-----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, BuMY8yhRwUXXicdfoYZZQ6ctb29RPJh6Vj8jjz9tXNLoP1njU5xJAOphh+UZB7vC 9OpOzdqmuV+UQcJ87VnISw== 0000950124-99-004654.txt : 19990813 0000950124-99-004654.hdr.sgml : 19990813 ACCESSION NUMBER: 0000950124-99-004654 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 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: SEC FILE NUMBER: 000-16640 FILM NUMBER: 99685903 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 QUARTERLY REPORT DATED 6/30/99 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-Q |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 or | | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ------------------------- COMMISSION FILE #0-16640 UNITED BANCORP, INC. (Exact name of registrant as specified in its charter) MICHIGAN 38-2606280 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 205 E. CHICAGO BOULEVARD, TECUMSEH, MI 49286 (Address of principal executive offices, including Zip Code) Registrant's telephone number, including area code: (517) 423-8373 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | | As of July 15, 1999, there were outstanding 1,816,984 shares of the registrant's common stock, no par value. Page 1 2 CROSS REFERENCE TABLE
ITEM NO. DESCRIPTION PAGE NO. - ------------------------------------------------------------------------------------------------------------------------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Condensed) (a) Consolidated Balance Sheets 3 (b) Consolidated Statements of Income 4 (c) Consolidated Statements of Changes in Shareholders' Equity 5 (d) Consolidated Statements of Cash Flows 6 (e) Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis Financial Condition 8 Liquidity 10 Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 Exhibit Index 18
Page 2 3 PART I FINANCIAL INFORMATION ITEM 1- FINANCIAL STATEMENTS
(A) CONSOLIDATED BALANCE SHEETS (UNAUDITED) In thousands of dollars June 30, December 31, June 30, 1999 1998 1998 ---------- ----------- --------- ASSETS Cash and demand balances in other banks $ 13,098 $ 12,348 $ 20,947 Federal funds sold 4,300 - 1,300 --------- --------- --------- Total cash and cash equivalents 17,398 12,348 22,247 Securities available for sale 52,161 58,468 50,263 Securities held to maturity (fair value of $33,755, $37,999 and $40,888, respectively) 33,402 36,919 39,947 --------- --------- --------- Total securities 85,563 95,387 90,210 Loans held for sale 199 535 661 Portfolio loans 281,235 269,714 259,656 --------- --------- --------- Total loans 281,434 270,249 260,317 Less: allowance for loan losses 3,043 2,799 2,627 --------- --------- --------- Net loans 278,391 267,450 257,690 Premises and equipment, net 12,969 11,406 11,299 Accrued interest receivable and other assets 9,199 7,104 6,506 --------- --------- --------- TOTAL ASSETS $ 403,520 $ 393,695 $ 387,952 ========= ========= ========= LIABILITIES Deposits Noninterest bearing $ 44,353 $ 42,468 $ 46,010 Interest bearing certificates of deposit of $100,000 or more 29,089 31,108 34,387 Other interest bearing deposits 277,272 263,691 255,852 --------- --------- --------- Total deposits 350,714 337,267 336,249 Federal funds and other short term borrowings - 3,874 658 Other borrowings 10,624 10,900 10,900 Accrued interest payable and other liabilities 2,484 2,890 3,015 --------- --------- --------- TOTAL LIABILITIES 363,822 354,931 350,822 SHAREHOLDERS' EQUITY Common stock, no par value; 5,000,000 shares authorized; 1,816,984, 1,730,480 and 1,728,657 shares issued and outstanding, respectively 23,769 19,837 19,708 Retained earnings 16,184 18,607 17,155 Accumulated other comprehensive income (loss) (255) 320 267 --------- --------- --------- TOTAL SHAREHOLDERS' EQUITY 39,698 38,764 37,130 --------- --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 403,520 $ 393,695 $ 387,952 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. Page 3 4 (B) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) In thousands of dollars, except per share data
Three Months Ended Six Months Ended June 30, June 30, ------------------------------------- 1999 1998 1999 1998 ------- ------- ------- ------- INTEREST INCOME Interest and fees on loans Taxable $ 5,909 $ 5,807 $11,682 $11,692 Tax exempt 23 19 42 38 Interest on securities Taxable 804 801 1,617 1,513 Tax exempt 435 469 901 945 Interest on federal funds sold 49 129 53 249 ------- ------- ------- ------- Total interest income 7,220 7,225 14,295 14,437 INTEREST EXPENSE Interest on certificates of deposit of $100,000 or more 370 501 763 1,065 Interest on other deposits 2,409 2,611 4,723 5,215 Interest on short term borrowings 1 8 46 20 Interest on other borrowings 166 166 331 316 ------- ------- ------- ------- Total interest expense 2,946 3,286 5,863 6,616 ------- ------- ------- ------- NET INTEREST INCOME 4,274 3,939 8,432 7,821 Provision for loan losses 315 274 630 549 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,959 3,665 7,802 7,272 NONINTEREST INCOME Service charges on deposit accounts 512 430 920 805 Trust & Investment fee income 518 407 980 780 Gains on securities transactions 1 9 12 9 Loan sales and servicing 149 255 345 546 Sales of nondeposit investment products 159 138 311 269 Other income 188 134 349 282 ------- ------- ------- ------- Total noninterest income 1,527 1,373 2,917 2,691 NONINTEREST EXPENSE Salaries and employee benefits 2,050 1,770 4,037 3,490 Occupancy and equipment expense 626 593 1,226 1,198 Other expense 1,119 942 2,107 1,943 ------- ------- ------- ------- Total noninterest expense 3,795 3,305 7,370 6,631 ------- ------- ------- ------- INCOME BEFORE FEDERAL INCOME TAX 1,691 1,733 3,349 3,332 Federal income tax 443 453 870 861 ------- ------- ------- ------- NET INCOME $ 1,248 $ 1,280 $ 2,479 $ 2,471 ======= ======= ======= ======= Basic and diluted earnings per share $ 0.68 $ 0.70 $ 1.36 $ 1.36 Cash dividends declared per share of common stock 0.28 0.25 0.55 0.48
The accompanying notes are an integral part of these consolidated financial statements. Page 4 5 (C) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) In thousands of dollars, except per share data
Accumulated Other Compre- Common Retained hensive Stock Earnings Income Total ------- -------- ------------- -------- Balance, December 31, 1997 $ 16,366 $ 18,867 $ 233 $ 35,466 Net Income 2,471 2,471 Net change in unrealized gains (losses) on securities 34 34 -------- Total comprehensive income 2,505 Cash dividends declared (877) (877) 5% stock dividend declared, 82,298 shares at $40 3,292 (3,292) - Common stock and contingently issuable stock 50 (14) - 36 -------- -------- ------ -------- Balance, June 30, 1998 $ 19,708 $ 17,155 $ 267 $ 37,130 ======== ======== ====== ======== Balance, December 31, 1998 $ 19,837 $ 18,607 $ 320 $ 38,764 Net Income 2,479 2,479 Net change in unrealized gains (losses) on securities (575) (575) -------- Total comprehensive income 1,904 Cash dividends declared (993) (993) 5% stock dividend declared, 86,512 shares at $45 3,893 (3,893) - Common stock and contingently issuable stock 39 (16) - 23 -------- -------- ------- -------- Balance, June 30, 1999 $ 23,769 $16,184 $ (255) $ 39,698 ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. Page 5 6
(D) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended In thousands of dollars June 30 --------------------- 1999 1998 -------- --------- Cash Flows from Operating Activities Net Income $ 2,479 $ 2,471 -------- -------- Adjustments to Reconcile Net Income to Net Cash from Operating Activities Depreciation and amortization 901 755 Provision for loan losses 630 549 Change in loans held for sale 336 (521) Change in accrued interest receivable and other assets (2,266) (156) Change in accrued interest payable and other liabilities 75 147 -------- -------- Total adjustments (324) 774 -------- -------- Net cash from operating activities 2,155 3,245 -------- -------- Cash Flows from Investing Activities Securities available for sale Purchases (13,121) (14,294) Sales -- 1,000 Maturities and calls 14,166 2,809 Principal payments 4,292 2,744 Securities held to maturity Purchases (1,198) (11,725) Maturities and calls 4,706 8,977 Change in portfolio loans (11,907) 5,073 Premises and equipment expenditures, net (2,185) (1,001) -------- -------- Net cash from investing activities (5,247) (6,417) -------- -------- Cash Flows from Financing Activities Net change in deposits 13,447 19,414 Net change in short term borrowings (3,874) (4,284) Proceeds from other borrowings -- 3,900 Principal payments on other borrowings (276) (3,000) Proceeds from stock transactions 23 36 Dividends paid (1,178) (1,053) -------- -------- Net cash from financing activities 8,142 15,013 -------- -------- Net change in cash and cash equivalents 5,050 11,841 Cash and cash equivalents at beginning of year 12,348 10,406 -------- -------- Cash and cash equivalents at end of period $ 17,398 $ 22,247 ======== ======== Cash Paid During the Period for Interest $ 5,820 $ 6,768 Income taxes 900 850 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page 6 7 (E) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The unaudited condensed consolidated financial statements of United Bancorp, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ending June 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. NOTE 2 - LOANS HELD FOR SALE Mortgage loans serviced for others are not included in the accompanying consolidated statements. The unpaid principal balances of mortgage loans serviced for others was $124,578,000 and $110,667,000 at the end of June 1999 and 1998. The balance of loans serviced for others related to servicing rights that have been capitalized was $98,705,000 and $68,682,000 at June 30, 1999 and 1998. Mortgage servicing rights activity in thousands of dollars for the six months ended June 30, 1999 and 1998 follows:
Unamortized cost of mortgage servicing rights 1999 1998 --------------------------------------------- ---- ---- Balance at January 1 $ 646 $ 340 Amount capitalized year to date 137 231 Amount amortized year to date (69) (71) ----- ----- Balance at period end $ 714 $ 500 ===== =====
No valuation allowance was considered necessary for mortgage servicing rights at period end 1999 and 1998. NOTE 3 - COMMON STOCK AND EARNINGS PER SHARE Earnings per share are based upon the weighted average number of shares outstanding plus contigently issuable shares during the year. On May 28, 1999 and May 29, 1998 the Company issued 5% stock dividends. Earnings per share, dividends per share and weighted average shares have been restated to reflect the stock dividend. The weighted average number of shares outstanding plus contingently issuable shares was 1,822,483 for 1999 and 1,818,643 for 1998. NOTE 4 - COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Financial Accounting Standard No. 130, "Reporting Comprehensive Income." Under this new standard, comprehensive income is now reported for all periods and encompasses both net income and other comprehensive income. Other comprehensive income in thousands of dollars for the period ended June 30, follows: Page 7 8
Six Months Ended June 30, ------------------------- Other comprehensive income 1999 1998 -------------------------- ---------- --------- Unrealized gains (losses) on securities arising during period $ (860) $ 52 Reclassification for realized amount included in income (11) (1) ---------- --------- Other comprehensive income, before tax (871) 51 Federal income tax expense (benefit) (296) 17 ---------- --------- Other comprehensive income $ (575) $ 34 ========== =========
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion provides information about the consolidated financial condition and results of operations of United Bancorp, Inc. and its subsidiary, United Bank & Trust ("Bank") for the three and six month periods ending June 30, 1999. FINANCIAL CONDITION SECURITIES Investment securities balances increased during the second three months of 1999, reflecting an increase in deposits as the result of the acquisition of the Manchester, Michigan office of Great Lakes National Bank during April of 1999. A number of maturities within the municipal bond portfolio during May contributed to a decline in that segment of the portfolio from March 31. However, The mix of the securities portfolio remained relatively unchanged during the quarter. The chart below shows the mix of the portfolio.
6/30/1999 12/31/1998 6/30/1998 --------- ---------- --------- U.S. Treasury and agency securities 23.9% 28.2% 22.4% Mortgage backed agency securities 22.4% 22.3% 26.0% Tax exempt obligations of states and political subdivisions 38.5% 37.0% 38.9% Corporate, taxable municipal and asset backed securities 15.2% 12.5% 12.7% -------- -------- -------- Total Securities 100.0% 100.0% 100.0% ======== ======== ========
LOANS Loan growth continued to be strong in the second quarter of 1999. During the second three months, annualized loan growth was 9.3%, compared to 7.1% for the first quarter of the year. Business loans and residential mortgages led the increases, while all categories other than tax exempt loans recorded increases. The mix of the loan portfolio continues to reflect this growth trend, although overall the mix has remained relatively unchanged from prior periods. Over the long term, the trend is toward an increased percentage of residential mortgage and business loans, with slight declines in personal loans. The table below shows total loans outstanding, in thousands of dollars at June 30, and December 31, and their percentage of the total loan portfolio. All loans are domestic and contain no concentrations by industry or customer. Page 8 9
June 30, 1999 December 31, 1998 June 30, 1998 ---------------------- ------------------------ ------------------------ Portfolio loans: Balance % of total Balance % of total Balance % of total --------- ---------- --------- ----------- --------- ---------- Personal $ 57,363 20.4% $ 58,797 21.8% $ 63,977 24.6% Business/commercial mtgs 85,732 30.5% 82,521 30.5% 78,405 30.1% Tax exempt 1,737 0.6% 1,381 0.5% 1,390 0.5% Residential mortgage 110,375 39.2% 104,903 38.8% 102,591 39.4% Construction 26,227 9.3% 22,647 8.4% 13,954 5.4% --------- --------- --------- ----------- --------- ---------- Total loans $ 281,434 100.00% $ 270,249 100.00% $ 260,317 100.00% ========= ========= ========= =========== ========= ==========
CREDIT QUALITY The Company continues to maintain a high level of asset quality compared to peers, as a result of actively monitoring delinquencies, nonperforming assets and potential problem loans. In addition, the Bank uses an independent loan review firm to assess the continued quality of its business loan portfolio. Nonperforming loans are comprised of (1) loans accounted for on a nonaccrual basis; (2) loans contractually past due 90 days or more as to interest or principal payments (but not included in the nonaccrual loans in (1) above;) and (3) other loans whose terms have been renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower (exclusive of loans in (1) or (2) above.) The aggregate amount of nonperforming loans, in thousands of dollars, is shown in the table below. The Company's classification of nonperforming loans are generally consistent with loans identified as impaired.
6/30/1999 12/31/1998 6/30/1998 --------- ---------- --------- Nonaccrual loans $ 1,015 $ 821 $ 295 Loans past due 90 days or more 295 194 376 Troubled debt restructurings 135 136 137 --------- ---------- --------- Total nonperforming loans $ 1,445 $ 1,151 $ 808 Other real estate 335 335 335 --------- ---------- --------- Total nonperforming assets $ 1,780 $ 1,486 $ 1,143 Percent of total loans 0.63% 0.53% 0.44%
Balances in nonperforming loans were up from March 31, 1999 and December 31, 1998. Loans past due ninety days or more and nonaccrual loans both increased during the period. Nonperforming loans as a percent of total loans remain well below industry standards, although higher than traditionally experienced by the Company. The amount listed for other real estate relates primarily to property that has been leased to a third party with an option to purchase, and no loss is anticipated on that property. As a result of continued loan growth, the Company has maintained its provision for loan losses at the same level as in the first quarter of 1999, which reflects an increase over the same period in 1998. The allowance for loan losses is maintained at a level believed adequate by Management to absorb potential losses in the loan portfolio. An analysis of the allowance for loan losses, in thousands of dollars, for the six months ended June 30, 1999 and 1998 follows:
1999 1998 ------- ------- Balance at beginning of period $ 2,799 $ 2,467 Loans charged off (486) (512) Recoveries credited to allowance 100 123 Provision charged to operations 630 549 ------- ------- Balance at end of period $ 3,043 $ 2,627 ======= =======
Page 9 10 DEPOSITS Deposit totals continued to grow during the quarter, in part as a result of the acquisition of the deposits of the Manchester office of Great Lakes Bank. During the quarter, the Bank also completed a major restructuring of its transaction account products, resulting in the loss of a number of accounts, as was anticipated. However, the average balances of accounts increased, and improvement in deposit account service charges is anticipated in the second half of the year as a result of this restructuring. Management anticipates that deposit growth during 1999 will be steady, with continued growth from new and existing markets. LIQUIDITY The Bank maintained an average funds sold position for the first half of 1999, although generally the Bank moves in and out of the fed funds market as liquidity needs vary. Deposit growth moving at different times than loan growth will cause continued variation in the short term funds position of the Bank. The Company has a number of additional liquidity sources should the need arise, and Management has no concerns for the liquidity position of the Company. CAPITAL RESOURCES The capital ratios of the Company exceed the regulatory guidelines for well capitalized institutions. The following table shows the Company's capital ratios and ratio calculations at June 30, 1999 and 1998 and December 31, 1998. Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc. --------------------- -------------------- Adequate Well 6/30/1999 12/31/1998 6/30/1998 -------- ---- --------- ---------- --------- Tier 1 capital to average assets 4% 5% 8.9% 9.4% 9.1% Tier 1 risk adjusted capital ratio 4% 6% 13.5% 14.0% 13.7% Total risk adjusted capital ratio 8% 10% 14.6% 15.0% 14.7% Total shareholders' equity $39,698 $ 38,764 $ 37,130 Intangible assets (4,503) (2,230) (2,359) Unrealized (gain) loss on securities available for sale 255 (320) (267) ------- -------- -------- Tier 1 capital 35,450 36,214 34,504 Qualifying loan loss reserves 3,043 2,799 2,627 ------- -------- -------- Tier 2 capital $38,493 $ 39,013 $ 37,131 ======= ======== ========
RESULTS OF OPERATIONS NET INTEREST INCOME Net interest margin remained relatively unchanged for the second quarter compared to the first quarter of 1999, and was improved from the same period in 1998. At the same time, the company's spread continued to show improvement over prior periods. Continued loan growth has provided the bulk of this improvement over 1998 levels. The table below shows the year to date daily average Consolidated Balance Sheet, interest earned (on a taxable equivalent basis) or paid, and the annualized effective rate or yield, for the periods ended June 30, 1999 and 1998. Page 10 11 YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
dollars in thousands 1999 1998 - -------------------- -------------------------------------------------------------------------------- Average Interest Yield/ Average Interest Yield/ Balance (b) Rate Balance (b) Rate ------- --- ---- ------- --- ---- ASSETS Interest earning assets (a) Federal funds sold $ 2,295 $ 53 4.62% $ 9,153 $ 249 5.44% Taxable securities 52,754 1,617 6.13% 46,989 1,513 6.44% Tax exempt securities (b) 34,385 1,311 7.62% 35,222 1,368 7.77% Taxable loans 273,548 11,682 8.54% 260,638 11,692 8.97% Tax exempt loans (b) 1,613 61 7.52% 1,441 55 7.63% --------- ------- --------- ------- Total int. earning assets (b) 364,595 14,724 8.08% 353,443 14,877 8.42% Less allowance for loan losses (2,892) (2,531) Other assets 34,854 29,273 --------- --------- TOTAL ASSETS $ 396,557 $ 380,185 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY NOW accounts $ 53,821 $ 478 1.77% $ 41,862 $ 324 1.55% Savings deposits 72,529 793 2.19% 73,337 1,051 2.87% CDs $100,000 and over 29,790 763 5.12% 36,970 1,065 5.76% Other interest bearing deposits 143,874 3,453 4.80% 141,842 3,841 5.42% --------- ------- --------- ------- Total int. bearing deposits 300,014 5,486 3.66% 294,011 6,281 4.27% Short term borrowings 1,861 46 4.99% 726 20 5.52% Other borrowings 10,875 331 6.08% 10,460 316 6.03% --------- ------- --------- ------- Total int. bearing liabilities 312,750 5,863 3.75% 305,197 6,616 4.34% Noninterest bearing deposits 41,699 35,371 Other liabilities 2,617 3,211 Shareholders' equity 39,491 36,406 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 396,557 $ 380,185 ========= ========= Net interest income (b) $ 8,860 $ 8,261 ======= ======= Net spread (b) 4.33% 4.08% ==== ===== Net yield on interest earning assets (b) 4.86% 4.67% ==== ===== Ratio of interest earning assets to interest bearing liabilities 1.17 1.16 ========= =========
(a) Non-accrual loans and overdrafts are included in the average balances of loans. (b) Fully tax-equivalent basis; 34% tax rate. The table below shows the effect of volume and rate changes on net interest income for the six months ended June 30, on a taxable equivalent basis, in thousands of dollars.
1999 Compared to 1998 1998 Compared to 1997 --------------------- --------------------- Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a) ------------------------------- ------------------------------- Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- Interest earned on: Federal funds sold $ (163) $ (33) $ (196) $ 57 $ 5 $ 62 Taxable securities 179 (76) 103 (88) 9 (79) Tax exempt securities (32) (25) (57) 180 (33) 147 Taxable loans 565 (575) (10) 819 (11) 808 Tax exempt loans 7 (1) 6 13 (1) 12 ------- ------- -------- ------ ----- ----- Total interest income $ 556 $ (710) $ (154) $ 981 $ (31) $ 950 ======= ======= ======== ====== ===== =====
Page 11 12
1999 Compared to 1998 1998 Compared to 1997 -------------------------------- ----------------------------------- Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a) -------------------------------- ----------------------------------- Volume Rate Net Volume Rate Net -------- -------- ------- -------- -------- -------- Interest paid on: NOW accounts $ 101 $ 53 $ 154 $ 25 $ (9) $ 16 Savings deposits (11) (247) (258) 56 32 88 CDs $100,000 and over (192) (110) (302) (139) (11) (150) Other interest bearing deposits 54 (442) (388) 505 (120) 385 Short term borrowings 28 (2) 26 (38) 2 (36) Other borrowings 12 3 15 (76) 5 (71) ------ ------ ------ ------ ----- ----- Total interest expense $ (8) $ (745) $ (753) $ 333 $(101) $ 232 ====== ====== ====== ====== ===== ===== Net change in net interest income $ 564 $ 35 $ 599 $ 648 $ 70 $ 718 ====== ====== ====== ====== ===== =====
(a) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. NONINTEREST INCOME Noninterest income continues to improve over prior periods. All categories of noninterest income increased from the same period in 1998, while all categories other than income from loan sales and servicing improved from the prior quarter. In addition, earnings from the Trust & Investment group continue to increase at significant rates, reflecting the strong growth experienced by the department. Overall, on an annualized basis, total noninterest income is up 9.9% over the first quarter, and is up 8.4% year to date over same period of 1998. NONINTEREST EXPENSES Noninterest expense also continued to increase over prior periods, reflecting continued growth and expansion of the Bank. Additions to Bank facilities and staff contribute immediately to expenses, but will contribute to earnings in future periods. Total noninterest expense for the year, excluding provision for loan losses, is 11.1% over the same period for 1998, and is 6.2% higher than first quarter levels. Substantially all of this increase relates to growth and expansion of the Bank. FEDERAL INCOME TAX There has been no significant change in the income tax position of the Company during the second quarter of 1999. NET INCOME Consolidated net income during the first half of the year was substantially unchanged from the same period in 1998, and income for the second quarter was behind that of the second quarter of 1998. Likewise, second quarter income for 1999 was substantially unchanged from net earnings of the first quarter, as a result of the investments made in staff and facilities to generate future growth and income. Management anticipates that benefits of this expansion will begin to be evident in the third quarter of the year, and will exceed 1998 levels for the balance of the year. YEAR 2000 READINESS Federal banking regulators require specific actions of every financial institution to become Year 2000 ready. These guidelines require a bank to: - - Ensure the involvement of the board of directors and management in the institution's Year 2000 effort - - Adopt a written project plan - - Renovate its mission-critical systems Page 12 13 - - Complete tests of the renovated mission-critial systems by specific deadlines - - Plan for contingencies - - Manage customer risk United has an active Year 2000 committee that reports regularly on its progress to the Board of Directors. The Board has adopted a written plan, and continues to assess its risk. Management has determined which systems are mission-critical, and those which are not. Based on these determinations, a plan of action has been implemented. Key clients have been surveyed, and plans are underway to assess and manage client risk. Through the second quarter of 1999, the Company's Year 2000 task force has continued to monitor the readiness of its major data processing hardware and software providers, other critical vendor suppliers, and its large commercial customers. United uses major external third party vendors to the banking industry for its mainframe and all personal computer hardware and software. These well-known, national third party providers for the mission critical systems have provided written assurances that they are Year 2000 ready and their systems have been fully tested. The Company does not use any custom programmed software. In 1998, United determined that its Unisys mainframe computer system, while Year 2000 compliant, did not have sufficient capacity for future growth. In the fourth quarter of 1998, the Company installed a new Unisys mainframe to replace its previous system. This system provides a substantial increase in efficiency and capacity of operations, and allowed complete testing of its banking software provided by Information Technology, Inc. during the installation of the hardware, without any disruption to daily processing and customer service. All testing was completed by June 30, 1999 within the FFIEC published guidelines and no disruption in service due to a Year 2000 issue is anticipated. Other systems are being tested, and all noncompliant systems will be replaced or abandoned. Some non-critical systems have been found to be noncompliant, due to their age, and will be replaced. The readiness of the software used for mission critical systems is included in the cost of our normal maintenance of those systems and we do not expect any additional charges. Some minor hardware and software replacements will be needed, and expenditures are expected to be less than $50,000. The staffing needed to complete the testing and implementation plan has been identified and is available. Other new software installations for the balance of the year will be restricted to assure that we can complete our Year 2000 plan. Contingency planning has begun for mission critical tasks and will be continually monitored and updated to ensure uninterrupted customer services and backroom processing. United, however, cannot necessarily ensure uninterruption with certain vendors such as utility companies and phone companies, but those vendor plans are being monitored as an ongoing part of the assessment. Currently, all critical dates mandated by the regulators have been met by the data processing vendor and United is also on schedule for its review of any in-house critical systems, software, and equipment. During the second quarter of 1999, the Bank installed an auxilliary power generator at its main office, and began the process of installation of a generator at its Operations Center. The generators are capable of powering the entire building where installed, and will assure continued operation of the Bank's data center and operations areas in the event of a power failure. While the Bank does not Page 13 14 expect systemic power failures, the generators also provide protection from power failure from causes other than Year 2000 issues, including storms. The Company has evaluated its anticipated liquidity needs relating to potential cash demands, and has established a liquidity contingency policy. Management believes that sufficient liquidity sources are available to provide the Bank with adequate funding for any special cash needs that might develop. Overall, the cost of evaluating the Company's Year 2000 readiness and assuring its compliance will not have a measurable impact on the financial condition of the Company. United regularly provides for upgrades and replacement of its software and hardware, and the Year 2000 situation will not significantly impact those expenditures. Major loan and deposit customers have been surveyed to evaluate the level of Year 2000 planning and readiness and to assess any potential risk. Currently, it is unknown what impact a high risk client's inability to pay its bank obligations will have on the adequacy of United's allowance for possible loan losses or its financial position. United updates the Board of Directors and appropriate banking regulators regarding its Year 2000 readiness on a quarterly basis. No material affect on United's financial performance is anticipated, due to the systematic approach the Company has adopted to prepare for the Year 2000 date impact. FORWARD-LOOKING STATEMENTS Statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations relate to United's expectations as to future events relating to such items as the adequacy of the allowance for loan losses, changes in economic conditions including interest rates, management's ability to manage interest rate, liquidity and credit risks, impact on operations and credit losses as it relates to the Year 2000 issue. Such statements are not statements of historical fact and are forward-looking statements. United believes the assumptions upon which these statements are founded are reasonable, based on management's knowledge of its business and operations; however, there is no assurance the assumptions will prove to have been correct. Furthermore, United undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. ITEM 3- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FUNDS MANAGEMENT AND INTEREST RATE RISK The composition of the Company's balance sheet consists of investments in interest earning assets (loans and investment securities) that are funded by interest bearing liabilities (deposits and borrowings). These financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. Bank policies place strong emphasis on stabilizing net interest margin, with the goal of providing a sustained level of satisfactory earnings. The Funds Management, Investment and Loan policies provide direction for the flow of funds necessary to supply the needs of depositors and borrowers. Management of interest sensitive assets and liabilities is also necessary to reduce interest rate risk during times of fluctuating interest rates. A number of measures are used to monitor and manage interest rate risk, including interest sensitivity (gap) and income simulation analyses. A gap model is the primary tool used to assess this risk with Page 14 15 supplemental information supplied by an income simulation model. The simulation model is used to estimate the effect that specific interest rate changes would have on 12 months of pretax net interest income assuming an immediate and sustained up or down parallel change in interest rates of 200 basis points. Key assumptions in the models include prepayment speeds on mortgage related assets; cash flows and maturities of financial instruments held for purposes other than trading; changes in market conditions, loan volumes and pricing; and management's determination of core deposit sensitivity. These assumptions are inherently uncertain and, as a result, the models cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions. Based on the results of the simulation model as of June 30, 1999, the Company would expect a maximum potential reduction in net interest margin of less than 5% if market rates increased under an immediate and sustained parallel shift of 200 basis points. The Bank's interest sensitivity position remained virtually unchanged from the previouis quarter. The Company's exposure to market risk is reviewed on a regular basis by the Funds Management Committee. The Committee's policy objective is to manage the Company's assets and liabilities to provide an optimum and consistent level of earnings within the framework of acceptable risk standards. The Funds Management Committee of the Bank is also responsible for evaluating and anticipating various risks other than interest rate risk. Those risks include prepayment risk, credit risk and liquidity risk. The Committee is made up of senior members of management, and continually monitors the makeup of interest sensitive assets and liabilities to assure appropriate liquidity, maintain interest margins and to protect earnings in the face of changing interest rates and other economic factors. The Funds Management policy of the Bank provides for a level of interest sensitivity which, Management believes, allows the Bank to take advantage of opportunities within the market relating to liquidity and interest rate risk, allowing flexibility without subjecting the Bank to undue exposure to risk. In addition, other measures are used to evaluate and project the anticipated results of Management's decisions. PART II OTHER INFORMATION ITEM 1- LEGAL PROCEEDINGS The Company is not involved in any material legal proceedings. The Company's sole subsidiary, United Bank & Trust, is involved in ordinary routine litigation incident to its business; however, no such proceedings are expected to result in any material adverse effect on the operations or earnings of the Bank. Neither the Bank nor the Company is involved in any proceedings to which any director, principal officer, affiliate thereof, or person who owns of record or beneficially five percent (5%) or more of the outstanding stock of the Company or the Bank, or any associate of the foregoing, is a party or has a material interest adverse to the Company or the Bank. Page 15 16 ITEM 2- CHANGES IN SECURITIES No changes in the securities of the Company occurred during the quarter ended June 30, 1999. ITEM 3- DEFAULTS UPON SENIOR SECURITIES There have been no defaults upon senior securities relevant to the requirements of this section during the three months ended June 30, 1999. ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders of the Company was held on April 20, 1999. At that meeting, the following matters were submitted to a vote of the shareholders. There were 1,730,251 voting shares outstanding on April 20, 1999. The following directors were elected to three year terms:
For Against Abstain --- ------- ------- John H. Foss Re-elected 1,170,893 4,418 - David S. Hickman Re-elected 1,175,272 39 - Ann Hinsdale Knisel Re-elected 1,157,887 17,424 - John R. Roberstad Re-elected 1,170,546 4,765 - Jeffrey T. Robideau Re-elected 1,174,272 1,039 - Scott F. Hill Newly elected 1,158,044 17,267 -
Directors Berlin, Bush, Butcko, Farver, Gurdijan, Kuhman, Lawson, Martin, Maxwell, Mohr, Niethammer, and Wanke hold terms which continue after the meeting. Director Whelan has retired from the Board and did not stand for re-election. Crowe, Chizek and Company LLP of Grand Rapids, Michigan were ratified as independent auditors for the Company and its subsidiary for the year ending December 31, 1999. The vote was as follows:
For Against Abstain --- ------- ------- Ratification of auditors 1,154,799 130 20,382
No other matters were considered by shareholders at that meeting. ITEM 5- OTHER INFORMATION None. ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K (a) Listing of Exhibits (numbered as in Item 601 of Regulation S-K): 27. Financial Data Schedule. (b) The Company has filed no reports on Form 8-K during the quarter ended June 30, 1999. Page 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. United Bancorp, Inc. July 30, 1999 /S/ Dale L. Chadderdon -------------------------------------------------------- Dale L. Chadderdon Senior Vice President, Secretary & Treasurer Page 17 18 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - -------------------------------------------------------------------------------- 27 Financial Data Schedule Page 18 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-1999 JUN-30-1999 13,098 0 4,300 0 52,161 33,402 33,755 281,434 3,043 403,520 350,714 0 2,484 10,624 0 0 23,769 15,929 403,520 11,724 2,518 53 14,295 5,486 5,863 8,432 630 11 7,370 3,349 3,349 0 0 2,479 1.36 1.36 4.86 1,015 295 135 226 2,799 486 100 3,043 1,821 0 1,222
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