<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 June 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.
(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 August 11, 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 1. 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 Results of Operations 8 - 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security
Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
<PAGE>
Item 1.
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 19,406 $ 29,236
Federal funds sold 2,757 10,267
Securities held to maturity 34,592 35,017
Securities available for sale 169,803 188,538
Loans, net 356,432 343,428
Premises and equipment 14,555 13,580
Intangible assets 10,416 10,801
Other assets 9,310 11,157
----------- -----------
TOTAL ASSETS $ 617,271 $ 642,024
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing $ 59,428 $ 65,864
Interest bearing 453,272 477,880
----------- -----------
TOTAL DEPOSITS 512,700 543,744
Federal funds purchased and securities sold under agreements to repurchase 27,449 21,817
Advances from the Federal Home Loan Bank 8,455 10,021
Notes payable 12,658 13,180
Other liabilities 5,327 5,027
----------- -----------
TOTAL LIABILITIES 566,589 593,789
----------- -----------
Minority interest in subsidiaries 854 795
----------- -----------
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 19,318 19,312
Retained earnings 24,933 22,981
Unrealized gain (loss) on securities available for sale 355 (74)
----------- -----------
49,493 47,105
Less treasury stock, at cost: 271,263 shares 522 522
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 48,971 46,583
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 617,271 $ 642,024
=========== ===========
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
1
<PAGE>
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1997 1996
----------- ------------
<S> <C> <C>
Interest income:
Loans and fees on loans $ 15,995 $ 8,643
Securities:
U.S. Treasury securities 710 401
U.S. government agencies and corporations 1,880 1,301
States and political subdivisions 896 676
Collateralized mortgage obligations 1,871 3
U.S. Government agency mortgage backed securities 1,127 178
Other securities 108 43
Federal funds sold 173 33
----------- -----------
TOTAL INTEREST INCOME 22,760 11,278
----------- -----------
Interest expense:
Deposits 10,724 5,390
Federal funds purchased and securities sold under agreements to repurchase 544 276
Advances from the Federal Home Loan Bank 255
Notes payable 541 184
----------- -----------
TOTAL INTEREST EXPENSE 12,064 5,850
----------- -----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 10,696 5,428
Provision for loan losses 473 500
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,223 4,928
Noninterest income:
Service charges 897 488
Merchant fee income 302 237
Trust income 236 184
Gain on sale of loans 149 142
Securities gains, net 97 13
Other noninterest income 610 260
----------- -----------
TOTAL NONINTEREST INCOME 2,291 1,324
----------- -----------
Noninterest expense:
Salaries and employee benefits 4,637 2,544
Occupancy expense, net 772 384
Furniture and equipment expense 736 331
FDIC deposit assessment 30 3
Amortization of intangible assets 459 71
Other noninterest expenses 2,553 1,428
----------- -----------
TOTAL NONINTEREST EXPENSE 9,187 4,761
----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 3,327 1,491
Minority interest 42
----------- -----------
INCOME BEFORE INCOME TAXES 3,285 1,491
Income taxes 917 380
----------- -----------
NET INCOME $ 2,368 $ 1,111
=========== ===========
Net income available for common stock dividends, after preferred dividends $ 2,238 $ 1,111
=========== ===========
Earnings per common share $ 0.54 $ 0.51
=========== ===========
Weighted average common shares outstanding 4,148,477 2,169,012
=========== ===========
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
2
<PAGE>
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------
1997 1996
----------- ------------
<S> <C> <C>
Interest income:
Loans and fees on loans $ 8,106 $ 4,308
Securities:
U.S. Treasury securities 350 192
U.S. government agencies and corporations 852 666
States and political subdivisions 453 340
Collateralized mortgage obligations 948 1
U.S. Government agency mortgage backed securities 540 87
Other securities 55 16
Federal funds sold 67 6
----------- -----------
TOTAL INTEREST INCOME 11,371 5,616
----------- -----------
Interest expense:
Deposits 5,267 2,656
Federal funds purchased and securities sold under agreements to repurchase 265 121
Advances from the Federal Home Loan Bank 137
Notes payable 237 92
----------- -----------
TOTAL INTEREST EXPENSE 5,906 2,869
----------- -----------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 5,465 2,747
Provision for loan losses 316 325
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,149 2,422
----------- -----------
Noninterest income:
Service charges 467 249
Merchant fee income 141 108
Trust income 114 92
Gain on sale of loans 115 76
Securities gains, net 12 6
Other noninterest income 266 129
----------- -----------
TOTAL NONINTEREST INCOME 1,115 660
----------- -----------
Noninterest expense:
Salaries and employee benefits 2,212 1,283
Occupancy expense, net 381 189
Furniture and equipment expense 384 167
FDIC deposit assessment 16 1
Amortization of intangible assets 229 36
Other noninterest expenses 1,254 762
----------- -----------
TOTAL NONINTEREST EXPENSE 4,476 2,438
----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 1,788 644
Minority interest 22
----------- -----------
INCOME BEFORE INCOME TAXES 1,766 644
Income taxes 535 154
----------- -----------
NET INCOME $ 1,231 $ 490
=========== ===========
Net income available for common stock dividends, after preferred dividends $ 1,166 $ 490
=========== ===========
Earnings per common share $ 0.28 $ 0.23
=========== ===========
Weighted average common shares outstanding 4,148,956 2,175,221
=========== ===========
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
UNIONBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1997 1996
----------- ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,368 $ 1,111
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 473 500
Provision for depreciation 684 297
Amortization and accretion on securities 222 239
Amortization of intangibles 385 49
Amortization of deferred compensation - stock option plans 20 7
Gain on sale of securities (97) (13)
Gain on sale of loans (149) (142)
Minority interest in net income of subsidiary 42
Proceeds from sales of loans 4,084 4,475
Origination of loans for resale (8,395) (4,332)
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable and other assets (409) 1,853
(Decrease) increase in accrued interest payable and other liabilities 5 (465)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (767) 3,579
----------- -----------
Cash Flows from Investing Activities:
Decrease in federal funds sold 7,510 2,040
Purchase of securities available for sale (11,408) (11,585)
Proceeds from sales of securities available for sale 20,912 11,820
Proceeds from maturities of securities available for sale 12,589 2,750
Purchase of securities held to maturity (1,391) (876)
Proceeds from maturities of securities held to maturity 1,774 782
Increase in loans (9,416) (6,080)
Purchase of premises and equipment, net (1,659) (556)
Proceeds from sale of other real estate owned 39 150
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 18,950 (1,555)
----------- -----------
Cash Flows from Financing Activities:
Decrease in deposits (31,044) (2,640)
(Decrease) increase in federal funds purchased and securities
sold under agreement to repurchase 5,632 (3,961)
Repayment of advances from the Federal Home Loan Bank (1,566) -
Proceeds from short-term borrowings 478 -
Repayments of short-term borrowings (1,000) (45)
Proceeds from exercise of stock options 8 -
Dividends paid (includes dividends on preferred stock) (521) (142)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (28,013) (6,788)
----------- -----------
DECREASE IN CASH AND DUE FROM BANKS (9,830) (4,764)
Cash and due from banks, beginning of period 29,236 16,167
----------- -----------
Cash and due from banks, end of period $ 19,406 $ 11,403
=========== ===========
</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 June 30, 1997 and December 31, 1996, the
results of operations for the six months and three months ended June 30, 1997
and 1996, and the results of its operations and cash flows for the six months
ended June 30, 1997 and 1996. All adjustments to the financial statements
were normal and recurring in nature.
Operating results for the six months and three months ended June 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. This bank endeavor, which is intended to increase
internal efficiency and reduce cost, is anticipated to be completed during
the final quarter of 1997. 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 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
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.
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 six months ended June 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>
Item 2.
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 10.39% and
11.60% respectively, at June 30, 1997, and 11.74% and 12.54%, respectively,
at June 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>
June 30, Minimum Well-
------------------------------ Capital Capitalized
1997 1996 1995 Ratios Ratios
-------- -------- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 39,076 $ 23,617 $ 21,793
Tier 2 risk-based capital 4,558 1,597 1,871
-------- -------- --------
Total capital $ 43,634 $ 25,214 $ 23,664
Risk-weighted assets $376,151 $201,133 $190,753
Average leveraged assets $607,517 $297,119 $272,012
Capital ratios:
Tier 1 risk-based capital 10.39% 11.74% 11.42% 4.00% 6.00%
Total capital to risk
adjusted assets 11.60% 12.54% 12.41% 8.00% 10.00%
Tier 1 leverage ratio 6.43% 7.95% 8.01% 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.
8
<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.
9
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
FINANCIAL CONDITION
Total assets decreased $24,753,000 or 3.86% to $617,271,000 at June 30, 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 due from banks decreased $9,830,000 or 33.62%. 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 $7,510,000 or 73.15% to $2,757,000 at June 30,
1997 from $10,267,000 at December 31, 1996. The decrease was primarily
related to a decrease in deposits coupled with heightened awareness of
liquidity management with increased emphasis on maximizing the yield
composition of the earning assets.
The increase in gross loans of $13,137,000 or 3.79% to $359,633,000 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 $19,160,000 or 8.57% since December 31, 1996
was partly related to strategic plans to improve the net interest margin by
increasing the earning asset mix toward
10
<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 $31,044,000 or 5.71% since December 31, 1996 to a
level of $512,700,000 at June 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 $975,000 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 $3,201,000 or
.89% of loans receivable at June 30, 1997, which was comparable to
$3,068,000, or .89% of loans receivable at December 31, 1996. The level of
nonperforming loans was .82% of total loans at June 30, 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.
11
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
Net charge-offs amounted to $340,000 for the six months ended June 30, 1997
and were significantly less than the net charge-offs of $917,000 for the
six months ended June 30, 1996. The net charge-offs recorded during the first
six 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 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,
12
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
"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 June 30, 1997, the recorded investment in loans for
which impairment has been recognized in accordance with SFAS No. 114 and SFAS
No. 118 totaled $2,463,000 of which $2,273,000 are 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 $190,000 of impaired loans required a
related allowance for possible loan losses in the amount of $71,000. There
was no interest income recognized on impaired loans (during the portion of
this quarter that they were impaired) during the second quarter of 1997.
NONPERFORMING ASSETS
At June 30, 1997, the Company had $3,594,000 of nonperforming assets, of
which $1,066,000 were related to the acquisitions. On June 30, 1996, the
Company had $1,887,000 of nonperforming assets. Nonperforming assets to total
assets at June 30, 1997 and 1996 were .58% and .64%, 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
13
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
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.
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 June 30, 1997
and December 31, 1996, cash and due from banks totaled $19.4 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 June 30, 1997, the Company had
$8,455,000 in outstanding advances from the FHLB.
At June 30, 1997, the Company had $7,321,000 in outstanding commitments to
originate loans. In addition, the Company had unused commitments of
$67,346,000 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.
14
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
NET INCOME - The Company's net income for the three months ended June 30,
1997 was $1,231,000 compared to $490,000 for the three months ended June 30,
1996. The increase of $741,000 or 151.22% in net earnings resulted primarily
from the acquisition of additional income producing subsidiaries.
NET INTEREST INCOME - Net interest income for the three months ended June 30,
1997 increased by $2,718,000 or 98.94% to $5,465,000 from $2,747,000 for the
three months ended June 30, 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 4.06% for the quarter ended June
30, 1997 from 4.21% that was earned for the same time frame in the previous
year. The decrease in the net interest margin was 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 $5,755,000 or 102.48% from
$5,616,000 to $11,371,000, during the second quarter of 1997 compared to the
same 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 $3,037,000 or 105.86% to
$5,906,000 for the three months ended June 30, 1997 from $2,869,000 for the
same period in 1996. The increase was primarily attributable to the increase
in total deposits from $259,087,000 at June 30, 1996 to
15
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
$512,700,000 at June 30, 1997, which resulted from the acquisitions. In
addition, interest expense on borrowings, including FHLB advances, increased
by $282,000 or 306.52% 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 loss allowance. During the three months ended June 30,
1997 and 1996, the provision for loan losses was $316,000 and $325,000,
respectively.
NONINTEREST INCOME - Noninterest income was $1,115,000 for the three months
ended June 30, 1997 compared to $660,000 for the three months ended June 30,
1996. The increase of $455,000 or 68.94% was largely attributable to the
acquisition of income producing subsidiaries.
NONINTEREST EXPENSE - Noninterest expense increased $2,038,000 for the three
months ended June 30, 1997 to $4,476,000 from $2,438,000 for the three months
ended June 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 June 30, 1997 and
1996 was approximately 30.29% and 23.91%, respectively.
16
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
NET INCOME - The Company's net income for the six months ended June 30, 1997
was $2,368,000 compared to $1,111,000 for the six months ended June 30, 1996.
The increase of $1,257,000 or 113.14% in net earnings resulted primarily from
the acquisition of additional income producing subsidiaries.
NET INTEREST INCOME - Net interest income for the six months ended June 30,
1997 increased by $5,268,000 or 97.05% to $10,696,000 from $5,428,000 for
the six months ended June 30, 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 3.94% at June 30, 1997, from 4.23%
at June 30, 1996. The decrease in the net interest margin was 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. The June 30, 1997 net interest margin of 3.94%
represented an 11 basis point improvement over the 3.83% margin that was
earned during the first quarter of 1997. The improvement was 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 $11,482,000 or 101.81% from
$11,278,000 to $22,760,000, during the first six 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, that was
partially offset by a reduction in yields on interest earning assets.
17
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
INTEREST EXPENSE - Interest expense increased by $6,214,000 or 106.22% to
$12,064,000 for the six months ended June 30, 1997 from $5,850,000 for the
same period in 1996. The increase was primarily attributable to the increase
in total deposits from $259,087,000 at June 30, 1996 to $512,700,000 at June
30, 1997, which resulted from the acquisitions. In addition, interest expense
on borrowings, including FHLB advances, increased by $612,000 or 332.61% 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 loss allowance. During the six months ended June 30,
1997 and 1996, the provision for loan losses was $473,000 and $500,000,
respectively.
NONINTEREST INCOME - Noninterest income was $2,291,000 for the six months
ended June 30, 1997 compared to $1,324,000 for the six months ended June 30,
1996. The increase of $967,000 or 73.04% was largely attributable to the
acquisition of income producing subsidiaries. In addition, securities gains
increased by $84,000 to $97,000 for the six months ended June 30, 1997 from
$13,000 for the six months ended June 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 lower yielding investment portfolio.
18
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
NONINTEREST EXPENSE - Noninterest expense increased $4,426,000 for the six
months ended June 30, 1997 to $9,187,000 from $4,761,000 for the six months
ended June 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 six months ended June 30, 1997 and
1996 was approximately 27.91% and 25.49%, 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
The Committee on Banking and Financial Services of the U.S. House of
Representatives has approved legislation 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.
19
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
The expanded powers generally would be available to a bank holding company
only if the bank holding company and its bank subsidiaries remain
well-capitalized and well managed, and if each of the depository institution
subsidiaries of the bank holding company had received at least a
"satisfactory" rating under the Community Reinvestment Act. The proposed
legislation would 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
institutions from the risks of the new nonbanking activities permitted to
such affiliates. At this time, the Company is unable to predict whether the
proposed legislation will be enacted and, therefore, is unable to predict the
impact such legislation may have on the operations of the Company and its
subsidiaries.
Additionally, legislation has been enacted in Illinois that would allow
Illinois banks, effective October 1, 1997, to engage in insurance activities,
subject to various conditions, including requirements for the manner in which
insurance products are marketed to bank customers and requirements that banks
selling insurance provide certain disclosures to customers. Legislation has
also been enacted in Illinois that would prohibit out-of-state banks from
acquiring an Illinois bank unless the Illinois bank has been in existence and
continuously operated for a period of at least five years.
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
20
<PAGE>
UNIONBANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
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-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.
21
<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
On April 25, 1997, the annual meeting of stockholders was held.
At the meeting, L. Paul Broadus, John Michael Daw, Robert J. Doty,
Jimmie D. Lansford and I.J. Reinhardt, Jr. were elected to serve as
Class II directors with terms expiring in 2000. Continuing as Class I
directors until 1999 are Richard J. Berry, Walter E. Breipohl and
Lawrence J. McGrogan. Continuing as Class III directors are R. Scott
Grigsby, H. Dean Reynolds, John A. Shinkle and Scott C. Sullivan.
There were 4,116,001 issued and outstanding shares of Common Stock
entitled to vote at the annual meeting. The voting on each item
presented at the annual meeting was as follows:
Election of Directors FOR WITHHELD
L. Paul Broadus 3,218,407 44,082
John Michael Daw 3,218,407 44,082
Robert J. Doty 3,215,407 47,082
Jimmie D. Lansford 3,212,843 49,646
I.J. Reinhardt 3,218,407 44,082
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
None.
Reports on Form 8K:
None
22
<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:___________________ _______________________________________
R. Scott Grigsby
Chairman of the Board, President and
Chief Executive Officer
Date:___________________ _______________________________________
Charles J. Grako
Executive Vice President and
Chief Financial Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 19,406
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,757
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 169,803
<INVESTMENTS-CARRYING> 34,592
<INVESTMENTS-MARKET> 35,024
<LOANS> 359,633
<ALLOWANCE> 3,201
<TOTAL-ASSETS> 617,271
<DEPOSITS> 512,700
<SHORT-TERM> 40,107
<LIABILITIES-OTHER> 6,181<F1>
<LONG-TERM> 8,455
857
500
<COMMON> 4,387
<OTHER-SE> 44,084
<TOTAL-LIABILITIES-AND-EQUITY> 617,271
<INTEREST-LOAN> 15,995
<INTEREST-INVEST> 6,765
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 22,760
<INTEREST-DEPOSIT> 10,724
<INTEREST-EXPENSE> 12,064
<INTEREST-INCOME-NET> 10,696
<LOAN-LOSSES> 473
<SECURITIES-GAINS> 97
<EXPENSE-OTHER> 9,187
<INCOME-PRETAX> 3,285
<INCOME-PRE-EXTRAORDINARY> 3,285
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,368
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
<YIELD-ACTUAL> 7.94
<LOANS-NON> 2,402
<LOANS-PAST> 532
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,068
<CHARGE-OFFS> 496
<RECOVERIES> 156
<ALLOWANCE-CLOSE> 3,201
<ALLOWANCE-DOMESTIC> 3,201
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> INCLUDES MINORITY INTEREST
</FN>
</TABLE>
