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 SEPTEMBER 30, 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 October 15, 2000, there were outstanding 1,909,520 shares of the
registrant's common stock, no par value.
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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 Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 9
Operations
Financial Condition 9
Liquidity 12
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
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PART I
FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS (Condensed)
(A) CONSOLIDATED BALANCE SHEETS
In thousands of dollars
(unaudited) (unaudited)
September 30, December 31, September 30,
2000 1999 1999
------------- ------------ -------------
ASSETS
Total cash and cash equivalents $ 20,348 $ 17,469 $ 14,627
Securities available for sale 74,817 81,923 49,572
Securities held to maturity; fair value of $34,413 at Sep. 30, 1999 -- -- 34,176
--------- --------- ---------
Total securities 74,817 81,923 83,748
Loans held for sale 624 154 --
Portfolio loans 335,287 308,113 293,650
--------- --------- ---------
Total loans 335,911 308,267 293,650
Less allowance for loan losses 3,968 3,300 3,218
--------- --------- ---------
Net loans 331,943 304,967 290,432
Premises and equipment, net 12,920 13,116 12,976
Accrued interest receivable and other assets 10,328 10,046 9,883
--------- --------- ---------
TOTAL ASSETS $ 450,356 $ 427,521 $ 411,666
========= ========= =========
LIABILITIES
Deposits
Noninterest bearing $ 53,408 $ 46,829 $ 44,480
Interest bearing certificates of deposit of $100,000 or more 43,121 32,445 32,157
Other interest bearing deposits 289,045 281,569 274,833
--------- --------- ---------
Total deposits 385,574 360,843 351,470
Federal funds purchased and other short term borrowings 5,600 19,300 6,700
Other borrowings 12,328 3,624 10,624
Accrued interest payable and other liabilities 3,080 2,790 2,377
--------- --------- ---------
TOTAL LIABILITIES 406,582 386,557 371,171
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value;
5,000,000 shares authorized; 1,909,520, 1,819,193 and
1,816,956 shares issued and outstanding, respectively 28,264 23,919 23,787
Retained earnings 15,733 17,544 16,977
Accumulated other comprehensive income (loss), net of tax (223) (499) (269)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 43,774 40,964 40,495
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 450,356 $ 427,521 $ 411,666
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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(B) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
In thousands of dollars, except per share data
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------
2000 1999 2000 1999
------- ------- ------- -------
INTEREST INCOME
Interest and fees on loans
Taxable $ 7,379 $ 6,188 $21,317 $17,870
Tax exempt 29 23 85 65
Interest on securities
Taxable 697 791 2,142 2,408
Tax exempt 394 430 1,211 1,332
Interest on federal funds sold 9 31 9 84
------- ------- ------- -------
Total interest income 8,508 7,463 24,764 21,759
INTEREST EXPENSE
Interest on certificates of deposit of $100,000 or more 611 395 1,593 1,158
Interest on other deposits 3,155 2,522 8,784 7,245
Interest on short term borrowings 143 19 717 66
Interest on other borrowings 214 164 501 495
------- ------- ------- -------
Total interest expense 4,123 3,100 11,595 8,964
------- ------- ------- -------
NET INTEREST INCOME 4,385 4,363 13,169 12,795
Provision for loan losses 240 315 948 945
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,145 4,048 12,221 11,850
NONINTEREST INCOME
Service charges on deposit accounts 575 569 1,699 1,489
Trust & Investment fee income 718 568 2,070 1,548
Gains on securities transactions -- -- 4 11
Loan sales and servicing 124 96 286 442
Sales of nondeposit investment products 146 186 493 497
Gain on sale of credit card loans -- -- 308 --
Other income 209 208 680 557
------- ------- ------- -------
Total noninterest income 1,772 1,627 5,540 4,544
NONINTEREST EXPENSE
Salaries and employee benefits 2,201 2,108 6,516 6,145
Occupancy and equipment expense, net 697 638 2,124 1,863
Other expense 1,104 1,089 3,323 3,197
------- ------- ------- -------
Total noninterest expense 4,002 3,835 11,963 11,205
------- ------- ------- -------
INCOME BEFORE FEDERAL INCOME TAX 1,915 1,840 5,798 5,189
Federal income tax 538 500 1,618 1,371
------- ------- ------- -------
NET INCOME $ 1,377 $ 1,340 $ 4,180 $ 3,818
======= ======= ======= =======
Basic earnings per share $ 0.72 $ 0.70 $ 2.18 $ 2.00
Diluted earnings per share 0.72 0.70 2.18 2.00
Cash dividends declared per share of common stock 0.30 0.29 0.89 0.81
The accompanying notes are an integral part of these consolidated financial
statements.
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(C) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
In thousands of dollars
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 2000 1999 2000 1999
-------- -------- -------- --------
Balance at beginning of period $ 42,579 $ 39,698 $ 40,964 $ 38,764
Net Income 1,377 1,340 4,180 3,818
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net 354 (14) 276 (589)
-------- -------- -------- --------
Total comprehensive income 1,731 1,326 4,456 3,229
Cash dividends declared (573) (545) (1,690) (1,539)
5% stock dividend declared -- -- -- --
Common stock and contingently issuable stock 37 16 44 41
-------- -------- -------- --------
Balance at end of period $ 43,774 $ 40,495 $ 43,774 $ 40,495
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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(D) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In thousands of dollars
Nine Months Ended
September 30,
--------------------------------
2000 1999
-------- --------
Cash Flows from Operating Activities
Net Income $ 4,180 $ 3,818
-------- --------
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization 1,523 1,381
Provision for loan losses 948 945
Gain on sale of credit card loans (308) --
Change in loans held for sale (470) 535
Gains on securities transactions (4) (11)
Change in accrued interest receivable and other assets (187) (609)
Change in accrued interest payable and other liabilities 446 (62)
-------- --------
Total adjustments 1,948 2,179
-------- --------
Net cash from operating activities 6,128 5,997
-------- --------
Cash Flows from Investing Activities
Securities available for sale
Purchases (4,653) (14,132)
Maturities and calls 9,064 15,820
Principal payments 2,979 6,168
Securities held to maturity
Purchases -- (2,298)
Maturities and calls -- 5,021
Proceeds from sale of credit card loans 3,745 --
Net change in portfolio loans (31,435) (24,462)
Premises and equipment expenditures, net (882) (2,509)
Cash received for net liabilities assumed in acquisition of branch -- 17,590
-------- --------
Net cash from investing activities (21,182) 1,198
-------- --------
Cash Flows from Financing Activities
Net change in deposits 24,731 (5,820)
Net change in short term borrowings (13,700) 2,826
Proceeds from other borrowings 9,000 --
Principal payments on other borrowings (296) (276)
Proceeds from common stock transactions 44 41
Dividends paid (1,846) (1,687)
-------- --------
Net cash from financing activities 17,933 (4,916)
-------- --------
Net change in cash and cash equivalents 2,879 2,279
Cash and cash equivalents at beginning of year 17,469 12,348
-------- --------
Cash and cash equivalents at end of period $ 20,348 $ 14,627
======== ========
Supplement Disclosure of Cash Flow Information:
Interest paid $ 11,334 $ 9,100
Income tax paid 2,025 1,400
Loans transferred to other real estate 544 --
Increase in deposits from branch acquisition -- 20,023
Goodwill resulting from branch acquisition -- 2,433
The accompanying notes are an integral part of these consolidated financial
statements.
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(E) NOTES TO CONSOLIDATED 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 nine month
period ending September 30, 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 $124,151,000 and $125,126,000 at the end of September
2000 and 1999. The balance of loans serviced for others related to servicing
rights that have been capitalized was $104,059,000 and $100,818,000 at September
30, 2000 and 1999.
Mortgage servicing rights activity in thousands of dollars for the six months
ended September 30, 2000 and 1999 follows:
Unamortized cost of mortgage servicing rights 2000 1999
----------- -----------
Balance at January 1 $ 728 $ 646
Amount capitalized year to date 76 176
Amount amortized year to date (65) (91)
----------- -----------
Balance at period end $ 739 $ 731
=========== ===========
No valuation allowance was considered necessary for mortgage servicing rights at
period end 2000 and 1999.
NOTE 3 - COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share are based upon the weighted average number of shares
outstanding plus contingently issuable shares during the year. Diluted earnings
per share further assumes the dilutive effect of additional common shares
issuable under stock options. The Company issued 5% stock dividends in May 2000
and 1999. Earnings per share, dividends per share and weighted average shares
have been restated to reflect these stock dividends.
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A reconciliation of basic and diluted earnings per share follows:
Three Months Ended Nine Months Ended
In thousands of dollars, except per share data September 30, September 30,
-------------------------------------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net income $ 1,377 $ 1,340 $ 4,180 $ 3,818
========== ========== ========== ==========
Basic earning per share:
Weighted average common shares outstanding 1,909,360 1,907,824 1,909,729 1,907,787
Weighted average contingently issuable shares 8,454 6,055 7,962 5,912
---------- ---------- ---------- ----------
1,917,814 1,913,879 1,917,691 1,913,699
========== ========== ========== ==========
Basic earnings per share $ 0.72 $ 0.70 $ 2.18 $ 2.00
========== ========== ========== ==========
Diluted earnings per share:
Weighted average common shares outstanding
from basic earnings per share 1,917,814 1,913,879 1,917,691 1,913,699
Dilutive effect of stock options 576 -- -- --
---------- ---------- ---------- ----------
1,918,390 1,913,879 1,917,691 1,913,699
========== ========== ========== ==========
Diluted earnings per share $ 0.72 $ 0.70 $ 2.18 $ 2.00
========== ========== ========== ==========
NOTE 4 - STOCK OPTIONS
On April 18, 2000, Shareholders approved the Company's 1999 Stock Option Plan as
proposed. The plan is a Non-Qualified Stock Option Plan as defined under
Internal Revenue Service regulations. Under the Plan, Directors and management
of the Company and subsidiaries are given the right to purchase stock of the
Company at a stipulated price over a specific period of time.
The Plan is administered by a committee consisting of non-employee Directors of
the Company. The Committee determines: (a) The persons to whom options will be
granted (b) The number of shares included with each option, and, (c) The date on
which each option is to be granted. In making decisions for the above criteria,
the Committee may consider input provided by the Bank's senior management. All
grants are subject to approval by the Board of Directors. The Plan will continue
in effect for five years, unless the plan is extended with the approval of
shareholders.
The stock subject to the options would be shares of authorized and unissued
common stock of the Company. As defined in the Plan, options representing no
more than 109,000 shares are to be made available to the Plan.
Options under this plan are granted to Directors and certain key members of
management at the then-current market price at the time the option is granted.
The options have a three-year vesting period, and with certain exceptions,
expire at the end of ten years, or three years after retirement.
Under the Company's 1999 stock option plan, 30,550 options were granted on May
10, 2000 at the then-current market price. The weighted fair value of the
options granted was $5.94.
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The following is summarized option activity for the period April 18, 2000
through September 30, 2000.
Available Options Weighted Ave.
for Grant Outstanding Exercise Price
------------ ----------- --------------
Balance at April 18, 2000 109,000 -- --
Options granted (30,550) 30,550 $ 45.71
-------- -------- ---------
Balance at September 30, 2000 78,450 30,550 $ 45.71
======== ======== =========
The following pro forma information presents net income and earnings per share
had the fair value method been used to measure compensation cost for stock
option grants. The exercise price of the option grants is equivalent to the
market value of the underlying stock at the grant date, adjusted for stock
dividends. Accordingly, no compensation cost was recorded for the three and nine
month periods ended September 30, 2000 and 1999.
Three Months Ended Nine Months Ended
In thousands of dollars, except per share data September 30, September 30,
---------------------------------------------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net income $ 1,377 $ 1,340 $ 4,180 $ 3,818
Pro forma net income 1,367 1,340 4,164 3,818
Basic earnings per share as reported $ 0.72 $ 0.70 $ 2.18 $ 2.00
Pro forma basic earnings per share 0.71 0.70 2.17 2.00
Diluted earnings per share as reported $ 0.72 $ 0.70 $ 2.18 $ 2.00
Pro forma diluted earnings per share 0.71 0.70 2.17 2.00
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 and nine month periods ending September 30,
2000 and 1999.
FINANCIAL CONDITION
SECURITIES
Balances in the Company's investment securities portfolio remained relatively
flat during the third quarter of 2000. Principal repayments on mortgage backed
securities and maturities within the various portfolios were substantially
offset by purchases within the municipal bond portfolio. The mix of the
securities portfolio has gradually changed in the past year, as a result of an
increased emphasis on municipal issues with less focus on mortgage-backed and
asset-backed securities. The chart below shows the mix of the portfolio.
9/30/2000 12/31/1999 9/30/1999
--------- ---------- ---------
U.S. Treasury and agency securities 24.5% 24.7% 24.4%
Mortgage backed agency securities 17.1% 19.3% 20.5%
Obligations of states and political subdivisions 47.7% 46.2% 40.2%
Corporate, asset backed, and other securities 10.7% 9.8% 14.9%
------- ------- -------
Total Securities 100.0% 100.0% 100.0%
======= ======= =======
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LOANS
Loan growth during the third quarter of 2000 remained steady. For the quarter,
annualized loan growth was 7.8%, compared to nine month annualized growth of
12.0%. All categories of loans other than construction and tax exempt loans
experienced growth during the quarter, with the dollars spread relatively evenly
among the portfolios. The decline in construction loans was offset by an
increase in residential real estate loans as the building season approached
seasonal slowdowns in home construction.
The mix of the loan portfolio has remained relatively unchanged from the prior
quarter, but continues a long-term trend is toward an increased percentage of
residential mortgage and business loans, with slight declines in personal loans.
Sale of the Bank's credit card portfolio at the end of June resulted in a
decline in personal loans as of June 30.
The table below shows total loans outstanding, in thousands of dollars at
September 30, 2000 and 1999 and December 31, 1999 and their percentage of the
total loan portfolio. All loans are domestic and contain no concentrations by
industry or client.
September 30, 2000 December 31, 1999 September 30, 1999
-------------------------- -------------------------- -------------------------
Portfolio loans: Balance % of total Balance % of total Balance % of total
-------- ---------- -------- --------- -------- ----------
Personal $ 58,648 17.5% $ 59,045 19.2% $ 59,376 20.2%
Business loans and
commercial mortgages 113,876 33.9% 99,832 32.4% 92,375 31.5%
Tax exempt 2,084 0.6% 1,710 0.6% 1,834 0.6%
Residential mortgage 129,799 38.6% 114,150 37.0% 111,594 38.0%
Construction 31,504 9.4% 33,530 10.9% 28,471 9.7%
-------- ----- -------- ------ -------- -----
Total loans $335,911 100.0% $308,267 100.00% $293,650 100.0%
======== ===== ======== ====== ======== =====
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 chart below shows the aggregate amount of the Company's nonperforming assets
by type, in thousands of dollars, as of September 30, 2000 and 1999, and
December 31, 1999. The Company's classification of nonperforming loans is
generally consistent with loans identified as impaired.
9/30/2000 12/31/1999 9/30/1999
--------- ---------- ---------
Nonaccrual loans $ 921 $1,305 $1,356
Loans past due 90 days or more 117 174 17
Troubled debt restructurings 133 134 135
------ ------ ------
Total nonperforming loans 1,171 1,613 1,508
Other real estate 544 347 335
------ ------ ------
Total nonperforming assets $1,715 $1,960 $1,843
====== ====== ======
Percent of nonperforming loans to total loans 0.35% 0.52% 0.51%
Percent of nonperforming assets to total assets 0.38% 0.46% 0.45%
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Nonperforming assets are at their lowest point in recent periods, as credit
quality remains quite strong for the organization. Balances in nonaccrual loans
are well below those achieved at the end of the third quarter last year and the
end of 1999, but are up slightly from June 30, 2000 levels. Delinquencies were
down from second quarter 2000 totals and are at very acceptable levels. The
Company's ratios of nonperforming assets are in line with other banks of similar
size and makeup.
The Company's allowance for loan losses remains at a level consistent with its
anticipated potential losses. The provision provides for currently anticipated
losses inherent in the current portfolio. Charge-offs for the year have been
lower than during previous periods, resulting in an increase in the allowance.
The Company retains some liability for a limited time on the portfolio of credit
card loans that were sold during the second quarter of 2000. As a result,
$100,000 was transferred from the Company's allowance for loan losses to a
contingent liability account. That transfer is reflected in the chart below.
An analysis of the allowance for loan losses, in thousands of dollars, for the
nine months ended September 30, 2000 and 1999 follows:
2000 1999
------- -------
Balance at January 1: $ 3,300 $ 2,799
Loans charged off (332) (673)
Recoveries credited to allowance 152 147
Provision charged to operations 948 945
Adjustment for credit cards sold (100) --
------- -------
Balance at September 30: $ 3,968 $ 3,218
======= =======
The Company has increased its provision for loan losses over the same period in
1999 as a result of an increase in loan volume. This increase in the provision,
which reflects increased anticipated losses in the loan portfolio, is also
reflected in changes made during the first quarter of 2000 in the method of
allocation of the allowance for loan losses. During the third quarter of 2000,
the Company reduced its monthly provision to better reflect its estimates of
losses inherent in the portfolio. The following table presents the allocation of
the allowance for loan losses applicable to each loan category in thousands of
dollars, as of September 30, 2000 and 1999, and December 31, 1999.
9/30/2000 12/31/1999 9/30/1999
--------- ---------- ---------
Business and commercial mortgage $2,247 $1,130 $1,344
Tax exempt -- -- --
Residential mortgage 11 22 23
Personal 627 646 645
Construction -- -- --
Unallocated 1,083 1,502 1,206
------ ------ ------
Total $3,968 $3,300 $3,218
====== ====== ======
The allocation method used prior to the first quarter of 2000 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 allocated to that segment of the loan portfolio.
Construction loans are short-term and are converted to residential or commercial
mortgages on the books 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.
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DEPOSITS
The Company experienced excellent growth in total deposits during the third
quarter, following minimal growth during the second quarter. Total deposit
growth during the quarter was $16.3 million. Year to date annualized deposit
growth is 9.1%, with annualized growth for the quarter of 17.7%. This deposit
growth was primarily in interest bearing deposits, and reflects continued growth
and expansion, as well as some desire on the part of consumers to return to the
relative safety of bank deposit products. Management anticipates that deposit
growth during 2000 will continue to be steady, with continued expansion in new
and existing markets.
LIQUIDITY
The Bank significantly reduced its average federal funds borrowed position for
the third quarter of 2000 as a result of deposit growth in excess of loan
demand. Generally the Bank moves in and out of the fed funds market as liquidity
needs vary, and the Company remains in an average net borrowed position for the
year. Borrowings decreased significantly from December 31, 1999 and June 30,
2000, 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 September 30, 2000 and 1999, and December 31, 1999.
Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc.
--------------------- -----------------------------------
Adequate Well 9/30/2000 12/31/1999 9/30/1999
-------- ---- --------- ---------- ---------
Tier 1 capital to average assets 4% 5% 9.1% 9.2% 9.1%
Tier 1 capital to risk weighted assets 4% 6% 13.1% 13.0% 13.3%
Total capital to risk weighted assets 8% 10% 14.4% 14.2% 14.5%
Total shareholders' equity $ 43,774 $ 40,964 $ 40,495
Intangible assets (3,990) (4,296) (4,400)
Unrealized (gain) loss on securities available for sale 223 499 269
-------- -------- --------
Tier 1 capital 40,007 37,167 36,364
Total loan loss reserves 3,968 3,300 3,218
Excess portion of loan loss reserves (150) -- --
-------- --------- ---------
Tier 2 capital $ 43,825 $ 40,467 $ 39,582
======== ========= =========
RESULTS OF OPERATIONS
NET INTEREST INCOME
Both yields on earning assets and cost of funds increased for 2000 compared to
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. Rising
interest rates during the year have resulted 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. The following
table shows the year to date daily average Consolidated Balance Sheets, interest
earned (on a taxable equivalent basis) or paid, and the annualized effective
yield or rate, for the periods ended September 30, 2000 and 1999.
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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 $ 191 $ 9 6.46% $ 2,319 $ 84 4.81%
Taxable securities 46,356 2,142 6.16% 52,449 2,408 6.12%
Tax exempt securities (b) 31,332 1,746 7.43% 33,968 1,934 7.59%
Taxable loans 322,692 21,317 8.81% 277,898 17,870 8.57%
Tax exempt loans (b) 2,148 122 7.58% 1,659 94 7.58%
--------- --------- --------- ---------
Total int. earning assets (b) 402,719 25,337 8.39% 368,293 22,390 8.11%
Less allowance for loan losses (3,686) (2,965)
Other assets 39,063 35,441
--------- ---------
TOTAL ASSETS $ 438,096 $ 400,769
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 57,663 $ 1,035 2.39% $ 54,481 $ 751 1.84%
Savings deposits 67,456 1,171 2.32% 73,488 1,218 2.21%
CDs $100,000 and over 36,348 1,593 5.85% 30,113 1,158 5.13%
Other interest bearing deposits 158,640 6,577 5.53% 145,258 5,277 4.84%
--------- --------- --------- ---------
Total int. bearing deposits 320,107 10,377 4.32% 303,340 8,403 3.69%
Short term borrowings 15,018 717 6.36% 1,741 66 5.04%
Other borrowings 9,783 501 6.83% 10,792 495 6.11%
--------- --------- --------- ---------
Total int. bearing liabilities 344,908 11,595 4.48% 315,873 8,964 3.78%
Noninterest bearing deposits 48,090 42,660
Other liabilities 2,839 2,502
Shareholders' equity 42,259 39,734
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 438,096 $ 400,769
========= =========
Net interest income (b) $ 13,742 $ 13,427
========= =========
Net spread (b) 3.91% 4.32%
==== ====
Net yield on interest earning assets (b) 4.55% 4.86%
==== ====
Ratio of interest earning assets to
interest bearing liabilities 1.17 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, the greatest portion of
improvement in interest income during the first nine months of 2000 came as a
result of changes in volume. At the same time, increases in interest expense
were distributed fairly evenly between changes in volume and rate. The net
result is an increase in net interest income, resulting from improvements in
volumes in excess of declines caused by rate. The following table shows the
effect of volume and rate changes on net interest income for the nine months
ended September 30, 2000 and 1999 on a taxable equivalent basis, in thousands of
dollars.
Page 13
14
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 $ (96) $ 22 $ (74) $ (237) $ (39) $ (276)
Taxable securities (282) 16 (266) 173 (109) 64
Tax exempt securities (148) (40) (188) (75) (40) (115)
Taxable loans 2,948 499 3,447 1,184 (823) 361
Tax exempt loans 28 -- 28 12 (1) 11
------- ------- ------- ------- ------- -------
Total interest income $ 2,450 $ 497 $ 2,947 $ 1,057 $(1,012) $ 45
======= ======= ======= ======= ======= =======
Interest paid on:
NOW accounts $ 46 $ 238 $ 284 $ 157 $ 68 $ 225
Savings deposits (103) 57 (46) 14 (338) (324)
CDs $100,000 and over 260 176 436 (225) (154) (379)
Other interest bearing deposits 513 788 1,301 121 (610) (489)
Short term borrowings 629 22 651 39 (2) 37
Other borrowings (49) 55 6 9 2 11
------- ------- ------- ------- ------- -------
Total interest expense $ 1,296 $ 1,336 $ 2,632 $ 115 $(1,034) $ (919)
======= ======= ======= ======= ======= =======
Net change in net interest
income $ 1,154 $ (839) $ 315 $ 942 $ 22 $ 964
======= ======= ======= ======= ======= =======
(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 remains strong for the year. Income from loan sales and
servicing, and sales of nondeposit investment products are down slightly from
the high levels achieved in 1999. However, all other areas are improved, and
total noninterest income exceeds prior periods by a significant amount.
Service charges on deposit accounts remain ahead of 1999 levels, and are 14.1%
over 1999 year to date, as a result of continued deposit growth in transaction
accounts and restructuring of the Company's deposit account product structure
during mid-1999.
The Bank's Trust & Investment Group continues to provide significant
contribution to the Company's noninterest income, through continued growth and
expansion. Fee income in the Trust & Investment Group is up 26.4% over the same
quarter of 1999 and up 33.7% year to date. Shifts in the mix of the types of
accounts managed has increased fee income while assets under management have
experienced considerable growth.
Income from loan sales and servicing continues to be depressed from previous
periods, 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.
In June of 2000, the Bank sold its portfolio of credit card loans. The sale
resulted in a net addition to noninterest income during the second quarter of
$308,000. Other income increased 22.1% year to date over the same period of
1999.
Page 14
15
NONINTEREST EXPENSES
Noninterest expense is virtually flat from the second quarter of 2000, and
showed modest increases over comparable periods of 1999. Total noninterest
expense, excluding provision for loan losses, for the nine months ended
September 30, 2000 was 6.8% above the same period for 1999, reflecting continued
growth and expansion of the Bank. At the same time, total noninterest expense
increased just 4.4% over the second quarter of 1999. The largest increases are
seen in the compensation and occupancy expenses, reflecting the Company's
continued growth and expansion in various markets.
FEDERAL INCOME TAX
There has been no significant change in the income tax position of the Company
during the third quarter of 2000. The increase in federal income tax for the
three and nine months ended September 30, 2000 as compared to the same periods
for 1999 in the result of higher pre-tax income and slightly less tax exempt
income in the 2000 periods as compared to the 1999 periods.
NET INCOME
Consolidated net income exceeded that of the third quarter of 1999 by 2.8%, and
is ahead of 1999 year to date by 9.5%. Management anticipates that net income
will continue to remain strong for the remainder of the year, although second
quarter earnings were helped by non-recurring gains on the sale of the Bank's
credit card portfolio as discussed above under "Noninterest Income." Preliminary
work relating to expansion of the Company's service area may result in some
increase in expenses during the fourth quarter of 2000.
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.
Page 15
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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 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 September 30, 2000, the
Company would expect a maximum potential reduction in net interest margin of
less than 5% 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.
Page 16
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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- owned subsidiary of the Bank. United Mortgage Company
became active during the second quarter of the year, but as a subsidiary of the
Bank, its operations are completely transparent to the financial statements of
the Bank or the Company.
ITEM 2- CHANGES IN SECURITIES AND USE OF PROCEEDS
No changes in the securities of the Company occurred during the quarter ended
September 30, 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 September 30, 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
September 30, 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
September 30, 2000.
Page 17
18
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.
November 3, 2000
/S/ Dale L. Chadderdon
------------------------------------------------
Dale L. Chadderdon
Senior Vice President, Secretary & Treasurer
Page 18
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- --------------------------------------------------------------------------------
27 Financial Data Schedule