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 JUNE 30, 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
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(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 August 11, 2000
----------------------------- --------------------------------------
Common Stock, Par Value $1.00 3,961,738
<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 8 - 21
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
<PAGE>
<TABLE>
<CAPTION>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
--------- ---------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 32,810 $ 27,230
Securities available-for-sale 171,340 173,893
Loans 480,908 472,395
Allowance for loan losses (4,030) (3,691)
--------- ---------
Net loans 476,878 468,704
Premises and equipment, net 12,716 13,446
Intangible assets, net 10,312 10,862
Mortgage servicing rights 1,343 1,201
Other assets 11,079 8,741
--------- ---------
TOTAL ASSETS $ 716,478 $ 704,077
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 68,212 $ 67,634
Interest-bearing 526,518 526,564
--------- ---------
Total deposits 594,730 594,198
Federal funds purchased and securities sold
under agreements to repurchase 7,344 5,308
Advances from the Federal Home Loan Bank 40,633 32,733
Notes payable 10,775 9,500
Other liabilities 6,341 5,140
--------- ---------
TOTAL LIABILITIES 659,823 646,879
--------- ---------
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;
4,552,001 shares at June 30, 2000 and 4,538,572
shares at December 31, 1999 4,552 4,539
Surplus 21,705 21,608
Retained earnings 37,225 35,743
Accumulated other comprehensive loss (2,895) (1,995)
Unearned compensation under stock option plans (165) (204)
--------- ---------
60,922 60,191
Treasury stock, at cost; 590,263 shares
at June 30, 2000 and 491,263 at December 31, 1999 (5,124) (3,850)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 55,798 56,341
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 716,478 $ 704,077
========= =========
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
1.
<PAGE>
<TABLE>
<CAPTION>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------------------------------------------
Quarter Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income
Loans $10,690 $ 9,368 $20,967 $18,256
Securities
Taxable 2,087 2,023 4,229 4,175
Exempt from federal income taxes 507 503 1,005 989
Federal funds sold and other 6 6 22 25
------- ------- ------- -------
TOTAL INTEREST INCOME 13,290 11,900 26,223 23,445
------- ------- ------- -------
Interest expense
Deposits 6,418 5,332 12,552 10,339
Federal funds purchased and securities sold
under agreements to repurchase 121 173 179 425
Advances from the Federal Home Loan Bank 552 378 1,044 710
Notes payable 217 184 401 317
------- ------- ------- -------
TOTAL INTEREST EXPENSE 7,308 6,067 14,176 11,791
------- ------- ------- -------
NET INTEREST INCOME 5,982 5,833 12,047 11,654
Provision for loan losses 653 303 1,246 601
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,329 5,530 10,801 11,053
------- ------- ------- -------
Noninterest income
Service charges 677 542 1,309 1,024
Merchant fee income 296 261 571 507
Trust income 188 178 376 357
Mortgage banking income 357 255 663 571
Insurance commissions and fees 617 706 1,578 1,294
Securities gains, net -- -- -- 122
Other income 406 326 822 693
------- ------- ------- -------
2,541 2,268 5,319 4,568
------- ------- ------- -------
Noninterest expenses
Salaries and employee benefits 3,348 3,003 7,176 6,126
Occupancy expense, net 409 384 835 768
Furniture and equipment expense 470 470 917 910
Supplies and printing 160 167 292 266
Telephone 191 166 380 327
Amortization of intangible assets 274 219 550 439
Other expenses 1,454 1,410 3,008 2,698
------- ------- ------- -------
6,306 5,819 13,158 11,534
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,564 1,979 2,962 4,087
Income taxes 476 616 876 1,286
------- ------- ------- -------
NET INCOME 1,088 1,363 2,086 2,801
Preferred stock dividends 65 65 130 130
------- ------- ------- -------
NET INCOME FOR COMMON STOCKHOLDERS $ 1,023 $ 1,298 $ 1,956 $ 2,671
======= ======= ======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.26 $ 0.32 $ 0.49 $ 0.65
======= ======= ======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.26 $ 0.32 $ 0.49 $ 0.64
======= ======= ======= =======
Comprehensive income $ 1,484 $ 284 $ 1,901 $ 1,736
======= ======= ======= =======
</TABLE>
See Accompanying Notes to Unaudited Financial Statements
2.
<PAGE>
<TABLE>
<CAPTION>
UNIONBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (IN THOUSANDS)
----------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,086 $ 2,801
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 785 815
Amortization of intangible assets 550 439
Amortization of unearned compensation under stock option plans 39 40
Amortization of bond premiums, net 49 145
Provision for loan losses 1,246 601
Securities gains, net -- (122)
Loss on sale of equipment 58 45
(Gain) Loss on sale of real estate acquired in settlement of loans 41 (16)
Gain on sale of loans (415) (423)
Proceeds from sales of loans held for sale 28,256 31,840
Origination of loans held for sale (23,629) (31,528)
Change in assets and liabilities
(Increase) decrease in other assets (2,338) (265)
Increase (decrease) in other liabilities 1,845 (712)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,573 3,660
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 8,140 19,998
Proceeds from sales -- 5,655
Purchases (7,104) (24,856)
Net decrease in federal funds sold -- 75
Net increase in loans (14,311) (42,275)
Purchase of premises and equipment (153) (1,019)
Proceeds from sale of real estate acquired in settlement of loans 420 149
Proceeds from sale of equipment 40 97
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (12,968) (44,717)
Cash flows from financing activities
Net increase in deposits $ 532 $ 44,481
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 2,036 (6,326)
Net increase in advances from the
Federal Home Loan Bank 7,900 5,527
Proceeds from notes payable 1,275 3,000
Dividends on common stock (474) (364)
Dividends on preferred stock (130) (130)
Proceeds from exercise of stock options 110 22
Purchase of treasury stock (1,274) (3,328)
-------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 9,975 42,882
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,580 1,825
Cash and cash equivalents
Beginning of period 27,230 24,613
-------- --------
End of period $ 32,810 $ 26,438
======== ========
</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 quarter and six months
ended June 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 3,997 shares of common stock
outstanding at June 30, 2000 and 4,124 shares outstanding at June 30, 1999.
Basic earnings per share for the quarter and six months ended June 30, 2000 and
1999 were computed by dividing net income by the weighted average number of
shares outstanding. Diluted earnings per share for the quarter and six months
ended June 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
Quarter Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income available to common shareholders $1,023 $1,298 $1,956 $2,671
Weighted average common shares outstanding 3,958 4,043 3,997 4,124
------ ------ ------ ------
BASIC EARNINGS PER COMMON SHARE $ 0.26 $ 0.32 $ 0.49 $ 0.64
====== ====== ====== ======
DILUTED EARNINGS PER COMMON SHARE
Quarter Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 3,958 4,043 3,997 4,124
Add: dilutive effect of assumed
exercised stock options 33 43 33 44
------ ------ ------ ------
Weighted average common and dilutive
Potential shares outstanding 3,991 4,086 4,030 4,168
====== ====== ====== ======
DILUTED EARNINGS PER COMMON SHARE $ 0.26 $ 0.32 $ 0.49 $ 0.64
====== ====== ====== ======
</TABLE>
4.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Options to purchase 151,850 shares were outstanding at June 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 June 30,
2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
June 30, 2000
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. treasury $ 5,263 $ -- $ (66) $ 5,197
U.S. government agencies 59,775 1 (1,887) 57,889
States and political subdivisions 44,149 266 (552) 43,863
U.S. government mortgage-backed securities 28,518 3 (1,044) 27,477
Collateralized mortgage obligations 34,454 24 (1,470) 33,008
Other 3,906 -- -- 3,906
--------- --------- --------- ---------
$ 176,065 $ 294 $ (5,019) $ 171,340
========= ========= ========= =========
December 31, 1999
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
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 June 30, 2000 and
December 31, 1999 are as follows:
June 30, 2000 December 31, 1999
------------------------- -----------------------
$ % $ %
----------- ----------- ----------- -----------
Commercial $ 104,249 21.68% $ 103,842 21.98%
Agricultural 37,551 7.81 38,328 8.11
Real estate:
Commercial mortgages 127,794 26.57 126,645 26.81
Construction 17,478 3.63 15,786 3.34
Agricultural 40,334 8.39 38,847 8.22
1-4 family mortgages 100,746 20.95 102,695 21.74
Installment 50,087 10.42 43,644 9.24
Other 2,672 0.55 2,615 0.56
----------- ----------- ----------- -----------
480,911 100.00% 472,402 100.00%
=========== ===========
Unearned Income (3) (7)
----------- -----------
Total loans 480,908 472,395
Allowance for loan losses (4,030) (3,691)
----------- -----------
Loans, net $ 476,878 $ 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 quarters and six months
ended June 30, 2000 and 1999 are summarized below:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Beginning balance $ 4,103 $ 4,043 $ 3,691 $ 3,858
Charge-offs:
Commercial 652 160 768 227
Real estate mortgages 40 119 65 169
Installment and other loans 61 64 149 149
-------- -------- -------- --------
Total charge-offs 753 343 982 545
-------- -------- -------- --------
Recoveries:
Commercial 7 3 30 61
Real estate mortgages 3 9 3 11
Installment and other loans 17 19 42 48
-------- -------- -------- --------
Total recoveries 27 31 75 120
-------- -------- -------- --------
Net charge-offs 726 312 907 425
-------- -------- -------- --------
Provision for loan losses 653 303 1,246 601
-------- -------- -------- --------
Ending balance $ 4,030 $ 4,034 $ 4,030 $ 4,034
======== ======== ======== ========
Period end total loans, net of
unearned interest $480,908 $440,143 $480,908 $440,143
======== ======== ======== ========
Average loans $481,616 $429,558 $477,962 $417,058
======== ======== ======== ========
Ratio of net charge-offs to
average loans 0.15% 0.07% 0.19% 0.10%
Ratio of provision for loan losses
to average loans 0.14 0.07 0.26 0.14
Ratio of allowance for loan losses
to ending total loans 0.84 0.92 0.84 0.92
Ratio of allowance for loan losses
to total nonperforming loans 118.63 101.92 118.63 101.92
Ratio of allowance at end of period
to average loans 0.84 0.94 0.84 0.97
</TABLE>
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
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 quarter and six months ended June
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 quarter and six months ended June 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 second quarter, the Company announced that UnionBank/ West had
executed an agreement to sell approximately $2.5 million in deposits from its
Camp Point branch. The consummation of the transaction is expected to be
completed during the third quarter of 2000 and is expected to have a minimal
after-tax gain on sale. This transaction is 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
8.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
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 second quarter of 2000 was $1,088,000, or $0.26 per common
share (diluted), compared to the $1,363,000, or $0.32 per common share
(diluted), earned in the second quarter of 1999. Net income for the six months
ended June 30, 2000 was $2,086,000, or $0.49 per common share (diluted),
compared to the $2,801,000, or $0.64 per common share (diluted), earned in the
same period for 1999. Cash earnings per share (diluted) for the six month period
equaled $0.59 compared to $0.69 during the previous year. Cash earnings exclude
the after-tax effect of purchase accounting adjustments.
Return on average assets was 0.62% for the second quarter of 2000, compared to
0.84% for the same period in 1999. Return on average assets was 0.60% for the
six months ended June 30, 2000, compared to 0.88% for the same period in 1999.
Cash return on average assets for the six month period was 0.72%, compared to
0.95% for the same period in 1999. Cash return on average assets consists of the
cash earnings described above divided by average assets less intangibles.
Return on average stockholders' equity was 7.88% for the second quarter of 2000,
compared to 9.91% for the same period in 1999. Return on average tangible equity
capital for the quarter equaled 10.7%. Return on average stockholders' equity
was 7.54% for the six months ended June 30, 2000, compared to 10.08% for the
same period in 1999. Return on average tangible equity capital for the six month
period equaled 10.3%, compared to 12.5% for the same period in 1999.
As previously reported, the 2000 six months earnings included a one-time
severance expense associated with the resignation of the organization's former
chief executive officer earlier this year. Excluding the effect of these
expenditures (approximately $290,000, net of taxes), the Company's six month
core earnings would have equaled $2,375,000 or $0.56 per share (diluted)
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 $6,270,000 for the second quarter of 2000, compared with
net interest income of $6,125,000 earned during the same period in 1999. This
represented an increase of $145,000 or 2.4% and was primarily attributable to a
$50,929,000 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.
9.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
The quarter to quarter increase resulted from higher interest income of
$1,386,000 and higher interest expense of $1,241,000. The $1,386,000 increase in
interest income resulted from $1,114,000 associated with volume and $272,000
associated with rate. The majority of the increase in interest income was
related to a $51,637,000 increase in the volume of average loans. The $1,241,000
increase in interest expense resulted from a $650,000 increase associated with
volume and a $591,000 increase associated with rate. The majority of the
increase in interest expense was related to a $46,949,000 increase in the volume
of average time deposits.
The net interest margin for the second quarter of 2000 equaled 3.83%, a decrease
from the 4.04% margin earned during the second 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 18 basis points to
8.96% in the second quarter of 2000, as compared to 8.78% during the same period
in 1999. Yields on interest-bearing liabilities increased 52 basis points to
5.10% in the second quarter of 2000, as compared to 4.58% during the same period
in 1999.
Net interest income for the six months ended June 30, 2000 totaled $12,620,000,
representing an increase of $403,000 or 3.3% over the $12,217,000 earned during
the same period in 1999. This improvement in net interest income was
attributable to higher interest income of $2,788,000 offset by higher interest
expense of $2,385,000. The net interest margin for the first six months of 2000
decreased to 3.87% compared to 4.14% for the same period in 1999.
10.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
VOLUME/RATE ANALYSIS - QUARTER
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
June 30, 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.
<TABLE>
<CAPTION>
For the Quarter Ended June 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>
ASSETS
INTEREST-EARNING ASSETS
Interest-earning deposits $ 1,565 $ 27 6.94% $ 1,299 $ 16 5.25% $ 4 $ 6 $ 10
Securities (1)
Taxable 134,332 2,060 6.17% 135,466 2,007 5.94% (18) 71 53
Non-taxable (2) 41,165 767 7.49% 40,911 762 7.47% 3 2 5
--------- ------ ------ --------- ------- ------ ------ ------- -------
Total securities (tax equivalent) 175,497 2,827 6.48% 176,377 2,769 6.30% (15) 73 58
--------- ------ ------ --------- ------- ------ ------ ------- -------
Federal funds sold 375 6 6.44% 469 6 5.13% (1) 1 --
--------- ------ ------ --------- ------- ------ ------ ------- -------
Loans (3)(4)
Commercial 143,772 3,262 9.13% 121,052 2,707 8.97% 507 48 555
Real estate 287,096 6,018 8.43% 270,226 5,512 8.18% 340 166 506
Installment and other 50,327 1,112 8.89% 38,280 857 8.98% 264 (9) 255
Fees on loans - 325 - - 323 - 15 (13) 2
--------- ------ ------ --------- ------- ------ ------ ------- -------
Net loans (tax equivalent) 481,195 10,717 8.96% 429,558 9,399 8.78% 1,126 192 1,318
--------- ------ ------ --------- ------- ------ ------ ------- -------
Total interest-earning assets 658,632 13,577 8.29% 607,703 12,191 8.05% 1,114 272 1,386
--------- ------ ------ --------- ------- ------ ------ ------- -------
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 20,489 18,238
Premises and equipment, net 12,895 13,856
Other assets 13,781 13,687
--------- ---------
Total nonearning assets 47,165 45,781
--------- ---------
Total assets $ 705,797 $ 653,484
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $ 52,199 305 2.35% $ 52,257 $ 292 2.24% $ - $ 13 $ 13
Money market accounts 36,171 361 4.01% 31,789 284 3.58% 41 36 77
Savings deposits 50,278 322 2.58% 58,241 400 2.75% (54) (24) (78)
Time deposits 384,045 5,429 5.69% 337,096 4,355 5.18% 629 445 1,074
Federal funds purchased and
repurchase agreements 7,287 121 6.68% 13,199 173 5.23% (90) 39 (51)
Advances from FHLB 35,843 552 6.17% 28,249 378 5.40% 111 59 170
Notes payable 10,775 217 8.14% 10,081 184 7.24% 13 23 36
--------- ------ ------ --------- ------- ------ ------ ------- -------
Total interest-bearing liabilities 576,598 7,308 5.10% 530,912 6,067 4.58% 650 591 1,241
--------- ------ ------ --------- ------- ------ ------ ------- -------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 66,238 60,811
Other liabilities 7,560 6,578
--------- ---------
Total noninterest-bearing
liabilities 73,798 67,389
--------- ---------
Stockholders' equity 55,401 55,183
--------- ---------
Total liabilities and
stockholders' equity $ 705,797 $ 653,484
========= =========
Net interest income (tax equivalent) $6,270 $ 6,125 $ 464 $ (319)$ 145
====== ======= ====== ======= =======
Net interest income (tax equivalent)
to total earning assets 3.83% 4.04%
====== ======
Interest-bearing liabilities to
earning assets 87.54% 87.36%
========= =========
</TABLE>
----------
(1) Average balance and average rate on securities classified as
available-for-sale is based on historical amortized cost balances.
(2) Interest income and average rate on non-taxable securities are reflected on
a tax equivalent basis based upon a statutory federal income tax rate of
34%.
(3) Nonaccrual loans are included in the average balances.
(4) Overdraft loans are excluded in the average balances.
11.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
VOLUME/RATE ANALYSIS - SIX MONTHS
The table below summarizes the changes in average interest-earning assets and
interest -bearing liabilities as well as the average rates earned and paid on
these assets and liabilities, respectively, for the six months ended June 30,
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 Six Months Ended June 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>
INTEREST-EARNING ASSETS
Interest-earning deposits $ 1,833 $ 54 5.92% $ 1,304 $ 34 5.26% $ 15 $ 5 $ 20
Securities (1)
Taxable 135,609 4,175 6.19% 135,604 4,142 6.16% - 33 33
Non-taxable (2) 40,843 1,523 7.50% 40,425 1,498 7.47% 20 5 25
--------- ------ ------ -------- ------- ------ ------- ------ -------
Total securities (tax equivalent) 176,452 5,698 6.49% 176,029 5,640 6.46% 20 38 58
--------- ------ ------ -------- ------- ------ ------- ------ -------
Federal funds sold 727 22 6.09% 900 25 5.60% (5) 2 (3)
--------- ------ ------ -------- ------- ------ ------- ------ -------
Loans (3)(4)
Commercial 142,417 6,349 8.97% 117,342 5,218 8.97% 1,131 - 1,131
Real estate 285,969 11,908 8.37% 262,748 10,754 8.25% 991 163 1,154
Installment and other 49,192 2,163 8.84% 36,968 1,686 9.20% 545 (68) 477
Fees on loans - 602 - - 651 - 46 (95) (49)
--------- ------- ------ -------- ------- ------ ------- ------ -------
Net loans (tax equivalent) 477,578 21,022 8.85% 417,058 18,309 8.85% 2,713 - 2,713
--------- ------- ------ -------- ------- ------ ------- ------ -------
Total interest-earning assets 656,590 26,796 8.21% 595,291 24,008 8.13% 2,743 45 2,788
--------- ------- ------ -------- ------- ------ ------- ------ -------
NONINTEREST-EARNING ASSETS
Cash and cash equivalents 20,608 19,620
Premises and equipment, net 13,076 13,847
Other assets 13,738 13,014
--------- --------
Total nonearning assets 47,422 46,481
--------- --------
Total assets $ 704,012 $641,772
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW accounts $ 53,134 $ 617 2.34% $ 53,310 $ 600 2.27% $ (2) $ 19 $ 17
Money market accounts 36,688 716 3.92% 31,738 547 3.48% 93 76 169
Savings deposits 50,783 645 2.55% 58,173 815 2.83% (96) (74) (170)
Time deposits 384,053 10,574 5.54% 322,491 8,377 5.24% 1,690 507 2,197
Federal funds purchased and
repurchase agreements 5,824 179 6.18% 16,869 425 5.08% (324) 78 (246)
Advances from FHLB 34,731 1,044 6.03% 26,346 710 5.43% 246 85 331
Notes payable 10,416 401 7.80% 9,106 317 7.02% 49 38 87
--------- ------- ------ -------- ------- ------ ------- ------ -------
Total interest-bearing liabilities 575,629 14,176 4.95% 518,033 11,791 4.59% 1,656 729 2,385
--------- ------- ------ -------- ------- ------ ------- ------ -------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing deposits 65,632 60,736
Other liabilities 7,128 6,992
--------- --------
Total noninterest-bearing
liabilities 72,760 67,728
--------- --------
Stockholders' equity 55,623 56,011
--------- --------
Total liabilities and
stockholders' equity $ 704,012 $641,772
========= ========
Net interest income (tax equivalent) $ 12,620 $12,217 $ 1,087 $ (684) $ 403
======== ======= ======== ====== =======
Net interest income (tax equivalent)
to total earning assets 3.87% 4.14%
======= ======
Interest-bearing liabilities
to earning assets 87.67% 87.02%
========= ========
</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.
12.
<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 second
quarter of 2000 equaled $653,000 as compared to $303,000 for the same quarter in
1999. The increase in the provision was attributable to the increase in
charge-offs during the quarter. Net charge-offs for the three months ended June
30, 2000 were $726,000 as compared to $312,000 for the quarter ended June 30,
1999. Approximately 62% of the charge-offs were related to one loan. For the six
month period ending June 30, 2000, the provision for loan losses charged to
operating expense equaled $1,246,000 as compared to $601,000 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 in
light of general concerns relating to general asset quality 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 $2,541,000 for the quarter ended June 30, 2000, compared to
$2,268,000 for the same time frame in 1999. This represented a positive variance
of $273,000, or 12.0% As a percentage of total income (net interest income plus
noninterest income), noninterest income increased to 29.8% versus 28.0% for the
second quarter of 1999.
Approximately $135,000 or 49% of the increase in 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 50% of the increase was
due to an increase in service charges due to higher average balances in business
checking accounts. The remaining increase was primarily related to higher
overdraft and insufficient fund fees.
Also contributing to the improvement in noninterest income were increases in
revenue associated with mortgage banking, as income increased by $102,000,
internet service provider (ISP) which increased by $68,000 due to an increase in
ISP customers from 1,612 to 2,424, and merchant fee income which increased by
$35,000.
These improvements were offset by a $89,000 decline in revenue associated with
insurance and brokerage services. Approximately 50% of the quarter over quarter
decrease was attributable to lower brokerage fees.
Noninterest income totaled $5,319,000 for the six months ended June 30, 2000,
compared to $4,568,000 for the same time frame in 1999. Exclusive of net
securities gains, noninterest income increased by $871,000 or 19.6%. As a
13.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
percentage of total income, noninterest income increased to 30.6% versus 28.2%
for the second quarter of 1999. The 19.6% increase was largely reflective of the
same items discussed regarding the second quarter.
NONINTEREST EXPENSE
Noninterest expense totaled $6,306,000 for the quarter ended June 30, 2000,
increasing by $487,000 or 8.4% from the same period in 1999. Salaries and
employee benefits accounted for $345,000 or 70.8% of the increase and was due to
regular merit increases, basic incentive compensation, and the initial staffing
and related compensation costs of three new banking centers. The increase in
amortization of intangible assets was related to the 1999 fourth quarter
acquisition of the Rushville 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 second 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 three
banking centers during the rest of 2000.
Noninterest expense totaled $13,158,000 for the six months ended June 30, 2000,
increasing by $1,624,000 or 14.1% 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 9.9% or $1,149,000. The 9.9% core increase was largely
reflective of the same items discussed regarding the second quarter.
INCOME TAX EXPENSE
The Company recorded income tax expense of $476,000 and $616,000, for the
quarters ended June 30, 2000 and 1999, respectively. Effective tax rates equaled
30.4% and 31.1% 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 $165,000 in nontaxable U.S. agency
interest income that is deductible for Illinois state income tax purposes.
The Company recorded income tax expense of $876,000 and $1,286,000, for the six
months ended June 30, 2000 and 1999, respectively. Effective tax rates equaled
29.6% and 31.5% 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 $357,000 in nontaxable U.S. agency
interest income that is deductible for Illinois state income tax purposes.
14.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY MANAGEMENT
The business of the Company and the composition of its balance sheet consist of
investments in interest-earning assets (primarily loans and securities) which
are primarily funded by interest-bearing liabilities (deposits and borrowings).
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 June 30, 2000 and December
31, 1999.
June 30, 2000
------------------------------------
Net Interest Income
------------------------------------
Amount Change Change
------- ------- ------
(Dollars in Thousands)
+200 bp $24,891 $(1,581) (5.97)%
+100 bp 25,670 (802) (3.03)
Base 26,472 -- --
-100 bp 26,935 463 1.75
-200 bp 26,398 (74) (0.28)
Based upon the Company's model at June 30, 2000, the effect of an immediate 200
basis point increase in interest rates would decrease the Company's net interest
income by 5.97% or approximately $1,581,000. The effect of an immediate 200
basis point decrease in rates would reduce the Company's net interest income by
0.28% or approximately $74,000.
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.
15.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
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 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 June 30, 2000, non-performing assets totaled $4,138,000 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 0.71% at June 30, 2000, as compared to 0.74% at December
31, 1999. 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
---------------- --------------------------
Jun 30, Mar 31, Dec 31, Sep 30, Jun 30,
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual and impaired loans not
accruing $2,777 $4,026 $2,949 $4,397 $3,045
Impaired and other loans 90 days past
due and still accruing interest 620 573 566 1,532 913
------ ------ ------ ------ ------
Total nonperforming loans 3,397 4,599 3,515 5,929 3,958
Other real estate owned 741 739 523 227 279
------ ------ ------ ------ ------
Total nonperforming assets $4,138 $5,338 $4,038 $6,156 $4,237
====== ====== ====== ====== ======
Nonperforming loans to total end of period loans 0.71% 0.96% 0.74% 1.30% 0.90%
Nonperforming assets to total end of period loans 0.86 1.12 0.85 1.35 0.96
Nonperforming assets to total end of period assets 0.58 0.76 0.57 0.90 0.63
</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
16.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
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
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 $4,030,000 at June 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
June 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 concerns relating to asset quality and the increase in charge-offs during the
first six months of 2000.
17.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
Transactions in the allowance for loan losses during the quarter and six months
ended June 30, 2000 and 1999 are summarized in the table on page 7. At June 30,
2000, the allowance for loan losses totaled $4,030,000 and decreased to 0.84% of
total loans outstanding as compared to $4,034,000 or 0.92% at June 30, 1999.
During the same time frame, net charge-offs increased to $726,000 during the
second quarter of 2000 as compared to $312,000 for the same 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.
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 increase in cash and cash equivalents
of $5,580,000 from December 31, 1999 to June 30, 2000. This increase was
primarily related to the increase in federal funds purchased and securities sold
under agreements to repurchase and advances from the Federal Home Loan Bank.
This was partially offset by increased loans. 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 10.00% and
10.96%, respectively, at June 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 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
18.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
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.
The following table sets forth an analysis of the Company's capital ratios:
<TABLE>
<CAPTION>
December 31, Minimum Well
June 30, -------------------- Capital Capitalized
2000 1999 1998 Ratios Ratios
-------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 50,907 $ 50,115 $ 47,297
Tier 2 risk-based capital 4,887 4,548 5,215
Total capital 55,794 54,663 52,512
Risk-weighted assets 509,293 494,953 429,325
Capital ratios
Tier 1 risk-based capital 10.00% 10.13% 11.02% 4.00% 6.00%
Tier 2 risk-based capital 10.96 11.04 12.23 8.00 10.00
Leverage ratio 7.18 7.20 7.66 4.00 5.00
</TABLE>
As of June 30, 2000, the Tier 2 risk-based capital was comprised of $4,030,000
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
19.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
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.
Six Months Ended
----------------------------------
June 30, 2000
----------------------------------
Banking Other Consolidated
Segment Segments Totals
-------- -------- ------
Net interest income (loss) $ 12,237 $ (190) $ 12,047
Other revenue 3,234 2,085 5,319
Other expense 8,771 3,052 11,823
Noncash items
Depreciation 466 319 785
Provision for loan loss 1,246 -- 1,246
Goodwill and other intangibles 457 93 550
Segment profit 4,531 (1,569) 2,962
Segment assets 710,656 5,822 716,478
Six Months Ended
----------------------------------
June 30, 1999
----------------------------------
Banking Other Consolidated
Segment Segments Totals
-------- -------- ------
Net interest income (loss) $ 11,975 $ (321) $ 11,654
Other revenue 2,774 1,794 4,568
Other expense 7,839 2,441 10,280
Noncash items
Depreciation 469 346 815
Provision for loan loss 601 -- 601
Goodwill and other intangibles 342 97 439
Segment profit 5,498 (1,411) 4,087
Segment assets 665,904 4,827 670,731
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
20.
<PAGE>
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
holding companies (as described above) and certain 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.
Various bank regulatory agencies have begun issuing regulations as mandated by
the Act. During June, 2000, all of the federal bank regulatory agencies jointly
issued regulations implementing the privacy provisions of the Act. In addition,
the Federal Reserve issued interim regulations establishing procedures for bank
holding companies to elect to become financial holding companies and listing the
financial activities permissible for financial holding companies, as well as
describing the extent to 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. 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
Company's subsidiary banks have not applied for or received approval to
establish financial subsidiaries.
21.
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
its subsidiaries is a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULT UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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.
On June 22, 2000, Dennis J. McDonnell was added to the board as a class
II director until 2003.
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:
None.
22.
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIONBANCORP, INC.
Date: AUGUST 11, 2000 /s/ CHARLES J. GRAKO
------------------------- ------------------------------------------
Charles J. Grako
President and Chief Executive Officer
Date: AUGUST 11, 2000 /s/ KURT R. STEVENSON
------------------------- ------------------------------------------
Kurt R. Stevenson
Vice President and Chief Financial Officer
23.
