<PAGE> 1
SCHEDULE 14A INFORMATION STATEMENT
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
1998
[UNITED BANCORP, INC. LOGO]
<PAGE> 3
UNITED BANCORP, INC.
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
APRIL 21, 1998
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 21, 1998 at
4:30 p.m., local time, for the following purposes:
1. To elect six directors constituting Class I of the Board
of Directors, to serve for three years until the 2001 Annual
Meeting of Shareholders, and to elect two directors in Class
III of the Board of Directors, to serve for two years until the
2000 Annual Meeting of Shareholders.
2. To ratify the appointment of Crowe, Chizek & Company, LLP
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 16,
1998 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, 1998. Since United Bank & Trust
is a subsidiary of a one-bank holding company, the accompanying
financial statements of United Bancorp, Inc. satisfy 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 27, 1998 Dale L. Chadderdon
Senior Vice President, Secretary and Treasurer
<PAGE> 4
UNITED BANCORP, INC.
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 21, 1998
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 1998 Annual Meeting of Shareholders of the Company and
any adjournment or adjournments thereof. The Annual Meeting will be held on
April 21, 1998 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 27, 1998.
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 16, 1998 will be
entitled to notice of and to vote at the Annual Meeting. On March 16, 1998,
there were 1,640,030 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 minimal 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
1999 Annual Meeting of Shareholders must be received by Dale L. Chadderdon,
Secretary and Treasurer, at the principal executive offices of the Company by
November 23, 1998.
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 1998
Annual Meeting of Shareholders ("Class I Directors") are L. Donald Bush,
Patrick D. Farver, James C. Lawson, Donald J. Martin, David E. Maxwell,
James K. Whitehouse and Jeffrey Kuhman. Directors Merlyn H.
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<PAGE> 5
Downing and Charles E. Gross have reached mandatory retirement age and
will retire from the Board effective with the 1998 Annual Meeting of
Shareholders. Director James K. Whitehouse does not intend to stand for
re-election. Director Linda J. Herrick resigned from the Board during 1997 to
pursue personal interests.
The Board of Directors has by resolution nominated six individuals for election
as Class I Directors at the 1998 Annual Meeting of Shareholders. These
individuals are all incumbent Class I Directors.
Those persons who are elected as Class I Directors at the 1998 Annual Meeting
of Shareholders will hold office for three years or as noted below. Their terms
will expire at the 2001 Annual Meeting of Shareholders or upon the election and
qualification of their successors.
The Board of Directors has by resolution nominated two individuals for election
as Class III Directors at the 1998 Annual Meeting of Shareholders. These
individuals, Richard A. Gurdjian and Kathleen M. Mohr, are not currently
Directors of the Company.
Those persons who are elected as Class III Directors at the 1998 Annual Meeting
of Shareholders will hold office for two 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.
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 I
Directors receiving the six highest number of votes will be elected, and those
nominees for election as Class II Directors receiving the two 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 eight persons named above as nominees
will be nominated for election as Directors at the 1998 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, LLP as
independent auditors for the Company and its subsidiary for the year ending
December 31, 1998. Crowe, Chizek & Company, LLP first became the auditors for
the Company in 1988.
A representative of the firm of Crowe, Chizek & Company, LLP will be present at
the Annual Meeting to respond to appropriate questions in regard to their audit
for 1997, and to make any comments that they deem appropriate.
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<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:
<TABLE>
<CAPTION>
Name, Age, and Five Year Business Experience (1) Director Since (2)
- ------------------------------------------------ ------------------
DIRECTOR NOMINEES - TERMS EXPIRING IN 2001 (CLASS I)
<S> <C>
L. Donald Bush, age 64; Farmer; Owner, Leland D. Bush & Sons 1992
Patrick D. Farver, age 43; President and Chief Operating officer
(1994); Executive Vice President (through 1994), Blissfield
Manufacturing Co., Blissfield, Michigan 1993
Jeffrey A. Kuhman, age 51, Chief Executive Officer, Glycon Corp.,
supplier to the plastics extrusion industry, Tecumseh, Michigan 1997
James C. Lawson, age 50; private investor (1997); President, Lenawee
Fuels, Inc. (prior to 1997), Tecumseh, Michigan 1986
D. J. Martin, age 58; President and Director, Martin's Home Center,
Tecumseh, Michigan 1985
David E. Maxwell, age 58; Executive Vice President and Chief
Operating Officer; Director, Brazeway, Inc., manufacturer of extruded
aluminum tubing and related products, Adrian, Michigan 1986
INCUMBENT DIRECTOR - NOT SEEKING RE-ELECTION (CLASS I)
- ------------------------------------------------------
James K. Whitehouse, age 51; Director, Gift and Estate Planning,
Albion College, Albion, Michigan 1991
INCUMBENT DIRECTORS - TERMS EXPIRING IN 1999 (CLASS II)
- -------------------------------------------------------
John H. Foss, Age 55; Director, Vice President, Treasurer and Chief
Financial Officer, Tecumseh Products Company, manufacturer of
compressors and refrigeration components, engines, and power train
components, Tecumseh, Michigan 1992
David S. Hickman, age 57; President and Chief Executive Officer of
the Company; Chairman and Chief Executive Officer of the Bank,
Tecumseh, Michigan 1985
Ann Hinsdale Knisel, age 47; County Extension Director, Michigan
State University Extension Service, Adrian, Michigan. 1993
John R. Robertstad, age 48, President, Chief Executive Officer and
Director, Lenawee Health Alliance, Adrian, Michigan 1997
Jeffrey T. Robideau, age 38; President, Tecumseh Corrugated Box
Company, Tecumseh, Michigan 1995
Richard S. Whelan, age 64; President and Director, Hoyt E. Whelan
Co., agricultural implement dealer, Tecumseh, Michigan 1985
</TABLE>
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<PAGE> 7
<TABLE>
<CAPTION>
Name, Age, and Five Year Business Experience (1) Director Since (2)
- ------------------------------------------------ ------------------
<S> <C>
INCUMBENT DIRECTORS - TERMS EXPIRING IN 2000 (CLASS III)
David N. Berlin, age 49; President, The Metalloy Corporation,
foundry, die casting and machining of aluminum castings, Hudson,
Michigan 1991
Joseph D. Butcko, age 55; Chief Operating Officer, Crescive Die &
Tool, Inc., supplier of stamped metal products and assemblies to the
automotive industry, Saline, Michigan; Co-owner, Clinton Gage &
Machine Tool, Inc., Tipton, Michigan; Co-owner, Saline Properties,
Inc., Saline, Michigan 1997
Richard Niethammer, age 60; Owner of Niethammer Transport, Hammer
Trucking, RSK Leasing, York Woods Development and R&R Realty, Saline
Michigan 1997
John J. Wanke, age 48; Executive Vice President of the Company;
President and Chief Operating Officer of the Bank 1994
INCUMBENT DIRECTORS - RETIRING IN 1998 (CLASS III)
- --------------------------------------------------
Merlyn H. Downing, age 70; Chairman of the Company, Tecumseh, Michigan 1985
Charles E. Gross, age 69; CPA; Gross, Puckey, Gruel & Roof, P.C.,
Certified Public Accountants, Adrian Michigan 1989
DIRECTOR NOMINEES - TERMS EXPIRING IN 2000 (CLASS III)
- ------------------------------------------------------
Richard A. Gurdjian, age 53; President, Gurdjian & Associates, Inc.
insurance, Adrian, Michigan; Treasurer, Gurdjian and Associates
Financial Services, Inc., Adrian, Michigan; general agent, Guarantee
Life Insurance Company N/A
Kathryn M. Mohr, age 35; Attorney, Robison, Curphey & O'Connell, LLC,
Adrian, Michigan and Toledo, Ohio N/A
DIRECTOR EMERITUS
- -----------------
William G. Thompson, age 83, Retired Chairman, C.E.O. and Director,
Thompson Savings Bank, Hudson, Michigan 1992
</TABLE>
- ----------------------------
(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
Following 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. Since Mr. Downing will retire from the Board effective with the
1998 Annual Meeting of Shareholders, it is anticipated that Mr. Hickman will
be named Chairman and Chief Executive Officer of the Company at the 1998
Organizational Meeting of the Board. At its regular meetings, the Board may
also make other Executive Officer appointments for the Company.
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<TABLE>
<CAPTION>
Year Became
Name, Age, and Five-Year Business Experience Executive Officer
- ------------------------------------------------------------------------------- --------------------
<S> <C>
Merlyn H. Downing, age 70; Chairman of the Company 1985
David S. Hickman, age 57; President and Chief Executive Officer of the
Company; Chairman and Chief Executive Officer of the Bank 1985
John J. Wanke, age 48; Executive Vice President of the Company; President
and Chief Operating Officer of the Bank 1987
Dale L. Chadderdon, age 49; Senior Vice President, Secretary and Treasurer of
the Company; Executive Vice President and Chief Financial Officer of the Bank 1987
Earl M. Roehm, age 55; Executive Vice President - Personal Banking of the Bank
(1995); Senior Vice President, First of America Bank - Ann Arbor (1962-1995) 1995
Richard L. Boyce, age 36; Senior Vice President & Trust Officer of the Bank 1995
Terry L. Douglass, age 48; Senior Vice President - Business Banking of the Bank 1995
</TABLE>
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 1997. 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, 1997 to all Directors and Executive Officers of the
Company, as a group, was $7,942,000. Any such loan transaction presently in
effect with any Director or Executive Officer of the Company is current as of
this date.
In May of 1997, the Bank entered into a lease agreement with Saline Properties,
Inc., of which Director Joseph D. Butcko is a principal. The lease, at $2,081
per month for thirty-six months, is for property in Saline to be used as a
banking office, and is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons. Mr. Butcko was
subsequently appointed to the Board of Directors in September of 1997.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The Boards of Directors of the Company and the Bank have both appointed Audit
and Compliance Review Committees consisting of Charles E. Gross, James C.
Lawson, David E. Maxwell, Jeffrey T. Robideau, John R. Robertstad 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. The Committees make periodic reports to
their respective Boards of Directors regarding these matters.
The Company's Audit and Compliance Review Committee and the Bank's Audit and
Compliance Review Committee each met six times during the year ended December
31, 1997. 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 seven times
during 1997, and is composed of the following Directors of the Bank: Merlyn H.
Downing, John H. Foss, David S.
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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, 1997, 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 Linda J. Herrick.
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 1997,
1996 and 1995 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 1997 $175,000 $32,928 $15,000
1996 156,500 25,325 15,000
1995 149,000 24,368 14,970
John J. Wanke, Executive Vice President of the Company 1997 $121,000 $22,611 $13,280
1996 111,000 16,855 12,562
1995 105,000 16,948 11,568
Earl M. Roehm, Executive Vice President of the Bank 1997 $112,500 $13,500 $12,132
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 Deferral Stock Plan adopted in 1996,
Executive Officers are eligible to elect cash bonus deferrals and, after
employment termination, to receive payment in
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whole or in part in the form of shares of Company stock. Amounts
deferred under this plan are included in the above table in the Bonus column.
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".
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 $3,000, 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.
<TABLE>
<CAPTION>
Meeting Attended Chairman All other
---------------- -------- ---------
<S> <C> <C>
Board of Directors of the Bank N/A $225
Executive Committee N/A 165
Loan Committee N/A 165
Trust Committee $190 165
Audit Committee 190 165
CRA Committee N/A 165
</TABLE>
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.
Directors have the option of deferring all or part of their annual retainers
and Board meeting fees into the Director Retainer Stock Plan approved by
Shareholders in 1996.
EMPLOYMENT CONTRACTS
The Company initiated annual employment contracts beginning 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 the Bank's designated CRA
community 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 1997, 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 1997.
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;
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<PAGE> 11
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.
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 1997:
The base salary for 1997 for Mr. Hickman reflects an increase from 1996. 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, 1993 as a base date.
(GRAPH)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
UBI 100.0 126.9 160.8 177.9 223.2 266.8
S & P 500 100.0 110.1 111.5 153.5 188.7 251.6
KBW 50 100.0 105.5 100.2 160.4 226.9 331.7
</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 16, 1998, no persons except
those listed below, owned beneficially more than five percent (5%) of the
voting securities of the Company. With 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, 1997.
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<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------------------------ ---------------------- ----------------
<S> <C> <C>
Lilley & Co., a nominee of United Bank & Trust as Trustee
P.O. Box 248
Tecumseh, MI 49286 227,330(1) 13.8%
</TABLE>
(1) The Bank as Trustee has sole voting and sole investment powers with
respect to 157,391 of the shares, and shared voting and shared
investment powers with respect to the remaining 69,939 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, 1997, 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, 1997, according to information furnished to the Company
by said persons.
Amounts deferred under the Director Retainer Stock Plan or the Senior
Management Bonus Deferral Stock Plan do not result in shares issued until the
date upon which a person ceases being a member of the plan. Therefore, shares
representing amounts deferred in these plans are not included in the totals
below.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership (1) Class (11)
- ------------------------------------ ----------------------------- ---------------
CLASS I DIRECTORS
- -----------------
<S> <C> <C>
L. Donald Bush
9432 Welch Road
Tecumseh, Michigan 49286 774 *
Patrick D. Farver
484 Seel Drive
Adrian, Michigan 49221 3,032 (2) *
Jeffrey A. Kuhman
8905 Hawthorne
Tecumseh, Michigan 49286 13,499 *
James C. Lawson
513 N. Occidental.
Tecumseh, Michigan 49286 17,239 (3) 1.05%
D. J. Martin
145 W. Chicago Boulevard
Tecumseh, Michigan 49286 32,815 1.93%
David E. Maxwell
P.O. Box 749
Adrian, Michigan 49221 19,643 (4) 1.15%
</TABLE>
Page 9
<PAGE> 13
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership (1) Class (11)
- ------------------------------------ --------------------------------- --------------------
<S> <C> <C>
James K. Whitehouse
2430 N. Maple Grove
Hudson, Michigan 49247 164 (5) *
CLASS II DIRECTORS
- ------------------
John H. Foss
100 E. Patterson
Tecumseh, Michigan 49286 661 *
David S. Hickman
P.O. Box 248
Tecumseh, Michigan 49286 33,190 2.02%
Ann Hinsdale Knisel
4404 Livesay Rd.
Sand Creek, Michigan 49279 204 *
John R. Robertstad
682 Stoneridge Drive
Adrian, Michigan 49221 140 *
Jeffrey T. Robideau
707 S. Evans Street
Tecumseh, Michigan 49286 17,435 (6) 1.06%
Richard S. Whelan
106 N. Occidental
Tecumseh, Michigan 49286 3,178 *
CLASS III DIRECTORS
- -------------------
David N. Berlin
103 W. Main
Hudson, Michigan 49247 346 *
Joseph D. Butcko
P.O. Box 96
Saline, Michigan 48176 600 *
Merlyn H. Downing
406 Burt Street
Tecumseh, Michigan 49286 16,972 (7) 1.03%
Charles E. Gross
P.O. Box 606
Adrian, Michigan 49221 5,655 (8) *
Richard R. Niethammer
9367 Sunset Lake Drive
Saline, Michigan 48176 500 *
John J. Wanke
P.O. Box 248
Tecumseh, Michigan 49286 1,085 (9) *
</TABLE>
Page 10
<PAGE> 14
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Amount and Nature of Beneficial Ownership (1) (11)
- ------------------------------------ ------------------------------------------------ --------------------
DIRECTOR NOMINEES
- -----------------
<S> <C> <C>
Richard A. Gurdjian
525 Meadowbrook Drive
Adrian, Michigan 49221 (10) *
Kathryn M. Mohr
17837 Tecumseh Street
Dundee, Michigan 48131 (10) *
DIRECTOR EMERITUS
- -----------------
William G. Thompson
331 W. Main
Hudson, Michigan 49247 1,450 *
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
- ----------------------------------------
Dale L. Chadderdon
P.O. Box 248
Tecumseh, Michigan 49286 3,712 *
Earl M. Roehm
P.O. Box 248
Tecumseh, Michigan 49286 420 *
Richard L. Boyce
P.O. Box 248
Tecumseh, Michigan 49286 245 *
Terry L. Douglass
P.O. Box 248
Tecumseh, Michigan 49286 311 *
-------
All Directors and Executive Officers as a Group (26 persons) 173,270 10.57%
</TABLE>
(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 1,457 shares with respect to which Mr. Farver has sole
voting and investment power, and 1,575 shares with respect to which he
has shared voting and investment power and no direct ownership interest.
(3) Includes 5,065 shares to which Mr. Lawson has sole voting and
investment power, and 12,174 shares with respect to which he has shared
voting and investment power and no direct ownership interest.
(4) Includes 17,007 shares to which Mr. Maxwell has sole voting and
investment power, and 2,636 shares with respect to which he has shared
voting and investment power and no direct ownership interest.
(5) Includes 164 shares for which Mr. Whitehouse has shared voting and
investment power and no direct ownership interest.
(6) Includes 12,862 shares to which Mr. Robideau has sole voting and
investment power, and 4,573 shares with respect to which he has shared
voting and investment power.
Page 11
<PAGE> 15
(7) Includes 5,072 shares to which Mr. Downing has sole voting and
investment power, and 11,900 shares with respect to which he has shared
voting and investment power and no direct ownership interest.
(8) Includes 2,011 shares to which Mr. Gross has sole voting and
investment power, and 3,644 shares with respect to which he has shared
voting and investment power and no direct ownership interest.
(9) Includes 938 shares to which Mr. Wanke has sole voting and investment
power, and 147 shares with respect to which he has shared voting and
investment power.
(10) Mr. Gurdjian and Ms. Mohr are newly nominated as Directors, and plan
to purchase stock of the Company as shares become available.
(11) The symbol *, shown in this column, indicates ownership of less than
1%.
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 27, 1998 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
<TABLE>
<S> <C>
The Business of United Bancorp, Inc. A-1
- ---------------------------------------------------------------------------
Management's Discussion and Analysis
Results of Operations A-2
-------------------------------------------------------------------------
Financial Condition A-6
-------------------------------------------------------------------------
Liquidity, Funds Management and Market Risk A-9
-------------------------------------------------------------------------
Prospective Accounting and Regulatory Changes A-12
-------------------------------------------------------------------------
Statement of Management Responsibility A-13
- ---------------------------------------------------------------------------
Report of Independent Auditors A-14
- ---------------------------------------------------------------------------
Consolidated Financial Statements
Consolidated Balance Sheets A-15
-------------------------------------------------------------------------
Consolidated Statements of Income A-16
-------------------------------------------------------------------------
Consolidated Statements of Cash Flows A-17
-------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity A-18
-------------------------------------------------------------------------
Notes to Consolidated Financial Statements A-19
-------------------------------------------------------------------------
</TABLE>
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, insurance,
trust and investment services through a system of fifteen banking
offices located in Lenawee, Monroe and Washtenaw Counties.
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").
In August of 1997, United Bank & Trust opened a banking office in Saline,
Michigan, and in December, the Bank acquired the Dundee, Michigan office of NBD
Bank. Both of these banking offices are now operating as offices of the Bank. In
November, the Bank opened its recently-completed Downing Center for Operations
and Staff Development. The Downing Center contributed 12,000 square feet of
expansion space, and now houses several back-office functions of the Bank. The
results of this 1997 expansion are included in the discussion that follows.
RESULTS OF OPERATIONS
Consolidated net income for 1997 continued to improve, up 5.5% from the record
level of earnings achieved in 1996. Continued improvement in the Company's
efficiency ratios contributed significantly to this performance. Record earnings
were achieved in spite of flat interest margin, record expansion during the
year, and higher than normal losses in the personal loan portfolio.
Earnings for the year accelerated through the year, with the fourth quarter of
1997 showing exceptional earnings levels. The chart below shows the trends in
earnings for the four quarters of 1997.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
in thousands of dollars, where appropriate 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income before provision $ 3,881 $ 3,779 $ 3,711 $ 3,442
Provision for loan losses 655 230 190 180
Noninterest income 1,155 1,131 943 895
Noninterest expense 2,527 2,817 2,729 2,780
----- ------ ------ ------
Net income $ 1,371 $ 1,350 $ 1,262 $ 1,030
Return on average assets (a) 1.53% 1.50% 1.44% 1.19%
Return on average shareholders' equity (a) 15.89% 15.77% 15.11% 12.90%
(a) Annualized
</TABLE>
As is apparent from the chart above, net interest income was a signiificant
factor contributing to these continued increasing earnings. In addition, control
of noninterest expense in spite of continued expansion, as well as steadily
improving noninterest income, resulted in excellent levels of performance.
In part as a result of this slow start, and also as a result of heavy provision
for loan losses, earnings ratios were behind those achieved in 1996. However,
all ratios that measure earnings performance and returns were very positive, and
reflect continuing recent trends in profitability and shareholder value. The
chart below shows trends in some of these ratios. All figures are adjusted to
reflect stock dividends.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
5 Year
Performance Ratios 1997 1996 1995 Average
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on average assets 1.41% 1.45% 1.30% 1.33%
Return on average shareholders' equity 14.87% 15.63% 14.89% 15.46%
Average equity to average total assets 9.48% 9.27% 8.76%
Dividend payout ratio 36.4% 34.9% 33.2%
Book value per share $ 21.55 $ 19.49 $ 17.57
Cash dividends per share 1.11 1.01 0.82
=======================================================================================================
</TABLE>
Page A-2
<PAGE> 18
Book value per share is based on shares outstanding at December 31, of
$1,646,030 for 1997, $1,565,890 for 1996 and $1,564,332 for 1995. Dividends per
share is based on shares outstanding of $1,644,095 in 1997, $1,564,302 in 1996
and $1,562,798 in 1995.
Net Interest Income
United Bancorp, Inc. derives its income primarily from net interest income,
which is an important contributor to the Company's profitability. Attempts to
influence deposit mix, as well as the benefit of continued growth, has resulted
in margin ratios that are significantly improved over those achieved by the bank
in years prior to 1995. The Yield Analysis table provides insight into the
various components of net interest income, as well as the results of recent
shifts in deposit mix that have helped to improve the margin.
<TABLE>
<CAPTION>
Yield Analysis of Consolidated Average Assets and Liabilities
-----------------------------------------------------------------------------------------------
Dollars in Thousands 1997 1996 1995
-----------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets (a)
Federal funds sold $ 4,011 $ 215 5.37% $ 2,607 $ 141 5.41% $ 3,644 $ 215 5.91%
Taxable securities 48,194 3,139 6.51% 48,132 2,949 6.13% 49,230 2,703 5.49%
Tax exempt securities (b) 32,659 2,553 7.82% 30,388 2,445 8.05% 25,408 2,166 8.52%
Taxable loans 248,043 22,515 9.08% 226,229 20,511 9.07% 211,342 19,006 8.99%
Tax exempt loans (b) 1,292 100 7.74% 1,092 91 8.33% 1,282 113 8.82%
-------------------- ------------------- ---------------------
Total interest earning
assets (b) 334,199 $ 28,522 8.53% 308,448 $ 26,138 8.47% 290,906 $24,203 8.32%
Cash and due from banks 9,524 8,639 7,759
Premises and
equipment, net 9,167 8,702 8,420
Intangible assets 1,490 1,591 1,804
Other assets 3,605 2,938 3,003
Unrealized loss on secur-
ities available for sale 133 (15) (421)
Allowance for loan losses (2,312) (2,235) (2,181)
--------- --------- --------
Total Assets $ 355,806 $ 328,068 $309,290
========= ========= ========
Liabilities and Shareholders' Equity
Interest bearing liabilities
NOW accounts $ 38,959 $ 590 1.51% $ 38,883 $ 691 1.78% $ 36,347 $ 763 2.10%
Savings deposits 70,742 2,029 2.87% 74,796 2,113 2.82% 73,092 2,124 2.91%
CDs $100,000 and over 41,209 2,408 5.84% 37,553 2,193 5.84% 29,942 1,829 6.11%
Other int. bearing deposits 123,846 6,985 5.64% 104,993 5,918 5.64% 105,001 5,824 5.55%
------------------- ---------------------- ----------------------
Total int. bearing deposits 274,756 12,013 4.37% 256,225 10,916 4.26% 244,382 10,540 4.31%
Short term borrowings 3,380 157 4.64% 3,189 173 5.43% 3,854 236 6.12%
Other borrowings 11,479 724 6.31% 9,074 525 5.79% 6,000 308 5.14%
------------------- ---------------------- -----------------------
Total int. bearing liabilities 289,615 $ 12,893 4.45% 268,488 $ 11,614 4.33% 254,236 $11,084 4.36%
Nonint. bearing deposits 29,365 26,616 25,821
Other liabilities 3,105 2,563 2,136
Shareholders' equity 33,721 30,401 27,097
--------- ---------------------- --------
Total Liabilities and
Shareholders' Equity $ 355,806 $ 328,068 $309,290
========== ========= ========
Net interest income $ 15,629 $ 14,523 $13,119
Net spread 4.08% 4.15% 3.96%
Net yield on interest earning assets (b) 4.68% 4.71% 4.51%
Ratio of interest earning assets to
interest bearing liabilities 1.15 1.15 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.
Page A-3
<PAGE> 19
Net interest income was up 7.8% over 1996. During 1997, yields on earning assets
increased, although at a slower rate of increase than the Company's cost of
funds. This resulted in lower spread for the year, but funds were utilized more
efficiently, resulting in a net interest margin that remained substantially
unchanged from 1996.
As noted from the data in the tables below, substantially all of the improvement
in net interest margin during 1997 came as a result of changes in volume. Of the
total increase in interest income, 94.5% was due to volume improvements, while
103.3% of the increase in interest expense was a result of volume increases.
Interest rate changes during the year did not have a significant impact on the
margin during 1997.
The tables below 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>
- -------------------------------------------------------------------------------------------------------------------------
1997 compared to 1996 1996 compared to 1995
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 $ 75 $ (1) $ 74 $ (57) $ (17) $ (74)
Taxable securities 4 186 190 (61) 307 246
Tax exempt securities 179 (71) 108 406 (127) 279
Taxable loans 1,980 24 2,004 1,349 156 1,505
Tax exempt loans 16 (7) 9 (16) (6) (22)
----------------------------------------------------------------------------------------------------------------------
Total interest income $ 2,254 $ 131 $ 2,385 $ 1,621 $ 313 $ 1,934
Interest expense on:
NOW accounts $ 1 $(102) $ (101) $ 51 $ (123) $ (72)
Savings deposits (116) 33 (83) 49 (60) (11)
Interest bearing CDs $100,000 or more 214 1 215 447 (83) 364
Other interest bearing deposits 1,063 3 1,066 0 94 94
Short term borrowings 10 (27) (17) (38) (25) (63)
Other borrowings 149 50 199 174 43 217
----------------------------------------------------------------------------------------------------------------------
Total interest expense $ 1,321 $ (42) $ 1,279 $ 683 $ (154) $ 529
----------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 933 $ 173 $ 1,106 $ 938 $ 467 $ 1,405
==========================================================================================================================
</TABLE>
Provision for Loan Losses
During 1997, the Bank continued to experience deterioration in the quality of
its installment loan portfolio, principally as a result of indirect installment
loans that were placed on the books in 1994, 1995 and 1996. This deterioration,
as well as continued growth in the business and personal loan categories, caused
Management to provide additional protection against potential losses in the
portfolio. A provision which exceeded 1996 levels by nearly 100% followed the
Bank's 1996 increase in provision by 74% over 1995 levels. This provision
provided for potential losses inherent in the current portfolio, and funded
actual charge-offs.
While these 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. In addition, further steps were undertaken during 1997 to strengthen
the collection efforts on loans already on the books, and underwriting standards
have been re-evaluated. All of these factors combine with the Bank's high level
of residential real estate loans to support an allowance as a percent of total
loans at a level that is somewhat below average for a commercial bank.
Page A-4
<PAGE> 20
Noninterest Income
Total noninterest income increased 12.6% in 1997 over 1996. A number of items
contributed to this continued improvement. Deposit service charges continued to
show steady strong improvement 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 21.8% in 1997 over 1996. This
compares to an increase of 25.0% in 1996 over 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. Total Trust & Investment Group fee income increased 34.0% in
1997, compared to increases of 7.5% in 1996 and 9.6% in 1995 over 1994. This
earnings growth is a direct result of growth of assets managed by the Department
due to new business as well as favorable market trends. At December 31, 1997,
assets managed by the Department were $259.3 million, up 30.1% from December 31,
1996. 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.
Income from the sales and servicing of loans continued to provide noninterest
income, although income from this source was down 23.0% in 1997 compared to
1996. The Bank maintains a 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 exhibited a preference for fixed rate loans, resulting in a
greater proportion of those loans originated by the Bank being sold in the
secondary market. This trend reversed in 1997, as clients generally selected
adjustable rate mortgages rather than fixed rates. This resulted directly in a
reduction in fee income resulting from the sale of these loans. The Bank
currently services $98.4 million of sold loans, compared to $86.2 million at the
end of 1996. These loans will continue to generate fee income in future periods.
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. Through late 1997, the sale
of nondeposit investment products was accomplished through an agreement with
Security First. Under this agreement, employees of Security First sold annuities
and mutual funds in United's banking offices, and the income was recorded on the
books of the Bank's insurance agency. Late in 1997, this arrangement was
modified, and the former sales persons of Security First became employees of
United Bank & Trust. This will change the accounting presentation for this
product's income and expenses in future periods, as fee income will be shown as
a gross number, and the costs of operating the department will be reflected in
the Bank's operating expenses.
Total income provided from the sale of nondeposit investment products declined
during 1997 as a result of decreased sales volumes. This decrease in volumes was
a result of significant changes in the staffing of the department late in 1996.
Volumes in the latter part of 1997 have once again improved, and continued
contribution on the part of the Bank's insurance agency is anticipated. In
addition, the Bank participated in forming a title insurance company, and income
generated from this venture is reflected in the income of the agency.
Management anticipates that noninterest income will continue to be emphasized in
the future as a significant source of income to augment net interest income in
light of continued increased competition in the financial services markets.
During 1997, non-banking segments of the Company's business generated
substantially all of the increases in fee income for the year.
Noninterest Expense
In spite of the expansion and growth experienced in 1997, noninterest expenses
increased at a moderate level. During the year, the Bank opened a new office in
Saline, and purchased the Dundee branch of NBD Bank. In addition, a 12,000
square foot building was constructed to house many of the operations and staff
development functions of the Bank. These changes came during the last half of
the year, however, so the full impact on earnings will not be realized until
future periods. The two new banking offices will provide income to offset the
overhead added to establish them, while the new operations and staff development
center provided much-needed expansion space to accommodate the growth of the
Bank.
Page A-5
<PAGE> 21
Personnel expense continues to be the largest single area of expense, but
increased only 5.4% during 1997, compared to an increase of 8.9% from 1995 to
1996. Total full-time equivalent staffing was 170.5 at December 31, 1997,
compared to 159.5 at December 31, 1996. Of this increase, 10 full-time
equivalent staff additions relate specifically to the two new banking offices
added during the year.
The cost of operating fifteen banking offices contributes significantly to the
noninterest expense of the Company. However, during 1997, the rate of growth
continued to slow, and net occupancy and equipment expense increased 8.0%,
compared to 12.1% from 1995 to 1996 and 17.1% in 1995 over 1994. As noted above,
however, the expansion experienced in the second half of 1997 will result in
added overhead in future years. Overall, the Company did an excellent job of
containing all other operating expenses during the year, with an increase of
3.3% from 1996 to 1997.
Federal Income Tax
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.
The chart below shows the effective federal tax rates of the Company for the
past three years.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Effective Tax Rates, in thousands of dollars where appropriate 1997 1996 1995
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before tax $ 6,829 $ 6,464 $ 5,457
Federal income tax accrual 1,816 1,713 1,422
Effective federal tax rate 26.6% 26.5% 26.1%
=====================================================================================================
</TABLE>
FINANCIAL CONDITION
Securities
The securities portfolio continued to increase moderately in size during 1997,
following the modest growth experienced in 1996. 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 1997 1996
------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury and agency securities $ (5,082) $(10,009)
Mortgage backed agency securities 1,156 13,308
Tax exempt obligations of states and political subdivisions 3,776 3,216
Corporate, taxable municipal and asset backed securities 1,307 (5,396)
------------------------------------------------------------------------------------------------------
Change in total securities $ 1,314 $ 1,119
======================================================================================================
</TABLE>
Recent trends in interest rates have made it less advantageous to hold U.S.
Treasury and agency securities. In addition, the Bank's portfolio of
mortgage-backed agency securities has not been replaced as it has paid out.
Substantially all of the growth in the portfolio was in holdings in tax exempt
obligations of states and political subdivisions. 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 following chart shows
the mix of the securities portfolio.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Percentage Makeup of Securities Portfolio at December 31, 1997 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury and agency securities 11.6% 18.1%
Mortgage backed agency securities 36.6% 35.6%
Tax exempt obligations of states and political subdivisions 43.7% 39.6%
Corporate, taxable municipal and asset backed securities 8.1% 6.6%
--------------------------------------------------------------------------------------------------------
Total securities 100.0% 100.0%
========================================================================================================
</TABLE>
Page A-6
<PAGE> 22
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.
The net unrealized gain on securities available for sale nearly doubled from
1996 to 1997, with minimal growth in the portfolio, as market interest rates
declined during the period. 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 9.7% continued near the strong pace experienced in 1996. However,
unlike 1996, the growth in the portfolio was principally in the residential
mortgage and business portfolios. As a result of strong competition and rising
losses in the consumer loan market, growth was curtailed during the year in the
direct and indirect installment loan products. The increase in tax exempt loans
reflects a recent shift on the part of some local municipalities to a preference
for term loans, as opposed to the issuance of bonds.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Percentage Change in Categories of Loan Portfolio 1997 1996
---------------------------------------------------------------------------------------------------------
<S> <C>
Personal 1.2% 21.0%
Business 12.5% 15.6%
Tax exempt 37.5% -11.9%
Residential mortgage 11.2% -2.8%
Construction 30.0% 114.2%
Total loans 9.7% 11.0%
=========================================================================================================
</TABLE>
The Bank continues to be the single largest provider of residential mortgage
loans in Lenawee County. As a full service lender, the Bank offers a variety of
home mortgage loan products in its market. Entry into the Dundee and Saline
markets, combined with the addition of full-time lenders and mortgage
originators in those markets, should provide opportunities for future continued
growth in all loan portfolios.
During 1996, construction loan activity increased significantly, reflecting
strong growth of the residential housing market in the Bank's market area. This
growth continued in 1997, although at a somewhat slower pace than experienced in
1996. These loans will convert to variable rate residential mortgages to be
retained in the Bank's portfolio, or to fixed rate mortgages to 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. The chart
below shows the amount of nonperforming assets by category for each of the past
five years.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Nonperforming Loans, in thousands of dollars 1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 71 $ 450 $ 41 $ 110 $ 172
Loans past due 90 days or more 910 663 163 517 21
Troubled debt restructurings 138 0 0 2 34
------------------------------------------------------------------------------------------------------
Total nonperforming loans 1,119 1,113 204 629 227
Other real estate 473 335 43 81 67
------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 1,592 $ 1,448 $ 247 $ 710 $ 294
======================================================================================================
Percent of total loans 0.60% 0.60% 0.11% 0.34% 0.15%
======================================================================================================
</TABLE>
Page A-7
<PAGE> 23
By the end of 1997, nonaccrual loans had returned to the low levels previously
experienced by the Company. While delinquency within the personal loan portfolio
has increased during the year, total nonperforming assets remained at the same
level as a percent of total loans as they were at December 31, 1996.
In general, banks have experienced higher delinquencies during 1997 and 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 of the collection department during the fourth quarter of 1997
should assure the reduction in this category of nonperforming loans in the near
future. While some further losses are anticipated, the Company's delinquency
ratios remain well below that of most other banks of similar size.
The amount listed above for other real estate reflect two residential properties
and one commercial property, all of which were acquired in lieu of foreclosure.
The commercial property has been leased to a third party with an option to
purchase and no loss is anticipated. Some minimal losses are possible on resale
of the residential properties.
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, 1997 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Personal - direct 16.2% 16.2%
Personal - indirect 10.3% 12.5%
Business 27.9% 27.2%
Tax exempt 0.6% 0.4%
Residential mortgage 39.5% 39.0%
Construction 5.5% 4.6%
--------------------------------------------------------------------------------------------------------
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
45.0% 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 $70.5 million at December 31, 1997. Of those loans,
approximately 75.3% are direct and indirect installment loans, compared to 76.8%
at the end of 1996. Home equity loans comprise another 17.0% 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.
Business loans carry the largest balances per loan, and therefore, any single
loss would be proportionally larger than losses in other portfolios. Because of
this, in addition to the precautions taken with credit quality in the other
portfolios, the Bank uses an independent loan review firm to assess the
continued quality of its business loan portfolio. Business loans contain no
significant concentrations other than geographic concentrations within Lenawee,
Monroe or Washtenaw Counties.
Further information concerning credit quality is contained in Note 6 of the
Notes to Consolidated Financial Statements.
Deposits
Deposit balances grew steadily during 1997, although the addition of the Saline
office and the acquisition of $12.2 million of deposits in Dundee skewed the
growth toward the fourth quarter. In 1996, the Company introduced a new cash
management account which contributed to deposit growth in the fourth quarter of
that year, and that growth continued in 1997. Total deposit growth for 1997 was
6.4%, exceeding the 1996 growth rate of 4.4%.
Page A-8
<PAGE> 24
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.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Percentage Change in Deposits by Category 1997 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Noninterest bearing 5.2% 2.6%
Interest bearing certificates of $100,000 or more -8.0% 22.1%
Other interest bearing 9.3% 1.9%
Total deposits 6.4% 4.4%
========================================================================================================
</TABLE>
The chart above shows the percentage change in deposits by category at December
31, 1997 and 1996. The chart below shows the percentage makeup of the deposit
portfolio in 1997 and 1996.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Percentage Breakdown of Deposit Portfolio as of December 31, 1997 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Noninterest bearing deposits 10.1% 10.2%
Interest bearing certificates of $100,000 or more 12.2% 14.1%
Other interest bearing deposits 77.7% 75.7%
--------------------------------------------------------------------------------------------------------
Total deposits 100.0% 100.0%
========================================================================================================
</TABLE>
In financial institutions, the presence of interest bearing certificates greater
than $100,000 often indicates a reliance upon purchased funds. However, in the
Bank's deposit portfolio, these balances represent core deposits of local
clients. The Bank does not support its growth through purchased or brokered
deposits.
The Bank's deposit rates are consistently competitive with other banks in its
market area, including those new markets that the Bank entered in 1997.
Cash Equivalents and Borrowed Funds
Loan and deposit growth did not parallel each other during 1997 and 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.
The Company also found it advantageous during 1996 to utilize longer term
borrowings from the Federal Home Loan Bank of Indianapolis. These long-term
borrowings, which remained on the books of the Bank throughout 1997 and are
detailed in Note 11 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, FUNDS MANAGEMENT AND MARKET RISK
Liquidity
Throughout 1997, 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 short term
advances from the Federal Home Loan Bank ("FHLB") in place of federal funds
borrowed. Funding needs varied throughout the year, but overall, federal funds
sold averaged approximately $1.3 million higher in 1997 than in 1996, while
short term borrowed funds, which included federal funds and FHLB advances,
averaged approximately $3.6 million less than in 1996.
Page A-9
<PAGE> 25
The chart below shows the change in levels of the average short term funds
position of the Bank by month during 1996 and 1997.
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- -----------------------------------------
Fed Short Term Fed Short Term
Funds Advances Funds Advances
<S> <C> <C> <S> <C> <C>
Jan 13,423 (10,000) Jan 2,035 0
Feb 14,479 (8,571) Feb 3,592 0
(GRAPH) Mar 9,106 0 Mar 4,874 0
Apr 5,440 0 Apr 3,460 0
May (2,997) 0 May (197) 0
Jun (5,593) 0 Jun (2,163) 0
Jul 1,268 0 Jul (9,216) (161)
Aug (1,336) 0 Aug (9,471) (5,323)
Sep 187 0 Sep (2,537) (10,000)
Oct (6,710) 0 Oct (4,361) (10,000)
Nov (9,410) 0 Nov 3,503 (10,000)
Dec (2,035) 0 Dec 10,984 (10,000)
</TABLE>
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.
Funds Management and Market Risk
The composition of the Company's balance sheet consists of investments in
interest earning assets (loans and investment securities) that are funded by
interest bearing liabilities (deposits and borrowings). These financial
instruments have varying levels of sensitivity to changes in market interest
rates resulting in market risk.
Bank policies place strong emphasis on stabilizing net interest margin, with the
goal of providing a sustained level of satisfactory earnings. The Funds
Management, Investment and Loan policies provide direction for the flow of funds
necessary to supply the needs of depositors and borrowers. Management of
interest sensitive assets and liabilities is also necessary to reduce interest
rate risk during times of fluctuating interest rates.
Interest rate risk is the exposure of the Company's financial condition to
adverse movements in interest rates. It results from differences in the
maturities or timing of coupon adjustments of the Company's assets, liabilities
and off-balance sheet instruments; from changes in the slope of the yield curve;
from imperfect correlations in the adjustment of rates earned and paid on
different financial instruments with otherwise similar repricing
characteristics; and from interest rate related options embedded in the
Company's products such as prepayment and early withdrawal options.
A number of measures are used to monitor and manage interest rate risk,
including interest sensitivity (gap) and income simulation analyses. A gap model
is the primary tool used to assess this risk with supplemental information
supplied by an income simulation model. The simulation model is used to estimate
the effect that specific interest rate changes would have on 12 months of pretax
net interest income assuming an immediate and sustained up or down parallel
change in interest rates of 200 basis points. Key assumptions in the models
include prepayment speeds on mortgage related assets; cash flows and maturities
of financial instruments held for purposes other than trading; changes in market
conditions, loan volumes and pricing; and management's determination of core
deposit sensitivity. These assumptions are inherently uncertain and, as a
result, the models cannot precisely estimate net interest income or precisely
predict the impact of higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes and changes in market conditions.
Based on the results of the simulation model as of December 31, 1997, the
Company would expect a maximum potential reduction in net interest margin of
less than 5% if market rates increased under an immediate and sustained parallel
shift of 200 basis points.
Page A-10
<PAGE> 26
The following table provides information about the Company's financial
instruments used for purposes other than trading that are sensitive to changes
in interest rates. For loans, securities, and liabilities with contractual
maturities, the table presents principal cash flows and related weighted average
interest rates by contractual maturities as well as market and historical
experience of the impact of interest rate fluctuations on the prepayment of
residential loans and mortgage-backed securities. For core deposits (noninterest
bearing checking, interest bearing checking, savings, and money market deposits)
that have no contractual maturity, the table presents estimated principal cash
flows and related weighted average interest rates based on the Company's
historical experience and management's judgment concerning their most likely
withdrawal behaviors. Weighted average variable rates are based on current rates
and indexes. The Company currently has no market sensitive instruments entered
into for trading purposes and no off-balance-sheet interest rate swaps or caps.
The information is in thousands of dollars as of December 31, 1997.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MATURING IN: FAIR VALUE
RATE-SENSITIVE ASSETS: 1998 1999 2000 2001 2002 THEREAFTER TOTAL 12/31/97
----- ----- ----- ----- ----- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate loans $ 36,174 $20,000 $ 19,747 $16,052 $10,926 $ 43,259 $ 146,158 $ 146,581
Average interest rate 8.9% 9.4% 9.0% 8.7% 8.7% 7.8% 8.7%
Variable rate loans $ 20,775 $ 9,055 $ 10,876 $ 9,087 $ 8,062 $ 61,245 $ 119,100 $ 119,308
Average interest rate 9.3% 9.0% 9.0% 9.0% 9.0% 9.1% 9.1%
Fixed rate investments $ 12,347 $17,353 $ 11,443 $12,766 $ 4,940 $ 9,308 $ 68,157 $ 69,536
Average interest rate 6.0% 6.2% 6.2% 6.0% 5.6% 5.5% 6.0%
Variable rate investments $ 1,830 $ 1,789 $ 851 $ 747 $ 548 $ 3,800 $ 9,565 $ 9,663
Average interest rate 6.9% 6.8% 6.8% 6.8% 6.8% 6.9% 6.9%
Other interest earning assets $ 1,576 $ - $ - $ - $ - $ - $ 1,576 $ 1,576
Average interest rate 8.0% 8.0%
RATE-SENSITIVE LIABILITIES:
Noninterest bearing demand $ - $ - $ - $ - $ - $ 31,924 $ 31,924 $ 31,924
Average interest rate 0.0% 0.0%
Savings & interest bearing demand $ 63,850 $ 3,831 $ 3,831 $ 3,831 $ 3,831 $ 61,297 $ 140,471 $ 140,471
Average interest rate 4.4% 2.0% 2.0% 2.0% 2.0% 2.0% 2.9%
Time deposits $ 92,613 $35,478 $ 14,053 $ 1,506 $ 736 $ 53 $ 144,439 $ 144,675
Average interest rate 5.5% 6.0% 6.1% 5.9% 5.4% 6.7% 5.7%
Fixed rate borrowings $ 3,000 $ 7,000 $ - $ - $ - $ - $ 10,000 $ 9,990
Average interest rate 6.0% 6.0% 6.0%
Other interest bearing liabilities $ 4,942 $ - $ - $ - $ - $ - $ 4,942 $ 4,942
Average interest rate 6.5% 6.5%
</TABLE>
The Company's exposure to market risk is reviewed on a regular basis by the
Funds Management Committee. The Committee's policy objective is to manage the
Company's assets and liabilities to provide an optimum and consistent level of
earnings within the framework of acceptable risk standards.
The Funds Management Committee of the Bank is also responsible for evaluating
and anticipating various risks other than interest rate risk. Those risks
include prepayment risk, credit risk and liquidity risk. The Committee is made
up of senior members of management, and continually monitors the makeup of
interest sensitive assets and liabilities to assure appropriate liquidity,
maintain interest margins and to protect earnings in the face of changing
interest rates and other economic factors.
The Funds Management policy of the Bank provides for a level of interest
sensitivity which, Management believes, allows the Bank to take advantage of
opportunities within the market relating to liquidity and interest rate risk,
allowing flexibility without subjecting the Bank to undue exposure to risk. In
addition, other measures are used to evaluate and project the anticipated
results of Management's decisions.
Page A-11
<PAGE> 27
The table below shows the rate sensitivity of earning assets and interest
bearing liabilities as of December 31, 1997. 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 Yrs Years Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities and fed funds sold $ 14,396 $ 9,466 $ 46,502 $ 7,848 $ 1,460 $ 79,672
Loans 65,928 52,335 101,724 33,685 11,586 265,258
- -------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 80,324 $ 61,801 $148,226 $ 41,533 $ 13,046 $ 344,930
Negotiated rate time deposits of $100,000 or more $ 14,005 $ 14,244 $ 10,364 $ 38,613
Other interest bearing deposits 156,327 47,871 41,405 53 245,656
Repurchase agreements 642 642
Other borrowings 4,942 3,000 7,000 14,942
- -------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $175,916 $ 65,115 $ 58,769 $ 53 $ 299,853
- -------------------------------------------------------------------------------------------------------------------------
Net asset (liability) funding gap $(95,592) $ (3,314) $ 89,457 $ 41,480 $ 13,046 $ 45,077
Cumulative net asset (liability) funding gap $(95,592) $(98,906) $ (9,449) $ 32,031 $ 45,077
Cumulative gap ratio 0.46 0.59 0.97 1.11 1.15 to one
Cumulative gap as a percent of total assets -25.8% -26.7% -2.6% 8.7% 12.2%
=========================================================================================================================
</TABLE>
CAPITAL RESOURCES
It is the policy of the Company to pay 30% to 35% of net earnings as cash
dividends to shareholders. These dividends have resulted in a dividend yield of
approximately 3.25% and 3.6% in 1997 and 1996. Five percent stock dividends were
paid to shareholders in 1997 and 1996. 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 1997. 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 of the Company has formed an internal task force to evaluate the
potential costs, problems and uncertainties surrounding the so-called Year 2000
issue, and to determine the effect of these factors on the operations of the
Company. Management does not believe that the cost of addressing the Year 2000
issue is a material event that would cause reported financial information not to
be necessarily indicative of future operating results or financial condition. No
material effect on the Company's products, services or competitive conditions is
anticipated.
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-12
<PAGE> 28
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
mechanisms, 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, 1997.
Based on its assessment, the Company believes that, as of December 31,
1997, its system of internal control over financial reporting is adequate
and appropriate.
United Bancorp, Inc.
/S/ David S. Hickman
----------------------------------------
David S. Hickman
President and Chief Executive Officer
/S/ John J. Wanke
----------------------------------------
John J. Wanke
Executive Vice President
/S/ Dale L. Chadderdon
----------------------------------------
Dale L. Chadderdon
Senior Vice President, Secretary and Treasurer
Page A-13
<PAGE> 29
REPORT OF INDEPENDENT AUDITORS
United Bancorp, Inc. and Subsidiary
[CROWE CHIZEK LOGO]
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/S/ Crowe, Chizek and Company LLP
---------------------------------------
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 23, 1998
Page A-14
<PAGE> 30
CONSOLIDATED BALANCE SHEETS
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
December 31,
In thousands of dollars 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and demand balances in other banks $ 10,406 $ 10,252
Federal funds sold - 11,400
- ------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 10,406 21,652
Securities available for sale 42,488 44,990
Securities held to maturity; fair value of $38,287 in 1997 and $34,391 in 1996 37,164 33,348
- ------------------------------------------------------------------------------------------------------------------------
Total securities 79,652 78,338
Loans held for sale 141 799
Portfolio loans 265,117 241,054
- ------------------------------------------------------------------------------------------------------------------------
Total loans 265,258 241,853
Less allowance for loan losses 2,467 2,320
- ------------------------------------------------------------------------------------------------------------------------
Net loans 262,791 239,533
Premises and equipment, net 10,933 8,775
Accrued interest receivable and other assets 6,489 5,072
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 370,271 353,370
========================================================================================================================
LIABILITIES
Deposits
Noninterest bearing deposits 31,924 30,335
Interest bearing certificates of deposit of $100,000 or more 38,714 42,060
Other interest bearing deposits 246,197 225,308
--------------------------------------------------------------------------------------------------------------------
Total deposits 316,835 297,703
Short term borrowings 4,942 609
Other borrowings 10,000 20,000
Accrued interest payable and other liabilities 3,028 3,010
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 334,805 321,322
- ------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value; 5,000,000 shares authorized,
1,646,030 shares issued and outstanding in 1997 and 1,565,890 in 1996 16,366 13,500
Retained earnings 18,867 18,419
Net unrealized gain on securities available for sale 233 129
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 35,466 32,048
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 370,271 $ 353,370
========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Page A-15
<PAGE> 31
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 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans
Taxable $ 22,515 $ 20,511 $ 19,006
Tax exempt 69 63 78
Securities
Taxable 3,139 2,949 2,703
Tax exempt 1,767 1,687 1,490
Federal funds sold 215 141 215
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 27,705 25,351 23,492
- ------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Certificates of deposit of $100,000 or more 2,408 2,193 1,829
Other deposits 9,604 8,723 8,711
Short term borrowings 157 173 236
Other borrowings 724 525 308
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 12,893 11,614 11,084
- ------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 14,812 13,737 12,408
Provision for loan losses 1,255 628 361
- ------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,557 13,109 12,047
- ------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 1,490 1,223 978
Trust & Investment fee income 1,301 971 903
Gains on securities transactions 5 8 4
Loan sales and servicing 573 604 389
Sales of nondeposit investment products 321 417 272
Other income 434 439 432
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 4,124 3,662 2,978
- ------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 5,654 5,363 4,927
Occupancy and equipment expense, net 2,076 1,922 1,715
Other expense 3,122 3,022 2,926
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 10,852 10,307 9,568
- ------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAX 6,829 6,464 5,457
Federal income tax 1,816 1,713 1,422
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5,013 $ 4,751 $ 4,035
========================================================================================================================
Earnings per share and earnings per common share assuming dilution $ 3.05 $ 2.89 $ 2.46
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-16
<PAGE> 32
CONSOLIDATED STATEMENTS OF CASH FLOWS
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
In thousands of dollars 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,013 $ 4,751 $ 4,035
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES
Depreciation and amortization 1,396 1,469 1,491
Provision for loan losses 1,255 628 361
Provision for losses on loans held for sale - - (118)
Gain on sale of loans (374) (209) (119)
Proceeds from sales of loans originated for sale 25,528 26,829 26,312
Loans originated for sale (24,496) (27,158) (25,035)
Gain on sale of securities (5) (8) (4)
Change in accrued interest receivable and other assets (1,470) (48) 32
Change in accrued interest payable and other liabilities (49) 29 671
- ------------------------------------------------------------------------------------------------------------------------
Total adjustments 1,785 1,532 3,591
- ------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 6,798 6,283 7,626
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (11,040) (20,670) (19,132)
Sales 2,002 732 -
Maturities 5,747 14,000 13,546
Principal payments 5,925 6,214 3,216
Securities held to maturity
Purchases (14,091) (5,570) (4,529)
Sales - - 93
Maturities and calls 10,221 2,638 6,780
Net increase in portfolio loans (25,309) (24,438) (8,399)
Premises and equipment expenditures (3,279) (1,370) (990)
- ------------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (29,824) (28,464) (9,415)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 19,132 12,531 20,888
Net change in short term borrowings 4,333 31 (6,222)
Principal payments on other borrowings (10,000) (8,000) (3,000)
Proceeds from other borrowings - 22,000 3,000
Proceeds from common stock transactions 124 78 41
Dividends paid (1,809) (1,524) (1,250)
- ------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 11,780 25,116 13,457
- ------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (11,246) 2,935 11,668
Cash and cash equivalents at beginning of year 21,652 18,717 7,049
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,406 $ 21,652 $ 18,717
========================================================================================================================
</TABLE>
Page A-17
<PAGE> 33
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
In thousands of dollars 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 12,861 $ 11,421 $ 10,972
Income tax paid $ 1,803 $ 1,719 $ 1,275
Non-cash transfer from portfolio loans to other real estate $ 138 $ 445 $ 43
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars, except per share data 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK AND PAID IN CAPITAL
Beginning balance $ 13,500 $ 11,262 $ 11,221
Stock dividends declared; 78,292 shares in 1997
and 74,492 shares in 1996 2,740 2,160 -
Common stock transactions; net shares of 1,848 in 1997,
1,559 in 1996 and 1,465 in 1995 67 52 41
Shares issuable under director and management deferred stock plans 59 26 -
- ------------------------------------------------------------------------------------------------------------------------
Ending balance $ 16,366 $ 13,500 $ 11,262
RETAINED EARNINGS
Beginning balance $ 18,419 $ 17,486 $ 14,791
Net income 5,013 4,751 4,035
Cash dividends declared; $1.109 per share in 1997, $1.009 in 1996
and $0.817 in 1995 (1,823) (1,658) (1,340)
Common stock dividends paid; 5% in 1997 and 1996 (2,740) (2,160) -
Director and management deferred stock plans (2) - -
- ------------------------------------------------------------------------------------------------------------------------
Ending balance $ 18,867 $ 18,419 $ 17,486
NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE
Beginning balance $ 129 $ 105 $ (854)
Valuation adjustments, net of tax 104 24 959
- ------------------------------------------------------------------------------------------------------------------------
Ending balance $ 233 $ 129 $ 105
Total Shareholders' Equity $ 35,466 $ 32,048 $ 28,853
========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-18
<PAGE> 34
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,
insurance, and trust and investment services, with operations conducted
through its main office and fourteen offices located in Lenawee, Washtenaw and
Monroe Counties in southeastern Michigan. These Counties are the source of
substantially all of the Company's deposit, loan, insurance 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. 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, or the fair value of
collateral. Loans are evaluated for impairment when payments are delayed or
when the internal grading system indicates a substandard or doubtful
classification.
Page A-19
<PAGE> 35
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," as amended by Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" at January 1,
1996 and 1997. These Statements change the accounting for mortgage servicing
rights retained by the loan originator. Under these Statements, 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 substantially 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-20
<PAGE> 36
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 computed under provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," which was adopted in the
fourth quarter of 1997. Adoption of the Statement did not change Earnings Per
Share amounts previously reported by the Company for prior periods. Amounts
reported as earnings per share are based upon the weighted average number of
shares outstanding plus the weighted average number of contingently issuable
shares associated with the Directors' and Senior Management Group's deferred
stock plans. In May, 1997 and 1996 five percent stock dividends were paid.
Earnings per share, dividends per share and weighted average shares have been
restated to reflect the stock dividends. The weighted average number of shares
outstanding was 1,644,095 for 1997, 1,642,517 for 1996 and 1,640,938 for 1995.
The weighted average of contingently issuable shares was 2,001 and 266 for 1997
and 1996.
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. 130, "Reporting Comprehensive Income," was
issued by the Financial Accounting Standards Board in 1997. It establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in the financial statements. It
includes all changes in equity during a period, other than those resulting from
investments by owners and distributions to owners. Components of other
comprehensive income include, for example, unrealized gains and losses on
available for sale securities. The Statement is effective for years beginning
after December 15, 1997. The effect on the financial statements will be
minimal.
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was also issued in 1997. The Statement
establishes standards for the way companies report information regarding
operating segments in the financial statements. Operating segments are parts of
a business about which separate financial information is available in assessing
performance and allocating resources. Generally speaking, information required
by the Statement is the same information used internally by the Company to
evaluate segment performance and determine resource allocation among segments.
The Statement is effective for years beginning after December 31, 1997. The
effect on the financial statements will be minimal.
RECLASSIFICATIONS
Some items in prior year financial statements have been reclassified to conform
with current year's presentation.
NOTE 2 - ACQUISITIONS
On December 5, 1997, the Bank acquired one office and related deposits from NBD
Bank. Approximately $12.2 million of deposits were assumed. Core deposit
premium associated with these deposits is not material. The excess of fair
value over book value of the net assets acquired was $1.2 million. The
transaction was accounted for under the purchase method, and intangible assets
acquired are being amortized over their estimated economic lives.
NOTE 3 - RESTRICTIONS ON CASH AND DEMAND BALANCES IN OTHER BANKS
The Bank is required to maintain average reserve balances in the form of cash
or balances due from the Federal Reserve Bank. These reserve balances vary
depending on the level of client deposits in the Bank. The amounts of reserve
balances required at December 31, 1997 and 1996 were approximately $3,390,000
and $2,351,000.
Page A-21
<PAGE> 37
NOTE 4 - SECURITIES
The amortized cost and fair value of securities, in thousands of dollars, as
of December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE Amortized Unrealized Unrealized Fair
In thousands of dollars Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities $ 9,003 $ 219 $ (10) $ 9,212
Mortgage backed agency securities 29,011 194 (58) 29,147
Asset backed and other securities 4,120 9 - 4,129
- ------------------------------------------------------------------------------------------------------------------------
Total $ 42,134 $ 422 $ (68) $ 42,488
========================================================================================================================
<CAPTION>
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 - 2,861
- ------------------------------------------------------------------------------------------------------------------------
Total $ 44,793 $ 313 $ (116) $ 44,990
========================================================================================================================
<CAPTION>
1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities $ 15,088 $ 33 $ (34) $ 15,087
Mortgage backed agency securities 26,854 260 (109) 27,005
Asset backed and other securities 3,319 9 - 3,328
- ------------------------------------------------------------------------------------------------------------------------
Total $ 45,261 $ 302 $ (143) $ 45,420
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity
In thousands of dollars
- ------------------------------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax exempt obligations of states and political subdivisions $ 34,835 $ 1,135 $ (14) $ 35,956
Corporate and taxable municipal securities 2,329 2 - 2,331
- ------------------------------------------------------------------------------------------------------------------------
Total $ 37,164 $ 1,137 $ (14) $ 38,287
========================================================================================================================
<CAPTION>
1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax exempt obligations of states and political subdivisions $ 31,059 $ 1,048 $ (10) $ 32,097
Corporate and taxable municipal securities 2,289 5 - 2,294
- ------------------------------------------------------------------------------------------------------------------------
Total $ 33,348 $ 1,053 $ (10) $ 34,391
========================================================================================================================
<CAPTION>
1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax exempt obligations of states and political subdivisions $ 28,883 $ 1,329 $ (7) $ 30,205
Corporate and taxable municipal securities 1,612 16 - 1,628
- ------------------------------------------------------------------------------------------------------------------------
Total $ 30,495 $ 1,345 $ (7) $ 31,833
========================================================================================================================
</TABLE>
Sales activities for securities for the years indicated are shown in the
following table. All sales during 1997 and 1996 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>
- ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales proceeds $ 2,002 $ 732 $ 93
Gross gains 6 8 4
Gross losses (1) - -
========================================================================================================================
</TABLE>
Page A-22
<PAGE> 38
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>
- ------------------------------------------------------------------------------------------------------------------------
Available for Sale Held to Maturity
SECURITIES ------------------ ----------------
As of December 31, 1997 Amortized Fair Amortized Fair
In thousands of dollars Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,207 $ 1,209 $ 4,896 $ 4,915
Due after one year through five years 39,351 39,703 18,140 18,699
Due after five years through ten years - - 9,660 10,074
Due after ten years - - 4,468 4,599
Equity investments 1,576 1,576 - -
- ------------------------------------------------------------------------------------------------------------------------
Total securities $ 42,134 $ 42,488 $ 37,164 $ 38,287
========================================================================================================================
</TABLE>
Securities carried at $8,879,000 and $10,811,000 as of December 31, 1997 and
1996 were pledged to secure deposits of public funds, repurchase agreements, and
for other purposes as required by law.
NOTE 5 - LOANS
The table below shows total loans outstanding, including loans held for sale, at
December 31. All loans are domestic and contain no concentrations by industry
or client.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Personal $ 70,308 $ 69,477
Business, including commercial mortgages 74,080 65,823
Tax exempt 1,482 1,078
Residential mortgage 104,659 93,456
Residential mortgages held for sale 141 799
Construction 14,588 11,220
- ------------------------------------------------------------------------------------------------------------------------
Total loans $ 265,258 $ 241,853
========================================================================================================================
</TABLE>
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses for the years ended December 31
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $ 2,320 $ 2,197 $ 2,127
Loans charged off (1,189) (572) (361)
Recoveries credited to allowance 81 67 70
Provision charged to operations 1,255 628 361
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 2,467 $ 2,320 $ 2,197
========================================================================================================================
</TABLE>
Information regarding impaired loans for the years ended December 31
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Average investment in impaired loans $ 938 $ 679
Interest income recognized on impaired loans 79 67
Interest income recognized on a cash basis 60 56
Balance of impaired loans at December 31 $ 973 $ 610
Portion for which no allowance for loan losses is allocated 764 -
Portion for which an allowance for loan losses is allocated 209 610
Portion of allowance for loan losses allocated to impaired loans 26 163
========================================================================================================================
</TABLE>
Page A-23
<PAGE> 39
NOTE 7 - 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 $98,385,000 and $86,762,000 at December 31, 1997
and 1996. The balance of loans serviced for others related to servicing rights
that have been capitalized was $46,621,000 and $24,986,000 at December 31, 1997
and 1996.
Unamortized cost of mortgage servicing rights for the period ended December 31,
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at January 1 $ 185 $ -
Amount capitalized 190 196
Amount amortized (35) (11)
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 340 $ 185
========================================================================================================================
</TABLE>
No valuation allowance was considered necessary for mortgage servicing rights
at December 31, 1997 and 1996.
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment as of December 31, consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,575 $ 1,135
Buildings and improvements 8,645 7,160
Furniture and equipment 5,954 4,937
Computer software 1,096 853
- ------------------------------------------------------------------------------------------------------------------------
Total cost 17,270 14,085
Less accumulated depreciation (6,337) (5,310)
- ------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net $ 10,933 $ 8,775
========================================================================================================================
</TABLE>
Depreciation expense was approximately $1,078,000 in 1997, $999,000 in 1996 and
$895,000 in 1995.
NOTE 9 - DEPOSITS
Information relating to maturities of time deposits as of December 31, is
summarized below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 92,613 $ 82,347
Between one and two years 35,478 35,456
Between two and three years 14,053 12,467
Between three and four years 1,506 9,804
Between four and five years 736 1,030
More than five years 53 45
- ------------------------------------------------------------------------------------------------------------------------
Total time deposits $ 144,439 $ 141,149
========================================================================================================================
</TABLE>
NOTE 10 - 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 was $4.3 million outstanding at
December 31, 1997 and no outstanding balance at December 31, 1996.
Page A-24
<PAGE> 40
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>
- ------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31 $ 642 5.40% $ 609 5.21%
Average balance during the year 618 5.17% 599 5.22%
Maximum month end balance during the year 642 609
U.S. Treasury and agency securities underlying the agreements
at year end
Carrying value $ 1,028 $ 997
Fair value 1,028 997
========================================================================================================================
</TABLE>
NOTE 11 - OTHER BORROWINGS
The Bank carried fixed rate, noncallable advances from the FHLB totaling $10.0
million at December 31, 1997. Those advances consist of $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 at
least 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 12 - 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>
- ------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Variable Fixed Variable Fixed
In thousands of dollars Rate Rate Rate Rate
========================================================================================================================
<S> <C> <C> <C> <C>
Commitments to make loans $ 2,715 $ 4,952 $ 4,234 $ 2,560
Unused lines of credit 42,234 2,632 37,387 2,837
Standby letters of credit 4,871 5,992
========================================================================================================================
</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, 1997, the rates for amounts in the fixed rate category ranged
from 6.8% to 10.0%.
Page A-25
<PAGE> 41
NOTE 13 - FEDERAL INCOME TAX
Income tax expense consists of the following for the years ended December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 1,814 $ 1,671 $ 1,311
Deferred 2 42 111
- ------------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 1,816 $ 1,713 $ 1,422
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of deferred tax assets and liabilities at December 31, are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 565 $ 515
Deferred compensation 124 88
Other 14 97
- ------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets $ 703 $ 700
Deferred tax liabilities:
Property and equipment $ (473) $ (507)
Mortgage servicing rights (116) (63)
Core deposit intangible (74) (101)
Unrealized appreciation on securities available for sale (120) (67)
Other (202) (189)
- ------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities $ (985) $ (927)
- ------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ (282) $ (227)
========================================================================================================================
</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 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at statutory rate of 34% $ 2,322 $ 2,198 $ 1,856
Effect of non-taxable income (536) (515) (464)
Other 30 30 30
- ------------------------------------------------------------------------------------------------------------------------
Total federal income tax $ 1,816 $ 1,713 $ 1,422
========================================================================================================================
</TABLE>
NOTE 14- 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, 1996 was
$3,364,000. During 1997, new loans to such related parties amounted to
$5,079,000 and repayments amounted to $501,000, resulting in a balance at
December 31, 1997 of $7,942,000. Related party deposits totaled $5,004,000 and
$1,247,000 at December 31, 1997 and 1996.
NOTE 15 - 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, 1997, $15.0
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-26
<PAGE> 42
NOTE 16 - 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 1997 and 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 1997, 1996 and 1995 were $348,000, $329,000 and $313,000.
Beginning in 1995, the Company began offering employees the option of
purchasing Company stock with the match portion of their 401(k) contribution.
On that basis 1,775 shares in 1997, 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
permits 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
During 1997, the Company discontinued postretirement health care and life
insurance benefits for future retirees. Approximately $151,000 of prior years
liability was reversed and actual costs incurred for current retirees are
included in operating expense.
Page A-27
<PAGE> 43
NOTE 17 - 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, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------
Carrying Carrying
In thousands of dollars Value Fair Value Value Fair Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 10,406 $ 10,406 $ 21,652 $ 21,652
Securities 79,652 80,775 78,338 79,381
Net loans 262,791 263,422 239,533 239,505
Accrued interest receivable 2,284 2,284 2,126 2,126
Financial Liabilities
Deposit liabilities $ 316,835 $ 317,070 $ 297,703 $ 297,863
Short term borrowings 4,942 4,942 609 609
Other borrowings 10,000 9,990 20,000 19,961
Accrued interest payable 1,328 1,328 1,296 1,296
========================================================================================================================
</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-28
<PAGE> 44
NOTE 18 - 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, 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets $ 35,213 14.2% $ 19,835 8.0% $ 24,793 10.0%
Tier I capital to risk weighted assets 32,746 13.2% 9,917 4.0% 14,876 6.0%
Tier I capital to average assets 32,746 9.2% 14,232 4.0% 17,790 5.0%
=======================================================================================================================
<CAPTION>
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%
=======================================================================================================================
</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 1997 and 1996 by their regulators.
NOTE 19 - 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 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 129 $ 80
Investment in subsidiary 35,296 31,901
Other assets 652 653
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 36,077 $ 32,634
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 611 $ 586
Shareholders' equity 35,466 32,048
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 36,077 $ 32,634
========================================================================================================================
</TABLE>
Page A-29
<PAGE> 45
NOTE 19 - PARENT COMPANY ONLY FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME For the years ended December 31,
In thousands of dollars 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from subsidiary $ 1,748 $ 1,690 $ 1,380
Other income 1 1 3
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 1,749 1,691 1,383
TOTAL NONINTEREST EXPENSE 41 73 31
- ------------------------------------------------------------------------------------------------------------------------
Income before undistributed net income of subsidiary and income taxes 1,708 1,618 1,352
Income tax benefit (14) (24) (10)
- ------------------------------------------------------------------------------------------------------------------------
Net income before undistributed net income of subsidiary 1,722 1,642 1,362
Equity in undistributed net income of subsidiary 3,291 3,109 2,673
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5,013 $ 4,751 $ 4,035
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31,
In thousands of dollars 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,013 $ 4,751 $ 4,035
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Undistributed net income of subsidiary (3,291) (3,109) (2,673)
Change in other assets 1 (125) (247)
Change in other liabilities 11 (16) (31)
- ------------------------------------------------------------------------------------------------------------------------
Total adjustments (3,279) (3,250) (2,951)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash from Operating Activities 1,734 1,501 1,084
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities - (28) -
- ------------------------------------------------------------------------------------------------------------------------
Net Cash from Investing Activities - (28) -
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Premises and equipment activities - - 113
Common stock transactions 124 78 41
Dividends paid (1,809) (1,524) (1,250)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash from Financing Activities (1,685) (1,446) (1,096)
- ------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH 49 27 (12)
Cash at Beginning of Year 80 53 65
- ------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 129 $ 80 $ 53
========================================================================================================================
</TABLE>
Page A-30
<PAGE> 46
[UNITED BANCORP, INC. LOGO]
_______________________________________________________________________________
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS
ON APRIL 21, 1998
_______________________________________________________________________________
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
21, 1998 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 six directors to serve as "Class I Directors" until the 2001 Annual
Meeting of Shareholders, or until their successors have been elected and
qualified, and to elect two directors as "Class III Directors" until the 2000
Annual Meeting of Shareholders, or until their successors have been elected and
qualified:
Class I Director Nominees:
L. Donald Bush James C. Lawson Jeffrey A. Kuhman
Patrick D. Farver Donald J. Martin David E. Maxwell
Class III Director Nominees:
Richard A. Gurdjian Kathryn M. Mohr
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, LLP as independent
auditors.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
_______________________________________________________________________________
Witness my hand and seal this _______ day of
_____________, 1998.
_______________________________________________
(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.
_______________________________________________________________________________
