UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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 NOVEMBER 10, 1998
- ----------------------------- ---------------------------------------
Common Stock, Par Value $1.00 4,262,359
<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 8 - 20
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
<PAGE>
<TABLE>
<CAPTION>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
- ----------------------------------------------------------------------------------------------------------
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 16,898 $ 22,826
Federal funds sold 9,140 1,404
Securities available-for-sale 139,639 163,568
Securities held-to-maturity 46,495 37,170
Loans 405,982 370,985
Allowance for loan losses (3,883) (3,188)
--------- ---------
Net loans 402,099 367,797
Premises and equipment, net 14,363 14,631
Intangible assets, net 9,223 9,898
Other assets 9,400 8,166
--------- ---------
TOTAL ASSETS $ 647,257 $ 625,460
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing $ 55,483 $ 62,095
Interest bearing 477,634 465,652
--------- ---------
Total deposits 533,117 527,747
Federal funds purchased and securities sold
under agreements to repurchase 19,165 11,761
Advances from the Federal Home Loan Bank 21,495 16,455
Notes payable 10,307 10,261
Other liabilities 6,401 6,154
--------- ---------
TOTAL LIABILITIES 590,485 572,378
--------- ---------
Minority interest in subsidiaries 691 644
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;
4,410,093 shares outstanding at September 30, 1998 and 4,407,093
at December 31, 1997 4,410 4,407
Surplus 19,850 19,705
Retained earnings 30,083 26,765
Accumulated other comprehensive income 1,104 856
Unearned compensation under stock option plans (201) (130)
--------- ---------
55,746 52,103
Treasury stock, at cost; 271,263 shares
at September 30, 1998 and December 31, 1997 (522) (522)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 55,224 51,581
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 647,257 $ 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 Nine Months Ended
September 30, September 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income
Loans and fees on loans $ 9,308 $ 8,461 $26,896 $24,456
Securities
Taxable 2,219 2,570 7,163 8,342
Exempt from federal income taxes 562 430 1,582 1,250
Federal funds sold and other 126 83 222 256
------- ------- ------- -------
TOTAL INTEREST INCOME 12,215 11,544 35,863 34,304
------- ------- ------- -------
Interest expense
Deposits 5,763 5,411 16,775 16,135
Federal funds purchased and securities sold
under agreements to repurchase 251 339 763 883
Advances from the Federal Home Loan Bank 347 130 918 385
Notes payable 197 254 574 795
------- ------- ------- -------
TOTAL INTEREST EXPENSE 6,558 6,134 19,030 18,198
------- ------- ------- -------
NET INTEREST INCOME 5,657 5,410 16,833 16,106
Provision for loan losses 319 230 1,200 703
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,338 5,180 15,633 15,403
------- ------- ------- -------
Noninterest income
Service charges 553 486 1,693 1,383
Merchant fee income 241 195 592 497
Trust income 150 158 451 394
Mortgage banking income 416 301 1,183 548
Securities gains, net 22 72 58 169
Other income 452 341 1,225 853
------- ------- ------- -------
1,834 1,553 5,202 3,844
------- ------- ------- -------
Noninterest expenses
Salaries and employee benefits 2,541 2,335 7,695 6,972
Occupancy expense, net 375 373 1,142 1,145
Furniture and equipment expense 446 390 1,312 1,126
FDIC insurance assessment 16 17 48 47
Supplies and printing 118 125 406 421
Telephone 139 148 398 316
Postage 65 89 267 303
Amortization of intangible assets 233 228 693 687
Other expenses 1,149 1,065 2,992 2,940
------- ------- ------- -------
5,082 4,770 14,953 13,957
------- ------- ------- -------
2,090 1,963 5,882 5,290
Minority interest 20 16 48 58
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 2,070 1,947 5,834 5,232
Income taxes 658 634 1,859 1,551
------- ------- ------- -------
NET INCOME 1,412 1,313 3,975 3,681
Preferred stock dividends 64 64 194 194
------- ------- ------- -------
NET INCOME FOR COMMON STOCKHOLDERS $ 1,348 $ 1,249 $ 3,781 $ 3,487
======= ======= ======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.33 $ 0.30 $ 0.91 $ 0.85
======= ======= ======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.32 $ 0.30 $ 0.90 $ 0.84
======= ======= ======= =======
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
2.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
- -------------------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
Net income $ 1,412 $ 1,313 $ 3,975 $ 3,681
Change in unrealized gains on
securities available-for-sale 765 568 248 997
------- ------- ------- -------
COMPREHENSIVE INCOME $ 2,177 $ 1,881 $ 4,223 $ 4,678
======= ======= ======= =======
See Accompanying Notes to Unaudited Financial Statements
3.
<PAGE>
<TABLE>
<CAPTION>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,975 $ 3,681
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation 1,224 1,073
Amortization of intangible assets 693 687
Amortization of unearned compensation under stock option plans 48 31
Amortization of bond premiums, net 243 317
Provision for loan losses 1,200 703
Securities gains, net (58) (169)
Gain on sale of equipment (125) (101)
Gain on sale of real estate acquired in settlement of loans (24) (47)
Gain on sale of loans (951) (403)
Proceeds from sales of loans held for sale 52,817 9,218
Origination of loans held for sale (57,004) (16,615)
Minority interest in net income of subsidiary 48 58
Change in assets and liabilities
(Increase) decrease in other assets (1,331) 290
Increase in other liabilities 247 239
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,002 (1,038)
Cash flows from investing activities
Securities
Held-to-maturity,
Proceeds from calls, maturities, and paydowns 1,471 1,892
Purchases (10,855) (2,055)
Available-for-sale
Proceeds from maturities and paydowns 51,279 21,285
Proceeds from sales 5,601 27,448
Purchases (32,703) (17,949)
Net (increase) decrease in federal funds sold (7,736) 5,594
Net increase in loans (30,364) (16,698)
Increase in intangibles (18) --
Purchase of premises and equipment (1,112) (2,343)
Proceeds from sale of real estate acquired in settlement of loans 270 174
Proceeds from sale of equipment 11 33
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (24,156) 17,381
Cash flows from financing activities
Net increase (decrease) in deposits $ 5,370 $(29,208)
Net increase in federal funds purchased
and securities sold under agreements to repurchase 7,404 6,204
Net increase (decrease) in advances from the
Federal Home Loan Bank 5,040 (1,566)
Payments on notes payable (274) (1,027)
Proceeds from notes payable 320 766
Dividends on common stock (455) (681)
Dividends on preferred stock (194) (194)
Proceeds from issuance of common stock -- 20
Proceeds from exercise of stock options 15 8
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 17,226 (25,678)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,928) (9,335)
Cash and cash equivalents
Beginning of year 22,826 29,236
-------- --------
End of year $ 16,898 $ 19,901
======== ========
</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 Statements 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 stockholders. This standard will
have no impact on the Company.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities. SFAS 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The accounting
for changes in the fair value (i.e. gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. If certain conditions are
met, entities may elect to designate a derivative instrument as a hedge of
exposures to changes in fair value, cash flows, or foreign currencies. If the
hedged exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedge item attributable to the risk being hedged.
If the hedged exposure is a cash flow exposure, the effective portion of the
gain or loss on the derivative instrument is reported initially as a component
of other comprehensive income (outside earnings) and subsequently reclassified
into earnings when the forecasted transaction affects earnings. Any amounts
excluded from the assessment of hedge effectiveness as well as the ineffective
portion of the gain or loss is reported in earnings immediately. Accounting for
foreign currency hedges is similar to accounting for fair value and cash flow
hedges. If the derivative instrument is not designated as a hedge, the gain or
loss is recognized in earnings in the period of changes. This Statement will
have no effect 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 September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
September 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 $ 46,495 $ 1,307 $ (43) $ 47,759 $ 37,170 $ 805 $ (135) $ 37,840
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Securities Available for Sale - The amortized cost and fair value of securities
available for sale at September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
September 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 $ 11,048 $ 200 $ -- $ 11,248 $ 19,071 $ 98 $ (6) $ 19,163
U.S. government agencies and
corporations 52,571 525 (55) 53,041 59,341 173 (199) 59,315
U.S. government mortgage-backed
securities 16,529 120 (7) 16,642 21,797 907 (9) 22,695
Collateralized mortgage obligations 54,113 1,050 (1) 55,162 57,800 528 (28) 58,300
Corporate bonds 100 -- -- 100 100 -- -- 100
Other 3,446 -- -- 3,446 4,001 -- (6) 3,995
--------- --------- --------- --------- --------- --------- --------- ---------
$ 137,807 $ 1,895 $ (63) $ 139,639 $ 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:
September 30, 1998 December 31, 1997
----------------------- -----------------------
$ % $ %
---------- --------- --------- ---------
Commercial $ 74,640 18.38% $ 62,936 16.96%
Agricultural 42,952 10.58 39,431 10.62
Real estate:
Commercial mortgages 91,336 22.49 72,730 19.60
Construction 16,229 4.00 14,393 3.88
Agricultural 38,057 9.37 27,955 7.53
1-4 family mortgages 102,762 25.31 109,411 29.48
Installment 37,372 9.20 41,210 11.10
Other 2,681 0.66 3,076 0.83
---------- --------- --------- ---------
406,029 100.00% 371,142 100.00%
========= =========
Unearned income (47) (157)
---------- ---------
Total loans 405,982 370,985
Allowance for loan losses (3,883) (3,188)
---------- ---------
Loans, net $ 402,099 $ 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 nine months
ended September 30, 1998 and 1997 are summarized below:
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Beginning balance $ 3,745 $ 3,201 $ 3,188 $ 3,068
Charge-offs:
Commercial 126 91 250 200
Real estate mortgages 19 132 138 291
Installment and other loans 114 191 311 419
-------- -------- -------- --------
Total charge-offs 259 414 699 910
-------- -------- -------- --------
Recoveries:
Commercial 42 9 73 38
Real estate mortgages 6 17 26 72
Installment and other loans 30 25 95 97
-------- -------- -------- --------
Total recoveries 78 51 194 207
-------- -------- -------- --------
Net charge-offs 181 363 505 703
-------- -------- -------- --------
Provision for loan losses 319 230 1,200 703
-------- -------- -------- --------
Ending balance $ 3,883 $ 3,068 $ 3,883 $ 3,068
======== ======== ======== ========
Period end total loans, net of
unearned interest $405,982 $369,811 $405,982 $369,811
======== ======== ======== ========
Average loans $403,991 $364,934 $386,066 $355,948
======== ======== ======== ========
Ratio of net charge-offs to
average loans 0.04% 0.10% 0.13% 0.20%
Ratio of provision for loan losses
to average loans 0.08 0.06 0.31 0.20
Ratio of allowance for loan losses
to ending total loans 0.96 0.83 0.96 0.83
Ratio of allowance for loan losses
to total nonperforming loans 159.27 93.25 159.27 93.25
Ratio of allowance at end of period
to average loans 0.96 0.84 1.01 0.86
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
During the second quarter of 1998, the Company announced that it had executed an
agreement to sell its 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 fourth quarter of 1998 and is expected to have a minimal
impact on 1998 earnings.
During July, 1998, the Company announced that it had signed an agreement for the
acquisition of the Mercier Insurance Agency, which is headquartered in Spring
Valley, Illinois. The acquisition received regulatory approval and was
subsequently consummated on October 30, 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.
The discussion presented below provides an analysis of the Company's results of
operations and financial condition during the quarter and nine months ended
September 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 nine months ended September 30, 1998 are not necessarily
indicative of results to be expected for the full year of 1998.
SUMMARY OF PERFORMANCE
Net income for the third quarter increased to $1,412,000 from the $1,313,000
earned in the third quarter of 1997, representing an increase of 7.54%. Per
share (diluted) earnings increased to $0.32 from $0.30 a year ago. Net income
for the nine months ended September 30, 1998, totaled $3,975,000, or $0.90
(diluted) per share from $3,681,000, or $0.84 (diluted) per share for the like
period in 1997, representing a 7.98% increase in net income and a 7.14% increase
in per share earnings.
Return on average assets was 0.86% for the third quarter of 1998, as compared to
0.84% for the same quarter in 1997. Return on average assets was 0.84% for the
nine months ended September 30, 1998, as compared to 0.80% for the same period
in 1997.
Return on average stockholders' equity was 10.30% for the third quarter of 1998,
as compared to 10.46% for the same 1997 quarter. Return on average stockholders'
equity was 10.02% for the nine months ended September 30, 1998, as compared to
10.26% for the same period in 1997.
NET INTEREST INCOME
Net interest income on a tax equivalent basis totaled $5,967,000 for the third
quarter of 1998, representing an increase of $316,000 or 5.59% over the
$5,651,000 earned during the quarter ended September 30, 1997. As shown in the
Volume/Rate Analysis on page 9, the improvement in net interest income was
attributable to increased interest income of $738,000, which was partially
offset by a higher interest expense of $422,000. The net interest margin for the
third quarter of 1998 equaled 3.93%, as compared to 3.94% for the same time
frame in 1997. The slight 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 $738,000 increase in interest
income for the quarter was primarily related to interest rate variances in the
loan portfolio, totaling an increase of $842,000 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.
8.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
The $422,000 increase in interest expense resulted from a $341,000 increase due
to rate coupled with a $81,000 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 Federal Home Loan Bank (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 nine month period ended September 30, 1998, the net interest margin
increased to 4.03% from 3.94% for 1997. The Volume/Rate Analysis for the nine
months ended September 30, 1998 as compared to the like 1997 period is presented
on page 10.
9.
<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 September 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 September 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 $ 3,293 $ 41 4.94% $ -- $ -- -- $ 41 $ -- $ 41
Securities (1)
Taxable 142,772 2,177 6.05% 166,105 2,570 6.14% (356) (37) (393)
Non-taxable (2) 44,565 852 7.58% 32,944 651 7.84% 223 (22) 201
-------- ------- ------- -------- ------- ------- ------- ------- -------
Total securities (tax equivalent) 187,337 3,029 6.41% 199,049 3,221 6.42% (133) (59) (192)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Federal funds sold 9,002 126 5.55% 5,988 79 5.23% 42 5 47
-------- ------- ------- -------- ------- ------- ------- ------- -------
Loans (3)(4)
Commercial 116,096 2,751 9.40% 98,357 2,346 9.46% 420 (15) 405
Real estate 246,327 5,318 8.57% 221,630 4,810 8.61% 531 (23) 508
Installment and other 40,450 964 9.46% 44,448 1,046 9.34% (95) 13 (82)
Fees on loans -- 295 -- -- 284 -- 11 -- 11
-------- ------- ------- -------- ------- ------- ------- ------- -------
Net loans (tax equivalent) 402,873 9,328 9.19% 364,435 8,486 9.24% 867 (25) 842
-------- ------- ------- -------- ------- ------- ------- ------- -------
Total interest-earning assets 602,505 12,524 8.25% 569,472 11,786 8.21% 817 (79) 738
-------- ------- ------- -------- ------- ------- ------- ------- -------
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 18,745 15,324
Premises and equipment, net 14,840 14,788
Other assets 16,675 18,053
-------- --------
Total nonearning assets 50,260 48,165
-------- --------
Total assets $652,765 $617,637
======== ========
LIABILITIES
NOW accounts $ 61,103 371 2.41% $ 56,403 $ 353 2.48% $ 28 $ (10) 18
Money market accounts 28,652 267 3.70% 30,290 248 3.25% (14) 33 19
Savings deposits 62,811 495 3.13% 59,567 408 2.72% 23 64 87
Time deposits 327,229 4,631 5.61% 312,838 4,402 5.58% 205 24 229
Federal funds purchased and
repurchase agreements 18,085 251 5.51% 22,979 339 5.85% (69) (19) (88)
Advances from FHLB 24,445 346 5.62% 8,455 131 6.15% 227 (12) 215
Notes payable 10,545 197 7.41% 13,717 253 7.32% (59) 3 (56)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 532,870 6,558 4.88% 504,249 6,134 4.83% 341 83 424
-------- ------- ------- -------- ------- ------- ------- ------- -------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 63,665 56,158
Other liabilities 1,857 7,409
-------- --------
Total noninterest-bearing liabilities 65,522 63,567
-------- --------
Stockholders' equity 54,373 49,821
-------- --------
Total liabilities and
stockholders' equity $652,765 $617,637
======== ========
Net interest income (tax equivalent) $ 5,966 $ 5,652 $ 435 $ (121) $ 314
======= ======= ======= ======= =======
Net interest income (tax equivalent) to
total earning assets 3.93% 3.94%
Interest-bearing liabilities
to earning assets 88.44% 88.55%
------- -------
</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
- --------------------------------------------------------------------------------
VOLUME/RATE ANALYSIS - NINE 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 nine months ended September
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 Nine Months Ended September 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 $ 1,484 $ 91 8.20% $ 20 $ 1 6.68% $ 90 $ 0 $ 90
Securities (1)
Taxable 153,931 7,072 6.14% 176,565 8,342 6.32% (1,039) (231) (1,270)
Non-taxable (2) 41,502 2,397 7.72% 32,118 1,894 7.88% 542 (39) 503
-------- ------- ------- -------- ------- ------- ------- ------- -------
Total securities (tax equivalent) 195,433 9,469 6.48% 208,683 10,236 6.56% (497) (270) (767)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Federal funds sold 5,131 222 5.78% 6,188 244 5.27% (44) 22 (22)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Loans (3)(4)
Commercial 107,269 7,678 9.57% 96,727 6,875 9.50% 752 51 803
Real estate 236,290 15,299 8.66% 214,545 13,777 8.59% 1,409 113 1,522
Installment and other 41,883 2,973 9.49% 44,266 3,075 9.29% (167) 65 (102)
Fees on loans -- 1,001 -- -- 793 -- 208 -- 208
-------- ------- ------- -------- ------- ------- ------- ------- -------
Net loans (tax equivalent) 385,442 26,951 9.35% 355,538 24,520 9.22% 2,202 229 2,431
-------- ------- ------- -------- ------- ------- ------- ------- -------
Total interest-earning assets 587,490 36,733 8.36% 570,429 35,001 8.20% 1,751 (19) 1,732
-------- ------- ------- -------- ------- ------- ------- ------- -------
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 17,050 17,150
Premises and equipment, net 14,727 14,283
Other assets 15,921 16,101
-------- --------
Total nonearning assets 47,698 47,534
-------- --------
Total assets $635,188 $617,963
======== ========
LIABILITIES
NOW accounts $ 56,522 1,022 2.42% $ 56,266 $ 1,055 2.51% $ 5 $ (38) (33)
Money market accounts 29,065 783 3.60% 31,473 769 3.27% (61) 75 14
Savings deposits 61,612 1,388 3.01% 63,332 1,346 2.84% (37) 79 42
Time deposits 320,264 13,582 5.67% 311,498 12,964 5.56% 363 255 618
Federal funds purchased and
repurchase agreements 17,665 763 5.77% 20,886 883 5.65% (138) 18 (120)
Advances from FHLB 21,706 918 5.65% 8,260 386 6.25% 572 (40) 532
Notes payable 10,403 574 7.38% 13,659 795 7.78% (182) (39) (221)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 517,237 19,030 4.92% 505,374 18,198 4.81% 522 310 832
-------- ------- ------- -------- ------- ------- ------- ------- -------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 59,184 57,276
Other liabilities 5,717 7,351
-------- --------
Total noninterest-bearing liabilities 64,901 64,627
-------- --------
Stockholders' equity 53,050 47,962
-------- --------
Total liabilities and
stockholders' equity $635,188 $617,963
======== ========
Net interest income (tax equivalent) $17,703 $16,803 $ 1,229 $ (329) $ 900
======= ======= ======= ======== =======
Net interest income (tax equivalent) to
total earning assets 4.03% 3.94%
Interest-bearing liabilities to earning assets 88.04% 88.60%
------- -------
</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.
11.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
NONINTEREST INCOME
Noninterest income totaled $1,834,000 for the quarter ended September 30, 1998,
as compared to $1,553,000 for the same time frame in 1997. Exclusive of net
securities gains, which totaled $22,000 for the third quarter 1998 as compared
to net securities gains of $72,000 for the like period in 1997, noninterest
income increased by $331,000 or a 22.35% 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 along
with the gain on the sale of assets. Specifically, mortgage banking income
increased by $115,000 to a level of $416,000 for the quarter ended September 30,
1998 and was 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 $67,000 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 $44,000. In addition, during the quarter the Company had a $122,000 one-time
gain relating to the sale of a parcel of real estate in Hannibal, Missouri,
which was acquired in conjunction with the September, 1996, Country Bancshares
acquisition that had previously been held for possible future expansion.
Noninterest income totaled $5,202,000 for the nine months ended September 30,
1998, as compared to $3,844,000 for the same period in 1997. Factoring out net
securities gains totaling $58,000 for the 1998 nine month period as compared to
$169,000 for the 1997 period, noninterest income increased by $1,469,000, or
39.97%. The reasons for the increase in noninterest income for the nine month
period generally paralleled those described above for the third quarter.
NONINTEREST EXPENSE
Noninterest expense totaled $5,082,000 for the quarter ended September 30, 1998,
increasing by $312,000 from the same time frame in 1997, which equates to a
6.54% 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 due to low interest rates. The increases in furniture and equipment
expenses were largely related to the increased level of activity in the
standardization of computer equipment in 1997 of the 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 $14,953,000 for the nine months ended September 30,
1998, increasing by $996,000 from the $13,957,000 expensed during the same
period in 1997. The 7.14% increase was largely reflective of the same items
discussed regarding the third quarter expenses.
The Company's efficiency ratio was 62.11% for the quarter ended September 30,
1998, as compared to the 63.70% recorded during the like period in 1997. For the
nine month period ending September 30, 1998, the efficiency ratio was down to
62.40% as compared to the 65.04% 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.
12.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE
Income tax expense totaled $658,000 for the quarter ended September 30, 1998,
increasing from $634,000 for the same period in 1997, and reflected effective
tax rates of 31.79% and 32.56% respectively. Income tax expense totaled
$1,859,000 for the nine months ended September 30, 1998, increasing from the
$1,551,000 for the 1997 nine month period and reflected effective tax rates of
31.86% and 29.64%, respectively.
13.
<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 September 30, 1998, nonperforming assets totaled $2,860,000 versus the
$3,042,000 that existed as of December 31,1997. The following table summarizes
nonperforming assets and loans past due 90 days or more and still accruing for
the previous five quarters.
<TABLE>
<CAPTION>
1998 1997
---------------------------- ------------------
Sep. 30, Jun. 30, Mar. 31, Dec. 31, Sep. 30,
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nonaccrual and impaired loans not
accruing $1,783 $1,303 $1,081 $1,714 $2,206
Impaired and other loans 90 days past
due and still accruing interest 655 1,521 1,362 1,013 1,084
------ ------ ------ ------ ------
Total nonperforming loans 2,438 2,824 2,443 2,727 3,290
Other real estate owned 322 468 204 215 455
Other nonperforming assets (1) 100 100 100 100 100
------ ------ ------ ------ ------
Total nonperforming assets $2,860 $3,392 $2,747 $3,042 $3,845
====== ====== ====== ====== ======
Nonperforming loans to total end of period loans 0.60% 0.71% 0.67% 0.74% 0.89%
Nonperforming assets to total end of period loans 0.70 0.85 0.75 0.82 1.04
Nonperforming assets to total end of period assets 0.44 0.52 0.44 0.49 0.60
</TABLE>
- ------------------------
(1) Represents a single municipal security in default status.
PROVISION FOR LOAN LOSSES
Activity in the allowance for loan losses during the quarter and nine months
ended September 30, 1998 and 1997 is summarized in the table on page 7. The
provision for loan losses charged to operating expense for the third quarter of
1998 equaled $319,000 as compared to $230,000 for the same quarter in 1997. For
the nine month period ending September 30, 1998, the provision for loan losses
charged to operating expense equaled $1,200,000 as compared to $703,000 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. Loan charge-offs, net of recoveries, decreased to $505,000 during
the first three quarters of 1998 as compared to $703,000 for the like period in
1997.
At September 30, 1998, the allowance for loan losses totaled $3,883,000 and
increased to 0.96% of total loans outstanding as compared to $3,068,000 or 0.83%
at September 30, 1997. Such allowance level is considered adequate in relation
to the estimated risk of losses within the loan portfolio.
14.
<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
Sept 30, ----------------------- Capital Capitalized
1998 1997 1996 Ratios Ratios
--------- ---------- --------- ------- ------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 44,894 $ 41,180 $ 36,242
Tier 2 risk-based capital 5,240 4,545 4,425
Total capital 50,134 45,725 40,667
Risk-weighted assets 433,019 385,685 374,028
Capital ratios
Tier 1 risk-based capital 10.37% 10.68% 9.69% 4.00% 6.00%
Total risk-based capital 11.58 11.86 10.87 8.00 10.00
Leverage ratio 7.04 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 September 30, 1998, was 7.04%, 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 September 30, 1998, total risk weighted capital ratio decreased
slightly to 11.58% from 11.86% at December 31, 1997. The Tier 1 Capital ratio
also decreased from 10.68% at December 31, 1997, to 10.37% at September 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
decrease in cash and cash equivalents of $5,928,000 from December 31, 1997 to
September 30, 1998. This usage was primarily related to the growth in the loan
portfolio along with 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 FHLB. For more detailed
cash flow information, see the Company's Consolidated Statement of Cash Flow
located on page 4.
15.
<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 September 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.
16.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 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
--------- ----------- --------- --------- --------- ---------
INTEREST-EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest bearing balances $ 875 $ -- $ -- $ -- $ -- $ 875
Federal funds sold 9,140 -- -- -- -- 9,140
Securities 81,746 10,920 14,184 49,362 29,922 186,134
Loans 99,917 46,590 56,883 161,217 41,375 405,982
--------- --------- --------- --------- --------- ---------
Total interest-earning assets $ 191,678 $ 57,510 $ 71,067 $ 210,579 $ 71,297 $ 602,131
========= ========= ========= ========= ========= =========
INTEREST-BEARING LIABILITIES
NOW accounts $ 54,716 $ -- $ -- $ -- $ -- $ 54,716
Money market accounts 29,850 -- -- -- -- 29,850
Savings 63,134 -- -- -- -- 63,134
Time deposits 86,266 74,297 72,106 96,937 328 329,934
--------- --------- --------- --------- --------- ---------
Total interest-bearing deposits 233,966 74,297 72,106 96,937 328 477,634
Federal funds and repurchase agreements 14,039 1,412 2,677 1,037 -- 19,165
Advances from FHLB 500 -- 4,500 12,195 4,300 21,495
Notes payable 10,225 -- -- 82 -- 10,307
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities $ 258,730 $ 75,709 $ 79,283 $ 110,251 $ 4,628 $ 528,601
========= ========= ========= ========= ========= =========
Period interest sensitivity gap $ (67,052) $ (18,199) $ (8,216) $ 100,328 $ 66,669 $ 73,530
Cumulative interest sensitivity gap (67,052) (85,251) (93,467) 6,861 73,530
Cumulative gap as a percent of total assets (10.36)% (13.17)% (14.44)% 1.06% 11.36%
Cumulative interest-sensitive assets as a
percent of cumulative interest-sensitive
liabilities 74.08% 74.51% 77.41% 101.31% 113.91%
</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.
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 September 30, 1998, the Company's subsidiary banks
held approximately $16,529,000 (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.
17.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
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 September 30, 1998.
Net Interest Income
------------------------------------------------
Amount Change Change
---------- -------- ------
(Dollars in Thousands)
+200 bp $ 24,542 $ (164) (0.66)%
+100 bp 24,638 (68) (0.28)
Base 24,706 -- --
-100 bp 24,566 (140) (0.57)
-200 bp 23,662 (1,044) (4.23)
Based upon the Company's model at September 30, 1998, the effect of an immediate
200 basis point increase in interest rates would decrease the Company's net
interest income by 0.66% or approximately $164,000. The effect of an immediate
200 basis point decrease in rates would reduce the Company's net income by 4.23%
or approximately $1,044,000.
RECENT REGULATORY DEVELOPMENTS/YEAR 2000
The federal banking regulators recently issued guidelines establishing minimum
safety and soundness standards for achieving Year 2000 compliance. The
guidelines, which took effect October 15, 1998 and apply to all FDIC-insured
depository institutions, establish standards for developing and managing Year
2000 project plans, testing remediation efforts and planning for contingencies.
The guidelines previously issued by the agencies under the auspices of the
Federal Financial Institutions Examination Council (the "FFIEC"), but are not
intended to replace or supplant the FFIEC guidelines which will continue to
apply to all federally insured depository institutions.
The guidelines were issued under section 39 of the Federal Deposit Insurance
Act, as amended (the "FDIA"), which requires the federal banking regulators to
establish standards for the safe and sound operation of federally insured
depository institutions. Under section 39 of the FDIA, if an institution fails
to meet any of the standards established in the guidelines, the institution's
primary federal regulator may require the institution to submit a plan for
achieving compliance. If an institution fails to submit an acceptable compliance
plan, or fails in any material respect to implement a compliance plan that has
been accepted by its primary federal regulator, the regulator is required to
issue an order directing the institution to cure the deficiency. Such an order
is enforceable in court in the same manner as a cease and desist order. Until
the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. In addition to the enforcement procedures established in section
39 of the FDIA,
18.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
noncompliance with the standards established by the guidelines may also be
grounds for other enforcement action by the federal banking regulators,
including cease and desist orders and civil money penalty assessments.
The Year 2000 has posed a unique set of challenges to those industries reliant
on information technology. As a result of methods employed by early programmers,
many software applications and operational programs may be unable to distinguish
the Year 2000 from the Year 1900. If not effectively addressed, this problem
could result in the production of inaccurate data, or, in the worst cases, the
inability of the systems to continue to function altogether. Financial
institutions are particularly vulnerable due to the industry's dependence on
electronic data processing systems. In 1997, the Company started the process of
identifying the hardware and software issues required to be addressed to assure
Year 2000 compliance. The Company began by assessing the issues related to the
Year 2000 and the potential for those issues to adversely affect the Company's
operations and those of its subsidiaries.
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 developed a
strategic plan for Year 2000 compliance which is being administered by a
committee comprised of individuals from all functional areas of the Company as
well as being reviewed by senior management and the board if directors. The plan
follows guidelines set forth by the Federal Financial Institutions Examinations
Council (FFEIC). The Company 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. It
is not impossible at this time to quantity the estimated future costs due to
possible business disruption caused by vendors, suppliers, customers, or even
the possible loss of electric power or phone service; however, such cost could
be substantial.
The Company is committed to a plan for achieving compliance, focusing not only
on its own data processing systems, but also on its loan customers. The
management committee has taken steps to educate and assist its customers with
identifying their Year 2000 compliance problems. In addition, the management
committee has proposed policy and procedure changes to help identify potential
risks to the Company and to gain an understanding of how customers are managing
the risks associated with the Year 2000. The Company is assessing the impact, if
any, the Year 2000 will have on its credit risk and loan underwriting. In
connection with potential credit risk related to the Year 2000 issue, the
Company has contacted its commercial loan customers regarding their level of
preparedness for the Year 2000.
The Company has developed contingency plans for various Year 2000 problems and
continues to revise those plans based on testing results and vendor
notifications.
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
19.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
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.
20.
<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
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
27.1 Financial Data Schedule
Reports on Form 8K:
None.
21.
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIONBANCORP, INC.
Date: November 12, 1998 /s/ R. SCOTT GRIGSBY
------------------- ---------------------------------------
R. Scott Grigsby
Chairman of the Board, President and
Chief Executive Officer
Date: November 12, 1998 /s/ CHARLES J. GRAKO
------------------- ---------------------------------------
Charles J. Grako
Executive Vice President and
Chief Financial Officer
22.
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