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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 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 November 12, 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........................................11
Item 3 Quantitative and Qualitative Disclosures
About Market Risk..............................................27
Item 4. Controls and Procedures ............................................27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........28
Item 3. Defaults Upon Senior Securities.....................................28
Item 4. Submission of Matters to a Vote of Security Holders.................28
Item 5. Other Information...................................................29
Item 6. Exhibits ...........................................................29
SIGNATURES...................................................................30
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, 2004 and December 31, 2003 (In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
September 30, December 31,
2004 2003
------------ ------------
ASSETS
Cash and cash equivalents $ 27,732 $ 22,198
Securities available-for-sale 190,385 252,248
Loans 413,941 476,812
Allowance for loan losses (9,962) (9,011)
------------ ------------
Net loans 403,979 467,801
Cash surrender value of life insurance 14,853 14,379
Mortgage servicing rights 2,808 2,775
Premises and equipment, net 13,933 16,576
Goodwill 6,963 7,642
Intangible assets, net 759 1,232
Other real estate 90 227
Other assets 6,316 8,344
------------ ------------
Total assets $ 667,818 $ 793,422
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 66,358 $ 89,424
Interest-bearing 445,210 548,608
------------ ------------
Total deposits 511,568 638,032
Federal funds purchased and securities sold
under agreements to repurchase 1,033 1,533
Advances from the Federal Home Loan Bank 70,400 72,450
Notes payable 7,650 7,873
Series B mandatory redeemable preferred stock 831 831
Other liabilities 5,775 4,656
------------ ------------
Total liabilities 597,257 725,375
------------ ------------
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 September 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 46,574 43,609
Accumulated other comprehensive income 1,744 2,141
Unearned compensation under stock option plans -- (2)
------------ ------------
76,030 73,360
Treasury stock, at cost; 608,763 shares at September 30, 2004
and 600,763 at December 31, 2003 (5,469) (5,313)
------------ ------------
Total stockholders' equity 70,561 68,047
------------ ------------
Total liabilities and stockholders' equity $ 667,818 $ 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 Nine Months Ended September 30, 2004 and 2003 (In Thousands,
Except Per Share Data)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Interest income
Loans 6,872 $ 8,378 $ 21,175 $ 25,198
Securities
Taxable 1,304 1,502 4,694 5,079
Exempt from federal income taxes 312 379 955 1,172
Federal funds sold and other 17 15 32 46
---------- ---------- ---------- ----------
Total interest income 8,505 10,274 26,856 31,495
Interest expense
Deposits 2,347 2,896 7,634 9,543
Federal funds purchased and securities sold
under agreements to repurchase 14 26 67 96
Advances from the Federal Home Loan Bank 691 771 2,190 2,228
Series B mandatory redeemable preferred stock 12 -- 37 --
Notes payable 78 82 233 247
---------- ---------- ---------- ----------
Total interest expense 3,142 3,775 10,161 12,114
---------- ---------- ---------- ----------
Net interest income 5,363 6,499 16,695 19,381
Provision for loan losses 200 4,356 1,450 6,225
---------- ---------- ---------- ----------
Net interest income after
Provision for loan losses 5,163 2,143 15,245 13,156
Noninterest income
Service charges 742 790 2,256 2,340
Trust income 179 180 543 503
Mortgage banking income 450 1,101 1,665 3,322
Insurance commissions and fees 513 580 1,754 1,815
Securities gains, net 122 59 132 280
Gain on sale of assets, net 3,369 -- 4,094 309
Other income 475 549 1,520 2,376
---------- ---------- ---------- ----------
5,850 3,259 11,964 10,945
Noninterest expenses
Salaries and employee benefits 3,828 4,256 12,114 12,065
Occupancy expense, net 613 478 1,724 1,446
Furniture and equipment expense 563 518 1,693 1,535
Supplies and printing 91 111 321 359
Telephone 129 199 425 737
Other real estate owned expense 4 -- 8 168
Amortization of intangible assets 72 72 281 178
Other expenses 1,343 1,527 4,085 4,859
---------- ---------- ---------- ----------
6,643 7,161 20,651 21,347
---------- ---------- ---------- ----------
Income (loss) before income taxes 4,370 (1,759) 6,558 2,754
Income taxes 1,753 (890) 2,228 370
---------- ---------- ---------- ----------
Net income (loss) 2,617 (869) 4,330 2,384
Preferred stock dividends 52 65 156 193
---------- ---------- ---------- ----------
Net income (loss) for common stockholders $ 2,565 $ (934) $ 4,174 $ 2,191
========== ========== ========== ==========
Basic earnings (loss) per share $ 0.64 $ (0.23) $ 1.03 $ 0.55
========== ========== ========== ==========
Diluted earnings (loss) per common share $ 0.62 $ (0.23) $ 1.02 $ 0.54
========== ========== ========== ==========
Total comprehensive income (loss) $ 4,140 $ (2,376) $ 3,933 $ 863
========== ========== ========== ==========
See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2004 and 2003 (In Thousands)
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Nine Months Ended
September 30,
------------------------
2004 2003
---------- ----------
Cash flows from operating activities
Net income $ 4,330 $ 2,384
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 1,614 1,186
Amortization of intangible assets 281 178
Amortization of unearned compensation under stock option plans 2 16
Amortization of bond premiums, net 1,319 1,301
Provision for loan losses 1,450 6,225
Securities gains, net (132) (280)
Gain on sale of assets, net (4,094) --
Loss on sale of real estate acquired in settlement of loans 8 80
Gain on sale of loans (1,582) (4,207)
Proceeds from sales of loans held for sale 72,212 179,461
Origination of loans held for sale (69,075) (170,162)
Change in assets and liabilities
Net decrease in other assets 2,034 (203)
Net increase in other liabilities 501 (2,918)
---------- ----------
Net cash provided by operating activities 8,868 13,061
Cash flows from investing activities
Securities available-for-sale
Proceeds from maturities and paydowns 72,290 90,014
Proceeds from sales 18,796 23,897
Purchases (31,033) (125,365)
Net decrease in loans 18,533 (8,498)
Proceeds from sale of assets -- --
Purchase of premises and equipment (1,881) (2,758)
Proceeds from sale of real estate acquired in settlement of loans 317 2,262
Sale of branches (50,835) --
---------- ----------
Net cash provided by (used in) investing activities 26,187 (20,448)
Cash flows from financing activities
Net decrease in deposits (25,328) (19,006)
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (500) 11,935
Payments on notes payable (223) 10,700
Net increase (decrease) in advances from the Federal Home Loan Bank (2,050) (350)
Dividends on common stock (1,211) (1,079)
Dividends on preferred stock (156) (193)
Proceeds from exercise of stock options 103 313
Purchase of treasury stock (156) (189)
---------- ----------
Net cash provided by/(used) in financing activities (29,521) 2,131
---------- ----------
Net increase (decrease) in cash and cash equivalents 5,534 (5,256)
Cash and cash equivalents
Beginning of period 22,198 38,962
---------- ----------
End of period $ 27,732 $ 33,706
========== ==========
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 10,820 $ 12,687
Income taxes 476 1,850
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 U.S.
generally accepted accounting principles 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 nine months ended September 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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income/ (loss) as reported
for common stockholders $ 2,565 $ (934) $ 4,174 $ 2,191
Deduct: stock-based compensation expense
Determined under fair value based method 30 30 90 90
---------- ---------- ---------- ----------
Pro forma net income / (loss) $ 2,535 $ (964) $ 4,084 $ 2,101
========== ========== ========== ==========
Basic earnings/(loss)
per common share as reported $ 0.64 $ (0.23) $ 1.03 $ 0.55
Pro forma basic earnings / (loss)
per common share 0.63 (0.24) 1.01 0.53
Diluted earnings / (loss)
per common share as reported $ 0.62 $ (0.23) $ 1.02 $ 0.54
Pro forma diluted earnings / (loss)
per common share 0.62 (0.24) 0.99 0.52
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 nine months ended
September 30, 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 and nine months ended September 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/(loss) Per Common Share Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income /(loss)
available to common shareholders $ 2,565 $ (934) $ 4,174 $ 2,191
Weighted average common shares outstanding 4,034 4,001 4,034 3,993
---------- ---------- ---------- ----------
Basic Earnings/(loss) Per Common Share $ 0.64 $ (0.23) $ 1.03 $ 0.55
========== ========== ========== ==========
Diluted Earnings/(loss) Per Common Share
Weighted average common shares outstanding 4,034 4,001 4,034 3,993
Add: dilutive effect of assumed exercised
stock options 72 97 77 76
---------- ---------- ---------- ----------
Weighted average common and dilutive
Potential shares outstanding 4,106 4,098 4,111 4,069
========== ========== ========== ==========
Diluted Earnings/(loss) Per Common Share $ 0.62 $ (0.23) $ 1.02 $ 0.54
========== ========== ========== ==========
There were approximately 20,000 and 16,000 options outstanding at
September 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
31.2% of the Company's 2004 third quarter average earning asset base, is managed
to minimize interest rate risk, maintain sufficient liquidity, and maximize
return. The portfolio includes several callable agency debentures, adjustable
rate mortgage pass-throughs, and collateralized mortgage obligations. Corporate
bonds consist of investment grade obligations of public corporations. Equity
securities consist of Federal Reserve stock, Federal Home Loan Bank stock, and
trust preferred stock. Securities classified as available-for-sale, carried at
fair value, were $190,385 at September 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)
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The following table describes the fair value, gross unrealized gains
and losses of securities available-for-sale at September 30, 2004 and December
31, 2003:
September 30, 2004
-------------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------------ ------------ ------------
U.S. government agencies $ 12,269 $ 198 $ --
States and political subdivisions 27,138 1,158 (28)
U.S. government mortgage-backed securities 118,983 1,289 (237)
Collateralized mortgage obligations 3,830 3 (31)
Equity securities 17,816 78 --
Corporate 10,349 417 --
------------ ------------ ------------
$ 190,385 $ 3,143 $ (296)
============ ============ ============
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 September 30, 2004 and December 31, 2003:
September 30, 2004 December 31, 2003
---------------------------- ----------------------------
$ % $ %
------------ ------------ ------------ ------------
Commercial $ 87,787 21.21% $ 105,767 22.18%
Agricultural 31,158 7.53 33,766 7.08
Real estate:
Commercial mortgages 127,910 30.90 134,985 28.31
Construction 34,566 8.35 30,674 6.43
Agricultural 30,296 7.32 37,092 7.78
1-4 family mortgages 77,913 18.82 94,163 19.75
Installment 23,779 5.74 37,415 7.85
Other 532 0.13 2,950 0.62
------------ ------------ ------------ ------------
Total loans 413,941 100.00% 476,812 100.00%
============ ============
Allowance for loan losses (9,962) (9,011)
------------ ------------
Loans, net $ 403,979 $ 467,801
============ ============
7.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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Note 5. Allowance For Loan Losses
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, current
economic conditions; the type of loan being made; the creditworthiness of the
borrower over the term of the loan; and in the case of a collateralized loan,
the quality of the collateral for such loan. The allowance for loan losses
represents the Company's estimate of the allowance necessary to provide for
probable incurred losses in the loan portfolio. In making this determination,
the Company analyzes the ultimate collectibility of the loans in its portfolio,
incorporating feedback provided by internal loan staff, the independent loan
review function and information provided by examinations performed by regulatory
agencies. The Company makes an ongoing evaluation as to the adequacy of the
allowance for loan losses. Transactions in the allowance for loan losses for the
three months and nine months ended September 30, 2004 and 2003 are summarized
below:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Beginning balance $ 10,224 $ 7,253 $ 9,011 6,450
Charge-offs:
Commercial 429 2,422 1,235 3,058
Real estate mortgages 6 54 149 373
Installment and other loans 129 174 435 566
---------- ---------- ---------- ----------
Total charge-offs 564 2,650 1,819 3,997
---------- ---------- ---------- ----------
Recoveries:
Commercial 38 89 969 294
Real estate mortgages 0 4 193 43
Installment and other loans 64 30 158 67
---------- ---------- ---------- ----------
Total recoveries 102 123 1,320 404
---------- ---------- ---------- ----------
Net charge-offs 462 2,527 499 3,593
---------- ---------- ---------- ----------
Provision for loan losses 200 4,356 1,450 6,225
---------- ---------- ---------- ----------
Ending balance $ 9,962 $ 9,082 $ 9,962 $ 9,082
========== ========== ========== ==========
Period end total loans, net of
unearned interest $ 413,941 $ 483,042 $ 413,941 $ 483,042
========== ========== ========== ==========
Average loans $ 444,414 $ 485,989 $ 457,772 $ 483,374
========== ========== ========== ==========
Ratio of net charge-offs to
average loans 0.10% 0.52% 0.11% 0.74%
Ratio of provision for loan losses
to average loans 0.05% 0.90% 0.32% 1.29%
Ratio of allowance for loan losses
to ending total loans 2.41% 1.88% 2.41% 1.88%
Ratio of allowance for loan losses
to total nonperforming loans 220.20% 89.01% 220.20% 89.01%
Ratio of allowance at end of period
to average loans 2.24% 1.87% 2.18% 1.88%
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.
Nine Months Ended
---------------------------------------------------------------------
September 30, 2004
---------------------------------------------------------------------
Banking Mortgage Financial Other Consolidated
Segment Banking Services Segments Totals
----------- ----------- ----------- ----------- -----------
Net interest income $ 15,333 $ 1,610 $ -- $ (248) $ 16,695
Other revenue 7,879 1,738 2,347 -- 11,964
Other expense 12,320 1,674 2,934 1,896 18,824
Segment profit (loss) 8,252 1,390 (750) (2,334) 6,558
Noncash items
Depreciation 1,241 76 148 187 1,652
Provision for loan losses 1,450 -- -- -- 1,450
Other intangibles 160 -- 15 -- 175
Goodwill 5,143 -- 1,820 -- 6,963
Segment assets 594,304 76,586 6,766 (9,838) 667,818
Nine Months Ended
---------------------------------------------------------------------
September 30, 2003
---------------------------------------------------------------------
Banking Mortgage Financial Other Consolidated
Segment Banking Services Segments Totals
----------- ----------- ----------- ----------- -----------
Net interest income $ 18,487 $ 1,149 $ -- $ (255) $ 19,381
Other revenue 4,762 3,303 2,309 571 10,945
Other expense 11,948 2,269 3,096 2,670 19,983
Segment profit (loss) 4,114 2,109 (802) (2,667) 2,754
Noncash items
Depreciation 858 74 123 131 1,186
Provision for loan losses 6,225 -- -- -- 6,225
Other intangibles 178 -- -- -- 178
Goodwill 5,718 -- 1,924 -- 7,642
Segment assets 782,835 6,972 8,137 (5,463) 792,481
9.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Note 8: Business Acquisitions and Divestures
On September 10, 2004, the Company completed the sale of five branch offices
located in western Illinois. Per the terms of the agreement announced on May 24,
2004, First Bankers Trust Company of Quincy, Illinois acquired the physical
assets, $88,600 in deposits, and $40,400 of the loan portfolio of UnionBank's
Quincy, Macomb, Paloma, Carthage and Rushville, Illinois offices. This
transaction effectively exited UnionBank from the western Illinois marketplace.
Included in the gain on sale of assets is the portion of goodwill allocated to
the sale of these branches of $679 as well as the amortization of the remaining
core deposit intangible assigned to the deposits sold of $192.
On October 20, 2004, the Company successfully completed the merger of
UnionFinancial Services & Trust Company into UnionBank. UnionFinancial was a
stand-alone financial services company that offers a full line of insurance,
brokerage, trust and asset management services.
10.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
The following discussion provides an analysis of the Company's results
of operations and financial condition of UnionBancorp, Inc. for the three months
and nine months ended September 30, 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 nine months
ended September 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 U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. By their nature, changes in these assumptions and estimates
could significantly affect the Company's financial position or results of
operations. Actual results could differ from those estimates. Discussed below
are those critical accounting policies that are of particular significance to
the Company.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required based on past loan loss experience, the nature
and volume of the portfolio, information about specific borrower situations and
estimated collateral values, current economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
11.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
charged off. Loan losses are charged against the allowance when management
believes that the uncollectibility of a loan balance is confirmed.
Mortgage Servicing Rights: Servicing assets represent purchased rights
and the allocated value of retained servicing rights on loans sold. Servicing
assets are expensed in proportion to, and over the period of, estimated net
servicing revenues. Impairment is evaluated based on the fair value of the
assets, using groupings of the underlying loans as to interest rates and then,
secondarily, as to geographic and prepayment characteristics. Fair value is
determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions.
Any impairment of a grouping is reported as a valuation allowance.
General
UnionBancorp, Inc. 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 bank subsidiary, but also derives revenue from its
Financial Services Division. The Company provides a full range of services to
individual and corporate customers located in the north central and 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 Bank are subject to regulations of certain regulatory agencies
and undergo periodic examinations by those regulatory agencies.
Third Quarter Highlights
o The Company completed the sale of five of its western Illinois branch
offices on September 10, 2004, selling $40,400 in loans and $88,600 in
deposits to First Bankers Trust Company of Quincy. The transaction,
which effectively exited the Company from the western Illinois market,
yielded a net gain on sale (after allocating a portion of the
intangible assets and goodwill, taxes and applicable expenses) of
approximately $1,700 or $0.41.
o The net interest margin remained relatively stable over the previous
four quarters, reported at 3.38% at the end of the third quarter 2004.
o The level of nonperforming loans to total end of period loans totaled
1.09% as of September 30, 2004, compared to 2.11% on September 30,
2003 and 1.78% at December 31, 2003.
o Net charge-offs for the third quarter were 0.10% of average loans, as
compared to 0.52% for third quarter 2003.
o The reserve coverage ratio (allowance to nonperforming loans) was
reported at 220.20% as of September 30, 2004 as compared to 89.01% as
of September 30, 2003 and 106.30% as of December 31, 2003.
o Loan demand in the third quarter remained soft, as total loans
decreased $62,900 to $413,900 since December 31, 2003. Of the $60,900
decrease in loans, $40,400 or 64.23% was associated with the sale of
the Company's western Illinois branch offices. The remaining decrease
was due to tighter underwriting standards, a continued softening of
overall loan demand and normal paydowns.
12.
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's Board of Directors approved the payment of a $0.10
quarterly cash dividend on the Company's common stock, marking the
78th consecutive quarter of dividends paid to stockholders.
Results of Operations
Net Income
Net income equaled $2,617 or $0.62 per diluted share for the three
months ended September 30, 2004, versus a net loss of $869 or $0.23 per diluted
share for the same period in 2003. For the nine months ended September 30, 2004,
net income equaled $4,330 or $1.02 per diluted share compared to $2,384 or $0.54
per diluted share earned in the same period during 2003.
The Company's quarterly results were positively impacted by the
approximate $1,700 net gain on sale (after allocating a portion of the
intangible assets and goodwill, taxes and applicable expenses) for the sale of
the five western Illinois branch offices. This nonrecurring item was partially
offset by decreases 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 to the change in earnings were decreases
in revenue generated from the mortgage banking division due to a slowdown in new
and refinancing activity and continued operating losses from UnionFinancial
Services & Trust Company.
Return on average assets was 1.46% for the third quarter of 2004
compared to (0.45)% for the same period in 2003. Return on average assets was
0.77% for the nine month period ended September 30, 2004 compared to 0.41% for
the same period in 2003.
Return on average stockholders' equity was 15.40% for the third quarter
of 2004 compared to (4.98)% for the same period in 2003. Return on average
stockholders' equity was 8.51% for the nine month period ended September 30,
2004 compared to 4.57% 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 $5,547 for the
three months ended September 30, 2004, compared with $6,717 earned during the
same period in 2003. This represented a decrease of $1,170 or 17.4%. The decline
in net interest income is attributable to the quarter-over-quarter reduction of
interest income earned on interest-earning assets totaling $1,803 exceeding the
quarter-over-quarter decrease in interest expense paid on interest bearing
liabilities totaling $633.
13.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
The $1,803 reduction in interest income resulted from a decrease of
$987 related to rate and $816 due to volume. The majority of the change in
interest income was related to a 70 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 $633 reduction in interest expense resulted from decreases of $327
associated with rate and $306 associated with volume. The majority of the change
was attributable to a 42 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 38 basis points to 3.38% in the third
quarter 2004 as compared with 3.76% for the same period in 2003. The decrease in
the net interest margin in the third quarter 2004 when compared to 2003 resulted
primarily from a decrease in loan 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
fourth quarter of 2004.
Net interest income, on a tax equivalent basis, for the nine months
ended September 30, 2004 totaled $17,249, representing a decrease of $2,802 or
14.0% compared to the $20,051 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 $4,755 exceeding the
year-over-year decrease in interest expense paid on interest bearing liabilities
totaling $1,953. The net interest margin for the first nine months of 2004
decreased 43 basis points to 3.34% 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 Ended September 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 $ 148 $ -- --% $ 186 $ 1 2.13% $ -- $ (1) $ (1)
Securities (1)
Taxable 177,728 1,305 2.91 186,752 1,502 3.19 (70) (127) (197)
Non-taxable (2) 25,819 472 7.25 31,128 575 7.33 (61) (42) (103)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total securities (tax
equivalent) 203,547 1,777 3.46 217,880 2,077 3.78 (131) (169) (300)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Federal funds sold 4,447 17 1.52 4,091 14 1.36 1 2 3
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loans (3)(4)
Commercial 122,475 1,813 5.87 132,466 1,958 5.86 (148) 3 (145)
Real estate 292,531 4,401 5.97 310,517 5,396 6.89 (301) (694) (995)
Installment and other 29,408 681 9.19 43,006 1,046 9.65 (237) (128) (365)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross loans (tax equivalent) 444,414 6,895 6.16 485,989 8,400 6.86 (686) (819) (1,505)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets 652,556 8,689 5.28 708,146 10,492 5.88 (816) (987) (1,803)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 21,851 23,392
Premises and equipment, net 15,726 14,991
Other assets 23,894 28,197
-------- --------
Total nonearning assets 61,471 66,580
-------- --------
Total assets $714,027 $774,726
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 71,940 $ 87 0.48% $ 61,515 $ 70 0.45% $ 12 $ 5 $ 17
Money market accounts 79,763 287 1.43 111,540 370 1.32 (112) 29 (83)
Savings deposits 47,518 63 0.53 49,284 87 0.70 (3) (21) (24)
Time deposits 294,275 1,909 2.57 314,715 2,369 2.99 (145) (315) (460)
Federal funds purchased and
repurchase agreements 2,752 14 2.02 5,345 26 1.93 (13) 1 (12)
Advances from FHLB 67,987 691 4.03 72,657 771 4.21 (48) (32) (80)
Notes payable 8,233 91 4.39 7,939 82 4.10 3 6 9
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 572,468 3,142 2.18 622,995 3,775 2.40 (306) (327) (633)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 70,051 75,591
Other liabilities 3,900 6,888
-------- --------
Total noninterest-bearing
liabilities 73,951 82,479
-------- --------
Stockholders' equity 67,608 69,252
-------- --------
Total liabilities and
stockholders' equity $714,027 $774,726
======== ========
Net interest income
(tax equivalent) $ 5,547 $ 6,717 $ (510) $ (660) $ (1,170)
======== ======== ======== ======== ========
Net interest income (tax
equivalent) to total
earning assets 3.38% 3.76%
======== ========
Interest-bearing liabilities
to earning assets 87.73% 87.98%
======== ========
- ----------------------------------
(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 Nine Months Ended September 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 $ 136 $ 1 0.98% $ 251 $ 4 2.13% $ (1) $ (2) $ (3)
Securities (1)
Taxable 201,595 4,693 3.10 190,825 5,079 3.56 283 (669) (386)
Non-taxable (2) 26,389 1,447 7.30 31,748 1,776 7.48 (115) (214) (329)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total securities (tax
equivalent) 227,984 6,140 3.59 222,573 6,855 4.12 168 (883) (715)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Federal funds sold 3,239 32 1.32 4,817 42 1.17 (15) 5 (10)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loans (3)(4)
Commercial 134,245 5,653 5.61 133,577 6,242 6.25 32 (621) (589)
Real estate 289,954 13,275 6.10 303,318 15,731 6.93 (661) (1,795) (2,456)
Installment and other 33,573 2,309 9.16 46,479 3,291 9.47 (878) (104) (982)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross loans (tax equivalent) 457,772 21,237 6.18 483,374 25,264 6.99 (1,507) (2,520) (4,027)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets 689,131 27,410 5.30 711,015 32,165 6.05 (1,355) (3,400) (4,755)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 21,960 21,973
Premises and equipment, net 16,142 14,525
Other assets 25,932 31,339
-------- --------
Total nonearning assets 64,034 67,837
-------- --------
Total assets $753,165 $778,852
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 55,304 $ 203 0.49% $ 56,171 $ 227 0.54% $ (3) $ (21) $ (24)
Money market accounts 104,038 940 1.20 106,648 1,161 1.46 (27) (194) (221)
Savings deposits 49,048 208 0.56 49,570 287 0.77 (3) (76) (79)
Time deposits 312,862 6,282 2.67 330,549 7,868 3.18 (397) (1,189) (1,586)
Federal funds purchased and
repurchase agreements 5,312 67 1.68 6,401 96 2.01 (15) (14) (29)
Advances from FHLB 71,242 2,190 4.09 69,199 2,228 4.30 68 (106) (38)
Notes payable 8,173 271 4.42 8,054 247 4.10 4 20 24
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 605,979 10,161 2.23 626,592 12,114 2.58 (373) (1,580) (1,953)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 74,809 74,808
Other liabilities 4,393 7,691
-------- --------
Total noninterest-bearing
liabilities 79,202 82,499
-------- --------
Stockholders' equity 67,985 69,761
-------- --------
Total liabilities and
stockholders' equity $753,166 $778,852
======== ========
Net interest income
(tax equivalent) $ 17,249 $ 20,051 $ (738) $ (2,064) $ (2,802)
======== ======== ======== ======== ========
Net interest income (tax
equivalent) to total
earning assets 3.34% 3.77%
======== ========
Interest-bearing liabilities
to earning assets 87.93% 88.13%
======== ========
- ----------------------------------
(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 provision for loan losses charged to operating expense for the
third quarter of 2004 totaled $200, a decrease of $4,156 from the $4,356
recorded during the same period a year ago. The provision for the third quarter
of 2003 was largely attributable to the deterioration of two impaired commercial
credits. As a result of the continued deterioration of these two loan
relationships, the Company specifically provided $3,500 to its allowance for
loan losses during the third quarter of 2003 for the losses incurred on these
two credits. The provision for the third quarter of 2004 was a result of an
increase in the other potential problem loans of $818, as discussed later in the
document, offset in portion by the reduction in the overall loan portfolio. The
provision for loan losses charged to operating expense for the nine months ended
September 30, 2004 totaled $1,450, a decrease of $4,775 from $6,225 recorded
during the same period a year ago. The decline in the provision was due to the
previously mentioned two impaired credits from third quarter 2003, a decline in
the overall level of nonperforming loans and other improving trends in asset
quality.
Net charge-offs for the third quarter of 2004 were $462 compared with
$2,527 for the comparable period in 2003. Annualized net charge-offs decreased
to 0.10% of average loans for the third quarter of 2004 compared to 0.52% in the
same period in 2003. Net charge-off for the nine months ended September 30, 2004
were $499 compared with $3,593 for the comparable period in 2003. Annualized net
charge-offs decreased to 0.11% of average loans for the nine months ended
September 30, 2004 compared to 0.74% in the same period in 2003.
Net charge-offs for the third quarter of 2003 were impacted by one of
the previously mentioned commercial credits. This borrower essentially ceased
operations during the third quarter of 2003 resulting in $1,897 of the
outstanding loan balance being charged off. Approximately $500 of the
outstanding balance on the second loan discussed above was charged off in the
fourth quarter of 2003.
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.
Management remains watchful of credit quality issues and believes that
issues within the portfolio are reflective of the challenging economic
environment experienced over the past few years. Should the economic climate
deteriorate from current levels, 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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Service charges $ 742 $ 790 $ 2,256 $ 2,340
Trust income 179 180 543 503
Mortgage banking income 450 1,101 1,665 3,322
Insurance commissions and fees 513 580 1,754 1,815
Securities gains, net 122 59 132 280
Gain on the sale of assets 3,369 -- 4,094 309
Other income 475 549 1,520 2,376
---------- ---------- ---------- ----------
$ 5,850 $ 3,259 $ 11,964 $ 10,945
========== ========== ========== ==========
Noninterest income totaled $5,850 for the three months ended September
30, 2004, compared to $3,259 for the same time frame in 2003. This represented
an increase of $2,591, or 79.5.%. Included in third quarter 2004 results was a
$3,369 net gain on sale of the Company's branches in Western Illinois. Excluding
the net gain related to this divestiture and net securities gains from both
periods, noninterest income decreased $841 or 36%.
The majority of the change to noninterest income was related to a $651
decrease in mortgage banking income attributable to a slowdown in new and
refinancing loan production activity. Mortgage banking income includes gains
generated from the sale of loans and net servicing revenue (after amortization
of mortgage servicing rights). Also contributing to the decline were decreases
in brokerage fee income (included in insurance commissions and fees), nsf fees
(included in service charges), and revenue generated from Bank Owned Life
Insurance (included in other income).
Noninterest income totaled $11,964 for the nine months ended September
30, 2004, compared to $10,945 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 $2,618 or 25%. The change was largely reflective of
the same items discussed regarding the third quarter.
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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Salaries and employee benefits $ 3,828 $ 4,256 $ 12,114 $ 12,065
Occupancy expense, net 613 478 1,724 1,446
Furniture and equipment expense 563 518 1,693 1,535
Supplies and printing 91 111 321 359
Telephone 129 199 425 737
Other real estate owned expense 4 -- 8 168
Amortization of intangible assets 72 72 281 178
Other expenses 1,343 1,527 4,085 4,859
---------- ---------- ---------- ----------
$ 6,643 $ 7,161 $ 20,651 $ 21,347
========== ========== ========== ==========
Noninterest expense totaled $6,643 for the three months ended September
30, 2004, as compared to $7,161 for the same timeframe in 2003. This represented
a decrease of $518 or 7.2%. This improvement in noninterest expense was
primarily due to a decrease in salary and employee benefits partially offset by
increases in occupancy and furniture and equipment expense, incurred as a result
of the Company's branch expansion into the Yorkville market.
Noninterest expense totaled $20,651 for the nine months ended September
30, 2004, decreasing by $696 or 3.26% from the same period in 2003. The change
was largely reflective of the same items discussed regarding the third 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 nine months ended September 30, 2004 and 2003.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Income before income taxes $ 4,370 $ (1,759) 6,558 $ 2,754
Applicable income taxes 1,753 (890) 2,228 370
Effective tax rates 40.1% (50.6%) 34.0% 13.4%
The Company recorded an income tax expense of $1,753 and an income tax
benefit of $890 for the three months ended September 30, 2004 and 2003. The
Company recorded income tax expense of $2,228 and $370 for the nine months ended
September 30, 2004 and 2003, respectively. The fluctuation in tax rate from
period to period has been a result of the impact of earnings, tax exempt
interest and tax planning strategies for each of the periods presented, as well
as the non-deductibility of the goodwill related to the branch sale in the third
quarter of 2004.
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Preferred Stock Dividends
The Company paid $52 and $65 in preferred stock dividends for the three
months ended September 30, 2004 and 2003, respectively. The Company paid $156
and $193 in preferred stock dividends for the nine months ended September 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 rates
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 September 30, 2004 and December 31, 2003.
September 30, 2004
--------------------------------------------------
Net Interest Income
--------------------------------------------------
Amount Change Change
----------- ----------- ---------
(Dollars in Thousands)
+200 bp $ 22,693 $ 967 4.45%
+100 bp 22,257 531 2.44
Base 21,726 -- --
-100 bp 21,026 (700) (3.22)
Based upon the Company's model at September 30, 2004, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by $967 or 4.45%. The effect of an immediate 100
basis point decrease in rates would decrease the Company's net interest income
by $700 or 3.22%. For the September 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.
20.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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.
Financial Condition
General
As of September 30, 2004, the Company had total assets of $667,818,
total gross loans of $413,941, total deposits of $511,568 and total
stockholders' equity of $70,561. Total assets decreased by $125,604 or 15.8%
from year-end 2003. Total gross loans decreased by $62,871 or 13.2% from
year-end 2003 and reflected tighter underwriting standards, a continued
softening of overall loan demand, and normal paydowns. Approximately $40,400 or
64% was related to the sale of the Company's branches in Western Illinois. Total
deposits decreased by $126,464 or 19.8% from year-end 2003. Approximately
$88,600 or 70% was related to the sale of the Company's branches in Western
Illinois.
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
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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.
The following table summarizes nonperforming assets and loans past due
90 days or more and still accruing for the previous five quarters.
2004 2003
-------------------------------------- ------------------------
Sept 30, Jun 30, Mar 31, Dec 31, Sept 30,
---------- ---------- ---------- ---------- ----------
Nonaccrual loans $ 3,753 $ 5,293 $ 5,984 $ 8,149 $ 8,095
Loans 90 days past due and still accruing interest 771 502 1,170 328 2,108
---------- ---------- ---------- ---------- ----------
Total nonperforming loans 4,524 5,795 7,154 8,477 10,203
Other real estate owned 90 164 246 227 145
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 4,614 $ 5,959 $ 7,400 $ 8,704 $ 10,348
========== ========== ========== ========== ==========
Nonperforming loans to total end of period loans 1.09% 1.28% 1.53% 1.78% 2.11%
Nonperforming assets to total end of period loans 1.11 1.31 1.59 1.83 2.14
Nonperforming assets to total end of period assets 0.69 0.81 0.95 1.10 1.30
The level of nonperforming loans at September 30, 2004 decreased to
$4,524 versus the $8,477 that existed as of December 31, 2003 and decreased from
$10,203 at September 30, 2003. The level of nonperforming loans to total end of
period loans was 1.09% at September 30, 2004, as compared to 1.78% at December
31, 2003 and 2.11% at September 30, 2003. The reserve coverage ratio (allowance
to nonperforming loans) was reported at 220.2% as of September 30, 2004 as
compared to 89.01% as of September 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 $7,710 at September 30, 2004
as compared to $6,892 at June 30, 2004 and $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 September 30, 2004, the allowance for loan losses was $9,962 or
2.41% of total loans as compared to $9,011 or 1.89% at December 31, 2003, and
$9,082 or 1.88% at September 30, 2003. In originating loans, the Company
22.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
recognizes that credit losses will be experienced and the risk of loss will vary
with, among other things, general economic conditions; the type of loan being
made; the creditworthiness of the borrower over the term of the loan; and, in
the case of a collateralized loan, the quality of the collateral for such a
loan. The allowance for loan losses represents the Company's estimate of the
allowance necessary to provide for probable incurred losses in the loan
portfolio. In making this determination, the Company analyzes the ultimate
collectibility of the loans in its portfolio, incorporating feedback provided by
internal loan staff, the independent loan review function, and information
provided by examinations performed by regulatory agencies. The Company makes an
ongoing evaluation as to the adequacy of the allowance for loan losses.
On a quarterly basis, management reviews the adequacy of the allowance
for loan losses. Commercial credits are graded by the loan officers and the Loan
Review function validates the officers' grades. In the event that the loan
review function downgrades the loan, it is included in the allowance analysis at
the lower grade. The grading system is in compliance with the regulatory
classifications and the allowance is allocated to the loans based on the
regulatory grading, except in instances where there are known differences (i.e.,
collateral value is nominal, etc.). To establish the appropriate level of the
allowance, a sample of loans (including impaired and nonperforming loans) are
reviewed and classified as to potential loss exposure.
Based on an estimation 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.
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Management remains watchful of credit quality issues and believes that
issues within the portfolio are reflective of the challenging economic
environment experienced over the past few years. Should the economic climate
deteriorate from current levels, borrowers may experience difficulty, and the
level of nonperforming loans, charge-offs and delinquencies could rise and
require further increases in the provision.
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 increase in cash and cash equivalents of $5,534 from December 31, 2003 to
September 30, 2004.
During the first nine months of 2004, the Company experienced net cash
outflows of ($29,521) in financing activities primarily due to a decrease in
deposits. In contrast, net cash inflows were provided by $8,868 in operating
activities due to proceeds from net loans sales and net income and $26,187 in
investing activities largely due to the decrease in net loans and securities.
24.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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 September 30, 2004.
Payments Due by Period
--------------------------------------------------------------
Within 1 After
Contractual Obligations Year 1-3 Years 4-5 Years 5 Years Total
---------- ---------- ---------- ---------- ----------
Long-term debt $ 7,650 $ -- $ -- $ -- $ 7,650
FHLB Advances 22,300 19,500 20,400 8,200 70,400
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $ 29,975 $ 19,500 $ 20,400 $ 8,200 $ 78,050
========== ========== ========== ========== ==========
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 $ 54,961 $ 8,475 $ 562 $ 14,175 $ 78,173
Standby letters of credit 3,657 1,038 -- -- 4,695
---------- ---------- ---------- ---------- ----------
Total commercial commitments $ 58,618 $ 9,513 $ 562 $ 14,175 $ 82,868
========== ========== ========== ========== ==========
Capital Resources
Stockholders' Equity
The Company is committed to managing capital for maximum shareholder
benefit and maintaining strong protection for depositors and creditors.
Stockholders' equity at September 30, 2004 was $70,561, an increase of $2,514 or
3.7%, from December 31, 2003. The increase in stockholders' equity was largely
the result of earnings for the first nine months of 2004 less dividends paid to
shareholders and a decrease in accumulated other comprehensive. Average
quarterly equity as a percentage of average quarterly assets was 9.47% at
September 30, 2004, compared to 8.63% at December 31, 2003. Book value per
common share equaled $17.38 at September 30, 2004 compared to $16.77 at December
31, 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. On September 23, 2004, the Board of Directors extended the
Company's stock repurchase program through May 2, 2006. Under the terms of the
plan, the Company is able to repurchase, from time to time, up to 5% of its
outstanding shares of common stock in the open market or in private
transactions. Purchases are dependent upon market conditions and the
availability of shares. The extension of the repurchase program enables the
Company to optimize its 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 18,500 shares
at a weighted average cost of $18.62.
25.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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 13.1%
and 14.4%, respectively, at September 30, 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
September 30, ------------------------ Capital Capitalized
2004 2003 2002 Ratios Ratios
---------- ---------- ---------- ---------- ----------
Tier 1 risk-based capital $ 63,247 $ 59,851 $ 58,755
Tier 2 risk-based capital 6,031 7,790 7,281
---------- ---------- ----------
Total capital 69,278 67,641 66,036
Risk-weighted assets 482,497 556,729 557,620
Capital ratios
Tier 1 risk-based capital 13.1% 10.8% 10.5% 4.00% 6.00%
Tier 2 risk-based capital 14.4 12.2 11.8 8.00 10.00
Leverage ratio 9.6 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
26.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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.
EITF 03-1, Other-Than-Temporary Impairment
In March 2004, the FASB Emerging Issues Task Force ("EITF") reached a
consensus regarding EITF 03-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments." The consensus clarifies the meaning
of other-than-temporary impairment and its application to investments classified
as either available-for-sale or held-to-maturity under SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities," and investments accounted
for under the cost method or the equity method. The recognition and measurement
guidance for which the consensus was reached is to be applied to
other-than-temporary impairment evaluations. In September 2004, the Financial
Accounting Standards Board ("FASB") issued a final FASB Staff Position, FSP EITF
Issue 03-01-1, which has delayed the effective date for the measurement and
recognition guidance of EITF 03-01. The comment period is currently open related
to this staff position. The implementation date is unknown until further
guidance is issued by the FASB. We are currently evaluating the impact of
adopting EITF 03-01.
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
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1034, as amended) as of
September 30, 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 September 30, 2004.
27.
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. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases of the
Company's common stock by the Company during the quarter ended
September 30, 2004.
===================================================================================================
(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
===================================================================================================
07/01/04 - -- -- -- 198,947
07/31/04
===================================================================================================
08/01/04 - 8,000 $19.68 18,500 190,947
08/31/04
===================================================================================================
09/01/04 - -- -- -- 190,947
09/30/04
===================================================================================================
Total -- -- -- 190,947
===================================================================================================
(1) For the quarter ended September 30, 2004, the Company repurchased
8,000 shares at an average price per share of $19.68 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
May 2, 2006. 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.
28.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
31.1 Certification of Dewey R. Yaeger required by Rule 13a - 14(a).
31.2 Certification of Kurt R. Stevenson required by Rule 13a - 14(a).
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from
the Company's President and Principal Executive Officer.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from
the Company's Senior Vice President and Principal Financial and
Accounting Officer.
29.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on November 12, 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
30.
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.
31.