UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
UnionBancorp, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-28846 36-3145350
---------------------------- ----------- -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
122 West Madison Street, Ottawa, IL 61350
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(815) 434-3900
--------------------------------------------------
Registrant's telephone number, including area code
N.A.
-------------------------------------------------------
(Former name and address, if changed since last report)
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 14, 2000
----------------------------- ---------------------------------------
Common Stock, Par Value $1.00 3,962,788
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
o Consolidated Balance Sheets 1
o Consolidated Statements of Income and Comprehensive Income 2
o Consolidated Statements of Cash Flows 3
o Notes to Unaudited Consolidated Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 22,145 $ 27,230
Securities available-for-sale 178,055 173,893
Loans 496,386 472,395
Allowance for loan losses (4,653) (3,691)
---------- ----------
Net loans 491,733 468,704
Premises and equipment, net 12,290 13,446
Intangible assets, net 9,815 10,862
Mortgage servicing rights 1,390 1,201
Other assets 11,436 8,741
---------- ----------
TOTAL ASSETS $ 726,864 $ 704,077
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 70,516 $ 67,634
Interest-bearing 541,888 526,564
---------- ----------
Total deposits 612,404 594,198
Federal funds purchased and securities sold
under agreements to repurchase 1,456 5,308
Advances from the Federal Home Loan Bank 37,608 32,733
Notes payable 10,275 9,500
Other liabilities 6,284 5,140
---------- ----------
TOTAL LIABILITIES 668,027 646,879
---------- ----------
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;
4,553,051 shares at September 30, 2000 and 4,538,572
shares at December 31, 1999 4,553 4,539
Surplus 21,711 21,608
Retained earnings 38,172 35,743
Accumulated other comprehensive loss (1,685) (1,995)
Unearned compensation under stock option plans (147) (204)
---------- ----------
63,104 60,191
Treasury stock, at cost; 590,263 shares
at September 30, 2000 and 491,263 at December 31, 1999 (5,124) (3,850)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 57,980 56,341
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 726,864 $ 704,077
========== ==========
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
1.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income
Loans $ 11,035 $ 9,828 $ 32,002 $ 28,084
Securities
Taxable 2,172 2,020 6,401 6,195
Exempt from federal income taxes 515 512 1,520 1,501
Federal funds sold and other 126 19 148 44
--------- --------- --------- ---------
TOTAL INTEREST INCOME 13,848 12,379 40,071 35,824
--------- --------- --------- ---------
Interest expense
Deposits 7,094 5,725 19,646 16,064
Federal funds purchased and securities sold
under agreements to repurchase 42 133 221 558
Advances from the Federal Home Loan Bank 635 399 1,679 1,109
Notes payable 220 184 621 501
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 7,991 6,441 22,167 18,232
--------- --------- --------- ---------
NET INTEREST INCOME 5,857 5,938 17,904 17,592
Provision for loan losses 753 323 1,999 924
--------- --------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,104 5,615 15,905 16,668
--------- --------- --------- ---------
Noninterest income
Service charges 713 601 2,022 1,625
Merchant fee income 314 314 885 821
Trust income 183 179 559 536
Mortgage banking income 320 548 983 1,119
Insurance commissions and fees 652 608 2,230 1,902
Securities gains, net -- 2 2 124
Other income 833 254 1,653 947
--------- --------- --------- ---------
3,015 2,506 8,334 7,074
--------- --------- --------- ---------
Noninterest expenses
Salaries and employee benefits 3,046 3,064 10,222 9,190
Occupancy expense, net 458 445 1,293 1,213
Furniture and equipment expense 432 486 1,349 1,396
Supplies and printing 119 133 411 399
Telephone 184 172 564 499
Amortization of intangible assets 497 220 1,047 659
Other expenses 1,466 1,493 4,474 4,191
--------- --------- --------- ---------
6,202 6,013 19,360 17,547
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 1,917 2,108 4,879 6,195
Income taxes 668 662 1,544 1,948
--------- --------- --------- ---------
NET INCOME 1,249 1,446 3,335 4,247
Preferred stock dividends 64 64 194 194
--------- --------- --------- ---------
NET INCOME FOR COMMON STOCKHOLDERS $ 1,185 $ 1,382 $ 3,141 $ 4,053
======= ======= ======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.30 $ 0.34 $ 0.79 $ 0.99
======= ======= ======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.30 $ 0.34 $ 0.78 $ 0.98
======= ======= ======= =======
Comprehensive income $ 2,459 $ 1,444 $ 3,645 $ 3,180
======= ======= ======= =======
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
2.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,335 $ 4,247
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 1,165 1,234
Amortization of intangible assets 1,047 659
Amortization of unearned compensation under stock option plans 57 60
Amortization of bond premiums, net 60 214
Provision for loan losses 1,999 924
Securities gains, net (2) (124)
Loss on sale of equipment 71 57
(Gain) Loss on sale of real estate acquired in settlement of loans 64 (17)
Gain on sale of loans (614) (802)
Gain on sale of subsidiaries, net (438) --
Proceeds from sales of loans held for sale 40,517 51,257
Origination of loans held for sale (35,249) (44,581)
Change in assets and liabilities
Increase in other assets 3,001 (1,425)
Increase (decrease) in other liabilities 1,144 (1,219)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,155 10,484
Cash flows from investing activities
Securities
Held-to-maturity
Proceeds from calls, maturities, and paydowns -- 1,222
Purchases -- (3,763)
Available-for-sale
Proceeds from maturities and paydowns 16,286 26,826
Proceeds from sales -- 5,655
Purchases (20,002) (25,979)
Net decrease in federal funds sold -- 450
Net increase in loans (30,384) (63,717)
Purchase of premises and equipment (321) (1,155)
Proceeds from sale of real estate acquired in settlement of loans 566 207
Bank and Bank Holding Company sales, net of cash and cash equivalents received 438 --
Proceeds from sale of equipment 241 97
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (33,176) (60,157)
Cash flows from financing activities
Net increase in deposits 18,206 57,112
Net decrease in federal funds purchased
and securities sold under agreements to repurchase (3,852) (5,656)
Net increase in advances from the
Federal Home Loan Bank 4,875 1,525
Payments on notes payable (500) --
Proceeds from notes payable 1,275 3,000
Dividends on common stock (712) (566)
Dividends on preferred stock (194) (194)
Proceeds from exercise of stock options 112 22
Purchase of treasury stock (1,274) (3,328)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,936 51,915
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,085) 2,242
Cash and cash equivalents
Beginning of period 27,230 24,613
-------- --------
End of period $ 22,145 $ 26,855
======== ========
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
3.
<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 reporting 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, 1999. Annualized results of operations during the three and nine months
ended September 30, 2000 are not necessarily indicative of results to be
expected for the full year of 2000.
NOTE 2. EARNINGS PER COMMON SHARE (IN THOUSANDS)
For purposes of share calculations, the Company had 3,985 shares of common stock
outstanding at September 30, 2000 and 4,098 shares outstanding at September 30,
1999. Basic earnings per share for the three and nine months ended September 30,
2000 and 1999 were computed by dividing net income by the weighted average
number of shares outstanding. Diluted earnings per share for the three and nine
months ended September 30, 2000 and 1999 were computed by dividing net income by
the weighted average number of shares outstanding, adjusted for the dilutive
effect of the stock options. Computations for basic and diluted earnings per
share are provided below:
<TABLE>
<CAPTION>
BASIC EARNINGS PER COMMON SHARE
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income available to common shareholders $ 1,185 $ 1,382 $ 3,141 $ 4,053
Weighted average common shares outstanding 3,962 4,047 3,985 4,098
--------- --------- --------- ---------
BASIC EARNINGS PER COMMON SHARE $ 0.30 $ 0.34 $ 0.79 $ 0.99
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Weighted average common shares outstanding 3,962 4,047 3,985 4,098
Add: dilutive effect of assumed
exercised stock options 22 49 29 47
--------- --------- --------- ---------
Weighted average common and dilutive
Potential shares outstanding 3,984 4,096 4,014 4,145
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE $ 0.30 $ 0.34 $ 0.78 $ 0.98
========= ========= ========= =========
</TABLE>
4.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Options to purchase 146,850 shares were outstanding at September 30, 2000. These
options were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market price of
the common stock and were, therefore, antidilutive.
NOTE 3. SECURITIES
The amortized cost and fair value of securities available-for-sale at September
30, 2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
September 30, 2000
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. treasury $ 5,264 $ -- $ (40) $ 5,224
U.S. government agencies 67,035 53 (1,214) 65,874
U.S. government mortgage-backed securities 27,035 3 (733) 26,305
States and political subdivisions 43,991 411 (311) 44,091
Collateralized mortgage obligations 33,543 23 (943) 32,623
Other 3,938 -- -- 3,938
---------- ---------- ---------- ----------
$ 180,806 $ 490 $ (3,241) $ 178,055
========== ========== ========== ==========
December 31, 1999
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
U.S. treasury $ 5,519 $ 7 $ (65) $ 5,461
U.S. government agencies 57,797 3 (1,495) 56,305
States and political subdivisions 43,245 260 (685) 42,820
U.S. government mortgage-backed securities 30,888 4 (930) 29,962
Collateralized mortgage obligations 35,837 30 (386) 35,481
Other 3,864 -- -- 3,864
---------- ---------- ---------- ----------
$ 177,150 $ 304 $ (3,561) $ 173,893
========== ========== ========== ==========
</TABLE>
5.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4. LOANS
The composition of loans by major categories outstanding at September 30, 2000
and December 31, 1999 are as follows:
September 30, 2000 December 31, 1999
--------------------- ----------------------
$ % $ %
--------- --------- --------- ----------
Commercial $ 107,972 21.75% $ 103,842 21.98%
Agricultural 39,570 7.97 38,328 8.11
Real estate:
Commercial mortgages 133,122 26.82 126,645 26.81
Construction 18,692 3.77 15,786 3.34
Agricultural 40,121 8.08 38,847 8.22
1-4 family mortgages 100,949 20.34 102,695 21.74
Installment 53,230 10.72 43,644 9.24
Other 2,730 0.55 2,615 0.56
--------- --------- --------- ----------
496,386 100.00% 472,402 100.00%
========= ==========
Unearned Income -- (7)
--------- ---------
Total loans 496,386 472,395
Allowance for loan losses (4,653) (3,691)
--------- ---------
Loans, net $ 491,733 $ 468,704
========= =========
6.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses during the three and nine months
ended September 30, 2000 and 1999 are summarized below:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Beginning balance $ 4,030 $ 4,034 $ 3,691 $ 3,858
Charge-offs:
Commercial 95 197 863 424
Real estate mortgages -- 29 65 198
Installment and other loans 57 108 206 257
--------- --------- --------- ---------
Total charge-offs 152 334 1,134 879
--------- --------- --------- ---------
Recoveries:
Commercial 5 16 35 77
Real estate mortgages -- 11 3 22
Installment and other loans 17 18 59 66
--------- --------- --------- ---------
Total recoveries 22 45 97 165
--------- --------- --------- ---------
Net charge-offs 130 289 1,037 714
--------- --------- --------- ---------
Provision for loan losses 753 323 1,999 924
--------- --------- --------- ---------
Ending balance $ 4,653 $ 4,068 $ 4,653 $ 4,068
========= ========= ========= =========
Period end total loans, net of
unearned interest $ 496,386 $ 455,285 $ 496,386 $ 455,285
========= ========= ========= =========
Average loans $ 488,265 $ 453,061 $ 481,166 $ 429,191
========= ========= ========= =========
Ratio of net charge-offs to
average loans 0.03% 0.06% 0.22% 0.17%
Ratio of provision for loan
losses to average loans 0.15 0.07 0.42 0.22
Ratio of allowance for loan
losses to ending total loans 0.94 0.89 0.94 0.89
Ratio of allowance for loan
losses to total nonperforming
loans 92.50 68.61 92.50 68.61
Ratio of allowance at end of
period to average loans 0.95 0.90 0.97 0.95
NOTE 6. 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
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7. 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.
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.
Nine Months Ended
-----------------------------------
September 30, 2000
-----------------------------------
Banking Other Consolidated
Segment Segments Totals
--------- --------- ---------
Net interest income (loss) $ 18,179 $ (275) $ 17,904
Other revenue 5,144 3,190 8,334
Other expense 12,911 4,237 17,148
Noncash items
Depreciation 689 476 1,165
Provision for loan loss 1,999 -- 1,999
Goodwill and other intangibles 914 133 1,047
Segment profit 7,082 (2,203) 4,879
Segment assets 721,606 5,258 726,864
Nine Months Ended
-----------------------------------
September 30, 1999
-----------------------------------
Banking Other Consolidated
Segment Segments Totals
--------- --------- ---------
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
8.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
The following discussion provides an analysis of the Company's results of
operations and financial condition during the three and nine months ended
September 30, 2000 as compared to the same periods in 1999. 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 1999 Annual Report on Form 10-K. Annualized results of
operations during the three and nine months ended September 30, 2000 are not
necessarily indicative of results to be expected for the full year of 2000.
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 1993 as amended and Section 21E of the
Securities 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 Litigation 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
identified by the use of words "believe," "expect," "intend," "anticipate,"
"estimate," or "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 effect 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 changes; monetary and fiscal policies of the U.S.
government, including policies of the U.S. Treasury and the Federal Reserve
Board; the quality and composition of the loan or securities portfolios; demand
for loan products; deposit flows; competition; demand for financial services in
the Company's market areas; the Company's implementation of new technologies;
the Company's ability to develop and maintain secure and reliable electronic
systems; 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 Securities and Exchange Commission.
GENERAL
The Company derives most of its revenues and income from the operations of its
banking subsidiaries (the "Banks"), but also derives revenue from its nonbank
subsidiaries, UnionFinancial Services, UnionData and UnionTrust. The Banks
provide a full range of commercial and consumer banking services to businesses
and individuals, primarily in north central and west central Illinois, while the
nonbanks provide insurance, brokerage, asset management, trust and data
processing service to the same regions.
During the third quarter, the Company completed the sale of approximately $2.5
million in deposits from its UnionBank/West Camp Point branch. The consummation
of this transaction had a minimal after-tax, net gain on sale and was a result
of the Company's strategic initiative to analyze its distribution network to
improve operating efficiencies and reduce noninterest expense.
During the first quarter, the Company announced that it had purchased 99,000 of
its own shares in a privately negotiated transaction for a purchase price of
$1,274,000. The Company's board of directors believed that the Company's stock
was undervalued by the market and decided to take advantage of this opportunity
based on the general level of financial service sector stocks and the
9.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
opportunity it created for the Company to purchase stock at an attractive price
to earnings multiple.
SUMMARY OF PERFORMANCE
Net income for the third quarter of 2000 was $1,249,000, or $0.30 per common
share (diluted), compared to the $1,446,000, or $0.34 per common share
(diluted), earned in the third quarter of 1999. Net income for the nine months
ended September 30, 2000 was $3,335,000, or $0.78 per common share (diluted),
compared to the $4,247,000, or $0.98 per common share (diluted), earned in the
same period for 1999.
Return on average assets was 0.68% for the third quarter of 2000, compared to
0.84% for the same period in 1999. Return on average assets was 0.63% for the
nine months ended September 30, 2000, compared to 0.87% for the same period in
1999.
Return on average stockholders' equity was 8.65% for the third quarter of 2000,
compared to 10.27% for the same period in 1999. Return on average stockholders'
equity was 7.92% for the nine months ended September 30, 2000, compared to
10.15% for the same period in 1999.
As previously reported, the earnings for the nine months ended September 2000
included a one-time severance expense associated with the resignation of the
organization's former chief executive officer during the first quarter.
Excluding the effect of these expenditures (approximately $290,000, net of
taxes), the Company's nine month earnings would have equaled $3,625,000 or $0.85
per share (diluted).
In addition to the traditional measurement of net income, the Company also
calculates cash earnings which exclude the after-tax effect of purchase
accounting adjustments and the effect such adjustments had on profitability.
Cash earnings per share, cash return on average assets and cash return on
average equity capital are detailed as follows:
For the Three Months Ended
September 30, 2000
-----------------------------------------
Reported Cash
Earnings Goodwill Other Earnings
-------- -------- -------- --------
Income before income taxes $ 1,917 $ 319 $ 160 $ 2,396
Income taxes 668 -- 62 730
-------- -------- -------- --------
Net income 1,249 319 98 1,666
Preferred stock dividends 64 -- -- 64
-------- -------- -------- --------
Net income for common stockholders $ 1,185 $ 319 $ 98 $ 1,602
======== ======== ======== ========
Diluted earnings per common share $ 0.30 $ 0.08 $ 0.02 $ 0.40
======== ======== ======== ========
Return on average assets 0.68% 0.91%
Return on average equity 8.65% 11.60%
10.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
For the Nine Months Ended
September 30, 2000
-----------------------------------------
Reported Cash
Earnings Goodwill Other Earnings
-------- -------- -------- --------
Income before income taxes $ 4,879 $ 545 $ 447 $ 5,871
Income taxes 1,544 -- 173 1,717
-------- -------- -------- --------
Net income 3,335 545 274 4,154
Preferred stock dividends 194 -- -- 194
-------- -------- -------- --------
Net income for common stockholders $ 3,141 $ 545 $ 274 $ 3,960
======== ======== ======== ========
Diluted earnings per common share $ 0.78 $ 0.14 $ 0.07 $ 0.99
======== ======== ======== ========
Return on average assets 0.63% 0.79%
Return on average equity 7.92% 9.85%
NET INTEREST INCOME
Net interest income is the difference between income earned on interest-earning
assets and the interest expense incurred for the funding sources used to finance
these assets. Changes in net interest income generally occur due to fluctuations
in the volume of earning assets and paying liabilities and rates earned and
paid, respectively, on those assets and liabilities. The net yield on total
interest-earning assets, also referred to as interest rate margin or net
interest margin, represents net interest income divided by average
interest-earning assets. The Company's long term objective is to manage those
assets and liabilities to provide the largest possible amount of income while
balancing interest rate, credit, liquidity and capital risks. For purposes of
this discussion, both net interest income and margin have been adjusted to a
fully tax equivalent basis for certain tax-exempt securities and loans.
Net interest income was $6,151,000 for the third quarter of 2000, compared with
net interest income of $6,234,000 earned during the same period in 1999. This
represented a decrease of $83,000 or 1.3% and was primarily attributable to a
rise in the cost of funds due to interest rate increases. This was partially
offset by an increase in rates on loans. The increase in interest rates on
loans, as well as an overall tightening of loan underwriting standards,
contributed to slower than expected loan growth.
The quarter to quarter decrease resulted from higher interest income of
$1,467,000 offset by higher interest expense of $1,550,000. The $1,467,000
increase in interest income resulted from $991,000 associated with volume and
$476,000 associated with rate. The majority of the increase in interest income
was related to a $35,204,000 increase in the volume of average loans. The
$1,550,000 increase in interest expense resulted from a $597,000 increase
associated with volume and a $953,000 increase associated with rate. The
majority of the increase in interest expense was related to a $39,058,000
increase in the volume of average time deposits.
The net interest margin for the third quarter of 2000 equaled 3.61%, a decrease
from the 3.92% margin earned during the third quarter of 1999. The compression
in the net interest margin was attributable to the Company's increasing cost of
funds due to the rising interest rate environment and overall competition for
loans and deposits. Specifically, yields on loans increased 36 basis points to
8.99% in the third quarter of 2000, as compared to 8.63% during the same period
in 1999. Yields on interest-bearing liabilities
11.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
increased 73 basis points to 5.31% in the third quarter of 2000, as compared to
4.58% during the same period in 1999.
Net interest income for the nine months ended September 30, 2000 totaled
$18,771,000, representing an increase of $320,000 or 1.7% over the $18,451,000
earned during the same period in 1999. This improvement in net interest income
was attributable to higher interest income of $4,255,000 offset by higher
interest expense of $3,935,000. The net interest margin for the first nine
months of 2000 decreased to 3.78% compared to 4.06% for the same period in 1999.
12.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
VOLUME/RATE ANALYSIS - THREE 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 three months ended September
30, 2000 and 1999. 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 Three Months Ended September 30,
--------------------------------------------------------
2000 1999
---------------------------- ----------------------------
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 $ 2,400 $ 37 6.12% $ 2,527 $ 30 4.71% $ (2) $ 9 $ 7
Securities (1)
Taxable 139,035 2,136 6.10% 131,912 1,990 5.99% 109 37 146
Non-taxable (2) 41,768 779 7.40% 41,781 776 7.37% 5 (2) 3
-------- -------- ---- -------- -------- ---- -------- -------- --------
Total securities
(tax equivalent) 180,803 2,915 6.40% 173,693 2,766 6.32% 114 35 149
-------- -------- ---- -------- -------- ---- -------- -------- --------
Federal funds sold 6,657 126 7.51% 1,452 19 5.19% 95 12 107
-------- -------- ---- -------- -------- ---- -------- -------- --------
Loans (3)(4)
Commercial 143,834 3,362 9.27% 132,731 3,011 9.07% 258 93 351
Real estate 290,228 6,387 8.73% 277,023 5,795 8.37% 284 308 592
Installment and other 54,203 1,315 9.63% 43,307 1,054 9.74% 242 19 261
-------- -------- ---- -------- -------- ---- -------- -------- --------
Net loans (tax equivalent) 488,265 11,064 8.99% 453,061 9,860 8.63% 784 420 1,204
-------- -------- ---- -------- -------- ---- -------- -------- --------
Total interest-earning
assets 678,125 14,142 8.27% 630,733 12,675 7.97% 991 476 1,467
-------- -------- ---- -------- -------- ---- -------- -------- --------
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 24,053 22,464
Premises and equipment, net 12,505 13,755
Other assets 15,523 13,739
-------- --------
Total nonearning assets 52,081 49,958
-------- --------
Total assets $730,206 $680,691
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $ 57,083 348 2.42% $ 59,578 $ 341 2.27% $ (15) $ 22 7
Money market accounts 41,658 427 4.07% 34,578 311 3.57% 69 47 116
Savings deposits 47,075 305 2.57% 55,127 373 2.68% (53) (15) (68)
Time deposits 398,484 6,013 5.99% 359,426 4,700 5.19% 543 770 1,313
Federal funds purchased and
repurchase agreements 2,616 42 6.37% 10,157 134 5.23% (116) 24 (92)
Advances from FHLB 39,572 636 6.38% 29,027 398 5.44% 161 77 238
Notes payable 10,496 220 8.32% 10,076 184 7.24% 8 28 36
-------- -------- ---- -------- -------- ---- -------- -------- --------
Total interest-bearing
liabilities 596,984 7,991 5.31% 557,969 6,441 4.58% 597 953 1,550
-------- -------- ---- -------- -------- ---- -------- -------- --------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 68,060 60,663
Other liabilities 7,698 6,213
-------- --------
Total noninterest-bearing
liabilities 75,758 66,876
-------- --------
Stockholders' equity 57,464 55,846
-------- --------
Total liabilities and
stockholders' equity $730,206 $680,691
======== ========
Net interest income
(tax equivalent) $ 6,151 $ 6,234 $ 394 $ (477) $ (83)
======== ======== ======== ======== ========
Net interest income (tax equivalent)
to total earning assets 3.61% 3.92%
==== ====
Interest-bearing liabilities to
earning assets 88.03% 88.46%
======== ========
</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.
13.
<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, 2000 and 1999. 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,
--------------------------------------------------------
2000 1999
-------------------------- --------------------------
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 $ 2,023 $ 91 5.99% $ 1,716 $ 64 4.99% $ 13 $ 14 $ 27
Securities (1)
Taxable 136,758 6,311 6.15% 134,495 6,132 6.10% 100 79 179
Non-taxable (2) 41,154 2,302 7.45% 40,882 2,274 7.44% 18 10 28
-------- -------- ---- -------- -------- ---- -------- -------- --------
Total securities
(tax equivalent) 177,912 8,613 6.45% 175,377 8,406 6.41% 118 89 207
-------- -------- ---- -------- -------- ---- -------- -------- --------
Federal funds sold 2,720 148 7.25% 951 44 6.19% 95 9 104
-------- -------- ---- -------- -------- ---- -------- -------- --------
Loans (3)(4)
Commercial 142,892 9,777 9.11% 122,528 8,311 9.04% 1,401 65 1,466
Real estate 287,399 18,570 8.61% 267,559 17,078 8.51% 1,272 492 1,764
Installment and other 50,875 3,739 9.79% 39,104 2,780 9.48% 875 (188) 687
-------- -------- ---- -------- -------- ---- -------- -------- --------
Net loans (tax equivalent) 481,166 32,086 8.88% 429,191 28,169 8.78% 3,460 457 3,917
-------- -------- ---- -------- -------- ---- -------- -------- --------
Total interest-earning
assets 663,821 40,938 8.22% 607,235 36,683 8.08% 3,686 569 4,255
-------- -------- ---- -------- -------- ---- -------- -------- --------
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 21,765 21,430
Premises and equipment, net 12,884 13,816
Other assets 14,337 12,407
-------- --------
Total nonearning assets 48,986 47,653
-------- --------
Total assets $712,807 $654,888
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $ 53,460 $ 965 2.36% $ 55,422 $ 941 2.27% $ (17) $ 41 $ 24
Money market accounts 38,357 1,143 3.97% 32,695 858 3.51% 160 125 285
Savings deposits 49,558 950 2.55% 57,146 1,188 2.78% (149) (89) (238)
Time deposits 388,877 16,587 5.68% 334,939 13,077 5.22% 2,231 1,279 3,510
Federal funds purchased and
repurchase agreements 4,747 221 6.20% 14,607 558 5.11% (439) 102 (337)
Advances from FHLB 36,357 1,680 6.16% 27,249 1,109 5.44% 405 166 571
Notes payable 10,443 621 7.92% 9,433 501 7.10% 57 63 120
-------- -------- ---- -------- -------- ---- -------- -------- --------
Total interest-bearing
liabilities 582,799 22,167 5.07% 531,491 18,232 4.59% 2,248 1,687 3,935
-------- -------- ---- -------- -------- ---- -------- -------- --------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 66,447 60,711
Other liabilities 7,320 6,731
-------- --------
Total noninterest-bearing
liabilities 73,767 67,442
-------- --------
Stockholders' equity 56,241 55,955
-------- --------
Total liabilities and
stockholders' equity $712,807 $654,888
======== ========
Net interest income
(tax equivalent) $ 18,771 $ 18,451 $ 1,438 $ (1,118) $ 320
======== ======== ======== ======== ========
Net interest income (tax equivalent)
to total earning assets 3.78% 4.06%
==== ====
Interest-bearing liabilities to
earning assets 87.79% 87.53%
======== ========
</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.
14.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The amount of the provision for loan losses is based on monthly evaluations of
the loan portfolio, with particular attention directed toward non-performing and
other potential problem loans. During these evaluations, consideration is also
given to such factors as management's evaluation of specific loans, the level
and composition of impaired and other non-performing loans, historical loss
experience, results of examinations by regulatory agencies, an internal asset
quality review process, the market value of collateral, the estimate of
discounted cash flows, the strength and availability of guaranties,
concentrations of credits, and other factors.
The provision for loan losses charged to operating expense for the third quarter
of 2000 equaled $753,000 as compared to $323,000 for the same quarter in 1999.
Net charge-offs for the three months ended September 30, 2000 were $130,000 as
compared to $289,000 for the three months ended September 30, 1999. For the nine
month period ended September 30, 2000, the provision for loan losses charged to
operating expense equaled $1,999,000 as compared to $924,000 for the same period
in 1999. 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. Management felt that the increased provision was prudent
for a number of reasons, including the increase in nonperforming loans from
December 31, 1999 and general concerns relating to interest rate increases by
the Federal Reserve.
NONINTEREST INCOME
Noninterest income consists of a wide variety of fee generating services viewed
as traditional banking services as well as nontraditional revenues earned by its
insurance/brokerage, trust and data processing business segments. Noninterest
income totaled $3,015,000 for the three months ended September 30, 2000,
compared to $2,506,000 for the same time frame in 1999. Exclusive of the
approximate $438,000 gain on sale of assets related to the Camp Point branch,
which is included in other income, core noninterest income totaled $2,577,000.
This represented a positive variance of $71,000 or 2.8% As a percentage of total
income (net interest income plus noninterest income), noninterest income
increased to 30.6% versus 29.7% for the third quarter of 1999.
A majority of the increase in core noninterest income was related to service
charge income. Service charges consist of fees on both interest bearing and
noninterest bearing deposit accounts as well as charges for items such as
insufficient funds and overdrafts. Approximately 76% of the increase was due to
higher overdraft and insufficient fund fees. The remaining increase was
primarily related to an increase in service charges due to higher average
balances in business checking accounts.
Also contributing to the improvement in noninterest income were increases in
revenue associated with the internet service provider (ISP), which increased by
$58,000 due to an increase in ISP customers and a $44,000 increase in insurance
and brokerage revenue. These improvements were offset by a $228,000 decline in
revenue associated with mortgage banking income.
Noninterest income totaled $8,334,000 for the nine months ended September 30,
2000, compared to $7,074,000 for the same time frame in 1999. Exclusive of net
securities gains and gain on sale of assets related to the sale of the Camp
Point branch, noninterest income increased by $944,000 or 13.6%. As a percentage
of total income, noninterest income increased to 30.6% versus 28.3% for the nine
months of 1999. The 13.6% increase was largely reflective of the same items
discussed regarding the third quarter.
15.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
NONINTEREST EXPENSE
Noninterest expense totaled $6,202,000 for the three months ended September 30,
2000, increasing by $189,000 or 3.1% from the same period in 1999. A majority of
the increase was related to a $232,000 increase in the amortization of
intangibles, as a result of the sale of the Camp Point branch.
The increases in net occupancy and telephone were due to expenses associated
with the opening of new banking centers in 1999. Based upon past experience, new
banking centers may require 12 to 18 months to achieve breakeven levels due to
the substantial initial costs for staffing, promotion and operations incurred
during the first several months. As a result, other expenses during the third
quarter of 2000 reflected a significant portion of these expenses. It is
anticipated that other expenses will not increase materially on a quarterly
basis during the rest of 2000 due to expenses associated with the three banking
centers.
Noninterest expense totaled $19,360,000 for the nine months ended September 30,
2000, increasing by $1,813,000 or 10.3% from the same period in 1999. In
conjunction with the resignation of the Company's former chief executive
officer, approximately $475,000 in severance expenditures was expensed during
the first quarter in salary and benefits, insurance and loss on sale of company
vehicle. Excluding the effect of the severance expense, core noninterest expense
for the quarter increased 7.6% or $1,338,000 and was largely reflective of the
same items discussed regarding the third quarter.
INCOME TAX EXPENSE
The Company recorded income tax expense of $668,000 and $662,000, for the
quarters ended September 30, 2000 and 1999, respectively. Effective tax rates
equaled 34.8% and 31.4% respectively, for such periods. The Company recorded
income tax expense of $1,544,000 and $1,948,000, for the nine months ended
September 30, 2000 and 1999, respectively. Effective tax rates equaled 31.6% and
31.4% respectively, for such periods. The Company's effective tax rate was lower
than statutory rates because the Company derives interest income from municipal
securities and loans, which are exempt from federal tax and certain U.S.
government agency securities, which are exempt from Illinois state tax.
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).
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 Company measures its overall interest rate sensitivity through a net
interest income analysis. The net interest income analysis measures the change
in net interest income in the event of hypothetical changes in interest rates.
This analysis assesses the risk of changes in net interest income in the event
of a sudden and sustained 100 to 200 basis point increase or decrease in market
16.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
interest rates. The tables below present the Company's projected changes in net
interest income for the various rate shock levels at September 30, 2000 and
December 31, 1999.
September 30, 2000
--------------------------------------
Net Interest Income
--------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $ 24,221 $ (1,153) (4.54)%
+100 bp 24,684 (690) (2.72)
Base 25,374 -- --
-100 bp 25,811 437 1.72
-200 bp 25,382 8 0.03
Based upon the Company's model at September 30, 2000, the effect of an immediate
200 basis point increase in interest rates would decrease the Company's net
interest income by 4.54% or approximately $1,153,000. The effect of an immediate
200 basis point decrease in rates would increase the Company's net interest
income by 0.03% or approximately $8,000.
December 31, 1999
--------------------------------------
Net Interest Income
--------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $ 24,241 $ (1,405) (5.48)%
+100 bp 24,870 (776) (3.03)
Base 25,646 -- --
-100 bp 26,178 532 2.07
-200 bp 25,647 1 0.00
Based upon the Company's model at December 31, 1999, the effect of an immediate
200 basis point increase in interest rates would decrease the Company's net
interest income by 5.48% or approximately $1,405,000. The effect of an immediate
200 basis point decrease in rates would increase the Company's net interest
income by 0.00% or approximately $1,000.
NON-PERFORMING ASSETS AND 90 DAY PAST DUE LOANS
The Company's financial statements are prepared on the accrual basis of
accounting, including the recognition of interest income on its loan portfolio,
unless a loan is placed on nonaccrual status. Loans are placed on nonaccrual
status when there are serious doubts regarding the collectibility of all
principal and interest due under the terms of the loans. Amounts received on
nonaccrual loans generally are applied first to principal and then to interest
after all principal has been collected. It is the policy of the Company not to
renegotiate the terms of a loan because of a delinquent status. Rather, a loan
is generally transferred to nonaccrual status if it is not in the process of
collection and is delinquent in payment of either principal or interest beyond
90 days. Loans which are 90 days delinquent but are well secured and in the
process of collection are not included in non-performing assets. Other
non-performing assets consist of real estate acquired through loan foreclosures
or other workout situations and other assets acquired through repossessions.
17.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
Under Statement of Financial Accounting Standards No. 114 and No. 118, the
Company defined loans that will be individually evaluated for impairment to
include commercial loans and mortgages secured by commercial properties or
five-plus family residences that are in nonaccrual status or were restructured.
All other smaller balance homogeneous loans are evaluated for impairment
collectively.
At September 30, 2000, non-performing assets totaled $5,625,000 versus the
$4,038,000 that existed as of December 31, 1999. The level of non-performing
loans to total end of period loans was 1.01% at September 30, 2000, as compared
to 0.74% at December 31, 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>
--------------------------------- ---------------------
Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Nonaccrual and impaired loans not
accruing $ 2,591 $ 2,777 $ 4,026 $ 2,949 $ 4,397
Impaired and other loans 90 days past
due and still accruing interest 2,439 620 573 566 1,532
--------- --------- --------- --------- ---------
Total nonperforming loans 5,030 3,397 4,599 3,515 5,929
Other real estate owned 595 741 739 523 227
--------- --------- --------- --------- ---------
Total nonperforming assets $ 5,625 $ 4,138 $ 5,338 $ 4,038 $ 6,156
========= ========= ========= ========= =========
Nonperforming loans to total end of
period loans 1.01% 0.71% 0.96% 0.74% 1.30%
Nonperforming assets to total end of
period loans 1.13 0.86 1.12 0.85 1.35
Nonperforming assets to total end of
period assets 0.77 0.58 0.76 0.57 0.90
</TABLE>
The classification of a loan as impaired or nonaccrual does not necessarily
indicate that the principal is uncollectible, in whole or in part. The Banks
make a determination as to collectibility on a case-by-case basis. The Banks
consider both the adequacy of the collateral and the other resources of the
borrower in determining the steps to be taken to collect impaired or nonaccrual
loans. The final determination as to the steps taken is made based upon the
specific facts of each situation. Alternatives that are typically considered to
collect impaired or nonaccrual loans are foreclosure, collection under
guarantees, loan restructuring, or judicial collection actions.
Each of the Company's loans is assigned a rating based upon an internally
developed grading system. A separate credit administration department also
reviews grade assignments on an ongoing basis. Management continuously monitors
non-performing, impaired, and past due loans to prevent further deterioration of
these loans. Management is not aware of any material loans classified for
regulatory purposes as loss, doubtful, substandard, or special mention that have
been excluded from classification under non-performing assets or impaired loans.
Management further believes that credits classified as non-performing assets or
impaired loans include any material loans as to which any doubts exist as to
their collectibility in accordance with the contractual terms of the loan
agreement.
The Company has a loan review function which is separate from the lending
function and is responsible for the review of new and existing loans. Potential
problem credits are monitored by the loan review function and are submitted for
review to the loan committee and audit committee members.
18.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
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. On a monthly basis, management of each of the
subsidiary banks meets to review the adequacy of the allowance for loan losses.
Commercial credits are graded by the loan officers and the Company's Loan Review
Officer validates the officers' grades. In the event that the Loan Review
Officer downgrades the loan, it is included in the allowance analysis at the
lower grade. The grading system is in compliance with the regulatory
classifications and the allowance is allocated to the loans based on the
regulatory grading, except in instances where there are known differences (i.e.,
collateral value is nominal, etc.). To establish the appropriate level of the
allowance, a sample of loans (including impaired and non-performing loans) are
reviewed and classified as to potential loss exposure. 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. Commitments to extend credit and standby letters
of credit are reviewed to determine whether credit risk exists. The
determination by the Company of the appropriate level of its allowance for loan
losses was $4,653,000 at September 30, 2000.
The allowance for loan losses is based on estimates, and ultimate losses will
vary from current estimates. These estimates are reviewed monthly, and as
adjustments, either positive or negative, become necessary, a corresponding
increase or decrease is made in the provision for loan losses. The composition
of the loan portfolio did not significantly change between December 31, 1999 and
September 30, 2000. The methodology used to determine the adequacy of the
allowance for loan losses is consistent with prior periods and there were no
reallocations. Management felt that the increased allowance was prudent in light
of a number of factors, including the increase in nonperforming loans, general
concerns relating to asset quality and the increase in charge-offs during the
first nine months of 2000.
In addition to the normal internal review process, during the fourth quarter of
2000 the company has engaged a consulting firm to review an incremental 30% -
35% of the commercial and agricultural loan portfolio. It is anticipated that
the results of this review will be incorporated into the allowance for loan loss
analysis at December 31, 2000.
Transactions in the allowance for loan losses during the three and nine months
ended September 30, 2000 and 1999 are summarized in the table on page 7. At
September 30, 2000, the allowance for loan losses totaled $4,653,000 and
increased to 0.94% of total loans outstanding as compared to $4,068,000 or 0.89%
at September 30, 1999. During the same time frame, net charge-offs decreased to
$130,000 during the third quarter of 2000 as compared to $289,000 for the same
period in 1999.
19.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
LIQUIDITY
The Company manages its liquidity position with the objective of maintaining
sufficient funds to respond to the needs of depositors and borrowers and to take
advantage of earnings enhancement opportunities. In addition to the normal
inflow of funds from core-deposit growth together with repayments and maturities
of loans and investments, the Company utilizes other short-term funding sources
such as securities sold under agreements to repurchase, overnight federal funds
purchased from correspondent banks, and the acceptance of short-term deposits
from public entities and Federal Home Loan Bank advances.
The Company monitors and manages its liquidity position on several bases, which
vary depending upon the time period. As the time period is expanded, other data
is factored in, including estimated loan funding requirements, estimated loan
payoffs, investment portfolio maturities or calls, and anticipated depository
buildups or runoffs.
The Company classifies all of its investment securities as available-for-sale,
thereby maintaining significant liquidity. The Company's liquidity position is
further enhanced by structuring its loan portfolio interest payments as monthly
and by the significant representation of retail credit and residential mortgage
loans in the Company's loan portfolio, resulting in a steady stream of loan
repayments. In managing its investment portfolio, the Company provides for
staggered maturities so that cash flows are provided as such investments mature.
Cash flows used in operating and investing activities, offset by those provided
by financing activities, resulted in a net decrease in cash and cash equivalents
of $5,085,000 from December 31, 1999 to September 30, 2000.
CAPITAL RESOURCES
The Banks are expected to meet a minimum risk-based capital to risk-weighted
assets ratio of 8%, of which at least one-half (or 4%) must be in the form of
Tier 1 (core) capital. The remaining one-half (or 4%) may be in the form of Tier
1 (core) or Tier 2 (supplementary) capital. The amount of loan loss allowance
that may be included in capital is limited to 1.25% of risk-weighted assets. The
ratio of Tier 1 (core) and the combined amount of Tier 1 (core) and Tier 2
(supplementary) capital to risk-weighted assets for the Company was 9.99% and
10.96%, respectively, at September 30, 2000. The Company is currently, and
expects to continue to be, in compliance with these guidelines.
The Board of Governors of the Federal Reserve System (the "Federal Reserve") has
announced a policy known as the "source of strength doctrine" that requires a
bank holding company to serve as a source of financial and managerial strength
for its subsidiary banks. The Federal Reserve 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 Federal Reserve 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 Federal Reserve Regulation Y or both, justifying a cease
and desist order or other enforcement action, particularly if appropriate
resources are available to the bank holding company on a reasonable basis.
20.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
The following table sets forth an analysis of the Company's capital ratios:
<TABLE>
<CAPTION>
Sept 30, December 31, Minimum Well
------------ --------------------------- Capital Capitalized
2000 1999 1998 Ratios Ratios
------------ ------------ ------------ ------ ------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 52,321 $ 50,115 $ 47,297
Tier 2 risk-based capital 5,510 4,548 5,215
Total capital 57,831 54,663 52,512
Risk-weighted assets 523,501 494,953 429,325
Capital ratios
Tier 1 risk-based capital 9.99% 10.13% 11.02% 4.00% 6.00%
Total risk-based capital 11.05 11.04 12.23 8.00 10.00
Leverage ratio 7.27 7.20 7.66 4.00 5.00
</TABLE>
As of September 30, 2000, the Tier 2 risk-based capital was comprised of
$4,653,000 in allowance for loan losses and $857,000 of Mandatory Redeemable
Series B Preferred Stock. The Series A Preferred Stock is convertible into
common stock, subject to certain adjustments intended to offset the amount of
losses incurred by the Company upon the post-closing sale of certain securities
acquired in conjunction with the 1996 acquisition of Prairie Bancorp, Inc.
IMPACT OF INFLATION, CHANGING PRICES, AND MONETARY POLICIES
The financial statements and related financial data concerning the Company have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary effect of inflation on the
operations of the Company is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, changes in interest rates have
a more significant effect on the performance of a financial institution than do
the effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Interest rates are highly
sensitive to many factors which are beyond the control of the Company, including
the influence of domestic and foreign economic conditions and the monetary and
fiscal policies of the United States government and federal agencies,
particularly the Federal Reserve.
RECENT REGULATORY DEVELOPMENTS
The Gramm-Leach-Bliley Act (the "Act"), which was enacted in November, 1999,
allows eligible bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. Under the Act, an eligible bank holding company that elects to
become a financial holding company may engage in any activity that the Board of
Governors of the Federal Reserve System (the "Federal Reserve"), in consultation
with the Secretary of the Treasury, determines by regulation or order is
financial in nature, incidental to any such financial activity, or 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. National banks are also authorized by the Act to engage, through
"financial subsidiaries," in certain activity that is permissible for financial
holding companies (as described above) and certain activity that the Secretary
of the Treasury, in
21.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
consultation with the Federal Reserve, determines is financial in nature or
incidental to any such financial activity.
Although various bank regulatory agencies have issued regulations as mandated by
the Act, except for the jointly issued privacy regulations, the Act and its
implementing regulations have had little impact on the daily operations of the
Company and its subsidiary banks and, at this time, it is not possible to
predict the impact the Act and its implementing regulations may have on the
Company or its subsidiary banks. As of the date of this filing, the Company has
not applied for or received approval to operate as a financial holding company.
In addition, the Company's subsidiary banks have not applied for or received
approval to establish any financial subsidiaries. Less than 10% of all bank
holding companies have elected to become financial holding companies.
22.
<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.
23.
<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 14, 2000 /s/ CHARLES J. GRAKO
------------------------------------------
Charles J. Grako
President and Chief Executive Officer
Date: November 14, 2000 /s/ KURT R. STEVENSON
------------------------------------------
Kurt R. Stevenson
Vice President and Chief Financial Officer
24.
