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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 June 30, 2006
Commission File Number: 0-28846
UnionBancorp, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 36-3145350
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
122 West Madison Street Ottawa, Illinois 61350
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(Address of principal executive offices including zip code)
(815) 431-2720
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(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 August 11, 2006
----------------------------- -------------------------------------
Common Stock, Par Value $1.00 3,742,751
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UnionBancorp, Inc.
Form 10-Q Index
June 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...............3
o Notes to Unaudited Consolidated Financial Statements..........4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..............................................29
Item 4. Controls and Procedures .........................................29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................31
Item 1A. Risk Factors.....................................................31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......31
Item 3. Defaults Upon Senior Securities..................................31
Item 4. Submission of Matters to a Vote of Security Holders..............32
Item 5. Other Information................................................32
Item 6. Exhibits.........................................................32
SIGNATURES...................................................................33
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30, 2006 and December 31, 2005 (In Thousands, Except Share Data)
-----------------------------------------------------------------------------------------------------------
June 30, December 31,
2006 2005
------------ ------------
ASSETS
Cash and cash equivalents $ 30,265 $ 24,358
Securities available-for-sale 182,914 196,440
Loans 403,455 417,525
Allowance for loan losses (6,848) (8,362)
------------ ------------
Net loans 396,607 409,163
Cash surrender value of life insurance 15,775 15,498
Mortgage servicing rights 2,373 2,533
Premises and equipment, net 13,789 13,908
Goodwill 6,963 6,963
Intangible assets, net 446 533
Other real estate 1,390 203
Other assets 6,309 6,623
------------ ------------
Total assets $ 656,831 $ 676,222
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest-bearing $ 56,119 $ 57,832
Interest-bearing 466,576 486,009
------------ ------------
Total deposits 522,695 543,841
Federal funds purchased and securities sold
under agreements to repurchase 7,297 612
Advances from the Federal Home Loan Bank 46,700 50,000
Notes payable 8,824 9,468
Series B mandatory redeemable preferred stock 831 831
Other liabilities 5,180 5,395
------------ ------------
Total liabilities 591,527 610,147
------------ ------------
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;
4,697,893 shares issued at June 30, 2006 and
4,684,393 shares issued at December 31, 2005 4,698 4,684
Additional paid-in capital 23,381 23,167
Retained earnings 50,775 48,837
Accumulated other comprehensive income (1,204) 95
------------ ------------
78,150 77,283
Treasury stock, at cost; 955,142 shares at June 30, 2006
and 877,517 at December 31, 2005 (12,846) (11,208)
------------ ------------
Total stockholders' equity 65,304 66,075
------------ ------------
Total liabilities and stockholders' equity $ 656,831 $ 676,222
============ ============
See Accompanying Notes to Unaudited Financial Statements
1.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three and Six Months Ended June 30, 2006 and 2005 (In Thousands, Except Per Share Data)
---------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Interest income
Loans $ 7,194 $ 6,751 $ 14,349 $ 13,201
Securities
Taxable 2,027 1,481 4,018 2,906
Exempt from federal income taxes 210 263 426 521
Federal funds sold and other 45 50 66 59
------------ ------------ ------------ ------------
Total interest income 9,476 8,545 18,859 16,687
Interest expense
Deposits 3,845 2,571 7,324 4,890
Federal funds purchased and securities sold
under agreements to repurchase 51 37 123 111
Advances from the Federal Home Loan Bank 455 550 938 1,133
Series B mandatory redeemable preferred stock 13 13 25 25
Notes payable 161 94 315 163
------------ ------------ ------------ ------------
Total interest expense 4,525 3,265 8,725 6,322
------------ ------------ ------------ ------------
Net interest income 4,951 5,280 10,134 10,365
Provision for loan losses (300) -- (1,100) 100
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 5,251 5,280 11,234 10,265
Noninterest income
Service charges 495 525 935 1,008
Trust income 199 187 418 402
Mortgage banking income 281 364 527 704
Insurance commissions and fees 414 472 793 893
Banked owned life insurance 137 135 277 269
Securities gains, net (88) -- (88) --
Gain on sale of assets, net (9) 1 (9) 3
Other income 268 347 604 602
------------ ------------ ------------ ------------
1,697 2,031 3,457 3,881
Noninterest expenses
Salaries and employee benefits 2,910 3,366 5,955 6,842
Occupancy expense, net 346 385 789 779
Furniture and equipment expense 521 461 1,033 885
Marketing 98 128 209 224
Supplies and printing 65 86 162 163
Telephone 118 106 235 213
Other real estate owned expense 2 29 8 34
Amortization of intangible assets 43 43 87 87
Other expenses 1,026 1,023 1,985 1,946
------------ ------------ ------------ ------------
5,129 5,627 10,463 11,173
------------ ------------ ------------ ------------
Income before income taxes 1,819 1,684 4,228 2,973
Income taxes 525 302 1,288 627
------------ ------------ ------------ ------------
Net income 1,294 1,382 2,940 2,346
Preferred stock dividends 52 52 104 104
------------ ------------ ------------ ------------
Net income for common stockholders $ 1,242 $ 1,330 $ 2,836 $ 2,242
============ ============ ============ ============
Basic earnings per common share $ 0.33 $ 0.33 $ 0.75 $ 0.56
============ ============ ============ ============
Diluted earnings per common share $ 0.33 $ 0.33 $ 0.74 $ 0.55
============ ============ ============ ============
Total comprehensive income $ 351 $ 1,521 $ 1,641 $ 2,060
============ ============ ============ ============
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See Accompanying Notes to Unaudited Financial Statements
2.
UNIONBANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2006 and 2005 (In Thousands)
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Six Months Ended
June 30,
------------------------
2006 2005
---------- ----------
Cash flows from operating activities
Net income $ 2,940 $ 2,346
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 931 855
Amortization of intangible assets 87 87
Amortization of mortgage servicing rights 160 91
Amortization of bond premiums, net 244 584
Stock Option Expense 68 --
Federal Home Loan Bank stock dividend (47) (109)
Provision for loan losses (1,100) 100
Provision for deferred income taxes (310) 466
Net change in BOLI (277) (269)
Net change in OREO (2) --
(Gain) loss on sale of assets 9 (3)
Loss on sale of securities 88 --
Gain on sale of loans (353) (540)
Gain on sale of real estate acquired in settlement of loans -- (7)
Proceeds from sales of loans held for sale 27,395 22,927
Origination of loans held for sale (25,796) (20,710)
Change in assets and liabilities
(Increase) in other assets 577 (178)
Increase in other liabilities 569 124
---------- ----------
Net cash provided by operating activities 5,183 5,764
Cash flows from investing activities
Securities available-for-sale
Proceeds from maturities and paydowns 19,554 27,795
Proceeds from sales 16,594 --
Purchases (25,012) (29,757)
Purchase of loans (19,513) (3,275)
Net decrease in loans 30,618 15,429
Purchase of premises and equipment (758) (1,327)
Sale of branch (6,054) --
Proceeds from sale of real estate acquired in settlement of loans 173 67
---------- ----------
Net cash provided by (used in) investing activities 15,602 8,932
Cash flows from financing activities
Net increase (decrease) in deposits (15,138) 8,723
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 6,685 (8,044)
Payments on notes payable (2,045) (542)
Proceeds from notes payable 1,400 3,085
Net increase in other borrowed funds -- 11
Net decrease in advances from the Federal Home Loan Bank (3,300) (5,800)
Dividends on common stock (898) (878)
Dividends on preferred stock (104) (104)
Proceeds from exercise of stock options 160 420
Purchase of treasury stock (1,638) (2,997)
---------- ----------
Net cash provided by financing activities (14,878) (6,126)
---------- ----------
Net increase in cash and cash equivalents 5,907 8,570
Cash and cash equivalents
Beginning of period 24,358 22,802
---------- ----------
End of period $ 30,265 $ 31,372
========== ==========
Supplemental disclosures of cash flow information
Cash payments for
Interest $ 4,575 $ 6,129
Income taxes 861 643
Transfers from loans to other real estate owned 1,307 310
See Accompanying Notes to Unaudited Financial Statements
3.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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Note 1. Summary of Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements of
UnionBancorp, Inc. (the "Company") have been prepared in accordance with 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 six months ended June 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.
Note 2. Earnings Per Share
Basic earnings per share for the three and six months ended June 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 six
months ended June 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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Net income
available to common shareholders $ 1,242 $ 1,330 $ 2,836 $ 2,242
Weighted average common shares outstanding 3,743 3,993 3,765 4,021
---------- ---------- ---------- ----------
Basic Earnings Per Common Share $ 0.33 $ 0.33 $ 0.75 $ 0.56
========== ========== ========== ==========
Diluted Earnings Per Common Share
Weighted average common shares outstanding 3,743 3,993 3,765 4,021
Add: dilutive effect of assumed exercised
stock options 44 62 45 62
---------- ---------- ---------- ----------
Weighted average common and dilutive
Potential shares outstanding 3,787 4,055 3,810 4,083
========== ========== ========== ==========
Diluted Earnings Per Common Share $ 0.33 $ 0.33 $ 0.74 $ 0.55
========== ========== ========== ==========
There were approximately 60,000 and 40,000 options outstanding at June
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.
4.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
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Note 3. Securities
The Company's consolidated securities portfolio, which represented
32.1% of the Company's 2006 second 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 $182,914 at June 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 June 30, 2006 and December 31,
2005, respectively:
June 30, 2006
-------------------------------------------
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------------ ------------ ------------
U.S. government agencies $ 40,418 $ -- $ (795)
States and political subdivisions 19,177 258 (110)
U.S. government mortgage-backed securities 75,374 203 (1,082)
Collateralized mortgage obligations 23,777 -- (479)
Equity securities 17,363 95 (33)
Corporate 6,805 14 (37)
------------ ------------ ------------
$ 182,914 $ 570 $ (2,536)
============ ============ ============
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)
============ ============ ============
5.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
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 June 30, 2006 and December 31, 2005, respectively:
June 30, 2006 December 31, 2005
---------------------------- ----------------------------
$ % $ %
------------ ------------ ------------ ------------
Commercial $ 84,711 21.00% $ 91,537 21.92%
Agricultural 21,178 5.25 26,694 6.39
Real estate:
Commercial mortgages 130,942 32.46 126,503 30.31
Construction 75,424 18.69 68,508 16.41
Agricultural 27,590 6.84 33,033 7.91
1-4 family mortgages 52,876 13.11 57,920 13.87
Installment 9,531 2.36 12,747 3.05
Other 1,203 0.30 583 0.14
------------ ------------ ------------ ------------
Total loans 403,455 100.00% 417,525 100.00%
============ ============
Allowance for loan losses (6,848) (8,362)
------------ ------------
Loans, net $ 396,607 $ 409,163
============ ============
The following table presents data on impaired loans:
June 30, December 31,
2006 2005
------------ ------------
Impaired loans for which an allowance has been provided $ 6,455 $ 12,585
Impaired loans for which no allowance has been provided 3,955 563
------------ ------------
Total loans determined to be impaired $ 10,410 $ 13,148
============ ============
Allowance for loan loss for impaired loans included
in the allowance for loan losses $ 2,571 $ 3,913
============ ============
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 six months ended June 30, 2006 and 2005 are summarized below:
6.
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)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Beginning balance $ 7,506 $ 9,948 $ 8,362 $ 9,732
Charge-offs:
Commercial 203 464 223 464
Real estate mortgages 414 419 482 425
Installment and other loans 34 82 73 279
------------ ------------ ------------ ------------
Total charge-offs 651 965 778 1,168
------------ ------------ ------------ ------------
Recoveries:
Commercial 120 10 135 302
Real estate mortgages 168 122 209 138
Installment and other loans 5 44 20 55
------------ ------------ ------------ ------------
Total recoveries 293 176 364 495
------------ ------------ ------------ ------------
Net charge-offs 358 789 414 673
------------ ------------ ------------ ------------
Provision for loan losses (300) 0 (1,100) 100
------------ ------------ ------------ ------------
Ending balance $ 6,848 $ 9,159 $ 6,848 $ 9,159
============ ============ ============ ============
Period end total loans, net of
unearned interest $ 403,455 $ 404,462 $ 403,455 $ 404,462
============ ============ ============ ============
Average loans $ 407,360 $ 414,289 $ 410,780 $ 415,909
============ ============ ============ ============
Ratio of net charge-offs to
average loans 0.09% 0.19% 0.10% 0.16%
Ratio of provision for loan losses
to average loans (0.07)% 0.00% (0.27)% 0.02%
Ratio of allowance for loan losses
to ending total loans 1.70% 2.26% 1.70% 2.26%
Ratio of allowance for loan losses
to total nonperforming loans 244.05% 238.83% 244.05% 238.83%
Ratio of allowance at end of period
to average loans 1.68% 2.21% 1.67% 2.20%
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
7.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Note 5. Stock Option Plans (Continued)
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 110,000 shares available to grant under this plan.
A summary of the status of the option plans as of June 30, 2006, and changes
during the quarter ended on those dates is presented below:
June 30, 2006
----------------------------
Weighted-
Average
Exercise
Shares Price
------------ ------------
Outstanding at beginning
of quarter 301,675 $ 15.74
Granted -- --
Exercised (13,500) 8.09
Forfeited (21,811) 15.96
------------ ------------
Outstanding at end of quarter 266,364 $ 16.11
============ ============
Options exercisable at quarter end 175,233 $ 14.08
============ ============
Weighted-average fair
value of options granted
during the quarter $ --
============
8.
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 June 30, 2006 and December 31, 2005 were as follows:
June 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 0.7 years 9,000 $ 9.75
11.25 - 13.00 59,681 3.9 years 59,681 11.64
13.88 - 18.50 112,683 4.5 years 94,552 14.94
20.30 - 23.29 85,000 8.6 years 12,000 22.78
------- --------- ------- ---------
266,364 5.6 years 175,233 $ 14.08
======= ========= ======= =========
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
second quarter of 2006 and 2005 was $174 and $308. The company recorded $68 in
stock compensation expense during the six months ended June 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 no grants during the six months ended
June 30, 2006 and 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 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.
9.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Note 5. Stock Option Plans (Continued)
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
----------------------------- ---------
July, 2006 - December, 2006 $ 68
2007 67
2008 47
2009 28
---------
Total $ 210
=========
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 June 30, 2005:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2005
-------------- --------------
Net income as reported
for common stockholders $ 1,330 $ 2,242
Deduct: stock-based compensation expense
determined under fair value based method 27 57
-------------- --------------
Pro forma net income $ 1,303 $ 2,185
============== ==============
Basic earnings
per common share as reported $ 0.33 $ 0.56
Pro forma basic earnings
per common share $ 0.33 $ 0.54
Diluted earnings
per common share as reported $ 0.33 $ 0.55
Pro forma diluted earnings
per common share $ 0.32 $ 0.53
10.
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, financial
services, 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; insurance, brokerage, and trust services
generate the revenue in the financial services segment; and holding company
services generate the revenue in the operations & other segment.
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
June 30, 2006
--------------------------------------------------------------------------------------------
Retail Commercial Treasury Financial Other Consolidated
Segment Segment Segment Services Operations Totals
------------ ------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 1,926 $ 3,126 $ 86 $ 50 $ (237) $ 4,951
Other revenue 908 110 (89) 565 203 1,697
Other expense 1,497 523 63 710 1,845 4,638
Noncash items
Depreciation 200 3 -- 35 210 448
Provision for loan losses (100) (200) -- -- -- (300)
Other intangibles -- -- -- 15 28 43
Net allocations 624 1,256 158 233 (2,271) --
Income tax expense 207 540 (146) (128) 52 525
Segment profit (loss) 406 1,114 (78) (250) 102 1,294
Goodwill 2,512 2,631 -- 1,820 -- 6,963
Segment assets 91,575 326,048 209,259 3,575 -- 656,831
Three Months Ended
June 30, 2005
--------------------------------------------------------------------------------------------
Retail Commercial Treasury Financial Other Consolidated
Segment Segment Segment Services Operations Totals
------------ ------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 1,886 $ 3,284 $ 43 $ 11 $ 56 $ 5,280
Other revenue 1,026 112 -- 657 236 2,031
Other expense 1,647 1,053 59 671 1,713 5,143
Noncash items
Depreciation 229 3 -- 39 170 441
Provision for loan losses 190 (190) -- -- -- --
Other intangibles -- -- -- 15 28 43
Net allocations 757 864 120 197 (1,938) --
Income tax expense 28 358 (98) (63) 77 302
Segment profit (loss) 61 1,308 (38) (191) 242 1,382
Goodwill 2,512 2,631 -- 1,820 -- 6,963
Segment assets 104,239 311,763 218,152 3,975 27,295 665,424
11.
UNIONBANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Six Months Ended
June 30, 2006
--------------------------------------------------------------------------------------------
Retail Commercial Treasury Financial Other Consolidated
Segment Segment Segment Services Operations Totals
------------ ------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 3,908 $ 6,389 $ 216 $ 106 $ (485) $ 10,134
Other revenue 1,758 221 (88) 1,198 368 3,457
Other expense 2,936 1,167 131 1,374 3,837 9,445
Noncash items
Depreciation 443 6 -- 73 409 931
Provision for loan losses 25 (1,125) -- -- -- (1,100)
Other intangibles -- -- -- 30 57 87
Net allocations 1,471 2,469 318 466 (4,724) --
Income tax expense 264 1,389 (252) (215) 102 1,288
Segment profit (loss) 527 2,704 (69) (424) 202 2,940
Goodwill 2,512 2,613 -- 1,820 -- 6,963
Segment assets 91,575 326,048 209,259 3,575 -- 656,831
Six Months Ended
June 30, 2005
--------------------------------------------------------------------------------------------
Retail Commercial Treasury Financial Other Consolidated
Segment Segment Segment Services Operations Totals
------------ ------------ ------------ ------------ ------------ ------------
Net interest income (loss) $ 3,620 $ 6,418 $ 177 $ 18 $ 132 $ 10,365
Other revenue 1,976 226 -- 1,290 389 3,881
Other expense 3,188 1,700 117 1,404 3,822 10,231
Noncash items
Depreciation 454 6 -- 83 312 855
Provision for loan losses 290 (190) -- -- -- 100
Other intangibles -- -- -- 30 57 87
Net allocations 1,541 2,210 231 354 (4,336) --
Income tax expense 35 760 (195) (162) 189 627
Segment profit (loss) 88 2,158 24 (401) 477 2,346
Goodwill 2,512 2,613 -- 1,820 -- 6,963
Segment assets 104,239 311,763 218,152 3,975 27,295 665,424
12.
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 six months ended June
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 six months ended June 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 financial services in the Company's market areas; the Company's
implementation of new technologies; the Company's ability to develop and
maintain secure and reliable electronic systems; and accounting principles,
policies, and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements.
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.
13.
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; insurance products;
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.
Second 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, as the purchaser, UnionBancorp will issue to Centrue
shareholders 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 during the fourth quarter of
2006.
o Earnings per share were unchanged compared to the second quarter of
2005.
o The Company's earnings were positively impacted by a $300 negative
provision for loan losses largely based on continued improvements in
the quality of the loan portfolio, which was partially offset by a loss
on sale of securities of $88 in order to better position the securities
portfolio. Excluding these items, net income for the quarter would have
equaled $1,163 or $0.29 per diluted share.
o The second quarter of 2005 results were positively impacted by a $251
reduction in state income taxes and $90 of interest received due to the
receipt of a tax refund related to amended tax returns outstanding from
prior years. Excluding these items, net income for the second quarter
of 2005 would have equaled $1,076 or $0.25 per diluted share.
o Due to the flat yield curve, the net interest margin decreased to 3.37%
during the second quarter of 2006 as compared with 3.59% for the same
period in 2005 and 3.50% in the first quarter of 2006.
o The loan portfolio decreased to $403.5 million as compared to $417.5
million at December 31, 2005. Of this decrease in balances,
approximately $7.7 million or 55% was related to the pay-off of action
list credits refinanced with a competitor.
o The level of nonperforming loans to end of period loans totaled 0.70%
as of June 30, 2006 compared to 0.95% at June 30, 2005 and 0.96% on
December 31, 2005.
o Net charge-offs for the second quarter of 2006 were 0.09% of average
loans as compared to 0.19% for the same period 2005.
14.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Second Quarter Highlights (Continued)
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 85th
consecutive quarter of dividends paid to stockholders.
Results of Operations
Net Income
Net income equaled $1,294 or $0.33 per diluted share for the three
months ended June 30, 2006, versus $1,382 or $0.33 per diluted share for the
same period in 2005. For the six months ended June 30, 2006 net income equaled
$2,940 or $0.74 per diluted share compared to $2,346 or $0.55 per diluted share
earned in the same period during 2005.
The Company's quarterly results were positively impacted by a negative
provision of $300 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 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
insurance and brokerage product lines due to lower production volumes.
Return on average assets was 0.79% for the second quarter of 2006
compared to 0.83% for the same period in 2005. Return on average assets was
0.89% for the six month period ended June 30, 2006 compared to 0.71% for the
same period in 2005.
Return on average stockholders' equity was 7.93% for the second quarter
of 2006 compared to 7.94% for the same period in 2005. Return on average
stockholder's equity was 9.03% for the six month period ended June 30, 2006
compared to 6.73% 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.
Net interest income, on a tax equivalent basis, was $5,078 for the
three months ended June 30, 2006, compared with $5,438 earned during the same
three-month period in 2005. This represented a decrease of $360 or 6.6% from the
prior year period. The change in net interest income is attributable to the
15.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
increase in interest expense paid on interest bearing liabilities totaling
$1,260 partially offset by an increase in interest income earned on interest
earning assets totaling $900.
The $900 increase in interest income resulted from an increase of $976
due to rate partially offset by a decrease of $76 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. Additionally, the volume within the
security portfolio was $7,049 higher for the second quarter of 2006 as compared
to the same period in 2005. These increases were slightly offset by lower volume
in the loan portfolio.
The $1,260 increase in interest expense resulted from increases of
$1,182 associated with rate and $78 associated with volume. The majority of the
change was attributable to a 107 basis point increase in rates paid on time
deposits, a 114 basis point increase in rates paid on money market accounts and
a 68 basis point increase in rates paid on NOW accounts.
The net interest margin decreased 22 basis points to 3.37% in the
second quarter 2006 as compared with 3.57% 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 six months
ended June 30, 2006 totaled $10,392, representing a decrease of $289 or 2.7%
compared to the $10,681 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 $2,403 exceeding the increase in the
interest income earned on interest-earning assets totaling $2,114. The net
interest margin for the first six months of 2006 decreased 12 basis points to
3.44% compared to 3.56% 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.
16.
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 June 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 $ 211 $ 3 5.70% $ 158 $ 3 7.62% $ 1 $ (1) $ --
Securities (1)
Taxable 175,260 2,030 4.64 164,510 1,484 3.61 102 443 545
Non-taxable (2) 18,317 318 6.99 22,018 399 7.27 (29) (51) (80)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total securities
(tax equivalent) 193,577 2,345 4.86 186,528 1,880 4.04 73 392 465
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Federal funds sold 2,960 39 5.69 6,424 44 2.93 (34) 29 (5)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Loans (3)(4)
Commercial 111,997 1,981 7.09 119,364 2,018 6.79 (126) 89 (37)
Real estate 284,843 4,986 7.02 276,962 4,338 6.29 126 522 648
Installment and
other 10,364 246 9.52 17,963 417 9.31 (116) (55) (171)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross loans
(tax equivalent) 407,204 7,213 7.10 414,289 6,773 6.56 (116) 556 440
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-
earning assets 603,952 9,603 6.38 607,399 8,703 5.75 (76) 976 900
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Noninterest-earning
assets
Cash and cash
equivalents 17,735 19,889
Premises and
equipment, net 13,740 13,818
Other assets 23,285 23,975
---------- ----------
Total nonearning
assets 54,760 57,682
---------- ----------
Total assets $ 658,712 $ 665,081
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities
NOW accounts $ 69,410 $ 314 1.82% $ 71,981 $ 204 1.14% $ (7) $ 118 $ 111
Money market accounts 52,834 360 2.73 58,944 234 1.59 (26) 152 126
Savings deposits 37,050 68 0.74 44,028 51 0.46 (9) 26 17
Time deposits 308,770 3,103 4.03 282,356 2,082 2.96 210 811 1,021
Federal funds
purchased and
repurchase agreements 3,955 51 5.17 4,921 37 3.02 (8) 22 14
Advances from FHLB 47,074 455 3.88 57,430 550 3.87 (96) 1 (95)
Notes payable and other 9,668 174 7.18 8,660 107 4.96 14 52 66
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-
bearing liabilities 528,761 4,525 3.43 528,320 3,265 2.48 78 1,182 1,260
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Noninterest-bearing
liabilities
Noninterest-bearing
deposits 59,659 63,049
Other liabilities 4,843 3,860
---------- ----------
Total noninterest-
bearing liabilities 64,502 66,909
---------- ----------
Stockholders' equity 65,449 69,852
---------- ----------
Total liabilities and
stockholders' equity $ 658,712 $ 665,081
========== ==========
Net interest income
(tax equivalent) $ 5,078 $ 5,438 $ (154) $ (206) $ (360)
========== ========== ========== ========== ==========
Net interest income
(tax equivalent) to
total earning assets 3.37% 3.59%
========== ==========
Interest-bearing
liabilities
to earning assets 87.55% 86.98%
========== ==========
----------------------------------
(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.
17.
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 Six Months Ended June 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 $ 231 $ 7 6.11% $ 143 $ 3 4.23% $ 2 $ 2 $ 4
Securities (1)
Taxable 178,249 4,025 4.54 163,438 2,909 3.59 283 828 1,111
Non-taxable (2) 18,173 645 7.17 22,186 790 7.18 (58) (86) (144)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total securities
(tax equivalent) 196,422 4,663 4.79 185,624 3,696 4.02 225 742 967
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Federal funds sold 2,263 52 5.26 4,051 53 2.79 (32) 35 3
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Loans (3)(4)
Commercial 115,016 4,042 7.09 119,533 3,866 6.53 (149) 325 176
Real estate 284,405 9,820 6.96 277,207 8,517 6.20 228 1,075 1,303
Installment and
other 11,173 526 9.49 19,169 865 9.10 (375) 36 (339)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross loans
(tax equivalent) 410,594 14,388 7.07 415,909 13,248 6.43 (296) 1,436 1,140
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-
earning assets 609,510 19,117 6.32 605,727 17,003 5.66 (101) 2,215 2,114
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Noninterest-earning
assets
Cash and cash
equivalents 18,126 18,729
Premises and
equipment, net 13,791 13,630
Other assets 23,624 23,919
---------- ----------
Total nonearning
assets 55,541 56,278
---------- ----------
Total assets $ 665,051 $ 662,005
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities
NOW accounts $ 69,702 $ 596 1.73% $ 71,272 $ 369 1.04% $ (8) $ 236 $ 228
Money market accounts 54,305 709 2.63 58,554 448 1.54 (35) 296 261
Savings deposits 37,790 122 0.65 43,661 113 0.52 (17) 26 9
Time deposits 308,490 5,897 3.85 279,146 3,960 2.86 451 1,486 1,937
Federal funds
purchased and
repurchase agreements 4,977 123 4.98 7,993 111 2.80 (52) 64 12
Advances from FHLB 48,205 938 3.92 58,812 1,133 3.90 (202) 6 (196)
Notes payable and other 10,356 340 6.62 8,102 188 4.68 61 91 152
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-
bearing liabilities 533,825 8,725 3.30 527,540 6,322 2.42 198 2,205 2,403
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Noninterest-bearing
liabilities
Noninterest-bearing
deposits 60,689 60,211
Other liabilities 4,903 3,946
---------- ----------
Total noninterest-
bearing liabilities 65,592 64,157
---------- ----------
Stockholders' equity 65,634 70,308
---------- ----------
Total liabilities and
stockholders' equity $ 665,051 $ 662,005
========== ==========
Net interest income
(tax equivalent) $ 10,392 $ 10,681 $ (299) $ 10 $ (289)
========== ========== ========== ========== ==========
Net interest income
(tax equivalent) to
total earning assets 3.44% 3.56%
========== ==========
Interest-bearing
liabilities
to earning assets 87.58% 87.09%
========== ==========
----------------------------------
(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.
18.
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 $300 to the allowance for
loan losses for the second quarter of 2006 which is a decrease of $300 from the
$0 recorded during the same period a year ago. A negative $1,100 provision for
the loan losses was charged to operation expense for the six months ended June
30, 2006 which was a decrease of $1,200 from $100 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
$1,029 from $3,835 as of June 30, 2005 to $2,806 as of June 30, 2006. In
comparison to December 31, 2005, nonperforming loans decreased $1,198 from
$4,004.
Net charge-offs for the second quarter of 2006 were $358 compared with
$789 for the comparable period in 2005. Annualized net charge-offs were 0.09% of
average loans for the second quarter of 2006 compared with 0.19% of average
loans for same period in 2005. Net charge-off for the six months ended June 30,
2006 were $414 compared with $673 for the comparable period in 2005. Annualized
net charge-offs also decreased to 0.10% of average loans for the six months
ended June 30, 2006 compared to 0.16% 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 insurance,
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:
19.
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 Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Service charges $ 495 $ 525 $ 935 $ 1,008
Trust income 199 187 418 402
Mortgage banking income 281 364 527 704
Insurance commissions and fees 414 472 793 893
Bank owned life insurance 137 135 277 269
Securities gains (losses), net (88) -- (88) --
Gain on the sale of assets (9) 1 (9) 3
Other income 268 347 604 602
------------ ------------ ------------ ------------
$ 1,697 $ 2,031 $ 3,457 $ 3,881
============ ============ ============ ============
Noninterest income totaled $1,697 for the three months ended June 30,
2006, compared to $2,031 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 $1,794 for the three months ended June 30, 2006, compared to $2,030 for
the same period in 2005. This represented a decrease of $236 or 11.6%. The
quarter-over-quarter decrease was primarily attributable to a production level
decrease in revenue generated from the mortgage banking division, lower
brokerage and insurance revenue and losses related to investment activity.
Noninterest income totaled $3,457 for the six months ended June 30,
2006, compared to $3,881 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 $324 or 8.4%. The change was largely reflective of the same
items discussed regarding the second quarter.
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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Salaries and employee benefits $ 2,910 $ 3,366 $ 5,955 $ 6,842
Occupancy expense, net 346 385 789 779
Furniture and equipment expense 521 461 1,033 885
Marketing 98 128 209 224
Supplies and printing 65 86 162 163
Telephone 118 106 235 213
Other real estate owned expense 2 29 8 34
Amortization of intangible assets 43 43 87 87
Other expenses 1,026 1,023 1,985 1,946
------------ ------------ ------------ ------------
$ 5,129 $ 5,627 $ 10,463 $ 11,173
============ ============ ============ ============
Noninterest expense totaled $5,129 for the three months ended June 30,
2006, as compared to $5,627 for the same period in 2005. This represented a
decrease of $498 or 8.9%. This improvement in noninterest expense was primarily
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.
20.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
Noninterest expense totaled $10,463 for the six months ended June 30,
2006, decreasing by $710 or 6.4% from the same period in 2005. The change was
largely reflective of the same items discussed regarding the second quarter.
Applicable Income Taxes
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 following table shows the Company's
income before income taxes, as well as applicable income taxes and the effective
tax rate for the three and six months ended June 30, 2006 and 2005.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Income before income taxes $ 1,819 $ 1,684 $ 4,228 $ 2,973
Applicable income taxes 525 302 1,288 627
Effective tax rates 28.9% 17.9% 30.5% 21.1%
The Company recorded an income tax expense of $525 and of $302 for the
three months ended June 30, 2006 and 2005, respectively. Effective tax rates
equaled 28.9% and 17.9% respectively, for such periods. During the second
quarter of 2005, the Company recorded a $251 reduction in state income taxes due
to the receipt of a tax refund related to amended returns outstanding from prior
years. Excluding this refund, the effective tax rate would have been 32.8% for
that period.
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 $1,288 and $627 for the six
months ended June 30, 2006 and 2005, respectively. Effective tax rates equaled
30.5% and 21.1% respectively, for such periods.
Preferred Stock Dividends
The Company paid $52 in preferred stock dividends for the three months
ended June 30, 2006 and 2005, respectively. The Company paid $104 in preferred
stock dividends for the six months ended June 30, 2006 and 2005, respectively.
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,
21.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
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 in market
interest rates or a 100 basis point decrease in market 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 June 30, 2006 and December 31, 2005, respectively:
June 30, 2006
--------------------------------------------------
Net Interest Income
--------------------------------------------------
Amount Change Change
------ ------ ------
(Dollars in Thousands)
+200 bp $ 23,116 $ 347 1.52%
+100 bp 23,013 244 1.07
Base 22,769 -- --
-100 bp 22,412 (357) (1.57)
-200 bp 21,339 (1,430) (6.28)
Based upon the Company's model at June 30, 2006, the effect of an
immediate 200 basis point increase in interest rates would increase the
Company's net interest income by $347 or 1.52%. The effect of an immediate 200
basis point decrease in rates would decrease the Company's net interest income
by $1,430 or 6.28%.
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%.
22.
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 June 30, 2006, the Company had total assets of $656,831, total
gross loans of $403,455, total deposits of $522,695 and total stockholders'
equity of $65,304. Total assets decreased by $19,391 or 2.9% from year-end 2005.
Total gross loans decreased by $14,070 or 3.4% from year-end 2005. Total
deposits declined by $21,146 or 3.9% from year-end 2005.
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.
23.
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
---------------------- -----------------------------------
Jun 30, Mar 31, Dec 31, Sept 30, Jun 30,
--------- --------- --------- --------- ---------
Non-accrual loans $ 2,289 $ 2,785 $ 3,082 $ 2,397 $ 3,217
Loans 90 days past due and still accruing interest 517 567 922 1,329 618
--------- --------- --------- --------- ---------
Total nonperforming loans 2,806 3,352 4,004 3,726 3,835
Other real estate owned 1,390 536 203 194 669
--------- --------- --------- --------- ---------
Total nonperforming assets $ 4,196 $ 3,888 $ 4,207 $ 3,920 $ 4,504
========= ========= ========= ========= =========
Nonperforming loans to total end of period loans 0.70% 0.82% 0.96% 0.92% 0.95%
Nonperforming assets to total end of period loans 1.04 0.96 1.01 0.97 1.11
Nonperforming assets to total end of period assets 0.64 0.59 0.62 0.59 0.68
The level of nonperforming loans at June 30, 2006 decreased to $2,806
versus the $4,004 that existed as of December 31, 2005 and from $3,835 at June
30, 2005. The level of nonperforming loans to total end of period loans was
0.70% at June 30, 2006, as compared to 0.96% at December 31, 2005 and 0.95% at
June 30, 2005. The reserve coverage ratio (allowance to nonperforming loans) was
reported at 244.05% as of June 30, 2006 as compared to 208.84% as of December
31, 2005 and 238.83% as of June 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 $1,218 at June 30, 2006, as compared to $6,857 at June 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 June 30, 2006, the allowance for loan losses was $6,848 or 1.70% of
total loans as compared to $8,362 or 2.00% at December 31, 2005, and $9,159 or
2.26% at June 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. 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 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.
24.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
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
2004. The methodology used to determine the adequacy of the allowance for loan
losses is consistent with prior years, and there were no 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.
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.
25.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
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 increase in cash and cash equivalents of $5,907 from December 31, 2005 to
June 30, 2006.
During the first six months of 2006, the Company experienced net cash
in flows of $3,931 in operating activities due to negative provision and net
income and $16,854 in investing activities largely due to the decrease in net
loans and securities. In contrast, net cash outflow of $14,878 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 June 30, 2006.
Payments Due by Period
------------------------------------------------------------------------
Within 1 After
Contractual Obligations Year 1-3 Years 4-5 Years 5 Years Total
------------ ------------ ------------ ------------ ------------
Short-term debt $ 8,824 $ -- $ -- $ -- $ 8,824
Long-term debt -- 224 -- -- 224
Certificates of Deposit 233,681 70,547 618 2,526 307,372
Series B Mandatory redeemable
Preferred stock -- 831 -- -- 831
FHLB Advances 10,100 20,400 16,200 -- 46,700
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations $ 252,605 $ 92,002 $ 16,818 $ 2,526 $ 363,951
============ ============ ============ ============ ============
Amount of Commitment Expiration per Period
------------------------------------------------------------------------
Within 1 After
Off-Balance Sheet Financial Instruments Year 1-3 Years 4-5 Years 5 Years Total
------------ ------------ ------------ ------------ ------------
Lines of credit $ 89,058 $ 4,130 $ 1,287 $ 16,714 $ 111,189
Standby letters of credit 7,764 792 -- -- 8,556
------------ ------------ ------------ ------------ ------------
Total commercial commitments $ 96,822 $ 4,922 $ 1,287 $ 16,714 $ 119,745
============ ============ ============ ============ ============
26.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
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 $2,700,000 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 $500,000 to Centrue.
o In addition to the $500,000 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
$2,200,000 to Centrue.
o If UnionBancorp terminates the merger agreement as a result of a
Superior UnionBancorp Proposal, then UnionBancorp must pay $2,700,000
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 June 30, 2006 was $65,304, a decrease of $771 or 1.2%,
from December 31, 2005. The decrease in stockholders' equity was the result of
the dividends paid to shareholders and a decrease in accumulated other
comprehensive income partially offset by net income for the period. Average
quarterly equity as a percentage of average quarterly assets was 9.94% at June
30, 2006, compared to 10.39% at December 31, 2005. Book value per common share
equaled $17.31 at June 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
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
27.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
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 June 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 13.7%, respectively, at June 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
June 30, ------------------------ Capital Capitalized
2006 2005 2004 Ratios Ratios
---------- ---------- ---------- ---------- ----------
Tier 1 risk-based capital $ 61,130 $ 60,546 $ 63,347
Tier 2 risk-based capital 6,144 6,266 6,067
---------- ---------- ----------
Total capital 67,274 66,812 69,414
Risk-weighted assets 491,503 501,342 485,325
Capital ratios
Tier 1 risk-based capital 12.4% 12.1% 13.0% 4.00% 6.00%
Tier 2 risk-based capital 13.7 13.3 14.3 8.00 10.00
Leverage ratio 9.4 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
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.
28.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
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" ("SFAS155"). 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 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.
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 21 of this Form 10-Q under the caption "Interest
Rate Sensitivity Management" and the discussion on page 28 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 and 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
29.
UNIONBANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In Thousands, Except Per Share Data)
--------------------------------------------------------------------------------
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.
30.
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 June 30, 2006.
================================================================================================================
Total Number of
Shares Purchased as Maximum Number of
Part of Publicly Shares that May Yet
Total Number of Average Price Paid Announced Plans or Be Purchased Under
Period Shares Purchased per Share Programs the Plans or Programs
================================================================================================================
04/01/06 - -- -- -- 219,282
04/30/06
================================================================================================================
05/01/06 - -- -- -- 219,282
05/31/06
================================================================================================================
06/01/06 - -- -- -- 219,282
06/30/06
================================================================================================================
Total (1) -- -- -- 219,282
================================================================================================================
(1) The Company did not repurchase any stock during the quarter ended
June 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.
31.
Item 4. Submission of Matters to a Vote of Security Holders
At the April 25, 2006 annual meeting of stockholders, Robert J. Doty,
I. J. Reinhardt, Jr. and Scott A. Yeoman were elected to serve as Class
II directors until 2009. Continuing as Class III directors until 2007
are Dennis J. McDonnell, John A. Shinkle and Scott C. Sullivan.
Continuing as Class I directors until 2008 are Richard J. Berry, Walter
E. Breipohl, and John A. Trainor.
There were 3,762,876 issued and outstanding shares of common stock
entitled to vote at the annual meeting. The voting on each item
presented at the annual meeting was as follows:
For Withheld
--------- --------
Election of Directors
Robert J. Doty 3,455,405 8,317
I. J. Reinhardt, Jr. 3,456,405 7,317
Scott A. Yeoman 3,446,839 16,883
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).
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 UnionBancorp voting agreement (incorporated by reference from
current report of form 8-K filed on July 7, 2006).
10.2 Centrue voting agreement (incorporated by reference from
current report of form 8-K filed on July 7, 2006).
31.1 Certification of Scott A. Yeoman, President and Principal
Executive Officer, required by Rule 13a - 14(a).
31.2 Certification of Kurt R. Stevenson, Senior Executive Vice
President and Principal Financial and Accounting Officer
required by Rule 13a - 14(a).
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 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 Senior Executive Vice President and
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.
32.
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: August 11, 2006 By: /s/ SCOTT A. YEOMAN
-----------------------------------
Scott A. Yeoman
President and Principal Executive
Officer
Date: August 11, 2006 By: /s/ KURT R. STEVENSON
-----------------------------------
Kurt R. Stevenson
Senior Executive Vice President and
Principal Financial and
Accounting Officer
33.