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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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 August 14, 2003
- ----------------------------- -------------------------------------
Common Stock, Par Value $1.00 3,998,946
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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..........................................11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................................28
Item 4. Controls and Procedures ............................................29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................30
Item 2. Changes in Securities and Use of Proceeds...........................30
Item 3. Defaults Upon Senior Securities.....................................30
Item 4. Submission of Matters to a Vote of Security Holders.................30
Item 5. Other Information...................................................30
Item 6. Exhibits and Reports on Form 8-K....................................30
SIGNATURES...................................................................32
i
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30, 2003 and December 31, 2002 (In Thousands, Except Share Data)
- --------------------------------------------------------------------------------------------------------
June 30, December 31,
2003 2002
---------- ----------
ASSETS
Cash and cash equivalents $ 35,303 $ 38,962
Securities available-for-sale 220,937 227,229
Loans 476,386 483,229
Allowance for loan losses (7,253) (6,450)
---------- ----------
Net loans 469,133 476,779
Cash surrender value of life insurance 14,055 13,776
Mortgage servicing rights 2,685 2,640
Premises and equipment, net 14,750 14,055
Goodwill 7,642 7,642
Intangible assets, net 767 873
Other real estate 320 1,557
Other assets 7,339 8,103
---------- ----------
Total assets $ 772,931 $ 791,616
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 81,223 $ 90,606
Interest-bearing 525,732 551,352
---------- ----------
Total deposits 606,955 641,958
Federal funds purchased and securities sold
under agreements to repurchase 1,845 3,588
Advances from the Federal Home Loan Bank 77,450 61,750
Notes payable 7,925 8,275
Other liabilities 7,224 7,150
---------- ----------
Total liabilities 701,399 722,721
---------- ----------
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;
4,599,709 shares issued at June 30, 2003 and 4,571,209
shares issued at December 31, 2002 4,600 4,571
Surplus 22,121 21,856
Retained earnings 45,519 43,113
Accumulated other comprehensive income 3,285 3,171
Unearned compensation under stock option plans (11) (23)
---------- ----------
76,014 73,188
Treasury stock, at cost; 600,763 shares at June 30, 2003
and 590,263 shares at December 31, 2002 (5,313) (5,124)
---------- ----------
Total stockholders' equity 70,701 68,064
---------- ----------
Total liabilities and stockholders' equity $ 772,931 $ 791,616
========== ==========
See Accompanying Notes to Unaudited Financial Statements
1.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months and Six Months Ended June 30, 2003 and 2002 (In Thousands, Except Per Share Data)
- ---------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Interest income
Loans $ 8,281 8,976 16,820 18,511
Securities
Taxable 1,689 1,930 3,577 3,642
Exempt from federal income taxes 398 424 793 863
Federal funds sold and other 13 22 31 66
---------- ---------- ---------- ----------
Total interest income 10,381 11,352 21,221 23,082
Interest expense
Deposits 3,189 4,497 6,647 9,293
Federal funds purchased and securities sold
under agreements to repurchase 40 50 70 78
Advances from the Federal Home Loan Bank 770 531 1,457 1,123
Notes payable 81 83 165 179
---------- ---------- ---------- ----------
Total interest expense 4,080 5,161 8,339 10,673
---------- ---------- ---------- ----------
Net interest income 6,301 6,191 12,882 12,409
Provision for loan losses 1,257 2,018 1,869 2,537
---------- ---------- ---------- ----------
Net interest income after
Provision for loan losses 5,044 4,173 11,013 9,872
Noninterest income
Service charges 794 654 1,550 1,245
Merchant fee income 210 307 489 551
Trust income 146 191 323 371
Mortgage banking income 1,192 568 2,221 1,199
Insurance commissions and fees 641 500 1,235 1,044
Securities gains, net 129 57 221 300
Other income 975 561 1,647 1,131
---------- ---------- ---------- ----------
4,087 2,838 7,686 5,841
Noninterest expenses
Salaries and employee benefits 3,979 3,723 7,809 7,607
Occupancy expense, net 470 438 968 891
Furniture and equipment expense 524 485 1,017 875
Supplies and printing 122 113 248 270
Telephone 281 302 538 527
Other real estate owned expense 40 105 168 174
Amortization of intangible assets 52 101 106 202
Other expenses 1,701 1,738 3,332 3,375
---------- ---------- ---------- ----------
7,169 7,005 14,186 13,921
---------- ---------- ---------- ----------
Income before income taxes 1,962 6 4,513 1,792
Income taxes 516 (219) 1,260 298
---------- ---------- ---------- ----------
Net income 1,446 225 3,253 1,494
Preferred stock dividends 64 64 128 128
---------- ---------- ---------- ----------
Net income for common stockholders $ 1,382 $ 161 $ 3,125 $ 1,366
========== ========== ========== ==========
Basic earnings per common share $ 0.34 $ 0.04 $ 0.78 $ 0.34
========== ========== ========== ==========
Diluted earnings per common share $ 0.34 $ 0.04 $ 0.77 $ 0.34
========== ========== ========== ==========
Total comprehensive income
for common shareholders $ 1,573 $ 1,432 $ 3,239 $ 2,313
========== ========== ========== ==========
See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2003 and 2002 (In Thousands)
- -------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
------------------------
2003 2002
---------- ----------
Cash flows from operating activities
Net income $ 3,253 $ 1,494
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 789 733
Amortization of intangible assets 106 202
Amortization of unearned compensation under stock option plans 12 23
Amortization of bond premiums, net 753 738
Provision for loan losses 1,869 2,537
Securities gains, net (221) (300)
Gain on sale of land and equipment -- (3)
Loss on sale of real estate acquired in settlement of loans 88 13
Gain on sale of loans (2,692) (1,074)
Proceeds from sales of loans held for sale 104,150 72,561
Origination of loans held for sale (101,611) (67,383)
Change in assets and liabilities
Decrease in other assets 439 287
Increase (decrease) in other liabilities 74 (678)
---------- ----------
Net cash provided by operating activities 7,009 9,150
Cash flows from investing activities
Securities available-for-sale
Proceeds from maturities and paydowns 66,314 35,008
Proceeds from sales 13,438 11,614
Purchases (73,878) (73,796)
Net decrease in loans 5,720 14,569
Purchase of premises and equipment (1,484) (2,289)
Proceeds from sale of real estate acquired in settlement of loans 1,359 272
Proceeds from sale of equipment -- 5
---------- ----------
Net cash provided by (used in) investing activities 11,469 (14,617)
Cash flows from financing activities
Net increase (decrease) in deposits (35,003) 1,207
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (1,743) 3,051
Net increase (decrease) in advances from the Federal Home Loan Bank 15,700 (3,100)
Payments on notes payable (350) --
Dividends on common stock (719) (597)
Dividends on preferred stock (128) (128)
Proceeds from exercise of stock options 294 --
Purchase of treasury stock (188) --
---------- ----------
Net cash used in financing activities (22,137) 433
---------- ----------
Net increase (decrease) in cash and cash equivalents (3,659) (5,034)
Cash and cash equivalents
Beginning of period 38,962 26,699
---------- ----------
End of period $ 35,303 $ 21,665
========== ==========
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 8,602 $ 11,373
Income taxes 1,151 317
See Accompanying Notes to Unaudited Financial Statements
3.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per 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, 2002. The annualized results of operations during the three months and six
months ended June 30, 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.
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying common stock at date of grant. The following
table illustrates the effect on net income and earnings per share if expense was
measured using the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income as reported
for common stockholders $ 1,382 $ 161 $ 3,125 $ 1,366
Deduct: stock-based compensation expense
Determined under fair value based method 30 20 60 41
---------- ---------- ---------- ----------
Pro forma net income $ 1,352 $ 141 $ 3,065 $ 1,325
========== ========== ========== ==========
Basic earnings per common share as reported $ 0.34 $ 0.04 $ 0.78 $ 0.34
Pro forma basic earnings per common share 0.34 0.04 0.77 0.33
Diluted earnings per common share as reported $ 0.34 $ 0.04 $ 0.77 $ 0.34
Pro forma diluted earnings per common share 0.33 0.04 0.76 0.33
4.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Note 2. Earnings Per Share
Basic earnings per share for the three months and six months ended June
30, 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
and six months ended June 30, 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 Six Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income available to common shareholders $ 1,382 $ 161 $ 3,125 $ 1,366
Weighted average common shares outstanding 3,995 3,979 3,989 3,979
-------- -------- -------- --------
Basic Earnings Per Common Share $ 0.34 $ 0.04 $ 0.78 $ 0.34
======== ======== ======== ========
Diluted Earnings Per Common Share
Weighted average common shares outstanding 3,995 3,979 3,989 3,979
Add: dilutive effect of assumed exercised
stock options 73 49 64 46
-------- -------- -------- --------
Weighted average common and dilutive
Potential shares outstanding 4,068 4,028 4,053 4,025
======== ======== ======== ========
Diluted Earnings Per Common Share $ 0.34 $ 0.04 $ 0.77 $ 0.34
======== ======== ======== ========
There were approximately 16,000 and 65,000 options outstanding at June
30, 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 3. Securities
The Company's consolidated securities portfolio, which represented
31.7% of the Company's 2003 second quarter average earning asset base, is
managed to minimize interest rate risk, maintain sufficient liquidity, and
maximize return. The portfolio includes several callable agency debentures,
adjustable rate mortgage pass-throughs, and collateralized mortgage obligations.
Corporate bonds consist of investment grade obligations of public corporations.
Equity securities consist of Federal Reserve stock, Federal Home Loan Bank
stock, and trust preferred stock. The Company's financial planning anticipates
income streams generated by the securities portfolio based on normal maturity
and reinvestment.
5.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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 level of interest rates. Securities
classified as available-for-sale, carried at fair value, were $220,937 at June
30, 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 June 30, 2003 and December 31,
2002:
June 30, 2003
-------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
---------- ---------- ----------
U.S. treasury $ 1,005 $ 5 $ --
U.S. government agencies 28,411 685 (1)
States and political subdivisions 33,765 2,050 (16)
U.S. government mortgage-backed securities 120,998 1,717 (373)
Collateralized mortgage obligations and
other asset backed securities 8,696 447 (6)
Corporate bonds 10,818 810 --
Equity securities 17,244 12 (7)
---------- ---------- ----------
$ 220,937 $ 5,726 $ (403)
========== ========== ==========
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 Per Share Data)
- --------------------------------------------------------------------------------
Note 4. Loans
The Company offers a broad range of products, including granting
agribusiness, commercial, residential, and installment loans, designed to meet
the credit needs of its borrowers. The Company 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 June 30, 2003 and December 31, 2002:
June 30, 2003 December 31, 2002
------------------------ -----------------------
$ % $ %
---------- ---------- ---------- ----------
Commercial $ 96,570 20.27% $ 100,189 20.73%
Agricultural 35,476 7.45 36,467 7.55
Real estate:
Commercial mortgages 144,870 30.41 147,253 30.47
Construction 27,501 5.77 24,486 5.07
Agricultural 39,884 8.37 34,688 7.18
1-4 family mortgages 85,852 18.02 79,846 16.52
Loans held for sale 1,664 0.35 7,565 1.56
Installment 42,155 8.85 49,949 10.34
Other 2,414 0.51 2,786 0.58
---------- ---------- ---------- ----------
Total loans 476,386 100.00% 483,229 100.00%
========== ==========
Allowance for loan losses (7,253) (6,450)
---------- ----------
Loans, net $ 469,133 $ 476,779
========== ==========
7.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Note 5. Allowance For Loan Losses
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, current
economic conditions; the type of loan being made; the creditworthiness of the
borrower over the term of the loan; and in the case of a collateralized loan,
the quality of the collateral for such loan. The allowance for loan losses
represents the Company's estimate of the allowance necessary to provide for
probable incurred losses in the loan portfolio. In making this determination,
the Company analyzes the ultimate collectibility of the loans in its portfolio,
incorporating feedback provided by internal loan staff, the independent loan
review function and information provided by examinations performed by regulatory
agencies. The Company makes an ongoing evaluation as to the adequacy of the
allowance for loan losses. Transactions in the allowance for loan losses for the
three months and six months ended June 30, 2003 and 2002 are summarized below:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Beginning balance $ 6,498 6,387 $ 6,450 6,295
Charge-offs:
Commercial 248 604 636 937
Real estate mortgages 215 181 319 313
Installment and other loans 204 208 392 326
---------- ---------- ---------- ----------
Total charge-offs 667 993 1,347 1,576
---------- ---------- ---------- ----------
Recoveries:
Commercial 125 64 205 194
Real estate mortgages 20 22 39 28
Installment and other loans 20 16 37 36
---------- ---------- ---------- ----------
Total recoveries 165 102 281 258
---------- ---------- ---------- ----------
Net charge-offs 502 891 1,066 1,318
---------- ---------- ---------- ----------
Provision for loan losses 1,257 2,018 1,869 2,537
---------- ---------- ---------- ----------
Ending balance $ 7,253 $ 7,514 $ 7,253 $ 7,514
========== ========== ========== ==========
Period end total loans, net of
unearned interest $ 476,386 $ 483,998 $ 476,386 $ 483,998
========== ========== ========== ==========
Average loans $ 482,631 $ 483,424 $ 482,045 $ 491,125
========== ========== ========== ==========
Ratio of net charge-offs to
average loans 0.10% 0.18% 0.22% 0.27%
Ratio of provision for loan losses
to average loans 0.26% 0.42% 0.39% 0.52%
Ratio of allowance for loan losses
to ending total loans 1.52% 1.55% 1.52% 1.55%
Ratio of allowance for loan losses
to total nonperforming loans 117.69% 90.52% 117.69% 90.52%
Ratio of allowance at end of period
to average loans 1.50% 1.55% 1.50% 1.53%
8.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per 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 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.
Six Months Ended
--------------------------------------
June 30, 2003
--------------------------------------
Banking Other Consolidated
Segment Segments Totals
---------- ---------- ----------
Net interest income (loss) $ 13,050 $ (168) $ 12,882
Other revenue 5,591 2,095 7,686
Other expense 9,537 3,754 13,291
Segment profit (loss) 6,571 (2,058) 4,513
Noncash items
Depreciation 562 227 789
Provision for loan losses 1,869 -- 1,869
Other intangibles 103 3 106
Segment assets 772,010 921 772,931
Six Months Ended
--------------------------------------
June 30, 2002
--------------------------------------
Banking Other Consolidated
Segment Segments Totals
---------- ---------- ----------
Net interest income (loss) $ 12,585 $ (176) $ 12,409
Other revenue 4,073 1,768 5,841
Other expense 9,747 3,239 12,986
Segment profit (loss) 3,850 (2,058) 1,792
Noncash items
Depreciation 474 259 733
Provision for loan losses 2,537 -- 2,537
Other intangibles 186 16 202
Segment assets 744,756 6,049 750,805
9.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Note 8. Recent Developments
In its Press Release dated July 18, 2003, the Company reported
operating results for the second quarter of 2003. Subsequent to this release,
the Company discovered new information surrounding two large commercial credits
and determined that these credits should have been designated as impaired at
June 30, 2003. The categorization of these loans as impaired required that an
additional provision for loan losses of $900 be recorded for the second quarter
of 2003 and the second quarter press release for the three month and six month
period ended June 30, 2003 be revised.
On August 11, 2003 the banking regulators commenced a regularly
scheduled examination of the Banks. There can be no assurance that the
regulators will not identify items which may have an impact on the financial
statements of the Company.
10.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
The following discussion provides an analysis of the Company's results
of operations and financial condition of UnionBancorp, Inc. for the three months
and six months ended June 30, 2003 as compared to the same periods in 2002.
Management's discussion and analysis (MD&A) should be read in conjunction with
the consolidated financial statements and accompanying notes presented elsewhere
in this report as well as the Company's 2002 Annual Report on Form 10-K.
Annualized results of operations during the three months and six months ended
June 30, 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.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. By their nature, changes in these
assumptions and estimates could significantly affect the Company's financial
position or results of operations. Actual results could differ from those
estimates. Discussed below are those critical accounting policies that are of
particular significance to the Company.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required based on past loan loss experience, the nature
and volume of the portfolio, information about specific borrower situations and
estimated collateral values, current economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
11.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
charged off. Loan losses are charged against the allowance when management
believes that the uncollectibility of a loan balance is confirmed.
Mortgage Servicing Rights: Servicing assets represent purchased rights
and the allocated value of retained servicing rights on loans sold. Servicing
assets are expensed in proportion to, and over the period of, estimated net
servicing revenues. Impairment is evaluated based on the fair value of the
assets, using groupings of the underlying loans as to interest rates and then,
secondarily, as to geographic and prepayment characteristics. Fair value is
determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions.
Any impairment of a grouping is reported as a valuation allowance.
General
UnionBancorp, Inc. (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 May 2, 2003, the Board of Directors approved a stock repurchase plan
whereby the Company may repurchase from time to time up to 5% of its outstanding
shares of common stock in the open market or in private transactions over the
next 18 months. Purchases will be dependent upon market conditions and the
availability of shares. The repurchase program optimizes the use of capital
relative to other investment alternatives and benefits both the Company and the
shareholders by enhancing earnings per share and return on equity. To date, the
Company has repurchased 10,500 shares at a weighted average cost of $17.92.
Also during the second quarter, the Company made strategic divestitures
that resulted in the net gain on the sale of the Company's Internet Service
Provider (ISP) and Merchant Point of Sale (POS) product lines. The impact to
earnings, net of taxes, was approximately $0.04 per diluted share.
The Company is in the final stages of constructing its newest 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 by offering our full line of financial services
including banking, trust, internet, insurance and investment products. The
facility is expected to open in early fall and will be located in the new
Yorkville Marketplace development at the intersection of Routes 34 and 47.
12.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Results of Operations
Net Income
Net income equaled $1,446 or $0.34 per diluted share for the three
months ended June 30, 2003, versus $225 or $0.04 per diluted share for the same
period in 2002. For the six months ended June 30, 2003, net income equaled
$3,253 or $0.77 per diluted share compared to $1,494 or $0.34 per diluted share
earned in the same period during 2002.
The Company's quarterly earnings were driven by several factors. These
include 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 increases in operating expenses incurred to support the
growing level of business activity and continued investments in the Company and
taxes due to a higher tax base.
Also contributing to the positive quarterly earnings performance were
strategic divestitures that resulted in the net gain on the sale of the
Company's Internet Service Provider (ISP) and Merchant Point of Sale (POS)
product lines. The impact to earnings, net of taxes, was approximately $0.04 per
diluted share.
Return on average assets was 0.74% for the second quarter of 2003
compared to 0.12% for the same period in 2002. Return on average assets was
0.84% for the six month period ended June 30, 2003 compared to 0.40% for the
same period in 2002.
Return on average stockholders' equity was 8.10% for the second quarter
of 2003 compared to 1.38% for the same period in 2002. Return on average
stockholders' equity was 9.37% for the six month period ended June 30, 2003
compared to 4.63% 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 $6,528 for the
second quarter ended June 30, 2003, compared with $6,432 earned during the same
period in 2002. This represented an increase of $96 or 1.5%. The improvement in
net interest income is attributable to the quarter-over-quarter reduction of
interest expense paid on interest bearing liabilities totaling $1,081 exceeding
the quarter-over-quarter reduction of interest income earned on interest earning
assets totaling $985.
13.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
The $985 reduction in interest income resulted from a decrease of
$1,220 related to rate partially offset by an increase of $235 due to volume.
The majority of the change in interest income was related to a 57 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 $1,081 reduction in interest
expense resulted from a decrease of $1,197 associated with rate partially offset
by an increase of $116 associated with volume. The majority of the change was
attributable to a 91 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.
The net interest margin declined 6 basis points to 3.66% in the second
quarter 2003 from 3.72% during the same period in 2002 and declined 23 basis
points from 3.89% during the first quarter 2003. The margin contraction in the
second quarter 2003 resulted primarily from lower earning asset rates due to the
continued low interest rate environment, management's steps taken during the
year to insulate net interest income against the potential for rising interest
rates, and the impact of refinance related prepayments and calls on
mortgage-backed securities. The expectation of continued low interest rates is
likely to maintain pressure on margins in 2003.
Net interest income, on a tax equivalent basis, for the six months
ended June 30, 2003 totaled $13,334, representing an increase of $434 or 3.4%
over the $12,900 earned during the same period in 2002. The improvement in net
interest income is attributable to the year-over-year reduction of interest
expense paid on interest bearing liabilities totaling $2,334 exceeding the
year-over-year reduction of interest income earned on interest earning assets
totaling $1,900. The net interest margin for the first six months of 2003
increased 3 basis points to 3.77% compared to 3.74% for the same period in 2002.
The Company's net interest income is affected by changes in the amount
and mix of interest-earning assets and interest-bearing liabilities, referred to
as "volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as "rate change." The following table details each
category of average amounts outstanding for interest-earning assets and
interest-bearing liabilities, average rate earned on all interest-earning
assets, average rate paid on all interest-bearing liabilities, and the net yield
on average interest-earning assets. In addition, the table reflects the changes
in net interest income stemming from changes in interest rates and from asset
and liability volume, including mix. The change in interest attributable to both
rate and volume has been allocated to the changes in the rate and the volume on
a pro rata basis.
14.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended June 30,
---------------------------------------------------------------
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 $ 238 $ 1 1.69% $ 828 $ 5 2.42% $ (3) $ (1) $ (4)
Securities (1)
Taxable 194,674 1,688 3.48 169,781 1,925 4.55 257 (494) (237)
Non-taxable (2) 31,771 604 7.63 34,834 643 7.40 (3) (36) (39)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total securities (tax
equivalent) 226,445 2,292 4.06 204,615 2,568 5.03 254 (530) (276)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Federal funds sold 5,133 13 1.02 5,367 22 1.64 (1) (8) (9)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loans (3)(4)
Commercial 133,625 2,021 6.07 138,728 2,420 7.00 (86) (313) (399)
Real estate 302,898 5,195 6.88 293,983 5,418 7.39 160 (383) (223)
Installment and other 46,108 1,086 9.45 50,713 1,160 9.17 (89) 15 (74)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross loans (tax
equivalent) 482,631 8,302 6.90 483,424 8,998 7.47 (15) (681) (696)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets 714,447 10,608 5.96 694,234 11,593 6.70 235 (1,220) (985)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 21,563 19,951
Premises and equipment, net 14,470 13,868
Other assets 32,378 20,192
-------- --------
Total nonearning assets 68,411 54,011
-------- --------
Total assets $782,858 $748,245
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities
NOW accounts $ 52,847 $ 81 0.61% $ 43,279 $ 121 1.12% $ 23 $ (63) $ (40)
Money market accounts 100,869 366 1.46 81,926 437 2.14 87 (158) (71)
Savings deposits 50,689 101 0.80 52,305 171 1.31 (5) (65) (70)
Time deposits 333,664 2,641 3.17 370,358 3,768 4.08 (347) (780) (1,127)
Federal funds purchased and
repurchase agreements 9,722 40 1.65 6,282 50 3.19 20 (30) (10)
Advances from FHLB 72,160 770 4.28 40,647 531 5.24 351 (112) 239
Notes payable 7,940 81 4.09 9,296 83 3.58 (13) 11 (2)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 627,891 4,080 2.61 604,093 5,161 3.43 116 (1,197) (1,081)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 76,117 71,165
Other liabilities 7,253 7,431
-------- --------
Total noninterest-bearing
liabilities 83,370 78,596
-------- --------
Stockholders' equity 71,597 65,556
-------- --------
Total liabilities and
stockholders' equity $782,858 $748,245
======== ========
Net interest income (tax
equivalent) $ 6,528 $ 6,432 $ 119 $ (23) $ 96
======== ======== ======== ======== ========
Net interest income (tax
equivalent) to total earning
assets 3.66% 3.72%
======== ========
Interest-bearing liabilities
to earning assets 87.88% 87.02%
======== ========
- ------------------------------
(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 Per Share Data)
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Six Months Ended June 30,
---------------------------------------------------------------
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 $ 283 $ 3 2.14% $ 1,062 $ 12 2.28% $ (8) $ (1) $ (9)
Securities (1)
Taxable 192,896 3,574 3.74 159,349 3,629 4.59 686 (741) (55)
Non-taxable (2) 32,063 1,201 7.55 35,201 1,308 7.49 26 (133) (107)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total securities (tax
equivalent) 224,959 4,775 4.28 194,550 4,937 5.12 712 (874) (162)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Federal funds sold 5,186 31 1.21 8,123 66 1.64 (20) (15) (35)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loans (3)(4)
Commercial 134,142 4,284 6.44 140,789 4,981 7.13 (229) (468) (697)
Real estate 299,659 10,335 6.96 299,006 11,170 7.53 24 (859) (835)
Installment and other 48,244 2,245 9.38 51,330 2,407 9.46 (142) (20) (162)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross loans (tax
equivalent) 482,045 16,864 7.05 491,125 18,558 7.62 (336) (1,358) (1,694)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets 712,473 21,673 6.13 694,860 23,573 6.84 348 (2,248) (1,900)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 21,252 19,272
Premises and equipment, net 14,288 13,326
Other assets 32,936 21,082
-------- --------
Total nonearning assets 68,476 53,680
-------- --------
Total assets $780,949 $748,540
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities
NOW accounts $ 53,455 $ 157 0.59% $ 43,810 $ 250 1.15% $ 47 $ (140) $ (93)
Money market accounts 104,162 791 1.53 72,305 749 2.09 276 (234) 42
Savings deposits 49,716 200 0.81 51,212 351 1.38 (10) (141) (151)
Time deposits 338,595 5,499 3.28 379,631 7,943 4.22 (798) (1,646) (2,444)
Federal funds purchased and
repurchase agreements 6,938 70 2.03 4,886 78 3.22 26 (34) (8)
Advances from FHLB 67,442 1,457 4.36 43,962 1,123 5.15 527 (193) 334
Notes payable 8,113 165 4.10 9,295 179 3.88 (24) 10 (14)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 628,421 8,339 2.68 605,101 10,673 3.56 44 (2,378) (2,334)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 74,410 70,858
Other liabilities 8,098 7,450
-------- --------
Total noninterest-bearing
liabilities 82,508 78,308
-------- --------
Stockholders' equity 70,020 65,131
-------- --------
Total liabilities and
stockholders' equity $780,949 $748,540
======== ========
Net interest income (tax
equivalent) $ 13,334 $ 12,900 $ 304 $ 130 $ 434
======== ======== ======== ======== ========
Net interest income (tax
equivalent) to total earning
assets 3.77% 3.74%
======== ========
Interest-bearing liabilities
to earning assets 88.20% 87.08%
======== ========
- ------------------------------
(1) Average balance and average rate on securities classified as
available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances.
(4) Overdraft loans are excluded in the average balances.
16.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per 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
second quarter of 2003 totaled $1,257, a decrease of $761 from the $2,018
recorded during the same period a year ago. The provision for loan losses
charged to operating expense for the six months ended June 30, 2003 totaled
$1,869, a decrease of $668 from the $2,537 recorded during the same period a
year ago. The decline in the provision was due to a decline in the overall level
of nonperforming loans at June 30, 2003 as compared to June 30, 2002.
The provision for loan losses for the three months ended June 30, 2003
was largely attributable to one commercial credit for a chain of retail
convenience outlets. The total credit relationship to this borrower consists of
loans with a current aggregate outstanding principal balance of $3,785. This
credit was placed on the watch list during the first quarter of 2003 due to
declining financial results, competitive pressures facing the business and
personal issues of its principal. Management of the Company was actively working
with the borrower to restructure or sell the business, and a purchaser for the
business was in place. However, this action plan, which would have substantially
reduced the Company's exposure, did not materialize. As a result of this,
management completed an additional analysis of this credit, including a review
of current financial information and trends, and though the credit relationship
is currently paying as agreed, the Company determined that this loan
relationship should have been categorized as impaired at June 30, 2003 and a
specific reserve be allocated to this credit relationship. As of June 30, 2003
this loan relationship had a specific allocation of $750. The Company is
currently evaluating how to proceed with this credit. Due to the nature of the
business, the credit is worth substantially more as an ongoing entity than the
liquidation value of its assets. If the business remains a going concern,
management expects that the loss exposure will be consistent with what they have
currently allocated, but if the business ceases operations and foreclosure
proceedings are initiated, the loss exposure could be substantially increased.
In addition to the aforementioned credit, on August 4, 2003, the
Company became aware of serious deterioration in a previously identified watch
credit conducting business in the agricultural field. The total credit
relationship to this borrower consists of loans with a current aggregate
outstanding principal balance of $2,505. This credit was placed on the watch
list during the first quarter of 2002. As a result of additional analysis of
this credit, including a review of current financial information and trends, the
Company determined that this loan relationship should have been categorized as
impaired at June 30, 2003 and a specific reserve be allocated. The Company had
been working with this credit and a purchaser for the business was in place.
Unfortunately, after several months of preparing for the sale of the business,
the purchaser backed out of the arrangement in August 2003. During July and
August of 2003, two material events have taken place which has dramatically
altered the Company's approach to the credit. These include the exhaustion of
the borrower's liquid funds and a revoked license on their primary product. The
borrower took steps leading up to the anticipated acquisition which caused its
17.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
cash resources to be depleted and this, coupled with the inability to sell its
main product, have caused the Company to cease operating during the early part
of August 2003. Due to the nature of the business, the credit was worth much
more as an ongoing entity than the liquidation value of its assets. Thus, while
the Company provided approximately $150 for the estimated credit loss exposure
at June 30, 2003, assuming a going concern, the events that have occurred in the
third quarter cause the Company to currently believe that additional loss of
$1,500 to $2,000 may need to be recorded in the third quarter of 2003.
The provision for the second quarter of 2002 was in response to the
deterioration of several seasoned credits that surfaced during the second
quarter of 2002 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 was 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 second quarter of 2003 were $502 compared with
$891 in 2002. Annualized net charge-offs decreased to 0.10% of average loans for
the second quarter of 2003 compared to 0.18% in the same period in 2002. Net
charge-offs for the six months ended June 30, 2003 were $1,066 compared with
$1,318 in 2002. Annualized net charge-offs decreased to 0.22% of average loans
for the six months ended June 30, 2003 compared to 0.27% in the same period in
2002.
Management remains watchful of credit quality issues and believes that
current issues within the portfolio are reflective of a challenging economic
environment. 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. While management currently
believes its allowance for loan losses is adequate, the Company is currently
reviewing its policies and procedures regarding identification and
classification of impaired loans and its asset review process in an effort to
avoid subsequent changes to previously reported financial results.
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Noninterest Income
Noninterest income consists of a wide variety of fee-based revenues
from bank-related service charges on deposits and mortgage revenues. Also
included in this category are revenues generated by the Company's insurance,
brokerage, trust and asset management as well as increases in cash surrender
value on bank-owned life insurance. The following table summarizes the Company's
noninterest income:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2003 2002 2003 2002
-------------- ------------- ------------- --------------
Service charges $ 794 $ 654 $ 1,550 $ 1,245
Merchant fee income 210 307 489 551
Trust income 146 191 323 371
Mortgage banking income 1,192 568 2,221 1,199
Insurance commissions and fees 641 500 1,235 1,044
Securities gains, net 129 57 221 300
Other income 975 561 1,647 1,131
-------------- ------------- ------------- --------------
$ 4,087 $ 2,838 $ 7,686 $ 5,841
============== ============= ============= ==============
Noninterest income totaled $4,087 for the three months ended June 30,
2003, compared to $2,838 for the same time frame in 2002. Contributing to the
improvement in noninterest income were strategic divestitures that resulted in
$310 of gross gains on the sale of the Company's Internet Service Provider (ISP)
and Merchant Point of Sale (POS) product lines (included in other income).
Excluding securities gains and the gross gains on sale of the ISP and POS
product lines, noninterest income totaled $3,648 compared to $2,781 for the same
period in 2002, representing an increase of $867 or 31.1%.
The majority of the change to noninterest income was related to a $624
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). Net gains on mortgage activities were higher in
the second quarter of 2003 due to higher mortgage origination volume and lower
interest rates. Originations for the second quarter of 2003 grew to $70,622 from
$26,887 for the same period of 2002. 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 service charges
reflecting higher volumes of items drawn on customer accounts with insufficient
funds, insurance and commissions income largely due to increased brokerage
activity and revenue generated from incremental investments in bank-owned life
insurance (included in other income). Offsetting these improvements were
decreases in merchant fee income due to the divestiture of the POS product line
in the second quarter and trust revenue.
Noninterest income totaled $7,686 for the six months ended June 30,
2003, compared to $5,841 for the same time frame in 2002. Excluding securities
gains and the gains on sale of the ISP and POS product lines, noninterest
totaled $7,155 compared to $5,541 for the same period in 2002, representing an
increase of $1,614 or 29.1%. The change was largely reflective of the same items
discussed regarding the second quarter.
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Noninterest Expense
Noninterest expense is comprised primarily of compensation and employee
benefits, occupancy and other operating expense. The following table summarizes
the Company's noninterest expense:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2003 2002 2003 2002
-------------- ------------- ------------- --------------
Salaries and employee benefits $ 3,979 $ 3,723 $ 7,809 $ 7,607
Occupancy expense, net 470 438 968 891
Furniture and equipment expense 524 485 1,017 875
Supplies and printing 122 113 248 270
Telephone 281 302 538 527
Other real estate owned expense 40 105 168 174
Amortization of intangible assets 52 101 106 202
Other expenses 1,701 1,738 3,332 3,375
-------------- ------------- ------------- --------------
$ 7,169 $ 7,005 $ 14,186 $ 13,921
============== ============= ============= ==============
Noninterest expense totaled $7,169 for the three months ended June 30,
2003, as compared to $7,005 for the same timeframe in 2002. This represented an
increase of $164 or 2.3%.
A majority of the increase in noninterest expense was due to a $256
increase in salary and employee benefits related to variable commission expense
resulting from higher production volume from the mortgage banking and financial
services business lines. These areas of the Company operate at a lower gross
profit margin and historically generate significant levels of noninterest income
but also incur considerable noninterest expense.
Also contributing to the change were increases in equipment expense
largely due to technological upgrades implemented in 2002 and occupancy expense
related to higher insurance costs. These increases were partially offset by
decreases in other real estate owned expense due to the resolution of one
foreclosed asset, telephone and amortization of intangible assets.
Noninterest expense totaled $14,186 for the six months ended June 30,
2003, increasing by $265 or 1.9% from the same period in 2002. The change was
largely reflective of the same items discussed regarding the third quarter.
20.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per 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 and six months ended June 30, 2003 and 2002.
Three Months Ended Six Months Ended
June June
------------------------------ ------------------------------
2003 2002 2003 2002
-------------- ------------- ------------- --------------
Income before income taxes $ 1,962 $ 6 $ 4,513 $ 1,792
Applicable income taxes 516 (219) 1,260 298
Effective tax rates 26.3% --- 27.9% 16.6%
The Company recorded income tax expense of $516 and an income tax
benefit of $219 for the three months ended June 30, 2003 and 2002, respectively.
The Company recorded income tax expense of $1,260 and $298 for the six months
ended June 30, 2003 and 2002, respectively. Effective tax rates equaled 27.9%
and 16.6% 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 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 June 30, 2003 and 2002, respectively. The Company paid $128 of preferred
stock dividends for the six months ended June 30, 2002 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.
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per 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 June 30, 2003 and December 31, 2002.
June 30, 2003
----------------------------------------------------------
Net Interest Income
----------------------------------------------------------
Amount Change Change
----------- ----------- ------
(Dollars in Thousands)
+200 bp $ 23,679 $ 1,011 4.46%
+100 bp 23,326 658 2.90
Base 22,668 - -
- -100 bp 22,020 (648) (2.86)
Based upon the Company's model at June 30, 2003, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by 4.46% or approximately $1,011. The effect of an
immediate 100 basis point decrease in rates would decrease the Company's net
interest income by 2.86% or approximately $648. For the June 30, 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.
22.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Financial Condition
General
As of June 30, 2003, the Company had total assets of $772,931, total
gross loans of $476,386, total deposits of $606,955 and total stockholders'
equity of $70,701. Total assets decreased by $18,685 or 2.4% from year-end 2002.
Total gross loans decreased by $6,843 or 1.4% from year-end 2002 and reflected
tighter underwriting standards, a continued softening of overall loan demand,
and normal paydowns. Total deposits decreased by $35,003 or 5.5% 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.
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per 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
------------------- -----------------------------
June 30, Mar 31, Dec 31, Sept 30, June 30,
-------- ------- ------- -------- --------
Nonaccrual loans $ 4,415 $ 3,943 $ 3,931 $ 4,399 $ 7,239
Loans 90 days past due and still accruing 1,748 129 829 1,237 1,062
------- ------- ------- ------- -------
Total nonperforming loans 6,163 4,072 4,760 5,636 8,301
Other real estate owned 320 1,260 1,557 2,524 2,581
------- ------- ------- ------- -------
Total nonperforming assets $ 6,483 $ 5,332 $ 6,317 $ 8,160 $10,882
======= ======= ======= ======= =======
Nonperforming loans to total end of period loans 1.29% 0.86% 0.99% 1.15% 1.72%
Nonperforming assets to total end of period loans 1.36 1.13 1.31 1.67 2.25
Nonperforming assets to total end of period assets 0.84 0.68 0.80 1.06 1.45
The level of nonperforming loans at June 30, 2003 increased to $6,131
versus the $4,760 that existed as of December 31, 2002 and decreased from $8,301
at June 30, 2002. The level of nonperforming loans to total end of period loans
was 1.29% at June 30, 2003, as compared to 0.99% at December 31, 2002 and 1.72%
at June 30, 2002. The reserve coverage ratio (allowance to nonperforming loans)
was reported at 117.69% as of June 30, 2003 as compared to 90.52% as of June 30,
2002 and 135.50% as of December 31, 2002.
The $887 increase in 90 days past due loans, when compared to December
31, 2002, was largely due to three credits, diversified by loan concentration
and volume. These credits, as well as all loans 90 days past due, are the
subject of rigorous remediation efforts by management. The $1,237 decrease in
other real estate owned, when compared to December 31, 2002, was primarily
related to the sale of a single hotel property that was placed in other real
estate owned in the fourth quarter of 2001.
As previously discussed in Note 8 to the unaudited consolidated
financial statements and in the Provision for Loan Loss Section of the MD&A, the
Company increased its provision for loan losses for the second quarter of 2003
and anticipates increasing its provision for loan losses in the third quarter of
2003. It is likely that the $3,785 chain of retail convenience outlets credit
will be placed on nonaccrual during the third quarter. At June 30, 2003 this
loan had $16 of accrued interest receivable. The $2,505 credit conducting
business in the agricultural field has already been placed on nonaccrual status
and $57 of accrued interest was reversed in the third quarter of 2003.
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 $9,507 that management has classified as impaired at June 30, 2003
as compared to $3,987 at March 31, 2003 and $3,725 at December 31, 2002. This
increase is primarily because of the loans previously discussed in Note 8 of the
unaudited consolidated financial statements and in the Provision for Loan Loss
Section of the MD&A, 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
24.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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.
On a quarterly basis, management reviews the adequacy of the allowance
for loan losses. Commercial credits are graded by the loan officers and the Loan
Review function validates the officers' grades. In the event that the loan
review function downgrades the loan, it is included in the allowance analysis at
the lower grade. The grading system is in compliance with the regulatory
classifications and the allowance is allocated to the loans based on the
regulatory grading, except in instances where there are known differences (i.e.,
collateral value is nominal, etc.). To establish the appropriate level of the
allowance, a sample of loans (including impaired and nonperforming loans) are
reviewed and classified as to potential loss exposure.
Based on an estimation 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 current economic conditions, delays in
25.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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.
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. . 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 June 30, 2003, the allowance for loan losses was $7,253 or 1.52% of
total loans as compared to $6,450 or 1.33% at December 31, 2002, and $7,514 or
1.55% at June 30, 2002. The change from December 31, 2002 is because of the
increase in impaired loans previously discussed and as a result, additional
provisions have been made to the allowance for loan losses.
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.
26.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
The Company's cash flows are comprised of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Cash flows used in financing activities offset
by those provided by operating activities and investing activities, resulted in
a net decrease in cash and cash equivalents of $3,659 from December 31, 2002 to
June 30, 2003.
During the first six months of 2003, the Company experienced net cash
outflows of $22,137 in financing activities primarily due to a decrease in the
level of deposits partially offset by an increase in advances from the Federal
Home Loan Bank. Operating activities provided $7,909 in net cash inflows due to
proceeds from net loans sales and net income. Investing activities increased
$10,569 largely due to a net decrease in loans and proceeds from sales,
maturities and paydowns on securities.
Capital Resources
Stockholders' Equity
The Company is committed to managing capital for maximum shareholder
benefit and maintaining strong protection for depositors and creditors.
Stockholders' equity at June 30, 2003 was $70,701, an increase of $2,637 or
3.9%, from December 31, 2002. The stockholders' equity increase was largely the
result of an increase in earnings for the first six months of 2003 less
dividends paid to shareholders. Average quarterly equity as a percentage of
average quarterly assets was 9.0% at June 30, 2003, compared to 8.6% at December
31, 2002. Book value per common share increased to $17.55 at June 30 2003, up
from $16.97 at the end of 2002.
Stock Repurchase
On May 2, 2003, the Board of Directors approved a stock repurchase plan
whereby the Company may repurchase from time to time up to 5% of its outstanding
shares of common stock in the open market or in private transactions over the
next 18 months. Purchases will be dependent upon market conditions and the
availability of shares. The repurchase program optimizes the use of capital
relative to other investment alternatives and benefits both the Company and the
shareholders by enhancing earnings per share and return on equity. To date, the
Company has repurchased 10,500 shares at a weighted average cost of $17.92.
Capital Measurements
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
11.23% and 12.63%, respectively, at June 30, 2003. The Company is currently, and
expects to continue to be, in compliance with these guidelines.
As of June 30, 2003, the Tier 2 risk-based capital was comprised of
$6,834 in allowance for loan losses (limited to 1.25% of risk-weighted assets)
and $831 of Mandatory Redeemable Series B Preferred Stock. The Series A
Preferred Stock is convertible into common stock, subject to certain
adjustments.
27.
The following table sets forth an analysis of the Holding Company's
capital ratios:
December 31, Minimum Well
June 30, ----------------------------- Capital Capitalized
2003 2002 2001 Ratios Ratios
------------ ------------- ------------ ------ -----------
Tier 1 risk-based capital $ 61,395 $ 58,755 $ 55,911
Tier 2 risk-based capital 7,665 7,281 7,126
------------ ------------- ------------
Total capital 69,060 66,036 63,037
Risk-weighted assets 546,692 557,620 540,626
Capital ratios
Tier 1 risk-based capital 11.23% 10.54% 10.34% 4.00% 6.00%
Tier 2 risk-based capital 12.63 11.84 11.66 8.00 10.00
Leverage ratio 8.01 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 and Accounting Developments
The Financial Accounting Standards Board (FASB) recently issued two new
accounting standards, Statement No. 149, Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities, and Statement No. 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equities, both of which generally become effective in the quarter beginning July
1, 2003. Because the Company does not have these instruments or is only
nominally involved in these instruments, Management determined that, upon
adopting the new standards the new accounting standards will not materially
effect the Company's operating results or financial condition. The impact will
be that effective July 1, 2003 the Company's mandatory redeemable preferred
stock will be categorized in total liabilities.
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."
28.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1034, as amended) as of
June 30, 2003. Based on that evaluation, the Company's management, including the
Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls during the quarter ended June 30,
2003. While management concluded that the disclosure controls and procedures are
adequate in all material respects for SEC reporting purposes, the Company is
currently reviewing its policies and procedures regarding identification and
classification of impaired loans and its asset review process in an effort to
avoid subsequent changes to previously reported financial results.
29.
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
At the April 22, 2003 annual meeting of stockholders, Robert J. Doty,
Charles J. Grako and I.J. Reinhardt, Jr. were elected to serve as
Class II directors until 2006. Continuing as Class I directors until
2005 are Richard J. Berry, Walter E. Breipohl and John A. Trainor.
Continuing as Class III directors until 2004 are Dennis J. McDonnell,
John A. Shinkle and Scott C. Sullivan
At the April 22, 2003 annual meeting of stockholders, stockholders
adopted the UnionBancorp, Inc. 2003 Stock Option Plan.
There were 3,986,046 issued and outstanding shares of common stock
entitled to vote at the annual meeting. The voting on each item
presented at the annual meeting was as follows:
For Withheld
--------- --------
Election of Directors
Robert J. Doty 3,590,108 47,630
Charles J. Grako 3,589,217 48,521
I.J. Reinhardt, Jr. 3,546,899 90,839
For Against Abstain
--------- -------- -------
Adoption of the 2003 Stock Option Plan 3,000,697 224,054 45,760
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
31.1 Certification of Charles J. Grako required by Rule 13a - 14(a).
31.2 Certification of Kurt R. Stevenson required by Rule 13a - 14(a).
30.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from
the Company's President and Principal Executive Officer.
32.2 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:
On April 21, 2003, the Company filed a Form 8-K, under Item 9 "Regulation FD
Disclosure (Information provided under Item 12 - Results of Operations and
Financial Condition)" reporting that the Company had issued a press release to
report its financial results for the quarter ended March 31, 2003.
On May 5, 2003, the Company filed a Form 8-K, under Item 5 "Other Events"
reporting that the Company had issued a press release announcing that the Board
of Directors approved a stock repurchase plan whereby the Company may repurchase
from time to time up to 5% of its outstanding shares of common stock in the open
market or in private transactions over the next 18 months.
31.
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 August 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
32.
UNIONBANCORP, INC.
EXHIBIT INDEX
TO
QUARTERLY REPORT ON FORM 10-Q
Exhibit
No. Description
- ------- -----------
31.1 Certification of Charles J. Grako required by Rule 13a - 14(a).
31.2 Certification of Kurt R. Stevenson required by Rule 13a - 14(a).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from
the Company's President and Principal Executive Officer.
32.2 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.
33.