-----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, GhZlpW72PGHUoqqCBTVxeXdn0sbqfDQh6xbsnPPYOtgmTE3GEtZA95jusL6/RpRN NHcucM8oxKKhtb+ypokTbA== 0000950124-02-001765.txt : 20020514 0000950124-02-001765.hdr.sgml : 20020514 ACCESSION NUMBER: 0000950124-02-001765 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020514 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: 02645769 BUSINESS ADDRESS: STREET 1: 205 E CHICAGO BLVD STREET 2: PO BOX 248 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 k69601e10-q.txt FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2002 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 MARCH 31, 2002 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 May 2, 2002, there were outstanding 2,009,242 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 10 Financial Condition 10 Liquidity and Capital Resources 13 Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities and Use of Proceeds 17 Item 3. Defaults Upon Senior Securities 17 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 18
Page 2 PART I FINANCIAL INFORMATION ITEM 1- FINANCIAL STATEMENTS (Condensed) (A) CONSOLIDATED BALANCE SHEETS In thousands of dollars
(unaudited) (unaudited) March 31, December 31, March 31, 2002 2001 2001 --------- --------- ---------- ASSETS Cash and demand balances in other banks $ 19,593 $ 15,980 $ 20,866 Federal funds sold 4,000 10,800 22,400 --------- --------- ---------- Total cash and cash equivalents 23,593 26,780 43,266 Securities available for sale 102,654 90,243 80,313 Loans held for sale 3,570 6,686 2,001 Portfolio loans 388,041 372,038 344,052 --------- --------- ---------- Total loans 391,611 378,724 346,053 Less allowance for loan losses 4,684 4,571 4,199 --------- --------- ---------- Net loans 386,927 374,153 341,854 Premises and equipment, net 15,190 15,311 14,599 Accrued interest receivable and other assets 11,854 12,215 9,933 --------- --------- ---------- TOTAL ASSETS $ 540,218 $ 518,702 $ 489,965 ========= ========= ========== LIABILITIES Deposits Noninterest bearing $ 63,956 $ 61,845 $ 54,488 Interest bearing certificates of deposit of $100,000 or more 30,050 29,462 41,963 Other interest bearing deposits 373,129 359,991 331,217 --------- --------- ---------- Total deposits 467,135 451,298 427,668 Federal funds purchased and other short term borrowings 521 1,019 - Other borrowings 18,009 12,009 12,328 Accrued interest payable and other liabilities 5,617 6,199 3,852 --------- --------- ---------- TOTAL LIABILITIES 491,282 470,525 443,848 SHAREHOLDERS' EQUITY Common stock and paid in capital, no par value; 5,000,000 shares authorized; 2,009,242, 2,009,242 and 1,911,491 shares issued and outstanding 33,617 33,579 28,433 Stock dividend payable 5,124 - 4,874 Retained earnings 9,733 13,843 12,160 Accumulated other comprehensive income, net of tax 462 755 650 --------- --------- ---------- TOTAL SHAREHOLDERS' EQUITY 48,936 48,177 46,117 --------- --------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 540,218 $ 518,702 $ 489,965 ========= ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. Page 3 (B) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended In thousands of dollars, except per share data March 31, ----------------------- 2002 2001 ----------- ---------- INTEREST INCOME Interest and fees on loans Taxable $ 6,926 $ 7,296 Tax exempt 24 25 Interest on securities Taxable 702 626 Tax exempt 395 398 Interest on federal funds sold 68 372 ----------- ---------- Total interest income 8,115 8,717 INTEREST EXPENSE Interest on certificates of deposit of $100,000 or more 373 662 Interest on other deposits 2,033 3,466 Interest on short term borrowings 4 - Interest on other borrowings 262 210 ----------- ---------- Total interest expense 2,672 4,338 ----------- ---------- NET INTEREST INCOME 5,443 4,379 Provision for loan losses 192 169 ----------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,251 4,210 NONINTEREST INCOME Service charges on deposit accounts 558 555 Trust & Investment fee income 735 716 Loan sales and servicing 372 211 Sales of nondeposit investment products 226 184 Other income 398 341 ----------- ---------- Total noninterest income 2,289 2,007 NONINTEREST EXPENSE Salaries and employee benefits 3,071 2,397 Occupancy and equipment expense, net 944 801 Other expense 1,272 1,315 ----------- ---------- Total noninterest expense 5,287 4,513 ----------- ---------- INCOME BEFORE FEDERAL INCOME TAX 2,253 1,704 Federal income tax 630 466 ----------- ---------- NET INCOME $ 1,623 $ 1,238 =========== ========== Basic earnings per share $ 0.76 $ 0.58 Diluted earnings per share 0.76 0.58 Cash dividends declared per share of common stock 0.29 0.27
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 March 31, ---------------------- TOTAL SHAREHOLDERS' EQUITY 2002 2001 ---------- --------- Balance at beginning of period $ 48,177 $ 45,054 Net Income 1,623 1,238 Other comprehensive income (loss): Net change in unrealized gains (losses) on securities available for sale, net (293) 369 ---------- --------- Total comprehensive income 1,330 1,607 Cash dividends declared (603) (573) Common stock transactions 32 29 ---------- --------- Balance at end of period $ 48,936 $ 46,117 ========== =========
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 Three Months Ended March 31, -------------------- 2002 2001 --------- -------- Cash Flows from Operating Activities Net income $ 1,623 $ 1,238 Adjustments to Reconcile Net Income to Net Cash from Operating Activities Depreciation and amortization 753 547 Provision for loan losses 192 169 Change in loans held for sale 3,116 (845) Change in accrued interest receivable and other assets 441 (70) Change in accrued interest payable and other liabilities (342) 560 --------- -------- Total adjustments 4,160 361 --------- -------- Net cash from operating activities 5,783 1,599 Cash Flows from Investing Activities Securities available for sale Purchases (22,802) (18,821) Maturities and calls 8,130 10,292 Principal payments 1,630 1,421 Net change in portfolio loans (16,082) (6,703) Premises and equipment expenditures, net (374) (1,581) --------- -------- Net cash from investing activities (29,498) (15,392) Cash Flows from Financing Activities Net change in deposits 15,837 19,711 Net change in short term borrowings (498) - Proceeds from other borrowings 8,000 - Principal payments on other borrowings (2,000) - Proceeds from common stock transactions 32 29 Dividends paid (843) (803) --------- -------- Net cash from financing activities 20,528 18,937 --------- -------- Net change in cash and cash equivalents (3,187) 5,144 Cash and cash equivalents at beginning of year 26,780 38,122 --------- -------- Cash and cash equivalents at end of period $ 23,593 $ 43,266 ========= ======== Supplement Disclosure of Cash Flow Information: Interest paid $ 2,789 $ 4,246 Income tax paid - -
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 three month period ending March 31, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. 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, 2001. NOTE 2 - LOANS HELD FOR SALE Mortgage loans serviced for others are not included in the accompanying consolidated financial statements. The unpaid principal balance of mortgage loans serviced for others was $173,672,000 and $137,901,000 at the end of March 2002 and 2001. The balance of loans serviced for others related to servicing rights that have been capitalized was $162,437,000 and $118,070,000 at March 31, 2002 and 2001. Mortgage servicing rights activity in thousands of dollars for the three months ended March 31, 2002 and 2001 follows:
2002 2001 --------- -------- Balance at January 1 $ 1,100 $ 780 Amount capitalized year to date 154 127 Amount amortized year to date (81) (66) ------- ----- Balance at period end $ 1,173 $ 841 ======= =====
No valuation allowance was considered necessary for mortgage servicing rights at period end 2002 and 2001. 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 2002 and 2001, the Company declared 5% stock dividends payable in May 2002 and 2001. Earnings per share, dividends per share and weighted average shares have been restated to reflect these stock dividends. A reconciliation of basic and diluted earnings per share follows:
Three Months Ended In thousands of dollars, except per share data March 31, ---------------------- 2002 2001 ---------- ---------- Net income $ 1,623 $ 1,238 ========== ========== Basic earnings: Weighted average common shares outstanding 2,109,704 2,107,522 Weighted average contingently issuable shares 14,360 10,687 ---------- ---------- Total weighted average shares outstanding 2,124,064 2,118,209 ========== ========== Basic earnings per share $ 0.76 $ 0.58 ========== ==========
Page 7
Three Months Ended March 31, ---------------------- 2002 2001 ---------- ---------- Diluted earnings: Weighted average common shares outstanding from basic earnings per share 2,124,064 2,118,209 Dilutive effect of stock options 4,037 1,934 ---------- ---------- Total weighted average shares outstanding 2,128,101 2,120,143 ========== ========== Diluted earnings per share $ 0.76 $ 0.58 ========== ==========
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 126,181 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:
Options Weighted Average Outstanding Exercise Price ----------- -------------- Balance at January 1, 2002 64,623 $ 43.42 Options granted 16,485 48.57 Options exercised - - Options forfeited - - ------- Balance at March 31, 2002 81,108 $ 44.47 =======
Options granted under the plan during the current year were 16,485 on January 9, 2002. The weighted fair value of the options granted was $4.68. For stock options outstanding at March 31, 2002, the range of average exercise prices was $41.46 to $48.57 and the weighted average remaining contractual term was 8.7 years. At March 31, 2002, 29,979 options were exercisable at the weighted average exercise price of $43.34. 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. Accordingly, no compensations cost was recorded for the period ended March 31, 2002 and 2001.
Three Months Ended In thousands of dollars, except per share data March 31, --------------------- 2002 2001 ---------- -------- Net income $ 1,623 $ 1,238 Pro forma net income 1,600 1,219 Basic earnings per share as reported $ 0.76 $ 0.58 Pro forma basic earnings per share 0.75 0.58 Diluted earnings per share as reported $ 0.76 $ 0.58 Pro forma diluted earnings per share 0.75 0.57
Page 8 NOTE 5 - IMPACT OF NEW ACCOUNTING STANDARDS Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards "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 is no longer amortized, but will be assessed regularly for impairment, with any such impairment recognized as a reduction to earnings in the period identified. Current interpretation by the Financial Accounting Standards Board "FASB" requires that other intangible assets, such as core deposit intangibles and unidentified intangibles resulting from branch acquisitions, will continue to be amortized over their useful lives. However, the FASB is reconsidering their interpretation and it is possible that amortization of unidentifiable intangibles resulting from branch acquisitions may be discontinued. Intangible assets in thousands of dollars are as follows:
March 31, 2002 December 31, 2001 ---------------------- ----------------------- Gross Accumulated Gross Accumulated Amount Amortization Amount Amortization --------- ------------- -------- ------------ Amortizable intangible assets Core deposit intangibles $ 198 $ 187 $ 198 $ 183 Unidentified intangibles resulting from branch acquisitions 4,043 1,081 4,043 1,014 ------- ----------- -------- ----------- $ 4,241 $ 1,268 $ 4,241 $ 1,197 Unamortizable intangible assets Goodwill $ 969 $ 529 $ 969 $ 529
Adoption of the new accounting standard did not have a material effect on the Company's consolidated financial position or results of operations as management's assessment indicated, no impairment of the $440,000 of unamortized goodwill at January 1, 2002 and March 31, 2002 and no loss was recognized for the period ended March 31, 2002. The annual goodwill amortization expense for years prior to 2002 of $65,000 is considered to be immaterial and, therefore, no pro forma disclosures are provided to reflect the impact of the new accounting method on the prior period financial statements. Amortization expense for the three months ended March 31, 2002 and 2001 was $71,000 and $101,000. Estimated annual amortization expense, in thousands of dollars, for the next five years is: 2002 $ 284 2003 270 2004 270 2005 270 2006 268
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires a liability to be recognized for the fair value of obligations associated with the retirement of tangible, long-lived assets. Adoption of this standard on January 1, 2003 is not expected to have a material effect on the Company's consolidated financial position or results of operations. Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This new accounting standard establishes more restrictive requirements for the classification of assets "held for sale" and also expands the types of dispositions that are to be accounted for as discontinued operations. Adoption of this standard did not have a material effect on the Company's consolidated financial position or results of operations. Page 9 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 month periods ending March 31, 2002 and 2001. FINANCIAL CONDITION SECURITIES Balances in the Company's investment securities portfolio continued to increase during the first quarter of 2002, as investment securities replaced a portion of the Company's short term funds sold. This growth in the portfolio was primarily in short term investments, which caused the mix of the securities portfolio to shift somewhat. During the quarter, short-term agency and corporate bonds replaced maturing municipal obligations. The following chart shows the percentage mix of the securities portfolio.
3/31/2002 12/31/2001 3/31/2001 --------- ---------- --------- U.S. Treasury and agency securities 28.7% 18.5% 13.2% Mortgage backed agency securities 15.0% 18.9% 28.7% Obligations of states and political subdivisions 37.4% 46.1% 47.9% Corporate, asset backed, and other securities 18.9% 16.5% 10.2% -------- ---------- --------- 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. 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 Annualized loan growth during the first quarter of 2002 was 13.6%, reflecting continued strength in the market. Substantially all of this growth was in business loans, commercial and residential mortgages, while construction loans and personal loans declined somewhat during the same period. The mix of the loan portfolio continues a long-term trend toward an increased percentage of business loans, with slight declines in residential mortgage loans and personal 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. Page 10
March 31, 2002 December 31, 2001 March 31, 2001 -------------------- ------------------- ------------------ Total loans: Balance % of total Balance % of total Balance % of total --------- ---------- ------- ---------- ------- ---------- Personal $ 62,335 15.9% $ 62,792 16.6% $ 59,854 17.3% Business loans and commercial mortgages 180,932 46.2% 163,329 43.1% 123,013 35.5% Tax exempt 1,818 0.5% 1,878 0.5% 1,936 0.6% Residential mortgage 118,118 30.2% 117,553 31.0% 125,863 36.4% Construction 28,408 7.2% 33,172 8.8% 35,387 10.2% --------- --------- --------- ---------- --------- ---------- Total loans $ 391,611 100.0% $ 378,724 100.00% $ 346,053 100.0% ========= ========= ========= ========== ========= ==========
The Company's subsidiary Banks ("Banks") continue to be providers of residential mortgage loans. As full service lenders, the Banks offer a variety of home mortgage loan products in their markets. Demand for loans continues to be strong 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.
3/31/2002 12/31/2001 3/31/2001 --------- ---------- --------- Nonaccrual loans $ 1,081 $ 1,084 $ 1,007 Loans past due 90 days or more 691 1,104 279 Troubled debt restructurings 130 130 132 --------- ---------- --------- Total nonperforming loans 1,902 2,318 1,418 Other real estate 179 179 425 --------- ---------- --------- Total nonperforming assets $ 2,081 $ 2,497 $ 1,843 ========= ========== ========= Percent of nonperforming loans to total loans 0.49% 0.61% 0.41% Percent of nonperforming assets to total assets 0.39% 0.48% 0.38%
Nonperforming assets remain low, as credit quality remains quite strong for the organization. Balances in nonaccrual loans are virtually flat compared to the levels achieved at the end of 2001 and are up slightly from March 31, 2001. Delinquencies are down from year end 2001, but are above levels achieved at the end of the first quarter of 2001. Overall, the Company's ratios of nonperforming loans have improved since December of 2001 and continue to 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. Net charge-offs for the period have remained lower than the provision added to the allowance for loan losses, resulting in an increase in the allowance. An analysis of the allowance for loan losses, in thousands of dollars, for the three months ended March 31, 2002 and 2001 follows: Page 11
2002 2001 ---- ---- Balance at January 1: $ 4,571 $ 4,032 Loans charged off (108) (49) Recoveries credited to allowance 29 47 Provision charged to operations 192 169 -------- -------- Balance at March 31 $ 4,684 $ 4,199 ======== ========
The Company has slightly increased its provision for loan losses over the same period in 2001 as a result of continued loan growth. Loan quality remains strong, as evidenced by the low level of nonperforming loans. The following table presents the allocation of the allowance for loan losses applicable to each loan category in thousands of dollars, as of March 31, 2002 and 2001, and December 31, 2001.
3/31/2002 12/31/2001 3/31/2001 --------- ---------- --------- Business and commercial mortgage $ 3,983 $ 3,060 $ 2,831 Tax exempt - - - Residential mortgage 21 20 7 Personal 498 496 430 Construction - - - Unallocated 182 995 931 --------- --------- -------- Total $ 4,684 $ 4,571 $ 4,199 ========= ========= ========
One of 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 37.4% of the portfolio at March 31, 2002, 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 have declined slightly for the quarter. 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 Company uses an independent loan review firm to assess the continued quality of its 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. Growth within the Ann Arbor market continues to influence the deposit mix, and total deposits are up 14.0% for the quarter, 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 2002 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 Company's 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 Page 12 March 31, 2002 and 2001.
2002 2001 ---- ---- Noninterest bearing deposits 13.7% 12.7% Interest bearing certificates of $100,000 or more 6.4% 9.8% Other interest bearing deposits 79.9% 77.5% ------ ------ 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. 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 March 31, 2002 and 2001, and December 31, 2001. Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc. ------------------------ ---------------------------------- Adequate Well 3/31/2002 12/31/2001 3/31/2001 ---------- --------- ----------- ------------ --------- Tier 1 capital to average assets 4% 5% 8.5% 9.0% 8.8% Tier 1 capital to risk weighted assets 4% 6% 11.9% 11.9% 13.0% Total capital to risk weighted assets 8% 10% 13.1% 13.1% 14.3% Total shareholders' equity $ 48,936 $ 48,177 $ 46,117 Intangible assets (3,413) (3,484) (3,786) Unrealized (gain) loss on securities available for sale (462) (755) (650) -------- -------- -------- Tier 1 capital 45,061 43,938 41,681 Allowable loan loss reserves 4,670 4,537 4,007 -------- -------- -------- Tier 2 capital $ 49,731 $ 48,475 $ 45,688 ======== ======== ========
RESULTS OF OPERATIONS Consolidated net income for the first quarter of 2002 was significantly improved from that of the first and fourth quarters of 2001. Net income contributed by UBT continues to increase, while losses at UBTW are declining. NET INTEREST INCOME Net interest income increased by 24.7% from the first quarter of 2001, but remains flat compared to the fourth quarter of the year. During the first quarter of 2002, 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. This improvement slowed from fourth quarter 2001 levels, but has contributed significantly to net income of the Company, in part as a result of the Company's interest sensitivity position. The following table shows the year to date daily average consolidated balance sheets, interest earned (on a Page 13 taxable equivalent basis) or paid, and the annualized effective yield or rate, for the periods ended March 31, 2002 and 2001. YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
Quarter ended March 31, ---------------------------------------------------------------------------- dollars in thousands 2002 2001 - -------------------- ---------------------------------------------------------------------------- Average Interest Yield/ Average Interest Yield/ ASSETS Balance (b) Rate (c) Balance (b) Rate (c) ---------- --------- -------- ------- -------- -------- Interest earning assets (a) Federal funds sold $ 17,085 $ 68 1.59% $ 26,657 $ 372 5.58% Taxable securities 60,434 702 4.65% 40,768 626 6.15% Tax exempt securities (b) 36,724 591 6.44% 30,922 570 7.38% Taxable loans 381,394 6,926 7.26% 341,196 7,296 8.55% Tax exempt loans (b) 1,873 36 7.60% 1,970 36 7.32% ---------- -------- ---------- -------- Total int. earning assets (b) 497,510 8,323 6.69% 441,513 8,900 8.06% Less allowance for loan losses (4,620) (4,105) Other assets 44,013 39,704 ---------- ---------- TOTAL ASSETS $ 536,903 $ 477,112 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY NOW accounts $ 85,762 198 0.92% $ 67,047 438 2.61% Savings deposits 135,755 503 1.48% 61,279 382 2.49% CDs $100,000 and over 30,312 373 4.93% 44,755 662 5.92% Other interest bearing deposits 153,162 1,332 3.48% 190,550 2,646 5.55% ---------- -------- ---------- -------- Total int. bearing deposits 404,991 2,406 2.38% 363,631 4,128 4.54% Short term borrowings 965 4 1.51% - - -% Other borrowings 17,169 262 6.11% 12,328 210 6.82% ---------- -------- ---------- -------- Total int. bearing liabilities 423,125 2,672 2.53% 375,959 4,338 4.62% -------- -------- Noninterest bearing deposits 59,110 50,370 Other liabilities 5,758 5,038 Shareholders' equity 48,910 45,745 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 536,903 $ 477,112 ========== ========== Net interest income (b) $ 5,651 $ 4,563 ======== ======= Net spread (b) 4.17% 3.45% ===== ===== Net yield on interest earning assets (b) 4.54% 4.13% ===== ===== 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, interest income and interest expense declined during the first three months of 2002 as a result of changes in rates. At the same time, net interest income improved as a result of changes in volume compared to the same period of 2001. The following table shows the effect of volume and rate changes on net interest income for the three months ended March 31, 2002 and 2001 on a taxable equivalent basis, in thousands of dollars. Page 14
2002 Compared to 2001 2001 Compared to 2000 ---------------------------------------- ------------------------------------- Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a) ------------------------------------ ------------------------------------ Volume Rate Net Volume Rate Net ---------- -------- ------- ------- ------- ----------- Interest earned on: Federal funds sold $ (102) $ (202) $ (304) $ 372 $ - $ 372 Taxable securities 253 (177) 76 (116) 3 (113) Tax exempt securities 99 (79) 20 (41) (2) (43) Taxable loans 803 (1,173) (370) 622 (56) 566 Tax exempt loans (2) 2 - (1) (1) (2) -------- --------- -------- ------ ------ ------ Total interest income $ 1,051 $ (1,629) $ (578) $ 836 $ (56) $ 780 ======== ========= ======== ====== ====== ====== Interest paid on: NOW accounts $ 99 $ (339) $ (240) $ 60 $ 58 $ 118 Savings deposits 323 (202) 121 (64) 28 (36) CDs $100,000 and over (190) (98) (288) 170 33 203 Other interest bearing deposits (452) (862) (1,314) 494 147 641 Short term borrowings 4 - 4 (283) - (283) Other borrowings 76 (24) 52 118 4 122 -------- --------- -------- ------ ------ ------ Total interest expense $ (140) $ (1,525) $(1,665) $ 495 $ 270 $ 765 ======== ========= ======== ====== ====== ====== Net change in net interest income $ 1,191 $ (104) $ 1,087 $ 341 $ (326) $ 15 ======== ========= ======== ====== ====== ======
(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 down slightly from the record levels achieved in the fourth quarter of 2001. However, in comparison with the first quarter of 2001, noninterest income is up 14.1%. While service charges on deposit accounts are relatively flat, all other categories of noninterest income are improved from the same period last year. The largest percentage gains achieved is income from loan sales and servicing. Service charges on deposit accounts are up 0.5% over the first quarter of 2001, and are down 10.6% from the fourth quarter of 2001. Fourth quarter service charges are typically higher as a result of NSF/OD fees collected at that time of year. 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. Income in this category is up 2.7% from the fourth quarter of 2001, and up 15.9% from the first quarter of last year. Income from loan sales and servicing continues to be strong, as a result of an increased amount of residential mortgages sold in the secondary market. However, mortgage loan refinancing has slowed somewhat from the record levels experienced in 2001. For the first quarter of 2002, income in this category is up 76.3% from the same period of 2001, but is down nearly $100,000 from the fourth quarter of 2002. It is anticipated that income from the sale of residential loans will contribute a smaller portion of income as the volume of loans sold tapers off. However, the Company maintains a servicing portfolio of loans sold, which will provide ongoing future income. NONINTEREST EXPENSES Noninterest expenses are also up from the first quarter of 2001, but are below fourth quarter 2001 levels. In comparison to the same period of 2001, a substantial portion of the increase reflects the growth and expansion of the Company, including staffing for UBTW which opened in April of 2001, and the Dexter office of UBT, which opened in May of 2001. These increases are noted in compensation expense, as well as occupancy and equipment expense. Total noninterest expense, excluding provision for loan losses, for the three months ended March 31, 2002 was 17.2% above the same period for 2001, but was below the fourth Page 15 quarter of 2001 by 7.0%. FEDERAL INCOME TAX There has been no significant change in the income tax position of the Company as the effective tax rate was 28% for the first quarter of 2002 and 27% for the first quarter of 2001. NET INCOME First quarter consolidated net income is up 31.1% from the same periods of 2001, and up 15.7% over the fourth quarter of 2001. This reflects improvements in earnings at both banks, and Management anticipates that net income will remain strong for the remainder of the year, as a result of future earnings contributions by UBTW as well as strong earnings growth at UBT. 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 judgments 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 Adoption of new accounting standards did not have a material effect on the Company's consolidated financial position or results of operations. Additional information is contained in Note 5 of the Consolidated Financial Statements. 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 Page 16 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 March 31, 2002, 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. 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 any associate of the foregoing, is a party or has a material interest adverse to the Company or the Banks. ITEM 2- CHANGES IN SECURITIES AND USE OF PROCEEDS No changes in the securities of the Company occurred during the quarter ended March 31, 2002. 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 March 31, 2002. Page 17 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 March 31, 2002. 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 March 31, 2002. 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. May 14, 2002 /S/ Dale L. Chadderdon - ---------------------------------------------- Dale L. Chadderdon Senior Vice President, Secretary & Treasurer Page 18 -----END PRIVACY-ENHANCED MESSAGE-----