<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 September 30, 1997
-------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File Number: 0-28846
UNIONBANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-3145350
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(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 November 10, 1997
- ----------------------------- ---------------------------------------
Common Stock, Par Value $1.00 4,135,830
* 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 2-3
- - Consolidated Statements of Cash Flows 4
- - Notes to Unaudited Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial Condition and 8-16
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 19,901 $ 29,236
Federal funds sold 4,673 10,267
Securities held to maturity 35,118 35,017
Securities available for sale 162,043 188,538
Loans, net 366,743 343,428
Premises and equipment 14,817 13,580
Intangible assets 10,364 10,801
Other assets 8,455 11,157
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TOTAL ASSETS $ 622,114 $ 642,024
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing $ 53,490 $ 65,864
Interest bearing 461,046 477,880
------------ ------------
TOTAL DEPOSITS 514,536 543,744
Federal funds purchased and securities sold under
agreements to repurchase 28,021 21,817
Advances from the Federal Home Loan Bank 8,455 10,021
Notes payable 12,919 13,180
Other liabilities 5,929 5,027
------------ ------------
TOTAL LIABILITIES 569,860 593,789
------------ ------------
Minority interest in subsidiaries 633 795
------------ ------------
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;
4,407,093 and 4,386,064 shares issued and outstanding
in 1997 and 1996, respectively 4,407 4,386
Surplus 19,564 19,312
Retained earnings 25,892 22,981
Unrealized gain (loss) on securities available for sale 923 (74)
------------ ------------
51,286 47,105
Less treasury stock, at cost: 271,263 shares 522 522
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 50,764 46,583
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 622,114 $ 642,024
------------ ------------
------------ ------------
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
-1-
<PAGE>
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Interest income:
Loans and fees on loans $ 24,456 $ 14,291
Securities:
U.S. Treasury securities 1,058 546
U.S. government agencies and corporations 2,714 2,254
States and political subdivisions 1,355 1,099
Collateralized mortgage obligations 2,786 574
U.S. Government agency mortgage backed securities 1,540 548
Other securities 139 72
Federal funds sold 256 99
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TOTAL INTEREST INCOME 34,304 19,483
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Interest expense:
Deposits 16,135 9,424
Federal funds purchased and securities sold under agreements to repurchase 883 492
Advances from the Federal Home Loan Bank 385 289
Notes payable 795 212
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TOTAL INTEREST EXPENSE 18,198 10,417
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NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 16,106 9,066
Provision for loan losses 703 696
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,403 8,370
--------- ---------
Noninterest income:
Service charges 1,383 798
Merchant fee income 497 379
Trust income 394 275
Gain on sale of loans 403 188
Securities gains, net 169 (15)
Other noninterest income 998 501
--------- ---------
TOTAL NONINTEREST INCOME 3,844 2,126
--------- ---------
Noninterest expense:
Salaries and employee benefits 6,972 4,309
Occupancy expense, net 1,145 583
Furniture and equipment expense 1,126 577
FDIC deposit assessment 47 5
Amortization of intangible assets 688 165
Other noninterest expenses 3,979 2,270
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TOTAL NONINTEREST EXPENSE 13,957 7,909
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INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 5,290 2,587
Minority interest 58 9
--------- ---------
INCOME BEFORE INCOME TAXES 5,232 2,578
Income taxes 1,551 662
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NET INCOME $ 3,681 $ 1,916
--------- ---------
--------- ---------
Net income available for common stock dividends,
after preferred dividends $ 3,487 $ 1,876
--------- ---------
--------- ---------
Earnings per common share $ 0.84 $ 0.81
--------- ---------
--------- ---------
Weighted average common shares outstanding 4,175,285 2,305,488
--------- ---------
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</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
-2-
<PAGE>
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Interest income:
Loans and fees on loans $ 8,461 $ 5,648
Securities:
U.S. Treasury securities 348 145
U.S. government agencies and corporations 834 953
States and political subdivisions 459 423
Collateralized mortgage obligations 915 571
U.S. Government agency mortgage backed securities 413 370
Other securities 31 29
Federal funds sold 83 66
--------- ---------
TOTAL INTEREST INCOME 11,544 8,205
--------- ---------
Interest expense:
Deposits 5,411 4,034
Federal funds purchased and securities sold under
agreements to repurchase 339 216
Advances from the Federal Home Loan Bank 130 289
Notes payable 254 28
--------- ---------
TOTAL INTEREST EXPENSE 6,134 4,567
--------- ---------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 5,410 3,638
Provision for loan losses 230 196
--------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,180 3,442
--------- ---------
Noninterest income:
Service charges 486 310
Merchant fee income 195 142
Trust income 158 91
Gain on sale of loans 254 46
Securities gains, net 72 (28)
Other noninterest income 388 241
--------- ---------
TOTAL NONINTEREST INCOME 1,553 802
--------- ---------
Noninterest expense:
Salaries and employee benefits 2,335 1,765
Occupancy expense, net 373 199
Furniture and equipment expense 390 246
FDIC deposit assessment 17 2
Amortization of intangible assets 229 94
Other noninterest expenses 1,426 842
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TOTAL NONINTEREST EXPENSE 4,770 3,148
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INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 1,963 1,096
Minority interest 16 9
--------- ---------
INCOME BEFORE INCOME TAXES 1,947 1,087
Income taxes 634 283
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NET INCOME $ 1,313 $ 804
--------- ---------
--------- ---------
Net income available for common stock dividends,
after preferred dividends $ 1,249 $ 765
--------- ---------
--------- ---------
Earnings per common share $ 0.30 $ 0.29
--------- ---------
--------- ---------
Weighted average common shares outstanding 4,185,095 2,895,256
--------- ---------
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</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
-3-
<PAGE>
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 3,681 $ 1,916
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 703 696
Provision for depreciation 1,073 660
Amortization and accretion on securities 317 392
Amortization of intangibles 437 157
Amortization of deferred compensation - stock option plans 31 20
(Gain) Loss on sale of securities (169) 15
Gain on sale of loans (403) (188)
Minority interest in net income of subsidiary 58 9
Proceeds from sales of loans 9,218 7,962
Origination of loans for resale (16,615) (7,773)
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable and other assets 392 158
(Decrease) increase in accrued interest payable and other liabilities 239 389
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,038) 4,413
--------- ---------
Cash Flows from Investing Activities:
Decrease in federal funds sold 5,594 867
Purchase of securities available for sale (17,949) (14,525)
Proceeds from sales of securities available for sale 27,448 --
Proceeds from maturities of securities available for sale 21,285 27,758
Purchase of securities held to maturity (2,055) (7,864)
Proceeds from maturities of securities held to maturity 1,892 5,737
Increase in loans (16,698) (13,919)
Proceeds from sale of other real estate owned 174 --
Purchase of premises and equipment (2,310) (774)
Purchase price paid, net of cash received -- (11,475)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 17,381 (14,195)
--------- ---------
Cash Flows from Financing Activities:
Decrease in deposits (29,208) (6,029)
Increase in federal funds purchased and securities
sold under agreement to repurchase 6,204 8,508
Repayment of advances from the Federal Home Loan Bank (1,566) --
Proceeds from short-term borrowings 766 1,200
Repayments of short-term borrowings (1,027) (325)
Proceeds from notes payable -- 17,359
Net Proceeds from issuance of common stock 20 --
Proceeds from exercise of stock options 8 --
Dividends paid (includes dividends on preferred stock) (875) (217)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (25,678) 20,496
--------- ---------
(DECREASE) INCREASE IN CASH AND DUE FROM BANKS (9,335) 10,714
Cash and due from banks, beginning of period 29,236 16,167
--------- ---------
Cash and due from banks, end of period $ 19,901 $ 26,881
--------- ---------
--------- ---------
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
-4-
<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 September 30, 1997 and December 31,
1996, the results of operations for the nine months and three months ended
September 30, 1997 and 1996, and the results of its operations and cash flows
for the nine months ended September 30, 1997 and 1996. All adjustments to the
financial statements were normal and recurring in nature.
Operating results for the nine months and three months ended September 30,
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
-5-
<PAGE>
UNIONBANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
price of $11,627,000 resulted in goodwill of $4,842,000 and a 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 statements of income from the respective acquisition dates.
In conjunction with the reorganization and simplification of the Company's
corporate structure, applications were filed during the second quarter of
1997 with various regulators to complete the consolidation of a number of the
Company's subsidiaries. As of this date, all applications have been approved
and two of three scheduled mergers have been completed. The consolidation is
intended to increase internal efficiency and reduce cost along with freeing
up management at bank levels for customer contact and business development.
The transformation of the Company's internal structure is intended to create
a much more efficient organization capable of generating sustained revenue
and earnings growth. In addition, during the first part of the third quarter
of 1997, the Company completed its acquisition of minority stock interest at
three of its newly acquired bank subsidiaries. All subsidiaries of the
Company other than the Bank of Ladd are now wholly-owned.
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 Extinguishment of Liabilities." SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment 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 extinguishment 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
-6-
<PAGE>
UNIONBANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure". SFAS No. 129, effective for financial statements
for periods ending after December 15, 1997, consolidates existing disclosure
reporting guidance about a company's capital structure under a single
standard. This standard will have no impact on the Company.
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 this amount by the average number of common and
common equivalent shares outstanding during the period.
For the three months and nine months ended September 30, 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.
-7-
<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 $19,910,000 or 3.10% to $622,114,000 at September
30,1997 from $642,024,000 at December 31, 1996, stemming primarily from a
decrease in total deposits that was partially reduced by an increased
reliance on Federal funds purchased and securities sold under agreements to
repurchase.
Cash and due from banks decreased $9,335,000 or 31.93%. The decrease was
related to the decrease in deposits coupled with an increased emphasis by
management on reducing noninterest earning assets.
Federal funds sold decreased $5,594,000 or 54.49% to $4,673,000 at September
30, 1997 from $10,267,000 at December 31, 1996. The decrease was primarily
related to a decrease in deposits coupled with heightened focus on
liquidity management with increased emphasis on maximizing the yield
composition of the earning assets.
The increase in gross loans of $23,315,000 or 6.73% to $369,811,000 was
primarily the result of management's effort to increase the loan portfolios
at the recently acquired Prairie Banks. In
-8-
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
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 $26,394,000 or 11.81% since December 31, 1996
was partly related to strategic plans to improve the net interest margin by
increasing the earning asset mix toward higher yielding loans at the newly
acquired banks. The remaining decrease was directly related to the overall
decrease in assets.
Total deposits decreased $29,208,000 or 5.37% since December 31, 1996 to a
level of $514,536,000 at September 30, 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 and is in conjunction with management's philosophy to emphasize
profitability over growth as it restructures the balance sheet.
The increase in premises and equipment of $1,237,000 was largely related to
the acquisition and renovation of a building in Ottawa, Illinois, the
location of the Company's corporate headquarters, which was purchased to
house the centralized mortgage lending function. In addition, the building is
also being utilized by the Financial Controls and Human Resource Departments
of the Company.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses was $3,068,000 or
.83% of loans receivable at September 30, 1997, which was equal to
$3,068,000, or .89% of loans receivable at December 31, 1996. The level of
nonperforming loans was .89% of total loans at September 30, 1997, as
compared to .65% as of December 31, 1996. The increase in nonperforming loans
was primarily related to the inclusion of two large credits, which are past
due 30 days and still accruing interest, and are not expected to result in
material losses. 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 $703,000 for the nine months ended September 30,
1997 and were significantly less than the net charge-offs of $1,012,000 for
the nine months ended September 30, 1996. The net charge-offs recorded during
the first nine months of 1996 were primarily centered around one large credit
which amounted to approximately $692,000.
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 is 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
-9-
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
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 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. At September 30, 1997, the
recorded investment in loans for which impairment had been recognized in
accordance with SFAS No. 114 and SFAS No. 118 totaled $2,270,000 of which
$2,206,000 were impaired loans which do not require a related allowance for
possible loan losses as the carrying value of the loans is less than the
discounted present value of expected future cash flows. The remaining $64,000
of impaired loans required a related allowance for possible loan losses in
the amount of $5,000. There was no interest income recognized on impaired
loans (during the portion of this quarter that they were impaired) during the
third quarter of 1997.
NONPERFORMING ASSETS
At September 30, 1997, the Company had $3,844,000 of nonperforming assets
which $898,000 were related to the acquisitions. On September 30, 1996, the
Company had $2,896,000 of nonperforming assets. Nonperforming assets to total
assets at September 30, 1997 and 1996 were .60% and .45%, 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,
overnight funds purchased from correspondent banks and the acceptance of
short-term deposits from public entities.
-10-
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
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 September 30,
1997 and December 31, 1996, cash and due from banks totaled $19.9 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 September 30, 1997, the Company
had $8,455,000 in outstanding advances from the FHLB.
At September 30, 1997, the Company had $5,128,000 in outstanding commitments
to originate loans. In addition, the Company had unused commitments of
$73,387,000 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.
-11-
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
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 10.46% and
11.61% respectively, at September 30, 1997, and 5.48% and 6.54%,
respectively, at September 30, 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>
September 30, Minimum Well-
--------------------------------------- Capital Capitalized
1997 1996 1995 Ratios Ratios
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 40,232 $ 22,487 $ 21,982
Tier 2 risk-based capital 4,425 4,335 1,931
--------- --------- ---------
Total capital $ 44,657 $ 26,822 $ 23,913
Risk-weighted assets $ 384,756 $ 410,433 $ 297,788
Average leveraged assets $ 609,969 $ 467,890 $ 289,415
Capital ratios:
Tier 1 risk-based capital 10.46% 5.48% 7.38% 4.00% 6.00%
Total capital to risk
adjusted assets 11.61% 6.54% 8.03% 8.00% 10.00%
Tier 1 leverage ratio 6.60% 4.81% 7.60% 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 acquisitions which were
completed during 1996, thus reducing capital in percentage terms.
-12-
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NET INCOME - The Company's net income for the three months ended September
30, 1997 was $1,313,000 compared to $804,000 for the three months ended
September 30, 1996. The increase of $509,000 or 63.31% in net earnings
resulted primarily from the acquisition of additional income producing
subsidiaries.
NET INTEREST INCOME - Net interest income for the three months ended
September 30, 1997 increased by $1,772,000 or 48.71% to $5,410,000 from
$3,638,000 for the three months ended September 30, 1996. The increase was
partially attributable to an increase in interest earning assets as a result
of the acquisitions. In addition, the Company's net interest margin increased
to 3.94% for the quarter ended September 30, 1997 from 3.49% that was earned
for the same time frame in the previous year. The increase in the net
interest margin was primarily driven by management's strategy to enhance the
net interest margin of the acquired banks by utilizing a higher yielding
asset mix coupled with a revised deposit rate structure.
INTEREST INCOME - Interest income increased by $3,339,000 or 40.69% from
$8,205,000 to $11,544,000, during the third quarter of 1997 compared to the
same period of 1996. This increase resulted from an increase in interest
earning assets, which is primarily reflective of the acquisitions, coupled by
an increase in the yield on interest earning assets. The increase in the
yield on earning assets was primarily driven by a change in the asset mix of
the earning assets ,at the acquired banks, by shifting the emphasis toward
loans which have a higher yield than securities.
INTEREST EXPENSE - Interest expense increased by $1,567,000 or 34.31% to
$6,134,000 for the three months ended September 30, 1997 from $4,567,000 for
the same period in 1996. The increase was partially attributable to the
increase in total deposits which resulted from the acquisitions.
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 September
30, 1997 and 1996, the provision for loan losses was $230,000 and $196,000,
respectively.
NONINTEREST INCOME - Noninterest income was $1,553,000 for the three months
ended September 30, 1997 compared to $802,000 for the three months ended
September 30, 1996. The increase of $751,000 or 93.64% was largely
attributable to the acquisition of income producing subsidiaries.
-13-
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
NONINTEREST EXPENSE - Noninterest expense increased $1,622,000 for the three
months ended September 30, 1997 to $4,770,000 from $3,148,000 for the three
months ended September 30, 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 September 30,
1997 and 1996 was approximately 32.56% and 26.03%, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NET INCOME - The Company's net income for the nine months ended September
30, 1997 was $3,681,000 compared to $1,916,000 for the nine months ended
September 30, 1996. The increase of $1,765,000 or 92.12% in net earnings
resulted primarily from the acquisition of additional income producing
subsidiaries.
NET INTEREST INCOME - Net interest income for the nine months ended September
30, 1997 increased by $7,040,000 or 77.65% to $16,106,000 from $9,066,000
for the nine months ended September 30, 1996. The increase was partially
attributable to an increase in interest earning assets as a result of the
acquisition. In addition, the Company's net interest margin increased to
3.94% at September 30, 1997, from 3.79% at September 30, 1996. The September
30, 1996, net interest margin was adversely effected by the cost of carrying
the acquisition debt until the initial public offering was completed in
October, 1996. In addition, the timing of the consummation of the bank
acquisitions limited any asset mix changes to improve the net interest margin.
INTEREST INCOME - Interest income increased by $14,821,000 or 76.07% from
$19,483,000 to $34,304,000, during the first nine months of 1997 as compared
to the same period of 1996. This increase resulted primarily from an increase
in interest earning assets, which is reflective of the acquisitions.
INTEREST EXPENSE - Interest expense increased by $7,781,000 or 74.70% to
$18,198,000 for the nine months ended September 30, 1997 from $10,417,000 for
the same period in 1996. The increase was primarily attributable to the
increase in total average interest paying deposits, which resulted from the
acquisitions. In addition, interest expense on borrowings, including FHLB
advances, increased by $679,000 or 135.53% as a result of additional
borrowings required for the acquisition of 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
-14-
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
loss allowance. During the nine months ended September 30, 1997 and 1996, the
provision for loan losses was $703,000 and $696,000, respectively.
NONINTEREST INCOME - Noninterest income was $3,844,000 for the nine months
ended September 30, 1997 compared to $2,126,000 for the nine months ended
September 30, 1996. The increase of $1,718,000 or 80.81% was largely
attributable to the acquisition of income producing subsidiaries. In
addition, securities gains increased by $184,000 to $169,000 for the nine
months ended September 30, 1997 from a $15,000 loss for the nine months ended
September 30, 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
investment portfolio. All securities gains and losses that occurred during
1997 and 1996 were as a result of transactions involving available-for-sale
securities.
NONINTEREST EXPENSE - Noninterest expense increased $6,048,000 for the nine
months ended September 30, 1997 to $13,957,000 from $7,909,000 for the nine
months ended September 30, 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 nine months ended September 30, 1997
and 1996 was approximately 29.64% and 25.68%, 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.
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 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 Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-
-15-
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
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. These 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.
-16-
<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:
27 - Financial Data Schedule
Reports on Form 8K:
None.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirement 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: November 14, 1997 /s/ R. Scott Grigsby
-------------------------------------
R. Scott Grigsby
Chairman of the Board, President and
Chief Executive Officer
Date: November 14, 1997 /s/ Charles J. Grako
-------------------------------------
Charles J. Grako
Executive Vice President and
Chief Financial Officer
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 19,901
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,673
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 162,043
<INVESTMENTS-CARRYING> 35,118
<INVESTMENTS-MARKET> 35,433
<LOANS> 369,811
<ALLOWANCE> 3,068
<TOTAL-ASSETS> 622,114
<DEPOSITS> 514,536
<SHORT-TERM> 40,940
<LIABILITIES-OTHER> 6,562<F1>
<LONG-TERM> 8,455
857
500
<COMMON> 4,407
<OTHER-SE> 45,857
<TOTAL-LIABILITIES-AND-EQUITY> 622,114
<INTEREST-LOAN> 24,456
<INTEREST-INVEST> 9,848
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 34,304
<INTEREST-DEPOSIT> 16,135
<INTEREST-EXPENSE> 18,198
<INTEREST-INCOME-NET> 16,106
<LOAN-LOSSES> 703
<SECURITIES-GAINS> 169
<EXPENSE-OTHER> 13,957
<INCOME-PRETAX> 5,232
<INCOME-PRE-EXTRAORDINARY> 5,232
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,681
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
<YIELD-ACTUAL> 7.97
<LOANS-NON> 2,206
<LOANS-PAST> 1,084
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,068
<CHARGE-OFFS> 906
<RECOVERIES> 203
<ALLOWANCE-CLOSE> 3,068
<ALLOWANCE-DOMESTIC> 3,068
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Includes minority interest.
</FN>
</TABLE>
