-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KZh4Dn7AWre+mU4fHcKW9ISA7orZbgHulTnw6Xxkufv/cKEyBS13VcLrdWzuXYH6 6Wc+tYv9aI8N0ikdfJjMDQ== 0000950124-01-503962.txt : 20020410 0000950124-01-503962.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950124-01-503962 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED BANCORP INC /MI/ CENTRAL INDEX KEY: 0000775345 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382606280 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16640 FILM NUMBER: 1784768 BUSINESS ADDRESS: STREET 1: 205 E CHICAGO BLVD CITY: TECUMSEH STATE: MI ZIP: 49286 BUSINESS PHONE: 5174238373 MAIL ADDRESS: STREET 1: 205 E CHICAGO BLVD STREET 2: P O BOX 248 CITY: TECUMSEH STATE: MI ZIP: 49286 10-Q 1 k66006e10-q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ------------------------- COMMISSION FILE #0-16640 UNITED BANCORP, INC. (Exact name of registrant as specified in its charter) MICHIGAN 38-2606280 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 205 E. CHICAGO BOULEVARD, TECUMSEH, MI 49286 (Address of principal executive offices, including Zip Code) Registrant's telephone number, including area code: (517) 423-8373 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 2, 2001, there were outstanding 2,006,683 shares of the registrant's common stock, no par value. Page 1 CROSS REFERENCE TABLE
ITEM NO. DESCRIPTION PAGE NO. - ------------------------------------------------------------------------------------------------------------------------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Condensed) 3 (a) Consolidated Balance Sheets 3 (b) Consolidated Statements of Income 4 (c) Consolidated Statements of Changes in Shareholders' Equity 5 (d) Consolidated Statements of Cash Flows 6 (e) Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Financial Condition 9 Liquidity 12 Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use of Proceeds 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19
Page 2 PART I FINANCIAL INFORMATION ITEM 1- FINANCIAL STATEMENTS (Condensed) (a) CONSOLIDATED BALANCE SHEETS
In thousands of dollars (unaudited) (unaudited) September 30, December 31, September 30, 2001 2000 2000 ------------ ------------ ------------- ASSETS Cash and demand balances in other banks $ 14,294 $ 16,822 $ 20,348 Federal funds sold 6,300 21,300 - ---------- ---------- --------- Total cash and cash equivalents 20,594 38,122 20,348 Securities available for sale 86,078 72,679 74,817 Loans held for sale 1,126 1,156 624 Portfolio loans 370,899 337,351 335,287 ---------- ---------- --------- Total loans 372,025 338,507 335,911 Less allowance for loan losses 4,569 4,032 3,968 ---------- ---------- --------- Net loans 367,456 334,475 331,943 Premises and equipment, net 15,322 13,431 12,920 Accrued interest receivable and other assets 10,065 10,154 10,328 ---------- ---------- --------- TOTAL ASSETS $ 499,515 $ 468,861 $ 450,356 ========== ========== ========= LIABILITIES Deposits Noninterest bearing $ 54,791 $ 52,555 $ 53,408 Interest bearing certificates of deposit of $100,000 or more 29,445 46,445 43,121 Other interest bearing deposits 351,055 308,957 289,045 ---------- ---------- --------- Total deposits 435,291 407,957 385,574 Federal funds purchased and other short term borrowings 1,013 - 5,600 Other borrowings 12,009 12,328 12,328 Accrued interest payable and other liabilities 3,452 3,522 3,080 ---------- ---------- --------- TOTAL LIABILITIES 451,765 423,807 406,582 SHAREHOLDERS' EQUITY Common stock and paid in capital, no par value; 5,000,000 shares authorized; 2,006,683, 1,911,603 and 1,909,520 shares issued and outstanding 33,384 28,399 28,264 Retained earnings 13,287 16,374 15,733 Accumulated other comprehensive income (loss), net of tax 1,079 281 (223) ---------- ---------- --------- TOTAL SHAREHOLDERS' EQUITY 47,750 45,054 43,774 ---------- ---------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 499,515 $ 468,861 $ 450,356 ========== ========== =========
The accompanying notes are an integral part of these consolidated financial statements. Page 3 (b) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended In thousands of dollars, except per share data September 30, September 30, ---------------------------------------------------------- 2001 2000 2001 2000 ------------- -------- -------- ---------- INTEREST INCOME Interest and fees on loans Taxable $ 7,408 $ 7,379 $ 22,090 $ 21,317 Tax exempt 24 29 74 85 Interest on securities Taxable 642 697 1,926 2,142 Tax exempt 412 394 1,228 1,211 Interest on federal funds sold 121 9 690 9 -------- -------- -------- ------- Total interest income 8,607 8,508 26,008 24,764 INTEREST EXPENSE Interest on certificates of deposit of $100,000 or more 413 611 1,535 1,593 Interest on other deposits 2,973 3,155 9,749 8,784 Interest on short term borrowings 8 143 13 717 Interest on other borrowings 209 214 632 501 -------- -------- -------- ------- Total interest expense 3,603 4,123 11,929 11,595 -------- -------- -------- ------- NET INTEREST INCOME 5,004 4,385 14,079 13,169 Provision for loan losses 196 240 602 948 -------- -------- -------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,808 4,145 13,477 12,221 NONINTEREST INCOME Service charges on deposit accounts 605 575 1,759 1,699 Trust & Investment fee income 680 718 2,061 2,070 Gains on securities transactions - - - 4 Loan sales and servicing 301 124 797 286 Sales of nondeposit investment products 212 146 599 493 Gain on sale of credit card loans - - - 308 Other income 356 209 1,080 680 -------- -------- -------- ------- Total noninterest income 2,154 1,772 6,296 5,540 NONINTEREST EXPENSE Salaries and employee benefits 3,085 2,201 8,248 6,516 Occupancy and equipment expense, net 949 697 2,640 2,124 Other expense 1,315 1,104 3,963 3,323 -------- -------- -------- ------- Total noninterest expense 5,349 4,002 14,851 11,963 -------- -------- -------- ------- INCOME BEFORE FEDERAL INCOME TAX 1,613 1,915 4,922 5,798 Federal income tax 429 538 1,319 1,618 -------- -------- -------- ------- NET INCOME $ 1,184 $ 1,377 $ 3,603 $ 4,180 ======== ======== ======== ======= Basic earnings per share $ 0.59 $ 0.68 $ 1.79 $ 2.08 Diluted earnings per share 0.59 0.68 1.78 2.08 Cash dividends declared per share of common stock 0.30 0.29 0.89 0.84
The accompanying notes are an integral part of these consolidated financial statements. Page 4 (c) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) In thousands of dollars
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 2001 2000 2001 2000 ----------- ---------- --------- ---------- Balance at beginning of period $ 46,765 $ 42,579 $ 45,054 $ 40,964 Net Income 1,184 1,377 3,603 4,180 Other comprehensive income: Net change in unrealized gains (losses) on securities available for sale, net 389 354 798 276 ---------- ---------- --------- --------- Total comprehensive income 1,573 1,731 4,401 4,456 Cash dividends declared (603) (573) (1,778) (1,690) Common stock and contingently issuable stock 15 37 73 44 ---------- ---------- --------- --------- Balance at end of period $ 47,750 $ 43,774 $ 47,750 $ 43,774 ========== ========== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. Page 5 (d) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In thousands of dollars Nine Months Ended September 30, ------------------------------ 2001 2000 ------------ ----------- Cash Flows from Operating Activities Net income $ 3,603 $ 4,180 Adjustments to Reconcile Net Income to Net Cash from Operating Activities Depreciation and amortization 1,843 1,523 Provision for loan losses 602 948 Gain on sale of credit card loans - (308) Change in loans held for sale 30 (470) Gains on securities transactions - (4) Change in accrued interest receivable and other assets (625) (187) Change in accrued interest payable and other liabilities 131 446 --------- -------- Total adjustments 1,981 1,948 --------- -------- Net cash from operating activities 5,584 6,128 Cash Flows from Investing Activities Securities available for sale Purchases (40,565) (4,653) Maturities and calls 23,194 9,064 Principal payments 4,994 2,979 Proceeds from sale of credit card loans - 3,745 Net change in portfolio loans (33,613) (31,435) Premises and equipment expenditures, net (3,244) (882) --------- -------- Net cash from investing activities (49,234) (21,182) Cash Flows from Financing Activities Net change in deposits 27,334 24,731 Net change in short term borrowings 1,013 (13,700) Proceeds from other borrowings - 9,000 Principal payments on other borrowings (319) (296) Proceeds from common stock transactions 73 44 Dividends paid (1,979) (1,846) --------- -------- Net cash from financing activities 26,122 17,933 --------- -------- Net change in cash and cash equivalents (17,528) 2,879 Cash and cash equivalents at beginning of year 38,122 17,469 --------- -------- Cash and cash equivalents at end of period $ 20,594 $ 20,348 ========= ======== Supplement Disclosure of Cash Flow Information: Interest paid $ 12,490 $ 11,334 Income tax paid 1,710 2,025 Loans transferred to other real estate - 544
The accompanying notes are an integral part of these consolidated financial statements. Page 6 (e) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The unaudited condensed consolidated financial statements of United Bancorp, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ending September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. NOTE 2 - LOANS HELD FOR SALE Mortgage loans serviced for others are not included in the accompanying consolidated statements. The unpaid principal balances of mortgage loans serviced for others was $158,297,000 and $124,151,000 at the end of September 2001 and 2000. The balance of loans serviced for others related to servicing rights that have been capitalized was $142,155,000 and $104,059,000 at September 30, 2001 and 2000. Mortgage servicing rights activity in thousands of dollars for the nine months ended September 30, 2001 and 2000 follows:
Unamortized cost of mortgage servicing rights 2001 2000 --------------------------------------------- -------- ----- Balance at January 1 $ 780 $ 728 Amount capitalized year to date 466 76 Amount amortized year to date (227) (65) -------- ----- Balance at period end $ 1,019 $ 739 ======== =====
No valuation allowance was considered necessary for mortgage servicing rights at period end 2001 and 2000. NOTE 3 - COMMON STOCK AND EARNINGS PER SHARE Basic earnings per share are based upon the weighted average number of shares outstanding plus contingently issuable shares during the year. Diluted earnings per share further assumes the dilutive effect of additional common shares issuable under stock options. During March of 2001 and 2000, the Company declared 5% stock dividends payable in May 2001 and 2000. Earnings per share, dividends per share and weighted average shares have been restated to reflect these stock dividends. Page 7 A reconciliation of basic and diluted earnings per share follows:
Three Months Ended Nine Months Ended In thousands of dollars, except per share data September 30, September 30, ---------------------------------------------------------- 2001 2000 2001 2000 ------------ ----------- ----------- ------------ Net income $ 1,184 $ 1,377 $ 3,603 $ 4,180 =========== =========== =========== ========== Basic earnings: Weighted average common shares outstanding 2,006,854 2,004,828 2,007,015 2,005,215 Weighted average contingently issuable shares 11,747 8,877 11,025 8,360 ----------- ----------- ----------- ---------- Total weighted average shares outstanding 2,018,601 2,013,705 2,018,040 2,013,576 =========== =========== =========== ========== Basic earnings per share $ 0.59 $ 0.68 $ 1.79 $ 2.08 =========== =========== =========== ========== Diluted earnings: Weighted average common shares outstanding from basic earnings per share 2,018,601 2,013,705 2,018,040 2,013,576 Dilutive effect of stock options 1,436 605 3,432 - ----------- ----------- ----------- ---------- Total weighted average shares outstanding 2,020,037 2,014,310 2,021,472 2,013,576 =========== =========== =========== ========== Diluted earnings per share $ 0.59 $ 0.68 $ 1.78 $ 2.08 =========== =========== =========== ==========
NOTE 4 - STOCK OPTIONS In 2000, Shareholders approved the Company's 1999 Stock Option Plan as proposed. The plan is a non- qualified stock option plan as defined under Internal Revenue Service regulations. Under the plan, directors and management of the Company and subsidiaries are given the right to purchase stock of the Company at a stipulated price, adjusted for stock dividends, over a specific period of time. The Plan will continue in effect for five years, unless it is extended with the approval of the Shareholders. The stock subject to the options are shares of authorized and unissued common stock of the Company. As defined in the plan, options representing no more than 120,173 shares (adjusted for stock dividends declared) are to be made available to the plan. Options under this plan are 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. The following is summarized option activity for the plan, adjusted for stock dividends:
Weighted Available Options Average for Grant Outstanding Exercise Price --------- ----------- -------------- Balance at December 31, 2000 84,917 35,256 $ 43.72 Options granted (26,040) 26,040 47.93 Options exercised - (109) 43.54 Options forfeited 641 (641) 46.21 ------- ------- Balance at September 30, 2001 59,518 60,546 45.50 ======= =======
Options granted under the plan during the current year were 17,640 on January 10, 2001 and 8,400 on March 14, 2001. The weighted fair values of the options granted were $5.01 and $4.80. For stock options outstanding at September 30, 2001, the range of average exercise prices was $43.54 to $48.57 and the weighted average remaining contractual term was 8.9 years. At September 30, 2001, 11,006 options were exercisable at the weighted average exercise price of $43.54. Page 8 The following pro forma information presents net income and earnings per share had the fair value method been used to measure compensation cost for stock option grants. The exercise price of the option grants is equivalent to the market value of the underlying stock at the grant date, adjusted for stock dividends.
Three Months Ended Nine Months Ended In thousands of dollars, except per share data September 30, September 30, ---------------------------------------------------------- 2001 2000 2001 2000 ----------- -------- -------- --------- Net income $ 1,184 $ 1,377 $ 3,603 $ 4,180 Pro forma net income 1,165 1,367 3,547 4,164 Basic earnings per share as reported $ 0.59 $ 0.68 $ 1.79 $ 2.08 Pro forma basic earnings per share 0.58 0.68 1.76 2.07 Diluted earnings per share as reported $ 0.59 $ 0.68 $ 1.78 $ 2.08 Pro forma diluted earnings per share 0.58 0.68 1.75 2.07
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion provides information about the consolidated financial condition and results of operations of United Bancorp, Inc. and its subsidiaries for the three and nine month periods ending September 30, 2001 and 2000. FINANCIAL CONDITION SECURITIES Balances in the Company's investment securities portfolio increased during the third quarter of 2001, as investment securities replaced a portion of the Company's short term funds sold. The mix of the securities portfolio continues to evolve slowly. During the quarter, the Company replaced some of the previously- matured U.S. Treasury and agency securities, as the level of tax-exempt investments remained relatively flat. The following chart shows the percentage mix of the securities portfolio.
9/30/2001 12/31/2000 9/30/2000 --------- ---------- ---------- U.S. Treasury and agency securities 12.5% 24.1% 24.5% Mortgage backed agency securities 24.6% 16.9% 17.1% Obligations of states and political subdivisions 46.2% 47.9% 47.7% Corporate, asset backed, and other securities 16.7% 11.1% 10.7% --------- ---------- ---------- Total Securities 100.0% 100.0% 100.0% ========= ========== ==========
The Company's current and projected tax position continues to make carrying tax-exempt securities valuable, 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. Page 9 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 corporate, asset backed and other securities portfolio also contains a moderate level of credit risk. 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 Company's portfolio contains no "high risk" mortgage securities or structured notes. LOANS Loan growth during the third quarter of 2001 continued to be strong. For the period, annualized loan growth was 13.2%, compared to year to date annualized loan growth of 7.38%. Residential mortgages and construction loans declined during the quarter, while business, personal and tax exempt loans increased during the same period. The mix of the loan portfolio has remained relatively unchanged from the prior quarter, but continues a long-term trend toward an increased percentage of personal and business loans, with slight declines in residential mortgage loans. The loan mix also reflects growth at United Bank & Trust - Washtenaw ("UBTW"), which opened in April of 2001. The table below shows total loans outstanding, in thousands of dollars and their percentage of the total loan portfolio. All loans are domestic and contain no significant concentrations by industry or client.
September 30, 2001 December 31, 2000 September 30, 2000 ------------------ ----------------- ------------------ Portfolio loans: Balance % of total Balance % of total Balance % of total ------- ---------- ------- ---------- ------- ---------- Personal $ 63,829 17.2% $ 59,172 17.5% $ 58,648 17.5% Business loans and commercial mortgages 149,682 40.2% 115,155 34.0% 113,876 33.9% Tax exempt 1,827 0.5% 2,030 0.6% 2,084 0.6% Residential mortgage 120,863 32.5% 127,768 37.7% 129,799 38.6% Construction 35,824 9.6% 34,382 10.2% 31,504 9.4% --------- ------ --------- ------- --------- ------ Total loans $ 372,025 100.0% $ 338,507 100.00% $ 335,911 100.0% ========= ====== ========= ======= ========= ======
The Company's subsidiary Banks ("Banks") continue to be providers of residential mortgage loans in their markets. During 2000, United Mortgage Company was formed as a wholly-owned subsidiary of United Bank & Trust ("UBT"), in order to provide more alternatives for delivery of mortgage products. As full service lenders, the Banks offer a variety of home mortgage loan products in their markets. Entry into the Saline and Manchester markets has provided continued opportunities for future continued growth in all loan portfolios, and entry into the Ann Arbor and Dexter markets during 2001 continues to generate additional loan volume. 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 aggregate amount of the Company's nonperforming assets by type, in thousands of dollars. The Company's classification of nonperforming loans is generally consistent with loans identified as impaired. Page 10
9/30/2001 12/31/2000 9/30/2000 --------- ---------- --------- Nonaccrual loans $ 1,098 $ 889 $ 921 Loans past due 90 days or more 837 408 117 Troubled debt restructurings 131 132 133 --------- ----------- ---------- Total nonperforming loans 2,066 1,429 1,171 Other real estate 425 544 544 --------- ----------- ---------- Total nonperforming assets $ 2,491 $ 1,973 $ 1,715 ========== =========== ========== Percent of nonperforming loans to total loans 0.56% 0.42% 0.35% Percent of nonperforming assets to total assets 0.50% 0.42% 0.38%
Nonperforming assets remain low, as credit quality remains quite strong for the organization. Balances in nonaccrual loans are up slightly from the levels achieved at the end of 2000 and September 30, 2000. Delinquencies are up from year end 2000 but are down slightly from the end of the second quarter. The Company's ratios of nonperforming assets compare favorably with other banks of similar size and makeup. The Company's allowance for loan losses remains at a level consistent with its estimated potential losses. The provision provides for currently estimated losses inherent in the current portfolio. Charge-offs for the year have been lower than during previous periods, resulting in an increase in the allowance. The Company retains some liability for a limited time on the portfolio of credit card loans that were sold during the second quarter of 2000. As a result, $100,000 was transferred from the Company's allowance for loan losses to a contingent liability account. An analysis of the allowance for loan losses, in thousands of dollars, for the nine months ended September 30, 2001 and 2000 follows:
2001 2000 ------- ------- Balance at January 1: $ 4,032 $ 3,300 Loans charged off (183) (332) Recoveries credited to allowance 118 152 Provision charged to operations 602 948 Adjustment for credit cards sold - (100) ------- ------- Balance at September 30 $ 4,569 $ 3,968 ======== =======
The Company has decreased its provision for loan losses over the same period in 2000 as a result of continued excellent loan quality, as evidenced by its low level of nonperforming loans. This reduction is consistent with the reduction in provision instituted during the third quarter of 2000, at which time the Company reduced its monthly provision to better reflect its estimates of losses inherent in the portfolio. The following table presents the allocation of the allowance for loan losses applicable to each loan category in thousands of dollars, as of September 30, 2001 and 2000, and December 31, 2000.
9/30/2001 12/31/2000 9/30/2000 ---------- ---------- --------- Business and commercial mortgage $ 2,942 $ 2,580 $ 2,247 Tax exempt - - - Residential mortgage 19 7 11 Personal 467 638 627 Construction - - - Unallocated 1,141 807 1,083 ---------- ---------- --------- Total $ 4,569 $ 4,032 $ 3,968 ========== ========== =========
Page 11 The Company's largest single category of loans is also generally the one with the least risk. Loans to finance residential mortgages, including construction loans, make up 42.1% of the portfolio at September 30, 2001, and are well-secured and have had historically low levels of net losses. Personal and business loans make up the balance of the portfolio. Personal loan balances continue to experience steady growth for the quarter and from 2000 levels. The personal loan portfolio consists of direct and indirect installment, home equity 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, but make up a small percent of the personal loans. 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 Banks use an independent loan review firm to assess the continued quality of their business loan portfolios. 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 and Washtenaw Counties. DEPOSITS The Company has continued to achieve strong deposit growth in all categories of deposits other than noninterest bearing accounts, which are relatively unchanged from June 30, 2001 levels. Growth within the Ann Arbor market continues to impact the deposit mix, and total deposits are up 9.96% for the quarter and 5.03% year to date, annualized. This continued growth and expansion is a result in part of a desire of consumers to return to the relative safety of bank deposit products. Management anticipates that deposit growth during 2001 will continue to be steady, with continued contribution from Ann Arbor and other local markets. As in the past, the majority of the Banks' deposits are derived from core client sources, relating to long term relationships with local personal, business and public clients. In financial institutions, the presence of interest bearing certificates of $100,000 or more often indicates a reliance upon purchased funds. However, in the Banks' deposit portfolio, these balances represent core deposits of local clients. The Banks do not support their growth through purchased or brokered deposits. The Banks' deposit rates are consistently competitive with other banks in their market areas, including those new markets that the Company has entered in recent periods. The chart below shows the percentage makeup of the deposit portfolio as of September 30, 2001 and 2000.
2001 2000 ------- ------- Noninterest bearing deposits 12.6% 13.8% Interest bearing certificates of $100,000 or more 6.8% 11.2% Other interest bearing deposits 80.6% 75.0% ------- ------- Total deposits 100.0% 100.0% ======= =======
LIQUIDITY, CASH EQUIVALENTS AND BORROWED FUNDS Through its affiliate banks, the Company maintains correspondent accounts with a number of other banks for various purposes. In addition, cash sufficient to meet the operating needs of two banks is maintained at its lowest practical levels. At times, the Company, through its subsidiary banks, 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 Company has a number of additional liquidity sources should the need arise, and Management has no concerns for the liquidity position of the Company. Page 12 The Company periodically finds it advantageous to utilize longer term borrowings from the Federal Home Loan Bank of Indianapolis. These long-term borrowings serve to provide a balance to some of the interest rate risk inherent in the Company's balance sheet. CAPITAL RESOURCES The capital ratios of the Company exceed the regulatory guidelines for well capitalized institutions. The following table shows the Company's capital ratios and ratio calculations at September 30, 2001 and 2000, and December 31, 2000. Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc. --------------------- --------------------------------------- Adequate Well 9/30/2001 12/31/2000 9/30/2000 -------- ------- --------- ---------- --------- Tier 1 capital to average assets 4% 5% 9.0% 9.3% 9.2% Tier 1 capital to risk weighted assets 4% 6% 12.1% 13.1% 13.1% Total capital to risk weighted assets 8% 10% 13.4% 14.3% 14.4% Total shareholders' equity $ 47,750 $ 45,054 $ 43,774 Intangible assets (3,585) (3,888) (3,990) Unrealized (gain) loss on securities available for sale (1,079) (281) 223 -------- -------- -------- Tier 1 capital 43,086 40,885 40,007 Allowable loan loss reserves 4,439 3,902 3,818 -------- -------- --------- Tier 2 capital $ 47,525 $ 44,787 $ 43,825 ========= ========= =========
RESULTS OF OPERATIONS Consolidated net income for the third quarter of 2001 was not significantly different than that of the second quarter of 2001, and is down year to date compared to the same period in 2000. However, income at United Bank & Trust is up 5.0% annualized over last year, indicating the strength of basic earning levels of the Company. At the same time, startup costs of UBTW have reduced earnings below those levels achieved in the first nine months of 2000. Losses at UBTW are at expected levels, and Management anticipates that the Bank will begin contributing to the bottom line of the Company during 2002. NET INTEREST INCOME During the third quarter of 2001 and year to date 2001, yields on earning assets and the cost of funds continued to decline as a result of the unprecedented decline in market interest rates initiated by the Federal Reserve during 2001. The net result was an improvement in the Company's spread and net interest margin during the quarter. While these ratios remain below levels achieved in 2000, decreases in market interest rates so far during 2001 have allowed the margin of the Company to continue to improve as a result of its interest sensitivity position. The following table shows the year to date daily average consolidated balance sheets, interest earned (on a taxable equivalent basis) or paid, and the annualized effective yield or rate, for the periods ended September 30, 2001 and 2000. Page 13 YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
dollars in thousands 2001 2000 - -------------------- ---------------------------------- -------------------------------------- Average Interest Yield/ Average Interest Yield/ ASSETS Balance (b) Rate (c) Balance (b) Rate (c) ------- -------- -------- ------- -------- -------- Interest earning assets (a) Federal funds sold $ 19,449 $ 690 4.73% $ 191 $ 9 6.46% Taxable securities 44,121 1,926 5.82% 46,356 2,142 6.16% Tax exempt securities (b) 32,661 1,769 7.22% 31,332 1,746 7.43% Taxable loans 351,217 22,090 8.39% 322,692 21,317 8.81% Tax exempt loans (b) 1,916 106 7.39% 2,148 122 7.58% --------- -------- --------- -------- Total int. earning assets (b) 449,364 26,583 7.89% 402,719 25,337 8.39% Less allowance for loan losses (4,287) (3,686) Other assets 39,561 39,063 --------- --------- TOTAL ASSETS $ 484,638 $ 438,096 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY NOW accounts $ 69,893 $ 1,211 2.31% $ 57,663 $ 1,035 2.39% Savings deposits 95,107 1,880 2.64% 67,456 1,171 2.32% CDs $100,000 and over 34,780 1,535 5.89% 36,348 1,593 5.85% Other interest bearing deposits 169,531 6,659 5.24% 158,640 6,577 5.53% --------- -------- --------- -------- Total int. bearing deposits 369,311 11,284 4.07% 320,107 10,377 4.32% Short term borrowings 523 13 3.42% 15,018 717 6.36% Other borrowings 12,203 631 6.90% 9,783 501 6.83% --------- -------- --------- -------- Total int. bearing liabilities 382,037 11,929 4.16% 344,908 11,595 4.48% -------- -------- Noninterest bearing deposits 51,946 48,090 Other liabilities 4,066 2,839 Shareholders' equity 46,589 42,259 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 484,638 $ 438,096 ========= ========= Net interest income (b) $ 14,653 $ 13,742 ======== ======== Net spread (b) 3.72% 3.91% ===== ===== Net yield on interest earning assets (b) 4.35% 4.55% ===== ===== Ratio of interest earning assets to interest bearing liabilities 1.18 1.17 ==== ====
(a) Non-accrual loans and overdrafts are included in the average balances of loans. (b) Fully tax-equivalent basis, net of nondeductible interest impact; 34% tax rate. (c) Annualized As noted from the data in the following table, all of the improvement in interest income during the first nine months of 2001 came as a result of changes in volume. At the same time, increases in interest expense were principally a result of changes in volume. The net result is improved net interest income compared to the same period of 2000. The following table shows the effect of volume and rate changes on net interest income for the nine months ended September 30, 2001 and 2000 on a taxable equivalent basis, in thousands of dollars. Page 14
2001 Compared to 2000 2000 Compared to 1999 ----------------------------------- --------------------------------------- Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a) ----------------------------------- --------------------------------------- Volume Rate Net Volume Rate Net -------- -------- ------- ------- -------- ------- Interest earned on: Federal funds sold $ 684 $ (3) $ 681 $ (741) $ 667 $ (74) Taxable securities (101) (115) (216) (282) 16 (266) Tax exempt securities 73 (50) 23 (148) (40) (188) Taxable loans 1,826 (1,053) 773 2,948 499 3,447 Tax exempt loans (13) (3) (16) 28 - 28 -------- -------- ------- ------- -------- ------- Total interest income $ 2,469 $(1,224) $ 1,245 $ 1,805 $ 1,142 $ 2,947 ======== ======== ======= ======= ======== ======= Interest paid on: NOW accounts $ 213 $ (37) $ 176 $ 46 $ 238 $ 284 Savings deposits 529 179 708 (103) 57 (46) CDs $100,000 and over (69) 11 (58) 260 176 436 Other interest bearing deposits 438 (357) 81 513 788 1,301 Short term borrowings (475) (228) (703) 629 22 651 Other borrowings 125 5 130 (49) 55 6 -------- -------- ------- ------- -------- ------- Total interest expense $ 761 $ (427) $ 334 $ 1,296 $ 1,336 $ 2,632 ======== ======== ======= ======= ======== ======= Net change in net interest income $ 1,708 $ (797) $ 911 $ 509 $ (194) $ 315 ======== ======== ======= ======= ======== =======
(a) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. NONINTEREST INCOME Total noninterest income was up slightly from the record levels achieved last quarter. Year to date, all categories of noninterest income other than Trust & Investment fee income have improved from the same period last year, with the largest percentage gains achieved in income from loan sales and servicing and other income. Service charges on deposit accounts are up 4.0% over the second quarter of 2001, and are up 4.7% annualized year to date over 2000. The Trust & Investment Group of UBT continues to provide significant contribution to the Company's noninterest income, through continued growth and expansion. This growth is enhanced by further growth in the Washtenaw market. However, as a result of the continued declining market value of assets under management, income is down 0.6% from year to date 2000 levels, and is up slightly from the second quarter of 2001. For the long term, new business continues to be brought into the department, and income from this area will continue to provide a significant contribution to earnings. However, in the short term, it is anticipated that income from the Trust & Investment Group will provide less of a contribution to the Company's bottom line until recent downturns in the financial markets are reversed. Income from loan sales and servicing continues to be strong, as a result of an increased amount of residential mortgages being sold in the secondary market. Mortgage loan refinancing has continued to increase from 2000 levels, resulting in a greater percentage of loans sold during 2001. Year to date earnings in this category are up 238.2% over 2000 levels, and are up 142.7% over the same quarter last year. NONINTEREST EXPENSES Noninterest expenses are also up from 2000, with the greatest dollar increases in salaries and employee benefits. A substantial portion of this increase reflects the growth and expansion of the Company, including staffing for UBTW which opened in April, and the Dexter office of UBT, which opened in May of 2001. Total noninterest expense, excluding provision for loan losses, for the nine months ended September 30, 2001 was 35.4% annualized above the same period for 2000. Page 15 FEDERAL INCOME TAX There has been no significant change in the income tax position of the Company during the third quarter of 2001. NET INCOME Third quarter and year to date consolidated net income is down from the same periods of 2000, as a result of startup costs of UBTW and the gain on sale of UBT's credit card portfolio in 2000. Management anticipates that net income will continue to remain steady for the remainder of the year, although UBTW will not contribute to the Company's profitability during calendar year 2001. 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; 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. IMPACT OF NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board "FASB" issued Statement of Financial Accounting Standards "SFAS" No. 141, "Business Combinations." SFAS No. 141 requires all business combinations within its scope to be accounted for using the purchase method, rather than the pooling-of-interests method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. The adoption of this statement will only have an impact on our financial statements if we enter into a business combination. Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses the accounting for such assets arising from prior or future business combinations. Upon adoption of this statement, goodwill arising from business combinations will no longer be amortized, but rather will be assessed regularly for impairment, with any such impairment recognized as a reduction to earnings in the period identified. Other intangible assets, such as core deposit intangible assets, will continue to be amortized over their useful lives. We are required to adopt this statement on January 1, 2002, and early adoption is not permitted. Management has not yet determined the impact on our financial statements of adopting this new statement. Page 16 ITEM 3- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FUNDS MANAGEMENT AND INTEREST RATE RISK The composition of the Company's balance sheet consists of investments in interest earning assets (loans and investment securities) that are funded by interest bearing liabilities (deposits and borrowings). These financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. Policies place strong emphasis on stabilizing net interest margin, with the goal of providing a sustained level of satisfactory earnings. The Funds Management, Investment and Loan policies provide direction for the flow of funds necessary to supply the needs of depositors and borrowers. Management of interest sensitive assets and liabilities is also necessary to reduce interest rate risk during times of fluctuating interest rates. A number of measures are used to monitor and manage interest rate risk, including interest sensitivity and income simulation analyses. An interest sensitivity model is the primary tool used to assess this risk with supplemental information supplied by an income simulation model. The simulation model is used to estimate the effect that specific interest rate changes would have on twelve months of pretax net interest income assuming an immediate and sustained up or down parallel change in interest rates of 200 basis points. Key assumptions in the models include prepayment speeds on mortgage related assets; cash flows and maturities of financial instruments held for purposes other than trading; changes in market conditions, loan volumes and pricing; and management's determination of core deposit sensitivity. These assumptions are inherently uncertain and, as a result, the models cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions. Based on the results of the simulation model as of September 30, 2001, the Company would expect a maximum potential reduction in net interest margin of less than 5% if market rates increased under an immediate and sustained parallel shift of 200 basis points. The Company's interest sensitivity position remained substantially unchanged from the previous quarter. Each Bank maintains a Funds Management Committee, which reviews exposure to market risk on a regular basis. The Committees' overriding policy objective is to manage assets and liabilities to provide an optimum and consistent level of earnings within the framework of acceptable risk standards. The Funds Management Committees are also responsible for evaluating and anticipating various risks other than interest rate risk. Those risks include prepayment risk, credit risk and liquidity risk. The Committees are made up of senior members of management, and continually monitor 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 policies provide for a level of interest sensitivity which, Management believes, allows the Banks to take advantage of opportunities within their markets relating to liquidity and interest rate risk, allowing flexibility without subjecting the Company to undue exposure to risk. In addition, other measures are used to evaluate and project the anticipated results of Management's decisions. Page 17 PART II Other Information ITEM 1- LEGAL PROCEEDINGS The Company is not involved in any material legal proceedings. The Company's banking subsidiaries are 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 Banks. Neither the Banks nor the Company are involved in any proceedings to which any director, principal officer, affiliate thereof, or person who owns of record or beneficially five percent (5%) or more of the outstanding stock of the Company or the Banks, or any associate of the foregoing, is a party or has a material interest adverse to the Company or the Banks. During the first quarter of 2001, United Bancorp, Inc. chartered United Bank & Trust - Washtenaw as a de novo bank. UBTW was capitalized as a wholly-owned subsidiary of the Company, by means of a cash dividend from United Bank & Trust. UBTW opened for business on April 2, 2001. ITEM 2- CHANGES IN SECURITIES AND USE OF PROCEEDS No changes in the securities of the Company occurred during the quarter ended September 30, 2001. ITEM 3- DEFAULTS UPON SENIOR SECURITIES There have been no defaults upon senior securities relevant to the requirements of this section during the three months ended September 30, 2001. ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended September 30, 2001. ITEM 5- OTHER INFORMATION None. ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K (a) Listing of Exhibits (numbered as in Item 601 of Regulation S-K): None (b) The Company has filed no reports on Form 8-K during the quarter ended September 30, 2001. Page 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. United Bancorp, Inc. November 2, 2001 /S/ Dale L. Chadderdon -------------------------------------------------------- Dale L. Chadderdon Senior Vice President, Secretary & Treasurer Page 19 -----END PRIVACY-ENHANCED MESSAGE-----