================================================================================
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 June 30, 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
(Address of principal executive offices including zip code)
(815) 431-2720
(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 August 14, 2001
- ----------------------------- --------------------------------------
Common Stock, Par Value $1.00 3,977,099
================================================================================
UnionBancorp, Inc.
Form 10-Q Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. 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...........................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................25
Item 2. Changes in Securities and Use of Proceeds...........................25
Item 3. Defaults Upon Senior Securities.....................................25
Item 4. Submission of Matters to a Vote of Security Holders.................25
Item 5. Other Information...................................................25
Item 6. Exhibits and Reports on Form 8-K....................................25
SIGNATURES...................................................................26
i
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30, 2001 and December 31, 2000 (In Thousands, Except Share Data)
- -------------------------------------------------------------------------------------------------------
June 30, December 31,
2001 2000
--------- ---------
ASSETS
Cash and cash equivalents $ 22,806 $ 33,021
Securities available-for-sale 190,910 189,719
Loans 501,634 505,094
Allowance for loan losses (5,700) (6,414)
--------- ---------
Net loans 495,934 498,680
Premises and equipment, net 11,814 11,953
Intangible assets, net 9,068 9,552
Mortgage servicing rights 1,766 1,423
Other assets 12,615 14,385
--------- ---------
Total assets $ 744,913 $ 758,733
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 65,661 $ 72,956
Interest-bearing 544,431 563,047
--------- ---------
Total deposits 610,092 636,003
Federal funds purchased and securities sold
under agreements to repurchase 533 525
Advances from the Federal Home Loan Bank 52,408 43,408
Notes payable 9,775 10,275
Other liabilities 8,307 8,656
--------- ---------
Total liabilities 681,115 698,867
--------- ---------
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;
4,567,362 shares issued at June 30, 2001 and 4,555,811
shares issued at December 31, 2000 4,567 4,556
Surplus 21,820 21,734
Retained earnings 39,911 37,437
Accumulated other comprehensive income 1,389 61
Unearned compensation under stock option plans (96) (129)
--------- ---------
68,091 64,159
Treasury stock, at cost; 590,263 shares (5,124) (5,124)
--------- ---------
Total stockholders' equity 62,967 59,035
--------- ---------
Total liabilities and stockholders' equity $ 744,913 $ 758,733
========= =========
See Accompanying Notes to Unaudited Financial Statements
1.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months and Six Months Ended June 30, 2001 and 2000 (In Thousands, Except Share Data)
- ------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2001 2000 2001 2000
------- ------- ------- -------
Interest income
Loans $11,044 $10,690 $22,298 $20,967
Securities
Taxable 2,346 2,087 4,695 4,229
Exempt from federal income taxes 505 507 1,009 1,005
Federal funds sold and other 28 6 93 22
------- ------- ------- -------
Total interest income 13,923 13,290 28,095 26,223
------- ------- ------- -------
Interest expense
Deposits 6,845 6,418 14,245 12,552
Federal funds purchased and securities sold
under agreements to repurchase 21 121 34 179
Advances from the Federal Home Loan Bank 805 552 1,549 1,044
Notes payable 145 217 351 401
------- ------- ------- -------
Total interest expense 7,816 7,308 16,179 14,176
------- ------- ------- -------
Net interest income 6,107 5,982 11,916 12,047
Provision for loan losses 366 653 675 1,246
------- ------- ------- -------
Net interest income after
Provision for loan losses 5,741 5,329 11,241 10,801
------- ------- ------- -------
Noninterest income
Service charges 694 677 1,338 1,309
Merchant fee income 299 296 556 571
Trust income 170 188 342 376
Mortgage banking income 499 357 942 663
Insurance commissions and fees 632 617 1,303 1,578
Securities gains, net 209 -- 291 --
Other income 515 406 1,058 822
------- ------- ------- -------
3,018 2,541 5,830 5,319
------- ------- ------- -------
Noninterest expenses
Salaries and employee benefits 3,505 3,348 6,671 7,176
Occupancy expense, net 430 409 909 835
Furniture and equipment expense 380 470 786 917
Supplies and printing 149 160 316 292
Telephone 191 191 379 380
Amortization of intangible assets 236 274 484 550
Other expenses 1,585 1,454 3,061 3,008
------- ------- ------- -------
6,476 6,306 12,606 13,158
------- ------- ------- -------
Income before income taxes 2,283 1,564 4,465 2,962
Income taxes 698 476 1,345 876
------- ------- ------- -------
Net income 1,585 1,088 3,120 2,086
Preferred stock dividends 65 65 130 130
------- ------- ------- -------
Net income for common stockholders $ 1,520 $ 1,023 $ 2,990 $ 1,956
======= ======= ======= =======
Basic earnings per share $ 0.38 $ 0.26 $ 0.75 $ 0.49
======= ======= ======= =======
Diluted earnings per common share $ 0.38 $ 0.26 $ 0.75 $ 0.49
======= ======= ======= =======
Comprehensive income $ 1,556 $ 1,484 $ 4,448 $ 1,901
======= ======= ======= =======
See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2001 and 2000 (In Thousands)
- -------------------------------------------------------------------------------------------
Six Months Ended
June 30,
--------------------
2001 2000
-------- --------
Cash flows from operating activities
Net income $ 3,120 $ 2,086
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 657 785
Amortization of intangible assets 484 550
Amortization of unearned compensation under stock option plans 33 39
Amortization of bond premiums, net 121 49
Provision for loan losses 675 1,246
Securities (gains) losses, net (291) --
(Gain) loss on sale of equipment (4) 58
Loss on sale of real estate acquired in settlement of loans 71 41
Gain on sale of loans (834) (415)
Proceeds from sales of loans held for sale 64,669 28,256
Origination of loans held for sale (65,150) (23,629)
Change in assets and liabilities
(Increase) decrease in other assets 719 (2,338)
Increase (decrease) in other liabilities (349) 1,845
-------- --------
Net cash provided by operating activities 3,921 8,573
Cash flows from investing activities
Securities
Available-for-sale
Proceeds from maturities and paydowns 61,128 8,140
Proceeds from sales 4,988 --
Purchases (64,962) (7,104)
Net (increase) decrease in loans 2,756 (14,311)
Purchase of premises and equipment (518) (153)
Proceeds from sale of real estate acquired in settlement of loans 428 420
Proceeds from sale of equipment 4 40
-------- --------
Net cash provided by (used in) investing activities 3,824 (12,968)
Cash flows from financing activities
Net increase (decrease) in deposits $(25,911) $ 532
Net increase in federal funds purchased
and securities sold under agreements to repurchase 8 2,036
Increase in advances from the Federal Home Loan Bank 9,000 7,900
Payments on notes payable (500) --
Proceeds from notes payable -- 1,275
Dividends on common stock (517) (474)
Dividends on preferred stock (130) (130)
Proceeds from exercise of stock options 90 110
Purchase of treasury stock -- (1,274)
-------- --------
Net cash provided by (used in) financing
activities (17,960) 9,975
-------- --------
Net increase (decrease) in cash and cash equivalents (10,215) 5,580
Cash and cash equivalents
Beginning of period 33,021 27,230
-------- --------
End of period $ 22,806 $ 32,810
======== ========
See Accompanying Notes to Unaudited Financial Statements
3.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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
accounting principles generally accepted in the United States of America 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 operations
during the quarter and six month period ended June 30, 2001 are not necessarily
indicative of the results expected for the year ending December 31, 2001.
Note 2. Earnings Per Share
Basic earnings per share for the three months and six months ended June 30, 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 and six
months ended June 30, 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 Six Months Ended
June 30, June 30,
--------------- ---------------
2001 2000 2001 2000
------ ------ ------ ------
Net income available to common shareholders $1,520 $1,023 $2,990 $1,956
Weighted average common shares outstanding 3,975 3,958 3,971 3,997
------ ------ ------ ------
Basic Earnings Per Common Share $ 0.38 $ 0.26 $ 0.75 $ 0.49
====== ====== ====== ======
Diluted Earnings Per Common Share Three Months Ended Six Months Ended
June 30, June 30,
--------------- ---------------
2001 2000 2001 2000
------ ------ ------ ------
Weighted average common shares outstanding 3,975 3,958 3,971 3,997
Add: dilutive effect of assumed
exercised stock options 28 33 29 33
------ ------ ------ ------
Weighted average common and dilutive
Potential shares outstanding 4,003 3,991 4,000 4,030
====== ====== ====== ======
Diluted Earnings Per Common Share $ 0.38 $ 0.26 $ 0.75 $ 0.49
====== ====== ====== ======
There were approximately 103,600 options outstanding at June 30, 2001 that 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.
4.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 3. Securities
The Company's securities portfolio, which represented 28.0% of the Company's
average earning asset base as of June 30, 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 June 30, 2001 and December 31, 2000:
June 30, 2001
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
U.S. treasury $ 1,511 $ 17 $ -- $ 1,528
U.S. government agencies 48,568 575 (21) 49,122
U.S. government mortgage-backed securities 63,723 371 (213) 63,881
States and political subdivisions 43,102 1,225 (32) 44,295
Collateralized mortgage obligations 26,019 357 (4) 26,372
Other 5,712 -- -- 5,712
--------- --------- --------- ---------
$ 188,635 $ 2,545 $ (270) $ 190,910
========= ========= ========= =========
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 June 30, 2001 and December 31, 2000:
June 30, 2001 December 31, 2000
---------------------- ----------------------
$ % $ %
--------- --------- --------- ---------
Commercial $ 109,263 21.79% $117,534 23.27%
Agricultural 39,115 7.80 38,479 7.62
Real estate:
Commercial mortgages 138,808 27.67 134,942 26.72
Construction 20,752 4.14 19,322 3.83
Agricultural 39,403 7.85 39,658 7.85
1-4 family mortgages 96,968 19.33 99,237 19.65
Installment 54,801 10.92 53,276 10.55
Other 2,524 0.50 2,646 0.51
--------- --------- --------- ---------
Total loans 501,634 100.00% 505,094 100.00%
========= =========
Allowance for loan losses (5,700) (6,414)
--------- ---------
Loans, net $ 495,934 $ 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 June
30, 2001 and 2000 are summarized below:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Beginning balance $ 6,491 $ 4,103 $ 6,414 $ 3,691
Charge-offs:
Commercial 969 652 1,105 768
Real estate mortgages 180 40 230 65
Installment and other loans 111 61 174 149
-------- -------- -------- --------
Total charge-offs 1,260 753 1,509 982
-------- -------- -------- --------
Recoveries:
Commercial 82 7 87 30
Real estate mortgages -- 3 -- 3
Installment and other loans 21 17 33 42
-------- -------- -------- --------
Total recoveries 103 27 120 75
-------- -------- -------- --------
Net charge-offs 1,157 726 1,389 907
-------- -------- -------- --------
Provision for loan losses 366 653 675 1,246
-------- -------- -------- --------
Ending balance $ 5,700 $ 4,030 $ 5,700 $ 4,030
======== ======== ======== ========
Period end total loans, net of
unearned interest $501,634 $480,908 $501,634 $480,908
======== ======== ======== ========
Average loans $502,204 $481,195 $504,152 $477,578
======== ======== ======== ========
Ratio of net charge-offs to
average loans 0.23% 0.15% 0.28% 0.19%
Ratio of provision for loan losses
to average loans 0.07 0.14 0.13 0.26
Ratio of allowance for loan losses
to ending total loans 1.14 0.84 1.14 0.84
Ratio of allowance for loan losses
to total nonperforming loans 52.20 118.63 52.20 118.63
Ratio of allowance at end of period
to average loans 1.13 0.84 1.13 0.84
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. Information reported for internal performance
assessment is summarized below:
Six Months Ended
-------------------------------------
June 30, 2001
-------------------------------------
Banking Other Consolidated
Segment Segments Totals
------- -------- ------
Net interest income (loss) $ 12,237 $ (321) $ 11,916
Other revenue 3,890 1,940 5,830
Other expense 8,752 3,060 11,465
Segment profit (loss) 5,906 (1,441) 4,465
Noncash items
Depreciation 389 268 657
Provision for loan loss 675 -- 675
Goodwill and other intangibles 405 79 484
Segment assets 739,294 5,619 744,913
Six Months Ended
-------------------------------------
June 30, 2000
-------------------------------------
Banking Other Consolidated
Segment Segments Totals
------- -------- ------
Net interest income (loss) $ 12,237 $ (190) $ 12,047
Other revenue 3,234 2,805 5,319
Other expense 8,771 3,052 11,823
Segment profit (loss) 4,531 (1,569) 2,962
Noncash items
Depreciation 466 319 785
Provision for loan loss 1,246 -- 1,246
Goodwill and other intangibles 457 93 550
Segment assets 710,656 5,822 716,478
Note 8. New Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 141, "Business Combinations", which
requires that all business combinations be accounted for under a single method,
the purchase method. Use of the pooling-of-interests method is no longer
permitted. SFAS 141 requires that the purchase method be used for business
combinations initiated after June 30, 2001. Since this accounting standard
applies to business combinations initiated after June 30, 2001, it will have no
effect on the Company's financial statements unless the Company enters into a
business combination transaction.
8.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
In July 2001, the FASB also issued SFAS 142, "Goodwill and Other Intangible
Assets", which requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. The amortization of goodwill ceases upon
adoption of the Statement, which for most companies, will be January 1, 2002.
The Company is currently studying the requirements of this new accounting
standard to determine the impact to the financial statements.
9.
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 and six months ended
June 30, 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 quarter and six months ended June 30, 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 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 $1,585 or $0.38 per fully diluted share for the
three months ended June 30, 2001. This compares favorably with net income of
$1,088 or $0.26 per fully diluted share for the same period in 2000 and
represents a 46.2% increase in per share earnings and a 45.7% increase in net
income.
The quarter over quarter core increase in net income was primarily the result of
several factors. These include improvements in noninterest income associated
with revenue generated from the mortgage banking division, gain on sale of
securities, an improvement in net interest income, and a decrease in the
provision for loan losses.
10.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
For the six months ended June 30, 2001, net income equaled $3,120 or $0.75 per
fully diluted share compared with net income of $2,086 or $0.49 per fully
diluted share earned in the same period in 2000. This represents a 53.1%
increase in per share earnings and a 49.6% increase in net income.
As previously reported, the 2000 earnings included a one-time severance expense
associated with the resignation of the Company's former chief executive officer.
Excluding the effect of these expenditures from 2000 (approximately $290, net of
taxes), the Company's six months earnings would have equaled $2,375 or $0.56 per
fully diluted share.
Return on average assets was 0.84% for the second quarter of 2001 compared to
the 0.62% for the same period in 2000. Return on average assets was 0.83% for
the six months ended June 30, 2001, compared to 0.60% for the same period in
2000.
Return on average stockholders' equity was 10.16% for the second quarter of 2001
compared to 7.88% for the same period in 2000. Return on average stockholders'
equity was 10.17% for the six months ended June 30, 2001, compared to 7.54% for
the same period in 2000. Return on average tangible equity capital equaled
12.61% for the six months ended June 30, 2001, compared to 10.36% 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 diluted earnings per share, cash return on average assets, and cash return
on average equity capital are detailed as follows:
For the Three Months Ended June 30, 2001
-----------------------------------------
Reported Cash
Earnings Goodwill Other Earnings
-------- -------- -------- --------
Income before income taxes $ 2,283 $ 109 $ 127 $ 2,519
Income taxes 698 -- 49 747
-------- -------- -------- --------
Net income 1,585 109 78 1,772
Preferred stock dividends 65 -- -- 65
-------- -------- -------- --------
Net income for common stockholders $ 1,520 $ 109 $ 78 $ 1,707
======== ======== ======== ========
Diluted earnings per common share $ 0.38 $ 0.05 $ 0.04 $ 0.47
======== ======== ======== ========
Return on average assets 0.84% 0.94%
Return on average equity 10.16% 11.36%
11.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 2001
-----------------------------------------
Reported Cash
Earnings Goodwill Other Earnings
-------- -------- -------- --------
Income before income taxes $ 4,465 $ 199 $ 285 $ 4,949
Income taxes 1,345 -- 110 1,455
-------- -------- -------- --------
Net income 3,120 199 175 3,494
Preferred stock dividends 130 -- -- 130
-------- -------- -------- --------
Net income for common stockholders $ 2,990 $ 199 $ 175 $ 3,364
======== ======== ======== ========
Diluted earnings per common share $ 0.75 $ 0.05 $ 0.04 $ 0.84
======== ======== ======== ========
Return on average assets 0.83% 0.93%
Return on average equity 10.17% 11.39%
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.
Net interest income was $6,393 for the second quarter ended June 30, 2001,
compared with net interest income of $6,270 earned during the same period in
2000. This represented a increase of $123 and was primarily attributable to a
$44,850 increase in the volume of average earning assets. This increase was
partially offset by a rise in the cost of funds due to increased competition for
deposits during 2000 that have not yet repriced and a 12 basis point decrease in
rates earned on loans due to competitive pressures, overall tightening of loan
underwriting standards, and slower than expected loan growth.
The quarter over quarter net interest income increase resulted from higher
interest income of $632 offset by a $509 increase in interest expense. Further
breaking down the change, approximately 73% was related to an increase in volume
and 27% was related to a decrease in rate. The change in interest income
resulted from a $818 increase associated with volume offset by a $186 decrease
associated with rate. The majority of the change in interest income was related
to increases of $21,009 in the volume of average loans and $21,274 in the volume
of average securities. The change in interest expense resulted from a $625
increase associated with volume offset by a $116 associated with rate. The
majority of the change was associated with a increase of $25,796 in the average
balance of time deposits and an increase of 17 basis points in the rate paid on
total time deposits.
During the second quarter of 2001, the net interest margin on a tax equivalent
basis decreased 18 basis points to 3.65% compared to 3.83% earned during the
same period in 2000. The Company's net interest margin was compressed due to
escalating contractual interest rates paid on deposits and Federal Home Loan
12.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Bank advances from previous quarters which have not matured as interest rates
began their recent decline. Competitive pressures that made it difficult to
achieve commensurate pricing in loan yields and the cost of carrying a higher
level of nonperforming loans also contributed to the decrease. Yields on
interest-earning assets for the second quarter of 2001 decreased 19 basis points
to 8.10% as compared to the prior year's quarter of 8.29%. In contrast, rates
paid on interest-bearing liabilities for the second quarter of 2001 decreased
only 2 basis points to 5.08% as compared to the prior year's quarter of 5.10%.
With a lower interest rate environment during the first half of 2001 sparking a
slow but steady recovery in the margin, the net interest margin during the
second quarter of 2001 increased 14 basis points over the first quarter of 2001
mostly driven by a decrease in total funding costs.
Net interest income for the six months ended June 30, 2001 totaled $12,488,
representing a decrease of $132 or 1.0% over the $12,620 earned during the same
period in 2000. This compression in net interest income was attributable to
higher interest income of $1,871 offset by higher interest expense of $2,003.
The net interest margin for the first six months of 2001 decreased to 3.58%
compared to 3.87% for the same period in 2000.
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.
13.
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 June 30,
----------------------------------------------------------
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 $ 961 $ 12 5.01% $ 1,565 $ 27 6.94% $ (9) $ (6) $ (15)
Securities (1)
Taxable 155,861 2,329 5.99 134,332 2,060 6.17 324 (55) 269
Non-taxable (2) 40,910 766 7.51 41,165 767 7.49 11 (12) (1)
-------- -------- ---- -------- -------- ---- -------- -------- --------
Total securities
(tax equivalent) 196,771 3,095 6.31 175,497 2,827 6.48 335 (67) 268
-------- -------- ---- -------- -------- ---- -------- -------- --------
Federal funds sold 3,546 32 3.62 375 6 6.44 30 (4) 26
-------- -------- ---- -------- -------- ---- -------- -------- --------
Loans (3)(4)
Commercial 146,486 3,190 8.73 143,772 3,262 9.13 61 (133) (72)
Real estate 298,643 6,463 8.68 287,096 6,343 8.89 251 (131) 120
Installment and other 57,075 1,417 9.96 50,327 1,112 8.89 150 155 305
-------- -------- ---- -------- -------- ---- -------- -------- --------
Net loans
(tax equivalent) 502,204 11,070 8.84 481,195 10,717 8.96 462 (109) 353
-------- -------- ---- -------- -------- ---- -------- -------- --------
Total interest-earning
assets 703,482 14,209 8.10 658,632 13,577 8.29 818 (186) 632
-------- -------- ---- -------- -------- ---- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 18,940 20,489
Premises and equipment, net 11,824 12,895
Other assets 20,813 13,781
-------- --------
Total nonearning assets 51,577 47,165
-------- --------
Total assets $755,059 $705,797
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 42,634 $ 211 1.99% $ 52,199 $ 305 2.35% $ (52) $ (42) $ (94)
Money market accounts 51,810 395 3.06 36,171 361 4.01 132 (98) 34
Savings deposits 45,807 249 2.18 50,278 322 2.58 (27) (46) (73)
Time deposits 409,841 5,990 5.86 384,045 5,429 5.69 374 187 561
Federal funds purchased and
repurchase agreements 1,827 21 4.61 7,287 121 6.68 (71) (29) (100)
Advances from FHLB 55,452 805 5.82 35,843 552 6.17 287 (34) 253
Notes payable 9,809 145 5.93 10,775 217 8.14 (18) (54) (72)
-------- -------- ---- -------- -------- ---- -------- -------- --------
Total interest-bearing
liabilities 617,180 7,816 5.08 576,598 7,308 5.10 625 (116) 509
-------- -------- ---- -------- -------- ---- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 66,139 66,238
Other liabilities 8,360 7,560
-------- --------
Total noninterest-bearing
liabilities 74,499 73,798
-------- --------
Stockholders' equity 63,380 55,401
-------- --------
Total liabilities and stockholders'
equity $755,059 $705,797
======== ========
Net interest income (tax equivalent) $ 6,393 $ 6,270 $ 193 $ (70) $ 123
======== ======== ======== ======== ========
Net interest income (tax equivalent)
to total earning assets 3.65% 3.83%
==== ====
Interest-bearing liabilities to
earning assets 87.73% 87.54%
======== ========
- ----------------------------------------------
(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.
14.
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 Six Months Ended June 30,
----------------------------------------------------------
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 $ 1,284 $ 37 5.81% $ 1,833 $ 54 5.92% $ (16) $ (1) $ (17)
Securities (1)
Taxable 153,987 4,653 6.09 135,609 4,175 6.19 560 (82) 478
Non-taxable (2) 40,740 1,529 7.57 40,843 1,523 7.50 22 (16) 6
-------- -------- ----- -------- -------- ---- -------- -------- --------
Total securities (tax
equivalent) 194,727 6,182 6.40 176,452 5,698 6.49 582 (98) 484
-------- -------- ----- -------- -------- ---- -------- -------- --------
Federal funds sold 3,965 98 4.98 727 22 6.09 81 (5) 76
-------- -------- ----- -------- -------- ---- -------- -------- --------
Loans (3)(4)
Commercial 148,798 6,639 9.00 142,417 6,349 8.97 283 7 290
Real estate 298,854 12,876 8.69 285,969 12,510 8.85 554 (188) 366
Installment and other 56,500 2,835 10.12 49,192 2,163 8.84 345 327 672
-------- -------- ----- -------- -------- ---- -------- -------- --------
Net loans (tax
equivalent) 504,152 22,350 8.94 477,578 21,022 8.85 1,184 144 1,328
-------- -------- ----- -------- -------- ---- -------- -------- --------
Total interest-earning
assets 704,128 28,667 8.21 656,590 26,796 8.21 1,831 43 1,871
-------- -------- ----- -------- -------- ---- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 19,307 20,608
Premises and equipment, net 11,821 13,076
Other assets 20,415 13,738
-------- --------
Total nonearning assets 51,543 47,422
-------- --------
Total assets $755,671 $704,012
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 42,312 $ 462 2.20% $ 53,134 $ 617 2.34% $ (120) $ (35) $ (155)
Money market accounts 50,713 825 3.28 36,688 716 3.92 243 (134) 109
Savings deposits 45,352 517 2.30 50,783 645 2.55 (66) (62) (128)
Time deposits 416,282 12,441 6.03 384,053 10,574 5.54 920 947 1,867
Federal funds purchased and
repurchase agreements 1,594 34 4.30 5,824 179 6.18 (102) (43) (145)
Advances from FHLB 52,231 1,549 5.98 34,731 1,044 6.03 519 (14) 505
Notes payable 9,975 351 7.10 10,416 401 7.80 (17) (33) (50)
-------- -------- ----- -------- -------- ---- -------- -------- --------
Total interest-bearing
liabilities 618,459 16,179 5.28 575,629 14,176 4.95 1,377 626 2,003
-------- -------- ----- -------- -------- ---- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 66,562 65,632
Other liabilities 8,801 7,128
-------- --------
Total noninterest-bearing
liabilities 75,363 72,760
-------- --------
Stockholders' equity 61,849 55,623
-------- --------
Total liabilities and stockholders'
equity $755,671 $704,012
======== ========
Net interest income (tax equivalent) $ 12,488 $ 12,620 $ 451 $ (583) $ (132)
======== ======== ======== ======== ========
Net interest income (tax equivalent)
to total earning assets 3.58% 3.87%
===== ====
Interest-bearing liabilities to
earning assets 87.83% 87.67%
======== ========
- ----------------------------------------------
(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.
15.
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.
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
nonperforming loans, charge-offs, and delinquencies could rise and require
further increases in the provision.
The provision for loan losses charged to operating expense for the second
quarter of 2001 totaled $366 compared with $653 in 2000. Net charge-offs for the
second quarter of 2001 were $1,157 compared with $726 in 2000. The increase in
net charge-offs was largely the result of several credits which were early on
identified as requiring the status of watch list and specific allocation.
Subsequently, the identified credits deteriorated and management identified the
credits as non-bankable assets, which were charged off.
For the six month period ended June 30, 2001, the provision for loan losses
charged to operating expense equaled $675 compared to $1,246 for the same period
in 2000. Net charge-offs for the six month period were $1,389 compared with $907
in 2000. The increase in net charge-offs was largely the result of several
credits which were early on identified as requiring the status of watch list and
specific allocation. Subsequently, the identified credits deteriorated and
management identified the credits as non-bankable assets, which were charged
off.
Noninterest Income. The following table summarizes the Company's noninterest
income:
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ----------------
2001 2000 2001 2000
------ ------ ------ ------
Service charges $ 694 $ 677 $1,338 $1,309
Merchant fee income 299 296 556 571
Trust income 170 188 342 376
Mortgage banking income 499 357 942 663
Insurance commissions and fees 632 617 1,303 1,578
Securities gains, net 209 -- 291 --
Other income 515 406 1,058 822
------ ------ ------ ------
$3,018 $2,541 $5,830 $5,319
====== ====== ====== ======
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 $3,018 for the three months ended June 30, 2001 compared to
$2,541 for the same time frame in 2000. Exclusive of net securities gains,
noninterest income increased $268 or 10.6%. As a percentage of total income (net
interest income plus noninterest income), noninterest income, exclusive of
security gains, increased to 31.5% versus 29.8% for the second quarter of 2000.
16.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The majority of the increase was largely related to two factors. The first was a
$209 gain on sale of securities, which was a result of strategy to obtain call
protection by buying discount securities in the third quarter of 2000 that were
ultimately called at a gain during the second quarter of 2001. The second factor
was a $142 improvement in mortgage banking income associated with higher loan
origination and refinancing volume and growth in the servicing portfolio, partly
offset by an increase in amortization and impairment of mortgage servicing
rights. Also contributing to the improvement were marginal increases associated
with the internet service provider (ISP), overdraft and nsf fees, insurance
commissions, and prestige card transaction fees.
Noninterest income totaled $5,830 for the six months ended June 30, 2001,
compared to $5,319 for the same time frame in 2000. Exclusive of net securities
gains, noninterest income increased by $220 or 4.1%. As a percentage of total
income, noninterest income increased to 31.7% versus 30.6% for the six months of
2000. The increase was largely reflective of the same items discussed regarding
the second quarter.
Noninterest Expense. The following table summarizes the Company's noninterest
expense:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2001 2000 2001 2000
------- ------- ------- -------
Salaries and employee benefits $ 3,505 $ 3,348 $ 6,671 $ 7,176
Occupancy expense, net 430 409 909 835
Furniture and equipment expense 380 470 786 917
Supplies and printing 149 160 316 292
Telephone 191 191 379 380
Amortization of intangible assets 236 274 484 550
Other expenses 1,585 1,454 3,061 3,008
------- ------- ------- -------
$ 6,476 $ 6,306 $12,606 $13,158
======= ======= ======= =======
Noninterest expense, which is comprised primarily of compensation and employee
benefits, occupancy and other operating expenses, totaled $6,476 for the three
months ended June 30, 2001, as compared to $6,306 for the same timeframe in
2000. This represented an increase of $170 or 2.7%.
A majority of the quarter over quarter increase was reflective of a $157 or 4.7%
increase in salaries and employee benefits due to regular merit increases and
basic incentive compensation offset by decreases in group insurance premiums and
ESOP benefits. Occupancy expense increased marginally, primarily due to building
repairs and maintenance and a slight increase in property and casualty
insurance. Also contributing to the change was an increase in other expenses
driven by debit card transaction expense and personnel recruitment fees. These
increases were offset by reductions in furniture and equipment expense due to
lower depreciation and full impairment of intangible assets associated with two
segments that reduced the level of related amortization expense.
Noninterest expense totaled $12,606 for the six months ended June 30, 2001,
decreasing by $552 or 4.2% from the same period in 2000. 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 $474), core noninterest expense on a quarter over quarter basis
decreased 0.6% or $78.
17.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Applicable Income Taxes. The following table shows the Company's income before
income taxes, as well as applicable income taxes and the effective tax rate for
three months and six months ended June 30, 2001 and 2000.
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2001 2000 2001 2000
------ ------ ------ ------
Income before income taxes $2,283 $1,564 $4,465 $2,962
Applicable income taxes 698 476 1,345 876
Effective tax rates 30.6% 30.4% 30.1% 29.6%
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 $698 and $476 for the quarters ended June 30, 2001 and 2000,
respectively. Effective tax rates equaled 30.6% and 30.4% respectively, for such
periods. The Company recorded income tax expense of $1,345 and $876 for the six
months ended June 30, 2001 and 2000, respectively. Effective tax rates equaled
30.1% and 29.6% 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 for
the quarters ended June 30, 2001 and 2000. The Company paid $130 of preferred
stock dividends for the six months ended June 30, 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 June 30, 2001 and December
31, 2000.
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
June 30, 2001
-----------------------------------------
Net Interest Income
-----------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $25,634 $(1,413) (5.22)%
+100 bp 26,245 (802) (2.97)
Base 27,047 -- --
-100 bp 27,739 692 2.56
-200 bp 27,714 667 2.47
Based upon the Company's model at June 30, 2001, the effect of an immediate 200
basis point increase in interest rates would decrease the Company's net interest
income by 5.22% or approximately $1,413. The effect of an immediate 200 basis
point decrease in rates would increase the Company's net interest income by
2.47% or approximately $667.
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.
Modeling the sensitivity of earnings to interest rate risk is highly dependent
on the numerous assumptions embedded in the model. While the earnings
sensitivity analysis incorporates management's best estimate of interest rate
and balance sheet dynamics under various market rate movements, the actual
behavior and resulting earnings impact will likely differ from that projected.
The Company's interest rate and market risk profile has not materially changed
from the year ended December 31, 2000. Please refer to the Company's Form 10-K
filed on March 19, 2001 for further discussion of the Company's market and
interest rate risk.
Financial Condition
General. As of June 30, 2001, the Company had total assets of $744,913, gross
loans of $501,634, total deposits of $610,092, and total stockholders' equity of
$62,967. Total assets decreased by $13,820 or 1.8% from year-end 2000. Total
gross loans decreased by $3,460 or 0.7% from year-end 2000 and reflected tighter
underwriting standards and normal paydowns. Total deposits decreased by $25,911
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
or 4.1% 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
non-core certificates of deposits.
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.
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 June 30, 2001, nonperforming assets totaled $11,518 versus the $8,346 that
existed as of December 31, 2000. The level of nonperforming assets to total end
of period assets was 1.55% at June 30, 2001, as compared to 1.10% at December
31, 2000. Despite a diversified loan portfolio, the Company has experienced
credit quality deterioration in a number of business segments. During the second
quarter of 2001, the Company saw a rise in the number of nonperforming loans
resulting from continued economic slowdown and early detection of potential
problem credits.
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 nonperforming assets have been evaluated in this manner. 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.
20.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The following table summarizes nonperforming assets and loans past due 90 days
or more and still accruing for the previous five quarters.
2001 2000
------------------ -----------------------------
Jun 30, Mar 31, Dec 31, Sep 30, Jun 30,
------- ------- ------- ------- -------
Nonaccrual and impaired loans not
accruing $ 8,237 $ 8,448 $ 5,777 $ 2,591 $ 2,777
Impaired and other loans 90 days past
due and still accruing interest 2,683 1,134 2,102 2,439 620
------- ------- ------- ------- -------
Total nonperforming loans 10,920 9,582 7,879 5,030 3,397
Other real estate owned 598 562 467 595 741
------- ------- ------- ------- -------
Total nonperforming assets $11,518 $10,144 $ 8,346 $ 5,625 $ 4,138
======= ======= ======= ======= =======
Nonperforming loans to total end of period loans 2.18% 1.91% 1.56% 1.01% 0.71%
Nonperforming assets to total end of period loans 2.30 2.02 1.65 1.13 0.86
Nonperforming assets to total end of period assets 1.55 1.35 1.10 0.77 0.58
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 June 30, 2001, the allowance for loan losses
totaled $5,700 and increased to 1.14% of total loans outstanding as compared to
$4,030 or 0.84% at June 30, 2000 and $6,400 or 1.27% at December 31, 2000. The
quarter over quarter increase was primarily influenced by a single nonperforming
commercial credit, which led the Company to increase the allowance by $2,900
during the fourth quarter of 2000. As of June 30, 2001, there has been no
significant change in the status of this credit. Interest has been paid as
agreed but there has been no principal reductions on this credit and the
collateral shortfall remains. 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 nonperforming loans, general concerns over asset quality and an increase in
charge-offs during 2000. During the first six months of 2001 the Company has
charged off a portion of these loans identified in the fourth quarter of 2000,
which has caused the allowance for loan losses as a percentage of total loans to
decrease. In addition as discussed previously even though there has been an
increase in loans categorized as nonperforming, the Company believes its
allowance for loan losses to be adequate at June 30, 2001.
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
21.
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 nonperforming
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.
22.
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 $10,215 from December 31, 2000 to June 30, 2001.
This usage was primarily related to the net decrease in deposits due to
management's strategic plan to decrease the cost of funds through the run off of
certain higher costing non-core certificates of deposits.
During the first six months of 2001, the Company experienced a net cash inflow
of $3,824 from its investing activities primarily due to proceeds from security
sales, maturities, and paydowns and a net cash inflow of $3,921 in operating
activities. Financing activities, on the other hand, provided net cash outflows
of $17,960 largely due to a net decrease in deposits.
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 10.24% and
11.45%, respectively, at June 30, 2001. The Company is currently, and expects to
continue to be, in compliance with these guidelines.
The Board of Governors of the Federal Reserve ("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.
23.
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
June 30, -------------------- Capital Capitalized
2001 2000 1999 Ratios Ratios
-------- -------- -------- ------ ------
Tier 1 risk-based capital $ 54,837 $ 51,835 $ 50,115
Tier 2 risk-based capital 6,531 7,245 4,548
Total capital 61,368 59,080 54,663
Risk-weighted assets 535,777 537,549 494,953
Capital ratios
Tier 1 risk-based capital 10.24% 9.64% 10.13% 4.00% 6.00%
Tier 2 risk-based capital 11.45 10.99 11.04 8.00 10.00
Leverage ratio 7.43 6.90 7.20 4.00 5.00
As of June 30, 2001, the Tier 2 risk-based capital was comprised of $5,700 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
This information required by this item 3 is incorporated by reference from the
discussion on page 18 of this Form 10-Q under the caption "Interest Rate
Sensitivity Management" and the discussion on page 24 under the caption "Impact
of Inflation, Changing Prices, and Monetary Policies."
24.
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 and Use of Proceeds
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 3,950,709 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 8-K:
None.
25.
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
26.