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, 1999
-------------
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 12, 1999
- ----------------------------- -------------------------------------
Common Stock, Par Value $1.00 4,047,309
<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 - 20
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
JUNE 30, 1999 AND DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
- ----------------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 26,438 $ 24,613
Federal funds sold 375 450
Securities available-for-sale 131,589 133,772
Securities held-to-maturity 44,350 41,847
Loans 440,143 398,388
Allowance for loan losses (4,034) (3,858)
--------- ---------
Net loans 436,109 394,530
Premises and equipment, net 13,915 13,853
Intangible assets, net 8,660 9,099
Other assets 9,295 9,030
--------- ---------
TOTAL ASSETS $ 670,731 $ 627,194
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing $ 62,147 $ 67,227
Interest bearing 499,972 450,411
--------- ---------
Total deposits 562,119 517,638
Federal funds purchased and securities sold
under agreements to repurchase 8,529 14,855
Advances from the Federal Home Loan Bank 28,735 23,208
Notes payable 10,000 7,000
Other liabilities 5,413 6,545
--------- ---------
TOTAL LIABILITIES 614,796 569,246
--------- ---------
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;
4,537,072 shares outstanding at June 30, 1999 and
4,533,622 at December 31, 1998 4,537 4,534
Surplus 21,597 21,471
Retained earnings 33,571 31,262
Accumulated other comprehensive income (1,034) 31
Unearned compensation under stock option plans (243) (185)
--------- ---------
58,928 57,613
Treasury stock, at cost; 491,263 shares
at June 30, 1999 and 271,263 at December 31, 1998 (3,850) (522)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 55,078 57,091
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 670,731 $ 627,194
========= =========
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
1.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
- ---------------------------------------------------------------------------------------
Quarter Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income
Loans and fees on loans $ 9,368 $ 9,042 $18,256 $17,588
Securities
Taxable 2,023 2,352 4,175 4,944
Exempt from federal income taxes 503 539 989 1,020
Federal funds sold and other 6 18 25 96
------- ------- ------- -------
TOTAL INTEREST INCOME 11,900 11,951 23,445 23,648
------- ------- ------- -------
Interest expense
Deposits 5,332 5,559 10,339 11,012
Federal funds purchased and securities sold
under agreements to repurchase 173 298 425 512
Advances from the Federal Home Loan Bank 378 334 710 571
Notes payable 184 190 317 377
------- ------- ------- -------
TOTAL INTEREST EXPENSE 6,067 6,381 11,791 12,472
------- ------- ------- -------
NET INTEREST INCOME 5,833 5,570 11,654 11,176
Provision for loan losses 303 319 601 881
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,530 5,251 11,053 10,295
------- ------- ------- -------
Noninterest income
Service charges 542 617 1,024 1,140
Merchant fee income 261 169 507 351
Trust income 178 151 357 301
Mortgage banking income 255 375 571 767
Insurance commissions and fees 706 -- 1,294 --
Securities gains, net -- 50 122 36
Other income 326 372 693 773
------- ------- ------- -------
2,268 1,734 4,568 3,368
------- ------- ------- -------
Noninterest expenses
Salaries and employee benefits 3,003 2,603 6,126 5,154
Occupancy expense, net 384 400 768 767
Furniture and equipment expense 470 450 910 866
Supplies and printing 167 151 266 288
Telephone 166 127 327 259
Postage 87 96 175 202
Amortization of intangible assets 219 231 439 460
Other expenses 1,323 982 2,523 1,875
------- ------- ------- -------
5,819 5,040 11,534 9,871
------- ------- ------- -------
1,979 1,945 4,087 3,792
Minority interest -- 13 -- 28
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,979 1,932 4,087 3,764
Income taxes 616 612 1,286 1,201
------- ------- ------- -------
NET INCOME 1,363 1,320 2,801 2,563
Preferred stock dividends 65 65 130 130
------- ------- ------- -------
NET INCOME FOR COMMON STOCKHOLDERS $ 1,298 $ 1,255 $ 2,671 $ 2,433
======= ======= ======= =======
BASIC EARNINGS PER COMMON SHARE $0.32 $0.30 $0.65 $0.59
===== ===== ===== =====
DILUTED EARNINGS PER COMMON SHARE $0.32 $0.30 $0.64 $0.58
===== ===== ===== =====
</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,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
Net income $ 1,363 $ 1,320 $ 2,801 $ 2,563
Change in unrealized gains on
securities available-for-sale (1,079) 72 (1,065) (517)
------- ------- ------- -------
COMPREHENSIVE INCOME $ 284 $ 1,392 $ 1,736 $ 2,046
======= ======= ======= =======
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, 1999 AND 1998 (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,801 $ 2,563
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 815 804
Amortization of intangible assets 439 460
Amortization of unearned compensation under stock option plans 40 32
Amortization of bond premiums, net 145 184
Provision for loan losses 601 881
Securities gains, net (122) (36)
(Gain) loss on sale of equipment 45 (11)
(Gain) loss on sale of real estate acquired in settlement of loans (16) 4
Gain on sale of loans (423) (609)
Proceeds from sales of loans held for sale 31,840 33,905
Origination of loans held for sale (31,528) (37,900)
Minority interest in net income of subsidiary -- 28
Change in assets and liabilities
(Increase) decrease in other assets (265) 434
Increase (decrease) in other liabilities (712) 224
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,660 963
Cash flows from investing activities
Securities
Held-to-maturity
Proceeds from calls, maturities, and paydowns 1,222 1,151
Purchases (3,763) (9,457)
Available-for-sale
Proceeds from maturities and paydowns 19,998 35,329
Proceeds from sales 5,655 4,124
Purchases (24,856) (20,949)
Net decrease in federal funds sold 75 404
Net increase in loans (42,275) (25,546)
Purchase of premises and equipment (1,019) (984)
Proceeds from sale of real estate acquired in settlement of loans 149 6
Proceeds from sale of equipment 97 11
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (44,717) (15,911)
Cash flows from financing activities
Net increase in deposits $ 44,481 $ 313
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (6,326) 12,083
Net increase in advances from the
Federal Home Loan Bank 5,527 9,200
Payments on notes payable -- (9)
Proceeds from notes payable 3,000 95
Purchase of treasury stock (3,328) --
Dividends on common stock (364) (290)
Dividends on preferred stock (130) (130)
Proceeds from exercise of stock options 22 8
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 42,882 21,270
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,825 6,322
Cash and cash equivalents
Beginning of year 24,613 22,826
-------- --------
End of period $ 26,438 $ 29,148
======== ========
</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, 1998. The results of the interim periods ended June 30, 1999 are not
necessarily indicative of the results expected for the year ending December 31,
1999.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (Statement) No. 133 on derivatives
will, in 2000, require all derivatives to be recorded at fair value in the
balance sheet, with changes in fair value charged or credited to income. If
derivatives are documented and effective as hedges, the change in the derivative
fair value will be offset by an equal change in the fair value of the hedged
item. Under the new standard, securities held-to-maturity can no longer be
hedged, except for changes in the issuer's creditworthiness. Therefore, upon
adoption of Statement No. 133, companies will have another one-time window of
opportunity to reclassify held-to-maturity securities to either trading or
available-for-sale, provided certain criteria are met. This Statement may be
adopted early at the start of a calendar quarter. Since the Company has no
significant derivative instruments or hedging activities, adoption of Statement
No. 133 is not expected to have a material impact on the Company's financial
statements. Management has not decided whether to adopt Statement No. 133 early.
Statement No. 134 on mortgage banking will, in 1999, allow mortgage loans that
are securitized to be classified as trading, available-for-sale, or, in certain
circumstances, held-to-maturity. Currently, these must be classified as trading.
Since the Company has not securitized mortgage loans, Statement No. 134 is not
expected to affect the Company.
American Institute of Certified Public Accountants Statement of Position 98-1,
effective in 1999, sets the accounting requirement to capitalize costs incurred
to develop or obtain software that is to be used solely to meet internal needs.
Costs to capitalize are those direct costs incurred after the preliminary
project stage, up to the date when all testing has been completed and the
software is substantially ready for use. All training costs, research and
development costs, costs incurred to convert data, and all other general and
administrative costs are to be expensed as incurred. The capitalized cost of
internal-use software is amortized over its useful life and reviewed for
impairment using the criteria in Statement No. 121. Statement of Position 98-1
will not have a material impact on the Company.
American Institute of Certified Public Accountants Statement of Position 98-5,
also effective in 1999, requires all start-up, pre-opening, and organization
costs to be expensed as incurred. Any such costs previously capitalized for
financial reporting purposes must be written off to income at the start of the
year. Statement of Position 98-5 did not have a material impact on the Company.
5.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Financial Accounting Standards Board continues to study several issues,
including recording all financial instruments at fair value and abolishing
pooling-of-interests accounting. Also, it is likely that APB 25's measurement
for stock option plans will be limited to employees and not to nonemployees such
as directors, thereby causing compensation expense to be required for 1999
awards of stock options to outside directors.
NOTE 2. SECURITIES
Securities Held-to-Maturity - The amortized cost and fair value of securities
held-to-maturity at June 30, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
----------------------------------------- -----------------------------------------
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 $ 44,350 $ 483 $ (377) $ 44,456 $ 41,847 $ 1,245 $ (19) $ 43,073
========= ========== ========== ======== ========= ========== ========== ========
Securities Available-for-Sale - The amortized cost and fair value of securities
available-for-sale at June 30, 1999 and December 31, 1998 were as follows:
June 30, 1999 December 31, 1998
----------------------------------------- -----------------------------------------
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 $ 5,769 $ 17 $ (47) $ 5,739 $ 6,753 $ 138 $ -- $ 6,891
U.S. government agencies and
corporations 52,423 8 (1,064) 51,367 49,203 222 (95) 49,330
U.S. government mortgage-backed
securities 33,304 33 (795) 32,542 31,111 52 (158) 31,005
Collateralized mortgage obligations 37,225 289 (91) 37,423 43,315 474 (581) 43,208
Corporate bonds -- -- -- -- 100 -- -- 100
States and political subdivisions 1,000 -- (38) 962 -- -- -- --
Other 3,556 -- -- 3,556 3,238 -- -- 3,238
--------- ---------- ---------- -------- --------- ---------- ---------- --------
$ 133,277 $ 347 $ (2,035) $131,589 $ 133,720 $ 886 $ (834) $133,772
========= ========== ========== ======== ========= ========== ========== ========
</TABLE>
NOTE 3. LOANS
The following table provides the book value of loans, by major classification,
as of the dates indicated:
June 30, 1999 December 31, 1998
--------------------- ------------------
$ % $ %
--------- --------- --------- ------
Commercial $ 85,436 19.41% $ 74,481 18.69%
Agricultural 36,861 8.37 41,821 10.50
Real estate:
Commercial mortgages 121,334 27.57 99,872 25.07
Construction 14,167 3.22 13,935 3.50
Agricultural 38,822 8.82 35,790 8.98
1-4 family mortgages 102,372 23.26 96,921 24.33
Installment 38,649 8.78 32,714 8.21
Other 2,516 0.57 2,884 0.72
--------- --------- --------- ------
440,157 100.00% 398,418 100.00%
========= ======
Unearned income (14) (30)
--------- ---------
Total loans 440,143 398,388
Allowance for loan losses (4,034) (3,858)
--------- ---------
Loans, net $ 436,109 $ 394,530
========= =========
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, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Beginning balance $ 4,043 $ 3,551 $ 3,858 $ 3,188
Charge-offs:
Commercial 160 44 227 124
Real estate mortgages 119 30 169 119
Installment and other loans 64 97 149 197
-------- -------- -------- --------
Total charge-offs 343 171 545 440
-------- -------- -------- --------
Recoveries:
Commercial 3 2 61 31
Real estate mortgages 9 14 11 20
Installment and other loans 19 30 48 65
-------- -------- -------- --------
Total recoveries 31 46 120 116
-------- -------- -------- --------
Net charge-offs 312 125 425 324
-------- -------- -------- --------
Provision for loan losses 303 319 601 881
-------- -------- -------- --------
Ending balance $ 4,034 $ 3,745 $ 4,034 $ 3,745
======== ======== ======== ========
Period end total loans, net of
unearned interest $440,143 $400,343 $440,143 $400,343
======== ======== ======== ========
Average loans $429,558 $388,579 $417,058 $376,955
======== ======== ======== ========
Ratio of net charge-offs to
average loans 0.07% 0.03% 0.10% 0.09%
Ratio of provision for loan losses
to average loans 0.07 0.08 0.14 0.23
Ratio of allowance for loan losses
to ending total loans 0.92 0.94 0.92 0.94
Ratio of allowance for loan losses
to total nonperforming loans 101.92 132.61 101.92 132.61
Ratio of allowance at end of period
to average loans 0.94 0.96 0.97 0.99
</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
During the first six months of 1999, UnionBank opened its newest branch office
in Mendota and UnionBank/ West opened its newest branch office in Quincy,
Illinois. Both of these banking centers were established in order to further
reinvest into growth markets. In addition, the Company announced that it had
purchased 220,000 of its own shares in a privately negotiated transaction.
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, 1999 as compared to the same periods in 1998. 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 1998 Annual Report on Form 10-K. Results of operations during the
quarter and six months ended June 30, 1999 are not necessarily indicative of
results to be expected for the full year of 1999.
SUMMARY OF PERFORMANCE
Net income for the second quarter increased to $1,363,000, or $0.32 per share
(diluted), compared to the $1,320,000, or $0.30 per share (diluted), earned in
the same period of 1998. This represents a 6.7% increase in per share earnings
and a 3.3% increase in net income. Net income for the six months ended June 30,
1999 increased to $2,801,000, or $0.64 per share (diluted), compared to the
$2,563,000, or $0.58 per share (diluted), earned in the same period of 1998.
This represents a 10.3% increase in per share earnings and a 9.3% increase in
net income.
Return on average assets was 0.84% for the second quarter of 1999 and 1998.
Return on average assets increased to 0.88% for the six months ended June 30,
1999, as compared to 0.83% for the same period in 1998.
Return on average stockholders' equity was 9.91% for the second quarter of 1999,
as compared to 10.02% for the same period in 1998. Return on average
stockholders' equity was 10.08% for the six months ended June 30, 1999, as
compared to 9.87% for the same period in 1998.
NET INTEREST INCOME
Net interest income on a tax equivalent basis totaled $6,125,000 for the second
quarter of 1999, representing an increase of $256,000 or 4.4% over the
$5,869,000 earned during the same period in 1998. As shown in the Volume/Rate
Analysis on page 10, this improvement in net interest income was attributable to
a reduction in interest expense of $314,000 which was partially offset by lower
interest income of $58,000.
The $58,000 decrease in interest income for the quarter resulted from a $629,000
decrease associated with rate that was offset by a $571,000 increase due to
volume. Despite the growth in earning assets, the decrease in interest income
was primarily due to lower average yields on loans due to reductions in the
prime rate and competitive pressures on both new and existing loan customers.
The $314,000 decrease in interest expense resulted from a $531,000 decrease
associated with rate that was offset by a $217,000 increase in volume.
Approximately 83% of the decrease in interest expense was related to a 49 basis
point decline in rates on time deposits that repriced at lower rates and a
decrease of $7.3 million in volume of federal funds purchased and repurchase
agreements. The increase in volume associated with advances from the FHLB is
8.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
connected to the Company's continued utilization of this favorable low cost
funding alternative. This particular funding mechanism is employed to attract
certain maturities to match and fund term assets.
The net interest margin for the second quarter of 1999 increased to 4.04% as
compared to 4.00% for the same time frame in 1998. The improvement in the net
interest margin was primarily attributable to a 37 basis point reduction in the
effective cost of funds, which was partially offset by a 29 basis point decrease
in the yield on earning assets. The decreased effective cost of funds was due to
interest bearing liabilities repricing at lower rates. The decreased loan yields
were primarily due to a 75 basis point decrease in the prime rate from the
second quarter of 1998 to the second quarter of 1999.
Net interest income for the six months ended June 30, 1999 totaled $12,217,000,
representing an increase of $480,000 or 4.1% over the $11,737,000 earned during
the same period in 1998. As shown in the Volume/Rate Analysis on page 11, the
improvement in net interest income was attributable to lower interest expense of
$681,000 which was offset by lower interest income of $201,000.
The net interest margin for the six months ended increased to 4.14% as compared
to 4.08% for the same time frame in 1998. The improvement in the net interest
margin was primarily attributable to a $15,400,000 increase in the volume of
average earning assets in addition to a 35 basis point reduction in the cost of
funds.
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 June 30, 1999
and 1998. 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,
-----------------------------------------------------
1999 1998
--------------------------- ------------------------
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 $ 1,299 $ 17 5.25% $ 1,000 $ 13 5.21% $ 4 $ -- $ 4
Securities (1)
Taxable 135,466 2,007 5.94% 155,264 2,333 6.03% (292) (34) (326)
Non-taxable (2) 40,911 762 7.47% 43,034 825 7.69% (53) (10) (63)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Total securities (tax equivalent) 176,377 2,769 6.30% 198,298 3,158 6.39% (345) (44) (389)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Federal funds sold 469 6 5.13% 1,415 18 5.10% (12) -- (12)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Loans (3)(4)
Commercial 121,052 2,707 8.97% 108,102 2,612 9.69% 298 (203) 95
Real estate 270,226 5,512 8.18% 238,171 5,109 8.60% 662 (259) 403
Installment and other 38,280 857 8.98% 41,909 996 9.53% (83) (56) (139)
Fees on loans -- 323 -- -- 343 -- 47 (67) (20)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Net loans (tax equivalent) 429,558 9,399 8.78% 388,182 9,060 9.36% 924 (585) 339
-------- ------- ------- -------- ------- ------- ------- ------- -------
Total interest-earning assets 607,703 12,191 8.05% 588,895 12,249 8.34% 571 (629) (58)
-------- ------- ------- -------- ------- ------- ------- ------- -------
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 18,238 14,585
Premises and equipment, net 13,856 14,761
Other assets 13,687 15,347
-------- --------
Total nonearning assets 45,781 44,693
-------- --------
Total assets $653,484 $633,588
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $ 52,257 $ 292 2.24% $ 54,412 $ 326 2.40% $ (13) $ (21) $ (34)
Money market accounts 31,789 284 3.58% 27,951 258 3.70% 35 (9) 26
Savings deposits 58,241 400 2.75% 62,234 481 3.10% (29) (52) (81)
Time deposits 337,096 4,356 5.18% 317,654 4,492 5.67% 265 (401) (136)
Federal funds purchased and
repurchase agreements 13,199 172 5.23% 20,507 298 5.83% (98) (28) (126)
Advances from FHLB 28,249 380 5.40% 23,697 335 5.67% 62 (17) 45
Notes payable 10,081 182 7.24% 10,350 190 7.36% (5) (3) (8)
-------- ------- ------- -------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 530,912 6,066 4.58% 516,805 6,380 4.95% 217 (531) (314)
-------- ------- ------- -------- ------- ------- ------- ------- -------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 60,811 56,614
Other liabilities 6,578 7,316
-------- --------
Total noninterest-bearing liabilities 67,389 63,930
-------- --------
Stockholders' equity 55,183 52,853
-------- --------
Total liabilities and stockholders' equity $653,484 $633,588
======== ========
Net interest income (tax equivalent) $ 6,125 $ 5,869 $ 354 $ (98) $ 256
======= ======= ======= ======= =======
Net interest income (tax equivalent) to
total earning assets 4.04% 4.00%
Interest-bearing liabilities
to earning assets 87.36% 87.76%
-------- --------
</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 - 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,
1999 and 1998. 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,
-----------------------------------------------------
1999 1998
--------------------------- ------------------------
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 $ 1,304 $ 34 5.26% $ 565 $ 50 17.85% $ 35 $ (51) $ (16)
Securities (1)
Taxable 135,604 4,142 6.16% 159,604 4,895 6.18% (737) (16) (753)
Non-taxable (2) 40,425 1,498 7.47% 39,944 1,545 7.80% (14) (33) (47)
-------- ------- -------- -------- ------- ------- ------- ------- -------
Total securities (tax equivalent) 176,029 5,640 6.46% 199,548 6,440 6.51% (751) (49) (800)
-------- ------- -------- -------- ------- ------- ------- ------- -------
Federal funds sold 900 25 5.60% 3,163 96 6.12% (63) (8) (71)
-------- ------- -------- -------- ------- ------- ------- ------- -------
Loans (3)(4)
Commercial 117,342 5,218 8.97% 102,781 4,927 9.67% 665 (374) 291
Real estate 262,748 10,754 8.25% 231,189 9,981 8.71% 1,318 (545) 773
Installment and other 36,968 1,686 9.20% 42,612 2,009 9.51% (259) (64) (323)
Fees on loans -- 651 -- -- 706 -- 103 (158) (55)
-------- ------- -------- -------- ------- ------- ------- ------- -------
Net loans (tax equivalent) 417,058 18,309 8.85% 376,582 17,623 9.44% 1,827 (1,141) 686
-------- ------- -------- -------- ------- ------- ------- ------- -------
Total interest-earning assets 595,291 24,008 8.13% 579,858 24,209 8.42% 1,048 (1,249) (201)
-------- ------- -------- -------- ------- ------- ------- ------- -------
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 19,620 16,188
Premises and equipment, net 13,847 14,669
Other assets 13,014 15,538
-------- --------
Total nonearning assets 46,481 46,395
-------- --------
Total assets $641,772 $626,253
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $ 53,310 $ 600 2.27% $ 54,194 $ 651 2.42% $ (11) $ (40) $ (51)
Money market accounts 31,738 547 3.48% 29,275 516 3.55% 42 (11) 31
Savings deposits 58,173 815 2.83% 61,002 893 2.95% (42) (36) (78)
Time deposits 322,491 8,377 5.24% 316,726 8,952 5.70% 160 (735) (575)
Federal funds purchased and
repurchase agreements 16,869 425 5.08% 17,452 512 5.92% (17) (70) (87)
Advances from FHLB 26,346 710 5.43% 20,313 571 5.67% 164 (25) 139
Notes payable 9,106 317 7.02% 10,330 377 7.36% (43) (17) (60)
-------- ------- -------- -------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 518,033 11,791 4.59% 509,292 12,472 4.94% 253 (934) (681)
-------- ------- -------- -------- ------- ------- ------- ------- -------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 60,736 56,906
Other liabilities 6,992 7,677
-------- --------
Total noninterest-bearing liabilities 67,728 64,583
-------- --------
Stockholders' equity 56,011 52,378
-------- --------
Total liabilities and
stockholders' equity $641,772 $626,253
======== ========
Net interest income (tax equivalent) $12,217 $11,737 $ 795 $ (315) $ 480
======= ======= ======= ======= =======
Net interest income (tax equivalent) to
total earning assets 4.14% 4.08%
Interest-bearing liabilities
to earning assets 87.02% 87.83%
-------- --------
</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
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The provision for loan losses charged to operating expense for the second
quarter of 1999 equaled $303,000 as compared to $319,000 for the same quarter in
1998. For the six month period ending June 30, 1999, the provision for loan
losses charged to operating expense equaled $601,000 as compared to $881,000 for
the like period in 1998. The amount of the provision for loan losses in any
given period is dependent upon management's assessment of loan growth, changes
in the composition of the loan portfolio, net charge-offs, delinquencies,
collateral values and prevailing economic conditions.
NONINTEREST INCOME
Noninterest income totaled $2,268,000 for the quarter ended June 30, 1999, as
compared to $1,734,000 for the same time frame in 1998. Exclusive of net
securities gains, noninterest income increased by $584,000 or a 34.7%
improvement. The bulk of the increase was largely related to insurance
commissions and fees totaling $706,000 that were associated with the 1998 fourth
quarter acquisition of UnionFinancial Services, Inc. Also contributing to the
improvement in noninterest income was growth in merchant fee income of $92,000,
a $27,000 increase in income from trust services, and increases in revenue
associated with internet service provider (ISP) fees of $62,000. This was
partially offset by decreases in service charges of $75,000 and mortgage banking
income of $120,000. The reduction in long-term interest rates created a
significant demand for refinancing existing mortgages, as well as financing new
home sales, during 1998. However, though activity during the second quarter of
1999 was still strong, the demand for refinancings considerably lessened.
Noninterest income totaled $4,568,000 for the six months ended June 30, 1999, as
compared to $3,368,000 for the same time frame in 1998. Factoring out net
securities gains, noninterest income increased by $1,114,000 or a 33.4%
improvement. The 33.4% increase was largely reflective of the same items
discussed regarding the second quarter income.
NONINTEREST EXPENSE
Noninterest expense totaled $5,819,000 for the quarter ended June 30, 1999,
increasing by $779,000 or 15.5% from the same time frame in 1998. Salaries and
employee benefits accounted for $400,000 or 51.4% of the increase and was
attributable to regular merit increases, basic incentive compensation, the
initial staffing and related compensation costs of two new banking centers, and
salary and commission costs associated with UnionFinancial Services, Inc. The
increase in the other expense category was primarily associated with normal
operating expense from the acquired insurance agency, and start-up expenses for
the two new banking centers. These additional costs were offset in part by
expense decreases spread among various categories of miscellaneous expense.
Noninterest expense totaled $11,534,000 for the six months ended June 30, 1999,
increasing by $1,663,000 or 16.9% from the same time frame in 1998. The 16.9%
increase was largely reflective of the same items discussed regarding the second
quarter expenses.
INCOME TAX EXPENSE
Income tax expense for the quarter ended June 30, 1999, increased to $616,000 as
compared to $612,000 for the comparable period in 1998. As a percent of income
before taxes, the provision for income taxes decreased to 31.1% from 31.7% for
the same period in 1998. Income tax expense for the six months ended June 30,
12.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
1999, increased to $1,286,000 as compared to $1,201,000 for the comparable
period in 1998. As a percent of income before taxes, the provision for income
taxes decreased to 31.5% from 31.9% for the same period in 1998.
NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS
At June 30, 1999, nonperforming assets totaled $4,237,000 versus the $2,899,000
that existed as of December 31, 1998. The level of nonperforming loans was 0.90%
of total loans at June 30, 1999, as compared to 0.65% at December 31, 1998. The
increase in nonperforming loans was primarily related to the inclusion of two
large credits placed on nonaccrual status during the first quarter of 1999. The
following table summarizes nonperforming assets and loans past due 90 days or
more and still accruing for the previous five quarters.
<TABLE>
<CAPTION>
1999 1998
----------------- --------------------------
Jun 30, Mar 31, Dec 31, Sep 30, Jun 30,
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Nonaccrual and impaired loans not
accruing $3,045 $2,291 $1,487 $1,783 $1,303
Impaired and other loans 90 days past
due and still accruing interest 913 1,515 1,111 655 1,521
------ ------ ------ ------ ------
Total nonperforming loans 3,958 3,806 2,598 2,438 2,824
Other real estate owned 279 398 201 322 468
Other nonperforming assets (1) -- -- 100 100 100
------ ------ ------ ------ ------
Total nonperforming assets $4,237 $4,204 $2,899 $2,860 $3,392
====== ====== ====== ====== ======
Nonperforming loans to total end of period loans 0.90% 0.91% 0.65% 0.60% 0.71%
Nonperforming assets to total end of period loans 0.96 1.01 0.73 0.70 0.85
Nonperforming assets to total end of period assets 0.63 0.66 0.46 0.44 0.52
</TABLE>
- ------------------------
(1) Represents a single municipal security in default status.
ALLOWANCE FOR LOAN LOSSES
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions; the type of loan being made; the creditworthiness of the
borrower over the term of the loan; and in the case of a collateralized loan,
the quality of the collateral for such loan. The allowance for loan losses
represents the Company's estimate of the allowance necessary to provide for
possible losses in the loan portfolio. In making this determination, the Company
analyzes the ultimate collectibility of the loans in its portfolio,
incorporating feedback provided by internal loan staff, the loan review
function, and information provided by examinations performed by regulatory
agencies. The Company makes an ongoing evaluation as to the adequacy of the
allowance for loan losses. The analysis of the allowance for loan losses is
comprised of three components: specific credit allocation, general portfolio
allocation, and subjective determined allocation. Once these three components of
the allowance are calculated, management calculates a historical component for
each loan category based on the past five years of loan history and the
Company's evaluation of qualitative factors including future economic and
industry outlooks. The unallocated portion of the allowance is determined based
on current economic conditions and trends in the portfolio including
delinquencies and impairments, as well as changes in the composition of the
portfolio.
13.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Transactions in the allowance for loan losses during the quarter and six months
ended June 30, 1999 and 1998 are summarized in the table on page 7. At June 30,
1999, the allowance for loan losses totaled $4,034,000 and decreased to 0.92% of
total loans outstanding as compared to $3,745,000 or 0.94% at June 30, 1998.
During the same time frame, net charge-offs increased to $312,000 during the
second quarter of 1999 as compared to $125,000 for the like period in 1998.
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 to its subsidiary banks during periods of financial stress or
adversity. The FRB has stated that it would generally view a failure to assist a
troubled or failing subsidiary bank in these circumstances as an unsound or
unsafe banking practice or a violation of the FRB's Regulation Y or both,
justifying a cease and desist order or other enforcement action, particularly if
appropriated resources are available to the bank holding company on a reasonable
basis. The Company's capital ratios were as follows for the dates indicated:
December 31, Minimum Well
June 30, ----------------- Capital Capitalized
1999 1998 1997 Ratios Ratios
-------- -------- -------- ------ ------
Tier 1 risk-based capital $ 47,452 $ 47,297 $ 41,180
Tier 2 risk-based capital 4,891 5,215 4,545
Total capital 52,343 52,512 45,725
Risk-weighted assets 463,369 429,325 385,685
Capital ratios
Tier 1 risk-based capital 10.24% 11.02% 10.68% 4.00% 6.00%
Tier 2 risk-based capital 11.30 12.23 11.86 8.00 10.00
Leverage ratio 7.17 7.66 6.64 4.00 5.00
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 ratio of Tier
1 (core) and the combined amount of Tier 1 (core) and Tier 2 (supplementary)
capital to risk-weighted assets for the Company was 10.07% and 11.13%,
respectively, at June 30, 1999. The Company currently exceeds, and expects to
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
14.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
increase in cash and cash equivalents of $1,825,000 from December 31, 1998 to
June 30, 1999. This usage was primarily related to the net increase in loans.
This was partially offset by increased deposits, proceeds from notes payable,
and further utilization of advances from the Federal Home Loan Bank. For more
detailed cash flow information, see the Company's Consolidated Statements of
Cash Flows located on page 4.
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 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, 1999. 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.
15.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------------------------------------------------
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 $ 1,418 $ -- $ -- $ -- $ -- $ 1,418
Federal funds sold 375 -- -- -- -- 375
Securities 50,451 19,524 9,871 46,351 49,742 175,939
Loans 97,891 39,763 67,702 184,752 50,035 440,143
--------- --------- --------- --------- --------- ---------
Total interest-earning assets $ 150,135 $ 59,287 $ 77,573 $ 231,103 $ 99,777 $ 617,875
========= ========= ========= ========= ========= =========
INTEREST-BEARING LIABILITIES
NOW accounts $ 56,784 $ -- $ -- $ -- $ -- $ 56,784
Money market accounts 32,952 -- -- -- -- 32,952
Savings 89,736 -- -- -- -- 89,736
Time deposits 56,305 66,900 113,163 83,912 220 320,500
--------- --------- --------- --------- --------- ---------
Total interest-bearing deposits 235,777 66,900 113,163 83,912 220 499,972
Federal funds and repurchase agreements 7,002 368 624 535 -- 8,529
Advances from FHLB 4,000 1,000 5,500 13,935 4,300 28,735
Notes payable 10,000 -- -- -- -- 10,000
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities $ 256,779 $ 68,268 $ 119,287 $ 98,382 $ 4,520 $ 547,236
========= ========= ========= ========= ========= =========
Period interest sensitivity gap $(106,644) $ (8,981) $ (41,714) $ 132,721 $ 95,257 $ 70,639
Cumulative interest sensitivity gap (106,644) (115,625) (157,339) (24,618) 70,639
Cumulative gap as a percent of total assets (16.48)% (17.86)% (24.31)% (3.80)% 10.91%
Cumulative interest-sensitive assets as a
percent of cumulative interest-sensitive
liabilities 58.47% 64.43% 64.59% 95.46% 112.91%
</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 June 30, 1999, the Company held approximately
$33,304,000 (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 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 the tables
16.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
below is 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, 1999.
June 30, 1999
----------------------------------------------------
Net Interest Income
----------------------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $ 25,269 $ 1,571 6.63%
+100 bp 24,502 804 3.39
Base 23,698 -- --
-100 bp 22,810 (888) (3.75)
-200 bp 21,780 (1,918) (8.09)
Based upon the Company's model at June 30, 1999, the effect of an immediate 200
basis point increase in interest rates would increase the Company's net interest
income by 6.63% or approximately $1,571,000. The effect of an immediate 200
basis point decrease in rates would reduce the Company's net interest income by
8.09% or approximately $1,918,000. The reason for this is even though the
preceding table shows the Company as having a negative gap, certain core
deposits may not reprice when rates decrease depending on market conditions.
This causes the decline in net interest income.
December 31, 1998
----------------------------------------------------
Net Interest Income
----------------------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $ 20,811 $ (652) (3.04)%
+100 bp 21,155 (308) (1.43)
Base 21,463 -- --
-100 bp 21,542 80 0.37
-200 bp 20,882 (580) (2.70)
Based upon the Company's model at December 31, 1998, the effect of an immediate
200 basis point increase in interest rates would decrease the Company's net
interest income by 3.04% or approximately $652,000. The effect of an immediate
200 basis point decrease in rates would reduce the Company's net interest income
by 2.70% or approximately $580,000. The reason for this is even though the
preceding table shows the Company as having a negative gap, certain core
deposits may not reprice when rates decrease depending on market conditions.
This causes the decline in net interest income.
YEAR 2000
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
17.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
identifying the hardware and software issues related to the year 2000 and the
potential for those issues to adversely affect the Company's operations and
those of its subsidiaries.
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 of Directors. The
plan follows guidelines set forth by the FFIEC.
The status of each of the five phases of the FFIEC Year 2000 plan are:
1. Awareness 100% complete
2. Assessment 100% complete
3. Renovation 100% complete
4. Validation 100% complete
5. Implementation 95% complete
The 5% of implementation which remains to be completed consists of converting a
legacy system for ACH originations, which was replaced during the second quarter
of 1999 by a new system that is documented and tested by the vendor as being
Year 2000 compliant.
While the Company will incur some expenses during the next year, the Company has
not identified any situations at this time that will require material cost
expenditures to become fully compliant. It is impossible at this time to
quantify 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 achieving compliance, by focusing not only on its
own data processing systems, but also in assisting its customers needs as well.
Management has taken steps to educate and assist its customers with
identification of Year 2000 compliance problems. In addition, management has
proposed policy and procedure changes to help identify potential risks to the
Company and to gain an understanding of how its customers are managing the risks
associated with the Year 2000 issue. The Company has assessed 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 corporate loan review officer maintains a
current list of all customers that pose a potential liability to the Company due
to the Year 2000 issue and regularly updates the Board of Directors.
Further, the Company has analyzed its liquidity position and how it could be
affected by the Year 2000 issue. A plan has been developed that addresses
liquidity issues that may arise. Overall, the Company feels that there are
adequate sources available and that the costs associated with such sources will
not have a material impact on the profits of the Company.
The Company has developed contingency plans for various Year 2000 problems and
continues to revise those plans based on testing results and vendor
notifications.
18.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
SEGMENT INFORMATION
The reportable segments are determined by the products and services offered,
primarily distinguished between banking and other operations. Loans,
investments, and deposits provide the revenues in the banking segment, and
mortgage banking, insurance, trust and holding company services are categorized
as other segments. All inter-segment services provided are charged at the same
rates as those charged to unaffiliated customers. Such services are included in
the revenues and net income of the respective segments and are eliminated to
arrive at consolidated totals. Prior to 1998, the Company did not offer
insurance services.
The accounting policies used are the same as those described in the summary of
significant accounting policies. Segment performance is evaluated using net
interest income. Information reported internally for performance assessment
follows.
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------------------
Banking Other Consolidated
Segment Segments Totals
--------- --------- ---------
<S> <C> <C> <C>
Net interest income (loss) $ 11,975 $ (321) $ 11,654
Other revenue 2,774 1,794 4,568
Other expense 8,650 2,884 11,534
Noncash items
Depreciation 469 346 815
Provision for loan loss 601 -- 601
Goodwill and other intangibles 342 97 439
Segment profit 5,498 (1,411) 4,087
Segment assets 665,904 4,827 670,731
June 30, 1998
--------------------------------------------
Banking Other Consolidated
Segment Segments Totals
--------- --------- ---------
<S> <C> <C> <C>
Net interest income (loss) $ 11,575 $ (399) $ 11,176
Other revenue 3,014 354 3,368
Other expense 8,630 1,241 9,871
Noncash items
Depreciation 525 279 804
Provision for loan loss 881 -- 881
Goodwill and other intangibles 434 26 460
Segment profit 5,079 (1,315) 3,764
Segment assets 644,325 4,359 648,684
</TABLE>
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
19.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
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.
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
On April 29, 1999, the annual meeting of stockholders was held. At the
meeting, Richard J. Berry, Walter E. Breipohl, Lawrence J. McGrogan and
John A. Trainor were elected to serve as Class I directors with terms
expiring in 2002. 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. Continuing as Class III directors until 2001 are R.
Scott Grigsby, H. Dean Reynolds, John A. Shinkle and Scott C. Sullivan.
There were 4,262,359 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
--------------------- --------- --------
Richard J. Berry 3,194,609 227,650
Walter E. Breipohl 3,194,609 227,650
Lawrence J. McGrogan 3,194,609 227,650
John A. Trainor 3,194,609 227,650
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: August , 1999 /s/ R. SCOTT GRIGSBY
------------------- -----------------------------------------
R. Scott Grigsby
Chairman of the Board and
Chief Executive Officer
Date: August , 1999 /s/ CHARLES J. GRAKO
------------------- -----------------------------------------
Charles J. Grako
President and Chief Financial Officer
22.
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 25,020
<INT-BEARING-DEPOSITS> 1,418
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<INVESTMENTS-HELD-FOR-SALE> 131,589
<INVESTMENTS-CARRYING> 44,350
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<LOANS> 440,143
<ALLOWANCE> 4,034
<TOTAL-ASSETS> 670,731
<DEPOSITS> 562,119
<SHORT-TERM> 18,529
<LIABILITIES-OTHER> 5,413
<LONG-TERM> 28,735
857
500
<COMMON> 4,537
<OTHER-SE> 50,041
<TOTAL-LIABILITIES-AND-EQUITY> 670,731
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<INTEREST-INVEST> 5,164
<INTEREST-OTHER> 25
<INTEREST-TOTAL> 23,445
<INTEREST-DEPOSIT> 10,339
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<INTEREST-INCOME-NET> 11,654
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<INCOME-PRETAX> 4,087
<INCOME-PRE-EXTRAORDINARY> 4,087
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,801
<EPS-BASIC> 0.65
<EPS-DILUTED> 0.64
<YIELD-ACTUAL> 8.13
<LOANS-NON> 3,045
<LOANS-PAST> 913
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 3,858
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<ALLOWANCE-CLOSE> 4,034
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</TABLE>
