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, 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 November 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 - 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................22
Item 2. Changes in Securities.............................................22
Item 3. Defaults Upon Senior Securities...................................22
Item 4. Submission of Matters to a Vote of Security Holders...............22
Item 5. Other Information.................................................22
Item 6. Exhibits and Reports on Form 8-K..................................22
SIGNATURES................................................................23
<PAGE>
<TABLE>
<CAPTION>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
- -----------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
1999 1998
------------ -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 26,855 $ 25,063
Securities available-for-sale 170,188 133,772
Securities held-to-maturity - 41,847
Loans 455,285 398,388
Allowance for loan losses (4,068) (3,858)
------------ -----------
Net loans 451,217 394,530
Premises and equipment, net 13,620 13,853
Intangible assets, net 8,440 9,099
Other assets 10,831 9,030
----------- -----------
TOTAL ASSETS $ 681,151 $ 627,194
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing $ 60,228 $ 67,227
Interest bearing 514,522 450,411
----------- -----------
Total deposits 574,750 517,638
Federal funds purchased and securities sold
under agreements to repurchase 9,199 14,855
Advances from the Federal Home Loan Bank 24,733 23,208
Notes payable 10,000 7,000
Other liabilities 5,326 6,545
----------- -----------
TOTAL LIABILITIES 624,008 569,246
----------- -----------
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;
4,538,572 shares outstanding at September 30, 1999 and
4,533,622 at December 31, 1998 4,539 4,534
Surplus 21,607 21,471
Retained earnings 34,749 31,262
Accumulated other comprehensive income (1,036) 31
Unearned compensation under stock option plans (223) (185)
----------- -----------
60,136 57,613
Treasury stock, at cost; 491,263 shares
at September 30, 1999 and 271,263 at December 31, 1998 (3,850) (522)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 56,286 57,091
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 681,151 $ 627,194
=========== ===========
</TABLE>
See Accompanying Notes to Unaudited Consolidated 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,
------------------------------ ------------------------------
1999 1998 1999 1998
-------------- ------------- ------------- --------------
Interest income
<S> <C> <C> <C> <C>
Loans and fees on loans $ 9,828 $ 9,308 $ 28,084 $ 26,896
Securities
Taxable 2,020 2,219 6,195 7,163
Exempt from federal income taxes 512 562 1,501 1,582
Federal funds sold and other 19 126 44 222
-------------- ------------- ------------- --------------
TOTAL INTEREST INCOME 12,379 12,215 35,824 35,863
-------------- ------------- ------------- --------------
Interest expense
Deposits 5,725 5,763 16,064 16,775
Federal funds purchased and securities sold
under agreements to repurchase 133 251 558 763
Advances from the Federal Home Loan Bank 399 347 1,109 918
Notes payable 184 197 501 574
-------------- ------------- ------------- --------------
TOTAL INTEREST EXPENSE 6,441 6,558 18,232 19,030
-------------- ------------- ------------- --------------
NET INTEREST INCOME 5,938 5,657 17,592 16,833
Provision for loan losses 323 319 924 1,200
-------------- ------------- ------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,615 5,338 16,668 15,633
-------------- ------------- ------------- --------------
Noninterest income
Service charges 601 553 1,625 1,693
Merchant fee income 314 241 821 592
Trust income 179 150 536 451
Mortgage banking income 548 416 1,119 1,183
Insurance commissions and fees 608 - 1,902 -
Securities gains, net 2 22 124 58
Other income 254 452 947 1,225
-------------- ------------- ------------- --------------
2,506 1,834 7,074 5,202
-------------- ------------- ------------- --------------
Noninterest expenses
Salaries and employee benefits 3,064 2,541 9,190 7,695
Occupancy expense, net 445 375 1,213 1,142
Furniture and equipment expense 486 446 1,396 1,312
Supplies and printing 133 118 399 406
Telephone 172 139 499 398
Postage 81 65 256 267
Amortization of intangible assets 220 233 659 693
Other expenses 1,412 1,165 3,935 3,040
-------------- ------------- ------------- --------------
6,013 5,082 17,547 14,953
-------------- ------------- ------------- --------------
2,108 2,090 6,195 5,882
Minority interest - 20 - 48
-------------- ------------- ------------- --------------
INCOME BEFORE INCOME TAXES 2,108 2,070 6,195 5,834
Income taxes 662 658 1,948 1,859
-------------- ------------- ------------- --------------
NET INCOME 1,446 1,412 4,247 3,975
Preferred stock dividends 64 64 194 194
-------------- ------------- ------------- --------------
NET INCOME FOR COMMON STOCKHOLDERS $ 1,382 $ 1,348 $ 4,053 $ 3,781
============== ============= ============= ==============
BASIC EARNINGS PER COMMON SHARE $ 0.34 $ 0.33 $ 0.99 $ 0.91
======== ========= ========= ========
DILUTED EARNINGS PER COMMON SHARE $ 0.34 $ 0.32 $ 0.98 $ 0.90
======== ========= ========= ========
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
2.
<PAGE>
<TABLE>
<CAPTION>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1999 1998 1999 1998
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income $ 1,446 $ 1,412 $ 4,247 $ 3,975
Change in unrealized gains on
securities available-for-sale (2) 765 (1,067) 248
-------------- ------------- ------------- --------------
COMPREHENSIVE INCOME $ 1,444 $ 2,177 $ 3,180 $ 4,223
============== ============= ============= ==============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
3.
<PAGE>
<TABLE>
<CAPTION>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
---------------------------
1999 1998
------------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,247 $ 3,975
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 1,234 1,224
Amortization of intangible assets 659 693
Amortization of unearned compensation under stock option plans 60 48
Amortization of bond premiums, net 214 243
Provision for loan losses 924 1,200
Securities gains, net (124) (58)
(Gain) loss on sale of equipment 57 (125)
Gain on sale of real estate acquired in settlement of loans (17) (24)
Gain on sale of loans (802) (951)
Proceeds from sales of loans held for sale 51,257 52,817
Origination of loans held for sale (44,581) (57,004)
Minority interest in net income of subsidiary - 48
Change in assets and liabilities
Increase in other assets (1,425) (1,331)
Increase (decrease) in other liabilities (1,219) 247
------------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,484 1,002
Cash flows from investing activities
Securities
Held-to-maturity
Proceeds from calls, maturities, and paydowns 1,222 1,471
Purchases (3,763) (10,855)
Available-for-sale
Proceeds from maturities and paydowns 26,826 51,279
Proceeds from sales 5,655 5,601
Purchases (25,979) (32,703)
Net (increase) decrease in federal funds sold 450 (7,736)
Net increase in loans (63,717) (30,364)
Increase in intangibles - (18)
Purchase of premises and equipment (1,155) (1,112)
Proceeds from sale of real estate acquired in settlement of loans 207 270
Proceeds from sale of equipment 97 11
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (60,157) (24,156)
Cash flows from financing activities
Net increase in deposits $ 57,112 $ 5,370
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (5,656) 7,404
Net increase in advances from the Federal Home Loan Bank 1,525 5,040
Payments on notes payable - (274)
Proceeds from notes payable 3,000 320
Purchase of treasury stock (3,328) -
Dividends on common stock (566) (455)
Dividends on preferred stock (194) (194)
Proceeds from exercise of stock options 22 15
------------ -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 51,915 17,226
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,242 (5,928)
Cash and cash equivalents
Beginning of year 24,613 22,826
------------ -----------
End of period $ 26,855 $ 16,898
============ ===========
Supplemental disclosure of noncash investing activities
Securities transferred from held-to-maturity to
to available-for-sale, at fair value $ 44,350 $ -
</TABLE>
See Accompanying Notes to Unaudited Consolidated 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 September 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 No. 133, "Accounting for Derivative
Instruments and Hedging Activities" 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.
On July 1, 1999, the Company adopted Statement No. 133, which allows the Company
a one-time reclassification of securities held-to-maturity to available-for-sale
or trading. The Company transferred securities with an amortized cost of
$44,350,000 previously classified as held-to-maturity to available-for-sale upon
adoption. The unrealized gain on the securities transferred was $106,000 on July
1, 1999 and the Company's equity increased by $66,000 as a result of the
transfer.
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.
The Financial Accounting Standards Board continues to study several issues,
including recording all financial instruments at fair value and abolishing
pooling-of-interests accounting. On September 8, 1999, the FASB issued an
exposure draft which proposes to eliminate pooling-of-interest accounting for
business combinations. Any business combination entered into after the effective
date of this provision will be required to be accounted for using the purchase
method of accounting. The FASB will accept comments on this proposed rule until
December 7, 1999 and a final statement is expected to become effective during
the fourth quarter of 2000.
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 December 31, 1998 were as follows:
December 31, 1998
---------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
HELD-TO-MATURITY Cost Gains Losses Value
--------- ---------- ---------- -------
States and political subdivisions $41,847 $ 1,245 $ (19) $ 43,073
======= ======== ======= ========
Securities Available-for-Sale - The amortized cost and fair value of securities
available-for-sale at September 30, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
September 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 $ 14 $ (34) $ 5,749 $ 6,753 $ 138 $ - $ 6,891
U.S. government agencies and
corporations 48,915 2 (1,061) 47,856 49,203 222 (95) 49,330
U.S. government mortgage-backed
securities 32,387 18 (654) 31,751 31,111 52 (158) 31,005
Collateralized mortgage obligations 36,789 293 (128) 36,954 43,315 474 (581) 43,208
Corporate bonds - - - - 100 - - 100
States and political subdivisions 44,339 375 (500) 44,214 - - - -
Other 3,664 - - 3,664 3,238 - - 3,238
-------- -------- ------- -------- -------- --------- ------- --------
$171,863 $ 702 $(2,377) $170,188 $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:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------------- ---------------------------
$ % $ %
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Commercial $ 98,157 21.56% $ 74,481 18.69%
Agricultural 39,771 8.73 41,821 10.50
Real estate:
Commercial mortgages 119,389 26.22 99,872 25.07
Construction 14,025 3.08 13,935 3.50
Agricultural 38,542 8.47 35,790 8.98
1-4 family mortgages 100,192 22.01 96,921 24.33
Installment 42,651 9.37 32,714 8.21
Other 2,567 0.56 2,884 0.72
----------- ----------- ----------- ------------
455,294 100.00% 398,418 100.00%
=========== ============
Unearned income (9) (30)
----------- -----------
Total loans 455,285 398,388
Allowance for loan losses (4,068) (3,858)
----------- -----------
Loans, net $ 451,217 $ 394,530
=========== ===========
</TABLE>
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 quarters and nine
months ended September 30, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1999 1998 1999 1998
--------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Beginning balance $ 4,034 $ 3,745 $ 3,858 $ 3,188
Charge-offs:
Commercial 197 126 424 250
Real estate mortgages 29 19 198 138
Installment and other loans 108 114 257 311
-------------- ------------- ------------- --------------
Total charge-offs 334 259 879 699
-------------- ------------- ------------- --------------
Recoveries:
Commercial 16 42 77 73
Real estate mortgages 11 6 22 26
Installment and other loans 18 30 66 95
-------------- ------------- ------------- --------------
Total recoveries 45 78 165 194
-------------- ------------- ------------- --------------
Net charge-offs 289 181 714 505
-------------- ------------- ------------- --------------
Provision for loan losses 323 319 924 1,200
-------------- ------------- ------------- --------------
Ending balance $ 4,068 $ 3,883 $ 4,068 $ 3,883
============== ============= ============= ==============
Period end total loans, net of
unearned interest $ 455,285 $ 405,982 $ 455,285 $ 405,982
============== ============= ============= ==============
Average loans $ 453,061 $ 402,873 $ 429,191 $ 386,066
============== ============= ============= ==============
Ratio of net charge-offs to
average loans 0.06% 0.04% 0.17% 0.13%
Ratio of provision for loan losses
to average loans 0.07% 0.08% 0.22% 0.31%
Ratio of allowance for loan losses
to ending total loans 0.89% 0.96% 0.89% 0.96%
Ratio of allowance for loan losses
to total nonperforming loans 68.61% 159.27% 68.61% 159.27%
Ratio of allowance at end of period
to average loans 0.90% 0.96% 0.95% 1.01%
</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 third quarter of 1999, the Company announced that it had signed an
agreement under which its UnionBank/ West subsidiary will acquire the Rushville,
Illinois branch office of Associated Bank Illinois, Rockford, Illinois. The
acquisition is scheduled to consummate during the fourth quarter of 1999. The
addition of the Rushville branch is intended to extend UnionBank/ West's
operations into adjacent markets. During the first quarter of 1999, UnionBank/
West opened a branch office in Quincy, Illinois, and in the second quarter
UnionBank opened a branch office in Mendota, 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 during the first quarter of 1999.
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, 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 nine months ended September 30, 1999 are not necessarily
indicative of results to be expected for the full year of 1999.
SUMMARY OF PERFORMANCE
Net income for the third quarter increased to $1,446,000, or $0.34 per share
(diluted), compared to the $1,412,000, or $0.32 per share (diluted), earned in
the same period of 1998. This represents a 6.3% increase in per share earnings
and a 2.4% increase in net income. Net income for the nine months ended
September 30, 1999 increased to $4,247,000, or $0.98 per share (diluted),
compared to the $3,975,000, or $0.90 per share (diluted), earned in the same
period of 1998. This represents an 8.9% increase in per share earnings and a
6.8% increase in net income. Cash earnings per share for the nine month periods
increased to $1.07 from $1.03 during the same time frame. Cash earnings consists
of the Company's net income plus the income statement impact of the purchase
accounting adjustments, tax affected where appropriate.
Return on average assets was 0.84% for the third quarter of 1999, compared to
the 0.86% for the same period in 1998. Return on average assets increased to
0.87% for the nine months ended September 30, 1999, as compared to 0.84% for the
same period in 1998. Cash return on average assets for the nine month period was
0.95%, as compared to 0.96% during the same time frame. Cash return on average
assets consists of the cash earnings described above divided by average assets
less intangibles.
Return on average stockholders' equity was 10.27% for the third quarter of 1999,
as compared to 10.30% for the same period in 1998. Return on average
stockholders' equity was 10.15% for the nine months ended September 30, 1999, as
compared to 10.02% for the same period in 1998. Return on tangible equity
capital for the nine month period decreased to 12.81%, as compared to 13.36%
during the same time frame.
NET INTEREST INCOME
Net interest income on a tax equivalent basis totaled $6,234,000 for the third
quarter of 1999, representing an increase of $268,000 or 4.5% over the
$5,966,000 earned during the same period in 1998. This improvement in net
8.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
interest income was attributable to higher interest income of $151,000 and a
reduction in interest expense of $117,000.
The net interest margin for the third quarter of 1999 remained stable at 3.92%
as compared to 3.93% for the same time frame in 1998. The slight decrease in the
net interest margin was primarily attributable to competitive conditions that
resulted in the lower pricing of loans in the third quarter of 1999 which
contributed to a decrease in average rates earned on the loan portfolio.
Specifically, yields on loans decreased 56 basis points to 8.63% in the third
quarter of 1999 as compared to 9.19% for the third quarter of 1998. Partially
offsetting this was a 30 basis point reduction in the cost of funds which was
due to interest bearing liabilities repricing at lower rates.
The $151,000 quarter to quarter improvement in interest income was primarily
attributable to a $28.2 million increase in the volume of average earning
assets. Offsetting the increase in interest income resulting from higher volumes
was a corresponding decrease in the loan yields described above.
The $117,000 decrease in interest expense resulted from a $488,000 decrease
associated with rate that was offset by a $371,000 increase in volume. A
majority of the decrease in interest expense was related to a 42 basis point
decline in rates on time deposits that repriced at lower rates in addition to a
reduction of $7.9 million in the volume of federal funds purchased and
repurchase agreements. The increase in volume associated with advances from the
FHLB was due to the Company's continued utilization of this favorable low cost
funding alternative. This particular funding mechanism was employed to attract
certain maturities to match and fund term assets.
Net interest income for the nine months ended September 30, 1999 totaled
$18,451,000, representing an increase of $748,000 or 4.2% over the $17,703,000
earned during the same period in 1998. This improvement in net interest income
was attributable to lower interest expense of $798,000 which was partially
offset by lower interest income of $50,000.
The net interest margin for the first nine months of 1999 increased to 4.06% as
compared to 4.03% for the same period in 1998. The improvement in the net
interest margin was primarily attributable to a $19.7 million increase in the
volume of average earning assets in conjunction with a 33 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 September 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 September 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 $ 2,527 $ 30 4.71% $ 3,293 $ 41 4.94% $ (9) $ (2) $ (11)
Securities (1)
Taxable 131,912 1,990 5.99% 142,772 2,177 6.05% (165) (22) (187)
Non-taxable (2) 41,781 776 7.37% 44,565 852 7.58% (56) (20) (76)
Total securities (tax equivalent) 173,693 2,766 6.32% 187,337 3,029 6.41% (221) (42) (263)
-------- ------ ------ -------- ------- ------ ------ ------- -----
Federal funds sold 1,452 19 5.19% 9,002 126 5.55% (99) (8) (107)
-------- ------ ------ -------- ------- ------ ------ ------- -----
Loans (3)(4)
Commercial 132,731 2,922 8.73% 116,096 2,751 9.40% 376 (205) 171
Real estate 277,023 5,679 8.13% 246,327 5,318 8.57% 643 (282) 361
Installment and other 43,307 970 8.89% 40,450 964 9.46% 66 (60) 6
Fees on loans - 289 - - 295 - 36 (42) (6)
Net loans (tax equivalent) 453,061 9,860 8.63% 402,873 9,328 9.19% 1,121 (589) 532
-------- ------ ------ -------- ------- ------ ------ ------- -----
Total interest-earning assets 630,733 12,675 7.97% 602,505 12,524 8.25% 792 (641) 151
-------- ------ ------ -------- ------- ------ ------ ------- -----
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 22,464 18,745
Premises and equipment, net 13,755 14,840
Other assets 13,739 16,675
-------- --------
Total nonearning assets 49,958 50,260
-------- --------
Total assets $680,691 $652,765
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $ 59,578 $ 341 2.27% $ 61,103 $ 371 2.41% $ (9) $ (21) $ (30)
Money market accounts 34,578 311 3.57% 28,652 267 3.70% 54 (10) 44
Savings deposits 55,127 373 2.68% 62,811 495 3.13% (56) (66) (122)
Time deposits 359,426 4,700 5.19% 327,229 4,631 5.61% 433 (364) 69
Federal funds purchased and
repurchase agreements 10,157 134 5.23% 18,085 251 5.51% (105) (12) (117)
Advances from FHLB 29,027 398 5.44% 24,445 346 5.62% 63 (11) 52
Notes payable 10,076 184 7.24% 10,545 197 7.41% (9) (4) (13)
-------- ------ ------ -------- ------- ------ ------ ------ -----
Total interest-bearing liabilities 557,969 6,441 4.58% 532,870 6,558 4.88% 371 (488) (117)
-------- ------ ------ -------- ------- ------ ------ ------ -----
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 60,663 63,665
Other liabilities 6,213 1,857
-------- --------
Total noninterest-bearing
liabilities 66,876 65,522
-------- --------
Stockholders' equity 55,846 54,373
-------- --------
Total liabilities and
stockholders' equity $680,691 $652,765
======== ========
Net interest income (tax equivalent) $6,234 $ 5,966 $ 421 $ (153) $ 268
====== ======== ====== ======= =====
Net interest income (tax
equivalent) to total
earning assets 3.92% 3.93%
Interest-bearing liabilities
to earning assets 88.46% 88.44%
-------- --------
</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, 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 Nine Months Ended September 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 $ 1,716 $ 64 4.99% $ 1,484 $ 91 8.20% $ 13 $ (40) $ (27)
Securities (1)
Taxable 134,495 6,132 6.10% 153,931 7072 6.14% (894) (46) (940)
Non-taxable (2) 40,882 2,274 7.44% 41,502 2,397 7.72% (68) (55) (123)
-------- ------ ------ -------- ------- ------ ------ ------- -------
Total securities (tax equivalent) $175,377 8,406 6.41% 195,433 9,469 6.48% (962) (101) (1,063)
-------- ------ ------ -------- ------- ------ ------ ------- -------
Federal funds sold 951 44 6.19% 5,131 222 5.78% (193) 15 (178)
-------- ------ ------ -------- ------- ------ ------ ------- -------
Loans (3)(4)
Commercial 122,528 8,140 8.88% 107,269 7,678 9.57% 1,041 (579) 462
Real estate 267,559 16,432 8.21% 236,290 15,299 8.66% 1,955 (822) 1,133
Installment and other 39,104 2,656 9.08% 41,883 2,973 9.49% (192) (125) (317)
Fees on loans - 941 - - 1,001 - 126 (186) (60)
-------- ------ ------ -------- ------- ------ ------ ------- -------
Net loans (tax equivalent) 429,191 28,169 8.78% 385,442 26,951 9.35% 2,930 (1,712) 1,218
-------- ------ ------ -------- ------- ------ ------ ------- -------
Total interest-earning assets 607,235 36,683 8.08% 587,490 36,733 8.36% 1,788 (1,838) (50)
-------- ------ ------ -------- ------- ------ ------ ------- -------
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 21,430 17,050
Premises and equipment, net 13,816 14,727
Other assets 12,407 15,921
-------- --------
Total nonearning assets 47,653 47,698
-------- --------
Total assets $654,888 $635,188
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $ 55,422 $ 941 2.27% $ 56,522 $ 1,022 2.42% $ (19) $ (62) $ (81)
Money market accounts 32,695 858 3.51% 29,065 783 3.60% 95 (20) 75
Savings deposits 57,146 1,188 2.78% 61,612 1,388 3.01% (97) (103) (200)
Time deposits 334,939 13,077 5.22% 320,264 13,582 5.67% 604 (1,109) (505)
Federal funds purchased and
repurchase agreements 14,607 558 5.11% 17,665 763 5.77% (123) (82) (205)
Advances from FHLB 27,249 1,109 5.44% 21,706 918 5.65% 226 (35) 191
Notes payable 9,433 501 7.10% 10,403 574 7.38% (52) (21) (73)
-------- ------ ------ -------- ------- ------ ------ ------- -------
Total interest-bearing liabilities 531,491 18,232 4.59% 517,237 19,030 4.92% 634 (1,432) (798)
-------- ------ ------ -------- ------- ------ ------ ------- -------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 60,711 59,184
Other liabilities 6,731 5,717
-------- --------
Total noninterest-bearing
liabilities 67,442 64,901
-------- --------
Stockholders' equity 55,955 53,050
-------- --------
Total liabilities and
stockholders' equity $654,888 $635,188
======== ========
Net interest income (tax equivalent) 18,451 $17,703 $1,154 $ (406) $ 748
====== ======= ====== ======= =======
Net interest income (tax
equivalent) to total
earning assets 4.06% 4.03%
Interest-bearing liabilities
to earning assets 87.53% 88.04%
-------- --------
</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 third quarter
of 1999 equaled $323,000 as compared to $319,000 for the same quarter in 1998.
For the nine month period ending September 30, 1999, the provision for loan
losses charged to operating expense equaled $924,000 as compared to $1,200,000
for the like period in 1998. The amount of the provision for loan losses is
dependent upon management's assessment of its loan portfolio, changes in the
composition of the loan portfolio, net charge-offs, delinquencies, collateral
values and prevailing economic conditions.
NONINTEREST INCOME
Noninterest income totaled $2,506,000 for the quarter ended September 30, 1999,
as compared to $1,834,000 for the same time frame in 1998. Exclusive of net
securities gains, noninterest income increased by $692,000 or a 38.2%
improvement. The bulk of the increase was largely related to insurance
commissions and fees totaling $608,000 that were associated with the fourth
quarter of 1998 acquisition of an insurance agency. Also contributing to the
improvement in noninterest income was growth in mortgage banking income of
$132,000, increases in revenue associated with internet service provider (ISP)
of $79,000, and merchant fee income of $73,000. This was offset by a $198,000
decrease in other income related to a $122,000 gain on sale of property taken
during the third quarter of 1998 and $49,000 in revenue from a collection agency
the Company divested during the fourth quarter of 1998.
Noninterest income totaled $7,074,000 for the nine months ended September 30,
1999, as compared to $5,202,000 for the same time frame in 1998. Factoring out
net securities gains, noninterest income increased by $1,806,000 or a 35.1%
improvement. The 35.1% increase was largely reflective of the same items
discussed regarding the third quarter income.
NONINTEREST EXPENSE
Noninterest expense totaled $6,013,000 for the quarter ended September 30, 1999,
increasing by $931,000 or 18.3% from the same time frame in 1998. Salaries and
employee benefits accounted for $523,000 or 56.2% of the increase and was
attributable to salary and commission costs associated with the newly acquired
insurance agency, as well as to regular merit increases, basic incentive
compensation, and the initial staffing and related compensation costs of two new
banking centers. The increase in net occupancy and 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 $17,547,000 for the nine months ended September 30,
1999, increasing by $2,594,000 or 17.4% from the same time frame in 1998. The
17.4% increase was largely reflective of the same items discussed regarding the
third quarter expenses.
INCOME TAX EXPENSE
Income tax expense for the quarter ended September 30, 1999, increased to
$662,000 as compared to $658,000 for the comparable period in 1998. As a
percentage of income before taxes, the provision for income taxes decreased to
31.4% from 31.8% for the same period in 1998.
12.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Income tax expense for the nine months ended September 30, 1999, increased to
$1,948,000 as compared to $1,859,000 for the comparable period in 1998. As a
percentage of income before taxes, the provision for income taxes decreased to
31.4% from 31.9% for the same period in 1998.
NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS
At September 30, 1999, nonperforming assets totaled $6,156,000 versus the
$2,899,000 that existed as of December 31, 1998. The level of nonperforming
loans to total end of period loans was 1.30% at September 30, 1999, as compared
to 0.65% at December 31, 1998. The increase in nonperforming loans was primarily
related to the inclusion of three large credits placed on nonaccrual since
December 31, 1998. Excluding these three credits, the ratio would be 0.65%. One
of the credits totaling $857,000 is a general contractor loan where the debtor
on September 22, 1999 filed for protection under Chapter 7 of the Bankruptcy
Code. Based on its investigation to this point, management, in conjunction with
legal counsel, has not yet determined the Company's potential loss and is
reviewing alternatives to minimize corporate exposure as it relates to this
credit. The two remaining credits are secured by real estate and management does
not anticipate substantial loss. 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
----------------------------------- -----------------------
Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Nonaccrual and impaired loans not
accruing $ 4,397 $ 3,045 $ 2,291 $ 1,487 $ 1,783
Impaired and other loans 90 days past
due and still accruing interest 1,532 913 1,515 1,111 655
---------- ---------- ---------- ---------- ----------
Total nonperforming loans 5,929 3,958 3,806 2,598 2,438
Other real estate owned 227 279 398 201 322
Other nonperforming assets (1) - - - 100 100
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 6,156 $ 4,237 $ 4,204 $ 2,899 $ 2,860
========== ========== ========== ========== ==========
Nonperforming loans to total end of period loans 1.30% 0.90% 0.91% 0.65% 0.60%
Nonperforming assets to total end of period loans 1.35 0.96 1.01 0.73 0.70
Nonperforming assets to total end of period assets 0.90 0.63 0.66 0.46 0.44
- ------------------------
(1) Represents a single municipal security in default status.
</TABLE>
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
13.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
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.
Transactions in the allowance for loan losses during the quarter and nine months
ended September 30, 1999 and 1998 are summarized in the table on page 7. At
September 30, 1999, the allowance for loan losses totaled $4,068,000 and was
0.89% of total loans outstanding as compared to $3,883,000 or 0.96% at September
30, 1998. During the same time frame, net charge-offs increased to $289,000
during the third quarter of 1999 as compared to $181,000 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:
<TABLE>
<CAPTION>
December 31, Minimum Well
Sep 30, ---------------------------- Capital Capitalized
1999 1998 1997 Ratios Ratios
------------ ------------ ------------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 48,882 $ 47,297 $ 41,180
Tier 2 risk-based capital 4,925 5,215 4,545
Total capital 53,807 52,512 45,725
Risk-weighted assets 482,956 429,325 385,685
Capital ratios
Tier 1 risk-based capital 10.12% 11.02% 10.68% 4.00% 6.00%
Tier 2 risk-based capital 11.14 12.23 11.86 8.00 10.00
Leverage ratio 7.27 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 10.12% and 11.14%,
respectively, at September 30, 1999. The Company currently exceeds, and expects
to continue to exceed, regulatory minimums.
</TABLE>
14.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
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 was satisfactory. Cash flows used in operating and investing
activities, offset by those provided by financing activities, resulted in a net
increase in cash and cash equivalents of $2,242,000 from December 31, 1998 to
September 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 September 30, 1999. The table was
prepared assuming loans prepay at varying degrees, based on type, maturity, and
rate. All the NOW
15.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
accounts, money market accounts, and savings accounts reprice in three months or
less, and certificates of deposit have been included based on contractual
maturity.
<TABLE>
<CAPTION>
September 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
--------- --------- --------- --------- --------- --------
INTEREST-EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing balances $ 2,444 $ - $ - $ - $ - $ 2,444
Federal funds sold - - - - - -
Securities 62,834 7,338 10,625 40,360 49,031 170,188
Loans 104,367 46,686 61,727 190,627 51,878 455,285
--------- --------- --------- --------- --------- --------
Total interest-earning assets $ 169,645 $ 54,024 $ 72,352 $ 230,987 $ 100,909 $627,917
========= ========= ========= ========= ========= ========
INTEREST-BEARING LIABILITIES
NOW accounts $ 54,927 $ - $ - $ - $ - $ 54,927
Money market accounts 34,858 - - - - 34,858
Savings 52,734 - - - - 52,734
Time deposits 101,678 93,932 99,859 76,314 220 372,003
--------- --------- --------- --------- --------- --------
Total interest-bearing deposits 244,197 93,932 99,859 76,314 220 514,522
Federal funds and repurchase agreements 7,530 145 1,018 506 - 9,199
Advances from FHLB 1,000 1,000 5,025 13,408 4,300 24,733
Notes payable 10,000 - - - - 10,000
--------- --------- --------- --------- --------- --------
Total interest-bearing liabilities $ 262,727 $ 95,077 $ 105,902 $ 90,228 $ 4,520 $558,454
========= ========= ========= ========= ========= ========
Period interest sensitivity gap $ (93,082) $ (41,053) $ (33,550) $ 140,759 $ 96,389 $ 69,463
Cumulative interest sensitivity gap (93,082) (134,135) (167,685) (26,926) 69,463
Cumulative gap as a percent of total assets (13.67)% (19.69)% (24.62)% (3.95)% 10.20%
Cumulative interest-sensitive assets as a
percent of cumulative interest-sensitive
liabilities 64.57% 62.51% 63.84% 95.14% 112.44%
</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 was subject to competitive
and other pressures. As of September 30, 1999, the Company held approximately
$32,387,000 (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
16.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
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 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 September 30, 1999.
<TABLE>
September 30, 1999
---------------------------------------------------------------
Net Interest Income
---------------------------------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+200 bp $ 22,514 $ (938) (4.00)%
+100 bp 22,925 (527) (2.25)
Base 23,452 - -
-100 bp 23,761 309 1.32
-200 bp 23,149 (303) (1.29)
</TABLE>
Based upon the Company's model at September 30, 1999, the effect of an immediate
200 basis point increase in interest rates would decrease the Company's net
interest income by 4.00% or approximately $938,000. The effect of an immediate
200 basis point decrease in rates would reduce the Company's net interest income
by 1.29% or approximately $303,000. 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.
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------
Net Interest Income
---------------------------------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+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)
</TABLE>
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 that even though at
year-end the Company shows 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,
17.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
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 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
the remaining customers of a legacy system for ACH origination to the 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.
18.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
The Company has developed contingency plans for various Year 2000 problems and
continues to revise those plans based on testing results and vendor
notifications.
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 the fourth quarter of 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>
September 30, 1999
----------------------------------------------
Banking Other Consolidated
Segment Segments Totals
------- -------- ------
<S> <C> <C> <C>
Net interest income (loss) $ 18,094 $ (502) $ 17,592
Other revenue 4,398 2,676 7,074
Other expense 12,049 3,605 15,654
Noncash items
Depreciation 713 521 1,234
Provision for loan loss 924 -- 924
Goodwill and other intangibles 513 146 659
Segment profit 8,293 (2,098) 6,195
Segment assets 677,332 3,819 681,151
September 30, 1999
----------------------------------------------
Banking Other Consolidated
Segment Segments Totals
------- -------- ------
Net interest income (loss) $ 17,427 $ (594) $ 16,833
Other revenue 4,593 609 5,202
Other expense 11,608 1,428 13,036
Noncash items
Depreciation 685 539 1,224
Provision for loan loss 1,200 -- 1,200
Goodwill and other intangibles 652 41 693
Segment profit 7,875 (2,041) 5,834
Segment assets 643,921 3,336 647,257
</TABLE>
19.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION. On November 4, 1999, the United States Congress approved
legislation that would allow bank holding companies to engage in a wider range
of nonbanking activities, including greater authority to engage in securities
and insurance activities. Under the Gramm-Leach-Bliley Act (the "Act"), a bank
holding company that elects to become a financial holding company may engage in
any activity that the FRB, in consultation with the Secretary of the Treasury,
determines by regulation or order is (i) financial in nature, (ii) incidental to
any such financial activity, or (iii) complementary to any such financial
activity and does not pose a substantial risk to the safety or soundness of
depository institutions or the financial system generally. The Act specifies
certain activities that are deemed to be financial in nature, including lending,
exchanging, transferring, investing for others, or safeguarding money or
securities; underwriting and selling insurance; providing financial, investment,
or economic advisory services; underwriting, dealing in or making a market in,
securities; and any activity currently permitted for bank holding companies by
the FRB under section 4(c)(8) of the Bank Holding Company Act. A bank holding
company may elect to be treated as a financial holding company only if all
depository institution subsidiaries of the holding company are well-capitalized,
well-managed and have at least a satisfactory rating under the Community
Reinvestment Act.
National banks are also authorized by the Act to engage, through "financial
subsidiaries," in any activity that is permissible for a financial holding
company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the FRB, determines is financial in nature or
incidental to any such financial activity, except (i) insurance underwriting,
(ii) real estate development or real estate investment activities (unless
otherwise permitted by law), (iii) insurance company portfolio investments and
(iv) merchant banking. The authority of a national bank to invest in a financial
subsidiary is subject to a number of conditions, including, among other things,
requirements that the bank must be well-managed and well-capitalized (after
deducting from capital the bank's outstanding investments in financial
subsidiaries). The Act provides that state banks may invest in financial
subsidiaries (assuming they have the requisite investment authority under
applicable state law) subject to the same conditions that apply to national bank
investments in financial subsidiaries.
The Act must be signed by the President before it will take effect. At this
time, the Company is unable to predict the impact the Act may have on the
Company and its subsidiaries.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward looking statements within the meaning of
Section 27a of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory provisions, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating
20.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Company and its business,
including additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the SEC.
21.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There are no material pending legal proceedings to which the Company or
its subsidiaries is a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. Changes in Securities
---------------------
None.
Item 3. 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.
22.
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIONBANCORP, INC.
Date: November __, 1999 /s/ R. SCOTT GRIBSBY
------------------------- -----------------------------------
R. Scott Grigsby
Chairman of the Board and
Chief Executive Officer
Date: November __, 1999 /s/ CHARLES J. GRAKO
------------------------- -----------------------------------
Charles J. Grako
President and Chief Financial Officer
23.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001019650
<NAME> UNIONBANCORP, INC.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 24,411
<INT-BEARING-DEPOSITS> 2,444
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 170,188
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 455,285
<ALLOWANCE> 4,068
<TOTAL-ASSETS> 681,151
<DEPOSITS> 574,750
<SHORT-TERM> 19,199
<LIABILITIES-OTHER> 5,326
<LONG-TERM> 24,733
857
500
<COMMON> 4,539
<OTHER-SE> 51,247
<TOTAL-LIABILITIES-AND-EQUITY> 681,151
<INTEREST-LOAN> 28,084
<INTEREST-INVEST> 7,696
<INTEREST-OTHER> 44
<INTEREST-TOTAL> 35,824
<INTEREST-DEPOSIT> 16,064
<INTEREST-EXPENSE> 18,232
<INTEREST-INCOME-NET> 17,592
<LOAN-LOSSES> 924
<SECURITIES-GAINS> 124
<EXPENSE-OTHER> 17,547
<INCOME-PRETAX> 6,195
<INCOME-PRE-EXTRAORDINARY> 6,195
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,247
<EPS-BASIC> 0.99
<EPS-DILUTED> 0.98
<YIELD-ACTUAL> 8.08
<LOANS-NON> 4,397
<LOANS-PAST> 1,532
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,858
<CHARGE-OFFS> 879
<RECOVERIES> 165
<ALLOWANCE-CLOSE> 4,068
<ALLOWANCE-DOMESTIC> 4,068
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,017
</TABLE>
