
13.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
over quarter decrease was primarily attributable to lower than anticipated
brokerage fees due to the weakening stock market and lower transaction based fee
revenue.
NONINTEREST EXPENSE. The following table shows the Company's noninterest
expense:
Three Months Ended
March 31,
----------------------
2001 2000
------- -------
Salaries and employee benefits $ 3,166 $ 3,828
Occupancy expense, net 479 426
Furniture and equipment expense 406 447
Supplies and printing 167 132
Telephone 188 189
Amortization of intangible assets 248 276
Other expenses 1,476 1,554
------- -------
$ 6,130 $ 6,852
======= =======
Despite the Company's growth over the past year, continued efforts to closely
manage operational expenses have resulted in a significant improvement.
Noninterest expense, which is comprised primarily of compensation and employee
benefits, occupancy and other operating expenses, totaled $6,130 for the three
months ended March 31, 2001, as compared to $6,852 for the same timeframe in
2000. This represented a decrease of $722 or 10.5%.
During the first quarter of 2000, the Company incurred a nonrecurring pre-tax
charge of $474 for the severance expense associated with the resignation of the
organization's former chief executive officer. Excluding the effect of these
expenditures (approximately $290, net of taxes), core noninterest expense on a
quarter-over-quarter basis decreased 3.9% or $248.
A majority of the core decrease in expense for the quarter was reflective of the
salaries and employee benefits. Salary and employee benefits (excluding the
effect of severance expense) decreased $231 or 6.8% and was due to the closing
of two branches in 2000 that are not reflected in the 2001 totals, a decrease in
group insurance premiums, and a reduction in ESOP benefits. Occupancy expense
increased marginally, primarily due to an increase in the price of natural gas
used to heat branch buildings. Charges for supplies and printing, telephone and
other expenses remained relatively stable with only slight quarter over quarter
changes.
APPLICABLE INCOME TAXES. The following table shows the Company's income before
income taxes, as well as applicable income taxes and the effective tax rate for
three months ended March 31, 2001 and 2000.
Three Months Ended
March 31,
----------------------
2001 2000
------- -------
Income before income taxes $ 2,182 $ 1,398
Applicable income taxes 647 400
Effective tax rates 29.7% 28.6%
14.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Tax expense for the quarterly periods included benefits for tax-exempt income,
tax-advantaged investments and general business tax credits offset by the effect
of nondeductible expenses, including goodwill. The Company recorded income tax
expense of $647 and $400 for the quarters ended March 31, 2001 and 2000,
respectively. Effective tax rates equaled 29.7% and 28.6% respectively, for such
periods. The Company's effective tax rate was lower than statutory rates because
the Company derives interest income from municipal securities and loans, which
are exempt from federal tax and certain U.S. government agency securities, which
are exempt from Illinois state tax.
PREFERRED STOCK DIVIDENDS. The Company paid $65 of preferred stock dividends in
for the quarters ended March 31, 2001 and 2000.
INTEREST RATE SENSITIVITY MANAGEMENT
The business of the Company and the composition of its balance sheet consists of
investments in interest-earning assets (primarily loans and securities) which
are primarily funded by interest-bearing liabilities (deposits and borrowings).
All of the financial instruments of the Company are for other than trading
purposes. Such financial instruments have varying levels of sensitivity to
changes in market rates of interest. The operating income and net income of the
Banks depend, to a substantial extent, on "rate differentials," i.e., the
differences between the income the Banks receive from loans, securities, and
other earning assets and the interest expense they pay to obtain deposits and
other liabilities. These rates are highly sensitive to many factors that are
beyond the control of the Banks, including general economic conditions and the
policies of various governmental and regulatory authorities.
The Company measures its overall interest rate sensitivity through a net
interest income analysis. The net interest income analysis measures the change
in net interest income in the event of hypothetical changes in interest rates.
This analysis assesses the risk of changes in net interest income in the event
of a sudden and sustained 100 to 200 basis point increase or decrease in market
interest rates. The tables below present the Company's projected changes in net
interest income for the various rate shock levels at March 31, 2001 and December
31, 2000.
March 31, 2001
-------------------------------------------
Net Interest Income
-------------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $ 24,973 $ (1,505) (5.68)%
+100 bp 25,623 (855) (3.23)
Base 26,478 -- --
-100 bp 27,135 657 2.48
-200 bp 27,046 568 2.15
Based upon the Company's model at March 31, 2001, the effect of an immediate 200
basis point increase in interest rates would decrease the Company's net interest
income by 5.68% or approximately $1,505. The effect of an immediate 200 basis
point decrease in rates would increase the Company's net interest income by
2.15% or approximately $568.
15.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
December 31, 2001
-------------------------------------------
Net Interest Income
-------------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $ 24,188 $ (1,485) (5.78)%
+100 bp 24,783 (890) (3.47)
Base 25,673 -- --
-100 bp 26,338 665 2.59
-200 bp 26,227 554 2.16
Based upon the Company's model at December 31, 2000, the effect of an immediate
200 basis point increase in interest rates would decrease the Company's net
interest income by 5.78% or approximately $1,485. The effect of an immediate 200
basis point decrease in rates would increase the Company's net interest income
by 2.16% or approximately $554.
FINANCIAL CONDITION
GENERAL. As of March 31, 2001, the Company had total assets of $752,624, net
loans of $496,421, total deposits of $616,772, and total stockholders' equity of
$61,679. Total assets decreased by $6,109 or 0.8% from year-end 2000. Total net
loans decreased by $2,259 or 0.5% from year-end 2000 and reflected tighter
underwriting standards and normal paydowns. Total deposits decreased by $19,231
or 3.0% from year-end 2000 and was attributable to management's strategic plan
to decrease the cost of funds through the run off of certain higher costing
jumbo certificates.
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 non-performing assets. Other
non-performing assets consist of real estate acquired through loan foreclosures
or other workout situations and other assets acquired through repossessions.
Under Statement of Financial Accounting Standards No. 114 and No. 118, the
Company defined loans that will be individually evaluated for impairment to
include commercial loans and mortgages secured by commercial properties or
five-plus family residences that are in nonaccrual status or were restructured.
All other smaller balance homogeneous loans are evaluated for impairment in
total.
At March 31, 2001, non-performing assets totaled $10,144 versus the $8,346 that
existed as of December 31, 2000. The level of non-performing loans to total end
of period loans was 1.91% at March 31, 2001, as compared to 1.56% at December
31, 2000. During the first quarter of 2001, the Company saw a rise in the number
of non-performing loans resulting from early detection of potential problem
credits. The following table summarizes non-performing assets and loans past due
90 days or more and still accruing for the previous five quarters.
16.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
2001 2000
------- ----------------------------------------
Mar 31, Dec 31, Sep 30, Jun 30, Mar 31,
------- ------- ------- ------- -------
Nonaccrual and impaired loans not
accruing $ 8,448 $ 5,777 $ 2,591 $ 2,777 $ 4,026
Impaired and other loans 90 days past
due and still accruing interest 1,134 2,102 2,439 620 573
------- ------- ------- ------- -------
Total non-performing loans 9,582 7,879 5,030 3,397 4,599
Other real estate owned 562 467 595 741 739
------- ------- ------- ------- -------
Total non-performing assets $10,144 $ 8,346 $ 5,625 $ 4,138 $ 5,338
======= ======= ======= ======= =======
Non-performing loans to total end of period loans 1.91% 1.56% 1.01% 0.71% 0.96%
Non-performing assets to total end of period loans 2.02 1.65 1.13 0.86 1.12
Non-performing assets to total end of period assets 1.35 1.10 0.77 0.58 0.76
The classification of a loan as impaired or nonaccrual does not necessarily
indicate that the principal is uncollectible, in whole or in part. The Banks
make a determination as to collectibility on a case-by-case basis. The Banks
consider both the adequacy of the collateral and the other resources of the
borrower in determining the steps to be taken to collect impaired or nonaccrual
loans. The final determination as to the steps taken is made based upon the
specific facts of each situation. Alternatives that are typically considered to
collect impaired or nonaccrual loans are foreclosure, collection under
guarantees, loan restructuring, or judicial collection actions.
Each of the Company's loans is assigned a rating based upon an internally
developed grading system. A separate credit administration department also
reviews grade assignments on an ongoing basis. Management continuously monitors
nonperforming, impaired, and past due loans to prevent further deterioration of
these loans. Management is not aware of any material loans classified for
regulatory purposes as loss, doubtful, substandard, or special mention that have
been excluded from classification under nonperforming assets or impaired loans.
Management further believes that credits classified as nonperforming assets or
impaired loans include any material loans as to which any doubts exist as to
their collectibility in accordance with the contractual terms of the loan
agreement.
The Company has a loan review function which is separate from the lending
function and is responsible for the review of new and existing loans. Potential
problem credits are monitored by the loan review function and are submitted for
review to the loan committee and audit committee members.
ALLOWANCE FOR LOAN LOSSES. At March 31, 2001, the allowance for loan losses
totaled $6,491 and increased to 1.29% of total loans outstanding as compared to
$4,103 or 0.86% at March 31, 2000. The quarter over quarter increase was
primarily influenced by a single non-performing commercial credit which led the
Company to increase the allowance by $2,900 during the fourth quarter of 2000.
In addition to this credit, there were a number of other loans identified in the
fourth quarter that had deteriorating conditions. In reaching the decision to
provide a larger provision during the fourth quarter of 2000, management also
considered several other factors, including an increase in non-performing loans,
general concerns over asset quality and an increase in charge-offs during 2000.
During the same time frame, net charge-offs increased to $232 during the first
quarter of 2001 compared to $181 for the like period in 2000.
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
17.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
borrower over the term of the loan; and in the case of a collateralized loan,
the quality of the collateral for such loan. The allowance for loan losses
represents the Company's estimate of the allowance necessary to provide for
probable incurred losses in the loan portfolio. In making this determination,
the Company analyzes the ultimate collectibility of the loans in its portfolio,
incorporating feedback provided by internal loan staff, the loan review
function, and information provided by examinations performed by regulatory
agencies. The Company makes an ongoing evaluation as to the adequacy of the
allowance for loan losses.
On a monthly basis, management of each of the subsidiary banks meets to review
the adequacy of the allowance for loan losses. Commercial credits are graded by
the loan officers and the Company's Loan Review Officer validates the officers'
grades. In the event that the Loan Review Officer downgrades the loan, it is
included in the allowance analysis at the lower grade. The grading system is in
compliance with the regulatory classifications and the allowance is allocated to
the loans based on the regulatory grading, except in instances where there are
known differences (i.e., collateral value is nominal, etc.). To establish the
appropriate level of the allowance, a sample of loans (including impaired and
nonperforming loans) are reviewed and classified as to potential loss exposure.
The analysis of the allowance for loan losses is comprised of three components:
specific credit allocation, general portfolio allocation, and subjective
determined allocation. The specific allocation includes a detailed review of the
credit in accordance with SFAS 114 and 118 and an allocation is made based on
this analysis. The general portfolio allocation consists of an assigned reserve
percentage based on loans by major category. The subjective portion is
determined based on the past five years of loan history and the Company's
evaluation of qualitative factors including future economic and industry
outlooks. In addition, the subjective portion of the allowance is influenced by
current economic conditions and trends in the portfolio including delinquencies
and impairments, as well as changes in the composition of the portfolio.
Commitments to extend credit and standby letters of credit are reviewed to
determine whether credit risk exists.
The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. These estimates are reviewed monthly, and as
adjustments, either positive or negative, become necessary, a corresponding
increase or decrease is made in the provision for loan losses. The composition
of the loan portfolio did not significantly change in the past year. The
methodology used to determine the adequacy of the allowance for loan losses is
consistent with prior years and there were no reallocations. Along with other
financial institutions, management shares a concern for the possible continued
softening of the economy in 2001. Should the economic climate continue to
deteriorate, borrowers may experience difficulty, and the level of
non-performing loans, charge-offs, and delinquencies could rise and require
further increases in the allowance.
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 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.
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
The Company classifies all of its investment 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 operating and investing activities,
offset by those provided by financing activities, resulted in a net decrease in
cash and cash equivalents of $12,647 from December 31, 2000 to March 31, 2001.
This usage was primarily related to the net increase in loans and securities and
decreases in deposits and federal funds purchased and securities sold under
agreements to repurchase.
During the first three months of 2001, the Company experienced a net cash
outflow of $9,885 from its investing activities primarily due to the growth in
the loan portfolio and securities and $7,991 in financing activities attributed
to a decrease in the deposit base. Operating activities, on the other hand,
provided net cash inflows of $5,229. Net proceeds from sales of loans accounted
for the majority of the increase in net cash inflow from operating activities.
CAPITAL RESOURCES
The Banks are expected to meet a minimum risk-based capital to risk-weighted
assets ratio of 8%, of which at least one-half (or 4%) must be in the form of
Tier 1 (core) capital. The remaining one-half (or 4%) may be in the form of Tier
1 (core) or Tier 2 (supplementary) capital. The amount of loan loss allowance
that may be included in capital is limited to 1.25% of risk-weighted assets. The
ratio of Tier 1 (core) and the combined amount of Tier 1 (core) and Tier 2
(supplementary) capital to risk-weighted assets for the Company was 9.94% and
11.30%, respectively, at March 31, 2001. The Company is currently, and expects
to continue to be, in compliance with these guidelines.
The Board of Governors of the Federal Reserve Bank ("FRB") has announced a
policy known as the "source of strength doctrine" that requires a bank holding
company to serve as a source of financial and managerial strength for its
subsidiary banks. The FRB has interpreted this requirement to require that a
bank holding company, such as the Company, stand ready to use available
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity. The FRB has stated that it would
generally view a failure to assist a troubled or failing subsidiary bank in
these circumstances as an unsound or unsafe banking practice or a violation of
the FRB's Regulation Y or both, justifying a cease and desist order or other
enforcement action, particularly if appropriate resources are available to the
bank holding company on a reasonable basis.
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
The following table sets forth an analysis of the Company's capital ratios:
December 31, Minimum Well
March 31, ---------------------- Capital Capitalized
2001 2000 1999 Ratios Ratios
-------- -------- -------- ------ ------
Tier 1 risk-based capital $ 53,326 $ 51,835 $ 50,115
Tier 2 risk-based capital 7,322 7,245 4,548
Total capital 60,648 59,080 54,663
Risk-weighted assets 536,598 537,549 494,953
Capital ratios
Tier 1 risk-based capital 9.94% 9.64% 10.13% 4.00% 6.00%
Tier 2 risk-based capital 11.30 10.99 11.04 8.00 10.00
Leverage ratio 7.15 6.90 7.20 4.00 5.00
As of March 31, 2001, the Tier 2 risk-based capital was comprised of $6,491 in
allowance for loan losses and $831 of Mandatory Redeemable Series B Preferred
Stock. The Series A Preferred Stock is convertible into common stock, subject to
certain adjustments intended to offset the amount of losses incurred by the
Company upon the post-closing sale of certain securities acquired in conjunction
with the 1996 acquisition of Prairie Bancorp, Inc.
IMPACT OF INFLATION, CHANGING PRICES, AND MONETARY POLICIES
The financial statements and related financial data concerning the Company have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary effect of inflation on the
operations of the Company is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, changes in interest rates have
a more significant effect on the performance of a financial institution than do
the effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Interest rates are highly
sensitive to many factors which are beyond the control of the Company, including
the influence of domestic and foreign economic conditions and the monetary and
fiscal policies of the United States government and federal agencies,
particularly the Federal Reserve Bank.
20.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or its subsidiaries is a party other than ordinary routine litigation
incidental to their respective businesses.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 24, 2001, the annual meeting of stockholders was held. At the
meeting, Charles J. Grako, Dennis J. McDonnell, John A. Shinkle, and
Scott C. Sullivan were elected to serve as Class III directors with
terms expiring in 2004. Continuing as Class I directors until 2002 are
Richard J. Berry, Walter E. Breipohl, Lawrence J. McGrogan, and John A.
Trainor. Continuing as Class II directors until 2003 are L. Paul
Broadus, Robert J. Doty, Jimmie D. Lansford and I.J. Reinhardt, Jr.
There were 3,970,074 issued and outstanding shares of common stock
entitled to vote at the annual meeting. The voting on each item
presented at the annual meeting was as follows:
Election of Directors For Withheld
--------- --------
Charles J. Grako 3,205,522 27,085
Dennis J. McDonnell 3,223,525 9,082
John A. Shinkle 3,182,552 50,055
Scott C. Sullivan 3,205,228 27,379
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
None
Reports on Form 8K:
None.
21.
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 MAY 14, 2001.
UNIONBANCORP, INC.
By: /s/ CHARLES J. GRAKO
-------------------------------------
Charles J. Grako
President and Principal Executive
Officer
By: /s/ KURT R. STEVENSON
-------------------------------------
Kurt R. Stevenson
Vice President and Principal
Financial and Accounting Officer
22.