1 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, 1999 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 April 15, 1999, there were outstanding 1,730,251 shares of the registrant's common stock, no par value. Page 1 2 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 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults Upon Senior Securities 15 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 16 Exhibit Index 17 Page 2 3 PART I FINANCIAL INFORMATION ITEM 1- FINANCIAL STATEMENTS (a) CONSOLIDATED BALANCE SHEETS (UNAUDITED) In thousands of dollars March 31, December 31, March 31, 1999 1998 1998 ------------- ---------------- ------------ ASSETS Cash and demand balances in other banks $ 14,037 $ 12,348 $ 12,234 Federal funds sold 800 - 2,300 --------- ----------- ---------- Total cash and cash equivalents 14,837 12,348 14,534 Securities available for sale 48,650 58,468 45,378 Securities held to maturity (fair value of $36,860, $37,999 and $41,933, respectively) 35,952 36,919 40,929 --------- ----------- ---------- Total securities 84,602 95,387 86,307 Loans held for sale 957 535 605 Portfolio loans 274,092 269,714 261,253 --------- ----------- ---------- Total loans 275,049 270,249 261,858 Less: allowance for loan losses 2,887 2,799 2,516 --------- ----------- ---------- Net loans 272,162 267,450 259,342 Premises and equipment, net 12,229 11,406 10,860 Accrued interest receivable and other assets 8,242 7,104 6,910 --------- ----------- ---------- TOTAL ASSETS $ 392,072 $ 393,695 $ 377,953 ========= =========== ========== LIABILITIES Deposits Noninterest bearing $ 42,669 $ 42,468 $ 34,718 Interest bearing certificates of deposit of $100,000 or more 30,264 31,108 37,489 Other interest bearing deposits 266,231 263,691 255,688 --------- ----------- ---------- Total deposits 339,164 337,267 327,895 Federal funds and other short term borrowings - 3,874 650 Other borrowings 10,900 10,900 10,000 Accrued interest payable and other liabilities 2,600 2,890 3,161 --------- ----------- ---------- TOTAL LIABILITIES 352,664 354,931 341,706 SHAREHOLDERS' EQUITY Common stock, no par value; 5,000,000 shares authorized; 1,730,195, 1,730,480 and 1,645,974 shares issued and outstanding, respectively 19,858 19,837 16,389 Stock dividend payable 3,893 - 3,292 Retained earnings 15,459 18,607 16,335 Accumulated other comprehensive income (loss) 198 320 231 --------- ----------- ---------- TOTAL SHAREHOLDERS' EQUITY 39,408 38,764 36,247 --------- ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 392,072 $ 393,695 $ 377,953 ========= =========== ========== The accompanying notes are an integral part of these consolidated financial statements. Page 3 4 (b) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended In thousands of dollars, except per share data March 31, --------------------- 1999 1998 --------- --------- INTEREST INCOME Interest and fees on loans Taxable $ 5,773 $ 5,886 Tax exempt 19 19 Interest on securities Taxable 813 712 Tax exempt 466 476 Interest on federal funds sold 4 119 -------- -------- Total interest income 7,075 7,212 INTEREST EXPENSE Interest on certificates of deposit of $100,000 or more 394 565 Interest on other deposits 2,314 2,604 Interest on short term borrowings 45 12 Interest on other borrowings 165 149 -------- -------- Total interest expense 2,918 3,330 -------- -------- NET INTEREST INCOME 4,157 3,882 Provision for loan losses 315 275 -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,842 3,607 NONINTEREST INCOME Service charges on deposit accounts 408 376 Trust & Investment fee income 462 373 Gains on securities transactions 10 - Loan sales and servicing 196 291 Sales of nondeposit investment products 153 131 Other income 161 147 -------- -------- Total noninterest income 1,390 1,318 NONINTEREST EXPENSE Salaries and employee benefits 1,986 1,720 Occupancy and equipment expense 600 605 Other expense 988 1,000 -------- -------- Total noninterest expense 3,574 3,325 -------- -------- INCOME BEFORE FEDERAL INCOME TAX 1,658 1,600 Federal income tax 427 409 -------- -------- NET INCOME $ 1,231 $ 1,191 ======== ======== Basic and diluted earnings per share $ 0.71 $ 0.69 Cash dividends declared per share of common stock 0.28 0.25 The accompanying notes are an integral part of these consolidated financial statements. Page 4 5 (c) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) In thousands of dollars, except per share data Accumulated Stock Other Compre- Common Dividend Retained hensive Stock Payable Earnings Income Total --------- ---------- ----------- -------------- ---------- Balance, December 31, 1997 $ 16,366 $ - $ 18,867 $ 233 $ 35,466 Net Income 1,191 1,191 Net change in unrealized gains on securities (2) (2) -------- Total comprehensive income 1,189 Cash dividends declared (428) (428) 5% stock dividend declared, 82,301 shares at $40 3,292 (3,292) - Common stock and contingently issuable stock 23 - (3) - 20 -------- -------- --------- ----------- -------- Balance, March 31, 1998 $ 16,389 $ 3,292 $ 16,335 $ 231 $ 36,247 ======== ======== ========= =========== ======== Balance, December 31, 1998 $ 19,837 $ - $ 18,607 $ 320 $ 38,764 Net Income 1,231 1,231 Net change in unrealized gains on securities (122) (122) -------- Total comprehensive income 1,109 Cash dividends declared (484) (484) 5% stock dividend declared, 86,512 shares at $45 3,893 (3,893) - Common stock and contingently issuable stock 21 - (2) - 19 -------- -------- --------- ----------- -------- Balance, March 31, 1999 $ 19,858 $ 3,893 $ 15,459 $ 198 $ 39,408 ======== ======== ========= =========== ======== The accompanying notes are an integral part of these consolidated financial statements. Page 5 6 (d) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended In thousands of dollars March 31, ----------------------- 1999 1998 ----------- ---------- Cash Flows from Operating Activities - ------------------------------------ Net Income $ 1,231 $ 1,191 -------- -------- Adjustments to Reconcile Net Income to Net Cash from Operating Activities - ------------------------------------------------------------------------- Depreciation and amortization 425 376 Provision for loan losses 315 275 Change in loans held for sale (422) (465) Change in accrued interest receivable and other assets (1,201) (489) Change in accrued interest payable and other liabilities (19) 331 -------- -------- Total adjustments (902) 28 -------- -------- Net cash from operating activities 329 1,219 -------- -------- Cash Flows from Investing Activities - ------------------------------------ Securities available for sale Purchases - (4,441) Maturities and calls 7,152 374 Principal payments 2,439 1,169 Securities held to maturity Purchases (620) (5,969) Maturities and calls 1,578 2,210 Change in portfolio loans (4,605) 3,639 Premises and equipment expenditures, net (1,134) (239) -------- -------- Net cash from investing activities 4,810 (3,257) -------- -------- Cash Flows from Financing Activities - ------------------------------------ Net change in deposits 1,897 11,060 Net change in short term borrowings (3,874) (4,292) Proceeds from stock transactions 21 23 Dividends paid (694) (625) -------- -------- Net cash from financing activities (2,650) 6,166 -------- -------- Net change in cash and cash equivalents 2,489 4,128 Cash and cash equivalents at beginning of year 12,348 10,406 -------- -------- Cash and cash equivalents at end of period $ 14,837 $ 14,534 ======== ======== Cash Paid During the Period for - ------------------------------- Interest $ 3,030 $ 3,321 Income taxes - - ======== ======== The accompanying notes are an integral part of these consolidated financial statements. Page 6 7 (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 three month period ending March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. 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, 1998. 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 $122,862,000 and $104,734,000 at the end of March 1999 and 1998. The balance of loans serviced for others related to servicing rights that have been capitalized was $95,404,000 and $58,770,000 at March 31, 1999 and 1998. Mortgage servicing rights activity in thousands of dollars for the three months ended March 31, 1999 and 1998 follows: Unamortized cost of mortgage servicing rights 1999 1998 --------------------------------------------- ---------- ---------- Balance at January 1 $ 646 $ 340 Amount capitalized year to date 80 128 Amount amortized year to date (39) (40) --------- --------- Balance at period end $ 687 $ 428 ========= ========= No valuation allowance was considered necessary for mortgage servicing rights at period end 1999 and 1998. 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 the Company issued a 5% stock dividend. Earnings per share, dividends per share and weighted average shares have been restated to reflect the stock dividend. The weighted average number of shares outstanding plus contingently issuable shares was 1,735,442 for 1999 and 1,731,638 for 1998. NOTE 4 - COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Financial Accounting Standard No. 130, "Reporting Comprehensive Income." Under this new 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 three months ended March 31, follows: Page 7 8 Three Months Ended March 31, ---------------------------- Other comprehensive income 1999 1998 -------------------------- ---------- --------- Unrealized gains on securities arising during period $ (176) $ (3) Reclassification for realized amount included in income (9) - --------- -------- Other comprehensive income, before tax (185) (3) Federal income tax expense (63) (1) --------- -------- Other comprehensive income $ (122) $ (2) ========= ======== 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 month period ending March 31, 1999. FINANCIAL CONDITION SECURITIES Investment securities balances declined during the first three months of 1999, reflecting an increase in loan demand experienced by the Bank. Maturities within the portfolio were not replaced, in part in anticipation of an inflow of excess funds during the second quarter of 1999. The addition of approximately $20 million of deposits resulting from the acquisition of the Manchester, Michigan office of Great Lakes National Bank will undoubtedly cause an increase in securities during the second quarter of the year. The mix of the securities portfolio remained relatively unchanged during the quarter. The chart below shows the mix of the portfolio, in thousands of dollars. 3/31/1999 12/31/1998 3/31/1998 ----------- ------------ ----------- U.S. Treasury and agency securities 23.3% 28.2% 22.8% Mortgage backed agency securities 22.0% 22.3% 25.0% Tax exempt obligations of states and political subdivisions 41.9% 37.0% 41.5% Corporate, taxable municipal and asset backed securities 12.8% 12.5% 10.7% --------- ---------- --------- Total Securities 100.0% 100.0% 100.0% ========= ========== ========= LOANS Loan growth during the first quarter of 1999 exceeded the levels achieved in 1998. During the first three months, annualized loan growth was 7.1%, compared to 1.9% for all of 1998. Business loans and residential mortgages led the increases, while other personal loan categories declined. The mix of the loan portfolio reflected this growth trend, although overall the mix has remained relatively unchanged from prior periods. Over the long term, the trend is toward an increased percentage of residential mortgage and business loans, with slight declines in personal loans. The table below shows total loans outstanding, in thousands of dollars at March 31, and December 31, and their percentage of the total loan portfolio. All loans are domestic and contain no concentrations by industry or customer. Page 8 9 March 31, 1999 December 31, 1998 March 31, 1998 ------------------------- ------------------------ -------------------------- Portfolio loans: Balance % of total Balance % of total Balance % of total - ---------------- ------- ---------- ------- ---------- ------- ---------- Personal $ 55,403 20.1% $ 58,797 21.8% $ 65,868 25.2% Business/commercial mtgs 85,594 31.1% 82,521 30.5% 77,290 29.5% Tax exempt 1,794 0.7% 1,381 0.5% 1,448 0.6% Residential mortgage 108,269 39.4% 104,903 38.8% 103,238 39.4% Construction 23,989 8.72% 22,647 8.38% 14,014 5.35% --------- --------- -------- --------- ----------- --------- Total loans $ 275,049 100.00% $270,249 100.00% $ 261,858 100.00% ========= ========= ======== ========= =========== ========= 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. 3/31/1999 12/31/1998 3/31/1998 ----------- ------------ ------------- Nonaccrual loans $ 778 $ 821 $ 241 Loans past due 90 days or more 205 194 753 Troubled debt restructurings 136 136 138 -------- --------- ----------- Total nonperforming loans $ 1,119 $ 1,151 $ 1,132 Other real estate 335 335 335 -------- --------- ----------- Total nonperforming assets $ 1,454 $ 1,486 $ 1,467 Percent of total loans 0.53% 0.54% 0.56% Nonperforming loans remained relatively unchanged from December 31, 1998 and March 31, 1998. Although categories are virtually unchanged from December 31, 1998, loans past due ninety days or more declined from March of 1998, while nonaccrual loans increased during the period. Nonperforming loans as a percent of total loans remain well below industry standards, although higher than 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 increased its provision for loan losses over the same period in 1998 as a result of the increase in loan volume. The allowance for loan losses is maintained at a level believed adequate by Management to absorb potential losses in the loan portfolio. An analysis of the allowance for loan losses, in thousands of dollars, for the three months ended March 31, 1999 and 1998 follows: 1999 1998 ---------- ----------- Balance at beginning of period $ 2,799 $ 2,467 Loans charged off (283) (307) Recoveries credited to allowance 56 81 Provision charged to operations 315 275 --------- ---------- Balance at end of period $ 2,887 $ 2,516 ========= ========== Page 9 10 DEPOSITS Total deposits continued to grow during the quarter, although the rate of growth of noninterest bearing and interest bearing balances continue to fluctuate with swings in corporate and public fund balances. The category of other interest bearing deposit balances enjoyed the greatest growth during the quarter, reflecting continued growth in Cash Management and Certificates of Deposit accounts. During the second quarter of 1999, United Bank & Trust will acquire the deposits of the Manchester office of Great Lakes Bank, contributing approximately $20 million to deposit totals. Management anticipates that deposit growth during 1999 will be steady, with anticipated growth from new markets, as well as from consumer use of newer cash management account products. LIQUIDITY The Bank maintained an average funds sold position for the first quarter of 1999, 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 March 31, 1999 and 1998 and December 31, 1998. Dollars are shown in thousands. Regulatory Guidelines United Bancorp, Inc. --------------------- -------------------- Adequate Well 3/31/1999 12/31/1998 3/31/1998 ---------- ---------- ---------- ------------ ----------- Tier 1 capital to average assets 4% 5% 9.5% 9.4% 8.9% Tier 1 risk adjusted capital ratio 4% 6% 14.1% 14.0% 13.4% Total risk adjusted capital ratio 8% 10% 15.2% 15.0% 14.4% Total shareholders' equity $ 39,408 $ 38,764 $ 36,247 Intangible assets (2,167) (2,230) (2,423) Unrealized (gain) loss on securities available for sale (198) (320) (231) --------- --------- --------- Tier 1 capital 37,043 36,214 33,593 Qualifying loan loss reserves 2,887 2,799 2,516 --------- --------- --------- Tier 2 capital $ 39,930 $ 39,013 $ 36,109 ========= ========= ========= RESULTS OF OPERATIONS NET INTEREST INCOME In general, yields declined for the first quarter of 1999 compared to the fourth quarter of 1998 and the same period in 1998. At the same time, the Company's cost of funds dropped compared to the prior quarter, and continued to decline compared to the same period in 1998. This resulted in improved net interest income and spread over the same period of 1998 and the prior quarter. 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 periods ended March 31, 1999 and 1998. Page 10 11 YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES -------------------------------------- --------------------------------------- dollars in thousands 1999 1998 -------------------------------------- --------------------------------------- Average Interest Yield/ Average Interest Yield/ Balance (b) Rate Balance (b) Rate ----------- ------------ ------------- ------------- ------------ ------------ ASSETS Interest earning assets (a) Federal funds sold $ 328 $ 4 4.46% $ 8,829 $ 119 5.40% Taxable securities 52,654 813 6.17% 44,206 712 6.45% Tax exempt securities (b) 35,431 675 7.62% 35,311 689 7.80% Taxable loans 270,912 5,773 8.52% 263,236 5,885 8.94% Tax exempt loans (b) 1,463 27 7.48% 1,471 28 7.57% --------- ---------- ---------- ---------- Total int. earning assets (b) 360,788 7,292 8.08% 353,053 7,434 8.42% Less allowance for loan losses (2,841) (2,482) Other assets 33,028 28,790 --------- ---------- TOTAL ASSETS $ 390,975 $ 379,361 ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY NOW accounts $ 51,542 $ 225 1.74% $ 40,896 $ 145 1.42% Savings deposits 71,999 399 2.22% 74,493 533 2.86% CDs $100,000 and over 30,703 394 5.13% 39,114 565 5.77% Other interest bearing deposits 140,303 1,691 4.82% 140,655 1,926 5.48% --------- ---------- ---------- ---------- Total int. bearing deposits 294,547 2,708 3.68% 295,158 3,169 4.29% Short term borrowings 3,686 45 4.91% 804 12 5.87% Other borrowings 10,900 165 6.05% 10,000 149 5.98% --------- ---------- ---------- ---------- Total int. bearing liabilities 309,133 2,918 3.78% 305,962 3,330 4.35% Noninterest bearing deposits 40,110 34,184 Other liabilities 2,506 3,225 Shareholders' equity 39,226 35,990 --------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 390,975 $ 379,361 ========= ========== Net interest income (b) $ 4,374 $ 4,103 ========== ========== Net spread (b) 4.31% 4.07% ========= ====== Net yield on interest earning assets (b) 4.85% 4.65% ========= ====== Ratio of interest earning assets to interest bearing liabilities 1.17 1.15 ========= ========== (a) Non-accrual loans and overdrafts are included in the average balances of loans. (b) Fully tax-equivalent basis; 34% tax rate. The table below shows the effect of volume and rate changes on net interest income for the three months ended March 31, on a taxable equivalent basis, in thousands of dollars. 1999 Compared to 1998 1998 Compared to 1997 ---------------------------------------- ------------------------------------------ Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a) ------------------------------- ------------------------------- Volume Rate Net Volume Rate Net -------------- ------------ ------------ -------------- ---------------- ---------- Interest earned on: Federal funds sold $ (98) $ (18) $ (116) $ (46) $ 5 $ (41) Taxable securities 131 (31) 100 (50) 11 (39) Tax exempt securities 2 (16) (14) 81 (12) 69 Taxable loans 169 (281) (112) 524 60 584 Tax exempt loans - - - 8 - 8 --------- -------- -------- --------- ---------- -------- Total interest income $ 204 $ (346) $ (142) $ 517 $ 64 $ 581 ========= ======== ======== ========= ========== ======== Page 11 12 1999 Compared to 1998 1998 Compared to 1997 ---------------------------------------- ------------------------------------------ Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a) ------------------------------- ------------------------------- Volume Rate Net Volume Rate Net -------------- ------------ ------------ -------------- ---------------- ---------- Interest paid on: NOW accounts $ 42 $ 37 $ 79 $ 10 $ (31) $ (21) Savings deposits (17) (117) (134) 31 17 48 CDs $100,000 and over (113) (58) (171) (49) - (49) Other interest bearing deposits (5) (231) (236) 246 (24) 222 Short term borrowings 35 (2) 33 3 1 4 Other borrowings 13 2 15 (90) 3 (87) --------- -------- -------- --------- ---------- -------- Total interest expense $ (45) $ (369) $ (414) $ 151 $ (34) $ 117 ========= ======== ======== ========= ========== ======== Net change in net interest income $ 249 $ 23 $ 272 $ 366 $ 98 $ 464 ========= ======== ======== ========= ========== ======== (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 has contributed to significant increases in noninterest income over prior periods. All categories of noninterest income increased from the same period in 1998. In addition, earnings from the Trust & Investment group, as well as from the sales of nondeposit investment products, continue to increase at significant rates. Overall, total noninterest income for the first three months is up 5.5% over the same period of 1998. NONINTEREST EXPENSES Noninterest expense also continued to increase over the same periods of 1998, reflecting continued growth and expansion of the Bank. Total noninterest expense, excluding provision for loan losses, for the first three months is 7.5% above the same period for 1998. FEDERAL INCOME TAX There has been no significant change in the income tax position of the Company during the first quarter of 1999. NET INCOME Consolidated net income exceeded that of the same period in 1998 by 3.4%, however, it was slightly behind fourth quarter levels. Management anticipates that net income will continue to remain strong for the remainder of the year. 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-critial 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 Page 12 13 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 quarter of 1999, 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. In 1998, United determined that its Unisys mainframe computer system, while Year 2000 compliant, did not have sufficient capacity for future growth. In the fourth quarter of 1998, the Company installed a new Unisys mainframe to replace its previous system. This system provides a substantial increase in efficiency and capacity of operations, and allowed 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. 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 9 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. Page 13 14 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 200 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. 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. Page 14 15 Based on the results of the simulation model as of March 31, 1999, the Company would expect a maximum potential reduction in net interest margin of less than 5% if market rates increased under an immediate and sustained parallel shift of 200 basis points. The Bank's interest sensitivity position remained virtually unchanged from the previouis 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. 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 March 31, 1999. ITEM 3-DEFAULTS UPON SENIOR SECURITIES There have been no defaults upon senior securities relevant to the requirements of this section during the three months ended March 31, 1999. Page 15 16 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, 1999. 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 March 31, 1999. 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. April 30, 1999 /S/ Dale L. Chadderdon ------------------------------------------------ Dale L. Chadderdon Senior Vice President, Secretary & Treasurer Page 16 17 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - -------------------------------------------------------------------------------- 27 Financial Data Schedule Page 17