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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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 August 13, 2004
- ----------------------------- -------------------------------------
Common Stock, Par Value $1.00 4,038,800
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UnionBancorp, Inc.
Form 10-Q Index
Page
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..............................................27
Item 4. Controls and Procedures ............................................27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................29
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases
of Equity Securities...........................................29
Item 3. Defaults Upon Senior Securities.....................................29
Item 4. Submission of Matters to a Vote of Security Holders.................29
Item 5. Other Information...................................................30
Item 6. Exhibits and Reports on Form 8-K....................................30
SIGNATURES...................................................................35
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30, 2004 and December 31, 2003 (In Thousands, Except Share Data)
- ----------------------------------------------------------------------------------------------------------
June 30, December 31,
2004 2003
------------ ------------
ASSETS
Cash and cash equivalents $ 26,972 $ 22,198
Securities available-for-sale 211,733 252,248
Loans 453,676 476,812
Allowance for loan losses (10,224) (9,011)
------------ ------------
Net loans 443,452 467,801
Cash surrender value of life insurance 14,725 14,379
Mortgage servicing rights 2,804 2,775
Premises and equipment, net 16,200 16,576
Goodwill 7,642 7,642
Intangible assets, net 1,129 1,232
Other real estate 164 227
Other assets 7,198 8,344
------------ ------------
Total assets $ 732,019 $ 793,422
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 77,072 $ 89,424
Interest-bearing 506,540 548,608
------------ ------------
Total deposits 583,612 638,032
Federal funds purchased and securities sold
under agreements to repurchase 1,336 1,533
Advances from the Federal Home Loan Bank 67,700 72,450
Notes payable 7,296 7,873
Series B mandatory redeemable preferred stock 831 831
Other liabilities 4,212 4,656
------------ ------------
Total liabilities 664,987 725,375
------------ ------------
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;
4,639,563 shares issued at June 30, 2004 and
4,627,613 shares issued at December 31, 2003 4,640 4,628
Additional paid-in capital 22,572 22,484
Retained earnings 44,412 43,609
Accumulated other comprehensive income 221 2,141
Unearned compensation under stock option plans -- (2)
------------ ------------
72,345 73,360
Treasury stock, at cost; 600,763 shares at June 30, 2004
and December 31, 2003 (5,313) (5,313)
------------ ------------
Total stockholders' equity 67,032 68,047
------------ ------------
Total liabilities and stockholders' equity $ 732,019 $ 793,422
============ ============
See Accompanying Notes to Unaudited Financial Statements
1.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months and Six Months Ended June 30, 2004 and 2003 (In Thousands, Except Per Share Data)
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Interest income
Loans 7,035 $ 8,281 $ 14,303 $ 16,820
Securities
Taxable 1,485 1,689 3,390 3,577
Exempt from federal income taxes 318 398 643 793
Federal funds sold and other 5 13 15 31
---------- ---------- ---------- ----------
Total interest income 8,843 10,381 18,351 21,221
Interest expense
Deposits 2,456 3,189 5,287 6,647
Federal funds purchased and securities sold
under agreements to repurchase 40 40 53 70
Advances from the Federal Home Loan Bank 728 770 1,499 1,457
Series B mandatory redeemable preferred stock 13 -- 25 --
Notes payable 75 81 155 165
---------- ---------- ---------- ----------
Total interest expense 3,312 4,080 7,019 8,339
---------- ---------- ---------- ----------
Net interest income 5,531 6,301 11,332 12,882
Provision for loan losses 500 1,257 1,250 1,869
---------- ---------- ---------- ----------
Net interest income after
Provision for loan losses 5,031 5,044 10,082 11,013
Noninterest income
Service charges 803 794 1,514 1,550
Merchant fee income 12 210 68 489
Trust income 180 146 364 323
Mortgage banking income 647 1,192 1,215 2,221
Insurance commissions and fees 608 641 1,241 1,235
Securities gains, net 10 129 10 221
Gain on sale of assets 466 309 725 309
Other income 464 666 977 1,338
---------- ---------- ---------- ----------
3,190 4,087 6,114 7,686
Noninterest expenses
Salaries and employee benefits 4,136 3,979 8,286 7,809
Occupancy expense, net 559 470 1,111 968
Furniture and equipment expense 573 524 1,130 1,017
Supplies and printing 115 122 230 248
Telephone 142 281 296 538
Other real estate owned expense (3) 40 4 168
Amortization of intangible assets 51 52 103 106
Other expenses 1,456 1,701 2,848 3,332
---------- ---------- ---------- ----------
7,029 7,169 14,008 14,186
---------- ---------- ---------- ----------
Income before income taxes 1,192 1,962 2,188 4,513
Income taxes 279 516 475 1,260
---------- ---------- ---------- ----------
Net income 913 1,446 1,713 3,253
Preferred stock dividends 52 64 104 128
---------- ---------- ---------- ----------
Net income for common stockholders $ 861 $ 1,382 $ 1,609 $ 3,125
========== ========== ========== ==========
Basic earnings per share $ 0.21 $ 0.34 $ 0.40 $ 0.78
========== ========== ========== ==========
Diluted earnings per common share $ 0.21 $ 0.34 $ 0.39 $ 0.77
========== ========== ========== ==========
Total comprehensive income (loss) $ (1,119) $ 1,573 $ (207) $ 3,239
========== ========== ========== ==========
See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2004 and 2003 (In Thousands)
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Six Months Ended
June 30,
-------------------------
2004 2003
---------- ----------
Cash flows from operating activities
Net income $ 1,713 $ 3,253
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 1,085 789
Amortization of intangible assets 103 106
Amortization of unearned compensation under stock option plans 2 12
Amortization of bond premiums, net 895 753
Provision for loan losses 1,250 1,869
Securities gains, net (10) (221)
Gain on sale of assets (725) (309)
Loss on sale of real estate acquired in settlement of loans -- 88
Gain on sale of loans (1,160) (2,692)
Proceeds from sales of loans held for sale 53,452 104,150
Origination of loans held for sale (50,025) (101,611)
Change in assets and liabilities
Net decrease in other assets 1,909 748
Net increase in other liabilities (132) 74
---------- ----------
Net cash provided by operating activities 8,357 7,009
Cash flows from investing activities
Securities available-for-sale
Proceeds from maturities and paydowns 50,639 66,314
Proceeds from sales 11,438 13,438
Purchases (25,542) (73,878)
Net decrease in loans 18,978 5,720
Proceeds from sale of assets 30 --
Purchase of premises and equipment (1,124) (1,484)
Proceeds from sale of real estate acquired in settlement of loans 198 1,359
Proceeds from Sale of Blandinsville (9,984) --
---------- ----------
Net cash provided by (used in) investing activities 44,633 11,469
Cash flows from financing activities
Net decrease in deposits (41,884) (35,003)
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (197) (1,743)
Payments on notes payable (577) (350)
Net increase (decrease) in advances from the Federal Home Loan Bank (4,750) 15,700
Dividends on common stock (807) (719)
Dividends on preferred stock (104) (128)
Proceeds from exercise of stock options 103 294
Purchase of treasury stock -- (188)
---------- ----------
Net cash used in financing activities (48,216) (22,137)
---------- ----------
Net increase (decrease) in cash and cash equivalents 4,774 (3,659)
Cash and cash equivalents
Beginning of period 22,198 38,962
---------- ----------
End of period $ 26,972 $ 35,303
========== ==========
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 7,319 $ 8,602
Income taxes 476 1,151
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, 2003. The annualized results of operations during the three months and six
months ended June 30, 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 Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income as reported
for common stockholders $ 861 $ 1,382 $ 1,609 $ 3,125
Deduct: stock-based compensation expense
Determined under fair value based method 30 30 60 60
---------- ---------- ---------- ----------
Pro forma net income $ 831 $ 1,352 $ 1,549 $ 3,065
========== ========== ========== ==========
Basic earnings
per common share as reported $ 0.21 $ 0.34 $ 0.40 $ 0.78
Pro forma basic earnings
per common share 0.21 0.34 0.38 0.77
Diluted earnings
per common share as reported $ 0.21 $ 0.34 $ 0.39 $ 0.77
Pro forma diluted earnings
per common share 0.20 0.33 0.38 0.76
4.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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Note 2. Earnings Per Share
Basic earnings per share for the three months and six months ended June
30, 2004 and 2003 were computed by dividing net income by the weighted average
number of shares outstanding. Diluted earnings per share for three months and
six months ended June 30, 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 Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income
available to common shareholders $ 861 $ 1,382 $ 1,609 $ 3,125
Weighted average common shares outstanding 4,037 3,995 4,034 3,989
---------- ---------- ---------- ----------
Basic Earnings Per Common Share $ 0.21 $ 0.34 $ 0.40 $ 0.78
========== ========== ========== ==========
Diluted Earnings Per Common Share
Weighted average common shares outstanding 4,037 3,995 4,034 3,989
Add: dilutive effect of assumed exercised
stock options 78 73 80 64
---------- ---------- ---------- ----------
Weighted average common and dilutive
Potential shares outstanding 4,115 4,068 4,114 4,053
========== ========== ========== ==========
Diluted Earnings Per Common Share $ 0.21 $ 0.34 $ 0.39 $ 0.77
========== ========== ========== ==========
There were approximately 20,000 and 16,000 options outstanding at June
30, 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
33.1% of the Company's 2004 second quarter average earning asset base, is
managed to minimize interest rate risk, maintain sufficient liquidity, and
maximize return. The portfolio includes several callable agency debentures,
adjustable rate mortgage pass-throughs, and collateralized mortgage obligations.
Corporate bonds consist of investment grade obligations of public corporations.
Equity securities consist of Federal Reserve stock, Federal Home Loan Bank
stock, and trust preferred stock. Securities classified as available-for-sale,
carried at fair value, were $211,733 at June 30, 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 June 30, 2004 and December 31,
2003:
June 30, 2004
----------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
---------- ---------- ----------
U.S. government agencies $ 13,256 $ 201 $ (18)
States and political subdivisions 26,969 933 (34)
U.S. government mortgage-backed securities 139,656 757 (1,815)
Collateralized mortgage obligations 3,929 7 (50)
Equity securities 17,587 28 (38)
Corporate 10,336 389 --
---------- ---------- ----------
$ 211,733 $ 2,315 $ (1,955)
========== ========== ==========
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 June 30, 2004 and December 31, 2003:
June 30, 2004 December 31, 2003
-------------------------- --------------------------
$ % $ %
----------- ----------- ----------- -----------
Commercial $ 94,333 20.79% $ 105,767 22.18%
Agricultural 29,970 6.61 33,766 7.08
Real estate:
Commercial mortgages 134,638 29.68 134,985 28.31
Construction 38,362 8.45 30,674 6.43
Agricultural 33,090 7.29 37,092 7.78
1-4 family mortgages 90,720 20.00 94,163 19.75
Installment 31,741 7.00 37,415 7.85
Other 822 0.18 2,950 0.62
----------- ----------- ----------- -----------
Total loans 453,676 100.00% 476,812 100.00%
=========== ===========
Allowance for loan losses (10,224) (9,011)
----------- -----------
Loans, net $ 443,452 $ 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 and six months ended June 30, 2004 and 2003 are summarized below:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Beginning balance $ 9,882 $ 6,498 $ 9,011 6,450
Charge-offs:
Commercial 412 248 806 636
Real estate mortgages 71 215 143 319
Installment and other loans 125 204 306 392
---------- ---------- ---------- ----------
Total charge-offs 608 667 1,255 1,347
---------- ---------- ---------- ----------
Recoveries:
Commercial 379 125 931 205
Real estate mortgages 0 20 193 39
Installment and other loans 71 20 94 37
---------- ---------- ---------- ----------
Total recoveries 450 165 1,218 281
---------- ---------- ---------- ----------
Net charge-offs 158 502 37 1,066
---------- ---------- ---------- ----------
Provision for loan losses 500 1,257 1,250 1,869
---------- ---------- ---------- ----------
Ending balance $ 10,224 $ 7,253 $ 10,224 $ 7,253
========== ========== ========== ==========
Period end total loans, net of
unearned interest $ 453,676 $ 476,386 $ 453,676 $ 476,386
========== ========== ========== ==========
Average loans $ 461,698 $ 482,631 $ 464,524 $ 482,045
========== ========== ========== ==========
Ratio of net charge-offs to
average loans 0.03% 0.10% 0.01% 0.22%
Ratio of provision for loan losses
to average loans 0.11% 0.26% 0.28% 0.39%
Ratio of allowance for loan losses
to ending total loans 2.25% 1.52% 2.25% 1.52%
Ratio of allowance for loan losses
to total nonperforming loans 176.43% 117.69% 176.43% 117.69%
Ratio of allowance at end of period
to average loans 2.21% 1.50% 2.20% 1.50%
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.
Six Months Ended
-----------------------------------------------------------------------
June 30, 2004
-----------------------------------------------------------------------
Banking Mortgage Financial Other Consolidated
Segment Banking Services Segments Totals
---------- ---------- ---------- ---------- -----------
Net interest income $ 11,086 $ 410 $ -- $ (164) $ 11,332
Other revenue 3,228 1,222 1,657 7 6,114
Other expense 8,690 1,722 2,220 (1,062) 11,570
Segment profit (loss) 1,596 460 (476) 133 1,713
Noncash items
Depreciation 875 51 87 72 1,085
Provision for loan losses 1,250 -- -- -- 1,250
Other intangibles 103 -- -- -- 103
Goodwill 5,718 -- 1,924 -- 7,642
Segment assets 733,201 3,633 6,938 (11,753) 732,019
Six Months Ended
-----------------------------------------------------------------------
June 30, 2003
-----------------------------------------------------------------------
Banking Mortgage Financial Other Consolidated
Segment Banking Services Segments Totals
---------- ---------- ---------- ---------- -----------
Net interest income $ 12,352 $ 698 $ -- $ (168) $ 12,882
Other revenue 3,393 2,198 1,556 539 7,686
Other expense 8,146 1,391 2,013 1,741 13,291
Segment profit (loss) 4,131 1,180 (465) (1,593) 3,253
Noncash items
Depreciation 513 49 83 144 789
Provision for loan losses 1,869 -- -- -- 1,869
Other intangibles 103 -- -- 3 106
Goodwill 5,718 -- 1,924 -- 7,642
Segment assets 766,488 5,522 5,354 (4,433) 772,931
9.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Note 8: Business Acquisitions and Divestures
On May 3, 2004, the Company sold the deposits and premises of a UnionBank/West
branch location. At the date of sale, the branch had approximately $12,535 in
deposits, $1,720 in loans, and $336 in fixed assets. The sale price was $440.
In addition, the Company entered into a Definitive Purchase and Assumption
Agreement with First Bankers Trust Company to sell approximately $90 million in
deposits and $40 million in loans as part of its strategy to exit from the
Quincy, Macomb, Carthage, Rushville and Paloma markets. The transaction is
expected to be completed late in the third quarter, pending the timing of
regulatory approval by the Federal Reserve System and the Office of the
Comptroller of the Currency.
The following discussion provides an analysis of the Company's results
of operations and financial condition of UnionBancorp, Inc. for the three months
and six months ended June 30, 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 and six months ended
June 30, 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
10.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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
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.
Second Quarter Highlights
o Earnings per share increased 16.7% over the first quarter of 2004.
The Company completed the sale of its Blandinsville sales and service
o office that resulted in a net gain on the sale. The impact to earnings,
net of taxes, was approximately $0.07 per diluted share.
o The Company entered into a Definitive Purchase and Assumption Agreement
with First Bankers Trust Company to purchase approximately $90 million
in deposits and $40 million in loans as part of its strategy to exit
from the Quincy, Macomb, Carthage, Rushville and Paloma markets. The
transaction is expected to be completed late in the third quarter,
pending the timing of regulatory approval by the Federal Reserve System
and the Office of the Comptroller of the Currency.
11.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
o The Company announced that it has filed the necessary applications to
merge UnionFinancial Services & Trust Company into UnionBank. Since
UnionBank and UnionFinancial are under common control, the merger will
be accounted for at UnionFinancial's carrying amount which had no
impact on the consolidated financial statements.
o The net interest margin remained relatively stable over the previous
three quarters, reported at 3.31% at the end of the second quarter
2004.
o The Company experienced favorable trends in expense control as
noninterest expense levels decreased $140,000 or 2.0% during the second
quarter of 2004 in comparison to the second quarter of 2003.
o The reserve coverage ratio (allowance to nonperforming loans) was
reported at 176.43% as of June 30, 2004 as compared to 117.69% as of
June 30, 2003 and 106.30% as of December 31, 2003.
o Provision for loan losses decreased $250,000 as compared with the
first quarter 2004.
o The level of non-performing loans to total end of period loans totaled
1.28% as of June 30, 2004 compared to 1.29% on June 30, 2003 and 1.78%
at December 31, 2003.
o Loan demand in the second quarter remained soft, as total loans
decreased $23.1 million to $453.7 million since December 31, 2003.
o The Board of Directors of UnionBancorp, Inc., approved the payment of a
$0.10 quarterly cash dividend on the Company's common stock, marking
the 77th consecutive quarter of dividends paid to stockholders.
Results of Operations
Net Income
Net income equaled $913 or $0.21 per diluted share for the three months
ended June 30, 2004, versus $1,446 or $0.34 per diluted share for the same
period in 2003. For the six months ended June 30, 2004, net income equaled
$1,713 or $0.39 per diluted share compared to $3,253 or $0.77 per diluted share
earned in the same period during 2003.
The Company's quarterly results were adversely impacted by a decrease
in net interest income due to a reduction in loan yields and an adverse 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 and continued
operating losses at UnionFinancial Services & Trust Company.
Return on average assets was 0.49% for the second quarter of 2004
compared to 0.74% for the same period in 2003. Return on average assets was
0.45% for the six month period ended June 30, 2004 compared to 0.84% for the
same period in 2003.
12.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Return on average stockholders' equity was 5.44% for the second quarter
of 2004 compared to 8.10% for the same period in 2003. Return on average
stockholders' equity was 5.05% for the six month period ended June 30, 2004
compared to 9.37% 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 $5,714 for the
three months ended June 30, 2004, compared with $6,528 earned during the same
period in 2003. This represented a decrease of $814 or 12.5%. The decline in net
interest income is attributable to the quarter-over-quarter reduction of
interest income earned on interest-earning assets totaling $1,582 exceeding the
quarter-over-quarter decrease in interest expense paid on interest bearing
liabilities totaling $768.
The $1,582 reduction in interest income resulted from a decrease of
$1,256 related to rate and $326 due to volume. The majority of the change in
interest income was related to a 77 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 $768 reduction in interest expense resulted from decreases of $602
associated with rate and $166 associated with volume. The majority of the change
was attributable to a 53 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 decreased 35 basis points to 3.31% in the
second quarter 2004 as compared with 3.66% for the same period in 2003. The
decrease in the net interest margin in the second quarter 2004 when compared to
2003 resulted primarily from a decrease in loans yields due to repricing of
variable rate loans in a lower interest rate environment and a shift in the
earning-asset mix away from higher yielding loans to lower yielding investments.
The expectation of continued low interest rates is likely to maintain pressure
on margins for the remainder of 2004.
Net interest income, on a tax equivalent basis, for the six months
ended June 30, 2004 totaled $11,702, representing a decrease of $1,632 or 12.2%
compared to the $13,334 earned during the same period in 2003. The decline in
net interest income is attributable to the year-over-year reduction of interest
income earned on interest-earning assets totaling $2,952 exceeding the
year-over-year decrease in interest expense paid on interest bearing liabilities
13.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
totaling $1,320. The net interest margin for the first six months of 2004
decreased 44 basis points to 3.33% compared to 3.77% for the same period in
2003.
The Company's net interest income is affected by changes in the amount
and mix of interest-earning assets and interest-bearing liabilities, referred to
as "volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as "rate change." The following table details each
category of average amounts outstanding for interest-earning assets and
interest-bearing liabilities, average rate earned on all interest-earning
assets, average rate paid on all interest-bearing liabilities, and the net yield
on average interest-earning assets. In addition, the table reflects the changes
in net interest income stemming from changes in interest rates and from asset
and liability volume, including mix. The change in interest attributable to both
rate and volume has been allocated to the changes in the rate and the volume on
a pro rata basis.
14.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ending June 30,
----------------------------------------------------------
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 $ 54 $ -- --% $ 238 $ 1 1.69% $ -- $ (1) $ (1)
Securities (1)
Taxable 203,307 1,483 2.93 194,674 1,688 3.48 72 (277) (205)
Non-taxable (2) 26,424 484 7.35 31,771 604 7.63 (39) (81) (120)
--------- ------- ------ --------- ------- ------ ------- ------- -------
Total securities (tax equivalent) 229,731 1,967 3.43 226,445 2,292 4.06 33 (358) (325)
--------- ------- ------ --------- ------- ------ ------- ------- -------
Federal funds sold 1,969 6 1.22 5,133 13 1.02 (9) 2 (7)
--------- ------- ------ --------- ------- ------ ------- ------- -------
Loans (3)(4)
Commercial 134,872 1,837 5.46 133,625 2,021 6.07 19 (203) (184)
Real estate 293,238 4,467 6.11 302,898 5,195 6.88 (161) (567) (728)
Installment and other 33,588 749 8.94 46,108 1,086 9.45 (208) (129) (337)
--------- ------- ------ --------- ------- ------ ------- ------- -------
Gross loans (tax equivalent) 461,698 7,053 6.13 482,631 8,302 6.90 (350) (899) (1,249)
--------- ------- ------ --------- ------- ------ ------- ------- -------
Total interest-earning assets 693,452 9,026 5.22 714,447 10,608 5.96 (326) 1,256) (1,582)
--------- ------- ------ --------- ------- ------ ------- ------- -------
Noninterest-earning assets
Cash and cash equivalents 21,806 21,563
Premises and equipment, net 16,348 14,470
Other assets 24,938 32,378
--------- ---------
Total nonearning assets 63,092 68,411
--------- ---------
Total assets $ 756,544 $ 782,858
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 46,400 $ 49 0.42% $ 52,847 $ 81 0.61% $ (9) $ (23) $ (32)
Money market accounts 114,406 304 1.07 100,869 366 1.46 45 (107) (62)
Savings deposits 50,207 66 0.53 50,689 101 0.80 (1) (34) (35)
Time deposits 307,116 2,025 2.64 333,664 2,641 3.17 (199) (417) (616)
Federal funds purchased and
repurchase agreements 11,000 40 1.46 9,722 40 1.65 5 (5) --
Advances from FHLB 71,304 728 4.10 72,160 770 4.28 (9) (33) (42)
Notes payable 8,142 100 4.93 7,940 81 4.09 2 17 19
--------- ------- ------ --------- ------- ------ ------- ------- -------
Total interest-bearing liabilities 608,575 3,312 2.18 627,891 4,080 2.61 (166) (602) (768)
--------- ------- ------ --------- ------- ------ ------- ------- -------
Noninterest-bearing liabilities
Noninterest-bearing deposits 76,363 76,117
Other liabilities 4,110 7,253
--------- ---------
Total noninterest-bearing liabilities 80,473 83,370
--------- ---------
Stockholders' equity 67,496 71,597
--------- ---------
Total liabilities and stockholders'
equity $ 756,544 $ 782,858
========= =========
Net interest income (tax equivalent) $ 5,714 $ 6,528 $ (160) $ (654) $ (814)
======= ======= ======= ======= =======
Net interest income (tax equivalent) to
total earning assets 3.31% 3.66%
====== ======
Interest-bearing liabilities to
earning assets 87.76% 87.88%
========= =========
- --------------------------------------------
(1) Average balance and average rate on securities classified as
available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances.
(4) Overdraft loans are excluded in the average balances.
15.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Six Months Ended June 30,
----------------------------------------------------------
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 $ 129 $ 1 1.55% $ 283 $ 3 2.14% $ (1) $ (1) $ (2)
Securities (1)
Taxable 213,652 3,388 3.18 192,896 3,574 3.74 373 (559) (186)
Non-taxable (2) 26,677 975 7.33 32,063 1,201 7.55 (52) (174) (226)
--------- ------- ------ --------- ------- ------ ------- ------- -------
Total securities (tax equivalent) 240,329 4,363 3.64 224,959 4,775 4.28 321 (733) (412)
--------- ------- ------ --------- ------- ------ ------- ------- -------
Federal funds sold 2,629 15 1.14 5,186 31 1.21 (14) (2) (16)
--------- ------- ------ --------- ------- ------ ------- ------- -------
Loans (3)(4)
Commercial 136,686 3,840 5.63 134,142 4,284 6.44 84 (528) (444)
Real estate 292,160 8,874 6.09 299,659 10,335 6.96 (244) (1,217) (1,461)
Installment and other 35,678 1,628 9.15 48,244 2,245 9.38 (564) (53) (617)
--------- ------- ------ --------- ------- ------ ------- ------- -------
Gross loans (tax equivalent) 464,524 14,342 6.19 482,045 16,864 7.05 (724) (1,798) (2,522)
--------- ------- ------ --------- ------- ------ ------- ------- -------
Total interest-earning assets 707,611 18,721 5.31 712,473 21,673 6.13 (418) (2,534) (2,952)
--------- ------- ------ --------- ------- ------ ------- ------- -------
Noninterest-earning assets
Cash and cash equivalents 22,015 21,252
Premises and equipment, net 16,353 14,288
Other assets 26,970 32,936
--------- ---------
Total nonearning assets 65,338 68,476
--------- ---------
Total assets $ 772,949 $ 780,949
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 46,894 $ 116 0.50% $ 53,455 $ 157 0.59% $ (18) $ (23) $ (41)
Money market accounts 116,309 653 1.13 104,162 791 1.53 86 (224) (138)
Savings deposits 49,821 145 0.58 49,716 200 0.81 -- (55) (55)
Time deposits 322,258 4,373 2.72 338,595 5,499 3.28 (248) (878) (1,126)
Federal funds purchased and
repurchase agreements 6,605 53 1.61 6,938 70 2.03 (3) (14) (17)
Advances from FHLB 72,887 1,499 4.12 67,442 1,457 4.36 121 (79) 42
Notes payable 8,006 180 4.51 8,113 165 4.10 (2) 17 15
--------- ------- ------ --------- ------- ------ ------- ------- -------
Total interest-bearing liabilities 622,780 7,019 2.26 628,421 8,339 2.68 (64) (1,256) (1,320)
--------- ------- ------ --------- ------- ------ ------- ------- -------
Noninterest-bearing liabilities
Noninterest-bearing deposits 77,215 74,410
Other liabilities 4,779 8,098
--------- ---------
Total noninterest-bearing liabilities 81,994 82,508
--------- ---------
Stockholders' equity 68,175 70,020
--------- ---------
Total liabilities and stockholders'
equity $ 772,949 $ 780,949
========= =========
Net interest income (tax equivalent) $ 11,702 $13,334 $ (354) $(1,278) $(1,632)
======== ======= ======= ======= =======
Net interest income (tax equivalent) to
total earning assets 3.33% 3.77%
====== ======
Interest-bearing liabilities to
earning assets 88.01% 88.20%
========= =========
- ----------------------------------------------
(1) Average balance and average rate on securities classified as
available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances.
(4) Overdraft loans are excluded in the average balances.
16.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Provision for Loan Losses
The amount of the provision for loan losses is based on management's
evaluations of the loan portfolio, with particular attention directed toward
nonperforming, impaired and other potential problem loans. During these
evaluations, consideration is also given to such factors as management's
evaluation of specific loans, the level and composition of impaired loans, other
nonperforming loans, other identified potential problem loans, historical loss
experience, results of examinations by regulatory agencies, results of the
independent asset quality review process, the market value of collateral, the
estimate of discounted cash flows, the strength and availability of guarantees,
concentrations of credits, and various other factors, including concentration of
credit risk in various industries and current economic conditions.
The provision for loan losses charged to operating expense for the
second quarter of 2004 totaled $500, a decrease of $757 from the $1,257 recorded
during the same period a year ago. The provision for loan losses charged to
operating expense for the six months ended June 30, 2003 totaled $1,250, a
decrease of $619 from $1,869 recorded during the same period a year ago. The
decline in the provision was due to a decline in the overall level of
nonperforming loans at June 30, 2004 as compared to June 30, 2003.
Net charge-offs for the second quarter of 2004 were $158 compared with
$502 for the comparable period in 2003. Annualized net charge-offs decreased to
0.03% of average loans for the second quarter of 2004 compared to 0.10% in the
same period in 2003. Net charge-off for the six months ended June 30, 2004 were
$37 compared with $1,066 for the comparable period in 2003. Annualized net
charge-offs decreased to 0.01% of average loans for the six months ended June
30, 2004 compared to 0.22% 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.
17.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Noninterest Income
Noninterest income consists of a wide variety of fee-based revenues
from bank-related service charges on deposits and mortgage revenues. Also
included in this category are revenues generated by the Company's insurance,
brokerage, trust and asset management as well as increases in cash surrender
value on bank-owned life insurance. The following table summarizes the Company's
noninterest income:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Service charges $ 803 $ 794 $ 1,514 $ 1,550
Merchant fee income 12 210 68 489
Trust income 180 146 364 323
Mortgage banking income 647 1,192 1,215 2,221
Insurance commissions and fees 608 641 1,241 1,235
Securities gains, net 10 129 10 221
Gain on the sale of assets 466 309 725 309
Other income 464 666 977 1,338
---------- ---------- ---------- ----------
$ 3,190 $ 4,087 $ 6,114 $ 7,686
========== ========== ========== ==========
Noninterest income totaled $3,190 for the three months ended June 30,
2004, compared to $4,087 for the same time frame in 2003. This represented a
decrease of $897, or 21.9%. Included in second quarter 2004 results was a $440
gain on sale of the Blandinsville branch. Included in second quarter 2003
results were $309 in gains on the sale of the Company's Internet Service
Provider (ISP) and Merchant Point of Sale (POS) product lines. Excluding gains
related to these divestiture and net securities gains from both periods,
noninterest income decreased $1,038 or 27.5%.
The majority of the change to noninterest income was related to a $545
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 61% from $70,622 in the
second quarter of 2003 to $27,372 in the second quarter of 2004. Also
contributing to the decline were decreases in POS merchant fee income and ISP
and credit card income (located in other income) due to the divestiture of these
product lines.
Noninterest income totaled $6,114 for the six months ended June 30,
2004, compared to $7,686 for the same time frame in 2003. Excluding all gains on
the sale of assets and net securities gains for both periods, noninterest income
decreased $1,779 or 24.8%.
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Noninterest Expense
Noninterest expense is comprised primarily of compensation and employee
benefits, occupancy and other operating expense. The following table summarizes
the Company's noninterest expense:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Salaries and employee benefits $ 4,136 $ 3,979 $ 8,286 $ 7,809
Occupancy expense, net 559 470 1,111 968
Furniture and equipment expense 573 524 1,130 1,017
Supplies and printing 115 122 230 248
Telephone 142 281 296 538
Other real estate owned expense (3) 40 4 168
Amortization of intangible assets 51 52 103 106
Other expenses 1,456 1701 2,848 3,332
---------- ---------- ---------- ----------
$ 7,029 $ 7,169 $ 14,008 $ 14,186
========== ========== ========== ==========
Noninterest expense totaled $7,029 for the three months ended June 30,
2004, as compared to $7,169 for the same timeframe in 2003. This represented a
decrease of $140 or 2.0%. 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, credit card, and ISP product lines (located in
other expenses) sold. 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.
Noninterest expense totaled $14,008 for the six months ended June 30,
2004, decreasing by $178 or 1.3% from the same period in 2003. The change was
largely reflective of the same items discussed regarding the second quarter.
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 and six months ended June 30, 2004 and 2003.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Income before income taxes $ 1,192 $ 1,962 $ 2,188 $ 4,513
Applicable income taxes 279 516 475 1,260
Effective tax rates 23.4% 26.3% 21.7% 27.9%
The Company recorded an income tax expense of $279 and of $516 for the
three months ended June 30, 2004 and 2003. Effective tax rates equaled 23.4% and
26.3% respectively, for such periods.
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
The Company recorded income tax expense of $475 and $1,260 for the six
months ended June 30, 2004 and 2003, respectively. Effective tax rates equaled
21.7% and 27.9% 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 $52 and $64 in preferred stock dividends for the three
months ended June 30, 2004 and 2003, respectively. The Company paid $104 and
$128 in preferred stock dividends for the six months ended June 30, 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 Bank depends, to a substantial extent, on "rate differentials,"
i.e., the differences between the income the Bank receives 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 Bank, 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 June 30, 2004 and December 31, 2003.
June 30, 2004
--------------------------------------------------
Net Interest Income
--------------------------------------------------
Amount Change Change
---------- ---------- --------
(Dollars in Thousands)
+200 bp $ 21,752 $ (117) (0.54)%
+100 bp 21,848 (21) (0.10)
Base 21,869 -- --
-100 bp 21,809 (60) (0.27)
Based upon the Company's model at June 30, 2004, the effect of an
immediate 200 basis point increase in interest rates would decrease the
Company's net interest income by $117 or 0.54%. The effect of an immediate 100
20.
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 $60 or 0.27%. For the June 30, 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
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.
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Financial Condition
General
As of June 30, 2004, the Company had total assets of $732,019, total
gross loans of $453,676, total deposits of $583,612 and total stockholders'
equity of $67,032. Total assets decreased by $61,403 or 7.7% from year-end 2003.
Total gross loans decreased by $23,136 or 4.9% from year-end 2003 and reflected
tighter underwriting standards, a continued softening of overall loan demand,
and normal paydowns. Total deposits decreased by $54,420 or 8.5% 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.
22.
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
---------------------- -----------------------------------
Jun 30, Mar 31, Dec 31, Sept 30, Jun 30,
---------- ---------- ---------- ---------- ----------
Nonaccrual loans $ 5,293 $ 5,984 $ 8,149 $ 8,095 $ 4,415
Loans 90 days past due and still accruing interest 502 1,170 328 2,108 1,748
---------- ---------- ---------- ---------- ----------
Total nonperforming loans 5,795 7,154 8,477 10,203 6,163
Other real estate owned 164 246 227 145 320
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 5,959 $ 7,400 $ 8,704 $ 10,348 $ 6,483
========== ========== ========== ========== ==========
Nonperforming loans to total end of period loans 1.28% 1.53% 1.78% 2.11% 1.29%
Nonperforming assets to total end of period loans 1.31 1.59 1.83 2.14 1.36
Nonperforming assets to total end of period assets 0.81 0.95 1.10 1.30 0.84
The level of nonperforming loans at June 30, 2004 decreased to $5,795
versus the $8,477 that existed as of December 31, 2003 and decreased from $6,163
at June 30, 2003. The level of nonperforming loans to total end of period loans
was 1.28% at June 30, 2004, as compared to 1.78% at December 31, 2003 and 1.29%
at June 30, 2003. The reserve coverage ratio (allowance to nonperforming loans)
was reported at 176.43% as of June 30, 2004 as compared to 117.69% as of June
30, 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 $6,892 at June 30, 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
At June 30, 2004, the allowance for loan losses was $10,224 or 2.25% of
total loans as compared to $9,011 or 1.89% at December 31, 2003, and $7,253 or
1.52% at June 30, 2003. 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.
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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 computed 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) 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.
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
24.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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 $4,774 from December 31, 2003 to
June 30, 2004.
During the first six months of 2004, the Company experienced net cash
outflows of ($48,216) in financing activities primarily due to a decrease in
deposits. In contrast, net cash inflows were provided by $8,357 in operating
activities due to proceeds from net loans sales and net income and $44,633 in
investing activities largely due to the decrease in net loans and securities.
Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet
Financial Instruments
The Company has entered into contractual obligations and commitments
and off-balance sheet financial instruments. The following tables summarize the
Company's contractual cash obligations and other commitments and off balance
sheet instruments as of June 30, 2004.
Payments Due by Period
--------------------------------------------------------------
Within 1 After
Contractual Obligations Year 1-3 Years 4-5 Years 5 Years Total
---------- ---------- ---------- ---------- ----------
Long-term debt $ 6,775 $ -- $ -- $ -- $ 6,775
FHLB Advances 14,600 24,500 20,400 8,200 67,700
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $ 21,375 $ 24,500 $ 20,400 $ 8,200 $ 74,475
========== ========== ========== ========== ==========
25.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Amount of Commitment Expiration per Period
--------------------------------------------------------------
Within 1 After
Off-Balance Sheet Financial Instruments Year 1-3 Years 4-5 Years 5 Years Total
---------- ---------- ---------- ---------- ----------
Lines of credit $ 55,161 $ 4,436 $ 1,204 $ 18,303 $ 79,104
Standby letters of credit 3,472 161 -- -- 3,633
---------- ---------- ---------- ---------- ----------
Total commercial commitments $ 58,633 $ 4,597 $ 1,204 $ 18,303 $ 82,737
========== ========== ========== ========== ==========
Capital Resources
Stockholders' Equity
The Company is committed to managing capital for maximum shareholder
benefit and maintaining strong protection for depositors and creditors.
Stockholders' equity at June 30, 2004 was $67,032, a decrease of $1,015 or 1.5%,
from December 31, 2003. The decrease in stockholders' equity was largely the
result of a decrease in accumulated other comprehensive income partially offset
by the earnings for the first six months of 2004 less dividends paid to
shareholders. Average quarterly equity as a percentage of average quarterly
assets was 8.92% at June 30, 2004, compared to 8.63% at December 31, 2003. Book
value per common share equaled $16.47 at June 30, 2004, a slight decrease 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
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 Bank is 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 11.5%
and 12.7%, respectively, at June 30, 2004. The Company is currently, and expects
to continue to be, in compliance with these guidelines.
26.
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 sets forth an analysis of the Holding Company's
capital ratios:
December 31, Minimum Well
June 30, ----------------------- Capital Capitalized
2004 2003 2002 Ratios Ratios
---------- ---------- ---------- ---------- ----------
Tier 1 risk-based capital $ 60,860 $ 59,851 $ 58,755
Tier 2 risk-based capital 6,629 7,790 7,281
---------- ---------- ----------
Total capital 67,489 67,641 66,036
Risk-weighted assets 530,355 556,729 557,620
Capital ratios
Tier 1 risk-based capital 11.5% 10.8% 10.5% 4.00% 6.00%
Tier 2 risk-based capital 12.7 12.2 11.8 8.00 10.00
Leverage ratio 8.4 7.7 7.5 4.00 5.00
Impact of Inflation, Changing Prices, and Monetary Policies
The financial statements and related financial data concerning the
Company have been prepared in accordance with accounting principles generally
accepted in the United States of America which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. The primary effect of inflation on the operations of the Company is
reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, changes in interest rates have a more
significant effect on the performance of a financial institution than do the
effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Interest rates are highly
sensitive to many factors which are beyond the control of the Company, including
the influence of domestic and foreign economic conditions and the monetary and
fiscal policies of the United States government and federal agencies,
particularly the FRB.
Recent Regulatory and Accounting Developments
Mortgage Loan Commitments
On March 9, 2004, the SEC issued Staff Accounting Bulletin No. 105
("SAB 105"), "Application of Accounting Principles to Loan Commitments."
According to the release, the fair value of the loan commitment is determined
without considering the value of future cash flows related to servicing the
loan, and thus the fair value represents the value of having to make a loan at
what may become a below-market rate. This guidance is applicable for mortgage
loan commitments for loans held-for-sale entered into April 1, 2004 or later.
The adoption of SAB 105 did not have a material effect on the Company's
consolidated 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 20 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
27.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1034, as amended) as of
June 30, 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 June 30,
2004.
28.
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 June 30,
2004.
ISSUER PURCHASES OF EQUITY SECURITIES
------------------- ----------------- ------------------ ----------------- -------------------
(d) Maximum Number
(c) Total Number (or Approximate
of Shares Dollar Value)
Purchased as Part of 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 Programs or Programs
------------------- ----------------- ------------------ ----------------- -------------------
04/01/04 - -- -- -- 198,947
04/30/04
------------------- ----------------- ------------------ ----------------- -------------------
05/01/04 - -- -- -- 198,947
05/31/04
------------------- ----------------- ------------------ ----------------- -------------------
06/01/04 - -- -- -- 198,947
06/30/04
------------------- ----------------- ------------------ ----------------- -------------------
Total -- -- -- 198,947
------------------- ----------------- ------------------ ----------------- -------------------
(1) For the quarter ended June 30, 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
At the April 27, 2004 annual meeting of stockholders, Dennis J.
McDonnell, John A. Shinkle and Scott C. Sullivan. were elected to serve
as Class III directors until 2007. Continuing as Class I directors
29.
until 2005 are Richard J. Berry, Walter E. Breipohl and John A.
Trainor. Continuing as Class II directors until 2006 are Robert J.
Doty, I.J. Reinhardt, Jr. and Dewey R. Yaeger.
There were 3,695,615 issued and outstanding shares of common stock
entitled to vote at the annual meeting. The voting on each item
presented at the annual meeting was as follows:
For Withheld
Election of Directors --------- --------
Dennis J. McDonnell 3,672,100 23,515
John A. Shinkle 3,635,387 60,228
Scott C. Sullivan 3,607,679 87,936
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
4.1 Amended and Restated Bylaws
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.
99.1 Purchase and Assumption Agreement dated May 21, 2004 between
UnionBank and First Bankers Trust Company, N.A.
Reports on Form 8-K:
Registrant filed a Current Report on Form 8-K on May 13, 2004 to
furnish its earnings announcement for the quarter ended March 31, 2004.
Registrant filed a Current Report on Form 8-K on May 24, 2004 to report
the execution of a Purchase and Assumption Agreement for the sale of
UnionBank's Quincy, Macomb, Paloma, Carthage, and Rushville, Illinois
branches.
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 August 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
31.
UNIONBANCORP, INC.
EXHIBIT INDEX
TO
QUARTERLY REPORT ON FORM 10-Q
Exhibit
No. Description
--- -----------
4.1 Amended and Restated Bylaws
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.
99.1 Purchase and Assumption Agreement Dated May 21, 2004 between
UnionBank and First Bankers Trust Company, N.A.
32.