1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-Q |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 or |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ------------------------- COMMISSION FILE #0-16640 UNITED BANCORP, INC. (Exact name of registrant as specified in its charter) MICHIGAN 38-2606280 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 205 E. CHICAGO BOULEVARD, TECUMSEH, MI 49286 (Address of principal executive offices, including Zip Code) Registrant's telephone number, including area code: (517) 423-8373 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 shorter periods 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 |_| As of April 15, 2000, there were outstanding 1,819,022 shares of the registrant's common stock, no par value. Page 1 2 CROSS REFERENCE TABLE ITEM NO. DESCRIPTION PAGE NO. - -------------------------------------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Condensed) 3 (a) Consolidated Balance Sheets 3 (b) Consolidated Statements of Income 4 (c) Consolidated Statements of Changes in Shareholders' Equity 5 (d) Consolidated Statements of Cash Flows 6 (e) Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis 7 Financial Condition 8 Liquidity 10 Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 13 PART II - OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 15 Exhibit Index 16 Page 2 3 PART I FINANCIAL INFORMATION FINANCIAL INFORMATION ITEM 1- FINANCIAL STATEMENTS (Condensed) (A) CONSOLIDATED BALANCE SHEETS (UNAUDITED) In thousands of dollars March 31, December 31, March 31, 2000 1999 1999 --------- ------------ --------- ASSETS Total cash and cash equivalents $ 18,443 $ 17,469 $ 14,837 Securities available for sale 79,008 81,923 48,650 Securities held to maturity; fair value of $36,860 at March 31, 1999 -- -- 35,952 --------- --------- --------- Total securities 79,008 81,923 84,602 Loans held for sale -- 154 957 Portfolio loans 318,690 308,113 274,092 --------- --------- --------- Total loans 318,690 308,267 275,049 Less allowance for loan losses 3,623 3,300 2,887 --------- --------- --------- Net loans 315,067 304,967 272,162 Premises and equipment, net 13,374 13,116 12,229 Accrued interest receivable and other assets 10,039 10,046 8,242 --------- --------- --------- TOTAL ASSETS $ 435,931 $ 427,521 $ 392,072 ========= ========= ========= LIABILITIES Deposits Noninterest bearing $ 49,928 $ 46,829 $ 42,669 Interest bearing certificates of deposit of $100,000 or more 34,924 32,445 30,264 Other interest bearing deposits 284,417 281,569 266,231 --------- --------- --------- Total deposits 369,269 360,843 339,164 Federal funds purchased and other short term borrowings 14,800 19,300 -- Other borrowings 7,624 3,624 10,900 Accrued interest payable and other liabilities 2,756 2,790 2,600 --------- --------- --------- TOTAL LIABILITIES 394,449 386,557 352,664 SHAREHOLDERS' EQUITY Common stock and paid in capital, no par value; 5,000,000 shares authorized; 1,819,022, 1,819,193 and 1,730,195 shares issued and outstanding, respectively 23,947 23,919 19,858 Stock dividend payable 4,275 -- 3,893 Retained earnings 13,955 17,544 15,459 Accumulated other comprehensive income (loss), net of tax (695) (499) 198 --------- --------- --------- TOTAL SHAREHOLDERS' EQUITY 41,482 40,964 39,408 --------- --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 435,931 $ 427,521 $ 392,072 ========= ========= ========= The accompanying notes are an integral part of these consolidated financial statements. Page 3 4 (B) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended thousands of dollars, except per share data March 31, ---------------------------- 2000 1999 --------- --------- INTEREST INCOME Interest and fees on loans Taxable $ 6,729 $ 5,773 Tax exempt 27 19 Interest on securities Taxable 739 813 Tax exempt 424 466 Interest on federal funds sold -- 4 --------- ------- Total interest income 7,919 7,075 INTEREST EXPENSE Interest on certificates of deposit of $100,000 or more 459 394 Interest on other deposits 2,743 2,314 Interest on short term borrowings 282 45 Interest on other borrowings 88 165 --------- ------- Total interest expense 3,572 2,918 --------- ------- NET INTEREST INCOME 4,347 4,157 Provision for loan losses 354 315 --------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,993 3,842 NONINTEREST INCOME Service charges on deposit accounts 547 408 Trust & Investment fee income 644 462 Gains on securities transactions -- 10 Loan sales and servicing 77 196 Sales of nondeposit investment products 172 153 Other income 233 161 --------- ------- Total noninterest income 1,673 1,390 NONINTEREST EXPENSE Salaries and employee benefits 2,152 1,986 Occupancy and equipment expense 719 600 Other expense 1,112 988 --------- ------- Total noninterest expense 3,983 3,574 --------- ------- INCOME BEFORE FEDERAL INCOME TAX 1,683 1,658 Federal income tax 448 427 --------- ------- NET INCOME $ 1,235 $ 1,231 ========= ======= Basic and diluted earnings per share $ 0.64 $ 0.64 Cash dividends declared per share of common stock 0.29 0.25 The accompanying notes are an integral part of these consolidated financial statements. Page 4 5 (C) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) In thousands of dollars, except per share data Accumulated Other Compre- Stock hensive Common Dividend Retained Income (Loss), Stock (1) Payable Earnings Net of Tax Total ---------- -------- --------- -------------- --------- Balance, December 31, 1998 $ 19,837 $ -- $ 18,607 $ 320 $ 38,764 Net Income 1,231 1,231 Other comprehensive income: Net change in unrealized gains (losses) on securities available for sale, net (122) (122) --------- Total comprehensive income 1,109 Cash dividends declared (484) (484) 5% stock dividend declared, 86,512 shares at $45 3,893 (3,893) -- Common stock and contingently issuable stock 21 -- (2) -- 19 ---------- -------- --------- -------------- --------- Balance, March 31, 1999 $ 19,858 $ 3,893 $ 15,459 $ 198 39,408 ========== ======== ========= ============== ========= Balance, December 31, 1999 $ 23,919 $ -- $ 17,544 $ (499) $ 40,964 Net Income 1,235 1,235 Other comprehensive income: Net change in unrealized gains (losses) on securities available for sale, net (196) (196) --------- Total comprehensive income 1,039 Cash dividends declared (546) (546) 5% stock dividend declared, 90,954 shares at $47 4,275 (4,275) -- Common stock and contingently issuable stock 28 -- (3) -- 25 ---------- -------- --------- -------------- --------- Balance, March 31, 2000 $ 23,947 $ 4,275 $ 13,955 $ (695) $ 41,482 ========== ======== ========= ============== ========= (1) Includes Paid In Capital The accompanying notes are an integral part of these consolidated financial statements. Page 5 6 (D) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended In thousands of dollars March 31, ----------------------------- 2000 1999 -------- ---------- Cash Flows from Operating Activities Net Income $ 1,235 $ 1,231 -------- ---------- Adjustments to Reconcile Net Income to Net Cash from Operating Activities Depreciation and amortization 518 425 Provision for loan losses 354 315 Change in loans held for sale 154 (422) Change in accrued interest receivable and other assets 43 (1,201) Change in accrued interest payable and other liabilities 149 (19) -------- ---------- Total adjustments 1,218 (902) -------- ---------- Net cash from operating activities 2,453 329 -------- ---------- Cash Flows from Investing Activities Securities available for sale Purchases (50) -- Maturities and calls 1,535 7,152 Principal payments 1,077 2,439 Securities held to maturity Purchases -- (620) Maturities and calls -- 1,578 Change in portfolio loans (10,648) (4,605) Premises and equipment expenditures, net (616) (1,134) -------- ---------- Net cash from investing activities (8,702) 4,810 -------- ---------- Cash Flows from Financing Activities Net change in deposits 8,426 1,897 Net change in short term borrowings (4,500) (3,874) Proceeds from other borrowings 4,000 -- Proceeds from common stock transactions 25 21 Dividends paid (728) (694) -------- ---------- Net cash from financing activities 7,223 (2,650) -------- ---------- Net change in cash and cash equivalents 974 2,489 Cash and cash equivalents at beginning of year 17,469 12,348 -------- ---------- Cash and cash equivalents at end of period $ 18,443 $ 14,837 ======== ========== Supplement Disclosure of Cash Flow Information: Interest $ 3,659 $ 3,030 Income taxes -- -- Loans transferred to other real estate 40 -- The accompanying notes are an integral part of these consolidated financial statements. Page 6 7 (E) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The unaudited condensed consolidated financial statements of United Bancorp, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ending March 31, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. NOTE 2 - LOANS HELD FOR SALE Mortgage loans serviced for others are not included in the accompanying consolidated statements. The unpaid principal balances of mortgage loans serviced for others was $122,481,000 and $122,862,000 at the end of March 2000 and 1999. The balance of loans serviced for others related to servicing rights that have been capitalized was $100,417,000 and $98,404,000 at March 31, 2000 and 1999. Mortgage servicing rights activity in thousands of dollars for the three months ended March 31, 2000 and 1999 follows: Unamortized cost of mortgage servicing rights 2000 1999 --------------------------------------------- ------ ----- Balance at January 1 $ 728 $ 646 Amount capitalized year to date 7 80 Amount amortized year to date (17) (39) ------ ----- Balance at period end $ 718 $ 687 ====== ===== No valuation allowance was considered necessary for mortgage servicing rights at period end 2000 and 1999. NOTE 3 - COMMON STOCK AND EARNINGS PER SHARE Earnings per share are based upon the weighted average number of shares outstanding plus contingently issuable shares during the year. In March 2000, the Company declared a 5% stock to shareholders of record on May 1, 2000, payable May 30, 2000. The Company also issued a 5% stock dividend in May 1999. Earnings per share, dividends per share and weighted average shares have been restated to reflect these stock dividends. The weighted average number of shares outstanding plus contingently issuable shares was 1,917,517 for 2000 and 1,909,131 for 1999. ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion provides information about the consolidated financial condition and results of operations of United Bancorp, Inc. and its subsidiary, United Bank & Trust ("Bank") for the three month period ending March 31, 2000 and 1999. Page 7 8 FINANCIAL CONDITION SECURITIES Balances in the Company's investment securities portfolio continued to decline during the first quarter of 2000. Principal repayments on mortgage backed securities, as well as maturities within the various portfolios, contributed to the decrease in balances, as most maturities were not replaced during the quarter. In spite of this decline, the mix of the securities portfolio remains relatively unchanged from period to period over the long term. The chart below shows the mix of the portfolio. 3/31/2000 12/31/1999 3/31/1999 --------- ---------- ---------- U.S. Treasury and agency securities 24.2% 24.7% 23.3% Mortgage backed agency securities 18.5% 19.3% 22.0% Obligations of states and political subdivisions 47.2% 46.2% 43.6% Corporate, asset backed, and other securities 10.1% 9.8% 11.1% ---------- --------- --------- Total Securities 100.0% 100.0% 100.0% ========== ========= ========= LOANS Loan growth continued to be strong during the first quarter of 2000, and exceeded the levels achieved in 1999. During the first three months, annualized loan growth was 13.5%, compared to 14.1% for all of 1999. Business loans and residential mortgages led the increases, while other personal loan categories declined. The mix of the loan portfolio reflected this growth trend, although overall the mix has remained relatively unchanged from prior periods. Over the long term, the trend is toward an increased percentage of residential mortgage and business loans, with slight declines in personal loans. The table below shows total loans outstanding, in thousands of dollars at March 31, and December 31, and their percentage of the total loan portfolio. All loans are domestic and contain no concentrations by industry or customer. March 31, 2000 December 31, 1999 March 31, 1999 ----------------------- ------------------------- ------------------------- Portfolio loans: Balance % of total Balance % of total Balance % of total ---------- ---------- ---------- ---------- ---------- ---------- Personal $ 58,560 18.4% $ 59,045 19.2% $ 55,403 20.1% Business loans and commercial mortgages 106,877 33.5% 99,832 32.4% 85,594 31.1% Tax exempt 2,254 0.7% 1,710 0.6% 1,794 0.7% Residential mortgage 120,214 37.7% 114,150 37.0% 108,269 39.4% Construction 30,785 9.66% 33,530 10.88% 23,989 8.72% ---------- ---------- ---------- ---------- ---------- ---------- Total loans $ 318,690 100.00% $ 308,267 100.00% $ 275,049 100.00% ========== ========== ========== ========== ========== ========== CREDIT QUALITY The Company continues to maintain a high level of asset quality compared to peers, as a result of actively monitoring delinquencies, nonperforming assets and potential problem loans. In addition, the Bank uses an independent loan review firm to assess the continued quality of its business loan portfolio. Nonperforming loans are comprised of (1) loans accounted for on a nonaccrual basis; (2) loans contractually past due 90 days or more as to interest or principal payments (but not included in the nonaccrual loans in (1) above); and (3) other loans whose terms have been renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower (exclusive of loans in (1) or (2) above). The aggregate amount of nonperforming loans, in thousands of dollars, is shown in the table below. The Company's classification of nonperforming loans are generally consistent with loans identified as impaired. The chart below shows the makeup of the Company's nonperforming assets by type, in thousands of Page 8 9 dollars, as of March 31, 2000 and 1999, and December 31, 1999. 3/31/2000 12/31/1999 3/31/1999 --------- ---------- --------- Nonaccrual loans $ 1,283 $ 1,305 $ 778 Loans past due 90 days or more 182 174 205 Troubled debt restructurings 134 134 136 --------- --------- --------- Total nonperforming loans 1,599 1,613 1,119 Other real estate 52 347 335 --------- ---------- --------- Total nonperforming assets $ 1,651 $ 1,960 $ 1,454 ========= ========== ========= Percent of nonperforming loans to total loans 0.50% 0.52% 0.41% Percent of nonperforming assets to total assets 0.38% 0.46% 0.37% Nonperforming assets declined from December 31, 1999, principally as a result of removal of one commercial property from Other Real Estate Owned classification during the quarter. This property was sold when the third party who was leasing the property exercised an option to purchase. No loss was incurred on the transaction. All other categories of nonperforming assets remained virtually unchanged from December of 1999, but remain slightly higher than March, 1999 levels. The Company has increased its provision for loan losses over the same period in 1999 as a result of the increase in loan volume. The provision provides for currently anticipated losses inherent in the current portfolio. An analysis of the allowance for loan losses, in thousands of dollars, for the three months ended March 31, 2000 and 1999 follows: 2000 1999 -------- ------- Balance at beginning of period $ 3,300 $ 2,799 Loans charged off (78) (283) Recoveries credited to allowance 47 56 Provision charged to operations 354 315 -------- ------- Balance at end of period $ 3,623 $ 2,887 ======== ======= This increase in the provision, which reflects increased anticipated losses in the loan portfolio, is also reflected in changes made during the quarter in the method of allocation of the allowance for loan losses. The following table presents the portion of the allowance for loan losses applicable to each loan category in thousands of dollars, as of March 31, 2000 and 1999, and December 31, 1999. March 31, December 31, March 31, 2000 1999 1999 --------- ------------ --------- Business and commercial mortgage $ 2,148 $ 1,130 $ 889 Tax exempt -- -- -- Residential mortgage 11 22 25 Personal 645 646 723 Construction -- -- -- Unallocated 819 1,502 1,250 --------- ------------ --------- Total $ 3,623 $ 3,300 $ 2,887 ========= ============ ========= The allocation method used prior to the first quarter of 1999 was based on account-specific allocations for identified credits and the four-year historical loss average, in order to determine allocations by portfolio. Effective with the first quarter of 2000, the allocation method was modified to incorporate recent trends in the rate of net charge-offs and delinquency in the business and commercial mortgage portfolio, resulting in an increased percentage of the allowance to that segment of the loan portfolio. Construction loans are short-term and are converted to residential or commercial mortgages on the books Page 9 10 of the Company. These loans do not typically result in a loss during the construction phase. Therefore, any allocation for construction loans is applied to the category of loan where the final loan resides, rather than to Construction loans. DEPOSITS Total deposits increased during the quarter at a rate higher than experienced in recent periods. Annualized deposit growth for the quarter was 9.34%, compared to 6.99% for all of 1999. Both interest bearing and noninterest bearing deposits experienced increases during the period. This is due in part to growth in markets where the Bank has recently expanded. Management anticipates that deposit growth during 2000 will continue to be strong, with continued expansion in new and existing markets. LIQUIDITY The Bank maintained an average federal funds borrowed position for the first quarter of 2000, although generally the Bank moves in and out of the fed funds market as liquidity needs vary. Borrowings declined from December 31, 1999, and Management anticipates that deposit and loan growth will cause continued variation in the short term funds position of the Bank. The Company has a number of additional liquidity sources should the need arise, and Management has no concerns for the liquidity position of the Company. CAPITAL RESOURCES The capital ratios of the Company exceed the regulatory guidelines for well capitalized institutions. The following table shows the Company's capital ratios and ratio calculations at March 31, 2000 and 1999 and December 31, 1999. Dollars are shown in thousands. Regulatory Guidelines United Bancorp, Inc. --------------------- -------------------- Adequate Well 3/31/2000 12/31/1999 3/31/1999 -------- ------ --------- ---------- --------- Tier 1 capital to average assets 4% 5% 8.8% 9.2% 9.5% Tier 1 risk adjusted capital ratio 4% 6% 12.9% 13.0% 14.1% Total risk adjusted capital ratio 8% 10% 14.1% 14.2% 15.2% Total shareholders' equity $ 41,482 $ 40,964 $ 39,408 Intangible assets (4,194) (4,296) (2,167) Unrealized (gain) loss on securities available for sale 695 499 (198) --------- ---------- --------- Tier 1 capital 37,983 37,167 37,043 Qualifying loan loss reserves 3,623 3,300 2,887 --------- ---------- --------- Tier 2 capital $ 41,606 $ 40,467 $ 39,930 ========= ========= ========= RESULTS OF OPERATIONS NET INTEREST INCOME Both yields on earning assets and cost of funds increased from December 31, 1999. The net result was a tightening of spread and net interest margin. This tightening is primarily a result of the Company's interest liability-sensitive position, reflecting a risk to earnings when interest rates rise. In fact, interest rates have risen during recent periods, resulting in the expected decline in margin. However, the Company's margin remains quite strong, and Management continues to take steps to neutralize some portion of this risk. Page 10 11 The following table shows the year to date daily average Consolidated Balance Sheet, interest earned (on a taxable equivalent basis) or paid, and the annualized effective rate or yield, for the periods ended March 31, 2000 and 1999. YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES ----------------------------------------------------------------------------------- dollars in thousands 2000 1999 ------------------------------------ ----------------------------------------- Average Interest Yield/ Average Interest Yield/ ASSETS Balance (b) Rate (c) Balance (b) Rate (c) ---------- -------- -------- --------- -------- ------------ Interest earning assets (a) Federal funds sold $ -- $ -- --% $ 328 $ 4 4.46% Taxable securities 48,322 739 6.12% 52,654 813 6.17% Tax exempt securities (b) 33,126 613 7.40% 35,431 675 7.62% Taxable loans 312,128 6,729 8.62% 270,912 5,773 8.52% Tax exempt loans (b) 2,019 39 7.63% 1,463 27 7.48% ---------- -------- --------- -------- Total int. earning assets (b) 395,595 8,120 8.21% 360,788 7,292 8.08% Less allowance for loan losses (3,437) (2,841) Other assets 37,744 33,028 ---------- --------- TOTAL ASSETS $ 429,902 $ 390,975 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY NOW accounts $ 57,218 $ 320 2.24% $ 51,542 $ 225 1.74% Savings deposits 71,841 418 2.33% 71,999 399 2.22% CDs $100,000 and over 33,156 459 5.54% 30,703 394 5.13% Other interest bearing deposits 154,417 2,005 5.19% 140,303 1,691 4.82% ---------- -------- --------- -------- Total int. bearing deposits 316,632 3,202 4.05% 294,547 2,708 3.68% Short term borrowings 19,014 283 5.94% 3,686 45 4.91% Other borrowings 5,348 88 6.56% 10,900 165 6.05% ---------- -------- --------- -------- Total int. bearing liabilities 340,994 3,572 4.19% 309,133 2,918 3.78% Noninterest bearing deposits 45,228 40,110 Other liabilities 2,409 2,506 Shareholders' equity 41,271 39,226 ---------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 429,902 $ 390,975 ========== ========= Net interest income (b) $ 4,548 $ 4,374 ======== ======== Net spread (b) 4.02% 4.31% ======== ============ Net yield on interest earning assets (b) 4.60% 4.85% ======== ============ Ratio of interest earning assets to interest bearing liabilities 1.16 1.17 ========== ========= (a) Non-accrual loans and overdrafts are included in the average balances of loans. (b) Fully tax-equivalent basis, net of nondeductible interest impact; 34% tax rate. (c) Annualized As noted from the data in the following table, substantially all of the improvement in net interest income during 1999 came as a result of changes in volume. This continued to be the case during the first quarter of 2000. The net result is an increase in net interest income, primarily as a result of the additional volumes experienced. The following table shows the effect of volume and rate changes on net interest income for the three months ended March 31, on a taxable equivalent basis, in thousands of dollars. Page 11 12 2000 Compared to 1999 1999 Compared to 1998 --------------------------------------- ----------------------------------- Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a) ----------------------------------- --------------------------------- Volume Rate Net Volume Rate Net ------------- --------- ------------ --------- --------- ------------ Interest earned on: Federal funds sold $ (4) $ -- $ (4) $ (98) $ (18) $ (116) Taxable securities (67) (7) (74) 131 (31) 100 Tax exempt securities (43) (19) (62) 2 (16) (14) Taxable loans 888 68 956 169 (281) (112) Tax exempt loans 10 1 11 -- -- -- --------- --------- ------------ --------- --------- ------------ Total interest income $ 784 $ 43 $ 827 $ 204 $ (346) $ (142) ========= ========= ============ ========= ========= ============ 2000 Compared to 1999 1999 Compared to 1998 ----------------------------------- ----------------------------------- Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a) ----------------------------------- ----------------------------------- Volume Rate Net Volume Rate Net --------- --------- ------------ --------- --------- ------------ Interest paid on: NOW accounts $ 27 $ 68 $ 95 $ 42 $ 37 $ 79 Savings deposits (1) 20 19 (17) (117) (134) CDs $100,000 and over 33 32 65 (113) (58) (171) Other interest bearing deposits 178 137 315 (5) (231) (236) Short term borrowings 226 11 237 35 (2) 33 Other borrowings (90) 13 (77) 13 2 15 --------- --------- ------------ --------- --------- ------------ Total interest expense $ 373 $ 281 $ 654 $ (45) $ (369) $ (414) ========= ========= ============ ========= ========= ============ Net change in net interest income $ 411 $ (238) $ 173 $ 249 $ 23 $ 272 ========= ========= ============ ========= ========= ============ (a) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. NONINTEREST INCOME Total noninterest income is up 20.4% over the first quarter of 1999, reflecting initiatives in a number of areas. In general, all categories of noninterest income, other than income from loan sales and servicing, increased from the same period in 1999. Service charges on deposit accounts are 34.1% ahead of first quarter 1999 levels, as a result of continued deposit growth in transaction accounts, as well as from restructuring of the Company's deposit account product structure during mid-1999. An increase of 44.7% in other income consists principally of increased fee income from debit card interchange. The Bank's emphasis on debit cards in conjunction with the restructuring of deposit account products has contributed to this increased usage by clients and the resulting improvement in fee income. Fee income in the Trust & Investment Group is up 39.4% over the same period of 1999, again reflecting the strong growth of the department. In addition to the growth generated by new business, robust economic markets have contributed to growth of assets under management by the Department. This has translated into current fee income. At the same time, income from loan sales and servicing has declined, reflecting a decline in residential mortgages being sold in the secondary market. This decline results from a shift in client preference to variable rate loans, which the Bank retains in its portfolio. Mortgage loan refinancing has also declined from 1999 levels, resulting in fewer loans sold during 2000. Page 12 13 NONINTEREST EXPENSES Noninterest expense also continued to increase over the same period of 1999, reflecting continued growth and expansion of the Bank. Total noninterest expense, excluding provision for loan losses, for the first three months was 11.4% above the same period for 1999, reflecting continued growth and expansion of the Bank. At the same time, total noninterest expense increased just 2.2% over the fourth quarter of 1999, with salaries and benefits decreasing 4.1%. FEDERAL INCOME TAX There has been no significant change in the income tax position of the Company during the first quarter of 2000. NET INCOME Consolidated net income exceeded that of the same period in 1999 by .3%, and was slightly behind fourth quarter 1999 levels. Management anticipates that net income will continue to remain strong for the remainder of the year. FORWARD-LOOKING STATEMENTS Statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations include forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Company itself. Words such as "anticipate," "believe," "determine," "estimate," "expect," forecast, "intend," "is likely," "plan," "project," "opinion," variations of such terms, and similar expressions are intended to identify such forward-looking statements. The presentations and discussions of the provision and allowance for loan losses, and determinations as to the need for other allowances presented in this report are inherently forward-looking statements in that they involve judgements and statements of belief as to the outcome of future events. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Internal and external factors that may cause such a difference include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking laws and regulations; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior and customer ability to repay loans; software failure, errors or miscalculations; the ability of other companies on which the Company relies to be Year 2000 compliant; the ability of the Company to locate and correct all data sensitive computer code; and the vicissitudes of the national economy. The Company undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. ITEM 3- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FUNDS MANAGEMENT AND INTEREST RATE RISK The composition of the Company's balance sheet consists of investments in interest earning assets (loans and investment securities) that are funded by interest bearing liabilities (deposits and borrowings). These financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. Bank policies place strong emphasis on stabilizing net interest margin, with the goal of providing a sustained level of satisfactory earnings. The Funds Management, Investment and Loan policies provide direction for the flow of funds necessary to supply the needs of depositors and borrowers. Management of interest sensitive assets and liabilities is also necessary to reduce interest rate risk during Page 13 14 times of fluctuating interest rates. A number of measures are used to monitor and manage interest rate risk, including interest sensitivity and income simulation analyses. An interest sensitivity model is the primary tool used to assess this risk with supplemental information supplied by an income simulation model. The simulation model is used to estimate the effect that specific interest rate changes would have on twelve months of pretax net interest income assuming an immediate and sustained up or down parallel change in interest rates of 200 basis points. Key assumptions in the models include prepayment speeds on mortgage related assets; cash flows and maturities of financial instruments held for purposes other than trading; changes in market conditions, loan volumes and pricing; and management's determination of core deposit sensitivity. These assumptions are inherently uncertain and, as a result, the models cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions. Based on the results of the simulation model as of March 31, 2000, the Company would expect a maximum potential reduction in net interest margin of less than 7% if market rates increased under an immediate and sustained parallel shift of 200 basis points. The Bank's interest sensitivity position remained substantially unchanged from the previous quarter. The Company's exposure to market risk is reviewed on a regular basis by the Funds Management Committee. The Committee's policy objective is to manage the Company's assets and liabilities to provide an optimum and consistent level of earnings within the framework of acceptable risk standards. The Funds Management Committee of the Bank is also responsible for evaluating and anticipating various risks other than interest rate risk. Those risks include prepayment risk, credit risk and liquidity risk. The Committee is made up of senior members of management, and continually monitors the makeup of interest sensitive assets and liabilities to assure appropriate liquidity, maintain interest margins and to protect earnings in the face of changing interest rates and other economic factors. The Funds Management policy of the Bank provides for a level of interest sensitivity which, Management believes, allows the Bank to take advantage of opportunities within the market relating to liquidity and interest rate risk, allowing flexibility without subjecting the Bank to undue exposure to risk. In addition, other measures are used to evaluate and project the anticipated results of Management's decisions. PART II OTHER INFORMATION ITEM 1- LEGAL PROCEEDINGS The Company is not involved in any material legal proceedings. The Company's sole subsidiary, United Bank & Trust, is involved in ordinary routine litigation incident to its business; however, no such proceedings are expected to result in any material adverse effect on the operations or earnings of the Bank. Neither the Bank nor the Company is involved in any proceedings to which any director, principal officer, affiliate thereof, or person who owns of record or beneficially five percent (5%) or more of the outstanding stock of the Company or the Bank, or any associate of the foregoing, is a party or has a material interest adverse to the Company or the Bank. During the first quarter of 2000, United Bank & Trust formed United Mortgage Company as a wholly- Page 14 15 owned subsidiary of the Bank. United Mortgage Company will become active during the second quarter of the year, but as a subsidiary of the Bank, its operations will be completely transparent to the financial statements of the Bank or the Company. ITEM 2- CHANGES IN SECURITIES No changes in the securities of the Company occurred during the quarter ended March 31, 2000. ITEM 3- DEFAULTS UPON SENIOR SECURITIES There have been no defaults upon senior securities relevant to the requirements of this section during the three months ended March 31, 2000. ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended March 31, 2000. ITEM 5- OTHER INFORMATION None. ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K (a) Listing of Exhibits (numbered as in Item 601 of Regulation S-K): 27. Financial Data Schedule. (b) The Company has filed no reports on Form 8-K during the quarter ended March 31, 2000. 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. United Bancorp, Inc. April 30, 2000 /S/ Dale L. Chadderdon -------------------------------------------------------- Dale L. Chadderdon Senior Vice President, Secretary & Treasurer Page 15 16 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - -------------------------------------------------------------------------------- 27 Financial Data Schedule Page 16