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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
Commission File Number: 0-28846
UnionBancorp, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 36-3145350
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
321 West Main Street Ottawa, Illinois 61350
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(Address of principal executive offices including zip code)
(815) 431-2720
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Exchange Class which Registered
- --------------------------------------------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($1.00 par value)
(Title of Class)
Preferred Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Shares outstanding at May 13, 2004
----------------------------- ----------------------------------
Common Stock, Par Value $1.00 4,035,900
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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 and
Comprehensive Income ......................................2
o Unaudited Consolidated Statements of Cash Flows................3
o Notes to Unaudited Consolidated Financial Statements...........4
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition.......................................10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.............................................24
Item 4. Controls and Procedures ...........................................24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................25
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases
of Equity Securities..........................................25
Item 3. Defaults Upon Senior Securities....................................25
Item 4. Submission of Matters to a Vote of Security Holders................25
Item 5. Other Information..................................................25
Item 6. Exhibits and Reports on Form 8-K...................................26
SIGNATURES..................................................................27
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
March 31, 2004 and December 31, 2003 (In Thousands, Except Share Data)
- -----------------------------------------------------------------------------------------------------------
March 31, December 31,
2004 2003
------------ ------------
ASSETS
Cash and cash equivalents $ 19,585 $ 22,198
Securities available-for-sale 250,282 252,248
Loans 466,591 476,812
Allowance for loan losses (9,882) (9,011)
------------ ------------
Net loans 456,709 467,801
Cash surrender value of life insurance 14,551 14,379
Mortgage servicing rights 2,792 2,775
Premises and equipment, net 16,735 16,576
Goodwill 7,642 7,642
Intangible assets, net 1,180 1,232
Other real estate 246 227
Other assets 6,677 8,344
------------ ------------
Total assets $ 776,399 $ 793,422
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 81,923 $ 89,424
Interest-bearing 533,052 548,608
------------ ------------
Total deposits 614,975 638,032
Federal funds purchased and securities sold
under agreements to repurchase 4,435 1,533
Advances from the Federal Home Loan Bank 74,700 72,450
Notes payable 7,816 7,873
Series B mandatory redeemable preferred stock 831 831
Other liabilities 5,023 4,656
------------ ------------
Total liabilities 707,780 725,375
------------ ------------
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;
4,636,663 shares issued at March 31, 2004 and
4,627,613 shares issued at December 31, 2003 4,637 4,628
Surplus 22,549 22,484
Retained earnings 43,993 43,609
Accumulated other comprehensive income 2,253 2,141
Unearned compensation under stock option plans -- (2)
------------ ------------
73,932 73,360
Treasury stock, at cost; 600,763 shares at March 31, 2004
and December 31, 2003 (5,313) (5,313)
------------ ------------
Total stockholders' equity 68,619 68,047
------------ ------------
Total liabilities and stockholders' equity $ 776,399 $ 793,422
============ ============
See Accompanying Notes to Unaudited Financial Statements
1.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended March 31, 2004 and 2003 (In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------
2004 2003
---------- ----------
Interest income
Loans $ 7,268 $ 8,541
Securities
Taxable 1,905 1,886
Exempt from federal income taxes 325 395
Federal funds sold and other 10 18
---------- ----------
Total interest income 9,508 10,840
Interest expense
Deposits 2,831 3,458
Federal funds purchased and securities sold
under agreements to repurchase 13 30
Advances from the Federal Home Loan Bank 771 687
Series B mandatory redeemable preferred stock 12 --
Notes payable 80 84
---------- ----------
Total interest expense 3,707 4,259
---------- ----------
Net interest income 5,801 6,581
Provision for loan losses 750 612
---------- ----------
Net interest income after
Provision for loan losses 5,051 5,969
Noninterest income
Service charges 711 756
Merchant fee income 56 279
Trust income 184 177
Mortgage banking income 568 1,029
Insurance commissions and fees 633 594
Securities gains, net -- 92
Gain on sale of the credit card portfolio 259 --
Other income 513 672
---------- ----------
2,924 3,599
Noninterest expenses
Salaries and employee benefits 4,150 3,830
Occupancy expense, net 552 498
Furniture and equipment expense 557 493
Supplies and printing 115 126
Telephone 154 257
Other real estate owned expense 7 128
Amortization of intangible assets 52 54
Other expenses 1,392 1,631
---------- ----------
6,979 7,017
---------- ----------
Income before income taxes 996 2,551
Income taxes 196 744
---------- ----------
Net income 800 1,807
Preferred stock dividends 52 64
---------- ----------
Net income for common stockholders $ 748 $ 1,743
========== ==========
Basic earnings per share $ 0.19 $ 0.44
========== ==========
Diluted earnings per common share $ 0.18 $ 0.43
========== ==========
Total comprehensive income $ 912 $ 1,730
========== ==========
See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2004 and 2003 (In Thousands)
- ------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
------------------------
2004 2003
---------- ----------
Cash flows from operating activities
Net income $ 800 $ 1,807
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 504 400
Amortization of intangible assets 52 54
Amortization of unearned compensation under stock option plans 2 7
Amortization of bond premiums, net 375 414
Provision for loan losses 750 612
Securities gains, net -- (92)
Gain on sale of the credit card portfolio (259) --
Loss on sale of real estate acquired in settlement of loans -- 159
Gain on sale of loans (515) (1,242)
Proceeds from sales of loans held for sale 24,087 48,605
Origination of loans held for sale (21,223) (45,675)
Change in assets and liabilities
Net decrease in other assets 1,486 252
Net increase in other liabilities 367 918
---------- ----------
Net cash provided by operating activities 6,426 6,219
Cash flows from investing activities
Securities available-for-sale
Proceeds from maturities and paydowns 20,530 26,369
Proceeds from sales 6,498 4,601
Purchases (25,325) (34,281)
Net decrease in loans 6,333 3,571
Proceeds from sale of the credit card portfolio 1,900 --
Purchase of premises and equipment (663) (638)
Proceeds from sale of real estate acquired in settlement of loans 30 138
---------- ----------
Net cash provided by (used in) investing activities 9,303 (240)
Cash flows from financing activities
Net decrease in deposits (23,057) (15,882)
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 2,902 (752)
Payments on notes payable (57) --
Net increase in advances from the Federal Home Loan Bank 2,250 2,300
Dividends on common stock (403) (359)
Dividends on preferred stock (52) (64)
Proceeds from exercise of stock options 75 45
---------- ----------
Net cash used in financing activities (18,342) (14,712)
---------- ----------
Net increase (decrease) in cash and cash equivalents (2,613) (8,733)
Cash and cash equivalents
Beginning of period 22,198 38,962
---------- ----------
End of period $ 19,585 $ 30,229
========== ==========
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 3,163 $ 4,346
Income taxes -- 325
See Accompanying Notes to Unaudited Financial Statements
3.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements of
UnionBancorp, Inc. (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America and
with the rules and regulations of the Securities and Exchange Commission for
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required for complete financial statements. In the
opinion of management, all normal and recurring adjustments which are necessary
to fairly present the results for the interim periods presented have been
included. The preparation of financial statements requires management to make
estimates and assumptions that affect the recorded amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
For further information with respect to significant accounting policies followed
by the Company in the preparation of its consolidated financial statements,
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 2003. The annualized results of operations during the three months ended
March 31, 2004 are not necessarily indicative of the results expected for the
year ending December 31, 2004. 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
March 31,
-----------------------
2004 2003
---------- ----------
Net income as reported
for common stockholders $ 748 $ 1,743
Deduct: stock-based compensation expense
Determined under fair value based method 30 30
---------- ----------
Pro forma net income $ 718 $ 1,713
========== ==========
Basic earnings
per common share as reported $ 0.19 $ 0.44
Pro forma basic earnings
per common share 0.19 0.43
Diluted earnings
per common share as reported $ 0.18 $ 0.43
Pro forma diluted earnings
per common share 0.18 0.42
4.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Note 2. Earnings Per Share
Basic earnings per share for the three months ended March 31, 2004 and
2003 were computed by dividing net income by the weighted average number of
shares outstanding. Diluted earnings per share for the three months ended March
31, 2004 and 2003 were computed by dividing net income by the weighted average
number of shares outstanding, adjusted for the dilutive effect of the stock
options. Computations for basic and diluted earnings per share are provided
below:
Basic Earnings Per Common Share Three Months Ended
March 31,
-----------------------
2004 2003
---------- ----------
Net income
available to common shareholders $ 748 $ 1,743
Weighted average common shares outstanding 4,031 3,984
---------- ----------
Basic Earnings Per Common Share $ 0.19 $ 0.44
========== ==========
Diluted Earnings Per Common Share
Weighted average common shares outstanding 4,031 3,984
Add: dilutive effect of assumed exercised
stock options 83 61
---------- ----------
Weighted average common and dilutive
Potential shares outstanding 4,114 4,045
========== ==========
Diluted Earnings Per Common Share $ 0.18 $ 0.43
========== ==========
There were approximately 20,000 and 38,450 options outstanding at March
31, 2004 and 2003, respectively, that were not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market price of the common stock and were, therefore, antidilutive.
Note 3. Securities
The Company's consolidated securities portfolio, which represented
31.8% of the Company's 2004 first quarter average earning asset base, is managed
to minimize interest rate risk, maintain sufficient liquidity, and maximize
return. The portfolio includes several callable agency debentures, adjustable
rate mortgage pass-throughs, and collateralized mortgage obligations. Corporate
bonds consist of investment grade obligations of public corporations. Equity
securities consist of Federal Reserve stock, Federal Home Loan Bank stock, and
trust preferred stock. Securities classified as available-for-sale, carried at
fair value, were $250,282 at March 31, 2004 compared to $252,248 at December 31,
2003. The Company does not have any securities classified as trading or
held-to-maturity.
5.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
The following table describes the fair value, gross unrealized gains
and losses of securities available-for-sale at March 31, 2004 and December 31,
2003:
March 31, 2004
-------------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------------ ------------ ------------
U.S. government agencies $ 23,705 $ 390 $ --
States and political subdivisions 28,325 1,575 (20)
U.S. government mortgage-backed securities 164,364 1,386 (446)
Collateralized mortgage obligations 5,698 30 (25)
Equity securities 17,508 68 --
Corporate 10,682 719 --
------------ ------------ ------------
$ 250,282 $ 4,168 $ (491)
============ ============ ============
December 31, 2003
-------------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------------ ------------ ------------
U.S. government agencies 30,270 403 --
States and political subdivisions 29,723 1,473 (42)
U.S. government mortgage-backed securities 158,305 1,392 (398)
Collateralized mortgage obligations 5,972 65 (40)
Equity securities 17,380 23 --
Corporate 10,598 620 --
------------ ------------ ------------
$ 252,248 $ 3,976 $ (480)
============ ============ ============
6.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Note 4. Loans
The Company offers a broad range of products, including agribusiness,
commercial, residential, and installment loans, designed to meet the credit
needs of its borrowers. The Company concentrates its lending activity in the
geographic market areas that it serves, generally lending to consumers and small
to mid-sized businesses from which deposits are garnered in the same market
areas. As a result, the Company strives to maintain a loan portfolio that is
diverse in terms of loan type, industry, borrower and geographic concentrations.
The following table describes the composition of loans by major categories
outstanding as of March 31, 2004 and December 31, 2003:
March 31, 2004 December 31, 2003
-------------------------- -------------------------
$ % $ %
----------- ----------- ----------- -----------
Commercial $ 115,787 24.82% $ 105,767 22.18%
Agricultural 29,944 6.42 33,766 7.08
Real estate:
Commercial mortgages 127,458 27.31 134,985 28.31
Construction 33,009 7.07 30,674 6.43
Agricultural 32,608 6.99 37,092 7.78
1-4 family mortgages 92,228 19.77 94,163 19.75
Installment 34,957 7.49 37,415 7.85
Other 600 0.13 2,950 0.62
----------- ----------- ----------- -----------
Total loans 466,591 100.00% 476,812 100.00%
=========== ===========
Allowance for loan losses (9,882) (9,011)
----------- -----------
Loans, net $ 456,709 $ 467,801
=========== ===========
7.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Note 5. Allowance For Loan Losses
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, current
economic conditions; the type of loan being made; the creditworthiness of the
borrower over the term of the loan; and in the case of a collateralized loan,
the quality of the collateral for such loan. The allowance for loan losses
represents the Company's estimate of the allowance necessary to provide for
probable incurred losses in the loan portfolio. In making this determination,
the Company analyzes the ultimate collectibility of the loans in its portfolio,
incorporating feedback provided by internal loan staff, the independent loan
review function and information provided by examinations performed by regulatory
agencies. The Company makes an ongoing evaluation as to the adequacy of the
allowance for loan losses. Transactions in the allowance for loan losses for the
three months ended March 31, 2004 and 2003 are summarized below:
Three Months Ended
March 31,
--------------------------
2004 2003
---------- ----------
Beginning balance $ 9,011 6,450
Charge-offs:
Commercial 394 388
Real estate mortgages 72 104
Installment and other loans 181 188
---------- ----------
Total charge-offs 647 680
---------- ----------
Recoveries:
Commercial 552 80
Real estate mortgages 193 19
Installment and other loans 23 17
---------- ----------
Total recoveries 768 116
---------- ----------
Net charge-offs (recoveries) (121) 564
---------- ----------
Provision for loan losses 750 612
---------- ----------
Ending balance $ 9,882 $ 6,498
========== ==========
Period end total loans, net of
unearned interest $ 466,591 $ 470,908
========== ==========
Average loans $ 467,350 $ 475,467
========== ==========
Ratio of net charge-offs to
average loans (0.03)% 0.12%
Ratio of provision for loan losses
to average loans 0.16% 0.13%
Ratio of allowance for loan losses
to ending total loans 2.12% 1.38%
Ratio of allowance for loan losses
to total nonperforming loans 138.13% 159.58%
Ratio of allowance at end of period
to average loans 2.11% 1.37%
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, mortgage banking, financial
services, and other operations. Loans, investments, and deposits provide the
revenues in the banking segment; insurance, brokerage, and trust in the
financial services segment; and holding company services are categorized as
other.
The accounting policies used are the same as those described in the
summary of significant accounting policies. Segment performance is evaluated
using net interest income. Information reported internally for performance
assessment follows.
Three Months Ended
---------------------------------------------------------------------------
March 31, 2004
---------------------------------------------------------------------------
Banking Mortgage Financial Other Consolidated
Segment Banking Services Segments Totals
------------ ------------ ------------ ------------ ------------
Net interest income $ 5,750 $ 174 $ -- $ (123) $ 5,801
Other revenue 1,506 562 855 1 2,924
Other expense 3,278 750 1,123 1,828 6,979
Segment profit (loss) 1,466 (9) (175) (482) 800
Noncash items
Depreciation 375 25 43 61 504
Provision for loan losses 750 -- -- -- 750
Other intangibles 52 -- -- -- 52
Goodwill 5,718 -- 1,924 -- 7,642
Segment assets 762,408 5,435 7,423 1,133 776,399
Three Months Ended
---------------------------------------------------------------------------
March 31, 2003
---------------------------------------------------------------------------
Banking Mortgage Financial Other Consolidated
Segment Banking Services Segments Totals
------------ ------------ ------------ ------------ ------------
Net interest income $ 6,350 $ 316 $ (3) $ (82) $ 6,581
Other revenue 1,649 1,011 823 116 3,599
Other expense 4,159 972 1,014 872 7,017
Segment profit (loss) 2,257 242 (121) (571) 1,807
Noncash items
Depreciation 254 24 41 81 400
Provision for loan losses 612 -- -- -- 612
Other intangibles 52 -- -- 2 54
Goodwill 5,718 -- 1,924 -- 7,642
Segment assets 763,929 9,748 5,183 564 779,424
9.
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
ended March 31, 2004 as compared to the same periods in 2003. 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 2003 Annual Report on Form 10-K. Annualized
results of operations during the three months ended March 31, 2004 are not
necessarily indicative of results to be expected for the full year of 2004.
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
10.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
allowance is available for any loan that, in management's judgment, should be
charged off. Loan losses are charged against the allowance when management
believes that the uncollectibility of a loan balance is confirmed.
Mortgage Servicing Rights: Servicing assets represent purchased rights
and the allocated value of retained servicing rights on loans sold. Servicing
assets are expensed in proportion to, and over the period of, estimated net
servicing revenues. Impairment is evaluated based on the fair value of the
assets, using groupings of the underlying loans as to interest rates and then,
secondarily, as to geographic and prepayment characteristics. Fair value is
determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions.
Any impairment of a grouping is reported as a valuation allowance.
General
UnionBancorp, Inc. (the "Company") is a bank holding company organized
under the laws of the state of Delaware. The Company derives most of its
revenues and income from the operations of its banking subsidiaries (the
"Banks"), but also derives revenue from its nonbank subsidiary, UnionFinancial
Services & Trust Company ("UnionFinancial"). The Company provides a full range
of services to individual and corporate customers located in the north central
and west central Illinois areas. These services include demand, time, and
savings deposits; lending; mortgage banking; insurance products; brokerage
services; asset management; and trust services. The Company is subject to
competition from other financial institutions, including banks, thrifts and
credits unions, as well as nonfinancial institutions providing financial
services. Additionally, the Company and the Banks are subject to regulations of
certain regulatory agencies and undergo periodic examinations by those
regulatory agencies.
On March 19, 2004 UnionBank/West and UnionBank/Northwest, stand-alone
bank subsidiaries, were 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/West and UnionBank/Northwest were under common control, the merger was
accounted for at UnionBank/West's and UnionBank/Northwest's carrying amount
which had no impact on the consolidated financial statements.
The Board of Directors of UnionBancorp, Inc., in a continuing effort to
enhance shareholder value, approved the payment of an 11.1% increase in the
quarterly cash dividend to $0.10 from $0.09 on the Company's common stock during
the first quarter, marking the 76th consecutive quarter of dividends paid to
stockholders.
In an effort to divest of high risk low profit margin product lines,
the Company sold its credit card portfolio. Total outstanding balances sold
approximated $1,900. The impact to earnings, net of taxes, was approximately
$0.04 per diluted share.
11.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Results of Operations
Net Income
Net income equaled $800 or $0.18 per diluted share for the three months
ended March 31, 2004, versus $1,807 or $0.43 per diluted share for the same
period in 2003. This represents a 56% decrease in net income.
The Company's quarterly results were adversely impacted by a decrease
in net interest income due to a reduction in loan yields and a shift in the
earning-asset mix from higher yielding loans to lower yielding securities. Also
contributing were decreases in revenue generated from the mortgage banking
division due to a slowdown in new and refinancing activity, decreases in revenue
due to the divestiture of the merchant POS and ISP product lines sold in the
second quarter of 2003 and continued operating losses at UnionFinancial Services
& Trust Company.
Return on average assets was 0.41% for the first quarter of 2004
compared to 0.94% for the same period in 2003. Return on average stockholders'
equity was 4.67% for the first quarter of 2003 compared to 10.58% for the same
period in 2003.
Net Interest Income/ Margin
Net interest income is the difference between income earned on
interest-earning assets and the interest expense incurred for the funding
sources used to finance these assets. Changes in net interest income generally
occur due to fluctuations in the volume of earning assets and paying liabilities
and rates earned and paid, respectively, on those assets and liabilities. The
net yield on total interest-earning assets, also referred to as net interest
margin, represents net interest income divided by average interest-earning
assets. Net interest margin measures how efficiently the Company uses its
earning assets and underlying capital. The Company's long-term objective is to
manage those assets and liabilities to provide the largest possible amount of
income while balancing interest rate, credit, liquidity and capital risks. For
purposes of this discussion, both net interest income and margin have been
adjusted to a fully tax equivalent basis for certain tax-exempt securities and
loans.
Net interest income, on a tax equivalent basis, was $5,988 for the
first quarter ended March 31, 2004, compared with $6,806 earned during the same
period in 2003. This represented a decrease of $818 or 12.0%. The decline in net
interest income is attributable to the quarter-over-quarter reduction of
interest income earned on interest-earning assets totaling $1,370 exceeding the
quarter-over-quarter decrease in interest expense paid on interest bearing
liabilities totaling $552.
The $1,370 reduction in interest income resulted from a decrease of
$1,432 related to rate partially offset by an increase of $62 due to volume. The
majority of the change in interest income was related to a 95 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 $552 reduction in interest expense resulted from decrease of $653
associated with rate partially offset by an increase of $101 associated with
volume. The majority of the change was attributable to a 59 basis point
reduction in rates paid on time deposits due to the repricing dynamics of
12.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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 decreased 55 basis points to 3.34% in the first
quarter 2004 as compared with 3.89% for the same period in 2003 and increased
from 3.29% during the fourth quarter 2003. The decrease in the net interest
margin in the first quarter 2004 when compared to 2003 resulted primarily from a
decrease in loans yields and a shift in the earning-asset mix. The expectation
of continued low interest rates is likely to maintain pressure on margins for
the remainder of 2004.
The Company's net interest income is affected by changes in the amount
and mix of interest-earning assets and interest-bearing liabilities, referred to
as "volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as "rate change." The following table details each
category of average amounts outstanding for interest-earning assets and
interest-bearing liabilities, average rate earned on all interest-earning
assets, average rate paid on all interest-bearing liabilities, and the net yield
on average interest-earning assets. In addition, the table reflects the changes
in net interest income stemming from changes in interest rates and from asset
and liability volume, including mix. The change in interest attributable to both
rate and volume has been allocated to the changes in the rate and the volume on
a pro rata basis.
13.
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 March 31,
----------------------------------------------------------------------
2004 2003
---------------------------------- ---------------------------------
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 $ 205 $ 1 1.96% $ 330 $ 2 2.46% $ (1) $ -- $ (1)
Securities (1)
Taxable 223,997 1,905 3.41 191,097 1,886 4.00 313 (294) 19
Non-taxable (2) 26,931 491 7.31 32,358 597 7.48 (12) (94) (106)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total securities
(tax
equivalent) 250,928 2,396 3.83 223,455 2,483 4.51 301 (388) (87)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Federal funds sold 3,288 9 1.10 5,240 18 1.39 (6) (3) (9)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Loans (3)(4)
Commercial 138,499 2,003 5.80 134,665 2,263 6.82 68 (328) (260)
Real estate 291,082 4,407 6.07 296,385 5,140 7.03 (85) (648) (733)
Installment and
other 37,769 879 9.33 50,402 1,159 9.33 (280) -- (280)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross loans
(tax
equivalent) 467,350 7,289 6.26 481,452 8,562 7.21 (232) (1,041) (1,273)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total
interest-
earning
assets 721,771 9,695 5.39 710,477 11,065 6.32 62 (1,432) (1,370)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Noninterest-earning
assets
Cash and cash
equivalents 22,225 20,938
Premises and
equipment, net 16,357 14,104
Other assets 29,002 33,500
---------- ----------
Total nonearning
assets 67,584 68,542
---------- ----------
Total assets $ 789,355 $ 779,019
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities
NOW accounts $ 47,389 $ 67 0.56% $ 54,069 $ 76 0.57% $ (9) $ -- $ (9)
Money market
accounts 118,212 349 1.18 107,492 425 1.60 41 (117) (76)
Savings deposits 49,436 79 0.64 48,731 99 0.82 1 (21) (20)
Time deposits 337,397 2,348 2.79 343,581 2,858 3.37 (48) (462) (510)
Federal funds
purchased
and repurchase
agreements 2,212 13 2.36 4,123 30 2.95 (12) (5) (17)
Advances from FHLB 74,469 771 4.15 62,672 687 4.45 131 (47) 84
Notes payable 7,870 80 4.08 8,288 84 4.11 (4) (1) (4)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-
bearing
liabilities 636,985 3,707 2.33 628,956 4,259 2.75 101 (653) (552)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Noninterest-bearing
liabilities
Noninterest-bearing
deposits 78,067 72,684
Other liabilities 5,449 8,113
---------- ----------
Total noninterest-
bearing
liabilities 83,516 80,797
---------- ----------
Stockholders' equity 68,854 69,266
---------- ----------
Total liabilities
and
stockholders'
equity $ 789,355 $ 779,019
========== ==========
Net interest income
(tax equivalent) $ 5,988 $ 6,806 $ (39) $ (779) $ (818)
========== ========== ========== ========== ==========
Net interest income
(tax equivalent)
to total
earning assets 3.34% 3.89%
========== ==========
Interest-bearing
liabilities
to earning assets 88.25% 88.53%
========== ==========
- ----------------------------------------------
(1) Average balance and average rate on securities classified as
available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances.
(4) Overdraft loans are excluded in the average balances.
14.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except 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
first quarter of 2004 totaled $750, an increase of $138 from the $612 recorded
during the same period a year ago. Net charge-offs (recoveries) for the first
quarter of 2004 were ($121) compared with $564 in 2003. Annualized net
charge-offs decreased to (0.03)% of average loans for the first quarter of 2004
compared to 0.12% in the same period in 2003.
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.
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
March 31,
-------------------
2004 2003
-------- --------
Service charges $ 711 $ 756
Merchant fee income 56 279
Trust income 184 177
Mortgage banking income 568 1,029
Insurance commissions and fees 633 594
Securities gains, net -- 92
Gain on the sale of the credit card portfolio 259 --
Other income 513 672
-------- --------
$ 2,924 $ 3,599
======== ========
Noninterest income totaled $2,924 for the three months ended March 31,
2004, compared to $3,599 for the same time frame in 2003. This represented a
decrease of $675 or 18.8%. Excluding net securities gains of $92 in the first
quarter of 2003, noninterest income decreased $583 or 16.6%.
15.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
The majority of the change to noninterest income was related to a $461
decrease in mortgage banking income attributable to a slowdown in new and
refinancing loan activity. Mortgage banking income includes gains generated from
the sale of loans and net servicing revenue (after amortization of mortgage
servicing rights). Total mortgage loans sold decreased 59% from $56,667 in the
first quarter of 2003 to $23,251 in the first quarter of 2004.
Also contributing to the decline were decreases in service charges
reflecting lower volumes of items drawn on customer accounts with insufficient
funds, decreases in merchant fee income and ISP income (located in other income)
due to the divestiture of these product lines in the second quarter of 2003.
Positively contributing to noninterest income was a $259 gain on the sale of the
credit card portfolio.
Noninterest Expense
Noninterest expense is comprised primarily of compensation and employee
benefits, occupancy and other operating expense. The following table summarizes
the Company's noninterest expense:
Three Months Ended
March 31,
-------------------
2004 2003
-------- --------
Salaries and employee benefits $ 4,150 $ 3,830
Occupancy expense, net 552 498
Furniture and equipment expense 557 493
Supplies and printing 115 126
Telephone 154 257
Other real estate owned expense 7 128
Amortization of intangible assets 52 54
Other expenses 1,392 1,631
-------- --------
$ 6,979 $ 7,017
======== ========
Noninterest expense totaled $6,979 for the three months ended March 31,
2004, as compared to $7,017 for the same timeframe in 2003. This represented a
decrease of $38 or 0.5%.
This improvement in noninterest expense was primarily due to decreases
in telephone expense, other real estate expense due to resolution of foreclosed
assets, and savings in expenses related to the divestiture of the Company's POS
and ISP product lines (located in other expenses) sold during the second quarter
of 2003. These decreases were partially offset by increases in salary and
employee benefits, occupancy expense and furniture and equipment expense,
incurred as a result of the Company's branch expansion into the Yorkville
market.
16.
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 the three months ended March 31, 2004 and 2003.
Three Months Ended
March 31,
-----------------------
2004 2003
---------- ----------
Income before income taxes $ 996 $ 2,551
Applicable income taxes 196 744
Effective tax rates 19.7% 29.2%
The Company recorded an income tax expense of $196 and of $744 for the
three months ended March 31, 2004 and 2003. Effective tax rates equaled 19.7%
and 29.2% 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 $52 and of $64 of preferred stock dividends for the
three months ended March 31, 2004 and 2003, 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.
The Company measures its overall interest rate sensitivity through a
net interest income analysis. The net interest income analysis measures the
change in net interest income in the event of hypothetical changes in interest
rates. This analysis assesses the risk of changes in net interest income in the
event of a sudden and sustained 100 to 200 basis point increase in market
interest rates or a 100 basis point decrease in market rates. The interest rate
scenarios are used for analytical purposes and do not necessarily represent
management's view of future market movements. The tables below present the
Company's projected changes in net interest income for the various rate shock
levels at March 31, 2004 and December 31, 2003.
17.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
March 31, 2004
-------------------------------------------
Net Interest Income
-------------------------------------------
Amount Change Change
----------- ----------- -----------
(Dollars in Thousands)
+200 bp $ 22,677 $ (552) (2.38)%
+100 bp 23,019 (210) (0.90)
Base 23,229 -- --
-100 bp 23,188 (41) (0.18)
Based upon the Company's model at March 31, 2004, the effect of an
immediate 200 basis point increase in interest rates would decrease the
Company's net interest income by $552 or 2.38%. The effect of an immediate 100
basis point decrease in rates would decrease the Company's net interest income
by $41 or 0.18%. For the March 31, 2004 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.
Net interest income would be adversely affected initially by a
significant increase in interest rates due to the recent desire by investors to
commit funds to short-term deposits, or transactional accounts that are
immediately subject to changes in interest rates. The Company has
correspondingly kept its investments shorter in terms of final maturity, but
many of the variable rate investments, such as adjustable rate mortgages, are
not subject immediately to a change in interest rates. Subsequent to the initial
adverse impact of higher interest rates, principal payments on amortizing
securities and maturities of non-amortizing securities will allow reinvestment
at the new higher level of interest rates. Also the adjustable rate securities
will ultimately have coupons adjusted to the higher level of interest rates to
also beneficially impact net interest income. If interest rates stay at higher
levels, the Company would ultimately reprice a greater amount of assets than
liabilities adjusting to the higher level of interest rates.
Additionally, net interest income would be adversely impacted by a
decline in interest rates due to the explicit or implicit options in assets it
holds. The Company earns a higher yield on callable agency securities due to the
additional interest paid by the issuer to retain the right to call a security
should interest rates decline. Likewise, a borrower with a fixed rate mortgage
or other type of loan retains the option to prepay the mortgage or loan should
interest rates decline. The reinvestment by the Company in a lower yielding
asset available at the lower level of interest rates adversely impacts net
interest income.
December 31, 2003
-------------------------------------------
Net Interest Income
-------------------------------------------
Amount Change Change
----------- ----------- -----------
(Dollars in Thousands)
+200 bp $ 22,270 $ (420) (1.85)%
+100 bp 22,512 (178) (0.79)
Base 22,690 -- --
-100 bp 22,570 (120) (0.53)
Based upon the Company's model at December 31, 2003, the effect of an
immediate 200 basis point increase in interest rates would decrease the
Company's net interest income by $420 or 1.85%. The effect of an immediate 100
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
basis point decrease in rates would decrease the Company's net interest income
by $120 or 0.53%. For the December 31, 2003 reporting cycle, the Company has
suppressed an immediate 200 basis point decrease in its Asset Liability model
due to the abnormally low prevailing interest rate environment.
Financial Condition
General
As of March 31, 2004, the Company had total assets of $776,399, total
gross loans of $466,591, total deposits of $614,975 and total stockholders'
equity of $68,619. Total assets decreased by $17,023 or 2.1% from year-end 2003.
Total gross loans decreased by $10,221 or 2.1% from year-end 2003 and reflected
tighter underwriting standards, a continued softening of overall loan demand,
and normal paydowns. Total deposits decreased by $23,057 or 3.6% from year-end
2003.
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.
19.
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.
2004 2003
--------- ------------------------------------------------
Mar 31, Dec 31, Sept 30, Jun 30, Mar 31,
--------- --------- --------- --------- ---------
Nonaccrual loans $ 5,984 $ 8,149 $ 8,095 $ 4,415 $ 3,943
Loans 90 days past due and still accruing interest 1,170 328 2,108 1,748 129
--------- --------- --------- --------- ---------
Total nonperforming loans 7,154 8,477 10,203 6,163 4,072
Other real estate owned 246 227 145 320 1,260
--------- --------- --------- --------- ---------
Total nonperforming assets $ 7,400 $ 8,704 $ 10,348 $ 6,483 $ 5,332
========= ========= ========= ========= =========
Nonperforming loans to total end of period loans 1.53% 1.78% 2.11% 1.29% 0.86%
Nonperforming assets to total end of period loans 1.59 1.83 2.14 1.36 1.13
Nonperforming assets to total end of period assets 0.95 1.10 1.30 0.84 0.68
The level of nonperforming loans at March 31, 2004 decreased to $7,154 versus
the $8,477 that existed as of December 31, 2003 and increased from $4,072 at
March 31, 2003. The level of nonperforming loans to total end of period loans
was 1.53% at March 31, 2004, as compared to 1.78% at December 31, 2003 and 0.86%
at March 31, 2003. The reserve coverage ratio (allowance to nonperforming loans)
was reported at 138.13% as of March 31, 2004 as compared to 159.58% as of March
31, 2003 and 106.30% as of December 31, 2003.
Other Potential Problem Loans
The Company has other potential problem loans that are currently
performing, but where some concerns exist as to the ability of the borrower to
comply with present loan repayment terms. Excluding nonperforming loans, loans
that management has classified as impaired totaled $4,114 at March 31, 2004 as
compared to $5,086 at December 31, 2003. 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
20.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
review function downgrades the loan, it is included in the allowance analysis at
the lower grade. The grading system is in compliance with the regulatory
classifications and the allowance is allocated to the loans based on the
regulatory grading, except in instances where there are known differences (i.e.,
collateral value is nominal, etc.). To establish the appropriate level of the
allowance, a sample of loans (including impaired and nonperforming loans) are
reviewed and classified as to potential loss exposure.
Based on an estimation done pursuant to the requirements of Financial
Accounting Standards Board ("FASB") Statement No. 5, "Accounting for
Contingencies," and FASB Statements Nos. 114 and 118, "Accounting by Creditors
for Impairment of a Loan," the analysis of the allowance for loan losses
consists of three components: (i) specific credit allocation established for
expected losses resulting from analysis developed through specific credit
allocations on individual loans for which the recorded investment in the loan
exceeds its fair value; (ii) general portfolio allocation based on historical
loan loss experience for each loan category; and (iii) unallocated subjective
reserves based on general economic conditions as well as specific economic
factors in the markets in which the Company operates.
The specific credit allocation component of the allowance for loan
losses is based on a regular analysis of loans over a fixed-dollar amount where
the internal credit rating is at or below a predetermined classification. The
fair value of the loan is determined based on either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
market price of the loan, or, if the loan is collateral dependent, the fair
value of the underlying collateral less cost of sale.
The general portfolio allocation component of the allowance for loan
losses is determined statistically using a loss migration analysis that examines
historical loan loss experience. The loss migration analysis is performed
quarterly and loss factors are updated regularly based on actual experience. The
general portfolio allocation element of the allowance for loan losses also
includes consideration of the amounts necessary for concentrations and changes
in portfolio mix and volume.
The 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
2003. 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 March 31, 2004, the allowance for loan losses was $9,882 or 2.12% of
total loans as compared to $9,011 or 1.89% at December 31, 2003, and $6,498 or
1.38% at March 31, 2003. The change from December 31, 2003 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.
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Liquidity
The Company manages its liquidity position with the objective of
maintaining sufficient funds to respond to the needs of depositors and borrowers
and to take advantage of earnings enhancement opportunities. In addition to the
normal inflow of funds from core-deposit growth together with repayments and
maturities of loans and investments, the Company utilizes other short-term
funding sources such as brokered time deposits, securities sold under agreements
to repurchase, overnight federal funds purchased from correspondent banks and
the acceptance of short-term deposits from public entities, and Federal Home
Loan Bank advances.
The Company monitors and manages its liquidity position on several
bases, which vary depending upon the time period. As the time period is
expanded, other data is factored in, including estimated loan funding
requirements, estimated loan payoffs, investment portfolio maturities or calls,
and anticipated depository buildups or runoffs.
The Company classifies all of its securities as available-for-sale,
thereby maintaining significant liquidity. The Company's liquidity position is
further enhanced by structuring its loan portfolio interest payments as monthly
and by the significant representation of retail credit and residential mortgage
loans in the Company's loan portfolio, resulting in a steady stream of loan
repayments. In managing its investment portfolio, the Company provides for
staggered maturities so that cash flows are provided as such investments mature.
The Company's cash flows are comprised of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Cash flows used in financing activities offset
by those provided by operating activities and investing activities, resulted in
a net decrease in cash and cash equivalents of $2,613 from December 31, 2003 to
March 31, 2004.
During the first three months of 2004, the Company experienced net cash
outflows of ($18,342) in financing activities primarily due to a decrease in
deposits. In contrast, net cash inflows were provided by $6,426 in operating
activities due to proceeds from net loans sales and net income and $9,303 in
investing activities largely due to decrease in net loans.
Capital Resources
Stockholders' Equity
The Company is committed to managing capital for maximum shareholder
benefit and maintaining strong protection for depositors and creditors.
Stockholders' equity at March 31, 2004 was $68,619, an increase of $572 or 0.8%,
from December 31, 2003. The increase in stockholders' equity was largely the
result of earnings for the first three months of 2004 less dividends paid to
shareholders and an increase in accumulated other comprehensive income. Average
quarterly equity as a percentage of average quarterly assets was 8.7% at March
31, 2004, compared to 8.6% at December 31, 2003. Book value per common share
equaled $16.88 at March 31, 2004, a slight increase from $16.77 that was
reported at the end of 2003.
Stock Repurchase
On May 2, 2003, the Board of Directors approved a stock repurchase plan
whereby the Company may repurchase from time to time up to 5% of its outstanding
shares of common stock in the open market or in private transactions over an 18
month period. Purchases will be dependent upon market conditions and the
22.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
availability of shares. The repurchase program optimizes the use of capital
relative to other investment alternatives and benefits both the Company and the
shareholders by enhancing earnings per share and return on equity. To date, the
Company has repurchased 10,500 shares at a weighted average cost of $17.92.
Capital Measurements
The Banks are expected to meet a minimum risk-based capital to
risk-weighted assets ratio of 8%, of which at least one-half (or 4%) must be in
the form of Tier 1 (core) capital. The remaining one-half (or 4%) may be in the
form of Tier 1 (core) or Tier 2 (supplementary) capital. The amount of loan loss
allowance that may be included in capital is limited to 1.25% of risk-weighted
assets. The ratio of Tier 1 (core) and the combined amount of Tier 1 (core) and
Tier 2 (supplementary) capital to risk-weighted assets for the Company was
11.07% and 12.32%, respectively, at March 31, 2004. The Company is currently,
and expects to continue to be, in compliance with these guidelines.
The following table sets forth an analysis of the Holding Company's
capital ratios:
December 31, Minimum Well
March 31, ------------------------ Capital Capitalized
2004 2003 2002 Ratios Ratios
---------- ---------- ---------- ---------- ----------
Tier 1 risk-based capital $ 60,363 $ 59,851 $ 58,755
Tier 2 risk-based capital 6,816 7,790 7,281
---------- ---------- ----------
Total capital 67,179 67,641 66,036
Risk-weighted assets 545,265 556,729 557,620
Capital ratios
Tier 1 risk-based capital 11.07% 10.80% 10.50% 4.00% 6.00%
Tier 2 risk-based capital 12.32 12.20 11.80 8.00 10.00
Leverage ratio 7.83 7.70 7.50 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.
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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 18 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
March 31, 2004. 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 March 31,
2004.
24.
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, Use of Proceeds and Issuer Purchases of Equity
Securities
The following table provides information about purchases of the
Company's common stock by the Company during the quarter ended March
31, 2004.
ISSUER PURCHASES OF EQUITY SECURITIES
===============================================================================================
(d) Maximum
Number (or
(c) Total Number Approximate
of Shares Dollar Value) of
Purchased as Part Shares that May
(a) Total Number of Publicly Yet Be Purchased
of Shares (b) Average Price Announced Plans Under the Plans
Period Purchased Paid per Share or Programs or Programs
===============================================================================================
01/01/04 - -- -- -- 198,947
01/31/04
===============================================================================================
02/01/04 - -- -- -- 198,947
02/29/04
===============================================================================================
03/01/04 - -- -- -- 198,947
03/31/04
===============================================================================================
Total -- -- -- 198,947
===============================================================================================
(1) For the quarter ended March 31, 2004, we repurchased no shares of
our common stock pursuant to the repurchase program that we
announced on May 2, 2003 (the "Program").
(2) Our board of directors approved the repurchase by us of up to an
aggregate of 5% of the outstanding shares of our common stock
pursuant to the Program. The expiration date of this Program is
November 2, 2004. Unless terminated earlier by resolution of our
board of directors, the Program will expire on the earlier of
such expiration date or when we have repurchased all shares
authorized for repurchase under the Program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
25.
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 Senior Vice President and Principal
Financial and Accounting Officer.
Reports on Form 8-K:
Registrant filed a Current Report on Form 8-K on February 27, 2004 to
furnish its earnings announcement for the quarter ended December 31,
2003.
26.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on May 13, 2004.
UNIONBANCORP, INC.
By: /s/ DEWEY R. YAEGER
----------------------------------------
Dewey R. Yaeger
President and Principal Executive
Officer
By: /s/ KURT R. STEVENSON
----------------------------------------
Kurt R. Stevenson
Senior Vice President and Principal
Financial and Accounting Officer
27.
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 Senior Vice President and Principal Financial and
Accounting Officer.
28.