<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/x/ Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. /x/
As of March 8, 1996, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $30,916,000 (common stock, no par value.)
As of March 8, 1996, there were outstanding 1,489,840 shares of the
registrant's common stock, no par value.
Documents Incorporated By Reference:
Portions of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 16, 1996 are incorporated by reference into Part
III.
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CROSS REFERENCE TABLE
<TABLE>
<CAPTION>
PAGE NUMBERS
--------------------------
Proxy Form
ITEM NO. DESCRIPTION Statement 10-K
- ------------------------------------------------------------------------------------------------------
PART I
<S> <C> <C>
1.Business 3
I. Selected Statistical information 6
-Distribution of Assets, Liabilities and Equity 6,18
-Interest Rates and Interest Differential 6,20
II. Securities Portfolio 6,12,30
III. Loan Portfolio 7
-Types of Loans 7
-Maturities and Sensitivities of Loans to Changes in Interest 7
-Risk Elements 7,26,31
-Other Interest Bearing Assets 8
IV. Summary of Loan Loss Experience 8
-Changes in Allowance for Loan Losses 8
-Allocation of Allowance for Loan Losses 9
V. Deposits 10,18,20
VI. Return on Equity and Assets 10
VII. Short-term Borrowings 10,32
2. Properties 10
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 11
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 11
6. Selected Financial Data 11
7. Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
8. Financial Statement and Supplementary Data 23
9. Changes in and disagreements with Accountants on Accounting and 39
Financial Disclosure
PART III
10.Directors and Executive Officers of the Registrant 9 39
11.Executive Compensation 12 39
12.Security Ownership of Certain Beneficial Owners and Management 15 39
13.Certain Relationships and related Transactions 11 34,39
PART IV
14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K 39
Signatures 41
</TABLE>
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PART I
ITEM 1 - BUSINESS
United Bancorp, Inc. (the "Company") was incorporated on May 31, 1985 as a
business corporation under the Michigan Business Corporation Act, pursuant to
the authorization and direction of the Directors of United Bank & Trust (the
"Bank").
The Company is a bank holding company registered with the Board of Governors of
the Federal Reserve System under the Bank Holding Company Act, with the Bank as
its only wholly-owned subsidiary. The Bank was acquired by the Company
effective January 1, 1986. The Company has corporate power to engage in such
activities as permitted to business corporations under the Michigan Business
Corporation Act, subject to the limitations of the Bank Holding Company Act and
regulations of the Federal Reserve System. In general, the Bank Holding Company
Act and regulations restrict the Company with respect to its own activities and
activities of any subsidiaries to the business of banking or such other
activities which are closely related to the business of banking.
The Bank offers a full range of services to individuals, corporations,
fiduciaries and other institutions. Banking services include checking, NOW
accounts, savings, time deposit accounts, money market deposit accounts, safe
deposit facilities and money transfers. Lending operations provide real estate
loans, secured and unsecured business and personal loans, consumer installment
loans, credit card and check-credit loans, home equity loans, accounts
receivable and inventory financing, equipment lease financing and construction
financing.
The Bank's Trust & Investment Group offers a wide variety of fiduciary services
to individuals, corporations and governmental entities, including services as
trustee for personal, corporate, pension, profit sharing and other employee
benefit trusts. The Department provides securities custody services as an
agent, acts as the personal representative for estates and as a fiscal, paying
and escrow agent for corporate customers and governmental entities.
In 1995, the Bank renewed its efforts to offer nontraditional financial
services to its market. Through an agreement with Security First Corporation,
the Bank began offering the sale of mutual funds and annuities through
representatives located in the Bank's offices.
Late in 1995, the Bank formed an insurance agency. No activity was conducted by
the Agency during 1995, but this subsidiary provides an additional vehicle to
provide additional financial services to clients and nonclients in the future.
Banking services are delivered through a system of thirteen banking offices
plus nine automated teller machines, all in Lenawee County, Michigan. The
business base of the County is primarily agricultural and light manufacturing,
with its manufacturing sector exhibiting moderate dependence on the automotive
and refrigeration and air conditioning industries. The Bank maintains
correspondent bank relationships with several larger banks, which involve check
clearing operations, transfer of funds, loan participation, and the purchase
and sale of federal funds and other similar services.
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Supervision and Regulation
As a bank holding company within the meaning of the Bank Holding Company Act,
the Company is required by said Act to file annual reports of its operations
and such additional information as the Board of Governors may require and is
subject, along with its subsidiaries, to examination by the Board of Governors.
The Federal Reserve is the primary regulator of the Company.
The Bank Holding Company Act requires every bank holding company to obtain
prior approval of the Board of Governors before it may merge with or
consolidate into another bank holding company, acquire substantially all the
assets of any bank, or acquire ownership or control of any voting shares of any
bank if after such acquisition it would own or control, directly or indirectly,
more than 5% of the voting shares of such bank holding company or bank. The
Board of Governors may not approve the acquisition by the Company of voting
shares or substantially all the assets of any bank located in any state other
than Michigan unless the laws of such other state specifically authorize such
an acquisition. The Bank Holding Company Act also prohibits a bank holding
company, with certain exceptions, from acquiring direct or indirect ownership
or control of more than 5% of the voting shares of any company which is not a
bank and from engaging in any business other than that of banking, managing and
controlling banks or furnishing services to banks and their subsidiaries.
However, holding companies may engage in, and may own shares of companies
engaged in, certain businesses found by the Board of Governors to be so closely
related to banking or the management or control of banks as to be a proper
incident thereto.
Under current regulations of the Board of Governors, a holding company and its
nonbank subsidiaries are permitted, among other activities, to engage, subject
to certain specified limitations, in such banking related business ventures as
sales and consumer finance, equipment leasing, computer service bureau and
software operations, data processing and services transmission, discount
securities brokerage, mortgage banking and brokerage, sale and leaseback and
other forms of real estate banking. The Bank Holding Company Act does not place
territorial restrictions on the activities of nonbank subsidiaries of bank
holding companies.
In addition, federal legislation prohibits acquisition of "control" of a bank
or bank holding company without prior notice to certain federal bank
regulators. "Control" in certain cases may include the acquisition of as little
as 10% of the outstanding shares of capital stock.
Michigan's banking laws restrict the payment of cash dividends by a state bank
by providing, subject to certain exceptions, that dividends may be paid only
out of net profits then on hand after deducting therefrom its losses and bad
debts and no dividends may be paid unless the bank will have a surplus
amounting to not less than twenty percent (20%) of its capital after the
payment of the dividend.
United Bank & Trust is a Michigan banking corporation, and as such is subject
to the regulation of, and supervision and regular examination by, the Michigan
Financial Institutions Bureau ("FIB") and also the Federal Deposit Insurance
Corporation ("FDIC"). The FIB is the primary regulator of the Bank. Deposit
accounts of the Bank are insured by the FDIC. Requirements and restrictions
under the laws of the United States and the State of Michigan include the
requirement that banks maintain reserves against deposits, restrictions on the
nature and amount of loans which may be made by a bank and the interest that
may be charged thereon, restrictions on the payment of interest on certain
deposits and restrictions relating to investments and other activities of a
bank.
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The Federal Reserve Board has established guidelines for risk-based capital by
bank holding companies. These guidelines establish a risk adjusted ratio
relating capital to risk-weighted assets and off-balance-sheet exposures. These
capital guidelines primarily define the components of capital, categorize
assets into different risk classes, and include certain off-balance-sheet items
in the calculation of capital requirements. Tier I capital consists of
shareholders' equity less intangible assets and unrealized gain or loss on
securities available for sale, and Tier 2 capital consists of Tier 1 capital
plus qualifying loan loss reserves.
The capital ratios of the Company exceed the regulatory guidelines for well
capitalized institutions. The following table shows the Company's regulatory
capital and capital ratios at December 31, 1995 and 1994, as well as the
regulatory requirements for adequately capitalized and well capitalized
institutions established by the FDIC. Figures shown are in thousands of
dollars, where appropriate.
<TABLE>
<CAPTION>
Regulatory Guidelines United Bancorp, Inc.
--------------------- --------------------
Adequate Well 1995 1994
-------- ---- ---- ----
<S> <C> <C> <C> <C>
Tier 1 leverage ratio 4% 5% 8.42% 7.95%
Tier I risk adjusted capital ratio 4% 8% 13.34% 12.46%
Total risk adjusted capital ratio 8% 10% 14.42% 13.56%
Total shareholders' equity $28,853 $25,158
Intangible assets (1,683) (1,915)
Unrealized (gain) loss on securities available
for sale (105) 854
------- -------
Tier 1 capital 27,065 24,097
Qualifying loan loss reserves 2,197 2,127
------- -------
Tier 2 capital $29,262 $26,224
</TABLE>
The above ratios, in conjunction with regulatory ratings, have qualified the
Bank for the lowest FDIC insurance rate available to insured financial
institutions.
During 1993, the Company adopted three accounting standards issued by the
Financial Accounting Standards Board ("FASB"). In 1994 the Company modified and
expanded certain disclosures to comply with Statement of Financial Accounting
Standards No. 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments. For 1995 the Company adopted Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." In 1995 the Company also adopted AICPA Statement of Position
94-6, "Disclosure of Certain Significant Risks and Uncertainties." The adoption
of these pronouncements is discussed in Note 1 of Item 8 on Pages 26 - 29 and
is incorporated herein by reference.
Competition
The banking business in the Bank's service area is highly competitive. In
Lenawee County, the Bank competes with seven other banks, one savings & loan
association, two credit unions, and various finance companies and loan
production offices. Three of the banks and the savings & loan association are
subsidiaries of large multi-state, multi-bank holding companies. The Bank
expanded its penetration in various areas in the County through two
acquisitions in 1992 and one acquisition in 1994. These acquisitions opened up
markets in the County that were not previously served directly by the Company.
During 1994, the Bank completed a significant addition to its existing Adrian
office to house additional offices of the Bank's Trust & Investment Group, and
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completed construction of a 3,500 square foot office near the Adrian Mall, in
the City of Adrian. In addition construction of an office in the Village of
Blissfield was completed in May of 1995.
The Bank continued to make inroads into Lenawee County markets through its
offices. The Company believes that the market perceives a competitive benefit
to an independent, locally controlled commercial bank. Much of the Bank's
competition comes from affiliates of organizations controlled from outside the
area. Against these competitors, the Bank continues to expand its loan
portfolio. Coupled with the fact that the Company offers the only locally-based
trust department in the County, this local focus has provided a significant
competitive advantage.
Employees
On December 31, 1995, the Bank employed 134 full-time and 36 part-time
employees. This compares to 129 full time and 28 part time employees as of
December 31, 1994. The Company has no full time employees. Its operation and
business are carried out by officers and employees of the Bank, who are not
compensated by the Company.
I SELECTED STATISTICAL INFORMATION
(A) Distribution of Assets, Liabilities and Shareholders' Equity;
(B) Interest Rates and Interest Differential:
The information called for by this item is presented in Item 7 on pages 18 - 20
and is incorporated herein by reference.
II SECURITIES PORTFOLIO
The following table reflects the amortized costs and yields of the Company's
securities portfolio for 1995. The average yield on tax exempt securities of
states and political subdivisions is adjusted to a taxable equivalent basis,
assuming a 34% marginal tax rate. In thousands of dollars where applicable:
Amortized Costs and Yields of Investments
<TABLE>
<CAPTION>
0 - 1 1 - 5 5 - 10 Over 10
Available For Sale Year Years Years Years Total
- ------------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and Government Agencies (1) $13,104 $28,838 $41,942
Weighted average yield 4.60% 6.58% 5.96%
Other Securities (2) 1,354 1,965 3,319
Weighted average yield 8.00% 6.50% 7.11%
------- ------- ------- ------- -------
Total Securities $14,458 $30,803 $45,261
Weighted average yield 4.92% 6.57% 6.05%
Held to Maturity
- ----------------
Tax Exempt Securities of States and Political Subdivisions $855 $11,012 $14,800 $2,216 $28,883
Weighted average yield 7.77% 8.40% 8.38% 8.12% 8.35%
Other Securities (2) 1,312 300 1,612
Weighted average yield 6.58% 6.78% 6.62%
------- ------- ------- ------- -------
Total Securities $ 2,167 $11,312 $14,800 $2,216 $30,495
Weighted average yield 7.05% 8.36% 8.38% 8.12% 8.26%
</TABLE>
(1) Reflects the scheduled amortization and an estimate of future prepayments
based on past and current experience of amortizing U.S. agency securities.
(2) Reflects the scheduled amortization and an estimate of future prepayments
based on past and current experience of the issuer for various
collateralized mortgage obligations.
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The Company's securities portfolio contains no concentrations by issuer greater
than 10% of shareholders' equity. Additional information concerning the
Company's securities portfolio is included in Item 7 on Page 12 and in Note 4
on Page 30 of Item 8 and is incorporated herein by reference.
III LOAN PORTFOLIO
(A) TYPES OF LOANS
The table below shows loans outstanding (net of unearned interest) at December
31. All loans are domestic and contain no concentrations by industry or
customer. Balances are stated in thousands of dollars.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Personal $ 57,418 $ 47,102 $ 36,105 $ 31,746 $ 26,083
Business 56,946 56,765 47,969 49,066 42,650
Tax exempt 1,224 1,513 1,975 2,296 2,336
Residential mortgage (1) 97,000 101,329 105,223 95,854 66,754
Construction loans 5,239 4,050 6,037 3,964 2,263
Bankers' acceptances 2,490
-------- -------- -------- -------- --------
Total loans (1) $217,827 $210,759 $197,309 $182,926 $142,576
======== ======== ======== ======== ========
</TABLE>
(1) includes loans held for sale
(B) MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table presents the maturity of total loans outstanding, other
than residential mortgages and personal loans, as of December 31, 1995,
according to scheduled repayments of principal. All figures are stated in
thousands of dollars.
<TABLE>
<CAPTION>
0 - 1 1 - 5 After 5
Year Years Years Total
------- ------- ------- -------
<S> <C> <C> <C> <C>
Business - fixed rate $ 6,660 $13,928 $11,322 $31,910
Business - variable rate 10,088 10,292 4,656 25,036
Tax exempt - fixed rate 400 411 114 925
Tax exempt - variable rate 299 299
Construction loans -fixed rate 4,557 321 182 5,060
Construction loans -variable rate 179 179
------- ------- ------- -------
Total fixed rate 11,617 14,660 11,618 37,895
Total variable rate 10,566 10,292 4,656 25,514
------- ------- ------- -------
Grand total $22,183 $24,952 $16,274 $63,409
======= ======= ======= =======
</TABLE>
(C) RISK ELEMENTS
Non-Accrual, Past Due and Restructured Loans
The aggregate amount of non-performing loans is presented in the table below.
Nonperforming loans comprise (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). All numbers other than
the percent of total loans are stated in thousands of dollars.
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<TABLE>
<CAPTION>
Nonperforming Loans: 1995 1994 1993 1992 1991
- -------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 41 $110 $172 $416 $ 699
Loans past due 90 days or more 163 517 21 122 429
Troubled debt restructurings 2 34 36 103
----- ----- ----- ----- ------
Total nonperforming loans $204 $629 $227 $574 $1,231
===== ===== ===== ===== ======
Percent of total loans 0.09% 0.30% 0.12% 0.31% 0.86%
</TABLE>
For purposes of the above summary, loans renewed on market terms existing at
the time of renewal are not considered troubled debt restructurings. The
accrual of interest income is discontinued when a loan becomes 90 days past due
unless it is both well secured and in the process of collection, or the
borrower's capacity to repay the loan and the collateral value appear
sufficient.
The following shows the effect on interest revenue of nonperforming loans for
the year ended December 31, 1995, in thousands of dollars:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Gross amount of interest that would have been recorded at original rate $6
Interest that was included in revenue
----
Net impact on interest revenue $6
====
</TABLE>
Additional information concerning nonperforming loans, the Bank's nonaccrual
policy, and loan concentrations is provided in Note 1 on Page 26, Note 5 on
Page 31 and Note 6 on Page 31 of Item 8 and is incorporated herein by
reference.
At December 31, 1995, the Bank had no loans other than those disclosed above
which cause management to have serious doubts as to the ability of the
borrowers to comply with the present loan repayment terms and which may result
in disclosure of such loans pursuant to Item III.C.1.
(D) OTHER INTEREST BEARING ASSETS
As of December 31, 1995, there were no other interest bearing assets that would
be required to be disclosed under Item III, Parts (C)(1) or (C)(2) of the Loan
Portfolio listing if such assets were loans.
IV SUMMARY OF LOAN LOSS EXPERIENCE
(A) CHANGES IN ALLOWANCE FOR LOAN LOSSES
The Bank's allowance for loan losses was 1.01% of total loans at December 31,
1995 and 1994. The table below summarizes changes in the allowance for loan
losses for the years 1991 through 1995, stated in thousands of dollars.
CHANGES IN ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $2,127 $2,074 $1,871 $1,516 $1,277
------ ------ ------ ------ ------
Charge-offs:
Business loans 6 19 45 290 34
Residential mortgages 2 12 14 40
Personal loans 355 222 143 143 146
------ ------ ------ ------ ------
Total charge-offs 361 243 200 447 220
------ ------ ------ ------ ------
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Recoveries:
Business loans 4 12 26 41 25
Residential mortgages 24
Personal loans 66 35 42 41 34
------ ------ ------ ------ ------
Total recoveries 70 47 68 82 83
------ ------ ------ ------ ------
Net charge-offs 291 196 132 365 137
------ ------ ------ ------ ------
Allowance for loans acquired 300
Additions charged to operations 361 249 335 420 376
------ ------ ------ ------ ------
Balance at end of period $2,197 $2,127 $2,074 $1,871 $1,516
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans 0.14% 0.10% 0.07% 0.21% 0.10%
</TABLE>
The allowance for loan losses is maintained at a level believed adequate by
Management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
amount and composition of the loan portfolio, and other factors. The
higher-than-historical loan losses experienced in 1992 were caused primarily by
one business customer. Management increased the provision charged to earnings
to $361,000 in 1995, compared to $249,000 in 1994 and $335,000 in 1993. The
allowance is based on the analysis of the loan portfolio and a four year
historical average of net charge offs to average loans of .13% of the
portfolio.
(B) ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The following table presents the portion of the allowance for loan losses
applicable to each loan category in thousands of dollars, and the percent of
loans in each category to total loans, as of December 31.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1995 1994 1993
--------------------- --------------------- --------------------
Amount Percent Amount Percent Amount Percent
--------------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Business $1,056 26.1% $ 455 26.9% $ 642 24.3%
Tax exempt 0.6% 0.7% 1.0%
Residential mortgage 34 44.5% 57 48.1% 71 53.3%
Personal 230 26.4% 169 22.3% 110 18.3%
Construction 2.4% 1.9% 3.1%
Unallocated 877 1,446 1,251
------ ----- ------ ----- ------ -----
Total $2,197 100.0% $2,127 100.0% $2,074 100.0%
====== ===== ====== ===== ====== =====
<CAPTION>
1992 1991
--------------------- ---------------------
Amount Percent Amount Percent
--------------------- ---------------------
<S> <C> <C> <C> <C>
Business $ 568 26.8% $ 685 29.9%
Tax exempt 1.3% 1.6%
Residential mortgages 77 52.4% 46 46.8%
Personal 122 17.4% 96 18.3%
Construction 2.2% 1.6%
Bankers acceptances 1.7%
Unallocated 1,104 689
------ ----- ------ -----
Total $1,871 100.0% $1,516 100.0%
====== ===== ====== =====
</TABLE>
The allocation method used takes into account specific allocations for
identified credits and a four year historical loss average in determining the
allocation for the balance of the portfolio.
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V DEPOSITS
The information concerning average balances of deposits and the
weighted-average rates paid thereon is included in Item 8, Pages 18 and 20 of
this report, and is incorporated herein by reference. Maturities of negotiated
rate time deposits of $100,000 or more outstanding at December 31, 1995 are
summarized below, in thousands of dollars:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION 1995
--------------------- ----
<S> <C>
Three months or less $11,909
Over three months through six months 6,293
Over six months through twelve months 4,749
Over twelve months 11,488
-------
Total $34,439
=======
</TABLE>
VI RETURN ON EQUITY AND ASSETS
Various ratios required by this section and other ratios commonly used in
analyzing bank holding company financial statements are included in the table
below. Book value per share is based on outstanding shares at December 31, of
1,489,840 in 1995 and 1,488,375 in 1994 and 1993. Dividends per share is based
on average shares outstanding of 1,488,379 in 1995 and 1,488,375 in 1994 and
1993.
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Return on average assets 1.30% 1.20% 1.30%
Return on average shareholders' equity 14.9% 14.6% 17.3%
Dividend payout ratio 33.2% 33.7% 29.2%
Average equity to average total assets 8.8% 8.2% 7.5%
Book value per share $19.37 $16.90 $16.01
Cash dividends per share $0.900 $0.813 $0.750
</TABLE>
VII SHORT-TERM BORROWINGS
The information called for by this item is contained in Note 8, Page 32 of Item
8 and is incorporated herein by reference.
ITEM 2 -PROPERTIES
The executive offices of the Company are located at the main office of United
Bank & Trust, 205 East Chicago Boulevard, Tecumseh, Michigan. The Bank owns and
occupies the entire two-story brick building, which was built in 1980. The Bank
operates three other offices in the Tecumseh area, two in the city of Adrian,
one each in the cities of Hudson and Morenci, one each in the villages of
Britton and Blissfield, and one each in Clinton, Rollin and Raisin Townships,
all in Lenawee County. The Bank owns all of the buildings and leases the land
for one office in the city of Adrian. All branches offer drive-up facilities.
ITEM 3 -LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings. The Bank 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 more than five percent
(5%) of the outstanding stock
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<PAGE> 11
of either 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1995.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
PRICE RANGE FOR COMMON STOCK
The following table shows the high and low selling prices of common stock of
the Company for each quarter of 1995 and 1994 as reported by First of Michigan
Corporation. These prices do not reflect private trades not involving First of
Michigan Corporation. The common stock of the Company is traded over the
counter. The Company had 830 shareholders as of December 31, 1995. The prices
and dividends per share have been adjusted to reflect the 1994 stock split.
<TABLE>
<CAPTION>
1995 1994
----------------------------------------- -----------------------------------------
Market price Cash Market price Cash
------------------------ dividends ------------------------ dividends
Quarter High Low declared High Low declared
- ----------------------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st $27.00 $26.00 $0.190 $21.00 $20.00 $0.183
2nd 27.25 26.50 0.190 21.75 20.75 0.185
3rd 27.50 26.00 0.200 26.00 24.00 0.185
4th 28.00 27.00 0.320 26.00 24.00 0.260
</TABLE>
ITEM 6 - SELECTED FINANCIAL DATA
The following table presents five years of financial data for the Company, for
the years ended December 31. (In thousands, except per share data).
<TABLE>
<CAPTION>
FINANCIAL CONDITION 1995 1994 1993 1992 1991
- ------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and demand balances in other banks $ 10,017 $ 7,049 $ 6,304 $ 7,515 $ 3,850
Federal funds sold 8,700 2,600 6,800
Securities available for sale 45,420 41,900 46,882 5,000
Securities held to maturity 30,495 32,896 35,624 77,439 57,520
Net loans 215,630 208,632 195,236 181,054 141,060
Other assets 13,174 13,784 12,367 11,081 6,959
-------- -------- -------- -------- --------
TOTAL ASSETS $323,436 $304,261 $299,013 $288,889 $209,389
======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest bearing deposits $ 29,565 $ 26,712 $ 25,145 $ 21,866 $ 13,131
Interest bearing certificates of deposit
of $100,000 or more 34,439 24,016 21,005 20,764 16,301
Other interest bearing deposits 221,168 213,556 220,997 220,279 149,526
-------- -------- -------- -------- --------
Total deposits 285,172 264,284 267,147 262,909 178,958
Short term borrowings 578 6,800 3,000 9,800
Other borrowings 6,000 6,000 6,000
Other liabilities 2,833 2,019 2,032 2,046 1,997
-------- -------- -------- -------- --------
Total Liabilities 294,583 279,103 275,179 267,955 190,755
Shareholders' Equity 28,853 25,158 23,834 20,934 18,634
-------- -------- -------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $323,436 $304,261 $299,013 $288,889 $209,389
======== ======== ======== ======== ========
</TABLE>
PAGE 11
<PAGE> 12
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
- ---------------------
<S> <C> <C> <C> <C> <C>
Interest income $23,492 $20,667 $20,908 $20,982 $18,373
Interest expense 11,084 9,419 9,910 11,172 10,461
------- ------- ------- ------- -------
Net Interest Income 12,408 11,248 10,998 9,810 7,913
Provision for loan losses 361 249 335 420 376
Noninterest income 2,707 2,262 2,594 2,053 1,433
Noninterest expense 9,297 8,506 8,158 7,093 5,602
------- ------- ------- ------- -------
Income before Federal income tax 5,457 4,755 5,099 4,350 3,368
Federal income tax 1,422 1,171 1,279 1,081 781
------- ------- ------- ------- -------
NET INCOME $ 4,035 $ 3,584 $ 3,820 $ 3,269 $ 2,587
======= ======= ======= ======= =======
Per share earnings (1) $ 2.71 $ 2.41 $ 2.57 $ 2.20 $ 1.74
</TABLE>
(1) Per share data is based on average shares outstanding and has been adjusted
to reflect a 3 for 1 stock split in 1994 and stock dividends paid in 1993
and 1991.
ITEM 7 - 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.
FINANCIAL CONDITION
SECURITIES
The securities portfolio of the Bank increased slightly during 1995, following
declines in 1994. This increase reflects deposit growth which outpaced loan
growth during the year.
<TABLE>
<CAPTION>
Change in Categories of Securities Portfolio,
in thousands of dollars 1995 1994
- --------------------------------------------- -------- --------
<S> <C> <C>
U.S. Treasury and agency securities $(10,009) $(7,079)
Mortgage backed agency securities 13,308 1,922
Tax exempt obligations of states and political subdivisions 3,216 1,871
Corporate, taxable municipal and asset backed securities (5,396) (4,425)
-------- -------
Total securities $ 1,119 $(7,711)
======== =======
</TABLE>
In 1995, the Bank actively pursued high-balance money market deposit accounts
from existing clients, and invested the funds in variable rate mortgage backed
agency securities. Holdings in U.S. Treasury and agency securities declined
during the year as a result of maturities in the portfolio. These investments
were generally replaced with U.S. Government agency mortgage backed securities,
which offered higher yields than U.S. Treasury bonds. In general, maturities of
corporate asset backed and debt securities were not replaced during the year.
Holdings in tax exempt obligations of states and political subdivisions
increased during the year, as in prior years. The Company's current and
projected tax position continues to make carrying these securities valuable to
the Bank. In addition, the Company does not anticipate being subject to the
alternative minimum tax in the near future. The investment in local municipal
issues also reflects the Company's commitment to the development of the local
area through support of its political subdivisions.
Page 12
<PAGE> 13
<TABLE>
<CAPTION>
Percentage Makeup of Securities Portfolio at December 31 1995 1994
- -------------------------------------------------------- ----- -----
<S> <C> <C>
U.S. Treasury and agency securities 19.9% 33.6%
Mortgage backed agency securities 35.5% 18.3%
Tax exempt obligations of states and political subdivisions 38.1% 34.3%
Corporate, taxable municipal and asset backed securities 6.5% 13.8%
----- -----
Total securities 100.0% 100.0%
</TABLE>
Investments in U.S. Treasury and agency securities are considered to possess
low credit risk. Obligations of U.S. government agency mortgage-backed
securities possess a somewhat higher interest rate risk due to certain
prepayment risks. The Bank's portfolio contains no "high risk" mortgage
securities or structured notes.
The Company experienced a significant shift in its unrealized gains and losses
on securities available for sale during 1995 and 1994. At December 31, 1993,
the gain was $196,000, net of tax. During 1994, market rates increased,
resulting in declines in the market value of investments. At December 31,
1994, the unrealized net loss on securities available for sale was $854,000,
net of tax. Following declines in rates during 1995, market values increased,
and at December 31, 1995, the position had shifted to an unrealized net gain of
$105,000.
These unrealized gains and losses are temporary, since they are a result of
market changes, rather than a reflection of credit quality. Management has no
specific intent to sell any securities classified as either held to maturity or
available for sale.
LOANS
Total loans increased 3.4% in 1995, compared to 6.8% growth in 1994. Growth in
the consumer loan area during 1995 continued to reflect significant growth in
the Bank's home equity, credit card and consumer installment loan portfolios.
Demand for business loans was flat during the year, following significant
growth in 1994. The continued decline in tax exempt loans reflects normal
amortization as well as a decline in demand for this type of financing.
<TABLE>
<CAPTION>
Percentage Change in Categories of Loan Portfolio 1995 1994
- ------------------------------------------------- ----- -----
<S> <C> <C>
Personal 21.9% 30.5%
Business 0.3% 18.3%
Tax exempt -19.1% 23.4%
Residential mortgage -3.4% -3.6%
Construction 29.4% -32.9%
Total loans 3.4% 6.8%
</TABLE>
The Bank continues to be the single largest provider of residential mortgage
loans in Lenawee County. As a full service lender, the Bank offers a variety of
home mortgage loan products in its market. During 1995, the preference of
consumers was primarily for fixed rate residential real estate loans, rather
than for variable rate loans. This resulted in a decline in the residential
real estate portfolio, since the Bank generally retains ownership of adjustable
rate and short term fixed rate loans, and originates and sells long term single
family residential fixed rate mortgage loans in the secondary market. While the
Bank anticipates that it will continue to sell loans in the secondary market,
the actual amounts originated for sale will depend on several factors,
including local economic conditions and demand in the real estate market.
Page 13
<PAGE> 14
CREDIT QUALITY
The Company continues to maintain a high level of asset quality as a result of
actively monitoring delinquencies, nonperforming assets and potential problem
loans. At December 31, 1995, the Bank had approximately $202,000 of loans past
due 90 days or more or not accruing interest. This amount represents .07% of
all loans outstanding, and is an unusually low percentage for the industry.
This number is down from $517,000 at the end of 1994, when the increase from
1993 was due primarily to the delinquency of one large commercial customer, for
which no loss was experienced.
<TABLE>
<CAPTION>
Percentage Makeup of Loan Portfolio as of December 31 1995 1994
- ----------------------------------------------------- ----- -----
<S> <C> <C>
Personal - direct 15.3% 13.4%
Personal - indirect 11.1% 8.9%
Business 26.1% 26.9%
Tax exempt 0.6% 0.7%
Residential mortgage 44.5% 48.1%
Construction 2.4% 1.9%
----- -----
Total loans 100.0% 100.0%
</TABLE>
The largest single category of loans is also generally the category with the
least risk. Loans to finance residential mortgages are well-secured and have
had historically low levels of net losses. Personal and business loans make up
the balance of the portfolio in equal proportions.
Business loans carry the largest balances per loan, and therefore, any single
loss would be proportionally larger than losses in other portfolios. Because of
this, in addition to the precautions taken with credit quality in the other
portfolios, the Bank uses an independent loan review firm to assess the
continued quality of its business loan portfolio. Business loans contain no
significant concentrations other than geographic concentrations within Lenawee
County.
Personal loan balances were $57.4 million at December 31, 1995. Of those loans,
approximately 73% are direct and indirect installment loans. Home equity loans
comprise another 20% of personal loans, and the balance consists of credit card
loans and unsecured revolving line of credit loans, including overdraft
protection. Installment loans consist primarily of loans for consumer durable
goods, principally automobiles. Indirect personal loans consist of loans for
automobiles and manufactured housing.
During the past two years, the Bank has increased its involvement in indirect
personal lending. This indirect lending is performed within the Bank's market
area, and underwriting standards are strict. All loans are obtained through
established dealers who are well-known to the Company. Indirect lending is
traditionally somewhat riskier than direct lending, but the Company maintains a
high level of asset quality on indirect loans as well as direct loans by
actively monitoring delinquencies, nonperforming assets and potential problem
loans.
Further information concerning credit quality is contained in Note 6 of the
Notes to Consolidated Financial Statements.
DEPOSITS AND REPURCHASE AGREEMENTS
Deposits increased during 1995, following modest declines in 1994. The greatest
percentage increases in deposits during 1995 were seen in demand deposits,
money market deposit accounts, certificates of deposit over one year and
interest bearing certificates greater than $100,000. The majority of the Bank's
deposits are derived from core customer sources, relating to long term
Page 14
<PAGE> 15
relationships with local personal, business and public customers.
A number of factors contributed to deposit growth in 1995. Personal demand
deposit accounts increased due to the introduction of the very successful
Freedom Checking product during 1995. This product features no monthly
statement charges or minimum balances, with unlimited check writing. In
addition, successful penetrations into the Adrian and Blissfield markets
contributed to deposit growth. Increases in long term CDs more than offset
declines in short term CDs, as clients continued their shifts to longer
maturities during 1995.
<TABLE>
<CAPTION>
Percentage Change in Deposits by Category 1995 1994
- ----------------------------------------- ----- -----
<S> <C> <C>
Noninterest bearing 10.6% 6.4%
Interest bearing certificates of $100,000 or more 43.4% 14.3%
Other interest bearing 3.4% -3.4%
Total deposits 7.9% -1.1%
</TABLE>
Late in 1994, the Bank began offering a repurchase agreement product to
non-retail customers, and balances in this product were $5.2 million at
December 31, 1994. Management considered this product to be a logical
replacement for uninsured deposits for municipalities and large corporate
customers. However, following the decrease in FDIC insurance rates in 1995,
rates on repurchase agreements became less attractive to clients, and most of
these balances returned to certificates of deposit over $100,000. This is
responsible for a large portion of the increases in that category of deposits.
Other interest bearing deposits remained virtually unchanged as a percent of
total deposits.
<TABLE>
<CAPTION>
Percentage Breakdown of Deposit Portfolio as of December 31 1995 1994
- ----------------------------------------------------------- ----- -----
<S> <C> <C>
Noninterest bearing deposits 10.4% 10.1%
Interest bearing certificates of $100,000 or more 12.1% 9.1%
Other interest bearing deposits 77.5% 80.8%
----- -----
Total deposits 100.0% 100.0%
</TABLE>
In financial institutions, the presence of interest bearing certificates
greater than $100,000 often indicates a reliance upon purchased funds. However,
in the Bank's deposit portfolio, these balances represent core deposits of
local clients. The Bank does not support its growth through purchased or
brokered deposits.
The Bank's deposit rates are consistently competitive with other banks in its
market, and in general, the Lenawee County market has traditionally paid higher
interest rates on deposits than the nearby Detroit and Toledo metropolitan
market areas.
CASH EQUIVALENTS AND BORROWED FUNDS
The Bank found it advantageous to borrow periodically through the federal funds
market during 1994. However, early in 1995, the Bank shifted from being a user
to a provider of funds in the federal funds market. This strategic move was in
response to a flattening of the yield curve, which made short term rates
relatively more attractive. Further information concerning this change is
discussed in the "Liquidity and Funds Management" section below.
In addition to the federal funds market, the Bank continued to use advances
from the Federal Home Loan Bank, renewing $3 million of advances which matured
during 1995. Additional information concerning borrowings is detailed in Notes
8 and 9 of the Notes to Consolidated Financial Statements and in the "Liquidity
and Funds Management" section following.
Page 15
<PAGE> 16
LIQUIDITY AND FUNDS MANAGEMENT
LIQUIDITY
While 1994 presented challenges to provide funding for continued strong loan
demand, expansion in the Adrian market and entry into the Blissfield market
contributed additional sources of deposits in 1995.
During 1995, the interest rate yield curve shifted dramatically, providing
proportionally better returns for federal funds balances than for other types
of investments. In order to take advantage of this unusual rate scenario, the
reinvestment of some investment maturities was delayed in order to enhance
investment income. This provided additional liquidity during the year.
The Bank monitors its liquidity position regularly, and is in compliance with
regulatory guidelines for liquidity. The Company has a number of liquidity
sources other than deposits, including federal funds and other lines of credit
with correspondent banks, securities available for sale, and a line of credit
with the Federal Home Loan Bank of Indianapolis. Information concerning
available lines is contained in Note 8 of the Notes to Consolidated Financial
Statements.
FUNDS MANAGEMENT
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.
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 Bank relies on traditional methods to balance the interest sensitivity of
its asset and liability portfolios. Interest rate futures, caps, swaps and
similar instruments are avoided, in preference for more familiar, traditional
funds management techniques.
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.
The Bank continued to maintain its interest sensitivity position near to a
neutral position. As a result, continued emphasis on variable rate assets was
combined with attempts to acquire short term fixed rate deposits.
Page 16
<PAGE> 17
The following table shows the rate sensitivity of earning assets and interest
bearing liabilities as of December 31, 1995. Assets and liabilities are shown
in the table according to their anticipated repricing dates. Loans and
investments are categorized using their scheduled payment dates, where
applicable. Savings, NOW and money market deposit accounts are considered to be
immediately repriceable. All other liabilities are reported by their scheduled
maturities.
INTEREST SENSITIVITY SUMMARY
<TABLE>
<CAPTION>
0-3 4-12 1-5 5-10 Over 10
In thousands of dollars Months Months Years Years Years Total
-------- -------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Securities and fed funds sold $30,626 $14,644 $26,224 $11,386 $1,735 $ 84,615
Loans 55,744 53,338 71,918 21,527 15,300 217,827
-------- -------- -------- -------- ------- ---------
Total earning assets $86,370 $67,982 $98,142 $32,913 $17,035 $302,442
======== ======== ======== ======== ======= ========
Interest bearing deposits $156,810 $45,667 $53,051 $ 79 $255,607
Repurchase agreements 578 578
Other borrowings 3,000 3,000 6,000
-------- -------- -------- -------- ------- ---------
Total interest bearing liabilities $157,388 $48,667 $56,051 $ 79 $262,185
======== ======== ======== ======== ======= =========
Net asset (liability) funding gap ($71,018) $19,315 $42,091 $32,834 $17,035 $ 40,257
Cumulative net asset (liability) funding gap ($71,018) ($51,703) ($9,612) $23,222 $40,257
Cumulative gap ratio 0.55 0.75 0.96 0.88 1.15 to 1
Cumulative gap as a percent of total assets -22.0% -16.0% -3.0% 7.2% 12.4%
</TABLE>
CAPITAL RESOURCES
It is the policy of the Company to pay 30% to 35% of net earnings as cash
dividends to shareholders. These dividends have resulted in a dividend yield of
approximately 3.3% and 3.5% in 1995 and 1994, respectively, with the decline
due entirely to an increase in the market value of the stock. A three-for-one
stock split was paid in 1994, and a 5% stock dividends was paid to shareholders
in 1993. The stock of the Company is traded locally over the counter, and
demand consistently exceeds supply. Additional information concerning capital
ratios and shareholder return is included in "Financial Highlights."
The capital ratios of the Bank and the Company continued to increase through
the retention of earnings during 1995. Capital ratios continued to exceed the
levels required by its regulators.
The Company maintains a five year plan, and utilizes a formal strategic
planning process. Management and the Board continue to monitor long term
goals, which include maintaining capital growth in relation to asset growth,
and the retention of earnings to fund growth while providing a return to
shareholders.
RESULTS OF OPERATIONS
Consolidated net income for 1995 was $4,035,000, compared to $3,584,000 for
1994 and $3,820,000 for 1993. This resulted in a return on consolidated average
assets for 1995 of 1.30%, compared to 1.20% for 1994 and 1.30% for 1993. Return
on average shareholders' equity increased to 14.9%, up from 14.7% in 1994 and
down from 17.3% in 1993. In addition, earnings per share for 1995 were $2.71,
compared to $2.41 and $2.57 for 1994 and 1993, respectively. All per share
figures have been restated to reflect the stock split in 1994 and the stock
dividend distributed in 1993.
Page 17
<PAGE> 18
NET INTEREST INCOME
United Bancorp, Inc. derives its income primarily from net interest income,
which is an important indicator of the Company's profitability. In general, the
Bank has a lower net interest margin than its peers, due principally to its
deposit mix. Interest income yields of the Bank are generally in line with
peers, but relatively low levels of noninterest bearing deposits and a high
amount of certificates of deposit contribute to a relatively high cost of
funds.
Management's attempts to influence the deposit mix proved marginally successful
during 1994, as the percent of noninterest bearing deposits to total deposits
increased slightly. This trend continued in 1995, due in part to the
introduction of the Freedom Checking product, as discussed under "Deposits,"
above. Improvements in margin also resulted in part from continued attempts
during 1995 to influence deposit mix through pricing and target marketing. The
Yield Analysis table provides insight into the various components of net
interest income, as well as the results of recent initiatives which have helped
to improve the margin.
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
------------------------------------- -------------------------------------
1995 1994
------------------------------------- -------------------------------------
Average Interest Yield/ Average Interest Yield/
ASSETS Balance (b) Rate Balance (b) Rate
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets (a)
Federal funds sold $ 3,644 $ 215 5.91% $ 1,602 $ 56 3.51%
Taxable securities 49,230 2,703 5.49% 56,398 2,803 4.97%
Tax exempt securities (b) 25,408 2,258 8.89% 24,977 2,249 9.00%
Taxable loans 211,342 19,006 8.99% 198,287 16,221 8.18%
Tax exempt loans (b) 1,282 118 9.18% 1,712 155 9.08%
-------- -------- -------- --------
Tot int earning assets (b) 290,906 24,300 8.35% 282,976 21,484 7.59%
Cash and due from banks 7,759 6,911
Premises and equipment, net 8,420 7,420
Intangible assets 1,804 1,999
Other assets 3,003 3,222
Unrealized loss on securities afs (421) (653)
Allowance for loan losses (2,181) (2,178)
-------- --------
TOTAL ASSETS $309,290 $299,697
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
Interest bearing liabilities
Interest bearing demand deposits $ 36,347 763 2.10% $32,764 681 2.08%
Savings deposits 73,092 2,124 2.91% 78,659 2,011 2.56%
CDs $100,000 and over 29,942 1,829 6.11% 24,279 1,310 5.40%
Other interest bearing deposits 105,001 5,824 5.55% 103,245 4,941 4.79%
-------- -------- -------- --------
Total int bearing deposits 244,382 10,540 4.31% 238,947 8,944 3.74%
Short term borrowings 3,854 236 6.12% 4,079 193 4.73%
Long term borrowings 6,000 308 5.14% 6,000 282 4.70%
-------- -------- -------- --------
Total int bearing liabilities 254,236 11,084 4.36% 249,026 9,419 3.78%
-------- ---- -------- ----
Noninterest bearing deposits 25,821 24,439
Other liabilities 2,136 1,727
Shareholders' equity 27,097 24,505
-------- --------
TOTAL LIABILITIES & EQUITY $309,290 $299,697
======== ========
Net interest income $13,216 $12,065
======== ========
Net spread (b) 3.99% 3.81%
==== ====
Net yield on interest earning
assets (b) 4.54% 4.26%
Ratio of interest earning assets to
interest bearing liabilities 1.14 1.14
==== ====
</TABLE>
Page 18
<PAGE> 19
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES, CONTINUED
<TABLE>
<CAPTION>
--------------------------------------
1993
--------------------------------------
Average Interest Yield/
ASSETS Balance (b) Rate
--------------------------------------
<S> <C> <C> <C>
Interest earning assets (a)
Federal funds sold $ 2,814 $ 84 2.99%
Taxable securities 58,151 2,938 5.05%
Tax exempt securities (b) 24,846 2,321 9.34%
Taxable loans 191,186 16,230 8.49%
Tax exempt loans (b) 1,988 189 9.51%
-------- -------
Total interest earning assets (b) 278,985 21,762 7.80%
Cash and due from banks 6,483
Premises and equipment, net 6,096
Intangible assets 2,038
Other assets 3,184
Unrealized loss on securities
available for sale
Allowance for loan losses (1,986)
--------
TOTAL ASSETS $294,800
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities
Interest bearing demand deposits $32,400 797 2.46%
Savings deposits 79,929 2,190 2.74%
CDs $100,000 and over 21,327 1,199 5.62%
Other interest bearing deposits 110,477 5,471 4.95%
-------- -------
Total interest bearing deposits 244,133 9,657 3.96%
Short term borrowings 1,577 72 4.57%
Long term borrowings 3,760 181 4.81%
-------- -------
Total interest bearing liabilities 249,470 9,909 3.97%
------- ------
Noninterest bearing deposits 21,176
Other liabilities 2,059
Shareholders' equity 22,095
--------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $294,800
========
Net interest income $11,852
=======
Net spread (b) 3.83%
======
Net yield on interest earning assets (b) 4.25%
Ratio of interest earning assets to
interest bearing liabilities 1.12
========
</TABLE>
(a) Non-accrual loans and overdrafts are included in the average balances of
loans.
(b) Fully tax-equivalent basis; 34% tax rate.
While the spread improved from 3.81% in 1994 to 3.99% in 1995, the improvement
in margin from 4.26% in 1994 to 4.54% in 1995 is perhaps more significant.
However, the ratio of interest earning assets to interest bearing liabilities
remained unchanged, at 1.14 for 1995 and 1994.
Total dollars of net interest income increased significantly during 1995, as a
result of both volume and rate increases. As noted above under "Securities,"
the move from U.S. Treasury securities to federal funds sold provided
improvements in interest income. Continued growth in personal loans also
contributed to the improvement in margin, as pricing on these products is
generally higher than on other categories of loans.
Page 19
<PAGE> 20
The following table sets forth the effects of volume and rate changes on net
interest income on a taxable equivalent basis. All figures are stated in
thousands of dollars.
<TABLE>
<CAPTION>
------------------------------------ ------------------------------------
1995 compared to 1994 1994 compared to 1993
------------------------------------ ------------------------------------
Increase (decrease) due to: (a) Volume Rate Net Volume Rate Net
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Federal funds sold $ 104 $ 55 $ 159 $ (41) $ 13 $ (28)
Taxable securities (377) 277 (100) (88) (47) (135)
Tax exempt securities (b) 39 (29) 10 12 (85) (73)
Taxable loans 1,110 1,675 2,785 592 (601) (9)
Tax exempt loans (b) (39) 1 (38) (25) (9) (34)
------ ------ ------ ----- ----- -----
Total interest income $ 837 $1,979 $2,816 $ 450 $(729) $(279)
------ ------ ------ ----- ----- -----
Interest expense on:
Interest bearing demand deposits $ 75 $ 8 $ 83 $ 9 $(125) $(116)
Savings deposits (149) 261 112 (34) (145) (179)
CDs $100,000 and over 331 188 519 161 (50) 111
Other interest bearing deposits 85 798 883 (350) (180) (530)
Short term borrowings (11) 54 43 118 3 121
Long term borrowings 27 27 105 (4) 101
------ ------ ------ ----- ----- -----
Total interest expense $ 331 $1,336 $1,667 $ 9 $(501) $(492)
------ ------ ------ ----- ----- -----
Net change in net interest income $ 506 $ 643 $1,149 $ 441 $(228) $ 213
====== ====== ====== ===== ===== =====
</TABLE>
(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.
The above tables further demonstrate the effect of volume and rate changes on
net interest income on a taxable equivalent basis for the last two years. 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. Nonaccrual loans are included in total loans, and
changes are treated as volume variances.
PROVISION FOR LOAN LOSSES
The purpose of the provision for loan losses is to maintain an adequate
allowance to absorb potential loan losses. Management strives to maintain the
allowance for loan losses at an appropriate level based upon their analysis of
the loan portfolio, in order to provide for possible future losses and
anticipated growth.
The Bank has consistently low levels of nonperforming loans, and loan loss
history has been excellent compared to peers. The use of an independent loan
review function for business loans, and careful monitoring of loans by
management allows the Bank to maintain its high level of quality in the loan
portfolio. All of these factors combine with the high level of residential real
estate loans to support an allowance as a percent of total loans at a level
which is somewhat below average for a commercial bank.
The amount of the 1995 provision for loan losses was $361,000, compared to
$249,000 in 1994 and $335,000 in 1993. Actual charge offs were $361,000 in
1995, compared to $243,000 in 1994 and $201,000 during 1993, while recoveries
for the same periods were $70,000, $48,000 and $68,000, respectively. The
allowance for loan losses at year end 1995 reached $2,197,000, representing
1.01% of total loans. The adoption by the Company of Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" effective
Page 20
<PAGE> 21
January 1, 1995 was immaterial to the Company's consolidated financial
statements.
NONINTEREST INCOME
Total noninterest income increased 29.8% during 1995, following a decrease of
13.2% from 1993 to 1994. A number of items contributed to these changes.
Growth in deposits, primarily in the banking offices opened in 1994 and 1995,
contributed to a 23.0% increase in deposit service charges from 1994 to 1995.
This followed modest declines from 1993 to 1994.
Also contributing to the overall profitability of the Company is the Trust &
Investment Group of the Bank, as gross income generated from trust fees
continued to rise. Trust & Investment fees provided 32.8% of the Company's
noninterest income in 1995, compared to 34.7% in 1994 and 30.1% in 1993. Total
Trust & Investment Group fee income increased 9.6% in 1995 over 1994. Future
increases in Trust fee income are dependent on the growth of the Department and
the market value of assets managed, but are expected to continue to increase in
future periods. The Department will celebrate its 20th year of operation in
1996.
One area of income that showed some improvement in 1995 following significant
decline for 1994 was income from the sales and servicing of loans. Gains on the
sale of loans, combined with net provision for losses on loans held for sale
was $237,000 in 1995. This compares to $65,000 for 1994 and $509,000 for 1993,
and reflects a rebound from the slowing of the demand for residential real
estate mortgages during 1994, as a decrease in long term rates in 1995 resulted
in some increase in volume from 1994 levels. The unprecedented origination
volume experienced throughout the country in 1993 and 1992 was a result of
interest rates which were significantly lower than the rates on virtually all
mortgages that were in place at that time. Almost all mortgage borrowers were
able to benefit during that period by refinancing their existing mortgage
loans. Management believes that the origination levels experienced in 1993 and
1992 are not likely to be repeated even as rates fall.
The Bank continues to build a significant portfolio of sold loans which it
continues to service, and this servicing provides ongoing income for the life
of the loans. The Bank generally markets its production of fixed rate long term
mortgages in the secondary market, and retains adjustable rate mortgages for
its portfolio. As loan rates declined during 1995, client preference shifted
toward fixed rate loans, resulting in a greater proportion of those loans
originated by the Bank being sold in the secondary market. The Bank currently
services nearly $72 million of sold loans, compared to $53 million at the end
of 1994. These loans will continue to generate fee income in future periods.
The other area providing significant increases from 1994 is income from the
sale of nondeposit investment products. Enhancements to the Bank's program in
late 1994 have provided substantial increases in sales, resulting in increased
fee income. Total income provided from the sale of annuities and mutual funds
these products in 1995 was $272,000, up 700% from 1994.
In 1995, the Michigan Banking Code was modified to permit state banks to sell
insurance products of all kinds. United Bank & Trust subsequently formed an
insurance agency, although the agency has not yet commenced operations and no
income was generated during the year.
Page 21
<PAGE> 22
Management anticipates that noninterest income will continue to be emphasized
in the future as a significant source of income to help augment net interest
income in light of continued increased competition in the financial services
markets.
NONINTEREST EXPENSE
Personnel expense continues to be the largest single area of expense. Expansion
and growth requires adequate staffing, and personnel expense increased 18.7%
over 1994. Total full-time equivalent staffing was 156.5 at December 31, 1995,
compared to 144.5 in 1994. This expansion also contributed to increases in
occupancy and equipment expenses, which increased 17.1% during 1995, compared
to an increase of 5.8% in 1994 and 42.0% in 1993.
Other noninterest expenses increased moderately due to the continued expansion
of the Company. Several areas reflecting increases relate primarily to this
expansion, and include costs of marketing, business development and staff
education, as well as expenses relating to the operation of thirteen banking
offices in 1995, compared to eleven for most of 1994 and 1993.
A reduction of FDIC insurance premium rates resulted in a decrease of
approximately $284,000 in the Company's FDIC insurance cost from 1994.
Effective May 1, 1995, the FDIC reduced the Company's premium rate from 23
basis points per $100 of deposits to 4 basis points. This change was a result
of the Bank Insurance Fund ("BIF"), which insures 95% of the Company's deposit
accounts, reaching its statutorially required level in the spring of 1995.
This rate has further been reduced to zero for the first six months of 1996.
However, because the Savings Association Insurance Fund ("SAIF") is not
projected to reach its fully funded level for several more years, SAIF insured
institutions will not benefit from these premium reductions. There has been
active discussion in the United States Congress that a significant premium
disparity between BIF and SAIF insured institutions might be inappropriate or
undesirable. One option being actively considered is a one-time special
assessment on SAIF insured deposits. Such special assessment or other charges,
if implemented, may reduce the level of premium reduction currently announced.
The Company has a small amount of SAIF insured deposits arising from the
acquisition of branches from a thrift institution, and the net income affect of
the one time charge currently proposed would be less than $55,000.
FEDERAL INCOME TAX
The Company's effective tax rate remained substantially unchanged from prior
years.
<TABLE>
<CAPTION>
Effective Tax Rates 1995 1994 1993
- ------------------- ------- ------- -------
<S> <C> <C> <C>
Income before tax ($000) $5,457 $4,755 $5,099
Federal income tax accrual ($000) 1,422 1,111 1,279
Effective federal tax rate 26.1% 24.6% 25.1%
</TABLE>
Tax exempt income continues to be a significant factor in the tax calculation
for the Company, due to the relatively large portion of the investment
portfolio carried in tax exempt municipal securities. The Bank intends to
continue to invest in these securities as long as liquidity, safety and tax
equivalent yields make them an attractive alternative.
PROSPECTIVE ACCOUNTING AND REGULATORY CHANGES
Information concerning the adoption of prospective accounting changes is
reviewed in Note 1 of the Notes to Consolidated Financial Statements.
Management is not aware of any other trends, events or uncertainties that are
likely to have a material effect on the Company's liquidity, capital
Page 22
<PAGE> 23
resources, or operations. In addition, Management is not aware of any current
recommendations by regulatory authorities, other than those previously
discussed, which would have such an effect.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEET
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
December 31,
In thousands of dollars Notes 1995 1994
- ----------------------- ----- ---- ----
<S> <C> <C> <C>
ASSETS
Cash and demand balances in other banks 3 $ 10,017 $ 7,049
Federal funds sold 8,700
-------- --------
Total cash and cash equivalents 18,717 7,049
Securities available for sale 4 45,420 41,900
Securities held to maturity (fair value of $31,833 in 1995 and $32,911 in 1994) 4 30,495 32,896
-------- --------
Total securities 75,915 74,796
Loans held for sale 261 1,301
Portfolio loans 217,566 209,458
-------- --------
Total loans 5,12 217,827 210,759
Less allowance for loan losses 6 2,197 2,127
-------- --------
Net loans 215,630 208,632
Premises and equipment, net 7 8,404 8,310
Accrued interest receivable and other assets 4,770 5,474
-------- --------
TOTAL ASSETS $323,436 $304,261
======== ========
LIABILITIES
Deposits
Noninterest bearing deposits $ 29,565 $ 26,712
Interest bearing certificates of deposit of $100,000 or more 34,439 24,016
Other interest bearing deposits 221,168 213,556
-------- --------
Total deposits 285,172 264,284
Short term borrowings 8 578 6,800
Other borrowings 9 6,000 6,000
Accrued interest payable and other liabilities 2,833 2,019
-------- --------
TOTAL LIABILITIES 294,583 279,103
-------- --------
Commitments and contingent liabilities 4,7,10
SHAREHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized,
1,489,840 and 1,488,375 shares issued and outstanding, respectively 11,262 11,221
Retained earnings 17,486 14,791
Unrealized gain (loss) on securities available for sale,
net of tax of ($54) and $440, respectively 105 (854)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 28,853 25,158
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $323,436 $304,261
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 23
<PAGE> 24
CONSOLIDATED STATEMENT OF INCOME
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
For the years ended December 31,
In thousands of dollars, except per share data Notes 1995 1994 1993
- ---------------------------------------------- ----- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans
Taxable $19,006 $16,221 $16,229
Tax exempt 78 103 125
Interest on securities
Available for sale - taxable 2,310 2,304
Held to maturity - taxable 393 499 2,938
Held to maturity - tax exempt 1,490 1,484 1,532
Interest on federal funds sold 215 56 84
------- ------- -------
Total interest income 23,492 20,667 20,908
------- ------- -------
INTEREST EXPENSE
Interest on certificates of deposit of $100,000 or more 1,829 1,310 1,199
Interest on other deposits 8,711 7,634 8,458
Interest on short term borrowings 236 193 72
Interest on other borrowings 308 282 181
------- ------- -------
Total interest expense 11,084 9,419 9,910
------- ------- -------
NET INTEREST INCOME 12,408 11,248 10,998
Provision for loan losses 6 361 249 335
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,047 10,999 10,663
------- ------- -------
NONINTEREST INCOME
Service charges on deposit accounts 978 795 798
Trust & Investment fee income 903 824 796
Gains on securities transactions 4 108 121
Loan sales and servicing 389 184 550
Income from sale of nondeposit investment products 272 34 49
Other income 432 349 328
------- ------- -------
Total noninterest income 2,978 2,294 2,642
------- ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 14 4,927 4,185 3,776
Occupancy and equipment expense, net 1,715 1,464 1,384
Federal deposit insurance premiums 321 605 590
Other expense 2,605 2,284 2,456
------- ------- -------
Total noninterest expense 9,568 8,538 8,206
------- ------- -------
INCOME BEFORE FEDERAL INCOME TAX 5,457 4,755 5,099
Federal income tax 11 1,422 1,171 1,279
------- ------- -------
NET INCOME $ 4,035 $ 3,584 $ 3,820
======= ======= =======
Earnings per share 1 $2.71 $2.41 $2.57
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 24
<PAGE> 25
CONSOLIDATED STATEMENT OF CASH FLOWS
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
For the years ended December 31,
In thousands of dollars 1995 1994 1993
- ----------------------- ------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 4,035 $3,584 $3,820
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES
Depreciation 895 849 716
Accretion/amortization on securities 364 467 700
Intangibles amortization 232 243 216
Provision for loan losses 361 249 335
Provision for losses on loans held for sale (118) 118
Gain on sale of loans (119) (183) (509)
Gain on sale of securities (4) (108) (121)
Loans originated for sale (25,035) (21,540) (24,886)
Proceeds from sales of loans originated for sale 26,312 23,599 22,759
Change in accrued interest receivable and other assets 32 (73) (229)
Change in accrued interest payable and other liabilities 671 206 (63)
------- ------- -------
Total adjustments 3,591 3,827 (1,082)
------- ------- -------
Net cash from operating activities 7,626 7,411 2,738
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (19,132) (14,171)
Proceeds from sale of securities available for sale 7,272 9,180
Proceeds from maturities of securities available for sale 13,546 6,000
Principal payments on securities available for sale 3,216 5,255 10,744
Purchase of securities held to maturity (4,529) (4,536)
Proceeds from sale of securities held to maturity 93
Proceeds from maturities of securities held to maturity 6,780 5,942
Purchase of securities (39,616)
Proceeds from maturities of securities 19,342
Proceeds from portfolio loan sales 2,278 4,418
Net increase in portfolio loans (8,399) (17,918) (16,298)
Premises and equipment expenditures (990) (2,129) (2,065)
------- ------- -------
Net cash from investing activities (9,415) (12,007) (14,295)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in noninterest bearing demand, savings and NOW deposits 7,975 (1,150) 10,053
Net change in time deposits 12,913 (1,713) (5,816)
Net change in short term borrowings (6,222) 6,800 (3,000)
Principal payments on other borrowings (3,000)
Proceeds from advances in other borrowings 3,000 6,000
Proceeds from the issuance of common stock 41
Dividends paid (1,250) (1,196) (1,091)
------- ------- -------
Net cash from financing activities 13,457 2,741 6,146
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 11,668 (1,855) (5,411)
Cash and cash equivalents at beginning of year 7,049 8,904 14,315
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $18,717 $7,049 $8,904
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Year for
Interest $10,972 $9,460 $10,209
Income tax $1,275 $1,075 $1,267
</TABLE>
Noncash Investing Activities
Upon the adoption of SFAS No. 115 at December 31, 1993, the Company transferred
$46,882,000 of securities at fair value to securities available for sale.
The accompanying notes are an integral part of these consolidated financial
statements.
Page 25
<PAGE> 26
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
Unrealized Gain
(Loss) on
Common Retained Securities Avail-
In thousands of dollars, except per share data Stock Earnings able for Sale Total
- ---------------------------------------------- ------- -------- -------------- --------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 $ 9,945 $10,989 $20,934
Net income, 1993 3,820 3,820
Cash dividends declared, $0.750 per share (1,116) (1,116)
Five percent stock dividend 1,276 (1,276)
Net unrealized gain on securities available for sale $ 196 196
------- ------- ------ -------
BALANCE, DECEMBER 31, 1993 11,221 12,417 196 23,834
Net income, 1994 3,584 3,584
Cash dividends declared, $0.813 per share (1,210) (1,210)
Net change in unrealized gain (loss) on securities available for sale (1,050) (1,050)
------- ------- ------ -------
BALANCE, DECEMBER 31, 1994 11,221 14,791 (854) 25,158
Net income, 1995 4,035 4,035
Cash dividends declared, $0.900 per share (1,340) (1,340)
Common stock issued, 1,465 shares 41 41
Net change in unrealized gain (loss) on securities available for sale 959 959
------- ------- ------ -------
BALANCE, DECEMBER 31, 1995 $11,262 $17,486 $ 105 $28,853
======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
United Bancorp, Inc. and Subsidiary
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The consolidated financial statements include the accounts of United Bancorp,
Inc. ("Company") and its wholly owned subsidiary, United Bank & Trust ("Bank"),
after elimination of significant intercompany transactions and accounts. The
Company is engaged 100% in the business of commercial and retail banking and
trust and investment services, with operations conducted through its main
office and twelve offices located in Lenawee County in southeastern Michigan.
This County is the source of substantially all of the Company's deposit, loan
and trust activities. The majority of the Company's income is derived from
commercial and retail lending activities and investments. Primarily all
installment and residential loans are secured by real and personal property,
while approximately 97% of commercial loans are secured by business and
personal assets.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires Management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period as well as affecting the disclosures
provided. Actual results could differ from those estimates.
Estimates incorporated into the Company's consolidated financial statements
which are more susceptible to change in the near term include the allowance for
loan losses and fair values of certain financial securities.
SECURITIES
Securities available for sale consist of bonds and notes not classified as held
to maturity. Such securities might be sold prior to maturity due to changes in
interest rates, prepayment risks, yield and availability of alternative
investments, liquidity needs, or other factors. At December 31, 1993, the
Company adopted Statement of Financial Accounting
Page 26
<PAGE> 27
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"). As required by SFAS No. 115, securities
classified as available for sale are reported at their fair value and the
related unrealized holding gain or loss is reported, net of related income tax
effect, as a separate component of shareholders' equity until realized.
Realized gains or losses are based upon the amortized cost of the specific
securities sold.
Bonds and notes for which Management has the positive intent and the Bank has
the ability to hold to maturity are reported at amortized cost. Premiums and
discounts on securities are recognized in interest income using the interest
method over the period to maturity.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or market in the aggregate. Net unrealized losses,
if any, are recognized in a valuation allowance by charges to income. Loan
servicing fees are recognized when received and the related costs are
recognized when incurred. The Bank sells mortgage loans into the secondary
market at market prices which include consideration for normal servicing fees.
LOANS
Loans receivable that Management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their unpaid
principal balances reduced by any charge-offs or specific valuation accounts
and net of any deferred fees or costs.
Interest on loans is credited to operations based on the principal amount
outstanding. Management reviews loans delinquent 90 days or more to determine
if the interest accrual should be discontinued. Loan fees, net of direct loan
origination costs, are deferred and recognized over the life of the loan as a
yield adjustment. Fees on loans sold are recognized at the time of the sale.
The carrying values of impaired loans are periodically adjusted to reflect cash
payments, revised estimates of future cash flows, and increases in the present
value of expected cash flows due to the passage of time. Cash payments
representing interest income are reported as such. Other cash payments are
reported as reductions in carrying value, while increases or decreases due to
changes in estimates of future payments and due to the passage of time are
reported as increases or decreases in bad debt expense.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
Management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
amount and composition of the loan portfolio, and other factors. The allowance
is increased by provisions for loan losses charged to income and reduced by net
charge-offs.
In May of 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" ("SFAS No. 114") and later amended by Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures." The Company adopted SFAS No.
114 and 118 at January 1, 1995. Under this standard, the carrying value of
loans considered to be impaired is reduced to the present value of expected
future cash flows or, as a practical expedient, to the fair value of the
collateral by allocating a portion of the allowance for loan losses to such
loans. If these allocations cause the allowance for loan losses to require
increase, such increase is reported as bad debt expense. There was no increase
in the allowance for loan losses due to the adoption of SFAS No. 114 at January
1, 1995.
Smaller-balance homogeneous loans are residential first mortgage loans secured
by one-to-four family residences, residential construction loans, and
automobile, home equity and second mortgage loans, and are collectively
evaluated for impairment. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment. When credit analysis of
borrower operating results and financial condition indicates that underlying
cash flows of the borrower's business are not adequate to meet its debt service
requirements, including the Bank's loans to the borrower, the loan is evaluated
for impairment. Often this is associated with a delay or shortfall of payments
of 30 days or more. Commercial loans are rated "Class 1", "Class 2" and "All
Other". Class 2 are special mention loans and Class 1 are deemed substandard.
Loans in these categories are individually evaluated for impairment. All other
loans
Page 27
<PAGE> 28
are considered to be satisfactory. Loans are generally moved to nonaccrual
status when 90 days or more past due. These loans are often also considered
impaired. Impaired loans, or portions thereof, are charged off when deemed
uncollectible. This typically occurs when the loan is 120 or more days past
due. SFAS Nos. 114 and 118 disclosures for impaired loans are not expected to
be materially different from nonaccrual and renegotiated loans disclosures or
non-performing and past-due asset disclosures.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation. The
provisions for depreciation are computed principally by the straight line
method, based on useful lives of 10 to 40 years for premises and 5 to 8 years
for equipment.
OTHER REAL ESTATE OWNED
Other real estate, which is included with other assets, consists of properties
acquired through foreclosure or acceptance of a deed in lieu of foreclosure and
property acquired for possible future expansion. Real estate properties
acquired through, or in lieu of, loan foreclosure are to be sold and are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis. After foreclosure, valuations are periodically performed by
Management and the real estate is carried at the lower of carrying amount or
fair value less cost to sell. Revenue and expenses from operations and changes
in the valuation allowances are included in loss on foreclosed real estate. The
historical average holding period for such properties is less than 18 months.
INTANGIBLE ASSETS AND GOODWILL
The value of core deposits acquired in bank and branch acquisitions are
amortized on an accelerated method over their expected lives. The excess of
purchase price over the fair value of assets and liabilities acquired
(goodwill) is amortized on a straight-line basis over 15 years.
INCOME TAX
Beginning January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
The Company records income tax expense based on the amount of taxes due on its
tax return plus deferred taxes computed based on the expected future tax
consequences of temporary differences between the carrying amounts and tax
bases of assets and liabilities, using enacted tax rates, adjusted for
allowances made for uncertainty regarding the realization of net tax assets.
The cumulative effect of adopting SFAS No. 109, and the effect on 1993 net
income, was immaterial.
EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of shares
outstanding during the year. On May 27, 1994 the Company's stock was split on a
3 for 1 basis. Earnings per share, dividends per share and weighted average
shares have been restated to reflect the 1994 stock split. The weighted average
number of shares outstanding was 1,488,379 for 1995 and 1,488,375 for 1994 and
1993.
STATEMENT OF CASH FLOWS
For purposes of this statement, cash and cash equivalents include cash on hand,
demand balances with banks, and federal funds sold. Federal funds are generally
sold for one day periods. The Company reports net cash flows for customer loan
and deposit transactions, deposits made with other financial institutions, and
short term borrowings.
ISSUED BUT NOT YET ADOPTED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"). The Statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, and establishes criteria for evaluating recoverability. The
Statement also requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell, with certain exceptions. The Statement is
effective for fiscal years beginning after December 15, 1995. Management does
not expect the Statement to have a material impact on the financial condition
or results of operations of the Company.
Page 28
<PAGE> 29
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS
No. 122"). This Statement changes the accounting for mortgage servicing rights
retained by the loan originator. Under the Statement, if the originator sells
or securitizes mortgage loans and retains the related servicing rights, the
total cost of the mortgage loan is allocated between the loan (without the
servicing rights) and the servicing rights, based on their relative fair
values. Under current practice, all such costs are assigned to the loan. The
costs allocated to mortgage servicing rights will be recorded as a separate
asset and amortized in proportion to, and over the life of, the net servicing
income. The carrying value of the mortgage servicing rights will be
periodically evaluated for impairment. Impairment will be recognized using the
fair value of individual stratum of servicing rights based on the underlying
risk characteristics of the serviced loan portfolio, compared to an aggregate
portfolio approach under existing accounting guidance.
The Company currently retains servicing on almost all loans originated and sold
into the secondary market. Accordingly, the Statement will apply to most loan
sales. The impact on the Company's results of operations and financial position
will depend upon the volume of loans sold with servicing retained, the cost of
loans originated, the relative fair values of loans and servicing rights at the
point of sale, among other factors. In general, this Statement will increase
the amount of income recognized when loans are sold and will reduce the amount
of income recognized during the servicing period. The Statement is effective
for the Company in 1996. Retroactive application for servicing rights created
prior to adoption of the statement is prohibited. Based on its current volume
of loan originations and sales, the Company anticipates that the adoption of
SFAS No. 122 would have a positive effect on income of approximately $120,000
net of tax, for 1996.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS
No. 123"). The Statement establishes a fair value based method of accounting
for employee stock options and similar equity instruments, such as warrants,
and encourages all companies to adopt that method of accounting for all of
their employee stock compensation plans. However, the Statement allows
companies to continue measuring compensation cost for such plans using
accounting guidance in place prior to SFAS No. 123. Companies that elect to
remain with the former method of accounting must make pro-forma disclosures of
net income and earnings per share as if the fair value method provided for in
SFAS No. 123 has been adopted. The accounting requirements of the Statement are
required for transactions entered into in fiscal years that begin after
December 15, 1995, although early adoption is permitted. The Company currently
has no stock based compensation plans which would fall under the standards
established by the Statement and currently has not taken any action to
implement such a plan. Accordingly, the Statement will have no impact on the
financial condition or results of operations of the Company.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1993 consolidated financial statements have
been reclassified to conform with the 1995 presentation.
NOTE 2 - ACQUISITIONS
On September 23, 1994, the Bank acquired one office and related deposits from
Comerica Bank. Approximately $1.5 million of deposits were assumed. The
transaction was accounted for using the purchase method of accounting.
NOTE 3 - RESTRICTIONS ON CASH AND DEMAND BALANCES IN OTHER BANKS
The Bank is required to maintain average reserve balances in the form of cash
or balances due from the Federal Reserve Bank. These reserve balances vary
depending on the level of customer deposits in the Bank. The amounts of reserve
balances required at December 31, 1995 and 1994 were approximately $2,424,000
and $1,869,000, respectively.
Page 29
<PAGE> 30
NOTE 4 - SECURITIES
The amortized cost and fair value of securities, in thousands of dollars, as of
December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
SECURITIES AVAILABLE FOR SALE Cost Gains Losses Value
- ----------------------------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
1995
U.S. Treasury and agency securities $15,088 $ 33 $ (34) $15,087
Mortgage backed agency securities 26,854 260 (109) 27,005
Asset backed and other securities 3,319 9 3,328
------- ------ ------- -------
Total $45,261 $ 302 $ (143) $45,420
======= ====== ======= =======
1994
U.S. Treasury and agency securities $25,796 $ 1 $ (701) $25,096
Mortgage backed agency securities 14,229 8 (540) 13,697
Asset backed and other securities 3,168 (61) 3,107
------- ------ ------- -------
Total $43,193 $9 $(1,302) $41,900
======= ====== ======= =======
1993
U.S. Treasury and agency securities $31,979 $ 200 $ (4) $32,175
Mortgage backed agency securities 11,795 77 (97) 11,775
Asset backed and other securities 2,810 122 2,932
------- ------ ------- -------
Total $46,584 $ 399 $ (101) $46,882
======= ====== ======= =======
SECURITIES HELD TO MATURITY
- ---------------------------
1995
Tax exempt obligations of states and political subdivisions $28,883 $1,329 $ (7) $30,205
Corporate and taxable municipal securities 1,612 16 1,628
------- ------ ------- -------
Total $30,495 $1,345 $ (7) $31,833
======= ====== ======= =======
1994
Tax exempt obligations of states and political subdivisions $25,667 $ 413 $ (288) $25,792
Corporate and taxable municipal securities 7,229 2 (112) 7,119
------- ------ ------- -------
Total $32,896 $ 415 $ (400) $32,911
======= ====== ======= =======
1993
Tax exempt obligations of states and political subdivisions $23,796 $1,831 $ (1) $25,626
Corporate and taxable municipal securities 11,829 121 11,950
------- ------ ------- -------
Total $35,625 $1,952 $ (1) $37,576
======= ====== ======= =======
</TABLE>
State and municipal and other corporate securities represent securities which
are actively traded in a liquid market, and fair values are determined from
these markets. The Bank occasionally purchases local, nonrated municipal
securities in small dollar amounts. The amount of these local municipal
securities held is not significant. All other securities are rated investment
grade by a national rating service.
Sales activities for securities for the years indicated are shown in the
following table. All sales during 1994 and 1993 were of securities identified
as available for sale. Proceeds for 1995 relate to the sale of one security
from the held to maturity category, which was sold due to a significant
deterioration in the credit quality of the issuing municipality, resulting from
losses on certain derivatives.
<TABLE>
<CAPTION>
Year ended December 31 (In thousands of dollars) 1995 1994 1993
- ------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Sales proceeds $93 $7,272 $9,180
Gross gains 4 156 123
Gross losses 48 2
</TABLE>
Page 30
<PAGE> 31
The amortized cost and fair value of securities by contractual maturity are
shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. Asset backed securities are included in
periods based on their estimated average lives.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
---------------------- ----------------------
Amortized Fair Amortized Fair
December 31, 1995 (In thousands of dollars) Cost Value Cost Value
- ------------------------------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Due in one year or less $13,104 $13,074 $2,167 $2,179
Due after one year through five years 30,803 30,992 11,312 11,758
Due after five years through ten years 14,800 15,568
Due after ten years 2,216 2,328
Equity securities 1,354 1,354
------- ------- ------- -------
Total securities $45,261 $45,420 $30,495 $31,833
======= ======= ======= =======
</TABLE>
Securities carried at $12,104,000 as of December 31, 1995 were pledged to
secure deposits of public funds, repurchase agreements, and for other purposes
as required by law. In 1994, the Bank entered into an agreement with the
Department of Labor to pledge $632,000 of securities as a contingency to cover
any potential liability for the purchase of Presidential Life annuities when
the Bank terminated its defined benefit pension plan in 1989. The potential
future liability of the Bank depends on the ongoing financial viability of
Presidential Life, but will continue to decrease as annuities pay down.
NOTE 5 - LOANS
The table below shows total loans outstanding, including loans held for sale,
at December 31. All loans are domestic and contain no concentrations by
industry or customer.
<TABLE>
<CAPTION>
Total loans outstanding (In thousands of dollars) 1995 1994
- ------------------------------------------------- -------- --------
<S> <C> <C>
Personal $ 57,418 $ 47,102
Business 56,946 56,765
Tax exempt 1,224 1,513
Residential mortgage 96,739 100,028
Residential mortgages held for sale 261 1,301
Construction 5,239 4,050
-------- --------
Total loans $217,827 $210,759
======== ========
</TABLE>
Mortgage loans originated for sale in the secondary market are generally sold
with servicing rights retained. Mortgage loans serviced for others were
$71,633,000 and $53,005,000 at December 31, 1995 and 1994, respectively. Future
potential recourse obligations at December 31, 1995 consisted of 2 loans for a
total of $84,000.
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses for the years ended December 31
follows:
<TABLE>
<CAPTION>
In thousands of dollars 1995 1994 1993
- ------------------------ ------ ------ ------
<S> <C> <C> <C>
Balance, January 1 $2,127 $2,074 $1,871
Loans charged off (361) (243) (200)
Recoveries credited to allowance 70 47 68
Provision charged to operations 361 249 335
------ ------ ------
Balance, December 31 $2,197 $2,127 $2,074
====== ====== ======
</TABLE>
Page 31
<PAGE> 32
Information regarding impaired loans for the year ended December 31 follows:
<TABLE>
<CAPTION>
In thousands of dollars 1995
- ----------------------- ----
<S> <C>
Average investment in impaired loans $581
Interest income recognized on impaired loans 54
Interest income recognized on a cash basis 0
Balance of impaired loans at December 31 $552
Portion for which no allowance for loan losses is allocated 391
Portion for which an allowance for loan losses is allocated 161
Portion of allowance for loan losses allocated to impaired loans 62
</TABLE>
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31 (In thousands of dollars) 1995 1994
- ------------------------------------- ------- -------
<S> <C> <C>
Land $ 1,077 $ 889
Buildings and improvements 6,874 6,455
Furniture and equipment 4,096 3,930
Computer software 705 652
Construction in progress 16 12
------- -------
Total cost 12,768 11,938
Less accumulated depreciation (4,364) (3,628)
------- -------
Premises and equipment, net $ 8,404 $ 8,310
======= =======
</TABLE>
At December 31, 1995 future minimum lease payments under noncancelable leases
are $36,000 in 1996, 1997 and 1998, $37,000 in 1999, $42,000 in 2000 and
$434,000 thereafter.
NOTE 8 - SHORT TERM BORROWINGS
The Company has several credit facilities in place for short term borrowing
which are used on occasion as a source of short term liquidity. These
facilities consist of borrowing authority totaling $13.2 million from two major
correspondent banks to purchase federal funds on a daily basis. There was no
outstanding balance at December 31, 1995 and $1.6 million at December 31, 1994.
In addition, at December 31, 1995 and 1994 the Company had an unused line of
credit from the Federal Home Loan Bank of Indianapolis ("FHLB") of $9.0
million.
The Bank also enters into sales of securities under agreements to repurchase
(repurchase agreements). These agreements generally mature within one to 120
days from the transaction date. U.S. Treasury and agency securities involved
with the agreements are recorded as assets and are generally held in
safekeeping by correspondent banks. Repurchase agreements are offered
principally to certain large customers as an investment alternative to deposit
products.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
In thousands of dollars 1995 1994
- ------------------------ -------------------- ----------------------
Amount Rate Amount Rate
-------------------- ----------------------
<S> <C> <C> <C> <C>
Balance at December 31 $ 578 5.54% $5,200 5.70%
Average balance during the year 3,150 6.19% 672 5.05%
Maximum month end balance during the year 5,793 5,200
U.S. Treasury and agency securities underlying
the agreements at year end
Carrying value $2,001 $6,167
Fair value 1,998 5,937
</TABLE>
Page 32
<PAGE> 33
NOTE 9 - OTHER BORROWINGS
The Bank carries fixed rate, noncallable advances from the FHLB totaling $6.0
million; $3.0 million at 4.80% due in 1996 and $3.0 million at 5.99% due in
1998. These advances are collateralized by loans under a blanket security
agreement. The 5% commitment fee paid with these advances is being amortized
using the interest method over the lives of the advances. Interest payments are
made monthly with principal due at maturity.
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet financing needs of its customers. These
financial instruments include commitments to make loans, unused lines of
credit, and letters of credit. The Bank's exposure to credit loss in the event
of nonperformance by the other party to the financial instrument for
commitments to make loans is represented by the contractual amount of those
instruments. The Bank follows the same credit policy to make such commitments
as is followed for those loans and investments recorded in the consolidated
financial statements. The Bank's commitments to extend credit are agreements at
predetermined terms, as long as the customer continues to meet specified
criteria, with fixed expiration dates or termination clauses.
The following table shows the commitments to make loans and the unused lines of
credit available to Bank customers at December 31:
<TABLE>
<CAPTION>
In thousands of dollars 1995 1994
- ----------------------- ----------------------- -----------------------
Variable Fixed Variable Fixed
Rate Rate Rate Rate
----------------------- -----------------------
<S> <C> <C> <C> <C>
Commitments to make loans $1,834 $1,190 $3,630 $388
Unused lines of credit 33,772 2,713 26,658 1,087
Standby letters of credit 4,222 4,383
</TABLE>
Commitments to make loans generally expire within thirty to ninety days while
unused lines of credit expire at the maturity date of the individual loans. At
December 31, 1995, the rates for amounts in the fixed rate category ranged from
7.3% to 10.0%.
Noninterest bearing and interest bearing deposits and federal funds sold at two
regional money center banks totaled $15.0 million and $3.8 million at December
31, 1995 and 1994, respectively.
The Company and its subsidiary are subject to certain claims and legal actions
arising in the ordinary course of business. In the opinion of Management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
condition of the Company.
NOTE 11 - INCOME TAX
Income tax expense consists of the following for the years ended December 31:
<TABLE>
<CAPTION>
In thousands of dollars 1995 1994 1993
- ----------------------- ------ ------ ------
<S> <C> <C> <C>
Current $1,311 $1,038 $1,202
Deferred 111 133 77
------ ------ ------
Total income tax expense $1,422 $1,171 $1,279
====== ====== ======
</TABLE>
Page 33
<PAGE> 34
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31 (In thousands of dollars) 1995 1994
- ------------------------------------- ------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 473 $ 449
Net operating loss carryforward from acquisitions 52
Alternative minimum tax credit carryforward from acquisitions 68
Loan fees 91 126
Unrealized depreciation on securities available for sale 440
Other 126 100
------ ------
Total deferred tax assets $ 690 $1,235
Deferred tax liabilities:
Property and equipment ($ 497) ($ 453)
Core deposit intangible (132) (164)
Unrealized appreciation on securities available for sale (54)
Other (179) (185)
------ ------
Total deferred tax liabilities (862) (802)
------ ------
Net deferred tax (liability) asset ($ 172) $ 433
====== ======
</TABLE>
A valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefits related to
such assets will not be realized. Management has determined that no such
allowance was necessary at December 31, 1995 and 1994.
A reconciliation between total federal income tax and the amount computed
through the use of the federal statutory tax rate for the years ended is as
follows:
<TABLE>
<CAPTION>
In thousands of dollars 1995 1994 1993
- ----------------------- ------ ------ ------
<S> <C> <C> <C>
Income taxes at statutory rate of 34% $1,856 $1,617 $1,733
Effect of non-taxable income (464) (479) (483)
Other 30 33 29
------ ------ ------
Total federal income tax $1,422 $1,171 $1,279
====== ====== ======
</TABLE>
NOTE 12 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and the Bank, including
their immediate families and companies in which they are principal owners, are
loan customers of the Bank. Such loans did not, in the opinion of Management,
involve more than normal credit risk or present other unfavorable features. The
aggregate amount of these loans at December 31, 1994 was $2,822,000. During
1995, new loans to such related parties amounted to $1,123,000 and repayments
amounted to $1,199,000, resulting in a balance at December 31, 1995 of
$2,746,000.
NOTE 13 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Banking laws and regulations restrict the amount the Bank can transfer to the
Company in the form of cash dividends and loans. At December 31, 1995, $16.6
million of retained earnings of the Bank was available for distribution to the
Company as dividends without prior regulatory approval. It is not the intent of
Management to pay dividends in amounts which would reduce the capital of the
Bank to a level below that which is considered prudent by Management and in
accordance with the guidelines of regulatory authorities.
NOTE 14 - EMPLOYEE BENEFIT PLANS
Employee Savings Plan
The Bank maintains a 401(k) employee savings plan which is available to
substantially all employees. Individual employees may make contributions to the
plan up to 15% of their compensation. The Bank offers discretionary matching of
funds for a percentage of the employee contribution, plus an amount based on
Bank earnings. The Bank's contributions for 1995, 1994 and 1993 were $313,000,
$246,000 and $242,000, respectively.
Page 34
<PAGE> 35
For 1995, the Company offered employees the option of purchasing Corporation
stock with the match portion of their 401(k) contribution. On that basis, on
December 31, 1995, 1,465 shares of United Bancorp, Inc. common stock were
issued to the 401(k) plan for the benefit of plan participants who so elected
Company stock for their 1995 match.
INCENTIVE COMPENSATION PLAN
Bonuses for officers and supervisory personnel are administered under an
Incentive Compensation Plan which requires a minimum return on assets before
any performance incentive award can be made. Bonuses for the six executive
officers consist of both cash and deferred cash payments, while payments for
other participants are not deferred. Incentive compensation expense is
included in salaries and employee benefits.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS
No. 106") as of January 1, 1993. This Statement requires the costs of retiree
health care and life insurance benefits to be accrued over employee service
periods. Retiree life and health insurance coverage provided by the Company was
previously charged to expense as premiums were paid. The accumulated
postretirement benefit obligation ("APBO") for both medical and death benefits
was approximately $520,000 as of January 1, 1993 and $627,000 at December 31,
1995. As permitted under SFAS No. 106, the Company has elected to amortize the
APBO at January 1, 1993 as an operating expense over 20 years. Postretirement
benefit expense for 1995, 1994 and 1993 was approximately $77,000 in each year.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair value of principal financial assets and
liabilities were as follows:
<TABLE>
<CAPTION>
In thousands of dollars December 31, 1995 December 31, 1994
- ----------------------- ------------------------ ------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------------------ ------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 18,717 $ 18,717 $ 7,049 $ 7,049
Securities 75,915 77,253 74,796 74,811
Net loans 215,630 216,472 208,632 203,647
Accrued interest receivable 2,214 2,214 2,087 2,087
Financial Liabilities
Deposit liabilities $285,172 $286,041 $264,284 $263,743
Short term borrowings 578 578 6,800 6,800
Other borrowings 6,000 6,026 6,000 5,825
Accrued interest payable 1,102 1,102 989 989
</TABLE>
Estimated fair values require subjective judgments and are approximate. The
above estimates of fair value are not necessarily representative of amounts
that could be realized in actual market transactions, nor of the underlying
value of the Company. Changes in the following methodologies and assumptions
could significantly affect the estimated fair value:
Cash and cash equivalents, accrued interest receivable and accrued interest
payable - Due to the short periods to maturity, the carrying amounts are
reasonable estimates of the fair values of these instruments at the
respective balance sheet dates.
Securities - Fair values for securities are based on quoted market prices,
and are disclosed in detail in Note 4.
Net loans - The carrying amount is a reasonable estimate of fair value for
personal loans for which rates adjust quarterly or more frequently, and for
business and tax exempt loans which are prime related and for which rates
adjust immediately or quarterly. The fair value for residential mortgage
loans which are held for sale on the secondary market is the price offered
by the secondary market purchaser. The fair value of all other loans is
estimated by discounting future cash flows using current rates for loans
with similar characteristics and maturities.
Page 35
<PAGE> 36
Deposit liabilities - With the exception of certificates of deposit, the
carrying value is deemed to be the fair value due to the demand nature of
the deposits. The fair value of fixed maturity certificates of deposit is
estimated by discounting future cash flows using the current rates paid on
certificates of deposit with similar maturities.
Short term borrowings - Carrying value is a reasonable approximation of fair
value.
Other borrowings - The fair value is estimated by discounting future cash
flows using current rates on advances with similar maturities.
Off-balance-sheet financial instruments - The Bank's commitments to extend
credit, standby letters of credit, and undisbursed loans are deemed to have
no material fair value as such commitments are generally fulfilled at
current market rates.
NOTE 16 - PARENT COMPANY ONLY FINANCIAL INFORMATION
The condensed financial information for United Bancorp, Inc. is summarized
below.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET December 31,
In thousands of dollars 1995 1994
- ----------------------- ------ ------
<S> <C> <C>
ASSETS
Cash $ 53 $ 65
Building and premises 113
Investment in subsidiary 28,767 25,136
Other assets 500 253
------- -------
TOTAL ASSETS $29,320 $25,567
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $467 $409
Shareholders' equity 28,853 25,158
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $29,320 $25,567
======= =======
<CAPTION>
CONDENSED STATEMENT OF INCOME For the years ended December 31,
In thousands of dollars 1995 1994 1993
- ----------------------- ------ ------ ------
<S> <C> <C> <C>
INCOME
Dividends from subsidiary $1,380 $ 973 $ 720
Other income 3 116 108
------ ------ ------
TOTAL INCOME 1,383 1,089 828
EXPENSE
Interest expense 72
Other expenses 31 42 46
------ ------ ------
TOTAL EXPENSES 31 42 118
------ ------ ------
Income before undistributed equity and income taxes 1,352 1,047 710
Income tax (benefit) (10) 25 (4)
------ ------ ------
Net income before undistributed equity 1,362 1,022 714
Equity in undistributed net income of subsidiary 2,673 2,562 3,106
------ ------ ------
NET INCOME $4,035 $3,584 $3,820
====== ====== ======
</TABLE>
Page 36
<PAGE> 37
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS For the years ended December 31,
In thousands of dollars 1995 1994 1993
- ----------------------- ------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $4,035 $3,584 $3,820
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Undistributed income of subsidiary (2,673) (2,562) (3,106)
Gain from sale of investment (119)
Change in other assets (247) 183 (138)
Change in other liabilities (31) (26) 67
------ ------ ------
Total adjustments (2,951) (2,524) (3,177)
------ ------ ------
Net Cash from Operating Activities 1,084 1,060 643
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investment securities 171
Repurchase agreement transaction 3,500
------ ------ ------
Net Cash from Investing Activities 171 3,500
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of short-term borrowings (3,000)
Premises and equipment activities 113 (113)
Issuance of 1,465 shares of common stock 41
Dividends paid (1,250) (1,196) (1,079)
------ ------ ------
Net Cash from Financing Activities (1,096) (1,196) (4,192)
------ ------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (12) 35 (49)
Cash and Cash Equivalents at Beginning of Year 65 30 79
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 53 $ 65 $ 30
====== ====== ======
</TABLE>
Page 37
<PAGE> 38
REPORT OF INDEPENDENT AUDITORS
United Bancorp, Inc. and Subsidiary
Shareholders and Board of Directors
United Bancorp, Inc.
Tecumseh, Michigan
We have audited the accompanying consolidated balance sheet of United Bancorp,
Inc. and Subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Bancorp,
Inc. and Subsidiary as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 14 to the Consolidated Financial Statements, the
Company changed its method of accounting for loan impairment in 1995 and its
methods of accounting for securities, income taxes and postretirement benefits
other than pensions in 1993.
/S/ Crowe Chizek and Company LLP
-----------------------------------
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 19, 1996
Page 38
<PAGE> 39
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The information required by this item is inapplicable, and therefore has been
omitted.
PART III
Some information called for by the items within this part is contained in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held
April 16, 1996, and is incorporated herein by reference, as follows:
<TABLE>
<CAPTION>
Pages in
Proxy Statement
----------------
<S> <C>
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT 9-12
ITEM 11 - EXECUTIVE COMPENSATION 12-14
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 15-17
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
</TABLE>
Information appearing in Note 12 on Page 34 of Item 8 and on Page 11 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held
April 16, 1996, is incorporated herein by reference in response to this item.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a)The following documents are filed as a part of this report:
<TABLE>
<CAPTION>
1. Financial Statements Page
----
<S> <C>
Consolidated Balance Sheet - December 31, 1995 and 1994 23
Consolidated Statement of Income -
Years Ended December 31, 1995, 1994 and 1993 24
Consolidated Statement of Cash Flows -
Years Ended December 31, 1995, 1994 and 1993 25
Consolidated Statement of Changes in Shareholders' Equity -
Years Ended December 31, 1995, 1994 and 1993 26
Notes To Consolidated Financial Statements 26-37
Report of Crowe, Chizek and Company LLP, Certified Public
Accountants, Dated January 19, 1996 38
</TABLE>
Page 39
<PAGE> 40
2. Not applicable.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
(b) No reports on Form 8-K were filed during the quarter ending December 31,
1995.
(c) Listing of Exhibits (numbered as in Item 601 of Regulation S-K):
<TABLE>
<CAPTION>
Exhibit #
---------
<S> <C>
3(a) Amended and restated Articles of Incorporation of United Bancorp, Inc.
(incorporated by reference to Registration on Form 10, file #0-16640,
which became effective March 31, 1988).
3(b) Amended and restated Bylaws of United Bancorp, Inc. (incorporated by
reference to Registration on Form 10, file #0-16640, which became
effective March 31, 1988).
4(a) Amended and restated Articles of Incorporation of United Bancorp, Inc.
(see Exhibit 3(a) hereto).
4(b) Amended and restated Bylaws of United Bancorp, Inc. (see Exhibit 3(b)
hereto).
10 Incentive Compensation Plan of the Bank, effective January 1, 1987
(incorporated by reference to Registration on Form 10, file #0-16640,
which became effective March 31, 1988).
11 The information required by this section is incorporated by reference
in Note 1 on Page 28 of Item 8 in this report.
21 Listing of Subsidiaries, filed herewith
</TABLE>
(d) All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
Page 40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/S/ David S. Hickman March 13, 1996
---------------------------------- --------------
David S. Hickman, President and Date
Chief Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on March 13, 1996.
S/ John J. Wanke /S/ Dale L. Chadderdon
- ---------------------------------- ----------------------------------
John J. Wanke Dale L. Chadderdon,Senior Vice
Executive Vice President, Director President, Secretary and Treasurer
/S/ David N. Berlin /S/ L. Donald Bush
- ---------------------------------- ----------------------------------
David N. Berlin, Director L. Donald Bush, Director
/S/ Linda J. Herrick /S/ Patrick D. Farver
- ---------------------------------- ----------------------------------
Linda J. Herrick, Director Patrick D. Farver, Director
/S/ James C. Lawson /S/ Charles E. Gross
- ---------------------------------- ----------------------------------
James C, Lawson, Director Charles E. Gross, Director
/S/ David E. Maxwell /S/ Ann Hinsdale Knisel
- ---------------------------------- ----------------------------------
David E. Maxwell, Director Ann Hinsdale Knisel, Director
/S/ Richard Whelan /S/ Donald J. Martin
- ---------------------------------- ----------------------------------
Richard Whelan, Director Donald J. Martin, Director
Page 41
<PAGE> 42
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
EX-21 Subsidiaries
EX-27 Financial Data Schedule
Page 42
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
United Bank & Trust Michigan
Page 43
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 10,017
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,420
<INVESTMENTS-CARRYING> 30,495
<INVESTMENTS-MARKET> 31,833
<LOANS> 217,827
<ALLOWANCE> 2,197
<TOTAL-ASSETS> 323,436
<DEPOSITS> 285,172
<SHORT-TERM> 578
<LIABILITIES-OTHER> 2,833
<LONG-TERM> 6,000
0
0
<COMMON> 11,262
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<INTEREST-INVEST> 4,408
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 23,492
<INTEREST-DEPOSIT> 10,540
<INTEREST-EXPENSE> 11,084
<INTEREST-INCOME-NET> 12,408
<LOAN-LOSSES> 361
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 9,568
<INCOME-PRETAX> 5,457
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,035
<EPS-PRIMARY> 2.71
<EPS-DILUTED> 2.71
<YIELD-ACTUAL> 4.54
<LOANS-NON> 41
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<ALLOWANCE-OPEN> 2,127
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<RECOVERIES> 70
<ALLOWANCE-CLOSE> 2,197
<ALLOWANCE-DOMESTIC> 1,320
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 877
</TABLE>
