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 JUNE 30, 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 August 3, 2001, there were outstanding 2,006,836 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 Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
Financial Condition 9
Liquidity 12
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
Page 2
3
PART I
FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS (Condensed)
(A) CONSOLIDATED BALANCE SHEETS
In thousands of dollars (unaudited) (unaudited)
June 30, December 31, June 30,
2001 2000 2000
------------ ----------- ----------
ASSETS
Cash and demand balances in other banks $ 15,202 $ 16,822 $ 19,406
Federal funds sold 9,700 21,300 -
-------- -------- ---------
Total cash and cash equivalents 24,902 38,122 19,406
Securities available for sale 81,879 72,679 74,478
Loans held for sale 3,226 1,156 419
Portfolio loans 356,919 337,351 329,100
-------- -------- ---------
Total loans 360,145 338,507 329,519
Less allowance for loan losses 4,412 4,032 3,828
-------- -------- ---------
Net loans 355,733 334,475 325,691
Premises and equipment, net 15,267 13,431 13,118
Accrued interest receivable and other assets 10,031 10,154 10,391
-------- -------- ---------
TOTAL ASSETS $487,812 $468,861 $ 443,084
======== ======== =========
LIABILITIES
Deposits
Noninterest bearing $ 54,899 $ 52,555 $ 52,262
Interest bearing certificates of deposit of $100,000 or more 28,180 46,445 36,318
Other interest bearing deposits 341,636 308,957 280,654
-------- -------- ---------
Total deposits 424,715 407,957 369,234
Federal funds purchased and other short term borrowings 1,005 - 16,200
Other borrowings 12,009 12,328 12,328
Accrued interest payable and other liabilities 3,318 3,522 2,743
-------- -------- ---------
TOTAL LIABILITIES 441,047 423,807 400,505
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value;
5,000,000 shares authorized; 2,007,056, 1,911,603 and
1,909,713 shares issued and outstanding, respectively 33,367 28,399 28,207
Retained earnings 12,708 16,374 14,949
Accumulated other comprehensive income (loss), net of tax 690 281 (577)
-------- -------- ---------
TOTAL SHAREHOLDERS' EQUITY 46,765 45,054 42,579
-------- -------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $487,812 $468,861 $ 443,084
======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
4
(B) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended
In thousands of dollars, except per share data June 30, June 30,
---------------------------------------------------------
2001 2000 2001 2000
----------- --------- ---------- -------------
INTEREST INCOME
Interest and fees on loans
Taxable $ 7,387 $ 7,209 $14,683 $13,939
Tax exempt 24 29 49 56
Interest on securities
Taxable 658 706 1,284 1,445
Tax exempt 418 393 816 817
Interest on federal funds sold 198 - 570 -
------- ------- ------- -------
Total interest income 8,685 8,337 17,402 16,257
INTEREST EXPENSE
Interest on certificates of deposit of $100,000 or more 461 524 1,123 983
Interest on other deposits 3,310 2,885 6,776 5,628
Interest on short term borrowings 5 291 5 574
Interest on other borrowings 212 200 422 287
------- ------- ------- -------
Total interest expense 3,988 3,900 8,326 7,472
------- ------- ------- -------
NET INTEREST INCOME 4,697 4,437 9,076 8,785
Provision for loan losses 237 354 406 708
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,460 4,083 8,670 8,077
NONINTEREST INCOME
Service charges on deposit accounts 599 578 1,154 1,124
Trust & Investment fee income 665 708 1,381 1,352
Gains on securities transactions - 4 - 4
Loan sales and servicing 285 85 496 162
Sales of nondeposit investment products 202 175 386 347
Gain on sale of credit card loans - 308 - 308
Other income 384 237 724 471
------- ------- ------- -------
Total noninterest income 2,135 2,095 4,141 3,768
NONINTEREST EXPENSE
Salaries and employee benefits 2,767 2,164 5,164 4,316
Occupancy and equipment expense, net 890 707 1,691 1,427
Other expense 1,332 1,107 2,647 2,219
------- ------- ------- -------
Total noninterest expense 4,989 3,978 9,502 7,962
------- ------- ------- -------
INCOME BEFORE FEDERAL INCOME TAX 1,606 2,200 3,309 3,883
Federal income tax 425 632 890 1,080
------- ------- ------- -------
NET INCOME $ 1,181 $ 1,568 $ 2,419 $ 2,803
======= ======= ======= =======
Basic earnings per share $ 0.59 $ 0.78 $ 1.20 $ 1.39
Diluted earnings per share 0.58 0.78 1.20 1.39
Cash dividends declared per share of common stock 0.30 0.29 0.59 0.56
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
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 2001 2000 2001 2000
--------- ----------- --------- -----------
Balance at beginning of period $ 46,117 $ 41,482 $ 45,054 $ 40,964
Net Income 1,181 1,568 2,419 2,803
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net 40 118 409 (78)
-------- -------- -------- --------
Total comprehensive income 1,221 1,686 2,828 2,725
Cash dividends declared (602) (572) (1,175) (1,118)
Common stock and contingently issuable stock 29 (17) 58 8
-------- -------- -------- --------
Balance at end of period $ 46,765 $ 42,579 $ 46,76 $ 42,579
========= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
6
(D) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In thousands of dollars Six Months Ended
June 30,
-----------------------------
2001 2000
---------- ------------
Cash Flows from Operating Activities
Net Income $ 2,419 $ 2,803
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization 1,177 1,030
Provision for loan losses 406 708
Gain on sale of credit card loans - (308)
Change in loans held for sale (2,070) (265)
Gains on securities transactions - (4)
Change in accrued interest receivable and other assets (289) 29
Change in accrued interest payable and other liabilities (3) 108
-------- --------
Total adjustments (779) 1,298
-------- --------
Net cash from operating activities 1,640 4,101
Cash Flows from Investing Activities
Securities available for sale
Purchases (30,763) (2,853)
Maturities and calls 18,749 7,968
Principal payments 3,332 2,114
Proceeds from sale of credit card loans - 3,745
Net change in portfolio loans (19,594) (25,148)
Premises and equipment expenditures, net (2,710) (720)
-------- --------
Net cash from investing activities (30,986) (14,894)
Cash Flows from Financing Activities
Net change in deposits 16,758 8,391
Net change in short term borrowings 1,005 (3,100)
Proceeds from other borrowings - 9,000
Principal payments on other borrowings (319) (296)
Proceeds from common stock transactions 58 8
Dividends paid (1,376) (1,273)
-------- --------
Net cash from financing activities 16,126 12,730
-------- --------
Net change in cash and cash equivalents (13,220) 1,937
Cash and cash equivalents at beginning of year 38,122 17,469
-------- --------
Cash and cash equivalents at end of period $ 24,902 $ 19,406
======== ========
Supplement Disclosure of Cash Flow Information:
Interest paid $ 8,581 $ 7,439
Income tax paid 1,210 1,175
Loans transferred to other real estate - 544
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6
7
(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 six month period
ending June 30, 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 $148,092,000 and $121,337,000 at the end of June 2001
and 2000. The balance of loans serviced for others related to servicing rights
that have been capitalized was $131,399,000 and $100,571,000 at June 30, 2001
and 2000.
Mortgage servicing rights activity in thousands of dollars for the six months
ended June 30, 2001 and 2000 follows:
Unamortized cost of mortgage servicing rights 2001 2000
--------------------------------------------- ---- ----
Balance at January 1 $ 780 $ 728
Amount capitalized year to date 317 28
Amount amortized year to date (156) (41)
----- -----
Balance at period end $ 941 $ 715
===== =====
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.
Page 7
8
A reconciliation of basic and diluted earnings per share follows:
Three Months Ended Six Months Ended
In thousands of dollars, except per share data June 30, June 30,
---------------------------------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -------------
Net income $ 1,181 $ 1,568 $ 2,419 $ 2,803
========== ========== ========== ===========
Basic earning:
Weighted average common shares outstanding 2,007,031 2,005,233 2,007,097 2,005,412
Weighted average contingently issuable shares 11,034 8,395 10,658 8,099
---------- ---------- ---------- -----------
Total basic earnings 2,018,065 2,013,628 2,017,755 2,013,510
========== ========== ========== ===========
Basic earnings per share $ 0.59 $ $ 0.78 $ 1.20 $ 1.39
========== ========== ========== ===========
Diluted earnings:
Weighted average common shares outstanding
from basic earnings per share 2,018,065 2,013,628 2,017,755 2,013,510
Dilutive effect of stock options 2,153 565 3,006 282
---------- ---------- ---------- -----------
Net diluted earnings 2,020,218 2,014,193 2,020,761 2,013,793
========== ========== ========== ===========
Diluted earnings per share $ 0.58 $ 0.78 $ 1.20 $ 1.39
========== ========== ========== ===========
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
Options exercised - (109) 43.54
Options forfeited 641 (641) 46.21
------- -------
Balance at June 30, 2001 59,518 60,546 45.50
======= =======
Options granted under the plan during the current year 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 June 30, 2001,
the range of average exercise prices was $43.54 to $48.57 and the weighted
average remaining contractual term was 9.2 years. At June 30, 2001, 11,006
options were exercisable at the weighted average exercise price of $43.54.
Page 8
9
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.
<Caption>
Three Months Ended Six Months Ended
In thousands of dollars, except per share data June 30, June 30,
---------------------------------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income $ 1,181 $ 1,568 $ 2,419 $ 2,803
Pro forma net income 1,162 1,560 2,382 2,795
Basic earnings per share as reported $ 0.59 $ 0.78 $ 1.20 $ 1.39
Pro forma basic earnings per share 0.58 0.77 1.18 1.39
Diluted earnings per share as reported $ 0.58 $ 0.78 $ 1.20 $ 1.39
Pro forma diluted earnings per share 0.58 0.77 1.18 1.39
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 and six month periods ending June 30, 2001 and 2000.
FINANCIAL CONDITION
SECURITIES
Balances in the Company's investment securities portfolio increased slightly
during the second quarter of 2001. 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, as the level of tax-exempt
investments remained relatively flat. The following chart shows the percentage
mix of the securities portfolio.
6/30/2001 12/31/2000 6/30/2000
--------- ---------- ---------
U.S. Treasury and agency securities 13.7% 24.1% 24.3%
Mortgage backed agency securities 25.2% 16.9% 18.2%
Obligations of states and political subdivisions 45.6% 47.9% 46.7%
Corporate, asset backed, and other securities 15.5% 11.1% 10.8%
----- ----- -----
Total Securities 100.0% 100.0% 100.0%
====== ====== ======
The Company's current and projected tax position continues to make carrying
tax-exempt securities valuable, 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.
Page 9
10
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 Company's portfolio contains no "high risk"
mortgage securities or structured notes.
LOANS
Loan growth during the second quarter of 2001 continued to be strong. For the
quarter, annualized loan growth was 16.2%, compared to growth of 9.8% for 2000.
Year to date annualized loan growth is 12.8%. Residential mortgages and tax
exempt loans declined during the quarter, while business, personal and
construction loans increased during the quarter.
The mix of the loan portfolio has remained relatively unchanged from the prior
quarter, but continues a long-term trend toward an increased percentage of
residential mortgage and business loans, with slight declines in residential
mortgage loans. Personal loan balances remain relatively flat as a percentage of
total loans. United Bank & Trust ("UBT") sold its credit card portfolio in June
of 2000. 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.
June 30, 2001 December 31, 2000 June 30, 2000
------------------------------------------------------------------------------
Portfolio loans: Balance % of total Balance % of total Balance % of total
------- ---------- ------- ---------- ------- ----------
Personal $ 61,944 17.2% $ 59,172 17.5% $ 56,068 17.0%
Business loans and
commercial mortgages 135,499 37.6% 115,155 34.0% 110,958 33.7%
Tax exempt 1,782 0.5% 2,030 0.6% 2,306 0.7%
Residential mortgage 122,761 34.1% 127,768 37.7% 126,245 38.3%
Construction 38,159 10.6% 34,382 10.2% 33,942 10.3%
---------- ----- ---------- ------- ---------- ------
Total loans $ 360,145 100.0% $ 338,507 100.00% $ 329,519 100.0%
========== ====== ========== ======= ========== ======
The Company's subsidiary Banks ("Banks") continue to be providers of residential
mortgage loans in their markets. During 2000, United Mortgage Company was formed
as a wholly-owned subsidiary of UBT, in order to provide more alternatives for
delivery of mortgage products. As full service lenders, the Banks offer a
variety of home mortgage loan products in their markets. 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 beginning 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.
Page 10
11
6/30/2001 12/31/2000 6/30/2000
--------- ---------- ---------
Nonaccrual loans $ 1,031 $ 889 $ 864
Loans past due 90 days or more 857 408 564
Troubled debt restructurings 131 132 133
------- ------- --------
Total nonperforming loans 2,019 1,429 1,561
Other real estate 425 544 544
------- ------- --------
Total nonperforming assets $ 2,444 $ 1,973 $ 2,105
======= ======= ========
Percent of nonperforming loans to total loans 0.56% 0.42% 0.47%
Percent of nonperforming assets to total assets 0.50% 0.42% 0.48%
Nonperforming assets remain low, 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 and June 30, 2000 levels. Delinquencies are up from
year end 2000 but 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 six months ended June 30, 2001 and 2000 follows:
2001 2000
---- ----
Balance at January 1: $ 4,032 $ 3,300
Loans charged off (104) (185)
Recoveries credited to allowance 78 105
Provision charged to operations 406 708
Adjustment for credit cards sold - (100)
------- --------
Balance at June 30: $ 4,412 $ 3,828
======== ========
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
June 30, 2001 and 2000, and December 31, 2000.
6/30/2001 12/31/2000 6/30/2000
--------- ---------- ---------
Business and commercial mortgage $ 2,730 $ 2,580 $ 2,193
Tax exempt - - -
Residential mortgage 7 7 11
Personal 454 638 610
Construction - - -
Unallocated 1,221 807 1,014
--------- --------- ---------
Total $ 4,412 $ 4,032 $ 3,828
========= ========= =========
Page 11
12
The largest single category above is also generally the one with the least risk.
Loans to finance residential mortgages, including construction loans, make up
44.7% of the portfolio June 30, 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 June 30, 2000, in spite of the sale
of UBT's credit card portfolio in June, 2000. The personal loan 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 Banks use an independent loan review firm to assess the continued
quality of their business loan portfolios. 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 has continued to achieve strong deposit growth in all categories of
deposits other than Certificates of Deposit of $100,000 or more. The decline in
this category is intentional, as the Company has excess liquidity and has chosen
to reduce some of its discretionary deposits. Total deposits are down 2.76% for
the quarter, but noninterest bearing deposits have increased 3.02% and other
interest bearing deposits are up 12.58% for the quarter. This continued growth
and expansion is a result of entry into new markets, 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 contribution from the Ann Arbor and existing markets.
As in the past, the majority of the Banks' 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 Banks' deposit portfolio, these balances represent core
deposits of local clients. The Banks do not support their growth through
purchased or brokered deposits. The Banks' deposit rates are consistently
competitive with other banks in their market areas, including those new markets
that the Company entered in recent periods. The chart below shows the percentage
makeup of the deposit portfolio as of June 30, 2001 and 2000.
2001 2000
---- ----
Noninterest bearing deposits 12.9% 14.2%
Interest bearing certificates of $100,000 or more 6.6% 9.8%
Other interest bearing deposits 80.5% 76.0%
----- -----
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.
Page 12
13
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 June 30, 2001 and 2000, and December 31, 2000. Dollars
are shown in thousands.
Regulatory Guidelines United Bancorp, Inc.
--------------------- ---------------------------------------
Adequate Well 6/30/2001 12/31/2000 6/30/2000
-------- ---- --------- ---------- ---------
Tier 1 capital to average assets 4% 5% 8.9% 9.3% 9.1%
Tier 1 capital to risk weighted assets 4% 6% 12.5% 13.1% 13.0%
Total capital to risk weighted assets 8% 10% 13.7% 14.3% 14.2%
Total shareholders' equity $ 46,765 $ 45,054 $ 42,579
Intangible assets (3,686) (3,888) (4,092)
Unrealized (gain) loss on securities available for sale (690) (281) 577
--------- -------- --------
Tier 1 capital 42,389 40,885 39,064
Allowable loan loss reserves 4,248 3,902 3,828
--------- -------- --------
Tier 2 capital $ 46,637 $ 44,787 $ 42,892
========= ======== ========
RESULTS OF OPERATIONS
Consolidated net income for the second quarter of 2001 was virtually flat
compared to that of the first quarter of 2001, and is down year to date compared
to the same period in 2000. However, income at United Bank & Trust is up 8.75%
annualized over last year, indicating the strength of basic earning levels of
the Company. At the same time, startup costs of United Bank & Trust - Washtenaw
("UBTW") have reduced earnings below those levels achieved in the first six
months of 2000. Losses at the Ann Arbor de novo bank are at expected levels, and
Management anticipates that UBTW will begin contributing to the bottom line of
the Company in the near future.
NET INTEREST INCOME
During the second quarter of 2001, yields on earning assets and the cost of
funds declined for 2001 compared to the first quarter. The net result was an
improvement in spread and net interest margin. While these ratios remain below
levels achieved in 2000, decreases in market interest rates so far during 2001
have allowed the margin of the Company to improve, as a result of its interest
sensitivity position. 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 June 30,
2001 and 2000.
Page 13
14
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 $ 22,378 $ 570 5.09% $ - $ - -%
Taxable securities 43,083 1,284 5.96% 47,316 1,445 6.11%
Tax exempt securities (b) 32,186 1,174 7.29% 31,823 1,179 7.41%
Taxable loans 345,079 14,682 8.51% 319,039 13,938 8.74%
Tax exempt loans (b) 1,924 71 7.37% 2,126 81 7.63%
-------- -------- --------- --------
Total int. earning assets (b) 444,650 17,781 8.00% 400,304 16,644 8.32%
Less allowance for loan losses (4,195) (3,592)
Other assets 39,371 38,209
-------- ---------
TOTAL ASSETS $479,826 $ 434,921
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 68,117 $ 849 2.49% $ 57,023 $ 659 2.31%
Savings deposits 84,636 1,142 2.70% 69,357 796 2.30%
CDs $100,000 and over 37,638 1,123 5.97% 34,595 983 5.68%
Other interest bearing deposits 175,503 4,785 5.45% 155,742 4,173 5.36%
-------- -------- --------- --------
Total int. bearing deposits 365,894 7,899 4.32% 316,717 6,611 4.17%
Short term borrowings 280 5 3.88% 18,436 574 6.22%
Other borrowings 12,300 422 6.86% 8,500 288 6.77%
-------- -------- --------- --------
Total int. bearing liabilities 378,474 8,326 4.40% 343,653 7,472 4.35%
-------- --------
Noninterest bearing deposits 50,852 46,941
Other liabilities 4,334 2,638
Shareholders' equity 46,166 41,689
-------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $479,826 $ 434,921
======== =========
Net interest income (b) $ 9,455 $ 9,172
======== ========
Net spread (b) 3.60% 3.97%
===== =====
Net yield on interest earning assets (b) 4.25% 4.58%
===== =====
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 six months of 2001 came as a result of changes
in volume. At the same time, increases in interest expense were principally a
result of changes in volume, with some improvement attributable to rate. The net
result is
Page 14
15
improved net interest income, net spread and net yield on interest
earning assets compared to the first quarter of 2001. The following table shows
the effect of volume and rate changes on net interest income for the six months
ended June 30, 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 $ 570 $ - $ 570 $ (53) $ - $ (53)
Taxable securities (127) (34) (161) (166) (5) (171)
Tax exempt securities 13 (19) (6) (96) (36) (132)
Taxable loans 1,115 (371) 744 1,982 274 2,256
Tax exempt loans (7) (3) (10) 19 1 20
-------- ------ -------- -------- ------ -------
Total interest income $ 1,564 $ (427) $ 1,137 $ 1,686 $ 234 $ 1,920
======== ====== ======== ======== ====== =======
Interest paid on:
NOW accounts $ 135 $ 55 $ 190 $ 30 $ 151 $ 181
Savings deposits 193 153 346 (36) 39 3
CDs $100,000 and over 89 51 140 131 89 220
Other interest bearing deposits 538 74 612 298 422 720
Short term borrowings (411) (157) (568) 513 14 527
Other borrowings 130 4 134 (77) 34 (43)
-------- ------ -------- -------- ------ -------
Total interest expense $ 674 $ 180 $ 854 $ 859 $ 749 $ 1,608
======== ====== ======== ======== ====== =======
Net change in net interest
income $ 890 $ (607) $ 283 $ 827 $ (515) $ 312
======== ====== ======== ======== ====== =======
(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 other than Trust & Investment fee 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 are up 3.6% over the first quarter of 2001,
and are up 3.1% year to date over 2000. The Trust & Investment Group of UBT
continues to provide significant contribution to the Company's noninterest
income, through continued growth and expansion. However, as a result of the
declining market value of assets under management, income is up just 2.1% over
2000 levels, and is down slightly from the first quarter of 2001. For the long
term, new business continues to be brought into the department, and income from
this area will continue to provide a significant contribution to earnings.
Income from loan sales and servicing continues to be strong, as a result of an
increased amount of 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. Year to date earnings in this category are
up 206% over 2000 levels, and are up 235.3% over the same quarter last year.
Page 15
16
NONINTEREST EXPENSES
Noninterest expense is also up from 2000, with the greatest dollar increases in
salaries and employee benefits. A good share of this increase reflects the
growth and expansion of the Company, including staffing for UBTW which opened in
April, and the Dexter office of UBT, which opened in May of 2001. Total
noninterest expense, excluding provision for loan losses, for the six months
ended June 30, 2001 was 19.3% 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 second quarter of 2001.
NET INCOME
Second quarter and year to date consolidated net income is down from the same
periods of 2000, as a result of startup costs of UBTW and the gain on sale of
UBT's credit card portfolio in 2000. Management anticipates that net income will
continue to remain strong for the remainder of the year, although UBTW will not
contribute to the Company's profitability during calendar year 2001.
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.
Page 16
17
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. 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 June 30, 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 Company's interest sensitivity position remained
substantially unchanged from the previous quarter.
Each Bank maintains a Funds Management Committee, which reviews exposure to
market risk on a regular basis. The Committees' overriding policy objective is
to manage assets and liabilities to provide an optimum and consistent level of
earnings within the framework of acceptable risk standards.
The Funds Management Committees are also responsible for evaluating and
anticipating various risks other than interest rate risk. Those risks include
prepayment risk, credit risk and liquidity risk. The Committees are made up of
senior members of management, and continually monitor 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 policies provide for a level of interest sensitivity which,
Management believes, allows the Banks to take advantage of opportunities within
their markets relating to liquidity and interest rate risk, allowing flexibility
without subjecting the Company to undue exposure to risk. In addition, other
measures are used to evaluate and project the anticipated results of
Management's decisions.
Page 17
18
PART II
OTHER INFORMATION
ITEM 1- LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings. The Company's
banking subsidiaries are 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 Banks. Neither the Banks nor
the Company are 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 Banks, or
any associate of the foregoing, is a party or has a material interest adverse to
the Company or the Banks.
During the first quarter of 2001, United Bancorp, Inc. chartered United Bank &
Trust - Washtenaw 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
June 30, 2001.
ITEM 3- DEFAULTS UPON SENIOR SECURITIES
There have been no defaults upon senior securities relevant to the requirements
of this section during the six months ended June 30, 2001.
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on April 17, 2001. At
that meeting, the following matters were submitted to a vote of the
shareholders. There were 1,911,603 voting shares outstanding on April 17, 2001.
As a result of the formation of UBTW in 2001, the Company modified the makeup of
its Board of Directors to better represent the Boards of the Banks. As a result,
Directors Bush, Farver and Kuhman did not seek re-election as Directors of the
Company, and Directors Berlin, Gurdjian, Hill, Knisel, Mohr, Niethammer,
Roberstad and Robideau voluntarily resigned as Directors of the Company. Each of
these individuals continue to serve as Directors of United Bank & Trust.
The following directors were elected to three year terms:
For Against Abstain
-------------- ----------- -----------
James C. Lawson re-elected 1,592,289 28,306 -
Donald J. Martin re-elected 1,603,863 16,732 -
David E. Maxwell re-elected 1,617,868 2,727 -
Chris L. McKenney elected 1,600,211 20,384 -
Page 18
19
The following directors were elected to two year terms:
For Against Abstain
-------------- ----------- -----------
Robert K. Chapman elected 1,617,868 2,727 -
George H. Cress elected 1,615,946 4,649 -
</Table>
The following director was elected to a one year term:
<Table>
For Against Abstain
-------------- ----------- -----------
Patricia M. Garcia elected 1,617,868 2,727 -
</Table>
Directors Butcko, Foss, Hickman and Wanke hold terms which continue after the
meeting.
The firm of Crowe, Chizek and Company LLP of Grand Rapids, Michigan was ratified
as independent auditors for the Company and its subsidiaries for the year ending
December 31, 2001. The vote was as follows:
<Table>
For Against Abstain
-------------- ----------- -----------
Ratification of auditors 1,599,375 1,732 19,488
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 June
30, 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.
August 3, 2001
/S/ Dale L. Chadderdon
--------------------------------------------------------
Dale L. Chadderdon
Senior Vice President, Secretary & Treasurer
Page 19