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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2006
Commission File Number: 0-28846
UnionBancorp, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 36-3145350
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
122 West Madison Street Ottawa, Illinois 61350
(Address of principal executive offices including zip code)
(815) 431-2720
(Registrant's telephone number, including area code)
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 by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X].
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b of the Exchange Act). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares outstanding at November 13, 2006
----------------------------- ---------------------------------------
Common Stock, Par Value $1.00 3,756,351
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UnionBancorp, Inc.
Form 10-Q Index
September 30, 2006
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
o Unaudited Consolidated Balance Sheets.......................1
o Unaudited Consolidated Statements of Income and
Comprehensive Income .....................................2
o Unaudited Consolidated Statements of Cash Flows.............4
o Notes to Unaudited Consolidated Financial Statements........5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.................................................32
Item 4. Controls and Procedures ............................................32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................33
Item 1A. Risk Factors........................................................33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........33
Item 3. Defaults Upon Senior Securities.....................................33
Item 4. Submission of Matters to a Vote of Security Holders.................33
Item 5. Other Information...................................................34
Item 6. Exhibits............................................................34
SIGNATURES...................................................................36
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, 2006 and December 31, 2005 (In Thousands, Except Share Data)
-----------------------------------------------------------------------------------------------------------------
September 30, December 31,
2006 2005
------------ ------------
ASSETS
Cash and cash equivalents $ 20,051 $ 24,358
Securities available-for-sale 182,171 196,440
Loans 407,015 417,525
Allowance for loan losses (6,103) (8,362)
------------ ------------
Net loans 400,912 409,163
Cash surrender value of life insurance 15,928 15,498
Mortgage servicing rights 2,314 2,533
Premises and equipment, net 13,826 13,908
Goodwill 6,310 6,963
Intangible assets, net 44 533
Other real estate 859 203
Other assets 6,436 6,623
------------ ------------
Total assets $ 648,851 $ 676,222
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 56,564 $ 57,832
Interest-bearing 470,354 486,009
------------ ------------
Total deposits 526,918 543,841
Federal funds purchased and securities sold
under agreements to repurchase 4,116 612
Advances from the Federal Home Loan Bank 36,700 50,000
Notes payable 8,301 9,468
Series B mandatory redeemable preferred stock 831 831
Other liabilities 4,672 5,395
------------ ------------
Total liabilities 581,538 610,147
------------ ------------
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;
4,697,993 shares issued at September 30, 2006 and
4,684,393 shares issued at December 31, 2005 4,698 4,684
Additional paid-in capital 23,417 23,167
Retained earnings 51,510 48,837
Accumulated other comprehensive income 34 95
------------ ------------
80,159 77,283
Treasury stock, at cost; 955,142 shares at September 30, 2006
and 877,517 at December 31, 2005 (12,846) (11,208)
------------ ------------
Total stockholders' equity 67,313 66,075
------------ ------------
Total liabilities and stockholders' equity $ 648,851 $ 676,222
============ ============
See Accompanying Notes to Unaudited Financial Statements
1.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three and Nine Months Ended September 30, 2006 and 2005 (In Thousands, Except Per Share Data)
------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Interest income
Loans $ 7,444 $ 6,874 $ 21,793 $ 20,075
Securities
Taxable 2,065 1,587 6,083 4,493
Exempt from federal income taxes 218 241 644 762
Federal funds sold and other 75 18 141 77
------------ ------------ ------------ ------------
Total interest income 9,802 8,720 28,661 25,407
Interest expense
Deposits 4,128 2,832 11,452 7,722
Federal funds purchased and securities sold
under agreements to repurchase 69 44 192 155
Advances from the Federal Home Loan Bank 363 486 1,300 1,619
Series B mandatory redeemable preferred stock 12 12 37 37
Notes payable 156 128 468 287
------------ ------------ ------------ ------------
Total interest expense 4,728 3,502 13,449 9,820
------------ ------------ ------------ ------------
Net interest income 5,074 5,218 15,212 15,587
Provision (credit) for loan losses (200) 50 (1,300) 150
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 5,274 5,168 16,512 15,437
Noninterest income
Service charges 476 490 1,411 1,498
Trust income 202 193 620 595
Mortgage banking income 240 357 767 1,061
Brokerage commissions and fees 87 236 260 439
Banked owned life insurance 153 138 430 407
Securities gains, net -- -- (88) --
Gain on sale of assets, net (1) -- (2) 3
Other income 324 288 927 890
------------ ------------ ------------ ------------
1,481 1,702 4,325 4,893
Noninterest expenses
Salaries and employee benefits 2,630 3,098 8,035 9,307
Occupancy expense, net 356 386 1,110 1,120
Furniture and equipment expense 515 497 1,508 1,339
Marketing 88 115 294 337
Supplies and printing 71 80 230 238
Telephone 104 112 339 321
Other real estate owned expense 2 12 10 46
Amortization of intangible assets 11 30 71 90
Other expenses 814 1,017 2,754 2,906
------------ ------------ ------------ ------------
4,591 5,347 14,351 15,704
------------ ------------ ------------ ------------
Income from continuing operations
before income taxes 2,164 1,523 6,486 4,626
Income taxes 658 405 1,983 1,076
------------ ------------ ------------ ------------
Income from continuing operations 1,506 1,118 4,503 3,550
See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three and Nine Months Ended September 30, 2006 and 2005 (In Thousands, Except Per Share Data)
------------------------------------------------------------------------------------------------------------------
Discontinued Operations:
Loss from operations of discontinued insurance
unit (including loss on disposal
of $355 in 2006) (440) (93) (534) (223)
Income tax benefit (170) (36) (207) (80)
------------ ------------ ------------ ------------
Loss on discontinued operations (270) (57) (327) (143)
------------ ------------ ------------ ------------
Net Income $ 1,236 $ 1,061 $ 4,176 $ 3,407
============ ============ ============ ============
Preferred stock dividends 52 52 156 156
------------ ------------ ------------ ------------
Net income for common stockholders $ 1,184 $ 1,009 $ 4,020 $ 3,251
============ ============ ============ ============
Basic earnings per common share
from continuing operations $ 0.39 $ 0.27 $ 1.16 $ 0.85
============ ============ ============ ============
Basic earnings per common share
from discontinued operations $ (0.07) $ (0.01) $ (0.09) $ (0.04)
============ ============ ============ ============
Basic earnings per common share $ 0.32 $ 0.26 $ 1.07 $ 0.81
============ ============ ============ ============
Diluted earnings per common share
from continuing operations $ 0.38 $ 0.26 $ 1.14 $ 0.84
============ ============ ============ ============
Diluted earnings per common share
From discontinued operations $ (0.07) $ (0.01) $ (0.08) $ (0.04)
============ ============ ============ ============
Diluted earnings per common share $ 0.31 $ 0.25 $ 1.06 $ 0.80
============ ============ ============ ============
Total comprehensive income $ 2,476 $ 891 $ 4,115 $ 2,951
============ ============ ============ ============
See Accompanying Notes to Unaudited Financial Statements
3.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2006 and 2005 (In Thousands)
------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
----------------------------
2006 2005
------------ ------------
Cash flows from operating activities
Net income $ 4,176 $ 3,407
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 1,412 1,349
Amortization of intangible assets 71 90
Amortization of mortgage servicing rights 219 165
Amortization of bond premiums, net 328 864
Stock option expense 103 --
Federal Home Loan Bank stock dividend (47) (109)
Provision (credit) for loan losses (1,300) 150
Provision for deferred income taxes (310) 292
Net change in BOLI (430) (407)
Net change in OREO 2 (301)
(Gain) loss on sale of assets 7 (4)
Loss on sale of securities 88 --
Gain on sale of loans (511) (831)
Gain on sale of real estate acquired in settlement of loans (32) (22)
Proceeds from sales of loans held for sale 38,239 43,876
Origination of loans held for sale (38,387) (44,547)
Change in assets and liabilities
Decrease (Increase) in other assets 439 (260)
Increase in other liabilities (563) (190)
------------ ------------
Net cash provided by operating activities 3,504 3,631
Cash flows from investing activities
Securities available-for-sale
Proceeds from maturities and paydowns 30,634 42,149
Proceeds from sales 15,515 --
Purchases (33,400) (49,677)
Redemption of FHLB stock 1,079 --
Purchase of loans (19,513) (3,275)
Net decrease in loans 28,418 16,779
Purchase of premises and equipment (1,169) (2,008)
Cash paid to assume deposits, net of cash received on sale of branch (6,054) --
Sale of insurance unit 856 --
Proceeds from sale of real estate acquired in settlement of loans 681 549
------------ ------------
Net cash provided by investing activities 17,047 4,517
Cash flows from financing activities
Net increase (decrease) in deposits (10,915) 10,466
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 3,504 (6,980)
Payments on notes payable (2,567) (1,064)
Proceeds from notes payable 1,400 4,540
Net increase in other borrowed funds -- 11
Net decrease in advances from the Federal Home Loan Bank (13,300) (8,800)
Dividends on common stock (1,346) (1,302)
Dividends on preferred stock (156) (156)
Proceeds from exercise of stock options 160 486
Purchase of treasury stock (1,638) (4,563)
------------ ------------
Net cash used by financing activities (24,858) (7,373)
------------ ------------
Net decrease in cash and cash equivalents (4,307) 775
Cash and cash equivalents
Beginning of period 24,358 22,802
------------ ------------
End of period $ 20,051 $ 23,577
============ ============
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 13,900 $ 9,981
Income taxes 1,372 1,025
Transfers from loans to other real estate owned 1,307 310
See Accompanying Notes to Unaudited Financial Statements
4.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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Note 1. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements of
UnionBancorp, Inc. (the "Company") have been prepared in accordance with U.S.
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
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, 2005. The annualized results of operations
during the three and nine months ended September 30, 2006 are not necessarily
indicative of the results expected for the year ending December 31, 2006. All
financial information is in thousands (000's), except per share data.
The consolidated financial statements have been restated to report the
results of the Company's Insurance unit of the Wealth Management segment as a
discontinued operation as described in Note 8.
Note 2. Earnings Per Share
Basic earnings per share for the three and nine months ended September
30, 2006 and 2005 were computed by dividing net income by the weighted average
number of shares outstanding. Diluted earnings per share for the three and nine
months ended September 30, 2006 and 2005 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:
Basic Earnings Per Common Share
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net Income from continuing operations
available to common shareholders $ 1,454 $ 1,066 $ 4,347 $ 3,394
Net loss from discontinued operations
available to common shareholders $ (270) $ (57) $ (327) $ (143)
------------ ------------ ------------ ------------
Net Income
available to common shareholders $ 1,184 $ 1,009 $ 4,020 $ 3,251
Weighted average common shares outstanding 3,743 3,895 3,757 3,979
------------ ------------ ------------ ------------
Basic Earnings Per Common Share
from continuing operations $ 0.39 $ 0.27 $ 1.16 $ 0.85
============ ============ ============ ============
Basic Earnings Per Common Share
from discontinued operations $ (0.07) $ (0.01) $ (0.09) $ (0.04)
============ ============ ============ ============
Basic Earnings Per Common Share $ 0.32 $ 0.26 $ 1.07 $ 0.81
============ ============ ============ ============
5.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Diluted Earnings Per Common Share
Weighted average common shares outstanding 3,743 3,895 3,757 3,979
Add: dilutive effect of assumed exercised
stock options 40 64 44 61
------------ ------------ ------------ ------------
Weighted average common and dilutive
Potential shares outstanding 3,783 3,959 3,801 4,040
============ ============ ============ ============
Diluted Earnings Per Common Share
from continuing operations $ 0.38 $ 0.26 $ 1.14 $ 0.84
============ ============ ============ ============
Diluted Earnings Per Common Share
from discontinued operations $ (0.07) $ (0.01) $ (0.08) $ (0.04)
============ ============ ============ ============
Diluted Earnings Per Common Share $ 0.31 $ 0.25 $ 1.06 $ 0.80
============ ============ ============ ============
There were approximately 60,000 and 40,000 options outstanding at
September 30, 2006 and 2005, respectively, that were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common stock and were,
therefore, antidilutive.
Note 3. Securities
The Company's consolidated securities portfolio, which represented
30.8% of the Company's 2006 third quarter average earning asset base, is managed
to minimize interest rate risk, maintain sufficient liquidity, and maximize
return. The portfolio includes several callable agency debentures, adjustable
rate mortgage pass-throughs, and collateralized mortgage obligations. Corporate
bonds consist of investment grade obligations of public corporations. Equity
securities consist of Federal Reserve stock, Federal Home Loan Bank stock, and
trust preferred stock. Securities classified as available-for-sale, carried at
fair value, were $182,171 at September 30, 2006 compared to $196,440 at December
31, 2005. The Company does not have any securities classified as trading or
held-to-maturity.
The following table describes the fair value, gross unrealized gains
and losses of securities available-for-sale at September 30, 2006 and December
31, 2005, respectively:
September 30, 2006
--------------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------------ ------------ ------------
U.S. government agencies $ 46,984 $ 186 $ (288)
States and political subdivisions 19,604 311 (24)
U.S. government mortgage-backed securities 67,575 285 (508)
Collateralized mortgage obligations 23,737 48 (97)
Equity securities 17,452 140 --
Corporate 6,819 17 (13)
------------ ------------ ------------
$ 182,171 $ 987 $ (930)
============ ============ ============
6.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
December 31, 2005
--------------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------------ ------------ ------------
U.S. government agencies 30,857 8 (364)
States and political subdivisions 18,400 424 (16)
U.S. government mortgage-backed securities 101,022 854 (675)
Collateralized mortgage obligations 20,938 21 (157)
Equity securities 18,316 54 (49)
Corporate 6,907 62 (7)
------------ ------------ ------------
$ 196,440 $ 1,423 $ (1,268)
============ ============ ============
Note 4. Loans and Allowance for Loan Losses
The Company offers a broad range of products, including agribusiness,
commercial, residential, and installment loans, designed to meet the credit
needs of its borrowers. The Company concentrates its lending activity in the
geographic market areas that it serves, generally lending to consumers and small
to mid-sized businesses from which deposits are garnered in the same market
areas. As a result, the Company strives to maintain a loan portfolio that is
diverse in terms of loan type, industry, borrower and geographic concentrations.
The following table describes the composition of loans by major categories
outstanding as of September 30, 2006 and December 31, 2005, respectively:
September 30, 2006 December 31, 2005
---------------------------- ----------------------------
$ % $ %
------------ ------------ ------------ ------------
Commercial $ 91,921 22.58% $ 91,537 21.92%
Agricultural 21,718 5.34 26,694 6.39
Real estate:
Commercial mortgages 117,602 28.89 126,503 30.31
Construction 86,085 21.15 68,508 16.41
Agricultural 25,525 6.27 33,033 7.91
1-4 family mortgages 55,761 13.70 57,920 13.87
Installment 8,090 1.99 12,747 3.05
Other 313 0.08 583 0.14
------------ ------------ ------------ ------------
Total loans 407,015 100.00% 417,525 100.00%
============ ============
Allowance for loan losses (6,103) (8,362)
------------ ------------
Loans, net $ 400,912 $ 409,163
============ ============
The following table presents data on impaired loans:
September 30, December 31,
2006 2005
------------ ------------
Impaired loans for which an allowance has been provided $ 6,034 $ 12,585
Impaired loans for which no allowance has been provided 2,804 563
------------ ------------
Total loans determined to be impaired $ 8,838 $ 13,148
============ ============
Allowance for loan loss for impaired loans included
in the allowance for loan losses $ 1,956 $ 3,913
============ ============
7.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Note 4. Loans and Allowance For Loan Losses (Continued)
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, current
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
probable incurred 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 independent 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. Transactions in the allowance for loan losses for the
three and nine months ended September 30, 2006 and 2005 are summarized below:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Beginning balance $ 6,848 $ 9,159 $ 8,362 $ 9,732
Charge-offs:
Commercial 249 (208) 472 256
Real estate mortgages 378 1,004 860 1,429
Installment and other loans 4 15 77 294
------------ ------------ ------------ ------------
Total charge-offs 631 811 1,409 1,979
------------ ------------ ------------ ------------
Recoveries:
Commercial 24 32 159 334
Real estate mortgages 46 36 255 174
Installment and other loans 16 27 36 82
------------ ------------ ------------ ------------
Total recoveries 86 95 450 590
------------ ------------ ------------ ------------
Net charge-offs 545 716 959 1,389
------------ ------------ ------------ ------------
Provision (credit) for loan losses (200) 50 (1,300) 150
------------ ------------ ------------ ------------
Ending balance $ 6,103 $ 8,493 $ 6,103 $ 8,493
============ ============ ============ ============
Period end total loans, net of
unearned interest $ 407,015 $ 405,884 $ 407,015 $ 405,884
============ ============ ============ ============
Average loans $ 403,049 $ 409,545 $ 408,175 $ 413,904
============ ============ ============ ============
Ratio of net charge-offs to
average loans 0.14% 0.17% 0.23% 0.34%
Ratio of provision for loan losses
to average loans (0.05)% 0.01% (0.32)% 0.04%
Ratio of allowance for loan losses
to ending total loans 1.50% 2.09% 1.50% 2.09%
Ratio of allowance for loan losses
to total nonperforming loans 189.48% 227.94% 189.48% 227.94%
Ratio of allowance at end of period
to average loans 1.51% 2.07% 1.50% 2.05%
8.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Note 5. Stock Option Plans
In April 1993, the Company adopted the UnionBancorp 1993 Stock Option Plan ("the
1993 Option Plan"). A total of 490,206 shares were issued pursuant to stock
options issued to employees and outside directors under this plan. The 1993
Stock Option Plan was terminated on April 12, 2003.
In 1999, the Company adopted the UnionBancorp, Inc. Non-qualified Stock Option
Plan ("the 1999 Option Plan"). Under the 1999 Option Plan, nonqualified options
may be granted to employees and eligible directors of the Company and its
subsidiaries to purchase the Company's common stock at 100% of the fair market
value on the date the option is granted. The Company has authorized 50,000
shares for issuance under the 1999 Option Plan. During 1999, 40,750 of these
shares were granted and are 100% fully vested. The options have an exercise
period of ten years from the date of grant. There are 9,250 shares available to
grant under this plan.
In April 2003, the Company adopted the UnionBancorp 2003 Stock Option Plan ("the
2003 Option Plan"). Under the 2003 Option Plan, nonqualified options, incentive
stock options, and/or stock appreciation rights may be granted to employees and
outside directors of the Company and its subsidiaries to purchase the Company's
common stock at an exercise price to be determined by the 2003 Option Plan's
administrative committee. Pursuant to the 2003 Option Plan, 200,000 shares of
the Company's unissued common stock have been reserved and are available for
issuance upon the exercise of options and rights granted under the 2003 Option
Plan. The options have an exercise period of ten years from the date of grant.
There are 92,500 shares available to grant under this plan.
A summary of the status of the option plans as of September 30, 2006, and
changes during the quarter ended on those dates is presented below:
September 30, 2006
----------------------------
Weighted-
Average
Exercise
Shares Price
------------ ------------
Outstanding at beginning
of quarter 266,364 $ 16.11
Granted 17,500 19.60
Exercised 100 16.07
Forfeited -- --
------------ ------------
Outstanding at end of quarter 283,764 $ 16.33
============ ============
Options exercisable at quarter end 174,133 $ 14.07
============ ============
Weighted-average fair
value of options granted
during the quarter $ 19.60
============
9.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Note 5. Stock Option Plans (Continued)
Options outstanding at September 30, 2006 and December 31, 2005 were as follows:
September 30, 2006
Outstanding Exercisable
-------------------------- ----------------------
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Number Life Number Price
------------------ ---------- ---------- --------- ----------
$ 7.25 - $ 9.75 9,000 0.4 years 9,000 $ 9.75
11.25 - 13.00 59,681 3.7 years 59,681 11.64
13.88 - 18.50 112,583 4.3 years 94,452 14.92
19.60 - 23.29 102,500 8.6 years 12,000 22.78
---------- ---------- --------- ----------
283,764 5.6 years 174,133 $ 14.07
========== ========== ========= ==========
December 31, 2005
Outstanding Exercisable
-------------------------- ----------------------
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Number Life Number Price
------------------ ---------- ---------- --------- ----------
$ 7.25 - $ 9.75 22,300 0.7 years 22,300 $ 8.69
11.25 - 13.00 62,681 4.5 years 54,855 11.63
13.88 - 18.50 126,694 5.0 years 98,356 15.04
20.30 - 23.29 90,000 9.2 years 12,000 22.78
---------- ---------- --------- ----------
301,675 5.8 years 187,511 $ 13.78
========== ========== ========= ==========
The intrinsic value for stock options is calculated based on the
exercise price of the underlying awards and the market price of our common stock
as of the reporting date. The intrinsic value of options exercised during the
third quarter of 2006 and 2005 was $310 and $375. The company recorded $103 in
stock compensation expense during the nine months ended September 30, 2006 to
salaries and employee benefits.
The fair value of each stock option granted is estimated using the
Black-Scholes based stock option valuation model. This model requires the input
of subjective assumptions that will usually have a significant impact on the
fair value estimate. Expected volatilities are based on historical volatility of
the Company's stock, and other factors. Expected dividends are based on dividend
trends and the market price of the Company's stock price at grant. The Company
uses historical data to estimate option exercises and employee terminations
within the valuation model. The risk-free rate for periods within the
contractual life of the options is bases on the U. S. Treasury yield curves in
effect at the time of grant. There were 17,500 of grants issued during the nine
months ended September 30, 2006 and no grants were issued for the nine months
ended September 30, 2005.
The Company elected to adopt the modified prospective application
method as provided by SFAS 123R, and, accordingly the Company recorded
compensation costs as the requisite service rendered for the
10.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Note 5. Stock Option Plans (Continued)
unvested portion of previously issued awards that remain outstanding at the
initial date of adoption and any awards issued, modified, repurchased, or
cancelled after the effective date of SFAS 123R.
Prior to January 1, 2006, the Company accounted for share-based
compensation to employees in accordance with Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The Company also followed the disclosure requirements of SFAS
123, "Accounting for Stock-Based Compensation". No stock-based compensation was
recognized on employee stock options in the consolidated statement of income
before January 1, 2006. Accordingly, financial statement amounts for the prior
periods presented in this Form 10-Q have not been restated to reflect the fair
value method of expensing share-based compensation.
SFAS 123R requires the recognition of stock based compensation for the
number of awards that are ultimately expected to vest. As a result, recognized
stock option compensation expense was reduced for estimated forfeitures prior to
vesting primarily based on historical annual forfeiture rates of approximately
three percent. Estimated forfeitures will be reassessed in subsequent periods
and may change based on new facts and circumstances. Prior to January 1, 2006,
actual forfeitures were accounted for as they occurred for purposes of required
pro forma stock compensation disclosures.
Unrecognized stock option compensation expense related to unvested
awards (net of estimated forfeitures) for the remainder of 2006 and beyond is
estimated as follows:
Year Expense
------------------------------ ------------
October, 2006 - December, 2006 $ 34
2007 67
2008 47
2009 28
------------
Total $ 176
============
The following table illustrates the effect on net income and earnings
per share if expense was measured using the fair value recognition provisions of
SFAS 123R as of September 30, 2005:
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2005
------------ ------------
Net income as reported
for common stockholders $ 1,009 $ 3,251
Deduct: stock-based compensation expense
determined under fair value based method 27 81
------------ ------------
Pro forma net income $ 982 $ 3,170
============ ============
Basic earnings
per common share as reported $ 0.26 $ 0.82
Pro forma basic earnings
per common share $ 0.25 $ 0.80
Diluted earnings
per common share as reported $ 0.25 $ 0.80
Pro forma diluted earnings
per common share $ 0.25 $ 0.78
11.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
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.
Note 7. Segment Information
The reportable segments are determined by the products and services
offered, primarily distinguished between retail, commercial, treasury, wealth
management, and operations & other. Loans, and deposits generate the revenues in
the commercial segments; deposits, loans, secondary mortgage sales and servicing
generates the revenue in the retail segment; investment income generates the
revenue in the treasury segment; brokerage and trust services generate the
revenue in the wealth management segment (formerly known as the Financial
Services segment); and holding company services and discontinued operations
associated with the sale of the insurance segment generate the revenue in the
operations & other segment. With the sale of the Insurance unit, the results for
Insurance were reclassified into the Operations & Other segment from the
Financial Services segment (which is now referred to as Wealth Management).
The accounting policies used with respect to segment reporting are the
same as those described in the summary of significant accounting policies set
forth in Note 1 on page 4. Segment performance is evaluated using net income.
Information reported internally for performance assessment follows.
Three Months Ended
---------------------------------------------------------------------------------
September 30, 2006
---------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Consolidated
Segment Segment Segment Management Operations Total
----------- ----------- ----------- ----------- ----------- -----------
Net interest income (loss) $ 1,909 $ 3,217 $ 126 $ 50 $ (228) $ 5,074
Other revenue 883 126 -- 290 94 1,393
Other expense 1,306 584 61 323 2,164 4,438
Noncash items
Depreciation 225 2 -- 17 237 481
Provision for loan losses 300 (500) -- -- -- (200)
Other intangibles -- -- -- 1 23 24
Net allocations 740 1,193 158 214 (2,305) --
Income tax expense 87 641 (101) (30) (109) 488
Segment profit (loss) 134 1,423 8 (185) (144) 1,236
Goodwill 2,512 2,631 -- 1,167 -- 6,310
Segment assets 93,948 329,836 197,225 2,132 25,710 648,851
Three Months Ended
---------------------------------------------------------------------------------
September 30, 2005
---------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Consolidated
Segment Segment Segment Management Operations Total
----------- ----------- ----------- ----------- ----------- -----------
Net interest income (loss) $ 1,914 $ 3,310 $ 50 $ 19 $ (75) $ 5,218
Other revenue 1,024 96 -- 430 464 2,014
Other expense 1,675 821 57 399 2,287 5,239
Noncash items
Depreciation 221 2 -- 1 246 470
Provision for loan losses 40 10 -- -- -- 50
Other intangibles -- -- -- 1 42 43
Net allocations 850 1,163 140 235 (2,388) --
Income tax expense 53 434 (123) (54) 59 369
Segment profit (loss) 99 976 (24) (133) 143 1,061
Goodwill 2,512 2,631 -- 1,820 -- 6,963
Segment assets 106,675 317,766 209,040 4,350 23,472 661,303
12.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Nine Months Ended
---------------------------------------------------------------------------------
September 30, 2006
---------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Consolidated
Segment Segment Segment Management Operations Total
----------- ----------- ----------- ----------- ----------- -----------
Net interest income (loss) $ 5,817 $ 9,606 $ 342 $ 159 $ (712) $ 15,212
Other revenue 2,641 347 (88) 876 1,081 4,857
Other expense 4,242 1,751 192 1,057 6,652 13,894
Noncash items
Depreciation 668 8 -- 54 682 1,412
Provision for loan losses 325 (1,625) -- -- -- (1,300)
Other intangibles -- -- -- 4 107 111
Net allocations 2,211 3,662 476 680 (7,029) --
Income tax expense 351 2,030 (353) (208) (44) 1,776
Segment profit (loss) 661 4,127 (61) (552) 1 4,176
Goodwill 2,512 2,631 -- 1,167 -- 6,310
Segment assets 93,948 329,836 197,225 2,132 25,710 648,851
Nine Months Ended
---------------------------------------------------------------------------------
September 30, 2005
---------------------------------------------------------------------------------
Retail Commercial Treasury Wealth Other Consolidated
Segment Segment Segment Management Operations Total
----------- ----------- ----------- ----------- ----------- -----------
Net interest income (loss) $ 5,534 $ 9,728 $ 227 $ 41 $ 45 $ 15,587
Other revenue 3,000 322 -- 1,030 1,543 5,895
Other expense 4,863 2,521 174 996 6,920 15,474
Noncash items
Depreciation 675 8 -- 61 581 1,325
Provision for loan losses 330 (180) -- -- -- 150
Other intangibles -- -- -- 45 85 130
Net allocations 2,391 3,373 371 589 (6,724) --
Income tax expense 88 1,194 (318) (172) 364 996
Segment profit (loss) 187 3,134 -- (448) 534 3,407
Goodwill 2,512 2,631 -- 1,820 -- 6,963
Segment assets 106,675 317,766 209,040 4,350 23,472 661,303
Note 8. -- Discontinued Operations
The Company sold the Insurance unit of their Wealth Management segment
to the Phoenix Group for $1.2 million and the deal closed on September 29, 2006.
The sale price is subject to final adjustments until December 28, 2006. The
Company and Phoenix Group have until this date to evaluate any accounts
receivable balances that are ninety days or more past due as of the date of the
sale that is not collected in full within ninety days, at the sole discretion of
the Phoenix Group, is subject to repurchase by the Company. The Company does not
anticipate any significant changes at this time.
In accordance with FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144") the results of
operations of the insurance division are reflected in the Company's statements
of income for the three and nine months ended September 30, 2006 and 2005 as
"discontinued operations." The loss on the sale of the insurance unit of $355
thousand and related tax benefit of $138 thousand are included in discontinued
operations for the three and nine months ended September 30, 2006. Additionally,
approximately $1,030 of goodwill and intangibles attributed to the Insurance
unit on the Company's balance sheet were written off as a result of this
transaction and factored into the loss on the sale of the discontinued
operations.
13.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Note 8. -- Discontinued Operations (Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net Interest Income $ 0 $ (0) $ 0 $ 0
Noninterest Income (88) 312 532 1,002
Noninterest Expense 352 405 1,066 1,225
------------ ------------ ------------ ------------
Loss from discontinued operations
before income taxes (440) (93) (534) (223)
Benefit for taxes (170) (36) (207) (80)
------------ ------------ ------------ ------------
Net Income (loss) from discontinued operations (270) (57) (327) (143)
============ ============ ============ ============
14.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
The following discussion provides an analysis of the Company's results
of operations and financial condition for the three and nine months ended
September 30, 2006 as compared to the same period in 2005. Management's
discussion and analysis (MD&A) should be read in conjunction with the
consolidated financial statements and accompanying notes presented elsewhere in
this report as well as the Company's 2005 Annual Report on Form 10-K. Annualized
results of operations during the three and nine months ended September 30, 2006
are not necessarily indicative of results to be expected for the full year of
2006. Unless otherwise stated, all earnings per share data included in this
section and throughout the remainder of this discussion are presented on a
diluted basis. All financial information is in thousands (000's), except per
share data.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities 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 such as "believe," "expect," "intend,"
"anticipate," "estimate," "project," "planned" or "potential" 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 wealth management 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.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported 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. By their nature, changes in these assumptions and estimates
could significantly affect the Company's financial position or results of
operations. Actual results could differ from those estimates. Discussed below
are those critical accounting policies that are of particular significance to
the Company.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required based on past loan loss experience, the nature
and volume of the portfolio, information about specific borrower situations and
estimated collateral values, current economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged off. Loan losses are charged against the allowance when management
believes that the uncollectibility of a loan balance is confirmed.
15.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
General
UnionBancorp, Inc. is a bank holding company organized under the laws
of the state of Delaware. The Company derives most of its revenues and income
from the operations of its bank subsidiary, UnionBank (the "Bank"). The Company
provides a full range of services to individual and corporate customers located
in the north central and central Illinois areas. These services include demand,
time, and savings deposits; lending; mortgage banking; brokerage services; asset
management; and trust services. The Company is subject to competition from other
financial institutions, including banks, thrifts and credits unions, as well as
nonfinancial institutions providing financial services. Additionally, the
Company and the Bank are subject to regulations of certain regulatory agencies
and undergo periodic examinations by those regulatory agencies.
Third Quarter Highlights
o On June 30, 2006, UnionBancorp, Inc. and Centrue Financial Corporation
(NASDAQ: TRUE) announced that they have signed a definitive agreement
to join forces in a merger of equals transaction. Under the terms of
the agreement, Centrue shareholders will receive shares of UnionBancorp
common stock, using a fixed exchange ratio of 1.2 shares of
UnionBancorp common stock for each share of Centrue common stock
outstanding. The combined company will adopt the Centrue name and
change its stock market ticker symbol to TRUE. The merger is subject to
approval by UnionBancorp's and Centrue's stockholders and banking
regulators and other customary conditions. The transaction is expected
to be completed in mid-November, 2006.
o Diluted earnings per share increased 24.0% compared to the third
quarter of 2005 and decreased 6.1% as compared to second quarter 2006
levels.
o The Company's earnings were positively impacted by a $200 negative
provision for loan losses largely based on continued improvements in
the quality of the loan portfolio.
o During the quarter, the Company sold its Insurance unit to a third
party.
o The net interest margin decreased to 3.49% during the third quarter of
2006 as compared with 3.53% for the same period in 2005 due largely to
the flat yield curve and intense competition for deposits and loans.
o The loan portfolio decreased to $407.0 million as compared to $417.5
million at December 31, 2005.
o The level of nonperforming loans to end of period loans totaled 0.79%
as of September 30, 2006 compared to 0.92% at September 30, 2005 and
0.96% on December 31, 2005.
o Net charge-offs for the third quarter of 2006 were 0.14% of average
loans as compared to 0.17% for the same period 2005.
o The Company's Board of Directors approved the payment of a $0.12
quarterly cash dividend on the Company's common stock, marking the 86th
consecutive quarter of dividends paid to stockholders.
16.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Results of Operations
Net Income
Income from continuing operations equaled $1,506 or $0.38 per diluted
share for the three months ended September 30, 2006 compared to $1,118 or $0.26
per diluted share earned for same period in 2005. The Company recorded a net
loss of ($270) or ($0.07) per diluted share from discontinued operations related
to the recent sale of the insurance group. Net income for the period was $1,184
or $0.31 per diluted share as compared to $1,009 or $0.25 per diluted share for
the same period in 2005.
For the nine months ended September 30, 2006, net income equaled $4,020
or $1.06 per diluted share compared to $3,251 or $0.80 per diluted share earned
in the same period during 2005. During this period, the Company reported a net
loss of ($327) or ($0.08) per diluted share related to the discontinued
operations for the insurance group as compared to a net loss of ($143) or
($0.04) per diluted share for the same period in 2005. For continuing
operations, the Company reported results of $4,503 or $1.14 per diluted share as
compared with earnings of $3,550 or $0.84 per diluted share for the same period.
The Company's quarterly results from continuing operations were
positively impacted by a negative provision of $200 to the allowance for loan
losses. This action was largely based on continued improvements in the quality
of the loan portfolio, favorable loan loss experience and management's beliefs
regarding the probability and estimations of future losses inherent in the loan
portfolio. Additionally, quarterly earnings were assisted by continued
management of noninterest expense levels which led to decreased expense levels,
and fewer FTE's drove salary and benefit costs lower and lower accounting and
professional fees. These items were partially offset by increased interest
expense due to higher rates and an adverse shift in the deposit base from lower
paying core deposit accounts to higher paying time deposit accounts. Also
contributing to the change in earnings were decreases in revenue generated from
the mortgage banking division and brokerage product lines due to lower
production volumes.
Return on average assets was 0.76% for the third quarter of 2006
compared to 0.64% for the same period in 2005. Return on average assets was
0.85% for the nine month period ended September 30, 2006 compared to 0.69% for
the same period in 2005.
Return on average stockholders' equity was 7.32% for the third quarter
of 2006 compared to 6.18% for the same period in 2005. Return on average
stockholder's equity was 8.43% for the nine month period ended September 30,
2006 compared to 6.55% for the same period in 2005.
Net Interest Income/ Margin
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 the rates earned and paid, respectively, on those assets and liabilities.
The net yield on total interest-earning assets, also referred to as net interest
margin, represents net interest income divided by average interest-earning
assets. Net interest margin measures how efficiently the Company uses its
earning assets and underlying capital. 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.
17.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Net interest income, on a tax equivalent basis, was $5,206 for the
three months ended September 30, 2006, compared with $5,365 earned during the
same three-month period in 2005. This represented a decrease of $159 or 3.0%
from the prior year period. The change in net interest income is attributable to
the increase in interest expense paid on interest bearing liabilities totaling
$1,226 partially offset by an increase in interest income earned on interest
earning assets totaling $1,067.
The $1,067 increase in interest income resulted from an increase of
$1,218 due to rate partially offset by a decrease of $151 due to volume. The
majority of the change in interest income was related to the increases in rates
experienced from the loan and investment portfolios. The volume within the
security and loan portfolios were lower for the third quarter of 2006 as
compared to the same period in 2005.
The $1,226 increase in interest expense resulted from increases of
$1,213 associated with rate and $13 associated with volume. The majority of the
change was attributable to a 98 basis point increase overall in rates paid on
the deposit portfolio. Specifically, the rates for time deposit products
increased by 102 basis points. There was an increase in rates paid on money
market accounts of 102 basis points. Also, the rates paid on NOW accounts
increased by 52 basis points.
The net interest margin decreased 4 basis points to 3.49% in the third
quarter 2006 as compared with 3.53% for the same period in 2005. The expectation
of a flat yield curve is likely to maintain pressure on margins for the
remainder of 2006.
Net interest income, on a tax equivalent basis, for the nine months
ended September 30, 2006 totaled $15,602, representing a decrease of $447 or
2.8% compared to the $16,049 earned during the same period in 2005. Net interest
income decreased largely due to the increase in interest expense paid on
interest bearing liabilities totaling $3,628 exceeding the increase in the
interest income earned on interest-earning assets totaling $3,181. The net
interest margin for the first nine months of 2006 decreased 9 basis points to
3.46% compared to 3.55% for the same period in 2005.
The Company's net interest income is affected by changes in the amount
and mix of interest-earning assets and interest-bearing liabilities, referred to
as "volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds referred to as "rate change." The following table details each
category of average amounts outstanding for interest-earning assets and
interest-bearing liabilities, average rate earned on all interest-earning
assets, average rate paid on all interest-bearing liabilities, and the net yield
on average interest-earning assets. In addition, the table reflects the changes
in net interest income stemming from changes in interest rates and from asset
and liability volume, including mix. The change in interest attributable to both
rate and volume has been allocated to the changes in the rate and the volume on
a pro rata basis.
18.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Three Months Ended September 30,
--------------------------------------------------------------
2006 2005
------------------------------ -----------------------------
Interest Interest Change Due To:
Average Income/ Average Average Income/ Average ------------------------------
Balance Expense Rate Balance Expense Rate Volume Rate Net
-------- -------- ------- -------- -------- ------- ------ -------- --------
ASSETS
Interest-earning assets
Interest-earning deposits $ 177 $ 4 8.97% $ 211 $ 2 3.76% $ -- $ 2 $ 2
Securities (1)
Taxable 163,762 2,066 5.01 170,696 1,587 3.69 (67) 545 478
Non-taxable (2) 19,123 330 6.85 20,433 366 7.09 (21) (14) (35)
-------- -------- ------- -------- -------- ------- ------ -------- --------
Total securities
(tax equivalent) 182,885 2,396 5.20 191,129 1,953 4.05 (88) 531 443
-------- -------- ------- -------- -------- ------- ------ -------- --------
Federal funds sold 5,678 71 4.96 1,850 16 3.43 45 10 55
-------- -------- ------- -------- -------- ------- ------ -------- --------
Loans (3)(4)
Commercial 108,754 2,067 7.54 116,435 2,018 6.79 (146) 195 49
Real estate 285,091 5,184 7.21 277,104 4,500 6.44 133 551 684
Installment and other 9,009 212 9.34 15,688 378 9.56 (95) (71) (166)
-------- -------- ------- -------- -------- ------- ------ -------- --------
Gross loans
(tax equivalent) 402,854 7,463 7.35 409,227 6,896 6.69 (108) 675 567
-------- -------- ------- -------- -------- ------- ------ -------- --------
Total interest-
earning assets 591,594 9,934 6.66 602,417 8,867 5.84 (151) 1,218 1,067
-------- -------- ------- -------- -------- ------- ------ -------- --------
Noninterest-earning assets
Cash and cash equivalents 17,226 20,973
Premises and equipment, net 13,730 13,881
Other assets 25,777 22,650
-------- --------
Total nonearning assets 56,733 57,504
-------- --------
Total assets $648,327 $659,921
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 69,124 $ 332 1.91% $ 71,893 $ 266 1.39% $ (26) $ 92 $ 66
Money market accounts 53,283 397 2.96 59,913 293 1.94 (35) 139 104
Savings deposits 34,657 65 0.74 41,521 48 0.46 (9) 26 17
Time deposits 307,100 3,334 4.31 283,165 2,225 3.12 201 908 1,109
Federal funds purchased and
repurchase agreements 5,317 69 5.15 5,055 44 3.45 2 23 25
Advances from FHLB 38,820 363 3.71 49,763 486 3.87 (104) (19) (123)
Notes payable and other 9,489 168 7.02 10,621 140 5.23 (16) 44 28
-------- -------- ------- -------- -------- ------- ------ -------- --------
Total interest-bearing
liabilities 517,790 4,728 3.62 525,931 3,502 2.64 13 1,213 1,226
-------- -------- ------- -------- -------- ------- ------ -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 58,554 61,537
Other liabilities 4,944 4,304
-------- --------
Total noninterest-bearing
liabilities 63,498 65,841
-------- --------
Stockholders' equity 67,039 68,149
-------- --------
Total liabilities and
stockholders' equity $648,327 $659,921
======== ========
Net interest income
(tax equivalent) $ 5,206 $ 5,365 $ (164) $ 5 $ (159)
======== ======== ====== ======== ========
Net interest income
(tax equivalent)
to total earning assets 3.49% 3.53%
======= ========
Interest-bearing liabilities to
earning assets 87.52% 87.30%
======== ========
----------------------------------------------
(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.
19.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
AND ANALYSIS OF NET INTEREST INCOME
For the Nine Months Ended September 30,
---------------------------------------------------------------
2006 2005
------------------------------ ------------------------------
Interest Interest Change Due To:
Average Income/ Average Average Income/ Average -------------------------------
Balance Expense Rate Balance Expense Rate Volume Rate Net
-------- -------- ------- -------- -------- ------- ------- -------- --------
ASSETS
Interest-earning assets
Interest-earning deposits $ 213 $ 11 6.90% $ 166 $ 5 4.03% $ 2 $ 4 $ 6
Securities (1)
Taxable 173,367 6,083 4.69 165,884 4,494 3.62 210 1,379 1,589
Non-taxable (2) 18,493 976 7.06 21,595 1,155 7.15 (75) (104) (179)
-------- -------- ------- -------- -------- ------- ------- -------- --------
Total securities
(tax equivalent) 191,860 7,059 4.92 187,479 5,649 4.03 135 1,275 1,410
-------- -------- ------- -------- -------- ------- ------- -------- --------
Federal funds sold 3,415 130 5.09 3,309 72 2.91 2 56 58
-------- -------- ------- -------- -------- ------- ------- -------- --------
Loans (3)(4)
Commercial 112,906 6,109 7.23 118,490 5,884 6.64 (284) 509 225
Real estate 284,636 15,004 7.05 277,172 13,017 6.28 358 1,629 1,987
Installment and other 10,442 738 9.45 17,996 1,243 9.23 (534) 29 (505)
-------- -------- ------- -------- -------- ------- ------- -------- --------
Gross loans
(tax equivalent) 407,984 21,851 7.16 413,658 20,144 6.51 (460) 2,167 1,707
-------- -------- ------- -------- -------- ------- ------- -------- --------
Total interest-
earning assets 603,472 29,051 6.44 604,612 25,870 5.72 (321) 3,502 3,181
-------- -------- ------- -------- -------- ------- ------- -------- --------
Noninterest-earning assets
Cash and cash equivalents 17,823 18,862
Premises and equipment, net 13,770 13,715
Other assets 24,350 24,114
-------- --------
Total nonearning assets 55,943 56,691
-------- --------
Total assets $659,415 $661,303
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
NOW accounts $ 69,507 $ 928 1.79% $ 72,827 $ 635 1.17% $ (30) $ 323 $ 293
Money market accounts 53,960 1,106 2.74 59,012 741 1.68 (68) 433 365
Savings deposits 36,734 187 0.68 42,940 161 0.50 (26) 52 26
Time deposits 308,021 9,231 4.01 280,501 6,186 2.95 653 2,392 3,045
Federal funds purchased and
repurchase agreements 5,092 192 5.04 7,002 155 2.96 (51) 88 37
Advances from FHLB 45,307 1,300 3.86 55,638 1,619 3.89 (307) (12) (319)
Notes payable and other 10,070 505 6.70 9,075 330 4.77 39 142 181
-------- -------- ------- -------- -------- ------- ------- -------- --------
Total interest-bearing
liabilities 528,421 13,449 3.40 526,997 9,827 2.42 210 3,418 3,628
-------- -------- ------- -------- -------- ------- ------- -------- --------
Noninterest-bearing liabilities
Noninterest-bearing deposits 59,969 60,658
Other liabilities 4,918 4,068
-------- --------
Total noninterest-bearing
liabilities 64,887 64,726
-------- --------
Stockholders' equity 66,107 69,580
-------- --------
Total liabilities and
stockholders' equity $659,415 $661,303
======== ========
Net interest income
(tax equivalent) $ 15,602 $ 16,043 $ (531) $ 84 $ (447)
======== ======== ======= ======== ========
Net interest income
(tax equivalent) to
total earning assets 3.46% 3.55%
======= =======
Interest-bearing liabilities
to earning assets 87.56% 87.16%
======== ========
----------------------------------------------
(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.
20.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Provision for Loan Losses
The Company recorded a negative provision of $200 to the allowance for
loan losses for the third quarter of 2006 which is a decrease of $250 from the
$50 recorded during the same period a year ago. A negative $1,300 provision for
the loan losses was charged to operation expense for the nine months ended
September 30, 2006 which was a decrease of $1,450 from $150 recorded during the
same period a year ago. The decrease in the provision was largely based on
continued improvements in the quality of the loan portfolio, favorable loan loss
experience and management's beliefs regarding the probability and estimations of
future losses inherent in the loan portfolio. Nonperforming loans decreased $505
from $3,726 as of September 30, 2005 to $3,221 as of September 30, 2006. In
comparison to December 31, 2005, nonperforming loans decreased $783 from $4,004.
Net charge-offs for the third quarter of 2006 were $545 compared with
$716 for the comparable period in 2005. Annualized net charge-offs were 0.14% of
average loans for the third quarter of 2006 compared with 0.17% of average loans
for same period in 2005. Net charge-off for the nine months ended September 30,
2006 were $959 compared with $1,389 for the comparable period in 2005.
Annualized net charge-offs also decreased to 0.23% of average loans for the nine
months ended September 30, 2006 compared to 0.34% in the same period in 2005.
See "Nonperforming Assets" and "Other Potential Problem Loans" for further
information.
The amount of the provision for loan losses is based on management's
evaluations of the loan portfolio, with particular attention directed toward
nonperforming, impaired 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 loans, other
nonperforming loans, other identified potential problem loans, historical loss
experience, results of examinations by regulatory agencies, results of the
independent asset quality review process, the market value of collateral, the
estimate of discounted cash flows, the strength and availability of guarantees,
concentrations of credits, and various other factors, including concentration of
credit risk in various industries and current economic conditions.
Management remains watchful of credit quality issues. Should the
economic climate deteriorate from current levels, borrowers may experience
difficulty, and the level of nonperforming loans, charge-offs and delinquencies
could rise and require further increases in the provision.
Noninterest Income
Noninterest income consists of a wide variety of fee-based revenues
from bank-related service charges on deposits and mortgage revenues. Also
included in this category are revenues generated by the Company's brokerage,
trust and asset management product lines as well as increases in cash surrender
value on bank-owned life insurance. The following table summarizes the Company's
noninterest income:
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Service charges $ 476 $ 490 $ 1,411 $ 1,498
Trust income 202 193 620 595
Mortgage banking income 240 357 767 1,061
Brokerage commissions and fees 87 236 260 439
Bank owned life insurance 153 138 430 407
Securities gains (losses), net -- -- (88) --
Gain on the sale of assets (1) -- (2) 3
Other income 324 288 927 890
------------ ------------ ------------ ------------
$ 1,481 $ 1,702 $ 4,325 $ 4,893
============ ============ ============ ============
Noninterest income totaled $1,481 for the three months ended September
30, 2006, compared to $1,702 for the same period in 2005. Exclusive of the net
gains on sale of assets and net securities gains for both periods, noninterest
income equaled $1,482 for the three months ended September 30, 2006, compared to
$1,702 for the same period in 2005. This represented a decrease of $220 or
12.9%. The quarter-over-quarter decrease was primarily attributable to a
production level decrease in revenue generated from the mortgage banking
division, and lower brokerage revenues.
Noninterest income totaled $4,325 for the nine months ended September
30, 2006, compared to $4,893 for the same time frame in 2005. Excluding all net
gains on sale of assets and net securities gains for both periods, noninterest
income decreased $475 or 10.0%. The change was largely reflective of the same
items discussed regarding the third quarter. Additionally, results were impacted
by the impact related to losses for investment activities.
Noninterest Expense
Noninterest expense is comprised primarily of compensation and employee
benefits, occupancy and other operating expense. The following table summarizes
the Company's noninterest expense:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Salaries and employee benefits $ 2,630 $ 3,098 $ 8,035 $ 9,307
Occupancy expense, net 356 386 1,110 1,120
Furniture and equipment expense 515 497 1,508 1,339
Marketing 88 115 294 337
Supplies and printing 71 80 230 238
Telephone 104 112 339 321
Other real estate owned expense 2 12 10 46
Amortization of intangible assets 11 30 71 90
Other expenses 814 1,017 2,754 2,906
------------ ------------ ------------ ------------
$ 4,591 $ 5,347 $ 14,351 $ 15,704
============ ============ ============ ============
Noninterest expense totaled $4,591 for the three months ended September
30, 2006, as compared to $5,347 for the same period in 2005. This represented a
decrease of $756 or 14.2%. This improvement in noninterest expense was primarily
22.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
due to the reduction of salary and benefit costs, and lower accounting and
professional fees. These savings were offset by a modest increase in furniture
and fixture expense.
Noninterest expense totaled $14,351 for the nine months ended September
30, 2006, decreasing by $1,353 or 8.7% from the same period in 2005. The change
was largely reflective of the same items discussed regarding the third quarter.
Applicable Income Taxes
Income tax expense for the periods included benefits for tax-exempt
income, tax-advantaged investments, loss from discontinued operations and
general business tax credits offset by the effect of nondeductible expenses. For
the third quarter, the Company's effective tax rate overall was 28.3% as its
total applicable taxes were $488 on pretax earnings of $1,724. for The following
table shows the Company's income from continuing operations before income taxes,
as well as applicable income taxes and the effective tax rate for the three and
nine months ended September 30, 2006 and 2005.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Income from continuing operations
before income taxes $ 2,164 $ 1,523 $ 6,436 $ 4,626
Applicable income taxes 658 405 1,983 1,076
Effective tax rates 30.4% 26.5% 30.8% 23.3%
The Company recorded an income tax expense of $658 and of $405 on
income from continuing operations for the three months ended September 30, 2006
and 2005, respectively. Effective tax rates equaled 30.4% and 26.5%
respectively, for such periods.
Income tax expense for the periods included benefits for tax-exempt
income, tax-advantaged investments and general business tax credits offset by
the effect of nondeductible expenses. The Company's effective tax rate was lower
than statutory rates due to the Company deriving 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.
Additionally, the Company has reduced tax expense through various tax planning
initiatives.
The Company recorded income tax expense of $1,983 and $1,076 on income
from continuing operations for the nine months ended September 30, 2006 and
2005, respectively. Effective tax rates equaled 30.8% and 23.3% respectively,
for such periods.
Preferred Stock Dividends
The Company paid $52 in preferred stock dividends for the three months
ended September 30, 2006 and 2005, respectively. The Company paid $156 in
preferred stock dividends for the nine months ended September 30, 2006 and 2005,
respectively.
23.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
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 Bank depends, to a substantial extent, on "rate differentials,"
i.e., the differences between the income the Bank receives 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 Bank, 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 interest rates scenarios are used for analytical
purposes and do not necessarily represent management's view of future market
movements. The tables below present the Company's projected changes in net
interest income for the various rate shock levels at September 30, 2006 and
December 31, 2005, respectively:
September 30, 2006
Net Interest Income
----------------------------------------------
Amount Change Change
------------ ------------ ------------
(Dollars in Thousands)
+200 bp $ 21,853 $ 1,106 5.33%
+100 bp 21,339 592 2.85
Base 20,748 -- --
-100 bp 20,058 (690) (3.32)
-200 bp 18,898 (1,850) (8.92)
Based upon the Company's model at September 30, 2006, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by $1,106 or 5.33%. The effect of an immediate 200
basis point decrease in rates would decrease the Company's net interest income
by $1,850 or 8.92%.
December 31, 2005
Net Interest Income
----------------------------------------------
Amount Change Change
------------ ------------ ------------
(Dollars in Thousands)
+200 bp $ 23,043 $ 959 4.34%
+100 bp 22,629 545 2.47
Base 22,084 -- --
-100 bp 21,314 (770) (3.49)
-200 bp 19,744 (2,340) (10.59)
Based upon the Company's model at December 31, 2005, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by $959 or 4.34%. The effect of an immediate 200
basis point decrease in rates would decrease the Company's net interest income
by $2,340 or 10.59%.
24.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Financial Condition
General
As of September 30, 2006, the Company had total assets of $648,851,
total gross loans of $400,912, total deposits of $526,918 and total
stockholders' equity of $67,304. Total assets decreased by $27,371 or 4.0% from
year-end 2005 related primarily to decline in the investment portfolio. Total
gross loans decreased by $10,510 or 2.5% from year-end 2005. Total deposits
declined by $16,923 or 3.1% from year-end 2005. These changes were implemented
to reduce the investment portfolio as with the flat yield curve the Company was
experiencing slim spreads over its cost of funds. Thus, the cost of funds which
was the primarily the FHLB advances was reduced as the investments were sold.
Nonperforming Assets
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 that are 90 days delinquent but are well secured and in the
process of collection are not included in nonperforming assets. Other
nonperforming assets consist of real estate acquired through loan foreclosures
or other workout situations and other assets acquired through repossessions.
The classification of a loan as nonaccrual does not necessarily
indicate that the principal is uncollectible, in whole or in part. The Bank
makes a determination as to collectibility on a case-by-case basis. The Bank
considers both the adequacy of the collateral and the other resources of the
borrower in determining the steps to be taken to collect 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
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 nonperforming, impaired, and past due loans to prevent further
deterioration of these loans. The Company has an independent loan review
function which is separate from the lending function and is responsible for the
review of new and existing loans.
25.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
The following table summarizes nonperforming assets and loans past due
90 days or more and still accruing for the previous five quarters.
2006 2005
------------------------------------------ ---------------------------
Sept 30, Jun 30, Mar 31, Dec 31, Sept 30,
------------ ------------ ------------ ------------ ------------
Non-accrual loans $ 3,053 $ 2,289 $ 2,785 $ 3,082 $ 2,397
Loans 90 days past due and still accruing interest 168 517 567 922 1,329
------------ ------------ ------------ ------------ ------------
Total nonperforming loans 3,221 2,806 3,352 4,004 3,726
Other real estate owned 859 1,390 536 203 194
------------ ------------ ------------ ------------ ------------
Total nonperforming assets $ 4,080 $ 4,196 $ 3,888 $ 4,207 $ 3,920
============ ============ ============ ============ ============
Nonperforming loans to total end of period loans 0.79% 0.70% 0.82% 0.96% 0.92%
Nonperforming assets to total end of period loans 1.00 1.04 0.96 1.01 0.97
Nonperforming assets to total end of period assets 0.63 0.64 0.59 0.62 0.59
The level of nonperforming loans at September 30, 2006 decreased to
$3,221 versus the $4,004 that existed as of December 31, 2005 and from $3,726 at
September 30, 2005. The level of nonperforming loans to total end of period
loans was 0.79% at September 30, 2006, as compared to 0.96% at December 31, 2005
and 0.92% at September 30, 2005. The reserve coverage ratio (allowance to
nonperforming loans) was reported at 189.48% as of September 30, 2006 as
compared to 208.84% as of December 31, 2005 and 227.94% as of September 30,
2005.
Other Potential Problem Loans
The Company has other potential problem loans that are currently
performing, but where some concerns exist as to the ability of the borrower to
comply with present loan repayment terms. Excluding nonperforming loans and
loans that management has classified as impaired, these other potential problem
loans totaled $3,785 at September 30, 2006, as compared to $6,339 at September
30, 2005 and $2,879 at December 31, 2005. The classification of these loans,
however, does not imply that management expects losses on each of these loans,
but believes that a higher level of scrutiny and close monitoring is prudent
under the circumstances. Such classifications relate to specific concerns for
each individual borrower and do not relate to any concentration risk common to
all loans in this group.
Allowance for Loan Losses
At September 30, 2006, the allowance for loan losses was $6,103 or
1.50% of total loans as compared to $8,362 or 2.00% at December 31, 2005, and
$8,493 or 2.09% at September 30, 2005. The decrease in the allowance was largely
based on continued improvements in the quality of the loan portfolio, favorable
loan loss experience and management's beliefs regarding the probability and
estimations of future losses inherent in the loan portfolio. This continued
improvement in asset quality has been driven by the decrease in non-performing
and watch list loans as well as resolutions, either through charge-off of
non-bankable assets or through the successful workout strategies that have been
executed. The Company's loans with specific reserves under FASB No. 114 assigned
to them have continued to decrease throughout the year. As of September 30, 2006
the Company has approximately $2,398 of specific reserves compared to $4,682 as
of December 31, 2005. 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 a loan. The
26.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
allowance for loan losses represents the Company's estimate of the allowance
necessary to provide for probable incurred 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 independent 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 quarterly basis, management reviews the adequacy of the allowance
for loan losses. Commercial credits are graded by the loan officers and the Loan
Review function validates the officers' grades. In the event that the loan
review function 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 nonperforming loans) are
reviewed and classified as to potential loss exposure.
Based on an estimation computed pursuant to the requirements of
Financial Accounting Standards Board ("FASB") Statement No. 5, "Accounting for
Contingencies," and FASB Statements Nos. 114 and 118, "Accounting by Creditors
for Impairment of a Loan," the analysis of the allowance for loan losses
consists of three components: (i) specific credit allocation established for
expected losses resulting from analysis developed through specific credit
allocations on individual loans for which the recorded investment in the loan
exceeds its fair value; (ii) general portfolio allocation based on historical
loan loss experience for each loan category; and (iii) subjective reserves based
on general economic conditions as well as specific economic factors in the
markets in which the Company operates.
The specific credit allocation component of the allowance for loan
losses is based on a regular analysis of loans over a fixed-dollar amount where
the internal credit rating is at or below a predetermined classification. The
fair value of the loan is determined based on either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
market price of the loan, or, if the loan is collateral dependent, the fair
value of the underlying collateral less cost of sale.
The general portfolio allocation component of the allowance for loan
losses is determined statistically using a loss migration analysis that examines
historical loan loss experience. The loss migration analysis is performed
quarterly and loss factors are updated regularly based on actual experience. The
general portfolio allocation element of the allowance for loan losses also
includes consideration of the amounts necessary for concentrations and changes
in portfolio mix and volume.
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 has not significantly changed since year-end
2005. The methodology used to determine the adequacy of the allowance for loan
losses is consistent with prior years, and there were no material reallocations.
Management remains watchful of credit quality issues. Should the
economic climate deteriorate from current levels, borrowers may experience
difficulty, and the level of nonperforming loans, charge-offs and delinquencies
could rise and require further increases in the provision.
27.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
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 brokered time deposits, 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 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.
The Company's cash flows are comprised of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Cash flows provided by operating activities and
investing activities offset by those used in financing activities, resulted in a
net decrease in cash and cash equivalents of $4,307 from December 31, 2005 to
September 30, 2006.
During the first nine months of 2006, the Company experienced net cash
in flows of $3,504 in operating activities due to negative provision and net
income and $17,047 in investing activities largely due to the decrease in net
loans and securities. In contrast, net cash outflow of $24,858 in financing
activities primarily due to a decrease in deposits and borrowed funds.
Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet
Financial Instruments
The Company has entered into contractual obligations and commitments
and off-balance sheet financial instruments. The following tables summarize the
Company's contractual cash obligations and other commitments and off balance
sheet instruments as of September 30, 2006.
Payments Due by Period
----------------------------------------------------------------------------
Within 1 After
Year 1-3 Years 4-5 Years 5 Years Total
------------ ------------ ------------ ------------ ------------
Contractual Obligations
Short-term debt $ 8,100 $ -- $ -- $ -- $ 8,100
Long-term debt -- 201 -- -- 201
Certificates of Deposit 244,115 64,410 1,917 796 311,238
Series B Mandatory redeemable
Preferred stock -- 831 -- -- 831
FHLB Advances 8,100 20,400 8,200 -- 46,700
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations $ 260,315 $ 85,842 $ 10,117 $ 796 $ 357,070
============ ============ ============ ============ ============
28.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Amount of Commitment Expiration per Period
----------------------------------------------------------------------------
Within 1 After
Year 1-3 Years 4-5 Years 5 Years Total
------------ ------------ ------------ ------------ ------------
Off-Balance Sheet Financial Instruments
Lines of credit $ 57,671 $ 5,935 $ 1,700 $ 15,197 $ 80,503
Standby letters of credit 8,861 742 -- -- 9,603
------------ ------------ ------------ ------------ ------------
Total commercial commitments $ 66,532 $ 6,677 $ 1,700 $ 15,197 $ 90,106
============ ============ ============ ============ ============
If the announced merger between UnionBancorp, Inc. and Centrue
Financial Corporation (NASDAQ: TRUE) is terminated, UnionBancorp, Inc is
required to fulfill the certain specified obligations to make certain payments
to Centrue Financial Corporation as described below:
o If the merger agreement is terminated by Centrue because UnionBancorp
has not satisfied its conditions or the closing has not occurred by
March 1, 2007 and UnionBancorp knowingly breached its covenants,
agreements, representations or warranties under the merger agreement
(unless such breach is a result of the failure by Centrue to perform
and comply with any of its obligations) then, provided Centrue is in
compliance with its obligations under the merger agreement,
UnionBancorp must pay $2,700 to Centrue.
o If the merger agreement is terminated by UnionBancorp or Centrue
because UnionBancorp's stockholders fail to approve the merger (a
"UnionBancorp Stockholder Termination"); then, provided Centrue is in
compliance with its obligations under the merger agreement,
UnionBancorp must pay $500 to Centrue.
o In addition to the $500 payment described above (if any), if there is a
UnionBancorp Stockholder Termination and, within twelve months after
such UnionBancorp Stockholder Termination, UnionBancorp enters into an
agreement with any party other than Centrue providing for the
acquisition of UnionBancorp, then, provided Centrue was in compliance
with its obligations under the merger agreement, UnionBancorp must pay
$2,200 to Centrue.
o If UnionBancorp terminates the merger agreement as a result of a
superior UnionBancorp Proposal, then UnionBancorp must pay $2,700 to
Centrue.
Capital Resources
Stockholders' Equity
The Company is committed to managing capital for maximum shareholder
benefit and maintaining strong protection for depositors and creditors.
Stockholders' equity at September 30, 2006 was $67,313, an increase of $1,238 or
1.8%, from December 31, 2005. The increase in stockholders' equity was the
result of the net income for the period partially offset by the dividends paid
to shareholders and a decrease in accumulated other comprehensive income.
Average quarterly equity as a percentage of average quarterly assets was 10.34%
at September 30, 2006, compared to 10.01% at December 31, 2005. Book value per
common share equaled $17.85 at September 30, 2006 compared to $17.23 at December
31, 2005.
Stock Repurchase
On May 2, 2003, the Board of Directors approved a stock repurchase plan
whereby the Company may repurchase from time to time up to 5% of its outstanding
shares of common stock in the open market or in private transactions over an 18
29.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
month period. On September 23, 2004, the Board of Directors extended the
Company's stock repurchase program through May 2, 2006. On June 16, 2005, the
Board of Directors amended the repurchase plan to enable the Company to acquire
an additional 5% of its outstanding shares of common stock in the open market or
in private transactions. On March 16, 2006, the Board of Directors approved an
additional 5% stock repurchase program that begins when the existing plan is
completed. Under the revised plan, the Company can repurchase approximately
188,000 shares of its outstanding shares of common stock. Under the terms of the
plan, the Company is able to repurchase, from time to time, up to 5% of its
outstanding shares of common stock in the open market or in private
transactions. Purchases are dependent upon market conditions and the
availability of shares. The extension of the repurchase program enables the
Company to optimize its use of capital relative to other investment alternatives
and benefits both the Company and the shareholders by enhancing earnings per
share and return on equity. During the quarter ending September 30, 2006, no
shares were repurchased and to date, the Company has repurchased 364,879 shares
at a weighted average cost of $21.16.
Capital Measurements
The Company is 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 12.4%
and 13.6%, respectively, at September 30, 2006. The Company is currently, and
expects to continue to be, in compliance with these guidelines.
The following table sets forth an analysis of the Company's capital
ratios:
December 31, Minimum Well
September 30, ---------------------------- Capital Capitalized
2006 2005 2004 Ratios Ratios
------------ ------------ ------------ ------------ ------------
Tier 1 risk-based capital $ 60,960 $ 60,546 $ 63,347
Tier 2 risk-based capital 6,103 6,266 6,067
------------ ------------ ------------
Total capital 67,063 66,812 69,414
Risk-weighted assets 492,984 501,342 485,325
Capital ratios
Tier 1 risk-based capital 12.4% 12.1% 13.0% 4.00% 6.00%
Tier 2 risk-based capital 13.6 13.3 14.3 8.00 10.00
Leverage ratio 9.5 9.0 9.5 4.00 5.00
Impact of Inflation, Changing Prices, and Monetary Policies
The financial statements and related financial data concerning the
Company have been prepared in accordance with U.S. 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
30.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
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 Board.
Recent Regulatory and Accounting Developments
In February, 2006, the FASB issued SFAS No. 155, "Accounting for
Certain Hybrid Financial Instruments - An Amendment of FASB Statement No. 133
and 140" ("SFAS 155"). SFAS 155 simplifies the accounting for certain hybrid
financial instruments that contain an embedded derivative that otherwise would
have required bifurcation. SFAS 155 also eliminates the interim guidance in FASB
Statement No. 133, which provides that beneficial interest in securitized
financial assets are not subject to the provisions of FASB Statement No. 133.
SFAS 155 is effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006,
which for the Company will be as of the beginning of fiscal 2007. The Company
does not believe that the adoption of SFAS 155 will have a significant effect on
its financial statements as the Company does not have any hybrid financial
instruments at this time.
In March, 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets - An Amendment of FASB Statement No. 140" ("SFAS 156"). SFAS
156 requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. The statement
permits, but does not require, the subsequent measurement of servicing assets
and servicing liabilities at fair value. SFAS 156 is effective as of the
beginning of the entity's first fiscal year that begins after September 15,
2006. The Company is currently evaluating any potential impact of the adoption
of this SFAS.
In September, 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements. It is effective
for financial statements issued for fiscal years beginning after November 15,
2007. The Company is currently evaluating the impact of the adoption of SFAS
157, with respect to its current practice of measuring fair value and disclosure
in its financial statements.
In June, 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB No. 109" ("FIN 48"). FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Interpretation is effective for fiscal
years beginning after December 15, 2006. The Company is currently evaluating the
impact of the adoption of FIN 48, with respect to its results of operations,
financial position and liquidity.
In September, 2006, the U.S. Securities and Exchange Commission ("SEC")
amended Part 211 of Title 17 of the Code of Federal Regulations by adding the
Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides guidance on the consideration of the
effects of prior year misstatements in quantifying current year misstatements
for the purpose of a materiality assessment. SAB 108 is effective for fiscal
years ending after November 15, 2006. The Company is reviewing this accounting
bulletin, but has not yet determined the effect of adopting the Interpretation.
31.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item 3 is incorporated by reference
from the discussion on page 24 of this Form 10-Q under the caption "Interest
Rate Sensitivity Management" and the discussion on page 31 under the caption
"Impact of Inflation, Changing Prices, and Monetary Policies."
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried
out an evaluation under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of
1934, as amended). Based on this evaluation, the Company's Chief Executive
Officer/Chief Financial Officer concluded that the Company's disclosure controls
and procedures were effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic
filings with the Securities and Exchange Commission. It should be noted that in
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
The Company has designed its disclosure controls and procedures to reach a level
of reasonable assurance of achieving the desired control objectives and, based
on the evaluation described above, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective at reaching that level of reasonable assurance.
There was no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended) during the Company's most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
32.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business the Company may be involved in various
legal proceedings from time to time. The Company does not believe it is
currently involved in any claim or action the ultimate disposition of which
would have a material adverse effect on the Company's financial statements.
Item 1A. Risk Factors
The Company did not experience any material changes in the Risk Factors
during the Company's most recently completed fiscal quarter. For specific
information about the risks facing the Company refer to the Company's Annual
Report on Form 10-K for the year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about purchases of the
Company's common stock by the Company during the quarter ended September 30,
2006.
======================== =============== ============== ===================== ====================
Maximum
Total Number Number of Shares
of Shares Purchased that May Yet Be
Total Number Average as Part of Publicly Purchased Under
of Shares Price Paid Announced Plans the Plans or
Period Purchased per Share or Programs Programs
======================== =============== ============== ===================== ====================
07/01/06 - -- -- -- 219,282
07/31/06
======================== =============== ============== ===================== ====================
08/01/06 - -- -- -- 219,282
08/31/06
======================== =============== ============== ===================== ====================
09/01/06 - -- -- -- 219,282
09/30/06
======================== =============== ============== ===================== ====================
Total (1) -- -- -- 219,282
======================== =============== ============== ===================== ====================
(1) The Company did not repurchase any stock during the quarter ended
September 30, 2006. The current repurchase program approved on March
23, 2006 provides for the repurchase by us of an additional 5% of the
outstanding shares of our common stock. The expiration date of this
program is September 23, 2007. Unless terminated earlier by resolution
of our board of directors, the program will expire on the earlier of
such expiration date or when we have repurchased all shares authorized
for repurchase under the program.
Item 3. Defaults Upon Senior Securities
None.
33.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibits:
2.1 Agreement and Plan of Merger between UnionBancorp, Inc and
Centrue Financial Corporation (incorporated by reference from
Current Report on Form 8-K filed on July 7, 2006).
2.2 First Amendment to Agreement and Plan of Merger (incorporated
by reference from Current Report on Form 8-K filed on October
26, 2006).
3.1 Restated Certificate of Incorporation of UnionBancorp, Inc.
and Amendments thereto (filed as Exhibit to UnionBancorp's
Registration Statement on Form S-1 (Registration No. 33-9891)
(the "S-1 Registration Statement").
4.1 Amendment No. 1 to Rights Agreement (incorporated by reference
from Current Report on Form 8-K filed on July 7, 2006).
10.1 Thomas A. Daiber Employment Agreement (incorporated by
reference from Exhibit 2.1 to UnionBancorp's Current Report on
Form 8-K filed with the SEC on July 7, 2006 (appears as
Exhibit F-1 thereto)).
10.2 Kurt R. Stevenson Employment Agreement (incorporated by
reference from Exhibit 2.1 to UnionBancorp's Current Report on
Form 8-K filed with the SEC on July 7, 2006 (appears as
Exhibit F-3 thereto)).
10.3 UnionBancorp Voting Agreement (incorporated by reference from
Current Report of Form 8-K filed on July 7, 2006).
10.4 Centrue Voting Agreement (incorporated by reference from
Current Report of Form 8-K filed on July 7, 2006).
31.1 Certification of Kurt R. Stevenson, Interim President and
Principal Executive Officer, required by Rule 13a - 14(a).
31.2 Certification of Kurt R. Stevenson, Principal Financial and
Accounting Officer required by Rule 13a - 14(a).
34.
32.1(1) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
from the Company's Interim President and Principal Executive
Officer.
32.2(1) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
from the Company's Principal Financial and Accounting Officer.
----------------------
(1) This certification is not "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, or incorporated
by reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.
35.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNIONBANCORP, INC.
Date: November 13, 2006 By: /s/ KURT R. STEVENSON
-------------------------------------
Kurt R. Stevenson
Interim President
Date: November 13, 2006 By: /s/ KURT R. STEVENSON
-------------------------------------
Kurt R. Stevenson
Chief Financial Officer
36.