<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
UNITED BANCORP, INC.
(Name of Registrant as Specified in its Charter)
_______________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1. Title of each class of securities to which transaction applies: N/A
2. Aggregate number of securities to which transaction applies: N/A
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): N/A
4. Proposed maximum aggregate value of transaction: N/A
5. Total fee paid: N/A:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
1. Amount Previously Paid: N/A
2. Form, Schedule or Registration Statement No.: N/A
3. Filing Party: N/A
4. Date Filed: N/A
<PAGE> 2
NOTICE OF
ANNUAL MEETING OF SHAREHOLDERS
AND
PROXY STATEMENT
1997
UNITED BANCORP, INC.
<PAGE> 3
UNITED BANCORP, INC.
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
APRIL 15, 1997
NOTICE IS HEREBY GIVEN, that the Annual Meeting of Shareholders
of United Bancorp, Inc. will be held at the Tecumseh Country
Club, 5200 Milwaukee Road, Tecumseh, Michigan, on Tuesday, April
15, 1997 at 4:30 p.m., local time, for the following purposes:
1. To elect five directors constituting Class III of the Board of
Directors, to serve for three years until the 2000 Annual
Meeting of Shareholders.
2. To ratify the appointment of Crowe, Chizek & Company L.L.P. as
independent auditors.
3. To transact such other business as may properly come before the
Annual Meeting or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on March
14, 1997 as the record date for the determination of
shareholders entitled to notice of and to vote at the Annual
Meeting.
The Federal Deposit Insurance Corporation (FDIC) requires
state-chartered banks that are not members of the Federal
Reserve System to prepare an annual disclosure statement that
must be available to the public by March 31, 1997. Since United
Bank & Trust is a subsidiary of a one-bank holding company, the
accompanying financial statements of United Bancorp, Inc.
satisfies the alternative disclosure requirements of the FDIC.
You are cordially invited to attend the Annual Meeting in
person. However, whether or not you expect to be present, please
promptly sign and date the enclosed Proxy and mail it in the
return envelope, which is enclosed for that purpose. It will
assist us in preparing for the Annual Meeting, and it is
important that your shares be represented at the Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ DALE L. CHADDERDON
----------------------------------------------
March 24, 1997 Dale L. Chadderdon
Senior Vice President, Secretary and Treasurer
<PAGE> 4
UNITED BANCORP, INC.
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 15, 1997
This Proxy Statement is furnished in connection with the
solicitation by the Board of Directors of United Bancorp, Inc.
(the "Company") of the accompanying Proxy to be used at the 1997
Annual Meeting of Shareholders of the Company and any
adjournment or adjournments thereof. The Annual Meeting will be
held on April 15, 1997 at the time and place and for the
purposes set forth in the accompanying Notice of Annual Meeting
of Shareholders.
This Proxy Statement, the Proxy, and Notice of Annual Meeting
will be mailed to shareholders on or before March 25, 1996.
The mailing address of the principal executive offices of the
Company is P.O. Box 248, Tecumseh, Michigan, 49286.
Only shareholders of record at the close of business on March
14, 1997 will be entitled to notice of and to vote at the Annual
Meeting. On March 14, 1997, there were 1,565,890 shares of the
Common Stock of the Company outstanding entitled to vote at the
Annual Meeting. Each share of Common Stock is entitled to one
vote. The Common Stock constitutes the only voting security of
the Company entitled to vote upon the proposals to be presented
at the Annual Meeting.
Shares represented by properly executed Proxies received by the
Company will be voted at the Annual Meeting in the manner
specified therein. If no instructions are specified in the
Proxy, the shares represented thereby will be voted in favor of
the proposals presented at the Annual Meeting by the Board of
Directors. Any Proxy may be revoked by the person giving it at
any time prior to being voted.
The cost of soliciting Proxies will be borne by the Company. The
solicitation of Proxies will be made primarily by mail. Proxies
may also be solicited by officers and regular employees of the
Company and its subsidiary, United Bank & Trust (the "Bank"),
personally and by telephone or other means, for which they will
receive no additional compensation and at a minimum cost to the
Company. Arrangements may also be made directly by the Company
with banks, brokerage houses, custodians, nominees, and
fiduciaries to forward soliciting matter to the beneficial
owners of stock held of record by them and to obtain
authorization for the execution of Proxies. The Company may
reimburse such institutional holders for reasonable expenses
incurred by them in connection therewith.
Any nominations to the Board of Directors, or other proposals,
by a shareholder of the Company to be considered for inclusion
in the Proxy Statement for the 1998 Annual Meeting of
Shareholders must be received by Dale L. Chadderdon, Secretary
and Treasurer, at the principal executive offices of the Company
by November 24, 1997.
Page 1
<PAGE> 5
PROPOSAL 1 - ELECTION OF DIRECTORS
In accordance with the Company's Articles of Incorporation and
By-Laws, the Board of Directors is divided into three classes.
Each year, on a rotating basis, the term of office of the
Directors in one of the three classes will expire. Successors to
the class of Directors whose terms have expired will be elected
for a three-year term. The Directors whose terms expire at the
1997 Annual Meeting of Shareholders ("Class III Directors") are
David N. Berlin, Merlyn H. Downing, Charles E. Gross, Linda J.
Herrick and John J. Wanke.
The Board of Directors has by resolution nominated five
individuals for election as Class III Directors at the 1997
Annual Meeting of Shareholders. These individuals are all
incumbent Class III Directors.
Those persons who are elected as Class III Directors at the 1997
Annual Meeting of Shareholders will hold office for three years
or as noted below. Their terms will expire at the 2000 Annual
Meeting of Shareholders or upon the election and qualification
of their successors. If any of the nominees is unable to serve,
the number of Directors to be elected at the Annual Meeting of
Shareholders may be reduced by the number unable to serve and
for whom no substitute is recommended by the Board of Directors.
Mr. Downing and Mr. Gross will reach mandatory retirement age
and will retire from the Board prior to the end of their
three-year term.
Provided that a quorum is present (i.e., a majority of the
shares of the Common Stock of the Company outstanding as of the
record date and entitled to vote are represented, in person or
by proxy, at the Annual Meeting), Directors will be elected from
among those persons duly nominated for such positions by a
plurality of the votes actually cast at the Annual Meeting.
Thus, for this year, assuming the presence of a quorum, those
nominees for election as Class III Directors receiving the five
highest number of votes will be elected, regardless of the
number of votes which for any reason, including abstentions,
broker non-votes or withholding of authority to vote, are not
cast for the election of such nominees.
So far as the Board is advised, only the five persons named
above as nominees will be nominated for election as Directors at
the 1997 Annual Meeting of Shareholders. It is intended that the
shares represented by Proxies in the accompanying form will be
voted for the election of such nominees unless a contrary
direction is indicated. If any of the nominees should be unable
to serve, which the Board does not contemplate, the Proxies may
be voted for the election of such other person or persons as the
Board of Directors may recommend.
PROPOSAL 2 - INDEPENDENT AUDITORS
The Audit Committee of the Board of Directors and the Board of
Directors itself, recommends the ratification of Crowe, Chizek &
Company , L.L.P. as independent auditors for the Company and its
subsidiary for the year ending December 31, 1997. Crowe, Chizek
& Company , L.L.P. first became the auditors for the Company in
1988.
A representative of the firm of Crowe, Chizek & Company , L.L.P.
will be present at the Annual Meeting to respond to appropriate
questions in regard to their audit for 1996, and to make any
comments that they deem appropriate.
Page 2
<PAGE> 6
DIRECTORS AND EXECUTIVE OFFICERS
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 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.
INFORMATION CONCERNING NOMINEES AND INCUMBENT DIRECTORS
The name and age of each nominee and each incumbent Director,
his or her five-year business experience, and the year each
became a Director of the Company, according to the information
furnished to the Company by each nominee or incumbent Director
are as follows:
Director
Name, Age, and Five Year Business Experience (1) Since (2)
INCUMBENT DIRECTORS - TERMS EXPIRING IN 1998 (CLASS I)
L. Donald Bush, age 63; Farmer; Owner, Leland D. Bush & Sons 1992
Patrick D. Farver, age 42; President and Chief Operating 1993
officer (1994); Executive Vice President (through 1994),
Blissfield Manufacturing Co., Blissfield, Michigan
James C. Lawson, age 49; President, Lenawee Fuels, Inc. 1986
Tecumseh, Michigan
D. J. Martin, age 57; President and Director, Martin's Home 1985
Center, Tecumseh, Michigan
David E. Maxwell, age 57; Executive Vice President and Chief 1986
Operating Officer; Director, Brazeway, Inc., manufacturer of
extruded aluminum tubing and related products, Adrian, Michigan
James K. Whitehouse, age 50; Director, Gift and Estate 1991
Planning, Albion College
INCUMBENT DIRECTORS - TERMS EXPIRING IN 1999 (CLASS II)
John H. Foss, Age 54; Director, Vice President, Treasurer and 1992
Chief Financial Officer, Tecumseh Products Company,
manufacturer of compressors and refrigeration components,
engines, and power train components, Tecumseh, Michigan
David S. Hickman, age 56; President and Chief Executive 1985
Officer of the Company; Chairman and Chief Executive Officer
of the Bank, Tecumseh, Michigan
Ann Hinsdale Knisel, age 46; County Extension Director, 1993
Michigan State University Extension Service, Adrian, Michigan.
Jeffrey T. Robideau, age 37; President, Tecumseh Corrugated 1995
Box Company, Tecumseh, Michigan
Richard S. Whelan, age 63; President and Director, Hoyt E. 1985
Whelan Co., agricultural implement dealer, Tecumseh, Michigan
Page 3
<PAGE> 7
DIRECTOR NOMINEES - TERMS EXPIRING IN 2000 (CLASS III)
David N. Berlin, age 48; President, The Metalloy Corporation, 1991
foundry, die casting and machining of aluminum castings, Hudson,
Michigan
Merlyn H. Downing, age 69; Chairman of the Company, Tecumseh, 1985
Michigan
Charles E. Gross, age 68; C.P.A.; Gross, Puckey, Gruel & Roof, 1989
P.C., Certified Public Accountants, Adrian Michigan
Linda J. Herrick, age 53; Homemaker and community volunteer 1993
John J. Wanke, age 47; Executive Vice President of the Company; 1994
President and Chief Operating Officer of the Bank
DIRECTOR EMERITUS
William G. Thompson, age 82, Chairman and C.E.O. (1979 to 1991); 1992
Director (1938 to 1991), Thompson Savings Bank, Hudson, Michigan
_________________________________________________
(1)None of the Incumbents or Director Nominees, with the exception of John H.
Foss, serves as a Director of any other Company with a class of
securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934, as amended, or subject to the requirements of Section 15 (d)
of such act, or any Company registered as an investment company under the
Investment Company Act of 1940 as amended.
(2)Incumbent Directors Downing, Hickman, Martin and Whelan were initially
elected as Directors of the Company following its organization on May 31,
1985.
INFORMATION CONCERNING EXECUTIVE OFFICERS
Below is a current listing of Executive Officers of the Company, setting forth
the name, age, five-year business experience, and year each became an Executive
Officer of the Company. Officer appointments for the Company are made or
reaffirmed annually at the Organizational Meeting of the Board of Directors. At
its regular meetings, the Board may also make other Executive Officer
appointments for the Company.
Year Became
Name, Age, and Five-Year Business Experience Executive Officer
Merlyn H. Downing, age 69; Chairman of the Company 1985
David S. Hickman, age 56; President and Chief Executive Officer
of the Company; Chairman and Chief Executive Officer of the Bank 1985
John J. Wanke, age 47; Executive Vice President of the Company; 1987
President and Chief Operating Officer of the Bank
Dale L. Chadderdon, age 48; Senior Vice President, Secretary and 1987
Treasurer of the Company; Executive Vice President and Chief
Financial Officer of the Bank
Earl M. Roehm, age 54; Executive Vice President - Personal 1995
Banking of the Bank (1995); Senior Vice President, First Of
America Bank - Ann Arbor (1962-1995)
Richard L. Boyce, age 35; Senior Vice President & Trust Officer 1995
of the Bank
Terry L. Douglass, age 47; Senior Vice President - Business 1995
Banking of the Bank
Page 4
<PAGE> 8
DIRECTORS, EXECUTIVE OFFICERS, PRINCIPAL SHAREHOLDERS AND THEIR
RELATED INTERESTS - TRANSACTIONS WITH THE BANK
Directors and Executive Officers of the Company, and their
related interests, were customers of and had transactions
(including loans and commitments to lend) with the Bank in the
ordinary course of business during 1996. All such loans and
commitments were made by the Bank on substantially the same
terms, including interest rates, collateral and repayment terms,
as those prevailing at the time for comparable transactions with
other persons, and did not involve more than the normal risk of
collectability or present other unfavorable features. Similar
transactions may be expected to take place in the ordinary
course of business in the future. The aggregate extensions of
credit outstanding at December 31, 1996 to all Directors and
Executive Officers of the Company, as a group, was $3,364,000.
Any such loan transaction presently in effect with any Director
or Executive Officer of the Company is current as of this date.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors of the Company and the Bank have both
appointed Audit Committees consisting of Charles E. Gross, Linda
J. Herrick, James C. Lawson, David E. Maxwell, Jeffrey T.
Robideau and Richard S. Whelan. One of the functions of these
Committees is to meet with the internal and independent auditors
to review audit procedures and reports and other matters with
respect to the Company's and the Bank's financial reporting. The
Committees also review examination reports of the Federal and
State regulatory agencies and recommend to their respective
Boards of Directors the selection of independent auditors.
Periodic reports are made by the Committees to their respective
Boards of Directors regarding these matters. The Company's Audit
Committee and the Bank's Audit Committee each met six times
during the year ended December 31, 1996.
The Company itself has no standing nominating or compensation
committees of the Board of Directors, but similar nominating and
compensation functions are performed by the Executive Committee
of the Board of Directors of the Bank.
The Executive Committee of the Board of Directors of the Bank
met six times during 1996, and is composed of the following
Directors of the Bank: Merlyn H. Downing, John H. Foss, David S.
Hickman, James C. Lawson, Donald J. Martin, and David E.
Maxwell. The Committee presents a slate of nominees for approval
of the Board of Directors and submission to the shareholders.
Additionally, the Committee reviews and recommends to the Board
of Directors of the Bank the compensation paid to Executive
Officers of the Bank and the amounts paid, if any, to officers
under the Bank's Incentive Compensation Plan.
During the year ended December 31, 1996, the Board of Directors
of the Company met a total of five times and the Board of
Directors of the Bank met a total of twelve times. Each of the
Directors attended at least 75% of the aggregate of the total
number of meetings of the Board and of the Board Committees of
which he/she is a member, with the exception of David N. Berlin
and John H. Foss.
Page 5
<PAGE> 9
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
COMPENSATION OF EXECUTIVE OFFICERS
The Company has not paid any compensation, direct or indirect,
to any officer. Moreover, management has no present intention of
instituting any such compensation. In the event substantial
duties unrelated to the operation of the Bank should develop,
this policy will be re-examined as necessary to attract and
retain qualified officers of the Company.
The following table sets forth the total compensation awarded
to, earned by, or paid by the Bank during 1996, 1995 and 1994 to
the Executive Officers who had total annual salary and bonus
which exceeded $100,000:
<TABLE>
<CAPTION>
Annual Compensation
---------------------------- All Other
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
David S. Hickman, President and C.E.O. of the Company 1996 $156,500 $25,325 $15,000
1995 149,000 24,368 14,970
1994 140,400 22,040 13,380
John J. Wanke, Executive Vice President of the Company 1996 $111,000 $16,855 $12,562
1995 105,000 16,948 11,568
1994 100,000 15,212 9,506
Earl M. Roehm, Executive Vice President of the Bank 1996 $105,000 $12,600 $10,781
</TABLE>
Executive and other officers and employees of the Bank receive
cash bonus payments in addition to their base salaries. These
discretionary bonuses are based on individual contributions to
performance as measured by subjective and quantitative
evaluations. These measures are constructed to recognize the
influence of both external and internal factors on performance,
and also include goals and objectives agreed upon by the plan
participant and their evaluator. The calculation of share of
profits to be distributed to the plan participants is
constructed to provide awards consistent with the increase in
profits, and is subject to change with the approval by the Board
of Directors.
Bonuses for Executive Officers are accumulated over a five year
period, subject to an annual payment of 50% of the awarded
bonus. After the fifth year, the participants receive 30% of the
accumulated fund balance annually. Since amounts accrued
pursuant to the plan are not unconditional and are subject to
future events, only the amount actually paid for the years
listed are included in the Compensation Table shown above,
except where an amount has been deferred at the request of a
participant.
Under the Senior Management Bonus Plan adopted in 1996,
Executive Officers are eligible to elect cash bonus deferrals
and, after employment termination, to receive payouts in whole
or in part in the form of shares of Company stock. Amounts
deferred under this plan are not included in the above table
until paid.
The amount listed above under "All other Compensation" includes
contributions to the Bank's Employee Savings Plan, commonly
known as a 401(k) plan, on behalf of those listed, as "matching
contribution" and "profit sharing contribution".
Page 6
<PAGE> 10
COMPENSATION OF DIRECTORS
Directors of the Company were paid an annual retainer of $600
with no additional fees for meetings attended. Directors of the
Bank were paid an annual retainer of $2,400, plus fees for
meetings attended according to the schedule below. No Director
who is also an employee of either the Company or the Bank
received any compensation for their services as a Director of
the Company or the Bank.
Meeting Attended Chairman All other
---------------- -------- ---------
Board of Directors of the Bank n/a $200
Executive Committee n/a 150
Loan Committee 150 150
Trust Committee 175 150
Audit Committee 175 150
CRA Committee n/a 150
Directors who are not employees do not participate in any of the
Bank's employee benefit programs, and receive no other direct or
indirect compensation except for certain life insurance
benefits. Mr. Hickman and Mr. Wanke are the only Directors that
are paid a salary and are eligible for employee benefits.
EMPLOYMENT CONTRACTS
The Company initiated employment contracts in 1996 with each of
the Executive Officers of the Company, with the exception of Mr.
Downing. Under the terms of the contracts, Executive Officers
are entitled to up to one year of severance pay in the event of
termination for most reasons other than those relating to job
performance. In return, each Executive Officer agrees not to
compete in the financial services industry within Lenawee County
for a predetermined period of time following termination, and
agrees to the results of arbitration in the event of a dispute.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Committee of the Board of Directors serves as the
Compensation Committee for the Company. The Committee reports
that during 1996, Mr. Hickman, who is an Executive Officer of
the Company, served as a member of the Executive Committee.
However, Mr. Hickman did not participate in decisions with
respect to his own compensation. No other Executive Officer
served as a member of the Executive Committee during 1996.
In addition, the Committee reports that:
1. No executive officer of the Company serves on the Compensation
Committee of another entity, one of whose executive officers served on the
compensation committee of the Company;
2. No executive officer of the Company served as a Director of another
entity, one of whose executive officers served on the compensation
committee of the Company;
3. No executive officer of the Company served as a member of the
compensation committee of another entity, one of whose executive
officers served as a Director of the Company.
Page 7
<PAGE> 11
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Executive Committee of the Board of Directors serves as the Board
Compensation Committee of the Company, and is composed of Directors Downing,
Foss, Hickman, Lawson, Martin and Maxwell. The Committee reviews and recommends
to the Board of Directors of the Bank the compensation paid to Executive
Officers of the Bank and the amounts paid, if any, to officers under the Bank's
Incentive Compensation Plan. The members of the above Committee offer the
following explanation for the determination of the CEO's compensation for 1996:
The base salary for 1996 for Mr. Hickman reflects an increase from 1995. The
Executive Committee is pleased with Mr. Hickman's leadership, and the combined
performance of the entire senior management group. The compensation objective
is to provide salaries above the midpoint of the range for banks in the $200 to
$500 million asset peer group, and to award bonuses that are determined by
financial performance.
STOCK PERFORMANCE GRAPH
The chart below shows the yearly percentage change in the Company's cumulative
total shareholder return on its common stock. This increase is compared in the
chart to similar changes in the Keefe, Bruyette & Woods, Inc. ("KBW") 50 index,
as well as the Standard & Poor's 500 Stock Index. All prices are adjusted for
stock splits and stock dividends. The index is calculated on a modified equal
dollar weighted basis with January 1, 1992 as a base date.
[GRAPH]
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
UBI 100.0 135.0 165.2 203.4 222.4 273.4
S&P 500 100.0 130.5 140.4 154.6 156.6 215.5
KBW 50 100.0 158.3 201.7 212.8 201.9 323.4
</TABLE>
KBW is an institutionally oriented securities broker/ dealer and
a full service investment bank. KBW is located in Hartford, CT
and New York, and specializes in the commercial banking and
thrift industries. The KBW 50 index is made up of 50 of the
nation's most important banking companies, including all money
center and most major regional banks, and is intended to be
representative of the price-performance of the nation's largest
banks.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
So far as is known to the Company, as of March 14, 1997, no persons except
those listed below, owned beneficially more than five percent (5%) of the
voting securities of the Company. With
Page 8
<PAGE> 12
respect to the Bank, such securities are held in its Trust & Investment Group.
The following table discloses the name and address of such beneficial owner,
the total number of shares beneficially owned, and the percentage of ownership
in relation to the total Common Stock of the Company outstanding and
entitled to vote as of December 31, 1996.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address of Beneficial Owner Beneficial Ownership of Class
<S> <C> <C>
Lilley & Co., a nominee of United Bank & Trust as Trustee 244,955 (1) 16.44%
P.O. Box 248
Tecumseh, MI 49286
</TABLE>
(1) The Bank as Trustee has sole voting and sole investment powers
with respect to 179,763 of the shares, and shared voting and shared
investment powers with respect to the remaining 65,192 of these shares.
It is the policy of the Bank's Trust & Investment Group to obtain written
direction from the grantor or the beneficiaries for voting. If no direction
is received, the Trust & Investment Group will generally vote with the
management of the Company.
SECURITY OWNERSHIP OF MANAGEMENT
The following table discloses the name and address of each of the incumbent
Directors, Director Nominees and Executive Officers, the total number of shares
beneficially owned by each, and their percentage of ownership in relation to the
total Common Stock of the Company outstanding and entitled to vote as of
December 31, 1996, according to information furnished to the Company by said
persons. The table also discloses the total number of shares beneficially owned
by all of the incumbent Directors and Director nominees and Executive Officers
of the Company as a group, and the percentage of ownership of said group in
relation to the total Common Stock of the Company outstanding and entitled to
vote as of December 31, 1996, according to information furnished to the Company
by said persons.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address of Beneficial Owner Beneficial Ownership (1) of Class(11)
<S> <C> <C>
INCUMBENT DIRECTORS - CLASS I DIRECTORS
L. Donald Bush 738 *
9432 Welch Road
Tecumseh, Michigan 49286
Patrick D. Farver 2,204 (2) *
484 Seel Drive
Adrian, Michigan 49221
James C. Lawson 14,952 (3) *
4070 Allen Rd.
Tecumseh, Michigan 49286
D. J. Martin 30,236 1.93%
145 W. Chicago Boulevard
Tecumseh, Michigan 49286
</TABLE>
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<PAGE> 13
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership (1) Class (11)
<S> <C> <C>
INCUMBENT DIRECTORS - CLASS I DIRECTORS (CONT'D)
David E. Maxwell 16,144 (4) 1.15%
P.O. Box 749
Adrian, Michigan 49221
James K. Whitehouse 157 (5) *
2430 N. Maple Grove
Hudson, Michigan 49247
INCUMBENT DIRECTORS - CLASS II DIRECTORS
John H. Foss 630 *
100 E. Patterson
Tecumseh, Michigan 49286
David S. Hickman 31,589 2.02%
P.O. Box 248
Tecumseh, Michigan 49286
Ann Hinsdale Knisel 195 *
4404 Livesay Rd.
Sand Creek, Michigan 49279
Jeffrey T. Robideau 16,606 (6) 1.06%
707 S. Evans Street
Tecumseh, Michigan 49286
Richard S. Whelan 2,837 *
106 N. Occidental
Tecumseh, Michigan 49286
DIRECTOR NOMINEES - CLASS III DIRECTORS
David N. Berlin 330 *
103 W. Main
Hudson, Michigan 49247
Merlyn H. Downing 16,831 (7) 1.07%
406 Burt Street
Tecumseh, Michigan 49286
Charles E. Gross 5,387 (8) *
P.O. Box 606
Adrian, Michigan 49221
Linda J. Herrick 8,319 (9) *
261 Wildwood Circle
Tecumseh, Michigan 49286
John J. Wanke 1,039 (10) *
P.O. Box 248
Tecumseh, Michigan 49286
</TABLE>
Page 10
<PAGE> 14
DIRECTOR EMERITUS
William G. Thompson 1,381 *
331 W. Main
Hudson, Michigan 49247
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Dale L. Chadderdon 3,441 *
P.O. Box 248
Tecumseh, Michigan 49286
Earl M. Roehm 305 *
P.O. Box 248
Tecumseh, Michigan 49286
Richard L. Boyce 181 *
P.O. Box 248
Tecumseh, Michigan 49286
Terry L. Douglass 237 *
P.O. Box 248
Tecumseh, Michigan 49286
All Directors and Executive Officers as a Group (21 persons) 155,555 9.93%
- -------------------------------------------------------------------------------
(1) The numbers of shares stated in this column includes shares owned
directly or indirectly, through any contract, arrangement, understanding,
relationship, or which the indicated beneficial owner otherwise has the
power to vote, or direct the voting of, and/or has investment power.
(2) Includes 1,102 shares with respect to which Mr. Farver has sole voting and
investment power, and 1,102 shares with respect to which he has shared
voting and investment power and no direct ownership interest.
(3) Includes 3,924 shares to which Mr. Lawson has sole voting and investment
power, and 11,028 shares with respect to which he has shared voting and
investment power and no direct ownership interest.
(4) Includes 16,386 shares to which Mr. Maxwell has sole voting and
investment power, and 1,124 shares with respect to which he has shared
voting and investment power and no direct ownership interest.
(5) Includes 157 shares for which Mr. Whitehouse has shared voting and
investment power and no direct ownership interest.
(6) Includes 12,250 shares to which Mr. Robideau has sole voting and
investment power, and 4,356 shares with respect to which he has shared
voting and investment power.
(7) Includes 4,831 shares to which Mr. Downing has sole voting and
investment power, and 12,000 shares with respect to which he has shared
voting and investment power and no direct ownership interest.
(8) Includes 1,916 shares to which Mr. Gross has sole voting and
investment power, and 3,471 shares with respect to which he has shared
voting and investment power and no direct ownership interest.
(9) Includes 1,651 shares to which Mrs. Herrick has sole voting and
investment power, and 6,668 shares with respect to which she has shared
voting and investment power and no direct ownership interest.
(10) Includes 802 shares to which Mr. Wanke has sole voting and
investment power, and 137 shares with respect to which he has shared
voting and investment power.
(11) The symbol *, shown in this column, indicates ownership of less
than 1%.
Page 11
<PAGE> 15
DISCLOSURE OF DELINQUENT FILERS
As far as can be determined by a review of Forms 3, 4 and 5 and amendments
thereto as required by Section 12 of the Exchange Act, no persons who were so
required, failed to file reports on a timely basis.
OTHER MATTERS
The Board of Directors knows of no other matter to be presented at the Annual
Meeting. If any other matter should be presented upon which a vote properly may
be taken, it is intended that shares represented by Proxies in the accompanying
form will be voted with respect thereto in accordance with the judgment of the
person or persons voting such shares.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ DALE L. CHADDERDON
--------------------------------------
March 24, 1997 Dale L. Chadderdon
Senior Vice President, Secretary and Treasurer
Page 12
<PAGE> 16
Appendix A
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AND
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
The Business of United Bancorp, Inc. A-1
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
Results of Operations A-2
------------------------------------------------------------------------------
Financial Condition A-6
------------------------------------------------------------------------------
Liquidity and Funds Management A-9
------------------------------------------------------------------------------
Prospective Accounting and Regulatory Changes A-11
------------------------------------------------------------------------------
Statement of Management Responsibility A-12
- --------------------------------------------------------------------------------
Report of Independent Auditors A-13
- --------------------------------------------------------------------------------
Consolidated Financial Statements
Consolidated Balance Sheets A-14
------------------------------------------------------------------------------
Consolidated Statements of Income A-15
------------------------------------------------------------------------------
Consolidated Statements of Cash Flows A-16
------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity A-17
------------------------------------------------------------------------------
Notes to Consolidated Financial Statements A-18
------------------------------------------------------------------------------
NATURE OF BUSINESS
United Bancorp, Inc. is a Michigan Bank Holding Company, with United Bank &
Trust as its only wholly-owned subsidiary. The Bank is locally owned and
managed, and offers a full range of financial, trust and investment services
through a system of thirteen banking offices located in Lenawee County.
Page A-1
<PAGE> 17
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. ("Company") and its
subsidiary, United Bank & Trust ("Bank").
RESULTS OF OPERATIONS
Consolidated net income for 1996 continued at record levels, resulting in
improved return on average assets and equity, as well as increased earnings per
share. This continued improvement in net earnings was a result of continually
improving interest margins, combined with continued improvement in the Company's
efficiency ratios. All ratios which measure earnings performance and returns
showed continual steady improvement during 1996, continuing the trends seen in
recent years.
The chart below shows trends in some of these ratios. All figures are adjusted
to reflect stock dividends.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Performance Ratios 1996 1995 1994 5 Yr. Avg.
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on average assets 1.45% 1.30% 1.20% 1.30%
Return on average shareholders' equity 15.63% 14.89% 14.63% 15.80%
Average equity to average total assets 9.3% 8.8% 8.2%
Dividend payout ratio 34.9% 33.2% 33.8%
Book value per share $20.47 $18.44 $16.10
Cash dividends per share $1.060 $0.857 $0.775
=====================================================================================
</TABLE>
Book value per share is based on outstanding shares at December 31, of
1,565,890 in 1996, 1,564,332 in 1995 and 1,562,794 in 1994. Dividends per
share is based on average shares outstanding of 1,564,302 in 1996 and
1,562,798 in 1995 and 1,562,794 in 1994.
Net Interest Income
United Bancorp, Inc. derives its income primarily from net interest income,
which is an important contributor to the Company's profitability. In prior
years, the Bank had a lower net interest margin than banks of similar size, due
principally to its deposit mix. Interest income yields of the Bank were
generally in line with comparable banks, but relatively low levels of
noninterest bearing deposits and a high amount of certificates of deposit
contributed to a relatively high cost of funds.
This trend has improved significantly during the past two years, as Management
continues to attempt to influence the deposit mix. Measurable improvements were
noted in 1995, due in part to the introduction of a successful new checking
product. Improvement also resulted in part from continued attempts during 1995
to influence deposit mix through pricing and target marketing. These efforts and
successes continued during 1996, resulting in further improvement both in net
interest margin and spread. 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.
Page A-2
<PAGE> 18
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
<TABLE>
<Capiton>
Dollars in Thousands 1996 1995 1994
---------------------------- --------------------------- ---------------------------
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance (b) Rate Balance (b) Rate Balance (b) Rate
---------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
ASSETS
Interest earning assets (a)
Federal funds sold $2,607 $141 5.41% $3,644 $215 5.91% $1,602 $56 3.51%
Taxable securities 48,132 2,949 6.13% 49,230 2,703 5.49% 56,398 2,803 4.97%
Tax exempt securities (b) 30,388 2,445 8.05% 25,408 2,166 8.52% 24,977 2,158 8.64%
Taxable loans 226,229 20,511 9.07% 211,342 19,006 8.99% 198,287 16,221 8.18%
Tax exempt loans (b) 1,092 91 8.33% 1,282 113 8.82% 1,712 149 8.72%
------------------- -------------------- -------------------
Total interest earning
assets (b) 308,448 26,138 8.47% 290,906 24,203 8.32% 282,976 21,387 7.56%
Cash and due from banks 8,639 7,759 6,911
Premises and
equipment, net 8,702 8,420 7,420
Intangible assets 1,591 1,804 1,999
Other assets 2,938 3,003 3,222
Unrealized loss on secur-
ities available for sale (15) (421) (653)
Allowance for loan losses (2,235) (2,181) (2,178)
--------- --------- ---------
Total Assets $328,068 $309,290 $299,697
========== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities
NOW accounts $38,883 $691 1.78% $36,347 $763 2.10% $32,764 $681 2.08%
Savings deposits 74,796 2,113 2.82% 73,092 2,124 2.91% 78,659 2,011 2.56%
CDs $100,000 and over 37,553 2,193 5.84% 29,942 1,829 6.11% 24,279 1,310 5.40%
Other int. bearing deposits 104,993 5,918 5.64% 105,001 5,824 5.55% 103,245 4,941 4.79%
------------------- -------------------- -------------------
Total int. bearing deposits 256,225 10,916 4.26% 244,382 10,540 4.31% 238,947 8,944 3.74%
Short term borrowings 3,189 173 5.43% 3,854 236 6.12% 4,079 193 4.73%
Other borrowings 9,074 525 5.79% 6,000 308 5.14% 6,000 282 4.70%
------------------- -------------------- -------------------
Total int. bearing liabilities 268,488 11,614 4.33% 254,236 11,084 4.36% 249,026 9,419 3.78%
Nonint. bearing deposits 26,616 25,821 24,439
Other liabilities 2,563 2,136 1,727
Shareholders' equity 30,401 27,097 24,505
--------- --------- ---------
Total Liabilities and
Shareholders' Equity $328,068 $309,290 $299,697
========== ========= =========
Net interest income $14,523 $13,119 $11,968
========== ========= =========
Net spread 4.15% 3.96% 3.78%
Net yield on interest earning assets 4.71% 4.51% 4.23%
Ratio of interest earning assets to
interest bearing liabilities 1.15 1.14 1.14
</TABLE>
(a) Non-accrual loans and overdrafts are included in the average balances
of loans.
(b) Fully tax-equivalent basis; 34% tax rate.
Total dollars of net interest income increased significantly during 1996, as a
result of both volume and rate increases. The use of FHLB advances contributed
liabilities to fund assets, increasing the size of the balance sheet. Continued
growth in the loan portfolio provided improvements in interest income, and
growth in personal loans contributed to the improvement in margin, as pricing on
these products is generally higher than on other categories of loans.
Page A-3
<PAGE> 19
The tables below 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1996 compared to 1995 1995 compared to 1994
Increase (decrease) due to: Increase (decrease) due to:
In thousands of dollars Volume Rate Net Volume Rate Net
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Federal funds sold ($57) ($17) ($74) $104 $55 $159
Taxable securities (61) 307 246 (377) 277 (100)
Tax exempt securities 406 (127) 279 37 (29) 8
Taxable loans 1,349 156 1,505 1,110 1,675 2,785
Tax exempt loans (16) (6) (22) (38) 2 (36)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income $1,621 $313 $1,934 $836 $1,980 $2,816
Interest expense on:
NOW accounts $51 ($123) ($72) $75 $8 $83
Savings deposits 49 (60) (11) (149) 261 112
Interest bearing CDs $100,000 or more 447 (83) 364 331 188 519
Other interest bearing deposits 0 94 94 85 798 883
Short term borrowings (38) (25) (63) (11) 54 43
Other borrowings 174 43 217 0 27 27
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense $683 ($154) $529 $331 $1,336 $1,667
----------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $938 $467 $1,405 $505 $644 $1,149
=============================================================================================================================
</TABLE>
Provision for Loan Losses
Growth in the business and personal loan categories, particularly indirect
installment loans, caused Management to provide additional protection against
losses in the portfolio. A provision which exceeded 1995 levels by 74% provided
for losses inherent in the current portfolio and funded actual charge-offs. Net
charge-offs during 1996 increased 74% over 1995, in part as a result of recent
portfolio growth and changes in mix.
While the percentage increases are high, the absolute amounts are relatively
low. The Bank has consistently low levels of nonperforming loans, and loan loss
history continues to be 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 adoption by the Company of Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" effective January 1,
1995 was immaterial to the Company's consolidated financial statements for 1996
and 1995.
Noninterest Income
Total noninterest income increased 23.0% in 1996 over 1995, following an
increase of 29.8% from 1994 to 1995. A number of items contributed to this
continued improvement. Deposit service charges continued to improve over prior
years. The shifting mix of the deposit portfolio has increased the percentage of
accounts contributing service charges, and total service charges on deposits
increased 25.0% in 1996 over 1995. This compares to a 23.0% increase in deposit
service charges from 1994 to 1995.
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 26.5% of the Company's
noninterest income in 1996, compared to 30.3% in 1995 and 35.9% in 1994. This
does not reflect a decline in the contribution of the Trust & Investment Group
fee income, but a continued increase in other noninterest income. Total Trust &
Investment Group fee income increased 7.5% in 1996, compared to 9.6% in
Page A-4
<PAGE> 20
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 celebrated its 20th year
of operation in 1996.
Significant contribution to noninterest income was generated by income from the
sales and servicing of loans. 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. During 1996, clients
continued to exhibit their preference for 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 $86.2 million of sold loans,
compared to $72 million at the end of 1995. These loans will continue to
generate fee income in future periods.
Income from the sale and servicing of loans was also helped by the adoption of
FAS 122 during 1996, which requires the costs allocated to mortgage servicing
rights to be recorded as a separate asset and to be amortized in proportion to,
and over the life of, the servicing period. The effect on 1996 earnings was an
increase of approximately $129,000, net of tax.
The future impact of the adoption of FAS 122 on the Company's earnings 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, the effect will be to increase
the amount of income recognized when loans are sold and will reduce the amount
of income recognized during the servicing period.
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. In that light, the Company has increased its emphasis in nonbanking
areas to generate additional income.
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, which commenced business in 1996. The Agency generated no
significant additional business during 1996, but the income generated by the
sale of nondeposit investment products was recorded on the books of the Agency.
Total income provided from the sale of nondeposit investment products remained
virtually flat during 1996, following a substantial increase from 1994 to
1995. In 1997, UB&T Insurance Agency will enter additional insurance businesses,
generating additional income for future periods.
Noninterest Expense
While expansion during 1995 contributed to significant increases in both
personnel and occupancy expenses, the rate of increase of both categories of
expense slowed during 1996.
Personnel expense continues to be the largest single area of expense. Growth of
personnel expense moderated during 1996, following an increase in 1995 of 17.7%
over 1994. Total full-time equivalent staffing was 159.5 at December 31, 1996,
compared to 156.5 at December 31, 1995. This compares to an increase of 12
full-time equivalents from 1994 to 1995.
The cost of operating thirteen banking offices contributes significantly to the
noninterest expense of the Company. However, during 1996, the rate of growth
slowed, and net occupancy and equipment expense increased 12.1%, compared to an
increase of 17.1% in 1995 over 1994.
A significant restructuring of FDIC insurance premiums during 1996 resulted in a
decrease in the Company's FDIC insurance cost from prior years. Effective May 1,
1995, the FDIC reduced the Company's premium rate from 23 basis points to four
basis points per $100 of deposits. 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 was further reduced to zero for 1996. However, because the Savings
Association Insurance Fund ("SAIF") was not projected to reach its fully funded
level for several more years, SAIF insured institutions would
Page A-5
<PAGE> 21
not have benefited from these premium reductions. As a result of action by the
United States Congress, a one-time special assessment was levied on SAIF insured
deposits during 1996. The result of this one-time assessment is that the SAIF
fund was deemed recapitalized by statute. Future FDIC assessments for the BIF
and SAIF funds will consist of amounts to pay the interest on FICO bonds.
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 was a reduction of $44,000 of 1996 earnings. In the
future, the Bank will pay a small FDIC premium, at levels greatly reduced from
amounts paid in recent years.
Federal Income Tax
The chart below shows the effective federal tax rates of the Company for
recent years.
-------------------------------------------------------------------
Effective Tax Rates 1996 1995 1994
-------------------------------------------------------------------
Income before tax ($000) $6,464 $5,457 $4,755
Federal income tax accrual ($000) $1,713 $1,422 $1,171
Effective federal tax rate 26.5% 26.1% 24.6%
===================================================================
The Company's effective federal tax rate remained substantially unchanged from
prior years. 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.
FINANCIAL CONDITION
Securities
The securities portfolio continued to increase moderately in size
during 1996, following the modest growth noted in 1995. The changes in the
various categories of the portfolio are shown in the chart below.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Change in Categories of Securities Portfolio,
in thousands of dollars 1996 1995
------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury and agency securities ($1,003) ($10,009)
Mortgage backed agency securities 1,001 13,308
Tax exempt obligations of states and political subdivisions 2,176 3,216
Corporate, taxable municipal and asset backed securities 211 (5,396)
------------------------------------------------------------------------------------------------
Total securities $2,423 $1,119
=================================================================================================
</TABLE>
Substantially all of the growth in the portfolio was in holdings in tax exempt
obligations of states and political subdivisions, as a result of purchases of
local municipal issues. 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. The mix of the portfolio remained virtually
unchanged, as seen in the chart below.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Percentage Makeup of Securities Portfolio at December 31, 1996 1995
------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury and agency securities 18.1% 19.9%
Mortgage backed agency securities 35.6% 35.6%
Tax exempt obligations of states and political subdivisions 39.6% 38.0%
Corporate, taxable municipal and asset backed securities 6.6% 6.5%
------------------------------------------------------------------------------------------------
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 municipal portfolio contains a small amount of geographic
risk, as approximately 21.3% of that portfolio is issued by political
subdivisions located within Lenawee County, Michigan. The Bank's portfolio
contains no "high risk" mortgage securities or structured notes.
Page A-6
<PAGE> 22
The net unrealized gain on securities available for sale remained relatively
unchanged from 1995 to 1996, as market interest rates remained relatively
stable. This contrasts to the period from 1994 to 1995, when the Company
experienced a significant shift in its unrealized gains and losses on
securities available for sale due to a more volatile interest rate environment.
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. At December 31, 1996, the net unrealized gain
was $129,000.
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
Loan growth at 11.0% was strong in 1996, compared to modest growth of 3.4% in
1995. The consumer loan area led the portfolio in growth, followed closely by
business loans. Increases in the personal loan portfolio continued to reflect
steady growth in the Bank's credit card and consumer installment loan
portfolios. Both direct and indirect automobile financing provided substantial
increases in balances outstanding. Demand for business loans rebounded during
the year, following minimal growth in 1995, and the continued decline in tax
exempt loans reflects normal amortization as well as a decline in demand for
this type of financing.
-----------------------------------------------------------------------
Percentage Change in Categories of Loan Portfolio 1996 1995
-----------------------------------------------------------------------
Personal 21.0% 21.9%
Business 15.6% 0.3%
Tax exempt -11.9% -19.1%
Residential mortgage -2.8% -4.3%
Construction 114.2% 29.4%
Total loans 11.0% 3.4%
=======================================================================
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 trend continued in 1996, and resulted in
continued 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.
During 1996, construction loan activity increased significantly, reflecting
strong growth of the residential housing market in the County. Many of these
loans will convert to variable rate residential mortgages, but a larger
portion is likely to be converted to fixed rate mortgages and will be sold in
the secondary market.
Credit Quality
The Company continues to maintain a high level of asset quality as a result of
actively monitoring delinquencies, nonperforming assets and potential problem
loans. The aggregate amount of non-performing loans is presented in the table
below. For purposes of that summary, loans renewed on market terms existing at
the time of renewal are not considered troubled debt restructurings. The accrual
of interest income is discontinued when a loan becomes 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.
Page A-7
<PAGE> 23
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Nonperforming Loans
in thousands of dollars 1996 1995 1994 1993 1992
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $450 $41 $110 $172 $416
Loans past due 90 days or more 663 163 517 21 122
Troubled debt restructurings 0 0 2 34 36
-------------------------------------------------------------------------
Total nonperforming loans 1,113 204 629 227 574
Other real estate 335 43 81 67 109
-------------------------------------------------------------------------
Total nonperforming assets $1,448 $247 $710 $294 $683
=========================================================================
Percent of total loans 0.60% 0.11% 0.34% 0.15% 0.37%
=========================================================================
</TABLE>
Nonaccrual loans consist of loans to two clients. Management anticipates that
the largest loan will return to accrual status in the first quarter of 1997.
Payments are currently being made by the other client on nonaccrual, and no
significant loss is anticipated on those loans.
In general, banks have experienced higher delinquencies during 1996 than in
recent periods, as personal borrowings reached all-time high levels. United has
noted the same increase in delinquency as consumers near their debt limits. In
addition, past due loans increased during the year as personal loan volumes
exceeded the capacity of the collections department of the Bank. Restructuring
during the fourth quarter, which included the addition of more collectors,
should assure the reduction in this category of nonperforming loans in the near
future. While some losses are anticipated, the Company's delinquency ratios
remain well below that of other banks of similar size.
The amount listed above for other real estate reflects one property which was
acquired in lieu of foreclosure. This property has since been leased to a
third party with an option to purchase, and no loss is anticipated.
Credit quality is dependent in part on the makeup of the loan portfolio. The
chart below shows the percentage makeup of the loan portfolio.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Percentage Makeup of Loan Portfolio at December 31, 1996 1995
------------------------------------------------------------------------
<S> <C> <C>
Personal - direct 16.2% 15.3%
Personal - indirect 12.5% 11.1%
Business 27.2% 26.1%
Tax exempt 0.4% 0.6%
Residential mortgage 39.0% 44.5%
Construction 4.6% 2.4%
------------------------------------------------------------------------
Total loans 100.0% 100.0%
========================================================================
</TABLE>
The largest single category above is also generally the one with the least risk.
Loans to finance residential mortgages, including construction loans, make up
43.6% of the portfolio, and are well-secured and have had historically low
levels of net losses. Personal and business loans make up the balance of the
portfolio in approximately equal proportions.
Personal loan balances were $69.5 million at December 31, 1996. Of those loans,
approximately 76.8% are direct and indirect installment loans. Home equity loans
comprise another 16.3% 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.
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
Page A-8
<PAGE> 24
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.
Further information concerning credit quality is contained in Note 6 of the
Notes to Consolidated Financial Statements.
Deposits and Repurchase Agreements
Deposit balances remained virtually flat for the first three quarters of 1996.
During the fourth quarter, the Company introduced a new cash management account
which contributed to deposit growth in that quarter, and as the year finished,
each category of deposits was enjoying growth. While total deposit growth for
the year did not match 1995 levels, the recent trend of deposits is
encouraging.
As in the past, the majority of the Bank's deposits are derived from core client
sources, relating to long term relationships with local personal, business and
public clients.
------------------------------------------------------------------------
Percentage Change in Deposits by Category 1996 1995
------------------------------------------------------------------------
Noninterest bearing 2.6% 10.7%
Interest bearing certificates of $100,000 or more 22.1% 43.4%
Other interest bearing 1.9% 3.6%
Total deposits 4.4% 7.9%
========================================================================
The mix of the portfolio reflects the changes noted above. The chart below
shows the percentage makeup of the deposit portfolio in 1996 and 1995.
----------------------------------------------------------------------------
Percentage Breakdown of Deposit Portfolio as of December 31, 1996 1995
----------------------------------------------------------------------------
Noninterest bearing deposits 10.2% 10.4%
Interest bearing certificates of $100,000 or more 14.1% 12.1%
Other interest bearing deposits 75.7% 77.6%
----------------------------------------------------------------------------
Total deposits 100.0% 100.0%
============================================================================
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 the
Lenawee County, which have traditionally paid higher interest rates on deposits
than the nearby Detroit, Ann Arbor and Toledo metropolitan market areas.
Cash Equivalents and Borrowed funds
Loan and deposit growth did not parallel each other during 1996, resulting in
several periods when the Bank became a borrower in the federal funds market. In
addition, the Bank continued to use short term advances from the Federal Home
Loan Bank as a source of liquidity, rather than liquidate portions of the
investment portfolio to meet temporary funding needs. By the fourth quarter of
1996, the Bank was once again a provider of funds in the federal funds market,
as liability growth provided additional liquidity.
The Company also found it advantageous during the year to invest in longer term
borrowings through the Federal Home Loan Bank of Indianapolis. These borrowings,
which are detailed in Note 10 of the Notes to Consolidated Financial Statements,
served to provide a balance to some of the interest rate risk inherent in the
Company's balance sheet. Additional information regarding borrowed funds is
found immediately below.
LIQUIDITY AND FUNDS MANAGEMENT
Throughout 1996, the Company participated in the federal funds market; at times
as a provider of funds and at other times as a purchaser. In addition, at times
when it appeared to be advantageous to do so, the Company utilized advances from
the Federal Home Loan Bank ("FHLB") in place of federal funds borrowed. Funding
Page A-9
<PAGE> 25
needs varied throughout the year, but overall, federal funds sold averaged
approximately $1 million lower in 1996 than in 1995, while short term borrowed
funds, which included federal funds and FHLB advances, averaged approximately
$700,000 less than in 1995.
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 FHLB. Information concerning available lines is contained in Note
11 of the Notes to Consolidated Financial Statements.
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 at the one year timeframe, adjusted for certain prepayment
assumptions. As a result, continued emphasis on variable rate assets was
combined with attempts to acquire fixed rate liabilities.
The table below shows the rate sensitivity of earning assets and interest
bearing liabilities as of December 31, 1996. 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, and no
adjustments for possible prepayments are included in the table.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVITY SUMMARY
- ------------------------------------------------------------------------------------------------------------------------------------
Over 10
In thousands of dollars 0-3 Mo. 4-12 Mo. 1-5 Yrs 5-10 Yr Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities and fed funds sold $26,451 $12,622 $42,159 $7,907 $599 $89,738
Loans 61,823 51,948 97,500 18,329 12,253 241,853
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets $88,274 $64,570 $139,659 $26,236 $12,852 $331,591
Negotiated rate time deposits of $100,000 or more $15,491 $13,438 $13,131 $42,060
Other interest bearing deposits $138,740 $40,897 $45,626 $45 225,308
Repurchase agreements 609 609
Other borrowings 10,000 10,000 20,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $164,840 $54,335 $68,757 $45 $287,977
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset (liability) funding gap ($76,566) $10,235 $70,902 $26,191 $12,852 $43,614
Cumulative net asset (liability) funding gap ($76,566) ($66,331) $4,571 $30,762 $43,614
Cumulative gap ratio 0.54 0.70 1.02 1.11 1.15 to one
Cumulative gap as a percent of total assets -21.7% -18.8% 1.3% 8.7% 12.3%
===================================================================================================================================
</TABLE>
Page A-10
<PAGE> 26
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 3.6% and 3.3% in 1996 and 1995. A five percent stock dividend
was paid to shareholders in 1996, and a three-for-one stock split was paid in
1994. The stock of the Company is traded locally over the counter, and demand
consistently exceeds supply.
The capital ratios of the Bank and the Company continued to increase through the
retention of earnings during 1996. Capital ratios exceed the levels required by
its regulators, and Management continues to evaluate methods to optimize the
high levels of equity of the Company. The table in Note 18 of the Notes to
Financial Statements details the capital ratios of the Company, and the Company
is considered to be well-capitalized 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 reasonable return to
shareholders.
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 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.
Page A-11
<PAGE> 27
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
United Bancorp, Inc. and Subsidiary
Financial Statements
The Management of United Bancorp, Inc. is responsible for the
preparation, integrity and fair presentation of its published financial
statements. The financial statements contained herein have been prepared in
accordance with generally accepted accounting principles and, as such, include
amounts based on judgments and estimates made by Management. The Company also
prepared the other information included in the annual report and is
responsible for its accuracy and consistency with the financial statements.
The financial statements have been audited by the independent accounting
firm of Crowe, Chizek and Company LLP, which was given unrestricted access to
all financial records and related data, including minutes of all meetings of
shareholders, the board of directors and committees of the board. The Company
believes that all representations made to the independent auditors during
their audit were valid and appropriate. Crowe Chizek's audit report is
presented on the following page.
Internal Control System
The Company maintains a system of internal control over financial
reporting which is designed to provide reasonable assurance to the Company's
management and board of directors regarding the preparation of reliable
published financial statements. The system contains self-monitoring mech-
anisms, and actions are taken to correct deficiencies as they are identified.
The board, operating through its audit committee, which is composed entirely
of directors who are not officers or employees of the Company, provides
oversight to the financial reporting process. Even an effective internal
control system, no matter how well designed, has inherent limitations,
including the possibility of circumvention or overriding of controls.
Accordingly, even an effective internal control system can provide only
reasonable assurance with respect to financial statement preparation.
Furthermore, the effectiveness of an internal control system may vary over
time.
The Company assessed its internal control system as of December 31, 1996.
Based on its assessment, the Company believes that, as of December 31, 1996,
its system of internal control over financial reporting is adequate and
appropriate.
United Bancorp, Inc.
(Signature)
David S. Hickman
President and Chief Executive Officer
(Signature)
John J. Wanke
Executive Vice President
(Signature)
Dale L. Chadderdon
Senior Vice President, Secretary and Treasurer
Page A-12
<PAGE> 28
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 sheets of
United Bancorp, Inc. and Subsidiary as of December 31, 1996
and 1995, 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, 1996. 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,
1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
(Signature)
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 17, 1997
Page A-13
<PAGE> 29
CONSOLIDATED BALANCE SHEETS
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
In thousands of dollars 1996 1995
===============================================================================================
<S> <C> <C>
ASSETS
Cash and demand balances in other banks $10,252 $10,017
Federal funds sold 11,400 8,700
- -----------------------------------------------------------------------------------------------
Total cash and cash equivalents 21,652 18,717
Securities available for sale 44,990 45,420
Securities held to maturity (fair value of $34,391 in 1996, $31,833 in 1995) 33,348 30,495
- -----------------------------------------------------------------------------------------------
Total securities 78,338 75,915
Loans held for sale 799 261
Portfolio loans 241,054 217,566
- -----------------------------------------------------------------------------------------------
Total loans 241,853 217,827
Less allowance for loan losses 2,320 2,197
- -----------------------------------------------------------------------------------------------
Net loans 239,533 215,630
Premises and equipment, net 8,775 8,404
Accrued interest receivable and other assets 5,072 4,770
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $353,370 $323,436
===============================================================================================
LIABILITIES
Deposits
Noninterest bearing deposits $30,335 $29,565
Interest bearing certificates of deposit of $100,000 or more 42,060 34,439
Other interest bearing deposits 225,308 221,168
---------------------------------------------------------------------------------------------
Total deposits 297,703 285,172
Short term borrowings 609 578
Other borrowings 20,000 6,000
Accrued interest payable and other liabilities 3,010 2,833
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 321,322 294,583
- -----------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value; 5,000,000 shares authorized,
1,565,890 in 1996 and 1,489,840 in 1995 shares issued and outstanding 13,500 11,262
Retained earnings 18,419 17,486
Net unrealized gain on securities available for sale 129 105
- -----------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 32,048 28,853
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $353,370 $323,436
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-14
<PAGE> 30
CONSOLIDATED STATEMENTS OF INCOME
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
For the years ended December 31,
In thousands of dollars, except per share data 1996 1995 1994
==========================================================================================
INTEREST INCOME
Loans
<S> <C> <C> <C>
Taxable $20,511 $19,006 $16,221
Tax exempt 63 78 103
Securities
Taxable 2,949 2,703 2,803
Tax exempt 1,687 1,490 1,484
Federal funds sold 141 215 56
- ------------------------------------------------------------------------------------------
Total interest income 25,351 23,492 20,667
- ------------------------------------------------------------------------------------------
INTEREST EXPENSE
Certificates of deposit of $100,000 or more 2,193 1,829 1,310
Other deposits 8,723 8,711 7,634
Short term borrowings 173 236 193
Other borrowings 525 308 282
- ------------------------------------------------------------------------------------------
Total interest expense 11,614 11,084 9,419
- ------------------------------------------------------------------------------------------
NET INTEREST INCOME 13,737 12,408 11,248
Provision for loan losses 628 361 249
- ------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,109 12,047 10,999
- ------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 1,223 978 795
Trust & Investment fee income 971 903 824
Gains on securities transactions 8 4 108
Loan sales and servicing 604 389 184
Sales of nondeposit investment products 246 272 34
Other income 610 432 349
- ------------------------------------------------------------------------------------------
Total noninterest income 3,662 2,978 2,294
- ------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 5,363 4,927 4,185
Occupancy and equipment expense, net 1,922 1,715 1,464
Federal deposit insurance premiums 98 321 605
Other expense 2,924 2,605 2,284
- ------------------------------------------------------------------------------------------
Total noninterest expense 10,307 9,568 8,538
- ------------------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAX 6,464 5,457 4,755
Federal income tax 1,713 1,422 1,171
- ------------------------------------------------------------------------------------------
NET INCOME $4,751 $4,035 $3,584
==========================================================================================
Earnings per share $ 3.04 $ 2.58 $ 2.29
==========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-15
<PAGE> 31
Consolidated Statements of Cash Flows
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
For the years ended December 31,
In thousands of dollars 1996 1995 1994
==================================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 4,751 $ 4,035 $ 3,584
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES
Depreciation and amortization 1,469 1,491 1,559
Provision for loan losses 628 361 249
Provision for losses on loans held for sale 0 (118) 118
Gain on sale of loans (209) (119) (183)
Proceeds from sales of loans originated for sale 26,829 26,312 23,599
Loans originated for sale (27,158) (25,035) (21,540)
Gain on sale of securities (8) (4) (108)
Change in accrued interest receivable and other assets (48) 32 (73)
Change in accrued interest payable and other liabilities 29 671 206
- ------------------------------------------------------------------------------------------------------------------
Total adjustments 1,532 3,591 3,827
- ------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 6,283 7,626 7,411
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (20,670) (19,132) (14,171)
Sales 732 0 7,272
Maturities 14,000 13,546 6,000
Principal payments 6,214 3,216 5,255
Securities held to maturity
Purchases (5,570) (4,529) (4,536)
Sales 0 93 0
Maturities 2,638 6,780 5,942
Proceeds from portfolio loan sales 0 0 2,278
Net increase in portfolio loans (24,438) (8,399) (17,918)
Premises and equipment expenditures (1,370) (990) (2,129)
- ------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (28,464) (9,415) (12,007)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 12,531 20,888 (2,863)
Net change in short term borrowings 31 (6,222) 6,800
Principal payments on other borrowings (8,000) (3,000) 0
Proceeds from other borrowings 22,000 3,000 0
Proceeds from common stock transactions 78 41 0
Dividends paid (1,524) (1,250) (1,196)
- ------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 25,116 13,457 2,741
- ------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,935 11,668 (1,855)
Cash and cash equivalents at beginning of year 18,717 7,049 8,904
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 21,652 $ 18,717 $7,049
==================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 11,421 $ 10,972 $ 9,460
Income tax paid $ 1,719 $ 1,275 $ 1,075
Non-cash transfer from portfolio loans to other real estate $ 445 $ 43 $ 81
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-16
<PAGE> 32
Consolidated Statements of Changes in Shareholders' Equity
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
In thousands of dollars, except per share data 1996 1995 1994
=========================================================================================================================
<S> <C> <C> <C>
COMMON STOCK AND PAID IN CAPITAL
Beginning balance $11,262 $11,221 $11,221
Stock dividend declared (shares: 74,492 in 1996) 2,160 0 0
Common stock transactions (shares, net: 1,559 in 1996, 1,465 in 1995) 78 41 0
- -------------------------------------------------------------------------------------------------------------------------
Ending balance $13,500 $11,262 $11,221
RETAINED EARNINGS
Beginning balance $17,486 $14,791 $12,417
Net income 4,751 4,035 3,584
Cash dividends declared
(per share: $1.060 in 1996, $0.857 in 1995, $0.775 in 1994) (1,658) (1,340) (1,210)
Common stock dividend (5% in 1996) (2,160) 0 0
- -------------------------------------------------------------------------------------------------------------------------
Ending balance $18,419 $17,486 $14,791
NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE
Beginning balance $ 105 ($854) $196
Valuation adjustments, net of tax 24 959 (1,050)
- -------------------------------------------------------------------------------------------------------------------------
Ending balance $ 129 $ 105 ($854)
TOTAL SHAREHOLDERS' EQUITY $32,048 $28,853 $25,158
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-17
<PAGE> 33
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.
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. The collectability
of loans and the fair values of financial instruments are particularly subject
to change.
SECURITIES
Securities available for sale consist of bonds and notes which might be sold
prior to maturity. Securities classified as available for sale are reported at
their fair values and the related net 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 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 value in the aggregate. Net unrealized
losses, if any, are recognized in a valuation allowance by charges to income.
LOANS
Loans are reported at the principal balance outstanding, net of deferred loan
fees and costs, the allowance for loan losses, and charge offs. Interest income
is reported on the interest method and includes amortization of net deferred
loan fees and costs over the loan term.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
Management to absorb 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.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance homogeneous loans
and on an individual basis for other loans. If a loan is impaired, a portion of
the allowance for loan losses is allocated so that the loan is reported, net, at
the present value of estimated future cash flows using the loan's existing
rate. Loans are evaluated for impairment when payments are delayed or when the
internal grading system indicates a doubtful classification.
Page A-18
<PAGE> 34
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. Business loans are rated "Class 1," "Class 2" and "All
Other." Class 1 are substandard and Class 2 are special mention loans. Loans in
these categories are individually evaluated for impairment. All other loans 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
uncollectable. This typically occurs when the loan is 120 or more days past due.
Disclosures for impaired loans are not materially different from nonaccrual and
renegotiated loan 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 ten to forty years for premises and five
to eight years for equipment. These assets are reviewed for impairment under
Financial Accounting Standard No. 121 when events indicate the carrying value
may not be recoverable.
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 cost basis or fair value. The
historical average holding period for such properties is less than 18 months.
INTANGIBLE ASSETS
The value of core deposits acquired in bank and branch acquisitions is amortized
on an accelerated method over the expected lives of the related accounts. The
excess of purchase price over the fair value of assets and liabilities acquired
(goodwill) is amortized on a straight-line basis over fifteen years. Intangibles
are evaluated for impairment and written down, if necessary.
SERVICING RIGHTS
The Company adopted Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" at January 1, 1996. 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. The costs allocated
to mortgage servicing rights are recorded as a separate asset and amortized in
proportion to, and over the life of, the net servicing income.
The Company currently retains servicing on almost all loans originated and sold
into the secondary market. Accordingly, the Statement applies to most loan
sales. In general, this Statement increases the amount of income recognized when
loans are sold and reduces the amount of income recognized during the servicing
period. Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans as to interest rates, remaining loan terms and
prepayment characteristics.
Page A-19
<PAGE> 35
INCOME TAX
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.
EARNINGS PER SHARE
Earnings per share is based upon the weighted average number of shares
outstanding during the year. In May, 1994 the Company's stock was split on a
three-for-one basis, and in May of 1996 a five percent stock dividend was
paid. Earnings per share, dividends per share and weighted average shares have
been restated to reflect the 1996 stock dividend and the 1994 stock split. The
weighted average number of shares outstanding was 1,564,302 for 1996, 1,562,798
for 1995 and 1,562,794 for 1994.
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 client loan and
deposit transactions, deposits made with other financial institutions, and short
term borrowings.
PENDING ACCOUNTING CHANGES
Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," was issued by the
Financial Accounting Standards Board in 1996. It revises the accounting for
transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It is effective for
some transactions in 1997 and others in 1998. The effect on the financial
statements has not yet been determined.
RECLASSIFICATIONS
Some items in prior year financial statements have been reclassified to
conform with current year's presentation.
NOTE 2 - 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 client deposits in the Bank. The amounts of
reserve balances required at December 31, 1996 and 1995 were approximately
$2,351,000 and $2,424,000.
Page A-20
<PAGE> 36
NOTE 3 - SECURITIES
The amortized cost and fair value of securities, in thousands of dollars, as of
December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE Amortized Unrealized Unrealized Fair
In thousands of dollars Cost Gains Losses Value
====================================================================================================================
1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities $14,085 $ 131 ($8) $14,208
Mortgage backed agency securities 27,855 174 (108) 27,921
Asset backed and other securities 2,853 8 0 2,861
- --------------------------------------------------------------------------------------------------------------------
Total $44,793 $ 313 ($116) $44,990
====================================================================================================================
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 0 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 0 (61) 3,107
- --------------------------------------------------------------------------------------------------------------------
Total $43,193 $ 9 ($1,302) $41,900
====================================================================================================================
- --------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY
In thousands of dollars
====================================================================================================================
1996
- --------------------------------------------------------------------------------------------------------------------
Tax exempt obligations of states and political subdivisions $31,059 $ 1,048 ($10) $32,097
Corporate and taxable municipal securities 2,289 5 0 2,294
- --------------------------------------------------------------------------------------------------------------------
Total $33,348 $ 1,053 ($10) $34,391
====================================================================================================================
1995
- --------------------------------------------------------------------------------------------------------------------
Tax exempt obligations of states and political subdivisions $28,883 $ 1,329 ($7) $30,205
Corporate and taxable municipal securities 1,612 16 0 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
====================================================================================================================
</TABLE>
Sales activities for securities for the years indicated are shown in the
following table. All sales during 1996 and 1994 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) 1996 1995 1994
====================================================================================================================
<S> <C> <C> <C>
Sales proceeds $732 $93 $7,272
Gross gains 8 4 156
Gross losses 0 0 48
====================================================================================================================
</TABLE>
Page A-21
<PAGE> 37
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 lives.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SECURITIES Available for Sale Held to Maturity
As of December 31, 1996 Amortized Fair Amortized Fair
In thousands of dollars Cost Value Cost Value
====================================================================================================================
<S> <C> <C> <C> <C>
Due in one year or less $ 1,993 $ 2,002 $ 5,385 $ 5,405
Due after one year through five years 40,203 40,391 15,611 16,090
Due after five years through ten years 1,021 1,021 11,274 11,729
Due after ten years 0 0 1,078 1,167
Equity securities 1,576 1,576 0 0
- --------------------------------------------------------------------------------------------------------------------
Total securities $44,793 $44,990 $33,348 $34,391
====================================================================================================================
</TABLE>
Securities carried at $10,811,000 and $12,104,000 as of December 31, 1996 and
1995 were pledged to secure deposits of public funds, repurchase agreements,
and for other purposes as required by law.
NOTE 4 - 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 client.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Total loans outstanding (In thousands of dollars) 1996 1995
====================================================================================================================
<S> <C> <C>
Personal $ 69,477 $ 57,418
Business, including commercial mortgages 65,823 56,946
Tax exempt 1,078 1,224
Residential mortgage 93,456 96,739
Residential mortgages held for sale 799 261
Construction 11,220 5,239
- --------------------------------------------------------------------------------------------------------------------
Total loans $241,853 $217,827
====================================================================================================================
</TABLE>
NOTE 5 - 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 1996 1995 1994
====================================================================================================================
<S> <C> <C> <C>
Balance, January 1 $2,197 $2,127 $2,074
Loans charged off (572) (361) (243)
Recoveries credited to allowance 67 70 47
Provision charged to operations 628 361 249
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31 $2,320 $2,197 $2,127
====================================================================================================================
</TABLE>
Information regarding impaired loans for the years ended December 31 follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1996 1995
====================================================================================================================
<S> <C> <C>
Average investment in impaired loans $679 $581
Interest income recognized on impaired loans 67 54
Interest income recognized on a cash basis 56 0
Balance of impaired loans at December 31 $610 $552
Portion for which no allowance for loan losses is allocated 0 391
Portion for which an allowance for loan losses is allocated 610 161
Portion of allowance for loan losses allocated to impaired loans 163 62
====================================================================================================================
</TABLE>
Page A-22
<PAGE> 38
NOTE 6 - LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. The unpaid principal balances of mortgage
loans serviced for others was $86,762,000 and $71,633,000 at December 31, 1996
and 1995. The balance of loans serviced for others related to servicing rights
that have been capitalized was $24,986,000 at December 31, 1996.
Mortgage servicing rights activity for the period ended December 31, follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Unamortized Cost of Mortgage Servicing Rights (In thousands of dollars 1996
========================================================================================
<S> <C>
Balance at January 1 $ 0
Amount capitalized 196
Amount amortized (11)
- ----------------------------------------------------------------------------------------
Balance at December 31 $185
========================================================================================
</TABLE>
No valuation allowance was considered necessary for mortgage servicing rights
at December 31, 1996.
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
As of December 31 (In thousands of dollars) 1996 1995
==========================================================================================
<S> <C> <C>
Land $ 1,135 $ 1,077
Buildings and improvements 7,160 6,874
Furniture and equipment 4,937 4,096
Computer software 853 705
Construction in progress 0 16
- ------------------------------------------------------------------------------------------
Total cost 14,085 12,768
Less accumulated depreciation (5,310) (4,364)
- ------------------------------------------------------------------------------------------
Premises and equipment, net $ 8,775 $8,404
==========================================================================================
</TABLE>
Depreciation expense was approximately $999,000 in 1996, $895,000 in 1995 and
$849,000 in 1994.
The Bank intends to construct an Operations and Education center in 1997. While
no contracts or commitments are in place at this time, the anticipated cost of
construction is approximately $1.1 million.
NOTE 8 - DEPOSITS
Information relating to maturities of time deposits is summarized below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
As of December 31 (In thousands of dollars) 1996
==========================================================================
<S> <C>
1997 $ 82,347
1998 35,456
1999 12,467
2000 9,804
2001 1,030
After 2001 45
- --------------------------------------------------------------------------
Total time deposits $141,149
==========================================================================
</TABLE>
Page A-23
<PAGE> 39
NOTE 9 - SHORT TERM BORROWINGS
The Company has several credit facilities in place for short term borrowing
which are used on occasion as a source of liquidity. These facilities consist
of borrowing authority totaling $14.0 million from two major correspondent
banks to purchase federal funds on a daily basis. There were no outstanding
balances at December 31, 1996 and 1995.
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 clients as an investment alternative to deposit
products.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
In thousands of dollars Amount Rate Amount Rate
================================================================================================================
<S> <C> <C> <C> <C>
Balance at December 31 $609 5.21% $ 578 5.54%
Average balance during the year 599 5.22% 3,150 6.19%
Maximum month end balance during the year 609 5,793
U.S. Treasury and agency securities underlying the agreements at year end
Carrying value $997 $1,998
Fair value 997 1,998
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 10 - OTHER BORROWINGS
The Bank carried fixed rate, noncallable advances from the FHLB totaling $20.0
million at December 31, 1996. Those advances consist of $10.0 million at 5.73%
due in 1997, $3.0 million at 5.99% due in 1998, and $7.0 million at 5.97% due
in 1999. These advances are collateralized by residential mortgage loans under
a blanket security agreement. The unpaid principal balance of the loans pledged
as collateral must equal 160% of the funds advanced. The five percent
commitment fee paid with the advance due in 1998 is being amortized using the
interest method over the life of the advance. Interest payments are made
monthly with principal due at maturity.
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
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 clients. 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 extend credit 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 client 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 clients at December 31:
<TABLE>
<CAPTION>
1996 1995
Variable Fixed Variable Fixed
In thousands of dollars Rate Rate Rate Rate
=======================================================================================
<S> <C> <C> <C> <C>
Commitments to make loans $4,234 $2,560 $ 1,834 $1,190
Unused lines of credit 37,387 2,837 33,772 2,713
Standby letters of credit 5,992 4,222
=======================================================================================
</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, 1996, the rates for amounts in the fixed rate category ranged from
7.5% to 9.4%.
Page A-24
<PAGE> 40
NOTE 12 - FEDERAL INCOME TAX
Income tax expense consists of the following for the years ended December 31:
<TABLE>
<CAPTION>
In thousands of dollars 1996 1995 1994
===============================================================================
<S> <C> <C> <C>
Current $1,671 $1,311 $1,038
Deferred 42 111 133
- -------------------------------------------------------------------------------
Total income tax expense $1,713 $1,422 $1,171
===============================================================================
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
December 31 (In thousands of dollars) 1996 1995
=============================================================================
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $515 $473
Loan fees 40 91
Deferred compensation 88 61
Other 57 65
- -----------------------------------------------------------------------------
Total deferred tax assets $700 $690
Deferred tax liabilities:
Property and equipment ($507) ($497)
Mortgage servicing rights (63) 0
Core deposit intangible (101) (132)
Unrealized appreciation on securities available for sale (67) (54)
Other (189) (179)
- -----------------------------------------------------------------------------
Total deferred tax liabilities (927) (862)
- -----------------------------------------------------------------------------
Net deferred tax liability ($227) ($172)
=============================================================================
</TABLE>
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 1996 1995 1994
===============================================================================
<S> <C> <C> <C>
Income taxes at statutory rate of 34% $2,198 $1,856 $1,617
Effect of non-taxable income (515) (464) (479)
Other 30 30 33
- -------------------------------------------------------------------------------
Total federal income tax $1,713 $1,422 $1,171
===============================================================================
</TABLE>
NOTE 13 - 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
clients of the Bank. Loans to these parties 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, 1995 was
$2,741,000. During 1996, new loans to such related parties amounted to
$1,932,000 and repayments amounted to $1,309,000, resulting in a balance at
December 31, 1996 of $3,364,000. Related party deposits totaled $1,247,000 and
$1,529,000 at December 31, 1996 and 1995.
NOTE 14 - 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, 1996, $19.7
million of retained earnings of the Bank were 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.
Page A-25
<PAGE> 41
NOTE 15 - 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 12% of their compensation for 1996. The maximum contribution was 15%
of their compensation for years prior to 1996. 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 1996, 1995 and 1994 were
$329,000, $313,000 and $246,000.
Beginning in 1995, the Company has offered employees the option of purchasing
Company stock with the match portion of their 401(k) contribution. On that basis
1,622 shares in 1996 and 1,465 shares in 1995 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 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.
DIRECTOR RETAINER STOCK PLAN
In 1996 the Company adopted a deferred compensation plan, designated as the
Director Retainer Stock Plan. The plan is intended to provide eligible directors
of the Company and/or the Bank with a means of deferring payment of retainers
and certain fees payable to them for Board service. The Director Plan did not
increase any cash retainers or fees payable for board service, and any retainers
or fees elected to be deferred under the plan by an eligible director ultimately
will be payable in common stock or cash at the discretion of the participant, in
an amount equivalent to the market value of common stock at the time of payment.
SENIOR MANAGEMENT BONUS DEFERRAL STOCK PLAN
In 1996 the Company also adopted a deferred compensation plan designated as the
Senior Management Bonus Deferral Stock Plan. The Management Plan has essentially
the same purposes as the Director Plan discussed above and would permit eligible
employees of the Company or of the Bank or another affiliated entity to elect
cash bonus deferrals and, after employment termination, to receive payouts in
whole or in part in the form of common stock on terms substantially similar to
those of the Director Plan. The Management Plan did not increase the amounts of
bonuses potentially payable to any employee.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement health care and life insurance benefits to
employees who render at least fifteen years of service and attain age 62 while
in service. The accumulated postretirement benefit obligation ("APBO") for
both medical and death benefits was approximately $627,000 at December 31,
1996. The amounts reflected in other liabilities were $151,000 and $108,000 at
year end 1996 and 1995. The Company has elected to amortize the APBO as an
operating expense over twenty years. Health care trend rate for medical
coverage is assumed to be 11.5% and the discount rate used is 7%.
Postretirement benefit expense for 1996 was $110,000 and approximately $77,000
each for 1995 and 1994.
Page A-26
<PAGE> 42
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair value of principal financial assets and
liabilities were as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
In thousands of dollars Value Value Value Value
==========================================================================================
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $21,652 $21,652 $18,717 $18,717
Securities 78,338 79,381 75,915 77,253
Net loans 239,533 239,505 215,630 216,472
Accrued interest receivable 2,126 2,126 2,214 2,214
Financial Liabilities
Deposit liabilities $297,703 $297,863 $285,172 $286,041
Short term borrowings 609 609 578 578
Other borrowings 20,000 19,961 6,000 6,026
Accrued interest payable 1,296 1,296 1,102 1,102
==========================================================================================
</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, if
available. If quoted values are not available, the estimated fair value is
determined by using quoted market prices for similar securities.
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.
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.
Page A-27
<PAGE> 43
NOTE 17 - REGULATORY MATTERS
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and Bank must meet specific
capital guidelines that involve quantitative measures of assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors. Quantitative measures established by regulation to ensure capital
adequacy require the Company and Bank to maintain minimum ratios of Total and
Tier I capital to risk-weighted assets, and of Tier I capital to average
assets.
The following table shows the Company's capital ratios and amounts compared to
regulatory requirements at year end, in thousands of dollars where appropriate.
<TABLE>
<CAPTION>
Minimum To Be Well
Minimum For Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
- ------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
==================================================================================================================
As of December 31, 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets $32,748 14.2% $18,466 8.0% $23,083 10.0%
Tier I capital to risk weighted assets 30,428 13.2% 9,233 4.0% 13,850 6.0%
Tier I capital to average assets 30,428 9.3% 13,123 4.0% 16,403 5.0%
==================================================================================================================
As of December 31, 1995
- ------------------------------------------------------------------------------------------------------------------
Total capital to risk weighted assets $29,262 14.4% $16,232 8.0% $20,290 10.0%
Tier I capital to risk weighted assets 27,065 13.3% 8,116 4.0% 12,174 6.0%
Tier I capital to average assets 27,065 8.8% 12,372 4.0% 15,465 5.0%
==================================================================================================================
</TABLE>
The actual and required capital ratios of the Company and Bank are
approximately the same. The Company and Bank were categorized as
well-capitalized at year end 1996 and 1995 by their regulators.
NOTE 18 - PARENT COMPANY ONLY FINANCIAL INFORMATION
The condensed financial information for United Bancorp, Inc. is summarized
below.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS December 31,
In thousands of dollars 1996 1995
================================================================================================================
<S> <C> <C>
ASSETS
Cash $ 80 $ 53
Investment in subsidiary 31,901 28,767
Other assets 653 500
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $32,634 $29,320
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 586 $ 467
Shareholders' equity 32,048 28,853
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $32,634 $29,320
================================================================================================================
</TABLE>
Page A-28
<PAGE> 44
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME For the years ended December 31,
In thousands of dollars 1996 1995 1994
================================================================================================================
<S> <C> <C> <C>
INCOME
Dividends from subsidiary $1,690 $1,380 $ 973
Other income 1 3 116
- ---------------------------------------------------------------------------------------------------------------
TOTAL INCOME 1,691 1,383 1,089
Total Noninterest Expense 73 31 42
- ---------------------------------------------------------------------------------------------------------------
Income before undistributed equity and income taxes 1,618 1,352 1,047
Income tax (benefit) (24) (10) 25
- ---------------------------------------------------------------------------------------------------------------
Net income before undistributed equity 1,642 1,362 1,022
Equity in undistributed net income of subsidiary 3,109 2,673 2,562
- ---------------------------------------------------------------------------------------------------------------
NET INCOME $4,751 $4,035 $3,584
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31,
In thousands of dollars 1995 1995 1994
===============================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $4,751 $4,035 $3,584
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
from Operating Activities
Undistributed net income of subsidiary (3,109) (2,673) (2,562)
Gain from sale of securities 0 0 (119)
Change in other assets (125) (247) 183
Change in other liabilities (16) (31) (26)
- --------------------------------------------------------------------------------------------------------------
Total adjustments (3,250) (2,951) (2,524)
- --------------------------------------------------------------------------------------------------------------
Net Cash from Operating Activities 1,501 1,084 1,060
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of securities 0 0 171
Purchase of securities (28) 0 0
- --------------------------------------------------------------------------------------------------------------
Net Cash from Investing Activities (28) 0 171
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Premises and equipment activities 0 113 0
Common stock transactions 78 41 0
Dividends paid (1,524) (1,250) (1,196)
- --------------------------------------------------------------------------------------------------------------
Net Cash from Financing Activities (1,446) (1,096) (1,196)
- --------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH 27 (12) 35
Cash at Beginning of Year 53 65 30
- --------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $80 $53 $65
==============================================================================================================
</TABLE>
Page A-29
<PAGE> 45
UNITED BANCORP, INC.
Tecumseh, Michigan 49286
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR ANNUAL
MEETING OF SHAREHOLDERS ON APRIL 15, 1997
The undersigned hereby appoints M. H. Downing and David S. Hickman, and either
of them, with full power of substitution, Proxies to attend the Annual Meeting
of the Shareholders of United Bancorp, Inc. ("Company"), to be held at the
Tecumseh Country Club, 5200 Milwaukee Road, Tecumseh, Michigan on Tuesday,
April 15, 1997 at 4:30 p.m., local time, and any adjournment thereof, and to
vote all shares of the common stock of the Company which the undersigned is
entitled to vote upon each of the matters referred to in this Proxy and, at
their discretion, upon such other matters as may properly come before this
meeting.
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, this Proxy will be
voted FOR all proposals.
The Board of Directors recommends a vote FOR all proposals.
PROPOSAL 1
To elect five directors to serve as "Class III Directors" until the 2000 Annual
Meeting of Shareholders, or until their successors have been elected and
qualified:
Class III Director Nominees:
David N. Berlin Merlyn H. Downing Charles E. Gross
Linda J. Herrick John J. Wanke
Mark only one box
[ ] FOR all nominees [ ] FOR, except vote withheld
from the following
nominees:
[ ] WITHHELD from all nominees ______________________________
______________________________
PROPOSAL 2
To ratify the appointment of Crowe, Chizek and Company, L.L.P. as independent
auditors.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Witness my hand and seal this ____ day
of ______________, 1997.
______________________________________
(Signature)
______________________________________
(Signature)
Note: Please sign exactly as your name appears on this Proxy. If signing for
estates, trusts, corporations or partnerships, title or capacity should be
stated. If shares are held jointly, each holder should sign.
