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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, 2005
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)
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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Shares outstanding at August 11, 2005
- ----------------------------- -------------------------------------
Common Stock, Par Value $1.00 3,923,018
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UnionBancorp, Inc.
Form 10-Q Index
June 30, 2005
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
o Unaudited Consolidated Balance Sheets..........................1
o Unaudited Consolidated Statements of Income and
Comprehensive Income ...................................2
o Unaudited Consolidated Statements of Cash Flows................3
o Notes to Unaudited Consolidated Financial Statements...........4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..............................................27
Item 4. Controls and Procedures ............................................27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........28
Item 3. Defaults Upon Senior Securities.....................................28
Item 4. Submission of Matters to a Vote of Security Holders.................29
Item 5. Other Information...................................................29
Item 6. Exhibits............................................................29
SIGNATURES...................................................................30
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30, 2005 and December 31, 2004 (In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
June 30, December 31,
2005 2004
------------ ------------
ASSETS
Cash and cash equivalents $ 31,372 $ 22,802
Securities available-for-sale 192,593 191,661
Loans 404,462 419,275
Allowance for loan losses (9,159) (9,732)
------------ ------------
Net loans 395,303 409,543
Cash surrender value of life insurance 15,222 14,953
Mortgage servicing rights 2,681 2,772
Premises and equipment, net 13,938 13,463
Goodwill 6,963 6,963
Intangible assets, net 616 703
Other real estate 669 420
Other assets 6,067 6,266
------------ ------------
Total assets $ 665,424 $ 669,546
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 70,621 $ 55,800
Interest-bearing 450,579 456,677
------------ ------------
Total deposits 521,200 512,477
Federal funds purchased and securities sold
under agreements to repurchase 4,678 12,722
Advances from the Federal Home Loan Bank 56,100 61,900
Notes payable 9,172 6,629
Series B mandatory redeemable preferred stock 831 831
Other borrowed funds 11 --
Other liabilities 4,683 4,740
------------ ------------
Total liabilities 596,675 599,299
------------ ------------
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;
4,672,643 shares issued at June 30, 2005 and
4,640,907 shares issued at December 31, 2004 4,673 4,641
Additional paid-in capital 23,021 22,632
Retained earnings 47,956 46,592
Accumulated other comprehensive income 1,065 1,351
------------ ------------
77,215 75,716
Treasury stock, at cost; 749,625 shares at June 30, 2005
and 608,763 at December 31, 2004 (8,466) (5,469)
------------ ------------
Total stockholders' equity 68,749 70,247
------------ ------------
Total liabilities and stockholders' equity $ 665,424 $ 669,546
============ ============
See Accompanying Notes to Unaudited Financial Statements
1.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three and Six Months Ended June 30, 2005 and 2004 (In Thousands, Except Per
Share Data)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Interest income
Loans $ 6,751 $ 7,035 $ 13,201 $ 14,303
Securities
Taxable 1,484 1,485 2,909 3,390
Exempt from federal income taxes 263 318 521 643
Federal funds sold and other 47 5 56 15
---------- ---------- ---------- ----------
Total interest income 8,545 8,843 16,687 18,351
Interest expense
Deposits 2,571 2,456 4,890 5,287
Federal funds purchased and securities sold
under agreements to repurchase 37 40 111 53
Advances from the Federal Home Loan Bank 550 728 1,133 1,499
Series B mandatory redeemable preferred stock 13 13 25 25
Notes payable 94 75 163 155
---------- ---------- ---------- ----------
Total interest expense 3,265 3,312 6,322 7,019
---------- ---------- ---------- ----------
Net interest income 5,280 5,531 10,365 11,332
Provision for loan losses -- 500 100 1,250
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 5,280 5,031 10,265 10,082
Noninterest income
Service charges 525 803 1,008 1,514
Merchant Fee Income -- 12 -- 68
Trust income 187 180 402 364
Mortgage banking income 364 647 704 1,215
Insurance commissions and fees 472 608 893 1,241
Banked owned life insurance 135 173 269 345
Securities gains, net -- 10 -- 10
Gain on sale of assets, net 1 466 3 725
Other income 347 291 602 632
---------- ---------- ---------- ----------
2,031 3,190 3,881 6,114
Noninterest expenses
Salaries and employee benefits 3,366 4,136 6,842 8,286
Occupancy expense, net 385 559 779 1,111
Furniture and equipment expense 461 573 885 1,130
Marketing 128 157 224 325
Supplies and printing 86 115 163 230
Telephone 106 142 213 296
Other real estate owned expense 29 (3) 34 4
Amortization of intangible assets 43 51 87 103
Other expenses 1,023 1,299 1,946 2,523
---------- ---------- ---------- ----------
5,627 7,029 11,173 14,008
---------- ---------- ---------- ----------
Income before income taxes 1,684 1,192 2,973 2,188
Income taxes 302 279 627 475
---------- ---------- ---------- ----------
Net income 1,382 913 2,346 1,713
Preferred stock dividends 52 52 104 104
---------- ---------- ---------- ----------
Net income for common stockholders $ 1,330 $ 861 $ 2,242 $ 1,609
========== ========== ========== ==========
Basic earnings per common share $ 0.33 $ 0.21 $ 0.56 $ 0.40
========== ========== ========== ==========
Diluted earnings per common share $ 0.33 $ 0.21 $ 0.55 $ 0.39
========== ========== ========== ==========
Total comprehensive income $ 1,521 $ (1,119) $ 2,060 $ (207)
========== ========== ========== ==========
See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2005 and 2004 (In Thousands)
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Six Months Ended
June 30,
------------------------
2005 2004
---------- ----------
Cash flows from operating activities
Net income $ 2,346 $ 1,713
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 968 1,085
Amortization of intangible assets 87 103
Amortization of mortgage servicing rights 91 29
Amortization of unearned compensation
under stock option plans -- 2
Amortization of bond premiums, net 584 895
Provision for loan losses 100 1,250
Provision for deferred income taxes 466 (975)
Net change in BOLI (269) (346)
Net change in OREO (309) 63
Gain on sale of assets (3) (725)
Gain on sale of real estate acquired
in settlement of loans (7) --
Securities gains, net -- (10)
Gain on sale of loans (540) (1,160)
Proceeds from sales of loans held for sale 22,927 53,452
Origination of loans held for sale (20,710) (50,025)
Change in assets and liabilities
(Increase) decrease in other assets (287) 1,818
Increase in other liabilities 124 1,188
---------- ----------
Net cash provided by operating activities 5,568 8,357
Cash flows from investing activities
Securities available-for-sale
Proceeds from maturities and paydowns 27,795 50,639
Proceeds from sales -- 11,438
Purchases (29,757) (25,542)
Purchase of loans (3,275) --
Net decrease in loans 15,738 18,978
Proceeds from sale of assets -- 30
Purchase of premises and equipment (1,440) (1,124)
Proceeds from sale of real estate acquired in settlement of loans 67 198
Proceeds from Sale of Blandinsville -- (9,984)
---------- ----------
Net cash provided by investing activities 9,128 44,633
Cash flows from financing activities
Net decrease in deposits 8,723 (41,884)
Net increase in federal funds purchased
and securities sold under agreements to repurchase (8,044) (197)
Payments on notes payable (542) (577)
Proceeds from notes payable 3,085 --
Net decrease in other borrowed funds 11 --
Net decrease in advances from the Federal Home Loan Bank (5,800) (4,750)
Dividends on common stock (878) (807)
Dividends on preferred stock (104) (104)
Proceeds from exercise of stock options 420 103
Purchase of treasury stock (2,997) --
---------- ----------
Net cash used in financing activities (6,126) (48,216)
---------- ----------
Net increase in cash and cash equivalents 8,570 4,774
Cash and cash equivalents
Beginning of period 22,802 22,198
---------- ----------
End of period $ 31,372 $ 26,972
========== ==========
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 6,129 $ 7,319
Income taxes 643 476
See Accompanying Notes to Unaudited Financial Statements
3.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per 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 U.S.
generally accepted accounting principles and with the rules and regulations of
the Securities and Exchange Commission for interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
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, 2004. The annualized results of operations
during the three and six months ended June 30, 2005 are not necessarily
indicative of the results expected for the year ending December 31, 2005. All
financial information is in thousands (000's), except per share data.
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying common stock at date of grant. The following
table illustrates the effect on net income and earnings per share if expense was
measured using the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income as reported
for common stockholders 1,330 $ 861 $ 2,242 $ 1,609
Deduct: stock-based compensation expense
Determined under fair value based method 27 30 57 60
---------- ---------- ---------- ----------
Pro forma net income 1,303 $ 831 $ 2,185 $ 1,549
========== ========== ========== ==========
Basic earnings
per common share as reported 0.33 $ 0.21 $ 0.56 $ 0.40
Pro forma basic earnings
per common share 0.33 0.21 0.54 0.38
Diluted earnings
per common share as reported 0.33 $ 0.21 $ 0.55 $ 0.39
Pro forma diluted earnings
per common share 0.32 0.20 0.53 0.38
4.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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Note 2. Earnings Per Share
Basic earnings per share for the three and six months ended June 30,
2005 and 2004 were computed by dividing net income by the weighted average
number of shares outstanding. Diluted earnings per share for the three and six
months ended June 30, 2005 and 2004 were computed by dividing net income by the
weighted average number of shares outstanding, adjusted for the dilutive effect
of issued and outstanding 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,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income
available to common shareholders $ 1,330 $ 861 $ 2,242 $ 1,609
Weighted average common shares outstanding 3,993 4,037 4,021 4,034
---------- ---------- ---------- ----------
Basic Earnings Per Common Share $ 0.33 $ .21 $ 0.56 $ 0.40
========== ========== ========== ==========
Diluted Earnings Per Common Share
Weighted average common shares outstanding $ 3,993 $ 4,037 $ 4,021 $ 4,034
Add: dilutive effect of assumed exercised
stock options 62 78 62 80
---------- ---------- ---------- ----------
Weighted average common and dilutive
Potential shares outstanding 4,055 4,115 4,083 4,114
========== ========== ========== ==========
Diluted Earnings Per Common Share $ 0.33 $ 0.21 $ 0.55 $ 0.39
========== ========== ========== ==========
There were approximately 40,000 and 20,000 options outstanding at June
30, 2005 and 2004, respectively, that were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of the common stock and were, therefore,
antidilutive.
5.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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Note 3. Securities
The Company's consolidated securities portfolio, which represented
30.7% of the Company's 2005 second quarter 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.
Corporate bonds consist of investment grade obligations of public corporations.
Equity securities consist of Federal Reserve stock, Federal Home Loan Bank
stock, and trust preferred stock. Securities classified as available-for-sale,
carried at fair value, were $192,593 at June 30, 2005 compared to $191,661 at
December 31, 2004. The Company does not have any securities classified as
trading or held-to-maturity.
The following table describes the fair value, gross unrealized gains
and losses of securities available-for-sale at June 30, 2005 and December 31,
2004, respectively:
June 30, 2005
-------------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------------ ------------ ------------
U.S. government agencies $ 22,258 $ 32 $ (124)
States and political subdivisions 22,382 676 (9)
U.S. government mortgage-backed securities 120,451 1,252 (334)
Collateralized mortgage obligations 1,216 -- (6)
Equity securities 18,207 47 (9)
Corporate 8,079 195 --
------------ ------------ ------------
$ 192,593 $ 2,202 $ (482)
============ ============ ============
December 31, 2004
-------------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------------ ------------ ------------
U.S. government agencies 20,924 144 (26)
States and political subdivisions 24,647 879 (6)
U.S. government mortgage-backed securities 117,500 1,205 (318)
Collateralized mortgage obligations 2,486 -- (26)
Equity securities 17,865 39 (9)
Corporate 8,239 323 --
------------ ------------ ------------
$ 191,661 $ 2,590 $ (385)
============ ============ ============
6.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Note 4. Loans
The Company offers a broad range of products, including agribusiness,
commercial, residential, and installment loans, designed to meet the credit
needs of its borrowers. The Company concentrates its lending activity in the
geographic market areas that it serves, generally lending to consumers and small
to mid-sized businesses from which deposits are garnered in the same market
areas. As a result, the Company strives to maintain a loan portfolio that is
diverse in terms of loan type, industry, borrower and geographic concentrations.
The following table describes the composition of loans by major categories
outstanding as of June 30, 2005 and December 31, 2004, respectively:
June 30, 2005 December 31, 2004
------------------------ ------------------------
$ % $ %
---------- ---------- ---------- ----------
Commercial $ 86,819 21.47% $ 91,941 21.93%
Agricultural 28,054 6.94 28,718 6.85
Real estate:
Commercial mortgages 128,649 31.80 129,597 30.91
Construction 39,101 9.67 38,882 9.27
Agricultural 26,413 6.53 30,601 7.30
1-4 family mortgages 78,524 19.41 77,566 18.50
Installment 16,449 4.07 21,502 5.13
Other 453 0.11 468 0.11
---------- ---------- ---------- ----------
Total loans 404,462 100.00% 419,275 100.00%
========== ==========
Allowance for loan losses (9,159) (9,732)
---------- ----------
Loans, net $ 395,303 $ 409,543
========== ==========
7.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per 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, 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 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 and six months ended June 30, 2005 and 2004 are summarized below:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Beginning balance $ 9,948 $ 9,882 $ 9,732 $ 9,011
Charge-offs:
Commercial 464 412 464 806
Real estate mortgages 419 71 425 143
Installment and other loans 82 125 279 306
---------- ---------- ---------- ----------
Total charge-offs 965 608 1,168 1,255
---------- ---------- ---------- ----------
Recoveries:
Commercial 10 379 302 931
Real estate mortgages 122 0 138 193
Installment and other loans 44 71 55 94
---------- ---------- ---------- ----------
Total recoveries 176 450 495 1,218
---------- ---------- ---------- ----------
Net charge-offs 789 158 673 37
---------- ---------- ---------- ----------
Provision for loan losses 0 500 100 1,250
---------- ---------- ---------- ----------
Ending balance $ 9,159 $ 10,224 $ 9,159 $ 10,224
========== ========== ========== ==========
Period end total loans, net of
unearned interest $ 404,462 $ 453,676 $ 404,462 $ 453,676
========== ========== ========== ==========
Average loans $ 414,289 $ 461,698 $ 415,909 $ 464,524
========== ========== ========== ==========
Ratio of net charge-offs to
average loans 0.19% 0.03% 0.16% 0.01%
Ratio of provision for loan losses
to average loans 0.00% 0.11% 0.02% 0.28%
Ratio of allowance for loan losses
to ending total loans 2.26% 2.25% 2.26% 2.25%
Ratio of allowance for loan losses
to total nonperforming loans 238.83% 176.43% 238.83% 176.43%
Ratio of allowance at end of period
to average loans 2.21% 2.21% 2.20% 2.20%
8.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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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 reportable segments are determined by the products and services
offered, primarily distinguished between banking, mortgage banking, financial
services, and other operations. Loans, investments, and deposits generate the
revenues in the banking segment; secondary mortgage sales and servicing
generates the revenue in the mortgage banking segment; insurance, brokerage, and
trust services generate the revenue in the financial services segment; and
holding company services generate the revenue in the operations segment.
The accounting policies used with respect to segment reporting are the
same as those described in the summary of significant accounting policies set
forth in Note 1 on page 4. Segment performance is evaluated using net interest
income. Information reported internally for performance assessment follows:
Three Months Ended
--------------------------------------------------------------------------
June 30, 2005
--------------------------------------------------------------------------
Banking Mortgage Financial Other Consolidated
Segment Banking Services Operations Totals
------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 5,277 $ 110 $ (4) $ (103) $ 5,280
Other revenue 1,041 391 656 (57) 2,031
Other expense 3,912 233 654 332 5,131
Noncash Items
Depreciation 367 22 39 25 453
Provision for loan losses -- -- -- -- --
Other Intangibles 27 -- 16 -- 43
Segment profit (loss) 2,122 246 (83) (601) 1,382
Goodwill 5,143 -- 1,820 -- 6,963
Segment assets 657,916 3,906 3,975 (373) 665,424
Three Months Ended
--------------------------------------------------------------------------
June 30, 2004
--------------------------------------------------------------------------
Banking Mortgage Financial Other Consolidated
Segment Banking Services Operations Totals
------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 5,336 $ 236 $ -- $ (41) $ 5,531
Other revenue 1,722 660 819 (11) 3,190
Other expense 7,089 397 1,070 (2,159) 6,397
Noncash Items
Depreciation 500 26 44 11 581
Provision for loan losses 500 -- -- -- 500
Other Intangibles 51 -- -- -- 51
Segment profit (loss) 613 443 (431) 567 913
Goodwill 5,822 -- 1,820 -- 7,642
Segment assets 733,201 3,633 6,938 (11,753) 732,019
9.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Note 7. Segment Information (continued)
Six Months Ended
--------------------------------------------------------------------------
June 30, 2005
--------------------------------------------------------------------------
Banking Mortgage Financial Other Consolidated
Segment Banking Services Operations Totals
------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 10,349 $ 203 $ (8) $ (179) $ 10,365
Other revenue 1,976 731 1,290 (116) 3,881
Other expense 7,743 477 1,402 593 10,215
Noncash Items
Depreciation 690 45 83 53 871
Provision for loan losses 100 -- -- -- 100
Other Intangibles 57 -- 30 -- 87
Segment profit (loss) 3,735 412 (233) (941) 2,346
Goodwill 5,143 -- 1,820 -- 6,963
Segment assets 657,916 3,906 3,975 (373) 665,424
Six Months Ended
--------------------------------------------------------------------------
June 30, 2004
--------------------------------------------------------------------------
Banking Mortgage Financial Other Consolidated
Segment Banking Services Operations Totals
------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 11,086 $ 410 $ -- $ (164) $ 11,332
Other revenue 3,228 1,222 1,674 (10) 6,114
Other expense 9,940 1,122 2,150 (392) 12,820
Noncash Items
Depreciation 875 51 87 72 1,085
Provision for loan losses 1,250 -- -- -- 1,250
Other Intangibles 103 -- -- -- 103
Segment profit (loss) 2,146 459 (563) 146 1,713
Goodwill 5,822 -- 1,820 -- 7,642
Segment assets 733,201 3,633 6,938 (11,753) 732,019
10.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
The following discussion provides an analysis of the Company's results
of operations and financial condition for the three and six months ended June
30, 2005 as compared to the same period in 2004. Management's discussion and
analysis (MD&A) should be read in conjunction with the consolidated financial
statements and accompanying notes presented elsewhere in this report as well as
the Company's 2004 Annual Report on Form 10-K. Annualized results of operations
during the three and six months ended June 30, 2005 are not necessarily
indicative of results to be expected for the full year of 2005. 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 1933, as amended, and Section
21E of the Securities Act of 1934 as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995 and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies, and expectations of the Company, are
generally identified by the use of words such as "believe," "expect," "intend,"
"anticipate," "estimate," "project," "planned" or "potential" or similar
expressions. The Company's ability to predict results, or the actual effect of
future plans or strategies, is inherently uncertain. Factors which could have a
material adverse effect on the operations and future prospects of the Company
and the subsidiaries include, but are not limited to, changes in: interest
rates; general economic conditions; legislative/regulatory changes; monetary and
fiscal policies of the U.S. government, including policies of the U.S. Treasury
and the Federal Reserve Board; the quality and composition of the loan or
securities portfolios; demand for loan products; deposit flows; competition;
demand for financial services in the Company's market areas; the Company's
implementation of new technologies; the Company's ability to develop and
maintain secure and reliable electronic systems; and accounting principles,
policies, and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. By their nature, changes in these assumptions and estimates
could significantly affect the Company's financial position or results of
operations. Actual results could differ from those estimates. Discussed below
are those critical accounting policies that are of particular significance to
the Company.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required based on past loan loss experience, the nature
and volume of the portfolio, information about specific borrower situations and
estimated collateral values, current economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged off. Loan losses are charged against the allowance when management
believes that the uncollectibility of a loan balance is confirmed.
11.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Mortgage Servicing Rights: Servicing assets represent purchased rights
and the allocated value of retained servicing rights on loans sold. Servicing
assets are expensed in proportion to, and over the period of, estimated net
servicing revenues. Impairment is evaluated based on the fair value of the
assets, using groupings of the underlying loans as to interest rates and then,
secondarily, as to geographic and prepayment characteristics. Fair value is
determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions.
Any impairment of a grouping is reported as a valuation allowance.
General
UnionBancorp, Inc. is a bank holding company organized under the laws
of the state of Delaware. The Company derives most of its revenues and income
from the operations of its bank subsidiary, UnionBank (the "Bank"), but also
derives revenue from its Financial Services Division. The Company provides a
full range of services to individual and corporate customers located in the
north central and 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, including banks, thrifts and
credits unions, as well as nonfinancial institutions providing financial
services. Additionally, the Company and the Bank are subject to regulations of
certain regulatory agencies and undergo periodic examinations by those
regulatory agencies.
Second Quarter Highlights
o Earnings per share increased 57.1% over the second quarter of 2004 and
50.0% over first quarter 2005 levels.
o The Company experienced a $251 reduction in state income taxes due to
the receipt of a tax refund related to amended tax returns outstanding
from prior years. The impact to earnings was approximately $0.06 per
diluted share.
o The net interest margin, reported at 3.59% at the end of the second
quarter 2005, showed continued improvement as compared with 3.52%
reported during the first quarter 2005 and 3.31% for the second
quarter 2004.
o The Company experienced favorable trends in expense control as
noninterest expense levels decreased $1,402 or 19.9% during the second
quarter of 2005 in comparison to the second quarter of 2004.
o The Company did not record a provision for loan losses during the
second quarter of 2005 as compared to a provision for loan losses of
$500 in the second quarter of 2004.
o The level of non-performing loans to total end of period loans totaled
0.95% as of June 30, 2005 compared to 1.28% at June 30, 2004 and 1.01%
at December 31, 2004.
o Loan demand in the second quarter remained soft, as total loans
decreased $14,800 to $404,500 since December 31, 2004.
o The Company's Board of Directors, in a continuing effort to enhance
stockholder value, approved the payment of an $0.11 quarterly cash
dividend on the Company's common stock, marking the 81st consecutive
quarter of dividends paid to stockholders.
o The Company repurchased 129,362 shares of Company common stock under
the Company's stock repurchase plan and announced an extension of the
current repurchase plan to commence at the conclusion of the existing
program.
12.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Results of Operations
Net Income
Net income equaled $1,382 or $0.33 per diluted share for the three
months ended June 30, 2005, versus $913 or $0.21 per diluted share for the same
period in 2004. For the six months ended June 30, 2005, net income equaled
$2,346 or $0.55 per diluted share compared to $1,713 or $0.39 per diluted share
earned in the same period during 2004.
The Company's quarterly results were positively impacted by improved
asset quality that allowed lower than anticipated funding for the provision of
loan losses, aggressive management of noninterest expense levels, and a shift in
the funding mix leading to a savings in interest expense. These items were
partially offset by decreases in interest income due to a reduction in loan
balances and an adverse shift in the earning-asset mix from higher yielding
loans to lower yielding securities. Also contributing to the change in earnings
were decreases in revenue generated from the mortgage banking division due to a
slowdown in new and refinancing activity and lower revenue generation from the
insurance and brokerage product lines.
Return on average assets was 0.83% for the second quarter of 2005
compared to 0.49% for the same period in 2004. Return on average assets was
0.71% for the six month period ended June 30, 2005 compared to 0.45% for the
same period in 2004.
Return on average stockholders' equity was 7.94% for the second quarter
of 2005 compared to 5.44% for the same period in 2004. Return on average
stockholders' equity was 6.73% for the six month period ended June 30, 2005
compared to 5.05% for the same period in 2004.
Net Interest Income/ Margin
Net interest income is the difference between income earned on
interest-earning assets and the interest expense incurred for the funding
sources used to finance these assets. Changes in net interest income generally
occur due to fluctuations in the volume of earning assets and paying liabilities
and the 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, on a tax equivalent basis, was $5,438 for the
three months ended June 30, 2005, compared with $5,714 earned during the same
three-month period in 2004. This represented a decrease of $276 or 4.8% from the
prior year period. The decline in net interest income is attributable to the
quarter-over-quarter reduction of interest income earned on interest-earning
assets totaling $323 which exceeded the quarter-over-quarter decrease in
interest expense paid on interest bearing liabilities totaling $47.
The $323 reduction in interest income resulted from a decrease of
$1,133 due to volume which was partially offset by an increase in the applicable
rate which generated an increase of $810. The majority of the change in interest
income was related to the decrease in the volume within the loan portfolio as
the divestiture of the Company's western Illinois sales and service centers
reduced the portfolio by $49,801 for the second quarter of 2005 as compared to
the same period in 2004. This was partially offset by higher rates driven from a
more disciplined approach to pricing loans and the rising interest rate
environment.
13.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
The $47 reduction in interest expense resulted from decreases of $488
associated with volume offset partially by a $441 increase associated with rate.
The majority of the change was attributable to a $104,529 reduction in deposits
related to the sale of the Company's branches in Western Illinois, as well as
certain steps taken during this period to more favorably manage the mix of
funding sources available to the Company.
The net interest margin increased 28 basis points to 3.59% in the
second quarter 2005 as compared with 3.31% for the same period in 2004. The
increase in the net interest margin in the second quarter 2005 when compared to
2004 resulted primarily from an increase in yields due to repricing of variable
rate assets in a higher interest rate environment and a shift in the
earning-asset mix to higher yielding loans from lower yielding investments.
Net interest income, on a tax equivalent basis, for the six months
ended June 30, 2005 totaled $10,681, representing a decrease of $1,021 or 8.7%
compared to the $11,702 earned during the same period in 2004. The decline in
net interest income is attributable to the year-over-year reduction of interest
income earned on interest-earning assets totaling $1,718 which exceeded the
year-over-year decrease in interest expense paid on interest bearing liabilities
totaling $697. The net interest margin for the first six months of 2005
increased 23 basis points to 3.56% compared to 3.33% for the same period in
2004.
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. 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.
14.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended June 30,
----------------------------------------------------------
2005 2004
--------------------------- ----------------------------
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 $ 158 $ 3 7.62% $ 54 $ -- --% $ -- $ 3 $ 3
Securities (1)
Taxable 164,510 1,481 3.61 203,307 1,483 2.93 (312) 310 (2)
Non-taxable (2) 22,018 399 7.27 26,424 484 7.35 (92) 7 (85)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Total securities (tax
equivalent) 186,528 1,880 4.04 229,731 1,967 3.43 (404) 317 (87)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Federal funds sold 6,424 47 2.93 1,969 6 1.22 25 16 41
-------- -------- ------- -------- -------- ------- -------- -------- --------
Loans (3)(4)
Commercial 119,364 2,018 6.79 134,872 1,837 5.46 (228) 409 181
Real estate 276,962 4,338 6.29 293,238 4,467 6.11 (251) 122 (129)
Installment and other 17,963 417 9.31 33,588 749 8.94 (275) (57) (332)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Gross loans (tax
equivalent) 414,289 6,773 6.56 461,698 7,053 6.13 (754) 474 (280)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Total interest-earning
assets 607,399 8,703 5.75 693,452 9,026 5.22 (1,133) 810 (323)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 19,889 21,806
Premises and equipment, net 13,818 16,348
Other assets 23,975 24,938
-------- --------
Total nonearning assets 57,682 63,092
-------- --------
Total assets $665,081 $756,544
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 71,981 $ 204 1.14% $ 46,400 $ 49 0.42% $ 38 $ 117 $ 155
Money market accounts 58,944 234 1.59 114,406 304 1.07 (183) 113 (70)
Savings deposits 44,028 51 0.46 50,207 66 0.53 (7) (8) (15)
Time deposits 282,356 2,082 2.96 307,116 2,025 2.64 (173) 230 57
Federal funds purchased and
repurchase agreements 4,921 37 3.02 11,000 40 1.46 (30) 27 (3)
Advances from FHLB 57,056 550 3.87 71,304 728 4.10 (139) (39) (178)
Other Borrowed Funds 374 -- 6.43 -- -- --
Notes payable 8,660 107 4.96 8,142 100 4.93 6 1 7
-------- -------- ------- -------- -------- ------- -------- -------- --------
Total interest-bearing
liabilities 528,320 3,265 2.48 608,575 3,312 2.18 (488) 441 (47)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 63,049 76,363
Other liabilities 3,860 4,110
-------- --------
Total noninterest-bearing
liabilities 66,909 80,473
-------- --------
Stockholders' equity 69,852 67,496
-------- --------
Total liabilities and
stockholders' equity $665,081 $756,544
======== ========
Net interest income (tax
equivalent) $ 5,438 $ 5,714 $ (645) $ 369 $ (276)
======== ======== ======== ======== ========
Net interest income (tax
equivalent) to total
earning assets 3.59% 3.31%
======== ========
Interest-bearing liabilities
to earning assets 86.98% 87.76%
======== ========
- -----------------------------------
(1) Average balance and average rate on securities classified as
available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances.
(4) Overdraft loans are excluded in the average balances.
15.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Six Months Ended June 30,
----------------------------------------------------------
2005 2004
--------------------------- ----------------------------
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 $ 143 $ 3 4.23% $ 129 $ 1 1.55% $ -- $ 2 $ 2
Securities (1)
Taxable 163,438 2,906 3.59 213,652 3,388 3.18 (872) 390 (482)
Non-taxable (2) 22,186 790 7.18 26,677 975 7.33 (206) 21 (185)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Total securities (tax
equivalent) 185,624 3,696 4.02 240,329 4,363 3.64 (1,078) 411 (667)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Federal funds sold 4,051 56 2.79 2,629 15 1.14 11 30 41
-------- -------- ------- -------- -------- ------- -------- -------- --------
Loans (3)(4)
Commercial 119,533 3,866 6.53 136,686 3,840 5.63 (522) 548 26
Real estate 277,207 8,517 6.20 292,160 8,874 6.09 (499) 142 (357)
Installment and other 19,169 865 9.10 35,678 1,628 9.15 (754) (9) (763)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Gross loans (tax
equivalent) 415,909 13,248 6.43 464,524 14,342 6.19 (1,775) 681 (1,094)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Total interest-earning
assets 605,727 17,003 5.66 707,611 18,721 5.31 (2,842) 1,124 (1,718)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 18,729 22,015
Premises and equipment, net 13,630 16,353
Other assets 23,919 26,970
-------- --------
Total nonearning assets 56,278 65,338
-------- --------
Total assets $662,005 $772,949
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 71,272 $ 369 1.04% $ 46,894 $ 116 0.50% $ 82 $ 171 $ 253
Money market accounts 58,554 448 1.54 116,309 653 1.13 (392) 187 (205)
Savings deposits 43,661 113 0.52 49,821 145 0.58 (17) (15) (32)
Time deposits 279,146 3,960 2.86 322,258 4,373 2.72 (621) 208 (413)
Federal funds purchased and
repurchase agreements 7,993 111 2.80 6,605 53 1.61 13 45 58
Advances from FHLB 58,624 1,133 3.90 72,887 1,499 4.12 (288) (78) (366)
Other borrowed funds 188 -- 6.44 -- -- -- -- 6 6
Notes payable 8,102 188 4.68 8,006 180 4.51 2 6 8
-------- -------- ------- -------- -------- ------- -------- -------- --------
Total interest-bearing
liabilities 527,540 6,322 2.42 622,780 7,019 2.26 (1,221) 524 (697)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 60,211 77,215
Other liabilities 3,946 4,779
-------- --------
Total noninterest-bearing
liabilities 64,157 81,994
-------- --------
Stockholders' equity 70,308 68,175
-------- --------
Total liabilities and
stockholders' equity $662,005 $772,949
======== ========
Net interest income (tax
equivalent) $ 10,681 $ 11,702 $ (1,621) $ 600 $ (1,021)
======== ======== ======== ======== ========
Net interest income (tax
equivalent) to total
earning assets 3.56% 3.33%
======== ========
Interest-bearing liabilities
to earning assets 87.09% 88.01%
======== ========
- -----------------------------------
(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.
16.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Provision for Loan Losses
The Company did not record a provision for loan losses charged to
operating expense for the second quarter of 2005, representing a decrease of
$500 recorded during the same period a year ago. The provision for loan losses
charged to operating expense for the six months ended June 30, 2005 totaled
$100, a decrease of $1,150 from $1,250 recorded during the same period a year
ago. The decrease in the provision was primarily due to a decrease in
non-performing and action/watch list loans from the second quarter of 2004
through the second quarter of 2005, as well as resolutions through successful
workout strategies that have been executed. Additionally, several loans for
which there was a specific allocation were collected in full during the period.
Net charge-offs for the second quarter of 2005 were $789 compared with
$158 for the comparable period in 2004. The majority of the charge-offs for the
second quarter was specifically allocated for within the provision. Annualized
net charge-offs increased to 0.19% of average loans for the second quarter of
2005 compared with 0.03% in the same period in 2004. Net charge-off for the six
months ended June 30, 2005 were $673 compared with $37 for the comparable period
in 2004. Annualized net charge-offs increased to 0.16% of average loans for the
six months ended June 30, 2005 compared to 0.01% in the same period in 2004. See
"Nonperforming Assets" and "Other Potential Problem Loans" for further
information.
The amount of the provision for loan losses is based on management's
evaluations of the loan portfolio, with particular attention directed toward
nonperforming, impaired and other potential problem loans. During these
evaluations, consideration is also given to such factors as management's
evaluation of specific loans, the level and composition of impaired loans, other
nonperforming loans, other identified potential problem loans, historical loss
experience, results of examinations by regulatory agencies, results of the
independent asset quality review process, the market value of collateral, the
estimate of discounted cash flows, the strength and availability of guarantees,
concentrations of credits, and various other factors, including concentration of
credit risk in various industries and current economic conditions.
Management remains watchful of credit quality issues and believes that
issues within the portfolio are reflective of the challenging economic
environment experienced over the past few years. Should the economic climate
deteriorate from current levels, borrowers may experience difficulty, and the
level of nonperforming loans, charge-offs and delinquencies could rise and
require further increases in the provision.
17.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Noninterest Income
Noninterest income consists of a wide variety of fee-based revenues
from bank-related service charges on deposits and mortgage revenues. Also
included in this category are revenues generated by the Company's insurance,
brokerage, trust and asset management product lines as well as increases in cash
surrender value on bank-owned life insurance. The following table summarizes the
Company's noninterest income:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Service charges $ 525 $ 803 $ 1,008 $ 1,514
Merchant fee income -- 12 -- 68
Trust income 187 180 402 364
Mortgage banking income 364 647 704 1,215
Insurance commissions and fees 472 608 893 1,241
Bank Owned Life Insurance 135 173 269 345
Securities gains, net -- 10 -- 10
Gain on the sale of assets 1 466 3 725
Other income 347 291 602 632
---------- ---------- ---------- ----------
$ 2,031 $ 3,190 3,881 $ 6,114
========== ========== ========== ==========
Noninterest income totaled $2,031 for the three months ended June 30,
2005, compared to $3,190 for the same period in 2004. Exclusive of the gain on
sale of assets and net securities gains for both periods, noninterest income
equaled $2,030 for the three months ended June 30, 2005, compared to $2,714 for
the same period in 2004. This represented a decrease of $684 or 25%. The
quarter-over-quarter decrease was primarily attributable to a decrease in
mortgage banking income related to a slowdown in new and refinancing loan
production activity and a decrease in insurance revenue related to lower
production volumes and account retention in 2005 versus 2004. Also contributing
were volume related decreases in overdraft fees (included in service charges)
and service charges due to the Company's exiting of their western Illinois sales
and service centers in 2004. Additionally, most other fee categories for the
quarter have shown a decrease as well when compared to 2004 results for the same
period.
Noninterest income totaled $3,881 for the six months ended June 30, 2005,
compared to $6,114 for the same time frame in 2004. Excluding all gains on sale
of assets and net securities gains for both periods, noninterest income
decreased $1,501 or 28%. The change was largely reflective of the same items
discussed regarding the second quarter.
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Noninterest Expense
Noninterest expense is comprised primarily of compensation and employee
benefits, occupancy and other operating expense. The following table summarizes
the Company's noninterest expense:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Salaries and employee benefits $ 3,366 $ 4,136 $ 6,842 $ 8,286
Occupancy expense, net 385 559 779 1,111
Furniture and equipment expense 461 573 885 1,130
Marketing 128 157 224 325
Supplies and printing 86 115 163 230
Telephone 106 142 213 296
Other real estate owned expense 29 (3) 34 4
Amortization of intangible assets 43 51 87 103
Other expenses 1,023 1,299 1,946 2,523
---------- ---------- ---------- ----------
$ 5,627 $ 7,029 $ 11,173 $ 14,008
========== ========== ========== ==========
Noninterest expense totaled $5,627 for the three months ended June 30,
2005, as compared to $7,029 for the same period in 2004. This represented a
decrease of $1,402 or 20%. This improvement in noninterest expense was primarily
due to savings related to the divestiture of the Company's western Illinois
sales and service centers leading to the decreases experienced for salary and
employee benefits, occupancy expense, marketing, supplies, telephone and other
expense categories. Additionally, legal fees associated with the workout of
problem credits have declined as asset quality continues to improve. Finally,
management's continued efforts to contain costs have led to decreases in most
all other expense categories.
Noninterest expense totaled $11,173 for the six months ended June 30,
2005, decreasing by $2,835 or 20% from the same period in 2004. The change was
largely reflective of the same items discussed regarding the second quarter.
Applicable Income Taxes
Income tax expense for the periods included benefits for tax-exempt
income, tax-advantaged investments and general business tax credits offset by
the effect of nondeductible expenses. The following table shows the Company's
income before income taxes, as well as applicable income taxes and the effective
tax rate for the three months and six months ended June 30, 2005 and 2004.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Income before income taxes $ 1,684 $ 1,192 $ 2,973 $ 2,188
Applicable income taxes 302 279 627 475
Effective tax rates 17.9% 23.4% 21.1% 21.7%
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
The Company recorded an income tax expense of $302 and of $279 for the
three months ended June 30, 2005 and 2004, respectively. Effective tax rates
equaled 17.9% and 23.4% respectively, for such periods. In the second quarter of
2005, the Company recorded a $251 reduction in state income taxes due to the
receipt of a tax refund related to amended tax returns outstanding from prior
years. Excluding this refund, the effective tax rate would have been 32.8%.
The Company recorded income tax expense of $627 and $475 for the six
months ended June 30, 2005 and 2004, respectively. Effective tax rates equaled
21.1% and 21.7% respectively, for such periods.
The Company's effective tax rate was lower than statutory rates due to
several factors. First, the Company derives interest income from municipal
securities and loans, which are exempt from federal tax and certain U. S.
government agency securities, which are exempt from Illinois State tax. Second,
the level of tax-exempt income has increased as a percentage of taxable income.
Third, state income taxes were lower due to a refund from amended tax returns
for prior years. Finally, the Company has reduced tax expense through various
tax planning initiatives.
Preferred Stock Dividends
The Company paid $52 in preferred stock dividends for the three months
ended June 30, 2005 and 2004, respectively. The Company paid $104 in preferred
stock dividends for the six months ended June 30, 2005 and 2004, respectively.
Interest Rate Sensitivity Management
The business of the Company and the composition of its balance sheet
consist of investments in interest-earning assets (primarily loans and
securities) which are primarily funded by interest-bearing liabilities (deposits
and borrowings). 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 Bank depends, to a substantial extent, on "rate differentials,"
i.e., the differences between the income the Bank receives from loans,
securities, and other earning assets and the interest expense they pay to obtain
deposits and other liabilities. These rates are highly sensitive to many factors
that are beyond the control of the Bank, including general economic conditions
and the policies of various governmental and regulatory authorities.
The Company measures its overall interest rate sensitivity through a
net interest income analysis. The net interest income analysis measures the
change in net interest income in the event of hypothetical changes in interest
rates. This analysis assesses the risk of changes in net interest income in the
event of a sudden and sustained 100 to 200 basis point increase in market
interest rates or a 100 basis point decrease in market rates. The interest rate
scenarios are used for analytical purposes and do not necessarily represent
management's view of future market movements.
20.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
The tables below present the Company's projected changes in net
interest income for the various rate shock levels at June 30, 2005 and December
31, 2004, respectively:
June 30, 2005
----------------------------------------------------------
Net Interest Income
----------------------------------------------------------
Amount Change Change
----------- ----------- --------
(Dollars in Thousands)
+200 bp $ 22,661 $ 1,082 5.01%
+100 bp 22,185 606 2.81
Base 21,579 -- --
-100 bp 20,584 (996) (4.61)
-200 bp 19,165 (2,414) (11.19)
Based upon the Company's model at June 30, 2005, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by $1,082 or 5.01%. The effect of an immediate 200
basis point decrease in rates would decrease the Company's net interest income
by $(2,414) or (11.19%).
December 31, 2004
----------------------------------------------------------
Net Interest Income
----------------------------------------------------------
Amount Change Change
----------- ----------- --------
(Dollars in Thousands)
+200 bp $ 21,070 $ 996 4.96%
+100 bp 20,635 560 2.79
Base 20,074 -- --
-100 bp 19,048 (1,026) (5.11)
-200 bp 17,558 (2,515) (12.53)
Based upon the Company's model at December 31, 2004, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by $996 or 4.96%. The effect of an immediate 200
basis point decrease in rates would decrease the Company's net interest income
by $(2,515) or (12.53%).
Financial Condition
General
As of June 30, 2005, the Company had total assets of $665,424, total
gross loans of $404,462, total deposits of $521,200 and total stockholders'
equity of $68,749. Total assets decreased by $4,122 or 0.6% from year-end 2004.
Total gross loans decreased by $14,813 or 3.53% from year-end 2004. Total
deposits increased by $8,723 or 1.7% from year-end 2004.
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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 that are 90 days delinquent but are well secured and in the
process of collection are not included in nonperforming assets. Other
nonperforming assets consist of real estate acquired through loan foreclosures
or other workout situations and other assets acquired through repossessions.
The classification of a loan as nonaccrual does not necessarily
indicate that the principal is uncollectible, in whole or in part. The Bank
makes a determination as to collectibility on a case-by-case basis. The Bank
considers both the adequacy of the collateral and the other resources of the
borrower in determining the steps to be taken to collect nonaccrual loans. The
final determination as to the steps taken is made based upon the specific facts
of each situation. Alternatives that are typically considered to collect
nonaccrual loans are foreclosure, collection under guarantees, loan
restructuring, or judicial collection actions.
Each of the Company's loans is assigned a rating based upon an
internally developed grading system. A separate credit administration department
also reviews grade assignments on an ongoing basis. Management continuously
monitors nonperforming, impaired, and past due loans to prevent further
deterioration of these loans. The Company has an independent loan review
function which is separate from the lending function and is responsible for the
review of new and existing loans.
The following table summarizes nonperforming assets and loans past due
90 days or more and still accruing for the previous five quarters.
2005 2004
-------------------- --------------------------------
Jun 30, Mar 31, Dec 31, Sept 30, Jun 30,
-------- -------- -------- -------- --------
Non-accrual loans $ 3,217 $ 4,176 $ 3,649 $ 3,753 $ 5,293
Loans 90 days past due and still accruing interest 618 846 553 771 502
-------- -------- -------- -------- --------
Total nonperforming loans 3,835 5,022 4,202 4,524 5,795
Other real estate owned 669 400 420 90 164
-------- -------- -------- -------- --------
Total nonperforming assets $ 4,504 $ 5,422 $ 4,622 $ 4,614 $ 5,959
======== ======== ======== ======== ========
Nonperforming loans to total end of period loans 0.95% 1.19% 1.00% 1.09% 1.28%
Nonperforming assets to total end of period loans 1.11 1.29 1.10 1.11 1.31
Nonperforming assets to total end of period assets 0.68 0.82 0.69 0.69 0.81
The level of nonperforming loans at June 30, 2005 decreased to $3,835
from the $4,202 that existed as of December 31, 2004 and from the $5,795 that
existed at June 30, 2004. The level of nonperforming loans to total end of
period loans was 0.95% at June 30, 2005, as compared to 1.00% at December 31,
2004 and 1.28% at June 30, 2004. The reserve coverage ratio (allowance to
nonperforming loans) was reported at 238.83% as of June 30, 2005 as compared to
231.60% as of December 31, 2004 and 176.43% as of June 30, 2004.
22.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Other Potential Problem Loans
The Company has other potential problem loans that are currently
performing, but where some concerns exist as to the ability of the borrower to
comply with present loan repayment terms. If nonperforming loans are excluded,
loans that management has classified as impaired totaled $6,644 at June 30, 2005
as compared to $6,892 at June 30, 2004, $7,782 at December 31, 2004 and $6,524
at March 31, 2005. The classification of these loans, however, does not imply
that management expects losses on each of these loans, but believes that a
higher level of scrutiny and close monitoring is prudent under the
circumstances. Such classifications relate to specific concerns for each
individual borrower and do not relate to any concentration risk common to all
loans in this group.
Allowance for Loan Losses
At June 30, 2005, the allowance for loan losses was $9,159 or 2.26% of
total loans as compared to $9,732 or 2.32% at December 31, 2004, and $10,224 or
2.25% at June 30, 2004. In originating loans, the Company recognizes that credit
losses will be experienced and the risk of loss will vary with, among other
things, general economic conditions; the type of loan being made; the
creditworthiness of the borrower over the term of the loan; and, in the case of
a collateralized loan, the quality of the collateral for such a loan. The
allowance for loan losses represents the Company's estimate of the allowance
necessary to provide for probable incurred losses in the loan portfolio. In
making this determination, the Company analyzes the ultimate collectibility of
the loans in its portfolio, 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 reviews the adequacy of the allowance
for loan losses. Commercial credits are graded by the loan officers and the loan
review function validates the officers' grades. In the event that the loan
review function downgrades the loan, it is included in the allowance analysis at
the lower grade. The grading system is in compliance with the regulatory
classifications and the allowance is allocated to the loans based on the
regulatory grading, except in instances where there are known differences (i.e.,
collateral value is nominal, etc.). To establish the appropriate level of the
allowance, a sample of loans (including impaired and nonperforming loans) are
reviewed and classified as to potential loss exposure.
Based on an estimation computed pursuant to the requirements of
Financial Accounting Standards Board ("FASB") Statement No. 5, "Accounting for
Contingencies," and FASB Statements Nos. 114 and 118, "Accounting by Creditors
for Impairment of a Loan," the analysis of the allowance for loan losses
consists of three components: (i) specific credit allocation established for
expected losses resulting from analysis developed through specific credit
allocations on individual loans for which the recorded investment in the loan
exceeds its fair value; (ii) general portfolio allocation based on historical
loan loss experience for each loan category; and (iii) subjective reserves based
on general economic conditions as well as specific economic factors in the
markets in which the Company operates.
The specific credit allocation component of the allowance for loan
losses is based on a regular analysis of loans over a fixed-dollar amount where
the internal credit rating is at or below a predetermined classification. The
fair value of the loan is determined based on either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
market price of the loan, or, if the loan is collateral dependent, the fair
value of the underlying collateral less cost of sale.
The general portfolio allocation component of the allowance for loan
losses is determined statistically using a loss migration analysis that examines
historical loan loss experience. The loss migration analysis is performed
quarterly and loss factors are updated regularly based on actual experience. The
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
general portfolio allocation element of the allowance for loan losses also
includes consideration of the amounts necessary for concentrations and changes
in portfolio mix and volume.
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 has not significantly changed since year-end
2004. The methodology used to determine the adequacy of the allowance for loan
losses is consistent with prior years, and there were no reallocations.
Management remains watchful of credit quality issues and believes that
issues within the portfolio are reflective of the challenging economic
environment experienced over the past few years. If the economic climate
deteriorates from current levels, borrowers may experience difficulty, and the
level of nonperforming loans, charge-offs and delinquencies could rise and
require further increases in the provision.
Liquidity
The Company manages its liquidity position with the objective of
maintaining sufficient funds to respond to the needs of depositors and borrowers
and to take advantage of earnings enhancement opportunities. In addition to the
normal inflow of funds from core-deposit growth together with repayments and
maturities of loans and investments, the Company utilizes other short-term
funding sources such as brokered time deposits, securities sold under agreements
to repurchase, overnight federal funds purchased from correspondent banks and
the acceptance of short-term deposits from public entities, and Federal Home
Loan Bank advances.
The Company monitors and manages its liquidity position on several
bases, which vary depending upon the time period. As the time period is
expanded, other data is factored in, including estimated loan funding
requirements, estimated loan payoffs, investment portfolio maturities or calls,
and anticipated depository buildups or runoffs.
The Company classifies all of its securities as available-for-sale,
thereby maintaining significant liquidity. The Company's liquidity position is
further enhanced by structuring its loan portfolio interest payments as monthly
and by the significant representation of retail credit and residential mortgage
loans in the Company's loan portfolio, resulting in a steady stream of loan
repayments. In managing its investment portfolio, the Company provides for
staggered maturities so that cash flows are provided as such investments mature.
The Company's cash flows are comprised of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Cash flows used in financing activities offset
by those provided by operating activities and investing activities, resulted in
a net increase in cash and cash equivalents of $8,570 from December 31, 2004 to
June 30, 2005.
During the first six months of 2005, the Company experienced net cash
outflows of $6,126 in financing activities primarily due to decreases in Federal
Home Loan Bank advances and federal funds purchased and securities sold under
agreements to repurchase. In contrast, net cash inflows were provided by $5,568
in operating activities due to proceeds from sales of net loans and net income
and $9,128 in investing activities largely due to the decrease in net loans.
24.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet
Financial Instruments
The Company has entered into contractual obligations and commitments
and off-balance sheet financial instruments. The following tables summarize the
Company's contractual cash obligations and other commitments and off balance
sheet instruments as of June 30, 2005.
Payments Due by Period
--------------------------------------------------------------
Within 1 After
Contractual Obligations Year 1-3 Years 4-5 Years 5 Years Total
---------- ---------- ---------- ---------- ----------
Short-term debt $ 8,860 -- -- -- 8,860
Long-term debt -- $ 312 $ -- $ -- $ 312
FHLB Advances 14,400 30,500 3,200 8,000 56,100
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $ 23,260 $ 30,812 $ 3,200 $ 8,000 $ 65,272
========== ========== ========== ========== ==========
Amount of Commitment Expiration per Period
--------------------------------------------------------------
Within 1 After
Off-Balance Sheet Financial Instruments Year 1-3 Years 4-5 Years 5 Years Total
---------- ---------- ---------- ---------- ----------
Lines of credit $ 73,806 $ 4,863 $ 3,583 $ 14,361 $ 86,952
Standby letters of credit 6,745 1,063 -- -- 7,808
---------- ---------- ---------- ---------- ----------
Total commercial commitments $ 80,551 $ 5,926 $ 3,583 $ 14,361 $ 94,761
========== ========== ========== ========== ==========
Capital Resources
Stockholders' Equity
The Company is committed to managing capital for maximum shareholder
benefit and maintaining strong protection for depositors and creditors.
Stockholders' equity at June 30, 2005 was $68,749, a decrease of $1,498 or 2.1%,
from December 31, 2004. The decrease in stockholders' equity was largely the
result of stock repurchase activity, dividends paid to shareholders and a
decrease in accumulated other comprehensive income. These factors were offset by
an increase in earnings for the first six months of 2005. Average quarterly
equity as a percentage of average quarterly assets was 10.50% at June 30, 2005,
compared to 9.98% at December 31, 2004. Book value per common share equaled
$17.40 at June 30, 2005 compared to $17.30 at December 31, 2004.
Stock Repurchase
On May 2, 2003, the Board of Directors approved a stock repurchase plan
whereby the Company may repurchase from time to time up to 5% of its outstanding
shares of common stock in the open market or in private transactions over an 18
month period. On September 23, 2004, the Board of Directors extended the
Company's stock repurchase program through May 2, 2006. Under the terms of the
plan, the Company is able to repurchase, from time to time, up to 5% of its
outstanding shares of common stock in the open market or in private
transactions. Purchases are dependent upon market conditions and the
availability of shares. On June 16, 2005, the Board of Directors amended the
repurchase plan to enable the Company to acquire an additional 5% of its
outstanding shares of common stock in the open market or in private
transactions. The extension of the repurchase program enables the Company to
optimize its use of capital relative to other investment alternatives and
benefits both the Company and the shareholders by enhancing earnings per share
and return on equity. During the current quarter, 129,362 shares were
repurchased at a weighted average cost of $21.29.
25.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Capital Measurements
The Bank is expected to meet a minimum risk-based capital to
risk-weighted assets ratio of 8%, of which at least one-half (or 4%) must be in
the form of Tier 1 (core) capital. The remaining one-half (or 4%) may be in the
form of Tier 1 (core) or Tier 2 (supplementary) capital. The amount of loan loss
allowance that may be included in capital is limited to 1.25% of risk-weighted
assets. The ratio of Tier 1 (core) and the combined amount of Tier 1 (core) and
Tier 2 (supplementary) capital to risk-weighted assets for the Company was 13.0%
and 14.3%, respectively, at June 30, 2005. The Company is currently, and expects
to continue to be, in compliance with these guidelines.
The following table sets forth an analysis of the Company's capital
ratios:
December 31, Minimum Well
June 30, ------------------------ Capital Capitalized
2005 2004 2003 Ratios Ratios
---------- ---------- ---------- ---------- ----------
Tier 1 risk-based capital $ 62,191 $ 63,347 $ 59,851
Tier 2 risk-based capital 5,975 6,067 7,790
---------- ---------- ----------
Total capital 68,166 69,414 67,641
Risk-weighted assets 477,989 485,325 556,729
Capital ratios
Tier 1 risk-based capital 13.0% 13.0% 10.8% 4.00% 6.00%
Tier 2 risk-based capital 14.3 14.3 12.2 8.00 10.00
Leverage ratio 9.4 9.5 7.7 4.00 5.00
Impact of Inflation, Changing Prices, and Monetary Policies
The financial statements and related financial data concerning the
Company have been prepared in accordance with U.S. generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. The primary
effect of inflation on the operations of the Company is reflected in increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
changes in interest rates have a more significant effect on the performance of a
financial institution than do the effects of changes in the general rate of
inflation and changes in prices. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services.
Interest rates are highly sensitive to many factors which are beyond the control
of the Company, including the influence of domestic and foreign economic
conditions and the monetary and fiscal policies of the United States government
and federal agencies, particularly the Federal Reserve Board.
Recent Regulatory and Accounting Developments
SFAS 123R, "Accounting for Stock-Based Compensation, Revised," requires all
public companies to record compensation cost for stock options provided to
employees in return for employee service. The cost is measured at the fair value
of the options when granted, and this cost is expensed over the employee service
period, which is normally the vesting period of the options. The Securities and
Exchange Commission in April 2005 amended the compliance dates for SFAS 123R
from periods beginning after June 15, 2005 to the beginning of the next fiscal
year. The effect on results of operations will depend on the level of future
option grants and the calculation of the fair value of the options granted at
26.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
such future date, as well as the vesting periods provided, and so cannot
currently be predicted. Adoption of SFAS 123R should not have a significant
effect on the Company's financial position because total equity will not change.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item 3 is incorporated by reference
from the discussion on pages 19 and 20 of this Form 10-Q under the caption
"Interest Rate Sensitivity Management" and the discussion on page 25 under the
caption "Impact of Inflation, Changing Prices, and Monetary Policies."
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried
out an evaluation under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of
1934, as amended). Based on this evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective in timely alerting them to material
information relating to the Company required to be included in the Company's
periodic filings with the Securities and Exchange Commission. It should be noted
that in designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. The Company has designed its disclosure controls and procedures to
reach a level of reasonable assurance of achieving the desired control
objectives and, based on the evaluation described above, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective at reaching that level of
reasonable assurance.
There was no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended) during the Company's most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
27.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business the Company may be involved in various
legal proceedings from time to time. The Company does not believe it is
currently involved in any claim or action the ultimate disposition of which
would have a material adverse effect on the Company's financial statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases of the Company's
common stock by the Company during the quarter ended June 30, 2005.
================================================================================================================
Total Number of
Shares Purchased as Maximum Number of
Part of Publicly Shares that May Yet
Total Number of Average Price Paid Announced Plans or Be Purchased Under
Period Shares Purchased per Share Programs the Plans or Programs
================================================================================================================
04/01/05 - -- -- -- 170,010
04/30/05
================================================================================================================
05/01/05 - 66,768 21.585 66,768 103,242
05/31/05
================================================================================================================
06/01/05 - 62,594 20.975 62,594 40,648
06/30/05
================================================================================================================
Total (1) (2) 129,362 21.289 129,362 40,648
================================================================================================================
(1) Pursuant to the repurchase program that we originally announced on May
2, 2003 (the "Program"), the Company repurchased 129,362 shares at an
average price per share of $21.29 of our common stock during the
quarter ended June 30, 2005.
(2) Our board of directors approved the repurchase by us of up to an
aggregate of 5% of the outstanding shares of our common stock pursuant
to the Program. The Program initially lasted for an eighteen month
period, but was extended by our board of directors on September 23,
2004 until May 2, 2006. Unless terminated earlier by resolution of our
board of directors, the Program will expire on the earlier of such
expiration date or when we have repurchased all shares authorized for
repurchase under the Program.
Item 3. Defaults Upon Senior Securities
None.
28.
Item 4. Submission of Matters to a Vote of Security Holders
At the April 26, 2005 annual meeting of stockholders, Richard J. Berry,
Walter E. Breipohl, and John A. Trainor were elected to serve as Class
I directors until 2008. Continuing as Class II directors until 2006 are
Robert J. Doty, I. J. Reinhardt, Jr. and Scott A. Yeoman. Continuing as
Class III directors until 2007 are Dennis J. McDonnell, John A. Shinkle
and Scott C. Sullivan.
There were 4,059,110 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:
For Withheld
--------- --------
Election of Directors
Richard J. Berry 3,510,175 71,437
Walter E. Breipohl 3,524,966 56,646
John A. Trainor 3,525,700 55,912
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
31.1 Certification of Scott A. Yeoman, President and Principal
Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Kurt R. Stevenson, Senior Vice President and
Principal Financial and Accounting Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(1) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
from the Company's President and Principal Executive Officer.
32.2(1) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
from the Company's Senior Vice President and Principal
Financial and Accounting Officer.
----------------
(1) This certification is not "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, or incorporated
by reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.
29.
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.
UNIONBANCORP, INC.
Date: August 11, 2005 By: /s/ SCOTT A. YEOMAN
-------------------------------------
Scott A. Yeoman
President and Principal Executive
Officer
Date: August 11, 2005 By: /s/ KURT R. STEVENSON
-------------------------------------
Kurt R. Stevenson
Senior Vice President and Principal
Financial and Accounting Officer
30.