<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
1999
[UNITED BANCORP, INC. LETTERHEAD]
<PAGE> 3
[UNITED BANCORP, INC.LETTERHEAD]
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
APRIL 20, 1999
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 20, 1999 at 4:30
p.m., local time, for the following purposes:
1. To elect six directors constituting Class II of the Board of
Directors, to serve for three years until the 2002 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 15,
1999 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, 1999. 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
March 26, 1999 Dale L. Chadderdon
Senior Vice President, Secretary and Treasurer
<PAGE> 4
[UNITED BANCORP, INC. LOGO]
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 20, 1999
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 1999 Annual Meeting of Shareholders of the Company and
any adjournment or adjournments thereof. The Annual Meeting will be held on
April 20, 1999 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 26, 1999.
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 15, 1999 will be
entitled to notice of and to vote at the Annual Meeting. On March 15, 1999,
there were 1,730,480 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
2000 Annual Meeting of Shareholders must be received by Dale L. Chadderdon,
Secretary and Treasurer, at the principal executive offices of the Company by
November 22, 1999.
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
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have expired will be elected for a three-year term. The Directors whose terms
expire at the 1999 Annual Meeting of Shareholders ("Class II Directors") are
John H. Foss, David S. Hickman, Ann Hinsdale Knisel, John R. Robertstad, Jeffrey
T. Robideau and Richard S. Whelan. Director Whelan does not intend to stand for
re-election.
The Board of Directors has by resolution nominated six individuals for election
as Class II Directors at the 1999 Annual Meeting of Shareholders. Five of these
individuals are incumbent Class II Directors. In addition, the Board of
Directors has by resolution nominated Scott F. Hill as a Class II Director. Mr.
Hill is not currently a Director of the Company. Those persons who are elected
as Class II Directors at the 1999 Annual Meeting of Shareholders will hold
office for three years or as noted below. Their terms will expire at the 2002
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 II
Directors receiving the six 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.
As far as the Board is advised, only the six persons named above as nominees
will be nominated for election as Directors at the 1999 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,
2000. 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 concerning their audit
for 1998, and to make any comments that they deem appropriate.
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
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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 CONCERNIING NOMINEES AND INCUMBENT DIRECTORS
The following table discloses the name and age of each incumbent Director and
Director Nominee, 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 shown below.
<TABLE>
<CAPTION>
Director
Name, Age, and Five Year Business Experience Since
-------------------------------------------- -----
<S> <C>
INCUMBENT DIRECTORS - TERMS EXPIRING IN 2001 (CLASS I)
L. Donald Bush, age 65; Farmer; Owner, Leland D. Bush & Sons 1992
Patrick D. Farver, age 44; President and Chief Operating officer (1994); Executive Vice President 1993
(through 1994), Blissfield Manufacturing Co., Blissfield, MI
Jeffrey A. Kuhman, age 52, Chief Executive Officer, Glycon Corp., supplier to the plastics extrusion 1997
industry, Tecumseh, MI
James C. Lawson, age 51; private investor (1997); President, Lenawee Fuels, Inc. (prior to 1997), 1986
Tecumseh, MI
D. J. Martin, age 59; President and Director, Martin's Home Center, Tecumseh, MI 1985
David E. Maxwell, age 59; Executive Vice President and Chief Operating Officer; Director, Brazeway, 1986
Inc., manufacturer of extruded aluminum tubing and related products, Adrian, MI
DIRECTOR NOMINEES - TERMS EXPIRING IN 2002 (CLASS II)
John H. Foss, age 56; Director, Vice President, Treasurer and Chief Financial Officer, Tecumseh Products 1992
Company, manufacturer of compressors and refrigeration components, engines, and power train components,
Tecumseh, MI
David S. Hickman, age 58; Chairman (1998) and Chief Executive Officer of the Company and the Bank, 1985
Tecumseh, MI
Ann Hinsdale Knisel, age 48; County Extension Director, Michigan State University Extension Service, 1993
Adrian, MI
John R. Robertstad, age 48, President, Chief Executive Officer and Director, Lenawee Health Alliance, 1997
Adrian, MI
Jeffrey T. Robideau, age 39; President, Tecumseh Corrugated Box Company, Tecumseh, MI 1995
Scott F. Hill, age 39; Vice President, Krieghoff Lenawee Company, commercial and industrial construction N/A
contractor, Adrian, MI
INCUMBENT DIRECTOR - NOT SEEKING RE-ELECTION (CLASS II)
Richard S. Whelan, age 65; President and Director, Hoyt E. Whelan Co., agricultural implement dealer, 1985
Tecumseh, MI
INCUMBENT DIRECTORS - TERMS EXPIRING IN 2000 (CLASS III)
David N. Berlin, age 50; Vice President, Sales & Engineering (1999); President (to 1999), The Metalloy 1991
Corporation, foundry, die casting and machining of aluminum castings, Hudson, MI
Joseph D. Butcko, age 56; Chief Operating Officer, Crescive Die & Tool, Inc., supplier of stamped metal 1997
products and assemblies to the automotive industry, Saline, MI; Co-owner, Clinton Gage & Machine Tool,
Inc., Tipton, MI; Co-owner, Saline Properties, Inc., Saline, MI
Richard A. Gurdjian, age 54; President, Gurdjian & Associates, Inc. insurance, Adrian, MI; Treasurer, 1998
Gurdjian and Associates Financial Services, Inc., Adrian, MI; general agent, Guarantee Life Insurance
Company
</TABLE>
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<TABLE>
<CAPTION>
Director
Name, Age, and Five Year Business Experience (1) Since
------------------------------------------------ -----
<S> <C>
Kathryn M. Mohr, age 36; Attorney, Robison, Curphey & O'Connell, LLC, Adrian, MI and Toledo, Ohio 1998
Richard Niethammer, age 61; Owner of Niethammer Transport, Hammer Trucking, RSK Leasing, York Woods 1997
Development and R&R Realty, Saline MI
John J. Wanke, age 49; President (1998) of the Company; President and Chief Operating Officer of the Bank 1994
DIRECTORS EMERITUS
Merlyn H. Downing, age 71; Retired Chairman, C.E.O. and Director of the Company, Tecumseh, MI 1985
William G. Thompson, age 84, Retired Chairman, C.E.O. and Director, Thompson Savings Bank, Hudson, MI 1992
</TABLE>
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. 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.
At its regular meetings, the Board may also make other Executive Officer
appointments for the Company.
<TABLE>
<CAPTION>
Executive
Name, Age, and Five Year Business Experience Officer Since
-------------------------------------------- -------------
<S> <C>
David S. Hickman, age 58; Chairman (1998) and Chief Executive Officer of the Company and the Bank 1985
John J. Wanke, age 49; President (1998) of the Company; President and Chief Operating Officer of 1987
the Bank
Dale L. Chadderdon, age 50; Senior Vice President, Secretary and Treasurer of the Company; 1987
Executive Vice President and Chief Financial Officer of the Bank
Earl M. Roehm, age 56; Executive Vice President - Personal Banking of the Bank (1995); Senior 1995
Vice President, First of America Bank - Ann Arbor (1962-1995)
Richard L. Boyce, age 37; Senior Vice President & Trust Officer of the Bank 1995
Terry L. Douglass, age 49; Senior Vice President - Business Banking of the Bank 1995
Thomas C. Gannon, age 45; Senior Vice President - Human Resources and Communication (1998); 1998
Division Human Resources Manager, Magna, International, Brighton MI (1996-1998); Vice President
of Administration, Lenawee Stamping Corporation, Tecumseh MI (1988-1996)
</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 1998. All such loans and
commitments were made by the Bank on
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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, 1998 to all Directors and Executive
Officers of the Company, as a group, was $6,905,000. 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 Richard A. Gurdjian, 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, 1998. 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 1998, and is composed of the following Directors of the Bank: Joseph D.
Butcko, John H. Foss, David S. Hickman, James C. Lawson, Donald J. Martin, David
E. Maxwell and John J. Wanke. 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, 1998, 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.
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 that 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.
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The following table sets forth the total compensation awarded to, earned by, or
paid by the Bank during 1998, 1997 and 1996 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, Chairman and C.E.O. of the Company 1998 $180,000 $45,380 $16,000
1997 175,000 32,928 15,000
1996 156,500 25,325 15,000
John J. Wanke, President of the Company 1998 $124,500 $31,515 $14,037
1997 121,000 22,611 13,280
1996 111,000 16,855 12,562
Earl M. Roehm, Executive Vice President of the Bank 1998 $115,400 $18,695 $12,689
1997 112,500 13,500 12,132
1996 105,000 12,600 10,781
Richard L. Boyce, Senior Vice President of the Bank 1998 $85,000 $20,435 $ 9,579
Dale L. Chadderdon, Senior Vice President of the Company; 1998 $81,000 $21,087 $ 9,115
Executive Vice President of the Bank
</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 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
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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 utilizes annual employment contracts with each of the Executive
Officers of the Company. 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 1998, Mr. Hickman
and Mr. Wanke, who are Executive Officers of the Company, served as members of
the Executive Committee. However, neither participated in decisions with respect
to his own compensation. No other Executive Officer served as a member of the
Executive Committee during 1998.
In addition, the Committee reports that:
1. No executive officer of the Company serves on the Compensation
Committee of another entity, one of whose executive officers served on
the compensation committee of the Company;
2. No executive officer of the Company served as a Director of another
entity, one of whose executive officers served on the compensation
committee of the Company;
3. No executive officer of the Company served as a member of the
compensation committee of another entity, one of whose executive
officers served as a Director of the Company.
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 Butcko,
Foss, Hickman, Lawson, Martin, Maxwell and Wanke. 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
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Committee offer the following explanation for the determination of the CEO's
compensation for 1998:
The base salary for 1998 for Mr. Hickman reflects an increase from 1997. 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, 1994 as a base date.
(GRAPH)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
UBI 100.0 127.7 141.5 178.5 214.0 269.2
S & P 500 100.0 101.3 139.4 171.4 228.6 293.9
KBW 50 100.0 94.9 152.0 215.0 314.3 340.3
</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 15, 1999, no persons except those
listed in the following table, 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, 1998.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address of Beneficial Owner Beneficial Ownership of Class
- ------------------------------------ -------------------- --------
<S> <C> <C>
Lilley & Co., a nominee of 221,197 (1) 12.8%
United Bank & Trust as Trustee
P.O. Box 248
</TABLE>
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(1) The Bank as Trustee has sole voting and sole investment powers with
respect to 150,096 of the shares, and shared voting and shared
investment powers with respect to the remaining 71,101 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, 1998, 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, 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, 1998, 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.
The numbers of shares show below 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Amount and Nature of
Beneficial Ownership % of
-------------------------- Total total
Name and Address of Beneficial Owner Shared Sole Shares (2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I DIRECTORS
- --------------------------------------------------------------------------------------------------------------------
L. Donald Bush, 9432 Welch Road, Tecumseh, MI 49286 812 812 *
Patrick D. Farver, 484 Seel Drive, Adrian, MI 49221 1,758 (1) 2,202 3,960 *
Jeffrey A. Kuhman, 8905 Hawthorne, Tecumseh, MI 49286 14,504 14,504 *
James C. Lawson, 513 N. Occidental, Tecumseh, MI 49286 15,482 (1) 5,317 21,159 1.22%
D.J. Martin, 145 W. Chicago Blvd., Tecumseh, MI 49286 37,070 37,070 2.14%
David E. Maxwell, P.O. Box 749, Adrian, MI 49221 2,307 (1) 18,519 20,826 1.20%
- --------------------------------------------------------------------------------------------------------------------
CLASS II DIRECTORS
- --------------------------------------------------------------------------------------------------------------------
John H. Foss, 100 E. Patterson, Tecumseh, MI 49286 694 694 *
David S. Hickman, P.O. Box 248, Tecumseh, MI 49286 34,889 34,889 2.02%
Ann Hinsdale Knisel, 4404 Livesay Rd., Sand Creek, MI 49279 214 214 *
John R. Robertstad, 682 Stoneridge Drive, Adrian, MI 49221 197 197 *
Jeffrey T. Robideau, 707 S. Evans St., Tecumseh, MI 49286 5,011 13,898 18,909 1.09%
Scott F. Hill, 10345 Newburg Rd. Tecumseh, MI 49286 1,102 (1) 1,102 *
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 9
<PAGE> 13
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Amount and Nature of
Beneficial Ownership % of
-------------------------- Total total
Name and Address of Beneficial Owner Shared Sole Shares (2)
- --------------------------------------------------------------------------------------------------------------------
CLASS III DIRECTORS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David N. Berlin, 103 W. Main, Hudson, MI 49247 363 363 *
Joseph D. Butcko, P.O. Box 96, Saline, MI 48176 867 867 *
Richard A. Gurdjian, 525 Meadowbrook, Adrian, MI 49221 365 365 *
Kathryn M. Mohr, 17837 Tecumseh St., Dundee, MI 48131 600 100 700 *
Richard R. Niethammer, 9367 Sunset Lake Drive, Saline, MI 48176 763 763 *
John J. Wanke, P.O. Box 248, Tecumseh, MI 49286 1,074 153 1,227 *
- --------------------------------------------------------------------------------------------------------------------
DIRECTORS EMERITUS
- --------------------------------------------------------------------------------------------------------------------
M. H. Downing, 406 Burt Street, Tecumseh, MI 49286 8,695 (1) 8,325 17,020
William G. Thompson, 331 W. Main, Hudson, MI 49247 1,522 1,522 *
- --------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
- --------------------------------------------------------------------------------------------------------------------
Dale L. Chadderdon, P.O. Box 248, Tecumseh, MI 49286 3,316 1,719 5,035 *
Earl M. Roehm, P.O. Box 248, Tecumseh, MI 49286 568 568 *
Richard L. Boyce, P.O. Box 248, Tecumseh, MI 49286 111 268 379 *
Terry L. Douglass, P.O. Box 248, Tecumseh, MI 49286 259 143 402 *
Thomas C. Gannon, P.O. Box 248, Tecumseh, MI 49286 *
All Directors and Executive Officers as a Group (26 persons) 183,547 10.6%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Shared voting and investment power and no direct ownership interest
(2) The symbol "*" shown in this column indicates ownership of less than 1%
of the Common Stock of the Company, which is the Company's only class of
voting securities.
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
March 26, 1999 Dale L. Chadderdon
Senior Vice President, Secretary and Treasurer
Page 10
<PAGE> 14
APPENDIX A
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AND
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
The Business of United Bancorp, Inc. A-1
Management's Discussion and Analysis
Results of Operations A-2
Financial Condition A-6
Liquidity, Funds Management and Market Risk A-10
Prospective Accounting and Regulatory Changes A-12
Year 2000 Readiness A-13
Statement of Management Responsibility A-15
Report of Independent Auditors A-16
Consolidated Financial Statements
Consolidated Balance Sheets A-17
Consolidated Statements of Income A-18
Consolidated Statements of Cash Flows A-19
Consolidated Statements of Changes in Shareholders' Equity A-20
Notes to Consolidated Financial Statements A-21
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 services through a system of
fifteen banking offices located in Lenawee, Monroe and Washtenaw Counties. While
the Company's chief decision makers monitor the revenue streams of the various
Company products and services, operations are managed and financial performance
is evaluated on a Company-wide basis. Accordingly, all of the Company's
financial services operations are considered by management to be aggregated in
one reportable operating segment.
Page A-1
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion provides information about the consolidated financial condition
and results of operations of United Bancorp, Inc. ("Company") and its
subsidiary, United Bank & Trust ("Bank").
RESULTS OF OPERATIONS
Consolidated net income for 1998 was up 1.78% from the record level of earnings
achieved in 1997. Continued improvement in the Company's efficiency ratios
contributed significantly to this performance. Record earnings were achieved in
spite of a flat interest margin, continued growth and expansion during the year,
and higher than normal losses in the personal loan portfolio.
Earnings for 1998 were relatively steady for each quarter through the year. The
chart below shows the trends in earnings for the four quarters of 1998.
<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 $4,157 $3,983 $3,939 $3,882
Provision for loan losses 425 275 275 275
Noninterest income 1,401 1,308 1,373 1,318
Noninterest expense 3,265 3,313 3,305 3,326
Federal income tax provision 498 443 452 409
Net income $1,370 $1,260 $1,280 $1,190
Return on average assets (a) 1.38% 1.31% 1.35% 1.27%
Return on average shareholders' equity (a) 14.07% 13.25% 13.95% 13.42%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized
As is apparent from the chart above, each category of the income statement
provided steady contribution to these stable 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.
Continued asset growth, combined with relatively flat earnings, resulted in
return on average assets for 1998 that was behind that achieved in 1997 and
1996. Return on average equity was impacted by capital growth at a higher rate
than asset growth. On the other hand, the percentage of earnings paid as
dividends, book value per share and cash dividends per share continue to provide
improving returns to shareholders. The chart below shows trends in these ratios.
All figures are adjusted to reflect stock dividends.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
5 Year
Performance Ratios 1998 1997 1996 Average
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on average assets 1.33% 1.41% 1.45% 1.34%
Return on average shareholders' equity 13.68% 14.87% 15.63% 14.70%
Average equity to average total assets 9.7% 9.5% 9.3%
Dividend payout ratio 40.3% 36.4% 34.9%
Book value per share $ 22.40 $ 20.52 $ 18.56
Cash dividends per share 1.188 1.056 0.961
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Book value per share is based on shares outstanding at December 31, of 1,730,480
for 1998, 1,728,332 for 1997, and 1,644,185 for 1996. Dividends per share is
based on average adjusted shares outstanding of 1,728,462 for 1998, 1,726,300 in
1997, and 1,724,643 in 1996.
Page A-2
<PAGE> 16
Net Interest Income
United Bancorp, Inc. derives the greatest portion of its income from net
interest income. Successful attempts to influence deposit mix, as well as the
benefit of continued growth, has resulted in margin ratios that are steady over
the past three years, in spite of wide swings in interest rates, flattening
yield curves, and a declining ratio of loans to deposits. The Yield Analysis
table below provides insight into the various components of net interest income,
as well as the results of shifts in deposit mix that have helped to improve the
margin.
<TABLE>
<CAPTION>
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
---------------------------------------------------------------------------------------
Dollars in Thousands 1998 1997
---------------------------------------------------------------------------------------
Average Yield/ Average Yield/
ASSETS Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets (a)
Federal funds sold $ 9,635 $ 509 5.29% $ 4,011 $ 215 5.37%
Taxable securities 49,574 3,166 6.39% 48,194 3,139 6.51%
Tax exempt securities (b) 35,283 2,734 7.75% 32,659 2,553 7.82%
Taxable loans 260,955 23,356 8.95% 248,043 22,515 9.08%
Tax exempt loans (b) 1,429 111 7.73% 1,292 100 7.74%
----------------------------- ------------------------------
Total interest earning
assets (b) 356,876 $ 29,876 8.37% 334,199 $ 28,522 8.53%
Cash and due from banks 11,847 9,524
Premises and
equipment, net 11,078 9,167
Intangible assets 2,365 1,490
Other assets 4,127 3,605
Unrealized loss on secur-
ities available for sale 487 133
Allowance for loan losses (2,613) (2,312)
---------------- ---------------
Total Assets $ 384,167 $ 355,806
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities
NOW accounts $ 43,942 $ 726 1.65% $ 38,959 $ 590 1.51%
Savings deposits 72,632 1,994 2.75% 70,742 2,029 2.87%
CDs $100,000 and over 34,641 1,976 5.70% 41,209 2,408 5.84%
Other int. bearing deposits 143,527 7,646 5.33% 123,846 6,985 5.64%
----------------------------- ------------------------------
Total int. bearing deposits 294,742 12,342 4.19% 274,756 12,013 4.37%
Short term borrowings 715 37 5.15% 3,380 157 4.64%
Other borrowings 10,680 652 6.11% 11,479 724 6.31%
----------------------------- ------------------------------
Total int. bearing liab. 306,137 $ 13,032 4.26% 289,615 $ 12,893 4.45%
Nonint. bearing deposits 37,707 29,365
Other liabilities 3,016 3,105
Shareholders' equity 37,307 33,721
------- ---------------
Total Liabilities and
Shareholders' Equity $ 384,167 $ 355,806
================ ===============
Net interest income $ 16,844 $ 15,629
Net spread 4.11% 4.08%
Net yield on interest earning assets (b) 4.72% 4.68%
Ratio of interest earning assets to
interest bearing liabilities 1.17 1.15
<CAPTION>
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
-------------------------------------------
Dollars in Thousands 1996
-------------------------------------------
Average Yield/
ASSETS Balance Interest Rate
-------------------------------------------
<S> <C> <C> <C>
Interest earning assets (a)
Federal funds sold $ 2,607 $ 141 5.41%
Taxable securities 48,132 2,949 6.13%
Tax exempt securities (b) 30,388 2,445 8.05%
Taxable loans 226,229 20,511 9.07%
Tax exempt loans (b) 1,092 91 8.33%
-----------------------------------
Total interest earning
assets (b) 308,448 $ 26,138 8.47%
Cash and due from banks 8,639
Premises and
equipment, net 8,702
Intangible assets 1,591
Other assets 2,938
Unrealized loss on secur-
ities available for sale (15)
Allowance for loan losses (2,235)
--------------
Total Assets $ 328,068
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities
NOW accounts $ 38,883 $ 691 1.78%
Savings deposits 74,796 2,113 2.82%
CDs $100,000 and over 37,553 2,193 5.84%
Other int. bearing deposits 104,993 5,918 5.64%
-------------------------------
Total int. bearing deposits 256,225 10,916 4.26%
Short term borrowings 3,189 173 5.43%
Other borrowings 9,074 525 5.79%
-------------------------------
Total int. bearing liab. 268,488 $ 11,614 4.33%
Nonint. bearing deposits 26,616
Other liabilities 2,563
Shareholders' equity 30,401
--------------
Total Liabilities and
Shareholders' Equity $ 328,068
==============
Net interest income $ 14,523
Net spread 4.15%
Net yield on interest earning assets (b) 4.71%
Ratio of interest earning assets to
interest bearing liabilities 1.15
</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> 17
Net interest income was up 7.8% in 1998 over 1997. During 1998, both the yields
on earning assets and the Company's cost of funds decreased, resulting in a
slightly improved spread. In addition, the Company's net interest margin
remained substantially unchanged from 1997.
As noted from the data in the tables below, substantially all of the improvement
in net interest income during 1997 came as a result of changes in volume. This
continued to be the case during 1998. On the other hand, while 1997 resulted in
modest rate increases, 1998 produced significant declines in rates and yields.
Interest rate changes during neither year had a significant impact on the
margin, as the decline in both yields and costs were relatively evenly matched.
The tables below demonstrate the effect of volume and rate changes on net
interest income on a taxable equivalent basis for the past 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>
- ---------------------------------------------------------------------------------------------------------------------
1998 compared to 1997 1997 compared to 1996
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 $ 297 $ (3) $ 294 $ 75 $ (1) $ 74
Taxable securities 89 (62) 27 4 186 190
Tax exempt securities 203 (22) 181 179 (71) 108
Taxable loans 1,159 (318) 841 1,980 24 2,004
Tax exempt loans 11 0 11 16 (7) 9
-----------------------------------------------------------------------------------------------------------------
Total interest income $ 1,759 $ (405) $ 1,354 $ 2,254 $ 131 $ 2,385
Interest expense on:
NOW accounts $ 79 $ 57 $ 136 $ 1 $ (102) $ (101)
Savings deposits 53 (88) (35) (116) 33 (83)
Interest bearing CDs $100,000 or more (376) (56) (432) 214 1 215
Other interest bearing deposits 1,064 (403) 661 1,063 3 1,066
Short term borrowings (136) 16 (120) 10 (27) (17)
Other borrowings (49) (23) (72) 149 50 199
-----------------------------------------------------------------------------------------------------------------
Total interest expense $ 635 $ (497) $ 138 $ 1,321 $ (42) $ 1,279
-----------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 1,124 $ 92 $ 1,216 $ 933 $ 173 $ 1,106
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Provision for Loan Losses
During 1998 and 1997, the Bank experienced higher-than-ordinary charge-offs
within its installment loan portfolio, principally as a result of direct and
indirect installment loans that were placed on the books in 1994, 1995 and 1996.
In addition, the mix of the portfolio continued to shift, with more loans in the
business loan categories. These factors caused Management to continue to provide
additional protection against potential losses in the portfolio. The provision
for 1998 was substantially the same as for 1997, which exceeded 1996 levels by
nearly 100%. This provision provided for potential losses inherent in the
current portfolio, and funded actual charge-offs.
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> 18
Noninterest Income
Total noninterest income increased 30.9% in 1998 over 1997, compared to an
increase of 12.6% in 1997 over 1996. A number of items contributed to this
continued improvement.
Deposit service charges provide a significant portion of the Bank's noninterest
income. Emphasis in recent years on fee income has improved deposit service
charge income, with fees increasing 21.8% in 1997 over 1996. No significant
deposit service charge increases were initiated during 1998. However, shifts in
the mix of the deposit portfolio resulting from new deposit products and entry
into new markets contributed to an increase of 11.2% in 1998 over 1997.
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 23.4% in
1998, compared to increases of 34.0% in 1997 and 7.5% in 1996 over 1995. This
revenue 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, 1998,
assets managed by the Department were $311.4 million, up from $259.3 million at
the end of 1997. 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 rebounded sharply from the lower
levels experienced in 1997. Income from this source was up 86.9% in 1998,
compared to a decline of 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. In 1998, the trend reversed again, with
declining market rates providing an impetus for clients to finance their
residences through fixed rate residential mortgages. The Bank currently services
$121.4 million of sold loans, compared to $98.4 million at the end of 1997.
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. Income from the Bank's
insurance subsidiary is derived from two primary sources. Income from the sale
of nondeposit investment products provides the greatest share of income in this
category. This income declined during 1997 as a result of decreased sales of
these products. This decrease in volumes was a result of significant changes in
the staffing of the department late in 1996. Volumes during 1998 improved as a
result of enhanced marketing efforts and better staffing, and continued
contribution on the part of the Bank's insurance agency is anticipated. The Bank
participated in forming a title insurance company during 1997, and income
generated from this venture is also reflected in the income of the agency.
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
net fee income was recorded on the books of the Bank's insurance agency. Late in
1997, this arrangement was terminated, and the sale of nondeposit investment
products was undertaken by employees of United Bank & Trust. This has changed
the way that this product's income and expenses appear in the income statement
in 1998 and future periods. Gross fee income is now reflected in noninterest
income, and the costs of operating the department is reflected in the Bank's
operating expenses.
Other noninterest income during the year consisted of income from various
fee-based banking services, including ATM and debit card interchange, sale of
official checks, wire transfer fees, safe deposit box income and various other
fees. In addition, some non-fee based income such as rental income of nonbank
property and gain on sale of assets is included
Page A-5
<PAGE> 19
in these totals. Total other income increased 32.7% in 1998 over 1997,
principally in the fee-based areas. Declines from 1996 to 1997 in this area were
due primarily to gain on sale of one banking office during 1996, which increased
totals for that year.
Management anticipates that noninterest income will continue to be emphasized in
the future as a significant source of income to augment net interest income.
Noninterest Expense
Total noninterest expenses grew at an overall rate of 21.7% during 1998, in part
as a result of the expansion and growth experienced in 1997 and 1998. In the
last half of 1997, 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. Since these changes came during the last half of the year, the full
impact on earnings was realized in 1998. On the other hand, the two new banking
offices began providing 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.
Personnel expense continues to be the largest single area of expense, increasing
26.1% over 1997, compared to an increase of 5.4% during 1997 over 1996. Total
full-time equivalent staffing was 178.5 at the end of 1998, compared to 170.5 at
December 31, 1997. Total full-time equivalent staff was 159.5 at December 31,
1996. Much of the increase in 1998 expense was a result of staff added late in
1997. During 1997, ten full-time equivalent staff additions relate specifically
to the two new banking offices added in 1997. In addition, the shift of sales of
nondeposit investment products to bank staff during 1998 added to personnel
expense of the Company. However, this additional cost was offset by increases in
income from these products.
In 1998, the Bank implemented an incentive compensation plan that pays bonuses
to substantially all of its employees. While this plan contributed to benefits
expense, it also provided direct benefit to the net income of the Company.
The cost of operating fifteen banking offices contributes significantly to the
noninterest expense of the Company. The expansion undertaken during 1997
contributed to increases in occupancy and equipment expense for 1998 and future
periods, with total occupancy and equipment expenses increasing 17.2% in 1998
over 1997. During 1998, the Bank purchased a new mainframe computer and
software, as a part of its efforts to assure its compliance with Year 2000
requirements, and the additional depreciation and maintenance associated with
the purchase also contributed to this increase. In addition, the cost of the
1997 expansion was also reflected in other expenses, as all other operating
expenses increased 16.8% over 1997, compared to 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 percentage 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 1998 1997 1996
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before tax $ 6,905 $ 6,829 $ 6,464
Federal income tax accrual 1,803 1,816 1,713
Effective federal tax rate 26.1% 26.6% 26.5%
---------------------------------------------------------------------------------------------------------------
</TABLE>
Page A-6
<PAGE> 20
FINANCIAL CONDITION
Securities
The securities portfolio increased significantly during 1998, principally as a
result of deposit growth which exceeded loan demand. 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 1998 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury and agency securities $ 17,647 $ (4,996)
Mortgage backed agency securities (7,914) 1,226
Tax exempt obligations of states and political subdivisions 491 3,776
Corporate, taxable municipal and asset backed securities 5,511 1,308
------------------------------------------------------------------------------------------------------------
Change in total securities $ 15,735 $ 1,314
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
</TABLE>
During 1998, flat interest rate yield curves offered little financial incentive
to extend maturities in the investment portfolio. In addition, the Bank's
portfolio of mortgage-backed agency securities was not replaced as paid down.
The growth in the portfolio during 1998 was primarily in U.S. Treasury and
agency securities, as well as corporate and asset backed securities. The
Company's current and projected tax position continues to make carrying
tax-exempt securities valuable to the Bank, and 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 local political
subdivisions.
The following chart shows the mix of the securities portfolio.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Percentage Makeup of Securities Portfolio at December 31, 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury and agency securities 28.2% 11.6%
Mortgage backed agency securities 22.3% 36.6%
Tax exempt obligations of states and political subdivisions 37.0% 43.7%
Corporate, taxable municipal and asset backed securities 12.5% 8.1%
-----------------------------------------------------------------------------------------------------------
Total securities 100.0% 100.0%
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
</TABLE>
Investments in U.S. Treasury and agency securities are considered to possess low
credit risk. Obligations of U.S. government agency mortgage-backed securities
possess a somewhat higher interest rate risk due to certain prepayment risks.
The municipal portfolio contains a small amount of geographic risk, as
approximately 20% 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 declined somewhat from
1997 to 1998, in spite of the growth of the portfolio. Unrealized gains and
losses within the investment portfolio 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 either as held to maturity or
available for sale.
Loans
The chart below shows the percentage change in each category of the loan
portfolio for 1998 and 1997.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Percentage Change in Categories of Loan Portfolio 1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Personal -16.4% 1.2%
Business 11.4% 12.5%
Tax exempt -6.8% 37.5%
Residential mortgage 0.1% 11.2%
Construction 55.2% 30.0%
Total loans 1.9% 9.7%
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>
Page A-7
<PAGE> 21
Net loan growth of 1.9% in 1998 slowed considerably from the strong pace
experienced in 1997 and 1996. However, this figure is somewhat misleading. The
volume of mortgage loans generated during 1998 reached record levels. During
this period, as a result of record low interest rates available in the market,
most residential mortgage clients chose fixed rate mortgage products. Since the
Bank sells most of its fixed-rate mortgage loans on the secondary market, this
increase in mortgage origination volume was not reflected on the Company's
balance sheet. It was instead reflected in its portfolio of loans sold with
servicing retained, resulting in improved fee income during the year.
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, provides opportunities for future continued growth
in all loan portfolios.
During 1998, construction loan activity increased significantly, reflecting
strong growth of the commercial mortgage and residential housing activity in the
Bank's market area. Residential construction loans will convert to residential
mortgages to be retained in the Bank's portfolio or to be sold in the secondary
market, while commercial construction loans will eventually be converted to
commercial mortgages.
Growth in the business loan portfolio continued to be strong in 1998.
Charge-offs within the personal installment area, as well as strong competition
in the consumer loan market, resulted in declining balances in the direct and
indirect installment loan products. The decrease in tax exempt loans reflects
normal amortizations of loans to local municipalities.
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 1998 1997 1996 1995 1994
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 821 $ 71 $ 450 $ 41 $ 110
Loans past due 90 days or more 194 910 663 163 517
Troubled debt restructurings 136 138 0 0 2
----------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 1,151 1,119 1,113 204 629
Other real estate 335 473 335 43 81
----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 1,486 $ 1,592 $ 1,448 $ 247 $ 710
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Percent of total loans 0.55% 0.60% 0.60% 0.11% 0.34%
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total nonperforming loans remained relatively unchanged from the prior two
years, while decreasing as a percentage of total loans. The amount listed above
as other real estate reflects one commercial property that was acquired in lieu
of foreclosure in 1996. The property has been leased to a third party with an
option to purchase, and no loss is anticipated.
In general, banks have experienced higher delinquencies in recent years, 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 1997 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 assisted in controlling
delinquency, but has not yet improved total nonperforming loans. While some
further losses are anticipated, the Company's delinquency ratios remain well
below that of most other banks of similar size.
Page A-8
<PAGE> 22
Credit quality is dependent in part on the makeup of the loan portfolio. The
following chart shows the percentage makeup of the loan portfolio.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Percentage Makeup of Loan Portfolio at December 31, 1998 1997
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Personal - direct 11.7% 14.0%
Personal - indirect 10.1% 12.5%
Business 30.5% 27.9%
Tax exempt 0.5% 0.6%
Residential mortgage 38.8% 39.5%
Construction 8.4% 5.5%
----------------------------------------------------------------------------------------------------------
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
47.2% 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.
Personal loan balances declined $11.5 million during 1998, with year-end
balances of $58.8 million. This portfolio consists of direct and indirect
installment, home equity, credit card and unsecured revolving line of credit
loans. Installment loans consist primarily of loans for consumer durable goods,
principally automobiles. Indirect personal loans consist of loans for
automobiles and manufactured housing. Substantially all of the decline in this
portfolio during 1998 occurred in the direct and indirect installment loan
portfolios.
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, the Bank uses an independent loan review firm to assess the continued
quality of its business loan portfolio. This is in addition to the precautions
taken with credit quality in the other loan portfolios. 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. This growth continued at the same level in
1998. The Company continued its emphasis on its cash management account which
was introduced in 1996, and also introduced new products in 1997 and 1998 to
continue to improve its deposit mix.
The Bank's decline in certificates of deposit seems to reflect continuing
desires on the part of clients to seek alternatives to traditional certificates
of deposit, in search of the best yields on their funds. In addition, banking
clients seem to be moving nationwide toward a trend of thinking of banks as a
place for saving, rather than for investing. While this philosophy has resulted
in slowed growth in the time deposit categories, it has presented opportunities
for the sale of additional nonbanking products to clients.
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. The chart below shows the percentage change in deposits by
category at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Percentage Change in Deposits by Category 1998 1997
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Noninterest bearing deposits 33.0% 5.2%
Interest bearing certificates of $100,000 or more -19.6% -8.0%
Other interest bearing deposits 7.1% 9.3%
Total deposits 6.4% 6.4%
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>
Page A-9
<PAGE> 23
The chart below shows the percentage makeup of the deposit portfolio in 1998 and
1997. 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.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Percentage Breakdown of Deposit Portfolio as of December 31, 1998 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Noninterest bearing deposits 12.6% 10.1%
Interest bearing certificates of $100,000 or more 9.2% 12.2%
Other interest bearing deposits 78.2% 77.7%
-------------------------------------------------------------------------------------------------------
Total deposits 100.0% 100.0%
=======================================================================================================
</TABLE>
Cash Equivalents and Borrowed Funds
The company maintains correspondent accounts with a number of other banks for
various purposes, including satisfaction of reserve requirements of the Federal
Reserve system. In addition, cash sufficient to meet the operating needs of
fifteen banking offices is maintained at its lowest practical levels. At times,
the Bank is a participant in the federal funds market, either as a borrower or
seller. Federal funds are generally sold for one-day periods. Periodically, the
Bank may become a borrower in the federal funds market, and may utilize short
term advances from the Federal Home Loan Bank ("FHLB"). While federal funds were
purchased on occasion during 1998, no short term advances were utilized during
the year.
The Company periodically finds it advantageous to utilize longer term borrowings
from the Federal Home Loan Bank of Indianapolis. These long-term borrowings, as
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 1998, the Company participated in the federal funds market; at times
as a provider of funds and at other times as a purchaser. Funding needs varied
throughout the year, but overall, the Company's liquidity position during 1998
was significantly changed from 1997. The Company averaged net federal funds sold
of $9.5 million for 1998. This compares to a net average borrowed position of
$0.2 million in 1997, including federal funds and short term FHLB advances.
These changes were a direct result of deposit growth which exceeded loan growth,
including the addition of deposits from the acquisition of the Dundee office in
December of 1997, and growth experienced in Saline and other markets.
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.
Page A-10
<PAGE> 24
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; 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, 1998, the
Company would expect a maximum potential reduction in net interest margin of
less than 4% if market rates increased under an immediate and sustained parallel
shift of 200 basis points.
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, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars Principal Amount Maturing In: Fair Value
---------------------------------------------------------------
RATE-SENSITIVE ASSETS: 1999 2000 2001 2002 2003 Thereafter Total 12/31/98
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate loans $ 34,375 $ 19,871 $ 18,064 $ 13,009 $ 12,670 $ 66,438 $ 164,427 $166,085
Average interest rate 8.4% 8.8% 8.6% 8.4% 8.1% 7.5% 8.4%
Variable rate loans $ 23,042 $ 10,016 $ 10,438 $ 11,848 $ 6,147 $ 44,331 $ 105,822 $106,189
Average interest rate 8.4% 8.7% 8.7% 8.8% 8.8% 8.8% 8.7%
Fixed rate investments $ 29,437 $ 16,658 $ 18,890 $ 6,574 $ 4,402 $ 9,801 $ 85,762 $ 88,781
Average interest rate 6.0% 6.1% 5.8% 5.5% 5.4% 5.5% 5.7%
Variable rate investments $ 2,479 $ 1,566 $ 1,387 $ 661 $ 221 $ 1,251 $ 7,565 $ 7,686
Average interest rate 6.5% 6.7% 6.7% 6.7% 6.8% 6.9% 6.7%
Other interest earning assets $ 1,576 $ 1,576 $ 1,576
Average interest rate 8.0% 8.0%
RATE-SENSITIVE LIABILITIES:
Noninterest bearing demand $ 42,468 $ 42,468 $ 42,468
Savings & interest bearing demand $ 74,514 $ 4,433 $ 4,433 $ 4,433 $ 4,433 $ 70,933 $ 163,179 $163,179
Average interest rate 3.7% 1.7% 1.7% 1.7% 1.7% 1.7% 2.6%
Time deposits $ 81,922 $ 35,396 $ 11,791 $ 1,299 $ 1,195 $ 17 $ 131,620 $132,938
Average interest rate 5.5% 5.8% 5.3% 5.2% 5.1% 8.4% 5.3%
Fixed rate borrowings $ 7,276 $ 296 $ 319 $ 342 $ 2,667 $ 10,900 $ 11,087
Average interest rate 6.0% 6.2% 6.2% 6.2% 6.2% 6.0%
Other interest bearing liabilities $ 3,874 $ 3,874 $ 3,874
Average interest rate 5.5% 5.5%
====================================================================================================================================
</TABLE>
Page A-11
<PAGE> 25
Management does not believe there has been a material change in the nature of
the Company's primary market risk exposures from 1997 to 1998, based on data
supplied by its measurement systems. 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.
The table below shows the rate sensitivity of earning assets and interest
bearing liabilities as of December 31, 1998. 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 $ 18,188 $ 20,873 $ 46,524 $ 9,377 $ 425 $ 95,387
Loans 66,691 46,807 87,620 56,134 12,997 270,249
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 84,879 $ 67,680 $ 134,144 $ 65,511 $ 13,422 $ 365,636
Negotiated rate time deposits of $100,000 or more $ 13,198 $ 8,430 $ 9,480 $ 31,108
Other interest bearing deposits 193,156 30,316 40,202 $ 17 263,691
Repurchase agreements 674 674
Other borrowings 3,200 7,276 957 2,667 14,100
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $ 210,228 $ 46,022 $ 50,639 $ 2,684 $ 309,573
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset (liability) funding gap $ (125,349) $ 21,658 $ 83,505 $ 62,827 $ 13,422 $ 56,063
Cumulative net asset (liability) funding gap $ (125,349) $ (103,691) $ (20,186) $ 42,641 $ 56,063
Cumulative gap ratio 0.40 0.60 0.93 1.14 1.18 to one
Cumulative gap as a percent of total assets -31.8% -26.3% -5.1% 10.8% 14.2%
====================================================================================================================================
</TABLE>
CAPITAL RESOURCES
It is the policy of the Company to pay 30% to 40% of net earnings as cash
dividends to shareholders. These dividends have resulted in a dividend yield of
approximately 3.00% and 3.25% in 1998 and 1997. Five percent stock dividends
were paid to shareholders in 1998 and 1997. 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 1998, as capital continued to grow at a faster rate
than did assets. 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.
A-12
<PAGE> 26
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
detailed in Note 1 of the Notes to Consolidated Financial Statements. Management
is not aware of any other trends, events or uncertainties that are likely to
have a material effect on the Company's liquidity, capital resources, or
operations. In addition, Management is not aware of any current recommendations
by regulatory authorities, other than those previously discussed, which would
have such an effect.
YEAR 2000 READINESS
Federal banking regulators require specific actions of every financial
institution to become Year 2000 ready. These guidelines require a bank to:
- Ensure the involvement of the board of directors and management in the
institution's Year 2000 effort
- Adopt a written project plan
- Renovate its mission-critical systems
- Complete tests of the renovated mission-critical systems by specific
deadlines
- Plan for contingencies
- Manage customer risk
Summary
United has an active Year 2000 committee that updates the Board of Directors and
appropriate banking regulators regarding its Year 2000 readiness on a quarterly
basis. The Board has adopted a written plan, and continues to assess its risk.
Management has determined which systems are mission critical, and those which
are not. Based on these determinations, a plan of action has been implemented.
Key clients have been surveyed, and plans are underway to assess and manage
customer risk. No material affect on United's financial performance is
anticipated, due to the systematic approach the Company has adopted to prepare
for the Year 2000 date impact.
Specific Information
During 1998, the Company's Year 2000 task force has continued to monitor the
readiness of its major data processing hardware and software providers, other
critical vendor suppliers, and its large commercial customers.
United uses major external third party vendors to the banking industry for its
mainframe and all personal computer hardware and software. These well-known,
national third party providers for the mission critical systems have provided
written assurances that they are Year 2000 ready and their systems have been
fully tested. The Company does not use any custom programmed software.
Earlier in 1998, United determined that its Unisys mainframe computer system,
while Year 2000 compliant, did not have sufficient capacity for future growth.
During the fourth quarter of 1998, the Company installed a new Unisys mainframe
to replace its old system. This system provides a substantial increase in
efficiency and capacity of operations, and will allow complete testing of its
banking software provided by Information Technology, Inc. without any disruption
to daily processing and customer service. All testing will be completed by June
30, 1999 within the FFIEC published guidelines and no disruption in service due
to a Year 2000 issue is anticipated.
Other systems are being tested, and all noncompliant systems will be replaced or
abandoned. Some non-critical systems have been found to be noncompliant, due to
their age, and will be replaced. The readiness of the software used for mission
critical systems is included in the cost of the Bank's normal maintenance of
those systems and Management
Page A-13
<PAGE> 27
does not expect any additional charges. Some minor hardware and software
replacements will be needed, and expenditures are expected to be less than
$50,000. The staffing needed to complete the testing and implementation plan has
been identified and is available. Other new software installations over the next
15 months will be restricted to assure that the Company can complete its Year
2000 plan.
Contingency planning has begun for mission critical tasks and will be
continually monitored and updated to ensure uninterrupted customer services and
backroom processing. The Company, however, cannot necessarily be assured of no
interruption with certain vendors such as utility companies and phone companies,
but those vendor plans are being monitored as an ongoing part of the assessment.
Currently, all critical dates mandated by the regulators have been met by the
Company's data processing vendors, and United is also on schedule for its review
of any in-house critical systems, software, and equipment.
Overall, the cost of evaluating the Company's Year 2000 readiness and assuring
its compliance will not have a measurable impact on the financial condition of
the Company. United regularly provides for upgrades and replacement of its
software and hardware, and the Year 2000 situation will not significantly impact
those expenditures.
Major loan and deposit customers have been surveyed to evaluate the level of
Year 2000 planning and readiness and to assess any potential risk. Currently, it
is unknown what impact a high risk client's inability to pay its bank
obligations will have on the adequacy of United's allowance for possible loan
losses or its financial position.
FORWARD-LOOKING STATEMENTS
Statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations relate to the Company's expectations as to
future events relating to such items as the adequacy of the allowance for loan
losses, changes in economic conditions including interest rates, management's
ability to manage interest rate, liquidity and credit risks, impact on
operations and credit losses as it relates to the Year 2000 issue. Such
statements are not statements of historical fact and are forward-looking
statements. Management believes the assumptions upon which these statements are
founded are reasonable, based on their knowledge of its business and operations;
however, there is no assurance the assumptions will prove to have been correct.
Furthermore, the Company undertakes no obligation to update, amend or clarify
forward-looking statements, whether as a result of new information, future
events, or otherwise.
Page A-14
<PAGE> 28
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
[UNITED BANCORP, INC. LETTERHEAD]
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, 1998. Based
on its assessment, the Company believes that, as of December 31, 1998, its
system of internal control over financial reporting is adequate and appropriate.
United Bancorp, Inc.
David S. Hickman John J. Wanke
Chairman and Chief Executive Officer President
Dale L. Chadderdon
Senior Vice President, Secretary and Treasurer
Page A-15
<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,
1998 and 1997, 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,
1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 22, 1999
Page A-16
<PAGE> 30
CONSOLIDATED BALANCE SHEETS
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
December 31,
In thousands of dollars 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and demand balances in other banks $ 12,348 $ 10,406
Federal funds sold - -
- -------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 12,348 10,406
Securities available for sale 58,468 42,488
Securities held to maturity; fair value of $37,999 in 1998 and $38,287 in 1997 36,919 37,164
- -------------------------------------------------------------------------------------------------------------------------
Total securities 95,387 79,652
Loans held for sale 535 141
Portfolio loans 269,714 265,117
- -------------------------------------------------------------------------------------------------------------------------
Total loans 270,249 265,258
Less allowance for loan losses 2,799 2,467
- -------------------------------------------------------------------------------------------------------------------------
Net loans 267,450 262,791
Premises and equipment, net 11,406 10,933
Accrued interest receivable and other assets 7,104 6,489
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 393,695 370,271
=========================================================================================================================
LIABILITIES
Deposits
Noninterest bearing deposits 42,468 31,924
Interest bearing certificates of deposit of $100,000 or more 31,108 38,714
Other interest bearing deposits 263,691 246,197
--------------------------------------------------------------------------------------------------------------------
Total deposits 337,267 316,835
Short term borrowings 3,874 4,942
Other borrowings 10,900 10,000
Accrued interest payable and other liabilities 2,890 3,028
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 354,931 334,805
- -------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value; 5,000,000 shares authorized,
1,730,480 shares issued and outstanding in 1998 and 1,646,030 in 1997 19,837 16,366
Retained earnings 18,607 18,867
Accumulated other comprehensive income 320 233
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 38,764 35,466
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 393,695 $ 370,271
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-17
<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 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans
Taxable $ 23,356 $ 22,515 $ 20,511
Tax exempt 76 69 63
Securities
Taxable 3,166 3,139 2,949
Tax exempt 1,886 1,767 1,687
Federal funds sold 509 215 141
- -------------------------------------------------------------------------------------------------------------------------
Total interest income 28,993 27,705 25,351
- -------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Certificates of deposit of $100,000 or more 1,976 2,408 2,193
Other deposits 10,367 9,604 8,723
Short term borrowings 37 157 173
Other borrowings 652 724 525
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 13,032 12,893 11,614
- -------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 15,961 14,812 13,737
Provision for loan losses 1,248 1,255 628
- -------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,713 13,557 13,109
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 1,657 1,490 1,223
Trust & Investment fee income 1,605 1,301 971
Gains on securities transactions 54 5 8
Loan sales and servicing 1,071 573 604
Sales of nondeposit investment products 437 321 417
Other income 576 434 439
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest income 5,400 4,124 3,662
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 7,128 5,654 5,363
Occupancy and equipment expense, net 2,434 2,076 1,922
Other expense 3,646 3,122 3,022
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 13,208 10,852 10,307
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAX 6,905 6,829 6,464
Federal income tax 1,803 1,816 1,713
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5,102 $ 5,013 $ 4,751
=========================================================================================================================
Basic and diluted earnings per share $ 2.95 $ 2.90 $ 2.75
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-18
<PAGE> 32
CONSOLIDATED STATEMENTS OF CASH FLOWS
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
In thousands of dollars 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,102 $ 5,013 $ 4,751
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES
Depreciation and amortization 1,635 1,396 1,469
Provision for loan losses 1,248 1,255 628
Change in loans held for sale (394) 658 (538)
Gain on sale of securities (54) (5) (8)
Change in accrued interest receivable and other assets (874) (1,470) (48)
Change in accrued interest payable and other liabilities (251) (49) 29
- -------------------------------------------------------------------------------------------------------------------------
Total adjustments 1,310 1,785 1,532
- -------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 6,412 6,798 6,283
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (30,474) (11,040) (20,670)
Sales 3,035 2,002 732
Maturities and calls 4,913 5,747 14,000
Principal payments 6,642 5,925 6,214
Securities held to maturity
Purchases (14,406) (14,091) (5,570)
Maturities and calls 14,696 10,221 2,638
Net increase in portfolio loans (5,513) (25,309) (24,438)
Premises and equipment expenditures (1,806) (3,279) (1,370)
- -------------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (22,913) (29,824) (28,464)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 20,432 19,132 12,531
Net change in short term borrowings (1,068) 4,333 31
Principal payments on other borrowings (3,000) (10,000) (8,000)
Proceeds from other borrowings 3,900 - 22,000
Proceeds from common stock transactions 164 124 78
Dividends paid (1,985) (1,809) (1,524)
- -------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 18,443 11,780 25,116
- -------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,942 (11,246) 2,935
Cash and cash equivalents at beginning of year 10,406 21,652 18,717
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,348 $ 10,406 $ 21,652
- -------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 13,323 $ 12,861 $ 11,421
Income tax paid $ 2,000 $ 1,803 $ 1,719
Non-cash transfer from portfolio loans to other real estate $ - $ 138 $ 445
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-19
<PAGE> 33
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Common Retained
In thousands of dollars, except per share data Shares Stock Earnings AOCI (1) Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,489,839 $ 11,262 $ 17,486 $ 105 $ 28,853
Net income, 1996 4,751 4,751
Net change in unrealized gains on securities 24 24
--------------
Total comprehensive income 4,775
Cash dividends declared, $0.961 per share (1,658) (1,658)
Five percent stock dividend declared 74,492 2,160 (2,160) -
Common stock transactions 1,559 52 52
Director and management deferred stock plans 26 26
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,565,890 $ 13,500 $ 18,419 $ 129 $ 32,048
Net income, 1997 5,013 5,013
Net change in unrealized gains on securities 104 104
--------------
Total comprehensive income 5,117
Cash dividends declared, $1.056 per share (1,823) (1,823)
Five percent stock dividend declared 78,292 2,740 (2,740) -
Common stock transactions 1,848 67 67
Director and management deferred stock plans 59 (2) 57
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,646,030 $ 16,366 $ 18,867 $ 233 $ 35,466
Net income, 1998 5,102 5,102
Net change in unrealized gains on securities 87 87
--------------
Total comprehensive income 5,189
Cash dividends declared, $1.188 per share (2,053) (2,053)
Five percent stock dividend declared 82,298 3,292 (3,292) -
Common stock transactions 2,152 94 94
Director and management deferred stock plans 85 (17) 68
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,730,480 $ 19,837 $ 18,607 $ 320 $ 38,764
=========================================================================================================================
</TABLE>
(1) Accumulated Other Comprehensive Income
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-20
<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 fifteen 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 allowance for
loan losses 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 in other comprehensive income. Bonds and notes for which Management has
the positive intent and the ability to hold to maturity are reported at
amortized cost. Other securities such as Federal Home Loan Bank stock are
carried at cost.
Premiums and discounts on securities are recognized in interest income using the
interest method over the period to maturity. Realized gains or losses are based
upon the amortized cost of the specific securities sold.
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-21
<PAGE> 35
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, credit card, home equity and second
mortgage loans. 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 thirty days or more. Loans are generally moved to nonaccrual status when
ninety days or more past due or in bankruptcy. 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.
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 eighteen 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.
SERVICING RIGHTS
Servicing rights are recognized as assets for the allocated value of retained
servicing on loans sold. Servicing rights are expensed in proportion to, and
over the period of, estimated net servicing revenues. 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. Any
impairment of a grouping is reported as a valuation allowance.
LONG-TERM ASSETS
These assets are reviewed for impairment when events indicate their carrying
amount may not be recoverable from future undiscounted cash flows. If impaired,
the assets are recorded at discounted amounts.
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
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, 1998, 1997 and 1996 five percent stock dividends
were paid.
Page A-22
<PAGE> 36
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 1,728,462 for 1998, 1,726,300 for 1997 and 1,724,643
for 1996. The weighted average of contingently issuable shares was 3,907 and
2,101 for 1998 and 1997 and 279 for 1996.
STATEMENTS OF CASH FLOWS
For purposes of this Statement, cash and cash equivalents include cash on hand,
demand balances with banks, and federal funds sold. Federal funds are generally
sold for one day periods. The Company reports net cash flows for client loan and
deposit transactions, deposits made with other financial institutions, and short
term borrowings with an original maturity of ninety days or less.
COMPREHENSIVE INCOME
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities
available for sale which are also recognized as separate components of
shareholders' equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable.
INDUSTRY SEGMENT
The Company and its subsidiary are primarily organized to operate in the banking
industry. Substantially all revenues and services are derived from banking
products and services in southeastern Michigan. While the Company's chief
decision makers monitor various products and services, operations are managed
and financial performance is evaluated on a Company-wide basis. Accordingly, all
of the Company's banking operations are considered by Management to be
aggregated in one business segment.
PENDING ACCOUNTING CHANGES
Beginning January 1, 2000, a new accounting standard will require all
derivatives to be recorded at fair value. Unless designated as hedges, changes
in these fair values will be recorded in the income statement. Fair value
changes involving hedges will generally be recorded by offsetting gains and
losses on the hedge and on the hedged item, even if the fair value of the hedged
item is not otherwise recorded. This is not expected to have a material effect
since there currently are no hedges, but the effect will depend on derivative
holdings when this standard applies.
Mortgage loans originated in mortgage banking are converted into securities on
occasion. A new accounting standard for 1999 will allow classifying these
securities as available for sale, trading, or held to maturity, instead of the
current requirement to classify as trading. This will have no material effect
since the Company currently does not securitize mortgages, but the effect will
depend on the level and designation of securitizations as well as on market
price movements.
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.
On January 22, 1999, the Bank reached an agreement to acquire one office and
related deposits from Great Lakes National Bank Michigan. Approximately $22.2
million of deposits will be assumed when the acquisition is completed in
mid-April of 1999. The transaction is subject to regulatory approval, but no
problems are anticipated. The transaction will be accounted for under the
purchase method, and intangible assets acquired will be amortized over their
estimated economic lives. No significant impact on 1999 earnings is anticipated.
Page A-23
<PAGE> 37
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, 1998 and 1997 were approximately $5,179,000
and $3,390,000.
NOTE 4 - SECURITIES
The amortized cost and fair value of securities, in thousands of dollars, as of
December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE Amortized Unrealized Unrealized Fair
In thousands of dollars Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities $ 26,635 $ 230 $ (6) $ 26,859
Mortgage backed agency securities 21,026 231 (24) 21,233
Asset backed and other securities 10,323 60 (7) 10,376
- -------------------------------------------------------------------------------------------------------------------------
Total $ 57,984 $ 521 $ (37) $ 58,468
- -------------------------------------------------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------
1996
- -------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY
In thousands of dollars
- -------------------------------------------------------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------------------------------------------------------
Tax exempt obligations of states and political subdivisions $ 35,326 $ 1,081 $ (12) $ 36,395
Corporate and taxable municipal securities 1,593 11 - 1,604
- -------------------------------------------------------------------------------------------------------------------------
Total $ 36,919 $ 1,092 $ (12) $ 37,999
- -------------------------------------------------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------
1996
- -------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page A-24
<PAGE> 38
Sales activities for securities for the years indicated are shown in the
following table. All sales were of securities identified as available for sale.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales proceeds $ 3,035 $ 2,002 $ 732
Gross gains 54 6 8
Gross losses - (1) -
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities by contractual maturity are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Asset-backed securities are included in periods based
on their estimated lives.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SECURITIES Available for Sale Held to Maturity
As of December 31, 1998 Amortized Fair Amortized Fair
In thousands of dollars Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 9,745 $ 9,773 $ 4,874 $ 4,910
Due after one year through five years 41,406 41,847 19,660 20,329
Due after five years through ten years 5,257 5,272 6,506 6,722
Due after ten years - - 5,879 6,038
Equity investments 1,576 1,576 - -
- -------------------------------------------------------------------------------------------------------------------------
Total securities $ 57,984 $ 58,468 $ 36,919 $ 37,999
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Securities carried at $9,114,000 and $8,879,000 as of December 31, 1998 and 1997
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 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Personal $ 58,797 $ 70,308
Business, including commercial mortgages 82,521 74,080
Tax exempt 1,381 1,482
Residential mortgage 104,368 104,659
Residential mortgages held for sale 535 141
Construction 22,647 14,588
- -------------------------------------------------------------------------------------------------------------------------
Total loans $ 270,249 $ 265,258
- -------------------------------------------------------------------------------------------------------------------------
</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 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $ 2,467 $ 2,320 $ 2,197
Loans charged off (1,106) (1,189) (572)
Recoveries credited to allowance 190 81 67
Provision charged to operations 1,248 1,255 628
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 2,799 $ 2,467 $ 2,320
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page A-25
<PAGE> 39
Information regarding impaired loans for the years ended December 31 follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average investment in impaired loans $ 908 $ 938 $ 679
Interest income recognized on impaired loans 35 79 67
Interest income recognized on a cash basis 36 60 56
Balance of impaired loans at December 31 $ 1,163 $ 973
Portion for which no allowance for loan losses is allocated 178 764
Portion for which an allowance for loan losses is allocated 985 209
Portion of allowance for loan losses allocated to impaired loans 136 26
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 $121,371,000 and $98,385,000 at December 31, 1998
and 1997. The balance of loans serviced for others related to servicing rights
that have been capitalized was $88,357,000 and $46,621,000 at December 31, 1998
and 1997.
Unamortized cost of mortgage servicing rights for the period ended December 31,
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 340 $ 185 $ -
Amount capitalized 468 190 196
Amount amortized (162) (35) (11)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 646 $ 340 $ 185
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
No valuation allowance was considered necessary for mortgage servicing rights at
December 31, 1998 and 1997.
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment as of December 31, consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,586 $ 1,575
Buildings and improvements 9,117 8,645
Furniture and equipment 7,083 5,954
Computer software 1,204 1,096
- -------------------------------------------------------------------------------------------------------------------------
Total cost 18,990 17,270
Less accumulated depreciation (7,584) (6,337)
- -------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net $ 11,406 $ 10,933
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense was approximately $1,291,000 in 1998, $1,078,000 in 1997
and $999,000 in 1996.
Page A-26
<PAGE> 40
NOTE 9 - DEPOSITS
Information relating to maturities of time deposits as of December 31, is
summarized below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 81,922 $ 92,613
Between one and two years 35,396 35,478
Between two and three years 11,791 14,053
Between three and four years 1,299 1,506
Between four and five years 1,195 736
More than five years 17 53
- -------------------------------------------------------------------------------------------------------------------------
Total time deposits $ 131,620 $ 144,439
- -------------------------------------------------------------------------------------------------------------------------
</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 $3.2 million and $4.3 million
outstanding at December 31, 1998 and 1997.
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>
- -------------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
In thousands of dollars Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31 $ 674 4.49% $ 642 5.40%
Average balance during the year 650 5.04% 618 5.17%
Maximum month end balance during the year 674 642
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 11 - OTHER BORROWINGS
The Bank carried fixed rate, noncallable advances from the FHLB totaling $10.9
million at December 31, 1998. Those advances consist of $7.0 million at 5.97%
due in 1999, and $3.9 million at 6.18% due in scheduled payments from 1999 to
2008. 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. Interest payments are
made monthly, with principal due annually and at maturity.
Maturities and scheduled principal payments over the next five years are shown
below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
In thousands of dollars 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 7,276 $ 3,000
Between one and two years 296 7,000
Between two and three years 319 -
Between three and four years 342 -
Between four and five years 368 -
More than five years 2,299 -
- ----------------------------------------------------------------------------------------
</TABLE>
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
Page A-27
<PAGE> 41
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>
- --------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------
Variable Fixed Variable Fixed
In thousands of dollars Rate Rate Rate Rate
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to make loans $ 1,557 $ 6,681 $ 2,715 $ 4,952
Unused lines of credit 57,242 1,754 42,234 2,632
Standby letters of credit 3,212 4,871
- --------------------------------------------------------------------------------------------
</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, 1998, the rates for amounts in the fixed rate category ranged from
6.25% to 9.25%.
NOTE 13 - FEDERAL INCOME TAX
Income tax expense consists of the following for the years ended December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
In thousands of dollars 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 1,874 $ 1,814 $ 1,671
Deferred (71) 2 42
- ----------------------------------------------------------------------------------------
Total income tax expense $ 1,803 $ 1,816 $ 1,713
- ----------------------------------------------------------------------------------------
</TABLE>
The components of deferred tax assets and liabilities at December 31, are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
In thousands of dollars 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 677 $ 565
Deferred compensation 158 124
Other 36 14
- ---------------------------------------------------------------------------------------
Total deferred tax assets $ 871 $ 703
Deferred tax liabilities:
Property and equipment $ (476) $ (473)
Mortgage servicing rights (220) (116)
Core deposit intangible (48) (74)
Unrealized appreciation on securities available for sale (165) (120)
Other (218) (202)
- ---------------------------------------------------------------------------------------
Total deferred tax liabilities $ (1,127) $ (985)
- ---------------------------------------------------------------------------------------
Net deferred tax liability $ (256) $ (282)
- ---------------------------------------------------------------------------------------
</TABLE>
No valuation allowance was considered necessary at December 31, 1998 and 1997.
Page A-28
<PAGE> 42
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 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at statutory rate of 34% $ 2,348 $ 2,322 $ 2,198
Effect of non-taxable income (577) (536) (515)
Other 32 30 30
- -------------------------------------------------------------------------------------------
Total federal income tax $ 1,803 $ 1,816 $ 1,713
- -------------------------------------------------------------------------------------------
</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, 1997 was
$7,942,000. During 1998, new loans to such related parties amounted to
$5,980,000 and repayments amounted to $3,674,000, resulting in a balance at
December 31, 1998 of $10,248,000. Related party deposits totaled $4,873,000 and
$5,004,000 at December 31, 1998 and 1997.
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, 1998, $8.2
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.
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 15% of their compensation for 1998. The maximum contribution was 12%
of their compensation for 1997 and 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 1998, 1997 and 1996 were $459,000,
$348,000 and $329,000.
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
2,072 shares in 1998, 1,775 shares in 1997 and 1,622 shares in 1996 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 other personnel are administered under an incentive
compensation plan which requires a minimum return on assets and equity before
any performance incentive award can be made. Bonuses for the seven 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.
Page A-29
<PAGE> 43
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.
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, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------
Carrying Carrying
In thousands of dollars Value Fair Value Value Fair Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 12,348 $ 12,348 $ 10,406 $ 10,406
Securities 95,387 96,467 79,652 80,775
Net loans 267,450 269,475 262,791 263,422
Accrued interest receivable 2,432 2,432 2,284 2,284
Financial Liabilities
Deposit liabilities $ 337,267 $ 338,586 $ 316,835 $ 317,070
Short term borrowings 3,874 3,874 4,942 4,942
Other borrowings 10,900 11,087 10,000 9,990
Accrued interest payable 1,037 1,037 1,328 1,328
- ---------------------------------------------------------------------------------------------
</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.
Page A-30
<PAGE> 44
Deposit liabilities - With the exception of certificates of deposit, the
carrying value is deemed to be the fair value due to the demand nature of
the deposits. The fair value of fixed maturity certificates of deposit is
estimated by discounting future cash flows using the current rates paid on
certificates of deposit with similar maturities.
Short term borrowings - Carrying value is a reasonable approximation of
fair value.
Other borrowings - The fair value is estimated by discounting future cash
flows using current rates on advances with similar maturities.
Off-balance-sheet financial instruments - The Bank's commitments to extend
credit, standby letters of credit, and undisbursed loans are deemed to have
no material fair value as such commitments are generally fulfilled at
current market rates.
NOTE 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 for Minimum To Be
Actual Capital Adequacy (1) Well Capitalized (2)
-------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets $ 39,013 15.0% $ 20,766 8.0% $ 25,957 10.0%
Tier I capital to risk weighted assets 36,214 14.0% 10,383 4.0% 15,574 6.0%
Tier I capital to average assets 36,214 9.4% 15,367 4.0% 19,208 5.0%
Tier I capital to tangible assets 36,214 9.3% 15,646 4.0% 19,557 5.0%
- -------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997
- -------------------------------------------------------------------------------------------------------------------------
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%
Tier I capital to tangible assets 32,746 8.9% 14,702 4.0% 18,378 5.0%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents minimum required to be considered adequately capitalized under
Federal regulatory requirements.
(2) Represents minimum required to be considered well-capitalized under Federal
regulatory prompt corrective action provisions.
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
1998 and 1997 by their regulators.
Page A-31
<PAGE> 45
NOTE 19 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains and (losses) on securities available for sale $ 178 $ 163 $ 44
Reclassification for realized amount included in income (46) (5) (8)
- -------------------------------------------------------------------------------------------------------------------------
Other comprehensive income, before tax effect 132 158 36
Tax effect 45 54 12
- -------------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 87 $ 104 $ 24
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 20 - 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 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 114 $ 129
Investment in subsidiary 38,609 35,296
Other assets 734 652
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 39,457 $ 36,077
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 693 $ 611
Shareholders' equity 38,764 35,466
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 39,457 $ 36,077
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME For the years ended December 31,
In thousands of dollars 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
INCOME
Dividends from subsidiary $ 1,906 $ 1,748 $ 1,690
Other income 1 1 1
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 1,907 1,749 1,691
TOTAL NONINTEREST EXPENSE 46 41 73
- -------------------------------------------------------------------------------------------------------------------------
Income before undistributed net income of subsidiary and income taxes 1,861 1,708 1,618
Income tax benefit (14) (14) (24)
- -------------------------------------------------------------------------------------------------------------------------
Net income before undistributed net income of subsidiary 1,875 1,722 1,642
Equity in undistributed net income of subsidiary 3,227 3,291 3,109
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME 5,102 5,013 4,751
Net change in unrealized gains on securities held by subsidiary 87 104 24
- -------------------------------------------------------------------------------------------------------------------------
Other comprehensive income 87 104 24
- -------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 5,189 $ 5,117 $ 4,775
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page A-32
<PAGE> 46
NOTE 20 - PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31,
In thousands of dollars 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,102 $ 5,013 $ 4,751
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Undistributed net income of subsidiary (3,227) (3,291) (3,109)
Change in other assets (81) 1 (125)
Change in other liabilities 12 11 (16)
- -------------------------------------------------------------------------------------------------------------------------
Total adjustments (3,296) (3,279) (3,250)
- -------------------------------------------------------------------------------------------------------------------------
Net Cash from Operating Activities 1,806 1,734 1,501
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities - - (28)
- -------------------------------------------------------------------------------------------------------------------------
Net Cash from Investing Activities - - (28)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock transactions 164 124 78
Dividends paid (1,985) (1,809) (1,524)
- -------------------------------------------------------------------------------------------------------------------------
Net Cash from Financing Activities (1,821) (1,685) (1,446)
- -------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH (15) 49 27
Cash at Beginning of Year 129 80 53
- -------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 114 $ 129 $ 80
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page A-33
<PAGE> 47
[UNITED BANCORP, INC LETTERHEAD]
- --------------------------------------------------------------------------------
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 20, 1999
- --------------------------------------------------------------------------------
The undersigned hereby appoints David S. Hickman and John J. Wanke, 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
20, 1999 at 4:30 p.m., local time, and any adjournment thereof, and to vote all
shares of the common stock of the Company that 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 II Directors" until the 2002 Annual
Meeting of Shareholders, or until their successors have been elected and
qualified, or until their successors have been elected and qualified:
<TABLE>
<S><C>
Class II Director Nominees:
John H. Foss Scott F. Hill John R. Robertstad
David S. Hickman Ann Hinsdale Knisel Jeffrey T. Robideau
Mark only one box
[ ] FOR all nominees [ ] FOR, except vote withheld from the following
nominees:
[ ] WITHHELD from all nominees
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 _____________, 1999.
--------------------------------------------------
(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.
- --------------------------------------------------------------------------------
