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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2005
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)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Shares outstanding at May 12, 2005
- ----------------------------- ----------------------------------
Common Stock, Par Value $1.00 4,038,800
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UnionBancorp, Inc.
Form 10-Q Index
March 31, 2005
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
o Unaudited Consolidated Balance Sheets...........................1
o Unaudited Consolidated Statements of Income and
Comprehensive Income ......................................2
o Unaudited Consolidated Statements of Cash Flows.................3
o Notes to Unaudited Consolidated Financial Statements............4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk...............................................24
Item 4. Controls and Procedures .............................................24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........26
Item 3. Defaults Upon Senior Securities......................................26
Item 4. Submission of Matters to a Vote of Security Holders..................26
Item 5. Other Information....................................................27
Item 6. Exhibits.............................................................27
SIGNATURES....................................................................28
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
March 31, 2005 and December 31, 2004 (In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
March 31, December 31,
2005 2004
------------ ------------
ASSETS
Cash and cash equivalents $ 18,860 $ 22,802
Securities available-for-sale 185,766 191,661
Loans 421,523 419,275
Allowance for loan losses (9,948) (9,732)
------------ ------------
Net loans 411,575 409,543
Cash surrender value of life insurance 15,087 14,953
Mortgage servicing rights 2,745 2,772
Premises and equipment, net 13,827 13,463
Goodwill 6,963 6,963
Intangible assets, net 659 703
Other real estate 400 420
Other assets 5,542 6,266
------------ ------------
Total assets $ 661,424 $ 669,546
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 64,117 $ 55,800
Interest-bearing 439,184 456,677
------------ ------------
Total deposits 503,301 512,477
Federal funds purchased and securities sold
under agreements to repurchase 19,297 12,722
Advances from the Federal Home Loan Bank 57,100 61,900
Notes payable 6,858 6,629
Series B mandatory redeemable preferred stock 831 831
Other liabilities 3,627 4,740
------------ ------------
Total liabilities 591,014 599,299
------------ ------------
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;
4,667,873 shares issued at March 31, 2005 and
4,640,907 shares issued at December 31, 2004 4,668 4,641
Additional paid-in capital 22,971 22,632
Retained earnings 47,057 46,592
Accumulated other comprehensive income 926 1,351
------------ ------------
76,122 75,716
Treasury stock, at cost; 620,263 shares at March 31, 2005
and 608,763 at December 31, 2004 (5,712) (5,469)
------------ ------------
Total stockholders' equity 70,410 70,247
------------ ------------
Total liabilities and stockholders' equity $ 661,424 $ 669,546
============ ============
See Accompanying Notes to Unaudited Financial Statements
1.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended March 31, 2005 and 2004 (In Thousands, Except Per Share Data)
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Three Months Ended
March 31,
---------------------------
2005 2004
------------ ------------
Interest income
Loans $ 6,450 $ 7,268
Securities
Taxable 1,425 1,905
Exempt from federal income taxes 258 325
Federal funds sold and other 9 10
------------ ------------
Total interest income 8,142 9,508
Interest expense
Deposits 2,319 2,831
Federal funds purchased and securities sold
under agreements to repurchase 74 13
Advances from the Federal Home Loan Bank 583 771
Series B mandatory redeemable preferred stock 12 12
Notes payable 69 80
------------ ------------
Total interest expense 3,057 3,707
------------ ------------
Net interest income 5,085 5,801
Provision for loan losses 100 750
------------ ------------
Net interest income after
provision for loan losses 4,985 5,051
Noninterest income
Service charges 483 711
Trust income 215 184
Mortgage banking income 340 568
Insurance commissions and fees 421 633
Banked owned life insurance 134 172
Gain on sale of assets, net 2 259
Other income 255 397
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1,850 2,924
Noninterest expenses
Salaries and employee benefits 3,476 4,150
Occupancy expense, net 394 552
Furniture and equipment expense 424 557
Marketing 96 168
Supplies and printing 77 115
Telephone 107 154
Amortization of intangible assets 44 52
Other expenses 928 1,231
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5,546 6,979
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Income before income taxes 1,289 996
Income taxes 325 196
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Net income 964 800
Preferred stock dividends 52 52
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Net income for common stockholders $ 912 $ 748
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Basic earnings per common share $ 0.23 $ 0.19
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Diluted earnings per common share $ 0.22 $ 0.18
============ ============
Total comprehensive income $ 539 $ 912
============ ============
See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2005 and 2004 (In Thousands)
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Three Months Ended
March 31,
------------------------
2005 2004
---------- ----------
Cash flows from operating activities
Net income $ 964 $ 800
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 418 504
Amortization of intangible assets 44 52
Amortization of mortgage servicing rights 142 179
Amortization of unearned compensation under stock option plans -- 2
Amortization of bond premiums, net 278 375
Provision for loan losses 100 750
Provision for deferred income taxes 466 --
Net change in BOLI (134) (172)
Gain on sale of the credit card portfolio -- (259)
Gain on sale of assets (2) --
Gain on sale of real estate acquired in settlement of loans (6) --
Gain on sale of loans (236) (515)
Proceeds from sales of loans held for sale 10,262 24,087
Origination of loans held for sale (9,011) (21,223)
Change in assets and liabilities
Decrease in other assets 145 1,479
Increase (decrease) in other liabilities (837) 367
---------- ----------
Net cash provided by operating activities 2,593 6,426
Cash flows from investing activities
Securities available-for-sale
Proceeds from maturities and paydowns 14,818 20,530
Proceeds from sales -- 6,498
Purchases (9,902) (25,325)
Purchase of loans (3,275) --
Net decrease in loans 128 6,333
Proceeds from sale of credit card portfolio -- 1,900
Purchase of premises and equipment (782) (663)
Proceeds from sale of real estate acquired in settlement of loans 26 30
---------- ----------
Net cash provided by investing activities 1,013 9,303
Cash flows from financing activities
Net decrease in deposits (9,176) (23,057)
Net increase in federal funds purchased
and securities sold under agreements to repurchase 6,575 2,902
Payments on notes payable -- (57)
Proceeds from notes payable 250 --
Net increase (decrease) in other borrowed funds (21) --
Net increase (decrease) in advances from the Federal Home Loan Bank (4,800) 2,250
Dividends on common stock (445) (403)
Dividends on preferred stock (52) (52)
Proceeds from exercise of stock options 364 75
Purchase of treasury stock (243) --
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Net cash provided by financing activities (7,548) (18,342)
---------- ----------
Net decrease in cash and cash equivalents (3,942) (2,613)
Cash and cash equivalents
Beginning of period 22,802 22,198
---------- ----------
End of period $ 18,860 $ 19,585
========== ==========
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 3,413 $ 3,163
Income taxes 311 --
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, 2004. The annualized results of operations
during the three months ended March 31, 2005 are not necessarily indicative of
the results expected for the year ending December 31, 2005. All financial
information is in thousands (000's), except per share data.
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying common stock at date of grant. The following
table illustrates the effect on net income and earnings per share if expense was
measured using the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation.
Three Months Ended
March 31,
-----------------------
2005 2004
---------- ----------
Net income as reported
for common stockholders $ 912 $ 748
Deduct: stock-based compensation expense
Determined under fair value based method 24 30
---------- ----------
Pro forma net income $ 888 $ 718
========== ==========
Basic earnings
per common share as reported $ 0.23 $ 0.19
Pro forma basic earnings
per common share 0.22 0.19
Diluted earnings
per common share as reported $ 0.22 $ 0.18
Pro forma diluted earnings
per common share 0.22 0.18
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 ended March 31, 2005 and
2004 were computed by dividing net income by the weighted average number of
shares outstanding. Diluted earnings per share for the three months ended March
31, 2005 and 2004 were computed by dividing net income by the weighted average
number of shares outstanding, adjusted for the dilutive effect of the stock
options. Computations for basic and diluted earnings per share are provided
below:
Basic Earnings Per Common Share
Three Months Ended
March 31,
-----------------------
2005 2004
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Net income
available to common shareholders $ 912 $ 748
Weighted average common shares outstanding 4,050 4,031
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Basic Earnings Per Common Share $ 0.23 $ 0.19
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Diluted Earnings Per Common Share
Weighted average common shares outstanding 4,050 4,031
Add: dilutive effect of assumed exercised
stock options 66 83
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Weighted average common and dilutive
Potential shares outstanding 4,116 4,114
========== ==========
Diluted Earnings Per Common Share $ 0.22 $ 0.18
========== ==========
There were approximately 40,000 and 20,000 options outstanding at March
31, 2005 and 2004, respectively, that were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of the common stock and were, therefore,
antidilutive.
Note 3. Securities
The Company's consolidated securities portfolio, which represented
30.6% of the Company's 2005 first quarter average earning asset base, is managed
to minimize interest rate risk, maintain sufficient liquidity, and maximize
return. The portfolio includes several callable agency debentures, adjustable
rate mortgage pass-throughs, and collateralized mortgage obligations. Corporate
bonds consist of investment grade obligations of public corporations. Equity
securities consist of Federal Reserve stock, Federal Home Loan Bank stock, and
trust preferred stock. Securities classified as available-for-sale, carried at
fair value, were $185,766 at March 31, 2005 compared to $191,661 at December 31,
2004. 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 March 31, 2005 and December 31,
2004, respectively:
March 31, 2005
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Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------------ ------------ ------------
U.S. government agencies $ 19,959 $ 46 $ (195)
States and political subdivisions 22,978 722 (9)
U.S. government mortgage-backed securities 114,725 1,097 (359)
Collateralized mortgage obligations 1,827 -- (14)
Equity securities 18,190 48 (19)
Corporate 8,087 187 --
------------ ------------ ------------
$ 185,766 $ 2,100 $ (596)
============ ============ ============
December 31, 2004
-------------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------------ ------------ ------------
U.S. government agencies 20,924 144 (26)
States and political subdivisions 24,647 879 (6)
U.S. government mortgage-backed securities 117,500 1,205 (318)
Collateralized mortgage obligations 2,486 -- (26)
Equity securities 17,865 39 (9)
Corporate 8,239 323 --
------------ ------------ ------------
$ 191,661 $ 2,590 $ (385)
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6.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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Note 4. Loans
The Company offers a broad range of products, including agribusiness,
commercial, residential, and installment loans, designed to meet the credit
needs of its borrowers. The Company concentrates its lending activity in the
geographic market areas that it serves, generally lending to consumers and small
to mid-sized businesses from which deposits are garnered in the same market
areas. As a result, the Company strives to maintain a loan portfolio that is
diverse in terms of loan type, industry, borrower and geographic concentrations.
The following table describes the composition of loans by major categories
outstanding as of March 31, 2005 and December 31, 2004, respectively:
March 31, 2005 December 31, 2004
----------------------- -----------------------
$ % $ %
---------- ---------- ---------- ----------
Commercial $ 101,398 24.06% $ 91,941 21.93%
Agricultural 25,316 6.01 28,718 6.85
Real estate:
Commercial mortgages 128,601 30.50 129,597 30.91
Construction 38,843 9.21 38,882 9.27
Agricultural 30,859 7.32 30,601 7.30
1-4 family mortgages 77,278 18.33 77,566 18.50
Installment 18,824 4.47 21,502 5.13
Other 404 0.10 468 0.11
---------- ---------- ---------- ----------
Total loans 421,523 100.00% 419,275 100.00%
========== ==========
Allowance for loan losses (9,948) (9,732)
---------- ----------
Loans, net $ 411,575 $ 409,543
========== ==========
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 ended March 31, 2005 and 2004 are summarized below:
Three Months Ended
March 31,
-------------------------
2005 2004
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Beginning balance $ 9,732 $ 9,011
Charge-offs:
Commercial -- 394
Real estate mortgages 6 72
Installment and other loans 197 181
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Total charge-offs 203 647
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Recoveries:
Commercial 292 552
Real estate mortgages 16 193
Installment and other loans 11 23
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Total recoveries 319 768
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Net charge-offs (116) (121)
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Provision for loan losses 100 750
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Ending balance $ 9,948 $ 9,882
========== ==========
Period end total loans, net of
unearned interest $ 421,523 $ 466,591
========== ==========
Average loans $ 417,549 $ 467,350
========== ==========
Ratio of net charge-offs to
average loans (0.03%) (0.03%)
Ratio of provision for loan losses
to average loans 0.02% 0.16%
Ratio of allowance for loan losses
to ending total loans 2.36% 2.12%
Ratio of allowance for loan losses
to total nonperforming loans 198.09% 138.13%
Ratio of allowance at end of period
to average loans 2.38% 2.11%
8.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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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 generate the
revenues in the banking segment; secondary mortgage sales and servicing
generates the revenue in the mortgage banking segment; insurance, brokerage, and
trust services generate the revenue in the financial services segment; and
holding company services generate the revenue in the operations segment.
The accounting policies used with respect to segment reporting are the
same as those described in the summary of significant accounting policies set
forth in Note 1 on page 4. Segment performance is evaluated using net interest
income. Information reported internally for performance assessment follows.
Three Months Ended
-----------------------------------------------------------------
March 31, 2005
-----------------------------------------------------------------
Banking Mortgage Financial Other Consolidated
Segment Banking Services Operations Totals
---------- ---------- ---------- ---------- ----------
Net interest income(loss) $ 5,072 $ 93 $ (4) $ (76) $ 5,085
Other revenue (loss) 935 340 634 (59) 1,850
Other expense 4,184 267 792 303 5,546
Segment profit (loss) 1,288 166 (150) (340) 964
Noncash items
Depreciation 323 23 44 28 418
Provision for loan losses 100 -- -- -- 100
Other intangibles 30 -- -- 14 44
Goodwill 5,143 -- 1,820 -- 6,963
Segment assets 653,784 3,953 5,159 (1,472) 661,424
Three Months Ended
-----------------------------------------------------------------
March 31, 2004
-----------------------------------------------------------------
Banking Mortgage Financial Other Consolidated
Segment Banking Services Operations Totals
---------- ---------- ---------- ---------- ----------
Net interest income (loss) $ 5,750 $ 174 $ -- $ (123) $ 5,801
Other revenue 1,506 562 855 1 2,924
Other expense 3,278 750 1,123 1,828 6,979
Segment profit (loss) 1,466 (9) (175) (482) 800
Noncash items
Depreciation 375 25 43 61 504
Provision for loan losses 750 -- -- -- 750
Other intangibles 52 -- -- -- 52
Goodwill 5,822 -- 1,820 -- 7,642
Segment assets 762,408 5,435 7,423 1,133 779,399
9.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
The following discussion provides an analysis of the Company's results
of operations and financial condition for the three months ended March 31, 2005
as compared to the same period in 2004. 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 2004 Annual Report on Form 10-K. Annualized results of operations
during the three months ended March 31, 2005 are not necessarily indicative of
results to be expected for the full year of 2005. 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 1933, 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," "project," "planned" or "potential" 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
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
10.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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, UnionBank (the "Bank"), 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.
First Quarter Highlights
o Asset quality trends continued to show improvement as a result of the
Company's ongoing efforts to enhance the credit process. These
improvements have driven nonperforming loans to a 30% decrease from
first quarter 2004 levels. The reserve coverage ratio (allowance to
nonperforming loans) was reported at 198.09% as of March 31, 2005 as
compared to 231.6% as of December 31, 2004 and 138.13% as of March 31,
2004. Because of the improvement in asset quality, the Company was
able to decrease the loan loss provision by $650 for the first quarter
of 2005 as compared to the same period in 2004.
o The net interest margin strengthened during the first quarter of 2005
increasing to 3.52% after being relatively stable the previous four
quarters and being 3.33% for the fourth quarter of 2004.
o Noninterest income, excluding gain on sale of assets, decreased $817
or 31% during the first quarter of 2005 as compared to the same period
in 2004. The year-over-year decrease is attributable to a drop in
revenue generated from mortgage banking division and a decrease in
other fee-based revenue related to the divestiture of the Company's
western Illinois sales and service centers during the third quarter of
2004.
o Noninterest expense experienced a $1,433 or 21% decrease during the
first quarter of 2005 as compared to the same period in 2004. This
decrease was due, in large part, to savings related to the divestiture
of the Company's western Illinois sales and service centers, a
decrease in legal fees associated with the workout of problem credits
and cost containment in most categories of expense.
o The Company's Board of Directors, in a continuing effort to enhance
shareholder value, approved the payment of a 10.0% increase in the
quarterly cash dividend to $0.11 from $0.10 on the Company's common
stock during the first quarter of 2005. This marks the 80th
consecutive quarter of dividends paid to stockholders.
11.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Results of Operations
Net Income
Net income equaled $964 or $0.22 per diluted share for the three months
ended March 31, 2005, versus $800 or $0.18 per diluted share for the same period
in 2004.
The Company's quarterly results were positively impacted by improved
asset quality that allowed lower than anticipated funding for the provision of
loan losses, aggressive management of noninterest expense levels, and a shift in
the funding mix leading to a savings in interest expense. These items were
partially offset by decreases in 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 lower revenue generation from the
insurance and brokerage product lines.
Return on average assets was 0.59% for the first quarter of 2005
compared to 0.41% for the same period in 2004. Return on average stockholders'
equity was 5.52% for the first quarter of 2005 compared to 4.67% for the same
period in 2004.
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 the 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 $5,242 for the
three months ended March 31, 2005, compared with $5,988 earned during the same
three-month period in 2004. This represented a decrease of $746 or 12.5% from
the prior year period. The decline in net interest income is attributable to the
quarter-over-quarter reduction of interest income earned on interest-earning
assets totaling $1,396 exceeding the quarter-over-quarter decrease in interest
expense paid on interest bearing liabilities totaling $650.
The $1,396 reduction in interest income resulted from a decrease of
$1,627 due to volume partially offset by an increase in the applicable rate
which generated an increase of $231. The majority of the change in interest
income was related to the decrease in the volume within the loan portfolio as
the divestiture of the Company's western Illinois sales and service centers
reduced the portfolio by $49,801 for the first quarter of 2005 as compared to
the same period in 2004. This was partially offset by higher rates driven from a
more disciplined approach to pricing loans and the rising interest rate
environment.
The $650 reduction in interest expense resulted from decreases of $714
associated with volume offset partially by a $64 increase associated with rate.
The majority of the change was attributable to a $104,529 reduction in deposits
related to the sale of the Company's branches in Western Illinois, as well as
certain steps taken during this period to more favorably manage the mix of
funding sources available to the Company.
12.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
The net interest margin increased 18 basis points to 3.52% in the first
quarter 2005 as compared with 3.34% for the same period in 2004. The increase in
the net interest margin in the first quarter 2005 when compared to 2004 resulted
primarily from an increase in yields due to repricing of variable rate assets in
a higher interest rate environment and a shift in the earning-asset mix to
higher yielding loans from lower yielding investments.
The Company's net interest income is affected by changes in the amount
and mix of interest-earning assets and interest-bearing liabilities, referred to
as "volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as "rate change." The following table details each
category of average amounts outstanding for interest-earning assets and
interest-bearing liabilities, average rate earned on all interest-earning
assets, average rate paid on all interest-bearing liabilities, and the net yield
on average interest-earning assets. In addition, the table reflects the changes
in net interest income stemming from changes in interest rates and from asset
and liability volume, including mix. The change in interest attributable to both
rate and volume has been allocated to the changes in the rate and the volume on
a pro rata basis.
13.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended March 31,
----------------------------------------------------------
2005 2004
--------------------------- ----------------------------
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 $ 128 $ -- --% $ 205 $ 1 1.96% $ -- $ (1) $ (1)
Securities (1)
Taxable 162,356 1,425 3.56 223,997 1,905 3.41 (557) 77 (480)
Non-taxable (2) 22,355 391 7.09 26,931 491 7.31 (115) 15 (100)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Total securities (tax
equivalent) 184,711 1,816 3.99 250,928 2,396 3.83 (672) 92 (580)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Federal funds sold 1,651 9 2.21 3,288 9 1.10 (6) 6 --
-------- -------- ------- -------- -------- ------- -------- -------- --------
Loans (3)(4)
Commercial 119,704 1,848 6.26 138,499 2,003 5.80 (296) 141 (155)
Real estate 277,454 4,178 6.11 291,082 4,407 6.07 (260) 31 (229)
Installment and other 20,391 448 8.91 37,769 879 9.33 (393) (38) (431)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Gross loans (tax
equivalent) 417,549 6,474 6.29 467,350 7,289 6.26 (949) 134 (815)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Total interest-earning
assets 604,039 8,299 5.57 721,771 9,695 5.39 (1,627) 231 (1,396)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 17,556 22,225
Premises and equipment, net 13,441 16,357
Other assets 23,859 29,002
-------- --------
Total nonearning assets 54,856 67,584
-------- --------
Total assets $658,895 $789,355
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 70,554 $ 165 0.95% $ 47,389 $ 67 0.56% $ 40 $ 58 $ 98
Money market accounts 58,160 214 1.49 118,212 349 1.18 (208) 73 (135)
Savings deposits 43,290 62 0.58 49,436 79 0.64 (10) (7) (17)
Time deposits 275,901 1,878 2.76 337,397 2,348 2.79 (444) (26) (470)
Federal funds purchased and
repurchase agreements 11,098 74 2.70 2,212 13 2.36 59 2 61
Advances from FHLB 60,210 583 3.93 74,469 771 4.15 (147) (41) (188)
Notes payable 7,537 81 4.36 7,870 80 4.08 (4) 5 1
-------- -------- ------- -------- -------- ------- -------- -------- --------
Total interest-bearing
liabilities 526,750 3,057 2.35 636,985 3,707 2.33 (714) 64 (650)
-------- -------- ------- -------- -------- ------- -------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 57,341 78,067
Other liabilities 4,034 5,449
-------- --------
Total noninterest-bearing
liabilities 61,375 83,516
-------- --------
Stockholders' equity 70,770 68,854
-------- --------
Total liabilities and
stockholders' equity $658,895 $789,355
======== ========
Net interest income (tax
equivalent) $ 5,242 $ 5,988 $ (913) $ 167 $ (746)
======== ======== ======== ======== ========
Net interest income (tax
equivalent) to total
earning assets 3.52% 3.34%
======== ========
Interest-bearing liabilities
to earning assets 87.20% 88.25%
======== ========
- -----------------------------------
(1) Average balance and average rate on securities classified as
available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances.
(4) Overdraft loans are excluded in the average balances.
14.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Provision for Loan Losses
The provision for loan losses charged to operating expense for the
first quarter of 2005 totaled $100, a decrease of $650 from the $750 recorded
during the same period a year ago. The decrease in the provision was primarily
due to a decrease in non-performing and action/watch list loans from the first
quarter of 2004 through the first quarter of 2005, as well as resolutions,
either through charge-off of non-bankable assets or through successful workout
strategies that have been executed. Nonperforming loans decreased $2,132 from
$7,154 as of March 31, 2004 to $5,022 as of March 31, 2005. Net charge-offs for
the first quarter of 2005 were ($116) compared with ($121) for the comparable
period in 2004. Annualized net charge-offs were (0.03%) of average loans for the
first quarter of 2005 and for the same period in 2004. See "Nonperforming
Assets" and "Other Potential Problem Loans" for further information.
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.
15.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(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 product lines as well as increases in cash
surrender value on bank-owned life insurance. The following table summarizes the
Company's noninterest income:
Three Months Ended
March 31,
------------------------
2005 2004
---------- ----------
Service charges $ 483 $ 711
Trust income 215 184
Mortgage banking income 340 568
Insurance commissions and fees 421 633
Bank owned life insurance 134 172
Gain on the sale of assets 2 259
Other income 255 397
---------- ----------
1,850 $ 2,924
========== ==========
Noninterest income totaled $1,850 for the three months ended March 31,
2005, compared to $2,924 for the same period in 2004. Exclusive of the gain on
sale of assets for both periods, noninterest income equaled $1,848 for the three
months ended March 31, 2005, compared to $2,665 for the same period in 2004.
This represented a decrease of $817 or 31%. The quarter-over-quarter decrease
was primarily attributable to a decrease in mortgage banking income related to a
slowdown in new and refinancing loan production activity and a decrease in
insurance revenue is related to lower production volumes and account retention
being lower in 2005 than in 2004. Also contributing were volume related
decreases in overdraft fees (included in service charges) and service charges
due to the Company's exiting of their western Illinois sales and service centers
in 2004. Additionally, most other fee categories for the quarter have shown a
decrease as well when compared to 2004 results for the same period.
16.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(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
March 31,
-----------------------
2005 2004
---------- ----------
Salaries and employee benefits $ 3,476 $ 4,150
Occupancy expense, net 394 552
Furniture and equipment expense 424 557
Marketing 96 168
Supplies and printing 77 115
Telephone 107 154
Amortization of intangible assets 44 52
Other expenses 928 1,231
---------- ----------
$ 5,546 $ 6,979
========== ==========
Noninterest expense totaled $5,546 for the three months ended March 31,
2005, as compared to $6,979 for the same period in 2004. This represented a
decrease of $1,433 or 21%. This improvement in noninterest expense was primarily
due to savings related to the divestiture of the Company's western Illinois
sales and service centers leading to the decreases experienced for salary and
employee benefits, occupancy expense, marketing, supplies, telephone and other
expense categories. Additionally, legal fees associated with the workout of
problem credits have declined as asset quality continues to improve. Finally,
management's continued efforts to contain costs have led to decreases in most
all other expense categories.
Applicable Income Taxes
Income tax expense for the periods included benefits for tax-exempt
income, tax-advantaged investments and general business tax credits offset by
the effect of nondeductible expenses. The following table shows the Company's
income before income taxes, as well as applicable income taxes and the effective
tax rate for the three months ended March 31, 2005 and 2004.
Three Months Ended
March 31,
-------------------------
2005 2004
---------- ----------
Income before income taxes $ 1,289 $ 996
Applicable income taxes 325 196
Effective tax rates 25.2% 19.7%
The Company recorded an income tax expense of $325 and of $196 for the
three months ended March 31, 2005 and 2004, respectively. 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 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 level of
tax-exempt income has increased as a percentage of taxable income. Finally, the
Company has reduced tax expense through various tax planning initiatives.
17.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
For the first quarter of 2005, the Company has less of its security
portfolio invested in federally tax-exempt assets than in the same period in
2004. Thus, the amount of tax exempt interest earned on the portfolio in the
first quarter of 2005 is lower than the same period of 2004. This change in mix
in the security portfolio increased the amount of interest that is taxable
leading to the higher effective tax rate experienced during the period.
Preferred Stock Dividends
The Company paid $52 in preferred stock dividends for the three months
ended March 31, 2005 and 2004, 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 March 31, 2005 and December 31, 2004, respectively:
March 31, 2005
----------------------------------------------
Net Interest Income
----------------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $ 22,204 $ 920 4.32%
+100 bp 21,804 520 2.44
Base 21,284 -- --
-100 bp 20,353 (931) (4.37)
Based upon the Company's model at March 31, 2005, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by $920 or 4.32%. The effect of an immediate 100
basis point decrease in rates would decrease the Company's net interest income
by $931 or 4.37%. For the March 31, 2005 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.
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
December 31, 2004
----------------------------------------------
Net Interest Income
----------------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $ 21,070 $ 996 4.96%
+100 bp 20,635 560 2.79
Base 20,074 -- --
-100 bp 19,048 (1,026) (5.11)
Based upon the Company's model at December 31, 2004, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by $996 or 4.96%. The effect of an immediate 100
basis point decrease in rates would decrease the Company's net interest income
by $(1,026) or (5.11%). For the December 31, 2004 reporting cycle, the Company
has suppressed an immediate 200 basis point decrease in its Asset Liability
model due to the abnormally low prevailing interest rate environment.
Financial Condition
General
As of March 31, 2005, the Company had total assets of $661,424, total
gross loans of $421,523, total deposits of $503,301 and total stockholders'
equity of $70,410. Total assets decreased by $8,122 or 1.21% from year-end 2004.
Total gross loans increased by $2,248 or 0.5% from year-end 2004. Total deposits
declined by $9,176 or 1.8% from year-end 2004.
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 that 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 Bank
makes a determination as to collectibility on a case-by-case basis. The Bank
considers both the adequacy of the collateral and the other resources of the
borrower in determining the steps to be taken to collect nonaccrual loans. The
final determination as to the steps taken is made based upon the specific facts
of each situation. Alternatives that are typically considered to collect
nonaccrual loans are foreclosure, collection under guarantees, loan
restructuring, or judicial collection actions.
Each of the Company's loans is assigned a rating based upon an
internally developed grading system. A separate credit administration department
also reviews grade assignments on an ongoing basis. Management continuously
monitors nonperforming, impaired, and past due loans to prevent further
deterioration of these loans. The Company has an independent loan review
function which is separate from the lending function and is responsible for the
review of new and existing loans.
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(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.
2005 2004
--------- ------------------------------------------------
Mar 31, Dec 31, Sept 30, Jun 30, Mar 31
--------- --------- --------- --------- ---------
Non-accrual loans $ 4,176 $ 3,649 $ 3,753 $ 5,293 $ 5,984
Loans 90 days past due and still accruing interest 846 553 771 502 1,170
--------- --------- --------- --------- ---------
Total nonperforming loans 5,022 4,202 4,524 5,795 7,154
Other real estate owned 400 420 90 164 246
--------- --------- --------- --------- ---------
Total nonperforming assets $ 5,422 $ 4,622 $ 4,614 $ 5,959 $ 7,400
========= ========= ========= ========= =========
Nonperforming loans to total end of period loans 1.19% 1.00% 1.09% 1.28% 1.53%
Nonperforming assets to total end of period loans 1.29 1.10 1.11 1.31 1.59
Nonperforming assets to total end of period assets 0.82 0.69 0.69 0.81 0.95
The level of nonperforming loans at March 31, 2005 increased to $5,022
versus the $4,202 that existed as of December 31, 2004 and decreased from $7,154
at March 31, 2004. The level of nonperforming loans to total end of period loans
was 1.19% at March 31, 2005, as compared to 1.00% at December 31, 2004 and 1.53%
at March 31, 2004. The reserve coverage ratio (allowance to nonperforming loans)
was reported at 198.09% as of March 31, 2005 as compared to 231.60% as of
December 31, 2004 and 138.13% as of March 31, 2004.
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. If nonperforming loans are excluded,
loans that management has classified as impaired totaled $6,524 at March 31,
2005 as compared to $4,114 at March 31, 2004 and $7,782 at December 31, 2004.
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 March 31, 2005, the allowance for loan losses was $9,948 or 2.36% of
total loans as compared to $9,732 or 2.32% at December 31, 2004, and $9,882 or
2.12% at March 31, 2004. In originating loans, the Company recognizes that
credit losses will be experienced and the risk of loss will vary with, among
other things, general economic conditions; the type of loan being made; the
creditworthiness of the borrower over the term of the loan; and, in the case of
a collateralized loan, the quality of the collateral for such a loan. The
allowance for loan losses represents the Company's estimate of the allowance
necessary to provide for probable incurred losses in the loan portfolio. In
making this determination, the Company analyzes the ultimate collectibility of
the loans in its portfolio, incorporating feedback provided by internal loan
staff, the independent loan review function, and information provided by
examinations performed by regulatory agencies. The Company makes an ongoing
evaluation as to the adequacy of the allowance for loan losses.
On a quarterly basis, management reviews the adequacy of the allowance
for loan losses. Commercial credits are graded by the loan officers and the Loan
Review function validates the officers' grades. In the event that the loan
20.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
review function downgrades the loan, it is included in the allowance analysis at
the lower grade. The grading system is in compliance with the regulatory
classifications and the allowance is allocated to the loans based on the
regulatory grading, except in instances where there are known differences (i.e.,
collateral value is nominal, etc.). To establish the appropriate level of the
allowance, a sample of loans (including impaired and nonperforming loans) are
reviewed and classified as to potential loss exposure.
Based on an estimation 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
2004. The methodology used to determine the adequacy of the allowance for loan
losses is consistent with prior years, and there were no reallocations.
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
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
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 $3,942 from December 31, 2004 to
March 31, 2005.
During the first three months of 2005, the Company experienced net cash
outflows of ($7,548) in financing activities primarily due to a decrease in
deposits. In contrast, net cash inflows were provided by $2,590 in operating
activities due to proceeds from net loans sales and net income and $1,016 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 March 31, 2005.
Payments Due by Period
-------------------------------------------------------------------
Within 1 After
Contractual Obligations Year 1-3 Years 4-5 Years 5 Years Total
----------- ----------- ----------- ----------- -----------
Short-term debt $ 6,524 -- -- -- 6,524
Long-term debt -- $ 334 $ -- $ -- $ 334
FHLB Advances 14,800 16,000 18,300 8,000 57,100
----------- ----------- ----------- ----------- -----------
Total contractual cash obligations $ 21,324 $ 16,334 $ 18,300 $ 8,000 $ 63,958
=========== =========== =========== =========== ===========
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 $ 62,549 $ 4,837 $ 4,700 $ 12,872 $ 84,958
Standby letters of credit 6,569 1,039 -- -- 7,608
----------- ----------- ----------- ----------- -----------
Total commercial commitments $ 69,118 $ 5,876 $ 4,700 $ 12,872 $ 92,566
=========== =========== =========== =========== ===========
22.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Capital Resources
Stockholders' Equity
The Company is committed to managing capital for maximum shareholder
benefit and maintaining strong protection for depositors and creditors.
Stockholders' equity at March 31, 2005 was $70,410, an increase of $163 or 0.2%,
from December 31, 2004. The increase in stockholders' equity was largely the
result of earnings for the first three months of 2005 less dividends paid to
shareholders and a decrease in accumulated other comprehensive income. Average
quarterly equity as a percentage of average quarterly assets was 10.61% at March
31, 2005, compared to 9.98% at December 31, 2004. Book value per common share
equaled $17.27 at March 31, 2005 compared to $17.30 at December 31, 2004.
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. During the current quarter, 11,500 shares were
repurchased at a weighted cost of $21.10 and to date, the Company has
repurchased 30,000 shares at a weighted average cost of $19.57.
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 14.3%, respectively, at March 31, 2005. The Company is currently, and
expects to continue to be, in compliance with these guidelines.
The following table sets forth an analysis of the Company's capital
ratios:
December 31, Minimum Well
March 31, -------------------- Capital Capitalized
2005 2004 2003 Ratios Ratios
-------- -------- -------- -------- --------
Tier 1 risk-based capital $ 63,964 $ 63,347 $ 59,851
Tier 2 risk-based capital 6,111 6,067 7,790
-------- -------- --------
Total capital 70,075 69,414 67,641
Risk-weighted assets 488,852 485,325 556,729
Capital ratios
Tier 1 risk-based capital 13.1% 13.0% 10.8% 4.00% 6.00%
Tier 2 risk-based capital 14.3 14.3 12.2 8.00 10.00
Leverage ratio 9.8 9.5 7.7 4.00 5.00
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Impact of Inflation, Changing Prices, and Monetary Policies
The financial statements and related financial data concerning the
Company have been prepared in accordance with U.S. generally accepted accounting
principles 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 Federal Reserve Board.
Recent Regulatory and Accounting Developments
SFAS 123R, "Accounting for Stock-Based Compensation, Revised," requires all
public companies to record compensation cost for stock options provided to
employees in return for employee service. The cost is measured at the fair value
of the options when granted, and this cost is expensed over the employee service
period, which is normally the vesting period of the options. The Securities and
Exchange Commission in April 2005 amended the compliance dates for SFAS 123R
from periods beginning after June 15, 2005 to the beginning of the next fiscal
year. The effect on results of operations will depend on the level of future
option grants and the calculation of the fair value of the options granted at
such future date, as well as the vesting periods provided, and so cannot
currently be predicted. There will be no significant effect on financial
position as total equity will not change.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item 3 is incorporated by reference
from the discussion on pages 18 and 19 of this Form 10-Q under the caption
"Interest Rate Sensitivity Management" and the discussion immediately above
under the caption "Impact of Inflation, Changing Prices, and Monetary Policies."
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried
out an evaluation under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of
1934, as amended). Based on this evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective in timely alerting them to material
information relating to the Company required to be included in the Company's
periodic filings with the Securities and Exchange Commission. It should be noted
that in designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. The Company has designed its disclosure controls and procedures to
reach a level of reasonable assurance of achieving the desired control
objectives and, based on the evaluation described above, the Company's Chief
24.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective at reaching that level of
reasonable assurance.
There was no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended) during the Company's most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
25.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business the Company may be involved in various
legal proceedings from time to time. The Company does not believe it is
currently involved in any claim or action the ultimate disposition of
which would have a material adverse effect on the Company's financial
statements.
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 March
31, 2005.
===========================================================================================================
Total Number of
Shares Purchased as Maximum Number of
Part of Publicly Shares that May Yet
Total Number of Average Price Paid Announced Plans or Be Purchased Under
Period Shares Purchased per Share Programs the Plans or Programs
===========================================================================================================
01/01/05 - -- -- -- 181,510
01/31/05
===========================================================================================================
02/01/05 - -- -- -- 181,510
02/28/05
===========================================================================================================
03/01/05 - 11,500 $21.10 11,500 170,010
03/31/05
===========================================================================================================
Total 11,500 $21.10 11,500 170,010
===========================================================================================================
(1) For the quarter ended March 31, 2005, the Company repurchased
11,500 shares at an average price per share of $21.10 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.
26.
Item 5. Other Information
The Company was notified by the Federal Reserve Bank of Chicago and the
Illinois Department of Financial and Professional Regulation that the
Joint Memorandum of Understanding effective December 17, 2002
previously disclosed in the Company's Form 10-Q Report as of September
30, 2002 has been terminated. In their inspection completed on August
16, 2004, they cited that improvements in the information technology
department and management's continued willingness to correct
deficiencies warranted the termination of the Memorandum.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
31.1 Certification of Dewey R. Yaeger, President and Principal
Executive Officer, required by Rule 13a - 14(a).
31.2 Certification of Kurt R. Stevenson, Senior Vice President and
Principal Financial and Accounting Officer required by Rule
13a - 14(a).
32.1(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(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 Senior Vice President and Principal
Financial and Accounting Officer.
----------------
(1) This certification is not "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, or incorporated
by reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.
27.
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.
UNIONBANCORP, INC.
Date: May 12, 2005 By: /s/ DEWEY R. YAEGER
--------------------------------------
Dewey R. Yaeger
President and Principal Executive
Officer
Date: May 12, 2005 By: /s/ KURT R. STEVENSON
--------------------------------------
Kurt R. Stevenson
Senior Vice President and Principal
Financial and Accounting Officer
28.