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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 September 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.
Shares outstanding at
Class November 12, 2001
- ----------------------------- -----------------------------
Common Stock, Par Value $1.00 3,977,099
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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 and Comprehensive 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
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................25
Item 2. Changes in Securities..................................................................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
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, 2001 and December 31, 2000 (In Thousands, Except Share Data)
- -----------------------------------------------------------------------------------------------------------------
September 30, December 31,
2001 2000
----------- -----------
ASSETS
Cash and cash equivalents $ 26,711 $ 33,021
Securities available-for-sale 198,484 189,719
Loans 506,757 505,094
Allowance for loan losses (4,700) (6,414)
----------- -----------
Net loans 502,057 498,680
Premises and equipment, net 11,891 11,953
Intangible assets, net 8,837 9,552
Mortgage servicing rights 1,927 1,423
Other assets 12,662 14,385
----------- -----------
Total assets $ 762,569 $ 758,733
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 65,522 $ 72,956
Interest-bearing 541,450 563,047
----------- -----------
Total deposits 606,972 636,003
Federal funds purchased and securities sold
under agreements to repurchase 5,793 525
Advances from the Federal Home Loan Bank 66,408 43,408
Notes payable 9,275 10,275
Other liabilities 8,269 8,656
----------- -----------
Total liabilities 696,717 698,867
----------- -----------
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 September 30, 2001 and 4,555,811
shares issued at December 31, 2000 4,567 4,556
Surplus 21,820 21,734
Retained earnings 41,037 37,437
Accumulated other comprehensive income 2,303 61
Unearned compensation under stock option plans (82) (129)
----------- -----------
70,145 64,159
Treasury stock, at cost; 590,263 shares (5,124) (5,124)
----------- -----------
Total stockholders' equity 65,021 59,035
----------- -----------
Total liabilities and stockholders' equity $ 762,569 $ 758,733
=========== ===========
See Accompanying Notes to Unaudited Financial Statements
1.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months and Nine Months Ended September 30, 2001 and 2000 (In Thousands, Except Share Data)
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
-------------- ------------- ------------- --------------
Interest income
Loans $ 10,628 $ 11,035 $ 32,926 $ 32,002
Securities
Taxable 2,062 2,172 6,757 6,401
Exempt from federal income taxes 502 515 1,511 1,520
Federal funds sold and other 44 126 137 148
-------------- ------------- ------------- --------------
Total interest income 13,236 13,848 41,331 40,071
-------------- ------------- ------------- --------------
Interest expense
Deposits 6,151 7,094 20,396 19,646
Federal funds purchased and securities sold
under agreements to repurchase 22 42 56 221
Advances from the Federal Home Loan Bank 748 635 2,297 1,679
Notes payable 149 220 500 621
-------------- ------------- ------------- --------------
Total interest expense 7,070 7,991 23,249 22,167
-------------- ------------- ------------- --------------
Net interest income 6,166 5,857 18,082 17,904
Provision for loan losses 596 753 1,271 1,999
-------------- ------------- ------------- --------------
Net interest income after
Provision for loan losses 5,570 5,104 16,811 15,905
-------------- ------------- ------------- --------------
Noninterest income
Service charges 719 713 2,057 2,022
Merchant fee income 301 314 857 885
Trust income 159 183 501 559
Mortgage banking income 494 320 1,436 983
Insurance commissions and fees 582 652 1,885 2,230
Securities gains, net 264 - 555 2
Other income 526 833 1,584 1,653
-------------- ------------- ------------- --------------
3,045 3,015 8,875 8,334
-------------- ------------- ------------- --------------
Noninterest expenses
Salaries and employee benefits 3,514 3,046 10,185 10,222
Occupancy expense, net 421 458 1,330 1,293
Furniture and equipment expense 402 432 1,188 1,349
Supplies and printing 155 119 471 411
Telephone 197 184 576 564
Amortization of intangible assets 231 497 715 1,047
Other expenses 1,611 1,466 4,672 4,474
-------------- ------------- ------------- --------------
6,531 6,202 19,137 19,360
-------------- ------------- ------------- --------------
Income before income taxes 2,084 1,917 6,549 4,879
Income taxes 616 668 1,961 1,544
-------------- ------------- ------------- --------------
Net income 1,468 1,249 4,588 3,335
Preferred stock dividends 64 64 194 194
-------------- ------------- ------------- --------------
Net income for common stockholders $ 1,404 $ 1,185 $ 4,394 $ 3,141
============== ============= ============= ==============
Basic earnings per share $ 0.35 $ 0.30 $ 1.11 $ 0.79
============== ============= ============= ==============
Diluted earnings per common share $ 0.35 $ 0.30 $ 1.10 $ 0.78
============== ============= ============= ==============
Comprehensive income $ 2,382 $ 2,459 $ 6,830 $ 3,645
============== ============= ============= ==============
See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2001 and 2000 (In Thousands)
- -------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
---------------------------
2001 2000
------------ -----------
Cash flows from operating activities
Net income $ 4,588 $ 3,335
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 998 1,165
Amortization of intangible assets 715 1,047
Amortization of unearned compensation under stock option plans 47 57
Amortization of bond premiums, net 326 60
Provision for loan losses 1,271 1,999
Securities gains, net (555) (2)
(Gain) loss on sale of equipment (4) 71
Loss on sale of real estate acquired in settlement of loans 52 64
Gain on sale of loans (1,252) (614)
Gain on sale of subsidiary, net - (438)
Proceeds from sales of loans held for sale 92,093 40,517
Origination of loans held for sale (91,294) (35,249)
Change in assets and liabilities
(Increase) decrease in other assets (620) (3,001)
Increase (decrease) in other liabilities (387) 1,144
------------- -----------
Net cash provided by operating activities 5,978 10,155
Cash flows from investing activities
Securities
Available-for-sale
Proceeds from maturities and paydowns 102,114 16,286
Proceeds from sales 11,017 -
Purchases (118,011) (20,002)
Net decrease in federal funds sold 500 -
Net increase in loans (4,860) (30,384)
Purchase of premises and equipment (936) (321)
Proceeds from sale of real estate acquired in settlement of loans 546 566
Branch sale, net of cash and cash equivalents received - 438
Proceeds from sale of equipment 4 241
------------ -----------
Net cash used in investing activities (9,626) (33,176)
Cash flows from financing activities
Net increase (decrease) in deposits $ (29,031) $ 18,206
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 5,268 (3,852)
Increase in advances from the Federal Home Loan Bank 23,000 4,875
Payments on notes payable (1,000) (500)
Proceeds from notes payable - 1,275
Dividends on common stock (795) (712)
Dividends on preferred stock (194) (194)
Proceeds from exercise of stock options 90 112
Purchase of treasury stock - (1,274)
------------ ------------
Net cash provided by (used in) financing activities (2,662) 17,936
------------- -----------
Net decrease in cash and cash equivalents (6,310) (5,085)
Cash and cash equivalents
Beginning of period 33,021 27,230
------------ -----------
End of period $ 26,711 $ 22,145
============ ===========
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 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 three month and nine
month periods ended September 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 nine months ended September
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 nine months ended September 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 Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
-------------- ------------- ------------- --------------
Net income available to common shareholders $ 1,404 $ 1,185 $ 4,394 $ 3,141
Weighted average common shares outstanding 3,977 3,962 3,973 3,985
-------------- ------------- ------------- --------------
Basic Earnings Per Common Share $ 0.35 $ 0.30 $ 1.11 $ 0.79
============== ============= ============= ==============
Diluted Earnings Per Common Share Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
-------------- ------------- ------------- --------------
Weighted average common shares outstanding 3,977 3,962 3,973 3,985
Add: dilutive effect of assumed
exercised stock options 42 22 33 29
-------------- ------------- ------------- --------------
Weighted average common and dilutive
Potential shares outstanding 4,019 3,984 4,006 4,014
============== ============= ============= ==============
Diluted Earnings Per Common Share $ 0.35 $ 0.30 $ 1.10 $ 0.78
============== ============= ============= ==============
There were approximately 100,850 options outstanding at September 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 27.6% of the Company's
third quarter average earning asset base, 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 September 30, 2001 and December 31, 2000:
September 30, 2001
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------- ------------- --------------
U.S. treasury $ 6,499 $ 36 $ (2) $ 6,533
U.S. government agencies 46,457 1,026 (2) 47,481
U.S. government mortgage-backed securities 74,504 889 (99) 75,294
States and political subdivisions 38,224 1,330 (17) 39,537
Collateralized mortgage obligations 23,084 595 - 23,679
Other 5,960 - - 5,960
-------------- ------------- ------------- --------------
$ 194,728 $ 3,876 $ (120) $ 198,484
============== ============= ============= ==============
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 September 30, 2001 and December 31, 2000:
September 30, 2001 December 31, 2000
------------------------- --------------------------
$ % $ %
----------- ----------- ----------- ------------
Commercial $ 107,097 21.13% $ 117,534 23.27%
Agricultural 41,250 8.14 38,479 7.62
Real estate:
Commercial mortgages 144,078 28.43 134,942 26.72
Construction 24,466 4.83 19,322 3.83
Agricultural 38,528 7.60 39,658 7.85
1-4 family mortgages 95,555 18.86 99,237 19.65
Installment 53,292 10.52 53,276 10.55
Other 2,491 0.49 2,646 0.51
----------- ----------- ----------- ------------
Total loans 506,757 100.00% 505,094 100.00%
=========== ============
Allowance for loan losses (4,700) (6,414)
----------- -----------
Loans, net $ 502,057 $ 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 and nine months
ended September 30, 2001 and 2000 are summarized below:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
-------------- ------------- ------------- --------------
Beginning balance $ 5,700 $ 4,030 $ 6,414 $ 3,691
Charge-offs:
Commercial 1,137 95 2,242 863
Real estate mortgages 358 - 588 65
Installment and other loans 143 57 317 206
-------------- ------------- ------------- --------------
Total charge-offs 1,638 152 3,147 1,134
-------------- ------------- ------------- --------------
Recoveries:
Commercial 31 5 118 35
Real estate mortgages - - - 3
Installment and other loans 11 17 44 59
-------------- ------------- ------------- --------------
Total recoveries 42 22 162 97
-------------- ------------- ------------- --------------
Net charge-offs 1,596 130 2,985 1,037
-------------- ------------- ------------- --------------
Provision for loan losses 596 753 1,271 1,999
-------------- ------------- ------------- --------------
Ending balance $ 4,700 $ 4,653 $ 4,700 $ 4,653
============== ============= ============= ==============
Period end total loans, net of
unearned interest $ 506,757 $ 496,386 $ 506,757 $ 496,386
============== ============= ============= ==============
Average loans $ 504,580 $ 488,265 $ 504,296 $ 481,166
============== ============= ============= ==============
Ratio of net charge-offs to
average loans 0.32% 0.03% 0.59% 0.22%
Ratio of provision for loan losses
to average loans 0.12 0.15 0.25 0.42
Ratio of allowance for loan losses
to ending total loans 0.93 0.94 0.93 0.94
Ratio of allowance for loan losses
to total nonperforming loans 41.49 92.50 41.49 92.50
Ratio of allowance at end of period
to average loans 0.93 0.95 0.93 0.97
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:
Nine Months Ended
----------------------------------------------
September 30, 2001
----------------------------------------------
Banking Other Consolidated
Segment Segments Totals
------- -------- ------
Net interest income (loss) $ 18,545 $ (463) $ 18,082
Other revenue 6,043 2,832 8,875
Other expense 13,298 4,126 17,424
Segment profit (loss) 8,833 (2,284) 6,549
Noncash items
Depreciation 591 407 998
Provision for loan loss 1,271 - 1,271
Goodwill and other intangibles 596 119 715
Segment assets 757,052 5,517 762,569
Nine Months Ended
----------------------------------------------
September 30, 2000
----------------------------------------------
Banking Other Consolidated
Segment Segments Totals
------- -------- ------
Net interest income (loss) $ 18,179 $ (275) $ 17,904
Other revenue 5,144 3,190 8,334
Other expense 12,911 4,237 17,148
Segment profit (loss) 7,082 (2,203) 4,879
Noncash items
Depreciation 689 476 1,165
Provision for loan loss 1,999 - 1,999
Goodwill and other intangibles 914 133 1,047
Segment assets 721,606 5,258 726,864
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 nine months ended
September 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 three month and nine months period ended September 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.
In October of 2001, the Company completed the integration of two of its
subsidiaries, UnionTrust Corporation and UnionFinancial Services, Inc. The
consolidated company was renamed UnionFinancial Services & Trust Company. This
initiative was completed in order to maximize growth and revenue opportunities
partially by eliminating confusion in the marketplace, provide a better
deployment of capital, and realize economies of scale. Also during October,
UnionData Corp, Inc. was merged into the Holding Company in order to provide a
flatter more efficient organizational structure.
10.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Results of Operations
Net Income. Net income equaled $1,468 or $0.35 per fully diluted share for the
three months ended September 30, 2001. This compares favorably with net income
of $1,249 or $0.30 per fully diluted share for the same period in 2000 and
represents increases of 16.7% in per share earnings and 17.5% in net income.
The quarter over quarter earnings growth was driven by the continued strong
performance of mortgage banking revenue, increased profitability in net interest
income, gains on the sale of securities, and a decrease in the provision for
loan losses. These improvements were offset by an increase in noninterest
expense incurred to support the growing levels of business activities and
continued investments in the Company.
For the nine months ended September 30, 2001, net income equaled $4,588 or $1.10
per fully diluted share compared with net income of $3,335 or $0.78 per fully
diluted share earned in the same period in 2000. This represents increases of
41.0% in per share earnings and 37.6% in net income.
As previously reported, the 2000 earnings included one-time severance expenses
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 nine months earnings would have equaled $3,625 or $0.85
per fully diluted share.
Return on average assets was 0.77% for the third quarter of 2001 compared to the
0.68% for the same period in 2000. Return on average assets was 0.81% for the
nine months ended September 30, 2001, compared to 0.63% for the same period in
2000.
Return on average stockholders' equity was 9.07% for the third quarter of 2001
compared to 8.65% for the same period in 2000. Return on average stockholders'
equity was 9.79% for the nine months ended September 30, 2001, compared to 7.92%
for the same period in 2000. Return on average tangible equity capital equaled
12.09% for the nine months ended September 30, 2001, compared to 11.29% for the
same period in 2000.
11.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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 diluted common share, cash return on average assets, and cash
return on average equity capital are detailed as follows:
For the Three Months Ended September 30, 2001
---------------------------------------------------------------
Reported Cash
Earnings Goodwill Other Earnings
-------------- ------------- ------------- --------------
Income before income taxes $ 2,084 $ 99 $ 132 $ 2,315
Income taxes 616 - 52 668
-------------- ------------- ------------- --------------
Net income 1,468 99 80 1,647
Preferred stock dividends 64 - - 64
-------------- ------------- ------------- --------------
Net income for common stockholders $ 1,404 $ 99 $ 80 $ 1,583
============== ============= ============= ==============
Diluted earnings per common share $ 0.35 $ 0.02 $ 0.02 $ 0.39
============== ============= ============= ==============
Return on average assets 0.77% 0.86%
Return on average equity 9.07% 10.17%
For the Nine Months Ended September 30, 2001
---------------------------------------------------------------
Reported Cash
Earnings Goodwill Other Earnings
-------------- ------------- ------------- --------------
Income before income taxes $ 6,549 $ 298 $ 417 $ 7,264
Income taxes 1,961 - 162 2,123
-------------- ------------- ------------- --------------
Net income 4,588 298 255 5,141
Preferred stock dividends 194 - - 194
-------------- ------------- ------------- --------------
Net income for common stockholders $ 4,394 $ 298 $ 255 $ 4,947
============== ============= ============= ==============
Diluted earnings per common share $ 1.10 $ 0.07 $ 0.06 $ 1.23
============== ============= ============= ==============
Return on average assets 0.81% 0.91%
Return on average equity 9.79% 10.97%
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 the rates earned and paid, 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.
12.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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 $6,448 for the third quarter ended September 30, 2001,
compared with $6,151 earned during the same period in 2000. This represented an
improvement of $297 and was primarily attributable to a $26,421 increase in the
volume of average earning assets. Also contributing to the increase, was a
decrease in the cost of funds due to sustained interest rate cuts by the Federal
Reserve partially offset by decreases in rates earned on loans due to
competitive pressures, overall tightening of loan underwriting standards, slower
than expected loan growth, and the cost of carrying a higher level of
nonperforming loans.
The quarter over quarter increase in net interest income resulted from lower
interest income of $624 offset by a $921 decrease in interest expense. Further
breaking down the change, approximately 83% was related to an increase in volume
and 17% was related to a decrease in rate. The change in interest income
resulted from a $521 increase associated with volume offset by a $1,145 decrease
associated with rate. The majority of the change in interest income was related
to decreases of 61 basis points in yields earned on loans and 63 basis points in
yields earned on total securities. The change in interest expense resulted from
a $275 increase associated with volume offset by a $1,196 decrease associated
with rate. The majority of the change was associated with a decrease of 69 basis
points in the rates paid on total time deposits.
During the third quarter of 2001, the net interest margin on a tax equivalent
basis increased 2 basis points to 3.63% compared to 3.61% earned during the same
period in 2000. The Company's net interest margin was positively impacted by
repricing liabilities at lower levels partially offset by narrower loan spreads
due to competitive pressures and the cost of carrying a higher level of
nonperforming assets. Specifically, yields on interest-earning assets for the
third quarter of 2001 decreased 66 basis points to 7.61% as compared to the
prior year's quarter of 8.27%. In contrast, rates paid on interest-bearing
liabilities for the third quarter of 2001 decreased 77 basis points to 4.54% as
compared to the prior year's quarter of 5.31%.
Net interest income for the nine months ended September 30, 2001 totaled
$18,937, representing a increase of $166 or 0.9% over the $18,771 earned during
the same period in 2000. The increase in net interest income was attributable to
higher interest income of $1,248 offset by a higher interest expense of $1,082.
The net interest margin for the first nine months of 2001 decreased to 3.60%
compared to 3.78% 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 September 30,
----------------------------------------------------------------------
2001 2000
-------------------------------- --------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
-------- -------- ------- -------- -------- -------
ASSETS
Interest-earning assets
Interest-earning deposits $ 1,101 $ 9 3.24% $ 2,400 $ 37 6.12%
Securities (1)
Taxable 153,163 2,057 5.33 139,035 2,136 6.10
Non-taxable (2) 40,558 760 7.43 41,768 779 7.40
-------- -------- ------- -------- -------- -------
Total securities (tax equivalent) 193,721 2,817 5.77 180,803 2,915 6.40
-------- -------- ------- -------- -------- -------
Federal funds sold 5,144 39 3.01 6,657 126 7.51
-------- -------- ------- -------- -------- -------
Loans (3)(4)
Commercial 149,492 2,974 7.89 143,834 3,362 9.27
Real estate 298,387 6,260 8.32 290,228 6,387 8.73
Installment and other 56,701 1,419 9.93 54,203 1,315 9.63
-------- -------- ------- -------- -------- -------
Net loans (tax equivalent) 504,580 10,653 8.38 488,265 11,064 8.99
-------- -------- ------- -------- -------- -------
Total interest-earning assets 704,546 13,518 7.61 678,125 14,142 8.27
-------- -------- ------- -------- -------- -------
Noninterest-earning assets
Cash and cash equivalents 20,996 24,053
Premises and equipment, net 11,858 12,505
Other assets 21,148 15,523
-------- --------
Total nonearning assets 54,002 52,081
-------- --------
Total assets $758,548 $730,206
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 48,847 $ 214 1.74% $ 57,083 $ 348 2.42%
Money market accounts 54,682 377 2.74 41,658 427 4.07
Savings deposits 47,854 252 2.09 47,075 305 2.57
Time deposits 397,364 5,308 5.30 398,484 6,013 5.99
Federal funds purchased and
repurchase agreements 3,302 22 2.64 2,616 42 6.37
Advances from FHLB 55,625 748 5.34 39,572 636 6.38
Notes payable 9,640 149 6.13 10,496 220 8.32
-------- -------- ------- -------- -------- -------
Total interest-bearing liabilities 617,314 7,070 4.54 576,984 7,991 5.31
-------- -------- ------- -------- -------- -------
Noninterest-bearing liabilities
Noninterest-bearing deposits 68,080 68,060
Other liabilities 8,925 7,698
-------- --------
Total noninterest-bearing liabilities 77,005 75,758
-------- --------
Stockholders' equity 64,229 57,464
-------- --------
Total liabilities and stockholders' equity $758,548 $730,206
======== ========
Net interest income (tax equivalent) $ 6,448 $ 6,151
======== ========
Net interest income (tax equivalent) to
total earning assets 3.63% 3.61%
======= =======
Interest-bearing liabilities to earning assets 87.62% 88.03%
======== ========
Change Due To:
----------------------------------
Volume Rate Net
-------- -------- --------
ASSETS
Interest-earning assets
Interest-earning deposits $ (15) $ (13) $ (28)
Securities (1)
Taxable 205 (284) (79)
Non-taxable (2) (5) (14) (19)
-------- -------- --------
Total securities (tax equivalent) 200 (298) (98)
-------- -------- --------
Federal funds sold (24) (63) (87)
-------- -------- --------
Loans (3)(4)
Commercial 128 (516) (388)
Real estate 177 (304) (127)
Installment and other 55 49 104
-------- -------- --------
Net loans (tax equivalent) 360 (771) (411)
-------- -------- --------
Total interest-earning assets 521 (1,145) (624)
-------- -------- --------
Noninterest-earning assets
Cash and cash equivalents
Premises and equipment, net
Other assets
Total nonearning assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ (45) $ (89) $ (134)
Money market accounts 112 (162) (50)
Savings deposits 5 (58) (53)
Time deposits (17) (688) (705)
Federal funds purchased and
repurchase agreements 9 (29) (20)
Advances from FHLB 228 (116) 112
Notes payable (17) (54) (71)
-------- -------- --------
Total interest-bearing liabilities 275 (1,196) (921)
-------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Total noninterest-bearing liabilities
Stockholders' equity
Total liabilities and stockholders' equity
Net interest income (tax equivalent) $ 246 $ 51 $ 297
======== ======== ========
Net interest income (tax equivalent) to
total earning assets
Interest-bearing liabilities to earning assets
- ----------------------------------
<FN>
(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.
</FN>
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 Nine Months Ended September 30,
------------------------------------------------------------------------
2001 2000
--------------------------------- ---------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
-------- -------- -------- -------- -------- --------
ASSETS
Interest-earning assets
Interest-earning deposits $ 1,222 $ 46 5.03% $ 2,023 $ 91 5.99%
Securities (1)
Taxable 153,710 6,710 5.84 136,758 6,311 6.15
Non-taxable (2) 40,678 2,289 7.52 41,154 2,302 7.45
-------- -------- -------- -------- -------- --------
Total securities (tax equivalent) 194,388 8,999 6.19 177,912 8,613 6.45
-------- -------- -------- -------- -------- --------
Federal funds sold 4,362 137 4.20 2,720 148 7.25
-------- -------- -------- -------- -------- --------
Loans (3)(4)
Commercial 149,032 9,613 8.62 142,892 9,777 9.11
Real estate 298,696 19,137 8.57 287,399 18,570 8.61
Installment and other 56,568 4,254 10.05 50,875 3,739 9.79
-------- -------- -------- -------- -------- --------
Net loans (tax equivalent) 504,296 33,004 8.75 481,166 32,086 8.88
-------- -------- -------- -------- -------- --------
Total interest-earning assets 704,268 42,186 8.01 663,821 40,938 8.22
-------- -------- -------- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 19,876 21,765
Premises and equipment, net 11,834 12,884
Other assets 20,662 14,337
-------- --------
Total nonearning assets 52,372 48,986
-------- --------
Total assets $756,640 $712,807
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 44,514 $ 676 2.03% $ 53,460 $ 965 2.36%
Money market accounts 52,051 1,202 3.09 38,357 1,143 3.97
Savings deposits 46,195 769 2.23 49,558 950 2.55
Time deposits 409,906 17,749 5.79 388,877 16,587 5.68
Federal funds purchased and
repurchase agreements 2,170 56 3.45 4,747 221 6.20
Advances from FHLB 53,375 2,297 5.75 36,357 1,680 6.16
Notes payable 9,862 500 6.78 10,443 621 7.92
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 618,073 23,249 5.03 582,799 22,167 5.07
-------- -------- -------- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 67,073 66,447
Other liabilities 8,843 7,320
-------- --------
Total noninterest-bearing liabilities 75,916 73,767
--------
Stockholders' equity 62,651 56,241
-------- --------
Total liabilities and stockholders' equity $756,640 $712,807
======== ========
Net interest income (tax equivalent) $ 18,937 $ 18,771
======== ========
Net interest income (tax equivalent) to
total earning assets 3.60% 3.78%
======== ========
Interest-bearing liabilities to earning assets 87.76% 87.79%
======== ========
Change Due To:
----------------------------------
Volume Rate Net
-------- -------- --------
ASSETS
Interest-earning assets
Interest-earning deposits $ (32) $ (13) $ (45)
Securities (1)
Taxable 750 (351) 399
Non-taxable (2) 21 (34) (13)
-------- -------- --------
Total securities (tax equivalent) 771 (385) 386
-------- -------- --------
Federal funds sold 67 (78) (11)
-------- -------- --------
Loans (3)(4)
Commercial 413 (577) (164)
Real estate 720 (153) 567
Installment and other 429 86 515
-------- -------- --------
Net loans (tax equivalent) 1,533 (615) 918
-------- -------- --------
Total interest-earning assets 2,339 (1,091) 1,248
-------- -------- --------
Noninterest-earning assets
Cash and cash equivalents
Premises and equipment, net
Other assets
Total nonearning assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ (162) $ (127) $ (289)
Money market accounts 350 (291) 59
Savings deposits (62) (119) (181)
Time deposits 899 263 1,162
Federal funds purchased and
repurchase agreements (91) (74) (165)
Advances from FHLB 741 (124) 617
Notes payable (33) (88) (121)
-------- -------- --------
Total interest-bearing liabilities 1,642 (560) 1,082
-------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Total noninterest-bearing liabilities 75,916
Stockholders' equity
Total liabilities and stockholders' equity
Net interest income (tax equivalent) $ 697 $ (531) $ 166
======== ======== ========
Net interest income (tax equivalent) to
total earning assets
Interest-bearing liabilities to earning assets
- ----------------------------------
<FN>
(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.
</FN>
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, especially in light of the
events of September 11, 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 third quarter
of 2001 totaled $596 compared with $753 in 2000. Net charge-offs for the third
quarter of 2001 were $1,596 compared with $130 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, these credits deteriorated and management identified the credits
as non-bankable assets, which were charged off.
For the nine month period ended September 30, 2001, the provision for loan
losses charged to operating expense equaled $1,271 compared to $1,999 for the
same period in 2000. Net charge-offs for the nine month period were $2,985
compared with $1,037 in 2000. The increase in net charge-offs was largely the
result of the same items discussed above regarding the third quarter.
Noninterest Income. The following table summarizes the Company's noninterest
income:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
-------------- ------------- ------------- --------------
Service charges $ 719 $ 713 $ 2,057 $ 2,022
Merchant fee income 301 314 857 885
Trust income 159 183 501 559
Mortgage banking income 494 320 1,436 983
Insurance commissions and fees 582 652 1,885 2,230
Securities gains, net 264 - 555 2
Other income 526 833 1,584 1,653
-------------- ------------- ------------- --------------
$ 3,045 $ 3,015 $ 8,875 $ 8,334
============== ============= ============= ==============
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 $3,045 for the three months ended September 30, 2001 compared to
$3,015 for the same time frame in 2000.
Two factors impacted the quarter over quarter change. First, as interest rates
declined during the first nine months of 2001, the market value of some
securities increased, and the Company took the opportunity to liquidate those
securities and either replace them with similar securities or fund loan growth.
Securities available-for-sale are held in a manner which allows for their sale
in response to changes in interest rates,
16.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
liquidity needs or significant prepayment risk. The second factor was, during
the third quarter of 2000, the Company completed the sale of its UnionBank/West
Camp Point branch.
Exclusive of $264 in net securities gain and $438 gain on sale of assets related
to the Camp Point branch, which is included in other income, core noninterest
income shows a quarter over quarter increase of $204 or 7.9%. As a percentage of
total income (net interest income plus noninterest income), core noninterest
income, exclusive of securities gains and gain on sale of the Camp Point branch,
increased to 31.1% versus 30.6% for the third quarter of 2000.
The majority of the $204 core increase was largely related to a $174 improvement
in mortgage banking income. The Company's mortgage loan production has more than
doubled to $112,905 during 2001 compared to last year as declining interest
rates resulted in increases in the rate of mortgage refinancing and residential
real estate activity in general. Also contributing to the improvement were
marginal increases in fees associated with overdraft and nsf fees and prestige
card transaction fees. These improvements were offset by lower than anticipated
brokerage and trust fees due to the weakening stock market and lower transaction
based fee revenue.
Noninterest income totaled $8,875 for the nine months ended September 30, 2001,
compared to $8,334 for the same time frame in 2000. Exclusive of net securities
gains and gain on sale of assets related to the Camp Point branch, core
noninterest income increased by $426 or 5.4%. As a percentage of total income,
noninterest income increased to 31.5% versus 30.6% for the nine months of 2000.
The increase was largely reflective of the same items discussed regarding the
third quarter.
Noninterest Expense. The following table summarizes the Company's noninterest
expense:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
-------------- ------------- ------------- --------------
Salaries and employee benefits $ 3,514 $ 3,046 $ 10,185 $ 10,222
Occupancy expense, net 421 458 1,330 1,293
Furniture and equipment expense 402 432 1,188 1,349
Supplies and printing 155 119 471 411
Telephone 197 184 576 564
Amortization of intangible assets 231 497 715 1,047
Other expenses 1,611 1,466 4,672 4,474
-------------- ------------- ------------- --------------
$ 6,531 $ 6,202 $ 19,137 $ 19,360
============== ============= ============= ==============
Noninterest expense, which is comprised primarily of compensation and employee
benefits, occupancy and other operating expenses, totaled $6,531 for the three
months ended September 30, 2001, as compared to $6,202 for the same timeframe in
2000. As previously mentioned, during the third quarter of 2000, the Company
completed the sale of its UnionBank/West Camp Point branch. As part of the
consummation of this transaction, the Company incurred an approximate $232
increase in the amortization of intangibles. Exclusive of the accelerated
amortization of intangibles from the third quarter of 2000, core noninterest
expense increased $561 or 9.4%.
A majority of the core change in expense for the quarter was reflective of the
salaries and employee benefits which increased $468 or 15.4% over the same
timeframe in 2000. This was due to regular merit increases, basic incentive
compensation primarily related to increased real estate production, new
17.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
additions incurred to support the growing levels of business activities, and an
increase in the Company's contributions to employee ESOP benefits. Other
expenses increased partially due to the volume of real estate appraisals,
postage due to the adoption of Regulation P, and legal fees related to
nonperforming loans. Occupancy expense, supplies and printing, and telephone
remained relatively stable with only slight quarter over quarter changes.
Noninterest expense totaled $19,137 for the nine months ended September 30,
2001, decreasing by $223 or 1.2% 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 and
the accelerated amortization related to the sale of the Camp Point branch, core
noninterest expense on a quarter-over-quarter basis increased 2.6% or $483. The
increase was largely reflective of the same items discussed regarding the third
quarter.
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 nine months ended September 30, 2001 and 2000.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
-------------- ------------- ------------- --------------
Income before income taxes $ 2,084 $ 1,917 $ 6,549 $ 4,879
Applicable income taxes 616 668 1,961 1,544
Effective tax rates 29.6% 34.9% 29.9% 31.7%
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 $616 and $668 for the quarters ended September 30, 2001 and 2000,
respectively. Effective tax rates equaled 29.6% and 34.9% respectively, for such
periods. The Company recorded income tax expense of $1,961 and $1,544 for the
nine months ended September 30, 2001 and 2000, respectively. Effective tax rates
equaled 29.9% and 31.7% 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 taxes.
In addition the Company has reduced Illinois state tax through various tax
planning initiatives.
Preferred Stock Dividends. The Company paid $64 of preferred stock dividends for
the quarters ended September 30, 2001 and 2000. The Company paid $194 of
preferred stock dividends for the nine months ended September 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
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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 September 30, 2001 and
December 31, 2000.
September 30, 2001
--------------------------------------------------------
Net Interest Income
--------------------------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $ 25,165 $ (279) (1.10)%
+100 bp 25,234 (210) (0.83)
Base 25,444 - -
-100 bp 25,329 (115) (0.45)
-200 bp 24,320 (1,124) (4.42)
Based upon the Company's model at September 30, 2001, the effect of an immediate
200 basis point increase in interest rates would decrease the Company's net
interest income by 1.10% or approximately $279. The effect of an immediate 200
basis point decrease in rates would decrease the Company's net interest income
by 4.42% or approximately $1,124. This analysis shows income decreases in either
a rising or falling rate environment. This is due to the optionality or negative
convexity of assets which results in an asset rate sensitivity with declining
rates and a liability rate sensitivity in a rising rate environment. With
declining rates, callable agencies will be called more quickly while mortgages
will prepay at a more rapid pace requiring greater reinvestment at lower yields.
In a rising rate environment, agencies are less likely to be called, prepayments
on mortgages slow, and the moderate net liability rate sensitivity otherwise
inherent in the balance sheet results in more liabilities than assets being
repriced to the new higher level of rates.
December 31, 2000
--------------------------------------------------------
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
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
$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 September 30, 2001, the Company had total assets of $762,569,
gross loans of $506,757, total deposits of $606,972, and total stockholders'
equity of $65,021. Total assets increased by $3,836 or 0.5% from year-end 2000.
Total gross loans increased by $1,663 or 0.3% from year-end 2000 and reflected
tighter underwriting standards, an overall softening of loan demand, and normal
paydowns. Total deposits decreased by $29,031 or 4.5% from year-end 2000 and was
attributable to management's strategic plan to reduce the amount of state and
local, and some other non-core high-cost 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.
Despite a diversified loan portfolio, the Company experienced credit quality
deterioration and saw a rise in the level of nonperforming loans during the
first nine months of the year. A weakening economy, among other factors,
resulted in the level of nonperforming assets increasing to $11,863 versus the
$8,346 that existed as of December 31, 2000. The level of nonperforming assets
to total end of period assets was 1.56% at September 30, 2001, as compared to
1.10% at December 31, 2000.
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
----------------------------------- -----------------------
Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
---------- ---------- ---------- ---------- ----------
Nonaccrual and impaired loans not
accruing $ 8,753 $ 8,237 $ 8,448 $ 5,777 $ 2,591
Impaired and other loans 90 days past
due and still accruing interest 2,576 2,683 1,134 2,102 2,439
---------- ---------- ---------- ---------- ----------
Total nonperforming loans 11,329 10,920 9,582 7,879 5,030
Other real estate owned 534 598 562 467 595
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 11,863 $ 11,518 $ 10,144 $ 8,346 $ 5,625
========== ========== ========== ========== ==========
Nonperforming loans to total end of period loans 2.24% 2.18% 1.91% 1.56% 1.01%
Nonperforming assets to total end of period loans 2.34 2.30 2.02 1.65 1.13
Nonperforming assets to total end of period assets 1.56 1.55 1.35 1.10 0.77
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 September 30, 2001, the allowance for loan losses
totaled $4,700 and decreased to 0.93% of total loans outstanding as compared to
$4,653 or 0.94% at September 30, 2000 and $6,400 or 1.27% at December 31, 2000.
In 2000, the allowance for loan losses was influenced by a single nonperforming
commercial credit, which resulted in the Company increasing the allowance by
$2,900 during the fourth quarter of 2000. As of September 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 of 2000 that had deteriorating
conditions. In reaching the decision to provide a larger provision during the
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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 nine 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 to prior levels.
The allowance is based on ranges of estimates and is intended to be adequate but
not excessive. Management believes that, given the current levels of
nonperforming assets, the loan to value and debt service coverage of its loan
portfolio, and the mix of commercial and residential assets in the portfolio,
the allowance remains adequate for anticipated levels of losses at September 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
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 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.
22.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Along with other financial institutions, management 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.
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 financing and investing activities,
offset by those provided by operating activities, resulted in a net decrease in
cash and cash equivalents of $6,310 from December 31, 2000 to September 30,
2001. This usage was primarily related to decreases in deposits and net increase
in loans and securities.
During the first nine months of 2001, the Company experienced a net cash outflow
of $9,626 from its investing activities primarily due to the growth in the loan
portfolio and the purchase of securities and $2,662 net cash outflow in
financing activities attributed to a decrease in the deposit base. Operating
activities, on the other hand, provided net cash inflows of $5,978. Net income
accounted for the majority of the 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 10.38% and
11.40%, respectively, at September 30, 2001. The Company is currently, and
expects to continue to be, in compliance with these guidelines.
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The Board of Governors of the Federal Reserve System ("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.
The following table sets forth an analysis of the Company's capital ratios:
December 31, Minimum Well
September 30, ---------------------------- Capital Capitalized
2001 2000 1999 Ratios Ratios
------------ ------------ ------------ ------ ------
Tier 1 risk-based capital $ 56,163 $ 51,835 $ 50,115
Tier 2 risk-based capital 5,531 7,245 4,548
Total capital 61,694 59,080 54,663
Risk-weighted assets 541,194 537,549 494,953
Capital ratios
Tier 1 risk-based capital 10.38% 9.64% 10.13% 4.00% 6.00%
Tier 2 risk-based capital 11.40 10.99 11.04 8.00 10.00
Leverage ratio 7.43 6.90 7.20 4.00 5.00
As of September 30, 2001, the Tier 2 risk-based capital was comprised of $4,700
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 accounting principles generally accepted in the
United States of America which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. The primary
effect of inflation on the operations of the Company is reflected in increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
changes in interest rates have a more significant effect on the performance of a
financial institution than do the effects of changes in the general rate of
inflation and changes in prices. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services.
Interest rates are highly sensitive to many factors which are beyond the control
of the Company, including the influence of domestic and foreign economic
conditions and the monetary and fiscal policies of the United States government
and federal agencies, particularly the FRB.
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
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit
Number
-------------
10.1 Employment Agreement Between UnionBancorp, Inc. and
Paul R. Tingley Dated August 22, 2001.
10.2 UnionBancorp, Inc. 2000 Incentive Compensation Plan.
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 November 12, 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.