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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 June 30, 2002
Commission File Number: 0-28846
UnionBancorp, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 36-3145350
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
321 West Main Street Ottawa, Illinois 61350
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(Address of principal executive offices including zip code)
(815) 431-2720
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Exchange Class which Registered
- --------------------------------------------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($1.00 par value)
------------------------------
(Title of Class)
Preferred Purchase Rights
-------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Shares outstanding at Juyl 29, 2002
- ----------------------------- -------------------------------------
Common Stock, Par Value $1.00 3,979,056
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UnionBancorp, Inc.
Form 10-Q Index
Page
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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
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
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30, 2002 and December 31, 2001 (In Thousands, Except Share Data)
- ----------------------------------------------------------------------------------------------------------
June 30, December 31,
2002 2001
--------- ---------
ASSETS
Cash and cash equivalents $ 21,665 $ 26,699
Securities available-for-sale 214,548 186,282
Loans 483,998 504,968
Allowance for loan losses (7,514) (6,295)
--------- ---------
Net loans 476,484 498,673
Premises and equipment, net 14,005 12,451
Intangible assets, net 8,405 8,607
Mortgage servicing rights 2,492 2,102
Other assets 13,206 13,493
--------- ---------
Total assets $ 750,805 $ 748,307
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 69,409 $ 73,138
Interest-bearing 543,942 539,006
--------- ---------
Total deposits 613,351 612,144
Federal funds purchased and securities sold
under agreements to repurchase 5,680 2,629
Advances from the Federal Home Loan Bank 49,650 52,750
Notes payable 9,275 9,275
Other liabilities 6,593 6,864
--------- ---------
Total liabilities 684,549 683,662
--------- ---------
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;
4,569,319 shares issued at June 30, 2002 and
December 31, 2001 4,569 4,569
Surplus 21,841 21,841
Retained earnings 41,329 40,560
Accumulated other comprehensive income 2,355 1,536
Unearned compensation under stock option plans (45) (68)
--------- ---------
70,549 68,938
Treasury stock, at cost; 590,263 shares (5,124) (5,124)
--------- ---------
Total stockholders' equity 65,425 63,814
--------- ---------
Total liabilities and stockholders' equity $ 750,805 $ 748,307
========= =========
See Accompanying Notes to Unaudited Financial Statements
1.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months and Six Months Ended June 30, 2002 and 2001 (In Thousands, Except Share Data)
- -------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Interest income
Loans $ 8,976 $ 11,044 $ 18,511 $ 22,298
Securities
Taxable 1,930 2,346 3,642 4,695
Exempt from federal income taxes 424 505 863 1,009
Federal funds sold and other 22 28 66 93
-------- -------- -------- --------
Total interest income 11,352 13,923 23,082 28,095
Interest expense
Deposits 4,497 6,845 9,293 14,245
Federal funds purchased and securities sold
under agreements to repurchase 50 21 78 34
Advances from the Federal Home Loan Bank 531 805 1,123 1,549
Notes payable 83 145 179 351
-------- -------- -------- --------
Total interest expense 5,161 7,816 10,673 16,179
-------- -------- -------- --------
Net interest income 6,191 6,107 12,409 11,916
Provision for loan losses 2,018 366 2,537 675
-------- -------- -------- --------
Net interest income after
Provision for loan losses 4,173 5,741 9,872 11,241
Noninterest income
Service charges 654 694 1,245 1,338
Merchant fee income 307 299 551 556
Trust income 191 170 371 342
Mortgage banking income 568 499 1,199 942
Insurance commissions and fees 500 632 1,044 1,303
Securities gains, net 57 209 300 291
Other income 561 515 1,131 1,058
-------- -------- -------- --------
2,838 3,018 5,841 5,830
Noninterest expenses
Salaries and employee benefits 3,723 3,505 7,607 6,671
Occupancy expense, net 438 430 891 909
Furniture and equipment expense 485 380 875 786
Supplies and printing 113 149 270 316
Telephone 302 191 527 379
Amortization of intangible assets 101 236 202 484
Other expenses 1,843 1,585 3,549 3,061
-------- -------- -------- --------
7,005 6,476 13,921 12,606
-------- -------- -------- --------
Income before income taxes 6 2,283 1,792 4,465
Income taxes (219) 698 298 1,345
-------- -------- -------- --------
Net income 225 1,585 1,494 3,120
Preferred stock dividends 64 65 128 130
-------- -------- -------- --------
Net income for common stockholders $ 161 $ 1,520 $ 1,366 $ 2,990
======== ======== ======== ========
Basic earnings per share $ 0.04 $ 0.38 $ 0.34 $ 0.75
======== ======== ======== ========
Diluted earnings per common share $ 0.04 $ 0.38 $ 0.34 $ 0.75
======== ======== ======== ========
Comprehensive income $ 1,432 $ 1,556 $ 2,313 $ 4,448
======== ======== ======== ========
See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2002 and 2001 (In Thousands)
- ---------------------------------------------------------------------------------------------
Six Months Ended
June 30,
--------------------
2002 2001
-------- --------
Cash flows from operating activities
Net income $ 1,494 $ 3,120
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 733 657
Amortization of intangible assets 202 484
Amortization of unearned compensation under stock option plans 23 33
Amortization of bond premiums, net 738 121
Provision for loan losses 2,537 675
Securities gains, net (300) (291)
Gain on sale of equipment (3) (4)
Loss on sale of real estate acquired in settlement of loans 13 71
Gain on sale of loans (1,074) (834)
Proceeds from sales of loans held for sale 72,561 64,669
Origination of loans held for sale (67,383) (65,150)
Change in assets and liabilities
Decrease in other assets 287 719
Decrease in other liabilities (678) (349)
-------- --------
Net cash provided by operating activities 9,150 3,921
Cash flows from investing activities
Securities
Available-for-sale
Proceeds from maturities and paydowns 35,008 61,128
Proceeds from sales 11,614 4,988
Purchases (73,796) (64,962)
Net decrease in loans 14,569 2,756
Purchase of premises and equipment (2,289) (518)
Proceeds from sale of real estate acquired in settlement of loans 272 428
Proceeds from sale of equipment 5 4
-------- --------
Net cash provided by (used in) investing activities (14,617) 3,824
Cash flows from financing activities
Net increase (decrease) in deposits 1,207 (25,911)
Net increase in federal funds purchased
and securities sold under agreements to repurchase 3,051 8
Increase (decrease) in advances from the Federal Home Loan Bank (3,100) 9,000
Payments on notes payable -- (500)
Dividends on common stock (597) (517)
Dividends on preferred stock (128) (130)
Proceeds from exercise of stock options -- 90
-------- --------
Net cash provided by (used in) financing activities 433 (17,960)
-------- --------
Net decrease in cash and cash equivalents (5,034) (10,215)
Cash and cash equivalents
Beginning of period 26,699 33,021
-------- --------
End of period $ 21,665 $ 22,806
======== ========
See Accompanying Notes to Unaudited Financial Statements
3.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
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Note 1. Summary of Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements of
UnionBancorp, Inc. (the "Company") have been prepared in accordance with
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, 2001. The annualized results of operations during the three months and six
months ended June 30, 2002 are not necessarily indicative of the results
expected for the year ending December 31, 2002. All financial information is in
thousands (000's), except per share data.
Note 2. Earnings Per Share
Basic earnings per share for the three months and six months ended June 30, 2002
and 2001 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, 2002 and 2001 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,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income available to common shareholders $ 161 $ 1,520 $ 1,366 $ 2,990
Weighted average common shares outstanding 3,979 3,975 3,979 3,971
------------ ------------ ------------ ------------
Basic Earnings Per Common Share $ 0.04 $ 0.38 $ 0.34 $ 0.75
============ ============ ============ ============
Diluted Earnings Per Common Share Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Weighted average common shares outstanding $ 3,979 $ 3,975 $ 3,979 $ 3,971
Add: dilutive effect of assumed exercised
stock options 49 28 46 29
------------ ------------ ------------ ------------
Weighted average common and dilutive
Potential shares outstanding 4,028 4,003 4,025 4,000
============ ============ ============ ============
Diluted Earnings Per Common Share $ 0.04 $ 0.38 $ 0.34 $ 0.75
============ ============ ============ ============
There were approximately 65,000 and 103,600 options outstanding at June 30, 2002
and 2001, respectively, 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 consolidated securities portfolio, which represented 29.5% of the
Company's quarterly average earning asset base, is managed to minimize interest
rate risk, maintain sufficient liquidity, and maximize return. The portfolio
includes several callable agency debentures, adjustable rate mortgage
pass-throughs, and collateralized mortgage obligations with implied calls. Other
securities consist of Federal Reserve stock, Federal Home Loan Bank stock, and
SBA pooled securities. The Company's financial planning anticipates income
streams generated by the securities portfolio based on normal maturity and
reinvestment. Securities classified as available-for-sale, carried at fair
value, were $214,548 at June 30, 2002 compared to $186,282 at December 31, 2001.
The Company does not have any securities classified as trading or
held-to-maturity.
The following table describes the amortized cost and fair value of securities
available-for-sale at June 30, 2002 and December 31, 2001:
June 30, 2002
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
U.S. treasury $ 1,004 $ 30 $ -- $ 1,034
U.S. government agencies 60,649 875 (3) 61,521
States and political subdivisions 35,084 1,484 (20) 36,548
U.S. government mortgage-backed securities 93,832 1,396 (129) 95,099
Collateralized mortgage obligations and
other asset backed securities 4,970 137 -- 5,107
Corporate bonds 3,042 80 -- 3,122
Other 12,123 21 (27) 12,117
------------ ------------ ------------ ------------
$ 210,704 $ 4,023 $ (179) $ 214,548
============ ============ ============ ============
December 31, 2001
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
U.S. treasury $ 1,006 $ 30 $ -- $ 1,036
U.S. government agencies 42,748 727 (75) 43,400
States and political subdivisions 36,592 829 (77) 37,344
U.S. government mortgage-backed securities 85,556 876 (154) 86,278
Collateralized mortgage obligations and
other asset backed securities 12,021 345 -- 12,366
Other 5,858 -- -- 5,858
------------ ------------ ------------ ------------
$ 183,781 $ 2,807 $ (306) $ 186,282
============ ============ ============ ============
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, including granting agribusiness,
commercial, residential, and installment loans, designed to meet the credit
needs of its borrowers. The Company's loans are diversified by borrower and
industry group.
The following table describes the composition of loans by major categories
outstanding at June 30, 2002 and December 31, 2001:
June 30, 2002 December 31, 2001
------------------------- -------------------------
$ % $ %
----------- ----------- ----------- -----------
Commercial $ 106,938 22.09% $ 107,382 21.27%
Agricultural 36,099 7.46 40,563 8.03
Real estate:
Commercial mortgages 144,989 29.96 150,878 29.88
Construction 23,680 4.89 23,676 4.69
Agricultural 35,469 7.33 34,611 6.85
1-4 family mortgages 85,996 17.77 94,368 18.69
Installment 48,478 10.02 50,961 10.09
Other 2,349 0.48 2,529 0.50
----------- ----------- ----------- -----------
Total loans 483,998 100.00% 504,968 100.00%
=========== ===========
Allowance for loan losses (7,514) (6,295)
----------- -----------
Loans, net $ 476,484 $ 498,673
=========== ===========
6.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 5. Allowance For Loan Losses
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, 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 independent loan review function
and information provided by examinations performed by regulatory agencies. The
Company makes an ongoing evaluation as to the adequacy of the allowance for loan
losses. Transactions in the allowance for loan losses for the three months and
six months ended June 30, 2002 and 2001 are summarized below:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Beginning balance $ 6,387 $ 6,491 $ 6,295 $ 6,414
Charge-offs:
Commercial 604 969 937 1,105
Real estate mortgages 181 180 313 230
Installment and other loans 208 111 326 174
------------ ------------ ------------ ------------
Total charge-offs 993 1,260 1,576 1,509
------------ ------------ ------------ ------------
Recoveries:
Commercial 64 82 194 87
Real estate mortgages 22 -- 28 --
Installment and other loans 16 21 36 33
------------ ------------ ------------ ------------
Total recoveries 102 103 258 120
------------ ------------ ------------ ------------
Net charge-offs 891 1,157 1,318 1,389
------------ ------------ ------------ ------------
Provision for loan losses 2,018 366 2,537 675
------------ ------------ ------------ ------------
Ending balance $ 7,514 $ 5,700 $ 7,514 $ 5,700
============ ============ ============ ============
Period end total loans, net of
unearned interest $ 483,998 $ 501,634 $ 483,998 $ 501,634
============ ============ ============ ============
Average loans $ 483,424 $ 502,204 $ 491,125 $ 504,152
============ ============ ============ ============
Ratio of net charge-offs to
average loans 0.18% 0.23% 0.27% 0.28%
Ratio of provision for loan losses
to average loans 0.42 0.07 0.52 0.13
Ratio of allowance for loan losses
to ending total loans 1.55 1.14 1.55 1.14
Ratio of allowance for loan losses
to total nonperforming loans 90.52 52.20 90.52 52.20
Ratio of allowance at end of period
to average loans 1.55 1.13 1.53 1.13
7.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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.
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, asset management,
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, 2002
---------------------------------------
Banking Other Consolidated
Segment Segments Totals
--------- --------- ---------
Net interest income (loss) $ 12,585 $ (176) $ 12,409
Other revenue 4,073 1,768 5,841
Other expense 9,747 3,239 12,986
Segment profit (loss) 3,850 (2,058) 1,792
Noncash items
Depreciation 474 259 733
Provision for loan losses 2,537 -- 2,537
Goodwill and other intangibles 186 16 202
Segment assets 744,756 6,049 750,805
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 losses 675 -- 675
Goodwill and other intangibles 405 79 484
Segment assets 739,294 5,619 744,913
8.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 8. New Accounting Standards
In 2001, the FASB issued SFAS No. 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
SFAS No. 142, which was adopted by the Company on January 1, 2002. At June 30,
2002, the Company has $7,547 of goodwill. Approximately $2,153 of the goodwill
recorded by the Company is related to a branch acquisition. This goodwill will
continue to be accounted for under SFAS No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions," (excluded from the scope from
SFAS No. 142) and continue to be amortized to expense.
The Company has completed the first step of its impairment testing to determine
if goodwill is impaired. The Company's conclusion is that there is not an
impairment issue at either the consolidated level, bank reporting unit level or
nonbanking reporting unit level. The impact of this standard on the periods
ended June 30, 2002 and 2001 was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net income $ 225 $ 1,585 $ 1,494 $ 3,120
Add back: goodwill amortization -- 99 -- 198
------------ ------------ ------------ ------------
Adjusted net income $ 225 $ 1,684 $ 1,494 $ 3,318
============ ============ ============ ============
Basic Earnings Per Common Share Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net income $ 0.04 $ 0.38 $ 0.34 $ 0.75
Add back: goodwill amortization -- 0.02 -- 0.05
------------ ------------ ------------ ------------
Adjusted net income $ 0.04 $ 0.40 $ 0.34 $ 0.80
============ ============ ============ ============
Diluted Earnings Per Common Share Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net income $ 0.04 $ 0.38 $ 0.34 $ 0.75
Add back: goodwill amortization -- 0.02 -- 0.05
------------ ------------ ------------ ------------
Adjusted net income $ 0.04 $ 0.40 $ 0.34 $ 0.80
============ ============ ============ ============
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 of UnionBancorp, Inc. for the three months
and six months ended June 30, 2002 as compared to the same periods in 2001.
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 2001 Annual Report on Form 10-K. Annualized
results of operations during the three months and six months ended June 30, 2002
are not necessarily indicative of results to be expected for the full year of
2002. Unless otherwise stated, all earnings per share data included in this
section and throughout the remainder of this discussion are presented on a
diluted basis. All financial information is in thousands (000's), except per
share data.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1993, as amended, and Section 21E of the
Securities Exchange 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.
General
UnionBancorp, Inc. (the "Company") is a bank holding company organized under the
laws of the state of Delaware. The Company derives most of its revenues and
income from the operations of its banking subsidiaries (the "Banks"), but also
derives revenue from its nonbank subsidiary, UnionFinancial Services & Trust
Company (the "Nonbank"). The Company provides a full range of services to
individual and corporate customers located in the north central and west central
Illinois areas. These services include demand, time, and savings deposits;
lending; mortgage banking; insurance products; brokerage services; asset
management; and trust services. The Company is subject to competition from other
financial institutions and nonfinancial institutions providing financial
services. Additionally, the Company and the Banks are subject to regulations of
certain regulatory agencies and undergo periodic examinations by those
regulatory agencies.
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 $225 or $0.04 per fully diluted share for the
three months ended June 30, 2002. This compares with net income of $1,585 or
$0.38 per fully diluted share for the same period in 2001. For the six months
ended June 30, 2002, net income equaled $1,494 or $0.34 per fully diluted share
compared with net income of $3,120 or $0.75 per fully diluted share earned in
the same period in 2001.
The Company's quarterly results were adversely impacted by a $1,652 increase in
the provision for loan losses as compared to the second quarter of 2001. This
increase was due to the deterioration of several seasoned credits that were
identified during the second quarter of this year, downgrades of various other
credits and a sustained level of nonperforming loans, the product of an overall
uncertain economic climate.
Also contributing to the reduction in earnings was an increase in noninterest
expense, incurred to support the growing level of business activities and a
decrease in gains on the sale of securities. Offsetting these factors were
increases in net interest income as a result of the decrease in cost of funds,
revenue generated from the mortgage banking division and a reduction of tax
expense associated with the additional provision.
Return on average assets was 0.12% for the second quarter of 2002 compared to
0.84% for the same period in 2001. Return on average assets was 0.40% for the
six months ended June 30, 2002, compared to 0.83% for the same period in 2001.
Return on average stockholders' equity was 1.38% for the second quarter of 2002
compared to 10.16% for the same period in 2001. Return on average stockholders'
equity was 4.63% for the six month period ended June 30, 2002, compared to
10.17% for the same period in 2001.
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 $6,432 for the second quarter ended June 30, 2002,
compared with $6,393 earned during the same period in 2001. This represented an
increase of $39 or 0.1%. The improvement in net interest income is attributable
to the quarter-over-quarter reduction of interest expense paid on interest
bearing liabilities totaling $2,655 exceeding the quarter-over-quarter reduction
of interest income earned on interest earning assets totaling $2,616. Also
contributing to the increase in net interest income was average
noninterest-bearing deposit growth of $5,026, or 7.6%, over the same period in
2001.
11.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The $2,616 change in interest income resulted from decreases of $272 associated
with volume and $2,344 related to rate. The majority of the decrease in interest
income was related to a 137 basis point decline in yields earned on average
loans. Also contributing was a shift in the earning asset mix from higher
yielding loans to lower yielding investments. The $2,655 change in interest
expense resulted from decreases of $486 associated with volume and $2,169
associated with rate. The majority of the decrease was attributable to a
reduction in the rates paid on total interest-bearing liabilities located in
expensive wholesale funding sources, including brokered deposits, which resulted
in a 178 basis point decrease in the cost of total time deposits. This was a
deliberate strategy aimed at reducing the Company's reliance on these
higher-cost funding sources and to reduce interest rate risk.
The net interest margin on a tax equivalent basis for the period increased 7
basis points to 3.72% as compared to the prior year's quarter 3.65%. Lower
funding costs, a result of actively reducing funding rates simultaneously with
Federal Reserve Board actions undertaken throughout 2001 to reduce the targeted
federal funds rate, were principally responsible for the margin growth. Also, a
decrease in loan balances, and a greater concentration of noninterest bearing
sources, allowed management to reduce the Company's reliance on high rate
brokered deposits, retail time deposits and FHLB advances. This was offset by
narrower loan spreads, 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. Specifically, yields on
interest-earning assets decreased 140 basis points to 6.70% as compared to the
prior year's quarter 8.10%. In contrast, rates paid on interest-bearing
liabilities decreased 165 basis points to 3.43% as compared to the prior year's
quarter 5.08%.
Net interest income for the six months ended June 30, 2002 totaled $12,900,
representing an increase of $412 or 3.3% over the $12,488 earned during the same
period in 2001. The improvement in net interest income is attributable to the
year-over-year reduction of interest expense paid on interest bearing
liabilities totaling $5,506 exceeding the year-over-year reduction of interest
income earned on interest earning assets totaling $5,094. The net interest
margin for the first six months of 2002 increased 16 basis points to 3.74%
compared to 3.58% for the same period in 2001.
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.
12.
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,
-----------------------------------------------------------
2002 2001
---------------------------- ----------------------------
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 $ 828 $ 5 2.42% $ 961 $ 12 5.01% $ (1) $ (6) $ (7)
Securities (1)
Taxable 169,781 1,925 4.55 155,861 2,329 5.99 194 (598) (404)
Non-taxable (2) 34,834 643 7.40 40,910 766 7.51 (74) (49) (123)
-------- -------- ---- -------- -------- ---- -------- -------- --------
Total securities (tax
equivalent) 204,615 2,568 5.03 196,771 3,095 6.31 120 (647) (527)
-------- -------- ---- -------- -------- ---- -------- -------- --------
Federal funds sold 5,367 22 1.64 3,546 32 3.62 12 (22) (10)
-------- -------- ---- -------- -------- ---- -------- -------- --------
Loans (3)(4)
Commercial 138,728 2,420 7.00 146,486 3,190 8.73 (162) (608) (770)
Real estate 293,983 5,418 7.39 298,643 6,463 8.68 (99) (946) (1,045)
Installment and other 50,713 1,160 9.17 57,075 1,417 9.96 (142) (115) (257)
-------- -------- ---- -------- -------- ---- -------- -------- --------
Net loans (tax equivalent) 483,424 8,998 7.47 502,204 11,070 8.84 (403) (1,669) (2,072)
-------- -------- ---- -------- -------- ---- -------- -------- --------
Total interest-earning
assets 694,234 11,593 6.70 703,482 14,209 8.10 (272) (2,344) (2,616)
-------- -------- ---- -------- -------- ---- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 19,951 18,940
Premises and equipment, net 13,868 11,824
Other assets 20,192 20,813
-------- --------
Total nonearning assets 54,011 51,577
-------- --------
Total assets $748,245 $755,059
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 43,279 $ 121 1.12% $ 42,634 $ 211 1.99% $ 3 $ (93) $ (90)
Money market accounts 81,926 437 2.14 51,810 395 3.06 184 (142) 42
Savings deposits 52,305 171 1.31 45,807 249 2.18 32 (110) (78)
Time deposits 370,358 3,768 4.08 409,841 5,990 5.86 (535) (1,687) (2,222)
Federal funds purchased and
repurchase agreements 6,282 50 3.19 1,827 21 4.61 37 (8) 29
Advances from FHLB 40,647 531 5.24 55,452 805 5.82 (200) (74) (274)
Notes payable 9,296 83 3.58 9,809 145 5.93 (7) (55) (62)
-------- -------- ---- -------- -------- ---- -------- -------- --------
Total interest-bearing
liabilities 604,093 5,161 3.43 617,180 7,816 5.08 (486) (2,169) (2,655)
-------- -------- ---- -------- -------- ---- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 71,165 66,139
Other liabilities 7,431 8,360
-------- --------
Total noninterest-bearing
liabilities 78,596 74,499
-------- --------
Stockholders' equity 65,556 63,380
-------- --------
Total liabilities and
stockholders' equity $748,245 $755,059
======== ========
Net interest income (tax
equivalent) $ 6,432 $ 6,393 $ 214 $ (175) $ 39
======== ======== ======== ======== ========
Net interest income (tax
equivalent) to total earning
assets 3.72% 3.65%
==== ====
Interest-bearing liabilities to
earning assets 87.02% 87.73%
===== =====
- -----------------------------------
(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.
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 Six Months Ended June 30,
-----------------------------------------------------------
2002 2001
---------------------------- ----------------------------
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 $ 1,062 $ 12 2.28% $ 1,284 $ 37 5.81% $ (6) $ (19) $ (25)
Securities (1)
Taxable 159,349 3,629 4.59 153,987 4,653 6.09 157 (1,181) (1,024)
Non-taxable (2) 35,201 1,308 7.49 40,740 1,529 7.57 (163) (58) (221)
-------- -------- ----- -------- -------- ----- -------- -------- --------
Total securities (tax
equivalent) 194,550 4,937 5.12 194,727 6,182 6.40 (6) (1,239) (1,245)
-------- -------- ----- -------- -------- ----- -------- -------- --------
Federal funds sold 8,123 66 1.64 3,965 98 4.98 61 (93) (32)
-------- -------- ----- -------- -------- ----- -------- -------- --------
Loans (3)(4)
Commercial 140,789 4,981 7.13 148,798 6,639 9.00 (341) (1,317) (1,658)
Real estate 299,006 11,170 7.53 298,854 12,876 8.69 7 (1,713) (1,706)
Installment and other 51,330 2,407 9.46 56,500 2,835 10.12 (250) (178) (428)
-------- -------- ----- -------- -------- ----- -------- -------- --------
Net loans (tax equivalent) 491,125 18,558 7.62 504,152 22,350 8.94 (565) (3,227) (3,792)
-------- -------- ----- -------- -------- ----- -------- -------- --------
Total interest-earning
assets 694,860 23,573 6.84 704,128 28,667 8.21 (516) (4,578) (5,094)
-------- -------- ----- -------- -------- ----- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 19,272 19,307
Premises and equipment, net 13,326 11,821
Other assets 21,082 20,415
-------- --------
Total nonearning assets 53,680 51,543
-------- --------
Total assets $748,540 $755,671
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 43,810 $ 250 1.15% $ 42,312 $ 462 2.20% $ 16 $ (228) $ (212)
Money market accounts 72,305 749 2.09 50,713 825 3.28 282 (358) (76)
Savings deposits 51,212 351 1.38 45,352 517 2.30 60 (226) (166)
Time deposits 379,631 7,943 4.22 416,282 12,441 6.03 (1,020) (3,478) (4,498)
Federal funds purchased and
repurchase agreements 4,886 78 3.22 1,594 34 4.30 54 (10) 44
Advances from FHLB 43,962 1,123 5.15 52,231 1,549 5.98 (227) (199) (426)
Notes payable 9,295 179 3.88 9,975 351 7.10 (22) (150) (172)
-------- -------- ----- -------- -------- ----- -------- -------- --------
Total interest-bearing
liabilities 605,101 10,673 3.56 618,459 16,179 5.28 (857) (4,649) (5,506)
-------- -------- ----- -------- -------- ----- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 70,858 66,562
Other liabilities 7,450 8,801
-------- --------
Total noninterest-bearing
liabilities 78,308 75,363
-------- --------
Stockholders' equity 65,131 61,849
-------- --------
Total liabilities and
stockholders' equity $748,540 $755,671
======== ========
Net interest income (tax
equivalent) $ 12,900 $ 12,488 $ 341 $ 71 $ 412
======== ======== ======== ======== ========
Net interest income (tax
equivalent) to total earning
assets 3.74% 3.58%
===== =====
Interest-bearing liabilities to
earning assets 87.08% 87.83%
===== =====
- -----------------------------------
(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)
- --------------------------------------------------------------------------------
Provision for Loan Losses. The amount of the provision for loan losses is based
on management's evaluations of the allowance necessary to provide for probable
incurred losses in the loan portfolio. During these evaluations, consideration
is also given to such factors as management's evaluation of specific loans, the
level and composition of impaired loans, other nonperforming loans, other
identified potential problem loans, historical loss experience, results of
examinations by regulatory agencies, results of the independent 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 various other factors, including concentration of
credit risk in various industries and current economic conditions.
The provision for loan losses charged to operating expense for the second
quarter of 2002 totaled $2,018, an increase of $1,652 over the $366 recorded
during the same period a year ago. The provision for loan losses charged to
operating expense for the six months ended June 30, 2002 totaled $2,537, an
increase of $1,862 over the $675 recorded during the same period a year ago.
The increase in the provision for loan losses was in response to the
deterioration of several seasoned credits that surfaced during the second
quarter of this year, downgrades of various other credits and the continued
softening of the economy. In addition, management also considered several
factors surrounding credit-quality, including the level of nonperforming loans,
the number of customers filing for bankruptcy, and net charge-offs and
delinquencies. In some cases, problem loans had been previously identified;
however, the loss incurred was greater than anticipated because of a soft
commercial real estate market in specific industries and additional losses in
the manufacturing, travel, and technology sectors. Management believes that
issues within the portfolio come as a result of the current state of the economy
and mirror problems faced by many of its peers throughout the financial
community. The added provision is consistent with the Company's practice of
focusing on early identification of problem credits and quick remediation where
possible.
Net charge-offs for the second quarter of 2002 were $891 compared with $1,157 in
2001. Annualized net charge-offs decreased to 0.18% of average loans for the
second quarter of 2002 compared to 0.23% in the same period in 2001. Net
charge-offs for the six months ended June 30, 2002 were $1,318 compared with
$1,389 in 2001. Annualized net charge-offs decreased to 0.27% of average loans
for the six months ended June 30, 2002 compared to 0.28% in the same period in
2001. The sustained level in net charge-offs was largely the result of several
credits which were identified as requiring the status of watch list and had
specific allocations. These credits continued to deteriorate and were identified
by management as non-bankable assets, and, subsequently, charged off.
Along with other financial institutions, management remains watchful of credit
quality issues and believes that current issues within the portfolio are
reflective of a challenging economic environment and mirror problems faced by
peers throughout the financial community. 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. Management continues to monitor the loan
portfolio and take action to limit credit exposure.
15.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Noninterest Income. The following table summarizes the Company's noninterest
income:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Service charges $ 654 $ 694 $ 1,245 $ 1,338
Merchant fee income 307 299 551 556
Trust income 191 170 371 342
Mortgage banking income 568 499 1,199 942
Insurance commissions and fees 500 632 1,044 1,303
Securities gains, net 57 209 300 291
Other income 561 515 1,131 1,058
------------ ------------ ------------ ------------
$ 2,838 $ 3,018 $ 5,841 $ 5,830
============ ============ ============ ============
Noninterest income, which consists of a wide variety of fee-based revenues
viewed as traditional banking services as well as revenues generated by the
Company's insurance, brokerage, trust, asset management and data processing
product lines, totaled $2,838 for the three months ended June 30, 2002, compared
to $3,018 for the same time frame in 2001. Exclusive of net securities gains,
core noninterest income decreased $28 or 0.1%.
The majority of the change was related to a $132 lower than anticipated
insurance, asset management and brokerage fees (included in insurance
commissions and fees). Insurance fees declined largely due to the loss of
producers and hardening of the overall insurance market, which has resulted in
clients shopping business to other vendors. Asset management and brokerage fees
generally follow the amount of total assets under management, as well as
conditions in the equity and credit markets, as such fees on certain accounts
are based on market value. The decrease in fees during the year was due, in
part, to the overall condition of equity and credit markets since the beginning
of the year, as well as to a slight decline in sales related to certain
customers' reluctance to commit new funds and shift existing assets.
Also contributing was a $40 decrease in service charges primarily related to the
number of nsf fees customers generated during the period. These decreases were
partially offset by a $69 improvement in mortgage banking income. Mortgage
banking income includes fees generated from underwriting, originating, and
servicing, in addition to gains realized from the sale of these loans. The
combined categories of merchant fee income, trust income, and other income
remained relatively stable with only slight quarter-over-quarter changes.
Noninterest income totaled $5,841 for the six months ended June 30, 2002,
compared to $5,830 for the same time frame in 2001. Exclusive of net securities
gains, noninterest income totaled $5,541 compared to $5,539 for the same period
in 2001. The change was largely reflective of the same items discussed regarding
the second quarter.
16.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Noninterest Expense. The following table summarizes the Company's noninterest
expense:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Salaries and employee benefits $ 3,723 $ 3,505 $ 7,607 $ 6,671
Occupancy expense, net 483 430 891 909
Furniture and equipment expense 485 380 875 786
Supplies and printing 113 149 270 316
Telephone 302 191 527 379
Amortization of intangible assets 101 236 202 484
Other expenses 1,843 1,585 3,549 3,061
------------ ------------ ------------ ------------
$ 7,005 $ 6,476 $ 13,921 $ 12,606
============ ============ ============ ============
Noninterest expense, which is comprised primarily of compensation and employee
benefits, occupancy and other operating expenses, totaled $7,005 for the three
months ended June 30, 2002, as compared to $6,476 for the same timeframe in
2001. This represented an increase of $529 or 8.2%.
The increase in noninterest expense on a quarter-over-quarter basis was
attributable, in large part, to a rise in salaries and benefits as we invested
in our own future through the recruitment and retention of high-quality,
seasoned industry professionals to fill existing vacancies. In addition, a
higher concentration of salary expenditures is also currently being realized by
our mortgage banking division and financial services division. These divisions,
with lower gross profit margins, historically produce significant noninterest
income, but also incur considerable noninterest expense.
Also contributing were increases in other expenses due to other real estate
related expenses, legal fees partially related to the work-out and collection of
nonperforming loans and furniture and equipment expense and telephone expense
largely related to investments in technology to improve the Company's network
infrastructure. These increases were partially offset by a decrease in goodwill
amortization due to the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets." The combined categories of net occupancy expense and supplies and
printing remained relatively stable with only slight quarter-over-quarter
changes.
Noninterest expense totaled $13,921 for the six months ended June 30, 2002,
increasing by $1,315 or 10.4% from the same period in 2001. The change was
largely reflective of the same items discussed regarding the second quarter.
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, 2002 and 2001.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Income before income taxes $ 6 $ 2,283 $ 1,792 $ 4,465
Applicable income taxes (219) 698 298 1,345
Effective tax rates -- 30.6% 16.6% 30.1%
Income tax expense for the periods included benefits for tax-exempt income,
tax-advantaged investments and general business tax credits offset by the effect
of nondeductible expenses. The Company recorded a reduction in income tax
expense of $219 for the three months ended June 30, 2002, compared to an income
tax expense of $698 for the same period in 2001. The Company recorded income tax
expense of $298 and $1,345 for the six months ended June 30, 2002 and 2001,
respectively. Effective tax rates equaled 16.6% and 30.1% 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. In addition, the Company has reduced tax
expense through various tax planning initiatives.
Preferred Stock Dividends. The Company paid $64 and $65 of preferred stock
dividends for the quarters ended June 30, 2002 and 2001, respectively. The
Company paid $128 and $130 of preferred stock dividends for the six months ended
June 30, 2002 and 2001, respectively.
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, 2002 and December
31, 2001.
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
June 30, 2002
--------------------------------------------------
Net Interest Income
--------------------------------------------------
Amount Change Change
---------- ---------- ----------
(Dollars in Thousands)
+200 bp $ 26,275 $ (522) (1.95)%
+100 bp 26,836 39 0.15
Base 26,797 -- --
-100 bp 26,874 77 0.29
-200 bp 26,848 51 0.19
Based upon the Company's model at June 30, 2002, the effect of an immediate 200
basis point increase in interest rates would decrease the Company's net interest
income by 1.95% or approximately $522. The effect of an immediate 200 basis
point decrease in rates would increase the Company's net interest income by
0.19% or approximately $51. However, the Company does not anticipate market
interest rates decreasing an additional 200 basis points, so these results may
not be achievable. This analysis shows income increasing in an immediate 100
basis point increase and a decrease in an immediate 200 basis point increase in
interest rates. 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, 2001
--------------------------------------------------
Net Interest Income
--------------------------------------------------
Amount Change Change
---------- ---------- ----------
(Dollars in Thousands)
+200 bp $ 28,134 $ 851 3.12%
+100 bp 27,695 412 1.51
Base 27,283 -- --
-100 bp 26,900 (383) (1.40)
-200 bp 26,095 (1,188) (4.35)
Based upon the Company's model at December 31, 2001, the effect of an immediate
200 basis point increase in interest rates would increase the Company's net
interest income by 3.12% or approximately $851. The effect of an immediate 200
basis point decrease in rates would decrease the Company's net interest income
by 4.35% or approximately $1,188.
Financial Condition
General. As of June 30, 2002, the Company had total assets of $750,805, gross
loans of $483,998, total deposits of $613,351, and total stockholders' equity of
$65,425. Total assets increased by $2,498 or 0.1% from year-end 2001. Total
gross loans decreased by $20,970 or 4.2% from year-end 2001 and reflected
tighter underwriting standards, an overall softening of loan demand, and normal
paydowns. In contrast, total deposits increased moderately by $1,207 or 0.1%
from year-end 2001.
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Nonperforming Assets. The following table summarizes nonperforming assets and
loans past due 90 days or more and still accruing for the previous five
quarters.
2002 2001
-------------------- --------------------------------
June 30, Mar 31, Dec 31, Sep 30, June 30,
-------- -------- -------- -------- --------
Nonaccrual and impaired loans not
accruing $ 7,239 $ 7,026 $ 7,259 $ 8,753 $ 8,237
Impaired and other loans 90 days past
due and still accruing interest 1,062 1,768 1,616 2,576 2,683
-------- -------- -------- -------- --------
Total nonperforming loans 8,301 8,794 8,875 11,329 10,920
Other real estate owned 2,581 2,244 1,886 534 598
-------- -------- -------- -------- --------
Total nonperforming assets $ 10,882 $ 11,038 $ 10,761 $ 11,863 $ 11,518
======== ======== ======== ======== ========
Nonperforming loans to total end of period loans 1.72% 1.79% 1.76% 2.24% 2.18%
Nonperforming assets to total end of period loans 2.25 2.25 2.13 2.34 2.30
Nonperforming assets to total end of period assets 1.45 1.49 1.44 1.56 1.55
Despite a diversified loan portfolio, the Company continued to experience asset
quality deterioration in 2002. During the first six months of 2002, the Company
charged off $993 in loans. Because of these charge-off's, there was only a
slight rise in the overall level of nonperforming assets during the first six
months of the year. A weakening economy, among other factors, resulted in the
level of nonperforming assets increasing slightly to $10,882 versus the $10,761
that existed as of December 31, 2001. The level of nonperforming assets to total
end of period assets was 1.45% at June 30, 2002, as compared to 1.44% at
December 31, 2001.
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.
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.
20.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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, past due, and other identified 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 has identified various loans which are now
current, but where some concerns exist as to the ability of the borrower to
comply with present loan repayment terms. These loans are not nonperforming, but
management believes a higher level of scrutiny and specific allocations of the
allowance are prudent under the circumstances.
The Company has an independent loan review function which is separate from the
lending function and is responsible for the review of new and existing loans.
Potential problem credits are monitored by the independent loan review function
and are submitted for review to the loan committee and audit committee members.
Allowance for Loan Losses. At June 30, 2002, the allowance for loan losses
increased to $7,514 or 1.55% of total loans as compared to $5,700 or 1.13% at
June 30, 2001 and $6,295 or 1.25% at December 31, 2001. Two factors impacted the
quarter-over-quarter change. In the fourth quarter of 2001, the Company
increased the allowance by $2,890, and, in the second quarter of 2002, the
Company increased the allowance by $1,652. Both increases were due to the
deterioration in overall credit quality and the impact of various identified
seasoned credits. At June 30, 2002, there has been no significant change in the
status of the various identified credits, but as indicated previously, overall
non-performing assets have increased and net charge-offs have increased on a
quarter-to-quarter comparison.
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, current
economic conditions; the type of loan being made; the creditworthiness of the
borrower over the term of the loan; and, in the case of a collateralized loan,
the quality of the collateral for such a loan. The allowance for loan losses
represents the Company's estimate of the allowance necessary to provide for
probable incurred losses in the loan portfolio. In making this determination,
the Company analyzes the ultimate collectibility of the loans in its portfolio,
incorporating feedback provided by internal loan staff, the independent loan
review function, and information provided by examinations performed by
regulatory agencies. The Company makes an ongoing evaluation as to the adequacy
of the allowance for loan losses.
On a quarterly basis, management 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 Independent Loan Review function validates the
officers' grades. In the event that the Independent Loan Review function
downgrades the loan, it is included in the allowance analysis at the lower
grade. The grading system is in compliance with the regulatory classifications
and the allowance is allocated to the loans based on the regulatory grading,
except in instances where there are known differences (i.e., collateral value is
nominal, etc.). To establish the appropriate level of the allowance, a sample of
loans (including impaired and nonperforming loans) are reviewed and classified
as to potential loss exposure.
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
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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 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 since year-end. 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 remains watchful of credit
quality issues and believes that current issues within the portfolio are
reflective of a challenging economic environment and mirror problems faced by
many of its peers throughout the financial community. 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. Management continues to monitor the
loan portfolio and take appropriate action to proactively limit credit exposure.
Liquidity. 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 provided by operating and financing
activities, offset by those used in investing activities, resulted in a net
decrease in cash and cash equivalents of $5,034 from December 31, 2001 to June
30, 2002.
During the first six months of 2002, the Company experienced a net cash inflow
of $9,150 from its operating activities primarily due to proceeds from sales of
loans and net income and $433 net cash inflow in financing activities attributed
to increases in deposits and federal funds purchased and repurchase agreements.
Investing activities, on the other hand, provided net cash outflows of $14,617
largely due to the purchase of securities.
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 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.
22.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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 10.70% and
12.11%, respectively, at June 30, 2002. The Company is currently, and expects to
continue to be, in compliance with these guidelines.
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
June 30, ---------------------- Capital Capitalized
2002 2001 2000 Ratios Ratios
--------- --------- --------- --------- ---------
Tier 1 risk-based capital $ 56,818 $ 55,911 $ 51,835
Tier 2 risk-based capital 7,468 7,126 7,245
Total capital 64,286 63,037 59,080
Risk-weighted assets 530,920 540,626 537,549
Capital ratios
Tier 1 risk-based capital 10.70% 10.34% 9.64% 4.00% 6.00%
Tier 2 risk-based capital 12.11 11.66 10.99 8.00 10.00
Leverage ratio 7.63 7.54 6.90 4.00 5.00
As of June 30, 2002, the Tier 2 risk-based capital was comprised of $6,637 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.
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The 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 immediately above 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
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On April 23, 2002, the annual meeting of stockholders was held. At the
meeting, Richard J. Berry, Walter E. Breipohl and John A. Trainor were
elected to serve as Class I directors until 2005. Continuing as Class
II directors until 2003 are Robert J. Doty, Charles J. Grako and I.J.
Reinhardt, Jr. Continuing as Class III directors until 2004 are Dennis
J. McDonnell, John A. Shinkle and Scott C. Sullivan
There were 3,979,056 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
------------- -------------
Richard J. Berry 3,475,782 138,532
Walter E. Breipohl 3,602,014 12,300
John A. Trainor 3,540,887 73,427
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
None.
Reports on Form 8-K:
On June 26, 2002, the Company filed a Form 8-K, under Item 5 "Other
Information," reporting that the Company had issued a press release
regarding an additional provision for loan loss during the second
quarter, 2002.
25.
SIGNATURES
Pursuant to the requirements 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 July 29, 2002.
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.