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, 2004
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Act.
Yes [X] No [ ]
As of April 30, 2004, there were outstanding 2,242,111 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
(a) Condensed Consolidated Balance Sheets 3
(b) Condensed Consolidated Statements of Income 4
(c) Condensed Consolidated Statements of Shareholders' Equity 5
(d) Condensed Consolidated Statements of Cash Flows 6
(e) Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary 9
Financial Condition 10
Liquidity and Capital Resources 13
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibits 22
Page 2
PART I
FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS
(a) CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (unaudited)
March 31, December 31, March 31,
In thousands of dollars 2004 2003 2003
-------- ------------ -----------
ASSETS
Cash and demand balances in other banks $ 19,631 $ 21,425 $ 16,209
Federal funds sold 3,600 - 26,300
-------- -------- --------
Total cash and cash equivalents 23,231 21,425 42,509
Securities available for sale 110,025 108,734 95,254
Loans held for sale 2,286 90 3,670
Portfolio loans 455,146 446,730 415,875
-------- -------- --------
Total loans 457,432 446,820 419,545
Less allowance for loan losses 5,503 5,497 5,159
-------- -------- --------
Net loans 451,929 441,323 414,386
Premises and equipment, net 14,507 14,734 14,133
Goodwill 3,469 3,469 3,469
Accrued interest receivable and other assets 19,405 20,088 9,289
-------- -------- --------
TOTAL ASSETS $622,566 $609,773 $579,040
======== ======== ========
LIABILITIES
Deposits
Noninterest bearing $ 82,773 $ 78,184 $ 69,614
Interest bearing deposits 431,498 424,399 407,105
-------- -------- --------
Total deposits 514,271 502,583 476,719
Federal funds purchased and other short term borrowings 76 8,076 75
Other borrowings 43,375 35,375 41,867
Accrued interest payable and other liabilities 5,512 6,356 5,985
-------- -------- --------
TOTAL LIABILITIES 563,234 552,390 524,646
COMMITMENT AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value;
5,000,000 shares authorized; 2,225,041, 2,114,765 and
2,111,848 shares issued and outstanding 46,609 45,809 39,178
Stock dividend payable 7,321 6,344
Retained earnings 4,621 10,994 7,709
Accumulated other comprehensive income, net of tax 781 580 1,163
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 59,332 57,383 54,394
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $622,566 $609,773 $579,040
======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
(b) CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 31,
----------------------
In thousands of dollars, except per share data 2004 2003
------ ------
INTEREST INCOME
Interest and fees on loans $6,774 $6,993
Interest on securities
Taxable 516 602
Tax exempt 307 314
Interest on federal funds sold 15 54
------ ------
Total interest income 7,612 7,963
INTEREST EXPENSE
Interest on deposits 1,479 1,798
Interest on short term borrowings 2 -
Interest on other borrowings 467 534
------ ------
Total interest expense 1,948 2,332
------ ------
NET INTEREST INCOME 5,664 5,631
Provision for loan losses 262 313
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,402 5,318
NONINTEREST INCOME
Service charges on deposit accounts 643 603
Trust & Investment fee income 889 699
Gains on securities transactions 2 -
Loan sales and servicing 255 841
ATM, debit and credit card fee income 314 342
Sales of nondeposit investment products 182 124
Other income 259 143
------ ------
Total noninterest income 2,544 2,752
NONINTEREST EXPENSE
Salaries and employee benefits 3,413 3,323
Occupancy and equipment expense, net 1,004 958
External data processing 274 310
Advertising and marketing 110 112
Other expense 831 818
------ ------
Total noninterest expense 5,632 5,521
------ ------
INCOME BEFORE FEDERAL INCOME TAX 2,314 2,549
Federal income tax 598 766
------ ------
NET INCOME $1,716 $1,783
====== ======
Basic earnings per share $ 0.73 $ 0.76
Diluted earnings per share 0.72 0.76
Cash dividends declared per share of common stock 0.34 0.31
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
(c) CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
Three Months Ended
March 31,
---------------------------
In thousands of dollars 2004 2003
-------- --------
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of period $ 57,383 $ 53,380
Net Income 1,716 1,783
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale, net 201 (118)
-------- --------
Total comprehensive income 1,917 1,665
Cash dividends declared (760) (699)
Common stock transactions 792 48
-------- --------
Balance at end of period $ 59,332 $ 54,394
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5
(d) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
---------------------------
In thousands of dollars 2004 2003
-------- --------
Cash Flows from Operating Activities
Net income $ 1,716 $ 1,783
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization 518 707
Provision for loan losses 262 313
Gain on sale of loans (204) (945)
Proceeds from sales of loans originated for sale 16,734 56,855
Loans originated for sale (18,930) (51,707)
Gains on securities transactions (2) -
Change in accrued interest receivable and other assets 755 (271)
Change in accrued interest payable and other liabilities (848) (790)
-------- --------
Net cash from operating activities 1 5,945
Cash Flows from Investing Activities
Securities available for sale
Purchases (18,400) (9,773)
Sales 4,343 -
Maturities and calls 11,752 10,203
Principal payments 1,120 1,271
Net change in portfolio loans (8,553) 6,649
Net investment in bank owned life insurance (121) -
Premises and equipment expenditures, net (92) (471)
Investment in limited partnership 32 -
-------- --------
Net cash from investing activities (9,919) 7,879
Cash Flows from Financing Activities
Net change in deposits 11,688 5,169
Net change in short term borrowings (8,000) -
Proceeds from other borrowings 8,000 2,000
Principal payments on other borrowings - (2,000)
Proceeds from common stock transactions 792 48
Dividends paid (756) (951)
-------- --------
Net cash from financing activities 11,724 4,266
-------- --------
Net change in cash and cash equivalents 1,806 18,090
Cash and cash equivalents at beginning of year 21,425 24,419
-------- --------
Cash and cash equivalents at end of period $ 23,231 $ 42,509
======== ========
Supplement Disclosure of Cash Flow Information:
Interest paid $ 1,946 $ 2,423
Income tax paid - -
Loans transferred to other real estate 85 -
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 6
(e) NOTES TO CONDENSED 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. The condensed consolidated balance sheet of the
Company as of December 31, 2003 has been derived from the audited consolidated
balance sheet of the Company as of that date. Operating results for the three
month period ending March 31, 2004 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2004. 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, 2003.
STOCK OPTIONS
In 2000, Shareholders approved the Company's 1999 Stock Option Plan. 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. Such approval is being requested at the Annual
Meeting of Shareholders to be held April 20, 2004.
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
144,426 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, 2004 102,403 $ 43.41
Options granted 23,423 60.00
Options exercised (19,685) 40.55
Options forfeited -
--------
Balance at March 31, 2004 106,141 $ 47.60
========
Options granted under the plan during the current year were 23,423 on January 9,
2004. The weighted fair value of the options granted was $5.46. For stock
options outstanding at March 31, 2004, the range of average exercise prices was
$37.61 to $60.00 and the weighted average remaining contractual term was 8.04
years. At March 31, 2004, 56,145 options were exercisable at the weighted
average exercise price of $41.69.
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, 2004 and 2003.
Page 7
Three Months Ended
In thousands of dollars, except per share data March 31,
---------------------
2004 2003
------- -------
Net income, as reported $ 1,716 $ 1,783
Less: Total stock-based compensation cost,
net of taxes 18 21
------- -------
Pro forma net income $ 1,698 $ 1,762
======= =======
Earnings per share:
Basic As reported $ 0.73 $ 0.76
Basic Pro forma 0.72 0.75
Diluted As reported $ 0.72 $ 0.76
Diluted Pro forma 0.71 0.75
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 $256,909,000 and $209,803,000 at the end of March,
2004 and 2003. The balance of loans serviced for others related to servicing
rights that have been capitalized was $252,981,000 and $203,137,000 at March 31,
2004 and 2003.
Mortgage servicing rights activity in thousands of dollars for the three months
ended March 31, 2004 and 2003 follows:
2004 2003
------- -------
Balance at January 1 $ 1,832 $ 1,352
Amount capitalized year to date 96 360
Amount amortized year to date (106) (231)
------- -------
Balance at period end $ 1,822 $ 1,481
======= =======
No valuation allowance was considered necessary for mortgage servicing rights at
period end 2004 and 2003.
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 2004 and 2003, the Company
declared 5% stock dividends payable in May 2004 and 2003. 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,
------------------------------
2004 2003
---- ----
Net income $ 1,716 $ 1,783
========== ==========
Basic earnings:
Weighted average common shares outstanding 2,344,337 2,331,515
Weighted average contingently issuable shares 21,811 19,222
---------- ----------
Total weighted average shares outstanding 2,366,148 2,350,737
========== ==========
Basic earnings per share $ 0.73 $ 0.76
========== ==========
Page 8
Three Months Ended
March 31,
----------------------------
2004 2003
--------- ---------
Diluted earnings:
Weighted average common shares outstanding
from basic earnings per share 2,366,148 2,350,737
Dilutive effect of stock options 16,666 8,984
--------- ---------
Total weighted average shares outstanding 2,382,814 2,359,721
========= =========
Diluted earnings per share $ 0.72 $ 0.76
========= =========
A small number of shares represented by stock options granted are not included
in the above calculations as they are non-dilutive as of the date of this
report.
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. (the "Company") and its
subsidiary banks, United Bank & Trust ("UBT") and United Bank & Trust -
Washtenaw ("UBTW") for the three month periods ending March 31, 2004 and 2003.
EXECUTIVE SUMMARY
The Company is a financial holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") under the
Bank Holding Company Act. The Company has corporate power to engage in such
activities as permitted to business corporations under the Michigan Business
Corporation Act, subject to the limitations of the Bank Holding Company Act and
regulations of the Federal Reserve System. The Company's subsidiary banks offer
a full range of services to individuals, corporations, fiduciaries and other
institutions. Banking services include checking, NOW accounts, savings, time
deposit accounts, money market deposit accounts, safe deposit facilities and
money transfers. Lending operations provide real estate loans, secured and
unsecured business and personal loans, consumer installment loans, and
check-credit loans, home equity loans, accounts receivable and inventory
financing, equipment lease financing and construction financing.
While unemployment in Michigan in recent months is generally higher than in many
areas of the U.S., the markets served by the Banks are only marginally impacted.
In particular, the Ann Arbor market has much lower unemployment levels than does
the rest of the State. While recent downturns in the economy have impacted some
small companies, in general the Banks have not felt the impact of this decline.
In addition, in part through the addition of its Ann Arbor subsidiary in 2001,
the Company continues to gain market share in its market areas.
The Company's Banks offer the sale of nondeposit investment products through
licensed representatives in their banking offices, and sell credit and life
insurance products. In addition, the Company and/or the Banks are co-owners of
Michigan Banker's Title Insurance Company of Mid-Michigan LLC and Michigan
Bankers Insurance Center, LLC, and derive income from the sale of various
insurance products to banking clients. UBT operates a trust department, and
provides trust services to UBTW on a contract basis. The Trust & Investment
Group offers a wide variety of fiduciary services to individuals, corporations
and governmental entities, including services as trustee for personal,
corporate, pension, profit sharing and other employee benefit trusts. The
department provides securities custody services as an agent, acts as the
personal representative for estates and as a fiscal, paying and escrow agent for
corporate customers and governmental entities, and provides trust services for
clients of the Banks. These products help to diversify the Company's sources of
income.
Page 9
Net income for the first quarter of 2004 was $1,715,815, representing the
Company's second best first quarter ever, at 3.7% below the first quarter of
2003. Steady asset growth continued, as total assets reached $622.5 million, an
increase of $43.1 million, or 7.4%, in the trailing 12 months. During the most
recent quarter, the Company's loan portfolio increased by $10.6 million,
deposits increased by $11.7 million, and assets under management by the Trust &
Investment Group of United Bank & Trust grew by $29.8 million.
In the fourth quarter of 2003, Management reported that the residential real
estate mortgage refinance boom had ended late in the third quarter. Mortgage
production at the subsidiary banks fell considerably in the fourth quarter of
2003, and that decline continued in the first quarter of 2004. As a result,
income from loan sales and servicing in the current quarter was $587,000 less
than the prior year. At the same time, Trust & Investment fee income improved by
$190.000, or 27.2%, from the first quarter of a year ago. This strong
performance, plus increases in other fee income categories, helped to offset a
portion of the decline in loan sales and servicing income.
While net interest income continues to be steady and expenses have not increased
significantly, the change in noninterest income has had the largest impact on
net income. The chart below shows the trends in the major components of earnings
for the four quarters of 2003, compared to the first quarter of 2004.
2004 2003
------- ----------------------------------------------------------
in thousands of dollars, where appropriate 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
------- ------- ------- ------- -------
Net interest income before provision $5,664 $5,579 $5,565 $5,553 $5,631
Provision for loan losses 262 212 248 296 313
Noninterest income 2,544 2,740 3,419 2,911 2,752
Noninterest expense 5,632 5,606 5,830 5,712 5,521
Federal income tax provision 598 664 840 754 766
Net income $1,716 $1,837 $2,066 $1,702 $1,783
Return on average assets (a) 1.12% 1.22% 1.37% 1.17% 1.25%
Return on average shareholders' equity (a) 11.71% 12.78% 14.61% 12.40% 13.35%
(a) annualized
FINANCIAL CONDITION
Securities
Balances in the Company's investment securities portfolio increased somewhat
during the first quarter of 2004, reflecting continued growth of the Company.
This increase in the portfolio was primarily in mortgage-backed agency bonds,
while holdings of municipal obligations and corporate and other securities
declined. This shift reflects the purchase of mortgage-backed securities during
the quarter to replace maturing and called investments within the municipal
portfolios of the banks.
3/31/2004 12/31/2003 3/31/2003
--------- ---------- ---------
U.S. Treasury and agency securities 37.9% 37.5% 37.2%
Mortgage backed agency securities 26.4% 17.0% 12.8%
Obligations of states and political subdivisions 30.7% 39.1% 35.8%
Corporate, asset backed, and other securities 5.0% 6.5% 14.2%
----- ----- -----
Total Securities 100.0% 100.0% 100.0%
===== ===== =====
The Company's current and projected tax position continues to make carrying
tax-exempt securities
Page 10
beneficial, 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 less than 5% of that portfolio is issued by political
subdivisions located within Lenawee County, Michigan. The Company's portfolio
contains no "high risk" mortgage securities or structured notes.
LOANS
Loan balances increased by more than $10 million in the first quarter of 2004,
in spite of continued refinancing in the Company's residential mortgage
portfolios into products that are sold on the secondary market. Personal loan
balances were relatively unchanged, while business loans, commercial mortgages
and construction loans provided substantial growth during the quarter.
The mix of the loan portfolio continues a long-term trend toward an increased
percentage of business loans, with declining percentages of residential mortgage
loans and personal loans. The table below shows total loans outstanding, in
thousands of dollars and their percentage of the total loan portfolio. All loans
are domestic and contain no significant concentrations by industry or client.
March 31, 2004 December 31, 2003 March 31, 2003
--------------------------- --------------------------- ---------------------------
Balance % of total Balance % of total Balance % of total
-------- ---------- -------- ---------- -------- ----------
Total loans:
Personal $ 69,341 15.2% $ 70,301 15.7% $ 68,311 16.3%
Business loans and
commercial mortgages 265,267 58.0% 256,778 57.5% 218,508 52.1%
Tax exempt 1,424 0.3% 1,476 0.3% 1,279 0.3%
Residential mortgage 73,656 16.1% 85,156 19.1% 96,769 23.0%
Construction 47,744 10.4% 33,109 7.4% 34,678 8.3%
-------- ------ -------- ------- -------- --------
Total loans $457,432 100.0% $446,820 100.00% $419,545 100.0%
======== ====== ======== ======= ======== ========
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, although a significant portion of the Company's
production of residential real estate mortgages is sold in the secondary
markets.
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.
Page 11
The chart below shows the aggregate amount of the Company's nonperforming assets
by type, in thousands of dollars.
3/31/2004 12/31/2003 3/31/2003
--------- ---------- ---------
Nonaccrual loans $3,524 $3,635 $3,302
Loans past due 90 days or more 1,320 761 353
Troubled debt restructurings - - -
------ ------ ------
Total nonperforming loans 4,844 4,396 3,655
Other real estate 541 593 467
------ ------ ------
Total nonperforming assets $5,385 $4,989 $4,122
====== ====== ======
Percent of nonperforming loans to total loans 1.06% 0.98% 0.87%
Percent of nonperforming assets to total assets 0.86% 0.82% 0.71%
The Company's classification of nonperforming loans is generally consistent with
loans identified as impaired. The Company's total nonperforming assets increased
from the end of 2003, with substantially all of the increase in loans past due
ninety days or more. Nonaccrual loans declined slightly, as did balances in
other real estate. The amount listed in the table above as other real estate
reflects a small number of properties that were acquired in lieu of foreclosure.
Properties have been leased to a third party with an option to purchase or are
listed for sale, and no significant losses are anticipated.
The Company's allowance for loan losses remains at a level consistent with its
estimated losses. The allowance provides for currently estimated losses inherent
in the portfolio. An analysis of the allowance for loan losses, in thousands of
dollars, for the three months ended March 31, 2004 and 2003 follows:
2004 2003
------- -------
Balance at January 1: $ 5,497 $ 4,975
Loans charged off (274) (148)
Recoveries credited to allowance 18 19
Provision charged to operations 262 313
------- -------
March 31 $ 5,503 $ 5,159
======= =======
The Company has reduced its provision for loan losses over the same period in
2003. 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,
2004 and 2003, and December 31, 2003.
3/31/2004 12/31/2003 3/31/2003
--------- ---------- ---------
Business and commercial mortgage $4,752 $4,775 $4,591
Tax exempt - - -
Residential mortgage 43 37 14
Personal 706 685 554
Construction - - -
Unallocated 2 - -
------ ------ ------
Total $5,503 $5,497 $5,159
====== ====== ======
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 26.5% of the portfolio at March 31, 2004, and are
well-secured and have had historically low levels of net losses. While that
ratio is down from the same period of 2003, it is consistent with the year-end
2003 figures. Personal and business loans make up the balance of the portfolio.
Page 12
The personal loan portfolio consists of direct and indirect installment, credit
cards, 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 in Michigan.
DEPOSITS
Deposit growth continued during the first quarter of 2004, as total deposits
increased at an annualized rate of 9.3%. Growth over the past twelve months has
been 7.9%. Products such as money market deposit accounts, Cash Management
Checking and Cash Management Accounts continue to be very popular with clients,
aiding in continued deposit growth. At the same time, demand deposit balances
continue their steady growth. Although clients continue to evaluate alternatives
to certificates of deposit in search of the best yields on their funds,
traditional banking products continue to be an important part of the Company's
product line.
As in the past, the majority of the Company's deposits are derived from core
client sources, relating to long term relationships with local personal,
business and public 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. The chart below shows the
percentage makeup of the deposit portfolio as of March 31, 2004 and 2003.
2004 2003
------ ------
Noninterest bearing deposits 16.1% 14.6%
Interest bearing deposits 83.9% 85.4%
----- -----
Total deposits 100.0% 100.0%
===== =====
LIQUIDITY, CASH EQUIVALENTS AND BORROWED FUNDS
The Company maintains correspondent accounts with a number of other banks for
various purposes. In addition, cash sufficient to meet the operating needs of
its banking offices is maintained at its lowest practical levels. At times, the
Banks are 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
Banks also have the ability to utilize short term advances from the Federal Home
Loan Bank ("FHLB") and borrowings at the discount window of the Federal Reserve
Bank as additional short-term funding sources. Federal funds were used during
2003 and 2004. Short term advances and discount window borrowings were not
utilized during either year.
The Company periodically finds it advantageous to utilize longer term borrowings
from the Federal Home Loan Bank of Indianapolis. These long-term borrowings
served to provide a balance to some of the interest rate risk inherent in the
Company's balance sheet.
Page 13
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, 2004 and 2003, and December 31, 2003.
Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc.
--------------------- ---------------------------------------
Adequate Well 3/31/2004 12/31/2003 3/31/2003
-------- ---- --------- ---------- ---------
Tier 1 capital to average assets 4% 5% 9.0% 9.1% 8.7%
Tier 1 capital to risk weighted assets 4% 6% 11.9% 11.7% 11.8%
Total capital to risk weighted assets 8% 10% 13.1% 12.8% 13.0%
Total shareholders' equity $ 59,332 $ 57,383 $ 54,394
Intangible assets (3,469) (3,469) (3,469)
Disallowed servicing assets (183) (183) (148)
Unrealized (gain) loss on securities
available for sale (781) (580) (1,163)
--------- --------- ---------
Tier 1 capital 54,899 53,151 49,614
Allowable loan loss reserves 5,482 5,440 5,032
--------- --------- ---------
Tier 2 capital $ 60,381 $ 58,591 $ 54,646
========= ========= =========
RESULTS OF OPERATIONS
Consolidated net income for the first quarter of 2004 was down from the past two
quarters, and represents the Company's second-best first quarter in its history.
The following discussion provides an analysis of these changes.
NET INTEREST INCOME
Net interest income exceeded the prior four quarters, in spite of historically
low market rates and refinancing of residential real estate mortgages from the
portfolios of the Banks. During the quarter, the Company's yield on earning
assets was substantially unchanged from the full-year 2003 yields, but was down
27 basis points from the yields of the first quarter of 2003. At the same time,
the Company's cost of funds declined from first-quarter and full-year 2003
levels, resulting in improved tax equivalent spread. This improvement was
derived both from reduced deposit interest cost and lower cost of other borrowed
funds. The following table shows the year to date daily average consolidated
balance sheets, interest earned (on a taxable equivalent basis) or paid, and the
annualized effective yield or rate, for the periods ended March 31, 2004 and
2003.
Page 14
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
Three Months Ended March 31,
------------------------------------------------------------------------------
2004 2003
--------- ----------
Average Interest Yield/ Average Interest Yield/
dollars in thousands Balance (b) Rate (c) Balance (b) Rate (c)
- -------------------- --------- ------- ------- ---------- -------- --------
ASSETS
Interest earning assets (a)
Federal funds sold $ 6,248 $ 15 0.96% $ 18,130 $ 54 1.19%
Taxable securities 70,525 516 2.93% 62,816 602 3.83%
Tax exempt securities (b) 31,906 459 5.75% 30,359 469 6.18%
Taxable loans 449,340 6,759 6.02% 424,966 6,976 6.57%
Tax exempt loans (b) 1,434 23 6.36% 1,362 25 7.23%
--------- ------- ---------- --------
Total int. earning assets (b) 559,453 7,771 5.56% 537,633 8,126 6.05%
Less allowance for loan losses (5,548) (5,055)
Other assets 59,464 44,560
--------- ----------
TOTAL ASSETS $ 613,369 $ 577,138
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 114,399 134 0.47% $ 98,147 184 0.75%
Savings deposits 174,005 359 0.82% 154,860 421 1.09%
CDs $100,000 and over 32,981 254 3.08% 27,362 286 4.19%
Other interest bearing deposits 107,139 733 2.74% 126,453 907 2.87%
--------- ------- ---------- --------
Total int. bearing deposits 428,524 1,479 1.38% 406,822 1,798 1.77%
Short term borrowings 804 2 0.96% 75 0 0.50%
Other borrowings 40,487 467 4.61% 41,736 534 5.12%
--------- ------- ---------- --------
Total int. bearing liabilities 469,815 1,948 1.66% 448,633 2,332 2.08%
------- --------
Noninterest bearing deposits 79,953 67,739
Other liabilities 4,880 6,610
Shareholders' equity 58,721 54,156
--------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 613,369 $ 577,138
========= ==========
Net interest income (b) 5,823 5,794
------- --------
Net spread (b) 3.90% 3.97%
===== ====
Net yield on interest earning
assets (b) 4.16% 4.31%
===== ====
Tax equivalent adjustment on
interest income (159) (163)
------- --------
Net interest income per income
statement $ 5,664 $ 5,631
======= ========
Ratio of interest earning assets to
interest bearing liabilities 1.19 1.20
========= ==========
(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
Page 15
As noted from the data in the following table, interest income and interest
expense declined during the first quarter of 2004 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 2003. The following table shows the effect
of volume and rate changes on net interest income for the three months ended
March 31, 2004 and 2003 on a taxable equivalent basis, in thousands of dollars.
2004 Compared to 2003 2003 Compared to 2002
--------------------------------------- ---------------------------------------
Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a)
--------------------------------------- ---------------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Interest earned on:
Federal funds sold $ (30) $ (9) $ (39) $ 4 $ (18) $ (14)
Taxable securities 68 (154) (86) 27 (127) (100)
Tax exempt securities 23 (33) (10) (99) (23) (122)
Taxable loans 386 (604) (218) 750 (700) 50
Tax exempt loans 1 (3) (2) (9) (2) (11)
----- ----- ----- ----- ----- -----
Total interest income $ 448 $(803) $(355) $ 673 $(870) $(197)
===== ===== ===== ===== ===== =====
Interest paid on:
NOW accounts $ 27 $ (77) $ (50) $ 26 $ (40) $ (14)
Savings deposits 48 (110) (62) 64 (146) (82)
CDs $100,000 and over 52 (84) (32) (34) (53) (87)
Other interest bearing deposits (133) (41) (174) (212) (213) (425)
Short term borrowings 2 - 2 (2) (2) (4)
Other borrowings (16) (51) (67) 321 (49) 272
----- ----- ----- ----- ----- -----
Total interest expense $ (20) $(363) $(383) $ 163 $(503) $(340)
===== ===== ===== ===== ===== =====
Net change in net interest
income $ 468 $(440) $ 28 $ 510 $(367) $ 143
===== ===== ===== ===== ===== =====
(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 declined from prior quarters, reaching its lowest level
in several quarters. While income from loan sales and servicing is down
significantly from the same period in 2003, improvements in several other
noninterest categories have improved, resulting in a reduction in total
noninterest income of 7.6% year to date.
Service charges on deposit accounts are up 6.7% over the first quarter of 2003.
No significant changes were made in the Company's service charge structure
during the quarter, and the increase reflects continued growth of the Company's
deposit base. The Trust & Investment Group of UBT continues to provide
significant contribution to the Company's noninterest income, through continued
growth and expansion. Growth of assets managed has improved Trust & Investment
income by 27.1% over the same quarter of 2003. In addition, income from sales of
nondeposit investment products, while not a large figure, is up 46.8% from the
first quarter last year.
The Banks generally market their production of fixed rate long-term mortgages in
the secondary market, and retain adjustable rate mortgages for their portfolios.
The Company maintains a portfolio of sold residential real estate mortgages,
which it continues to service. This servicing provides ongoing income for the
life of the loans. During 2004 and 2003, clients continued to exhibit a
preference for fixed rate loans as market rates declined, resulting in a greater
proportion of those loans originated by the Banks being sold in the secondary
market. However, the volume of residential mortgage lending has slowed from the
levels achieved in the first quarter of 2003, resulting in a reduction in income
from loan sales and servicing of 69.7% from last year at this time. As the
Company is conservative in its approach to valuation of mortgage servicing
rights, no write-downs in mortgage
Page 16
servicing rights were required in 2004 or 2003 as a result of declining market
rates.
NONINTEREST EXPENSES
Total noninterest expenses were relatively unchanged from the fourth quarter of
2003, but were up 2.0% from the first quarter of last year. The increases are
primarily in compensation expense, which has increased 2.7% over the first
quarter of 2003, and other expense categories are not significantly different
that in 2003. Growth in expense reflects the ongoing expansion of the Banks
within their markets.
FEDERAL INCOME TAX
The Company has improved its effective tax rate from 2003 to 2004, as a result
of various tax strategies, including the purchase of bank-owned life insurance
during 2003. The effective tax rate was 25.8% for the first quarter of 2004,
compared to 30.1% for the same period of 2003.
NET INCOME
While net income was down from recent quarters, Management anticipates that
earnings will remain strong for the remainder of the year, but with continued
decline in the amount of income attributed to gains on the sale of loans in the
secondary market. At the same time, it is anticipated that other categories of
income will improve from year to date levels, and management is optimistic that
earnings for the year will be at or above the levels achieved in 2003.
CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require management to
apply significant judgments to various accounting, reporting and disclosure
matters. The Company's Management must use assumptions and estimates to apply
these principles where actual measurement is not possible or practical. For a
complete discussion of the Company's significant accounting policies, see "Notes
to the Consolidated Financial Statements" in United Bancorp, Inc.'s 2003 Annual
Report on pages A-24 to A-27. Certain policies are considered critical because
they are highly dependent upon subjective or complex judgments, assumptions and
estimates. Changes in such estimates may have a significant impact on the
financial statements. Management has reviewed the application of these policies
with the Audit Committee of the Company's Board of Directors. For a discussion
of applying critical accounting policies, see Critical Accounting Policies" on
pages A-16 and A17 in United Bancorp, Inc.'s 2003 Annual Report.
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;
Page 17
trends in customer behavior and customer ability to repay loans; software
failure, errors or miscalculations; and the vicissitudes of the national
economy. The Company undertakes no obligation to update, amend or clarify
forward-looking statements, whether as a result of new information, future
events, or otherwise.
ITEM 3- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FUNDS MANAGEMENT AND INTEREST RATE RISK
The composition of the Company's balance sheet consists of investments in
interest earning assets (loans and investment securities) that are funded by
interest bearing liabilities (deposits and borrowings). These financial
instruments have varying levels of sensitivity to changes in market interest
rates resulting in market risk. Policies place strong emphasis on stabilizing
net interest margin, with the goal of providing a sustained level of
satisfactory earnings. The Funds Management, Investment and Loan policies
provide direction for the flow of funds necessary to supply the needs of
depositors and borrowers. Management of interest sensitive assets and
liabilities is also necessary to reduce interest rate risk during times of
fluctuating interest rates.
A number of measures are used to monitor and manage interest rate risk,
including interest sensitivity and income simulation analyses. An interest
sensitivity model is the primary tool used to assess this risk with supplemental
information supplied by an income simulation model. The simulation model is used
to estimate the effect that specific interest rate changes would have on twelve
months of pretax net interest income assuming an immediate and sustained up or
down parallel change in interest rates of 200 basis points. Key assumptions in
the models include prepayment speeds on mortgage related assets; cash flows and
maturities of financial instruments held for purposes other than trading;
changes in market conditions, loan volumes and pricing; and management's
determination of core deposit sensitivity. These assumptions are inherently
uncertain and, as a result, the models cannot precisely estimate net interest
income or precisely predict the impact of higher or lower interest rates on net
interest income. Actual results will differ from simulated results due to
timing, magnitude, and frequency of interest rate changes and changes in market
conditions.
Based on the results of the simulation model as of March 31, 2004, the Company
would expect a maximum potential reduction in net interest margin of less than
12% if market rates increased under an immediate and sustained parallel shift of
200 basis points. The Company's interest sensitivity position continues to be
asset- sensitive, continuing a trend evident throughout 2003. The Company
anticipates that interest rates will rise, and has positioned its balance sheet
to take advantage of this expected increase in rates. As a result, current net
interest income has been lowered in order to improve net interest margin in the
future.
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 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.
Page 18
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.
ITEM 4- CONTROLS AND PROCEDURES
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.
As of the end of the quarter ended March 31, 2004, an evaluation was carried out
under the supervision and with the participation of United Bancorp's management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).
Based on their evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that United Bancorp's disclosure controls and procedures
as of the end of the quarter ended March 31, 2004 are, to the best of their
knowledge, effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. There have been no changes
in the Company's internal controls over financial reporting identified in
connection with the evaluation that occurred during the quarter ended March 31,
2004 that has materially affected, or is likely to materially affect, the
Company's internal control over financial reporting.
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 AND ISSUER PURCHASES
OF EQUITY SECURITIES
No changes in the securities of the Company occurred during the quarter ended
March 31, 2004. The Company did not repurchase any of its securities during the
quarter ended March 31, 2004.
Page 19
ITEM 3- DEFAULTS UPON SENIOR SECURITIES
There have been no defaults upon senior securities relevant to the requirements
of this section during the quarter ended March 31, 2004.
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, 2004.
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):
Exhibit 31.1 Certification of principal executive officer pursuant to
Rule 13a - 14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 31.2 Certification of principal financial officer pursuant to
Rule 13a - 14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K filed during the quarter ended March 31, 2004.
Report on Form 8-K filed March 5, furnishing in Items 7, 9 and 12 thereof,
information on quarterly earnings and cash dividends declared from April
22, 2003 through January 14, 2004.
Report on Form 8-K filed March 15, furnishing in Items 7, 9 and 12
thereof, information regarding the declaration of cash and stock dividends
Page 20
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 7, 2004
/S/ David S. Hickman
- -------------------------------------------------
David S. Hickman
Chairman and Chief Executive Officer
(Principal Executive Officer)
/S/ Dale L. Chadderdon
- -------------------------------------------------
Dale L. Chadderdon
Senior Vice President, Secretary & Treasurer
(Principal Financial Officer)
Page 21
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-31.1 Certification of Chief Executive Officer pursuant to Section 302
EX-31.2 Certification of Chief Financial Officer pursuant to Section 302
EX-32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2202