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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, 2005
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Act. Yes [X] No [ ]
As of April 30, 2005, there were outstanding 2,373,701 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
(a) Condensed Consolidated Balance Sheets 3
(b) Condensed Consolidated Statements of Income 4
(c) Condensed Consolidated Statements of Shareholders' Equity 5
(d) Condensed Consolidated Statements of Cash Flows 6
(e) Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary 9
Financial Condition 10
Liquidity and Capital Resources 13
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 18
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 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibits 21
Page 2
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
(a) CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands of dollars
(unaudited) (unaudited)
March 31, December 31, March 31,
2005 2004 2004
----------- ------------ -----------
ASSETS
Cash and demand balances in other banks $ 16,130 $ 18,188 $ 19,631
Federal funds sold - - 3,600
----------- ------------ -----------
Total cash and cash equivalents 16,130 18,188 23,231
Securities available for sale 99,850 103,786 110,025
Loans held for sale 3,345 1,102 2,286
Portfolio loans 512,961 495,796 455,146
----------- ------------ -----------
Total loans 516,306 496,898 457,432
Less allowance for loan losses 5,893 5,766 5,503
----------- ------------ -----------
Net loans 510,413 491,132 451,929
Premises and equipment, net 13,102 13,147 13,846
Goodwill 3,469 3,469 3,469
Bank-owned life insurance 10,792 10,694 10,371
Accrued interest receivable and other assets 10,404 9,935 9,695
----------- ------------ -----------
TOTAL ASSETS $ 664,160 $ 650,351 $ 622,566
=========== ============ ===========
LIABILITIES
Deposits
Noninterest bearing $ 78,159 $ 85,598 $ 82,773
Interest bearing deposits 467,044 444,280 431,498
----------- ------------ -----------
Total deposits 545,203 529,878 514,271
Federal funds purchased and other short term borrowings 5,876 8,726 76
Other borrowings 42,847 42,847 43,375
Accrued interest payable and other liabilities 6,675 6,676 5,512
----------- ------------ -----------
TOTAL LIABILITIES 600,601 588,127 563,234
COMMITMENT AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value;
5,000,000 shares authorized; 2,371,356, 2,355,097, and
2,225,041 shares issued and outstanding 54,940 54,133 46,609
Stock dividend payable 7,925 - 7,321
Retained earnings 1,015 7,992 4,621
Accumulated other comprehensive income (loss), net of tax (321) 99 781
----------- ------------ -----------
TOTAL SHAREHOLDERS' EQUITY 63,559 62,224 59,332
----------- ------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 664,160 $ 650,351 $ 622,566
=========== ============ ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
(b) CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
In thousands of dollars, except per share data
Three Months Ended
March 31,
------------------
2005 2004
------- ------
INTEREST INCOME
Interest and fees on loans $ 7,857 $6,774
Interest on securities
Taxable 531 516
Tax exempt 261 307
Interest on federal funds sold 34 15
------- ------
Total interest income 8,683 7,612
INTEREST EXPENSE
Interest on deposits 2,054 1,479
Interest on short term borrowings 7 2
Interest on other borrowings 477 467
------- ------
Total interest expense 2,538 1,948
------- ------
NET INTEREST INCOME 6,145 5,664
Provision for loan losses 323 262
------- ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,822 5,402
NONINTEREST INCOME
Service charges on deposit accounts 657 643
Trust & Investment fee income 996 889
Gains (losses) on securities transactions (2) 2
Loan sales and servicing 244 255
ATM, debit and credit card fee income 376 314
Income from sale of nondeposit investment products 164 182
Income from bank-owned life insurance 98 121
Other income 166 138
------- ------
Total noninterest income 2,699 2,544
NONINTEREST EXPENSE
Salaries and employee benefits 3,610 3,413
Occupancy and equipment expense, net 1,044 1,004
External data processing 274 274
Advertising and marketing 246 110
Other expense 898 831
------- ------
Total noninterest expense 6,072 5,632
------- ------
INCOME BEFORE FEDERAL INCOME TAX 2,449 2,314
Federal income tax 665 598
------- ------
NET INCOME $ 1,784 $1,716
======= ======
Basic earnings per share $ 0.713 $0.691
Diluted earnings per share $ 0.709 $0.686
Cash dividends declared per share of common stock $ 0.333 $0.308
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
(c) CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
In thousands of dollars
Three Months Ended
March 31,
---------------------
2005 2004
-------- --------
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of period $ 62,224 $ 57,383
Net Income 1,784 1,716
Other comprehensive income:
Net change in unrealized gains (losses) on securities available for sale, net (420) 201
-------- --------
Total comprehensive income 1,364 1,917
Cash dividends declared (828) (760)
Common stock transactions 799 792
-------- --------
Balance at end of period $ 63,559 $ 59,332
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5
(d) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In thousands of dollars
Three Months Ended
March 31,
---------------------
2005 2004
-------- --------
Cash Flows from Operating Activities
Net income $ 1,784 $ 1,716
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization 522 518
Provision for loan losses 323 262
Gain on sale of loans (177) (204)
Proceeds from sales of loans originated for sale 11,421 16,734
Loans originated for sale (13,487) (18,930)
(Gains) Losses on securities transactions 2 (2)
Change in accrued interest receivable and other assets (277) 755
Gain on investment in bank-owned life insurance (98) (121)
(Gain) Loss on Investment in limited partnership 17 32
Change in accrued interest payable and other liabilities 33 (848)
-------- --------
Net cash from operating activities 63 (88)
Cash Flows from Investing Activities
Securities available for sale
Purchases (29) (18,400)
Sales - 4,343
Maturities and calls 1,834 11,752
Principal payments 1,397 1,120
Net change in portfolio loans (17,461) (8,553)
Premises and equipment expenditures, net (312) (92)
-------- --------
Net cash from investing activities (14,571) (9,830)
Cash Flows from Financing Activities
Net change in deposits 15,325 11,688
Net change in short term borrowings (2,850) (8,000)
Proceeds from other borrowings - 8,000
Principal payments on other borrowings - -
Proceeds from common stock transactions 799 792
Dividends paid (824) (756)
-------- --------
Net cash from financing activities 12,450 11,724
-------- --------
Net change in cash and cash equivalents (2,058) 1,806
Cash and cash equivalents at beginning of year 18,188 21,425
-------- --------
Cash and cash equivalents at end of period $ 16,130 $ 23,231
======== ========
Supplement Disclosure of Cash Flow Information:
Interest paid $ 2,457 $ 1,946
Income tax paid - -
Loans transferred to other real estate 100 85
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 6
(e) NOTES TO CONDENSED 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, 2004 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, 2005 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2005. 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, 2004.
STOCK OPTIONS
In 2004, Shareholders approved the Company's 2005 Stock Option Plan (the "2005
Plan"). 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 2005 Plan will continue in effect until the end of 2009, and is the
only plan in effect in 2005. The 2005 Plan is the successor to the Company's
1999 Stock Option Plan (the "1999 Plan") that continued in effect until the end
of 2004.
The stock subject to the options are shares of authorized and unissued common
stock of the Company. Options under the Plans 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 1999 and 2005
Plans, adjusted for stock dividends:
Stock Options
----------------------------
Options Weighted Avg
Outstanding Exercise Price
----------- --------------
Balance at January 1, 2005 106,025 $ 45.75
Options granted 52,500 63.81
Options exercised (27,986) 43.10
Options forfeited (25) 38.87
-----------
Balance at March 31, 2005 130,514 $ 53.58
===========
Options granted during the current quarter were 52,500, and the weighted fair
value of the options granted was $6.78. For stock options outstanding at March
31, 2005, the range of average exercise prices was $35.82 to $63.81 and the
weighted average remaining contractual term was 8.27 years. At March 31, 2005,
50,105 options were exercisable under the Plans.
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 compensation cost was recorded for the period ended
March 31, 2005 and 2004.
Page 7
In thousands of dollars, except per share data
Three Months Ended
March 31,
------------------
2005 2004
-------- --------
Net income, as reported $ 1,784 $ 1,716
Less: Total stock-based compensation cost, net of taxes 15 18
-------- --------
Pro forma net income $ 1,769 $ 1,698
======== ========
Earnings per share:
Basic As reported $ 0.713 $ 0.691
Basic Pro forma $ 0.707 $ 0.683
Diluted As reported $ 0.709 $ 0.686
Diluted Pro forma $ 0.703 $ 0.679
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 $250,374,000 and $256,909,000 at the end of March,
2005 and 2004. The balance of loans serviced for others related to servicing
rights that have been capitalized was $248,529,000 and $252,981,000 at March 31,
2005 and 2004. Mortgage servicing rights activity in thousands of dollars for
the three months ended March 31, 2005 and 2004 follows:
2005 2004
------- -------
Balance at January 1 $ 1,820 $ 1,832
Amount capitalized year to date 29 96
Amount amortized year to date (85) (106)
------- -------
Balance at March 31 $ 1,764 $ 1,822
======== =======
No valuation allowance was considered necessary for mortgage servicing rights at
period end 2005 and 2004.
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 2005 and 2004, the Company
declared 5% stock dividends payable in May 2005 and 2004. 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:
In thousands of dollars, except per share data
Three Months Ended
March 31,
----------------------
2005 2004
---------- ----------
$ 1,784 $ 1,716
========== ==========
Net income
Basic earnings:
Weighted average common shares outstanding 2,479,490 2,461,554
Weighted average contingently issuable shares 24,755 22,902
---------- ---------
Total weighted average shares outstanding 2,504,245 2,484,456
========== =========
Basic earnings per share $ 0.713 $ 0.691
========== ==========
Diluted earnings:
Weighted average common shares outstanding from basic earnings per share 2,504,245 2,484,456
Dilutive effect of stock options 13,651 17,498
---------- ----------
Total weighted average shares outstanding 2,517,896 2,501,954
========== ==========
Diluted earnings per share $ 0.709 $ 0.686
========== ==========
Page 8
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.
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. (the "Company") and its
subsidiary banks, United Bank & Trust ("UBT") and United Bank & Trust -
Washtenaw ("UBTW") for the three month periods ending March 31, 2005 and 2004.
EXECUTIVE SUMMARY
The Company is a financial holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") under the
Bank Holding Company Act. The Company has corporate power to engage in such
activities as permitted to business corporations under the Michigan Business
Corporation Act, subject to the limitations of the Bank Holding Company Act and
regulations of the Federal Reserve System. The Company's subsidiary banks offer
a full range of services to individuals, corporations, fiduciaries and other
institutions. Banking services include checking, NOW accounts, savings, time
deposit accounts, money market deposit accounts, safe deposit facilities and
money transfers. Lending operations provide real estate loans, secured and
unsecured business and personal loans, consumer installment loans, and
check-credit loans, home equity loans, accounts receivable and inventory
financing, equipment lease financing and construction financing.
While unemployment in Michigan is currently the third-highest of states in the
Nation, the markets served by the Banks are only marginally impacted. In
particular, the Ann Arbor market has much lower unemployment levels than does
the rest of the State. While recent downturns in the economy have impacted some
small companies, in general the Banks have not felt the impact of this decline.
In addition, the Company continues to gain market share in its market areas.
The Company's Banks offer the sale of nondeposit investment products through
licensed representatives in their banking offices, and sell credit and life
insurance products. In addition, the Company and/or the Banks are co-owners of
Michigan Banker's Title Insurance Company of Mid-Michigan LLC and Michigan
Bankers Insurance Center, LLC, and derive income from the sale of various
insurance products to banking clients. UBT operates a trust department, and
provides trust services to UBTW on a contract basis. The Trust & Investment
Group offer a wide variety of fiduciary services to individuals, corporations
and governmental entities, including services as trustee for personal,
corporate, pension, profit sharing and other employee benefit trusts. The
department provides securities custody services as an agent, acts as the
personal representative for estates and as a fiscal, paying and escrow agent for
corporate customers and governmental entities, and provides trust services for
clients of the Banks. These products help to diversify the Company's sources of
income.
Steady asset growth continued during the first quarter of 2005. Total assets
reached $664.2 million, for an increase of $41.6 million, or 6.7%, in the
trailing 12 months. During the most recent quarter, the Company's loan portfolio
increased by $19.4 million, deposits increased by $15.3 million, and assets
under management by the Trust & Investment Group of United Bank & Trust declined
by $22.7 million.
Consolidated net income of $1,783,555 for the first quarter of 2005 resulted in
the best first quarter earnings in the Company's history, increasing by 3.9%
over the first quarter of 2004. At the same time, consolidated
Page 9
net income for the first three months of 2005 was below the fourth quarter 2004
earnings by 14.4%. This reflects typical earnings streams, which are normally
lower in the first half of the year.
Net interest income is improved from the fourth quarter of 2004, while
noninterest income has declined. Expenses have increased during the first
quarter of 2005, primarily in compensation, advertising and marketing costs.
Compared to the first quarter of last year, income and expense categories are
up, with an improvement of $68,000 in consolidated net income. The chart below
shows the trends in the major components of earnings for the last five quarters.
2005 2004
------- ----------------------------------------
in thousands of dollars, where appropriate 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
- ------------------------------------------ ------- ------- ------- ------- -------
Net interest income $ 6,145 $ 6,031 $ 5,926 $ 5,676 $ 5,664
Provision for loan losses 323 253 229 304 262
Noninterest income 2,699 2,771 2,797 2,898 2,544
Noninterest expense 6,072 5,649 5,553 5,812 5,632
Federal income tax provision 665 816 839 707 598
Net income $ 1,784 $ 2,084 $ 2,102 $ 1,751 $ 1,716
Return on average assets (a) 1.09% 1.27% 1.30% 1.13% 1.12%
Return on average shareholders' equity (a) 11.45% 13.38% 13.80% 11.83% 11.71%
(a) annualized
FINANCIAL CONDITION
SECURITIES
Balances in the Company's investment securities portfolio continued to decline
during the first quarter of 2005, and the mix continues to evolve. This decrease
in the portfolio from December was a result of loan growth in excess of deposit
increases, and was primarily due to maturities and calls within the municipal
portfolios of the banks. The chart below shows the percentage composition of the
Company's investment portfolio as of the end of the current quarter for 2005 and
2004, as well as at December 31, 2004.
3/31/05 12/31/2004 3/31/04
------- ---------- -------
U.S. Treasury and agency securities 42.4% 41.0% 37.9%
Mortgage backed agency securities 21.0% 21.7% 26.4%
Obligations of states and political subdivisions 33.4% 34.2% 30.7%
Corporate, asset backed, and other securities 3.2% 3.1% 5.0%
------- ---------- -------
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 less than 5% 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.
Page 10
LOANS
Loan balances increased by $19.4 million in the first quarter of 2005, and have
grown by $58.9 million since the first quarter of 2004. During this period, the
Banks continue to experience some refinancing in the residential mortgage
portfolios into products that are sold on the secondary market, resulting in a
decline in mortgage balances within the loan portfolio. Personal loan balances
increased along with business loans and commercial mortgages, and construction
and development loan growth continues to be strong.
The mix of the loan portfolio continues a long-term trend toward an increased
percentage of business loans, which include construction and development loans.
At the same time, the trend of declining percentages of residential mortgage
loans and personal loans continues. 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, 2005 December 31, 2004 March 31, 2004
--------------------- --------------------- ---------------------
Total loans: Balance % of total Balance % of total Balance % of total
--------- ---------- --------- ---------- --------- ----------
Personal $ 75,917 14.7% $ 74,142 14.9% $ 69,341 15.2%
Business loans and
commercial mortgages 293,489 56.8% 278,838 56.1% 265,267 58.0%
Tax exempt 3,242 0.6% 3,325 0.7% 1,424 0.3%
Residential mortgage 75,410 14.6% 76,228 15.3% 73,656 16.1%
Construction & development 68,248 13.2% 64,365 13.0% 47,744 10.4%
--------- ---------- --------- ---------- --------- ----------
Total loans $ 516,306 100.0% $ 496,898 100.00% $ 457,432 100.0%
========= =========== ========= ========== ========= ==========
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 following chart shows the aggregate amount of the Company's
nonperforming assets by type, in thousands of dollars.
3/31/05 12/31/04 3/31/04
------- -------- -------
Nonaccrual loans $ 3,738 $ 3,709 $ 3,524
Loans past due 90 days or more 1,510 1,674 1,320
Troubled debt restructurings - - -
------- -------- -------
Total nonperforming loans 5,248 5,383 4,844
Other real estate (ORE) 944 844 541
------- -------- -------
Total nonperforming assets $ 6,192 $ 6,227 $ 5,385
======= ======== =======
Percent of nonperforming loans to total loans 1.02% 1.08% 1.06%
Percent of nonperforming assets to total assets 0.93% 0.96% 0.86%
The Company's classification of nonperforming loans is generally consistent with
loans identified as impaired.
The Company's total nonperforming assets are substantially unchanged from
year-end totals. Nonaccrual loan balances are up slightly, while loans past due
ninety days or more are down and balances in other real estate have increased as
a result of the move of one property from nonaccrual status to ORE. Collection
efforts are underway with nonaccrual loans, and the Company remains adequately
secured. No significant loss is anticipated with that category of loans. The
amount listed in the table above as other real estate reflects a small number of
properties that were acquired in lieu of foreclosure. Properties have been
leased to a third party with an option to purchase or are listed for sale, and
no significant losses are anticipated.
Page 11
The Company's allowance for loan losses remains at a level consistent with its
estimated losses, and the allowance provides for currently estimated losses
inherent in the portfolio. An analysis of the allowance for loan losses, in
thousands of dollars, for the three months ended March 31, 2005 and 2004
follows:
2005 2004
------- --------
Balance at January 1 $ 5,766 $ 5,497
Loans charged off (214) (274)
Recoveries credited to allowance 18 18
Provision charged to operations 323 262
------- --------
Balance at March 31 $ 5,893 $ 5,503
======= ========
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, 2005
and 2004, and December 31, 2004.
3/31/05 12/31/2004 3/31/04
------- ---------- -------
Business and commercial mortgage $ 5,101 $ 5,036 $ 4,752
Tax exempt - - -
Residential mortgage 14 20 43
Personal 712 710 706
Construction - - -
Unallocated 66 - 2
------- ---------- -------
Total $ 5,893 $ 5,766 $ 5,503
======= ========== =======
Loans to finance residential mortgages make up 14.6% of the portfolio at March
31, 2005, and are well-secured and have had historically low levels of net
losses. That percentage continues to decline from prior periods, however, as
loans have refinanced and many have been sold into the secondary market.
Personal and business loans, including business mortgages and development loans,
make up the balance of the portfolio. The personal loan portfolio consists of
direct and indirect installment, credit cards, 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, marine and manufactured housing, and 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 the
market areas served by the Banks.
DEPOSITS
Deposit growth continued during the first quarter of 2005, as total deposits
increased at an annualized rate of 11.6%, and growth over the past twelve months
was 6.0%. 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. At the same time, demand deposit balances
declined in the first quarter, although average balances continue their steady
growth. While 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.
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
Page 12
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, 2005 and 2004.
2005 2004
----- -----
Noninterest bearing deposits 14.3% 16.1%
Interest bearing deposits 85.7% 83.9%
----- -----
Total deposits 100.0% 100.0%
===== =====
LIQUIDITY AND CAPITAL RESOURCES
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 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
2004 and 2005. 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. No advances were added during the first quarter of
2005.
CAPITAL RESOURCES
The capital ratios of the Company exceed the regulatory guidelines for well
capitalized institutions at March 31, 2005. The following table shows the
Company's capital ratios and ratio calculations at March 31, 2005 and 2004, and
December 31, 2004. Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc.
--------------------- ----------------------------
Adequate Well 3/31/05 12/31/04 3/31/04
-------- ---- ------- -------- -------
Tier 1 capital to average assets 4% 5% 9.1% 9.3% 9.0%
Tier 1 capital to risk weighted assets 4% 6% 11.4% 11.5% 11.9%
Total capital to risk weighted assets 8% 10% 12.6% 12.7% 13.1%
Total shareholders' equity $63,559 $ 62,224 $59,332
Intangible assets (3,469) (3,469) (3,469)
Disallowed servicing assets - - (183)
Unrealized (gain) loss on securities available for sale 321 (99) (781)
------- -------- -------
Tier 1 capital 60,411 58,656 54,899
Allowable loan loss reserves 5,893 5,766 5,482
------- -------- -------
Tier 2 capital $66,304 $ 64,422 $60,381
======= ======== =======
RESULTS OF OPERATIONS
Consolidated net income for the first quarter of 2005 was the best first quarter
in the Company's history, surpassing the earnings of the first quarter of 2004
by 3.9%. At the same time, earnings were down from the fourth quarter of 2004,
which were exceptionally strong. The following discussion provides an analysis
of these changes.
Page 13
NET INTEREST INCOME
Net interest income continues to increase quarter over quarter, primarily as a
result of growth in the loan portfolio. The Company's year to date yield on
earning assets was up 25 basis points from the same period of 2004, while the
Company's cost of funds increased from three-month 2004 levels by 34 basis
points, resulting in a reduction of tax equivalent spread of nine basis points.
The first quarter 2005 spread of 3.81% is just one basis point lower than the
full year 2004 spread. 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, 2005 and 2004.
Three Months Ended March 31,
--------------------------------------------------------------
dollars in thousands 2005 2004
- ------------------------------------- ------------------------------ ------------------------------
Average Interest Yield/ Average Interest Yield/
Balance (b) Rate (c) Balance (b) Rate (c)
-------- -------- -------- -------- -------- --------
ASSETS
Interest earning assets (a)
Federal funds sold $ 5,647 $ 34 2.40% $ 6,248 $ 15 0.96%
Taxable securities 74,180 531 2.86% 70,525 516 2.93%
Tax exempt securities (b) 27,630 431 6.24% 31,906 459 5.75%
Taxable loans 500,366 7,823 6.25% 449,340 6,759 6.02%
Tax exempt loans (b) 3,291 58 6.99% 1,434 23 6.36%
-------- -------- -------- --------
Total int. earning assets (b) 611,114 8,876 5.81% 559,453 7,771 5.56%
Less allowance for loan losses (5,793) (5,548)
Other assets 59,446 59,464
------- --------
TOTAL ASSETS $664,767 $613,369
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $123,205 285 0.93% $114,399 134 0.47%
Savings deposits 173,551 555 1.28% 174,005 359 0.82%
CDs $100,000 and over 49,426 376 3.04% 32,981 254 3.08%
Other interest bearing deposits 117,074 838 2.86% 107,139 733 2.74%
-------- -------- -------- --------
Total int. bearing deposits 463,256 2,054 1.77% 428,524 1,479 1.38%
Short term borrowings 1,090 7 2.52% 804 2 0.96%
Other borrowings 42,847 477 4.45% 40,487 467 4.61%
-------- -------- -------- --------
Total int. bearing liabilities 507,193 2,538 2.00% 469,815 1,948 1.66%
-------- --------
Noninterest bearing deposits 85,487 79,953
Other liabilities 8,923 4,880
Shareholders' equity 63,164 58,721
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $664,767 $613,369
======== ========
Net interest income (b) 6,338 5,823
-------- --------
Net spread (b) 3.81% 3.90%
======== =======
Net yield on interest earning assets (b) 4.15% 4.16%
======== =======
Tax equivalent adjustment on interest
income (193) (159)
-------- --------
Net interest income per income
statement $ 6,145 $ 5,664
======== ========
Ratio of interest earning assets to
interest bearing liabilities 1.20 1.19
======== =======
(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
Page 14
As noted from the data in the following table, interest income for the first
three months of 2005 was up significantly from the same period of 2004, while
interest expense increased somewhat during the same period. As a result, net
interest income improved by more than $500,000 compared to the same period of
2004. During that time, interest income and interest expense both increased as a
result of volume, more than offsetting the reduction resulting from decreases in
rates. This is a shift in the trend noted in 2004 compared to 2003, when
decreases in net interest income as a result of lower rates nearly offset
improvements resulting from growth and volume. The following table shows the
effect of volume and rate changes on net interest income for the three months
ended March 31, 2005 and 2004 on a taxable equivalent basis, in thousands of
dollars.
2005 Compared to 2004 2004 Compared to 2003
------------------------------ ------------------------------
Increase (Decrease) Due To:(a) Increase (Decrease) Due To: (a)
------------------------------ ------------------------------
Volume Rate Net Volume Rate Net
------ ----- ------- ------ ----- -----
Interest earned on:
Federal funds sold $ (2) $ 21 $ 19 $ (30) $ (9) $ (39)
Taxable securities 27 (12) 15 68 (154) (86)
Tax exempt securities (65) 38 (27) 23 (33) (10)
Taxable loans 790 274 1,064 386 (604) (218)
Tax exempt loans 32 3 35 1 (3) (2)
------ ----- ------- ------ ----- -----
Total interest income $ 782 $ 324 $ 1,106 $ 448 $(803) $(355)
====== ===== ======= ====== ===== =====
Interest paid on:
NOW accounts $ 11 $ 140 $ 151 $ 27 $ (77) $ (50)
Savings deposits (1) 197 196 48 (110) (62)
CDs $100,000 and over 125 (3) 122 52 (84) (32)
Other interest bearing deposits 70 35 105 (133) (41) (174)
Short term borrowings 1 4 5 2 - 2
Other borrowings 26 (16) 10 (16) (51) (67)
------ ----- ------- ------ ----- -----
Total interest expense $ 232 $ 357 $ 589 $ (20) $(363) $(383)
====== ===== ======= ====== ===== =====
Net change in net interest
income $ 550 $ (33) $ 517 $ 468 $(440) $ 28
====== ===== ======= ====== ===== =====
(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 in the first quarter of 2005 was $155,000 better than
the first quarter of 2004, but was $72,000 lower than the fourth quarter of
2004. Year to date noninterest income is 6.1% above the same period of 2004,
with most of the improvement in Trust & Investment fees. Compared to the fourth
quarter of 2004, most categories of noninterest income are down slightly, with
no single category contributing significantly to the decline. Service charges on
deposits are down 3.8% from the fourth quarter of 2004, and no significant
changes were made in the Company's service charge structure during the period.
The Trust & Investment Group of UBT continues to provide significant
contribution to the Company's noninterest income, through ongoing growth and
expansion. Market value declines since the end of 2004 have caused a decline of
1.4% in Trust & Investment income over last quarter. In addition, income from
sales of nondeposit investment products, while not a large figure, is down 6.3%
from the fourth quarter of 2004.
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. Income from loan sales and servicing has stabilized following
significant declines in 2004. During that time, clients continued to exhibit a
preference for fixed rate loans as market rates declined, resulting in a
Page 15
greater proportion of those loans originated by the Banks being sold in the
secondary market. Income in this category was down approximately $8,000 from the
fourth quarter of 2004. As the Company is conservative in its approach to
valuation of mortgage servicing rights, no write-downs in mortgage servicing
rights were required in 2005 or 2004.
NONINTEREST EXPENSES
Total noninterest expenses were up 7.5% from the fourth quarter of 2004, with
the biggest increases in advertising and marketing expenses. Year to date
noninterest expenses are up 7.8% over the same period of 2004. Most categories
of expense have increased somewhat, reflecting the continued growth of the
Company. Staff additions to support that growth have caused increases in
salaries and benefit costs, and increases in advertising and marketing expenses
reflect a number of new initiatives for the Company for 2005.
FEDERAL INCOME TAX
The Company continues to improve its effective tax rate from 2004 to 2005 as a
result of various tax strategies. The effective tax rate was 27.2% for the first
three months of 2005, compared to 28.2% for the last quarter of 2004.
NET INCOME
Improvements in net income for the first quarter of 2005 compared to the same
period of 2004 have resulted from increased net interest income and noninterest
income, while expenses have increased as a result of continued growth. While
first quarter earnings are typically below those of the prior quarter,
Management is pleased with its earnings progress so far this year.
CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require management to
apply significant judgments to various accounting, reporting and disclosure
matters. The Company's Management must use assumptions and estimates to apply
these principles where actual measurement is not possible or practical. For a
complete discussion of the Company's significant accounting policies, see "Notes
to the Consolidated Financial Statements" in United Bancorp, Inc.'s 2004 Annual
Report on pages A-27 to A-30. Certain policies are considered critical because
they are highly dependent upon subjective or complex judgments, assumptions and
estimates. Changes in such estimates may have a significant impact on the
financial statements. Management has reviewed the application of these policies
with the Audit Committee of the Company's Board of Directors. For a discussion
of applying critical accounting policies, see Critical Accounting Policies" on
pages A-19 and A-20 in United Bancorp, Inc.'s 2004 Annual Report.
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
Page 16
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.
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, 2005, the Company
would expect a maximum potential reduction in net interest margin of less than
13% if market rates decreased under an immediate and sustained parallel shift of
200 basis points. The Company's interest sensitivity position continues to be
asset sensitive, continuing a trend evident throughout 2004. 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.
The Company and each Bank maintains Funds Management Committees, which review
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 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.
Page 17
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.
As of March 31, 2005, an evaluation was carried out under the supervision and
with the participation of United Bancorp's management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e) 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 as of the end
of the quarter ended March 31, 2005 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. There have been no changes in the Company's
internal controls over financial reporting identified in connection with the
evaluation that occurred during the quarter ended March 31, 2005 that has
materially affected, or is likely to materially affect, the Company's internal
control over financial reporting.
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 AND ISSUER PURCHASES OF
EQUITY SECURITIES
The Company did not repurchase any of its securities during the quarter ended
March 31, 2005.
Page 18
ITEM 3- DEFAULTS UPON SENIOR SECURITIES
There have been no defaults upon senior securities relevant to the requirements
of this section during the quarter ended March 31, 2005.
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, 2005.
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 31.1 Certification of principal executive officer pursuant to
Rule 13a - 14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 31.2 Certification of principal financial officer pursuant to
Rule 13a - 14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K filed during the quarter ended March 31, 2005.
Report on Form 8-K filed January 25, furnishing in Items 2.02 and 7.01
thereof, information on results of operations for the quarter and full
year ended December 31, 2004.
Report on Form 8-K filed March 1, furnishing in Items 1.01 thereof,
information on material definitive agreements.
Report on Form 8-K filed March 18, furnishing in Items 8.01 thereof,
information regarding the declaration of cash and stock dividends.
Page 19
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 4, 2005
/S/ David S. Hickman
- ------------------------------------
David S. Hickman
Chairman and Chief Executive Officer
(Principal Executive Officer)
/S/ Dale L. Chadderdon
- ------------------------------------
Dale L. Chadderdon
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
Page 20
EXHIBIT INDEX
Exhibit 31.1 Certification of principal executive officer pursuant
to Rule 13a - 14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Exhibit 31.2 Certification of principal financial officer pursuant
to Rule 13a - 14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.