UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 5, 2002, there were outstanding 2,111,060 shares of the
registrant's common stock, no par value.
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 and Capital Resources 12
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Certification of Financial Results 19
Signatures 19
Page 2
PART I
FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS (Condensed)
(A) CONSOLIDATED BALANCE SHEETS
In thousands of dollars (unaudited) (unaudited)
June 30, December 31, June 30,
2002 2001 2001
----------- ------------ -----------
ASSETS
Cash and demand balances in other banks $ 14,267 $ 15,980 $ 15,202
Federal funds sold 600 10,800 9,700
----------- ------------ -----------
Total cash and cash equivalents 14,867 26,780 24,902
Securities available for sale 100,967 90,243 81,879
Loans held for sale 1,472 6,686 3,226
Portfolio loans 413,985 372,038 356,919
----------- ------------ -----------
Total loans 415,457 378,724 360,145
Less allowance for loan losses 4,848 4,571 4,412
----------- ------------ -----------
Net loans 410,609 374,153 355,733
Premises and equipment, net 14,770 15,311 15,267
Accrued interest receivable and other assets 12,232 12,215 10,031
----------- ------------ -----------
TOTAL ASSETS $553,445 $518,702 $487,812
=========== ============ ===========
LIABILITIES
Deposits
Noninterest bearing $ 63,969 $ 61,845 $ 54,899
Interest bearing certificates of deposit of $100,000 or more 30,122 29,462 28,180
Other interest bearing deposits 368,637 359,991 341,636
----------- ------------ -----------
Total deposits 462,728 451,298 424,715
Federal funds purchased and other short term borrowings 523 1,019 1,005
Other borrowings 34,067 12,009 12,009
Accrued interest payable and other liabilities 5,402 6,199 3,318
----------- ------------ -----------
TOTAL LIABILITIES 502,720 470,525 441,047
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value;
5,000,000 shares authorized; 2,110,964, 2,009,242 and
2,007,056 shares issued and outstanding 38,848 33,579 33,367
Retained earnings 10,765 13,843 12,708
Accumulated other comprehensive income, net of tax 1,112 755 690
------------- ------------ -----------
TOTAL SHAREHOLDERS' EQUITY 50,725 48,177 46,765
------------- ------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $553,445 $518,702 $487,812
============= ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
(B) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended
In thousands of dollars, except per share data June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
------- ------- ------- -------
INTEREST INCOME
Interest and fees on loans
Taxable $ 7,251 $ 7,387 $14,177 $14,683
Tax exempt 21 24 45 49
Interest on securities
Taxable 742 658 1,445 1,284
Tax exempt 358 418 753 816
Interest on federal funds sold 35 198 102 570
------- ------- ------- -------
Total interest income 8,407 8,685 16,522 17,402
INTEREST EXPENSE
Interest on certificates of deposit of $100,000 or more 350 461 723 1,123
Interest on other deposits 1,930 3,310 3,962 6,776
Interest on short term borrowings 2 5 5 5
Interest on other borrowings 426 212 689 422
------- ------- ------- -------
Total interest expense 2,708 3,988 5,379 8,326
------- ------- ------- -------
NET INTEREST INCOME 5,699 4,697 11,143 9,076
Provision for loan losses 217 237 409 406
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,482 4,460 10,734 8,670
NONINTEREST INCOME
Service charges on deposit accounts 623 599 1,181 1,154
Trust & Investment fee income 747 665 1,482 1,381
Gains on securities transactions 9 -- 9 --
Loan sales and servicing 235 285 606 496
Sales of nondeposit investment products 212 202 438 386
Other income 425 384 823 724
------- ------- ------- -------
Total noninterest income 2,251 2,135 4,539 4,141
NONINTEREST EXPENSE
Salaries and employee benefits 3,003 2,767 6,074 5,164
Occupancy and equipment expense, net 927 890 1,871 1,691
Other expense 1,401 1,332 2,673 2,647
------- ------- ------- -------
Total noninterest expense 5,331 4,989 10,618 9,502
------- ------- ------- -------
INCOME BEFORE FEDERAL INCOME TAX 2,402 1,606 4,655 3,309
Federal income tax 696 425 1,326 890
------- ------- ------- -------
NET INCOME $ 1,706 $ 1,181 $ 3,329 $ 2,419
======= ======= ======= =======
Basic earnings per share $ 0.80 $ 0.56 $ 1.57 $ 1.14
Diluted earnings per share 0.80 0.56 1.56 1.14
Cash dividends declared per share of common stock 0.30 0.29 0.59 0.56
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
(C) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
In thousands of dollars
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
TOTAL SHAREHOLDERS' EQUITY 2002 2001 2002 2001
-------- -------- -------- --------
Balance at beginning of period $ 48,936 $ 46,117 $ 48,177 $ 45,054
Net Income 1,706 1,181 3,329 2,419
Other comprehensive income:
Net change in unrealized gains on securities
available for sale, net 651 40 357 409
-------- -------- -------- --------
Total comprehensive income 2,357 1,221 3,686 2,828
Cash dividends declared (633) (602) (1,237) (1,175)
Common stock transactions 65 29 99 58
-------- -------- -------- --------
Balance at end of period $ 50,725 $ 46,765 $ 50,725 $ 46,765
======== ======== ======== ========
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 Six Months Ended
June 30,
-----------------------------
2002 2001
-------- ---------
Cash Flows from Operating Activities
Net income $ 3,329 $ 2,419
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization 1,588 1,177
Provision for loan losses 409 406
Change in loans held for sale 5,214 (2,070)
Gains on securities transactions (9) --
Change in accrued interest receivable and other assets (287) (289)
Change in accrued interest payable and other liabilities (588) (3)
-------- ---------
Total adjustments 6,327 (779)
-------- ---------
Net cash from operating activities 9,656 1,640
Cash Flows from Investing Activities
Securities available for sale
Purchases (27,318) (30,763)
Maturities and calls 13,557 18,749
Principal payments 3,134 3,332
Net change in portfolio loans (42,135) (19,594)
Premises and equipment expenditures, net (452) (2,710)
-------- ---------
Net cash from investing activities (53,214) (30,986)
Cash Flows from Financing Activities
Net change in deposits 11,430 16,758
Net change in short term borrowings (496) 1,005
Proceeds from other borrowings 24,400 --
Principal payments on other borrowings (2,342) (319)
Proceeds from common stock transactions 99 58
Dividends paid (1,446) (1,376)
-------- ---------
Net cash from financing activities 31,645 16,126
-------- ---------
Net change in cash and cash equivalents (11,913) (13,220)
Cash and cash equivalents at beginning of year 26,780 38,122
-------- ---------
Cash and cash equivalents at end of period $ 14,867 $ 24,902
======== =========
Supplement Disclosure of Cash Flow Information:
Interest paid $ 5,503 $ 8,581
Income tax paid 1,350 1,210
Loans transferred to other real estate 56 --
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") and its subsidiaries, United Bank & Trust ("UBT") and
United Bank & Trust - Washtenaw ("UBTW") 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
six month period ending June 30, 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 - MORTGAGE SERVICING RIGHTS
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 $174,515,000 and $148,092,000 at the end of June
2002 and 2001. The balance of loans serviced for others related to servicing
rights that have been capitalized was $164,652,000 and $131,399,000 at June 30,
2002 and 2001.
Mortgage servicing rights activity in thousands of dollars for the six months
ended June 30, 2002 and 2001 follows:
2002 2001
------- -------
Balance at January 1 $ 1,100 $ 780
Amount capitalized year to date 235 317
Amount amortized year to date (147) (156)
------- -------
Balance at June 30 $ 1,188 $ 941
======= =======
No valuation allowance was considered necessary for mortgage servicing rights at
June 30, 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 Six Months Ended
In thousands of dollars, except per share data June 30, June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income $ 1,706 $ 1,181 $ 3,329 $ 2,419
========== ========== ========== ==========
Basic earnings:
Weighted average common shares outstanding 2,110,061 2,107,383 2,109,883 2,107,452
Weighted average contingently issuable shares 15,107 11,586 14,736 11,191
---------- ---------- ---------- ----------
Total weighted average shares outstanding 2,125,168 2,118,969 2,124,619 2,118,643
========== ========== ========== ==========
Basic earnings per share $ 0.80 $ 0.56 $ 1.57 $ 1.14
========== ========== ========== ==========
Page 7
Three Months Ended Six Months Ended
Diluted earnings: June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Weighted average common shares outstanding
from basic earnings per share 2,125,168 2,118,969 2,124,619 2,118,643
Dilutive effect of stock options 3,592 2,261 5,536 3,156
--------- --------- --------- ---------
Total weighted average shares outstanding 2,128,760 2,121,230 2,130,155 2,121,799
========= ========= ========= =========
Diluted earnings per share $ 0.80 $ 0.56 $ 1.56 $ 1.14
========= ========= ========= =========
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 (764) 41.46
Options forfeited (394) 41.46
----------
Balance at June 30, 2002 79,950 $44.51
==========
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 June 30, 2002, the range of average exercise prices was
$41.46 to $48.57 and the weighted average remaining contractual term was 8.5
years. At June 30, 2002, 31,771 options were exercisable at the weighted average
exercise price of $42.70.
The following pro forma information presents net income and earnings per share
had the fair value method been used to measure compensation cost for stock
option grants. The exercise price of the option grants is equivalent to the
market value of the underlying stock at the grant date, adjusted for stock
dividends. Accordingly, no compensation cost was recorded for the periods ended
June 30, 2002 and 2001.
Three Months Ended Six Months Ended
In thousands of dollars, except per share data June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net income $ 1,706 $ 1,181 $ 3,329 $ 2,419
Pro forma net income 1,682 1,162 3,282 2,382
Basic earnings per share as reported $ 0.80 $ 0.56 $ 1.57 $ 1.14
Pro forma basic earnings per share 0.79 0.55 1.54 1.12
Diluted earnings per share as reported $ 0.80 $ 0.56 $ 1.56 $ 1.14
Pro forma diluted earnings per share 0.79 0.55 1.54 1.12
Page 8
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion provides information about the consolidated financial condition
and results of operations of United Bancorp, Inc. and its subsidiaries for the
three and six month periods ending June 30, 2002 and 2001.
FINANCIAL CONDITION
SECURITIES
Balances in the Company's investment securities portfolio declined slightly
during the second quarter of 2002, as loan volume increased and deposit growth
declined. The mix of the securities portfolio continues to shift toward
shorter-term investments while market rates are low. During the quarter,
short-term agency and corporate bonds replaced maturing U.S Treasury
obligations. The following chart shows the percentage mix of the securities
portfolio.
6/30/2002 12/31/2001 6/30/2001
--------- ---------- ---------
U.S. Treasury and agency securities 31.8% 18.5% 13.7%
Mortgage backed agency securities 13.9% 18.9% 25.2%
Obligations of states and political subdivisions 35.6% 46.1% 45.6%
Corporate, asset backed, and other securities 18.7% 16.5% 15.5%
--------- ---------- ---------
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 in the portfolio also contains
a moderate level of credit risk. The municipal portfolio contains no significant
geographic risk, as approximately 9% of that portfolio and 3% of the total
investment 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 second quarter of 2002 was 24.3%, reflecting
continued strength in the market. Most loan categories experienced growth during
the quarter, with only tax exempt loans and residential mortgages exhibiting
declines, as clients refinanced loans into products that are sold in the
secondary markets.
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 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 9
June 30, 2002 December 31, 2001 June 30, 2001
-------------------------- -------------------------- ------------------------
Total loans: Balance % of total Balance % of total Balance % of total
-------- ---------- -------- ---------- -------- ----------
Personal $ 69,763 16.8% $ 62,792 16.6% $ 61,944 17.2%
Business loans and
commercial mortgages 195,063 46.9% 163,329 43.1% 135,499 37.6%
Tax exempt 1,591 0.4% 1,878 0.5% 1,782 0.5%
Residential mortgage 117,501 28.3% 117,553 31.0% 122,761 34.1%
Construction 31,539 7.6% 33,172 8.8% 38,159 10.6%
-------- ---------- -------- ---------- -------- ----------
Total loans $415,457 100.0% $378,724 100.00% $360,145 100.0%
======== ========= ======== ========== ======== ==========
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 in all markets that the Banks serve.
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. The chart shows the aggregate amount of the Company's nonperforming
assets by type, in thousands of dollars. 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 Company's classification of
nonperforming loans is generally consistent with loans identified as impaired.
6/30/2002 12/31/2001 6/30/2001
--------- ---------- ---------
Nonaccrual loans $1,449 $1,084 $1,031
Loans past due 90 days or more 237 1,104 857
Troubled debt restructurings 129 130 131
--------- ---------- ---------
Total nonperforming loans 1,815 2,318 2,019
Other real estate 235 179 425
--------- ---------- ---------
Total nonperforming assets $2,050 $2,497 $2,444
========= ========== =========
Percent of nonperforming loans to total loans 0.44% 0.61% 0.56%
Percent of nonperforming assets to total assets 0.37% 0.48% 0.50%
Nonperforming assets remain low, as credit quality remains quite strong for the
organization. Balances in nonperforming loans are down compared to the levels
achieved for the second quarter of 2001, the end of 2001 and the first quarter
of 2002. Delinquencies are also at their lowest levels in recent periods.
Overall, the Company's ratios of nonperforming loans 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 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 six months ended June 30, 2002 and 2001 follows:
Page 10
2002 2001
------- -------
Balance at January 1: $ 4,571 $ 4,032
Loans charged off (193) (104)
Recoveries credited to allowance 61 78
Provision charged to operations 409 406
------- -------
Balance at June 30 $ 4,848 $ 4,412
======= =======
The Company's provision for loan losses for the second quarter of the year is up
slightly from the first quarter of 2002, and is at substantially the same level
as it was for the same period in 2001. Loan quality remains strong, as evidenced
by the low level of nonperforming loans, while the portfolio continues to grow.
The following table presents the allocation of the allowance for loan losses
applicable to each loan category in thousands of dollars, as of June 30, 2002
and 2001, and December 31, 2001.
Amount allocated to: 6/30/2002 12/31/2001 6/30/2001
--------- ---------- ---------
Business loans and commercial mortgages $4,115 $3,060 $2,730
Tax exempt loans -- -- --
Residential mortgages 21 20 7
Personal loans 561 496 454
Construction loans -- -- --
Unallocated 151 995 1,221
--------- ---------- ---------
Total $4,848 $4,571 $4,412
========= ========== =========
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 35.9% of the portfolio at June 30, 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 increased during the quarter and since the end of 2001.
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
Deposit balances declined somewhat during the second quarter of 2002, following
strong growth during the first quarter of the year. The decline in deposits was
substantially all in certificates of deposit less than $100,000, reflecting the
search by clients for higher returns on their funds, without extending
maturities. In addition, the Company has not chosen to offer the highest rates
in its markets, as borrowings from the FHLB have provided opportunities to lock
in longer term funding at relatively low rates.
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
Page 11
with other banks in their market areas, including those new markets that the
Company has entered in recent months. The chart below shows the percentage
makeup of the deposit portfolio as of June 30, 2002 and 2001.
2002 2001
------ ------
Noninterest bearing deposits 13.8% 12.9%
Interest bearing certificates of $100,000 or more 6.5% 6.6%
Other interest bearing deposits 79.7% 80.4%
------ ------
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 the 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. During the past several months, the Company has
obtained a number of long-term fixed rate advances while rates were declining,
in order to lock in long-term funding at historically low rates. The Company's
balances in FHLB advances of four years or longer have increased more than $24
million since the end of 2001.
CAPITAL RESOURCES
The capital ratios of the Company exceed the regulatory guidelines for well
capitalized institutions. The following table shows the Company's capital ratios
and ratio calculations at June 30, 2002 and 2001, and December 31, 2001. Dollars
are shown in thousands.
Regulatory Guidelines United Bancorp, Inc.
--------------------- ---------------------------------------
Adequate Well 6/30/2002 12/31/2001 6/30/2001
--------- ---- --------- ---------- ---------
Tier 1 capital to average assets 4% 5% 8.6% 9.0% 8.9%
Tier 1 capital to risk weighted assets 4% 6% 11.4% 11.9% 12.5%
Total capital to risk weighted assets 8% 10% 12.6% 13.1% 13.7%
Total shareholders' equity $ 50,725 $ 48,177 $ 46,765
Intangible assets (3,342) (3,484) (3,686)
Unrealized (gain) loss on securities available for sale (1,112) (755) (690)
-------- -------- --------
Tier 1 capital 46,271 43,938 42,389
Allowable loan loss reserves 4,848 4,537 4,248
-------- -------- --------
Tier 2 capital $ 51,119 $ 48,475 $ 46,637
======== ======== ========
RESULTS OF OPERATIONS
Consolidated net income for the second quarter and first six months of 2002 was
significantly improved from the same periods of 2001. Net income contributed by
UBT continues to increase, while losses at UBTW are declining.
Page 12
NET INTEREST INCOME
Net interest income for the first six months of 2002 is 22.8% ahead of the same
period of 2001. During the second quarter of 2002, yields on earning assets
remained virtually flat compared to the first quarter, while the cost of funds
declined slightly. The net result was a slight improvement in the Company's
spread and net interest margin during the quarter. Compared to the first six
months of 2001, the improvement is considerable, and 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 taxable equivalent
basis) or paid, and the annualized effective yield or rate, for the periods
ended June 30, 2002 and 2001.
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
Six months ended June 30,
---------------------------------------------------------------------------
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 $ 12,617 $ 102 1.62% $ 22,378 $ 570 5.09%
Taxable securities 64,407 1,444 4.49% 43,083 1,284 5.96%
Tax exempt securities (b) 34,199 1,127 6.59% 32,186 1,174 7.29%
Taxable loans 392,640 14,177 7.22% 345,079 14,682 8.51%
Tax exempt loans (b) 1,785 68 7.57% 1,924 71 7.37%
--------- --------- --------- ---------
Total int. earning assets (b) 505,648 16,918 6.69% 444,650 17,781 8.00%
Less allowance for loan losses (4,686) (4,195)
Other assets 43,627 39,371
--------- ---------
TOTAL ASSETS $ 544,589 $ 479,826
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 87,178 409 0.94% $ 68,117 849 2.49%
Savings deposits 140,326 1,024 1.46% 84,636 1,142 2.70%
CDs $100,000 and over 30,064 723 4.81% 37,638 1,123 5.97%
Other interest bearing deposits 146,238 2,530 3.46% 175,503 4,785 5.45%
--------- --------- --------- ---------
Total int. bearing deposits 403,806 4,685 2.32% 365,894 7,899 4.32%
Short term borrowings 764 5 1.42% 280 5 3.88%
Other borrowings 23,651 688 5.82% 12,300 422 6.86%
--------- --------- --------- ---------
Total int. bearing liabilities 428,221 5,379 2.51% 378,474 8,326 4.40%
--------- ---------
Noninterest bearing deposits 61,014 50,852
Other liabilities 5,819 4,334
Shareholders' equity 49,535 46,166
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 544,589 $ 479,826
========= =========
Net interest income (b) $ 11,539 $ 9,455
========= =========
Net spread (b) 4.18% 3.60%
======== =======
Net yield on interest earning assets (b) 4.56% 4.25%
======== =======
(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, both interest income and interest
expense declined during the first six months of 2002 as compared to the same
time period in 2001. Net changes as a result of changes in rate were near zero,
while net interest income improved considerably as a result of changes in volume
Page 13
compared to the same period of 2001. The following table shows the effect of
volume and rate changes on net interest income for the six months ended June 30,
2002 and 2001 compared to the same time period in the prior years on a taxable
equivalent basis, in thousands of dollars.
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 $ (183) $ (285) $ (468) $ 570 $ -- $ 570
Taxable securities 531 (371) 160 (127) (34) (161)
Tax exempt securities 71 (117) (46) 13 (19) (6)
Taxable loans 1,878 (2,384) (506) 1,115 (371) 744
Tax exempt loans (5) 2 (3) (7) (3) (10)
------- ------- ------- ------- ------- -------
Total interest income $ 2,292 $(3,155) $ (863) $ 1,564 $ (427) $ 1,137
======= ======= ======= ======= ======= =======
Interest paid on:
NOW accounts $ 192 $ (632) $ (440) $ 135 $ 55 $ 190
Savings deposits 548 (666) (118) 193 153 346
CDs $100,000 and over (204) (196) (400) 89 51 140
Other interest bearing deposits (707) (1,549) (2,256) 538 74 612
Short term borrowings 5 (5) -- (411) (157) (568)
Other borrowings 339 (72) 267 130 4 134
------- ------- ------- ------- ------- -------
Total interest expense $ 173 $(3,120) $(2,947) $ 674 $ 180 $ 854
======= ======= ======= ======= ======= =======
Net change in net interest
income $ 2,119 $ (35) $ 2,084 $ 890 $ (607) $ 283
======= ======= ======= ======= ======= =======
(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 virtually unchanged from the first quarter of 2002,
but is up significantly from the first six months of 2001. While service charges
on deposit accounts are relatively flat, all other categories of noninterest
income are improved from the same six-month period last year. The largest
percentage gains achieved is income from loan sales and servicing.
Service charges on deposit accounts are up 11.6% over the first quarter of 2002,
and are up 2.3% year to date. The Trust & Investment Group of UBT continues to
provide significant contribution to the Company's noninterest income, through
continued growth and expansion. This improvement has been achieved as a result
of continued growth of assets managed, and in spite of declines in the market
value of assets resulting from recent weaknesses in the equity markets. Income
in this category is up 1.6% from the first quarter of 2002, and year to date is
up 7.3% from the same period 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 continues to slow. Income in this category is down
36.7% from the first quarter of 2002, but remains more than $100,000 ahead of
the first six months of 2001. 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 relatively flat compared to the first quarter of
2002, but are ahead of the first six months of 2001 by more than $1 million. 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
Page 14
office of UBT, which opened in May of 2001. These increases are noted in
compensation expense, as well as occupancy and equipment expense.
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 six months of 2002 and 27% for
the same period of 2001.
NET INCOME
Second quarter consolidated net income is up 5.1% from the first quarter of
2002, and is up 37.6% over the first six months 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.
INTERNAL CONTROL
The Company maintains internal controls that contain self-monitoring mechanisms,
and actions are taken to correct deficiencies as they are identified. The Board,
operating through its Audit and Compliance Committee, provides oversight to the
financial reporting process. Even effective internal controls, no matter how
well designed, have inherent limitations, including the possibility of
circumvention or overriding of controls. Accordingly, even effective internal
controls can provide only reasonable assurance with respect to financial
statement preparation. Furthermore, the effectiveness of internal controls may
vary over time.
The Company's Audit and Compliance Committee is composed entirely of Directors
who are not officers or employees of the Company,
Management is not aware of any significant changes in internal controls during
the second quarter of 2002, nor of other factors that could significantly affect
controls subsequent to the date of evaluation. Based on Management's assessment,
the Company believes that, as of June 30, 2002, its internal controls are
adequate and appropriate.
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.
Page 15
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.
The Financial Accounting Standards Board (FASB) recently issued Statement of
Financial Accounting Standards (SFAS) No. 145 and No. 146. SFAS No. 145 applies
for years beginning after May 14, 2002 and may be adopted sooner. SFAS No. 145
covers extinguishments of debt and leases, and includes some minor technical
corrections. Under previous accounting guidance, gains or losses from
extinguishments of debt were always treated as extraordinary items. Under SFAS
No. 145 they will no longer be considered extraordinary, except under very
limited conditions. Upon adoption of SFAS No. 145, any prior gains and losses
from extinguishments of debt must be reclassified as ordinary gains and losses.
Under SFAS No. 145, if a capital lease is modified to become an operating lease,
it will be accounted for as a sale-leaseback, by following the accounting
guidance of SFAS No. 98, instead of being accounted for as a new lease. SFAS
No. 146 covers accounting for costs associated with exit or long-lived asset
disposal activities, such as restructurings, consolidation or closing of
facilities, lease termination costs or employee relocation or severance costs.
SFAS No. 146 replaces Emerging Issues Task Force (EITF) 94-3, and is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002, and may be adopted sooner. A company may not restate its previously
issued financial statements. SFAS No. 146 requires exit or long-lived asset
disposal costs to be recognized as an expense when the liability is incurred and
can be measured at fair value, rather than at the date of making a commitment to
an exit or disposal plan. Management does not expect the effects of the future
adoptions of SFAS No. 145 and SFAS No.146 to be material to the Company's
consolidated financial position or results of operations.
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.
Page 16
Based on the results of the simulation model as of June 30, 2002, the Company
would expect a maximum potential reduction in net interest margin of less than
5% if market rates increased or decreased 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
June 30, 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 June 30, 2002.
Page 17
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on April 16, 2002. At
that meeting, the following matters were submitted to a vote of the
shareholders. There were 2,009,242 voting shares outstanding on April 16, 2002.
The following directors were elected to three-year terms:
For Against Abstain
--------- ------- -------
John H. Foss re-elected 1,596,033 22,114 7,007
Patricia M. Garcia re-elected 1,617,933 214 7,007
David S. Hickman re-elected 1,486,475 131,672 7,007
Directors Butcko, Chapman, Cress, Lawson, Martin, Maxwell, McKenney and Wanke
hold terms which continue after the meeting.
The firm of Crowe, Chizek and Company LLP of Grand Rapids, Michigan was ratified
as independent auditors for the Company and its subsidiaries for the year ending
December 31, 2002. The vote was as follows:
For Against Abstain
--------- ------- -------
Ratification of auditors 1,589,938 193 35,023
No other matters were considered by shareholders at that meeting.
ITEM 5- OTHER INFORMATION
None.
ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits (numbered as in Item 601 of Regulation S-K):
None
(b) The Company has filed no reports on Form 8-K during the quarter ended June
30, 2002.
Page 18
CERTIFICATION OF FINANCIAL RESULTS
We have reviewed this report in our roles of Chief Executive Officer and Chief
Financial Officer of United Bancorp, Inc., and hereby certify that:
- This form 10-Q fully complies with the requirements of Sections 13(a)
or 15(d) of the Securities Exchange Act of 1934 as amended, and
- The information contained in this report fairly presents, in all
material respects, the financial position and results of operations of
United Bancorp, Inc. as of and for the periods presented.
UNITED BANCORP, INC.
August 5, 2002
/S/ David S. Hickman
- --------------------------------------------
David S. Hickman
Chairman and Chief Executive Officer
/S/ Dale L. Chadderdon
- --------------------------------------------
Dale L. Chadderdon
Senior Vice President, Secretary & Treasurer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED BANCORP, INC.
August 5, 2002
/S/ Dale L. Chadderdon
- --------------------------------------------
Dale L. Chadderdon
Senior Vice President, Secretary & Treasurer
Page 19