UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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 May 2, 2002, there were outstanding 2,009,242 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 10
Financial Condition 10
Liquidity and Capital Resources 13
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
Page 2
PART I
FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS (Condensed)
(A) CONSOLIDATED BALANCE SHEETS
In thousands of dollars
(unaudited) (unaudited)
March 31, December 31, March 31,
2002 2001 2001
--------- --------- ----------
ASSETS
Cash and demand balances in other banks $ 19,593 $ 15,980 $ 20,866
Federal funds sold 4,000 10,800 22,400
--------- --------- ----------
Total cash and cash equivalents 23,593 26,780 43,266
Securities available for sale 102,654 90,243 80,313
Loans held for sale 3,570 6,686 2,001
Portfolio loans 388,041 372,038 344,052
--------- --------- ----------
Total loans 391,611 378,724 346,053
Less allowance for loan losses 4,684 4,571 4,199
--------- --------- ----------
Net loans 386,927 374,153 341,854
Premises and equipment, net 15,190 15,311 14,599
Accrued interest receivable and other assets 11,854 12,215 9,933
--------- --------- ----------
TOTAL ASSETS $ 540,218 $ 518,702 $ 489,965
========= ========= ==========
LIABILITIES
Deposits
Noninterest bearing $ 63,956 $ 61,845 $ 54,488
Interest bearing certificates of deposit of $100,000 or more 30,050 29,462 41,963
Other interest bearing deposits 373,129 359,991 331,217
--------- --------- ----------
Total deposits 467,135 451,298 427,668
Federal funds purchased and other short term borrowings 521 1,019 -
Other borrowings 18,009 12,009 12,328
Accrued interest payable and other liabilities 5,617 6,199 3,852
--------- --------- ----------
TOTAL LIABILITIES 491,282 470,525 443,848
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value;
5,000,000 shares authorized; 2,009,242, 2,009,242 and
1,911,491 shares issued and outstanding 33,617 33,579 28,433
Stock dividend payable 5,124 - 4,874
Retained earnings 9,733 13,843 12,160
Accumulated other comprehensive income, net of tax 462 755 650
--------- --------- ----------
TOTAL SHAREHOLDERS' EQUITY 48,936 48,177 46,117
--------- --------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 540,218 $ 518,702 $ 489,965
========= ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
(B) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
In thousands of dollars, except per share data March 31,
-----------------------
2002 2001
----------- ----------
INTEREST INCOME
Interest and fees on loans
Taxable $ 6,926 $ 7,296
Tax exempt 24 25
Interest on securities
Taxable 702 626
Tax exempt 395 398
Interest on federal funds sold 68 372
----------- ----------
Total interest income 8,115 8,717
INTEREST EXPENSE
Interest on certificates of deposit of $100,000 or more 373 662
Interest on other deposits 2,033 3,466
Interest on short term borrowings 4 -
Interest on other borrowings 262 210
----------- ----------
Total interest expense 2,672 4,338
----------- ----------
NET INTEREST INCOME 5,443 4,379
Provision for loan losses 192 169
----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,251 4,210
NONINTEREST INCOME
Service charges on deposit accounts 558 555
Trust & Investment fee income 735 716
Loan sales and servicing 372 211
Sales of nondeposit investment products 226 184
Other income 398 341
----------- ----------
Total noninterest income 2,289 2,007
NONINTEREST EXPENSE
Salaries and employee benefits 3,071 2,397
Occupancy and equipment expense, net 944 801
Other expense 1,272 1,315
----------- ----------
Total noninterest expense 5,287 4,513
----------- ----------
INCOME BEFORE FEDERAL INCOME TAX 2,253 1,704
Federal income tax 630 466
----------- ----------
NET INCOME $ 1,623 $ 1,238
=========== ==========
Basic earnings per share $ 0.76 $ 0.58
Diluted earnings per share 0.76 0.58
Cash dividends declared per share of common stock 0.29 0.27
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
March 31,
----------------------
TOTAL SHAREHOLDERS' EQUITY 2002 2001
---------- ---------
Balance at beginning of period $ 48,177 $ 45,054
Net Income 1,623 1,238
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net (293) 369
---------- ---------
Total comprehensive income 1,330 1,607
Cash dividends declared (603) (573)
Common stock transactions 32 29
---------- ---------
Balance at end of period $ 48,936 $ 46,117
========== =========
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 Three Months Ended
March 31,
--------------------
2002 2001
--------- --------
Cash Flows from Operating Activities
Net income $ 1,623 $ 1,238
Adjustments to Reconcile Net Income to Net Cash from Operating
Activities
Depreciation and amortization 753 547
Provision for loan losses 192 169
Change in loans held for sale 3,116 (845)
Change in accrued interest receivable and other assets 441 (70)
Change in accrued interest payable and other liabilities (342) 560
--------- --------
Total adjustments 4,160 361
--------- --------
Net cash from operating activities 5,783 1,599
Cash Flows from Investing Activities
Securities available for sale
Purchases (22,802) (18,821)
Maturities and calls 8,130 10,292
Principal payments 1,630 1,421
Net change in portfolio loans (16,082) (6,703)
Premises and equipment expenditures, net (374) (1,581)
--------- --------
Net cash from investing activities (29,498) (15,392)
Cash Flows from Financing Activities
Net change in deposits 15,837 19,711
Net change in short term borrowings (498) -
Proceeds from other borrowings 8,000 -
Principal payments on other borrowings (2,000) -
Proceeds from common stock transactions 32 29
Dividends paid (843) (803)
--------- --------
Net cash from financing activities 20,528 18,937
--------- --------
Net change in cash and cash equivalents (3,187) 5,144
Cash and cash equivalents at beginning of year 26,780 38,122
--------- --------
Cash and cash equivalents at end of period $ 23,593 $ 43,266
========= ========
Supplement Disclosure of Cash Flow Information:
Interest paid $ 2,789 $ 4,246
Income tax paid - -
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 three month period
ending March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2002. 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, 2001.
NOTE 2 - LOANS HELD FOR SALE
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. The unpaid principal balance of mortgage
loans serviced for others was $173,672,000 and $137,901,000 at the end of March
2002 and 2001. The balance of loans serviced for others related to servicing
rights that have been capitalized was $162,437,000 and $118,070,000 at March 31,
2002 and 2001.
Mortgage servicing rights activity in thousands of dollars for the three months
ended March 31, 2002 and 2001 follows:
2002 2001
--------- --------
Balance at January 1 $ 1,100 $ 780
Amount capitalized year to date 154 127
Amount amortized year to date (81) (66)
------- -----
Balance at period end $ 1,173 $ 841
======= =====
No valuation allowance was considered necessary for mortgage servicing rights at
period end 2002 and 2001.
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 2002 and 2001, the Company
declared 5% stock dividends payable in May 2002 and 2001. Earnings per share,
dividends per share and weighted average shares have been restated to reflect
these stock dividends. A reconciliation of basic and diluted earnings per share
follows:
Three Months Ended
In thousands of dollars, except per share data March 31,
----------------------
2002 2001
---------- ----------
Net income $ 1,623 $ 1,238
========== ==========
Basic earnings:
Weighted average common shares outstanding 2,109,704 2,107,522
Weighted average contingently issuable shares 14,360 10,687
---------- ----------
Total weighted average shares outstanding 2,124,064 2,118,209
========== ==========
Basic earnings per share $ 0.76 $ 0.58
========== ==========
Page 7
Three Months Ended
March 31,
----------------------
2002 2001
---------- ----------
Diluted earnings:
Weighted average common shares outstanding
from basic earnings per share 2,124,064 2,118,209
Dilutive effect of stock options 4,037 1,934
---------- ----------
Total weighted average shares outstanding 2,128,101 2,120,143
========== ==========
Diluted earnings per share $ 0.76 $ 0.58
========== ==========
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
126,181 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:
Options Weighted Average
Outstanding Exercise Price
----------- --------------
Balance at January 1, 2002 64,623 $ 43.42
Options granted 16,485 48.57
Options exercised - -
Options forfeited - -
-------
Balance at March 31, 2002 81,108 $ 44.47
=======
Options granted under the plan during the current year were 16,485 on January 9,
2002. The weighted fair value of the options granted was $4.68. For stock
options outstanding at March 31, 2002, the range of average exercise prices was
$41.46 to $48.57 and the weighted average remaining contractual term was 8.7
years. At March 31, 2002, 29,979 options were exercisable at the weighted
average exercise price of $43.34.
The following pro forma information presents net income and earnings per share
had the fair value method been used to measure compensation cost for stock
option grants. The exercise price of the option grants is equivalent to the
market value of the underlying stock at the grant date, adjusted for stock
dividends. Accordingly, no compensations cost was recorded for the period ended
March 31, 2002 and 2001.
Three Months Ended
In thousands of dollars, except per share data March 31,
---------------------
2002 2001
---------- --------
Net income $ 1,623 $ 1,238
Pro forma net income 1,600 1,219
Basic earnings per share as reported $ 0.76 $ 0.58
Pro forma basic earnings per share 0.75 0.58
Diluted earnings per share as reported $ 0.76 $ 0.58
Pro forma diluted earnings per share 0.75 0.57
Page 8
NOTE 5 - IMPACT OF NEW ACCOUNTING STANDARDS
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards "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 is no longer amortized, but will be assessed regularly for
impairment, with any such impairment recognized as a reduction to earnings in
the period identified. Current interpretation by the Financial Accounting
Standards Board "FASB" requires that other intangible assets, such as core
deposit intangibles and unidentified intangibles resulting from branch
acquisitions, will continue to be amortized over their useful lives. However,
the FASB is reconsidering their interpretation and it is possible that
amortization of unidentifiable intangibles resulting from branch acquisitions
may be discontinued.
Intangible assets in thousands of dollars are as follows:
March 31, 2002 December 31, 2001
---------------------- -----------------------
Gross Accumulated Gross Accumulated
Amount Amortization Amount Amortization
--------- ------------- -------- ------------
Amortizable intangible assets
Core deposit intangibles $ 198 $ 187 $ 198 $ 183
Unidentified intangibles resulting from
branch acquisitions 4,043 1,081 4,043 1,014
------- ----------- -------- -----------
$ 4,241 $ 1,268 $ 4,241 $ 1,197
Unamortizable intangible assets
Goodwill $ 969 $ 529 $ 969 $ 529
Adoption of the new accounting standard did not have a material effect on the
Company's consolidated financial position or results of operations as
management's assessment indicated, no impairment of the $440,000 of unamortized
goodwill at January 1, 2002 and March 31, 2002 and no loss was recognized for
the period ended March 31, 2002. The annual goodwill amortization expense for
years prior to 2002 of $65,000 is considered to be immaterial and, therefore, no
pro forma disclosures are provided to reflect the impact of the new accounting
method on the prior period financial statements.
Amortization expense for the three months ended March 31, 2002 and 2001 was
$71,000 and $101,000. Estimated annual amortization expense, in thousands of
dollars, for the next five years is:
2002 $ 284
2003 270
2004 270
2005 270
2006 268
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires a liability to be recognized for the fair
value of obligations associated with the retirement of tangible, long-lived
assets. Adoption of this standard on January 1, 2003 is not expected to have a
material effect on the Company's consolidated financial position or results of
operations.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This new accounting standard
establishes more restrictive requirements for the classification of assets "held
for sale" and also expands the types of dispositions that are to be accounted
for as discontinued operations. Adoption of this standard did not have a
material effect on the Company's consolidated financial position or results of
operations.
Page 9
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion provides information about the consolidated financial condition
and results of operations of United Bancorp, Inc. and its subsidiaries for the
three month periods ending March 31, 2002 and 2001.
FINANCIAL CONDITION
SECURITIES
Balances in the Company's investment securities portfolio continued to increase
during the first quarter of 2002, as investment securities replaced a portion of
the Company's short term funds sold. This growth in the portfolio was primarily
in short term investments, which caused the mix of the securities portfolio to
shift somewhat. During the quarter, short-term agency and corporate bonds
replaced maturing municipal obligations. The following chart shows the
percentage mix of the securities portfolio.
3/31/2002 12/31/2001 3/31/2001
--------- ---------- ---------
U.S. Treasury and agency securities 28.7% 18.5% 13.2%
Mortgage backed agency securities 15.0% 18.9% 28.7%
Obligations of states and political subdivisions 37.4% 46.1% 47.9%
Corporate, asset backed, and other securities 18.9% 16.5% 10.2%
-------- ---------- ---------
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.
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
Annualized loan growth during the first quarter of 2002 was 13.6%, reflecting
continued strength in the market. Substantially all of this growth was in
business loans, commercial and residential mortgages, while construction loans
and personal loans declined somewhat during the same period.
The mix of the loan portfolio continues a long-term trend toward an increased
percentage of business loans, with slight declines in residential mortgage loans
and personal 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.
Page 10
March 31, 2002 December 31, 2001 March 31, 2001
-------------------- ------------------- ------------------
Total loans: Balance % of total Balance % of total Balance % of total
--------- ---------- ------- ---------- ------- ----------
Personal $ 62,335 15.9% $ 62,792 16.6% $ 59,854 17.3%
Business loans and
commercial mortgages 180,932 46.2% 163,329 43.1% 123,013 35.5%
Tax exempt 1,818 0.5% 1,878 0.5% 1,936 0.6%
Residential mortgage 118,118 30.2% 117,553 31.0% 125,863 36.4%
Construction 28,408 7.2% 33,172 8.8% 35,387 10.2%
--------- --------- --------- ---------- --------- ----------
Total loans $ 391,611 100.0% $ 378,724 100.00% $ 346,053 100.0%
========= ========= ========= ========== ========= ==========
The Company's subsidiary Banks ("Banks") continue to be providers of residential
mortgage loans. As full service lenders, the Banks offer a variety of home
mortgage loan products in their markets. Demand for loans continues to be strong
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.
3/31/2002 12/31/2001 3/31/2001
--------- ---------- ---------
Nonaccrual loans $ 1,081 $ 1,084 $ 1,007
Loans past due 90 days or more 691 1,104 279
Troubled debt restructurings 130 130 132
--------- ---------- ---------
Total nonperforming loans 1,902 2,318 1,418
Other real estate 179 179 425
--------- ---------- ---------
Total nonperforming assets $ 2,081 $ 2,497 $ 1,843
========= ========== =========
Percent of nonperforming loans to total loans 0.49% 0.61% 0.41%
Percent of nonperforming assets to total assets 0.39% 0.48% 0.38%
Nonperforming assets remain low, as credit quality remains quite strong for the
organization. Balances in nonaccrual loans are virtually flat compared to the
levels achieved at the end of 2001 and are up slightly from March 31, 2001.
Delinquencies are down from year end 2001, but are above levels achieved at the
end of the first quarter of 2001. Overall, the Company's ratios of nonperforming
loans have improved since December of 2001 and continue to 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. Net charge-offs for the period have
remained lower than the provision added to the allowance for loan losses,
resulting in an increase in the allowance. An analysis of the allowance for loan
losses, in thousands of dollars, for the three months ended March 31, 2002 and
2001 follows:
Page 11
2002 2001
---- ----
Balance at January 1: $ 4,571 $ 4,032
Loans charged off (108) (49)
Recoveries credited to allowance 29 47
Provision charged to operations 192 169
-------- --------
Balance at March 31 $ 4,684 $ 4,199
======== ========
The Company has slightly increased its provision for loan losses over the same
period in 2001 as a result of continued loan growth. Loan quality remains
strong, as evidenced by the low level of nonperforming loans. The following
table presents the allocation of the allowance for loan losses applicable to
each loan category in thousands of dollars, as of March 31, 2002 and 2001, and
December 31, 2001.
3/31/2002 12/31/2001 3/31/2001
--------- ---------- ---------
Business and commercial mortgage $ 3,983 $ 3,060 $ 2,831
Tax exempt - - -
Residential mortgage 21 20 7
Personal 498 496 430
Construction - - -
Unallocated 182 995 931
--------- --------- --------
Total $ 4,684 $ 4,571 $ 4,199
========= ========= ========
One of 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 37.4% of the portfolio at March 31, 2002, 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 declined slightly for the quarter. 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 Company uses an independent loan review firm to assess the continued
quality of its 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. Growth within the Ann Arbor market continues to influence the deposit
mix, and total deposits are up 14.0% for the quarter, 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 2002 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 Company's 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
Page 12
March 31, 2002 and 2001.
2002 2001
---- ----
Noninterest bearing deposits 13.7% 12.7%
Interest bearing certificates of $100,000 or more 6.4% 9.8%
Other interest bearing deposits 79.9% 77.5%
------ ------
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.
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 March 31, 2002 and 2001, and December 31, 2001.
Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc.
------------------------ ----------------------------------
Adequate Well 3/31/2002 12/31/2001 3/31/2001
---------- --------- ----------- ------------ ---------
Tier 1 capital to average assets 4% 5% 8.5% 9.0% 8.8%
Tier 1 capital to risk weighted assets 4% 6% 11.9% 11.9% 13.0%
Total capital to risk weighted assets 8% 10% 13.1% 13.1% 14.3%
Total shareholders' equity $ 48,936 $ 48,177 $ 46,117
Intangible assets (3,413) (3,484) (3,786)
Unrealized (gain) loss on securities available for sale (462) (755) (650)
-------- -------- --------
Tier 1 capital 45,061 43,938 41,681
Allowable loan loss reserves 4,670 4,537 4,007
-------- -------- --------
Tier 2 capital $ 49,731 $ 48,475 $ 45,688
======== ======== ========
RESULTS OF OPERATIONS
Consolidated net income for the first quarter of 2002 was significantly improved
from that of the first and fourth quarters of 2001. Net income contributed by
UBT continues to increase, while losses at UBTW are declining.
NET INTEREST INCOME
Net interest income increased by 24.7% from the first quarter of 2001, but
remains flat compared to the fourth quarter of the year. During the first
quarter of 2002, 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. This
improvement slowed from fourth quarter 2001 levels, but has contributed
significantly to net income of the Company, in part as a result of the Company's
interest sensitivity position. The following table shows the year to date daily
average consolidated balance sheets, interest earned (on a
Page 13
taxable equivalent basis) or paid, and the annualized effective yield or rate,
for the periods ended March 31, 2002 and 2001.
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
Quarter ended March 31,
----------------------------------------------------------------------------
dollars in thousands 2002 2001
- -------------------- ----------------------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/
ASSETS Balance (b) Rate (c) Balance (b) Rate (c)
---------- --------- -------- ------- -------- --------
Interest earning assets (a)
Federal funds sold $ 17,085 $ 68 1.59% $ 26,657 $ 372 5.58%
Taxable securities 60,434 702 4.65% 40,768 626 6.15%
Tax exempt securities (b) 36,724 591 6.44% 30,922 570 7.38%
Taxable loans 381,394 6,926 7.26% 341,196 7,296 8.55%
Tax exempt loans (b) 1,873 36 7.60% 1,970 36 7.32%
---------- -------- ---------- --------
Total int. earning assets (b) 497,510 8,323 6.69% 441,513 8,900 8.06%
Less allowance for loan losses (4,620) (4,105)
Other assets 44,013 39,704
---------- ----------
TOTAL ASSETS $ 536,903 $ 477,112
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 85,762 198 0.92% $ 67,047 438 2.61%
Savings deposits 135,755 503 1.48% 61,279 382 2.49%
CDs $100,000 and over 30,312 373 4.93% 44,755 662 5.92%
Other interest bearing deposits 153,162 1,332 3.48% 190,550 2,646 5.55%
---------- -------- ---------- --------
Total int. bearing deposits 404,991 2,406 2.38% 363,631 4,128 4.54%
Short term borrowings 965 4 1.51% - - -%
Other borrowings 17,169 262 6.11% 12,328 210 6.82%
---------- -------- ---------- --------
Total int. bearing liabilities 423,125 2,672 2.53% 375,959 4,338 4.62%
-------- --------
Noninterest bearing deposits 59,110 50,370
Other liabilities 5,758 5,038
Shareholders' equity 48,910 45,745
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 536,903 $ 477,112
========== ==========
Net interest income (b) $ 5,651 $ 4,563
======== =======
Net spread (b) 4.17% 3.45%
===== =====
Net yield on interest earning assets (b) 4.54% 4.13%
===== =====
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, interest income and interest
expense declined during the first three months of 2002 as a result of changes in
rates. At the same time, net interest income improved as a result of changes in
volume compared to the same period of 2001. The following table shows the effect
of volume and rate changes on net interest income for the three months ended
March 31, 2002 and 2001 on a taxable equivalent basis, in thousands of dollars.
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2002 Compared to 2001 2001 Compared to 2000
---------------------------------------- -------------------------------------
Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a)
------------------------------------ ------------------------------------
Volume Rate Net Volume Rate Net
---------- -------- ------- ------- ------- -----------
Interest earned on:
Federal funds sold $ (102) $ (202) $ (304) $ 372 $ - $ 372
Taxable securities 253 (177) 76 (116) 3 (113)
Tax exempt securities 99 (79) 20 (41) (2) (43)
Taxable loans 803 (1,173) (370) 622 (56) 566
Tax exempt loans (2) 2 - (1) (1) (2)
-------- --------- -------- ------ ------ ------
Total interest income $ 1,051 $ (1,629) $ (578) $ 836 $ (56) $ 780
======== ========= ======== ====== ====== ======
Interest paid on:
NOW accounts $ 99 $ (339) $ (240) $ 60 $ 58 $ 118
Savings deposits 323 (202) 121 (64) 28 (36)
CDs $100,000 and over (190) (98) (288) 170 33 203
Other interest bearing deposits (452) (862) (1,314) 494 147 641
Short term borrowings 4 - 4 (283) - (283)
Other borrowings 76 (24) 52 118 4 122
-------- --------- -------- ------ ------ ------
Total interest expense $ (140) $ (1,525) $(1,665) $ 495 $ 270 $ 765
======== ========= ======== ====== ====== ======
Net change in net interest
income $ 1,191 $ (104) $ 1,087 $ 341 $ (326) $ 15
======== ========= ======== ====== ====== ======
(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 down slightly from the record levels achieved in
the fourth quarter of 2001. However, in comparison with the first quarter of
2001, noninterest income is up 14.1%. While service charges on deposit accounts
are relatively flat, all other categories of noninterest income are improved
from the same period last year. The largest percentage gains achieved is income
from loan sales and servicing.
Service charges on deposit accounts are up 0.5% over the first quarter of 2001,
and are down 10.6% from the fourth quarter of 2001. Fourth quarter service
charges are typically higher as a result of NSF/OD fees collected at that time
of year. 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.
Income in this category is up 2.7% from the fourth quarter of 2001, and up 15.9%
from the first quarter of last year.
Income from loan sales and servicing continues to be strong, as a result of an
increased amount of residential mortgages sold in the secondary market. However,
mortgage loan refinancing has slowed somewhat from the record levels experienced
in 2001. For the first quarter of 2002, income in this category is up 76.3% from
the same period of 2001, but is down nearly $100,000 from the fourth quarter of
2002. It is anticipated that income from the sale of residential loans will
contribute a smaller portion of income as the volume of loans sold tapers off.
However, the Company maintains a servicing portfolio of loans sold, which will
provide ongoing future income.
NONINTEREST EXPENSES
Noninterest expenses are also up from the first quarter of 2001, but are below
fourth quarter 2001 levels. In comparison to the same period of 2001, a
substantial portion of the increase reflects the growth and expansion of the
Company, including staffing for UBTW which opened in April of 2001, and the
Dexter office of UBT, which opened in May of 2001. These increases are noted in
compensation expense, as well as occupancy and equipment expense. Total
noninterest expense, excluding provision for loan losses, for the three months
ended March 31, 2002 was 17.2% above the same period for 2001, but was below the
fourth
Page 15
quarter of 2001 by 7.0%.
FEDERAL INCOME TAX
There has been no significant change in the income tax position of the Company
as the effective tax rate was 28% for the first quarter of 2002 and 27% for the
first quarter of 2001.
NET INCOME
First quarter consolidated net income is up 31.1% from the same periods of 2001,
and up 15.7% over the fourth quarter of 2001. This reflects improvements in
earnings at both banks, and Management anticipates that net income will remain
strong for the remainder of the year, as a result of future earnings
contributions by UBTW as well as strong earnings growth at UBT.
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 judgments 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
Adoption of new accounting standards did not have a material effect on the
Company's consolidated financial position or results of operations. Additional
information is contained in Note 5 of the Consolidated Financial Statements.
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
Page 16
assumptions in the models include prepayment speeds on mortgage related assets;
cash flows and maturities of financial instruments held for purposes other than
trading; changes in market conditions, loan volumes and pricing; and
management's determination of core deposit sensitivity. These assumptions are
inherently uncertain and, as a result, the models cannot precisely estimate net
interest income or precisely predict the impact of higher or lower interest
rates on net interest income. Actual results will differ from simulated results
due to timing, magnitude, and frequency of interest rate changes and changes in
market conditions.
Based on the results of the simulation model as of March 31, 2002, 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.
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 any associate
of the foregoing, is a party or has a material interest adverse to the Company
or the Banks.
ITEM 2- CHANGES IN SECURITIES AND USE OF PROCEEDS
No changes in the securities of the Company occurred during the quarter ended
March 31, 2002.
ITEM 3- DEFAULTS UPON SENIOR SECURITIES
There have been no defaults upon senior securities relevant to the requirements
of this section during the three months ended March 31, 2002.
Page 17
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
March 31, 2002.
ITEM 5- OTHER INFORMATION
None.
ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits (numbered as in Item 601 of Regulation S-K):
None
(b) The Company has filed no reports on Form 8-K during the quarter ended March
31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED BANCORP, INC.
May 14, 2002
/S/ Dale L. Chadderdon
- ----------------------------------------------
Dale L. Chadderdon
Senior Vice President, Secretary & Treasurer
Page 18