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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period
ended September 30, 2002
Commission File Number: 0-28846
UnionBancorp, Inc.
(Exact name of Registrant as specified in its charter)
----------------------------------------------------
Delaware 36-3145350
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
321 West Main Street Ottawa, Illinois 61350
(Address of principal executive offices including zip code)
(815) 431-2720
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Exchange Class which Registered
- --------------------------------------------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($1.00 par value)
(Title of Class)
Preferred Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Shares outstanding at November 13, 2002
- ----------------------------- ---------------------------------------
Common Stock, Par Value $1.00 3,980,946
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UnionBancorp, Inc.
Form 10-Q Index
Page
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements
o Consolidated Balance Sheets....................................1
o Consolidated Statements of Income and Comprehensive Income ....2
o Consolidated Statements of Cash Flows..........................3
o Notes to Unaudited Consolidated Financial Statements...........4
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition...........................................11
Item 3 Quantitative and Qualitative Disclosures
About Market Risk.................................................25
Item 4. Controls and Procedures ............................................25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................26
Item 2. Changes in Securities and Use of Proceeds...........................26
Item 3. Defaults Upon Senior Securities.....................................26
Item 4. Submission of Matters to a Vote of Security Holders.................26
Item 5. Other Information...................................................26
Item 6. Exhibits and Reports on Form 8-K....................................27
SIGNATURES...................................................................28
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001 (In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
September 30, December 31,
2002 2001
------------ ------------
ASSETS
Cash and cash equivalents $ 35,052 $ 26,699
Securities available-for-sale 213,077 186,282
Loans 489,148 504,968
Allowance for loan losses (6,808) (6,295)
------------ ------------
Net loans 482,340 498,673
Premises and equipment, net 14,007 12,451
Intangible assets, net 8,304 8,607
Mortgage servicing rights 2,544 2,102
Other assets 14,520 13,493
------------ ------------
Total assets $ 769,844 $ 748,307
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 77,677 $ 73,138
Interest-bearing 545,480 539,006
------------ ------------
Total deposits 623,157 612,144
Federal funds purchased and securities sold
under agreements to repurchase 4,600 2,629
Advances from the Federal Home Loan Bank 58,900 52,750
Notes payable 9,275 9,275
Other liabilities 6,184 6,864
------------ ------------
Total liabilities 702,116 683,662
------------ ------------
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;
4,571,209 shares issued at September 30, 2002 and 4,569,319
shares issued at December 31, 2001 4,571 4,569
Surplus 21,856 21,841
Retained earnings 42,092 40,560
Accumulated other comprehensive income 3,036 1,536
Unearned compensation under stock option plans (34) (68)
------------ ------------
72,021 68,938
Treasury stock, at cost; 590,263 shares (5,124) (5,124)
------------ ------------
Total stockholders' equity 66,897 63,814
------------ ------------
Total liabilities and stockholders' equity $ 769,844 $ 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 Nine Months Ended September 30, 2002 and 2001
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Interest income
Loans $ 8,911 10,628 $ 27,422 $ 32,926
Securities
Taxable 1,865 2,062 5,507 6,757
Exempt from federal income taxes 425 502 1,288 1,511
Federal funds sold and other 37 44 103 137
---------- ---------- ---------- ----------
Total interest income 11,238 13,236 34,320 41,331
Interest expense
Deposits 4,057 6,151 13,350 20,396
Federal funds purchased and securities sold
under agreements to repurchase 46 22 124 56
Advances from the Federal Home Loan Bank 690 748 1,813 2,297
Notes payable 86 149 265 500
---------- ---------- ---------- ----------
Total interest expense 4,879 7,070 15,552 23,249
---------- ---------- ---------- ----------
Net interest income 6,359 6,166 18,768 18,082
Provision for loan losses 519 596 3,056 1,271
---------- ---------- ---------- ----------
Net interest income after
Provision for loan losses 5,840 5,570 15,712 16,811
Noninterest income
Service charges 708 719 1,953 2,057
Merchant fee income 330 301 881 857
Trust income 180 159 551 501
Mortgage banking income 678 494 1,877 1,436
Insurance commissions and fees 558 582 1,602 1,885
Securities gains, net 107 264 407 555
Other income 499 526 1,630 1,584
---------- ---------- ---------- ----------
3,060 3,045 8,901 8,875
Noninterest expenses
Salaries and employee benefits 3,747 3,514 11,354 10,185
Occupancy expense, net 469 421 1,360 1,330
Furniture and equipment expense 474 402 1,349 1,188
Supplies and printing 110 155 380 471
Telephone 241 197 768 576
Amortization of intangible assets 101 231 303 715
Other expenses 2,298 1,611 5,847 4,672
---------- ---------- ---------- ----------
7,440 6,531 21,361 19,137
---------- ---------- ---------- ----------
Income before income taxes 1,460 2,084 3,252 6,549
Income taxes 314 616 612 1,961
---------- ---------- ---------- ----------
Net income 1,146 1,468 2,640 4,588
Preferred stock dividends 65 64 193 194
---------- ---------- ---------- ----------
Net income for common stockholders $ 1,081 $ 1,404 $ 2,447 $ 4,394
========== ========== ========== ==========
Basic earnings per share $ 0.27 $ 0.35 $ 0.61 $ 1.11
========== ========== ========== ==========
Diluted earnings per common share $ 0.27 $ 0.35 $ 0.61 $ 1.10
========== ========== ========== ==========
Comprehensive income $ 1,827 $ 2,382 $ 4,140 $ 6,830
========== ========== ========== ==========
See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001 (In Thousands)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------------------
2002 2001
---------- ----------
Cash flows from operating activities
Net income $ 2,640 $ 4,588
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 1,130 998
Amortization of intangible assets 303 715
Amortization of unearned compensation under stock option plans 34 47
Amortization of bond premiums, net 1,070 326
Provision for loan losses 3,056 1,271
Securities gains, net (407) (555)
Net (gain) loss on sale of equipment 4 (4)
Loss on sale of real estate acquired in settlement of loans 156 52
Gain on sale of loans (1,778) (1,252)
Proceeds from sales of loans held for sale 103,941 92,093
Origination of loans held for sale (104,628) (91,294)
Change in assets and liabilities
Increase in other assets (486) (620)
Decrease in other liabilities (1,614) (387)
---------- ----------
Net cash provided by operating activities 3,421 5,978
Cash flows from investing activities
Securities
Available-for-sale
Proceeds from maturities and paydowns 52,434 102,114
Proceeds from sales 19,776 11,017
Purchases (97,234) (117,511)
Net (increase) decrease in loans 13,575 (4,860)
Purchase of premises and equipment (2,700) (936)
Proceeds from sale of real estate acquired in settlement of loans 1,029 546
Proceeds from sale of equipment 10 4
---------- ----------
Net cash used in investing activities (13,110) (9,626)
Cash flows from financing activities
Net increase (decrease) in deposits 11,013 (29,031)
Net increase in federal funds purchased
and securities sold under agreements to repurchase 1,971 5,268
Increase in advances from the Federal Home Loan Bank 6,150 23,000
Payments on notes payable - (1,000)
Dividends on common stock (915) (795)
Dividends on preferred stock (193) (194)
Proceeds from exercise of stock options 16 90
---------- ----------
Net cash provided by (used in) financing activities 18,042 (2,662)
---------- ----------
Net increase (decrease) in cash and cash equivalents 8,353 (6,310)
Cash and cash equivalents
Beginning of period 26,699 33,021
---------- ----------
End of period $ 35,052 $ 26,711
========== ==========
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 16,520 $ 24,862
Income taxes 317 602
See Accompanying Notes to Unaudited Financial Statements
3.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements of
UnionBancorp, Inc. (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America and
with the rules and regulations of the Securities and Exchange Commission for
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required for complete financial statements. In the
opinion of management, all normal and recurring adjustments which are necessary
to fairly present the results for the interim periods presented have been
included. The preparation of financial statements requires management to make
estimates and assumptions that affect the recorded amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
For further information with respect to significant accounting policies followed
by the Company in the preparation of its consolidated financial statements,
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 2001. The annualized results of operations during the three months and nine
months ended September 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 nine months ended September
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 nine months ended September 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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income available to common shareholders $ 1,081 $ 1,404 $ 2,447 4,394
Weighted average common shares outstanding 3,980 3,977 3,979 3,973
---------- ---------- ---------- ----------
Basic Earnings Per Common Share $ 0.27 $ 0.35 $ 0.61 $ 1.11
========== ========== ========== ==========
Diluted Earnings Per Common Share Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Weighted average common shares outstanding 3,980 3,977 3,979 3,973
Add: dilutive effect of assumed exercised
stock options 48 42 46 33
---------- ---------- ---------- ----------
Weighted average common and dilutive
Potential shares outstanding 4,028 4,019 4,025 4,006
========== ========== ========== ==========
Diluted Earnings Per Common Share $ 0.27 $ 0.35 $ 0.61 $ 1.10
========== ========== ========== ==========
4.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
There were approximately 59,900 and 100,850 options outstanding at September 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.
Note 3. Securities
The Company's consolidated securities portfolio, which represented 29.5% of the
Company's 2002 third 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 with implied calls.
Corporate bonds consist of investment grade obligations of public corporations.
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 $213,077 at September 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 September 30, 2002 and December 31, 2001:
September 30, 2002
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
U.S. treasury $ 1,003 $ 28 $ - $ 1,031
U.S. government agencies 50,487 970 (1) 51,456
States and political subdivisions 34,537 2,015 (6) 36,546
U.S. government mortgage-backed securities 97,075 1,701 (138) 98,638
Collateralized mortgage obligations and
other asset backed securities 4,355 162 (1) 4,516
Corporate bonds 8,839 203 - 9,042
Other 11,846 24 (22) 11,848
----------- ----------- ----------- -----------
$ 208,142 $ 5,103 $ (168) $ 213,077
=========== =========== =========== ===========
5.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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
=========== =========== =========== ===========
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 September 30, 2002 and December 31, 2001:
September 30, 2002 December 31, 2001
-------------------------- --------------------------
$ % $ %
----------- ----------- ----------- -----------
Commercial $ 102,376 20.93% $ 107,382 21.27%
Agricultural 39,083 7.99 40,563 8.03
Real estate:
Commercial mortgages 145,855 29.82 150,878 29.88
Construction 23,499 4.80 23,676 4.69
Agricultural 35,132 7.18 34,611 6.85
1-4 family mortgages 89,366 18.27 94,368 18.69
Installment 51,285 10.49 50,961 10.09
Other 2,552 0.52 2,529 0.50
----------- ----------- ----------- -----------
Total loans 489,148 100.00% 504,968 100.00%
=========== ===========
Allowance for loan losses (6,808) (6,295)
----------- -----------
Loans, net $ 482,340 $ 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
nine months ended September 30, 2002 and 2001 are summarized below:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Beginning balance $ 7,514 5,700 $ 6,295 6,414
Charge-offs:
Commercial 1,072 1,137 2,009 2,242
Real estate mortgages 106 358 419 588
Installment and other loans 118 143 444 317
---------- ---------- ---------- ----------
Total charge-offs 1,296 1,638 2,872 3,147
---------- ---------- ---------- ----------
Recoveries:
Commercial 62 31 256 118
Real estate mortgages - - 28 -
Installment and other loans 9 11 45 44
---------- ---------- ---------- ----------
Total recoveries 71 42 329 162
---------- ---------- ---------- ----------
Net charge-offs 1,225 1,596 2,543 2,985
---------- ---------- ---------- ----------
Provision for loan losses 519 596 3,056 1,271
---------- ---------- ---------- ----------
Ending balance $ 6,808 $ 4,700 $ 6,808 $ 4,700
========== ========== ========== ==========
Period end total loans, net of
unearned interest $ 489,148 $ 506,757 $ 489,148 $ 506,757
========== ========== ========== ==========
Average loans $ 485,410 $ 504,580 $ 489,199 $ 504,296
========== ========== ========== ==========
Ratio of net charge-offs to
average loans 0.25% 0.32% 0.52% 0.59%
Ratio of provision for loan losses
to average loans 0.11 0.12 0.62 0.25
Ratio of allowance for loan losses
to ending total loans 1.39 0.93 1.39 0.93
Ratio of allowance for loan losses
to total nonperforming loans 120.79 41.49 120.79 41.49
Ratio of allowance at end of period
to average loans 1.40 0.93 1.39 0.93
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:
Nine Months Ended
-------------------------------------------
September 30, 2002
-------------------------------------------
Banking Other Consolidated
Segment Segments Totals
----------- ----------- -----------
Net interest income (loss) $ 19,027 $ (259) $ 18,768
Other revenue 6,270 2,631 8,901
Other expense 14,814 5,114 19,928
Segment profit (loss) 6,411 (3,159) 3,252
Noncash items
Depreciation 738 392 1,130
Provision for loan losses 3,056 - 3,056
Goodwill and other intangibles 285 18 303
Segment assets 764,112 5,732 769,844
Nine Months Ended
-------------------------------------------
September 30, 2001
-------------------------------------------
Banking Other Consolidated
Segment Segments Totals
----------- ----------- -----------
Net interest income (loss) $ 18,545 $ (463) $ 18,082
Other revenue 6,043 2,832 8,875
Other expense 13,298 4,126 17,424
Segment profit (loss) 8,833 (2,284) 6,549
Noncash items
Depreciation 591 407 998
Provision for loan losses 1,271 - 1,271
Goodwill and other intangibles 596 119 715
Segment assets 757,052 5,517 762,569
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 September
30, 2002, the Company has $7,498 of goodwill. Approximately $2,110 of the
goodwill recorded by the Company is related to a branch acquisition. This
goodwill is currently being accounted for under SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions," (excluded from the
scope from SFAS No. 142) and continues to be amortized to expense. The Company
has completed 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 September 30, 2002 and
2001 was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income $ 1,146 $ 1,468 $ 2,640 $ 4,588
Add back: goodwill amortization - 99 - 297
---------- ---------- ---------- ----------
Adjusted net income $ 1,146 $ 1,567 $ 2,640 $ 4,885
========== ========== ========== ==========
Basic Earnings Per Common Share Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income $ 0.27 $ 0.35 $ 0.61 $ 1.11
Add back: goodwill amortization - 0.02 - 0.07
---------- ---------- ---------- ----------
Adjusted net income $ 0.27 $ 0.37 $ 0.61 $ 1.18
========== ========== ========== ==========
Diluted Earnings Per Common Share Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income $ 0.27 $ 0.35 $ 0.61 $ 1.10
Add back: goodwill amortization - 0.02 - 0.07
---------- ---------- ---------- ----------
Adjusted net income $ 0.27 $ 0.37 $ 0.61 $ 1.17
========== ========== ========== ==========
On October 1, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 147, "Acquisitions of
Certain Financial Institutions." SFAS No. 147 is effective October 1, 2002, and
may be early applied. SFAS No. 147 supersedes SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions." SFAS No. 147 provides
guidance on the accounting for the acquisition of a financial institution, and
applies to all such acquisitions except those between two or more mutual
enterprises. Under SFAS No. 147, the excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired in a financial institution business combination represents goodwill
that should be accounted for under SFAS No. 142, "Goodwill and Other Intangible
9.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Assets." If certain criteria are met, the amount of the unidentifiable
intangible asset resulting from prior financial institutions acquisitions is to
be reclassified to goodwill upon adoption of this Statement. Financial
institutions meeting conditions outlined in SFAS No. 147 are required to restate
previously issued financial statements. The objective of the restatement is to
present the balance sheet and income statement as if the amount accounted for
under SFAS No. 72 as an unidentifiable intangible asset had been reclassified to
goodwill as of the date the Company adopted SFAS No. 142. The Company is
currently evaluating the impact of this standard on their previous branch
acquisition. If they determine that the branch acquisition qualifies for the
accounting treatment prescribed in SFAS 147, it will be applied in the fourth
quarter, which will result in the reversal of $130, of goodwill amortization,
$80 net of tax for the first nine months of the year.
Note 9. Recent Regulatory Developments
On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002 (the
"Sarbanes-Oxley Act"). This legislation impacts corporate governance of public
companies, affecting their officers and directors, their audit committees, their
relationships with their accountants and the audit function itself. Certain
provisions of the Act became effective on July 30, 2002. Others will become
effective as the SEC adopts appropriate rules.
The Sarbanes-Oxley Act implements a broad range of corporate governance and
accounting measures for public companies designed to promote honesty and
transparency in corporate America and better protect investors from corporate
wrongdoing. The Sarbanes-Oxley Act's principal legislation includes:
o the creation of an independent accounting oversight board to oversee the
audit of public companies and auditors who perform such audits;
o auditor independence provisions which restrict non-audit services that
independent accountants may provide to their audit clients;
o additional corporate governance and responsibility measures, including (i)
requiring the chief executive officer and chief financial officer to
certify financial statements; (ii) prohibiting trading of securities by
officers and directors during periods in which certain employee benefit
plans are prohibited from trading; (iii) requiring chief executive officer
and chief financial officer to forfeit salary and bonuses, including
profits on the sale of company securities, in certain situations; and (iv)
protecting whistleblowers and informants;
o expansion of the power of the audit committee, including the requirements
that the audit committee (i) have direct control of the outside auditor,
(ii) be able to hire and fire the auditor, and (iii) approve all non-audit
services;
o expanded disclosure requirements, including accelerated reporting of stock
transactions by insiders and the prohibition of most loans to directors and
executive officers of non-financial institutions;
o mandatory disclosure by analysts of potential conflicts of interest; and
o a range of enhanced penalties for fraud and other violations.
10.
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 nine months ended September 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 nine months ended
September 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.
11.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Results of Operations
Net Income. Net income equaled $1,146 or $0.27 per fully diluted share for the
three months ended September 30, 2002. This compares with net income of $1,468
or $0.35 per fully diluted share for the same period in 2001. For the nine
months ended September 30, 2002, net income equaled $2,640 or $0.61 per fully
diluted share compared with net income of $4,588 or $1.10 per fully diluted
share earned in the same period in 2001.
The Company's quarterly results were adversely impacted by an increase in
noninterest expense, largely related to an increase in valuation allowances on
OREO, a loss on the sale of OREO and a write-off of other assets. Also
contributing were increases in other operating expenses, incurred to support the
growing level of business activities. 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 a lower tax base.
Return on average assets was 0.60% for the third quarter of 2002 compared to
0.77% for the same period in 2001. Return on average assets was 0.47% for the
nine months ended September 30, 2002, compared to 0.81% for the same period in
2001.
Return on average stockholders' equity was 6.82% for the third quarter of 2002
compared to 9.07% for the same period in 2001. Return on average stockholders'
equity was 5.38% for the nine month period ended September 30, 2002, compared to
9.79% 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, on a tax equivalent basis, was $6,599 for the third quarter
ended September 30, 2002, compared with $6,448 earned during the same period in
2001. This represented an increase of $151 or 2.3%. The improvement in net
interest income is attributable to the quarter-over-quarter reduction of
interest expense paid on interest bearing liabilities totaling $2,191 exceeding
the quarter-over-quarter reduction of interest income earned on interest earning
assets totaling $2,040. Also contributing to the increase in net interest income
was a shift in the funding mix from higher costing time deposits and other
wholesale sources to lower costing core deposits (DDA, Now, IMMIA and Savings).
The $2,040 change in interest income resulted from decreases of $205 associated
with volume and $1,835 related to rate. The majority of the decrease in interest
income was related to a 108 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 $2,191 change in interest
expense resulted from decreases of $376 associated with volume and $1,850
12.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
associated with rate. The majority of the decrease was attributable to a 152
basis point reduction in the rates paid on total time deposits, primarily
located in expensive wholesale funding sources. 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 11
basis points to 3.74% as compared to the prior year's quarter 3.63%. Lower
funding costs, a result of actively reducing funding rates simultaneously with
Federal Reserve Board actions undertaken throughout 2001, were principally
responsible for the margin increase. 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 and retail time
deposits. 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 111 basis
points to 6.50% as compared to the prior year's quarter 7.61%. In contrast,
rates paid on interest-bearing liabilities decreased 137 basis points to 3.17%
as compared to the prior year's quarter 4.54%.
Net interest income, on a tax equivalent basis, for the nine months ended
September 30, 2002 totaled $19,499, representing an increase of $562 or 3.0%
over the $18,937 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 $7,697 exceeding the
year-over-year reduction of interest income earned on interest earning assets
totaling $7,135. The net interest margin for the first nine months of 2002
increased 14 basis points to 3.74% compared to 3.60% 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.
13.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended September 30,
-------------------------------------------------------
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 $ 211 $ 3 5.64% $ 1,101 $ 9 3.24% $ (10) $ 4 $ (6)
Securities (1)
Taxable 171,942 1,863 4.30 153,163 2,057 5.33 233 (427) (194)
Non-taxable (2) 34,704 643 7.35 40,558 760 7.43 (54) (63) (117)
-------- -------- ------- -------- -------- ------- ------- ------- -------
Total securities (tax equivalent) 206,646 2,506 4.81 193,721 2,817 5.77 179 (490) (311)
-------- -------- ------- -------- -------- ------- ------- ------- -------
Federal funds sold 8,188 37 1.79 5,144 39 3.01 18 (20) (2)
-------- -------- ------- -------- -------- ------- ------- ------- -------
Loans (3)(4)
Commercial 141,810 2,427 6.79 149,492 2,974 7.89 (147) (400) (547)
Real estate 291,544 5,320 7.24 298,387 6,260 8.32 (141) (799) (940)
Installment and other 52,056 1,185 9.03 56,701 1,419 9.93 (104) (130) (234)
-------- -------- ------- -------- -------- ------- ------- ------- -------
Gross loans (tax equivalent) 485,410 8,932 7.30 504,580 10,653 8.38 (392) (1,329) (1,721)
-------- -------- ------- -------- -------- ------- ------- ------- -------
Total interest-earning assets 700,455 11,478 6.50 704,546 13,518 7.61 (205) (1,835) (2,040)
-------- -------- ------- -------- -------- ------- ------- ------- -------
Noninterest-earning assets
Cash and cash equivalents 20,943 20,996
Premises and equipment, net 14,033 11,858
Other assets 21,802 21,148
------- --------
Total nonearning assets 56,778 54,002
-------- --------
Total assets $757,233 $758,548
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 49,837 $ 116 0.92% $ 48,847 $ 214 1.74% $ 4 $ (102) $ (98)
Money market accounts 98,195 526 2.13 54,682 377 2.74 248 (99) 149
Savings deposits 49,383 149 1.20 47,854 252 2.09 8 (111) (103)
Time deposits 342,450 3,266 3.78 397,364 5,308 5.30 (664) (1,378) (2,042)
Federal funds purchased and
repurchase agreements 5,015 46 3.64 3,302 22 2.64 14 10 24
Advances from FHLB 57,047 690 4.80 55,625 748 5.34 19 (77) (58)
Notes payable 9,291 86 3.67 9,640 149 6.13 (5) (58) (63)
-------- -------- ------- -------- -------- ------- ------- ------- -------
Total interest-bearing liabilities 611,218 4,879 3.17 617,314 7,070 4.54 (376) (1,815) (2,191)
-------- -------- ------- -------- -------- ------- ------- ------- -------
Noninterest-bearing liabilities
Noninterest-bearing deposits 72,165 68,080
Other liabilities 6,307 8,925
-------- --------
Total noninterest-bearing liabilities 78,472 77,005
-------- --------
Stockholders' equity 67,543 64,229
-------- --------
Total liabilities and stockholders' equity $757,233 $758,548
======== ========
Net interest income (tax equivalent) $ 6,599 $ 6,448 $ 171 $ (20) $ 151
======== ======== ======= ======= =======
Net interest income (tax equivalent) to
total earning assets 3.74% 3.63%
======== =======
Interest-bearing liabilities to earning assets 87.26% 87.62%
======== ========
- ----------------------------------------------
(1) Average balance and average rate on securities classified as
available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances.
(4) Overdraft loans are excluded in the average balances.
14.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Nine Months Ended September 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 $ 775 $ 15 2.59% $ 1,222 $ 46 5.03% $ (13) $ (18) $ (31)
Securities (1)
Taxable 163,593 5,492 4.49 153,710 6,710 5.84 410 (1,628) (1,218)
Non-taxable (2) 35,033 1,951 7.45 40,678 2,289 7.52 (218) (120) (338)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Total securities (tax equivalent) 198,626 7,443 5.01 194,388 8,999 6.19 192 (1,748) (1,556)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Federal funds sold 8,145 103 1.69 4,362 137 4.20 77 (111) (34)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Loans (3)(4)
Commercial 141,132 7,408 7.02 149,032 9,613 8.62 (490) (1,715) (2,205)
Real estate 296,491 16,490 7.44 298,696 19,137 8.57 (140) (2,507) (2,647)
Installment and other 51,576 3,592 9.31 56,568 4,254 10.05 (361) (301) (662)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Gross loans (tax equivalent) 489,199 27,490 7.51 504,296 33,004 8.75 (962) (4,552) (5,514)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Total interest-earning assets 696,745 35,051 6.73 704,268 42,186 8.01 (706) (6,429) (7,135)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Noninterest-earning assets
Cash and cash equivalents 19,835 19,876
Premises and equipment, net 13,564 11,834
Other assets 21,326 20,662
-------- --------
Total nonearning assets 54,725 52,372
-------- --------
Total assets $751,470 $756,640
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 45,841 $ 366 1.07% $ 44,514 $ 676 2.03% $ 20 $ (330) $ (310)
Money market accounts 81,030 1,275 2.10 52,051 1,202 3.09 535 (462) 73
Savings deposits 50,595 500 1.32 46,195 769 2.23 68 (337) (269)
Time deposits 367,100 11,209 4.08 409,906 17,749 5.79 (1,708) (4,832) (6,540)
Federal funds purchased and
repurchase agreements 4,930 124 3.36 2,170 56 3.45 69 (1) 68
Advances from FHLB 48,372 1,813 5.01 53,375 2,297 5.75 (204) (280) (484)
Notes payable 9,294 265 3.81 9,862 500 6.78 (27) (208) (235)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 607,162 15,552 3.42 618,073 23,249 5.03 (1,247) (6,450) (7,697)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Noninterest-bearing liabilities
Noninterest-bearing deposits 71,299 67,073
Other liabilities 7,345 8,843
-------- --------
Total noninterest-bearing liabilities 78,644 75,916
-------- --------
Stockholders' equity 65,664 62,651
-------- --------
Total liabilities and stockholders' equity $751,470 $756,640
======== ========
Net interest income (tax equivalent) $19,499 $18,937 $ 541 $ 21 $ 562
======= ======= ======= ======= =======
Net interest income (tax equivalent) to
total earning assets 3.74% 3.60%
======= =======
Interest-bearing liabilities to earning assets 87.14% 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 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 third quarter
of 2002 totaled $519, a decrease of $77 over the $596 recorded during the same
period a year ago. The provision for loan losses charged to operating expense
for the nine months ended September 30, 2002 totaled $3,056, an increase of
$1,785 over the $1,271 recorded during the same period a year ago.
The Company's quarterly and year to date provisions are a continued response to
the deterioration of several seasoned credits that surfaced and have been
reserved for previously, 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 third quarter of 2002 were $1,225 compared with $1,596
in 2001. Annualized net charge-offs decreased to 0.25% of average loans for the
second quarter of 2002 compared to 0.32% in the same period in 2001. Net
charge-offs for the nine months ended September 30, 2002 were $2,543 compared
with $2,985 in 2001. Annualized net charge-offs decreased to 0.52% of average
loans for the nine months ended September 30, 2002 compared to 0.59% in the same
period in 2001. The sustained level in net charge-offs was largely the result of
several credits which were identified in previous quarters 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.
16.
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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Service charges $ 708 $ 719 $ 1,953 $ 2,057
Merchant fee income 330 301 881 857
Trust income 180 159 551 501
Mortgage banking income 678 494 1,877 1,436
Insurance commissions and fees 558 582 1,602 1,885
Securities gains, net 107 264 407 555
Other income 499 526 1,630 1,584
---------- ---------- ---------- ----------
$ 3,060 $ 3,045 $ 8,901 $ 8,875
========== ========== ========== ==========
Noninterest income 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.
Noninterest income totaled $3,060 for the three months ended September 30, 2002,
compared to $3,045 for the same time frame in 2001. Exclusive of net securities
gains, core noninterest totaled $2,953 compared to $2,781 for the same period in
2001, representing an increase of $172 or 6.2%.
The majority of the change was related to a $184 improvement in mortgage banking
income. Mortgage banking income includes fees generated from servicing and the
gains realized from the sale of these loans. Also contributing were modest
increases in merchant fee income and trust income.
These increases were offset by lower than anticipated insurance, asset
management and brokerage fees (included in insurance commissions and fees).
Insurance fees declined largely due to the 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 and conditions in the equity and credit markets. The combined
categories of service charges and other income remained relatively stable with
only slight quarter-over-quarter changes.
Noninterest income totaled $8,901 for the nine months ended September 30, 2002,
compared to $8,875 for the same time frame in 2001. Exclusive of net securities
gains, core noninterest income totaled $8,494 compared to $8,320 for the same
period in 2001, representing an increase of $172 or 2.1%. The change was largely
reflective of the same items discussed regarding the third quarter.
17.
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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Salaries and employee benefits $ 3,747 $ 3,514 $ 11,354 $ 10,185
Occupancy expense, net 469 421 1,360 1,330
Furniture and equipment expense 474 402 1,349 1,188
Supplies and printing 110 155 380 471
Telephone 241 197 768 576
Amortization of intangible assets 101 231 303 715
Other expenses 2,298 1,611 5,847 4,672
---------- ---------- ---------- ----------
$ 7,440 $ 6,531 $ 21,361 $ 19,137
========== ========== ========== ==========
Noninterest expense totaled $7,440 for the three months ended September 30,
2002, as compared to $6,531 for the same timeframe in 2001. This represented an
increase of $909 or 13.9%. The increase in noninterest expense on a
quarter-over-quarter basis was largely related to a $368 increase in valuation
allowances on OREO, a loss on the sale of OREO of $110, a write-down of $150 in
other assets (all included in other expenses). Also contributing was an increase
of $233 in salaries and employee benefits. The rise in salaries and benefits was
the result of investing 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
levels of noninterest income, but also incur considerable noninterest expense.
Other factors included 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 decreases in supplies
and printing and goodwill amortization due to the adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets."
Noninterest expense totaled $21,361 for the nine months ended September 30,
2002, increasing by $2,224 or 11.6% from the same period in 2001. The change was
largely reflective of the same items discussed regarding the third quarter.
18.
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 nine months ended September 30, 2002 and 2001.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Income before income taxes $ 1,460 $ 2,084 $ 3,252 $ 6,549
Applicable income taxes 314 616 612 1,961
Effective tax rates 21.5% 29.6% 18.8% 29.9%
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 income tax expense of $314 and
$616 for the three months ended September 30, 2002 and 2001, respectively.
Effective tax rates equaled 21.5% and 29.6% respectively, for such periods. The
Company recorded income tax expense of $612 and $1,961 for the nine months ended
September 30, 2002 and 2001, respectively. Effective tax rates equaled 18.8% and
29.9% 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. And, finally, the Company has reduced tax expense through
various tax planning initiatives.
Preferred Stock Dividends. The Company paid $65 and $64 of preferred stock
dividends for the quarters ended September 30, 2002 and 2001, respectively. The
Company paid $193 and $194 of preferred stock dividends for the nine months
ended September 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.
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The Company measures its overall interest rate sensitivity through a net
interest income analysis. The net interest income analysis measures the change
in net interest income in the event of hypothetical changes in interest rates.
This analysis assesses the risk of changes in net interest income in the event
of a sudden and sustained 100 to 200 basis point increase or decrease in market
interest rates. The tables below present the Company's projected changes in net
interest income for the various rate shock levels at September 30, 2002 and
December 31, 2001.
September 30, 2002
--------------------------------------------------
Net Interest Income
--------------------------------------------------
Amount Change Change
---------- ---------- ----------
(Dollars in Thousands)
+200 bp $ 26,105 $ 455 1.77%
+100 bp 25,980 330 1.29
Base 25,650 - -
-100 bp 24,916 (734) (2.86)
-200 bp 24,272 (1,378) (5.37)
Based upon the Company's model at September 30, 2002, the effect of an immediate
200 basis point increase in interest rates would increase the Company's net
interest income by 1.77% or approximately $455. The effect of an immediate 200
basis point decrease in rates would decrease the Company's net interest income
by 5.37% or approximately $1,378.
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 September 30, 2002, the Company had total assets of $769,844,
total gross loans of $489,148, total deposits of $623,157 and total
stockholders' equity of $66,897. Total assets increased by $21,537 or 2.9% from
year-end 2001. Total gross loans decreased by $15,820 or 3.1% from year-end 2001
and reflected tighter underwriting standards, an overall softening of loan
demand, and normal paydowns. In contrast, total deposits increased by $11,013 or
1.8% from year-end 2001, largely related to growth in lower costing
interest-bearing deposits (Now, IMMIA and Savings) and noninterest-bearing
deposits.
20.
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
---------------------------------------- -------------------------
Sept 30, Jun 30, Mar 31, Dec 31, Sep 30,
---------- ---------- ---------- ---------- ----------
Nonaccrual and impaired loans not
accruing $ 4,399 $ 7,239 $ 7,026 $ 7,259 $ 8,753
Impaired and other loans 90 days past
due and still accruing interest 1,237 1,062 1,768 1,616 2,576
---------- ---------- ---------- ---------- ----------
Total nonperforming loans 5,636 8,301 8,794 8,875 11,329
Other real estate owned 2,524 2,581 2,244 1,886 534
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 8,160 $ 10,882 $ 11,038 $ 10,761 $ 11,863
========== ========== ========== ========== ==========
Nonperforming loans to total end of period loans 1.15% 1.72% 1.79% 1.76% 2.24%
Nonperforming assets to total end of period loans 1.67 2.25 2.25 2.13 2.34
Nonperforming assets to total end of period assets 1.06 1.45 1.49 1.44 1.56
At September 30, 2002, nonperforming loans totaled $5,636 versus the $8,875 that
existed as of December 31, 2001 and $8,301 as of June 30, 2002. The decrease in
nonperforming loans, when compared to December 31, 2001, was due to various
actions taken during the year to proactively address these problem loans. The
level of nonperforming loans to total end of period loans was 1.15% at September
30, 2002, as compared to 1.76% at December 31, 2001. The reserve coverage ratio
(allowance to nonperforming loans) improved to 120.79%, as of September 30,
2002, from the lower ratios of 90.52% at June 30, 2002 and 70.93% 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
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
collect impaired or nonaccrual loans are foreclosure, collection under
guarantees, loan restructuring, or judicial collection actions.
Each of the Company's loans is assigned a rating based upon an internally
developed grading system. A separate credit administration department also
reviews grade assignments on an ongoing basis. Management continuously monitors
nonperforming, impaired, 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.
Allowance for Loan Losses. At September 30, 2002, the allowance for loan losses
was $6,808 or 1.39% of total loans as compared to $7,514 or 1.55% at June 30,
2002, $4,700 or 0.93% at September 30, 2001 and $6,295 or 1.25% at December 31,
2001. Several 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. These
increases were due to the deterioration in overall credit quality and the impact
of various identified seasoned credits. These increases were offset by net
charge-offs, largely the result of several credits which were identified in
previous quarters as requiring the status of watch list with specific
allocations. These problem credits continued to deteriorate and were identified
by management as non-bankable assets, and, subsequently, charged off. Net
charge-offs for the third quarter of 2002 were $1,225 compared with $1,596 in
2001. Net charge-offs for the nine months ended September 30, 2002 were $2,543
compared with $2,985 in 2001.
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
22.
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 quarterly. As positive
or negative adjustments 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 increase in cash and cash equivalents of $8,353 from December 31, 2001 to
September 30, 2002.
During the first nine months of 2002, the Company experienced net cash inflow of
$3,421 from its operating activities primarily due to proceeds from loans sales
and net income and $18,042 in financing activities attributed to increases in
deposits and FHLB advances. Investing activities, on the other hand, provided
net cash outflows of $13,110 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 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.
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Capital Resources
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 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 10.64% and
12.05%, respectively, at September 30, 2002. The Company is currently, and
expects to continue to be, in compliance with these guidelines.
As of September 30, 2002, the Tier 2 risk-based capital was comprised of $6,772
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.
The following table sets forth an analysis of the Company's capital ratios:
December 31, Minimum Well
September 30, ------------------------- Capital Capitalized
2002 2001 2000 Ratios Ratios
---------- ---------- ---------- ---------- ----------
Tier 1 risk-based capital $ 57,667 $ 55,911 $ 51,835
Tier 2 risk-based capital 7,603 7,126 7,245
Total capital 65,270 63,037 59,080
Risk-weighted assets 541,735 540,626 537,549
Capital ratios
Tier 1 risk-based capital 10.64% 10.34% 9.64% 4.00% 6.00%
Tier 2 risk-based capital 12.05 11.66 10.99 8.00 10.00
Leverage ratio 7.55 7.54 6.90 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 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
24.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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 19 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."
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, the Company's Chief
Executive Officer and Chief Financial Officer carried out an evaluation, with
the participation of other member of management as they deemed appropriate, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures as contemplated by Exchange Act Rule 13a-14. Based upon,
and as of the date of that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective, in all material respects, in timely alerting them to
material information relating to the Company (and its consolidated subsidiaries)
required to be included in the periodic reports the Company is required to file
and submit to the SEC under the Exchange Act.
There were no significant changes to the Company's internal controls or in other
factors that could significantly affect these internal controls subsequent to
the date the Company carried out its evaluation of its internal controls. There
were no significant deficiencies or material weaknesses identified in the
evaluation and, therefore, no corrective actions were taken.
25.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or
its subsidiaries is a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. Changes in Securities
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
UnionBancorp, Inc. (the "Company") is a registered bank holding
company that holds all of the issued and outstanding shares of four
Illinois state-chartered banks and one non-bank subsidiary. As a
federally registered bank holding company and the holding company for
four Illinois state-chartered banks, the Company is subject to the
supervision, examination and regulation of the Federal Reserve Bank of
Chicago (the "Reserve Bank") and Illinois' Office of Banks and Real
Estate (the "OBRE") (collectively, the "Regulators"). The Regulators
have recently completed an examination of the Company pursuant to which
the Regulators found certain deficiencies with respect to the Company's
Information Technology ("IT") function. The Regulators determined that
the Company should enter into a Memorandum of Understanding ("MOU")
with the Regulators in order to ensure that the Company takes
appropriate steps to improve its IT function. An MOU is an informal
supervisory action which is utilized when the Federal Reserve Bank
believes that the deficiencies cited can be corrected by present
management. In November 2002, the Company's Board of Directors will be
entering into an MOU with the Regulators that requires the Company to
initiate various procedures to improve its IT function.
The MOU requires that the Company implement the policies and take
the various actions discussed in this paragraph within either 60 or 90
days of the effective date of the MOU, as indicated below. Among the
actions required by the MOU is the complete assessment by the Company
of its IT function and the submission to the Regulators of the
Company's findings, conclusions and specific actions to be taken to
address deficiencies cited. Within 60 days, the Company must conduct a
review of the management and staffing of the IT function and submit to
the Regulators the Company's findings, conclusions and specific actions
to be taken to strengthen its IT management. Within 60 days, the
Company must also submit to the Regulators an independent risk analysis
methodology for risk assessment of its IT function.
Within 30 days of receiving approval for the risk analysis, the
Company must submit to the Regulators an audit plan based on the
completed risk assessment described above. The Company must also
provide a plan for the internet service provider to the Company which
contains a complete risk assessment, plans for the organization's
continued offering of internet service, and intent to ensure system and
data security. Lastly, the Company must submit a plan indicating the
26.
steps taken to eliminate all deficiencies cited and must submit revised
IT plans, policies, and procedures.
Quarterly reports will be submitted by the Company to the
Regulators describing the actions taken to ensure compliance with the
MOU.
The Company has already begun to take various actions to
implement the requirements of the MOU. It believes that the adoption of
new policies, revisions to existing policies and procedures and the
implementation of the other changes required by the MOU will improve
the Company's IT functions.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
99.1 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.
99.2 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 Vice President and Principal Financial and
Accounting Officer.
Reports on Form 8-K:
None.
27.
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 November 13, 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
28.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
--------------------------------------------
I, Charles J. Grako, President and Principal Executive Officer, certify that:
1) I have reviewed this quarterly report on Form 10-Q of UnionBancorp, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ CHARLES J. GRAKO
- ----------------------------------
Charles J. Grako
President and Principal Executive Officer
29.
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
--------------------------------------------
I, Kurt R. Stevenson, Vice President and Principal Financial and Accounting
Officer, certify that:
1) I have reviewed this quarterly report on Form 10-Q of UnionBancorp, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ KURT R. STEVENSON
- ----------------------------------
Kurt R. Stevenson
Vice President and Principal Financial and Accounting Officer
30.