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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 March 31, 2003
Commission File Number: 0-28846
UnionBancorp, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 36-3145350
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
321 West Main Street Ottawa, Illinois 61350
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(Address of principal executive offices including zip code)
(815) 431-2720
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Exchange Class which Registered
- --------------------------------------------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($1.00 par value)
------------------------------
(Title of Class)
Preferred Purchase Rights
-------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Shares outstanding at May 14, 2003
- ----------------------------- ----------------------------------
Common Stock, Par Value $1.00 4,000,196
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UnionBancorp, Inc.
Form 10-Q Index
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
o Consolidated Balance Sheets.................................1
o Consolidated Statements of Income and Comprehensive
Income .....................................................2
o Consolidated Statements of Cash Flows.......................3
o Notes to Unaudited Consolidated Financial Statements........4
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition..........................................10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................................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....................................26
SIGNATURES...................................................................27
CERTIFICATIONS...............................................................28
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
March 31, 2003 and December 31, 2002 (In Thousands, Except Share Data)
- ---------------------------------------------------------------------------------------------------------
March 31, December 31,
2003 2002
--------- ---------
ASSETS
Cash and cash equivalents $ 30,229 $ 38,962
Securities available-for-sale 230,123 227,229
Loans 477,406 483,229
Allowance for loan losses (6,498) (6,450)
--------- ---------
Net loans 470,908 476,779
Cash surrender value of life insurance 13,879 13,776
Mortgage servicing rights 2,646 2,640
Premises and equipment, net 14,293 14,055
Goodwill 7,642 7,642
Intangible assets, net 819 873
Other real estate 1,260 1,557
Other assets 7,625 8,103
--------- ---------
Total assets $ 779,424 $ 791,616
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 80,573 $ 90,606
Interest-bearing 545,503 551,352
--------- ---------
Total deposits 626,076 641,958
Federal funds purchased and securities sold
under agreements to repurchase 2,836 3,588
Advances from the Federal Home Loan Bank 64,050 61,750
Notes payable 8,275 8,275
Other liabilities 7,933 7,150
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Total liabilities 709,170 722,721
--------- ---------
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;
4,576,309 shares issued at March 31, 2003 and 4,571,209
shares issued at December 31, 2002 4,576 4,571
Surplus 21,896 21,856
Retained earnings 44,497 43,113
Accumulated other comprehensive income 3,094 3,171
Unearned compensation under stock option plans (16) (23)
--------- ---------
74,547 73,188
Treasury stock, at cost; 590,263 shares (5,124) (5,124)
--------- ---------
Total stockholders' equity 69,423 68,064
--------- ---------
Total liabilities and stockholders' equity $ 779,424 $ 791,616
========= =========
See Accompanying Notes to Unaudited Financial Statements
1.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended March 31, 2003 and 2002 (In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
-------------------
2003 2002
------- -------
Interest income
Loans $ 8,541 9,535
Securities
Taxable 1,886 1,704
Exempt from federal income taxes 395 447
Federal funds sold and other 18 44
------- -------
Total interest income 10,840 11,730
Interest expense
Deposits 3,458 4,796
Federal funds purchased and securities sold
under agreements to repurchase 30 28
Advances from the Federal Home Loan Bank 687 592
Notes payable 84 96
------- -------
Total interest expense 4,259 5,512
------- -------
Net interest income 6,581 6,218
Provision for loan losses 612 519
------- -------
Net interest income after
Provision for loan losses 5,969 5,699
Noninterest income
Service charges 756 591
Merchant fee income 279 244
Trust income 177 180
Mortgage banking income 1,029 631
Insurance commissions and fees 594 544
Securities gains, net 92 243
Other income 672 570
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3,599 3,003
Noninterest expenses
Salaries and employee benefits 3,830 3,884
Occupancy expense, net 498 453
Furniture and equipment expense 493 390
Supplies and printing 126 157
Telephone 257 225
Other real estate owned expense 128 69
Amortization of intangible assets 54 101
Other expenses 1,631 1,637
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7,017 6,916
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Income before income taxes 2,551 1,786
Income taxes 744 517
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Net income 1,807 1,269
Preferred stock dividends 64 64
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Net income for common stockholders $ 1,743 $ 1,205
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Basic earnings per share $ 0.44 $ 0.30
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Diluted earnings per common share $ 0.43 $ 0.30
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Total comprehensive income for common shareholders $ 1,666 $ 817
======= =======
See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2003 and 2002 (In Thousands)
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Three Months Ended
March,
--------------------
2003 2002
-------- --------
Cash flows from operating activities
Net income $ 1,807 $ 1,269
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 400 324
Amortization of intangible assets 54 101
Amortization of unearned compensation under stock option plans 7 12
Amortization of bond premiums, net 414 397
Provision for loan losses 612 519
Securities gains, net (92) (243)
Loss on sale of real estate acquired in settlement of loans 159 13
Gain on sale of loans (1,242) (612)
Proceeds from sales of loans held for sale 48,605 47,346
Origination of loans held for sale (45,675) (45,099)
Change in assets and liabilities
Decrease in other assets 252 785
Increase in other liabilities 918 47
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Net cash provided by operating activities 6,219 4,859
Cash flows from investing activities
Securities
Proceeds from maturities and paydowns 26,369 19,944
Proceeds from sales 4,601 9,268
Purchases (34,281) (36,774)
Net decrease in loans 3,571 12,195
Purchase of premises and equipment (638) (1,502)
Proceeds from sale of real estate acquired in settlement of loans 138 196
-------- --------
Net cash provided by (used in) investing activities (240) 3,327
Cash flows from financing activities
Net increase (decrease) in deposits (15,882) 3,729
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (752) 1,713
Net increase (decrease) in advances from the Federal Home Loan Bank 2,300 (12,800)
Dividends on common stock (359) (279)
Dividends on preferred stock (64) (64)
Proceeds from exercise of stock options 45 --
-------- --------
Net cash used in financing activities (14,712) (7,701)
-------- --------
Net increase (decrease) in cash and cash equivalents (8,733) 485
Cash and cash equivalents
Beginning of period 38,962 26,699
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End of period $ 30,229 $ 27,184
======== ========
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 4,346 $ 5,704
Income taxes 325 --
See Accompanying Notes to Unaudited Financial Statements
3.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
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Note 1. Summary of Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements of
UnionBancorp, Inc. (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America and
with the rules and regulations of the Securities and Exchange Commission for
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required for complete financial statements. In the
opinion of management, all normal and recurring adjustments which are necessary
to fairly present the results for the interim periods presented have been
included. The preparation of financial statements requires management to make
estimates and assumptions that affect the recorded amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
For further information with respect to significant accounting policies followed
by the Company in the preparation of its consolidated financial statements,
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 2002. The annualized results of operations during the three months ended
March 31, 2003 are not necessarily indicative of the results expected for the
year ending December 31, 2003. All financial information is in thousands
(000's), except per share data.
Note 2. Stock Compensation
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying common stock at date of grant. The following
table illustrates the effect on net income and earnings per share if expense was
measured using the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation.
Three Months Ended
March 31,
----------------------
2003 2002
-------- --------
Net income as reported for common stockholders $ 1,743 1,205
Deduct: stock-based compensation expense
Determined under fair value based method 30 21
-------- --------
Pro forma net income $ 1,713 $ 1,184
======== ========
Basic earnings per common share as reported $ 0.44 $ 0.30
Pro forma basic earnings per common share 0.43 0.30
Diluted earnings per common share as reported 0.43 0.30
Pro forma diluted earnings per common share 0.42 0.29
4.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
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Note 3. Earnings Per Share
Basic earnings per share for the three months ended March 31, 2003 and
2002 were computed by dividing net income by the weighted average number of
shares outstanding. Diluted earnings per share for the three months ended March
31, 2003 and 2002 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
March 31,
-------------------
2003 2002
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Net income available to common shareholders $ 1,743 $ 1,205
Weighted average common shares outstanding 3,984 3,979
-------- --------
Basic Earnings Per Common Share $ 0.44 $ 0.30
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Diluted Earnings Per Common Share
Weighted average common shares outstanding 3,984 3,979
Add: dilutive effect of assumed exercised
stock options 61 42
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Weighted average common and dilutive
Potential shares outstanding 4,045 4,021
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Diluted Earnings Per Common Share $ 0.43 $ 0.30
======== ========
There were approximately 38,450 and 70,550 options outstanding at March
31, 2003 and 2002, 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 4. Securities
The Company's consolidated securities portfolio, which represented
31.5% of the Company's 2003 first quarter average earning asset base, is managed
to minimize interest rate risk, maintain sufficient liquidity, and maximize
return. The portfolio includes several callable agency debentures, adjustable
rate mortgage pass-throughs, and collateralized mortgage obligations. Corporate
bonds consist of investment grade obligations of public corporations. 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.
The exposure of capital to market valuation adjustments has been
reduced by the reduction in relative size of the portfolio, the shortening of
the average life of the securities by the passage of time and the sale of
floating rate securities with lower lifetime caps or reset limits or had
interest rate exposure not consistent with offsetting exposure of funding
sources. In addition, some of the callable securities that have been purchased
have shorter final maturities, which also reduce the sensitivity of the Economic
Value of Equity (EVE) to changes in the
5.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
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level of interest rates. Securities classified as available-for-sale, carried at
fair value, were $230,123 at March 31, 2003 compared to $227,229 at December 31,
2002. The Company does not have any securities classified as trading or
held-to-maturity.
The following table describes the fair value, gross unrealized gains
and losses of securities available-for-sale at March 31, 2003 and December 31,
2002:
March 31, 2003
-------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
---------- ---------- ----------
U.S. treasury $ 1,016 $ 14 $ --
U.S. government agencies 41,492 714 (1)
States and political subdivisions 33,803 1,750 (18)
U.S. government mortgage-backed securities 117,793 1,996 (90)
Collateralized mortgage obligations and
other asset backed securities 8,285 106 (23)
Corporate bonds 10,623 600 --
Equity securities 17,111 -- (29)
---------- ---------- ----------
$ 230,123 $ 5,180 $ (161)
========== ========== ==========
December 31, 2002
-------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
---------- ---------- ----------
U.S. treasury $ 1,025 $ 23 $ --
U.S. government agencies 46,817 838 (1)
States and political subdivisions 34,589 1,527 (17)
U.S. government mortgage-backed securities 113,579 2,399 (142)
Collateralized mortgage obligations and
other asset backed securities 3,889 152 (1)
Corporate 10,480 443 --
Equity securities 16,850 -- (58)
---------- ---------- ----------
$ 227,229 $ 5,382 $ (219)
========== ========== ==========
6.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
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Note 5. 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 concentrates its lending activity
in the geographic market areas that it serves, generally lending to consumers
and small to mid-sized businesses from whom deposits are garnered in the same
market areas. As a result, The Company strives to maintain a loan portfolio that
is diverse in terms of loan type, industry, borrower and geographic
concentrations. Such diversification reduces the exposure to economic downturns
that may occur in different segments of the economy or in different industries.
The following table describes the composition of loans by major categories
outstanding as of March 31, 2003 and December 31, 2002:
March 31, 2003 December 31, 2002
---------------------- ----------------------
$ % $ %
--------- --------- --------- ---------
Commercial $ 97,829 20.49% $ 100,189 20.73%
Agricultural 33,851 7.09 36,467 7.55
Real estate:
Commercial mortgages 146,164 30.62 147,253 30.47
Construction 26,617 5.58 24,486 5.07
Agricultural 36,319 7.61 34,688 7.18
1-4 family mortgages 87,752 18.38 87,411 18.08
Installment 46,110 9.66 49,949 10.34
Other 2,764 0.57 2,786 0.58
--------- --------- --------- ---------
Total loans 477,406 100.00% 483,229 100.00%
========= =========
Allowance for loan losses (6,498) (6,450)
--------- ---------
Loans, net $ 470,908 $ 476,779
========= =========
7.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Note 6. 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 ended
March 31, 2003 and 2002 are summarized below:
Three Months Ended
March 31,
------------------------
2003 2002
---------- ----------
Beginning balance $ 6,450 6,295
Charge-offs:
Commercial 388 333
Real estate mortgages 104 132
Installment and other loans 188 118
---------- ----------
Total charge-offs 680 583
---------- ----------
Recoveries:
Commercial 80 130
Real estate mortgages 19 6
Installment and other loans 17 20
---------- ----------
Total recoveries 116 156
---------- ----------
Net charge-offs 564 427
---------- ----------
Provision for loan losses 612 519
---------- ----------
Ending balance $ 6,498 $ 6,387
========== ==========
Period end total loans, net of
unearned interest $ 470,908 $ 490,144
========== ==========
Average loans $ 475,467 $ 498,912
========== ==========
Ratio of net charge-offs to
average loans 0.12% 0.09%
Ratio of provision for loan losses
to average loans 0.13% 0.10%
Ratio of allowance for loan losses
to ending total loans 1.38% 1.30%
Ratio of allowance for loan losses
to total nonperforming loans 159.58% 72.63%
Ratio of allowance at end of period
to average loans 1.37% 1.28%
8.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
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Note 7. 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 8. Segment Information
The reportable segments are determined by the products and services
offered, primarily distinguished between banking and other operations. Loans,
investments, deposits, and mortgage banking provide the revenues in the banking
segment, and insurance, brokerage, trust, and holding company services are
categorized as other segments.
The accounting policies used are the same as those described in the
summary of significant accounting policies. Segment performance is evaluated
using net interest income. Information reported internally for performance
assessment follows.
Three Months Ended
--------------------------------------
March 31, 2003
--------------------------------------
Banking Other Consolidated
Segment Segments Totals
---------- ---------- ----------
Net interest income (loss) $ 6,666 $ (85) $ 6,581
Other revenue 2,701 898 3,599
Other expense 4,761 1,802 6,563
Segment profit (loss) 3,663 (1,112) 2,551
Noncash items
Depreciation 278 122 400
Provision for loan losses 612 -- 612
Other intangibles 52 2 54
Segment assets 773,677 5,747 779,424
Three Months Ended
--------------------------------------
March 31, 2002
--------------------------------------
Banking Other Consolidated
Segment Segments Totals
---------- ---------- ----------
Net interest income (loss) $ 6,312 $ (94) $ 6,218
Other revenue 2,138 865 3,003
Other expense 5,187 1,729 6,916
Segment profit (loss) 2,744 (958) 1,786
Noncash items
Depreciation 205 119 324
Provision for loan losses 519 -- 519
Other intangibles 95 6 101
Segment assets 734,836 6,711 741,547
9.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The following discussion provides an analysis of the Company's results
of operations and financial condition of UnionBancorp, Inc. for the three months
ended March 31, 2003 as compared to the same periods in 2002. 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 2002 Annual Report on Form 10-K. Annualized results of
operations during the three months ended March 31, 2003 are not necessarily
indicative of results to be expected for the full year of 2003. 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 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 ("UnionFinancial"). 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, including banks, thrifts and
credits unions, as well as 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.
On March 28, 2003 UnionBank/Central, a stand-alone bank subsidiary, was
merged into the Company's flagship bank, UnionBank. Consolidation of these
entities is expected to provide several benefits to the organization including
an improved utilization of personnel as a result of the consolidation of various
backroom functions, which will result in a reduction in duplicated job functions
and a lessening of various administrative and operational tasks. Simplified
10.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
financial reporting, the elimination of inter-company banking transactions and a
flatter, more efficient management structure will improve the Company's
workflow, while an increased legal lending limit and additional product and
service offerings in our cross-over markets will be advantageous to our existing
and future customer base. Since UnionBank/Central was under common control, the
merger was accounted for at UnionBank/Central's carrying amount which had no
impact on the consolidated financial statements.
The Company is also in the process of constructing a new branch
facility in Yorkville, Illinois, one of the fastest growing Chicago suburbs.
Aimed at providing one-stop financial shopping to our customers, the Yorkville
site will deliver convenience and financial security by offering our full line
of financial services including banking, trust, internet, insurance and
investment products. The facility is expected to open in the third quarter of
2003 and will be located in the new Yorkville Marketplace development at Routes
34 and 47.
Results of Operations
Net Income
Net income equaled $1,807 or $0.43 per diluted share for the three
months ended March 31, 2003, versus $1,269 or $0.30 per diluted share for the
same period in 2002. This represents a 43.3% increase in per share earnings and
42.4% increase in net income.
The Company's quarterly earnings growth was driven by the continued
strong performance of the mortgage banking division; and increases in other fee
based revenue product-lines and net interest income due to lower cost of funds
and a shift in the deposit mix. These improvements were partially offset by
modest increases in operating expenses and taxes due to a higher tax base.
Return on average assets was 0.94% for the first quarter of 2003
compared to 0.69% for the same period in 2002. Return on average stockholders'
equity was 10.58% for the first quarter of 2003 compared to 7.96% for the same
period in 2002.
Net Interest Income/ Margin
Net interest income is the difference between income earned on
interest-earning assets and the interest expense incurred for the funding
sources used to finance these assets. Changes in net interest income generally
occur due to fluctuations in the volume of earning assets and paying liabilities
and 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 $6,806 for the
first quarter ended March 31, 2003, compared with $6,468 earned during the same
period in 2002. This represented an increase of $338 or 5.2%. The net interest
margin for the first quarter of 2003 equaled 3.89%, an increase from 3.77%
earned during the same period of 2002. The improvement in net interest income is
11.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
attributable to the quarter-over-quarter reduction of interest expense paid on
interest bearing liabilities totaling $1,253 exceeding the quarter-over-quarter
reduction of interest income earned on interest earning assets totaling $915.
The $915 reduction in interest income resulted from a decrease of
$1,022 related to rate offset by an increase of $107 in volume. The majority of
the change in interest income was related to a 56 basis point decline in yields
earned on average loans as competitive pricing on new and refinanced loans, as
well as the repricing of variable rate loans in a lower interest rate
environment, put downward pressure on loan yields. Also adversely contributing
to the change was a shift in the earning-asset mix away from higher yielding
loans to lower yielding investments. The $1,253 reduction in interest expense
resulted from decreases of $74 associated with volume and $1,179 associated with
rate. The majority of the change was attributable to a 98 basis point reduction
in rates paid on time deposits due to the repricing dynamics of maturing time
deposits, as well as certain steps taken during this period to more favorably
manage the mix of funding sources available to the Company.
Despite a continued difficult rate environment, the Company's net
interest margin improved during the first quarter of 2003. The net interest
margin for the first quarter of 2003 equaled 3.89%, an increase from 3.77%
earned during the same period of 2002. This improvement was due to the yield on
interest-earnings assets decreasing 67 basis points to 6.32% while the rates
paid on interest-bearing liabilities fell by 94 basis points to 2.75%.
Lower funding costs, a result of actively reducing deposit rates
simultaneously with Federal Reserve Bank policy actions, were largely
responsible for the margin increase. These actions were partially offset by a
decrease in loan balances and loan yields, due to competitive pressures, the
slow economy, and the overall tightening of loan underwriting standards.
However, we were able to mitigate the impact of this decline in loan balances
and yields, by a shift in our funding mix, away from higher-costing time
deposits and other wholesale sources, towards lower costing core deposits such
as checking, savings, and money market accounts.
The Company's net interest income is affected by changes in the amount
and mix of interest-earning assets and interest-bearing liabilities, referred to
as "volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as "rate change." The following table details each
category of average amounts outstanding for interest-earning assets and
interest-bearing liabilities, average rate earned on all interest-earning
assets, average rate paid on all interest-bearing liabilities, and the net yield
on average interest-earning assets. In addition, the table reflects the changes
in net interest income stemming from changes in interest rates and from asset
and liability volume, including mix. The change in interest attributable to both
rate and volume has been allocated to the changes in the rate and the volume on
a pro rata basis.
12.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended March 31,
---------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
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 $ 330 $ 2 2.46% $ 1,299 $ 8 2.50% $ (6) $ -- $ (6)
Securities (1)
Taxable 191,097 1,886 4.00 148,802 1,704 4.64 439 (257) 182
Non-taxable (2) 32,358 597 7.48 35,571 665 7.58 20 (88) (68)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total securities (tax
equivalent) 223,455 2,483 4.51 184,373 2,369 5.21 459 (345) 114
-------- -------- -------- -------- -------- -------- -------- -------- --------
Federal funds sold 5,240 18 1.39 10,909 44 1.64 (20) (6) (26)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loans (3)(4)
Commercial 134,665 2,263 6.82 142,872 2,561 7.27 (143) (155) (298)
Real estate 296,385 5,140 7.03 304,085 5,751 7.67 (142) (469) (611)
Installment and other 50,402 1,159 9.33 51,955 1,247 9.73 (37) (51) (88)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross loans (tax
equivalent) 481,452 8,562 7.21 498,912 9,559 7.77 (326) (671) (997)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets 710,477 11,065 6.32 695,493 11,980 6.99 107 (1,022) (915)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 20,938 18,584
Premises and equipment, net 14,104 12,777
Other assets 33,500 21,985
-------- --------
Total nonearning assets 68,542 53,346
-------- --------
Total assets $779,019 $748,839
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 54,069 $ 76 0.57% $ 44,347 $ 129 1.18% $ 24 $ (77) $ (53)
Money market accounts 107,492 425 1.60 62,577 312 2.02 188 (75) 113
Savings deposits 48,731 99 0.82 50,107 180 1.46 (5) (76) (81)
Time deposits 343,581 2,858 3.37 389,005 4,175 4.35 (450) (867) (1,317)
Federal funds purchased and
repurchase agreements 4,123 30 2.95 3,476 28 3.27 5 (3) 2
Advances from FHLB 62,672 687 4.45 47,314 592 5.07 174 (79) 95
Notes payable 8,288 84 4.11 9,294 96 4.19 (10) (2) (12)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 628,956 4,259 2.75 606,120 5,512 3.69 (74) (1,179) (1,253)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 72,684 70,549
Other liabilities 8,113 7,468
-------- --------
Total noninterest-bearing
liabilities 80,797 78,017
-------- --------
Stockholders' equity 69,266 64,702
-------- --------
Total liabilities and
stockholders' equity $779,019 $748,839
======== ========
Net interest income (tax
equivalent) $ 6,806 $ 6,468 $ (74) $ (20) $ 338
======== ======== ======== ======== ========
Net interest income (tax
equivalent) to total
earning assets 3.89% 3.77%
======== ========
Interest-bearing liabilities
to earning assets 88.53% 87.15%
======== ========
- ----------------------------------------
(1) Average balance and average rate on securities classified as
available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances.
(4) Overdraft loans are excluded in the average balances.
13.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Provision for Loan Losses
The amount of the provision for loan losses is based on management's
evaluations of the loan portfolio, with particular attention directed toward
nonperforming, impaired and other potential problem loans. During these
evaluations, consideration is also given to such factors as management's
evaluation of specific loans, the level and composition of impaired loans, other
nonperforming loans, other identified potential problem loans, historical loss
experience, results of examinations by regulatory agencies, results of the
independent asset quality review process, the market value of collateral, the
estimate of discounted cash flows, the strength and availability of guarantees,
concentrations of credits, and various other factors, including concentration of
credit risk in various industries and current economic conditions.
The provision for loan losses charged to operating expense for the
first quarter of 2003 totaled $612, an increase of $93 over the $519 recorded
during the same period a year ago. The Company's provisions are a continued
response to the deterioration of several seasoned credits that surfaced and have
been reserved for and downgrades of various other credits. In addition,
management also considered several factors surrounding credit-quality, including
the level of nonperforming loans, the number of customers filing for bankruptcy,
net charge-offs, delinquencies and current economic conditions. 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. The provision is consistent with the Company's practice of
focusing on early identification of problem credits, an assessment of probable
incurred losses and quick remediation where possible.
Net charge-offs for the first quarter of 2003 were $564 compared with
$427 in 2002. Annualized net charge-offs increased to 0.12% of average loans for
the first quarter of 2003 compared to 0.09% in the same period in 2002. The
high, although relatively consistent level of net charge-offs compared to 2002,
resulted from the impact of the weak economic climate and greater scrutiny by
management in identifying problem credits for our watch list. As these credits
continued to deteriorate, management actively sought methods of improving
problem credits or recognized the need to charge-off non-bankable assets. In
some cases, problem loans had been previously identified; however, the loss
incurred was greater than anticipated. Other factors included an increase in the
number of bankruptcies due to the soft commercial real estate market in specific
industries and additional losses in the manufacturing, travel, and technology
sectors.
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 to limit credit exposure.
14.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Noninterest Income
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 electronic data
processing product lines. The following table summarizes the Company's
noninterest income:
Three Months Ended
March 31,
--------------------
2003 2002
-------- --------
Service charges $ 756 $ 591
Merchant fee income 279 244
Trust income 177 180
Mortgage banking income 1,029 631
Insurance commissions and fees 594 544
Securities gains, net 92 243
Other income 672 570
-------- --------
$ 3,599 $ 3,003
======== ========
Noninterest income totaled $3,599 for the three months ended March 31,
2003, compared to $3,003 for the same time frame in 2002. Exclusive of net
securities gains, core noninterest totaled $3,507 compared to $2,760 for the
same period in 2002, representing an increase of $747 or 27.1%.
The majority of the change was related to a $398 improvement in
mortgage banking income. Mortgage banking income includes gains generated from
the sale of loans and net servicing revenue (after amortization of mortgage
servicing rights). The Company closed $56,667 in mortgage loans during the
period. This marks a 12% improvement in production over the same period in 2002,
and, due to a change in the strategy of pricing loan deals, accounts for a 103%
increase in the gains on sale of mortgage loans. Offsetting these gains, were
noncash amortization charges in the carrying value of our mortgage servicing
rights asset. These charges were due to increased refinancing activity, driven
by the declining interest rate environment.
Also contributing to the improvement were increases in overdraft and
nsf charges (included in service charges) reflecting higher fees assessed on
returned checks attributable to certain initiatives implemented in the fourth
quarter of 2002; and revenue generated from incremental investments in
bank-owned life insurance (included in other income). The combined categories of
merchant fee income, trust income and insurance commission and fees remained
relatively stable with only slight quarter-over-quarter changes.
15.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Noninterest Expense
Noninterest expense is comprised primarily of compensation and employee
benefits, occupancy and other operating expense. The following table summarizes
the Company's noninterest expense:
Three Months Ended
March 31,
--------------------
2003 2002
-------- --------
Salaries and employee benefits $ 3,830 $ 3,884
Occupancy expense, net 498 453
Furniture and equipment expense 493 390
Supplies and printing 126 157
Telephone 257 225
Other real estate owned expense 128 69
Amortization of intangible assets 54 101
Other expenses 1,631 1,637
-------- --------
$ 7,017 $ 6,916
======== ========
Noninterest expense totaled $7,017 for the three months ended March 31,
2003, as compared to $6,916 for the same timeframe in 2002. The total categories
of noninterest expense remained relatively consistent, increasing $101 or 1.5%.
Factors contributing to the change were increased general operating
expenses incurred to maintain foreclosed properties and a valuation allowance
taken due to a decline in the fair value against foreclosed assets; increases in
equipment and telephone expense largely due to technological upgrades
implemented in 2002; and increases in occupancy expense related to utility and
insurance costs. These increases were partially offset by decreases in supplies
and printing and amortization of intangible assets.
The slight decrease in salaries and employee benefits were due to
several factors. First, due to a reduction in force and attrition undertaken in
2002, we have decreased our staffing levels on a full-time equivalents basis to
356 from 372 at March 31, 2002. Second, during 2002, the Company adjusted
compensation schedules of certain 100% based commission producers.
16.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Applicable Income Taxes
Income tax expense for the periods included benefits for tax-exempt
income, tax-advantaged investments and general business tax credits offset by
the effect of nondeductible expenses. The following table shows the Company's
income before income taxes, as well as applicable income taxes and the effective
tax rate for three months ended March 31, 2003 and 2002.
Three Months Ended
March 31
----------------------
2003 2002
-------- --------
Income before income taxes $ 2,551 $ 1,786
Applicable income taxes 744 517
Effective tax rates 29.2% 28.9%
The Company recorded income tax expense of $744 and $517 for the three
months ended March 31, 2003 and 2002, respectively. Effective tax rates equaled
29.2% and 28.9% 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. And, second, the Company has reduced tax expense
through various tax planning initiatives.
Preferred Stock Dividends
The Company paid $64 of preferred stock dividends for the three months
ended March 31, 2003 and 2002, respectively.
Interest Rate Sensitivity Management
The business of the Company and the composition of its balance sheet
consist of investments in interest-earning assets (primarily loans and
securities) which are primarily funded by interest-bearing liabilities (deposits
and borrowings). All of the financial instruments of the Company are for other
than trading purposes. Such financial instruments have varying levels of
sensitivity to changes in market rates of interest. The operating income and net
income of the 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.
17.
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 in market
interest rates or a 100 basis point decreases in market rates. The tables below
present the Company's projected changes in net interest income for the various
rate shock levels at March 31, 2003 and December 31, 2002.
March 31, 2003
-------------------------------
Net Interest Income
-------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $ 25,451 $ 664 2.68%
+100 bp 25,236 449 1.81
Base 24,787 -- --
-100 bp 24,147 (640) (2.58)
-200 bp -- -- --
Based upon the Company's model at March 31, 2003, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by 2.68% or approximately $664. The effect of an
immediate 100 basis point decrease in rates would decrease the Company's net
interest income by 2.58% or approximately $640. For the March 31, 2003 reporting
cycle, the Company has suppressed an immediate 200 basis point decrease in its
Asset Liability model due to the abnormally low prevailing interest rate
environment.
December 31, 2002
-------------------------------
Net Interest Income
-------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $ 26,146 $ 822 3.25%
+100 bp 25,857 533 2.10
Base 25,324 -- --
-100 bp 24,587 (737) (2.91)
-200 bp 23,796 (1,528) (6.03)
Based upon the Company's model at December 31, 2002, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by 3.25% or approximately $822. The effect of an
immediate 200 basis point decrease in rates would decrease the Company's net
interest income by 6.03% or approximately $1,528.
Financial Condition
General
As of March 31, 2003, the Company had total assets of $779,424, total
gross loans of $477,406, total deposits of $626,076 and total stockholders'
equity of $69,423. Total assets decreased by $12,192 or 1.5% from year-end 2002.
Total gross loans decreased by $5,823 or 1.2% from year-end 2002 and reflected
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
tighter underwriting standards, a continued softening of overall loan demand,
and normal paydowns. Total deposits decreased by $15,882 or 2.5% from year-end
2002.
Nonperforming Assets
The Company's financial statements are prepared on the accrual basis of
accounting, including the recognition of interest income on its loan portfolio,
unless a loan is placed on nonaccrual status. Loans are placed on nonaccrual
status when there are serious doubts regarding the collectibility of all
principal and interest due under the terms of the loans. Amounts received on
nonaccrual loans generally are applied first to principal and then to interest
after all principal has been collected. It is the policy of the Company not to
renegotiate the terms of a loan because of a delinquent status. Rather, a loan
is generally transferred to nonaccrual status if it is not in the process of
collection and is delinquent in payment of either principal or interest beyond
90 days. Loans which are 90 days delinquent but are well secured and in the
process of collection are not included in nonperforming assets. Other
nonperforming assets consist of real estate acquired through loan foreclosures
or other workout situations and other assets acquired through repossessions.
The classification of a loan as 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 nonaccrual loans. The
final determination as to the steps taken is made based upon the specific facts
of each situation. Alternatives that are typically considered to collect
nonaccrual loans are foreclosure, collection under guarantees, loan
restructuring, or judicial collection actions.
Each of the Company's loans is assigned a rating based upon an
internally developed grading system. A separate credit administration department
also reviews grade assignments on an ongoing basis. Management continuously
monitors nonperforming, impaired, and past due loans to prevent further
deterioration of these loans. 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. 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.
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The following table summarizes nonperforming assets and loans past due
90 days or more and still accruing for the previous five quarters.
2003 2002
------- ----------------------------------------
Mar 31, Dec 31, Sep 30, June 30, Mar 31,
------- ------- ------- ------- -------
Nonaccrual loans 3,943 $ 3,931 $ 4,399 $ 7,239 $ 7,026
Loans 90 days past due and still accruing 129 829 1,237 1,062 1,768
------- ------- ------- ------- -------
Total nonperforming loans 4,072 4,760 5,636 8,301 8,794
Other real estate owned 1,260 1,557 2,524 2,581 2,244
------- ------- ------- ------- -------
Total nonperforming assets $ 5,332 $ 6,317 $ 8,160 $10,882 $11,038
======= ======= ======= ======= =======
Nonperforming loans to total end of period loans 0.86% 0.99% 1.15% 1.72% 1.79%
Nonperforming assets to total end of period loans 1.13 1.31 1.67 2.25 2.25
Nonperforming assets to total end of period assets 0.68 0.80 1.06 1.45 1.49
Due largely to tighter underwriting standards and an overall heightened
commitment to asset quality, the level of nonperforming loans at March 31, 2003
decreased to $4,072 versus the $4,760 that existed as of December 31, 2002 and
$8,794 as of March 31, 2002. The decrease in nonperforming loans, when compared
to December 31, 2002, was due to various actions taken to proactively address
these problem loans. The level of nonperforming loans to total end of period
loans was 0.86% at March 31, 2003, as compared to 0.99% at December 31, 2002 and
1.79% at March 31, 2002. The reserve coverage ratio (allowance to nonperforming
loans) improved to 159.58%, as of March 31, 2003, from the lower ratios of
135.50% at December 31, 2002 and 72.63% at March 31, 2002.
Other Potential Problem Loans
The Company has other potential problem loans that are currently
performing, but where some concerns exist as to the ability of the borrower to
comply with present loan repayment terms. Excluding nonperforming loans, these
loans totaled $3,987 that management has classified as impaired at March 31,
2003. Management considers these loans to be impaired due to declining financial
performance. The classification of these loans, however, does not imply that
management expects losses on each of these loans, but believes that a higher
level of scrutiny and close monitoring is prudent under the circumstances. Such
classifications relate to specific concerns for each individual borrower and do
not relate to any concentration risk common to all loans in this group.
Allowance for Loan Losses
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions; the type of loan being made; the creditworthiness of the
borrower over the term of the loan; and, in the case of a collateralized loan,
the quality of the collateral for such a loan. The allowance for loan losses
represents the Company's estimate of the allowance necessary to provide for
probable incurred losses in the loan portfolio. In making this determination,
the Company analyzes the ultimate collectibility of the loans in its portfolio,
incorporating feedback provided by internal loan staff, the independent loan
review function, and information provided by examinations performed by
regulatory agencies. The Company makes an ongoing evaluation as to the adequacy
of the allowance for loan losses.
20.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
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 Loan Review function validates the officers'
grades. In the event that the loan review function downgrades the loan, it is
included in the allowance analysis at the lower grade. The grading system is in
compliance with the regulatory classifications and the allowance is allocated to
the loans based on the regulatory grading, except in instances where there are
known differences (i.e., collateral value is nominal, etc.). To establish the
appropriate level of the allowance, a sample of loans (including impaired and
nonperforming loans) are reviewed and classified as to potential loss exposure.
Based on an estimation done pursuant to the requirements of Financial
Accounting Standards Board ("FASB") Statement No. 5, "Accounting for
Contingencies," and FASB Statements Nos. 114 and 118, "Accounting by Creditors
for Impairment of a Loan," the analysis of the allowance for loan losses
consists of three components: (i) specific credit allocation established for
expected losses resulting from analysis developed through specific credit
allocations on individual loans for which the recorded investment in the loan
exceeds its fair value; (ii) general portfolio allocation based on historical
loan loss experience for each loan category; and (iii) unallocated subjective
reserves based on general economic conditions as well as specific economic
factors in the markets in which the Company operates.
The specific credit allocation component of the allowance for loan
losses is based on a regular analysis of loans over a fixed-dollar amount where
the internal credit rating is at or below a predetermined classification. The
fair value of the loan is determined based on either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
market price of the loan, or, if the loan is collateral dependent, the fair
value of the underlying collateral less cost of sale.
The general portfolio allocation component of the allowance for loan
losses is determined statistically using a loss migration analysis that examines
historical loan loss experience. The loss migration analysis is performed
quarterly and loss factors are updated regularly based on actual experience. The
general portfolio allocation element of the allowance for loan losses also
includes consideration of the amounts necessary for concentrations and changes
in portfolio mix and volume.
The unallocated subjective component of the allowance for loan losses
reflects Management's estimate of probable inherent but undetected losses within
the portfolio due to uncertainties in economic conditions, delays in obtaining
information (including unfavorable information about a borrower's financial
condition), the difficulty in identifying triggering events that correlate
perfectly to subsequent loss rates, and risk factors that have not yet
manifested themselves in loss allocation factors. In addition, the unallocated
subjective component includes a portion that explicitly accounts for the
inherent imprecision in loan loss migration models. The uncertainty of the
current economic environment also impacts the allocation model's estimate of
loss. The historical losses used in the migration analysis may not be
representative of actual losses inherent in the portfolio that have not yet been
realized.
The allowance for loan losses is based on estimates, and ultimate
losses will vary from current estimates. These estimates are reviewed monthly,
and as adjustments, either positive or negative, become necessary, a
corresponding increase or decrease is made in the provision for loan losses. The
composition of the loan portfolio has not significantly changed since year-end
2002. The methodology used to determine the adequacy of the allowance for loan
losses is consistent with prior years, and there were no reallocations.
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Along with other financial institutions, management 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.
At March 31, 2003, the allowance for loan losses was $6,498 or 1.38% of
total loans as compared to $6,450 or 1.33% at December 31, 2002, and $6,387 or
1.30% at March 31, 2002. Several factors impacted the quarter-over-quarter
change. In the second quarter of 2002, the Company increased the allowance by
$1,652. This increase was 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 first quarter of 2003 were $564
Liquidity
The Company manages its liquidity position with the objective of
maintaining sufficient funds to respond to the needs of depositors and borrowers
and to take advantage of earnings enhancement opportunities. In addition to the
normal inflow of funds from core-deposit growth together with repayments and
maturities of loans and investments, the Company utilizes other short-term
funding sources such as brokered time deposits, securities sold under agreements
to repurchase, overnight federal funds purchased from correspondent banks and
the acceptance of short-term deposits from public entities, and Federal Home
Loan Bank advances.
The Company monitors and manages its liquidity position on several
bases, which vary depending upon the time period. As the time period is
expanded, other data is factored in, including estimated loan funding
requirements, estimated loan payoffs, investment portfolio maturities or calls,
and anticipated depository buildups or runoffs.
The Company classifies all of its securities as available-for-sale,
thereby maintaining significant liquidity. The Company's liquidity position is
further enhanced by structuring its loan portfolio interest payments as monthly
and by the significant representation of retail credit and residential mortgage
loans in the Company's loan portfolio, resulting in a steady stream of loan
repayments. In managing its investment portfolio, the Company provides for
staggered maturities so that cash flows are provided as such investments mature.
The Company's cash flows are comprised of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Cash flows used in financing and investing
activities offset by those provided by operating activities, resulted in a net
decrease in cash and cash equivalents of $8,733 from December 31, 2002 to March
31, 2003.
During the first three months of 2003, the Company experienced net cash
outflows of $14,712 in financing activities primarily due to a decrease in the
level of deposits; and $240 in investing activities largely due to the purchase
of securities and a net decrease in loans. Operating activities, on the other
hand, provided $6,219 in net cash inflows due to proceeds from loans sales and
net income.
22.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Capital Resources
Stockholders' Equity
The Company is committed to managing capital for maximum shareholder
benefit and maintaining strong protection for depositors and creditors.
Stockholders' equity at March 31, 2003 was $69,423, an increase of $1,359 or 2%,
from December 31, 2002. The stockholders' equity increase was largely the result
of an increase in earnings for the first three months of 2003 less dividends
paid to shareholders. Average equity as a percentage of average assets was 8.9%
at March 31, 2003, compared to 8.7% at December 31, 2002. Book value per common
share increased to $17.29 at the end of first quarter 2003, up from $16.97 at
the end of 2002.
Capital Measurements
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
10.93% and 12.26%, respectively, at March 31, 2003. The Company is currently,
and expects to continue to be, in compliance with these guidelines.
As of March 31, 2003, the Tier 2 risk-based capital was comprised of
$6,498 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.
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
The following table sets forth an analysis of the Company's capital
ratios:
December 31, Minimum Well
March 31, -------------------- Capital Capitalized
2003 2002 2001 Ratios Ratios
-------- -------- -------- -------- --------
Tier 1 risk-based capital $ 60,244 $ 58,755 $ 55,911
Tier 2 risk-based capital 7,329 7,281 7,126
Total capital 67,573 66,036 63,037
Risk-weighted assets 551,030 557,620 540,626
Capital ratios
Tier 1 risk-based capital 10.93% 10.54% 10.34% 4.00% 6.00%
Tier 2 risk-based capital 12.26 11.84 11.66 8.00 10.00
Leverage ratio 7.79 7.48 7.54 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 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.
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;
24.
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 a range of enhanced penalties for fraud and other violations.
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
None.
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.
26.
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 May 14, 2003.
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
27.
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 officer 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 officer 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 officer 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: May 14, 2003
/s/ CHARLES J. GRAKO
- --------------------
Charles J. Grako
President and Principal Executive Officer
28.
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 officer 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 officer 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 officer 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: May 14, 2003
/s/ KURT R. STEVENSON
- ---------------------
Kurt R. Stevenson
Vice President and Principal Financial and Accounting Officer
29.