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, 2001
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, 2001, there were outstanding 1,911,435 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)
(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
Operations
Financial Condition 9
Liquidity 12
Results of Operations 13
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 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
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PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (Condensed)
(A) CONSOLIDATED BALANCE SHEETS
In thousands of dollars
(unaudited) (unaudited)
March 31, December 31, March 31,
2001 2000 2000
----------- ------------ ----------
ASSETS
Cash and demand balances in other banks $ 20,866 $ 16,822 $ 18,443
Federal funds sold 22,400 21,300 --
--------- --------- ---------
Total cash and cash equivalents 43,266 38,122 18,443
Securities available for sale 80,313 72,679 79,008
Loans held for sale 2,001 1,156 --
Portfolio loans 344,052 337,351 318,690
--------- --------- ---------
Total loans 346,053 338,507 318,690
Less allowance for loan losses 4,199 4,032 3,623
--------- --------- ---------
Net loans 341,854 334,475 315,067
Premises and equipment, net 14,599 13,431 13,374
Accrued interest receivable and other assets 9,933 10,154 10,039
--------- --------- ---------
TOTAL ASSETS $ 489,965 $ 468,861 $ 435,931
========= ========= =========
LIABILITIES
Deposits
Noninterest bearing $ 54,488 $ 52,555 $ 49,928
Interest bearing certificates of deposit of $100,000 or more 41,963 46,445 34,924
Other interest bearing deposits 331,217 308,957 284,417
--------- --------- ---------
Total deposits 427,668 407,957 369,269
Federal funds purchased and other short term borrowings -- -- 14,800
Other borrowings 12,328 12,328 7,624
Accrued interest payable and other liabilities 3,852 3,522 2,756
--------- --------- ---------
TOTAL LIABILITIES 443,848 423,807 394,449
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value;
5,000,000 shares authorized; 1,911,491, 1,911,603 and
1,819,022 shares issued and outstanding, respectively 28,433 28,399 23,947
Stock dividend payable 4,874 -- 4,275
Retained earnings 12,160 16,374 13,955
Accumulated other comprehensive income (loss), net of tax 650 281 (695)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 46,117 45,054 41,482
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 489,965 $ 468,861 $ 435,931
========= ========= =========
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
March 31,
------------------
2001 2000
---- ----
INTEREST INCOME
Interest and fees on loans
Taxable $7,296 $6,729
Tax exempt 25 27
Interest on securities
Taxable 626 739
Tax exempt 398 424
Interest on federal funds sold 372 --
------ ------
Total interest income 8,717 7,919
INTEREST EXPENSE
Interest on certificates of deposit of $100,000 or more 662 459
Interest on other deposits 3,466 2,743
Interest on short term borrowings -- 282
Interest on other borrowings 210 88
------ ------
Total interest expense 4,338 3,572
------ ------
NET INTEREST INCOME 4,379 4,347
Provision for loan losses 169 354
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,210 3,993
NONINTEREST INCOME
Service charges on deposit accounts 555 547
Trust & Investment fee income 716 644
Loan sales and servicing 211 77
Sales of nondeposit investment products 184 172
Other income 341 233
------ ------
Total noninterest income 2,007 1,673
NONINTEREST EXPENSE
Salaries and employee benefits 2,397 2,152
Occupancy and equipment expense, net 801 719
Other expense 1,315 1,112
------ ------
Total noninterest expense 4,513 3,983
------ ------
INCOME BEFORE FEDERAL INCOME TAX 1,704 1,683
Federal income tax 466 448
------ ------
NET INCOME $1,238 $1,235
====== ======
Basic earnings per share $ 0.61 $ 0.61
Diluted earnings per share 0.61 0.61
Cash dividends declared per share of common stock 0.29 0.27
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
March 31,
--------------------
2001 2000
---- ----
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of period $ 45,054 $ 40,964
Net Income 1,238 1,235
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net 369 (196)
-------- --------
Total comprehensive income 1,607 1,039
Cash dividends declared (573) (546)
5% stock dividend declared - -
Common stock and contingently issuable stock 29 25
-------- --------
Balance at end of period $ 46,117 $ 41,482
======== ========
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
Three Months Ended
March 31,
--------------------
2001 2000
---- ----
Cash Flows from Operating Activities
Net Income $ 1,238 $ 1,235
-------- --------
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization 547 518
Provision for loan losses 169 354
Change in loans held for sale (845) 154
Change in accrued interest receivable and other assets (70) 43
Change in accrued interest payable and other liabilities 560 149
-------- --------
Total adjustments 361 1,218
-------- --------
Net cash from operating activities 1,599 2,453
-------- --------
Cash Flows from Investing Activities
Securities available for sale
Purchases (18,821) (50)
Maturities and calls 10,292 1,535
Principal payments 1,421 1,077
Net change in portfolio loans (6,703) (10,648)
Premises and equipment expenditures, net (1,581) (616)
-------- --------
Net cash from investing activities (15,392) (8,702)
-------- --------
Cash Flows from Financing Activities
Net change in deposits 19,711 8,426
Net change in short term borrowings -- (4,500)
Proceeds from other borrowings -- 4,000
Proceeds from common stock transactions 29 25
Dividends paid (803) (728)
-------- --------
Net cash from financing activities 18,937 7,223
-------- --------
Net change in cash and cash equivalents 5,144 974
Cash and cash equivalents at beginning of year 38,122 17,469
-------- --------
Cash and cash equivalents at end of period $ 43,266 $ 18,443
======== ========
Supplement Disclosure of Cash Flow Information:
Interest paid $ 4,246 $ 3,659
Income tax paid -- --
Loans transferred to other real estate -- 40
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 three month
period ending March 31, 2001 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2001. 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, 2000.
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 $137,901,000 and $122,481,000 at the end of March 2001
and 2000. The balance of loans serviced for others related to servicing rights
that have been capitalized was $118,070,000 and $100,417,000 at March 31, 2001
and 2000.
Mortgage servicing rights activity in thousands of dollars for the three months
ended March 31, 2001 and 2000 follows:
Unamortized cost of mortgage servicing rights 2001 2000
--------------------------------------------- ---- ----
Balance at January 1 $ 780 $ 728
Amount capitalized year to date 127 7
Amount amortized year to date (66) (17)
----- -----
Balance at period end $ 841 $ 718
===== =====
No valuation allowance was considered necessary for mortgage servicing rights at
period end 2001 and 2000.
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. During March of 2001 and 2000, the Company
declared 5% stock dividends payable in May 2001 and 2000. 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
In thousands of dollars, except per share data March 31,
-----------------------
2001 2000
----------- ----------
Net income $ 1,238 $ 1,235
========== ==========
Basic earning per share:
Weighted average common shares outstanding 2,007,164 2,005,590
Weighted average contingently issuable shares 10,178 7,807
---------- ----------
2,017,342 2,013,397
========== ==========
Basic earnings per share $ 0.61 $ 0.61
========== ==========
Diluted earnings per share:
Weighted average common shares outstanding
from basic earnings per share 2,017,342 2,013,397
Dilutive effect of stock options 1,842 --
---------- ----------
2,019,184 2,013,397
========== ==========
Diluted earnings per share $ 0.61 $ 0.61
========== ==========
Stock options for 27,615 shares of common stock were not considered in computing
diluted earnings per share at March 31, 2001 because they were not dilutive.
NOTE 4 - STOCK OPTIONS
In 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, adjusted for stock dividends, over a specific period of time.
The Plan will continue in effect for five years, unless it is extended with the
approval of the Shareholders.
The stock subject to the options are shares of authorized and unissued common
stock of the Company. As defined in the plan, options representing no more than
120,173 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. The following is summarized option activity for
the plan, adjusted for stock dividends:
Weighted
Available Options Average
for Grant Outstanding Exercise Price
--------- ----------- --------------
Balance at December 31, 2000 84,917 35,256 $ 43.72
Options granted (26,040) 26,040 47.93
------- -------
Balance at March 31, 2001 58,877 61,296 45.51
======= =======
Options granted under the plan during the quarter were 17,640 on January 10,
2001 and 8,400 on March 14, 2001. The weighted fair values of the options
granted were $5.01 and $4.80. For stock options outstanding at March 31, 2001,
the range of average exercise prices was $43.54 to $48.57 and the weighted
average remaining contractual term was 9.4 years. At March 31, 2001, no options
were exercisable.
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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 months
ended March 31, 2001 and 2000.
Three Months Ended
In thousands of dollars, except per share data March 31,
-------------------
2001 2000
---- ----
Net income $ 1,238 $ 1,235
Pro forma net income 1,219 1,235
Basic earnings per share as reported $ 0.61 $ 0.61
Pro forma basic earnings per share 0.60 0.61
Diluted earnings per share as reported $ 0.61 $ 0.61
Pro forma diluted earnings per share 0.60 0.61
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 subsidiaries for the
three month periods ending March 31, 2001 and 2000.
FINANCIAL CONDITION
SECURITIES
Balances in the Company's investment securities portfolio increased during the
first quarter of 2001, as deposit growth in excess of loan demand provided
additional funds to be invested during the period. The mix of the securities
portfolio continues to evolve slowly. During the quarter, maturing agency
securities were replaced in part by mortgage backed agency securities.
The Company's current and projected tax position continues to make carrying
tax-exempt securities valuable to the Bank, and the Company does not anticipate
being subject to the alternative minimum tax in the near future. The investment
in local municipal issues also reflects the Company's commitment to the
development of the local area through support of its local political
subdivisions. The following chart shows the percentage mix of the securities
portfolio.
3/31/2001 12/31/2000 3/31/2000
--------- ---------- ---------
U.S. Treasury and agency securities 13.2% 24.1% 24.2%
Mortgage backed agency securities 28.7% 16.9% 18.5%
Obligations of states and political subdivisions 47.9% 47.9% 47.2%
Corporate, asset backed, and other securities 10.2% 11.1% 10.1%
--------- ---------- ---------
Total Securities 100.0% 100.0% 100.0%
========= ========== =========
Investments in U.S. Treasury and agency securities are considered to possess low
credit risk. Obligations of U.S. government agency mortgage-backed securities
possess a somewhat higher interest rate risk due to certain prepayment risks.
The municipal portfolio contains a small amount of geographic risk, as
approximately 20% of that portfolio is issued by political subdivisions located
within Lenawee County, Michigan. The Bank's portfolio contains no "high risk"
mortgage securities or structured notes.
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LOANS
Loan growth during the first quarter of 2001 was relatively strong, although at
a pace somewhat behind levels achieved in 2000. For the quarter, annualized loan
growth was 8.9%, compared to growth of 9.8% for 2000. Residential mortgages and
tax exempt loans declined during the quarter, while business loans achieved
excellent growth. Personal and construction loans also increased during the
quarter.
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 in June of 2000 resulted in a decline
in personal loans. The table below shows total loans outstanding, in thousands
of dollars and their percentage of the total loan portfolio. All loans are
domestic and contain no significant concentrations by industry or client.
March 31, 2001 December 31, 2000 March 31, 2000
-------------- ----------------- --------------
Portfolio loans: Balance % of total Balance % of total Balance % of total
------- ---------- ------- ---------- ------- ----------
Personal $ 59,854 17.3% $ 59,172 17.5% $ 58,560 18.4%
Business loans and
commercial mortgages 123,013 35.5% 115,155 34.0% 106,877 33.5%
Tax exempt 1,936 0.6% 2,030 0.6% 2,254 0.7%
Residential mortgage 125,863 36.4% 127,768 37.7% 120,214 37.7%
Construction 35,387 10.2% 34,382 10.2% 30,785 9.7%
--------- ------ --------- ------- --------- ------
Total loans $ 346,053 100.0% $ 338,507 100.00% $ 318,690 100.0%
========= ====== ========= ======= ========= ======
The Bank continues to be a provider of residential mortgage loans in its
markets. During 2000, United Mortgage Company was formed as a wholly-owned
subsidiary of the Bank, in order to provide more alternatives for delivery of
mortgage products. As a full service lender, the Bank offers a variety of home
mortgage loan products in its market. Entry into the Saline and Manchester
markets have provided continued opportunities for future continued growth in all
loan portfolios, and entry into the Ann Arbor and Dexter markets during 2001 is
also anticipated to generate additional loan volume.
CREDIT QUALITY
The Company continues to maintain a high level of asset quality as a result of
actively monitoring delinquencies, nonperforming assets and potential problem
loans. The aggregate amount of nonperforming loans is presented in the table
below. For purposes of that summary, loans renewed on market terms existing at
the time of renewal are not considered troubled debt restructurings. The accrual
of interest income is discontinued when a loan becomes ninety days past due
unless it is both well secured and in the process of collection, or the
borrower's capacity to repay the loan and the collateral value appear
sufficient. The chart below shows the aggregate amount of the Company's
nonperforming assets by type, in thousands of dollars. The Company's
classification of nonperforming loans is generally consistent with loans
identified as impaired.
3/31/2001 12/31/2000 3/31/2000
--------- ---------- ---------
Nonaccrual loans $1,007 $ 889 $1,283
Loans past due 90 days or more 279 408 182
Troubled debt restructurings 132 132 134
------ ------ ------
Total nonperforming loans 1,418 1,429 1,599
Other real estate 425 544 52
------ ------ ------
Total nonperforming assets $1,843 $1,973 $1,651
====== ====== ======
Percent of nonperforming loans to total loans 0.41% 0.42% 0.50%
Percent of nonperforming assets to total assets 0.38% 0.42% 0.38%
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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 up slightly from the levels achieved at the end of 2000, but are down from
March 31, 2000 levels. Delinquencies were down from year end 2000 and are also
at very acceptable levels. The Company's ratios of nonperforming assets compare
favorably 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. An analysis of the allowance for loan losses, in
thousands of dollars, for the three months ended March 31, 2001 and 2000
follows:
2001 2000
---- ----
Balance at January 1: $ 4,032 $ 3,300
Loans charged off (49) (78)
Recoveries credited to allowance 47 47
Provision charged to operations 169 354
------- -------
Balance at March 31: $ 4,199 $ 3,623
======= =======
The Company has decreased its provision for loan losses over the same period in
2000 as a result of continued excellent loan quality, as evidenced by its low
level of nonperforming loans. This reduction is consistent with the reduction in
provision instituted during the third quarter of 2000, at which time 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
March 31, 2001 and 2000, and December 31, 2000.
3/31/2001 12/31/2000 3/31/2000
--------- ---------- ---------
Business and commercial mortgage $2,831 $2,580 $2,148
Tax exempt - - -
Residential mortgage 7 7 11
Personal 430 638 645
Construction - - -
Unallocated 931 807 819
------ ------ ------
Total $4,199 $4,032 $3,623
====== ====== ======
The largest single category above is also generally the one with the least risk.
Loans to finance residential mortgages, including construction loans, make up
46.6% of the portfolio March 31, 2001, and are well-secured and have had
historically low levels of net losses. Personal and business loans make up the
balance of the portfolio.
Personal loan balances have increased from March 31, 2000, in spite of the sale
of the Bank's credit card portfolio in 2000. This portfolio consists of direct
and indirect installment, home equity, credit card and unsecured revolving line
of credit loans. Installment loans consist primarily of loans for consumer
durable goods, principally automobiles. Indirect personal loans consist of loans
for automobiles and manufactured housing, but make up a small percent of the
personal loans.
Business loans carry the largest balances per loan, and therefore, any single
loss would be proportionally larger than losses in other portfolios. Because of
this, the Bank uses an independent loan review firm to
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assess the continued quality of its business loan portfolio. This is in addition
to the precautions taken with credit quality in the other loan portfolios.
Business loans contain no significant concentrations other than geographic
concentrations within Lenawee, Monroe or Washtenaw Counties.
DEPOSITS
The Company experienced continued strong deposit growth during the first quarter
of 2001, following excellent growth during the fourth quarter of 2001. Total
deposit growth during the quarter was $19.7 million. Year to date annualized
deposit growth is 19.3%, compared to growth for 2000 of 28.2%. This deposit
growth was in all categories other than certificates of deposit of $100,000 or
greater, 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 2001 will continue to be
steady, with continued expansion in new and existing markets.
As in the past, the majority of the Bank's deposits are derived from core client
sources, relating to long term relationships with local personal, business and
public clients. In financial institutions, the presence of interest bearing
certificates of $100,000 or more often indicates a reliance upon purchased
funds. However, in the Bank's deposit portfolio, these balances represent core
deposits of local clients. The Bank does not support its growth through
purchased or brokered deposits. The Bank's deposit rates are consistently
competitive with other banks in its market area, including those new markets
that the Bank entered in recent periods. The chart below shows the percentage
makeup of the deposit portfolio as of March 31, 2001 and 2000.
2001 2000
---- ----
Noninterest bearing deposits 12.7% 13.5%
Interest bearing certificates of $100,000 or more 9.8% 9.5%
Other interest bearing deposits 77.5% 77.0%
------ ------
Total deposits 100.0% 100.0%
====== ======
LIQUIDITY, CASH EQUIVALENTS AND BORROWED FUNDS
The Company maintains correspondent accounts with a number of other banks for
various purposes. In addition, cash sufficient to meet the operating needs of
two banks is maintained at its lowest practical levels. At times, the Company,
through its subsidiary banks, is a participant in the federal funds market,
either as a borrower or seller. Federal funds are generally borrowed or sold for
one-day periods. 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.
The Company periodically finds it advantageous to utilize longer term borrowings
from the Federal Home Loan Bank of Indianapolis. These long-term borrowings
serve to provide a balance to some of the interest rate risk inherent in the
Company's balance sheet. Additional information regarding borrowed funds is
found immediately below.
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, 2001 and 2000, and December 31, 2000.
Dollars are shown in thousands.
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Regulatory Guidelines United Bancorp, Inc.
--------------------- --------------------------------------
Adequate Well 3/31/2001 12/31/2000 3/31/2000
-------- ---- --------- ---------- ---------
Tier 1 capital to average assets 4% 5% 8.8% 9.3% 8.9%
Tier 1 capital to risk weighted assets 4% 6% 13.0% 13.1% 12.9%
Total capital to risk weighted assets 8% 10% 14.3% 14.3% 14.1%
Total shareholders' equity $ 46,117 $ 45,054 $ 41,482
Intangible assets (3,786) (3,888) (4,194)
Unrealized (gain) loss on securities available for sale (650) (281) 695
-------- -------- --------
Tier 1 capital 41,681 40,885 37,983
Total loan loss reserves 4,199 4,032 3,623
Excess portion of loan loss reserves (192) (130) -
-------- -------- --------
Tier 2 capital $ 45,688 $ 44,787 $ 41,606
======== ======== ========
RESULTS OF OPERATIONS
Consolidated net income for the first quarter of 2001 was virtually flat
compared to the same period of 2000. Continued expenses relating to the startup
of United Bank & Trust - Washtenaw and the Dexter office of United Bank & Trust
slowed earnings levels somewhat. After-tax expenditures of $164,000 relating to
the Ann Arbor de novo bank reduced current earnings, but also represent an
investment in the future growth of the Company. Net income of United Bank &
Trust is up 13.4% over the first quarter of 2000, indicating the strength of
basic earning levels of the Company.
NET INTEREST INCOME
During the first quarter, yields on earning assets declined and the cost of
funds increased for 2001 compared to 2000. The net result was a tightening of
spread and net interest 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 March 31, 2001 and
2000.
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
dollars in thousands 2001 2000
- -------------------- ---------------------------------- -------------------------------------
Average Interest Yield/ Average Interest Yield/
ASSETS Balance (b) Rate (c) Balance (b) Rate (c)
------- -------- -------- ------- -------- --------
Interest earning assets (a)
Federal funds sold $ 26,657 $ 372 5.58% $ - $ - -%
Taxable securities 40,768 626 6.15% 48,322 739 6.12%
Tax exempt securities (b) 30,922 570 7.38% 33,126 613 7.40%
Taxable loans 341,196 7,296 8.55% 312,128 6,729 8.62%
Tax exempt loans (b) 1,970 36 7.32% 2,019 39 7.63%
--------- ------ --------- ------
Total int. earning assets (b) 441,513 8,900 8.06% 395,595 8,120 8.21%
Less allowance for loan losses (4,105) (3,437)
Other assets 39,704 37,744
--------- ---------
TOTAL ASSETS $ 477,112 $ 429,902
========= =========
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YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES (CONTINUED)
2001 2000
---------------------------------- -----------------------------------
Average Interest Yield/ Average Interest Yield/
Balance (b) Rate (c) Balance (b) Rate (c)
------- --- -------- ------- --- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 67,047 $ 438 2.61% $ 57,218 $ 320 2.24%
Savings deposits 61,279 382 2.49% 71,841 418 2.33%
CDs $100,000 and over 44,755 662 5.92% 33,156 459 5.54%
Other interest bearing deposits 190,550 2,646 5.55% 154,417 2,005 5.19%
-------- -------- -------- --------
Total int. bearing deposits 363,631 4,128 4.54% 316,632 3,202 4.05%
Short term borrowings - - -% 19,014 283 5.94%
Other borrowings 12,328 210 6.82% 5,348 88 6.56%
-------- -------- -------- --------
Total int. bearing liabilities 375,959 4,338 4.62% 340,994 3,572 4.19%
Noninterest bearing deposits 50,370 45,228
Other liabilities 5,038 2,409
Shareholders' equity 45,745 41,271
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $477,112 $429,902
======== ========
Net interest income (b) $ 4,563 $ 4,548
======== ========
Net spread (b) 3.45% 4.02%
===== =====
Net yield on interest earning assets (b) 4.13% 4.60%
===== =====
Ratio of interest earning assets to
interest bearing liabilities 1.17 1.16
========= ========
(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, all of the improvement in
interest income during the first quarter of 2001 came as a result of changes in
volume. At the same time, increases in interest expense were more evenly
distributed between changes in volume and rate, with volume still being
responsible for the largest portion of the increase. The net result is an
virtually flat net interest income. The following table shows the effect of
volume and rate changes on net interest income for the three months ended March
31, 2001 and 2000 on a taxable equivalent basis, in thousands of dollars.
2001 Compared to 2000 2000 Compared to 1999
-------------------------------- ----------------------------------
Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a)
-------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Interest earned on:
Federal funds sold $ 372 $ - $ 372 $ (4) $ - $ (4)
Taxable securities (116) 3 (113) (67) (7) (74)
Tax exempt securities (41) (2) (43) (43) (19) (62)
Taxable loans 622 (56) 566 888 68 956
Tax exempt loans (1) (1) (2) 10 1 11
----- ----- ----- ----- ---- -----
Total interest income $ 836 $ (56) $ 780 $ 784 $ 43 $ 827
===== ===== ===== ===== ==== =====
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15
2001 Compared to 2000 2000 Compared to 1999
-------------------------------- -------------------------------
Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a)
-------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Interest paid on:
NOW accounts $ 60 $ 58 $ 118 $ 27 $ 68 $ 95
Savings deposits (64) 28 (36) (1) 20 19
CDs $100,000 and over 170 33 203 33 32 65
Other interest bearing deposits 494 147 641 178 137 315
Short term borrowings (283) - (283) 226 11 237
Other borrowings 118 4 122 (90) 13 (77)
----- ------ ----- ----- ----- -----
Total interest expense $ 495 $ 270 $ 765 $ 373 $ 281 $ 654
===== ====== ===== ===== ===== =====
Net change in net interest
income $ 341 $ (326) $ 15 $ 411 $(238) $ 173
===== ====== ===== ===== ===== =====
(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 reached its highest level ever for the Company. All
categories of noninterest income have improved from the same period last year,
with the largest percentage gains achieved in income from loan sales and
servicing and other income.
Service charges on deposit accounts remained relatively flat, slightly ahead of
2000. 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 11.2% over the same
quarter of 2000. Shifts in the mix of the types of accounts managed has
increased fee income, while assets under management have experienced slowed
growth as a result of recent market declines.
Income from loan sales and servicing has rebounded from previous periods that
reflected a decline in residential mortgages being sold in the secondary market.
Mortgage loan refinancing has increased from 2000 levels, resulting in a greater
percentage of loans sold during 2001.
NONINTEREST EXPENSES
Noninterest expense is up from the same period of 2000, with the greatest dollar
increases in salaries and employee benefits. At the same time, all categories of
noninterest expense increased more than 10% over the first quarter of 2000. This
reflects the growth and expansion of the Company, including staffing for United
Bank & Trust - Washtenaw and the Dexter office of United Bank & Trust, which is
anticipated to open in May of 2001. Total noninterest expense, excluding
provision for loan losses, for the three months ended March 31, 2001 was 13.3%
above the same period for 2000.
FEDERAL INCOME TAX
There has been no significant change in the income tax position of the Company
during the first quarter of 2001.
NET INCOME
Consolidated net income was virtually the same as the first quarter of 2000, as
a result of startup costs of United Bank & Trust - Washtenaw. Management
anticipates that net income will continue to remain strong for the remainder of
the year, although the new bank is not anticipated to achieve profitability
during calendar year 2001.
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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; 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 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.
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17
Based on the results of the simulation model as of March 31, 2001, 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.
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings. The Company's
banking 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 2001, United Bancorp, Inc. chartered United Bank &
Trust - Washtenaw ("UBTW") as a de novo bank. UBTW was capitalized as a wholly-
owned subsidiary of the Company, by means of a cash dividend from United Bank &
Trust. UBTW opened for business on April 2, 2001.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
No changes in the securities of the Company occurred during the quarter ended
March 31, 2001.
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, 2001.
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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, 2001.
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):
None
(b) The Company has filed no reports on Form 8-K during the quarter ended March
31, 2001.
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.
May 11, 2001
/s/ Dale L. Chadderdon
--------------------------------------------------
Dale L. Chadderdon
Senior Vice President, Secretary & Treasurer
Page 18