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, 1998
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 10, 1998
- ----------------------------- -------------------------------------
Common Stock, Par Value $1.00 4,137,330
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
o Consolidated Balance Sheets 1
o Consolidated Statements of Income 2
o Consolidated Statements of Comprehensive Income 3
o Consolidated Statements of Cash Flows 4
o Notes to Unaudited Consolidated Financial Statements 5 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
<PAGE>
<TABLE>
<CAPTION>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
- -----------------------------------------------------------------------------------------------------------
June 30, December 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 29,148 $ 22,826
Federal funds sold 1,000 1,404
Securities available-for-sale 144,063 163,568
Securities held-to-maturity 45,436 37,170
Loans 400,343 370,985
Allowance for loan losses (3,745) (3,188)
--------- ---------
Net loans 396,598 367,797
Premises and equipment, net 14,811 14,631
Intangible assets, net 9,456 9,898
Other assets 8,172 8,166
--------- ---------
TOTAL ASSETS $ 648,684 $ 625,460
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing $ 61,062 $ 62,095
Interest bearing 466,998 465,652
--------- ---------
Total deposits 528,060 527,747
Federal funds purchased and securities sold
under agreements to repurchase 23,844 11,761
Advances from the Federal Home Loan Bank 25,655 16,455
Notes payable 10,347 10,261
Other liabilities 6,014 6,154
--------- ---------
TOTAL LIABILITIES 593,920 572,378
--------- ---------
Minority interest in subsidiaries 661 644
Mandatory redeemable preferred stock, Series B, no par value;
1,092 shares authorized; 857 shares issued and outstanding 857 857
--------- ---------
Stockholders' equity
Preferred stock; 200,000 shares authorized; none issued -- --
Series A convertible preferred stock; 2,765 shares authorized,
2,762.24 shares outstanding (aggregate liquidation preference of $2,762) 500 500
Series C preferred stock; 4,500 shares authorized; none issued -- --
Common stock, $1 par value; 10,000,000 shares authorized; 4,408,593 shares
outstanding at June 30, 1998 and 4,407,093
at December 31, 1997 4,409 4,407
Surplus 19,837 19,705
Retained earnings 28,902 26,765
Accumulated other comprehensive income 339 856
Unearned compensation under stock option plans (219) (130)
--------- ---------
53,768 52,103
Treasury stock, at cost; 271,263 shares
at June 30, 1998 and December 31, 1997 (522) (522)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 53,246 51,581
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 648,684 $ 625,460
========= =========
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
1.
<PAGE>
<TABLE>
<CAPTION>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
- ---------------------------------------------------------------------------------------
Quarter Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income
Loans and fees on loans $ 9,042 $ 8,106 $17,588 $15,995
Securities
Taxable 2,352 2,773 4,944 5,772
Exempt from federal income taxes 539 424 1,020 820
Federal funds sold and other 18 67 96 173
------- ------- ------- -------
TOTAL INTEREST INCOME 11,951 11,370 23,648 22,760
------- ------- ------- -------
Interest expense
Deposits 5,559 5,267 11,012 10,724
Federal funds purchased and securities sold
under agreements to repurchase 298 265 512 544
Advances from the Federal Home Loan Bank 334 137 571 255
Notes payable 190 237 377 541
------- ------- ------- -------
TOTAL INTEREST EXPENSE 6,381 5,906 12,472 12,064
------- ------- ------- -------
NET INTEREST INCOME 5,570 5,464 11,176 10,696
Provision for loan losses 319 316 881 473
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,251 5,148 10,295 10,223
------- ------- ------- -------
Noninterest income
Service charges 617 467 1,140 897
Merchant fee income 169 141 351 302
Trust income 151 114 301 236
Mortgage banking income 371 164 767 247
Securities gains, net 50 12 36 97
Other income 372 217 773 512
------- ------- ------- -------
1,730 1,115 3,368 2,291
------- ------- ------- -------
Noninterest expenses
Salaries and employee benefits 2,603 2,212 5,154 4,637
Occupancy expense, net 400 381 767 772
Furniture and equipment expense 450 384 866 736
FDIC insurance assessment 16 16 32 30
Supplies and printing 151 168 288 296
Telephone 127 77 259 168
Postage 96 106 202 214
Amortization of intangible assets 231 230 460 459
Other expenses 962 902 1,843 1,875
------- ------- ------- -------
5,036 4,476 9,871 9,187
------- ------- ------- -------
1,945 1,787 3,792 3,327
Minority interest 13 22 28 42
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,932 1,765 3,764 3,285
Income taxes 612 535 1,201 917
------- ------- ------- -------
NET INCOME 1,320 1,230 2,563 2,368
Preferred stock dividends 65 65 130 130
------- ------- ------- -------
NET INCOME FOR COMMON STOCKHOLDERS $ 1,255 $ 1,165 $ 2,433 $ 2,238
======= ======= ======= =======
BASIC EARNINGS PER COMMON SHARE $ .30 $ .28 $ .59 $ .54
======= ======= ======= =======
DILUTED EARNINGS PER COMMON SHARE $ .30 $ .28 $ .58 $ .54
======= ======= ======= =======
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
2.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
- --------------------------------------------------------------------------
Quarter Ended Six Months Ended
June 30, June 30,
----------------- ------------------
1998 1997 1998 1997
------- ------- ------- -------
Net income $ 1,320 $ 1,230 $ 2,563 $ 2,368
Change in unrealized gains on
securities available-for-sale 72 665 (517) 429
------- ------- ------- -------
COMPREHENSIVE INCOME $ 1,392 $ 1,895 $ 2,046 $ 2,797
======= ======= ======= =======
See Accompanying Notes to Unaudited Financial Statements
3.
<PAGE>
<TABLE>
<CAPTION>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------------------
Six Months Ended
June 30,
--------------------
1998 1997
-------- --------
Cash flows from operating activities
<S> <C> <C>
Net income $ 2,563 $ 2,368
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation 804 684
Amortization of intangible assets 460 385
Amortization of unearned compensation under stock option plans 32 20
Amortization of bond premiums, net 184 222
Provision for loan losses 881 473
Securities gains, net (36) (97)
Gain (loss) on sale of equipment (11) 15
Loss on sale of real estate acquired in settlement of loans 4 (5)
Gain on sale of loans (609) (149)
Proceeds from sales of loans held for sale 33,905 4,084
Origination of loans held for sale (37,900) (8,395)
Minority interest in net income of subsidiary 28 42
Change in assets and liabilities
(Increase) decrease in other assets 452 (409)
Increase in other liabilities 224 5
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 981 (757)
Cash flows from investing activities
Securities
Held-to-maturity
Proceeds from calls, maturities, and paydowns 1,151 1,774
Purchases (9,457) (1,391)
Available-for-sale
Proceeds from maturities and paydowns 35,329 12,589
Proceeds from sales 4,124 20,912
Purchases (20,949) (11,408)
Net decrease in federal funds sold 404 7,510
Net increase in loans (25,546) (9,416)
Increase in intangibles (18) --
Purchase of premises and equipment (984) (1,707)
Proceeds from sale of real estate acquired in settlement of loans 6 44
Proceeds from sale of equipment 11 33
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (15,929) 18,940
Cash flows from financing activities
Net increase (decrease) in deposits $ 313 $(31,044)
Net increase in federal funds purchased
and securities sold under agreements to repurchase 12,083 5,632
Net increase (decrease) in advances from the
Federal Home Loan Bank 9,200 (1,566)
Payments on notes payable (9) (1,000)
Proceeds from notes payable 95 478
Dividends on common stock (290) (288)
Dividends on preferred stock (130) (233)
Proceeds from exercise of stock options 8 8
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 21,270 (28,013)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,322 (9,830)
Cash and cash equivalents
Beginning of year 22,826 29,236
-------- --------
End of year $ 29,148 $ 19,406
======== ========
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
4.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements of
UnionBancorp, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles and with the rules and regulations of
the Securities and Exchange Commission for interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all normal and recurring adjustments which are
necessary to fairly present the results for the interim periods presented have
been included. The preparation of financial statements requires management to
make estimates and assumptions that affect the recorded amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
For further information with respect to significant accounting policies followed
by the Company in the preparation of its consolidated financial statements,
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
NEW ACCOUNTING STANDARDS
Effective for fiscal years beginning after December 15, 1997, under a new
accounting standard (SFAS 130), comprehensive income is now reported for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains and
losses on securities available-for-sale. Comprehensive income has been disclosed
in the Consolidated Statement of Comprehensive Income.
Effective for fiscal years beginning after December 15, 1997, a new accounting
standard (SFAS 131), establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. This standard will
have no impact on the Company.
5.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
NOTE 2. SECURITIES
Securities Held to Maturity - The amortized cost and fair value of securities
held to maturity at June 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
----------------------------------------------- -----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
HELD-TO-MATURITY Cost Gains Losses Value Cost Gains Losses Value
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
States and political subdivisions $ 45,436 $ 899 $ (68) $ 46,267 $ 37,170 $ 805 $ (135) $ 37,840
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Securities Available for Sale - The amortized cost and fair value of securities
available for sale at June 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
----------------------------------------------- -----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
AVAILABLE-FOR-SALE Cost Gains Losses Value Cost Gains Losses Value
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 14,176 $ 79 $ (3) $ 14,252 $ 19,071 $ 98 $ (6) $ 19,163
U.S. government agencies and
corporations 54,323 146 (167) 54,302 59,341 173 (199) 59,315
U.S. government mortgage-backed
securities 15,009 170 (50) 15,129 21,797 907 (9) 22,695
Collateralized mortgage obligations 56,412 602 (215) 56,799 57,800 528 (28) 58,300
Corporate bonds 100 -- -- 100 100 -- -- 100
Other 3,481 -- -- 3,481 4,001 -- (6) 3,995
--------- --------- --------- --------- --------- --------- --------- ---------
$143,501 $ 997 $ (435) $ 144,063 $ 162,110 $ 1,706 $ (248) $ 163,568
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
NOTE 3. LOANS
The following table provides the book value of loans, by major classification,
as of the dates indicated:
June 30, 1998 December 31, 1997
------------------------- --------------------------
$ % $ %
----------- ----------- ----------- ------------
Commercial $ 76,066 19.00% $ 62,936 16.96%
Agricultural 41,005 10.24 39,431 10.62
Real estate:
Commercial mortgages 93,019 23.23 72,730 19.60
Construction 13,952 3.48 14,393 3.88
Agricultural 37,175 9.28 27,955 7.53
1-4 family mortgages 97,883 24.45 109,411 29.48
Installment 38,598 9.64 41,210 11.10
Other 2,719 0.68 3,076 0.83
----------- ----------- ----------- ------------
400,417 100.00% 371,142 100.00%
=========== ============
Unearned Income (74) (157)
------------ -----------
Total loans 400,343 370,985
Allowance for loan losses (3,745) (3,188)
------------ -----------
Loans, net $ 396,598 $ 367,797
=========== ===========
6.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses during the quarter and six months
ended June 30, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Beginning balance $ 3,551 $ 3,098 $ 3,188 $ 3,068
Charge-offs:
Commercial 44 99 124 109
Real estate mortgages 30 135 119 159
Installment and other loans 97 75 197 228
-------- -------- -------- --------
Total charge-offs 171 309 440 496
-------- -------- -------- --------
Recoveries:
Commercial 2 19 31 29
Real estate mortgages 14 37 20 55
Installment and other loans 30 40 65 72
-------- -------- -------- --------
Total recoveries 46 96 116 156
-------- -------- -------- --------
Net charge-offs 125 213 324 340
-------- -------- -------- --------
Provision for loan losses 319 316 881 473
-------- -------- -------- --------
Ending balance $ 3,745 $ 3,201 $ 3,745 $ 3,201
======== ======== ======== ========
Period end total loans, net of
unearned interest $400,343 $359,633 $400,343 $359,633
======== ======== ======== ========
Average loans $388,579 $353,653 $376,955 $351,399
======== ======== ======== ========
Ratio of net charge-offs to
average loans 0.03% 0.06% 0.09% 0.10%
Ratio of provision for loan losses
to average loans 0.08 0.09 0.23 0.13
Ratio of allowance for loan losses
to ending total loans 0.94 0.89 0.94 0.89
Ratio of allowance for loan losses
to total nonperforming loans 132.61 109.10 132.61 109.10
Ratio of allowance at end of period
to average loans 0.96 0.91 0.99 0.91
</TABLE>
NOTE 5. CONTINGENT LIABILITIES AND OTHER MATTERS
Neither the Company nor any of its subsidiaries are involved in any pending
legal proceedings other than routine legal proceedings occurring in the normal
course of business, which, in the opinion of management, in the aggregate, are
not material to the Company's consolidated financial condition.
7.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
The discussion presented below provides an analysis of the Company's results of
operations and financial condition during the quarter and six months ended June
30, 1998 as compared to the same period in 1997. Management's discussion and
analysis should be read in conjunction with the consolidated financial
statements and accompanying notes presented elsewhere in this report as well as
the Company's 1997 Annual Report on Form 10-K. Results of operations during the
quarter and six months ended June 30, 1998 are not necessarily indicative of
results to be expected for the full year of 1998.
SUMMARY OF PERFORMANCE
Net income for the second quarter increased to $1,320,000 from the $1,230,000
earned in the second quarter of 1997, representing an increase of 7%. Per share
(diluted) earnings increased to $0.30 from $0.28 a year ago. Net income for the
six months ended June 30, 1998, totaled $2,563,000, or $0.58 (diluted) per share
from $2,368,000, or $0.54 (diluted) per share for the like period in 1997,
representing a 7% increase per share.
Return on average assets was 0.84% for the second quarter of 1998, as compared
to 0.81% for the same quarter in 1997. Return on average assets was 0.83% for
the six months ended June 30, 1998, as compared to 0.77% for the same period in
1997.
Return on average stockholders' equity was 10.02% for the second quarter of
1998, as compared to annualized 10.48% for the same 1997 quarter. Return on
average stockholders' equity was 9.87% for the six months ended June 30, 1998,
as compared to 10.16% for the same period in 1997.
NET INTEREST INCOME
Net interest income on a tax equivalent basis totaled $5,869,000 for the second
quarter of 1998, representing an increase of $164,000 or 2.8% over the
$5,705,000 earned during the quarter ended June 30, 1997. As shown in the
Volume/Rate Analysis on page 10, the improvement in net interest income was
attributable to increased interest income of $639,000, which was partially
offset by a higher interest expense of $475,000. The net interest margin for the
second quarter of 1998 equaled 4.00% as compared to 4.06% for the same time
frame in 1997. The decrease in the net interest margin was primarily
attributable to higher interest costs for paying liabilities which was partly
offset by the higher yields on earning assets.
As indicated in the Volume/Rate Analysis, the $639,000 increase in interest
income for the quarter was primarily related to interest rate variances in the
loan portfolio, totaling an increase of $880,000 and resulted from a strategic
shift in the asset mix toward loans which have a higher yield than securities.
Consequently, the decrease in the securities portfolio interest income primarily
resulted from securities volumes which were reduced to fund the loan portfolio
growth.
The $475,000 increase in interest expense resulted from a $306,000 increase due
to rate coupled with a $169,000 increase associated with volume. A major
contributor to the increase in interest expense related to higher volumes and
rates on time deposits and advances from the FHLB. The increase in volume and
rate on time deposits resulted primarily from promotional efforts to attract
depositors. The increase in volume and rate associated with advances from the
FHLB is connected to the Company's utilization of this favorable funding
alternative. Both of the funding mechanisms were employed to attract certain
maturities to match and fund term assets.
For the six month period ended June 30, 1998, the net interest margin increased
to 4.08% from 3.94% for 1997. The Volume/Rate Analysis for the six months ended
June 30, 1998 as compared to the like 1997 period is presented on page 10.
8.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
VOLUME/RATE ANALYSIS - QUARTER
The table below summarizes the changes in average interest-earning assets and
interest -bearing liabilities as well as the average rates earned and paid on
these assets and liabilities, respectively, for the quarters ended June 30, 1998
and 1997. The table also details the increase and decrease in income and expense
for each major category of assets and liabilities and analyzes the extent to
which such variances are attributable to volume and rate changes.
<TABLE>
<CAPTION>
For the Quarter Ended June 30,
-------------------------------------------------
1998 1997
----------------------- ------------------------
Interest Interest Change Due To:
Average Income/ Average Average Income/ Average --------------------
Balance Expense Rate Balance Expense Rate Volume Rate Net
-------- ----- ---- -------- ------- ----- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Interest-earning deposits $ 1,000 $ 13 5.21% $ 112 $ 6 21.49% $ (8) $ 15 $ 7
Securities (1)
Taxable 155,264 2,333 6.03% 173,461 2,767 6.40% (154) (280) (434)
Non-taxable (2) 43,034 825 7.69% 32,763 643 7.87% (15) 197 182
-------- ----- ---- -------- ------- ----- ---- ---- ----
Total securities (tax equivalent) 198,298 3,158 6.39% 206,224 3,410 6.63% (169) (83) (252)
-------- ----- ---- -------- ------- ----- ---- ---- ----
Federal funds sold 1,415 18 5.10% 4,510 67 5.96% (9) (40) (49)
-------- ----- ---- -------- ------- ----- ---- ---- ----
Loans (3)(4)
Commercial 108,102 2,612 9.69% 94,918 2,264 9.57% 29 319 348
Real estate 238,171 5,109 8.60% 214,093 4,575 8.57% 16 518 534
Installment and other 41,909 996 9.53% 44,151 1,041 9.46% 8 (53) (45)
Fees on loans - 343 - - 247 - - 96 96
-------- ------ ------ -------- ------ ----- ---- ---- ----
Net loans (tax equivalent) 388,182 9,060 9.36% 353,162 8,127 9.23% 53 880 933
-------- ------ ------ -------- ------- ----- ---- ---- ----
Total interest-earning assets 588,895 12,249 8.34% 564,008 11,610 8.26% (133) 772 639
-------- ------ ------ -------- ------- ----- ---- ---- ----
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 14,585 16,676
Premises and equipment, net 14,761 14,323
Other assets 15,347 14,716
-------- --------
Total nonearning assets 44,693 45,715
-------- --------
Total assets $633,588 $609,723
======== ========
LIABILITIES
NOW accounts $54,412 326 2.40% $56,580 $ 353 2.50% $(14) $ (13) (27)
Money market accounts 27,951 258 3.70% 32,525 264 3.26% 33 (39) (6)
Savings deposits 62,234 481 3.10% 63,631 437 2.75% 54 (10) 44
Time deposits 317,654 4,492 5.67% 305,332 4,212 5.53% 108 172 280
Federal funds purchased and
repurchase agreements 20,507 298 5.83% 18,776 265 5.66% 8 25 33
Advances from FHLB 23,697 335 5.67% 8,716 137 6.30% (15) 213 198
Notes payable 10,350 190 7.36% 12,626 237 7.53% (5) (42) (47)
-------- ------ ------ -------- ------ ---- ---- ---- ---
Total interest-bearing liabilities 516,805 6,380 4.95% 498,186 5,905 4.75% 169 306 475
-------- ------ ------ -------- ------ ---- ---- ---- ---
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 56,614 57,217
Other liabilities 7,316 7,231
-------- --------
Total noninterest-bearing liabilities 63,930 64,448
-------- --------
Stockholders' equity 52,853 47,089
-------- --------
Total liabilities and
stockholders' equity $633,588 $609,723
======== ========
Net interest income (tax equivalent) $5,869 $ 5,705 $ (302) $ 466 $164
Net interest income (tax ====== ======= ====== ===== ====
equivalent) to total
earning assets 4.00% 4.06%
Interest-bearing liabilities
to earning assets 87.76% 88.33%
-------- ---------
</TABLE>
- ---------------
(1) Average balance and average rate on securities classified as
available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%
(3) Nonaccrual loans are included in the average balances.
(4) Overdraft loans are excluded in the average balances.
9.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
VOLUME/RATE ANALYSIS - SIX MONTHS
The table below summarizes the changes in average interest-earning assets and
interest -bearing liabilities as well as the average rates earned and paid on
these assets and liabilities, respectively, for the six months ended June 30,
1998 and 1997. The table also details the increase and decrease in income and
expense for each major category of assets and liabilities and analyzes the
extent to which such variances are attributable to volume and rate changes.
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
-------------------------------------------------
1998 1997
----------------------- ------------------------
Interest Interest Change Due To:
Average Income/ Average Average Income/ Average ----------------------
Balance Expense Rate Balance Expense Rate Volume Rate Net
-------- ------- ------- ------- ------- ------- ------ ------ -----
ASSETS
INTEREST-EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning deposits $ 565 $ 50 17.85% $ 89 $ 6 13.59% $ 1 $ $ 41 $ 42
Securities (1)
Taxable 159,604 4,895 6.18% 181,822 5,764 6.39% (184) (685) (869)
Non-taxable (2) 39,944 1,545 7.80% 31,699 1,243 7.91% (17) 319 302
-------- ------ ------ -------- ------- ------ ------ ---- ------
Total securities (tax equivalent) 199,548 6,440 6.51% 213,521 7,007 6.62% (201) (366) (567)
-------- ------ ------ -------- ------- ------ ------ ---- ------
Federal funds sold 3,163 96 6.12% 6,290 174 5.58% 15 (93) (78)
Loans (3)(4)
Commercial 102,781 4,927 9.67% 95,896 4,531 9.53% 67 329 396
Real estate 231,189 9,981 8.71% 210,944 8,973 8.58% 137 871 1,008
Installment and other 42,612 2,009 9.51% 44,175 2,023 9.23% 60 (74) (14)
Fees on loans - 706 - - 511 - - 195 195
-------- ------ ------ -------- ------- ------ ------ ------- -------
Net loans (tax equivalent) 376,582 17,623 9.44% 351,015 16,038 9.21% 264 1,321 1,585
-------- ------ ------ -------- ------- ------ ------ ------- -------
Total interest-earning assets 579,858 24,209 8.42% 570,915 23,225 8.20% 81 903 984
-------- ------ ------ -------- ------- ------ ------ ------- -------
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 16,188 18,078
Premises and equipment, net 14,669 14,027
Other assets 15,538 15,109
-------- --------
Total nonearning assets 46,395 47,214
-------- --------
Total assets $626,253 $618,129
======== ========
LIABILITIES
NOW accounts $54,194 651 2.42% $56,198 $ 702 2.52% $ (27) $ (24) (51)
Money market accounts 29,275 516 3.55% 32,074 521 3.28% 42 (47) (5)
Savings deposits 61,002 893 2.95% 65,246 937 2.90% 16 (60) (44)
Time deposits 316,726 8,952 5.70% 310,812 8,564 5.56% 221 167 388
Federal funds purchased and
repurchase agreements 17,452 512 5.92% 19,824 544 5.53% 36 (68) (32)
Advances from FHLB 20,313 571 5.67% 8,161 255 6.30% (28) 344 316
Notes payable 10,330 377 7.36% 13,630 541 8.00% (41) (123) (164)
-------- ------ ------ -------- ------- ------ ------ ------- -------
Total interest-bearing liabilities 509,292 12,472 4.94% 505,945 12,064 4.81% 219 189 408
-------- ------ ------ -------- ------- ------ ------ ------- -------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 56,906 57,843
Other liabilities 7,677 6,467
-------- --------
Total noninterest-bearing liabilities 64,583 64,310
-------- --------
Stockholders' equity 52,378 47,874
-------- --------
Total liabilities and
stockholders' equity $ 626,253 $618,129
========= ========
Net interest income (tax equivalent) $11,737 $11,161 $ (138)$ 714 $ 576
======= ======= ====== ======= =======
Net interest income (tax equivalent) to
total earning assets 4.08% 3.94%
Interest-bearing liabilities
to earning assets 87.83% 88.62%
--------- --------
</TABLE>
- ---------------
(1) Average balance and average rate on securities classified as
available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%
(3) Nonaccrual loans are included in the average balances.
(4) Overdraft loans are excluded in the average balances.
10.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
NONINTEREST INCOME
Noninterest income totaled $1,730,000 for the quarter ended June 30, 1998, as
compared to $1,115,000 for the same time frame in 1997, which represents an
increase of $615,000 or a 55.2% improvement. Basically, all categories of
operating income contributed to the increase with the bulk of the increase
largely related to growth in mortgage banking and service charge income.
Specifically, mortgage banking income increased by $207,000 to a level of
$371,000 for the quarter ended June 30, 1998 and is related to gains from sales
of loans and servicing. This was a result of increased loan originations due to
refinancing because of lower interest rates. Service charges on deposit accounts
was $150,000 in excess of the like period in 1997 and was essentially
attributable to a higher volume of NSF fees. Also contributing to the
improvement in income was growth in ATM revenues of $45,000 along with a $37,000
increase in income from trust operations.
Noninterest income totaled $3,368,000 for the six months ended June 30, 1998, as
compared to $2,291,000 for the same period in 1997. Factoring out net securities
gains totaling $36,000 for the 1998 six month period as compared to $97,000 for
the 1997 period, noninterest income increased by $1,138,000, or 51.9%. The
reasons for the six month period paralleled those described above for the second
quarter.
NONINTEREST EXPENSE
Noninterest expense totaled $5,036,000 for the quarter ended June 30, 1998,
increasing by $560,000 from the same time frame in 1997, which equates to a
12.5% increase. Increases in salaries and employee benefits accounted for a
large percentage of the increase and for the most part were directly related to
merit increases coupled with incentive payments relating to the mortgage banking
area. The increases in furniture and equipment expenses along with telephone
expense were largely related to the computer conversion of acquired entities.
The increase in the other expense category was primarily associated with
accounting fees, of which the bulk of the expense was related to the outsourcing
of the internal audit function, which was implemented at the beginning of the
second quarter of 1998.
Noninterest expense equaled $9,871,000 for the six months ended June 30, 1998,
increasing by $684,000 from the $9,187,000 expensed during the same period in
1997. The 7.5% increase is largely reflective of the same items discussed
regarding the second quarter expenses.
The Company's efficiency ratio was 63.8% for the quarter ended June 30, 1998,
which was comparable to the 63.0% recorded during the like period in 1997. For
the six month period ending June 30, 1998, the efficiency ratio was down to
62.6% as compared to the 66.1% for the same period in 1997. The improvement in
the 1998 efficiency ratio reflected the Company's continued improvement in
controlling overhead and realization of the cost benefits of the operating
strategy of capturing the economies of scale available by centralizing back room
operations along with the consolidation of several of the Company's
subsidiaries.
INCOME TAX EXPENSE
Income tax expense totaled $612,000 for the quarter ended June 30, 1998,
increasing from $535,000 for the same period in 1997, and reflected effective
tax rates of 31.7% and 30.3% respectively. Income tax expense totaled $1,201,000
for the six months ended June 30, 1998, increasing from the $917,000 for the
1997, six month period and reflected effective tax rates of 31.9% and 27.9%,
respectively.
11.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS
At June 30, 1998, nonperforming assets totaled $3,392,000 versus the $3,042,000
that existed as of December 31,1997. The following table summarizes
nonperforming assets and loans past 90 days or more and still accruing for the
previous five quarters.
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------------------
Jun. 30, Mar. 31, Dec. 31, Sep. 30, Jun. 30,
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nonaccrual and impaired loans not
accruing $1,303 $1,081 $1,714 $2,206 $2,402
Impaired and other loans 90 days past
due and still accruing interest 1,521 1,362 1,013 1,084 532
------ ------ ------ ------ ------
Total nonperforming loans 2,824 2,443 2,727 3,290 2,934
Other real estate owned 468 204 215 455 510
Other nonperforming assets (1) 100 100 100 100 150
------ ------ ------ ------ ------
Total nonperforming assets $3,392 $2,747 $3,042 $3,845 $3,594
====== ====== ====== ====== ======
Nonperforming loans to total end of period loans 0.71% 0.67% 0.74% 0.89% 0.82%
Nonperforming assets to total end of period loans 0.85 0.75 0.82 1.04 1.00
Nonperforming assets to total end of period assets 0.52 0.44 0.49 0.60 0.58
</TABLE>
- ------------
(1) Represents a single municipal security in default status.
PROVISION FOR LOAN LOSSES
Transactions in the allowance for loan losses during the quarter and six months
ended June 30, 1998 and 1997 are summarized in the table on page 7. The
provision for loan losses charged to operating expense for the second quarter of
1998 equaled $319,000 as compared to $316,000 for the same quarter in 1997. For
the six month period ending June 30, 1998, the provision for loan losses charged
to operating expense equaled $881,000 as compared to $473,000 for the like
period in 1997. The amount of the provision for loan losses in any given period
is dependent upon many factors, including loan growth, changes in the
composition of the loan portfolio, net charge-offs, delinquencies, collateral
values, and management's assessment of current and prospective economic
conditions. The increase in the provision for loan losses during the first half
of 1998, as compared to the same time frame in 1997, was primarily reflective of
the expansion of the loan portfolio that resulted from a strategic shift in the
asset mix of the Company toward loans. Loan charge-offs, net of recoveries,
decreased to $324,000 during the first half of 1998 as compared to $340,000 for
the like period in 1997.
At June 30, 1998, the allowance for loan losses totaled $3,745,000 and increased
to .94% of total loans outstanding as compared to $3,201,000 or .89% at June 30,
1997. Such allowance level is considered adequate in relation to the estimated
risk of future losses within the loan portfolio.
12.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
CAPITAL
The Board of Governors of the Federal Reserve System ("FRB") has 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 in 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>
December 31, Minimum Well
June 30, ---------------------------- Capital Capitalized
1998 1997 1996 Ratios Ratios
------------ ------------ ------------ ------- ------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 43,515 $ 41,180 $ 36,242
Tier 2 risk-based capital 5,102 4,545 4,425
Total capital 48,617 45,725 40,667
Risk-weighted assets 420,342 385,685 374,028
Capital ratios
Tier 1 risk-based capital 10.35% 10.68% 9.69% 4.00% 6.00%
Tier 2 risk-based capital 11.57 11.86 10.87 8.00 10.00
Leverage ratio 6.81 6.64 7.76 4.00 5.00
</TABLE>
The Company is committed to maintaining strong capital positions in each of its
subsidiaries and on a consolidated basis. Management monitors, analyzes and
forecasts capital positions for each entity to ensure that adequate capital is
available to support growth and maintain financial soundness. The Company's tier
1 leverage ratio as of June 30, 1998, was 6.81%, a modest increase from 6.64% at
December 31, 1997. The ratio exceeds the regulatory minimum, and management
believes the Company is maintaining a strong capital position. The Company's
June 30, 1998, total risk weighted capital ratio decreased slightly to 11.57%
from 11.86% at December 31, 1997. The Tier 1 Capital ratio also decreased from
10.68% at December 31, 1997, to 10.35% at June 30, 1998. Both the total risk
weighted and Tier 1 Capital ratios also continue to exceed regulatory minimums.
LIQUIDITY
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of assets. Additional
sources of liquidity, including cash flow from both the repayment of loans and
the securitization of assets, are also considered in determining whether
liquidity is satisfactory. Cash flows used in operating and investing
activities, offset by those provided by financing activities, resulted in a net
increase in cash and cash equivalents of $6,322,000 from December 31, 1997 to
June 30, 1998. This usage was primarily related to the increase in the
origination of loans held for sale which is related to the Company's mortgage
banking operation. This was partially offset by increased utilization of
advances from the Federal Home Loan Bank. For more detailed cash flow
information, see the Company's Consolidated Statement of Cash Flow located on
page 4.
13.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY MANAGEMENT
The business of the Company and the composition of its balance sheet consist of
investments in interest-earning assets ( primarily loans and securities) which
are primarily funded by interest-bearing liabilities (deposits and borrowings).
Other than loans held for sale, all of the financial instruments of the Company
are for other than trading purposes. Such financial instruments have varying
levels of sensitivity to changes in market rates of interest. The operating
income and net income of the Company's subsidiary banks depend, to a substantial
extent, on "rate differentials," i.e., the differences between the income the
banks receive from loans, securities, and other earning assets and the interest
expense they pay to obtain deposits and other liabilities. These rates are
highly sensitive to many factors that are beyond the control of the banks,
including general economic conditions and the policies of various governmental
and regulatory authorities.
The objective of monitoring and managing the interest rate risk position of the
balance sheet is to contribute to earnings and to minimize fluctuations in net
interest income. The potential for earnings to be affected by changes in
interest rates is inherent in a financial institution. Interest rate sensitivity
is the relationship between changes in market interest rates and changes in net
interest income due to the repricing characteristics of assets and liabilities.
An asset sensitive position in a given period will result in more assets being
subject to repricing; therefore, as interest rates rise, such a position will
have a positive effect on net interest income. Conversely, in a liability
sensitive position, where liabilities reprice more quickly than assets in a
given period, a rise in interest rates will have an adverse effect on net
interest income. The Company's exposure to interest rate risk is managed
primarily through the Company's strategy of selecting the types and terms of
interest-earning assets and interest-bearing liabilities which generate
favorable earnings, while limiting the potential negative effects of changes in
market interest rates. Since the Company's primary source of interest-bearing
liabilities is customer deposits, the Company's ability to manage the types and
terms of such deposits may be somewhat limited by customer maturity preferences
in the market areas in which the Company operates. The rates, terms, and
interest rate indices of the Company's interest-earning assets result primarily
from the Company's strategy of investing in loans and securities (a substantial
portion of which have adjustable rate terms) which permit the Company to limit
its exposure to interest rate risk, together with credit risk, while at the same
time achieving a positive interest rate spread.
One method of analyzing interest rate risk is to evaluate the balance of the
Company's interest rate sensitivity position. A mix of assets and liabilities
that are roughly equal in volume, term, and repricing represents a matched
interest rate sensitivity position. Any excess of assets or liabilities in a
particular period results in an interest rate sensitivity gap. The following
table presents the interest rate sensitivity for the Company's interest-earning
assets and interest-bearing liabilities at June 30, 1998. The table was prepared
assuming loans prepay at varying degrees, based on type, maturity, and rate. All
the NOW accounts, money market accounts, and savings accounts reprice in three
months or less, and certificates of deposit have been included based on
contractual maturity.
14.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1998
---------------------------------------------------------------
3 months 3 months to 6 months 1 year to Over
or less 6 months to 1 year 5 years 5 years Total
-------- ---------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest bearing balances $ 970 $ -- $ -- $ -- $ -- $ 970
Federal funds sold 1,000 -- -- -- -- 1,000
Securities 81,676 16,025 14,562 50,460 26,776 189,499
Loans 92,478 42,658 66,489 154,788 43,930 400,343
-------- -------- -------- -------- -------- --------
Total interest-earning assets $176,124 $ 58,683 $ 81,051 $205,248 $ 70,706 $591,812
======== ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES
NOW accounts $ 59,457 $ -- $ -- $ -- $ -- $ 59,457
Money market accounts 26,793 -- -- -- -- 26,793
Savings 62,607 -- -- -- -- 62,607
Time deposits 110,040 61,298 80,419 66,333 51 318,141
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 258,897 61,298 80,419 66,333 51 466,998
Federal funds and repurchase agreements 17,478 3,363 1,120 1,883 -- 23,844
Advances from FHLB 2,750 500 6,755 11,350 4,300 25,655
Notes payable 10,000 -- -- 347 -- 10,347
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $289,125 $ 65,161 $ 88,294 $ 79,913 $ 4,351 $526,844
======== ======== ======== ======== ======== ========
Period interest sensitivity gap $(113,001) $ (6,478) $ (7,243) $125,335 $ 66,355 $ 64,968
Cumulative interest sensitivity gap (113,001) (119,479) (126,722) (1,387) 64,968
Cumulative gap as a percent of
total assets (17.42)% (18.42)% (19.54)% (0.21)% 10.02%
Cumulative interest-sensitive assets as a
percent of cumulative interest-sensitive
liabilities 60.92% 66.28% 71.37% 99.73% 112.33%
</TABLE>
The Company undertakes this interest rate-sensitivity analysis to monitor the
potential risk to future earnings from the impact of possible future changes in
interest rates on currently existing net assets or net liability positions.
However, this type of analysis is as of a point-in-time, when in fact, the
Company's interest rate sensitivity can quickly change as market conditions,
customer needs, and management strategies change. Thus, interest rate changes do
not affect all categories of assets and liabilities equally or at the same time.
Pursuant to its investment policy, the Company does not purchase
off-balance-sheet derivative financial instruments.
15.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
The preceding table does not necessarily indicate the impact of general interest
rate movements on the Company's net interest income because the repricing of
certain assets and liabilities is discretionary and is subject to competitive
and other pressures. As of June 30, 1998, the Company's subsidiary banks held
approximately $15,009,000 (at amortized cost) in mortgage-backed securities.
Although the mortgage-backed securities have various stated maturities, it is
not uncommon for mortgage-backed securities to prepay outstanding principal
prior to stated maturities. As a result, assets and liabilities indicated as
repricing within the same period may, in fact, reprice at different times and at
different rate levels.
In addition to the aforementioned interest rate-sensitivity analysis, the
Company also measures its overall interest rate sensitivity through a net
interest income analysis. The net interest income analysis measures the change
in net income in the event of hypothetical changes in interest rates. This
analysis assesses the risk of changes in net interest in the event of sudden and
sustained 1.0% to 2.0% increases and decreases in market interest rates. The
assumption in this table are that assets will reprice faster than liabilities
due to market constraints and management's assessment of their assets and
liabilities. The table below presents the Company's projected changes in net
interest income for the various rate shock levels at June 30, 1998.
<TABLE>
<CAPTION>
Net Interest Income
-------------------------------------------------
Amount Change Change
----------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+200 bp $ 24,503 $ 144 0.59%
+100 bp 24,411 52 0.02
Base 24,359 -- --
-100 bp 24,015 (344) (1.41)
-200 bp 22,890 (1,469) (6.03)
</TABLE>
Based upon the Company's model at June 30, 1998, the effect of an immediate 200
basis point increase in interest rates would increase the Company's net interest
income by 0.59% or approximately $144,000. The effect of an immediate 200 basis
point decrease in rates would reduce the Company's net income by 6.03% or
approximately $1,469,000.
YEAR 2000
The federal banking regulators have issued several statements providing guidance
to financial institutions on the steps the regulators expect financial
institutions to take to become Year 2000 compliant. Each of the federal banking
regulators is also examining the financial institutions under its jurisdiction
to assess each institution's compliance with the outstanding guidance. If an
institution's progress in addressing the Year 2000 problem is deemed by its
primary federal regulator to be less than satisfactory, the institution will be
required to enter into a memorandum of understanding with the regulator which
will, among other things, require the institution to promptly develop and submit
an acceptable plan for becoming Year 2000 compliant and to provide periodic
16.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
reports describing the institution's progress in implementing the plan. Failure
to satisfactorily address the Year 2000 problem may also expose a financial
institution to other forms of enforcement action that its primary federal
regulator deems appropriate to address the deficiencies in the institution's
Year 2000 remediation program. As more fully discussed in the 1997 Annual Report
to Stockholders, the Company has spent considerable time and resources regarding
the impact of the Year 2000 issue with respect to its computer systems and
applications as well as to its general operations, customers and suppliers. The
Company has a Year 2000 committee, comprised of members of the Company which has
already taken steps regarding this issue. UnionData (a subsidiary company), has
completed a survey of all core processing systems and support systems. This
survey included contact with each hardware and software vendor. As of December
31, 1997, all core processing systems were documented as being Year 2000
compliant. Three vendors of non core processing subsystems have notified the
Company that their systems will be upgraded to Year 2000 compliance by year end
1998. While there will be some expenses incurred during the next two years, the
Company has not identified any situations at this time that will require
material cost expenditures to become fully compliant. An unknown element at this
time is the impact of the Year 2000 on the Company's borrowing customers and
their ability to repay. The Company has initiated a program to communicate with
key bank customers to ensure they are properly prepared for the Year 2000 and
will not suffer serious adverse consequences.
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-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.
17.
<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. DEFAULT UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 23, 1998, the annual meeting of stockholders was held. At the
meeting, R. Scott Grigsby, H. Dean Reynolds, John A. Shinkle and Scott
C. Sullivan were elected to serve as Class III directors with terms
expiring in 2001. Continuing as Class I directors until 1999 are Richard
J. Berry, Walter E. Breipohl and Lawrence J. McGrogan. Continuing as
Class II directors until 2000 are L. Paul Broadus, John Michael Daw,
Robert J. Doty, Jimmie D. Lansford and I.J. Reinhardt, Jr.
There were 4,135,830 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
--- --------
R. Scott Grigsby 3,192,573 13
H. Dean Reynolds 3,191,973 613
John A. Shinkle 3,192,573 13
Scott C. Sullivan 3,192,573 13
Item 5. OTHER INFORMATION
During the second quarter of 1998, the Company announced that they had
executed an agreement to sell their approximate 81.7% ownership of the
outstanding stock of the Bank of Ladd. The consummation of the
transaction is expected to be completed during the second half of 1998
and is expected to have a minimal impact on 1998 earnings.
During the month of July, the Company announced that it has signed an
agreement for the acquisition of the Mercier Insurance Agency, which is
headquartered in Spring Valley, Illinois. The acquisition is subject to
regulatory approval and is expected to be completed during the third
quarter of 1998. The addition of an insurance subsidiary is intended to
expand the Company's product mix and provide a full line of insurance
and investment opportunities to banking customers.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
27.1 Financial Data Schedule
Reports on Form 8K:
None.
18.
<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: August 11, 1998 /s/ R. SCOTT GRIGSBY
-------------------- ----------------------------------------
R. Scott Grigsby
Chairman of the Board, President and
Chief Executive Officer
Date: August 11, 1998 /s/ CHARLES J. GRAKO
-------------------- ----------------------------------------
Charles J. Grako
Executive Vice President and
Chief Financial Officer
19.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001019650
<NAME> Unionbancorp, Inc.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 29,148
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 144,063
<INVESTMENTS-CARRYING> 45,436
<INVESTMENTS-MARKET> 46,267
<LOANS> 400,343
<ALLOWANCE> 3,745
<TOTAL-ASSETS> 648,684
<DEPOSITS> 528,060
<SHORT-TERM> 39,804
<LIABILITIES-OTHER> 6,675
<LONG-TERM> 20,042
857
500
<COMMON> 4,409
<OTHER-SE> 48,337
<TOTAL-LIABILITIES-AND-EQUITY> 648,684
<INTEREST-LOAN> 17,588
<INTEREST-INVEST> 5,964
<INTEREST-OTHER> 96
<INTEREST-TOTAL> 23,648
<INTEREST-DEPOSIT> 11,012
<INTEREST-EXPENSE> 12,472
<INTEREST-INCOME-NET> 11,176
<LOAN-LOSSES> 881
<SECURITIES-GAINS> 36
<EXPENSE-OTHER> 9,899
<INCOME-PRETAX> 3,764
<INCOME-PRE-EXTRAORDINARY> 3,764
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,563
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.58
<YIELD-ACTUAL> 8.42
<LOANS-NON> 1,303
<LOANS-PAST> 1,521
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,188
<CHARGE-OFFS> 440
<RECOVERIES> 116
<ALLOWANCE-CLOSE> 3,745
<ALLOWANCE-DOMESTIC> 3,745
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
