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, 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 November 2, 2001, there were outstanding 2,006,683 shares of the
registrant's common stock, no par value.
Page 1
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 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Page 2
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,
2001 2000 2000
------------ ------------ -------------
ASSETS
Cash and demand balances in other banks $ 14,294 $ 16,822 $ 20,348
Federal funds sold 6,300 21,300 -
---------- ---------- ---------
Total cash and cash equivalents 20,594 38,122 20,348
Securities available for sale 86,078 72,679 74,817
Loans held for sale 1,126 1,156 624
Portfolio loans 370,899 337,351 335,287
---------- ---------- ---------
Total loans 372,025 338,507 335,911
Less allowance for loan losses 4,569 4,032 3,968
---------- ---------- ---------
Net loans 367,456 334,475 331,943
Premises and equipment, net 15,322 13,431 12,920
Accrued interest receivable and other assets 10,065 10,154 10,328
---------- ---------- ---------
TOTAL ASSETS $ 499,515 $ 468,861 $ 450,356
========== ========== =========
LIABILITIES
Deposits
Noninterest bearing $ 54,791 $ 52,555 $ 53,408
Interest bearing certificates of deposit of $100,000 or more 29,445 46,445 43,121
Other interest bearing deposits 351,055 308,957 289,045
---------- ---------- ---------
Total deposits 435,291 407,957 385,574
Federal funds purchased and other short term borrowings 1,013 - 5,600
Other borrowings 12,009 12,328 12,328
Accrued interest payable and other liabilities 3,452 3,522 3,080
---------- ---------- ---------
TOTAL LIABILITIES 451,765 423,807 406,582
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value;
5,000,000 shares authorized; 2,006,683, 1,911,603 and
1,909,520 shares issued and outstanding 33,384 28,399 28,264
Retained earnings 13,287 16,374 15,733
Accumulated other comprehensive income (loss), net of tax 1,079 281 (223)
---------- ---------- ---------
TOTAL SHAREHOLDERS' EQUITY 47,750 45,054 43,774
---------- ---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 499,515 $ 468,861 $ 450,356
========== ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
(b) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
In thousands of dollars, except per share data September 30, September 30,
----------------------------------------------------------
2001 2000 2001 2000
------------- -------- -------- ----------
INTEREST INCOME
Interest and fees on loans
Taxable $ 7,408 $ 7,379 $ 22,090 $ 21,317
Tax exempt 24 29 74 85
Interest on securities
Taxable 642 697 1,926 2,142
Tax exempt 412 394 1,228 1,211
Interest on federal funds sold 121 9 690 9
-------- -------- -------- -------
Total interest income 8,607 8,508 26,008 24,764
INTEREST EXPENSE
Interest on certificates of deposit of $100,000 or more 413 611 1,535 1,593
Interest on other deposits 2,973 3,155 9,749 8,784
Interest on short term borrowings 8 143 13 717
Interest on other borrowings 209 214 632 501
-------- -------- -------- -------
Total interest expense 3,603 4,123 11,929 11,595
-------- -------- -------- -------
NET INTEREST INCOME 5,004 4,385 14,079 13,169
Provision for loan losses 196 240 602 948
-------- -------- -------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,808 4,145 13,477 12,221
NONINTEREST INCOME
Service charges on deposit accounts 605 575 1,759 1,699
Trust & Investment fee income 680 718 2,061 2,070
Gains on securities transactions - - - 4
Loan sales and servicing 301 124 797 286
Sales of nondeposit investment products 212 146 599 493
Gain on sale of credit card loans - - - 308
Other income 356 209 1,080 680
-------- -------- -------- -------
Total noninterest income 2,154 1,772 6,296 5,540
NONINTEREST EXPENSE
Salaries and employee benefits 3,085 2,201 8,248 6,516
Occupancy and equipment expense, net 949 697 2,640 2,124
Other expense 1,315 1,104 3,963 3,323
-------- -------- -------- -------
Total noninterest expense 5,349 4,002 14,851 11,963
-------- -------- -------- -------
INCOME BEFORE FEDERAL INCOME TAX 1,613 1,915 4,922 5,798
Federal income tax 429 538 1,319 1,618
-------- -------- -------- -------
NET INCOME $ 1,184 $ 1,377 $ 3,603 $ 4,180
======== ======== ======== =======
Basic earnings per share $ 0.59 $ 0.68 $ 1.79 $ 2.08
Diluted earnings per share 0.59 0.68 1.78 2.08
Cash dividends declared per share of common stock 0.30 0.29 0.89 0.84
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
(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 2001 2000 2001 2000
----------- ---------- --------- ----------
Balance at beginning of period $ 46,765 $ 42,579 $ 45,054 $ 40,964
Net Income 1,184 1,377 3,603 4,180
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale, net 389 354 798 276
---------- ---------- --------- ---------
Total comprehensive income 1,573 1,731 4,401 4,456
Cash dividends declared (603) (573) (1,778) (1,690)
Common stock and contingently issuable stock 15 37 73 44
---------- ---------- --------- ---------
Balance at end of period $ 47,750 $ 43,774 $ 47,750 $ 43,774
========== ========== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
(d) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In thousands of dollars Nine Months Ended
September 30,
------------------------------
2001 2000
------------ -----------
Cash Flows from Operating Activities
Net income $ 3,603 $ 4,180
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization 1,843 1,523
Provision for loan losses 602 948
Gain on sale of credit card loans - (308)
Change in loans held for sale 30 (470)
Gains on securities transactions - (4)
Change in accrued interest receivable and other assets (625) (187)
Change in accrued interest payable and other liabilities 131 446
--------- --------
Total adjustments 1,981 1,948
--------- --------
Net cash from operating activities 5,584 6,128
Cash Flows from Investing Activities
Securities available for sale
Purchases (40,565) (4,653)
Maturities and calls 23,194 9,064
Principal payments 4,994 2,979
Proceeds from sale of credit card loans - 3,745
Net change in portfolio loans (33,613) (31,435)
Premises and equipment expenditures, net (3,244) (882)
--------- --------
Net cash from investing activities (49,234) (21,182)
Cash Flows from Financing Activities
Net change in deposits 27,334 24,731
Net change in short term borrowings 1,013 (13,700)
Proceeds from other borrowings - 9,000
Principal payments on other borrowings (319) (296)
Proceeds from common stock transactions 73 44
Dividends paid (1,979) (1,846)
--------- --------
Net cash from financing activities 26,122 17,933
--------- --------
Net change in cash and cash equivalents (17,528) 2,879
Cash and cash equivalents at beginning of year 38,122 17,469
--------- --------
Cash and cash equivalents at end of period $ 20,594 $ 20,348
========= ========
Supplement Disclosure of Cash Flow Information:
Interest paid $ 12,490 $ 11,334
Income tax paid 1,710 2,025
Loans transferred to other real estate - 544
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6
(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 accounting principles
generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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, 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 $158,297,000 and $124,151,000 at the end of September
2001 and 2000. The balance of loans serviced for others related to servicing
rights that have been capitalized was $142,155,000 and $104,059,000 at September
30, 2001 and 2000.
Mortgage servicing rights activity in thousands of dollars for the nine months
ended September 30, 2001 and 2000 follows:
Unamortized cost of mortgage servicing rights 2001 2000
--------------------------------------------- -------- -----
Balance at January 1 $ 780 $ 728
Amount capitalized year to date 466 76
Amount amortized year to date (227) (65)
-------- -----
Balance at period end $ 1,019 $ 739
======== =====
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
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,
----------------------------------------------------------
2001 2000 2001 2000
------------ ----------- ----------- ------------
Net income $ 1,184 $ 1,377 $ 3,603 $ 4,180
=========== =========== =========== ==========
Basic earnings:
Weighted average common shares outstanding 2,006,854 2,004,828 2,007,015 2,005,215
Weighted average contingently issuable shares 11,747 8,877 11,025 8,360
----------- ----------- ----------- ----------
Total weighted average shares outstanding 2,018,601 2,013,705 2,018,040 2,013,576
=========== =========== =========== ==========
Basic earnings per share $ 0.59 $ 0.68 $ 1.79 $ 2.08
=========== =========== =========== ==========
Diluted earnings:
Weighted average common shares outstanding
from basic earnings per share 2,018,601 2,013,705 2,018,040 2,013,576
Dilutive effect of stock options 1,436 605 3,432 -
----------- ----------- ----------- ----------
Total weighted average shares outstanding 2,020,037 2,014,310 2,021,472 2,013,576
=========== =========== =========== ==========
Diluted earnings per share $ 0.59 $ 0.68 $ 1.78 $ 2.08
=========== =========== =========== ==========
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 (adjusted for stock dividends declared) 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 September 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 September 30,
2001, the range of average exercise prices was $43.54 to $48.57 and the weighted
average remaining contractual term was 8.9 years. At September 30, 2001, 11,006
options were exercisable at the weighted average exercise price of $43.54.
Page 8
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.
Three Months Ended Nine Months Ended
In thousands of dollars, except per share data September 30, September 30,
----------------------------------------------------------
2001 2000 2001 2000
----------- -------- -------- ---------
Net income $ 1,184 $ 1,377 $ 3,603 $ 4,180
Pro forma net income 1,165 1,367 3,547 4,164
Basic earnings per share as reported $ 0.59 $ 0.68 $ 1.79 $ 2.08
Pro forma basic earnings per share 0.58 0.68 1.76 2.07
Diluted earnings per share as reported $ 0.59 $ 0.68 $ 1.78 $ 2.08
Pro forma diluted earnings per share 0.58 0.68 1.75 2.07
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 nine month periods ending September 30, 2001 and 2000.
FINANCIAL CONDITION
SECURITIES
Balances in the Company's investment securities portfolio increased during the
third quarter of 2001, as investment securities replaced a portion of the
Company's short term funds sold. The mix of the securities portfolio continues
to evolve slowly. During the quarter, the Company replaced some of the
previously- matured U.S. Treasury and agency securities, as the level of
tax-exempt investments remained relatively flat. The following chart shows the
percentage mix of the securities portfolio.
9/30/2001 12/31/2000 9/30/2000
--------- ---------- ----------
U.S. Treasury and agency securities 12.5% 24.1% 24.5%
Mortgage backed agency securities 24.6% 16.9% 17.1%
Obligations of states and political subdivisions 46.2% 47.9% 47.7%
Corporate, asset backed, and other securities 16.7% 11.1% 10.7%
--------- ---------- ----------
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
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 corporate, asset backed and other securities portfolio also contains a
moderate level of credit risk. 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 third quarter of 2001 continued to be strong. For the
period, annualized loan growth was 13.2%, compared to year to date annualized
loan growth of 7.38%. Residential mortgages and construction loans declined
during the quarter, while business, personal and tax exempt loans increased
during the same period.
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
personal and business loans, with slight declines in residential mortgage loans.
The loan mix also reflects growth at United Bank & Trust - Washtenaw ("UBTW"),
which opened in April of 2001. 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.
September 30, 2001 December 31, 2000 September 30, 2000
------------------ ----------------- ------------------
Portfolio loans: Balance % of total Balance % of total Balance % of total
------- ---------- ------- ---------- ------- ----------
Personal $ 63,829 17.2% $ 59,172 17.5% $ 58,648 17.5%
Business loans and
commercial mortgages 149,682 40.2% 115,155 34.0% 113,876 33.9%
Tax exempt 1,827 0.5% 2,030 0.6% 2,084 0.6%
Residential mortgage 120,863 32.5% 127,768 37.7% 129,799 38.6%
Construction 35,824 9.6% 34,382 10.2% 31,504 9.4%
--------- ------ --------- ------- --------- ------
Total loans $ 372,025 100.0% $ 338,507 100.00% $ 335,911 100.0%
========= ====== ========= ======= ========= ======
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 United Bank & Trust ("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 has provided continued opportunities for
future continued growth in all loan portfolios, and entry into the Ann Arbor and
Dexter markets during 2001 continues 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
9/30/2001 12/31/2000 9/30/2000
--------- ---------- ---------
Nonaccrual loans $ 1,098 $ 889 $ 921
Loans past due 90 days or more 837 408 117
Troubled debt restructurings 131 132 133
--------- ----------- ----------
Total nonperforming loans 2,066 1,429 1,171
Other real estate 425 544 544
--------- ----------- ----------
Total nonperforming assets $ 2,491 $ 1,973 $ 1,715
========== =========== ==========
Percent of nonperforming loans to total loans 0.56% 0.42% 0.35%
Percent of nonperforming assets to total assets 0.50% 0.42% 0.38%
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 September 30, 2000. Delinquencies are up from
year end 2000 but are down slightly from the end of the second quarter. 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
estimated potential losses. The provision provides for currently estimated
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 nine months ended September 30, 2001 and 2000
follows:
2001 2000
------- -------
Balance at January 1: $ 4,032 $ 3,300
Loans charged off (183) (332)
Recoveries credited to allowance 118 152
Provision charged to operations 602 948
Adjustment for credit cards sold - (100)
------- -------
Balance at September 30 $ 4,569 $ 3,968
======== =======
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
September 30, 2001 and 2000, and December 31, 2000.
9/30/2001 12/31/2000 9/30/2000
---------- ---------- ---------
Business and commercial mortgage $ 2,942 $ 2,580 $ 2,247
Tax exempt - - -
Residential mortgage 19 7 11
Personal 467 638 627
Construction - - -
Unallocated 1,141 807 1,083
---------- ---------- ---------
Total $ 4,569 $ 4,032 $ 3,968
========== ========== =========
Page 11
The Company's largest single category of loans is also generally the one with
the least risk. Loans to finance residential mortgages, including construction
loans, make up 42.1% of the portfolio at September 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 continue to experience steady growth for the quarter and
from 2000 levels. The personal loan portfolio consists of direct and indirect
installment, home equity 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 and Washtenaw Counties.
DEPOSITS
The Company has continued to achieve strong deposit growth in all categories of
deposits other than noninterest bearing accounts, which are relatively unchanged
from June 30, 2001 levels. Growth within the Ann Arbor market continues to
impact the deposit mix, and total deposits are up 9.96% for the quarter and
5.03% year to date, annualized. This continued growth and expansion is a result
in part of a desire 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 Ann Arbor and other
local 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 has entered in recent periods. The chart below shows the
percentage makeup of the deposit portfolio as of September 30, 2001 and 2000.
2001 2000
------- -------
Noninterest bearing deposits 12.6% 13.8%
Interest bearing certificates of $100,000 or more 6.8% 11.2%
Other interest bearing deposits 80.6% 75.0%
------- -------
Total deposits 100.0% 100.0%
======= =======
LIQUIDITY, CASH EQUIVALENTS AND BORROWED FUNDS
Through its affiliate banks, 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
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.
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, 2001 and 2000, and December 31, 2000.
Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc.
--------------------- ---------------------------------------
Adequate Well 9/30/2001 12/31/2000 9/30/2000
-------- ------- --------- ---------- ---------
Tier 1 capital to average assets 4% 5% 9.0% 9.3% 9.2%
Tier 1 capital to risk weighted assets 4% 6% 12.1% 13.1% 13.1%
Total capital to risk weighted assets 8% 10% 13.4% 14.3% 14.4%
Total shareholders' equity $ 47,750 $ 45,054 $ 43,774
Intangible assets (3,585) (3,888) (3,990)
Unrealized (gain) loss on securities available for sale (1,079) (281) 223
-------- -------- --------
Tier 1 capital 43,086 40,885 40,007
Allowable loan loss reserves 4,439 3,902 3,818
-------- -------- ---------
Tier 2 capital $ 47,525 $ 44,787 $ 43,825
========= ========= =========
RESULTS OF OPERATIONS
Consolidated net income for the third quarter of 2001 was not significantly
different than that of the second quarter of 2001, and is down year to date
compared to the same period in 2000. However, income at United Bank & Trust is
up 5.0% annualized over last year, indicating the strength of basic earning
levels of the Company. At the same time, startup costs of UBTW have reduced
earnings below those levels achieved in the first nine months of 2000. Losses at
UBTW are at expected levels, and Management anticipates that the Bank will begin
contributing to the bottom line of the Company during 2002.
NET INTEREST INCOME
During the third quarter of 2001 and year to date 2001, yields on earning assets
and the cost of funds continued to decline as a result of the unprecedented
decline in market interest rates initiated by the Federal Reserve during 2001.
The net result was an improvement in the Company's spread and net interest
margin during the quarter. 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 continue 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
September 30, 2001 and 2000.
Page 13
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 $ 19,449 $ 690 4.73% $ 191 $ 9 6.46%
Taxable securities 44,121 1,926 5.82% 46,356 2,142 6.16%
Tax exempt securities (b) 32,661 1,769 7.22% 31,332 1,746 7.43%
Taxable loans 351,217 22,090 8.39% 322,692 21,317 8.81%
Tax exempt loans (b) 1,916 106 7.39% 2,148 122 7.58%
--------- -------- --------- --------
Total int. earning assets (b) 449,364 26,583 7.89% 402,719 25,337 8.39%
Less allowance for loan losses (4,287) (3,686)
Other assets 39,561 39,063
--------- ---------
TOTAL ASSETS $ 484,638 $ 438,096
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 69,893 $ 1,211 2.31% $ 57,663 $ 1,035 2.39%
Savings deposits 95,107 1,880 2.64% 67,456 1,171 2.32%
CDs $100,000 and over 34,780 1,535 5.89% 36,348 1,593 5.85%
Other interest bearing deposits 169,531 6,659 5.24% 158,640 6,577 5.53%
--------- -------- --------- --------
Total int. bearing deposits 369,311 11,284 4.07% 320,107 10,377 4.32%
Short term borrowings 523 13 3.42% 15,018 717 6.36%
Other borrowings 12,203 631 6.90% 9,783 501 6.83%
--------- -------- --------- --------
Total int. bearing liabilities 382,037 11,929 4.16% 344,908 11,595 4.48%
-------- --------
Noninterest bearing deposits 51,946 48,090
Other liabilities 4,066 2,839
Shareholders' equity 46,589 42,259
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 484,638 $ 438,096
========= =========
Net interest income (b) $ 14,653 $ 13,742
======== ========
Net spread (b) 3.72% 3.91%
===== =====
Net yield on interest earning assets (b) 4.35% 4.55%
===== =====
Ratio of interest earning assets to
interest bearing liabilities 1.18 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, all of the improvement in
interest income during the first nine 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. The net result is improved net interest income
compared to the same period of 2000. The following table shows the effect of
volume and rate changes on net interest income for the nine months ended
September 30, 2001 and 2000 on a taxable equivalent basis, in thousands of
dollars.
Page 14
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 $ 684 $ (3) $ 681 $ (741) $ 667 $ (74)
Taxable securities (101) (115) (216) (282) 16 (266)
Tax exempt securities 73 (50) 23 (148) (40) (188)
Taxable loans 1,826 (1,053) 773 2,948 499 3,447
Tax exempt loans (13) (3) (16) 28 - 28
-------- -------- ------- ------- -------- -------
Total interest income $ 2,469 $(1,224) $ 1,245 $ 1,805 $ 1,142 $ 2,947
======== ======== ======= ======= ======== =======
Interest paid on:
NOW accounts $ 213 $ (37) $ 176 $ 46 $ 238 $ 284
Savings deposits 529 179 708 (103) 57 (46)
CDs $100,000 and over (69) 11 (58) 260 176 436
Other interest bearing deposits 438 (357) 81 513 788 1,301
Short term borrowings (475) (228) (703) 629 22 651
Other borrowings 125 5 130 (49) 55 6
-------- -------- ------- ------- -------- -------
Total interest expense $ 761 $ (427) $ 334 $ 1,296 $ 1,336 $ 2,632
======== ======== ======= ======= ======== =======
Net change in net interest
income $ 1,708 $ (797) $ 911 $ 509 $ (194) $ 315
======== ======== ======= ======= ======== =======
(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 was up slightly from the record levels achieved last
quarter. Year to date, 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 4.0% over the second quarter of 2001,
and are up 4.7% annualized 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. This growth is
enhanced by further growth in the Washtenaw market. However, as a result of the
continued declining market value of assets under management, income is down 0.6%
from year to date 2000 levels, and is up slightly from the second 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. However, in the short term, it is anticipated that
income from the Trust & Investment Group will provide less of a contribution to
the Company's bottom line until recent downturns in the financial markets are
reversed.
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 continued to increase from 2000 levels, resulting
in a greater percentage of loans sold during 2001. Year to date earnings in this
category are up 238.2% over 2000 levels, and are up 142.7% over the same quarter
last year.
NONINTEREST EXPENSES
Noninterest expenses are also up from 2000, with the greatest dollar increases
in salaries and employee benefits. A substantial portion 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
nine months ended September 30, 2001 was 35.4% annualized above the same period
for 2000.
Page 15
FEDERAL INCOME TAX
There has been no significant change in the income tax position of the Company
during the third quarter of 2001.
NET INCOME
Third 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 steady 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.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board "FASB" issued Statement
of Financial Accounting Standards "SFAS" No. 141, "Business Combinations." SFAS
No. 141 requires all business combinations within its scope to be accounted for
using the purchase method, rather than the pooling-of-interests method. The
provisions of this Statement apply to all business combinations initiated after
June 30, 2001. The adoption of this statement will only have an impact on our
financial statements if we enter into a business combination.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which addresses the accounting for such assets arising from prior or
future business combinations. Upon adoption of this statement, goodwill arising
from business combinations will no longer be amortized, but rather will be
assessed regularly for impairment, with any such impairment recognized as a
reduction to earnings in the period identified. Other intangible assets, such as
core deposit intangible assets, will continue to be amortized over their useful
lives. We are required to adopt this statement on January 1, 2002, and early
adoption is not permitted. Management has not yet determined the impact on our
financial statements of adopting this new statement.
Page 16
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 September 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
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
September 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 three months ended September 30, 2001.
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, 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
September 30, 2001.
Page 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 2, 2001
/S/ Dale L. Chadderdon
--------------------------------------------------------
Dale L. Chadderdon
Senior Vice President, Secretary & Treasurer
Page 19