<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
2000
[UNITED BANCORP, INC. LOGO]
<PAGE> 3
[UNITED BANCORP, INC. LOGO]
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
APRIL 18, 2000
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 18, 2000 at 4:30
p.m., local time, for the following purposes:
1. To elect six directors constituting Class III of the Board of
Directors, to serve for three years until the 2003 Annual Meeting
of Shareholders.
2. To ratify the appointment of Crowe, Chizek & Company, LLP as
independent auditors.
3. To approve adoption of the Company's 1999 Stock Option Plan.
4. 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,
2000 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, 2000. 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 24, 2000 Dale L. Chadderdon
Senior Vice President,
Secretary and Treasurer
Post Office Box 248 - 205 East Chicago Boulevard - Tecumseh, Michigan 49286
Phone 517.423.8373 - Fax 517.423.5041
<PAGE> 4
[UNITED BANCORP, INC. LOGO]
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 18, 2000
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 2000 Annual Meeting of Shareholders of the Company and
any adjournment or adjournments thereof. The Annual Meeting will be held on
April 18, 2000 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 24, 2000.
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, 2000 will be
entitled to notice of and to vote at the Annual Meeting. On March 15, 2000,
there were 1,819,193 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. Officers and regular employees of the
Company and its subsidiary, United Bank & Trust (the "Bank"), may also solicit
proxies, 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
2001 Annual Meeting of Shareholders must be received by Dale L. Chadderdon,
Secretary and Treasurer, at the principal executive offices of the Company by
November 27, 2000.
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
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Directors in one of the three classes will expire. Successors to the class of
Directors whose terms have expired will be elected for a three-year term. The
Directors whose terms expire at the 2000 Annual Meeting of Shareholders ("Class
III Directors") are David N. Berlin, Joseph D. Butcko, Richard A. Gurdjian,
Kathryn M. Mohr, Richard Niethammer and John J. Wanke.
The Board of Directors has by resolution nominated six individuals for election
as Class III Directors at the 1999 Annual Meeting of Shareholders. Those
individuals are incumbent Class III Directors. Those persons who are elected as
Class III Directors at the 2000 Annual Meeting of Shareholders will hold office
for three years or as noted below. Their terms will expire at the 2003 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 III
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 2000 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 1999, and to make any comments that they deem appropriate.
PROPOSAL 3 - STOCK OPTION PLAN
INTRODUCTION
The Board of Directors strongly believes that the Company's long-term interests
are best advanced by aligning the interests of its key leaders with the
interests of its shareholders. Therefore, to attract and retain Directors,
officers and other key management employees of exceptional abilities, and in
recognition of the significant contributions made by these individuals, the
Board of Directors of the Company has adopted a stock option incentive plan,
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designated as the United Bancorp, Inc. 1999 Stock Option Plan (the "Plan"),
subject to shareholder approval.
The Plan would serve to provide financial benefit to those who are most able to
impact the future profitability and viability of the Company, to the degree that
they are successful in that endeavor. Directors and Management would see a
direct cause and effect relationship between the long-term value of the Company
and their compensation.
Recent research by Crowe Chizek & Company, LLP indicates that of peer banks
surveyed in the range of $400 million to $1 billion in assets, 72% offer stock
options to their key staff. In addition, other sources indicate that nationally,
80% to 90% of community banks with assets over $500 million offer stock options.
The Board believes that top-notch talent is necessary to accomplish the
Company's objectives, and competitive compensation packages must be offered to
attract and retain that talent in the future. The Board's goals include
enhancing shareholders' wealth and maintaining the prosperity and independence
of the Company.
The Company will incur no expense other than minor administrative costs to
implement the plan, and no expense is recognized on the books of the Company
either for the issuance or exercise of options. Therefore, the Plan offers an
ideal incentive to motivate and align key management with the best interests of
the Company for the long term, at minimal cost to the Company.
The complete text of the Plan is attached to this Proxy Statement as Appendix B,
and shareholders are advised to review that text as they deliberate upon the
proposal to approve the Plan. The remainder of this section summarizes
significant features of the Plan, and provides other information relevant to
this proposal.
SUMMARY OF PLAN FEATURES
The proposed 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 would 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.
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:
Class Number of Potential Participants
Non-officer Directors 16
Executive Officers 10
Non-Executive Officers 12
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
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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 will become effective only if and when
approved by the shareholders at the Annual Meeting. If approved, the Plan
thereafter will continue in effect for five years, unless the plan is
extended with the approval of shareholders.
CERTAIN TAX ASPECTS OF THE PLAN
The tax consequences of the Plan are complex, and the following discussion deals
only with general tax principles applicable to the Plan under Federal law.
Recipients of options will not be deemed to have received any taxable income as
a result of the granting of options. Taxable income will be realized at ordinary
rates by the participants upon the exercise of an option in the amount that the
fair market value of the shares acquired at the time of exercise exceeds the
option price, and the Company will be entitled to a deduction for income tax
purposes in an equivalent amount at that time. The subsequent sale of shares
received on exercise will generally be taxed as a capital gain or loss to the
participant.
POTENTIAL REALIZABLE DOLLAR VALUE OF AWARDS UNDER THE PLAN
Because the specific participants and the market value of Common Stock on the
grant date cannot presently be determined, the benefits or amounts that will be
received by participants under the Plan in the future are not determinable.
Similarly, the benefits or amounts that would have been received by participants
had the Plan been in effect during 1999 can not determined.
VOTE REQUIRED FOR APPROVAL AND RECOMMENDATION
Michigan corporate law does not require shareholder approval of the Plan.
However, because the plan contemplates the issuance of shares of Common Stock,
shareholder approval currently is required in order for the Plan to meet certain
requirements of Rule 16b-3 of the Securities Exchange Act.
Assuming the presence of a quorum, the proposal to approve the Plan will be
carried if it receives the affirmative vote of a majority of the votes cast by
the holders of shares of Common Stock entitled to vote thereon at the Annual
Meeting. Thus, any abstention or broker non-vote with respect to shares entitled
to vote will have no effect on the outcome of the vote on this proposal.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE FOR APPROVAL OF THE 1999
STOCK OPTION PLAN.
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
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thereof, or person who owns of record or beneficially more than five percent
(5%) of the outstanding stock of either the Company or the Bank, or any
associate of the foregoing, is a party or has a material interest adverse to the
Company or the Bank.
INFORMATION CONCERNING NOMINEES AND INCUMBENT DIRECTORS
The 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 66; Farmer; Owner, Leland D. Bush & Sons 1992
Patrick D. Farver, age 45; President and Chief Operating officer (1994); Executive Vice President 1993
(through 1994), Blissfield Manufacturing Co., Blissfield, MI
Jeffrey A. Kuhman, age 53, Chief Executive Officer, Glycon Corp., supplier to the plastics extrusion 1997
industry, Tecumseh, MI
James C. Lawson, age 52; General Manager, Boley Fuels, Inc. (1999); private investor (1997-1999); 1986
President, Lenawee Fuels, Inc. (prior to 1997), Tecumseh, MI
D. J. Martin, age 60; President and Director, Martin's Home Center, Tecumseh, MI 1985
David E. Maxwell, age 60; Executive Vice President and Chief Operating Officer; Director, Brazeway, 1986
Inc., manufacturer of extruded aluminum tubing and related products, Adrian, MI
INCUMBENT DIRECTORS - TERMS EXPIRING IN 2002 (CLASS II)
John H. Foss, age 57; 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 59; Chairman (1998) and Chief Executive Officer of the Company and the Bank, 1985
Tecumseh, MI
Ann Hinsdale Knisel, age 49; County Extension Director, Michigan State University Extension Service, 1993
Adrian, MI
John R. Robertstad, age 51, President, Chief Executive Officer and Director, Lenawee Health Alliance, 1997
Adrian, MI
Jeffrey T. Robideau, age 40; President, Tecumseh Corrugated Box Company, Tecumseh, MI 1995
Scott F. Hill, age 40; Vice President, Krieghoff Lenawee Company, commercial and industrial construction 1999
contractor, Adrian, MI
DIRECTOR NOMINEES - TERMS EXPIRING IN 2003 (CLASS III)
David N. Berlin, age 51; 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 57; Co-owner, Saline Properties, Inc., Saline, MI; Chief Operating Officer, 1997
Crescive Die & Tool, Inc. (to 1999)
Richard A. Gurdjian, age 55; President, Gurdjian & Associates, Inc., insurance and employee benefits, 1998
Adrian, MI
Kathryn M. Mohr, age 37; Attorney; Partner, Robison, Curphey & O'Connell, LLC, Adrian, MI and Toledo, 1998
Ohio
</TABLE>
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<TABLE>
<CAPTION>
Director
Name, Age, and Five Year Business Experience Since
<S> <C>
DIRECTOR NOMINEES (CONTINUED) - TERMS EXPIRING IN 2003 (CLASS III)
Richard Niethammer, age 62; Owner of Niethammer Transport, Hammer Trucking, RSK Leasing, York Woods 1997
Development and R&R Realty, Saline MI
John J. Wanke, age 50; President (1998) of the Company; President and Chief Operating Officer of the Bank 1994
DIRECTORS EMERITUS
Merlyn H. Downing, age 72; Retired Chairman, C.E.O. and Director of the Company, Tecumseh, MI 1985
William G. Thompson, age 85, 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, and Martin 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 59; Chairman (1998) and Chief Executive Officer of the Company and the Bank 1985
John J. Wanke, age 50; President (1998) of the Company; President and Chief Operating Officer of 1987
the Bank
Dale L. Chadderdon, age 51; Senior Vice President, Secretary and Treasurer of the Company; 1987
Executive Vice President and Chief Financial Officer of the Bank
Earl M. Roehm, age 57; Executive Vice President - Personal Banking of the Bank 1995
Richard L. Boyce, age 38; Senior Vice President & Trust Officer of the Bank 1995
Terry L. Douglass, age 50; Senior Vice President - Business Banking of the Bank 1995
Thomas C. Gannon, age 46; 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 1999. 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, 1999 to all Directors and Executive
Officers of the Company, as a group, was $15,289,974. 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. Mr. Butcko was
subsequently appointed to the Board of Directors in September of 1997.The lease,
at $2,081 per month for thirty-six months, was for property in Saline to be used
as a temporary banking office, and was on substantially the same terms as those
prevailing at the time for comparable transactions with other persons. In June
of 1999, the Bank moved from this location, and the lease will expire as
scheduled in 2000.
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, Scott F.
Hill, James C. Lawson, Jeffrey T. Robideau and John R. Robertstad. 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, 1999. The Company itself has no standing nominating or compensation
committees of the Board of Directors, but similar nominating and compensation
functions are performed by the Executive Committee of the Board of Directors of
the Bank.
The Executive Committee of the Board of Directors of the Bank met six times
during 1999, 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, 1999, 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
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substantial duties unrelated to the operation of the Bank should develop, this
policy will be re-examined as necessary to attract and retain qualified officers
of the Company.
The following table sets forth the total compensation awarded to, earned by, or
paid by the Bank during 1999, 1998 and 1997 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 and the 1999 $190,000 $45,168 $14,400
Bank 1998 180,000 45,380 16,000
1997 175,000 32,928 15,000
John J. Wanke, President of the Company and the Bank 1999 $130,000 $31,146 $13,321
1998 124,500 31,515 14,037
1997 121,000 22,611 13,280
Earl M. Roehm, Executive Vice President of the Bank 1999 $120,000 $28,836 $11,539
1998 115,400 18,695 12,689
1997 112,500 13,500 12,132
Richard L. Boyce, Senior Vice President of the Bank 1999 $ 88,000 $21,214 $ 9,104
1998 85,000 20,435 9,579
Thomas C. Gannon, Senior Vice President of the Bank 1999 $ 87,550 $15,883 $ 8,695
Dale L. Chadderdon, Senior Vice President of the Company; 1999 $ 84,000 $20,225 $ 8,821
Executive Vice President of the Bank 1998 81,000 21,087 9,115
Terry L. Douglass, Senior Vice President of the Bank 1999 $ 80,500 $19,180 $ 8,416
</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
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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".
Effective January 1, 2000, the Bank adopted a supplemental employment retirement
plan. The purpose of the plan is to provide executive management of the Company
with additional retirement compensation, in order to achieve an overall targeted
level of retirement benefits. Under current guidelines, Mr. Hickman is the only
person covered by this plan.
COMPENSATION OF DIRECTORS
Directors of the Company were paid an annual retainer of $600 with no additional
fees for meetings attended. Directors of the Bank were paid an annual retainer
of $3,000, plus fees for meetings attended according to the schedule below. No
Director who is also an employee of either the Company or the Bank received any
compensation for their services as a Director of the Company or the Bank.
<TABLE>
<CAPTION>
Meeting Attended Chairman All other
---------------- -------- ---------
<S> <C>
Board of Directors of the Bank N/A $250
Executive Committee N/A 180
Loan Committee N/A 180
Trust Committee $205 180
Audit Committee 205 180
CRA Committee N/A 180
</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. In addition, Directors and other participants will have
the option of participating in the Company's Stock Incentive Plan if approved at
this meeting.
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 1999, 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 1999.
Page 9
<PAGE> 13
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 Committee offer
the following explanation for the determination of the CEO's compensation for
1999:
The base salary for 1999 for Mr. Hickman reflects an increase from 1998. 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 December 31, 1994 as a base date.
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.
[GRAPH]
CUMULATIVE YEARLY PERCENTAGE TOTAL SHAREHOLDER RETURN
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
UBI 100.0 111.3 141.3 169.9 214.6 244.6
S&P 500 100.0 137.6 169.2 225.6 290.1 351.1
KBW 50 100.0 160.2 226.6 331.2 358.6 346.2
</TABLE>
Page 10
<PAGE> 14
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
So far as is known to the Company, as of March 13, 2000, 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, 1999.
<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 242,322 (1) 13.3%
United Bank & Trust as Trustee
P.O. Box 248
Tecumseh, MI 49286
Cede & Co, on behalf of 159,274 (2) 8.74%
Comerica Bank as Trustee
One Detroit Center
Detroit, MI 48275
</TABLE>
(1) The Bank as Trustee has sole voting and sole investment powers with
respect to 140,253 of the shares, and shared voting and shared
investment powers with respect to the remaining 102,069 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.
(2) The Trust Department of Comerica Bank has sole voting powers with
respect to 120,125 of the shares, and shared voting power with respect
to the remaining 39,149 of these shares. Comerica has sole dispositive
power with respect to 9,713 of the shares, and shared dispositive
power with respect to the remaining 149,549 of these shares.
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, 1999, 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, 1999, 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.
Page 11
<PAGE> 15
<TABLE>
<CAPTION>
Amount and Nature of % of
Beneficial Ownership Total total
--------------------
Name and Address of Beneficial Owner Shared Sole Shares (2)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DIRECTORS
David N. Berlin, 103 W. Main, Hudson, MI 49247 381 381 *
L. Donald Bush, 9432 Welch Road, Tecumseh, MI 49286 852 852 *
Joseph D. Butcko, P.O. Box 96, Saline, MI 48176 2,273 2,273 *
Patrick D. Farver, 484 Seel Drive, Adrian, MI 49221 1,897 (1) 1,249 3,146 *
John H. Foss, 100 E. Patterson, Tecumseh, MI 49286 728 728 *
Richard A. Gurdjian, 525 Meadowbrook, Adrian, MI 49221 683 683 *
David S. Hickman, P.O. Box 248, Tecumseh, MI 49286 36,682 36,682 2.02%
Scott F. Hill, 10345 Newburg Rd. Tecumseh, MI 49286 1,157 (1) 100 1,257 *
Ann Hinsdale Knisel, 4404 Livesay Rd., Sand Creek, MI 49279 224 224 *
Jeffrey A. Kuhman, 8905 Hawthorne, Tecumseh, MI 49286 15,229 15,229 *
James C. Lawson, 513 N. Occidental, Tecumseh, MI 49286 16,633 (1) 5,582 22,215 1.22%
D.J. Martin, 145 W. Chicago Blvd., Tecumseh, MI 49286 9,327 30,448 39,775 2.24%
David E. Maxwell, P.O. Box 749, Adrian, MI 49221 2,620 (1) 19,444 22,064 1.24%
Kathryn M. Mohr, 17837 Tecumseh St., Dundee, MI 48131 630 105 735 *
Richard R. Niethammer, 9367 Sunset Lake Drive, Saline, MI 48176 801 801 *
John R. Robertstad, 682 Stoneridge Drive, Adrian, MI 49221 206 2900 3,106 *
Jeffrey T. Robideau, 707 S. Evans St., Tecumseh, MI 49286 5,261 15,092 20,353 1.12%
John J. Wanke, P.O. Box 248, Tecumseh, MI 49286 159 1,215 1,374 *
DIRECTORS EMERITUS
M. H. Downing, 406 Burt Street, Tecumseh, MI 49286 5,757 (1) 10,843 16,600 *
William G. Thompson, 331 W. Main, Hudson, MI 49247 1,598 1,598 *
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Dale L. Chadderdon, P.O. Box 248, Tecumseh, MI 49286 3,738 1,889 5,627 *
Earl M. Roehm, P.O. Box 248, Tecumseh, MI 49286 678 678 *
Richard L. Boyce, P.O. Box 248, Tecumseh, MI 49286 122 337 459 *
Terry L. Douglass, P.O. Box 248, Tecumseh, MI 49286 477 477 *
Thomas C. Gannon, P.O. Box 248, Tecumseh, MI 49286 0 *
All Directors and Executive Officers as a Group (25 persons) 197,317 10.8%
</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.
Page 12
<PAGE> 16
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 24, 2000 Dale L. Chadderdon
Senior Vice President, Secretary and Treasurer
Page 13
<PAGE> 17
APPENDIX A
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AND
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Business of United Bancorp, Inc. A-1
-----------------------------------------------------------------------------------------------------------------
Management's Discussion and Analysis
Results of Operations A-2
---------------------------------------------------------------------------------------------------------------
Financial Condition A-6
---------------------------------------------------------------------------------------------------------------
Liquidity, Funds Management and Market Risk A-10
---------------------------------------------------------------------------------------------------------------
Capital Resources A-13
---------------------------------------------------------------------------------------------------------------
Prospective Accounting and Regulatory Changes A-14
---------------------------------------------------------------------------------------------------------------
Year 2000 Readiness A-14
---------------------------------------------------------------------------------------------------------------
Forward-Looking Statements A-14
---------------------------------------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------------------------------
</TABLE>
NATURE OF BUSINESS
United Bancorp, Inc. is a Michigan Bank Holding Company, with United
Bank & Trust as its only wholly-owned subsidiary. The Bank is locally
owned and managed, and offers a full range of financial 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> 18
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. (the "Company") and its
subsidiary, United Bank & Trust (the "Bank").
RESULTS OF OPERATIONS
Consolidated net income for 1999 was up .25% from the record level of earnings
achieved in 1998. Continued growth and expansion, as well as slowing of
activity in mortgage secondary market, placed a burden on earnings. As the same
time, net interest margin remained strong, and noninterest income reached
record levels.
Earnings for 1999 were relatively steady for each quarter through the year. The
chart below shows the trends in earnings for the four quarters of 1999.
<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 $ 4,360 $ 4,363 $ 4,274 $ 4,157
Provision for loan losses 315 315 315 315
Noninterest income 1,598 1,627 1,527 1,390
Noninterest expense 3,897 3,836 3,795 3,574
Federal income tax provision 449 500 443 427
Net income $ 1,297 $ 1,339 $ 1,248 $ 1,231
Return on average assets (a) 1.23% 1.30% 1.24% 1.28%
Return on average shareholders' equity (a) 12.60% 13.21% 12.59% 12.73%
==================================================================================================
</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 sustained levels of performance.
Continued asset growth, combined with relatively flat earnings growth, resulted
in return on average assets for 1999 that was behind that achieved in 1998 and
1997. Return on average equity was impacted by average capital growth at a
higher rate than average 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>
-----------------------------------------------------------------------------------------------------
Performance Ratios 5 Year
1999 1998 1997 Average
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on average assets 1.26% 1.33% 1.41% 1.35%
Return on average shareholders' equity 12.79% 13.68% 14.87% 14.40%
Average equity to average total assets 9.9% 9.7% 9.5%
Dividend payout ratio 44.3% 40.2% 36.4%
Book value per share $ 22.52 $ 21.33 $ 19.54
Cash dividends per share 1.247 1.131 1.006
=====================================================================================================
</TABLE>
Book value per share is based on shares outstanding at December 31, of
1,819,193 for 1999, 1,817,004 for 1998, and 1,814,748 for 1997 as adjusted for
stock dividends. Dividends per share is based on average adjusted shares
outstanding of 1,816,960 for 1999, 1,814,885 for 1998 and 1,812,615 in 1997, as
adjusted for stock dividends.
Page A-2
<PAGE> 19
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 have steadily
improved over the past three years, in spite of wide swings in interest rates
and flattening yield curves. The Yield Analysis table below provides insight
into the various components of net interest income, as well as the results of
loan growth and shifts in deposit mix that have helped to improve the margin.
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Dollars in Thousands 1999 1998
-----------------------------------------------------------------------------------------
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 $ 1,765 $ 85 4.82% $ 9,635 $ 509 5.29%
Taxable securities 51,713 3,171 6.13% 49,574 3,166 6.39%
Tax exempt securities (b) 33,718 2,548 7.56% 35,283 2,734 7.75%
Taxable loans 283,080 24,304 8.59% 260,955 23,356 8.95%
Tax exempt loans (b) 1,738 132 7.62% 1,429 111 7.73%
-------------------------------- ----------------------------
Total interest earning
assets (b) 372,014 $ 30,241 8.13% 356,876 $ 29,876 8.37%
Cash and due from banks 15,091 11,847
Premises and
equipment, net 12,700 11,078
Intangible assets 3,804 2,365
Other assets 4,686 4,127
Unrealized loss on secur-
ities available for sale (89) 487
Allowance for loan losses (3,042) (2,613)
----------------- --------------
Total Assets $ 405,164 $ 384,167
================= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities
----------------------------
NOW accounts $ 55,200 $ 1,060 1.92% $ 43,942 $ 726 1.65%
Savings deposits 73,467 1,651 2.25% 72,632 1,994 2.75%
CDs $100,000 and over 30,714 1,594 5.19% 34,641 1,976 5.70%
Other int. bearing deposits 146,391 7,165 4.89% 143,527 7,646 5.33%
-------------------------------- ----------------------------
Total int. bearing deposits 305,772 11,471 3.75% 294,742 12,342 4.19%
Short term borrowings 3,304 178 5.39% 715 37 5.15%
Other borrowings 9,855 605 6.14% 10,680 652 6.11%
-------------------------------- ----------------------------
Total int. bearing liab. 318,931 $ 12,254 3.84% 306,137 $ 13,032 4.26%
Nonint. bearing deposits 43,603 37,707
Other liabilities 2,623 3,016
Shareholders' equity 40,007 37,307
----------------- --------------
Total Liabilities and
Shareholders' Equity $ 405,164 $ 384,167
================= ==============
Net interest income (b) $ 17,987 $ 16,844
Net spread 4.29% 4.11%
Net yield on interest earning assets (b) 4.83% 4.72%
Ratio of interest earning assets to
interest bearing liabilities 1.17 1.17
<CAPTION>
------------------------------------------
Dollars in Thousands 1997
------------------------------------------
Average Yield/
ASSETS Balance Interest Rate
------------------------------------------
<S> <C> <C> <C>
Interest earning assets (a)
---------------------------
Federal funds sold $ 4,011 $ 215 5.37%
Taxable securities 48,194 3,139 6.51%
Tax exempt securities (b) 32,659 2,553 7.82%
Taxable loans 248,043 22,515 9.08%
Tax exempt loans (b) 1,292 100 7.74%
----------------------------
Total interest earning
assets (b) 334,199 $ 28,522 8.53%
Cash and due from banks 9,524
Premises and
equipment, net 9,167
Intangible assets 1,490
Other assets 3,605
Unrealized loss on secur-
ities available for sale 133
Allowance for loan losses (2,312)
---------------
Total Assets $ 355,806
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities
----------------------------
NOW accounts $ 38,959 $ 590 1.51%
Savings deposits 70,742 2,029 2.87%
CDs $100,000 and over 41,209 2,408 5.84%
Other int. bearing deposits 123,846 6,985 5.64%
----------------------------
Total int. bearing deposits 274,756 12,013 4.37%
Short term borrowings 3,380 157 4.64%
Other borrowings 11,479 724 6.31%
----------------------------
Total int. bearing liab. 289,615 $ 12,893 4.45%
Nonint. bearing deposits 29,365
Other liabilities 3,105
Shareholders' equity 33,721
---------------
Total Liabilities and
Shareholders' Equity $ 355,806
===============
Net interest income (b) $ 15,629
Net spread 4.08%
Net yield on interest earning assets (b) 4.68%
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, net of nondeductible interest impact; 34% tax
rate.
Net interest income was up 7.5% in 1999 over 1998. During 1999, as in 1998,
both the yields on earning assets and the Company's cost of funds decreased,
resulting in a slightly improved spread. This also contributed to an
improvement in the Company's net interest margin.
Page A-3
<PAGE> 20
As noted from the data in the tables below, substantially all of the
improvement in net interest income during 1998 came as a result of changes in
volume. This continued to be the case during 1999. At the same time, 1999 and
1998 produced significant declines in yields and cost of funds. 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>
- --------------------------------------------------------------------------------------------------------------------------------
1999 compared to 1998 1998 compared to 1997
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 $ (383) $ (41) $ (424) $ 297 $ (3) $ 294
Taxable securities 134 (129) 5 89 (62) 27
Tax exempt securities (119) (67) (186) 203 (22) 181
Taxable loans 1,926 (978) 948 1,159 (318) 841
Tax exempt loans 24 (2) 22 11 - 11
----------------------------------------------------------------------------------------------------------------------------
Total interest income $ 1,582 $ (1,217) $ 365 $ 1,759 $ (405) $ 1,354
Interest expense on:
NOW accounts $ 205 $ 129 $ 334 $ 79 $ 57 $ 136
Savings deposits 23 (366) (343) 53 (88) (35)
Interest bearing CDs $100,000+ (213) (169) (382) (376) (56) (432)
Other interest bearing deposits 150 (631) (481) 1,064 (403) 661
Short term borrowings 139 2 141 (136) 16 (120)
Other borrowings (51) 4 (47) (49) (23) (72)
----------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 253 $ (1,031) $ (778) $ 635 $ (497) $ 138
----------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 1,329 $ (186) $1,143 $ 1,124 $ 92 $ 1,216
================================================================================================================================
</TABLE>
Provision for Loan Losses
During 1998 and 1997, the Bank experienced higher-than-ordinary charge-offs
within its personal loan portfolio, principally as a result of direct and
indirect installment loans that were placed on the books in 1995 and 1996. This
trend subsided in 1999, with fewer charge-offs and more recoveries than in
1998. On the other hand, the mix of the portfolio continued to shift, with more
loans in the business loan categories. This caused Management to continue to
provide for estimated incurred losses in the portfolio. The provision for 1999
was substantially unchanged from 1998 and 1997, and combined with the lower net
losses, increased the balance in the Allowance for Loan Losses. This provision
provides for currently anticipated losses inherent in the current portfolio.
The Bank has consistently low to moderate levels of nonperforming loans, and
loan loss history continues to compare favorably 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. 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.
Noninterest Income
Total noninterest income increased 13.7% in 1999 over 1998, compared to an
increase of 30.9% in 1998 over 1997. A number of items contributed to this
continued improvement.
Page A-4
<PAGE> 21
Deposit service charges provide a significant portion of the Bank's noninterest
income. Minimal 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. This improvement continued during 1999, as a result of continued
deposit growth and a significant restructuring of the Bank's deposit products
mid-year. This contributed to an increase in deposit service charges of 24.0%
in 1999 over 1998.
Also contributing to the overall profitability of the Company is the Trust &
Investment Group of the Bank, as gross income generated from trust fees
continues to provide significant fee income. Total Trust & Investment Group fee
income increased 34.1% in 1999, compared to increases of 23.4% in 1998 and
34.0% in 1997. 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, 1999, assets managed by the Department were $438.3
million, up from $311.4 at the end of 1998. 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 was down 48.9% in 1999, compared
to an increase of 86.9% in 1998 and a decline of 5.1% in 1997 compared to 1996.
During 1997, clients exhibited a preference for adjustable rate residential
mortgages, resulting in a decreased proportion of those loans originated by the
Bank being sold in the secondary market. This trend reversed in 1998, as
clients generally selected fixed rate mortgages rather than variable rates.
This resulted directly in an increase in fee income resulting from the sale of
these loans. In 1999, the trend reversed again, clients exhibiting a preference
to finance their residences using adjustable rate products.
The Bank generally markets its production of fixed rate long term mortgages in
the secondary market, and retains adjustable rate mortgages for its portfolio.
The Bank maintains a portfolio of sold loans, and currently services $124.2
million of sold loans, compared to $121.4 million at the end of 1998 and $98.4
million at the end of 1997. These loans will continue to generate ongoing fee
income for the life of the loans.
Income from the sale of nondeposit investment products is generated in the
Bank's insurance subsidiary, and is derived from two primary sources. Income
from the sale of nondeposit investment products provides the largest proportion
of income, and has experienced significant growth in the past two years as a
result of increased sales volume. Income from this source improved 48.5% in
1999 over 1998, following an increase of 36.1% over 1997. The other principal
source of income for the Insurance Subsidiary is from the sale of credit, life
and title insurance policies. Continued contribution on the part of the Bank's
insurance agency is anticipated.
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 in these totals. Total other
income increased 23.6% in 1999 over 1998, compared to 32.7% in 1998 over 1997,
principally in the fee-based areas.
Total noninterest income increased 13.7% in 1999 over 1998, in spite of the
decline in income from loan sales and servicing. 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 14.3% in 1999, compared
to an increase of 21.7% during 1998. These increases reflect the Bank's
continued expansion and growth during the most recent two years. During 1998,
the Bank began a program to convert some banking offices to a new retail
banking
Page A-5
<PAGE> 22
concept. This conversion process continued in 1999. In addition, during
1999, the Bank completed construction of a new banking office in Saline,
Michigan, and purchased a banking office from Great Lakes Bank. The expenses of
the Company reflect both the facilities and staffing costs of these
initiatives.
Personnel expense continues to be the largest single area of expense,
increasing 17.7% in 1999, compared to an increase of 26.1% in 1998. Total
full-time equivalent staffing was 187.0 at the end of 1999, compared to 178.5
at December, 1998. Much of the increase in 1998 expense was a result of staff
added late in 1997. During 1999, ten full-time equivalent staff additions
relate specifically to new banking offices and conversion to the retail
concept. 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 in 1998 and 1999, it also provided direct benefit to the net income of
the Company.
Occupancy and equipment expense moderated during 1999, increasing 1.1% over
1998 levels. 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.
Other expenses continued to increase, at levels consistent with prior years.
These increases reflect the continued cost of expansion and operation of
fifteen banking offices and an insurance subsidiary.
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 following chart 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 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before tax $ 6,934 $ 6,905 $ 6,829
Federal income tax 1,819 1,803 1,816
Effective federal tax rate 26.2% 26.1% 26.6%
======================================================================================================================
</TABLE>
FINANCIAL CONDITION
Securities
The securities portfolio declined during 1999, principally as a result of loan
volume that exceeded deposit growth. 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 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury and agency securities $ (6,623) $ 17,647
Mortgage backed agency securities (5,437) (7,914)
Tax exempt obligations of states and political subdivisions 2,543 491
Corporate, taxable municipal and asset backed securities (3,947) 5,511
--------------------------------------------------------------------------------------------------------------------
Change in total securities $ (13,464) $ 15,735
====================================================================================================================
</TABLE>
Page A-6
<PAGE> 23
Strong growth in the loan portfolio, coupled with less-robust growth of deposit
balances, resulted in a decrease in the Company's total securities portfolio
during 1999. The only category of securities exhibiting growth was tax exempt
obligations of states and political subdivisions. 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, 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury and agency securities 24.7% 28.2%
Mortgage backed agency securities 19.3% 22.3%
Obligations of states and political subdivisions 46.2% 37.0%
Corporate, asset backed and other securities 9.8% 12.5%
-------------------------------------------------------------------------------------------------------------------
Total securities 100.0% 100.0%
===================================================================================================================
</TABLE>
Investments in U.S. Treasury and agency securities are considered to possess
low credit risk. Obligations of U.S. government agency mortgage-backed
securities possess a somewhat higher interest rate risk due to certain
prepayment risks. The municipal portfolio contains a small amount of geographic
risk, as approximately 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.
As of October 1, 1999, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." As permitted in SFAS No. 133,
the Company transferred securities with an amortized cost of $34,176,000 and a
fair value of $34,413,000 from the held to maturity portfolio to the available
for sale portfolio. None of these securities were sold during the fourth
quarter of 1999. The chart below summarizes unrealized gains and losses in each
category of the portfolio at the end of 1999 and 1998, in thousands of dollars.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Unrealized Gains and Losses in the Investment Portfolio 1999 1998 Change
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury and agency securities $ (301) $ 224 $ (525)
Mortgage backed agency securities (244) 207 (451)
Obligations of states and political subdivisions (104) 1,069 (1,173)
Corporate, asset backed and other securities (107) 64 (171)
----------------------------------------------------------------------------------------------------------------
Total Investment Securities $ (756) $ 1,564 $ (2,320)
================================================================================================================
</TABLE>
The decline in market value of the portfolio in relationship to its book value
resulted from increased market rates during 1999. 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, although the entire portfolio is now
classified as available for sale.
Loans
The chart below shows the percentage change in each category of the loan
portfolio for 1999 and 1998.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Percentage Change in Categories of Loan Portfolio 1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Personal 0.4% -16.4%
Business 21.0% 11.4%
Tax exempt 23.8% -6.8%
Residential mortgage 8.8% 0.1%
Construction 48.1% 55.2%
Total loans 14.1% 1.9%
=================================================================================================================
</TABLE>
Page A-7
<PAGE> 24
Loan growth of 14.1% was consistent with the strong pace achieved in 1996 and
1997, and is considerably ahead of the 1.9% growth achieved in 1998. However,
the 1998 growth 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 1998.
During 1999, this volume subsided, and increases in loan volume was instead
experienced primarily in the business lending portfolio. In addition, the trend
of declining balances in the personal loan portfolio was reversed, with a small
amount of growth achieved. The increase in tax exempt loans reflects continued
involvement in funding local community expansion at local municipalities and
school districts, reduced by normal amortizations of loan balances.
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 Saline and Manchester
markets have provided opportunities for future continued growth in all loan
portfolios.
Construction loan activity continued to be strong during 1999, reflecting
continued 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.
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 nonperforming 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 ninety 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 Assets, in thousands of dollars 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 1,305 $ 821 $ 71 $ 450 $ 41
Accruing loans past due 90 days or more 174 194 910 663 163
Troubled debt restructurings 134 136 138 - -
-------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 1,613 1,151 1,119 1,113 204
Other real estate 347 335 473 335 43
-------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 1,960 $ 1,486 $ 1,592 $ 1,448 $ 247
=========================================================================================================================
Percent of nonperforming loans to total loans 0.52% 0.43% 0.42% 0.46% 0.09%
=========================================================================================================================
Percent of nonperforming assets to total assets 0.46% 0.38% 0.43% 0.41% 0.08%
=========================================================================================================================
</TABLE>
The percentage of nonperforming loans to total loans and nonperforming assets
to total assets remained relatively unchanged from prior years, although the
total dollars increased during 1999. 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.
The Bank's delinquency of ninety days or more has remained low for the past two
years, while nonaccrual loans have increased in each of the past two years.
Loans are generally moved to nonaccrual status when ninety days or more past
due or in bankruptcy. An increase in personal bankruptcies has contributed to
these
Page A-8
<PAGE> 25
totals, and some loss is anticipated on these loans. However, collection
efforts continue on nonaccrual loans where possible, and should result in some
recovery in future periods.
In general, banks have experienced higher delinquencies in recent years, as
personal borrowings reached all-time high levels. The Bank has noted an
increase in delinquency as consumers near their debt limits. However, the
Bank's delinquency ratios remain well below that of most other banks of similar
size.
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, 1999 1998
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Personal - direct 12.7% 13.0%
Personal - indirect 6.4% 8.8%
Business 32.4% 30.5%
Tax exempt 0.6% 0.5%
Residential mortgage 37.0% 38.8%
Construction 10.9% 8.4%
------------------------------------------------------------------------------------------------------------
Total loans 100.0% 100.0%
============================================================================================================
</TABLE>
The largest single category above is also generally the one with the least
risk. Loans to finance residential mortgages, including construction loans,
make up 47.9% of the portfolio at year end 1999, and are well-secured and have
had historically low levels of net losses. Personal and business loans make up
the balance of the portfolio.
Growth in personal loan balances was flat during 1999, following a decline of
$11.5 million during 1998. 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. Losses incurred in this portfolio during 1998 have subsided, as
recent production of personal loans generally have less credit risk than those
booked during 1995 and 1996.
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 growth continued during 1999, assisted by the acquisition of the new
Manchester office, and the addition of a larger banking office in Saline.
During the year, the Bank undertook a restructuring of its deposit account
product line-up. This resulted in a decline in the number of accounts, with no
significant corresponding decline in deposit balances. Products such as Cash
Management Checking and Cash Management Accounts continue to be very popular
with clients, aiding in continued deposit growth.
The Bank's decline in certificates of deposit noted in 1998 reversed itself in
1999, as CD balances grew 9.2% during the year. Although clients continue to
evaluate alternatives to certificates of deposit in search of the best yields
on their funds, traditional banking products continue to be an important part
of the Company's product line.
Page A-9
<PAGE> 26
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 following chart shows the percentage change in
deposits by category for 1999 and 1998.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Percentage Change in Deposits by Category 1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Noninterest bearing deposits 10.3% 33.0%
Interest bearing certificates of $100,000 or more 4.3% -19.6%
Other interest bearing deposits 6.8% 7.1%
Total deposits 7.0% 6.4%
=================================================================================================================
</TABLE>
The chart below shows the percentage makeup of the deposit portfolio in 1999
and 1998. In financial institutions, the presence of interest bearing
certificates of $100,000 or more 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 recent periods.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Percentage Breakdown of Deposit Portfolio as of December 31, 1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Noninterest bearing deposits 13.0% 12.6%
Interest bearing certificates of $100,000 or more 9.0% 9.2%
Other interest bearing deposits 78.0% 78.2%
-----------------------------------------------------------------------------------------------------------------
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. However,
during the fourth quarter of 1999, cash levels were purposely inflated, in
anticipation of potentially strong consumer demand for cash at the end of the
year. This increase in cash levels caused increased borrowings in the federal
funds market. At times, the Bank is a participant in the federal funds market,
either as a borrower or seller. Federal funds are generally borrowed or sold
for one-day periods. The Bank also has the ability to utilize short term
advances from the Federal Home Loan Bank ("FHLB") and borrowings at the
discount window of the Federal Reserve Bank as additional short-term funding
sources. While federal funds were used during 1999 and 1998, no short term
advances or discount window borrowings were utilized during either 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 1999, 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 1999
was considerably different than in 1998. The Company averaged net federal funds
borrowed of $1.5 million during 1999, compared to average funds sold of $9.5
million for 1998. These changes were a direct result of loan growth which
exceeded deposit growth, as well as additional borrowings to fund excess cash
carried during the fourth quarter of 1999.
Page A-10
<PAGE> 27
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 10
of the Notes to Consolidated Financial Statements.
Funds Management and Market Risk
The composition of the Company's balance sheet consists of investments in
interest earning assets (loans and investment securities) that are funded by
interest bearing liabilities (deposits and borrowings). These financial
instruments have varying levels of sensitivity to changes in market interest
rates resulting in market risk.
Bank policies place strong emphasis on stabilizing net interest margin, with
the goal of providing a sustained level of satisfactory earnings. The Funds
Management, Investment and Loan policies provide direction for the flow of
funds necessary to supply the needs of depositors and borrowers. Management of
interest sensitive assets and liabilities is also necessary to reduce interest
rate risk during times of fluctuating interest rates.
Interest rate risk is the exposure of the Company's financial condition to
adverse movements in interest rates. It results from differences in the
maturities or timing of coupon adjustments of the Company's assets, liabilities
and off-balance-sheet instruments; from changes in the slope of the yield
curve; from imperfect correlations in the adjustment of rates earned and paid
on different financial instruments with otherwise similar repricing
characteristics; and from interest rate related options embedded in the
Company's products such as prepayment and early withdrawal options.
A number of measures are used to monitor and manage interest rate risk,
including interest sensitivity 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 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, 1999, the Company would
expect a maximum potential reduction in net interest margin of less than 6% 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 the earlier of the contractual maturity or call dates
as well as market and historical experience of the impact of interest rate
fluctuations on the prepayment of mortgage-backed securities. 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, 1999 and 1998.
Page A-11
<PAGE> 28
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS AT DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Amount Maturing In:
In thousands of dollars ----------------------------------------------------------------------------------------------
RATE-SENSITIVE ASSETS: 2000 2001 2002 2003 2004 Thereafter
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate loans $ 41,945 $ 21,440 $ 19,747 $ 17,447 $24,044 $78,957
Average interest rate 7.8% 8.5% 8.2% 8.1% 7.9% 7.5%
Variable rate loans $ 26,972 $ 14,139 $ 9,056 $ 6,255 $ 6,486 $41,779
Average interest rate 9.3% 8.9% 8.7% 8.2% 8.2% 8.9%
Fixed rate investments $ 20,082 $ 24,442 $ 12,589 $ 7,240 $ 3,180 $ 8,190
Average interest rate 5.8% 5.8% 5.6% 5.5% 5.5% 5.6%
Variable rate investments $ 784 $ 784 $ 784 $ 783 $ 297 $ 1,948
Average interest rate 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
Other interest earning assets $ 1,576
Average interest rate 8.0%
RATE-SENSITIVE LIABILITIES:
Noninterest bearing demand $46,829
Savings & interest bearing
demand $ 170,275
Average interest rate 2.9%
Time deposits $ 97,272 $ 27,660 $ 10,045 $ 4,588 $ 4,172 $ 2
Average interest rate 5.2% 5.4% 5.6% 5.7% 6.2% 3.7%
Fixed rate borrowings $ 296 $ 319 $ 342 $ 368 $ 396 $ 1,903
Average interest rate 6.2% 6.2% 6.2% 6.2% 6.2% 6.2%
Other interest bearing liabilities $ 19,300
Average interest rate 5.9%
====================================================================================================================================
<CAPTION>
- -------------------------------------------------------------------
FINANCIAL INSTRUMENTS
AT DECEMBER 31, 1999
- -------------------------------------------------------------------
In thousands of dollars Fair Value
RATE-SENSITIVE ASSETS: Total 12/31/99
- -------------------------------------------------------------------
<S> <C> <C>
Fixed rate loans $ 203,580 $ 201,826
Average interest rate 7.8%
Variable rate loans $ 104,687 $ 104,644
Average interest rate 8.9%
Fixed rate investments $ 75,723 $ 74,981
Average interest rate 5.8%
Variable rate investments $ 5,380 $ 5,366
Average interest rate 6.3%
Other interest earning assets $ 1,576 $ 1,576
Average interest rate 8.0%
RATE-SENSITIVE LIABILITIES:
Noninterest bearing demand $ 46,829 $ 46,829
Savings & interest bearing
demand $ 170,275 $ 170,275
Average interest rate 2.9%
Time deposits $ 143,739 $ 143,410
Average interest rate 5.3%
Fixed rate borrowings $ 3,624 $ 3,456
Average interest rate 6.2%
Other interest bearing liabilities $ 19,300 $ 19,300
Average interest rate 5.9%
===================================================================
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS AT DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Principal Amount Maturing In:
- -----------------------------------------------------------------------------------------------------------------------------------
RATE-SENSITIVE ASSETS: 1999 2000 2001 2002 2003 Thereafter
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate loans $ 34,375 $ 19,871 $ 18,064 $ 13,009 $12,670 $ 66,438
Average interest rate 8.4% 8.8% 8.6% 8.4% 8.1% 7.5%
Variable rate loans $ 23,042 $ 10,016 $ 10,438 $ 11,848 $ 6,147 $ 44,331
Average interest rate 8.4% 8.7% 8.7% 8.8% 8.8% 8.8%
Fixed rate investments $ 29,437 $ 16,658 $ 18,890 $ 6,574 $ 4,402 $ 9,801
Average interest rate 6.0% 6.1% 5.8% 5.5% 5.4% 5.5%
Variable rate investments $ 2,479 $ 1,566 $ 1,387 $ 661 $ 221 $ 1,251
Average interest rate 6.5% 6.7% 6.7% 6.7% 6.8% 6.9%
Other interest earning assets $ 1,576
Average interest rate 8.0%
RATE-SENSITIVE LIABILITIES:
Noninterest bearing demand $ 42,468
Savings & interest bearing
demand $163,179
Average interest rate 2.6%
Time deposits $ 81,922 $ 35,396 $ 11,791 $ 1,299 $ 1,195 $ 17
Average interest rate 5.5% 5.8% 5.3% 5.2% 5.1% 8.4%
Fixed rate borrowings $ 7,276 $ 296 $ 319 $ 342 $ 368 $ 2,299
Average interest rate 6.0% 6.2% 6.2% 6.2% 6.2% 6.2%
Other interest bearing liabilities $ 3,874
Average interest rate 5.5%
<CAPTION>
- ----------------------------------------------------------------------
FINANCIAL INSTRUMENTS AT
DECEMBER 31, 1998
- ----------------------------------------------------------------------
- ----------------------------------------- Fair Value
RATE-SENSITIVE ASSETS: Total 12/31/98
- ----------------------------------------------------------------------
<S> <C> <C>
Fixed rate loans $ 164,427 $ 166,085
Average interest rate 8.4%
Variable rate loans $ 105,822 $ 106,189
Average interest rate 8.7%
Fixed rate investments $ 85,762 $ 87,205
Average interest rate 5.7%
Variable rate investments $ 7,565 $ 7,686
Average interest rate 6.7%
Other interest earning assets $ 1,576 $ 1,576
Average interest rate 8.0%
RATE-SENSITIVE LIABILITIES:
Noninterest bearing demand $ 42,468 $ 42,468
Savings & interest bearing
demand $ 163,179 $ 163,179
Average interest rate 2.6%
Time deposits $ 131,620 $ 132,939
Average interest rate 5.3%
Fixed rate borrowings $ 10,900 $ 11,087
Average interest rate 6.0%
Other interest bearing liabilities $ 3,874 $ 3,874
Average interest rate 5.5%
</TABLE>
The Company's primary market risk exposure increased somewhat from 1998 to
1999, based on data supplied by its measurement systems. This increase is
consistent with an increase in interest rate risk in peer banks, and Management
does not consider the magnitude of the change experienced by the Bank to be
material. 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.
Page A-12
<PAGE> 29
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 following table shows the rate sensitivity of earning assets and interest
bearing liabilities as of December 31, 1999. Loans and investments are
categorized using the earlier of their scheduled payment, call, or repricing
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 $ 8,967 $ 17,315 $ 47,451 $ 7,840 $ 350 $ 81,923
Loans 77,853 40,778 109,453 65,253 14,930 308,267
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 86,820 $ 58,093 $ 156,904 $ 73,093 $ 15,280 $ 390,190
Negotiated rate time deposits of $100,000 or more $ 18,047 $ 7,392 $ 7,006 $ 32,445
Other interest bearing deposits 210,496 31,612 39,459 $ 2 281,569
Other borrowings 19,300 296 1,425 1,903 22,924
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $ 247,843 $ 39,300 $ 47,890 $ 1,905 $ 336,938
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset (liability) interest sensitivity exposure $(161,023) $ 18,793 $ 109,014 $ 71,188 $ 15,280 $ 53,252
Cumulative net asset (liability) exposure $(161,023) $(142,230) $ (33,216) $ 37,972 $ 53,252
Cumulative ratio of asset to liability exposure 0.35 0.50 0.90 1.11 1.16 to one
Cumulative exposure as a percent of total assets -37.7% -33.3% -7.8% 8.9% 12.5%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CAPITAL RESOURCES
It is the policy of the Company to pay 30% to 45% of net earnings as cash
dividends to shareholders. These dividends have resulted in a dividend yield of
approximately 2.81% and 3.00% in 1999 and 1998. Five percent stock dividends
were paid to shareholders in 1999 and 1998. The stock of the Company is traded
locally over the counter, and demand consistently exceeds supply.
The ratios of average equity to average assets of the Bank and the Company
continued to increase through the retention of earnings during 1999, as average
capital continued to grow at a faster rate than did average 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 and the Bank are considered to be
well-capitalized by their regulators.
The Company maintains a five year plan, and utilizes a formal strategic
planning process. Management and the Board continue to monitor long term goals,
which include maintaining capital growth in relation to asset growth, and the
retention of earnings to fund growth while providing a reasonable return to
shareholders.
Page A-13
<PAGE> 30
PROSPECTIVE ACCOUNTING AND REGULATORY CHANGES
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 required specific actions of every financial
institution to become Year 2000 ready. These guidelines were fully met by the
Bank, and no problems were encountered relating to the date change issue at the
end of 1999.
Overall, the cost of evaluating the Company's Year 2000 readiness and assuring
its compliance did not have a measurable impact on the financial condition of
the Company. The Bank regularly provides for upgrades and replacement of its
computer software and hardware, and the Year 2000 situation did not
significantly impact those expenditures.
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.
Page A-14
<PAGE> 31
[UNITED BANCORP, INC. LETTERHEAD]
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
[UNITED BANCORP, INC. LOGO]
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, 1999. Based
on its assessment, the Company believes that, as of December 31, 1999, 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 and Chief Operating Officer
Dale L. Chadderdon
Senior Vice President, Secretary and Treasurer
Page A-15
<PAGE> 32
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
As disclosed in Note 1, on October 1, 1999 the Company changed its
method of accounting for derivative instruments and hedging activities
to comply with new accounting guidance.
CROWE, CHIZEK AND COMPANY LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 27, 2000
Page A-16
<PAGE> 33
CONSOLIDATED BALANCE SHEETS
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
In thousands of dollars 1999 1998
====================================================================================================================================
<S> <C> <C>
ASSETS
Total cash and cash equivalents $ 17,469 $ 12,348
Securities available for sale 81,923 58,468
Securities held to maturity; fair value of $37,999 in 1998 -- 36,919
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 81,923 95,387
Loans held for sale 154 535
Portfolio loans 308,113 269,714
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 308,267 270,249
Less allowance for loan losses 3,300 2,799
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans 304,967 267,450
Premises and equipment, net 13,116 11,406
Accrued interest receivable and other assets 10,046 7,104
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 427,521 $ 393,695
====================================================================================================================================
LIABILITIES
Deposits
Noninterest bearing deposits $ 46,829 $ 42,468
Interest bearing certificates of deposit of $100,000 or more 32,445 31,108
Other interest bearing deposits 281,569 263,691
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 360,843 337,267
Short term borrowings 19,300 3,874
Other borrowings 3,624 10,900
Accrued interest payable and other liabilities 2,790 2,890
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 386,557 354,931
- ------------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value; 5,000,000 shares authorized,
1,819,193 shares issued and outstanding in 1999 and 1,730,480 in 1998 23,919 19,837
Retained earnings 17,544 18,607
Accumulated other comprehensive income (loss), net of tax (499) 320
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 40,964 38,764
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 427,521 $ 393,695
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-17
<PAGE> 34
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 1999 1998 1997
====================================================================================================================================
<S> <C> <C> <C>
INTEREST INCOME
Loans
Taxable $24,304 $23,356 $22,515
Tax exempt 91 76 69
Securities
Taxable 3,171 3,166 3,139
Tax exempt 1,757 1,886 1,767
Federal funds sold 85 509 215
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 29,408 28,993 27,705
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Certificates of deposit of $100,000 or more 1,595 1,976 2,408
Other deposits 9,876 10,367 9,604
Short term borrowings 178 37 157
Other borrowings 605 652 724
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 12,254 13,032 12,893
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 17,154 15,961 14,812
Provision for loan losses 1,260 1,248 1,255
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,894 14,713 13,557
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 2,054 1,657 1,490
Trust & Investment fee income 2,152 1,605 1,301
Gains on securities transactions 28 54 5
Loan sales and servicing 547 1,071 573
Sales of nondeposit investment products 649 437 321
Other income 712 576 434
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 6,142 5,400 4,124
- ------------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 8,389 7,128 5,654
Occupancy and equipment expense, net 2,460 2,434 2,076
Other expense 4,253 3,646 3,122
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 15,102 13,208 10,852
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAX 6,934 6,905 6,829
Federal income tax 1,819 1,803 1,816
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5,115 $ 5,102 $ 5,013
====================================================================================================================================
Basic and diluted earnings per share $ 2.81 $ 2.81 $ 2.76
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-18
<PAGE> 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
United Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
In thousands of dollars 1999 1998 1997
====================================================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,115 $ 5,102 $ 5,013
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES
Depreciation and amortization 1,877 1,635 1,396
Provision for loan losses 1,260 1,248 1,255
Change in loans held for sale 381 (394) 658
Gain on securities transactions (28) (54) (5)
Change in accrued interest receivable and other assets (468) (874) (281)
Change in accrued interest payable and other liabilities 30 (251) (49)
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustments 3,052 1,310 2,974
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 8,167 6,412 7,987
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (16,556) (30,474) (11,040)
Sales -- 3,035 2,002
Maturities and calls 18,697 4,913 5,747
Principal payments 7,149 6,642 5,925
Securities held to maturity
Purchases (2,298) (14,406) (14,091)
Maturities and calls 5,021 14,696 10,221
Net increase in portfolio loans (39,264) (5,513) (25,309)
Premises and equipment expenditures (3,028) (1,806) (3,279)
Cash received for net liabilities assumed in acquisition of branch 17,590 -- 11,009
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (12,689) (22,913) (18,815)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 3,553 20,432 6,934
Net change in short term borrowings 15,426 (1,068) 4,333
Principal payments on other borrowings (7,276) (3,000) (10,000)
Proceeds from other borrowings -- 3,900 --
Proceeds from common stock transactions 171 164 124
Dividends paid (2,231) (1,985) (1,809)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 9,643 18,443 (418)
- ------------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,121 1,942 (11,246)
Cash and cash equivalents at beginning of year 12,348 10,406 21,652
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,469 $ 12,348 $ 10,406
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 12,333 $ 13,323 $ 12,861
Income tax paid 1,900 2,000 1,803
Securities transferred from held to maturity to available for sale 34,176 -- --
Loans transferred to other real estate 106 -- 138
Increase in deposits from branch acquisitions 20,023 -- 12,198
Goodwill resulting from branch acquisitions 2,433 -- 1,189
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-19
<PAGE> 36
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 (1) Earnings AOCI (2) Total
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 1,565,890 $ 13,500 $ 18,419 $ 129 $ 32,048
Net income, 1997 5,013 5,013
Other comprehensive income:
Net change in unrealized gains (losses) on
securities available for sale, net 104 104
----------
Total comprehensive income 5,117
Cash dividends declared, $1.006 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
Other comprehensive income:
Net change in unrealized gains (losses) on
securities available for sale, net 87 87
----------
Total comprehensive income 5,189
Cash dividends declared, $1.131 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
Net income, 1999 5,115 5,115
Other comprehensive income (loss):
Net change in unrealized gains (losses) on
securities available for sale, net (976)
Net cumulative effect of adopting SFAS No. 133 157
----------
Total other comprehensive income (loss) (819)
----------
Total comprehensive income 4,296
Cash dividends declared, $1.247 per share (2,267) (2,267)
Five percent stock dividend declared 86,512 3,893 (3,893) --
Common stock transactions 2,201 100 100
Director and management deferred stock plans 89 (18) 71
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 1,819,193 $ 23,919 $ 17,544 $ (499) $ 40,964
=================================================================================================================================
</TABLE>
(1) Includes Paid In Capital
(2) Accumulated Other Comprehensive Income (Loss), Net of Tax
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-20
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
United Bancorp, Inc. and Subsidiary
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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 (loss). 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.
As of October 1, 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Under SFAS No. 133, all derivative instruments are recorded at
their fair values. If derivative instruments are designated as hedges of fair
values, both the change in the fair value of the hedge and the hedged item are
included in current earnings. Fair value adjustments related to cash flow
hedges are recorded in other comprehensive income and reclassified to earnings
when the hedged transactions are reflected in earnings. Ineffective portions of
hedges are reflected in income currently. The Company does not have any
derivative instruments nor does the Company have any hedging activities. As
permitted in SFAS No. 133, the Company transferred securities with an amortized
cost of $34,176,000 and a fair value of $34,413,000 from the held to maturity
portfolio to the available for sale portfolio. None of these securities were
sold during the fourth quarter of 1999.
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.
Page A-21
<PAGE> 38
LOANS
Loans are reported at the principal balance outstanding, net of deferred loan
fees and costs and the allowance for loan losses. Interest income is reported
on the interest method and includes amortization of net deferred loan fees and
costs over the loan term. Loans are placed on non-accrual status at ninety days
or more past due and interest is considered a loss, unless the loan is
well-secured and in the process of collection.
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. Impaired loans are carried at the present value of estimated future
cash flows using the loan's existing rate, or the fair value of collateral if
the loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is deemed to be less
than the unpaid balance. If these allocations cause the allowance for loan
losses to require increase, such increase is reported as a component of the
provision for loan losses. Loans are evaluated for impairment when payments are
delayed or when the internal grading system indicates a substandard or doubtful
classification.
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 unless the loan is both well-secured and in the process of collection.
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 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. As of
December 31, 1999 and 1998, other real estate owned totaled $347,000 and
$335,000 and is included in other assets on the consolidated balance sheets.
Page A-22
<PAGE> 39
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. The unamortized value of core deposits and goodwill totaled
$4,296,000 and $2,230,000 at December 31, 1999 and 1998 and amortization
expense totaled $367,000, $257,000 and $192,000 for the years ended December
31, 1999, 1998, and 1997.
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 deferred 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, 1999, 1998 and 1997 five percent stock dividends
were paid. Earnings per share, dividends per share and weighted average shares
have been restated to reflect the stock dividends. The weighted average number
of shares outstanding was 1,816,960 for 1999, 1,814,885 for 1998 and 1,812,615
for 1997. The weighted average of contingently issuable shares was 4,839 for
1999, 4,102 for 1998 and 2,206 for 1997.
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
(loss). Other comprehensive income (loss) includes net unrealized gains and
losses on securities available for sale, net of tax, which are also recognized
as separate components of shareholders' equity.
Page A-23
<PAGE> 40
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.
RECLASSIFICATIONS
Some items in prior year financial statements have been reclassified to conform
with current year's presentation.
NOTE 2 - ACQUISITIONS
On April 17, 1999, the Bank acquired one office and related deposits from Great
Lakes National Bank Michigan. Approximately $20.2 million of deposits were
assumed. Core deposit premium associated with these deposits is not material.
The excess of acquisition cost over fair value of the net assets acquired was
$2.4 million. The transaction was accounted for under the purchase method, and
intangible assets acquired are being amortized over their estimated economic
lives.
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
acquisition cost over fair value of the net assets acquired was $1.2 million.
The transaction was accounted for under the purchase method, and intangible
assets acquired are being amortized over their estimated economic lives.
NOTE 3 - RESTRICTIONS ON CASH AND DEMAND BALANCES IN OTHER BANKS
The Bank is required to maintain average reserve balances in the form of cash
or balances due from the Federal Reserve Bank. These reserve balances vary
depending on the level of client deposits in the Bank. The amounts of reserve
balances required at December 31, 1999 and 1998 were approximately $6,605,000
and $5,179,000.
NOTE 4 - SECURITIES
The amortized cost and fair value of securities as of December 31, 1999, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE Amortized Unrealized Unrealized Fair
In thousands of dollars Cost Gains Losses Value
====================================================================================================================================
<S> <C> <C> <C> <C>
1999
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and agency securities $20,537 $ 17 $ (318) $20,236
Mortgage backed agency securities 16,040 37 (281) 15,796
Obligations of states and political subdivisions 37,973 257 (361) 37,869
Corporate, asset backed and other securities 8,129 -- (107) 8,022
- ------------------------------------------------------------------------------------------------------------------------------------
Total $82,679 $ 311 $(1,067) $81,923
====================================================================================================================================
1998
- ------------------------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================================
</TABLE>
Page A-24
<PAGE> 41
NOTE 4 - SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY Amortized Unrealized Unrealized Fair
In thousands of dollars Cost Gains Losses Value
====================================================================================================================================
<S> <C> <C> <C> <C>
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
====================================================================================================================================
</TABLE>
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 1999 1998 1997
====================================================================================================================================
<S> <C> <C> <C>
Sales proceeds $ -- $ 3,035 $ 2,002
Gross gains on sales -- 54 6
Gross losses on sales -- -- (1)
Gross gains on calls 28 -- --
</TABLE>
The amortized cost and fair value of securities by contractual maturity are
shown below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Asset-backed securities are included in periods based
on their estimated lives.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
SECURITIES ------------------
As of December 31, 1999 Amortized Fair
In thousands of dollars Cost Value
====================================================================================================================================
<S> <C> <C>
Due in one year or less $ 8,685 $ 8,704
Due after one year through five years 59,030 58,505
Due after five years through ten years 8,555 8,410
Due after ten years 4,833 4,728
Equity securities 1,576 1,576
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities $82,679 $81,923
====================================================================================================================================
</TABLE>
Securities carried at $21,424,000 and $9,114,000 as of December 31, 1999 and
1998 were pledged to secure deposits of public funds, funds borrowed,
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 1999 1998
====================================================================================================================================
<S> <C> <C>
Personal $ 59,045 $ 58,797
Business, including commercial mortgages 99,832 82,521
Tax exempt 1,710 1,381
Residential mortgage 113,996 104,368
Residential mortgages held for sale 154 535
Construction 33,530 22,647
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans $308,267 $270,249
====================================================================================================================================
</TABLE>
Page A-25
<PAGE> 42
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 1999 1998 1997
====================================================================================================================================
<S> <C> <C> <C>
Balance, January 1 $ 2,799 $ 2,467 $ 2,320
Loans charged off (968) (1,106) (1,189)
Recoveries credited to allowance 209 190 81
Provision charged to operations 1,260 1,248 1,255
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 3,300 $ 2,799 $ 2,467
====================================================================================================================================
</TABLE>
Information regarding impaired loans for the years ended December 31 follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1999 1998 1997
====================================================================================================================================
<S> <C> <C> <C>
Average investment in impaired loans $1,574 $ 908 $ 938
Interest income recognized on impaired loans 52 36 79
Interest income recognized on a cash basis 52 36 60
Balance of impaired loans at December 31 $1,640 $1,163
Portion for which no allowance for loan losses is allocated 1,101 178
Portion for which an allowance for loan losses is allocated 539 985
Portion of allowance for loan losses allocated to impaired loans 65 136
====================================================================================================================================
</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 $124,179,000 and $121,371,000 at December 31,
1999 and 1998. The balance of loans serviced for others related to servicing
rights that have been capitalized was $101,161,000 and $88,357,000 at December
31, 1999 and 1998.
Unamortized cost of mortgage servicing rights for the period ended December 31
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1999 1998 1997
====================================================================================================================================
<S> <C> <C> <C>
Balance at January 1 $ 646 $ 340 $ 185
Amount capitalized 195 468 190
Amount amortized (113) (162) (35)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 728 $ 646 $ 340
====================================================================================================================================
</TABLE>
No valuation allowance was considered necessary at December 31, 1999 and 1998.
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment as of December 31 consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1999 1998
====================================================================================================================================
<S> <C> <C>
Land $ 1,607 $ 1,586
Buildings and improvements 10,547 9,117
Furniture and equipment 7,689 7,083
Computer software 1,342 1,204
- ------------------------------------------------------------------------------------------------------------------------------------
Total cost 21,185 18,990
Less accumulated depreciation (8,069) (7,584)
- ------------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net $ 13,116 $ 11,406
====================================================================================================================================
</TABLE>
Depreciation expense was approximately $1,232,000 in 1999, $1,291,000 in 1998
and $1,078,000 in 1997.
Page A-26
<PAGE> 43
NOTE 9 - DEPOSITS
Information relating to maturities of time deposits as of December 31 is
summarized below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1999 1998
====================================================================================================================================
<S> <C> <C>
Within one year $ 97,272 $ 81,922
Between one and two years 27,660 35,396
Between two and three years 10,045 11,791
Between three and four years 4,588 1,299
Between four and five years 4,172 1,195
More than five years 2 17
- ------------------------------------------------------------------------------------------------------------------------------------
Total time deposits $ 143,739 $131,620
====================================================================================================================================
</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 $22.0 million from two major correspondent
banks to purchase federal funds on a daily basis. There was $19.3 million and
$3.2 million of federal funds purchased outstanding at December 31, 1999 and
1998.
During 1999 the Company arranged for $10.5 million in short term credit from
the Federal Reserve Bank discount window. At December 31, 1999 there was no
outstanding balance.
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. There was no outstanding balance at December 31, 1999 and $674,000 of
repurchase agreements were outstanding at year-end 1998.
NOTE 11 - OTHER BORROWINGS
The Bank carried fixed rate, noncallable advances from the Federal Home Loan
Bank of Indianapolis totaling $3.6 million and $10.9 million at December 31,
1999 and 1998. As of December 31, 1999, those advances consist of $3.6 million
at 6.18% due in scheduled payments from 2000 to 2008. These advances are
collateralized by residential mortgage loans and U.S. Treasury and government
agency securities 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 as of
December 31 are shown below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1999 1998
====================================================================================================================================
<S> <C> <C>
Within one year $ 296 $ 7,276
Between one and two years 319 296
Between two and three years 342 319
Between three and four years 368 342
Between four and five years 396 368
More than five years 1,903 2,299
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 3,624 $10,900
====================================================================================================================================
</TABLE>
Page A-27
<PAGE> 44
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet financing needs of its clients. These
financial instruments include commitments to make loans, unused lines of
credit, and letters of credit. The Bank's exposure to credit loss in the event
of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount of those
instruments. The Bank follows the same credit policy to make such commitments
as is followed for those loans and investments recorded in the consolidated
financial statements. The Bank's commitments to extend credit are agreements at
predetermined terms, as long as the client continues to meet specified
criteria, with fixed expiration dates or termination clauses.
The following table shows the commitments to make loans and the unused lines of
credit available to Bank clients at December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Variable Fixed Variable Fixed
In thousands of dollars Rate Rate Rate Rate
====================================================================================================================================
<S> <C> <C> <C> <C>
Commitments to make loans $ 5,102 $ 3,771 $ 1,557 $ 6,681
Unused lines of credit 60,033 3,839 57,242 1,754
Standby letters of credit 1,719 -- 3,212 --
====================================================================================================================================
</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, 1999, the rates for amounts in the fixed rate category ranged from
6.75% to 10.50%.
NOTE 13 - FEDERAL INCOME TAX
Income tax expense consists of the following for the years ended December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1999 1998 1997
====================================================================================================================================
<S> <C> <C> <C>
Current $ 1,981 $ 1,874 $ 1,814
Deferred (162) (71) 2
- ------------------------------------------------------------------------------------------------------------ -----------------------
Total income tax expense $ 1,819 $ 1,803 $ 1,816
====================================================================================================================================
</TABLE>
The components of deferred tax assets and liabilities at December 31, are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1999 1998
====================================================================================================================================
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 848 $ 677
Deferred compensation 184 158
Unrealized depreciation on securities available for sale 257 --
Other 53 36
- ------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets $ 1,342 $ 871
Deferred tax liabilities:
Property and equipment $ (538) $ (476)
Mortgage servicing rights (248) (220)
Core deposit intangible (25) (48)
Unrealized appreciation on securities available for sale -- (165)
Other (203) (218)
- ------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities $ (1,014) $(1,127)
- ------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 328 $ (256)
====================================================================================================================================
</TABLE>
No valuation allowance was considered necessary at December 31, 1999 and 1998.
Page A-28
<PAGE> 45
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 1999 1998 1997
==========================================================================================================================
<S> <C> <C> <C>
Income taxes at statutory rate of 34% $ 2,358 $ 2,348 $ 2,322
Effect of non-taxable income, net of nondeductible interest expense (551) (577) (536)
Other 12 32 30
- --------------------------------------------------------------------------------------------------------------------------
Total federal income tax $ 1,819 $ 1,803 $ 1,816
==========================================================================================================================
</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, 1998 was
$10,248,000. During 1999, new loans to such related parties amounted to
$7,568,000 and repayments amounted to $2,526,000, resulting in a balance at
December 31, 1999 of $15,290,000. Related party deposits totaled $3,095,000 and
$4,873,000 at December 31, 1999 and 1998.
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, 1999, $11.2
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 1999 and 1998. The maximum
contribution was 12% of their compensation for 1997. The Bank offers
discretionary matching of funds for a percentage of the employee contribution,
plus an amount based on Bank earnings. The Bank's contribution expense for
1999, 1998 and 1997 were $479,000, $459,000 and $348,000.
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 2,282 shares in 1999, 2,072 shares in 1998 and 1,775 shares in
1997 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
Page A-29
<PAGE> 46
plan by an eligible director ultimately will be payable in common stock or cash
at the discretion of the participant, in an amount equivalent to the market
value of common stock at the time of payment.
SENIOR MANAGEMENT BONUS DEFERRAL STOCK PLAN
In 1996, the Company also adopted a deferred compensation plan designated as
the Senior Management Bonus Deferral Stock Plan. The Management Plan has
essentially the same purposes as the Director Plan discussed above and permits
eligible employees of the Company or of the Bank or another affiliated entity
to elect cash bonus deferrals and, after employment termination, to receive
payouts in whole or in part in the form of common stock on terms substantially
similar to those of the Director Plan. The Management Plan did not increase the
amounts of bonuses potentially payable to any employee.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
During 1997, the Company discontinued postretirement health care and life
insurance benefits for future retirees. Approximately $151,000 of prior years
accrued liability was reversed.
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>
- -------------------------------------------------------------------------------------------------------------------------
As of December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Carrying Carrying
In thousands of dollars Value Fair Value Value Fair Value
=========================================================================================================================
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 17,469 $ 17,469 $ 12,348 $ 12,348
Securities 81,923 81,923 95,387 96,467
Net loans 304,967 303,170 267,450 269,475
Accrued interest receivable 2,600 2,600 2,432 2,432
Financial Liabilities
Deposit liabilities $(360,843) $(360,514) $ (337,267) $ (338,586)
Short term borrowings (19,300) (19,300) (3,874) (3,874)
Other borrowings (3,624) (3,456) (10,900) (11,087)
Accrued interest payable (958) (958) (1,037) (1,037)
=========================================================================================================================
</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. The allowance for loan losses
is considered to be a reasonable estimate of discount for credit quality
concerns
Page A-30
<PAGE> 47
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 CAPITAL REQUIREMENTS
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
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Total capital to risk weighted assets $ 40,467 14.2% $ 22,843 8.0% $ 28,554 10.0%
Tier I capital to risk weighted assets 37,167 13.0% 11,422 4.0% 17,133 6.0%
Tier I capital to average assets 37,167 9.2% 16,207 4.0% 20,258 5.0%
==================================================================================================================================
==================================================================================================================================
As of December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
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%
==================================================================================================================================
</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 1999 and 1998 by their regulators.
Page A-31
<PAGE> 48
NOTE 19 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars 1999 1998 1997
==================================================================================================================================
<S> <C> <C> <C>
Unrealized gains and (losses) on securities available for sale $(1,450) $ 178 $ 163
Reclassification for amount transferred from held to maturity to
available for sale upon adoption of SFAS No. 133 237 - -
Reclassification for realized amount included in income (28) (46) (5)
- ----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax effect (1,241) 132 158
Tax expense (benefit) (422) 45 54
- ----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $ (819) $ 87 $ 104
==================================================================================================================================
</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 1999 1998
==================================================================================================================================
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 140 $ 114
Investment in subsidiary 40,775 38,609
Other assets 776 734
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 41,691 $ 39,457
==================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 727 $ 693
Shareholders' equity 40,964 38,764
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 41,691 $ 39,457
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME For the years ended December 31,
In thousands of dollars 1999 1998 1997
==================================================================================================================================
<S> <C> <C> <C>
INCOME
Dividends from subsidiary $ 2,168 $ 1,906 $ 1,748
Other income 1 1 1
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 2,169 1,907 1,749
TOTAL NONINTEREST EXPENSE 57 46 41
- ----------------------------------------------------------------------------------------------------------------------------------
Income before undistributed net income of subsidiary and income taxes 2,112 1,861 1,708
Income tax benefit (19) (14) (14)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income before undistributed net income of subsidiary 2,131 1,875 1,722
Equity in undistributed net income of subsidiary 2,984 3,227 3,291
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME 5,115 5,102 5,013
Net change in unrealized gains (losses) on securities held by subsidiary (819) 87 104
- ----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (819) 87 104
- ----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 4,296 $ 5,189 $ 5,117
==================================================================================================================================
</TABLE>
Page A-32
<PAGE> 49
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31,
In thousands of dollars 1999 1998 1997
==================================================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,115 $ 5,102 $ 5,013
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Undistributed net income of subsidiary (2,984) (3,227) (3,291)
Change in other assets (42) (81) 1
Change in other liabilities (3) 12 11
- ----------------------------------------------------------------------------------------------------------------------------------
Total adjustments (3,029) (3,296) (3,279)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 2,086 1,806 1,734
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock transactions 171 164 124
Dividends paid (2,231) (1,985) (1,809)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities (2,060) (1,821) (1,685)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 26 (15) 49
Cash and cash equivalents at beginning of year 114 129 80
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 140 $ 114 $ 129
==================================================================================================================================
</TABLE>
Page A-33
<PAGE> 50
APPENDIX B
UNITED BANCORP, INC.
1999 STOCK OPTION PLAN
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS: As used herein, the following terms shall have the meaning set
forth below, unless the context clearly requires otherwise:
(a) "Applicable Event" shall mean (i) the expiration of a tender offer or
exchange offer (other than an offer by the Company) pursuant to which more
than 25% of the Company's issued and outstanding stock has been purchased,
or (ii) the entry into an agreement by the Board of Directors of the
Company to merge or consolidate the Company with or into another entity
where the Company is not the surviving entity, an agreement to sell or
otherwise dispose of all or substantially all of the Company's or the
Bank's assets (including a plan of liquidation), or the approval by the
shareholders of the Company of an agreement to merge or consolidate the
Company with or into another entity where the Company is the surviving
entity, pursuant to which more than 25% of the stock of the surviving
company will be owned by persons who were not holders of the Company's
issued and outstanding stock at the time of the agreement.
(b) "Bank" shall mean United Bancorp, Inc., and any subsidiary of United
Bancorp, Inc.
(c) "Administrative Committee" shall mean a Committee consisting of the members
of the Executive Committee of the Board of Directors of the Company who are
not employees of the Company.
(d) "Company" shall mean United Bancorp, Inc.
(e) "Director" shall mean a member of the Board of Directors of the Company.
(f) "Effective Date" with respect to the Plan shall mean the date specified in
Section 2.3 as the Effective Date.
(g) "Fair Market Value" with respect to a share of Stock shall mean the fair
market value of the Stock, as determined by application of market trading
or such other reasonable valuation methods as the Committee shall adopt or
apply. The Committee's determination of Fair Market Value shall be
conclusive and binding on the Company and the Participant.
(h) "Option" shall mean an option to purchase Stock granted pursuant to the
provisions of the Plan. Options granted under the Plan shall be
Non-qualified Stock Options. Non-qualified Stock Options shall mean an
Option to purchase shares of Stock which is not an Incentive Stock Option
under Section 422 of the Internal Revenue Code.
(i) "Participant" shall mean officers and Directors of the Company and/or any
subsidiaries to whom an Option has been granted.
(j) "Plan" shall mean the United Bancorp, Inc. 1999 Stock Option Plan, the
terms of which are set forth herein.
(k) "Plan Year" shall mean the twelve-month period beginning on the Effective
Date, and each twelve-month period thereafter beginning on the anniversary
date of the Effective Date.
Page B-1
<PAGE> 51
(l) "Stock" shall mean the Common Stock of the Company or, in the event
that the outstanding shares of Stock are changed into or exchanged for
shares of a different stock or securities of the Company or some other
entity, such other stock or securities.
(m) "Stock Option Agreement" shall mean the agreement between the Company
and the Participant under which the Participant may purchase Stock
pursuant to the terms of the Plan.
ARTICLE II
THE PLAN
2.1 NAME. This plan shall be known as the "United Bancorp, Inc. 1999
Stock Option Plan."
2.2 PURPOSE. The purpose of the Plan is to advance the interests of the
Company and its shareholders by affording to officers and Directors of
the Company and/or any subsidiaries an opportunity to acquire or increase
their proprietary interest in the Company by the grant to such persons of
Options under the terms set forth herein. By encouraging such persons to
become owners of the Company, the Company seeks to attract, motivate,
reward and retain those highly competent individuals upon whose judgment,
initiative, leadership and efforts the success of the Company depends.
2.3 EFFECTIVE DATE AND TERM. The Plan was approved by the Board of
Directors of the Company on December 8, 1999 and shall be effective May 1,
2000, as approved by a majority of the shareholders of the Company present
in person or by proxy at the meeting of shareholders of the Company held
on April 18, 2000. The Plan shall terminate upon the fifth anniversary of
the Effective Date, unless the plan is extended with the approval of the
shareholders.
ARTICLE III
ADMINISTRATION
3.1 ADMINISTRATION.
(a) The Plan shall be administered by the Administrative Committee.
Subject to the express provisions of the Plan, the Administrative
Committee shall have sole discretion and authority to determine from
time to time the individuals to whom Options may be granted, the
number of shares of Stock to be subject to each Option, the period
during which such Option may be exercised and the price at which such
Option may be exercised.
(b) Meetings of the Administrative Committee shall be held at such times
and places as shall be determined from time to time by the
Administrative Committee. A majority of the members of the
Administrative Committee shall constitute a quorum for the transaction
of business and the vote of a majority of those members present at any
meeting shall decide any question brought before the meeting. In
addition, the Administrative Committee may take any action otherwise
proper under the Plan by the affirmative vote, taken without a
meeting, of a majority of the members.
(c) No member of the Administrative Committee shall be liable for any act
or omission of any other member of the Committee or for any act or
omission on his own part, including, but not limited to, the exercise
of any power or discretion given to him under the Plan, except those
resulting from his own gross negligence or willful misconduct. All
questions of interpretations and application with respect to the Plan
or Options granted thereunder shall be
Page B-2
<PAGE> 52
subject to the determination, which shall be final and binding, of a
majority of the whole Administrative Committee.
3.2 COMPANY ASSISTANCE. The Company shall supply full and timely
information to the Administrative Committee on all matters relating to
eligible employees, their employment, death, retirement, disability or
other termination of employment, and such other pertinent facts as the
Administrative Committee may require. The Company shall furnish the
Administrative Committee with such clerical and other assistance as is
necessary in the performance of its duties.
ARTICLE IV
PARTICIPANTS
4.1 ELIGIBILITY. The Company's Management Committee and other vice
presidents of the Company or subsidiaries that may be approved by the
Administrative Committee, and Directors of the Company or subsidiaries.
ARTICLE V
SHARES OF STOCK SUBJECT TO PLAN
5.1 GRANT OF OPTIONS AND LIMITATIONS.
(a) As of the first day of each Plan Year, Options shall be granted
according to the following schedule:
1. Officers of the Company or subsidiaries as designated by the
Administrative Committee shall be eligible to receive Options
for the number of shares of Stock determined by the
Administrative Committee.
2. Each person who is a Director of the Company or its
subsidiaries, and is not actively employed by the Company
shall receive Options for 1,000 shares of Stock upon inception
of the Plan.
(b) STOCK AVAILABLE FOR OPTIONS. Subject to adjustment pursuant to the
provisions of Section 9.3 hereof, the aggregate number of shares
with respect to which Options may be granted during the term of the
Plan shall not exceed 109,000 shares of Company Stock. Shares with
respect to which Options may be granted may be either authorized and
unissued shares or shares issued and thereafter acquired by the
Company.
5.2 OPTIONS UNDER THE PLAN. If Options granted hereunder shall expire,
terminate or be canceled for any reason without being wholly exercised,
new Options may be granted hereunder covering the number of shares to
which such Option expiration, termination or cancellation relates. Shares
of Stock that have been exercised with respect to which an Option
granted hereunder shall not again be available for grant hereunder.
ARTICLE VI
OPTIONS
6.1 OPTION GRANT AND AGREEMENT. Each Option granted hereunder shall be
evidenced by minutes of a meeting or the written consent of at least a
majority of the members of the Administrative Committee and by a written
Stock Option Agreement dated as of the date of grant and executed by the
Company and the Participant. The Stock Option Agreement shall set
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forth such terms and conditions as may be determined by the Administrative
Committee consistent with the Plan.
6.2 OPTION PRICE. The exercise price of the Stock subject to each Option
shall not be less than the Fair Market Value of the Stock on the date the
Option is granted.
6.3 OPTION GRANT AND EXERCISE PERIODS. No Option may be granted after the
fifth anniversary of the Effective Date. The period for exercise of each
Option shall be determined by the Committee, but in no instance shall such
period extend beyond the tenth anniversary of the date of grant of the
Option.
6.4 OPTION EXERCISE.
(a) The Company shall not be required to sell or issue shares under any
Option if the issuance of such shares shall constitute or result in
a violation by the Participant or the Company of any provisions of
any law, statute or regulation of any governmental authority.
Specifically, in connection with the Securities Act of 1933, (the
"Act"), upon exercise of any Option, the Company shall not be
required to issue such shares unless the Administrative Committee
has received evidence satisfactory to it to the effect that
registration under the Act and applicable state securities laws is
not required, unless the offer and sale of securities under the Plan
is registered or qualified under the Act and applicable state laws.
Any determination in this connection by the Administrative Committee
shall be final, binding and conclusive. If shares are issued under
any Option without registrations under the Act of applicable state
securities laws, the Participant may be required to accept the
shares subject to such restrictions on transferability as may in the
reasonable judgment of the Administrative Committee be required to
comply with exemptions from registrations under such laws. The
Company may, but shall in no event be obligated to, register any
securities covered hereby pursuant to the Act of applicable state
securities laws. The Company shall not be obligated to take any
other affirmative action in order to cause the exercise of an Option
or the issuance of shares pursuant thereto to comply with any law or
regulation of any governmental authority.
(b) Subject to Section 6.4(c) and such terms and conditions as may be
determined by the Committee in its sole discretion upon the grant of
an Option, an Option may be exercised in whole or in part and from
time to time by delivering to the Company at its principal office
written notice of intent to exercise the Option with respect to a
specified number of shares.
(c) An Option shall be exercisable according to the following vesting
schedule:
33% after one year from the date of grant
66% after two years from the date of grant
100% after three years from the date of grant
Provided, however, that upon the earlier of (i) the occurrence of an
Applicable Event, (ii) the death of Participant (iii) or total
disability, all Options granted to the Participant shall be fully
exercisable in accordance with terms of the Plan. For purposes of this
Plan, a Participant is totally disabled if he is receiving disability
benefits under the Social Security Act as the result of a total and
permanent disability, or is determined to be totally disabled under
any long-term disability plan sponsored by the Company.
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At the discretion of the Committee, all or a portion of Options
previously granted to a Participant can be amended to reduce the
vesting schedule or immediately 100% vest the Options.
(d) Subject to such terms and conditions as may be determined by the
Administrative Committee in its sole discretion upon grant of any
Option, payment for the shares to be acquired pursuant to exercise
of the Option shall be made as follows:
1. by delivering to the Company at its principal office a check
payable to the order of the Company, in the amount of the
Option price for the number of shares of Stock with respect to
which the Option is then being exercised; or
2. by delivering to the Company at its principal office
certificates representing Stock, duly endorsed for transfer to
the Company, having an aggregate Fair Market Value as of the
date of exercise equal to the amount of the Option price, for
the number of shares of Stock with respect to which the Option
is then being exercised; or
3. by any combination of payments delivered pursuant to
paragraphs (d)(1) and (d)(2) above.
6.5 RIGHTS AS SHAREHOLDER. A Participant shall have no rights as a
Shareholder with respect to any share subject to such Option prior to
the exercise of the Option and the purchase of such shares.
ARTICLE VII
TERMINATION, AMENDMENT AND MODIFICATION OF PLAN
7.1 TERMINATION. The Board of Directors of the Company may at any
time and from time to time and in any respect amend, modify or terminate
the Plan; provided, however, that absent the approval of holders
representing a majority of the voting shares of stock of the Company,
no such action may:
(a) increase the total number shares of Stock subject to the Plan, or
(b) withdraw the administration of the Plan from the Administrative
Committee; or
(c) change the terms by which an Option may be exercised, in whole or in
part, as described in Section 6.4 of this Plan; or
(d) change the limitation on the price at which Options may be granted
hereunder as provided by Section 6.2 or;
(e) affect any Stock Option Agreement previously executed pursuant to
the Plan without the consent of the Participant.
ARTICLE VIII
MISCELLANEOUS
8.1 NONTRANSFERABILITY OF OPTION. No Option may be transferred by a
Participant under any circumstances. During the lifetime of a
Participant the Option shall be exercisable only by the Participant.
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8.2 EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH.
(a) If a Participant's status as a Director or an employee of the
Company terminates for any reason other than the death, disability
or termination of service after attainment of age 65 for an
employee, or age 70 for a Director, before the date of expiration of
non-exercised Stock Options held by such Participant, such Stock
Options shall become null and void on the 90th day following the
date of such termination. A Participant who terminates employment
with the Company, but retains his status as a Director, or an
employee who is no longer a Director, is not considered terminated
for purposes of this Section 8.2. The date of such termination shall
be the date the Participant ceases to be a Director or employee of
the Company.
(b) If a Participant dies or becomes totally disabled before the
expiration of non-exercised Stock Options held by the Participant,
such Stock Options shall terminate on the earlier of (i) the
date of expiration of the Stock Options or (ii) one year following
the date of the Participant's death or disability. The executor,
administrator, or personal representative of the estate of a
deceased Participant shall have the right to exercise the
Participant's Stock Option. To the extent that such Stock Options
would otherwise be exercisable under the terms of the Plan and the
Participant's Stock Option Agreement, such exercise may occur at any
time prior to the termination date specified in this paragraph.
(c) If a Participant separates from service after attainment of age 65
for an employee or age 70 for a Director before the expiration of
non-exercised Stock Options held by the Participant, such Stock
Options shall terminate on the earlier of (i) the date of
expiration of the Stock Options or (ii) three years following the
date of the Participant's termination of service.
8.3 ANTIDILUTION. The provisions of subsections (a) and (b) shall
apply in the event that the outstanding shares of Stock are changed into
or exchanged for a different number or kind of shares or other securities
of the Company or another entity by reason or any merger, consolidation,
reorganization, recapitalization, reclassification, combination, stock
split or stock dividend.
(a) The aggregate number and kind of shares subject to Options which may
be granted hereunder shall be adjusted appropriately.
(b) Where dissolution or liquidation of the Company or any merger or
combination in which the Company is not a surviving company is
involved, each outstanding Option granted hereunder shall, subject
to Section 7.1, terminate.
The foregoing adjustments and the manner of application of the foregoing
provisions shall be determined solely by the Administrative Committee and
any such adjustment may provide for the elimination of fractional share
interests.
8.4 APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of Stock pursuant to Options shall be used for general corporate
purposes.
8.5 TENURE. Nothing in the Plan or in any Option granted hereunder, or in
any Stock Option Agreement relating thereto, shall confer upon any
Director or officer, the right to continue in such position with the
Company.
8.6 OTHER COMPENSATION PLANS. The adoption of the Plan shall not affect
any other stock option or incentive or other compensation plan in effect
for the Company, nor shall the Plan
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preclude the Company from establishing any other forms of incentive or
other compensation for Directors or officers of the Company.
8.7 NO OBLIGATION TO EXERCISE OPTIONS. The granting of an Option shall
impose no obligation upon the Participant to exercise such Option.
8.8 PLAN BINDING ON SUCCESSORS. The Plan shall be binding upon the
successors and assigns of the Company.
8.9 SINGULAR, PLURAL GENDER. Whenever used herein, nouns in the singular
shall include the plural, and the masculine pronoun shall include
feminine.
8.10 HEADINGS, ETC., NO PART OF PLAN. Headings of Articles and Sections
hereof are inserted for convenience of reference; they constitute no part
of the Plan.
8.11 GOVERNING LAW. Except as otherwise required by law, the validity,
construction and administration of this Plan shall be determined under
the Laws of the State of Michigan.
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[UNITED BANCORP, INC. LOGO]
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PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 18, 2000
================================================================================
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
18, 2000 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 III Directors" until the 2003 Annual
Meeting of Shareholders, or until their successors have been elected and
qualified:
Class III Director Nominees:
David N. Berlin Richard A. Gurdjian Richard Niethammer
Joseph D. Butcko Kathryn M. Mohr John J. Wanke
Mark only one box
| | FOR all nominees | | FOR, except vote withheld from the
following nominees:
| | WITHHELD from all nominees
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PROPOSAL 2
To ratify the appointment of Crowe, Chizek and Company, LLP as independent
auditors.
| | FOR | | AGAINST | | ABSTAIN
================================================================================
================================================================================
PROPOSAL 3
To approve adoption of the Company's 1999 Stock Option Plan.
| | FOR | | AGAINST | | ABSTAIN
================================================================================
Witness my hand and seal this day of
-------
------------, 2000.
------------------------------------------
(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.
- --------------------------------------------------------------------------------
Post Office Box 248 - 205 East Chicago Boulevard - Tecumseh, Michigan 49286 -
Phone 517.423.8373 - Fax 517.423.5041 - www.ubat.com
