1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
10-Q/A
/x/ Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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 October 15, 1998, there were outstanding 1,728,490 shares of the
registrant's common stock, no par value.
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CROSS REFERENCE TABLE
ITEM NO. DESCRIPTION PAGE NO.
- ----------------------------------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Condensed)
(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 Financial Statements 7
Item 2. Management's Discussion and Analysis
Financial Condition 8
Liquidity 10
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
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PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
(A) CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
September 30, December 31, September 30,
In thousands of dollars 1998 1997 1997
=======================================================================================================================
ASSETS
Cash and demand balances in other banks $ 11,616 $ 10,406 $ 10,477
Federal funds sold 7,100 - -
- ----------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 18,716 10,406 10,477
Securities available for sale 51,335 42,488 48,107
Securities held to maturity (fair value of
$38,669, $38,287 and $35,269, respectively) 37,415 37,164 34,237
- ----------------------------------------------------------------------------------------------------------------------
Total securities 88,750 79,652 82,344
Loans held for sale 227 141 77
Portfolio loans 259,838 265,117 253,998
- ----------------------------------------------------------------------------------------------------------------------
Total loans 260,065 265,258 254,075
Less: allowance for loan losses 2,716 2,467 2,270
- ----------------------------------------------------------------------------------------------------------------------
Net loans 257,349 262,791 251,805
Premises and equipment, net 11,148 10,933 9,584
Accrued interest receivable and other assets 7,111 6,489 5,662
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 383,074 $ 370,271 $ 359,872
======================================================================================================================
LIABILITIES
Deposits
Noninterest bearing $ 37,452 $ 31,924 $ 30,866
Interest bearing certificates of deposit of $100,000 or more 32,211 38,714 41,565
Other interest bearing deposits 260,581 246,197 233,730
- ----------------------------------------------------------------------------------------------------------------------
Total deposits 330,244 316,835 306,161
Federal funds and other short term borrowings 667 4,942 5,833
Other borrowings 10,900 10,000 10,000
Accrued interest payable and other liabilities 3,089 3,028 3,239
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 344,900 334,805 325,233
SHAREHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized;
1,728,490, 1,646,030 and 1,644,008 shares issued and
outstanding, respectively 19,725 16,366 16,279
Retained earnings 17,929 18,867 18,121
Accumulated other comprehensive income 520 233 239
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 38,174 35,466 34,639
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 383,074 $ 370,271 $ 359,872
======================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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(B) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
In thousands of dollars, except per share data 1998 1997 1998 1997
======================================================================================================================
INTEREST INCOME
Interest and fees on loans
Taxable $ 5,818 $ 5,731 $ 17,510 $ 16,615
Tax exempt 19 20 57 49
Interest on securities
Taxable 831 801 2,344 2,394
Tax exempt 471 436 1,416 1,280
Interest on federal funds sold 111 26 360 213
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 7,250 7,014 21,687 20,551
INTEREST EXPENSE
Interest on certificates of deposit of $100,000 or more 472 611 1,537 1,826
Interest on other deposits 2,618 2,436 7,834 7,163
Interest on short term borrowings 8 12 28 68
Interest on other borrowings 168 177 484 563
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 3,266 3,236 9,883 9,620
- ----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 3,984 3,778 11,804 10,931
Provision for loan losses 275 230 824 600
- ----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,709 3,548 10,980 10,331
NONINTEREST INCOME
Service charges on deposit accounts 429 432 1,234 1,095
Trust & Investment fee income 417 379 1,198 907
Gains on securities transactions 45 - 54 1
Loan sales and servicing 212 134 758 407
Sales of nondeposit investment products 75 89 344 241
Other income 130 97 412 317
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,308 1,131 4,000 2,968
NONINTEREST EXPENSE
Salaries and employee benefits 1,820 1,473 5,310 4,405
Occupancy and equipment expense 629 567 1,827 1,592
Other expense 864 777 2,807 2,328
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,313 2,817 9,944 8,325
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAX 1,704 1,862 5,036 4,974
Federal income tax 443 512 1,305 1,332
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,261 $ 1,350 $ 3,731 $ 3,642
======================================================================================================================
Basic and diluted earnings per share $ 0.73 $ 0.78 $ 2.15 $ 2.11
Cash dividends declared per share of common stock 0.28 0.25 0.79 0.69
The accompanying notes are an integral part of these consolidated financial
statements.
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(C) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Retained Comprehensive
In thousands of dollars, except per share data Stock Earnings Income Total
======================================================================================================================
Balance, December 31, 1996 $ 13,500 $ 18,419 $ 129 $ 32,048
Net Income 3,642 3,642
Unrealized gains on securities, net of tax 110 110
-------------
Comprehensive income 3,752
Cash dividends declared (1,199) (1,199)
5% stock dividend declared, 78,292 shares at $35 2,740 (2,740) -
Common stock and contingently issuable stock 39 (1) 38
- ----------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 $ 16,279 $ 18,121 $ 239 $ 34,639
======================================================================================================================
Balance, December 31, 1997 $ 16,366 $ 18,867 $ 233 $ 35,466
Net Income 3,731 3,731
Unrealized gains on securities, net of tax 287 287
-------------
Comprehensive income 4,018
Cash dividends declared (1,362) (1,362)
5% stock dividend declared, 82,298 shares at $40 3,292 (3,292) -
Common stock and contingently issuable stock 67 (15) 52
- ----------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $ 19,725 $ 17,929 $ 520 $ 38,174
======================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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(D) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------
In thousands of dollars 1998 1997
======================================================================================================================
Cash Flows from Operating Activities
- ------------------------------------
Net Income $ 3,731 $ 3,642
- ----------------------------------------------------------------------------------------------------------------------
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
- -------------------------------------------------------------------------
Depreciation and amortization 1,175 1,047
Provision for loan losses 824 600
Loans originated for sale (43,116) (17,464)
Proceeds from sales of loans originated for sale 43,030 16,742
Change in accrued interest receivable and other assets (869) (730)
Change in accrued interest payable and other liabilities 53 356
- ----------------------------------------------------------------------------------------------------------------------
Total adjustments 1,097 551
- ----------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 4,828 4,193
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
- ------------------------------------
Securities available for sale
Purchases (18,941) (9,309)
Sales 3,035 50
Maturities and calls 2,809 1,943
Principal payments 4,690 4,340
Securities held to maturity
Purchases (13,590) (8,851)
Maturities and calls 13,382 7,921
Change in portfolio loans 4,704 (12,150)
Premises and equipment expenditures, net (1,191) (1,651)
- ----------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (5,102) (17,707)
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
- ------------------------------------
Net change in deposits 13,409 8,458
Net change in short term borrowings (4,275) 5,224
Proceeds from other borrowings 3,900 -
Principal payments on other borrowings (3,000) (10,000)
Proceeds from stock transactions 52 38
Dividends paid (1,502) (1,381)
- ----------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 8,584 2,339
- ----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 8,310 (11,175)
Cash and cash equivalents at beginning of year 10,406 21,652
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 18,716 $ 10,477
======================================================================================================================
Cash Paid During the Period for
- -------------------------------
Interest $ 10,137 $ 9,522
Income taxes 1,400 1,253
======================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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(E) NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of United Bancorp,
Inc. (the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the nine month
period ending September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. 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, 1997.
NOTE 2 - LOANS HELD FOR SALE
Mortgage loans serviced for others are not included
in the accompanying consolidated statements. The unpaid principal balances of
mortgage loans serviced for others was $115,112,000 and $94,409,000 at the end
of September 1998 and 1997. The balance of loans serviced for others related to
servicing rights that have been capitalized was $76,622,000 and $39,626,000 at
September 30, 1998 and 1997.
Mortgage servicing rights activity in thousands of dollars for the period ended
September 30, 1998 and 1997 follows:
Nine Months Ended September 30,
Unamortized cost of mortgage servicing rights 1998 1997
--------------------------------------------- ---- ----
Balance at January 1 $ 340 $ 185
Amount capitalized year to date 314 127
Amount amortized year to date (97) (22)
------------- ------------
Balance at period end $ 557 $ 290
No valuation allowance was considered necessary for mortgage servicing rights at
period end 1998 and 1997.
NOTE 3 - COMMON STOCK AND EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of shares
outstanding plus contigently issuable shares during the year. On May 29, 1998
and May 30, 1997 the Company issued 5% stock dividends. Earnings per share,
dividends per share and weighted average shares have been restated to reflect
the stock dividends. The weighted average number of shares outstanding plus
contingently issuable shares was 1,732,433 for 1998 and 1,728,620 for 1997.
NOTE 4 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Financial Accounting Standard No.
130, "Reporting Comprehensive Income." Under the standard, comprehensive income
is now reported for all periods and encompasses both net income and other
comprehensive income. Other comprehensive income in thousands of dollars for the
period ended September 30, follows:
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Nine Months Ended September 30,
Other comprehensive income 1998 1997
-------------------------- ---- ----
Unrealized gains on securities arising during period $ 481 $ 167
Reclassification for realized amount included in income (46) -
------------- ------------
Other comprehensive income, before tax 435 167
Federal income tax expense 148 57
------------- ------------
Other comprehensive income $ 287 $ 110
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 subsidiary, United
Bank & Trust ("Bank") for the three and nine month periods ending September 30,
1998.
FINANCIAL CONDITION
SECURITIES
Maturities in the investment portfolio, as well as unfavorable market conditions
for reinvestment during the quarter resulted in a slight decline in balances of
securities, although balances continue to exceed 1997 levels. This is a result
of recent trends of continued deposit growth that exceeds loan demand. The mix
of the portfolio remained relatively unchanged from prior periods.
The table below shows total securities outstanding, in thousands of dollars, at
September 30, and December 31, and their percentage of the total securities
portfolio. Securities Held to Maturity consist primarily of municipal
investments.
September 30, 1998 December 31, 1997
------------------------- -------------------------
Securities Available for Sale: Balance % of total Balance % of total
------- ---------- ------- ----------
U.S. Government Securities $ 41,898 47.2% $ 38,015 47.7%
Asset Backed Corporate & Other Securities 8,648 9.7% 4,120 5.2%
Unrecognized Gain (Loss) on Securities 789 0.9% 353 0.4%
--------------------------- -------------------------
Net Securities Available for Sale 51,335 57.8% 42,488 53.3%
Securities Held to Maturity 37,415 42.2% 37,164 46.7%
--------------------------- -------------------------
Total Securities $ 88,750 100.0% $ 79,652 100.0%
LOANS
Loan volume flattened during the quarter, reversing the declining trend noted
during the first two quarters. Personal loans continued to decline, but demand
for business loans strengthened. In addition, balances in residential mortgages
remained flat in spite of significant loan activity, as current low market rates
have resulted in many owners of adjustable rate mortgages seeking to refinance
into long term fixed rate loans. Since the bank does not retain these loans on
its books but sells them on the secondary market, the result is a decline in
loans carried on the portfolio. The offset is increased income from the sale and
servicing of these sold loans.
The mix of the loan portfolio reflects this shift toward more commercial and
fewer personal loans. Over the long term, the trend is toward an increased
percentage of business loans, with slight declines in personal loans, while the
percent of residential mortgages remains constant. The table below shows total
loans outstanding, in thousands of dollars, at September 30, and December 31,
and their
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percentage of the total loan portfolio. All loans are domestic and contain no
concentrations by industry or customer.
September 30, 1998 December 31, 1997 September 30, 1997
----------------------- ------------------------- ------------------------
Portfolio loans: Balance % of total Balance % of total Balance % of total
------- ---------- ------- ---------- ------- ----------
Personal $ 62,476 24.0% $ 70,308 26.5% $ 72,001 28.3%
Business/commercial mtgs 80,127 30.8% 74,080 27.9% 70,010 27.6%
Tax exempt 1,437 0.6% 1,482 0.6% 1,536 0.6%
Residential mortgage 102,757 39.5% 104,800 39.5% 97,342 38.3%
Construction 13,268 5.1% 14,588 5.5% 13,186 5.2%
------------------------- ------------------------- ------------------------
Total loans $ 260,065 100.0% $ 265,258 100.0% $ 254,075 100.0%
CREDIT QUALITY
The Company continues to maintain a high level of asset quality compared to
peers, as a result of actively monitoring delinquencies, nonperforming assets
and potential problem loans. In addition, the Bank uses an independent loan
review firm to assess the continued quality of its business loan portfolio.
Nonperforming loans are comprised of (1) loans accounted for on a nonaccrual
basis; (2) loans contractually past due 90 days or more as to interest or
principal payments (but not included in the nonaccrual loans in (1) above); and
(3) other loans whose terms have been renegotiated to provide a reduction or
deferral of interest or principal because of a deterioration in the financial
position of the borrower (exclusive of loans in (1) or (2) above). The aggregate
amount of nonperforming loans, in thousands of dollars, is shown in the table
below. The Company's classification of nonperforming loans are generally
consistent with loans identified as impaired.
9/30/98 12/31/97 9/30/97
------- -------- -------
Nonaccrual loans $ 543 $ 71 $ 74
Loans past due 90 days or more 275 910 727
Troubled debt restructurings 137 138 -
------------------------- ------------
Total nonperforming loans $ 955 $ 1,119 $ 801
Other real estate 335 473 385
------------------------- ------------
Total nonperforming assets $ 1,290 $ 1,592 $ 1,186
Percent of total loans 0.50% 0.61% 0.47%
Nonperforming loan balances declined significantly from the relatively high
levels experienced at December 31, 1997, but are up slightly from the levels
noted at June 30, 1998. This increase is due to modest increases in balances of
loans in nonaccrual status. Loans past due ninety days or more continued to
decline during the quarter, following the trend seen in the past two quarters.
Overall, nonperforming loans as a percent of total loans remain well below
industry standards, and are much nearer the levels traditionally experienced by
the Company. The amount listed for other real estate relates primarily to
property that has been leased to a third party with an option to purchase, and
no loss is anticipated on that property.
The Company has maintained its provision for loan losses at first and second
quarter 1998 levels, which represents an increase over the same period in 1997.
An analysis of the allowance for loan losses, in thousands of dollars, for the
nine months ended September 30, 1998 and 1997 follows:
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1998 1997
---- ----
Balance at beginning of period $ 2,467 $ 2,320
Loans charged off (738) (702)
Recoveries credited to allowance 163 52
Provision charged to operations 824 600
------------- ------------
Balance at end of period $ 2,716 $ 2,270
The allowance for loan losses is maintained at a level believed adequate by
Management to absorb potential losses in the loan portfolio.
DEPOSITS
Total deposits continued to grow during the quarter, but were down at September
30 as a result of temporary transfers from some business accounts. Noninterest
bearing deposit balances enjoyed strong growth during the second quarter, and
leveled off during the third quarter. Balances in other deposit accounts
continued to increase, although balances in certificates of $100,000 or more
declined during the quarter. Two factors contributed to this decline. First of
all, normal seasonal fluctuations are typical for this type of account.
Secondly, continued low levels of market rates have caused some depositors to
seek rates higher than are currently available in the CD market. Management
expects that deposit growth will continue, with anticipated growth from new
markets as well as from consumer use of newer cash management account products.
In December of 1997, the Bank acquired the Dundee office of NBD Bank, resulting
in an increase of $12.6 million of deposits. In addition, the Saline office of
the Bank, opened in August of 1997, continues to enjoy strong deposit growth,
also contributing to total deposit growth of the institution.
LIQUIDITY
The Bank continued to maintain an average funds sold position for the third
quarter of 1998, although generally the Bank moves in and out of the fed funds
market as liquidity needs vary. Deposit growth moving at different times than
loan growth will cause continued variation in the short term funds position of
the Bank. 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.
CAPITAL RESOURCES
The capital ratios of the Company exceed the regulatory guidelines for well
capitalized institutions. The following table shows the Company's capital ratios
and ratio calculations at September 30, 1998 and 1997 and December 31, 1997.
Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc.
---------------------- --------------------
Adequate Well 9/30/98 12/31/97 9/30/97
-------- ---- ------- -------- -------
Tier 1 capital to average assets 4% 5% 9.3% 9.3% 9.4%
Tier 1 risk adjusted capital ratio 4% 6% 14.3% 13.2% 13.9%
Total risk adjusted capital ratio 8% 10% 15.4% 14.2% 14.8%
Total shareholders' equity $ 38,174 $ 35,466 $ 34,639
Intangible assets (2,294) (2,487) (1,352)
Unrealized (gain) loss on securities available for sale (520) (233) (239)
------------- -------------------------
Tier 1 capital 35,360 32,746 33,048
Qualifying loan loss reserves 2,716 2,467 2,270
------------- -------------------------
Tier 2 capital $ 38,076 $ 35,213 $ 35,318
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RESULTS OF OPERATIONS
NET INTEREST INCOME
In general, the Company's spread remained virtually unchanged from the first and
second quarters of 1998 and the third quarter of 1997. In fact, the absolue
dollars of interest income and expense were substantially unchanged from the
prior quarter. This has been accomplished in spite of continued declines in
market rates that reduce income earned on assets. The Company continues to
incrementally improve its ratio of interest earning assets to interest bearing
liabilities.
The table below shows the year to date daily average Consolidated Balance Sheet,
interest earned (on a taxable equivalent basis) or paid, and the annualized
effective rate or yield, for the year-to-date periods ended September 30, 1998
and 1997.
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
-------------------------------------------------------------
-------------------------------------------------------------------------------
dollars in thousands 1998 1997
- --------------------
-------------------------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/
Balance (b) Rate Balance (b) Rate
-------------------------------------------------------------------------------
ASSETS
Interest earning assets (a)
Federal funds sold $ 8,775 $ 360 5.46% $ 5,387 $ 213 5.28%
Taxable securities 48,746 2,344 6.41% 49,464 2,393 6.45%
Tax exempt securities (b) 35,275 2,049 7.75% 31,026 1,852 7.96%
Taxable loans 259,828 17,510 8.99% 245,074 16,615 9.04%
Tax exempt loans (b) 1,439 83 7.70% 1,221 71 7.75%
------------------------- ---------------------------
Total int. earning assets (b) 354,063 $ 22,346 8.42% 332,172 $ 21,144 8.49%
------------------------- ---------------------------
Less allowance for loan losses (2,576) (2,292)
Other assets 29,534 23,271
------------ -------------
TOTAL ASSETS $ 381,021 $ 353,151
============ =============
LIABILITIES AND SHaREHOLDERS' EQUITY
NOW accounts $ 42,741 $ 526 1.64% $ 38,734 $ 448 1.54%
Savings deposits 72,833 1,542 2.82% 70,435 1,502 2.84%
CDs $100,000 and over 35,691 1,537 5.74% 41,684 1,826 5.84%
Other interest bearing deposits 142,225 5,766 5.41% 123,397 5,213 5.63%
------------------------- ---------------------------
Total int. bearing deposits 293,490 9,371 4.26% 274,250 8,989 4.37%
Short term borrowings 704 28 5.38% 2,239 92 5.46%
Other borrowings 10,607 484 6.08% 12,024 539 5.98%
------------------------- ---------------------------
Total int. bearing liabilities 304,801 9,883 4.32% 288,513 9,620 4.45%
Noninterest bearing deposits 36,415 28,420
Other liabilities 2,949 2,936
Shareholders' equity 36,856 33,282
------------ -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 381,021 $ 353,151
============ =============
Net interest income (b) $ 12,463 $ 11,524
============= ============
Net spread (b) 4.09% 4.04%
============ =============
Net yield on interest earning assets (b) 4.69% 4.63%
============ =============
Ratio of interest earning assets to
interest bearing liabilities 1.16 1.15
============ =============
(a) Non-accrual loans and overdrafts are included in the average balances of
loans.
(b) Fully tax-equivalent basis; 34% tax rate.
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The table below shows the effect of volume and rate changes on net interest
income for the nine months ended September 30, on a taxable equivalent basis, in
thousands of dollars.
-------------------------------------------------------------------------------
1998 Compared to 1997 1997 Compared to 1996
-------------------------------------------------------------------------------
Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a)
-------------------------------------- ------------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Interest earned on:
Federal funds sold $ 138 $ 8 $ 146 $ 142 $ (6) $ 136
Taxable securities (35) (14) (49) 47 151 198
Tax exempt securities 248 (51) 197 52 (26) 26
Taxable loans 995 (100) 895 1,512 (1) 1,511
Tax exempt loans 12 - 12 8 (6) 2
-------------------------------------------------------------------------------
Total interest income $ 1,358 $ (157) $ 1,201 $ 1,761 $ 112 $ 1,873
===============================================================================
-------------------------------------------------------------------------------
1998 Compared to 1997 1997 Compared to 1996
-------------------------------------------------------------------------------
Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a)
-------------------------------------- ------------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Interest paid on:
NOW accounts $ 48 $ 30 $ 78 $ (8) $ (70) $ (78)
Savings deposits 51 (11) 40 (107) 3 (104)
CDs $100,000 and over (258) (31) (289) 226 4 230
Other interest bearing deposits 770 (217) 553 821 18 839
Short term borrowings (62) (1) (63) (52) 1 (51)
Other borrowings (64) 9 (55) 244 17 261
-------------------------------------------------------------------------------
Total interest expense $ 485 $ (221) $ 264 $ 1,124 $ (27) $ 1,097
===============================================================================
Net change in net interest
income $ 873 $ 64 $ 937 $ 637 $ 139 $ 776
===============================================================================
(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
Income from nontraditional banking products and services continues to contribute
to significant levels of noninterest income. Substantially all categories of
noninterest income increased from the same period in 1997. While income from the
sales and servicing of residential real estate mortgages slowed somewhat from
levels achieved in the first quarter, strong volume reflects consumer preference
for fixed rate mortgages that are subsequently sold on the secondary market, and
generate income for current and future periods. In addition, earnings from the
Trust & Investment group, as well as from the sales of nondeposit investment
products, continue to increase at significant rates.
NONINTEREST EXPENSES
Noninterest expense also continued to increase over the same periods of 1997, at
a level consistent with that seen in the second quarter. This reflects continued
growth and expansion of the Bank, with investments in additional computer
equipment, as well as staff additions necessitated by growth in new markets.
Total noninterest expense, excluding provision for loan losses, for the first
nine months is 19.4% above the same period for 1997. However, a portion of this
increase reflects the fact that the sales of nondeposit investment products are
now being sold by Bank staff, as opposed to external contractors, as was the
case in prior years. This results in more overhead, which is offset by the fact
that more income is retained by the Company, rather than paid to a third party.
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FEDERAL INCOME TAX
There has been no significant change in the income tax position of the Company
during the third quarter of 1998.
NET INCOME
Consolidated net income was slightly behind second quarter level, and year to
date, exceeded that of the same period in 1997 by 2.4%. This rate of growth
slowed during the quarter from levels achieved during the first quarter, but
Management anticipates that net income will continue to remain strong, and will
exceed 1997 levels for the year, barring unforeseen circumstances.
YEAR 2000 READINESS
Federal banking regulators require specific actions of every financial
institution to become Year 2000 ready. These guidelines require a bank to:
- Ensure the involvement of the board of directors and management in the
institution's Year 2000 effort
- Adopt a written project plan
- Renovate its mission-critical systems
- Complete tests of the renovated mission-critical systems by specific
deadlines
- Plan for contingencies
- Manage customer risk
United has an active Year 2000 committee that reports regularly on its progress
to the Board of Directors. The Board has adopted a written plan, and continues
to assess its risk. Management has determined which systems are
mission-critical, and those which are not. Based on these determinations, a plan
of action has been implemented. Key clients have been surveyed, and plans are
underway to assess and manage customer risk.
Throughout the first nine months of 1998, the Company's Year 2000 task force has
continued to monitor the readiness of its major data processing hardware and
software providers, other critical vendor suppliers, and its large commercial
customers.
United uses major external third party vendors to the banking industry for its
mainframe and all personal computer hardware and software. These well-known,
national third party providers for the mission critical systems have provided
written assurances that they are Year 2000 ready and their systems have been
fully tested. The Company does not use any custom programmed software.
Earlier in 1998, United determined that its Unisys mainframe computer system,
while Year 2000 compliant, did not have sufficient capacity for future growth.
The Company has placed an order for a new Unisys mainframe to replace its old
system, for installation during the fourth quarter of 1998. This system will
provide a substantial increase in efficiency and capacity of operations. This
new system will allow complete testing of its banking software provided by
Information Technology, Inc. during the installation of the hardware, without
any disruption to daily processing and customer service. All testing will be
completed by June 30, 1999 within the FFIEC published guidelines and no
disruption in service due to a Year 2000 issue is anticipated.
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Other systems are being tested, and all noncompliant systems will be replaced or
abandoned. Some non-critical systems have been found to be noncompliant, due to
their age, and will be replaced. The readiness of the software used for mission
critical systems is included in the cost of our normal maintenance of those
systems and we do not expect any additional charges. Some minor hardware and
software replacements will be needed, and expenditures are expected to be less
than $50,000. The staffing needed to complete the testing and implementation
plan has been identified and is available. Other new software installations over
the next 15 months will be restricted to assure that we can complete our Year
2000 plan.
Contingency planning has begun for mission critical tasks and will be
continually monitored and updated to ensure uninterrupted customer services and
backroom processing. United, however, cannot necessarily ensure uninterruption
with certain vendors such as utility companies and phone companies, but those
vendor plans are being monitored as an ongoing part of the assessment.
Currently, all critical dates mandated by the regulators have been met by the
data processing vendor and United is also on schedule for its review of any
in-house critical systems, software, and equipment.
Overall, the cost of evaluating the Company's Year 2000 readiness and assuring
its compliance will not have a measurable impact on the financial condition of
the Company. United regularly provides for upgrades and replacement of its
software and hardware, and the Year 2000 situation will not significantly impact
those expenditures.
Major loan and deposit customers have been surveyed to evaluate the level of
Year 2000 planning and readiness and to assess any potential risk. Currently, it
is unknown what impact a high risk client's inability to pay its bank
obligations will have on the adequacy of United's allowance for possible loan
losses or its financial position.
United updates the Board of Directors and appropriate banking regulators
regarding its Year 2000 readiness on a quarterly basis. No material affect on
United's financial performance is anticipated, due to the systematic approach
the Company has adopted to prepare for the Year 2000 date impact.
FORWARD-LOOKING STATEMENTS
Statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations relate to United's expectations as to future
events relating to such items as the adequacy of the allowance for loan losses,
changes in economic conditions including interest rates, management's ability to
manage interest rate, liquidity and credit risks, impact on operations and
credit losses as it relates to the Year 2000 issue. Such statements are not
statements of historical fact and are forward-looking statements. United
believes the assumptions upon which these statements are founded are reasonable,
based on management's knowledge of its business and operations; however, there
is no assurance the assumptions will prove to have been correct. Furthermore,
United undertakes no obligation to update, amend or clarify forward-looking
statements, whether as a result of new information, future events, or otherwise.
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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. Bank 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 (gap) and income simulation analyses. A gap 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 12 months of pretax
net interest income assuming an immediate and sustained up or down parallel
change in interest rates of 200 basis points. Key assumptions in the models
include prepayment speeds on mortgage related assets; cash flows and maturities
of financial instruments held for purposes other than trading; changes in market
conditions, loan volumes and pricing; and management's determination of core
deposit sensitivity. These assumptions are inherently uncertain and, as a
result, the models cannot precisely estimate net interest income or precisely
predict the impact of higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes and changes in market conditions.
Based on the results of the simulation model as of September 30, 1998, the
Company would expect a maximum potential reduction in net interest margin of
less than 4% if market rates increased under an immediate and sustained parallel
shift of 200 basis points. The Bank's interest sensitivity position remained
virtually unchanged from the previous quarter.
The Company's exposure to market risk is reviewed on a regular basis by the
Funds Management Committee. The Committee's policy objective is to manage the
Company's assets and liabilities to provide an optimum and consistent level of
earnings within the framework of acceptable risk standards.
The Funds Management Committee of the Bank is also responsible for evaluating
and anticipating various risks other than interest rate risk. Those risks
include prepayment risk, credit risk and liquidity risk. The Committee is made
up of senior members of management, and continually monitors 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 policy of the Bank provides for a level of interest
sensitivity which, Management believes, allows the Bank to take advantage of
opportunities within the market relating to liquidity and interest rate risk,
allowing flexibility without subjecting the Bank to undue exposure to risk. In
addition, other measures are used to evaluate and project the anticipated
results of Management's decisions.
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PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings. The Company's
sole subsidiary, United Bank & Trust, is 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 Bank. Neither
the Bank nor the Company is involved in any proceedings to which any director,
principal officer, affiliate thereof, or person who owns of record or
beneficially five percent (5%) or more of the outstanding stock of the Company
or the Bank, or any associate of the foregoing, is a party or has a material
interest adverse to the Company or the Bank.
ITEM 2 - CHANGES IN SECURITIES
No changes in the securities of the Company occurred during the quarter ended
September 30, 1998.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
There have been no defaults upon senior securities relevant to the requirements
of this section during the three months ended September 30, 1998.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
September 30, 1998.
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):
27. Financial Data Schedule.
(b) The Company has filed no reports on Form 8-K during the quarter ended
September 30, 1998.
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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.
January 29, 1999
/S/ Dale L. Chadderdon
--------------------------------------------
Dale L. Chadderdon
Senior Vice President, Secretary & Treasurer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- --------------------------------------------------------------------------------
27 Financial Data Schedule
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