<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
or
| | Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
-------------------------
COMMISSION FILE #0-16640
UNITED BANCORP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2606280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
205 E. CHICAGO BOULEVARD, TECUMSEH, MI 49286
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (517) 423-8373
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes |X| No | |
As of July 15, 1999, there were outstanding 1,816,984 shares of the registrant's
common stock, no par value.
Page 1
<PAGE> 2
CROSS REFERENCE TABLE
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION PAGE NO.
- ------------------------------------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements (Condensed)
(a) Consolidated Balance Sheets 3
(b) Consolidated Statements of Income 4
(c) Consolidated Statements of Changes in Shareholders' Equity 5
(d) Consolidated Statements of Cash Flows 6
(e) Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
Financial Condition 8
Liquidity 10
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
</TABLE>
Page 2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(A) CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In thousands of dollars June 30, December 31, June 30,
1999 1998 1998
---------- ----------- ---------
ASSETS
<S> <C> <C> <C>
Cash and demand balances in other banks $ 13,098 $ 12,348 $ 20,947
Federal funds sold 4,300 - 1,300
--------- --------- ---------
Total cash and cash equivalents 17,398 12,348 22,247
Securities available for sale 52,161 58,468 50,263
Securities held to maturity (fair value of
$33,755, $37,999 and $40,888, respectively) 33,402 36,919 39,947
--------- --------- ---------
Total securities 85,563 95,387 90,210
Loans held for sale 199 535 661
Portfolio loans 281,235 269,714 259,656
--------- --------- ---------
Total loans 281,434 270,249 260,317
Less: allowance for loan losses 3,043 2,799 2,627
--------- --------- ---------
Net loans 278,391 267,450 257,690
Premises and equipment, net 12,969 11,406 11,299
Accrued interest receivable and other assets 9,199 7,104 6,506
--------- --------- ---------
TOTAL ASSETS $ 403,520 $ 393,695 $ 387,952
========= ========= =========
LIABILITIES
Deposits
Noninterest bearing $ 44,353 $ 42,468 $ 46,010
Interest bearing certificates of deposit of $100,000 or more 29,089 31,108 34,387
Other interest bearing deposits 277,272 263,691 255,852
--------- --------- ---------
Total deposits 350,714 337,267 336,249
Federal funds and other short term borrowings - 3,874 658
Other borrowings 10,624 10,900 10,900
Accrued interest payable and other liabilities 2,484 2,890 3,015
--------- --------- ---------
TOTAL LIABILITIES 363,822 354,931 350,822
SHAREHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized;
1,816,984, 1,730,480 and 1,728,657 shares issued and
outstanding, respectively 23,769 19,837 19,708
Retained earnings 16,184 18,607 17,155
Accumulated other comprehensive income (loss) (255) 320 267
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 39,698 38,764 37,130
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 403,520 $ 393,695 $ 387,952
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
<PAGE> 4
(B) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
In thousands of dollars, except per share data
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans
Taxable $ 5,909 $ 5,807 $11,682 $11,692
Tax exempt 23 19 42 38
Interest on securities
Taxable 804 801 1,617 1,513
Tax exempt 435 469 901 945
Interest on federal funds sold 49 129 53 249
------- ------- ------- -------
Total interest income 7,220 7,225 14,295 14,437
INTEREST EXPENSE
Interest on certificates of deposit of $100,000 or more 370 501 763 1,065
Interest on other deposits 2,409 2,611 4,723 5,215
Interest on short term borrowings 1 8 46 20
Interest on other borrowings 166 166 331 316
------- ------- ------- -------
Total interest expense 2,946 3,286 5,863 6,616
------- ------- ------- -------
NET INTEREST INCOME 4,274 3,939 8,432 7,821
Provision for loan losses 315 274 630 549
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,959 3,665 7,802 7,272
NONINTEREST INCOME
Service charges on deposit accounts 512 430 920 805
Trust & Investment fee income 518 407 980 780
Gains on securities transactions 1 9 12 9
Loan sales and servicing 149 255 345 546
Sales of nondeposit investment products 159 138 311 269
Other income 188 134 349 282
------- ------- ------- -------
Total noninterest income 1,527 1,373 2,917 2,691
NONINTEREST EXPENSE
Salaries and employee benefits 2,050 1,770 4,037 3,490
Occupancy and equipment expense 626 593 1,226 1,198
Other expense 1,119 942 2,107 1,943
------- ------- ------- -------
Total noninterest expense 3,795 3,305 7,370 6,631
------- ------- ------- -------
INCOME BEFORE FEDERAL INCOME TAX 1,691 1,733 3,349 3,332
Federal income tax 443 453 870 861
------- ------- ------- -------
NET INCOME $ 1,248 $ 1,280 $ 2,479 $ 2,471
======= ======= ======= =======
Basic and diluted earnings per share $ 0.68 $ 0.70 $ 1.36 $ 1.36
Cash dividends declared per share of common stock 0.28 0.25 0.55 0.48
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 5
(C) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
In thousands of dollars, except per share data
<TABLE>
<CAPTION>
Accumulated
Other Compre-
Common Retained hensive
Stock Earnings Income Total
------- -------- ------------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $ 16,366 $ 18,867 $ 233 $ 35,466
Net Income 2,471 2,471
Net change in unrealized gains (losses) on securities 34 34
--------
Total comprehensive income 2,505
Cash dividends declared (877) (877)
5% stock dividend declared, 82,298 shares at $40 3,292 (3,292) -
Common stock and contingently issuable stock 50 (14) - 36
-------- -------- ------ --------
Balance, June 30, 1998 $ 19,708 $ 17,155 $ 267 $ 37,130
======== ======== ====== ========
Balance, December 31, 1998 $ 19,837 $ 18,607 $ 320 $ 38,764
Net Income 2,479 2,479
Net change in unrealized gains (losses) on securities (575) (575)
--------
Total comprehensive income 1,904
Cash dividends declared (993) (993)
5% stock dividend declared, 86,512 shares at $45 3,893 (3,893) -
Common stock and contingently issuable stock 39 (16) - 23
-------- -------- ------- --------
Balance, June 30, 1999 $ 23,769 $16,184 $ (255) $ 39,698
======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 6
<TABLE>
<CAPTION>
(D) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended
In thousands of dollars June 30
---------------------
1999 1998
-------- ---------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $ 2,479 $ 2,471
-------- --------
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization 901 755
Provision for loan losses 630 549
Change in loans held for sale 336 (521)
Change in accrued interest receivable and other assets (2,266) (156)
Change in accrued interest payable and other liabilities 75 147
-------- --------
Total adjustments (324) 774
-------- --------
Net cash from operating activities 2,155 3,245
-------- --------
Cash Flows from Investing Activities
Securities available for sale
Purchases (13,121) (14,294)
Sales -- 1,000
Maturities and calls 14,166 2,809
Principal payments 4,292 2,744
Securities held to maturity
Purchases (1,198) (11,725)
Maturities and calls 4,706 8,977
Change in portfolio loans (11,907) 5,073
Premises and equipment expenditures, net (2,185) (1,001)
-------- --------
Net cash from investing activities (5,247) (6,417)
-------- --------
Cash Flows from Financing Activities
Net change in deposits 13,447 19,414
Net change in short term borrowings (3,874) (4,284)
Proceeds from other borrowings -- 3,900
Principal payments on other borrowings (276) (3,000)
Proceeds from stock transactions 23 36
Dividends paid (1,178) (1,053)
-------- --------
Net cash from financing activities 8,142 15,013
-------- --------
Net change in cash and cash equivalents 5,050 11,841
Cash and cash equivalents at beginning of year 12,348 10,406
-------- --------
Cash and cash equivalents at end of period $ 17,398 $ 22,247
======== ========
Cash Paid During the Period for
Interest $ 5,820 $ 6,768
Income taxes 900 850
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6
<PAGE> 7
(E) NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of United Bancorp,
Inc. (the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six month period
ending June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
NOTE 2 - LOANS HELD FOR SALE
Mortgage loans serviced for others are not included in the accompanying
consolidated statements. The unpaid principal balances of mortgage loans
serviced for others was $124,578,000 and $110,667,000 at the end of June 1999
and 1998. The balance of loans serviced for others related to servicing rights
that have been capitalized was $98,705,000 and $68,682,000 at June 30, 1999 and
1998.
Mortgage servicing rights activity in thousands of dollars for the six months
ended June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Unamortized cost of mortgage servicing rights 1999 1998
--------------------------------------------- ---- ----
<S> <C> <C>
Balance at January 1 $ 646 $ 340
Amount capitalized year to date 137 231
Amount amortized year to date (69) (71)
----- -----
Balance at period end $ 714 $ 500
===== =====
</TABLE>
No valuation allowance was considered necessary for mortgage servicing rights at
period end 1999 and 1998.
NOTE 3 - COMMON STOCK AND EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of shares
outstanding plus contigently issuable shares during the year. On May 28, 1999
and May 29, 1998 the Company issued 5% stock dividends. Earnings per share,
dividends per share and weighted average shares have been restated to reflect
the stock dividend. The weighted average number of shares outstanding plus
contingently issuable shares was 1,822,483 for 1999 and 1,818,643 for 1998.
NOTE 4 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Financial Accounting Standard No.
130, "Reporting Comprehensive Income." Under this new standard, comprehensive
income is now reported for all periods and encompasses both net income and other
comprehensive income. Other comprehensive income in thousands of dollars for the
period ended June 30, follows:
Page 7
<PAGE> 8
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
Other comprehensive income 1999 1998
-------------------------- ---------- ---------
<S> <C> <C>
Unrealized gains (losses) on securities arising during period $ (860) $ 52
Reclassification for realized amount included in income (11) (1)
---------- ---------
Other comprehensive income, before tax (871) 51
Federal income tax expense (benefit) (296) 17
---------- ---------
Other comprehensive income $ (575) $ 34
========== =========
</TABLE>
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion provides information about the consolidated financial condition
and results of operations of United Bancorp, Inc. and its subsidiary, United
Bank & Trust ("Bank") for the three and six month periods ending June 30, 1999.
FINANCIAL CONDITION
SECURITIES
Investment securities balances increased during the second three months of 1999,
reflecting an increase in deposits as the result of the acquisition of the
Manchester, Michigan office of Great Lakes National Bank during April of 1999.
A number of maturities within the municipal bond portfolio during May
contributed to a decline in that segment of the portfolio from March 31.
However, The mix of the securities portfolio remained relatively unchanged
during the quarter. The chart below shows the mix of the portfolio.
<TABLE>
<CAPTION>
6/30/1999 12/31/1998 6/30/1998
--------- ---------- ---------
<S> <C> <C> <C>
U.S. Treasury and agency securities 23.9% 28.2% 22.4%
Mortgage backed agency securities 22.4% 22.3% 26.0%
Tax exempt obligations of states and political subdivisions 38.5% 37.0% 38.9%
Corporate, taxable municipal and asset backed securities 15.2% 12.5% 12.7%
-------- -------- --------
Total Securities 100.0% 100.0% 100.0%
======== ======== ========
</TABLE>
LOANS
Loan growth continued to be strong in the second quarter of 1999. During the
second three months, annualized loan growth was 9.3%, compared to 7.1% for the
first quarter of the year. Business loans and residential mortgages led the
increases, while all categories other than tax exempt loans recorded increases.
The mix of the loan portfolio continues to reflect this growth trend, although
overall the mix has remained relatively unchanged from prior periods. Over the
long term, the trend is toward an increased percentage of residential mortgage
and business loans, with slight declines in personal loans. The table below
shows total loans outstanding, in thousands of dollars at June 30, and December
31, and their percentage of the total loan portfolio. All loans are domestic and
contain no concentrations by industry or customer.
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<PAGE> 9
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998 June 30, 1998
---------------------- ------------------------ ------------------------
Portfolio loans: Balance % of total Balance % of total Balance % of total
--------- ---------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Personal $ 57,363 20.4% $ 58,797 21.8% $ 63,977 24.6%
Business/commercial mtgs 85,732 30.5% 82,521 30.5% 78,405 30.1%
Tax exempt 1,737 0.6% 1,381 0.5% 1,390 0.5%
Residential mortgage 110,375 39.2% 104,903 38.8% 102,591 39.4%
Construction 26,227 9.3% 22,647 8.4% 13,954 5.4%
--------- --------- --------- ----------- --------- ----------
Total loans $ 281,434 100.00% $ 270,249 100.00% $ 260,317 100.00%
========= ========= ========= =========== ========= ==========
</TABLE>
CREDIT QUALITY
The Company continues to maintain a high level of asset quality compared to
peers, as a result of actively monitoring delinquencies, nonperforming assets
and potential problem loans. In addition, the Bank uses an independent loan
review firm to assess the continued quality of its business loan portfolio.
Nonperforming loans are comprised of (1) loans accounted for on a nonaccrual
basis; (2) loans contractually past due 90 days or more as to interest or
principal payments (but not included in the nonaccrual loans in (1) above;) and
(3) other loans whose terms have been renegotiated to provide a reduction or
deferral of interest or principal because of a deterioration in the financial
position of the borrower (exclusive of loans in (1) or (2) above.) The aggregate
amount of nonperforming loans, in thousands of dollars, is shown in the table
below. The Company's classification of nonperforming loans are generally
consistent with loans identified as impaired.
<TABLE>
<CAPTION>
6/30/1999 12/31/1998 6/30/1998
--------- ---------- ---------
<S> <C> <C> <C>
Nonaccrual loans $ 1,015 $ 821 $ 295
Loans past due 90 days or more 295 194 376
Troubled debt restructurings 135 136 137
--------- ---------- ---------
Total nonperforming loans $ 1,445 $ 1,151 $ 808
Other real estate 335 335 335
--------- ---------- ---------
Total nonperforming assets $ 1,780 $ 1,486 $ 1,143
Percent of total loans 0.63% 0.53% 0.44%
</TABLE>
Balances in nonperforming loans were up from March 31, 1999 and December 31,
1998. Loans past due ninety days or more and nonaccrual loans both increased
during the period. Nonperforming loans as a percent of total loans remain well
below industry standards, although higher than traditionally experienced by the
Company. The amount listed for other real estate relates primarily to property
that has been leased to a third party with an option to purchase, and no loss is
anticipated on that property.
As a result of continued loan growth, the Company has maintained its provision
for loan losses at the same level as in the first quarter of 1999, which
reflects an increase over the same period in 1998. The allowance for loan losses
is maintained at a level believed adequate by Management to absorb potential
losses in the loan portfolio. An analysis of the allowance for loan losses, in
thousands of dollars, for the six months ended June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Balance at beginning of period $ 2,799 $ 2,467
Loans charged off (486) (512)
Recoveries credited to allowance 100 123
Provision charged to operations 630 549
------- -------
Balance at end of period $ 3,043 $ 2,627
======= =======
</TABLE>
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<PAGE> 10
DEPOSITS
Deposit totals continued to grow during the quarter, in part as a result of the
acquisition of the deposits of the Manchester office of Great Lakes Bank. During
the quarter, the Bank also completed a major restructuring of its transaction
account products, resulting in the loss of a number of accounts, as was
anticipated. However, the average balances of accounts increased, and
improvement in deposit account service charges is anticipated in the second half
of the year as a result of this restructuring. Management anticipates that
deposit growth during 1999 will be steady, with continued growth from new and
existing markets.
LIQUIDITY
The Bank maintained an average funds sold position for the first half of 1999,
although generally the Bank moves in and out of the fed funds market as
liquidity needs vary. Deposit growth moving at different times than loan growth
will cause continued variation in the short term funds position of the Bank. The
Company has a number of additional liquidity sources should the need arise, and
Management has no concerns for the liquidity position of the Company.
CAPITAL RESOURCES
The capital ratios of the Company exceed the regulatory guidelines for well
capitalized institutions. The following table shows the Company's capital ratios
and ratio calculations at June 30, 1999 and 1998 and December 31, 1998. Dollars
are shown in thousands.
<TABLE>
<CAPTION>
Regulatory Guidelines United Bancorp, Inc.
--------------------- --------------------
Adequate Well 6/30/1999 12/31/1998 6/30/1998
-------- ---- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Tier 1 capital to average assets 4% 5% 8.9% 9.4% 9.1%
Tier 1 risk adjusted capital ratio 4% 6% 13.5% 14.0% 13.7%
Total risk adjusted capital ratio 8% 10% 14.6% 15.0% 14.7%
Total shareholders' equity $39,698 $ 38,764 $ 37,130
Intangible assets (4,503) (2,230) (2,359)
Unrealized (gain) loss on securities available for sale 255 (320) (267)
------- -------- --------
Tier 1 capital 35,450 36,214 34,504
Qualifying loan loss reserves 3,043 2,799 2,627
------- -------- --------
Tier 2 capital $38,493 $ 39,013 $ 37,131
======= ======== ========
</TABLE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest margin remained relatively unchanged for the second quarter
compared to the first quarter of 1999, and was improved from the same period in
1998. At the same time, the company's spread continued to show improvement over
prior periods. Continued loan growth has provided the bulk of this improvement
over 1998 levels.
The table below shows the year to date daily average Consolidated Balance Sheet,
interest earned (on a taxable equivalent basis) or paid, and the annualized
effective rate or yield, for the periods ended June 30, 1999 and 1998.
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YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
dollars in thousands 1999 1998
- -------------------- --------------------------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/
Balance (b) Rate Balance (b) Rate
------- --- ---- ------- --- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets (a)
Federal funds sold $ 2,295 $ 53 4.62% $ 9,153 $ 249 5.44%
Taxable securities 52,754 1,617 6.13% 46,989 1,513 6.44%
Tax exempt securities (b) 34,385 1,311 7.62% 35,222 1,368 7.77%
Taxable loans 273,548 11,682 8.54% 260,638 11,692 8.97%
Tax exempt loans (b) 1,613 61 7.52% 1,441 55 7.63%
--------- ------- --------- -------
Total int. earning assets (b) 364,595 14,724 8.08% 353,443 14,877 8.42%
Less allowance for loan losses (2,892) (2,531)
Other assets 34,854 29,273
--------- ---------
TOTAL ASSETS $ 396,557 $ 380,185
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 53,821 $ 478 1.77% $ 41,862 $ 324 1.55%
Savings deposits 72,529 793 2.19% 73,337 1,051 2.87%
CDs $100,000 and over 29,790 763 5.12% 36,970 1,065 5.76%
Other interest bearing deposits 143,874 3,453 4.80% 141,842 3,841 5.42%
--------- ------- --------- -------
Total int. bearing deposits 300,014 5,486 3.66% 294,011 6,281 4.27%
Short term borrowings 1,861 46 4.99% 726 20 5.52%
Other borrowings 10,875 331 6.08% 10,460 316 6.03%
--------- ------- --------- -------
Total int. bearing liabilities 312,750 5,863 3.75% 305,197 6,616 4.34%
Noninterest bearing deposits 41,699 35,371
Other liabilities 2,617 3,211
Shareholders' equity 39,491 36,406
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 396,557 $ 380,185
========= =========
Net interest income (b) $ 8,860 $ 8,261
======= =======
Net spread (b) 4.33% 4.08%
==== =====
Net yield on interest earning assets (b) 4.86% 4.67%
==== =====
Ratio of interest earning assets to
interest bearing liabilities 1.17 1.16
========= =========
</TABLE>
(a) Non-accrual loans and overdrafts are included in the average balances of
loans.
(b) Fully tax-equivalent basis; 34% tax rate.
The table below shows the effect of volume and rate changes on net interest
income for the six months ended June 30, on a taxable equivalent basis, in
thousands of dollars.
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
--------------------- ---------------------
Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a)
------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Federal funds sold $ (163) $ (33) $ (196) $ 57 $ 5 $ 62
Taxable securities 179 (76) 103 (88) 9 (79)
Tax exempt securities (32) (25) (57) 180 (33) 147
Taxable loans 565 (575) (10) 819 (11) 808
Tax exempt loans 7 (1) 6 13 (1) 12
------- ------- -------- ------ ----- -----
Total interest income $ 556 $ (710) $ (154) $ 981 $ (31) $ 950
======= ======= ======== ====== ===== =====
</TABLE>
Page 11
<PAGE> 12
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
-------------------------------- -----------------------------------
Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a)
-------------------------------- -----------------------------------
Volume Rate Net Volume Rate Net
-------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest paid on:
NOW accounts $ 101 $ 53 $ 154 $ 25 $ (9) $ 16
Savings deposits (11) (247) (258) 56 32 88
CDs $100,000 and over (192) (110) (302) (139) (11) (150)
Other interest bearing deposits 54 (442) (388) 505 (120) 385
Short term borrowings 28 (2) 26 (38) 2 (36)
Other borrowings 12 3 15 (76) 5 (71)
------ ------ ------ ------ ----- -----
Total interest expense $ (8) $ (745) $ (753) $ 333 $(101) $ 232
====== ====== ====== ====== ===== =====
Net change in net interest
income $ 564 $ 35 $ 599 $ 648 $ 70 $ 718
====== ====== ====== ====== ===== =====
</TABLE>
(a) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
NONINTEREST INCOME
Noninterest income continues to improve over prior periods. All categories of
noninterest income increased from the same period in 1998, while all categories
other than income from loan sales and servicing improved from the prior quarter.
In addition, earnings from the Trust & Investment group continue to increase at
significant rates, reflecting the strong growth experienced by the department.
Overall, on an annualized basis, total noninterest income is up 9.9% over the
first quarter, and is up 8.4% year to date over same period of 1998.
NONINTEREST EXPENSES
Noninterest expense also continued to increase over prior periods, reflecting
continued growth and expansion of the Bank. Additions to Bank facilities and
staff contribute immediately to expenses, but will contribute to earnings in
future periods. Total noninterest expense for the year, excluding provision for
loan losses, is 11.1% over the same period for 1998, and is 6.2% higher than
first quarter levels. Substantially all of this increase relates to growth and
expansion of the Bank.
FEDERAL INCOME TAX
There has been no significant change in the income tax position of the Company
during the second quarter of 1999.
NET INCOME
Consolidated net income during the first half of the year was substantially
unchanged from the same period in 1998, and income for the second quarter was
behind that of the second quarter of 1998. Likewise, second quarter income for
1999 was substantially unchanged from net earnings of the first quarter, as a
result of the investments made in staff and facilities to generate future growth
and income. Management anticipates that benefits of this expansion will begin to
be evident in the third quarter of the year, and will exceed 1998 levels for the
balance of the year.
YEAR 2000 READINESS
Federal banking regulators require specific actions of every financial
institution to become Year 2000 ready. These guidelines require a bank to:
- - Ensure the involvement of the board of directors and management in the
institution's Year 2000 effort
- - Adopt a written project plan
- - Renovate its mission-critical systems
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<PAGE> 13
- - Complete tests of the renovated mission-critial systems by specific
deadlines
- - Plan for contingencies
- - Manage customer risk
United has an active Year 2000 committee that reports regularly on its progress
to the Board of Directors. The Board has adopted a written plan, and continues
to assess its risk. Management has determined which systems are
mission-critical, and those which are not. Based on these determinations, a plan
of action has been implemented. Key clients have been surveyed, and plans are
underway to assess and manage client risk.
Through the second quarter of 1999, the Company's Year 2000 task force has
continued to monitor the readiness of its major data processing hardware and
software providers, other critical vendor suppliers, and its large commercial
customers.
United uses major external third party vendors to the banking industry for its
mainframe and all personal computer hardware and software. These well-known,
national third party providers for the mission critical systems have provided
written assurances that they are Year 2000 ready and their systems have been
fully tested. The Company does not use any custom programmed software.
In 1998, United determined that its Unisys mainframe computer system, while Year
2000 compliant, did not have sufficient capacity for future growth. In the
fourth quarter of 1998, the Company installed a new Unisys mainframe to replace
its previous system. This system provides a substantial increase in efficiency
and capacity of operations, and allowed complete testing of its banking software
provided by Information Technology, Inc. during the installation of the
hardware, without any disruption to daily processing and customer service. All
testing was completed by June 30, 1999 within the FFIEC published guidelines and
no disruption in service due to a Year 2000 issue is anticipated.
Other systems are being tested, and all noncompliant systems will be replaced or
abandoned. Some non-critical systems have been found to be noncompliant, due to
their age, and will be replaced. The readiness of the software used for mission
critical systems is included in the cost of our normal maintenance of those
systems and we do not expect any additional charges. Some minor hardware and
software replacements will be needed, and expenditures are expected to be less
than $50,000. The staffing needed to complete the testing and implementation
plan has been identified and is available. Other new software installations for
the balance of the year will be restricted to assure that we can complete our
Year 2000 plan.
Contingency planning has begun for mission critical tasks and will be
continually monitored and updated to ensure uninterrupted customer services and
backroom processing. United, however, cannot necessarily ensure uninterruption
with certain vendors such as utility companies and phone companies, but those
vendor plans are being monitored as an ongoing part of the assessment.
Currently, all critical dates mandated by the regulators have been met by the
data processing vendor and United is also on schedule for its review of any
in-house critical systems, software, and equipment.
During the second quarter of 1999, the Bank installed an auxilliary power
generator at its main office, and began the process of installation of a
generator at its Operations Center. The generators are capable of powering the
entire building where installed, and will assure continued operation of the
Bank's data center and operations areas in the event of a power failure. While
the Bank does not
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<PAGE> 14
expect systemic power failures, the generators also provide protection from
power failure from causes other than Year 2000 issues, including storms.
The Company has evaluated its anticipated liquidity needs relating to potential
cash demands, and has established a liquidity contingency policy. Management
believes that sufficient liquidity sources are available to provide the Bank
with adequate funding for any special cash needs that might develop.
Overall, the cost of evaluating the Company's Year 2000 readiness and assuring
its compliance will not have a measurable impact on the financial condition of
the Company. United regularly provides for upgrades and replacement of its
software and hardware, and the Year 2000 situation will not significantly impact
those expenditures.
Major loan and deposit customers have been surveyed to evaluate the level of
Year 2000 planning and readiness and to assess any potential risk. Currently, it
is unknown what impact a high risk client's inability to pay its bank
obligations will have on the adequacy of United's allowance for possible loan
losses or its financial position.
United updates the Board of Directors and appropriate banking regulators
regarding its Year 2000 readiness on a quarterly basis. No material affect on
United's financial performance is anticipated, due to the systematic approach
the Company has adopted to prepare for the Year 2000 date impact.
FORWARD-LOOKING STATEMENTS
Statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations relate to United's expectations as to future
events relating to such items as the adequacy of the allowance for loan losses,
changes in economic conditions including interest rates, management's ability to
manage interest rate, liquidity and credit risks, impact on operations and
credit losses as it relates to the Year 2000 issue. Such statements are not
statements of historical fact and are forward-looking statements. United
believes the assumptions upon which these statements are founded are reasonable,
based on management's knowledge of its business and operations; however, there
is no assurance the assumptions will prove to have been correct. Furthermore,
United undertakes no obligation to update, amend or clarify forward-looking
statements, whether as a result of new information, future events, or otherwise.
ITEM 3- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FUNDS MANAGEMENT AND INTEREST RATE RISK
The composition of the Company's balance sheet consists of investments in
interest earning assets (loans and investment securities) that are funded by
interest bearing liabilities (deposits and borrowings). These financial
instruments have varying levels of sensitivity to changes in market interest
rates resulting in market risk. Bank policies place strong emphasis on
stabilizing net interest margin, with the goal of providing a sustained level of
satisfactory earnings. The Funds Management, Investment and Loan policies
provide direction for the flow of funds necessary to supply the needs of
depositors and borrowers. Management of interest sensitive assets and
liabilities is also necessary to reduce interest rate risk during times of
fluctuating interest rates.
A number of measures are used to monitor and manage interest rate risk,
including interest sensitivity (gap) and income simulation analyses. A gap model
is the primary tool used to assess this risk with
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supplemental information supplied by an income simulation model. The simulation
model is used to estimate the effect that specific interest rate changes would
have on 12 months of pretax net interest income assuming an immediate and
sustained up or down parallel change in interest rates of 200 basis points. Key
assumptions in the models include prepayment speeds on mortgage related assets;
cash flows and maturities of financial instruments held for purposes other than
trading; changes in market conditions, loan volumes and pricing; and
management's determination of core deposit sensitivity. These assumptions are
inherently uncertain and, as a result, the models cannot precisely estimate net
interest income or precisely predict the impact of higher or lower interest
rates on net interest income. Actual results will differ from simulated results
due to timing, magnitude, and frequency of interest rate changes and changes in
market conditions.
Based on the results of the simulation model as of June 30, 1999, the Company
would expect a maximum potential reduction in net interest margin of less than
5% if market rates increased under an immediate and sustained parallel shift of
200 basis points. The Bank's interest sensitivity position remained virtually
unchanged from the previouis quarter.
The Company's exposure to market risk is reviewed on a regular basis by the
Funds Management Committee. The Committee's policy objective is to manage the
Company's assets and liabilities to provide an optimum and consistent level of
earnings within the framework of acceptable risk standards.
The Funds Management Committee of the Bank is also responsible for evaluating
and anticipating various risks other than interest rate risk. Those risks
include prepayment risk, credit risk and liquidity risk. The Committee is made
up of senior members of management, and continually monitors the makeup of
interest sensitive assets and liabilities to assure appropriate liquidity,
maintain interest margins and to protect earnings in the face of changing
interest rates and other economic factors.
The Funds Management policy of the Bank provides for a level of interest
sensitivity which, Management believes, allows the Bank to take advantage of
opportunities within the market relating to liquidity and interest rate risk,
allowing flexibility without subjecting the Bank to undue exposure to risk. In
addition, other measures are used to evaluate and project the anticipated
results of Management's decisions.
PART II
OTHER INFORMATION
ITEM 1- LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings. The Company's
sole subsidiary, United Bank & Trust, is involved in ordinary routine litigation
incident to its business; however, no such proceedings are expected to result in
any material adverse effect on the operations or earnings of the Bank. Neither
the Bank nor the Company is involved in any proceedings to which any director,
principal officer, affiliate thereof, or person who owns of record or
beneficially five percent (5%) or more of the outstanding stock of the Company
or the Bank, or any associate of the foregoing, is a party or has a material
interest adverse to the Company or the Bank.
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ITEM 2- CHANGES IN SECURITIES
No changes in the securities of the Company occurred during the quarter ended
June 30, 1999.
ITEM 3- DEFAULTS UPON SENIOR SECURITIES
There have been no defaults upon senior securities relevant to the requirements
of this section during the three months ended June 30, 1999.
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on April 20, 1999. At
that meeting, the following matters were submitted to a vote of the
shareholders. There were 1,730,251 voting shares outstanding on April 20, 1999.
The following directors were elected to three year terms:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C> <C>
John H. Foss Re-elected 1,170,893 4,418 -
David S. Hickman Re-elected 1,175,272 39 -
Ann Hinsdale Knisel Re-elected 1,157,887 17,424 -
John R. Roberstad Re-elected 1,170,546 4,765 -
Jeffrey T. Robideau Re-elected 1,174,272 1,039 -
Scott F. Hill Newly elected 1,158,044 17,267 -
</TABLE>
Directors Berlin, Bush, Butcko, Farver, Gurdijan, Kuhman, Lawson, Martin,
Maxwell, Mohr, Niethammer, and Wanke hold terms which continue after the
meeting. Director Whelan has retired from the Board and did not stand for
re-election.
Crowe, Chizek and Company LLP of Grand Rapids, Michigan were ratified as
independent auditors for the Company and its subsidiary for the year ending
December 31, 1999. The vote was as follows:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
Ratification of auditors 1,154,799 130 20,382
</TABLE>
No other matters were considered by shareholders at that meeting.
ITEM 5- OTHER INFORMATION
None.
ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits (numbered as in Item 601 of Regulation S-K): 27.
Financial Data Schedule.
(b) The Company has filed no reports on Form 8-K during the quarter ended June
30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
United Bancorp, Inc.
July 30, 1999
/S/ Dale L. Chadderdon
--------------------------------------------------------
Dale L. Chadderdon
Senior Vice President, Secretary & Treasurer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- --------------------------------------------------------------------------------
27 Financial Data Schedule
Page 18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 13,098
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52,161
<INVESTMENTS-CARRYING> 33,402
<INVESTMENTS-MARKET> 33,755
<LOANS> 281,434
<ALLOWANCE> 3,043
<TOTAL-ASSETS> 403,520
<DEPOSITS> 350,714
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,484
<LONG-TERM> 10,624
0
0
<COMMON> 23,769
<OTHER-SE> 15,929
<TOTAL-LIABILITIES-AND-EQUITY> 403,520
<INTEREST-LOAN> 11,724
<INTEREST-INVEST> 2,518
<INTEREST-OTHER> 53
<INTEREST-TOTAL> 14,295
<INTEREST-DEPOSIT> 5,486
<INTEREST-EXPENSE> 5,863
<INTEREST-INCOME-NET> 8,432
<LOAN-LOSSES> 630
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 7,370
<INCOME-PRETAX> 3,349
<INCOME-PRE-EXTRAORDINARY> 3,349
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,479
<EPS-BASIC> 1.36
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 4.86
<LOANS-NON> 1,015
<LOANS-PAST> 295
<LOANS-TROUBLED> 135
<LOANS-PROBLEM> 226
<ALLOWANCE-OPEN> 2,799
<CHARGE-OFFS> 486
<RECOVERIES> 100
<ALLOWANCE-CLOSE> 3,043
<ALLOWANCE-DOMESTIC> 1,821
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,222
</TABLE>
