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 SEPTEMBER 30, 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 October 15, 1999, there were outstanding 1,816,956 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 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 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 16
Exhibit Index 17
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PART I
FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS
(A) CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In thousands of dollars
September 30, December 31, September 30,
1999 1998 1998
------------- ------------ -------------
ASSETS
Cash and demand balances in other banks $ 14,627 $ 12,348 $ 11,616
Federal funds sold - - 7,100
--------- --------- ---------
Total cash and cash equivalents 14,627 12,348 18,716
Securities available for sale 49,572 58,468 51,335
Securities held to maturity (fair value of
$34,413, $37,999 and $48,669, respectively) 34,176 36,919 37,415
--------- --------- ---------
Total securities 83,748 95,387 88,750
Loans held for sale - 535 227
Portfolio loans 293,650 269,714 259,838
--------- --------- ---------
Total loans 293,650 270,249 260,065
Less: allowance for loan losses 3,218 2,799 2,716
--------- --------- ---------
Net loans 290,432 267,450 257,349
Premises and equipment, net 12,976 11,406 11,148
Accrued interest receivable and other assets 9,883 7,104 7,111
--------- --------- ---------
TOTAL ASSETS $ 411,666 $ 393,695 $ 383,074
========= ========= =========
LIABILITIES
Deposits
Noninterest bearing $ 44,480 $ 42,468 $ 37,452
Interest bearing certificates of deposit of $100,000 or more 32,157 31,108 32,211
Other interest bearing deposits 274,833 263,691 260,581
--------- --------- ---------
Total deposits 351,470 337,267 330,244
Federal funds and other short term borrowings 6,700 3,874 667
Other borrowings 10,624 10,900 10,900
Accrued interest payable and other liabilities 2,377 2,890 3,089
--------- --------- ---------
TOTAL LIABILITIES 371,171 354,931 344,900
SHAREHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized;
1,816,956, 1,730,480 and 1,728,490 shares issued and
outstanding, respectively 23,787 19,837 19,725
Retained earnings 16,977 18,607 17,929
Accumulated other comprehensive income (loss) (269) 320 520
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 40,495 38,764 38,174
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 411,666 $ 393,695 $ 383,074
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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(B) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
In thousands of dollars, except per share data
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------
1999 1998 1999 1998
---------------- ------------- ------------ -----------
INTEREST INCOME
Interest and fees on loans
Taxable $ 6,188 $ 5,818 $ 17,870 $ 17,510
Tax exempt 23 19 65 57
Interest on securities
Taxable 791 831 2,408 2,344
Tax exempt 430 471 1,332 1,416
Interest on federal funds sold 31 111 84 360
------- ------- ------- -------
Total interest income 7,463 7,250 21,759 21,687
INTEREST EXPENSE
Interest on certificates of deposit of $100,000 or more 395 472 1,158 1,537
Interest on other deposits 2,522 2,618 7,245 7,834
Interest on short term borrowings 19 8 66 28
Interest on other borrowings 164 168 495 484
------- ------- ------- -------
Total interest expense 3,100 3,266 8,964 9,883
------- ------- ------- -------
NET INTEREST INCOME 4,363 3,984 12,795 11,804
Provision for loan losses 315 275 945 824
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,048 3,709 11,850 10,980
NONINTEREST INCOME
Service charges on deposit accounts 569 429 1,489 1,234
Trust & Investment fee income 568 417 1,548 1,198
Gains on securities transactions - 45 11 54
Loan sales and servicing 96 212 442 758
Sales of nondeposit investment products 186 75 497 344
Other income 208 130 557 412
------- ------- ------- -------
Total noninterest income 1,627 1,308 4,544 4,000
NONINTEREST EXPENSE
Salaries and employee benefits 2,108 1,820 6,145 5,310
Occupancy and equipment expense 638 629 1,863 1,827
Other expense 1,089 864 3,197 2,807
------- ------- ------- -------
Total noninterest expense 3,835 3,313 11,205 9,944
------- ------- ------- -------
INCOME BEFORE FEDERAL INCOME TAX 1,840 1,704 5,189 5,036
Federal income tax 500 443 1,371 1,305
------- ------- ------- -------
NET INCOME $ 1,340 $ 1,261 $ 3,818 $ 3,731
======= ======= ======= =======
Basic and diluted earnings per share $ 0.73 $ 0.69 $ 2.10 $ 2.05
Cash dividends declared per share of common stock 0.30 0.27 0.85 0.75
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)
In thousands of dollars, except per share data
Accumulated
Other Compre-
Common Retained hensive
Stock Earnings Income Total
--------- -------- ------------- --------
Balance, December 31, 1997 $ 16,366 $ 18,867 $ 233 $ 35,466
Net Income 3,731 3,731
Net change in unrealized gains (losses) on securities 287 287
--------
Total 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
======== ======== ===== ========
Balance, December 31, 1998 $ 19,837 $ 18,607 $ 320 $ 38,764
Net Income 3,818 3,818
Net change in unrealized gains (losses) on securities (589) (589)
--------
Total comprehensive income 3,229
Cash dividends declared (1,539) (1,539)
5% stock dividend declared, 86,512 shares at $45 3,893 (3,893) -
Common stock and contingently issuable stock 57 (16) - 41
-------- -------- ----- --------
Balance, September 30, 1999 $ 23,787 $ 16,977 $(269) $ 40,495
======== ======== ===== ========
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
In thousands of dollars September 30
-----------------------------
1999 1998
------------- --------------
Cash Flows from Operating Activities
Net Income $ 3,818 $ 3,731
-------- --------
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization 1,381 1,175
Provision for loan losses 945 824
Change in loans held for sale 535 (86)
Change in accrued interest receivable and other assets (3,053) (869)
Change in accrued interest payable and other liabilities (62) 53
-------- --------
Total adjustments (254) 1,097
-------- --------
Net cash from operating activities 3,564 4,828
-------- --------
Cash Flows from Investing Activities
Securities available for sale
Purchases (14,132) (18,941)
Sales - 3,035
Maturities and calls 15,820 2,809
Principal payments 6,168 4,690
Securities held to maturity
Purchases (2,298) (13,590)
Maturities and calls 5,021 13,382
Change in portfolio loans (24,462) 4,704
Premises and equipment expenditures, net (2,509) (1,191)
-------- --------
Net cash from investing activities (16,392) (5,102)
-------- --------
Cash Flows from Financing Activities
Net change in deposits 14,203 13,409
Net change in short term borrowings 2,826 (4,275)
Proceeds from other borrowings - 3,900
Principal payments on other borrowings (276) (3,000)
Proceeds from stock transactions 41 52
Dividends paid (1,687) (1,502)
-------- --------
Net cash from financing activities 15,107 8,584
-------- --------
Net change in cash and cash equivalents 2,279 8,310
Cash and cash equivalents at beginning of year 12,348 10,406
-------- --------
Cash and cash equivalents at end of period $ 14,627 $ 18,716
======== ========
Cash Paid During the Period for
Interest $ 9,100 $ 10,137
Income taxes 1,400 1,400
======== ========
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, 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 $125,126,000 and $115,112,000 at the end of September
1999 and 1998. The balance of loans serviced for others related to servicing
rights that have been capitalized was $100,818,000 and $76,622,000 at September
30, 1999 and 1998.
Mortgage servicing rights activity in thousands of dollars for the nine months
ended September 30, 1999 and 1998 follows:
Unamortized cost of mortgage servicing rights 1999 1998
--------------------------------------------- ---- ----
Balance at January 1 $ 646 $ 340
Amount capitalized year to date 176 314
Amount amortized year to date (91) (97)
----- -----
Balance at period end $ 731 $ 557
===== =====
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 28, 1999
and May 29, 1998 the Company issued 5% stock dividends. 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 1,822,559 for 1999 and 1,818,804 for 1998.
NOTE 4 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Financial Accounting Standard No.
130, "Reporting Comprehensive Income." Under this 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 follows:
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Nine Months Ended September 30,
-------------------------------
Other comprehensive income 1999 1998
-------------------------- ------ ------
Unrealized gains (losses) on securities arising during period $ (882) $ 481
Reclassification for realized amount included in income (11) (46)
------ ------
Other comprehensive income, before tax (893) 435
Federal income tax expense (benefit) (304) 148
------ ------
Other comprehensive income $ (589) $ 287
====== ======
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,
1999.
FINANCIAL CONDITION
SECURITIES
Investment securities balances increased during the third quarter of 1999.
Principal repayments on mortgage backed securities, as well as maturities within
the various portfolios, caused some minor shifts in the mix of the portfolio.
However, the mix of the securities portfolio remains relatively unchanged from
period to period over the long term. The chart below shows the mix of the
portfolio.
9/30/1999 12/31/1998 9/30/1998
---------- ----------- ----------
U.S. Treasury and agency securities 24.4% 28.2% 23.6%
Mortgage backed agency securities 20.5% 22.3% 24.4%
Tax exempt obligations of states and political subdivisions 40.2% 37.0% 40.4%
Corporate, taxable municipal and asset backed securities 14.9% 12.5% 11.6%
----- ----- -----
Total Securities 100.0% 100.0% 100.0%
===== ===== =====
LOANS
Loan growth continued to be strong in the third quarter of 1999. During the
quarter, annualized loan growth was 17.4% compared to 9.3% for the second
quarter and 7.1% for the first quarter of the year. Year to date annualized
growth in the loan portfolio is 11.6%. Business loans and residential mortgages
led the increases, while all categories recorded growth for the quarter.
The mix of the loan portfolio continues to reflect this growth trend. Over the
long term, the trend is toward an increased percentage of residential mortgage
and business loans, with declines in personal loans. On the other hand, personal
loan balances have increased since December 31, 1998, reversing the declines
seen since September 30 of last year. The table below shows total loans
outstanding, in thousands of dollars at September 30, and December 31, and their
percentage of the total loan portfolio. All loans are domestic and contain no
concentrations by industry or customer.
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September 30, 1999 December 31, 1998 September 30, 1998
--------------------- ----------------------- ------------------------
Portfolio loans: Balance % of total Balance % of total Balance % of total
------- ---------- ------- ---------- ------- ----------
Personal $ 59,376 20.2% $ 58,797 21.8% $ 62,476 24.0%
Business/commercial mtgs 92,375 31.5% 82,521 30.5% 80,127 30.8%
Tax exempt 1,834 0.6% 1,381 0.5% 1,437 0.6%
Residential mortgage 111,594 38.0% 104,903 38.8% 102,757 39.5%
Construction 28,471 9.7% 22,647 8.4% 13,268 5.1%
---------- ------ ---------- ------ ---------- ------
Total loans $ 293,650 100.00% $ 270,249 100.00% $ 260,065 100.00%
========== ====== ========== ====== ========== ======
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.
9/30/1999 12/31/1998 9/30/1998
--------- ---------- ---------
Nonaccrual loans $ 1,356 $ 821 $ 543
Loans past due 90 days or more 17 194 275
Troubled debt restructurings 135 136 137
------- ------- -------
Total nonperforming loans $ 1,508 $ 1,151 $ 955
Other real estate 335 335 335
------- ------- -------
Total nonperforming assets $ 1,843 $ 1,486 $ 1,290
======= ======= =======
Percent of total loans 0.63% 0.51% 0.50%
Balances in nonperforming loans were up from June 30, 1999 and December 31,
1998. Loans past due ninety days or more declined, 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.
Because of continued loan growth, the Company has maintained its provision for
loan losses at the same level throughout 1999, which reflects an increase over
the same period in 1998. 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 nine months ended September 30, 1999 and 1998 follows:
1999 1998
------- -------
Balance at beginning of period $ 2,799 $ 2,467
Loans charged off (673) (738)
Recoveries credited to allowance 147 163
Provision charged to operations 945 824
------- -------
Balance at end of period $ 3,218 $ 2,716
======= =======
As a percent of total loans 1.10% 1.04%
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DEPOSITS
Deposit totals continued to grow during the year, in part as a result of recent
expansion efforts. Growth during the quarter was light, at just under 1%
annualized. For the year, annualized deposit growth during 1999 is 5.61%,
compared to 5.64% for the first nine months of 1998. Management anticipates that
deposit growth during 1999 will be continue to improve, with continued growth
from new and existing markets.
LIQUIDITY
The Bank maintained an average funds sold position for the third 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 increase in intangible assets shown below is the
result of the acquisition of the Manchester office of Great Lakes National Bank
during the second quarter of 1999. The following table shows the Company's
capital ratios and ratio calculations at September 30, 1999 and 1998 and
December 31, 1998. Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc.
----------------------- --------------------
Adequate Well 9/30/1999 12/31/1998 9/30/1998
---------- ---------- --------- ---------- ---------
Tier 1 capital to average assets 4% 5% 9.1% 9.4% 9.3%
Tier 1 risk adjusted capital ratio 4% 6% 13.3% 14.0% 14.3%
Total risk adjusted capital ratio 8% 10% 14.5% 15.0% 15.4%
Total shareholders' equity $ 40,495 $ 38,764 $ 38,174
Intangible assets (4,400) (2,230) (2,294)
Unrealized (gain) loss on securities available for sale 269 (320) (520)
-------- -------- --------
Tier 1 capital 36,364 36,214 35,360
Qualifying loan loss reserves 3,218 2,799 2,716
-------- -------- --------
Tier 2 capital $ 39,582 $ 39,013 $ 38,076
======== ======== ========
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest margin remained relatively unchanged for the third quarter compared
to the first and second quarters of 1999, and was improved from the same period
in 1998. At the same time, the company's spread continued to show improvement
over prior periods. Continued loan growth and changes in deposit mix have
provided the majority of this improvement over 1998 levels.
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 September 30, 1999 and 1998.
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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 $ 2,319 $ 84 4.81% $ 8,775 $ 360 5.46%
Taxable securities 52,449 2,408 6.12% 48,746 2,344 6.41%
Tax exempt securities (b) 33,968 1,934 7.59% 35,275 2,049 7.75%
Taxable loans 277,898 17,870 8.57% 259,828 17,510 8.99%
Tax exempt loans (b) 1,659 94 7.58% 1,439 83 7.70%
--------- ------- --------- --------
Total int. earning assets (b) 368,293 22,390 8.11% 354,063 22,346 8.42%
Less allowance for loan losses (2,965) (2,576)
Other assets 35,441 29,534
--------- ---------
TOTAL ASSETS $ 400,769 $ 381,021
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 54,481 $ 751 1.84% $ 42,741 $ 526 1.64%
Savings deposits 73,488 1,218 2.21% 72,833 1,542 2.82%
CDs $100,000 and over 30,113 1,158 5.13% 35,691 1,537 5.74%
Other interest bearing deposits 145,258 5,277 4.84% 142,225 5,766 5.41%
--------- ------- --------- --------
Total int. bearing deposits 303,340 8,403 3.69% 293,490 9,371 4.26%
Short term borrowings 1,741 66 5.04% 704 28 5.38%
Other borrowings 10,792 495 6.11% 10,607 484 6.08%
--------- ------- --------- --------
Total int. bearing liabilities 315,873 8,964 3.78% 304,801 9,883 4.32%
Noninterest bearing deposits 42,660 36,415
Other liabilities 2,502 2,949
Shareholders' equity 39,734 36,856
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 400,769 $ 381,021
========= =========
Net interest income (b) $ 13,427 $ 12,463
======== ========
Net spread (b) 4.32% 4.09%
===== =====
Net yield on interest earning assets (b) 4.86% 4.69%
===== =====
Ratio of interest earning assets to
interest bearing liabilities 1.17 1.16
==== ====
(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 nine months ended September 30, 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 $ (237) $ (39) $(276) $ 138 $ 8 $ 146
Taxable securities 173 (109) 64 (35) (14) (49)
Tax exempt securities (75) (40) (115) 248 (51) 197
Taxable loans 1,184 (823) 361 995 (100) 895
Tax exempt loans 12 (1) 11 12 - 12
-------- -------- ----- ------- ------ -------
Total interest income $ 1,057 $(1,012) $ 45 $ 1,358 $ (157) $ 1,201
======== ======== ===== ======= ====== =======
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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 $ 157 $ 68 $ 225 $ 48 $ 30 $ 78
Savings deposits 14 (338) (324) 51 (11) 40
CDs $100,000 and over (225) (154) (379) (258) (31) (289)
Other interest bearing deposits 121 (610) (489) 770 (217) 553
Short term borrowings 39 (2) 37 (62) (1) (63)
Other borrowings 9 2 11 (64) 9 (55)
----- -------- ------ ----- ------ -----
Total interest expense $ 115 $ (1,034) $ (919) $ 485 $ (221) $ 264
===== ======== ====== ===== ====== =====
Net change in net interest
income $ 942 $ 22 $ 964 $ 873 $ 64 $ 937
===== ======== ====== ===== ====== =====
(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
Noninterest income continues to improve over prior periods. All categories of
noninterest income other than income from loan sales and servicing increased
from the same period in 1998 and from the prior quarter. Overall, on an
annualized basis, total noninterest income is up 26.2% over the second quarter,
and is up 18.1% year to date over the same period of 1998. Income from service
charges on deposit accounts, as well as Trust & Investment Group fee income,
have continued to lead the increases. In particular, the increase in Trust &
Investment Group income reflects continued growth of the Department.
NONINTEREST EXPENSES
Noninterest expense also continued to increase over prior periods, reflecting
continued growth and expansion of the Bank. Additions to Bank facilities and
staff contribute immediately to expenses, but will contribute to earnings in
future periods. Total noninterest expense for the year, excluding provision for
loan losses, is 16.9% over the same period for 1998, and is 4.2% higher than
second quarter levels. Substantially all of this increase relates to growth and
expansion of the Bank.
FEDERAL INCOME TAX
There has been no significant change in the income tax position of the Company
during the third quarter of 1999.
NET INCOME
Consolidated net income during the first nine months of the year was
substantially unchanged from the same period in 1998, and income for the third
quarter exceeded that of the third quarter of 1998. However, income during the
quarter improved from previous quarters of the year. The slowing of earnings
generally reflects investments made in staff and facilities to generate future
growth and income. Management anticipates that benefits of this expansion will
become more evident in the fourth quarter of the year and into 2000. Year to
date earnings are up 3.1% (annualized) over 1998 levels.
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
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- 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 client risk.
Through the third 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 was 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 for
the balance of the year will be restricted to assure that we can complete our
Year 2000 plan.
Contingency planning is substantially complete 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.
During the second quarter of 1999, the Bank installed an auxiliary power
generator at its main office, and installed a generator at its Operations Center
during the third quarter. The generators are capable of powering the entire
building where installed, and will assure continued operation of the Bank's data
center and operations areas in the event of a power failure. While the Bank does
not expect systemic
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power failures, the generators also provide protection from power failure from
causes other than Year 2000 issues, including storms.
The Company has evaluated its anticipated liquidity needs relating to potential
cash demands, and has established a liquidity contingency policy. Management
believes that sufficient liquidity sources are available to provide the Bank
with adequate funding for any special cash needs that might develop.
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.
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 and income simulation analyses. An interest
sensitivity model is the primary tool used to assess this risk
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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 September 30, 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 increased
slightly during the 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.
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ITEM 2- CHANGES IN SECURITIES
No changes in the securities of the Company occurred during the quarter ended
September 30, 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 September 30, 1999.
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, 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
September 30, 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.
October 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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