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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 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 November 13, 2003
------------------------------ ---------------------------------------
Common Stock, Par Value $1.00 4,000,646
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UnionBancorp, Inc.
Form 10-Q Index
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
o Unaudited Consolidated Balance Sheets..........................1
o Unaudited Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss)..................................2
o Unaudited Consolidated Statements of Cash Flows................3
o Notes to Unaudited Consolidated Financial Statements...........4
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition...........................................11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.................................................29
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...................................................................31
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, 2003 and December 31, 2002 (In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
September 30, December 31,
2003 2002
------------ ------------
ASSETS
Cash and cash equivalents $ 33,706 $ 38,962
Securities available-for-sale 235,508 227,229
Loans 483,042 483,229
Allowance for loan losses (9,082) (6,450)
------------ ------------
Net loans 473,960 476,779
Cash surrender value of life insurance 14,226 13,776
Mortgage servicing rights 2,666 2,640
Premises and equipment, net 15,627 14,055
Goodwill 7,642 7,642
Intangible assets, net 695 873
Other real estate 145 1,557
Other assets 8,306 8,103
------------ ------------
Total assets $ 792,481 $ 791,616
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 77,911 $ 90,606
Interest-bearing 545,041 551,352
------------ ------------
Total deposits 622,952 641,958
Federal funds purchased and securities sold
under agreements to repurchase 15,523 3,588
Advances from the Federal Home Loan Bank 72,450 61,750
Notes payable 7,925 8,275
Other liabilities 4,811 7,150
------------ ------------
Total liabilities 723,661 722,721
------------ ------------
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;
4,601,409 shares issued at September 30, 2003 and
4,571,209 shares issued at December 31, 2002 4,601 4,571
Surplus 22,138 21,856
Retained earnings 44,227 43,113
Accumulated other comprehensive income 1,843 3,171
Unearned compensation under stock option plans (7) (23)
------------ ------------
73,302 73,188
Treasury stock, at cost; 600,763 shares at September 30, 2003
And 590,263 shares at December 31, 2002 (5,313) (5,124)
------------ ------------
Total stockholders' equity 67,989 68,064
------------ ------------
Total liabilities and stockholders' equity $ 792,481 $ 791,616
============ ============
See Accompanying Notes to Unaudited Financial Statements
1.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
Three Months and Nine Months Ended September 30, 2003 and 2002
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Interest income
Loans $ 8,378 $ 8,911 $ 25,198 $ 27,422
Securities
Taxable 1,502 1,865 5,079 5,507
Exempt from federal income taxes 379 425 1,172 1,288
Federal funds sold and other 15 37 46 103
------------ ------------ ------------ ------------
Total interest income 10,274 11,238 31,495 34,320
Interest expense
Deposits 2,896 4,057 9,543 13,350
Federal funds purchased and securities sold
under agreements to repurchase 26 46 96 124
Advances from the Federal Home Loan Bank 771 690 2,228 1,813
Notes payable 82 86 247 265
------------ ------------ ------------ ------------
Total interest expense 3,775 4,879 12,114 15,552
------------ ------------ ------------ ------------
Net interest income 6,499 6,359 19,381 18,768
Provision for loan losses 4,356 519 6,225 3,056
------------ ------------ ------------ ------------
Net interest income after
Provision for loan losses 2,143 5,840 13,156 15,712
Noninterest income
Service charges 790 708 2,340 1,953
Merchant fee income 39 330 528 881
Trust income 180 180 503 551
Mortgage banking income 1,101 678 3,322 1,877
Insurance commissions and fees 580 558 1,815 1,602
Securities gains, net 59 107 280 407
Other income 510 499 2,157 1,630
------------ ------------ ------------ ------------
3,259 3,060 10,945 8,901
Noninterest expenses
Salaries and employee benefits 4,256 3,747 12,065 11,354
Occupancy expense, net 478 469 1,446 1,360
Furniture and equipment expense 518 474 1,535 1,349
Supplies and printing 111 110 359 380
Telephone 199 241 737 768
Other real estate owned expense -- 544 168 718
Amortization of intangible assets 72 101 178 303
Other expenses 1,527 1,754 4,859 5,129
------------ ------------ ------------ ------------
7,161 7,440 21,347 21,361
------------ ------------ ------------ ------------
Income (loss) before income taxes (1,759) 1,460 2,754 3,252
Income taxes (890) 314 370 612
------------ ------------ ------------ ------------
Net income (loss) (869) 1,146 2,384 2,640
Preferred stock dividends 65 65 193 193
------------ ------------ ------------ ------------
Net income (loss) for common stockholders $ (934) $ 1,081 $ 2,191 $ 2,447
============ ============ ============ ============
Basic earnings (loss) per share $ (0.23) $ 0.27 $ 0.55 $ 0.61
============ ============ ============ ============
Diluted earnings (loss) per common share $ (0.23) $ 0.27 $ 0.54 $ 0.61
============ ============ ============ ============
Total comprehensive income (loss)
for common shareholders $ (2,376) $ 1,827 $ 863 $ 4,140
============ ============ ============ ============
See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2003 and 2002 (In Thousands)
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Nine Months Ended
September 30,
----------------------------
2003 2002
------------ ------------
Cash flows from operating activities
Net income $ 2,384 $ 2,640
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 1,186 1,130
Amortization of intangible assets 178 303
Amortization of unearned compensation under stock option plans 16 34
Amortization of bond premiums, net 1,301 1,070
Provision for loan losses 6,225 3,056
Securities gains, net (280) (407)
Loss on sale of equipment -- 4
Loss on sale of real estate acquired in settlement of loans 80 156
Gain on sale of loans (4,207) (1,778)
Proceeds from sales of loans held for sale 179,461 103,941
Origination of loans held for sale (170,162) (104,628)
Change in assets and liabilities
Net increase in other assets (203) (486)
Net decrease in other liabilities (2,918) (1,614)
------------ ------------
Net cash provided by operating activities 13,061 3,421
Cash flows from investing activities
Securities available-for-sale
Proceeds from maturities and paydowns 90,014 52,434
Proceeds from sales 23,897 19,776
Purchases (125,365) (97,234)
Net (increase) decrease in loans (8,498) 13,575
Purchase of premises and equipment (2,758) (2,700)
Proceeds from sale of real estate acquired in settlement of loans 2,262 1,029
Proceeds from sale of equipment -- 10
------------ ------------
Net cash provided by (used in) investing activities (20,448) (13,110)
Cash flows from financing activities
Net increase (decrease) in deposits (19,006) 11,013
Net increase in federal funds purchased
and securities sold under agreements to repurchase 11,935 1,971
Net increase in advances from the Federal Home Loan Bank 10,700 6,150
Payments on notes payable (350) --
Dividends on common stock (1,079) (915)
Dividends on preferred stock (193) (193)
Proceeds from exercise of stock options 313 16
Purchase of treasury stock (189) --
------------ ------------
Net cash provided by financing activities 2,131 18,042
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Net increase (decrease) in cash and cash equivalents (5,256) 8,353
Cash and cash equivalents
Beginning of period 38,962 26,699
------------ ------------
End of period $ 33,706 $ 35,052
============ ============
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 12,687 $ 16,520
Income taxes 1,850 317
See Accompanying Notes to Unaudited Financial Statements
3.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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Note 1. Summary of Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements of
UnionBancorp, Inc. (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America and
with the rules and regulations of the Securities and Exchange Commission for
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required for complete financial statements. In the
opinion of management, all normal and recurring adjustments which are necessary
to fairly present the results for the interim periods presented have been
included. The preparation of financial statements requires management to make
estimates and assumptions that affect the recorded amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
For further information with respect to significant accounting policies followed
by the Company in the preparation of its consolidated financial statements,
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 2002. The annualized results of operations during the three months and nine
months ended September 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 (loss), 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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
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Net income (loss) as reported
for common stockholders $ (934) $ 1,081 $ 2,191 $ 2,447
Deduct: stock-based compensation expense
Determined under fair value based method 30 20 90 61
---------- ---------- ---------- ----------
Pro forma net income (loss) $ (964) $ 1,061 $ 2,101 $ 2,386
========== ========== ========== ==========
Basic earnings (loss)
per common share as reported $ (0.23) $ 0.27 $ 0.55 $ 0.61
Pro forma basic earnings (loss)
per common share (0.24) 0.27 0.53 0.60
Diluted earnings (loss)
per common share as reported $ (0.23) $ 0.27 $ 0.54 $ 0.61
Pro forma diluted earnings (loss)
per common share (0.24) 0.26 0.52 0.60
4.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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Note 2. Earnings (Loss) Per Share
Basic earnings (loss) per share for the three months and nine months
ended September 30, 2003 and 2002 were computed by dividing net income (loss) by
the weighted average number of shares outstanding. Diluted earnings (loss) per
share for the three months and nine months ended September 30, 2003 and 2002
were computed by dividing net income (loss) by the weighted average number of
shares outstanding, adjusted for the dilutive effect of the stock options.
Computations for basic and diluted earnings (loss) per share are provided below:
Basic Earnings (Loss) Per Common Share Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income (loss)
available to common shareholders $ (934) $ 1,081 $ 2,191 $ 2,447
Weighted average common shares outstanding 4,001 3,980 3,993 3,979
---------- ---------- ---------- ----------
Basic Earnings (Loss) Per Common Share $ (0.23) $ 0.27 $ 0.55 $ 0.61
========== ========== ========== ==========
Diluted Earnings (Loss) Per Common Share
Weighted average common shares outstanding 4,001 3,980 3,993 3,979
Add: dilutive effect of assumed exercised
stock options 97 48 76 46
---------- ---------- ---------- ----------
Weighted average common and dilutive
Potential shares outstanding 4,098 4,028 4,069 4,025
========== ========== ========== ==========
Diluted Earnings (Loss) Per Common Share $ (0.23) $ 0.27 $ 0.54 $ 0.61
========== ========== ========== ==========
There were approximately 16,000 and 59,900 options outstanding at
September 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
30.8% of the Company's 2003 third quarter average earning asset base, is managed
to minimize interest rate risk, maintain sufficient liquidity, and maximize
return. The portfolio includes several callable agency debentures, adjustable
rate mortgage pass-throughs, and collateralized mortgage obligations. 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)
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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. 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 $235,508 at September 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 September 30, 2003 and December
31, 2002:
September 30, 2003
----------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
---------- ---------- ----------
U.S. government agencies $ 26,231 $ 536 $ --
States and political subdivisions 32,756 1,633 (35)
U.S. government mortgage-backed securities 142,043 1,164 (1,084)
Collateralized mortgage obligations and
other asset backed securities 6,581 205 (39)
Corporate bonds 10,603 610 --
Equity securities 17,294 24 (5)
---------- ---------- ----------
$ 235,508 $ 4,172 $ (1,163)
========== ========== ==========
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)
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Note 4. Loans
The Company offers a broad range of products, including agribusiness,
commercial, residential, and installment loans, designed to meet the credit
needs of its borrowers. The Company concentrates its lending activity in the
geographic market areas that it serves, generally lending to consumers and small
to mid-sized businesses from 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.
The following table describes the composition of loans by major categories
outstanding as of September 30, 2003 and December 31, 2002:
September 30, 2003 December 31, 2002
----------------------------- -----------------------------
$ % $ %
------------ ------------ ------------ ------------
Commercial $ 94,663 19.60% $ 100,189 20.73%
Agricultural 36,425 7.54 36,467 7.55
Real estate:
Commercial mortgages 147,113 30.45 147,253 30.47
Construction 29,717 6.15 24,486 5.07
Agricultural 38,351 7.94 34,688 7.18
1-4 family mortgages 92,198 19.09 79,846 16.52
Real estate loans held for sale 2,473 0.51 7,565 1.56
Installment 39,606 8.20 49,949 10.34
Other 2,496 0.52 2,786 0.58
------------ ------------ ------------ ------------
Total loans 483,042 100.00% 483,229 100.00%
============ ============
Allowance for loan losses (9,082) (6,450)
------------ ------------
Loans, net $ 473,960 $ 476,779
============ ============
7.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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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 nine months ended September 30, 2003 and 2002 are summarized
below:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Beginning balance $ 7,253 7,514 $ 6,450 6,295
Charge-offs:
Commercial 2,422 1,072 3,058 2,009
Real estate mortgages 54 106 373 419
Installment and other loans 174 118 566 444
---------- ---------- ---------- ----------
Total charge-offs 2,650 1,296 3,997 2,872
---------- ---------- ---------- ----------
Recoveries:
Commercial 89 62 294 256
Real estate mortgages 4 -- 43 28
Installment and other loans 30 9 67 45
---------- ---------- ---------- ----------
Total recoveries 123 71 404 329
---------- ---------- ---------- ----------
Net charge-offs 2,527 1,225 3,593 2,543
---------- ---------- ---------- ----------
Provision for loan losses 4,356 519 6,225 3,056
---------- ---------- ---------- ----------
Ending balance $ 9,082 $ 6,808 $ 9,082 $ 6,808
========== ========== ========== ==========
Period end total loans, net of
unearned interest $ 483,042 $ 489,148 $ 483,042 $ 489,148
========== ========== ========== ==========
Average loans $ 485,989 $ 485,410 $ 483,374 $ 489,199
========== ========== ========== ==========
Ratio of net charge-offs to
average loans 0.52% 0.25% 0.74% 0.52%
Ratio of provision for loan losses
to average loans 0.90% 0.11% 1.29% 0.62%
Ratio of allowance for loan losses
to ending total loans 1.88% 1.39% 1.88% 1.39%
Ratio of allowance for loan losses
to total nonperforming loans 89.01% 120.79% 89.01% 120.79%
Ratio of allowance at end of period
to average loans 1.87% 1.40% 1.88% 1.39%
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.
Nine Months Ended
----------------------------------------------
September 30, 2003
----------------------------------------------
Banking Other Consolidated
Segment Segments Totals
------------ ------------ ------------
Net interest income (loss) $ 19,636 $ (255) $ 19,381
Other revenue 8,065 2,880 10,945
Other expense 14,240 5,743 19,983
Segment profit (loss) 6,223 (3,469) 2,754
Noncash items
Depreciation 858 328 1,186
Provision for loan losses 6,225 -- 6,225
Other intangibles 155 23 178
Segment assets 789,807 2,674 792,481
Nine Months Ended
----------------------------------------------
September 30, 2002
----------------------------------------------
Banking Other Consolidated
Segment Segments Totals
------------ ------------ ------------
Net interest income (loss) $ 19,027 $ (259) $ 18,768
Other revenue 6,270 2,631 8,901
Other expense 14,814 5,114 19,928
Segment profit (loss) 6,411 (3,159) 3,252
Noncash items
Depreciation 738 392 1,130
Provision for loan losses 3,056 -- 3,056
Other intangibles 285 18 303
Segment assets 764,112 5,732 769,844
9.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Note 8. Recent 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. Management determined that, upon adopting the
new standards the Company's operating results or financial condition was not be
materially affected.
In November 2002, the FASB issued FASB Interpretation ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", an interpretation of SFAS No. 5,
57, and 107 and Rescission of FIN 34. This Interpretation clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies," relating to the
guarantor's accounting for and disclosure of the issuance of certain types of
guarantees. The disclosure provisions of the Interpretation are effective for
financial statements in interim or annual reports for periods that end after
December 15, 2002. However, the provisions for initial recognition and
measurement are effective on a prospective basis for guarantees that are issued
or modified after December 31, 2002, irrespective of the guarantor's year-end.
The application of this Interpretation did not have a material impact on the
Company's consolidated statement of financial condition or consolidated
statement of income.
In January 2003, FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 requires a company to consolidate a variable interest
entity ("VIE") if the company has variable interests that give it a majority of
the expected losses or a majority of the expected residual returns of the
entity. FIN 46 is effective immediately for VIEs created after January 31, 2003.
For VIEs created prior to February 1, 2003, FIN 46 will apply in the first
interim period or fiscal year beginning after September 15, 2003. Management
believes the implementation of FIN 46 will not have a material impact on the
Company's financial statements.
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 nine months ended September 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 nine months
ended September 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.
Third Quarter
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, 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.
Second Quarter
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.
12.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
First Quarter
On March 28, 2003 UnionBank/Central, a stand-alone bank subsidiary, was
merged into the Company's flagship bank, UnionBank. Consolidation of these
entities is expected to provide several benefits to the organization including
an improved utilization of personnel as a result of the consolidation of various
backroom functions, which will result in a reduction in duplicated job functions
and a lessening of various administrative and operational tasks. Simplified
financial reporting, the elimination of inter-company banking transactions and a
flatter, more efficient management structure will improve the Company's
workflow, while an increased legal lending limit and additional product and
service offerings in our cross-over markets will be advantageous to our existing
and future customer base. Since UnionBank/Central was under common control, the
merger was accounted for at UnionBank/Central's carrying amount which had no
impact on the consolidated financial statements.
Results of Operations
Net Income (Loss)
Net income (loss) equaled ($869) or ($0.23) per diluted share for the
three months ended September 30, 2003, versus $1,146 or $0.27 per diluted share
for the same period in 2002. For the nine months ended September 30, 2003, net
income equaled $2,384 or $0.54 per diluted share compared to $2,640 or $0.61 per
diluted share earned in the same period during 2002.
The Company's quarterly results were adversely impacted by a $3,837
increase in the provision for loan losses as compared to the third quarter of
2002. This increase was due to the further deterioration of two impaired
commercial credits previously identified in the Company's June 30, 2003 Form
10-Q. As a result of the continued deterioration of these two loan
relationships, the Company specifically provided $3,500 (or approximately $0.53
per fully diluted share, net after-tax) to its allowance for loan losses during
the third quarter of 2003 for the losses incurred on these two credits.
Positively contributing to earnings were increases in operating
performance of the mortgage banking division, other fee based revenue
product-lines, and net interest income due to a lower cost of funds and a shift
in the deposit mix. These improvements were partially offset by an increase in
salaries and employee benefits incurred to support the growing level of business
activity and continued investments in the Company.
Return on average assets was (0.45)% for the third quarter of 2003
compared to 0.60% for the same period in 2002. Return on average assets was
0.41% for the nine month period ended September 30, 2003 compared to 0.47% for
the same period in 2002.
Return on average stockholders' equity was (4.98)% for the third
quarter of 2003 compared to 6.82% for the same period in 2002. Return on average
stockholders' equity was 4.57% for the nine month period ended September 30,
2003 compared to 5.38% 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
13.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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 $6,717 for the
third quarter ended September 30, 2003, compared with $6,599 earned during the
same period in 2002. This represented an increase of $118 or 1.8%. The
improvement in net interest income is attributable to the quarter-over-quarter
reduction of interest expense paid on interest bearing liabilities totaling
$1,104 exceeding the quarter-over-quarter reduction of interest income earned on
interest earning assets totaling $986.
The $986 reduction in interest income resulted from a decrease of
$1,112 related to rate partially offset by an increase of $126 due to volume.
The majority of the change in interest income was related to a 44 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 $1,104 reduction in interest
expense resulted from decreases of $1,103 associated with rate and $1 associated
with volume. The majority of the change was attributable to a 79 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 increased 2 basis points to 3.76% in the third
quarter 2003 from 3.74% during the same period in 2002. The relatively unchanged
margin in the third quarter 2003 resulted primarily from a decrease in funding
rates due to the continued low interest rate environment. Also contributing to
the change were 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 for the remainder of 2003.
Net interest income, on a tax equivalent basis, for the nine months
ended September 30, 2003 totaled $20,051, representing an increase of $567 or
2.9% over the $19,484 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 $3,438 exceeding the
year-over-year reduction of interest income earned on interest earning assets
totaling $2,871. The net interest margin for the first nine months of 2003
increased 3 basis points to 3.77% compared to 3.74% for the same period in 2002.
14.
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.
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 Three Months Ended September 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 $ 186 $ 1 2.13% $ 211 $ 1 1.88% $ -- $ -- --
Securities (1)
Taxable 186,752 1,502 3.19 171,942 1,865 4.30 150 (513) (363)
Non-taxable (2) 31,128 575 7.33 34,704 641 7.33 (20) (46) (66)
--------- -------- ------- --------- ------- ------- ------- ------- -------
Total securities (tax equivalent) 217,880 2,077 3.78 206,646 2,506 4.81 130 (559) (429)
--------- -------- ------- --------- ------- ------- ------- ------- -------
Federal funds sold 4,091 14 1.36 8,188 36 1.74 (15) (7) (22)
--------- -------- ------- --------- ------- ------- ------- ------- -------
Loans (3)(4)
Commercial 132,466 1,958 5.86 141,810 2,427 6.79 (152) (317) (469)
Real estate 310,517 5,396 6.89 291,544 5,323 7.24 337 (264) 73
Installment and other 43,006 1,046 9.65 52,056 1,185 9.03 (216) 77 (139)
--------- -------- ------- --------- ------- ------- ------- ------- -------
Gross loans (tax equivalent) 485,989 8,400 6.86 485,410 8,935 7.30 (31) (504) (535)
--------- -------- ------- --------- ------- ------- ------- ------- -------
Total interest-earning assets 708,146 10,492 5.88 700,455 11,478 6.50 84 (1,070) (986)
--------- -------- ------- --------- ------- ------- ------- ------- -------
Noninterest-earning assets
Cash and cash equivalents 23,392 20,943
Premises and equipment, net 14,991 14,033
Other assets 28,197 21,802
--------- ---------
Total nonearning assets 66,580 56,778
--------- ---------
Total assets $ 774,726 $ 757,233
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 61,515 $ 70 0.45% $ 49,837 $ 116 0.92% $ 23 $ (69) $ (46)
Money market accounts 111,540 370 1.32 98,195 526 2.13 64 (220) (156)
Savings deposits 49,284 87 0.70 49,383 149 1.20 -- (62) (62)
Time deposits 314,715 2,369 2.99 342,450 3,266 3.78 (251) (646) (897)
Federal funds purchased and
repurchase agreements 5,345 26 1.93 5,015 46 3.64 3 (23) (20)
Advances from FHLB 72,657 771 4.21 57,047 690 4.80 173 (92) 81
Notes payable 7,939 82 4.10 9,291 86 3.67 (13) 9 (4)
--------- -------- ------- --------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 622,995 3,775 2.40 611,218 4,879 3.17 (1) (1,103) (1,104)
--------- -------- ------- --------- ------- ------- ------- ------- -------
Noninterest-bearing liabilities
Noninterest-bearing deposits 75,591 72,165
Other liabilities 6,888 6,307
--------- ---------
Total noninterest-bearing liabilities 82,479 78,472
--------- ---------
Stockholders' equity 69,252 67,543
--------- ---------
Total liabilities and stockholders'
equity $ 774,726 $ 757,233
========= =========
Net interest income (tax equivalent) $ 6,717 $ 6,599 $ 85 $ 33 $ 118
======== ======= ======= ======= =======
Net interest income (tax equivalent)
to total earning assets 3.76% 3.74%
======= =======
Interest-bearing liabilities to
earning assets 87.98% 87.26%
========= =========
- ----------------------------
(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)
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Nine Months Ended September 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 $ 251 $ 4 2.13% $ 775 $ 8 1.38% $ (9) $ 5 $ (4)
Securities (1)
Taxable 190,825 5,079 3.56 163,593 5,507 4.50 1,174 (1,602) (428)
Non-taxable (2) 31,748 1,776 7.48 35,033 1,936 7.39 18 (178) (160)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Total securities (tax equivalent) 222,573 6,855 4.12 198,626 7,443 5.01 1,192 (1,780) (588)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Federal funds sold 4,817 42 1.17 8,145 95 1.56 (33) (20) (53)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Loans (3)(4)
Commercial 133,577 6,242 6.25 141,132 7,408 7.02 (382) (784) (1,166)
Real estate 303,318 15,731 6.93 296,491 16,490 7.44 569 (1,328) (759)
Installment and other 46,479 3,291 9.47 51,576 3,592 9.31 (397) 96 (301)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Gross loans (tax equivalent) 483,374 25,264 6.99 489,199 27,490 7.51 (210) (2,016) (2,226)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Total interest-earning assets 711,015 32,165 6.05 696,745 35,036 6.72 940 (3,811) (2,871)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 21,973 19,835
Premises and equipment, net 14,525 13,564
Other assets 31,339 21,326
-------- --------
Total nonearning assets 67,837 54,725
-------- --------
Total assets $778,852 $751,470
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $56,171 $ 227 0.54% $ 45,841 $ 366 1.07% $ 108 $ (247) $ (139)
Money market accounts 106,648 1,161 1.46 81,030 1,275 2.10 470 (584) (114)
Savings deposits 49,570 287 0.77 50,595 500 1.32 (10) (203) (213)
Time deposits 330,549 7,868 3.18 367,100 11,209 4.08 (1,039) (2,302) (3,341)
Federal funds purchased and
repurchase agreements 6,401 96 2.01 4,930 124 3.36 45 (73) (28)
Advances from FHLB 69,199 2,228 4.30 48,372 1,813 5.01 829 (414) 415
Notes payable 8,054 247 4.10 9,294 265 3.81 (46) 28 (18)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Total interest-bearing liabilities 626,592 12,114 2.58 607,162 15,552 3.42 357 (3,795) (3,438)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 74,808 71,299
Other liabilities 7,691 7,345
-------- --------
Total noninterest-bearing liabilities 82,499 78,644
-------- --------
Stockholders' equity 69,761 65,664
-------- --------
Total liabilities and stockholders'
equity $778,852 $751,470
======== ========
Net interest income (tax equivalent) $ 20,051 $ 19,484 $ 583 $ (16) $ 567
======== ======== ======== ======== ========
Net interest income (tax equivalent) to
total earning assets 3.77% 3.74%
======= =======
Interest-bearing liabilities to earning
assets 88.13% 87.14%
======== ========
- ----------------------------
(1) Average balance and average rate on securities classified as
available-for-sal 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.
17.
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
third quarter of 2003 totaled $4,356, an increase of $3,837 from the $519
recorded during the same period a year ago. The provision for loan losses
charged to operating expense for the nine months ended September 30, 2003
totaled $6,225, an increase of $3,169 from the $3,056 recorded during the same
period a year ago.
The provision for loan losses for the three months ended September 30,
2003 was largely attributable to the further deterioration of two impaired
commercial credits previously identified in the Company's June 30, 2003 Form
10-Q. As a result of the continued deterioration of these two loan
relationships, the Company specifically provided $3,500 to its allowance for
loan losses during the third quarter of 2003 for the losses incurred on these
two credits.
The action comes as a result of management's ongoing workout analysis
of these two commercial loan relationships and their current financial status
and trends. Primary elements of the debtor corporations filed bankruptcy
reorganization proceedings in early September. In both instances, these credits
were worth substantially more as ongoing entities than the liquidation of their
assets. During the third quarter, the $3,778 loan to a chain of retail
convenience outlets was placed on non-accrual. The second credit, a $2,521 loan
to a company which conducted business in the agricultural field was placed on
nonaccrual status in the second quarter of 2003. The company essentially ceased
operations during the third quarter of 2003 resulting in $1,897 of the
outstanding loan balance being charged off.
Net charge-offs for the third quarter of 2003 were $2,527 compared with
$1,225 in 2002. Annualized net charge-offs increased to 0.52% of average loans
for the third quarter of 2003 compared to 0.25% in the same period in 2002. As
previously discussed, the Company charged off $1,897 of the outstanding loan
balance of the $2,521 loan to a company which conducted business in the
agricultural field. This accounts for approximately 75% of the net charge-offs
for the third quarter of 2003. Net charge-offs for the nine months ended
September 30, 2003 were $3,593 compared with $2,543 in 2002. Annualized net
charge-offs increased to 0.74% of average loans for the nine months ended
September 30, 2003 compared to 0.52% 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.
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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Service charges $ 790 $ 708 $ 2,340 $ 1,953
Merchant fee income 39 330 528 881
Trust income 180 180 503 551
Mortgage banking income 1,101 678 3,322 1,877
Insurance commissions and fees 580 558 1,815 1,602
Securities gains, net 59 107 280 407
Other income 510 499 2,157 1,630
---------- ---------- ---------- ----------
$ 3,259 $ 3,060 $ 10,945 $ 8,901
========== ========== ========== ==========
Noninterest income totaled $3,259 for the three months ended September
30, 2003, compared to $3,060 for the same time frame in 2002. Excluding
securities gains, noninterest income totaled $3,200 compared to $2,953 for the
same period in 2002, representing an increase of $247 or 8.4%.
The majority of the change to noninterest income was related to a $423
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 third quarter of 2003 due to higher mortgage origination volume and lower
interest rates. Originations for the third quarter of 2003 grew to $82,388 from
$49,308 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 and ISP income due to the divestiture of these
product lines in the second quarter.
Noninterest income totaled $10,945 for the nine months ended September
30, 2003, compared to $8,901 for the same time frame in 2002. Excluding
securities gains and the gains on sale of the ISP and POS product lines,
noninterest totaled $10,355 compared to $8,494 for the same period in 2002,
representing an increase of $1,861 or 21.9%. The change was largely reflective
of the same items discussed regarding the third 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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Salaries and employee benefits $ 4,256 $ 3,747 $ 12,065 $ 11,354
Occupancy expense, net 478 469 1,446 1,360
Furniture and equipment expense 518 474 1,535 1,349
Supplies and printing 111 110 359 380
Telephone 199 241 737 768
Other real estate owned expense -- 544 168 718
Amortization of intangible assets 72 101 178 303
Other expenses 1,527 1,754 4,859 5,129
---------- ---------- ---------- ----------
$ 7,161 $ 7,440 $ 21,347 $ 21,361
========== ========== ========== ==========
Noninterest expense totaled $7,161 for the three months ended September
30, 2003, as compared to $7,440 for the same timeframe in 2002. This represented
a decrease of $279 or 3.8%. A majority of the decrease in noninterest expense
was due to a $544 decrease in other real estate owned expense due to the
resolution of foreclosed assets. Also contributing to the change was a decrease
in merchant expense due to the divestiture of the POS product line in the second
quarter (included in other expenses).
These decreases were partially offset by a $509 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. The remaining categories remained relatively
stable with only slight quarter-over-quarter changes.
Noninterest expense totaled $21,347 for the nine months ended September
30, 2003, decreasing by $14 or 0.1% 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 nine months ended September 30, 2003 and 2002.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2003 2002 2003 2002
---------- --------- --------- ---------
Income before income taxes $ (1,759) $ 1,460 $ 2,754 $ 3,252
Applicable income taxes (890) 314 370 612
Effective tax rates -- 21.5% 13.4% 18.9%
The Company recorded an income tax benefit of $890 and an income tax
expense of $314 for the three months ended September 30, 2003 and 2002,
respectively. The Company recorded income tax expense of $370 and $612 for the
nine months ended September 30, 2003 and 2002, respectively. Effective tax rates
equaled 13.4% and 18.9% respectively, for such periods.
The Company's effective tax rate was lower than statutory rates due to
several factors. First, the Company derives interest income from municipal
securities and loans, which are exempt from federal tax and certain U.S.
government agency securities, which are exempt from Illinois state tax. Second,
the Company has reduced tax expense through various tax planning initiatives.
Preferred Stock Dividends
The Company paid $65 of preferred stock dividends for the three months
ended September 30, 2003 and 2002, respectively. The Company paid $193 of
preferred stock dividends for the nine months ended September 30, 2003 and 2002,
respectively.
Interest Rate Sensitivity Management
The business of the Company and the composition of its balance sheet
consist of investments in interest-earning assets (primarily loans and
securities) which are primarily funded by interest-bearing liabilities (deposits
and borrowings). All of the financial instruments of the Company are for other
than trading purposes. Such financial instruments have varying levels of
sensitivity to changes in market rates of interest. The operating income and net
income of the Banks depend, to a substantial extent, on "rate differentials,"
i.e., the differences between the income the Banks receive from loans,
securities, and other earning assets and the interest expense they pay to obtain
deposits and other liabilities. These rates are highly sensitive to many factors
that are beyond the control of the Banks, including general economic conditions
and the policies of various governmental and regulatory authorities.
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 decrease in market rates. The tables below
present the Company's projected changes in net interest income for the various
rate shock levels at September 30, 2003 and December 31, 2002.
September 30, 2003
---------------------------
Net Interest Income
---------------------------
Amount Change Change
------- ------- -------
(Dollars in Thousands)
+200 bp $23,490 $ 619 2.71%
+100 bp 23,212 341 1.49
Base 22,871 -- --
-100 bp 22,403 (468) (2.05)
Based upon the Company's model at September 30, 2003, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by $619 or 2.71%. The effect of an immediate 100
basis point decrease in rates would decrease the Company's net interest income
by $468 or 2.05%. For the September 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 $822 or 3.25%. The effect of an immediate 200
basis point decrease in rates would decrease the Company's net interest income
by $1,528 or 6.03%.
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 September 30, 2003, the Company had total assets of $792,481,
total gross loans of $483,042, total deposits of $622,952 and total
stockholders' equity of $67,989. Total assets increased by $865 or 0.1% from
year-end 2002. Total gross loans decreased by $187 or 0.1% from year-end 2002
and reflected tighter underwriting standards, a continued softening of overall
loan demand, and normal paydowns. Total deposits decreased by $19,006 or 3.0%
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. 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
---------------------------------- -----------------------
Sept 30, Jun 30, Mar 31, Dec 31, Sep 30,
---------- ---------- ---------- ---------- ----------
Nonaccrual loans $ 8,095 $ 4,415 $ 3,943 $ 3,931 $ 4,399
Loans 90 days past due and still accruing interest 2,108 1,748 129 829 1,237
---------- ---------- ---------- ---------- ----------
Total nonperforming loans 10,203 6,163 4,072 4,760 5,636
Other real estate owned 145 320 1,260 1,557 2,524
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 10,348 $ 6,483 $ 5,332 $ 6,317 $ 8,160
========== ========== ========== ========== ==========
Nonperforming loans to total end of period loans 2.11% 1.29% 0.86% 0.99% 1.15%
Nonperforming assets to total end of period loans 2.14 1.36 1.13 1.31 1.67
Nonperforming assets to total end of period assets 1.30 0.84 0.68 0.80 1.06
The level of nonperforming loans at September 30, 2003 increased to
$10,203 versus the $4,760 that existed as of December 31, 2002 and increased
from $5,636 at September 30, 2002. The level of nonperforming loans to total end
of period loans was 2.11% at September 30, 2003, as compared to 0.99% at
December 31, 2002 and 1.15% at September 30, 2002. The reserve coverage ratio
(allowance to nonperforming loans) was reported at 89.01% as of September 30,
2003 as compared to 120.79% as of September 30, 2002 and 135.50% as of December
31, 2002.
As previously discussed in the Provision for Loan Loss Section of the
MD&A, the Company increased its provision for loan losses for the third quarter
of 2003. Approximately 94% or $3,895 of the $4,164 increase in nonaccrual loans,
when compared to December 31, 2002, was due to the further deterioration of two
impaired commercial credits previously identified in the Company's June 30, 2003
Form 10-Q. As a result of the continued deterioration of these two loan
relationships, the Company specifically provided $3,500 to its allowance for
loan losses during the third quarter of 2003 for the losses incurred on these
two credits.
The action comes as a result of management's ongoing workout analysis
of these two commercial loan relationships and their current financial status
and trends. Primary elements of the debtor corporations filed bankruptcy
reorganization proceedings in early September. In both instances, these credits
were worth substantially more as ongoing entities than the liquidation of their
assets. During the third quarter, the $3,778 loan to a chain of retail
convenience outlets was placed on non-accrual. The second credit, a $2,521 loan
to a company which conducted business in the agricultural field was placed on
nonaccrual status in the second quarter of 2003. The company essentially ceased
operations during the third quarter of 2003 resulting in $1,897 of the
outstanding loan balance being charged off.
The $1,412 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.
24.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Other Potential Problem Loans
The Company has other potential problem loans that are currently
performing, but where some concerns exist as to the ability of the borrower to
comply with present loan repayment terms. Excluding nonperforming loans, loans
that management has classified as impaired totaled $2,920 at September 30, 2003
as compared to $3,725 at December 31, 2002. The classification of these loans,
however, does not imply that management expects losses on each of these loans,
but believes that a higher level of scrutiny and close monitoring is prudent
under the circumstances. Such classifications relate to specific concerns for
each individual borrower and do not relate to any concentration risk common to
all loans in this group.
Allowance for Loan Losses
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions; the type of loan being made; the creditworthiness of the
borrower over the term of the loan; and, in the case of a collateralized loan,
the quality of the collateral for such a loan. The allowance for loan losses
represents the Company's estimate of the allowance necessary to provide for
probable incurred losses in the loan portfolio. In making this determination,
the Company analyzes the ultimate collectibility of the loans in its portfolio,
incorporating feedback provided by internal loan staff, the independent loan
review function, and information provided by examinations performed by
regulatory agencies. The Company makes an ongoing evaluation as to the adequacy
of the allowance for loan losses.
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
25.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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 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 September 30, 2003, the allowance for loan losses was $9,082 or
1.88% of total loans as compared to $6,450 or 1.33% at December 31, 2002, and
$6,808 or 1.39% at September 30, 2002. The change from December 31, 2002 is due
to 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.
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 classifies all of its securities as available-for-sale,
thereby maintaining significant liquidity. The Company's liquidity position is
further enhanced by structuring its loan portfolio interest payments as monthly
and by the significant representation of retail credit and residential mortgage
loans in the Company's loan portfolio, resulting in a steady stream of loan
repayments. In managing its investment portfolio, the Company provides for
staggered maturities so that cash flows are provided as such investments mature.
The Company's cash flows are comprised of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Cash flows used in investing activities offset
by those provided by operating activities and financing activities, resulted in
a net decrease in cash and cash equivalents of $5,256 from December 31, 2002 to
September 30, 2003.
During the first nine months of 2003, the Company experienced net cash
outflows of ($20,448) in investing activities primarily due to purchases of
securities. In contrast, net cash inflows were provided by $13,061 in operating
activities due to proceeds from net loans sales and net income; and $2,131 in
financing activities due to increases in repurchase agreements and FHLB advances
partially offset by a net decrease in deposits.
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 September 30, 2003 was $67,989, a decrease of $75 or
0.1%, from December 31, 2002. The stockholders' equity decrease was largely the
result of earnings for the first nine months of 2003 less dividends paid to
shareholders and a decrease in accumulated other comprehensive income. Average
quarterly equity as a percentage of average quarterly assets was 8.9% at
September 30, 2003, compared to 8.6% at December 31, 2002. Book value per common
share equaled $16.87 at September 30, 2003, a slight decrease 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
27.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
allowance that may be included in capital is limited to 1.25% of risk-weighted
assets. The ratio of Tier 1 (core) and the combined amount of Tier 1 (core) and
Tier 2 (supplementary) capital to risk-weighted assets for the Company was
10.80% and 12.20%, respectively, at September 30, 2003. The Company is
currently, and expects to continue to be, in compliance with these guidelines.
As of September 30, 2003, the Tier 2 risk-based capital was comprised
of $6,964 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.
The following table sets forth an analysis of the Holding Company's
capital ratios:
December 31, Minimum Well
September 30, ---------------------------- Capital Capitalized
2003 2002 2001 Ratios Ratios
------------ ------------ ------------ ------ ------
Tier 1 risk-based capital $ 60,165 $ 58,755 $ 55,911
Tier 2 risk-based capital 7,795 7,281 7,126
------------ ------------ ------------
Total capital 67,960 66,036 63,037
Risk-weighted assets 557,086 557,620 540,626
Capital ratios
Tier 1 risk-based capital 10.80% 10.54% 10.34% 4.00% 6.00%
Tier 2 risk-based capital 12.20 11.84 11.66 8.00 10.00
Leverage ratio 7.63 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.
28.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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. Management determined that, upon adopting the
new standards the Company's operating results or financial condition was not be
materially affected.
In November 2002, the FASB issued FASB Interpretation ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", an interpretation of SFAS No. 5,
57, and 107 and Rescission of FIN 34. This Interpretation clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies," relating to the
guarantor's accounting for and disclosure of the issuance of certain types of
guarantees. The disclosure provisions of the Interpretation are effective for
financial statements in interim or annual reports for periods that end after
December 15, 2002. However, the provisions for initial recognition and
measurement are effective on a prospective basis for guarantees that are issued
or modified after December 31, 2002, irrespective of the guarantor's year-end.
The application of this Interpretation did not have a material impact on the
Company's consolidated statement of financial condition or consolidated
statement of income.
In January 2003, FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 requires a company to consolidate a variable interest
entity ("VIE") if the company has variable interests that give it a majority of
the expected losses or a majority of the expected residual returns of the
entity. FIN 46 is effective immediately for VIEs created after January 31, 2003.
For VIEs created prior to February 1, 2003, FIN 46 will apply in the first
interim period or fiscal year beginning after September 15, 2003. Management
believes the implementation of FIN 46 will not have a material impact on the
Company's financial statements.
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 21 of this Form 10-Q under the caption "Interest
Rate Sensitivity Management" and the discussion immediately above under the
caption "Impact of Inflation, Changing Prices, and Monetary Policies."
Item 4. Controls and Procedures
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
September 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 September 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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
31.1 Certification of Dewey R. Yaeger 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.
Reports on Form 8-K:
On August 15, 2003, the Company filed a Form 8-K/A, under Item 9
"Regulation FD Disclosure (Information provided under Item 12 - Results
of Operations and Financial Condition)" reporting that on July 18, 2003
the Company had issued a press release entitled "UNIONBANCORP, INC.
REPORTS RECORD SECOND QUARTER EARNINGS" announcing its preliminary
results of operations for the quarter ended June 30, 2003. A copy of
the press release was furnished as Exhibit 99.1 to a report on Form 8-K
filed by UnionBancorp, Inc. on July 21, 2003. This report on Form 8-K/A
amends the report on Form 8-K filed by UnionBancorp, Inc. on July 21,
2003 to restate in its entirety the press release furnished as Exhibit
99.1 thereto.
On July 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 June 30, 2003.
30.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on November 13, 2003.
UNIONBANCORP, INC.
By: /s/ DEWEY R. YAEGER
-------------------------------------
Dewey R. Yaeger
President and Principal Executive
Officer
By: /s/ KURT R. STEVENSON
-------------------------------------
Kurt R. Stevenson
Vice President and Principal
Financial and Accounting Officer
31.
UNIONBANCORP, INC.
EXHIBIT INDEX
TO
QUARTERLY REPORT ON FORM 10-Q
Exhibit
No. Description
--- -----------
31.1 Certification of Dewey R. Yaeger 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.
32.