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 MARCH 31, 2000
UNIONBANCORP, INC.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-28846 36-3145350
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(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
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Registrant's telephone number, including area code
N.A.
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(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 May 12, 2000
- ----------------------------- -----------------------------------
Common Stock, Par Value $1.00 3,950,709
<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 Cash Flows 3
o Notes to Unaudited Consolidated Financial Statements 4 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
<PAGE>
<TABLE>
<CAPTION>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
THREE MONTHS ENDED
MARCH 31, 2000 AND DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------
MARCH 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 23,206 $ 27,230
Securities available-for-sale 171,296 173,893
Loans 477,524 472,395
Allowance for loan losses (4,103) (3,691)
------------ ------------
Net loans 473,421 468,704
Premises and equipment, net 13,131 13,446
Intangible assets, net 10,586 10,862
Mortgage servicing rights 1,224 1,201
Other assets 10,484 8,741
------------ ------------
TOTAL ASSETS $ 703,348 $ 704,077
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 65,372 $ 67,634
Interest-bearing 530,768 526,564
------------ ------------
Total deposits 596,140 594,198
Federal funds purchased and securities sold under agreements
to repurchase 2,205 5,308
Advances from the Federal Home Loan Bank 31,733 32,733
Notes payable 10,775 9,500
Other liabilities 6,844 5,140
------------ ------------
TOTAL LIABILITIES 647,697 646,879
------------ ------------
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;
4,540,972 shares at March 31, 2000 and 4,538,572
shares at December 31, 1999 4,541 4,539
Surplus 21,627 21,608
Retained earnings 36,449 35,743
Accumulated other comprehensive loss (3,016) (1,995)
Unearned compensation under stock option plans (183) (204)
------------ ------------
59,918 60,191
Treasury stock, at cost; 590,263 shares
at March 31, 2000 and 491,263 at December 31, 1999 (5,124) (3,850)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 54,794 56,341
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 703,348 $ 704,077
============ ============
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
1.
<PAGE>
<TABLE>
<CAPTION>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
THREE MONTHS ENDED MARCH 31, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------
Three Months Ended
March 31,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Interest income
Loans $ 10,277 $ 8,888
Securities
Taxable 2,142 2,152
Exempt from federal income taxes 493 486
Federal funds sold and other 21 19
------------ ------------
TOTAL INTEREST INCOME 12,933 11,545
------------ ------------
Interest expense
Deposits 6,134 5,007
Federal funds purchased and securities sold
under agreements to repurchase 58 252
Advances from the Federal Home Loan Bank 492 332
Notes payable 184 133
------------ ------------
TOTAL INTEREST EXPENSE 6,868 5,724
------------ ------------
NET INTEREST INCOME 6,065 5,821
Provision for loan losses 593 298
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,472 5,523
------------ ------------
Noninterest income
Service charges 632 482
Merchant fee income 275 246
Trust income 188 179
Mortgage banking income 306 316
Insurance commissions and fees 961 588
Securities gains, net -- 122
Other income 416 367
------------ ------------
2,778 2,300
------------ ------------
Noninterest expenses
Salaries and employee benefits 3,828 3,123
Occupancy expense, net 426 384
Furniture and equipment expense 447 440
Supplies and printing 132 99
Telephone 189 161
Amortization of intangible assets 276 220
Other expenses 1,554 1,288
------------ ------------
6,852 5,715
------------ ------------
INCOME BEFORE INCOME TAXES 1,398 2,108
Income taxes 400 670
------------ ------------
NET INCOME 998 1,438
Preferred stock dividends 65 65
------------ ------------
NET INCOME FOR COMMON STOCKHOLDERS $ 933 $ 1,373
============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.23 $ 0.33
============ ============
DILUTED EARNINGS PER COMMON SHARE $ 0.23 $ 0.32
============ ============
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
2.
<PAGE>
<TABLE>
<CAPTION>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (IN THOUSANDS)
- ---------------------------------------------------------
Three Months Ended
March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 998 $ 1,438
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 381 402
Amortization of intangible assets 276 220
Amortization of unearned compensation under stock option plans 21 17
Amortization of bond premiums, net 9 68
Provision for loan losses 593 298
Securities (gains) losses, net -- (122)
Loss on sale of equipment 41 40
Loss on sale of real estate acquired in settlement of loans 13 2
Gain on sale of loans (182) (243)
Proceeds from sales of loans held for sale 11,228 17,025
Origination of loans held for sale (9,917) (17,017)
Change in assets and liabilities
(Increase) decrease in other assets (882) 670
Increase (decrease) in other liabilities 1,693 (392)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,272 2,406
Cash flows from investing activities
Securities
Held-to-maturity
Proceeds from calls, maturities, and paydowns -- 841
Purchases -- (2,009)
Available-for-sale
Proceeds from maturities and paydowns 2,798 13,125
Proceeds from sales -- 4,142
Purchases (1,876) (14,415)
Net decrease in federal funds sold -- 325
Net increase in loans (7,050) (18,345)
Purchase of premises and equipment (107) (707)
Proceeds from sale of real estate acquired in settlement of loans 382 6
Proceeds from sale of equipment -- 97
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (5,853) (16,940)
Cash flows from financing activities
Net increase in deposits $ 1,942 $ 2,311
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (3,103) 3,432
Net increase (decrease) in advances from the
Federal Home Loan Bank (1,000) 2,000
Proceeds from notes payable 1,275 3,000
Dividends on common stock (237) (162)
Dividends on preferred stock (65) (65)
Proceeds from exercise of stock options 19 --
Purchase of treasury stock (1,274) (3,328)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (2,443) 7,188
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,024) (7,346)
Cash and cash equivalents
Beginning of period 27,230 24,613
------------ ------------
End of period $ 23,206 $ 17,267
============ ============
</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 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, 1999. The annualized results of the three month period ended
March 31, 2000 are not necessarily indicative of the results expected for the
year ending December 31, 2000.
NOTE 2. EARNINGS PER SHARE
For purposes of share calculations, the Company had 4,035 shares of common
stock outstanding at March 31, 2000 and 4,206 shares outstanding at March 31,
1999. Basic earnings per share for the three months ended March 31, 2000 and
1999 were computed by dividing net income by the weighted average number of
shares outstanding. Diluted earnings per share for the three months ended March
31, 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>
IN THOUSANDS:
BASIC EARNINGS PER COMMON SHARE Three Months Ended
March 31,
----------------
2000 1999
------ ------
<S> <C> <C>
Net income available to common stockholders $ 933 $1,373
====== ======
Weighted average common shares outstanding 4,035 4,206
====== ======
BASIC EARNINGS PER COMMON SHARE $ 0.23 $ 0.33
====== ======
DILUTED EARNINGS PER COMMON SHARE
Weighted average common shares outstanding 4,035 4,206
Add: dilutive effect of assumed exercised stock options 38 47
------ ------
Weighted average common and dilutive
Potential shares outstanding 4,073 4,253
====== ======
DILUTED EARNINGS PER COMMON SHARE $ 0.23 $ 0.32
====== ======
</TABLE>
4.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Options to purchase 164,350 shares were outstanding at March 31, 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. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes both net income and other comprehensive
income (loss) elements, including the change in unrealized gains and losses on
securities available-for-sale, net of tax.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net Income $ 998 $ 1,438
Change in unrealized gains on securities available-for-sale (1,021) 14
------------ ------------
Comprehensive income (loss) $ (23) $ 1,452
============ ============
</TABLE>
NOTE 4. SECURITIES
The amortized cost and fair value of securities available-for-sale at March 31,
2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ------- --------- ---------- ---------- ------
VALUE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 5,764 $ -- $ (77) $ 5,687 $ 5,519 $ 7 $ (65) $ 5,461
U.S. government agencies 58,629 -- (1,960) 56,669 57,797 3 (1,495) 56,305
States and political subdivisions 43,073 226 (657) 42,642 43,245 260 (685) 42,820
U.S. government mortgage-backed
securities 29,647 5 (1,205) 28,447 30,888 4 (930) 29,962
Collateralized mortgage obligations 35,242 27 (1,282) 33,987 35,837 30 (386) 35,481
Other 3,864 -- -- 3,864 3,864 -- -- 3,864
-------- ------- --------- -------- -------- ------- --------- --------
$176,219 $ 258 $ (5,181) $171,296 $177,150 $ 304 $ (3,561) $173,893
======== ======= ========= ======== ======== ======= ========= ========
</TABLE>
5.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5. LOANS
The following table describes the composition of loans by major categories
outstanding.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
--------------------- -----------------------
$ % $ %
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Commercial $ 109,475 22.93% $ 103,842 21.98%
Agricultural 32,638 6.83 38,328 8.11
Real estate:
Commercial mortgages 128,781 26.97 126,645 26.81
Construction 15,770 3.30 15,786 3.34
Agricultural 40,080 8.39 38,847 8.22
1-4 family mortgages 101,460 21.25 102,695 21.74
Installment 46,291 9.69 43,644 9.24
Other 3,034 0.64 2,615 0.56
--------- --------- --------- ----------
477,529 100.00% 472,402 100.00%
========= ==========
Unearned Income (5) (7)
--------- ---------
Total loans 477,524 472,395
Allowance for loan losses (4,103) (3,691)
--------- ---------
Loans, net $ 473,421 $ 468,704
========= =========
</TABLE>
6.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 6. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses for the three months ended March
31, 2000 and 1999 are summarized below:
<TABLE>
<CAPTION>
March 31,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Beginning balance $ 3,691 $ 3,858
Charge-offs:
Commercial 116 67
Real estate mortgages 25 50
Installment and other loans 88 85
--------- ---------
Total charge-offs 229 202
--------- ---------
Recoveries:
Commercial 23 58
Real estate mortgages - 2
Installment and other loans 25 29
--------- ---------
Total recoveries 48 89
--------- ---------
Net charge-offs 181 113
--------- ---------
Provision for loan losses 593 298
--------- ---------
Ending balance $ 4,103 $ 4,043
========= =========
Period end total loans, net of
unearned interest $ 477,524 $ 416,662
========= =========
Average loans $ 473,962 $ 404,419
========= =========
Ratio of net charge-offs to
average loans 0.04% 0.03%
Ratio of provision for loan losses
to average loans 0.13 0.07
Ratio of allowance for loan losses
to ending total loans 0.86 0.97
Ratio of allowance for loan losses
to total non-performing loans 89.22 106.23
Ratio of allowance at end of period
to average loans 0.87 1.00
</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
- --------------------------------------------------------------------------------
The following discussion provides an analysis of the Company's results of
operations and financial condition for the three months ended March 31, 2000 as
compared to the same period 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 for the three
months ended March 31, 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; 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 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
opportunity it created for the Company to purchase stock at an attractive price
to earnings multiple.
SUMMARY OF PERFORMANCE
Net income for the first quarter 2000 was $998,000, or $0.23 per share
(diluted), compared to the $1,438,000, or $0.32 per share (diluted), earned in
the first quarter of 1999. Cash earnings per share
8.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
(diluted) equaled $0.28 compared to $0.34 during the previous year and
represented an approximate 9.92% return on tangible equity capital. Cash
earnings consist of the Company's earnings plus the income statement impact of
the purchase accounting adjustments, tax affected where appropriate.
Return on average assets was 0.57% for the period compared to 0.93% for the
same period in 1999. Cash return on average assets for the period was 0.70%.
Cash return on average assets consists of the cash earnings described above
divided by average assets less intangibles. Return on average stockholders'
equity was 7.17% for the period compared to 10.26% for the same period in 1999.
Return on average tangible equity capital for the period equaled 9.92%.
First quarter results of the Company were significantly impacted by the
one-time severance expense associated with the resignation of the Company's
former chief executive officer on February 8, 2000. Excluding the effect
of these expenditures (approximately $290,000, net of taxes), the Company's
first quarter earnings would have equaled $1,288,000 or $0.30 per share
(diluted) and were in line with management's expectations for the first
quarter.
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 (tax equivalent) was $6,350,000 for the first quarter of
2000, compared with net interest income of $6,093,000 earned (tax equivalent)
during the same period in 1999. This represented an increase of $257,000 or
4.2% and was primarily attributable to a $71,808,000 increase in the volume of
average interest-earning assets. The growth in interest-earning assets was
largely funded by internally generated deposits due to increased market share
and three new banking centers opened during 1999.
The quarter to quarter increase resulted from higher interest income of
$1,401,000 and higher interest expense of $1,144,000. The $1,401,000 increase
in interest income resulted from $1,633,000 associated with volume offset by a
$232,000 reduction associated with rate. The majority of the increase in
interest income was related to a $69,543,000 increase in the volume of average
loans. The $1,144,000 increase in interest expense resulted from a $1,014,000
increase associated with volume and a $130,000 increase associated with rate.
The majority of the increase in interest expense was related to a $76,339,000
increase in the volume of average time deposits.
The net interest margin for the first quarter of 2000 equaled 3.90%, a decrease
from the 4.24% margin earned during the first quarter of 1999. The compressed
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 decreased 20 basis points to 8.74% in
the first quarter of 2000, as compared to 8.94% during the first quarter of
1999. Yields on interest-bearing liabilities increased 21 basis points to 4.81%
in the first quarter of 2000, as compared to 4.60% during the first quarter
of 1999.
9.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
VOLUME/RATE ANALYSIS
The following table sets forth for each category of interest-earning assets
and interest-bearing liabilities the average amounts outstanding, the interest
earned or paid on such amounts, and the average rate paid for the quarters
ended March 31, 2000 and 1999. The table also sets forth the average rate
earned on all interest-earning assets, the average rate paid on all
interest-bearing liabilities, and the net yield on average interest-earning
assets for the same period.
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------------------------------------------------------
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 $ 2,101 $ 26 4.98% $ 1,309 $ 17 5.27% $ 10 $ (1) $ 9
Securities (1)
Taxable 136,496 2,111 6.22% 135,440 2,135 6.39% 21 (45) (24)
Non-taxable (2) 40,522 755 7.49% 39,934 736 7.47% 14 5 19
Total securities(tax equivalent) -------- ------ ------ -------- ----- ----- ------ ---- -----
177,018 2,866 6.51% 175,374 2,871 6.64% 35 (40) (5)
-------- ------ ------ -------- ----- ----- ------ ---- -----
Federal funds sold 1,468 21 5.75% 1,639 19 4.70% (2) 4 2
Loans (3)(4) -------- ------ ------ -------- ----- ----- ------ ---- -----
Commercial 141,064 3,088 8.80% 113,587 2,510 8.96% 622 (44) 578
Real estate 284,842 5,890 8.32% 255,190 5,242 8.33% 654 (6) 648
Installment and other 48,056 1,051 8.80% 35,642 829 9.43% 280 (58) 222
Fees on loans - 276 - - 329 - 34 (87) (53)
-------- ------ ------ -------- ----- ----- ------ ---- -----
Net loans (tax equivalent) 473,962 10,305 8.74% 404,419 8,910 8.94% 1,590 (195) 1,395
-------- ------ ------ -------- ----- ----- ------ ---- -----
Total interest-earning assets 654,549 13,218 8.12% 582,741 11,817 8.22% 1,633 (232) 1,401
-------- ------ ------ -------- ----- ----- ------ ---- -----
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 22,828 19,703
Premises and equipment, net 13,257 13,383
Other assets 11,594 14,103
-------- ---------
Total nonearning assets 47,679 47,189
-------- ---------
Total assets $702,228 $ 629,930
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $54,069 312 2.32% $ 54,373 $ 308 2.30% $(1) $ 5 4
Money market accounts 37,205 355 3.84% 31,687 263 3.37% 51 41 92
Savings deposits 51,289 324 2.54% 58,104 415 2.90% (44) (47) (91)
Time deposits 384,062 5,143 5.39% 307,723 4,021 5.30% 1,050 72 1,122
Federal funds purchased and
repurchase agreements 4,360 58 5.35% 20,581 252 4.97% (212) 18 (194)
Advances from FHLB 33,678 492 5.88% 24,422 332 5.51% 136 24 160
Notes payable 9,998 184 7.40% 8,121 133 6.64% 34 17 51
-------- ------ ------ ------- ----- ----- ------ ---- -----
Total interest-bearing liabilities 574,661 6,868 4.81% 505,011 5,724 4.60% 1,014 130 1,144
-------- ------ ------ ------- ----- ----- ------ ---- -----
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 65,027 60,660
Other liabilities 6,694 7,411
-------- --------
Total noninterest-bearing 71,721 68,071
liabilities -------- --------
Stockholders' equity 55,846 56,848
-------- --------
Total liabilities and stockholders'
equity $702,228 $629,930
======== ========
Net interest income (tax equivalent) $ 6,350 $6,093 $ 619 $(362) $257
======== ====== ===== ===== ====
Net interest income (tax equivalent) to
total earning assets 3.90% 4.24%
====== =====
Interest-bearing liabilities to earning
assets 87.79% 86.66%
======== =======
- ----------------------------------------------
(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.
</TABLE>
10.
<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 first
quarter of 2000 equaled $593,000 as compared to $298,000 for the same quarter
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 in light of general concerns relating to asset quality as well
as the overall increase in non-performing loans.
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 $2,778,000 for the quarter ended March 31, 2000,
as compared to $2,300,000 for the same time frame in 1999. Exclusive of net
securities gains, noninterest income increased by $600,000 or 27.6%. As a
percentage of total income, noninterest income increased to 31.4% versus 28.3%
for the first quarter of 1999.
The majority of the increase in noninterest income was related to insurance
commissions and fees and merchant fee income. The Company, through its wholly
owned subsidiary Union Financial Services, provides a full range of insurance
and brokerage services to its customers. The $373,000 quarter over quarter
increase was attributable to a general hardening of the insurance market and
increased volume due to the Company's 1999 strategic initiatives to employ
more brokerage producers.
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 72.0% or $108,000 of the $150,000 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 was increases in
revenue associated with internet service provider (ISP) and payroll processing
of $49,000, and merchant fee income of $29,000. These improvements were offset
by a $10,000 decline in mortgage banking income, as rising interest rates
resulted in a reduction in the rate of mortgage refinancing and slowed
residential real estate activity in general.
NONINTEREST EXPENSE
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
11.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
and loss on sale of company vehicle. Excluding the effect of the severance
expense, noninterest expense for the quarter increased 11.6% or $662,000.
Approximately 54.5% or $145,000 of the $266,000 increase in other expense for
the quarter was reflective of the lower gross profit margin associated with the
insurance segment. Salaries and employee benefits (excluding the effect of
severance expense) increased $270,000 or 8.6% and was due to regular merit
increases, basic incentive compensation, and the initial staffing and related
compensations costs of three new banking centers. The increases in net
occupancy, furniture and equipment, supplies and printing and telephone
increased due to expenses associated with the opening of three 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 first quarter of 2000 reflected a significant portion
of these expenses. It is anticipated that other expenses will not increase
materially on a quarterly basis due to expenses associated with the new banking
centers during the rest of 2000.
INCOME TAX EXPENSE
The Company recorded income tax expense of $400,000 and $670,000, for the
quarters ended March 31, 2000 and 1999, respectively. Effective tax rates
equaled 28.6% and 31.8% respectively, for such periods. The Company's effective
tax rate is 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. The reduction in the effective tax rate between 2000 and 1999 is
primarily attributable to an increase of approximately $192,000 in nontaxable
U.S. agency interest income that is deductible for Illinois state income tax
purposes.
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
interest rates. The tables below present the Company's projected changes in net
interest income for the various rate shock levels at March 31, 2000 and
December 31, 1999.
12.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------------
Net Interest Income
-----------------------------------------------
AMOUNT CHANGE CHANGE
------ ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
+200 bp $ 24,594 $ (1,164) (4.52)%
+100 bp 25,079 (679) (2.64)
Base 25,758 - -
-100 bp 26,173 415 1.61
-200 bp 25,710 (48) (0.19)
</TABLE>
Based upon the Company's model at March 31, 2000, the effect of an immediate
200 basis point increase in interest rates would decrease the Company's net
interest income by 4.52% or approximately $1,164,000. The effect of an
immediate 200 basis point decrease in rates would reduce the Company's net
interest income by 0.19% or approximately $48,000.
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------
Net Interest Income
-----------------------------------------------
AMOUNT CHANGE CHANGE
------ ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
+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
</TABLE>
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 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.
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.
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
13.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
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 in total.
At March 31, 2000, non-performing assets totaled $5,338,000 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 0.96% at March 31, 2000, as compared to
0.74% at December 31, 1999. The increase in non-performing loans was primarily
related to one commercial loan that was placed on nonaccrual status during the
first quarter. The following table summarizes non-performing assets and loans
past due 90 days or more and still accruing for the previous five quarters.
<TABLE>
<CAPTION>
2000 1999
------- ---------------------------------------
Mar 31, Dec 31, Sep 30, Jun 30, Mar 31,
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nonaccrual and impaired loans not
accruing $4,026 $2,949 $4,397 $3,045 $2,291
Impaired and other loans 90 days past
due and still accruing interest 573 566 1,532 913 1,515
------ ------ ------ ------ ------
Total non-performing loans 4,599 3,515 5,929 3,958 3,806
Other real estate owned 739 523 227 279 398
------ ------ ------ ------ ------
Total non-performing assets $5,338 $4,038 $6,156 $4,237 $4,204
====== ====== ====== ====== ======
Non-performing loans to total end of period loans 0.96% 0.74% 1.30% 0.90% 0.91%
Non-performing assets to total end of period loans 1.12 0.85 1.35 0.96 1.01
Non-performing assets to total end of period assets 0.76 0.57 0.90 0.63 0.66
</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.
ALLOWANCE FOR LOAN LOSSES
14.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
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 $4,103,000 at March 31, 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 March 31, 2000 and
December 31, 1999. 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 general concerns relating to asset quality.
Transactions in the allowance for loan losses during the three months ended
March 31, 2000 and 1999 are summarized in the table on page 7. At March 31,
2000, the allowance for loan losses totaled $4,103,000 and decreased to 0.86%
of total loans outstanding as compared to $4,043,000 or 0.97% at March 31,
1999. During the same time frame, net charge-offs increased to $181,000 during
the first quarter of 2000 as compared to $113,000 for the like period in 1999.
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.
15.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
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 $4,024,000 from December 31, 1999 to March 31, 2000. This usage
was primarily related to the net increase in loans and a decrease in federal
funds purchased and securities sold under agreements to repurchase. This was
partially offset by increased deposits. For more detailed cash flow
information, see the Company's Consolidated Statements of Cash Flows located
on page 3.
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
9.92% and 10.91%, respectively, at March 31, 2000. The Company is currently,
and expects to continue to be, in compliance with these guidelines.
The Board of Governors of the Federal Reserve Bank ("FRB") 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 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 appropriate resources are available to the
bank holding company on a reasonable basis.
16.
<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>
December 31, Minimum Well
March 31, ------------------------ Capital Capitalized
2000 1999 1998 Ratios Ratios
---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 49,808 $ 50,115 $ 47,297
Tier 2 risk-based capital 4,960 4,548 5,215
Total capital 54,768 54,663 52,512
Risk-weighted assets 502,150 494,953 429,325
Capital ratios
Tier 1 risk-based capital 9.92% 10.13% 11.02% 4.00% 6.00%
Tier 2 risk-based capital 10.91 11.04 12.23 8.00 10.00
Leverage ratio 7.16 7.20 7.66 4.00 5.00
</TABLE>
As of March 31, 2000, the Tier 2 risk-based capital was comprised of $4,103,000
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 Bank.
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.
17.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
March 31, 2000
-----------------------------------
Banking Other Consolidated
Segment Segments Totals
-------- ---------- -------------
<S> <C> <C> <C>
Net interest income (loss) $ 6,085 $ (20) $ 6,065
Other revenue 1,499 1,279 2,778
Other expense 4,179 2,016 6,195
Noncash items
Depreciation 224 157 381
Provision for loan loss 593 -- 593
Goodwill and other intangibles 228 48 276
Segment profit 2,360 (962) 1,398
Segment assets 697,814 5,534 703,348
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
March 31, 2000
-----------------------------------
Banking Other Consolidated
Segment Segments Totals
-------- ---------- -------------
<S> <C> <C> <C>
Net interest income (loss) $ 5,959 $ (138) $ 5,821
Other revenue 1,427 873 2,300
Other expense 3,905 1,194 5,099
Noncash items
Depreciation 226 170 396
Provision for loan loss 298 -- 298
Goodwill and other intangibles 171 49 220
Segment profit 2,786 (678) 2,108
Segment assets 631,355 4,106 635,461
</TABLE>
RECENT REGULATORY DEVELOPMENTS
On November 12, 1999, President Clinton signed legislation that will 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 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. The Act specifies certain activities that are deemed to be
financial in nature, including lending, exchanging, transferring, investing
financial 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 bankholding companies by the Federal Reserve 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.
18.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
National banks are also authorized by the Act to engage, through "financial
subsidiaries," in any activity that is permissible for financial holding
companies (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve, 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 expressly 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 banks.
Various bank regulatory agencies have begun issuing regulations as mandated by
the Act. The Federal Reserve has issued an interim regulation establishing
procedures for bank holding companies to elect to become financial holding
companies. In addition, the Federal Reserve has issued interim regulations
listing the financial activities permissible for financial holding companies
and describing the parameters under which financial holding companies may
engage in securities and merchant banking activities. The Federal Reserve has
issued an interim regulation regarding the parameters under which state member
banks may establish and maintain financial subsidiaries. In addition, all
federal bank regulatory agencies have jointly issued a proposed regulation
that would implement the privacy provisions of the Act. At this time, it is
not possible to predict the impact the Act and its implementing regulations
may have on the Company. 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 Banks have not applied for or received approval to establish
financial subsidiaries.
19.
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
its subsidiaries is a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULT UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 25,2000, the annual meeting of stockholders was held. At the
meeting, L. Paul Broadus, Robert J. Doty, Jimmie D. Lansford and I.J.
Reinhardt, Jr. were elected to serve as Class II directors with terms
expiring in 2003. Continuing as Class III directors until 2001 are
Charles J. Grako, Joseph D. O'Brien Jr., John A. Shinkle, and Scott C.
Sullivan. Continuing as Class I directors until 2002 are Richard J.
Berry, Walter E. Breipohl, Lawrence J. McGrogan, and John A. Trainor.
There were 4,047,309 issued and outstanding shares of common stock
entitled to vote at the annual meeting. The voting on each item
presented at the annual meeting was as follows:
Election of Directors FOR WITHHELD
--------------- -----------
L. Paul Broadus 3,351,993 42,519
Robert J. Doty 3,350,713 43,799
Jimmie D. Lansford 3,327,963 66,549
I.J. Reinhardt, Jr. 3,350,863 43,649
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
27.1 Financial Data Schedule
Reports on Form 8K:
On February 18, 2000, the Company filed a report on Form 8-K under item
5 announcing the resignation of R. Scott Grigsby as Chairman of the
Board and Chief Executive Officer of the Company and the appointment of
John A. Trainor as the Chairman of the Board.
20.
<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: May 12, 2000 /s/ CHARLES J. GRAKO
------------------------ -----------------------------------
Charles J. Grako
President and Chief Financial Officer
21.
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<NAME> UNIONBANCORP, INC.
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