<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 (I.R.S. Employer ID Number)
of incorporation or organization)
122 West Madison Street, Ottawa, IL 61350
- ----------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (815) 434-3900
--------------
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 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 9, 1997
- ------------------------------------- ---------------------------------------
Common Stock, Par Value $1.00 4,116,001
* Registrant became subject to the periodic reporting requirements of the
Securities Exchange Act of 1934 on September 30, 1996, the effective date
of the registrant's Form 8-A Registration Statement.
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
- - Consolidated Balance Sheets 1
- - Consolidated Statements of Income 2
- - Consolidated Statements of Cash Flows 3
- - Notes to Unaudited Consolidated Financial Statements 4-6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------
March 31, December 31,
1997 1996
--------- ------------
ASSETS
Cash and due from banks $ 22,827 $ 29,236
Federal funds sold 4,219 10,267
Securities held to maturity 34,566 35,017
Securities available for sale 175,540 188,538
Loans, net 349,440 343,428
Premises and equipment 14,152 13,580
Intangible assets 10,621 10,801
Other assets 7,413 11,157
--------- ---------
TOTAL ASSETS $ 618,778 $ 642,024
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing $ 59,203 $ 65,864
Interest bearing 465,753 477,880
--------- ---------
TOTAL DEPOSITS 524,956 543,744
Federal funds purchased and securities sold
under agreements to repurchase 17,848 21,817
Advances from the Federal Home Loan Bank 9,021 10,021
Notes payable 12,458 13,180
Other liabilities 5,703 5,027
--------- ---------
TOTAL LIABILITIES 569,986 593,789
--------- ---------
Minority interest in subsidiaries 822 795
Mandatory redeemable preferred stock,
Series B, no par value; 1,092 shares
authorized; 857 shares issued 857 857
Stockholders' Equity
Preferred stock, no par value; 191,643
shares authorized; none issued and
outstanding -- --
Series A convertible preferred stock, no
par value; 2,765 shares authorized;
2,762.24 shares issued and outstanding 500 500
Series C preferred stock, no par value;
4,500 shares authorized, none issued
and outstanding -- --
Common stock, $1.00 par value; 10,000,000
shares authorized; 4,387,264 and
4,386,064 shares issued and outstanding
in 1997 and 1996, respectively 4,387 4,386
Surplus 19,305 19,312
Retained earnings 23,753 22,981
Unrealized gain (loss) on securities
available for sale (310) (74)
--------- ---------
47,635 47,105
Less treasury stock, at cost: 271,263
shares 522 522
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 47,113 46,583
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 618,778 $ 642,024
--------- ---------
--------- ---------
See Accompanying Notes to Unaudited Consolidated Financial Statements
1
<PAGE>
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------
1997 1996
---------- ----------
Interest income:
Loans and fees on loans $ 7,889 $ 4,335
Securities:
U.S. Treasury securities 360 209
U.S. government agencies and corporations 1,028 635
States and political subdivisions 443 336
Collateralized mortgage obligations 923 2
U.S. Government agency mortgage backed
securities 587 91
Other securities 54 27
Federal funds sold 106 27
---------- ----------
TOTAL INTEREST INCOME 11,390 5,662
---------- ----------
Interest expense:
Deposits 5,457 2,734
Federal funds purchased and securities sold under
agreements to repurchase 279 155
Advances from the Federal Home Loan Bank 118 --
Notes payable 304 92
---------- ----------
TOTAL INTEREST EXPENSE 6,158 2,981
---------- ----------
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES 5,232 2,681
Provision for loan losses 157 175
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 5,075 2,506
---------- ----------
Noninterest income:
Service charges 430 239
Merchant fee income 161 129
Trust income 122 92
Gain on sale of loans 34 66
Securities gains, net 85 7
Other noninterest income 344 131
---------- ----------
TOTAL NONINTEREST INCOME 1,176 664
---------- ----------
Noninterest expense:
Salaries and employee benefits 2,425 1,261
Occupancy expense, net 391 195
Furniture and equipment expense 352 164
FDIC deposit assessment 14 2
Amortization of intangible assets 230 35
Other noninterest expenses 1,299 664
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TOTAL NONINTEREST EXPENSE 4,711 2,321
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INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST 1,540 849
Minority interest 20 --
---------- ----------
INCOME BEFORE INCOME TAXES 1,520 849
Income taxes 382 227
---------- ----------
NET INCOME $ 1,138 $ 622
---------- ----------
---------- ----------
Net income available for common stock dividends,
after preferred dividends $ 1,073 $ 622
---------- ----------
---------- ----------
Earnings per common share $ 0.26 $ 0.29
---------- ----------
---------- ----------
Weighted average common shares outstanding 4,148,890 2,159,904
---------- ----------
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See Accompanying Notes to Unaudited Consolidated Financial Statements.
2
<PAGE>
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------
1997 1996
---------- ----------
Cash Flows from Operating Activities:
Net income $ 1,138 $ 622
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 157 175
Provision for depreciation 331 149
Amortization and accretion on securities 123 121
Amortization of intangibles 180 35
Amortization of deferred compensation - stock
option plans 7 4
Gain on sale of securities (85) (7)
Minority interest in net income of subsidiary 20 --
Proceeds from sales of loans 2,438 2,673
Origination of loans for resale (5,120) (4,012)
Change in assets and liabilities:
Decrease in accrued interest receivable and
other assets 1,305 1,188
(Decrease) Increase in accrued interest
payable and other liabilities 676 (77)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,170 871
---------- ----------
Cash Flows from Investing Activities:
Decrease in federal funds sold 6,048 285
Purchase of securities available for sale (3,650) (10,348)
Proceeds from sales of securities available
for sale 13,992 8,927
Proceeds from maturities of securities available
for sale 4,914 1,708
Purchase of securities held to maturity (1,265) (1,696)
Proceeds from maturities of securities held
to maturity 1,713 878
(Increase) decrease in loans (3,487) 351
Purchase of premises and equipment, net (903) (446)
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 17,362 (341)
---------- ----------
Cash Flows from Financing Activities:
Decrease in deposits (18,788) (4,357)
Decrease in federal funds purchased and securities
sold under agreement to repurchase (3,969) (1,674)
Repayment of advances from the Federal Home
Loan Bank (1,000) --
Proceeds from short-term borrowings 278 300
Repayments of short-term borrowings (596) (25)
Repayments of notes payable (404) (150)
Proceeds from exercise of stock options 8 --
Dividends paid (includes dividends on
preferred stock) (470) (72)
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (24,941) (5,978)
---------- ----------
DECREASE IN CASH AND DUE FROM BANKS (6,409) (5,448)
Cash and due from banks, beginning of period 29,236 16,167
---------- ----------
Cash and due from banks, end of period $ 22,827 $ 10,719
---------- ----------
---------- ----------
See Accompanying Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
UNIONBANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of UnionBancorp, Inc. (the "Company") and its subsidiaries,
UnionBank, UnionBank/Sandwich, UnionData, Union Corporation, LaSalle County
Collections, Inc., Prairie Acquisition Corp. and Country Bancshares, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions for Form 10-Q and,
therefore, do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations, or cash flows in
conformity with generally accepted accounting principles.
In the opinion of management of the Company, the unaudited consolidated
financial statements reflect all adjustments necessary to present fairly the
financial position of the Company at March 31, 1997 and December 31, 1996,
the results of operations for the three months ended March 31, 1997 and 1996,
and the results of its operations and cash flows for the three months ended
March 31, 1997 and 1996. All adjustments to the financial statements were
normal and recurring in nature.
Operating results for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997.
NOTE 2. BUSINESS ACQUISITIONS
On August 1, 1996, the Company acquired LaSalle County Collections, Inc.
("LaSalle"), a collection agency in Ottawa, Illinois. The purchase price of
$177,000 included the issuance of 9,090 shares of Common Stock, valued at
$11.00 per share, and payment of $77,000 in cash. The Company recognized an
intangible asset of $170,000 for the excess of purchase price over total
assets acquired.
On August 6, 1996, the Company acquired six additional bank subsidiaries
through the purchase of Prairie Bancorp, Inc. ("Prairie"), a multi-bank
holding company headquartered in Princeton, Illinois. At the date of
acquisition, Prairie had approximately $226,756,000 in total assets and
$189,271,00 in total deposits. In conjunction with the acquisition, the
Company issued 2,762.24 of the 2,765 authorized shares of Series A
Convertible Preferred Stock, which were valued at $500,000. In addition, the
Company issued 857,000 of the 1,092,000 authorized shares of Series B
Preferred Stock, which were valued at $857,000 and 710,576 shares of Common
Stock valued at $7,710,000. The total acquisition cost of $14,302,000
resulted in goodwill of $2,749,000 and core deposit intangible estimated at
$1,857,000.
On September 25, 1996, the Company acquired an additional bank subsidiary
through the purchase of Country Bancshares, Inc. ("Country"). At the date of
acquisition, Country had approximately $109,040,000 in total assets and
$90,999,000 in total deposits. The cash purchase
4
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UNIONBANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
price of $11,627,000 resulted in goodwill of $4,842,000 and core deposit
intangible estimated at $632,000.
All acquisitions were recorded using the purchase method of accounting. As
such, the results of operations of the acquired entities are included in the
consolidated statement of income from respective acquisition dates.
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Extinguishments of Liabilities." SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. SFAS No. 125 requires a consistent
application of a financial- components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, and derecognizes liabilities when extinguished. SFAS No. 125 also
supersedes SFAS No. 122 and requires that servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the period of
estimated net servicing income or loss and requires assessment for asset
impairment or increases obligation based on their fair values. SFAS No. 125
applies to transfers and extinguishments occurring after December 31, 1996,
and early or retroactive application is not permitted. Because the volume and
variety of certain transactions will make it difficult for some entities to
comply, some provisions have been delayed by SFAS No. 127. The adoption of
SFAS No. 125 did not have a material impact on the results of operations or
financial condition of the Company.
On March 3, 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
is effective for financial statements beginning with year end 1997. SFAS 128
simplifies the calculation of earnings per share ("EPS") by replacing primary
EPS with basic EPS. It also requires dual presentation of basic EPS and
diluted EPS for entities with complex capital structures. Basic EPS includes
no dilution and is computed by dividing income available to common
stockholders by the weighted-average common shares outstanding for the
period. Diluted EPS reflects the potential dilution of securities that could
share in earnings, such as stock options, warrants or other common stock
equivalents. The Company expects SFAS No. 128 to have little impact on its
EPS calculations in future years, other than changing terminology from
primary EPS to basic EPS. All prior period EPS data will be restated to
conform with the new presentations.
NOTE 4. EARNINGS PER COMMON SHARE
Earnings per common share amounts are computed by subtracting from earnings
the dividend requirements on Preferred Stock to arrive at earnings applicable
to Common Stock and dividing
5
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UNIONBANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
this amount by the average number of common and common equivalent shares
outstanding during the period.
For the three months ended March 31, 1997 and 1996, the average number of
common and common equivalent shares outstanding was the sum of the average
number of shares of Common Stock outstanding and the incremental number of
shares issuable under outstanding stock options that had a dilutive effect as
computed under the treasury stock method. Under this method, the number of
incremental shares is determined by assuming the issuance of the outstanding
stock options reduced by the number of shares assumed to be repurchased from
the issuance proceeds, using the market price of the Company's Common Stock.
6
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
GENERAL
The principal assets of the Company are its investments in the common stock
of its various subsidiaries. The Company's principal revenue source is
dividends from its subsidiaries. The principal business of the Company's
subsidiary banks consists of attracting deposits from the general public and
using these funds to originate mortgage, consumer and commercial loans
primarily in northern, central and western Illinois and areas surrounding
subsidiary bank locations. The Company's subsidiary banks engage in various
forms of consumer and commercial lending and invest in U.S. Government and
federal agency securities, local municipal issues, and interest-bearing
deposits. The Company's subsidiary banks' profitability depends primarily on
their net interest income, which is the difference between the interest
income they earn on their loan and investment portfolios, and their cost of
funds, which consist mainly of interest paid on deposits and borrowings. Net
interest income is affected by the relative amounts of interest-earning
assets, interest-bearing liabilities, and the interest rates earned or paid
on these balances. The profitability of the Company's subsidiary banks is
also affected by the level of noninterest income and expense. Noninterest
income consists primarily of late charges and other fees. Noninterest expense
consists of salaries and employee benefits, occupancy related expenses,
deposit insurance premiums, and other operating expenses. The operations of
the Company's subsidiary banks are significantly influenced by general
economic conditions and related monetary and fiscal policies of financial
institutions' regulatory agencies. Deposit flows and the cost of funds are
influenced by interest rates on competing investments and general market
rates of interest. Lending activities are affected by the demand for
financing real estate and other types of loans, which in turn is affected by
the interest rates at which such financing may be offered and other factors
affecting loan demand and the availability of funds.
FINANCIAL CONDITION
Total assets decreased $23,246,000 or 3.62% to $618,778,000 at March 31, 1997
from $642,024,000 at December 31, 1996, stemming primarily from a decrease in
total deposits and by a reduced reliance on securities sold under agreements
to repurchase.
Cash and cash equivalents decreased $6,409,000 or 21.92%. The decrease was
related to the decrease in deposits coupled by an increased emphasis by
management to reduce noninterest earning assets.
The increase in loans of $6,042,000 or 1.74% to $352,538,000 was primarily
the result of management's effort to increase the loan portfolios at the
recently acquired Prairie Banks. In addition, the Company continues to see
growth in the new market areas obtained through acquisitions and expansion of
existing subsidiaries.
The decrease in securities of $13,449,000 or 6.02% since December 31, 1996
was partly related to strategic plans to improve the net interest margin by
increasing the earning asset mix toward
7
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ---------------------------------------------------------------------------
higher yielding loans at the newly acquired banks. The remaining decrease
was directly related to the overall decrease in assets.
Total deposits decreased $18,788,000 or 3.46% since December 31, 1996 to a
level of $524,956,000 at March 31, 1997. The majority of the overall
decrease in deposits was related to revising the deposit rate structure of
the banks acquired during 1996, with the runoff being well within management
expectations.
ALLOWANCE FOR LOANS LOSSES - The allowance for loan losses was $3,098,000 or
.88% of loans receivable at March 31, 1997, which was comparable to $3,068,000,
or .89% of loans receivable at December 31, 1996. The level of nonperforming
loans was 1.07% of total loans at March 31, 1997 compared to .65% as of December
31, 1996. The increase in nonperforming loans resulted from management's
proactive identification and work with credits in the portfolios of the acquired
banks. The increase in nonperforming loans does not represent a significant
loss exposure over previously identified loans. Based on a comparison of the
allowance for loan losses in relation to total loans and classified loans and
the efforts put forth by management to address problem loans in recent years,
management believes its allowance for loan losses is currently adequate.
Net charge-offs amounted to $127,000 for the three months ended March 31, 1997
compared to net charge-offs of $86,000 for the three months ended March 31,
1996. The increase was associated with charge-offs that occurred at one of the
banks acquired last year.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal and interest
in unlikely. The allowance is an amount that management believes will be
adequate to absorb losses on existing loans that may become uncollectible, based
on evaluation of the collectibility of loans and prior loss experience. The
evaluation also takes into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem loans and current economic conditions that may affect the borrowers'
ability to pay. While management uses the best information available to make
its evaluation, future adjustments to the allowance may be necessary if there
are significant changes in economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the subsidiary banks' allowance for loan losses, and may require the banks to
make additions to their allowances based on the agencies' judgment about
information available to them at the time of their examinations.
On January 1, 1995, the Company adopted guidelines for impaired loans required
by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended
by Statement No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." The adoption of these accounting standards did
not have a material effect on the Company's
8
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UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
consolidated financial position or results of operations because the Company's
recognition and measurement policies regarding nonperforming loans were
materially consistent with these accounting standards.
NONPERFORMING ASSETS
At March 31, 1997, the Company had $4,148,000 of nonperforming assets, of which
$1,920,000 were related to the acquisitions. On March 31, 1996, the Company had
$2,864,000 of nonperforming assets. Nonperforming assets to total assets at
March 31, 1997 and 1996 were .67% and .96%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
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 securities sold under agreements to repurchase,
overnights funds purchased from corespondent banks and the acceptance of
short-term deposits from public entities.
A portion of the Company's liquidity consists of cash and due from banks. The
level of these assets is dependent on the Company's operating, investing,
lending and financing activities during any given period. At March 31, 1997 and
December 31, 1996, cash and due from banks totaled $22.8 million and $29.2
million, respectively.
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, its subsidiary banks may borrow additional funds from the Federal
Home Loan Bank of Chicago "The FHLB". At March 31, 1997, the Company had
$9,021,000 in outstanding advances from the FHLB.
At March 31, 1997, the Company had $5,483,000 in outstanding commitments to
originate loans. In addition, the Company had unused commitments of $53,299,000
under revolving, open-end or similar type lines of credit. The Company
anticipates that it will have sufficient funds available to meet its current
loan commitments.
9
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UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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CAPITAL RESOURCES
The Company's subsidiary banks (the "Banks") are expected to meet a minimum
risk-based capital to risk-weighted assets ratio of 8%, of which at least
one-half (or 4%) must be in the form of Tier 1 (core) capital. The remaining
one-half (or 4%) may be in the form of Tier 1 (core) or Tier 2 (supplementary)
capital. The amount of loan loss allowance that may be included in capital is
limited to 1.25% of risk-weighted assets. The ratio of tier 1 (core) and the
combined amount of Tier 1 (core) and Tier 2 (supplementary) capital to
risk-weighted assets for the Banks were 10.36% and 11.59% respectively, at March
31, 1997, and 11.94% and 13.00%, respectively, at March 31, 1996. Each of the
Banks are currently, and expect to continue to be, in compliance with these
guidelines.
The Board of Governors of the Federal Reserve System (the "FRB") has announced a
policy known as the "source of strength doctrine" that requires a bank holding
company to serve as a source of financial and managerial strength for its
subsidiary banks. The FRB has interpreted this requirement to require that a
bank holding company, such as the Company, stand ready to use available
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity. The FRB has stated that it would
generally view a failure to assist a troubled or failing subsidiary bank in
these circumstances as an unsound or unsafe banking practice or a violation of
the FRB's Regulation Y or both, justifying a cease and desist order or other
enforcement action, particularly if appropriated resources are available to the
bank holding company on a reasonable basis. The Company's capital ratios were
as follows for the dates indicated:
<TABLE>
<CAPTION>
March 31, Minimum Well-
------------------------------------------- Capital Capitalized
1997 1996 1995 Ratios Ratios
------------------------------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 37,645 $ 23,641 $ 21,382
Tier 2 risk-based capital 4,455 2,104 1,793
---------- ---------- ---------
Total capital $ 42,100 $ 25,745 $ 23,175
Risk-weighted assets $ 363,194 $ 198,081 $ 183,585
Average leveraged assets $ 615,902 $ 298,383 $ 265,942
Capital ratios:
Tier 1 risk-based capital 10.36% 11.94% 11.65% 4.00% 6.00%
Total capital to risk
adjusted assets 11.59% 13.00% 12.62% 8.00% 10.00%
Tier 1 leverage ratio 6.11% 7.92% 8.04% 3.00% 5.00%
</TABLE>
The capital ratios detailed above declined as a result of two factors.
First, although the level of stockholders' equity was not directly affected,
intangible assets are recorded as part of the required purchase accounting
method. Intangible assets are required to be deducted from capital during
the calculation of the capital ratios. Second, the level of assets and risk
based assets increased significantly with the acquisition which were
completed during 1996, thus reducing capital in percentage terms.
10
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NET INTEREST INCOME - Net interest income for the three months ended March
31, 1997 increased by $2,551,000 or 95.15% to $5,232,000 from $2,681,000 for
the three months ended March 31, 1996. The increase was attributable to an
increase in interest earning assets as a result of the acquisitions. The
Company's net interest margin declined to 3.83% at March 31, 1997, from 4.14%
at March 31, 1996. The decrease in the net interest margin is primarily
related to a change in the asset mix of the earning assets resulting from the
Acquisitions, which brought about a higher level of earning assets in lower
yielding securities.
INTEREST INCOME - Interest income increased by $5,728,000 or 101.17% from
$5,662,000 to $11,390,000, during the first quarter of 1997 compared to the
respective period of 1996. This increase resulted primarily from an increase in
interest earning assets, which is reflective of the acquisitions, that was
partially offset by a reduction in yields on interest earning assets.
INTEREST EXPENSE - Interest expense increased by $3,177,000 or 106.57% to
$6,158,000 for the three months ended March 31, 1997 from $2,981,000 for the
same period in 1996. The increase was primarily attributable to the increase in
total deposits from $257,370,000 at March 31, 1996 to $524,956,000 at March 31,
1997, which resulted from the acquisitions. In addition, interest expense on
borrowings, including FHLB Advances, increased by $330,000 or 358.70% as a
result of additional borrowings required for the acquisition of subsidiaries.
NET INCOME - The Company's net income for the three months ended March 31, 1997
was $1,138,000 compared to $622,000 for the three months ended March 31, 1996.
The increase of $516,000 or 82.96% in net earnings resulted primarily from the
acquisition of additional income producing subsidiaries.
PROVISION FOR LOAN LOSSES - The allowance for loan losses is established through
a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation
considers numerous factors, including general economic conditions, loan
portfolio composition, prior loss experience, the estimated fair value of the
underlying collateral and other factors that warrant recognition in providing
for an adequate loan loss allowance. During the three months ended March 31,
1997 and 1996, the provision for loan losses was $157,000 and $175,000,
respectively.
NONINTEREST INCOME - Noninterest income was $1,176,000 for the three months
ended March 31, 1997 compared to $664,000 for the three months ended March
31, 1996. The increase of $512,000 or 77.11% was largely attributable to the
acquisition of income producing subsidiaries.
11
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
In addition, Securities gains increased by $78,000 to $85,000 for the three
months ended March 31, 1997 from $7,000 for the three months ended March 31,
1996. The securities gains are directly reflective of the Company's strategic
plan to improve the net interest margin by increasing the earning asset mix
toward higher yielding loans at the newly acquired banks, which consequently is
being achieved by selling off a portion of the lower yielding investment
portfolio.
NONINTEREST EXPENSE - Noninterest expense increased $2,390,000 for the three
months ended March 31, 1997 to $4,711,000 from $2,321,000 for the three months
ended March 31, 1996. All categories of noninterest expense reported increases
which were predominately connected to costs linked to the acquired subsidiaries.
The Company's effective tax rate for the three months ended March 31, 1997 and
1996 was approximately 25.13% and 26.74%, respectively.
IMPACT ON INFLATION AND CHANGING PRICES
The unaudited consolidated financial statements and related data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and results of
operations in terms of historical dollars without considering changes in the
relative purchasing power of money over time because of inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a more significant
impact on the Company's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services.
RECENT REGULATORY DEVELOPMENTS
Various bills have been introduced in the Congress that would allow bank
holding companies to engage in a wider range of nonbanking activities,
including greater authority to engage in securities and insurance activities.
While the scope of permissible nonbanking activities and the conditions
under which the new powers could be exercised varies among the bills, the
expanded powers generally would be available to a bank holding company only
if the bank holding company and its subsidiaries remain well-capitalized and
well-managed. The bills also impose various restrictions on transactions
between the depository institution subsidiaries of bank holding companies and
their nonbank affiliates. These restrictions are intended to protect the
depository institution from the risks of the new nonbanking activities
permitted to such affiliates.
Additionally, legislation has been introduced in Illinois that would generally
allow banks to engage in insurance activities, subject to various conditions,
including restrictions on the manner
12
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
in which insurance products are marketed to bank customers and requirements that
banks selling insurance provide certain disclosures to customers. The Illinois
legislature is also considering legislation that would prohibit out-of-state
banks from acquiring a bank located in Illinois unless the Illinois-based bank
has been in existence and continuously operated for a period of at least five
years.
At this time, the Company is unable to predict whether any of the pending bills
will be enacted and, therefore, is unable to predict the impact such legislation
may have on the operations of the Company and its bank subsidiaries.
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 Exchange Act 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 Reform Act of
1985, 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 identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "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 affect 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 provisions, monetary and
fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles, policies and guidelines. The risks and uncertainties
should be considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that
could materially affect the Company's financial results, is included in the
Company's filings with the SEC.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or its subsidiaries is a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
Exhibit 27. Financial Data Schedule
Reports on Form 8K:
On March 24, 1997, the Company filed a report on Form 8-K under Item
4 announcing the recommendation of the Company's Board of Directors
to engage the accounting firm of Crowe, Chizek and Company, LLP as
its certified public accountants for 1997, replacing McGladrey &
Pullen, LLP.
14
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
UNIONBANCORP, INC.
Date: May 13, 1997 /s/ R. Scott Grigsby
------------------ -----------------------
R. Scott Grigsby
Chairman of the Board, President
and Chief Executive Officer
Date: May 13, 1997 /s/ Charles J. Grako
------------------ ------------------------
Charles J. Grako
Executive Vice President and
Chief Financial Officer
15
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<PERIOD-START> JAN-01-1997
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