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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, 2003
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, 2003, there were outstanding 2,114,732 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
Financial Condition 9
Liquidity and Capital Resources 12
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 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
Exhibits
Disclosure Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 20
Disclosure Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 22
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,
ASSETS 2003 2002 2002
-------- -------- --------
Cash and demand balances in other banks $ 16,209 $ 16,719 $ 19,593
Federal funds sold 26,300 7,700 4,000
-------- -------- --------
Total cash and cash equivalents 42,509 24,419 23,593
Securities available for sale 95,254 97,380 102,654
Loans held for sale 3,670 7,873 3,570
Portfolio loans 415,875 422,653 388,041
-------- -------- --------
Total loans 419,545 430,526 391,611
Less allowance for loan losses 5,159 4,975 4,684
-------- -------- --------
Net loans 414,386 425,551 386,927
Premises and equipment, net 14,133 14,123 15,190
Goodwill 3,469 3,469 3,413
Accrued interest receivable and other assets 9,289 8,957 8,441
-------- -------- --------
TOTAL ASSETS $579,040 $573,899 $540,218
======== ======== ========
LIABILITIES
Deposits
Noninterest bearing $ 69,614 $ 71,976 $ 63,956
Interest bearing deposits 407,105 399,574 403,179
-------- -------- --------
Total deposits 476,719 471,550 467,135
Federal funds purchased and other short term borrowings 75 75 521
Other borrowings 41,867 41,867 18,009
Accrued interest payable and other liabilities 5,985 7,027 5,617
-------- -------- --------
TOTAL LIABILITIES 524,646 520,519 491,282
COMMITMENT AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value;
5,000,000 shares authorized; 2,114,732, 2,114,765 and
2,009,242 shares issued and outstanding 39,178 39,122 33,617
Stock dividend payable 6,344 - 5,124
Retained earnings 7,709 12,977 9,733
Accumulated other comprehensive income, net of tax 1,163 1,281 462
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 54,394 53,380 48,936
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $579,040 $573,899 $540,218
======== ======== ========
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,
---------------------
2003 2002
-------- --------
INTEREST INCOME
Interest and fees on loans $ 6,993 $ 6,950
Interest on securities
Taxable 602 702
Tax exempt 314 395
Interest on federal funds sold 54 68
-------- --------
Total interest income 7,963 8,115
INTEREST EXPENSE
Interest on deposits 1,798 2,406
Interest on short term borrowings - 4
Interest on other borrowings 534 262
-------- --------
Total interest expense 2,332 2,672
-------- --------
NET INTEREST INCOME 5,631 5,443
Provision for loan losses 313 192
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,318 5,251
NONINTEREST INCOME
Service charges on deposit accounts 603 504
Trust & Investment fee income 699 735
Loan sales and servicing 841 372
ATM, debit and credit card fee income 342 303
Sales of nondeposit investment products 124 226
Other income 143 149
-------- --------
Total noninterest income 2,752 2,289
NONINTEREST EXPENSE
Salaries and employee benefits 3,323 3,071
Occupancy and equipment expense, net 958 944
External data processing 310 277
Advertising and marketing 112 145
Other expense 818 850
-------- --------
Total noninterest expense 5,521 5,287
-------- --------
INCOME BEFORE FEDERAL INCOME TAX 2,549 2,253
Federal income tax 766 630
-------- --------
NET INCOME $ 1,783 $ 1,623
======== ========
Basic earnings per share $ 0.80 $ 0.73
Diluted earnings per share 0.79 0.73
Cash dividends declared per share of common stock 0.31 0.27
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
(C) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
In thousands of dollars
Three Months Ended
March 31,
----------------------
TOTAL SHAREHOLDERS' EQUITY 2003 2002
-------- --------
Balance at beginning of period $ 53,380 $ 48,177
Net Income 1,783 1,623
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale, net (118) (293)
-------- --------
Total comprehensive income 1,665 1,330
Cash dividends declared (699) (603)
Common stock transactions 48 32
-------- --------
Balance at end of period $ 54,394 $ 48,936
======== ========
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,
----------------------
2003 2002
-------- --------
Cash Flows from Operating Activities
Net income $ 1,783 $ 1,623
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization 707 753
Provision for loan losses 313 192
Gain on sale of loans (945) (341)
Proceeds from sales of loans originated for sale 56,855 24,000
Loans originated for sale (51,707) (20,543)
Change in accrued interest receivable and other assets (271) 441
Change in accrued interest payable and other liabilities (790) (342)
-------- --------
Net cash from operating activities 5,945 5,783
Cash Flows from Investing Activities
Securities available for sale
Purchases (9,773) (22,802)
Maturities and calls 10,203 8,130
Principal payments 1,271 1,630
Net change in portfolio loans 6,649 (16,082)
Premises and equipment expenditures, net (471) (374)
-------- --------
Net cash from investing activities 7,879 (29,498)
Cash Flows from Financing Activities
Net change in deposits 5,169 15,837
Net change in short term borrowings - (498)
Proceeds from other borrowings 2,000 8,000
Principal payments on other borrowings (2,000) (2,000)
Proceeds from common stock transactions 48 32
Dividends paid (951) (843)
-------- --------
Net cash from financing activities 4,266 20,528
-------- --------
Net change in cash and cash equivalents 18,090 (3,187)
Cash and cash equivalents at beginning of year 24,419 26,780
-------- --------
Cash and cash equivalents at end of period $ 42,509 $ 23,593
======== ========
Supplement Disclosure of Cash Flow Information:
Interest paid $ 2,423 $ 2,789
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. The condensed consolidated balance sheet of the
Company as of December 31, 2002 has been derived from the audited consolidated
balance sheet of the Company as of that date. Operating results for the three
month period ending March 31, 2003 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2003. 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, 2002.
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 $209,803,000 and $173,672,000 at the end of March
2003 and 2002. The balance of loans serviced for others related to servicing
rights that have been capitalized was $203,137,000 and $162,437,000 at March 31,
2003 and 2002.
Mortgage servicing rights activity in thousands of dollars for the three months
ended March 31, 2003 and 2002 follows:
2003 2002
------ ------
Balance at January 1 $ 1,352 $ 1,100
Amount capitalized year to date 360 154
Amount amortized year to date (231) (81)
------- -------
Balance at period end $ 1,481 $ 1,173
======= =======
No valuation allowance was considered necessary for mortgage servicing rights at
period end 2003 and 2002.
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 2003 and 2002, the Company
declared 5% stock dividends payable in May 2003 and 2002. 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,
-----------------------
2003 2002
--------- ---------
Net income $ 1,783 $ 1,623
========= =========
Basic earnings:
Weighted average common shares outstanding 2,220,490 2,215,189
Weighted average contingently issuable shares 18,307 15,078
--------- ---------
Total weighted average shares outstanding 2,238,797 2,230,267
========= =========
Basic earnings per share $ 0.80 $ 0.73
========= =========
Page 7
Three Months Ended
Diluted earnings: March 31,
-----------------------
Weighted average common shares outstanding 2003 2002
--------- ---------
from basic earnings per share 2,238,797 2,230,267
Dilutive effect of stock options 8,556 4,239
--------- ---------
Total weighted average shares outstanding 2,247,353 2,234,506
========= =========
Diluted earnings per share $ 0.79 $ 0.73
========= =========
A small number of shares represented by stock options granted are not included
in the above calculations as they are non-dilutive as of the date of this
report.
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
126,182 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, 2003 79,821 $ 44.80
Options granted 23,000 54.35
Options exercised - -
Options forfeited - -
--------
Balance at March 31, 2003 102,821 $ 46.94
========
Options granted under the plan during the current year were 21,000 on January
10, 2003, 1,000 on February 17, 2003 and 1,000 on March 12, 2003. The weighted
fair value of the options granted was $3.93. For stock options outstanding at
March 31, 2003, the range of average exercise prices was $41.46 to $60.00 and
the weighted average remaining contractual term was 8.2 years. At March 31,
2003, 44,852 options were exercisable at the weighted average exercise price of
$44.10.
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, 2003 and 2002.
Three Months Ended
In thousands of dollars, except per share data March 31,
---------------------
2003 2002
------- -------
Net income, as reported $ 1,783 $ 1,623
Less: Total stock-based compensation cost, net of taxes 21 23
------- -------
Pro forma net income $ 1,762 $ 1,600
======= =======
Page 8
Three Months Ended
March 31,
--------------------
Earnings per share: 2003 2002
------ ------
Basic As reported $ 0.80 $ 0.73
Basic Pro forma 0.79 0.72
Diluted As reported $ 0.79 $ 0.73
Diluted Pro forma 0.78 0.72
NOTE 5: EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") adopted Statement of Financial
Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure. This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. Under the provisions of SFAS No. 123, companies that
adopted the fair value based method were required to apply that method
prospectively for new stock option awards. This contributed to a "ramp-up"
effect on stock-based compensation expense in the first few years following
adoption, which caused concern for companies and investors because of the lack
of consistency in reported results. To address that concern, SFAS No. 148
provides two additional methods of transition that reflect an entity's full
complement of stock-based compensation expense immediately upon adoption,
thereby eliminating the ramp-up effect. SFAS No. 148 also improves the clarity
and prominence of disclosures about the proforma effects of using the fair value
based method of accounting for stock-based compensation for all companies -
regardless of the accounting method used - by requiring that the data be
presented more prominently and in a more user-friendly format in the footnotes
to the financial statements. In addition, SFAS No. 148 improves the timeliness
of those disclosures by requiring that this information be included in interim
as well as annual financial statements. In the past, companies were required to
make proforma disclosures only in annual financial statements. The transition
guidance and annual disclosure provisions of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002, with earlier application permitted
in certain circumstances. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. The FASB has stated it intends to issue a new statement
on accounting for stock-based compensation and will require companies to expense
stock options using a fair value based method at date of grant. The
implementation for this proposed state statement is not known.
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, 2003 and 2002.
FINANCIAL CONDITION
SECURITIES
Balances in the Company's investment securities portfolio continued to increase
during the first quarter of 2003, as investment securities replaced a portion of
the Company's short term funds sold. This growth in the
Page 9
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.
3/31/2003 12/31/2002 3/31/2002
--------- ---------- ---------
U.S. Treasury and agency securities 37.2% 30.6% 28.7%
Mortgage backed agency securities 12.8% 14.0% 15.0%
Obligations of states and political subdivisions 35.8% 39.1% 37.4%
Corporate, asset backed, and other securities 14.2% 16.3% 18.9%
----- ----- -----
Total Securities 100.0% 100.0% 100.0%
====== ====== ======
The Company's current and projected tax position continues to make carrying
tax-exempt securities beneficial, 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 12% 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 balances declined during the first quarter of 2003, reflecting continued
refinancing in the Company's residential mortgage portfolios, into products that
are sold on the secondary market. Personal loan balances were also down
somewhat, while balances in the business loan portfolio were up for the quarter.
The mix of the loan portfolio continues a long-term trend toward an increased
percentage of business loans, with declining percentages of residential mortgage
loans and personal loans. 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.
March 31, 2003 December 31, 2002 March 31, 2002
---------------------- ----------------------- ----------------------
Total loans: Balance % of total Balance % of total Balance % of total
--------- ---------- --------- ----------- --------- ----------
Personal $ 68,311 16.3% $ 71,010 16.5% $ 62,335 15.9%
Business loans and
commercial mortgages 218,508 52.1% 212,611 49.4% 180,932 46.2%
Tax exempt 1,279 0.3% 1,417 0.3% 1,818 0.5%
Residential mortgage 96,769 23.1% 110,985 25.8% 118,118 30.2%
Construction 34,678 8.3% 34,503 8.0% 28,408 7.2%
------- ---------- --------- ----------- --------- ----------
Total loans $ 419,545 100.0% $ 430,526 100.00% $ 391,611 100.0%
========= ========== ========= =========== ========= ==========
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, although a portion of this production is sold in the
secondary markets.
Page 10
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.
3/31/2003 12/31/2002 3/31/2002
--------- ---------- ---------
Nonaccrual loans $ 3,302 $ 1,583 $ 1,081
Loans past due 90 days or more 353 748 691
Troubled debt restructurings -- -- 130
-------- -------- -------
Total nonperforming loans 3,655 2,331 1,902
Other real estate 467 467 179
-------- -------- -------
Total nonperforming assets $ 4,122 $ 2,798 $ 2,081
======== ======== =======
Percent of nonperforming loans to total loans 0.87% 0.54% 0.49%
Percent of nonperforming assets to total assets 0.71% 0.49% 0.39%
The Company's classification of nonperforming loans is generally consistent with
loans identified as impaired. The amount listed in the table above as other real
estate reflects a small number of commercial properties that were acquired in
lieu of foreclosure. Total dollars in this category remain unchanged from
December 31, 2002. Properties have been leased to a third party with an option
to purchase or are listed for sale, and no significant losses are anticipated.
Nonperforming assets are up from prior periods, as credit quality has declined
somewhat. Balances in non- accrual loans are up substantially compared to the
levels achieved at the end of 2002 and March 31, 2002. Delinquencies are down
from year end 2002 and the end of the first quarter of 2002. Overall, the
Company's ratios of nonperforming loans have increased since December of 2002,
substantially all as a result of the increase in nonaccrual loans. The ratios
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 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, 2003 and 2002
follows:
2003 2002
------- ------
Balance at January 1: $ 4,975 $ 4,571
Loans charged off (148) (108)
Recoveries credited to allowance 19 29
Provision charged to operations 313 192
------- -------
Balance at March 31 $ 5,159 $ 4,684
======= =======
The Company has increased its provision for loan losses over the same period in
2002 as a result of continued loan growth and the upward trend in balances 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, 2003 and 2002, and December 31, 2002.
Page 11
3/31/2003 12/31/2002 3/31/2002
--------- ---------- ---------
Business and commercial mortgage $ 4,591 $ 3,950 $ 3,983
Tax exempt - - -
Residential mortgage 14 15 21
Personal 554 571 498
Construction - - -
Unallocated - 439 182
------- ------- -------
Total $ 5,159 $ 4,975 $ 4,684
======= ======= =======
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 31.4% of the portfolio at March 31, 2003, and are
well-secured and have had historically low levels of net losses. Personal and
business loans make up the balance of the portfolio.
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
Deposit growth improved in the first quarter of 2003. Total deposits increased
at an annualized rate of 4.4% in the first quarter, compared to growth of 4.5%
in 2002. Products such as money market deposit accounts, Cash Management
Checking and Cash Management Accounts continue to be very popular with clients,
aiding in continued deposit growth. Although clients continue to evaluate
alternatives to certificates of deposit in search of the best yields on their
funds, traditional banking products continue to be an important part of the
Company's product line.
As in the past, the majority of the Company's deposits are derived from core
client sources, relating to long term relationships with local personal,
business and public 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. The chart below shows the
percentage makeup of the deposit portfolio as of March 31, 2003 and 2002.
2003 2002
----- ----
Noninterest bearing deposits 14.6% 13.7%
Interest bearing deposits 85.4% 86.3%
------ ------
Total deposits 100.0% 100.0%
====== ======
LIQUIDITY, CASH EQUIVALENTS AND BORROWED FUNDS
The Company maintains correspondent accounts with a number of other banks for
various purposes. In addition, cash sufficient to meet the operating needs of
its banking offices is maintained at its lowest practical levels. At times, the
Banks are 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
Banks also have the ability to utilize short term
Page 12
advances from the Federal Home Loan Bank ("FHLB") and borrowings at the
discount window of the Federal Reserve Bank as additional short-term funding
sources. Federal funds were used during 2003 and 2002. Short term advances and
discount window borrowings were not utilized during either year.
The Company periodically finds it advantageous to utilize longer term borrowings
from the Federal Home Loan Bank of Indianapolis. These long-term borrowings
served 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, 2003 and 2002, and December 31, 2002.
Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc.
--------------------- --------------------------------------
Adequate Well 3/31/2003 12/31/2002 3/31/2002
-------- ---- --------- ---------- ---------
Tier 1 capital to average assets 4% 5% 8.7% 8.8% 8.5%
Tier 1 capital to risk weighted assets 4% 6% 11.8% 11.6% 11.9%
Total capital to risk weighted assets 8% 10% 13.0% 12.8% 13.1%
Total shareholders' equity $ 54,394 $ 53,380 $ 48,936
Intangible assets (3,469) (3,469) (3,413)
Disallowed servicing assets (148) (97) -
Unrealized (gain) loss on securities available for sale (1,163) (1,281) (462)
-------- -------- --------
Tier 1 capital 49,614 48,533 45,061
Allowable loan loss reserves 5,032 4,975 4,670
-------- -------- --------
Tier 2 capital $ 54,646 $ 53,508 $ 49,731
======== ======== ========
RESULTS OF OPERATIONS
Consolidated net income for the first quarter of 2003 was improved from that of
the first quarter of 2002, but was down from the record earnings of the fourth
quarter of last year. Net income contributed by UBT continues to increase, and
UBTW reached profitability during the fourth quarter of 2002.
NET INTEREST INCOME
Net interest income increased by 3.4% from the first quarter of 2002, but was
down 3.1% from the fourth quarter of the year. During the first quarter of 2003,
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 and 2002. At the same time, the Company's level of excess
funding has increased, resulting in lower overall yields on earning assets.
Spread and net interest margin is lower than that of the first quarter and the
Page 13
full year of 2002. 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 March
31, 2003 and 2002.
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
Quarter ended March 31,
---------------------------------------------------------------------------------
dollars in thousands 2003 2002
-------- -------
Average Interest Yield/ Average Interest Yield/
ASSETS Balance (b) Rate (c) Balance (b) Rate (c)
------- -------- -------- ------- --- --------
Interest earning assets (a)
Federal funds sold $ 18,130 $ 54 1.19% $ 17,085 $ 68 1.59%
Taxable securities 62,816 602 3.83% 60,434 702 4.65%
Tax exempt securities (b) 30,359 469 6.18% 36,724 591 6.44%
Taxable loans 424,966 6,976 6.57% 381,394 6,926 7.26%
Tax exempt loans (b) 1,362 25 7.23% 1,873 36 7.60%
--------- --------- --------- -------
Total interest earning assets (b) 537,633 8,126 6.05% 497,510 8,323 6.69%
Less allowance for loan losses (5,055) (4,620)
Other assets 44,560 44,013
--------- ---------
TOTAL ASSETS $ 577,138 $ 536,903
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 98,147 184 0.75% $ 85,762 198 0.92%
Savings deposits 154,860 421 1.09% 135,755 503 1.48%
CDs $100,000 and over 27,362 286 4.19% 30,312 373 4.93%
Other interest bearing deposits 126,453 907 2.87% 153,162 1,332 3.48%
--------- --------- --------- -------
Total interest bearing deposits 406,822 1,798 1.77% 404,991 2,406 2.38%
Short term borrowings 75 0 0.50% 965 4 1.51%
Other borrowings 41,736 534 5.12% 17,169 262 6.11%
--------- --------- --------- -------
Total interest bearing liabilities 448,633 2,332 2.08% 423,125 2,672 2.53%
--------- -------
Noninterest bearing deposits 67,739 59,110
Other liabilities 6,610 5,758
Shareholders' equity 54,156 48,910
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 577,138 $ 536,903
========= =========
Net interest income (b) $ 5,794 $ 5,651
========= =======
Net spread (b) 3.97% 4.17%
===== ====
Net yield on interest earning assets (b) 4.31% 4.54%
===== ====
Ratio of interest earning assets to
interest bearing liabilities 1.20 1.18
========= =========
(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 2003 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 2002. The following table shows the effect
of volume and rate changes on net interest income for the three months ended
March 31, 2003 and 2002 on a taxable equivalent basis, in thousands of dollars.
Page 14
2003 Compared to 2002 2002 Compared to 2001
------------------------------- -------------------------------
Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a)
------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Interest earned on:
Federal funds sold $ 4 $ (18) $ (14) $ (102) $ (202) $ (304)
Taxable securities 27 (127) (100) 253 (177) 76
Tax exempt securities (99) (23) (122) 99 (79) 20
Taxable loans 750 (700) 50 803 (1,173) (370)
Tax exempt loans (9) (2) (11) (2) 2 -
----- ----- ----- ------- ------- -------
Total interest income $ 673 $(870) $(197) $ 1,051 $(1,629) $ (578)
===== ===== ===== ======= ======= =======
Interest paid on:
NOW accounts $ 26 $ (40) $ (14) $ 99 $ (339) $ (240)
Savings deposits 64 (146) (82) 323 (202) 121
CDs $100,000 and over (34) (53) (87) (190) (98) (288)
Other interest bearing deposits (212) (213) (425) (452) (862) (1,314)
Short term borrowings (2) (2) (4) 4 - 4
Other borrowings 321 (49) 272 76 (24) 52
----- ----- ----- ------- ------- -------
Total interest expense $ 163 $(503) $(340) $ (140) $(1,525) $(1,665)
===== ===== ===== ======= ======= =======
Net change in net interest
income $ 510 $(367) $ 143 $ 1,191 $ (104) $ 1,087
===== ===== ===== ======= ======= =======
(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 2002. However, in comparison with the first quarter of
2002, noninterest income is up 20.2%. While income from the sale of nondeposit
investment products is down somewhat, most 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 19.6% over the first quarter of 2002
and 27.8% above the fourth quarter of 2002. No significant changes were made in
the Company's service charge structure during the quarter. The Trust &
Investment Group of UBT continues to provide significant contribution to the
Company's noninterest income, through continued growth and expansion. However,
this growth has been hindered during the past several quarters by declines in
the equity markets, which impact the market value of assets managed and the
resulting fee income. Income in this category is down 0.1% from the fourth
quarter of 2002, and down 4.9% from the first quarter of last year.
The Banks generally market their production of fixed rate long-term mortgages in
the secondary market, and retain adjustable rate mortgages for their portfolios.
The Company maintains a portfolio of sold residential real estate mortgages,
which it continues to service. This servicing provides ongoing income for the
life of the loans. During 2002 and 2003, clients continued to exhibit a
preference for fixed rate loans as market rates declined, resulting in a greater
proportion of those loans originated by the Banks being sold in the secondary
market. While activity in residential mortgages declined somewhat from the
strong fourth quarter of 2002, income in this category remains very high. Income
from the sale and servicing of loans was down 16.6% from the fourth quarter of
2002, but is up 12.9% over the first quarter of 2002. The Company does not
believe that this volume of business is sustainable, and is likely to decline
significantly when interest rates increase. As the Company is conservative in
its approach to valuation of mortgage servicing rights, no write-downs in
mortgage servicing rights were required in 2003 or 2002 as a result of declining
market rates.
Page 15
NONINTEREST EXPENSES
Total noninterest expenses increased 4.4% from the first quarter of 2002 to
2003, with most of the increase in salaries and employee benefits. At the same
time, expenses were down 2.1% from the fourth quarter of 2002, which included
additional compensation expenses as a result of commissions expense and
additional bonus accruals. Overall, expenses remain in line with the Company's
growth.
FEDERAL INCOME TAX
There has been no significant change in the income tax position of the Company.
The effective tax rate was 30.1% for the first quarter of 2003 compared to 28.0%
for the first quarter of 2002 and 29.8% for the fourth quarter of 2002, as a
result of a decrease in the amount of tax-exempt income from loans and
securities.
NET INCOME
Income for the first quarter of 2003 represents the best first quarter in the
Company's history, with an increase of 9.9% over the same period in 2002.
However, net income was down slightly from the record levels achieved in the
third and fourth quarters of 2002. Management anticipates that net income will
remain strong for the remainder of the year, but with a decrease in the amount
of income attributed to gains on the sale of loans in the secondary market. At
the same time, it is anticipated that other categories of income will improve
from first-quarter levels, resulting in a strong earnings year for the Company.
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.
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.
Page 16
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 March 31, 2003, the Company
would expect a maximum potential reduction in net interest margin of less than
6% if market rates increased under an immediate and sustained parallel shift of
200 basis points. The Company's interest sensitivity position is slightly more
asset-sensitive than in the fourth quarter of 2002, continuing a trend evident
throughout 2002. The Company anticipates that interest rates will rise, and has
positioned its balance sheet to take advantage of this expected increase in
rates. As a result, current net interest income has been lowered in order to
improve net interest margin in the future.
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.
ITEM 4- CONTROLS AND PROCEDURES
INTERNAL CONTROL
The Company maintains internal controls that contain self-monitoring mechanisms,
and actions are taken to correct deficiencies as they are identified. The Board,
operating through its Audit and Compliance Committee, provides oversight to the
financial reporting process. Even effective internal controls, no matter how
well designed, have inherent limitations, including the possibility of
circumvention or overriding of controls. Accordingly, even effective internal
controls can provide only reasonable assurance with respect to financial
statement preparation. Furthermore, the effectiveness of internal controls may
vary over time.
The Company's Audit and Compliance Committee is composed entirely of Directors
who are not officers or employees of the Company.
Within the 90-day period prior to the filing date of this report, an evaluation
was carried out under the supervision and with the participation of United
Bancorp's management, including our Chief Executive
Page 17
Officer and Chief Financial Officer, of the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934). Based on their evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that
United Bancorp's disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent to the date of
their evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that there were no significant changes in the company's internal
controls or in other factors that could significantly affect its internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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, 2003.
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, 2003.
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, 2003.
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):
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) The Company has filed no reports on Form 8-K during the quarter ended March
31, 2003.
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.
May 13, 2003
/S/ Dale L. Chadderdon
- ---------------------------------------------
Dale L. Chadderdon
Senior Vice President, Secretary & Treasurer
Page 19
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
DISCLOSURE PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David S. Hickman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United Bancorp, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/S/ David S. Hickman May 13, 2003
- ----------------------------------------- ---------------
David S. Hickman Date
Chairman and Chief Executive Officer
Page 20
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
DISCLOSURE PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dale L. Chadderdon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United Bancorp, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/S/ Dale L. Chadderdon May 13, 2003
- ---------------------------------------------- -----------------
Dale L. Chadderdon Date
Senior Vice President, Secretary & Treasurer
Page 21
Exhibit Index
No. 1 Description
- ----- -----------
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Page 22