<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, 2000
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, 2000, there were outstanding 1,909,713 shares of the registrant's
common stock, no par value.
Page 1
<PAGE> 2
CROSS REFERENCE TABLE
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION PAGE NO.
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Condensed) 3
(a) Consolidated Balance Sheets 3
(b) Consolidated Statements of Income 4
(c) Condensed Consolidated Statements of Changes in Shareholders' Equity 5
(d) Consolidated Statements of Cash Flows 6
(e) Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 8
Financial Condition 8
Liquidity 11
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
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 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
Exhibit Index 19
</TABLE>
Page 2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS (Condensed)
(A) CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
(unaudited) (unaudited)
In thousands of dollars June 30, December 31, June 30,
2000 1999 1999
--------- ------------ ---------
<S> <C> <C> <C>
ASSETS
Total cash and cash equivalents $ 19,406 $ 17,469 $ 17,398
Securities available for sale 74,478 81,923 52,161
Securities held to maturity; fair value of $33,755 at June 30, 1999 -- -- 33,402
--------- --------- ---------
Total securities 74,478 81,923 85,563
Loans held for sale 419 154 199
Portfolio loans 329,100 308,113 281,235
--------- --------- ---------
Total loans 329,519 308,267 281,434
Less allowance for loan losses 3,828 3,300 3,043
--------- --------- ---------
Net loans 325,691 304,967 278,391
Premises and equipment, net 13,118 13,116 12,969
Accrued interest receivable and other assets 10,391 10,046 9,199
--------- --------- ---------
TOTAL ASSETS $ 443,084 $ 427,521 $ 403,520
========= ========= =========
LIABILITIES
Deposits
Noninterest bearing $ 52,262 $ 46,829 $ 44,353
Interest bearing certificates of deposit of $100,000 or more 36,318 32,445 29,089
Other interest bearing deposits 280,654 281,569 277,272
--------- --------- ---------
Total deposits 369,234 360,843 350,714
Federal funds purchased and other short term borrowings 16,200 19,300 --
Other borrowings 12,328 3,624 10,624
Accrued interest payable and other liabilities 2,743 2,790 2,484
--------- --------- ---------
TOTAL LIABILITIES 400,505 386,557 363,822
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value;
5,000,000 shares authorized; 1,909,713, 1,819,193 and
1,816,984 shares issued and outstanding, respectively 28,207 23,919 23,769
Retained earnings 14,949 17,544 16,184
Accumulated other comprehensive income (loss), net of tax (577) (499) (255)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 42,579 40,964 39,698
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 443,084 $ 427,521 $ 403,520
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 4
(B) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
In thousands of dollars, except per share data June 30, June 30,
------------------------------------------------
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans
Taxable $7,209 $5,909 $13,939 $11,682
Tax exempt 29 23 56 42
Interest on securities
Taxable 706 804 1,445 1,617
Tax exempt 393 435 817 901
Interest on federal funds sold -- 49 -- 53
------ ------ ------- -------
Total interest income 8,337 7,220 16,257 14,295
INTEREST EXPENSE
Interest on certificates of deposit of $100,000 or more 524 370 983 763
Interest on other deposits 2,885 2,409 5,628 4,723
Interest on short term borrowings 291 1 574 46
Interest on other borrowings 200 166 287 331
------ ------ ------- -------
Total interest expense 3,900 2,946 7,472 5,863
------ ------ ------- -------
NET INTEREST INCOME 4,437 4,274 8,785 8,432
Provision for loan losses 354 315 708 630
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,083 3,959 8,077 7,802
NONINTEREST INCOME
Service charges on deposit accounts 578 512 1,124 920
Trust & Investment fee income 708 518 1,352 980
Gains on securities transactions 4 1 4 12
Loan sales and servicing 85 149 162 345
Sales of nondeposit investment products 175 159 347 311
Gain on sale of credit card loans 308 -- 308 --
Other income 237 188 471 349
------ ------ ------- -------
Total noninterest income 2,095 1,527 3,768 2,917
NONINTEREST EXPENSE
Salaries and employee benefits 2,164 2,050 4,316 4,037
Occupancy and equipment expense, net 707 626 1,427 1,226
Other expense 1,107 1,119 2,219 2,107
------ ------ ------- -------
Total noninterest expense 3,978 3,795 7,962 7,370
------ ------ ------- -------
INCOME BEFORE FEDERAL INCOME TAX 2,200 1,691 3,883 3,349
Federal income tax 632 443 1,080 870
------ ------ ------- -------
NET INCOME $1,568 $1,248 $ 2,803 $ 2,479
====== ====== ======= =======
Basic earnings per share $ 0.82 $ 0.65 $ 1.46 $ 1.30
Diluted earnings per share 0.82 0.65 1.46 1.30
Cash dividends declared per share of common stock 0.30 0.27 0.58 0.52
</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)
<TABLE>
<CAPTION>
In thousands of dollars, except per share data
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
<S> <C> <C> <C> <C>
TOTAL SHAREHOLDERS' EQUITY 2000 1999 2000 1999
Balance at beginning of period $ 41,482 $ 39,408 $ 40,964 $ 38,764
Net Income 1,568 1,248 2,803 2,479
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale, net 118 (453) (78) (575)
--------- --------- --------- ---------
Total comprehensive income 1,686 795 2,725 1,904
Cash dividends declared (572) (509) (1,118) (993)
5% stock dividend declared - - - -
Common stock and contingently issuable stock (17) 4 8 23
--------- --------- --------- ---------
Balance at end of period $ 42,579 $ 39,698 $ 42,579 $ 39,698
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
<PAGE> 6
(D) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
In thousands of dollars June 30,
----------------------
2000 1999
------- -------
<S> <C> <C>
Cash Flows from Operating Activities
------------------------------------
Net Income $ 2,803 $ 2,479
------- -------
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
-------------------------------------------------------------------------
Depreciation and amortization 1,030 901
Provision for loan losses 708 630
Gain on sale of credit card loans (308) -
Change in loans held for sale (265) 336
Change in accrued interest receivable and other assets 29 167
Change in accrued interest payable and other liabilities 108 75
------- -------
Total adjustments 1,302 2,109
------- -------
Net cash from operating activities 4,105 4,588
------- -------
Cash Flows from Investing Activities
------------------------------------
Securities available for sale
Purchases (2,853) (13,121)
Maturities and calls 7,964 14,166
Principal payments 2,114 4,292
Securities held to maturity
Purchases - (1,198)
Maturities and calls - 4,706
Proceeds from sale of credit card loans 3,745 -
Net change in portfolio loans (25,148) (11,907)
Premises and equipment expenditures, net (720) (2,185)
Cash received for net liabilities assumed in acquisition of branch - 17,590
------- -------
Net cash from investing activities (14,898) 12,343
------- -------
Cash Flows from Financing Activities
------------------------------------
Net change in deposits 8,391 (6,576)
Net change in short term borrowings (3,100) (3,874)
Proceeds from other borrowings 9,000 -
Principal payments on other borrowings (296) (276)
Proceeds from common stock transactions 8 23
Dividends paid (1,273) (1,178)
------- -------
Net cash from financing activities 12,730 (11,881)
------- -------
Net change in cash and cash equivalents 1,937 5,050
Cash and cash equivalents at beginning of year 17,469 12,348
------- -------
Cash and cash equivalents at end of period $19,406 $17,398
======= =======
Supplement Disclosure of Cash Flow Information:
-----------------------------------------------
Interest paid $ 7,439 $ 5,820
Income tax paid 1,175 900
Loans transferred to other real estate 544 -
Increase in deposits from branch acquisition - 20,023
Goodwill resulting from branch acquisition - 2,433
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6
<PAGE> 7
(E) NOTES TO CONSOLIDATED 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, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. 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, 1999.
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 $121,337,000 and $124,578,000 at the end of June 2000
and 1999. The balance of loans serviced for others related to servicing rights
that have been capitalized was $100,571,000 and $98,705,000 at June 30, 2000 and
1999.
Mortgage servicing rights activity in thousands of dollars for the six months
ended June 30, 2000 and 1999 follows:
<TABLE>
<CAPTION>
Unamortized cost of mortgage servicing rights 2000 1999
--------------------------------------------- ------ ------
<S> <C> <C>
Balance at January 1 $ 728 $ 646
Amount capitalized year to date 28 137
Amount amortized year to date (41) (69)
----- -----
Balance at period end $ 715 $ 714
===== =====
</TABLE>
No valuation allowance was considered necessary for mortgage servicing rights at
period end 2000 and 1999.
NOTE 3 - COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share are based upon the weighted average number of shares
outstanding plus contingently issuable shares during the year. Diluted earnings
per share further assumes the dilutive effect of additional common shares
issuable under stock options. The Company issued 5% stock dividends in May 2000
and 1999. Earnings per share, dividends per share and weighted average shares
have been restated to reflect these stock dividends.
Under the Company's 1999 stock option plan, 30,550 options were granted on May
10, 2000 at the market price of $48.00 per share.
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<PAGE> 8
A reconciliation of basic and diluted earnings per share follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
In thousands of dollars, except per share data June 30, June 30,
-------------------------------------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 1,568 $ 1,248 $ 2,803 $ 2,479
========== ========== ========== ==========
Basic earning per share:
Weighted average common shares outstanding 1,909,746 1,907,835 1,909,916 1,907,769
Weighted average contingently issuable shares 7,995 5,976 7,713 5,838
---------- ---------- ---------- ----------
1,917,741 1,913,811 1,917,629 1,913,607
========== ========== ========== ==========
Basic earnings per share $ 0.82 $ 0.65 $ 1.46 $ 1.30
========== ========== ========== ==========
Diluted earnings per share:
Weighted average common shares outstanding
from basic earnings per share 1,917,741 1,913,811 1,917,629 1,913,607
Dilutive effect of stock options 538 -- 269 --
---------- ---------- ---------- ----------
1,918,279 1,913,811 1,917,898 1,913,607
========== ========== ========== ==========
Diluted earnings per share $ 0.82 $ 0.65 $ 1.46 $ 1.30
========== ========== ========== ==========
</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, 2000
and 1999.
FINANCIAL CONDITION
SECURITIES
Balances in the Company's investment securities portfolio continued to decline
during the second quarter of 2000, primarily as a result of loan growth in
excess of deposit growth. Principal repayments on mortgage backed securities, as
well as maturities within the various portfolios, contributed to the decrease in
balances, as most maturities were not replaced during the quarter. In spite of
this decline, the mix of the securities portfolio remains relatively unchanged
from period to period over the long term. The chart below shows the mix of the
portfolio.
<TABLE>
<CAPTION>
6/30/2000 12/31/1999 6/30/1999
----------- ------------ -----------
<S> <C> <C> <C>
U.S. Treasury and agency securities 24.3% 24.7% 23.9%
Mortgage backed agency securities 18.2% 19.3% 22.4%
Obligations of states and political subdivisions 46.7% 46.2% 38.5%
Corporate, asset backed, and other securities 10.8% 9.8% 15.2%
---------- ----------- ----------
Total Securities 100.0% 100.0% 100.0%
========== =========== ==========
</TABLE>
LOANS
Loan growth during the second quarter of 2000 remained consistent with that
achieved in the first quarter of the year, and exceeded the levels achieved in
1999. During the second quarter of 2000, annualized loan growth was 13.6%,
compared to six month annualized growth of 13.8%. Business loans and residential
Page 8
<PAGE> 9
mortgages led the year to date increases, while other personal loan categories
declined. This decline was due to the sale of the Bank's credit card portfolio
at the end of the second quarter. Information regarding the sale of the credit
card portfolio is detailed in the noninterest income discussion below.
The mix of the loan portfolio 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.
Sale of the Bank's credit card portfolio at the end of June resulted in a
decline in personal loans as of June 30.
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 client.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999 June 30, 1999
----------------------- ------------------------ ------------------------
Balance % of total Balance % of total Balance % of total
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Portfolio loans:
Personal $ 56,068 17.0% $ 59,045 19.2% $ 57,363 20.4%
Business loans and
commercial mortgages 110,958 33.7% 99,832 32.4% 85,732 30.5%
Tax exempt 2,306 0.7% 1,710 0.6% 1,737 0.6%
Residential mortgage 126,245 38.3% 114,150 37.0% 110,375 39.2%
Construction 33,942 10.3% 33,530 10.88% 26,227 9.3%
---------- --------- --------- --------- --------- ---------
Total loans $ 329,519 100.0% $ 308,267 100.00% $ 281,434 100.0%
========== ========= ========= ========= ========= =========
</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 chart below shows the aggregate amount of the Company's nonperforming assets
by type, in thousands of dollars, as of June 30, 2000 and 1999, and December 31,
1999. The Company's classification of nonperforming loans is generally
consistent with loans identified as impaired.
<TABLE>
<CAPTION>
6/30/2000 12/31/1999 6/30/1999
--------- ---------- ---------
<S> <C> <C> <C>
Nonaccrual loans $ 864 $ 1,305 $ 1,015
Loans past due 90 days or more 564 174 295
Troubled debt restructurings 133 134 135
--------- ---------- ---------
Total nonperforming loans 1,561 1,613 1,445
Other real estate 544 347 335
--------- ---------- ---------
Total nonperforming assets $ 2,105 $ 1,960 $ 1,780
========= ========== =========
Percent of nonperforming loans to total loans 0.47% 0.52% 0.51%
Percent of nonperforming assets to total assets 0.48% 0.46% 0.44%
</TABLE>
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<PAGE> 10
Nonperforming assets increased from December 31, 1999, while nonperforming loans
remained virtually flat. This is a result of the addition of two properties to
other real estate during the quarter. All other categories of nonperforming
assets remained virtually unchanged from December of 1999, but remain slightly
higher than June 1999 levels. The Company's ratios of nonperforming assets are
in line with other banks of similar size and makeup.
The Company's allowance for loan losses remains at a level consistent with its
anticipated potential losses. The provision provides for currently anticipated
losses inherent in the current portfolio. Charge-offs for the year have been
lower than during previous periods, resulting in an increase in the allowance.
The Company retains some liability for a limited time on the portfolio of credit
card loans that were sold during the second quarter of 2000. As a result,
$100,000 was transferred from the Company's Allowance for Loan Losses to a
contingent liability account. That transfer is reflected in the chart below.
An analysis of the allowance for loan losses, in thousands of dollars, for the
six months ended June 30, 2000 and 1999 follows:
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Balance at January 1: $ 3,300 $ 2,799
Loans charged off (185) (486)
Recoveries credited to allowance 105 100
Provision charged to operations 708 630
Adjustment for credit cards sold (100) -
------- -------
Balance at June 30: $ 3,828 $ 3,043
======= =======
</TABLE>
The Company has increased its provision for loan losses over the same period in
1999 as a result of an increase in loan volume. This increase in the provision,
which reflects increased anticipated losses in the loan portfolio, is also
reflected in changes made during the first quarter of 2000 in the method of
allocation of the allowance for loan losses. The following table presents the
portion of the allowance for loan losses applicable to each loan category in
thousands of dollars, as of June 30, 2000 and 1999, and December 31, 1999.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
2000 1999 1999
---- ----- ----
<S> <C> <C> <C>
Business and commercial mortgage $ 2,193 $ 1,130 $ 1,184
Tax exempt - - -
Residential mortgage 11 22 23
Personal 610 646 613
Construction - - -
Unallocated 1,014 1,502 1,223
------------------------------------
Total $ 3,828 $ 3,300 $ 3,043
====================================
</TABLE>
The allocation method used prior to the first quarter of 2000 was based on
account-specific allocations for identified credits and the four-year historical
loss average, in order to determine allocations by portfolio. Effective with the
first quarter of 2000, the allocation method was modified to incorporate recent
trends in the rate of net charge-offs and delinquency in the business and
commercial mortgage portfolio, resulting in an increased percentage of the
allowance to that segment of the loan portfolio.
Construction loans are short-term and are converted to residential or commercial
mortgages on the books of the Company. These loans do not typically result in a
loss during the construction phase. Therefore, any allocation for construction
loans is applied to the category of loan where the final loan resides, rather
than to construction loans.
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<PAGE> 11
DEPOSITS
Total deposits were flat for the second quarter, following an increase during
the first quarter. Year to date annualized deposit growth is 4.65%, compared to
annualized growth of 8.99% for the first six months of 1999. However, deposit
growth in the second quarter of 1999 included the acquisition of more than $20
million of deposits as a result of a branch purchase. Management anticipates
that deposit growth during 2000 will continue to be steady, with continued
expansion in new and existing markets.
LIQUIDITY
The Bank maintained an average federal funds borrowed position for the second
quarter of 2000 and year to date, although generally the Bank moves in and out
of the fed funds market as liquidity needs vary. Borrowings increased from
December 31, 1999 and March 31, 2000, and Management anticipates that deposit
and 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, 2000 and 1999, and December 31, 1999. Dollars
are shown in thousands.
<TABLE>
<CAPTION>
Regulatory Guidelines United Bancorp, Inc.
--------------------- --------------------
Adequate Well 6/30/2000 12/31/1999 6/30/1999
-------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Tier 1 capital to average assets 4% 5% 9.0% 9.2% 8.9%
Tier 1 capital to risk weighted assets 4% 6% 13.0% 13.0% 13.5%
Total capital to risk weighted assets 8% 10% 14.2% 14.2% 14.6%
</TABLE>
<TABLE>
<S> <C> <C> <C>
Total shareholders' equity $ 42,579 $ 40,964 $ 39,698
Intangible assets (4,092) (4,296) (4,503)
Unrealized (gain) loss on securities available for sale 577 499 255
-------- --------
Tier 1 capital 39,064 37,167 35,450
Qualifying loan loss reserves 3,828 3,300 3,043
-------- -------- --------
Tier 2 capital $ 42,892 $ 40,467 $ 38,493
======== ======== ========
</TABLE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Both yields on earning assets and cost of funds increased from the same period
of 1999. The net result was a tightening of spread and net interest margin. This
tightening is primarily a result of the Company's interest liability-sensitive
position, reflecting a risk to earnings when interest rates rise. In fact,
interest rates have risen during recent periods, resulting in the expected
decline in margin. However, the Company's margin remains quite strong, and
Management continues to take steps to neutralize some portion of this risk. The
following table 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, 2000 and 1999.
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<PAGE> 12
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
dollars in thousands 2000 1999
-------------------- ------------------------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/
ASSETS Balance (b) Rate (c) Balance (b) Rate (c)
--------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets (a)
Federal funds sold $ -- $ -- -% $ 2,295 $ 53 4.62%
Taxable securities 47,316 1,445 6.11% 52,754 1,617 6.13%
Tax exempt securities (b) 31,823 1,179 7.41% 34,385 1,311 7.62%
Taxable loans 319,039 13,938 8.74% 273,548 11,682 8.54%
Tax exempt loans (b) 2,126 81 7.63% 1,613 61 7.52%
--------- --------- --------- --------
Total int. earning assets (b) 400,304 16,644 8.32% 364,595 14,724 8.08%
Less allowance for loan losses (3,592) (2,892)
Other assets 38,209 34,854
--------- ---------
TOTAL ASSETS $ 434,921 $ 396,557
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 57,023 $ 659 2.31% $ 53,821 $ 478 1.77%
Savings deposits 69,357 796 2.30% 72,529 793 2.19%
CDs $100,000 and over 34,595 983 5.68% 29,790 763 5.12%
Other interest bearing deposits 155,742 4,173 5.36% 143,874 3,453 4.80%
--------- --------- --------- --------
Total int. bearing deposits 316,717 6,611 4.17% 300,014 5,486 3.66%
Short term borrowings 18,436 574 6.22% 1,861 46 4.99%
Other borrowings 8,500 288 6.77% 10,875 331 6.08%
--------- --------- --------- --------
Total int. bearing liabilities 343,653 7,472 4.35% 312,750 5,863 3.75%
Noninterest bearing deposits 46,941 41,699
Other liabilities 2,638 2,617
Shareholders' equity 41,689 39,491
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 434,921 $ 396,557
========= =========
Net interest income (b) $ 9,172 $ 8,860
========= ========
Net spread (b) 3.97% 4.33%
========= =========
Net yield on interest earning assets (b) 4.58% 4.86%
========= =========
Ratio of interest earning assets to
interest bearing liabilities 1.16 1.17
========= =========
</TABLE>
(a) Non-accrual loans and overdrafts are included in the average balances of
loans.
(b) Fully tax-equivalent basis, net of nondeductible interest impact; 34% tax
rate.
(c) Annualized
As noted from the data in the following table, the greatest portion of
improvement in interest income during the first half of 2000 came as a result of
changes in volume. At the same time, increases in interest expense were
distributed fairly evenly between changes in volume and rate. The net result is
an increase in net interest income, resulting from improvements in volumes in
excess of declines caused by rate. The following table 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.
Page 12
<PAGE> 13
<TABLE>
<CAPTION>
2000 Compared to 1999 1999 Compared to 1998
-------------------------------------- ----------------------------------
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 $ (53) $ -- $ (53) $(163) $ (33) $(196)
Taxable securities (166) (5) (171) 179 (76) 103
Tax exempt securities (96) (36) (132) (32) (25) (57)
Taxable loans 1,982 274 2,256 565 (575) (10)
Tax exempt loans 19 1 20 7 (1) 6
------- ----- ------- ----- ----- -----
Total interest income $ 1,686 $ 234 $ 1,920 $ 556 $(710) $(154)
======= ===== ======= ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
2000 Compared to 1999 1999 Compared to 1998
-------------------------------------- ----------------------------------
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 $ 30 $ 151 $ 181 $ 101 $ 53 $ 154
Savings deposits (36) 39 3 (11) (247) (258)
CDs $100,000 and over 131 89 220 (192) (110) (302)
Other interest bearing deposits 298 422 720 54 (442) (388)
Short term borrowings 513 14 527 28 (2) 26
Other borrowings (77) 34 (43) 12 3 15
------- ----- ------- ----- ----- -----
Total interest expense $ 859 $ 749 $ 1,608 $ (8) $(745) $(753)
======= ===== ======= ===== ===== =====
Net change in net interest
income $ 827 $(515) $ 312 $ 564 $ 35 $ 599
======= ===== ======= ===== ===== =====
</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
Total noninterest income is up 37.2% over the second quarter of 1999, and 29.2%
year to date over 1999, reflecting initiatives in a number of areas. All
categories of noninterest income other than income from loan sales and
servicing, increased from the same periods in 1999.
Service charges on deposit accounts are 5.9% ahead of first quarter 2000 and
22.2% over 1999 year to date, as a result of continued deposit growth in
transaction accounts and restructuring of the Company's deposit account product
structure during mid-1999.
Fee income in the Trust & Investment Group is up 36.7% over the same quarter of
1999 and up 38.0% year to date. Shifts in the mix of the types of accounts
managed has increased fee income while assets under management have experienced
modest growth.
Income from loan sales and servicing continues to be depressed from previous
periods, reflecting a decline in residential mortgages being sold in the
secondary market. This decline results from a shift in client preference to
variable rate loans, which the Bank retains in its portfolio. Mortgage loan
refinancing has also declined from 1999 levels, resulting in fewer loans sold
during 2000.
In June, the Bank sold its portfolio of credit card loans. The sale of principal
balances of $3,437,252 resulted in a net addition to noninterest income during
the quarter of $307,834. Other income increased 35.0% year to date over the same
period of 1999.
NONINTEREST EXPENSES
Noninterest expense is virtually flat from the first quarter of 2000, and showed
modest increases over comparable periods of 1999. Total noninterest expense,
excluding provision for loan losses, for the six months ended June 30, 2000 was
8.0% above the same period for 1999, reflecting continued growth and expansion
of the Bank. At the same time, total noninterest expense increased just 4.8%
over the second
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<PAGE> 14
quarter of 1999. The largest increases are seen in the compensation and
occupancy expenses, reflecting the Company's continued growth and expansion in
various markets.
FEDERAL INCOME TAX
There has been no significant change in the income tax position of the Company
during the second quarter of 2000. The increase in federal income tax for the
three and six months ended June 30, 2000 as compared to the same periods for
1999 in the result of higher pre-tax income and slightly less tax exempt income
in the 2000 periods as compared to the 1999 periods.
NET INCOME
Consolidated net income exceeded that of the second quarter of 1999 by 25.6%,
and is ahead of 1999 year to date by 13.1%. Management anticipates that net
income will continue to remain strong for the remainder of the year, although
second quarter earnings were helped by non-recurring gains on the sale of the
Bank's credit card portfolio as discussed above under "Noninterest Income."
FORWARD-LOOKING STATEMENTS
Statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations include forward-looking statements that are
based on management's beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about the
Company itself. Words such as "anticipate," "believe," "determine," "estimate,"
"expect," "forecast," "intend," "is likely," "plan," "project," "opinion,"
variations of such terms, and similar expressions are intended to identify such
forward-looking statements. The presentations and discussions of the provision
and allowance for loan losses, and determinations as to the need for other
allowances presented in this report are inherently forward-looking statements in
that they involve judgements and statements of belief as to the outcome of
future events. These statements are not guarantees of future performance and
involve certain risks, uncertainties, and assumptions that are difficult to
predict with regard to timing, extent, likelihood, and degree of occurrence.
Therefore, actual results and outcomes may materially differ from what may be
expressed or forecasted in such forward-looking statements. Internal and
external factors that may cause such a difference include changes in interest
rates and interest rate relationships; demand for products and services; the
degree of competition by traditional and non-traditional competitors; changes in
banking laws and regulations; changes in tax laws; changes in prices, levies,
and assessments; the impact of technological advances; governmental and
regulatory policy changes; the outcomes of pending and future litigation and
contingencies; trends in customer behavior and customer ability to repay loans;
software failure, errors or miscalculations; the ability of other companies on
which the Company relies to be Year 2000 compliant; the ability of the Company
to locate and correct all data sensitive computer code; and the vicissitudes of
the national economy. The Company 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.
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<PAGE> 15
A number of measures are used to monitor and manage interest rate risk,
including interest sensitivity and income simulation analyses. An interest
sensitivity 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 twelve
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, 2000, 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 Bank's interest sensitivity position remained
substantially unchanged from the previous 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
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<PAGE> 16
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.
During the first quarter of 2000, United Bank & Trust formed United Mortgage
Company as a wholly- owned subsidiary of the Bank. United Mortgage Company
became active during the second quarter of the year, but as a subsidiary of the
Bank, its operations are completely transparent to the financial statements of
the Bank or the Company.
ITEM 2- CHANGES IN SECURITIES
No changes in the securities of the Company occurred during the quarter ended
June 30, 2000.
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, 2000.
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on April 18, 2000. At
that meeting, the following matters were submitted to a vote of the
shareholders. There were 1,819,193 voting shares outstanding on April 18, 2000.
The following directors were elected to three year terms:
<TABLE>
<CAPTION>
For Against Abstain
--------- ------- -------
<S> <C> <C> <C> <C>
David N. Berlin Re-elected 1,164,536 13,601 -
Joseph D. Butcko Re-elected 1,168,004 10,133 -
Richard A. Gurdjian Re-elected 1,167,524 10,613 -
Kathryn M. Mohr Re-elected 1,168,044 10,093 -
Richard R. Niethammer Re-elected 1,167,794 10,343 -
John J. Wanke Re-elected 1,167,809 10,328 -
</TABLE>
Directors Bush, Farver, Foss, Hickman, Hill, Knisel, Kuhman, Lawson, Martin,
Maxwell, Roberstad and Robideau hold terms which continue after the meeting.
The firm of Crowe, Chizek and Company LLP of Grand Rapids, Michigan was ratified
as independent auditors for the Company and its subsidiary for the year ending
December 31, 2000. The vote was as follows:
<TABLE>
<CAPTION>
For Against Abstain
--------- ------- -------
<S> <C> <C> <C>
Ratification of auditors 1,157,912 40 20,185
</TABLE>
Shareholders approved the Company's 1999 Stock Option Plan as proposed. The plan
is a Non-Qualified Stock Option Plan as defined under Internal Revenue Service
regulations. Under the Plan, Directors and management of the Company and
subsidiaries are given the right to purchase stock of the Company at a
stipulated price over a specific period of time.
1. Administration. The Plan is to be administered by a committee consisting
of non-employee Directors of the Company. The Committee will determine:
(a) The persons to whom options will be granted
(b) The number of shares included with each option
(c) The date on which each option is to be granted.
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<PAGE> 17
In making decisions for the above criteria, the Committee may consider
input provided by the Bank's senior management. All grants are subject to
approval by the Board of Directors.
2. Eligible Participants. The table below delineates the classes and
approximate number of persons in each class who may be eligible to
participate in the plan:
<TABLE>
<CAPTION>
Class Number of Potential Participants
----- --------------------------------
<S> <C>
Non-officer Directors 16
Executive Officers 10
Non-Executive Officers 12
</TABLE>
3. Shares covered by the Plan. The stock subject to the options would be
shares of authorized and unissued common stock of the Company. As defined
in the Plan, options representing no more than 109,000 shares are to be
made available to the Plan. This represents approximately 6% of the
Company's current outstanding stock.
4. General Plan Operation. Options under this plan will be granted to
Directors and certain key members of management at the then-current market
price at the time the option is granted. The options have a three-year
vesting period, and with certain exceptions, expire at the end of ten
years, or three years after retirement.
5. Duration of the Plan. The Plan became effective when approved by the
shareholders at the Annual Meeting, and will continue in effect for five
years, unless the plan is extended with the approval of shareholders
The Plan was approved upon the following vote:
<TABLE>
<CAPTION>
For Against Abstain
--------- ------- -------
<S> <C> <C> <C>
Adoption of Plan 1,040,975 103,979 33,183
</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, 2000.
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<PAGE> 18
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, 2000
/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 19
