10-K 1 k24109e10vk.txt ANNUAL REPORT FOR FISCIAL YEAR ENDED DECEMBER 31, 2007 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 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) Registrant's telephone number, including area code: (517) 423-8373 Securities registered pursuant to Section 12(b) of the Act: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR VALUE OTCBB (Title of Class) (Name of Exchange on which registered) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] 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 and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of June 30, 2007, the aggregate market value of the voting stock held by non-affiliates of the registrant was $92,026,000, based on a closing price of $21.75 as reported on the OTC Bulletin Board. As of January 31, 2008, there were 5,089,507 outstanding shares of registrant's common stock, no par value. Documents Incorporated By Reference: Portions of the registrant's definitive 2008 Proxy Statement in connection with the 2008 Annual Meeting of Shareholders are incorporated by reference into Part III. Page 1 CROSS REFERENCE TABLE
Page ITEM NO. DESCRIPTION Numbers -------- ---------------------------------------------------------- ------- PART I 1. Business 3 I Selected Statistical Information 9 (A) Distribution of Assets, Liabilities and Shareholders' Equity 9 (B) Interest Rates and Interest Differential 9 II Investment Portfolio 10 III Loan Portfolio 10 (A) Types of Loans 10 (B) Maturities and Sensitivities of Loans to Changes in Interest Rates 11 (C) Risk Elements 11 (D) Other Interest Bearing Assets 12 IV Summary of Loan Loss Experience 12 (A) Changes in Allowance for Loan Losses 12 (B) Allocation of Allowance for Loan Losses 12 V Deposits 13 VI Return on Equity and Assets 13 VII Short-Term Borrowings 13 1A. Risk Factors 13 1B. Unresolved Staff Comments 16 2. Properties 16 3. Legal Proceedings 17 4. Submission of Matters to a Vote of Security Holders 17 PART II 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17 6. Selected Financial Data 19 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 7A. Quantitative and Qualitative Disclosures About Market Risk 20 8. Financial Statements and Supplementary Data 20 9. Changes in and Disagreements With Accountants on Accounting & Financial Disclosure 20 9A. Controls and Procedures 20 9B. Other Information 22 PART III 10. Directors, Executive Officers and Corporate Governance 22 11. Executive Compensation 23 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 23 13. Certain Relationships and Related Transactions and Director Independence 23 14. Principal Accounting Fees and Services 23 PART IV 15. Exhibits and Financial Statement Schedules 23 Signatures 24 Power of Attorney 25 Exhibit Index 26
Page 2 PART I ITEM 1 - BUSINESS United Bancorp, Inc. (the "Company") was incorporated on May 31, 1985 as a business corporation under the Michigan Business Corporation Act, pursuant to the authorization and direction of the Directors of United Bank & Trust ("UBT"). 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 of 1956, as amended (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. In general, the Bank Holding Company Act and regulations restrict the Company with respect to its own activities and activities of any subsidiaries to the business of banking or such other activities which are closely related to the business of banking. The Company was formed by Directors of UBT, and the bank was acquired by the Company on January 1, 1986. In November of 2000, the Company filed applications with its regulators for permission to establish a second bank as a subsidiary of the Company. United Bank & Trust - Washtenaw ("UBTW") opened for business on April 2, 2001, and is headquartered in Ann Arbor. UBTW operates with its own local management and board of directors, and targets the Washtenaw County market for its growth. In 2003, UBT sold its three Washtenaw County offices to UBTW. UBT delivers financial services through a system of twelve banking offices and one Trust office, plus fourteen automated teller machines, located in Lenawee and Monroe Counties, Michigan. The business base of the area is primarily agricultural and light manufacturing, with its manufacturing sector exhibiting moderate dependence on the automotive and refrigeration and air conditioning industries. Banking services are delivered by UBTW through five banking offices and five automated teller machines in Washtenaw County, Michigan. The employment base of Washtenaw County is centered around health care, education and automotive high technology. Economic stability is provided to a great extent by the University of Michigan, which is a major employer and is not as economically sensitive to the fluctuations of the automotive industry. The services and public sectors account for a substantial percentage of total industry employment, in a large part due to the University of Michigan and the University of Michigan Medical Center. The Company's subsidiary banks (the "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, credit card and check-credit loans, home equity loans, accounts receivable and inventory financing, equipment lease financing and construction financing. The Banks maintain correspondent bank relationships with a small number of larger banks, which involve check clearing operations, securities safekeeping, transfer of funds, loan participation, and the purchase and sale of federal funds and other similar services. UBTW also maintains a correspondent banking relationship with UBT. Page 3 The following table shows comparative information concerning the Banks as of December 31, 2007, in thousands of dollars:
Assets Loans Deposits -------- -------- -------- United Bank & Trust $496,318 $370,690 $419,757 United Bank & Trust - Washtenaw 302,377 279,611 256,069
UBT operates a trust department, and provides trust services to UBTW on a contract basis. The Wealth Management Group offers a variety of fiduciary services to individuals, corporations and governmental entities, including services as trustee for personal, pension, and employee benefit trusts. The department provides trust services, financial planning services, investment services, custody services, pension paying agent services and acts as the personal representative for estates. These products help to diversify the Company's sources of income. The Banks offer the sale of nondeposit investment products through licensed representatives in their banking offices, and sell credit and life insurance products. The Company owns a structured finance company that was established in the third quarter of 2007. United Structured Finance ("USFC") is a finance company that offers simple, effective financing solutions to small businesses, primarily by engaging in SBA 504 and 7(a) lending. The loans generated by USFC are typically sold on the secondary market. Gains on the sale of those loans is included in income from loan sales and servicing. USFC revenue will provide additional diversity to the Company's income stream going forward, and will provide additional financing alternatives to clients of the Banks as well as non-bank clients. Supervision and Regulation General. The Company and the Banks are subject to extensive regulation under federal and state laws. The regulatory framework is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole and not for the protection of security holders. Set forth below is a description of the significant elements of some of the laws and regulations applicable to the Company and the Banks. The description is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are described. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to the Company and the Banks could have a material effect on the business of the Company and the Banks. As a bank holding company within the meaning of the Bank Holding Company Act, the Company is required to file quarterly and annual reports of its operations and such additional information as the Federal Reserve Board may require and is subject, along with its subsidiaries, to examination by the Federal Reserve Board. The Federal Reserve Board is the primary regulator of the Company. The Bank Holding Company Act requires every bank holding company to obtain prior approval of the Federal Reserve Board before it may merge with or consolidate into another bank holding company, acquire substantially all the assets of any bank, or acquire ownership or control of any voting shares of any bank if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank holding company or bank. The Federal Reserve Board may not approve the acquisition by the Company of voting shares or substantially all the assets of any bank located in any state other than Michigan unless the laws of such other state specifically authorize such an acquisition. The Bank Holding Company Act also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing Page 4 services to banks and their subsidiaries. However, holding companies may engage in, and may own shares of companies engaged in, certain businesses found by the Federal Reserve Board to be so closely related to banking or the management or control of banks as to be a proper incident thereto. Under current regulations of the Federal Reserve Board, a holding company and its nonbank subsidiaries are permitted, among other activities, to engage, subject to certain specified limitations, in such banking related business ventures as sales and consumer finance, equipment leasing, credit bureau services and software operations, data processing and services transmission, discount securities brokerage, insurance, mortgage banking and brokerage, sale and leaseback and other forms of real estate banking. The Bank Holding Company Act does not place territorial restrictions on the activities of nonbank subsidiaries of bank holding companies. In addition, federal legislation prohibits acquisition of "control" of a bank or bank holding company without prior notice to certain federal bank regulators. "Control" in certain cases may include the acquisition of as little as 10% of the outstanding shares of capital stock. In March of 2000, the Gramm-Leach-Bliley Act of 1999 (the "GLB Act") was enacted. Under the GLB Act, new opportunities became available for bank holding companies, banks and other depository institutions, insurance companies and securities firms to enter into combinations that permit a single financial services organization to offer customers a more complete array of financial products and services. The GLB Act provided a new regulatory framework for regulation through the "financial holding company," with the Federal Reserve Board as the umbrella regulator. Functional regulation of the separately regulated subsidiaries of a financial holding company are conducted by their primary functional regulator. The Company became a financial holding company in 2000. UBT and UBTW are Michigan banking corporations, and as such are subject to the regulation of, and supervision and regular examination by, the Michigan Office of Financial and Insurance Services ("OFIS") and the FDIC. OFIS is the primary regulator of the Banks. Deposit accounts of the Banks are insured by the FDIC. Requirements and restrictions under the laws of the United States and the State of Michigan include the requirement that banks maintain reserves against certain deposits, restrictions on the nature and amount of loans which may be made by a bank and the interest that may be charged thereon, restrictions on the payment of interest on certain deposits and restrictions relating to investments and other activities of a bank. Dividends. The Company is a legal entity, separate and distinct from the Banks. While the Banks contract with the Company and pay for services provided, much of the Company's revenue will be received in the form of dividends, if any, paid by UBT and UBTW. Thus, the Company's ability to pay dividends to its shareholders will be limited by statutory and regulatory restrictions on UBT and UBTW concerning dividends. Michigan's banking laws restrict the payment of cash dividends by a state bank by providing, subject to certain exceptions, that dividends may be paid only out of net profits then on hand after deducting therefrom its losses and bad debts and no dividends may be paid unless the bank will have a surplus amounting to not less than twenty percent (20%) of its capital after the payment of the dividend. Federal law generally prohibits a bank from making any capital distribution (including payment of a dividend) or paying any management fee to its parent company if the depository institution would thereafter be undercapitalized. The Federal Deposit Insurance Corporation ("FDIC") may prevent an insured bank from paying dividends if the Bank is in default of payment of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by a bank, if such payment is determined, by reason of the financial conditions of the bank, to be an unsafe and unsound banking practice. Page 5 Holding Company Support of Subsidiary Banks. Under Federal Reserve Board policy, the Company is expected to act as a source of financial and managerial strength to its Banks and to commit resources to support such subsidiaries. This support of its subsidiary banks may be required at times when, absent such Federal Reserve Board policy, the Company might not otherwise be inclined to provide it. In addition, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and certain other indebtedness of such subsidiary banks. Liability of Commonly Controlled Depository Institutions. Under the Federal Deposit Insurance Act, as amended ("FDIA"), FDIC-insured depository institutions, such as either Bank, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the "default" of a commonly controlled FDIC-insured depository institution, or (ii) any assistance provided by the FDIC to any commonly controlled depository institution in "danger of default." For these purposes, the term "default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur without federal regulatory assistance. Capital Adequacy and Prompt Corrective Action. The Federal Reserve Board and the FDIC have established guidelines for risk-based capital by bank holding companies and banks. These guidelines establish a risk adjusted ratio relating capital to risk-weighted assets and off-balance-sheet exposures. These capital guidelines primarily define the components of capital, categorize assets into different risk classes, and include certain off-balance-sheet items in the calculation of capital requirements. Generally, Tier 1 capital consists of shareholders' equity less intangible assets and unrealized gain or loss on securities available for sale, and Tier 2 capital consists of Tier 1 capital plus qualifying loan loss reserves. The FDIC Improvement Act of 1991 established a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, federal banking regulators have established five capital categories, well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each of the categories. Federal banking regulators are required to take specified mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. An institution in any of the under- capitalized categories is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, such a bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless the bank could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time. The capital ratios of the Company and the Banks exceed the regulatory guidelines for well capitalized institutions. Information in Note 18 on Page A-38 hereof provides additional information regarding the Company's capital ratios, and is incorporated herein by reference. Page 6 The federal regulatory authorities' risk-based capital guidelines are based upon the 1988 capital accord of the Basel Committee on Banking Supervision (the "BIS"). The BIS is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country's supervisors in determining the supervisory policies they apply. In 2004, the BIS published a new capital accord to replace its 1988 capital accord. The new capital accord would, among other things, set capital requirements for operational risk and refine the existing capital requirements for credit risk and market risk. Operational risk is defined to mean the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems in connection with external events. The 1988 capital accord does not include separate capital requirements for operational risk. The United States federal banking regulators reached an agreement in the third quarter of 2007 regarding the implementation of Basel II in the United States. The agreement will lead to finalization of a rule implementing the methodology for computing large banks' risk-based capital requirements. The Company cannot predict the timing or final form of the United States rules implementing the new capital accord and their impact on the Company. The new capital requirements that may arise from the final rules could increase the minimum capital requirements applicable to the Company and the Banks. Affiliate Transactions. Banks are subject to restrictions imposed by federal law on extensions of credit to, purchases of assets from, and certain other transactions with affiliates and on investments in stock or other securities issued by affiliates. Such restrictions prevent the Banks from making loans to affiliates unless the loans are secured by collateral in specified amounts and have terms at least as favorable to the Banks as the terms of comparable transactions between the Banks and non-affiliates. Further, applicable federal and state laws significantly restrict extensions of credit by the Banks to directors, executive officers and principal stockholders and related interests of such persons. Deposit Insurance. Substantially all of the deposits of the Banks are insured up to applicable limits by the Deposit Insurance Fund ("DIF") of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a matrix that takes into account a bank's capital level and supervisory rating. Pursuant to the Federal Deposit Insurance Reform Act of 2005, the FDIC modified its method of calculating FDIC insurance assessments effective November 2006, and provided credits to certain banks for the calendar year 2007, to be applied to future assessments. UBT has earned assessment credits, while UBTW has not, since it is a relatively new institution. These changes have resulted in increased FDIC insurance premiums for UBTW, while UBT will be able to offset all of its FDIC insurance assessments for 2007 and much of 2008 using credits it has earned. The assessment methodology allows the FDIC to set its assessment rates in the future in connection with declines in the insurance funds or increases in the amount of insurance coverage. An increase in the assessment rate could have a material adverse effect on the Company's earnings, depending on the amount of the increase. During 2007, the Banks paid $74,795 in Financing Corporation ("FICO") assessments related to outstanding FICO bonds to the FDIC as collection agent. The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings and Loan Insurance Corporation. FICO assessments will continue in the future for both banks. Page 7 Depositor Preference. The FDIA provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution. Community Reinvestment Act. The Community Reinvestment Act of 1977 ("CRA") requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. In order for a financial holding company to commence any new activity permitted by the Bank Holding Company Act, or to acquire any company engaged in any new activity permitted by the Bank Holding Company Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least "satisfactory" in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA ratings when considering approval of a proposed transaction. Financial Privacy. In accordance with the GLB Act, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the GLB Act affect how consumer information is transmitted and conveyed to outside vendors. Anti-Money Laundering Initiatives and the USA Patriot Act. A major focus of governmental policy on financing institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the "USA Patriot Act"), which was renewed in substantially the same form on March 9, 2006, substantially broadened the scope of the United States and anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued a number of regulations that apply various requirements of the USA Patriot Act to financial institutions such as the Banks. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing by verifying the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institutions. Legislative Initiatives. From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, Page 8 and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to the Company or the Banks could have a material effect on the business of the Company. Consumer Protection Regulation. Other aspects of the lending and deposit businesses of the Banks that are subject to federal and state regulation include disclosure requirements with respect to interest, payment and other terms of consumer and residential mortgage loans, disclosure of interest and fees and other terms of, and the availability of, funds for withdrawal from consumer deposit accounts, prohibiting certain forms of discrimination in credit transactions, and imposing certain recordkeeping, reporting and disclosure requirements with respect to residential mortgage loan applications. Accounting Standards Information regarding accounting standards adopted by the Company are discussed beginning on Page A-26 hereof, and is incorporated herein by reference. Competition The banking business in the Company's service area is highly competitive. In their markets, the Banks compete with a number of community banks and subsidiaries of large multi-state, multi-bank holding companies. In addition, the banks face competition from credit unions, savings associations, finance companies, loan production offices and other financial services companies. The Company believes that the market perceives a competitive benefit to an independent, locally controlled commercial bank. Much of the Company's competition comes from affiliates of organizations controlled from outside the area. Against these competitors, the subsidiary banks continue to expand their loan and deposit portfolios. Employees On December 31, 2007, the Company and its subsidiaries employed 219 full-time and 43 part-time employees. This compares to 202 full-time and 42 part-time employees at December 31, 2006. Available Information You can find more information about us at our website, located at www.ubat.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available as soon as reasonably practicable after such forms have been filed with or furnished to the Securities and Exchange Commission (the "SEC") free of charge on our website through a link to the SEC website. I SELECTED STATISTICAL INFORMATION (A) DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; (B) INTEREST RATES AND INTEREST DIFFERENTIAL: The information required by these sections are contained on Pages A-3 through A-9 hereof, and is incorporated herein by reference. Page 9 II INVESTMENT PORTFOLIO (A) BOOK VALUE OF INVESTMENT SECURITIES The following table reflects the book value of various categories of investment securities of the Company at December 31:
In thousands of dollars 2007 2006 ----------------------- ------- ------- U.S. Treasury and government agencies $46,748 $52,209 Obligations of states and political subdivisions 36,353 40,512 Equity and other securities 3,232 3,192 ------- ------- Total Investment Securities $86,333 $95,913
(B) CARRYING VALUES AND YIELDS OF INVESTMENT SECURITIES The following table reflects the carrying values and yields of the Company's securities portfolio for 2007. Average yields are based on amortized costs and the average yield on tax exempt securities of states and political subdivisions is adjusted to a taxable equivalent basis, assuming a 34% marginal tax rate. Carrying Values and Yields of Investments
In thousands of dollars where applicable 0 - 1 1 - 5 5 - 10 Over 10 Available For Sale Year Years Years Years Total ---------------------------------------- ------- ------- ------- ------- ------- U.S. Treasury and government agencies (1) $27,173 $ 6,359 $ -- $ -- $33,532 Weighted average yield 5.17% 5.04% -- -- 5.12% Obligations of states and political subdivisions $ 8,850 $26,292 $12,678 $1,359 $49,179 Weighted average yield 4.06% 4.02% 4.02% 4.72% 4.06% Equity and other securities (2) $ 3,187 $ -- $ -- $ -- $ 3,187 Weighted average yield 4.50% -- -- -- 4.50% Total securities $39,210 $32,651 $12,678 $1,359 $85,898 Weighted average yield 4.87% 4.63% 4.02% 4.72% 4.65%
(1) Reflects the scheduled amortization and an estimate of future prepayments based on past and current experience of amortizing U.S. agency securities. (2) Reflects the scheduled amortization and an estimate of future prepayments based on past and current experience of the issuer for various collateralized mortgage obligations. As of December 31, 2007, the Company's securities portfolio contains no concentrations by issuer greater than 10% of shareholders' equity. Additional information concerning the Company's securities portfolio is included on Page A-10, and in Note 3 on Page A-29 hereof, and is incorporated herein by reference. III LOAN PORTFOLIO (A) TYPES OF LOANS The tables below show loans outstanding (net of unearned interest) at December 31, and the percentage makeup of the portfolios. All loans are domestic and contain no concentrations by industry or customer. Balances are stated in thousands of dollars. Page 10
2007 2006 2005 2004 2003 -------- -------- -------- -------- -------- Personal $ 98,075 $ 91,002 $ 81,571 $ 74,142 $ 70,301 Business and commercial mortgage 376,637 327,928 320,188 278,838 256,778 Tax exempt 2,709 2,841 3,133 3,325 1,476 Residential mortgage (1) 91,793 85,636 67,246 76,228 85,156 Commercial construction & development 81,086 94,356 85,974 64,365 33,109 -------- -------- -------- -------- -------- Total loans (1) $650,300 $601,763 $558,112 $496,898 $446,820 ======== ======== ======== ======== ======== Personal 15.1% 15.1% 14.6% 14.9% 15.7% Business and commercial mortgage 57.9% 54.5% 57.4% 56.1% 57.5% Tax exempt 0.4% 0.5% 0.6% 0.7% 0.3% Residential mortgage (1) 14.1% 14.2% 12.0% 15.3% 19.1% Commercial construction & development 12.5% 15.7% 15.4% 13.0% 7.4% -------- -------- -------- -------- -------- Total loans (1) 100.0% 100.0% 100.0% 100.0% 100.0% ======== ======== ======== ======== ========
(1) Includes loans held for sale (B) MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES The following table presents the maturity of total loans outstanding, other than residential mortgages and personal loans, as of December 31, 2007, according to scheduled repayments of principal. All figures are stated in thousands of dollars.
0 - 1 1 - 5 After 5 Year Years Years Total -------- -------- ------- -------- Business and commercial mortgage - fixed rate $ 43,399 $129,094 $25,464 $197,957 Business and commercial mortgage - variable rate 63,140 61,973 53,567 178,680 Tax exempt - fixed rate 214 2,430 65 2,709 Tax exempt - variable rate -- -- -- -- Construction -fixed rate 5,318 10,806 -- 16,124 Construction -variable rate 56,985 7,977 -- 64,962 -------- -------- ------- -------- Total $169,056 $212,280 $79,096 $460,432 ======== ======== ======= ======== Total fixed rate 48,931 142,330 25,529 216,790 Total variable rate 120,125 69,950 53,567 243,642
(C) RISK ELEMENTS Non-Accrual, Past Due and Restructured Loans The following shows the effect on interest revenue of nonaccrual and troubled debt restructured loans as of December 31, 2007, in thousands of dollars: Gross amount of interest that would have been recorded at original rate $771 Interest that was included in revenue -- ---- Net impact on interest revenue $771 ====
Additional information concerning nonperforming loans, the Company's nonaccrual policy, and loan concentrations is provided on Pages A-12 and A-13, in Note 1 on Pages A-26 and A-27 and Notes 4 and 5 on Page A-31 hereof, and is incorporated herein by reference At December 31, 2007, the Banks had fifteen loans, other than those disclosed above, for a total of $8,682,000 which would cause management to have serious doubts as to the ability of the borrowers to comply with the present loan repayment terms. These loans were included on the Banks' "watch lists" and were classified as impaired; however, payments are current. Page 11 (D) OTHER INTEREST BEARING ASSETS As of December 31, 2007, other than $2,253,000 in other real estate, there were no other interest bearing assets that would be required to be disclosed under Item III, Parts (C)(1) or (C)(2) of the Loan Portfolio listing if such assets were loans. IV SUMMARY OF LOAN LOSS EXPERIENCE (A) CHANGES IN ALLOWANCE FOR LOAN LOSSES The table below summarizes changes in the allowance for loan losses for the years 2003 through 2007, in thousands of dollars. CHANGES IN ALLOWANCE FOR LOAN LOSSES
2007 2006 2005 2004 2003 ------- ------ ------ ------ ------ Balance at beginning of period $ 7,849 $6,361 $5,766 $5,497 $4,975 Charge-offs: Business and commercial mortgage (1) 3,521 447 516 739 139 Residential mortgage 176 61 1 7 19 Personal 593 254 362 320 512 ------- ------ ------ ------ ------ Total charge-offs 4,290 762 879 1,066 670 ------- ------ ------ ------ ------ Recoveries: Business and commercial mortgage (1) 61 13 58 188 20 Residential mortgage -- 13 2 -- 3 Personal 49 101 82 99 100 ------- ------ ------ ------ ------ Total recoveries 110 127 142 287 123 ------- ------ ------ ------ ------ Net charge-offs 4,180 635 737 779 547 ------- ------ ------ ------ ------ Additions charged to operations 8,637 2,123 1,332 1,048 1,069 Balance at end of period $12,306 $7,849 $6,361 $5,766 $5,497 ======= ====== ====== ====== ====== Ratio of net charge-offs to average loans 0.66% 0.11% 0.14% 0.17% 0.13% Allowance as percent of total loans 1.89% 1.30% 1.14% 1.16% 1.23%
(1) Includes commercial construction and development loans The allowance for loan losses is maintained at a level believed adequate by Management to absorb losses inherent in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, amount and composition of the loan portfolio, and other factors. The provision charged to earnings was $8,637,000 in 2007, compared to $2,123,000 in 2006 and $1,332,000 in 2005. The allowance is based on the analysis of the loan portfolio and a three year historical average of net charge offs to average loans of 0.32% of the portfolio. (B) ALLOCATION OF ALLOWANCE FOR LOAN LOSSES The following table presents the portion of the allowance for loan losses applicable to each loan category in thousands of dollars, as of December 31. A table showing the percent of loans in each category to total loans is included in Section III (A), above.
2007 2006 2005 2004 2003 ------- ------ ------ ------ ------ Business and commercial mortgage (1) $10,924 $6,911 $5,471 $5,036 $4,775 Residential mortgage 368 24 14 20 37 Personal 974 889 777 710 685 Unallocated 40 25 99 -- -- ------- ------ ------ ------ ------ Total $12,306 $7,849 $6,361 $5,766 $5,497 ======= ====== ====== ====== ======
(1) Includes commercial construction and development loans Page 12 The allocation method used takes into account specific allocations for identified credits and a three year historical loss average in determining the allocation for the balance of the portfolio. V DEPOSITS The information concerning average balances of deposits and the weighted-average rates paid thereon, is included on Page A-5 and maturities of time deposits is provided in Note 9 on Page A-32 hereof, and is incorporated herein by reference. There were no foreign deposits. As of December 31, 2007, outstanding time certificates of deposit in amounts of $100,000 or more were scheduled to mature as shown below. All amounts are in thousands of dollars.
Time Certificates ----------------- Within three months $ 38,221 Over three through six months 21,531 Over six through twelve months 24,037 Over twelve months 38,477 -------- Total $122,266 ========
VI RETURN ON EQUITY AND ASSETS Various ratios required by this section and other ratios commonly used in analyzing bank holding company financial statements are included on Page A-3 and A-4 hereof, and are incorporated herein by reference. VII SHORT-TERM BORROWINGS Some of the information required by this section is contained in Note 10 on Page A-32 hereof, and is incorporated herein by reference. No additional information is required, as for all reporting periods, there were no categories of short-term borrowings for which the average balance outstanding during the period was 30% or more of shareholders' equity at the end of the period. ITEM 1A - RISK FACTORS An investment in the Company's common stock is subject to risks inherent to the Company's business. The material risks and uncertainties that management believes affect the Corporation are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company's business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, the Company's financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company's common stock could decline significantly, and you could lose all or part of your investment. RISKS RELATED TO THE COMPANY'S BUSINESS The Company Is Subject To Interest Rate Risk The Company's earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and Page 13 securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company's control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Company's ability to originate loans and obtain deposits, and (ii) the fair value of the Company's financial assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company's net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. The Company Is Subject To Lending Risk There are inherent risks associated with the Company's lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Company operates. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Company is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Company. As of December 31, 2007, approximately 71% of the Company's loan portfolio consisted of business and commercial mortgage and construction loans. Because the Company's loan portfolio contains a significant number of business and commercial mortgage and construction loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non- performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for possible loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on the Company's financial condition and results of operations. The Company's Allowance For Possible Loan Losses May Be Insufficient The Company maintains an allowance for possible loan losses, which is a reserve established through a provision for possible loan losses charged to expense, that represents management's best estimate of probable losses that may be incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management's continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for possible loan losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Company's control, may require an increase in the allowance for possible loan losses. In addition, bank regulatory agencies periodically review the Company's allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. Any increases in the allowance for possible loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the Company's financial condition and results of operations. Page 14 The Company's Profitability Depends Significantly On Economic Conditions In The State Of Michigan The Company's success depends primarily on the general economic conditions of the State of Michigan and the specific local markets in which the Company operates. Unlike larger national or other regional banks that are more geographically diversified, the Company provides banking and financial services to customers primarily in the Lenawee, Monroe and Washtenaw Counties, Michigan. The local economic conditions in these areas have a significant impact on the demand for the Company's products and services as well as the ability of the Company's customers to repay loans, the value of the collateral securing loans and the stability of the Company's deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on the Company's financial condition and results of operations. See, however, the disclosure under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Background" on page A-2. The Company Operates In A Highly Competitive Industry and Market Area The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include credit unions, savings associations and various finance companies and loan production offices, in addition to a number of community banks and subsidiaries of large multi-state and multi-bank holding companies. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Company's competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company can. The Company believes that the market perceives a competitive benefit to an independent, locally controlled commercial bank. Much of the Company's competition comes from affiliates of organizations controlled from outside the area. Against these competitors, the subsidiary banks continue to expand their loan and deposit portfolios. The Company Is Subject To Extensive Government Regulation and Supervision The Company and the Banks are subject to extensive federal and state regulation and supervision as disclosed under "Item 1. Business - Supervision and Regulation." Banking regulations are primarily intended to protect depositors' funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect the Company's lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways. Page 15 The Company Continually Encounters Technological Change The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company's future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company's operations. Many of the Company's competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. The Company's Stock Price Can Be Volatile Stock price volatility may make it more difficult for you to resell your common stock when you want to and at prices you find attractive. The Company's stock price can fluctuate significantly in response to a variety of factors. General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause the Company's stock price to decrease regardless of operating results. In addition, the trading volume in the Company's common stock is significantly less than that of other larger financial services companies. This can make the Company's stock price volatile as significant sales of the Company's common stock, or the expectation of these sales, could cause the Company's stock price to fall. An Investment In The Company's Common Stock Is Not An Insured Deposit The Company's common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Corporation (FDIC), any other deposit insurance fund or by any other public or private entity. Investment in the Company's common stock is inherently risky for the reasons described in this "Risk Factors" section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire the Company's common stock, you may lose some or all of your investment. The Company's Controls and Procedures May Fail or Be Circumvented Management regularly reviews and updates the Company's internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company's controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company's business, results of operations and financial condition. ITEM 1B - UNRESOLVED STAFF COMMENTS None. ITEM 2 - PROPERTIES The executive offices of the Company are located at the main office (Hickman Financial Center) of United Bank & Trust, 205 East Chicago Boulevard, Tecumseh, Michigan. UBT owns and occupies the entire two-story building, which was built in 1980. UBT operates three other banking offices in the Page 16 Tecumseh area, two in the city of Adrian, one each in the cities of Hudson and Morenci, one in the village of Blissfield, and one each in Clinton, Rollin and Raisin Townships, all in Lenawee County. In addition, the bank operates one office in Dundee, Monroe County, Michigan. In 2005, the Bank moved its Trust & Investment Group to a new leased facility in Tecumseh. The bank owns all of the buildings except for the Trust facility, and leases the land for one office in the city of Adrian. All offices other than the Hickman Financial Center offer drive-up facilities. UBI owns and occupies a 12,000 square foot operations and training center in Tecumseh. United Bank & Trust - Washtenaw operates one banking office in the City of Ann Arbor and one office each in the city of Saline, the villages of Dexter and Manchester, and Scio Township, Washtenaw County, Michigan. The bank owns the Saline and Dexter buildings, leases the buildings for the Manchester and Scio Township offices, and leases the land for the Dexter office. UBTW holds a long-term lease on the facilities for its administrative and banking offices, which it moved into in 2003. All offices offer ATM services, and all offices other than Manchester offer drive-up facilities. ITEM 3 - LEGAL PROCEEDINGS The Company and its subsidiaries are not involved in any other material legal proceedings. They 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 Company. Neither the Company nor it subsidiaries are involved in any proceedings to which any director, principal officer, affiliate thereof, or person who owns of record or beneficially more than five percent (5%) 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. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2007. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES PRICE RANGE FOR COMMON STOCK The following table shows the high and low selling prices of common stock of the Company for each quarter of 2007 and 2006 as quoted on the OTC Bulletin Board, under the symbol of UBMI. These prices do not reflect private trades not involving brokers or dealers. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The Company had 1,287 shareholders of record as of December 31, 2007. The prices and dividends per share have been adjusted to reflect stock dividends paid in 2007 and 2006.
2007 2006 --------------------------- --------------------------- Market price Cash Market price Cash --------------- dividends --------------- dividends Quarter High Low declared High Low declared ------- ------ ------ --------- ------ ------ --------- 1st $23.50 $21.88 $0.190 $29.31 $26.52 $ -- 2nd 24.00 21.75 0.200 28.03 21.39 0.176 3rd 22.50 20.20 0.200 23.55 21.87 0.185 4th 22.00 17.00 0.200 22.50 22.00 0.190
Page 17 Banking laws and regulations restrict the amount the Banks can transfer to the Company in the form of cash dividends and loans. Those restrictions are discussed in Note 15 on Page A-35 hereof. As a result of a change in the timing of declaration of cash dividends, only three cash dividends were declared in 2006, although four cash dividends were paid. ISSUER PURCHASES OF EQUITY SECURITIES In February of 2007, the Company announced a stock repurchase program for up to 260,000 shares of its common stock (adjusted for stock dividend). The following table provides information about purchases by the Company during the quarter ended December 31, 2007 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:
Total Total Number of Maximum Number Number Average Shares Purchased as of Shares that May of Shares Price Paid a Part of Publicly yet be Purchased Period Purchased per Share Announced Plans Under the Plan -------------------- --------- ---------- ------------------- ------------------ 10/1/2007-10/31/2007 400 $20.31 400 127,521 11/1/2007-11/30/2007 46,774 20.20 46,774 80,747 12/1/2007-12/31/2007 1,000 18.06 1,000 79,747 ------ ------ Total 48,174 $20.16 48,174
All purchases during the quarter were part of the publicly announced plan. STOCK PERFORMANCE GRAPH The following chart shows the yearly percentage change in the Company's cumulative total shareholder return on its common stock. The change in stock price is compared in the chart to similar changes in the NASDAQ Bank Index and the Standard & Poor's 500 Stock Index. All prices are adjusted for stock splits and stock dividends. The graph assumes $100 invested on December 31, 2002. The total return assumes reinvestment of dividends. The NASDAQ Bank Index is a broad-based capitalization- weighted index of domestic and foreign common stocks of banks that are traded on the NASDAQ National Market System as well as the Small Cap Market. The Index contains various types of NASDAQ listed banks and savings institutions and related holding companies, establishments performing functions closely related to banking, such as check cashing agencies, currency exchanges, safe deposit companies and corporations for banking abroad. The index is made up of 519 institutions at December 31, 2007. (PERFORMANCE GRAPH) Page 18 ITEM 6 - SELECTED FINANCIAL DATA The following tables present five years of financial data for the Company, for the years ended December 31 (In thousands, except per share data).
FINANCIAL CONDITION 2007 2006 2005 2004 2003 ------------------- -------- -------- -------- -------- -------- ASSETS Cash and demand balances in other banks $ 17,996 $ 17,606 $ 20,416 $ 18,188 $ 21,425 Federal funds sold 11,130 3,770 -- -- -- Securities available for sale 85,898 95,811 103,432 103,786 108,734 Net loans 637,994 593,914 551,751 491,132 441,323 Other assets 42,669 39,888 38,180 37,245 38,291 -------- -------- -------- -------- -------- Total Assets $795,687 $750,989 $713,779 $650,351 $609,773 ======== ======== ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest bearing deposits $ 77,878 $ 81,373 $ 88,404 $ 85,598 $ 78,184 Interest bearing certificates of deposit of $100,000 or more 122,266 102,492 68,062 40,057 30,946 Other interest bearing deposits 471,393 444,137 434,186 404,223 393,453 -------- -------- -------- -------- -------- Total deposits 671,537 628,002 590,652 529,878 502,583 Short term borrowings -- 77 6,376 8,726 8,076 Other borrowings 44,611 40,945 42,228 42,847 35,375 Other liabilities 6,572 7,429 6,901 6,676 6,356 -------- -------- -------- -------- -------- Total Liabilities 722,720 676,453 646,157 588,127 552,390 Shareholders' Equity 72,967 74,536 67,622 62,224 57,383 -------- -------- -------- -------- -------- Total Liabilities and Shareholders' Equity $795,687 $750,989 $713,779 $650,351 $609,773 ======== ======== ======== ======== ======== RESULTS OF OPERATIONS Interest income $ 51,634 $ 47,056 $ 38,649 $ 31,720 $ 30,835 Interest expense 21,873 17,802 12,286 8,423 8,507 -------- -------- -------- -------- -------- Net Interest Income 29,761 29,254 26,363 23,297 22,328 Provision for loan losses 8,637 2,123 1,332 1,048 1,069 Noninterest income 13,652 12,175 11,669 11,010 11,822 Noninterest expense 27,559 26,914 25,195 22,646 22,669 -------- -------- -------- -------- -------- Income before Federal income tax 7,217 12,392 11,505 10,613 10,412 Federal income tax 1,635 3,420 3,181 2,960 3,024 -------- -------- -------- -------- -------- Net Income $ 5,582 $ 8,972 $ 8,324 $ 7,653 $ 7,388 ======== ======== ======== ======== ======== Basic earnings per share (1) (2) $ 1.06 $ 1.69 $ 1.58 $ 1.46 $ 1.42 Diluted earnings per share (1) (2) 1.06 1.69 1.57 1.45 1.41 Cash dividends paid per share (2) 0.79 0.73 0.68 0.62 0.57
(1) Earnings per share data is based on average shares outstanding plus average contingently issuable shares. (2) Adjusted to reflect stock dividends paid in 2007, 2006, 2005, 2004 and 2003. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is contained on pages A-2 through A-20 hereof, and is incorporated by reference herein. Page 19 ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is contained on pages A-14 through A-17 hereof, and is incorporated by reference herein. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Selected Quarterly Financial Data - The information required by this item is contained on page A-3 hereof, and is incorporated by reference herein. Other information required by this item is contained on pages A-21 through A-41 hereof, and is incorporated by reference herein.
INDEX TO FINANCIAL STATEMENTS Page No. ----------------------------- -------- Report of Independent Registered Public Accounting Firm A-21 Consolidated Financial Statements Consolidated Balance Sheets A-22 Consolidated Statements of Income A-23 Consolidated Statements of Cash Flow A-24 Consolidated Statements of Changes in Shareholders' Equity A-25 Notes to Consolidated Financial Statements A-26
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A - CONTROLS AND PROCEDURES (a) The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported, within required time periods. Our Chief Executive Officer and Principal Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (the "Evaluation Date"), and have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in providing them with material information relating to the Company known to others within the Company which is required to be included in our periodic reports filed under the Exchange Act. (b) The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control system was designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Page 20 The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2007. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of Treadway Commission ("COSO") in "Internal Control - Integrated Framework." Based on our assessment we believe that, as of December 31, 2007, the Company's internal control over financial reporting is effective based on those criteria. The Company's independent auditors have issued an audit report on the effectiveness of the Company's internal control over financial reporting. The report immediately follows this report. /s/ Robert K. Chapman /s/ Randal J. Rabe ------------------------------------- ---------------------------------------- Robert K. Chapman Randal J. Rabe President and Chief Executive Officer Executive Vice President and Chief Financial Officer (c) Report of Independent Registered Public Accounting Firm Audit Committee, Board of Directors and Stockholders United Bancorp, Inc. Tecumseh, Michigan We have audited United Bancorp, Inc.'s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Page 21 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, United Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of United Bancorp, Inc. and our report dated February 15, 2008, expressed an unqualified opinion thereon. BKD, LLP Indianapolis, Indiana February 15, 2008 (d) There has been no change in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2007 that has materially affected, or is reasonably likely to affect, the Company's internal control over financial reporting. ITEM 9B - OTHER INFORMATION None PART III ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE On December 9, 2003, the Company adopted a Code of Business Conduct and Ethics (the "Code") that applies to all co-workers, officers and Directors of the Company and its subsidiaries. The Code is designed to deter wrongdoing and to promote: - Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; - Full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Commission and in other public communications made by the registrant; - Compliance with applicable governmental laws, rules and regulations; - Prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and - Accountability for adherence to the Code. A copy of the Code is included in this report as Exhibit 14. Page 22 The information required by this item, other than as set forth above, is contained under the heading "Directors and Executive Officers, Committees and Meetings of the Board of Directors" and "Beneficial Ownership Reporting Compliance" in the Company's 2008 Proxy Statement and is incorporated herein by reference. ITEM 11 - EXECUTIVE COMPENSATION The information required by this item is contained under the heading "Compensation of Directors and Executive Officers" in the Company's 2008 Proxy Statement and is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is contained under the heading "Equity Compensation Plan Information", "Security Ownership of Certain Beneficial Owners," and "Security Ownership of Management" and under the headings "Compensation Committee Report" and "Compensation and Governance Interlocks and Insider Participation" in the Company's 2008 Proxy Statement and is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item is contained under the headings "Directors and Executive Officers" and "Directors, Executive Officers, Principal Shareholders and their Related Interests - Transactions with the Banks" in the Company's 2008 Proxy Statement and in Note 14 on Page A-34 hereof and is incorporated herein by reference. ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is contained under the heading "Relationship With Independent Public Accountants" in the Company's 2008 Proxy Statement and is incorporated herein by reference. PART IV ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. The information required by this Item are included in Item 8 on Page 20 of this report, and are incorporated herein by reference. 2. Financial statement schedules are not applicable. (b) The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated herein by reference. (c) All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Page 23 UNITED BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS The Business of United Bancorp, Inc. A-1 Management's Discussion and Analysis of Financial Condition and Results of Operations Background A-2 Executive Summary A-2 Results of Operations A-3 Financial Condition A-10 Liquidity, Funds Management and Market Risk A-14 Capital Resources A-17 Contractual Obligations A-17 Prospective Accounting and Regulatory Changes A-18 Critical Accounting Policies A-18 Forward-Looking Statements A-20 Report of Independent Registered Public Accounting Firm A-21 Consolidated Financial Statements Consolidated Balance Sheets A-22 Consolidated Statements of Income A-23 Consolidated Statements of Cash Flows A-24 Consolidated Statements of Changes in Shareholders' Equity A-25 Notes to Consolidated Financial Statements A-26
NATURE OF BUSINESS United Bancorp, Inc. (the "Company") is a Michigan Bank Holding Company headquartered in Tecumseh, Michigan. The Company's subsidiary banks (the "Banks") have local Boards of Directors and are locally managed. The Banks offer a full range of financial services through a system of seventeen banking offices located in Lenawee, Monroe and Washtenaw Counties. While the Company's chief decision makers monitor the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a Companywide basis. Accordingly, all of the Company's financial services operations are considered by management to be aggregated in one reportable operating segment. Page A-1 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 the Company and its subsidiary banks, United Bank & Trust ("UBT") and United Bank & Trust - Washtenaw ("UBTW"). BACKGROUND The Company is a financial holding company registered with the Board of Governors of the Federal Reserve System 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, electronic banking and bill payment, and money transfers. Lending operations provide real estate loans, secured and unsecured business and personal loans, consumer installment loans, check-credit loans, home equity loans, accounts receivable and inventory financing, equipment lease financing and construction financing. The 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 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 Wealth Management Group offers a variety of fiduciary services to individuals, corporations and governmental entities, including services as trustee for personal, pension, and employee benefit trusts. The department provides trust services, financial planning services, investment services, custody services, pension paying agent services and acts as the personal representative for estates. The company owns a structured finance company that was established in the third quarter of 2007. The structured finance company offers financing solutions to small businesses, primarily by generating SBA 504 and 7(a) loans that are typically sold on the secondary market. These products help to diversify the Company's sources of income. Unemployment for the State of Michigan at the end of December 2007 was 7.6%, which places it highest among the fifty states, and 100 basis points higher than the next highest state. The Lenawee County unemployment rate of 7.9% is above the State's level, while the Washtenaw County unemployment rate of 4.7% is the lowest in the State. The continued economic issues in Michigan have had an impact on earnings of the Company. Growth continues to slow and loan quality has deteriorated, particularly in the areas of construction and residential real estate development. Management is actively addressing the quality issues in the loan portfolios while continuing efforts to gain market share in tough local economic conditions. EXECUTIVE SUMMARY United Bancorp, Inc. net income for 2007 declined by $3.39 million from the level achieved in 2006. The decrease resulted primarily from a charge to the Company's provision for loan losses in the fourth quarter of the year. Net interest income improved by 1.7% over 2006 levels in spite of margin compression and increasing costs of funding asset growth. Noninterest income improved by 12.1% from the prior year, and noninterest expenses for the year were up by 2.4%. Earnings per share of $1.06 was down from $1.69 per share for 2006. Return on average shareholders' equity for 2007 was 7.44%, compared to 12.62% for 2006, and return on average assets for the year ended December 31, 2007 was 0.72%, compared to 1.23% for 2006. Page A-2 While the Company is not involved in sub-prime loans and has not directly been impacted by recent issues relating to the sub-prime mortgage market, the related economic issues have taken their toll on the credit quality of the Banks' loan portfolios. Segments of the portfolios reflect the negative impact of the continued deterioration in the Southeast Michigan real estate markets and the economy in general. In particular, several of the Company's residential real estate development and construction borrowers and certain other real estate-dependent commercial borrowers were identified as negatively impacted by the weakness in the housing sector. Gross loans increased by $48.5 million over 2006, representing growth of 8.1% for the year. Investment balances declined while fed funds sold increased, and total assets grew by 6.0% in 2007 over 2006. This growth was funded by deposit growth of 6.9%, or $43.5 million, as well as an increase in borrowings of $3.6 million. RESULTS OF OPERATIONS Earnings Summary and Key Ratios Consolidated net income declined by 37.8% in 2007 from the levels achieved in 2006, compared to an increase of 7.8% in 2006 over 2005. Both banks contributed to the reduction of earnings. Tightening interest spreads were offset by continued loan growth, resulting in a 1.7% increase in net interest income from 2006 to 2007. The net interest margins of the banks declined as a result of increasing costs of funding loan growth, in part as a result of high liquidity-driven deposit rates offered by competition in our markets. At the same time, noninterest income increased by 12.1% over 2006. While substantially all categories of noninterest income improved for the year, income from the sale and servicing of residential real estate mortgages in the secondary market provided much of that improvement, as income from the sale and servicing of loans increased significantly over 2006 levels. Noninterest expenses were up just 2.4% over 2006, compared to an increase of 6.8% in 2006 over 2005. Net interest income improved each quarter except for the fourth quarter, when nonaccrual loans and increased funding costs reduced the Company's margin. Noninterest income provided continued improvement quarter over quarter, and expenses remained relatively flat except for the third quarter. The significant impact on earnings for the year was the result of additional charges to the provision for loan losses in the first and fourth quarters of the year. The following chart shows the trends of the major components of earnings for the five most recent quarters.
2007 2006 ----------------- ----------------- in thousands of dollars, where appropriate 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr ------------------------------------------ ------- ------- ------- ------- ------- Net interest income before provision $7,411 $7,580 $7,478 $7,291 $7,424 Provision for loan losses 5,801 618 710 1,509 921 Noninterest income 3,567 3,538 3,338 3,209 3,110 Noninterest expense 6,613 7,267 6,990 6,690 6,598 Federal income tax provision (686) 895 849 577 818 Net income (loss) $ (750) $2,339 $2,267 $1,725 $2,197 Earnings (loss) per share (a) $(0.15) $ 0.45 $ 0.43 $ 0.33 $ 0.41 Return on average assets (b) -0.37% 1.18% 1.18% 0.92% 1.18% Return on average shareholders' equity (b) -3.97% 12.32% 12.11% 9.35% 11.85%
(a) Basic earnings per share, adjusted for stock dividends paid (b) Annualized Page A-3 Return on average assets declined to 0.72% for 2007, down from 1.23% for 2006. Return on average average shareholders' equity for 2007 was 7.44%, compared to 12.62% for 2006. At the same time, book value per share and cash dividends per share continue to improve. The following chart shows trends in these and other ratios. As a result of a change in the timing of declaration of cash dividends, only three cash dividends were declared in 2006, although four cash dividends were paid. To facilitate comparison to prior periods, the figure shown in the table represent the dividends actually paid during the year. All figures are adjusted to reflect stock dividends.
Performance Ratios 2007 2006 2005 5 Year Average ------------------ ------ ------ ------ -------------- Return on average assets 0.72% 1.23% 1.21% 1.12% Return on average shareholders' equity 7.44% 12.62% 12.75% 11.76% Average equity to average total assets 9.65% 9.74% 9.46% Dividend payout ratio 73.7% 42.5% 42.6% Book value per share $14.33 $14.20 $12.92 Cash dividends per share $ 0.79 $ 0.73 $ 0.68
Book value per share is based on shares outstanding at December 31 of 5,092,230 for 2007, 5,247,432 for 2006 and 5,235,773 for 2005 as adjusted for stock dividends. Dividends per share does not include contingently issuable shares, and is based on average shares outstanding of 5,190,868 for 2007, 5,246,938 for 2006, and 5,228,137 for 2005, as adjusted for stock dividends. Net Interest Income As a financial services holding company, United Bancorp, Inc. derives the greatest portion of its income from net interest income. During 2005 and much of 2006, rising short term interest rates caused the yield curve to flatten and eventually to invert. During 2007, the prime rate was much more stable, and was unchanged for eight of the twelve months of the year. During that period, the yield curve regained its normal shape. While that would typically benefit the Company and its Banks, the Company's cost of funds increased as a result of increased competition for funding within its market. In spite of those challenges, the Company managed to improve its net interest income in 2007 over 2006, with growth in net interest income of $508,000. That increase was the result of the growth of the Company's balance sheet, during a period when spreads and net interest margin have declined. Interest income increased 9.7% in 2007 over 2006, compared to improvement of 21.8% in 2006 over 2005. At the same time, interest expense increased 22.9% for 2007, compared to an increase of 44.9% for 2006. The net result was an increase of 1.7% in net interest income for 2007 over 2006. Tax- equivalent yields on earning assets improved to 7.18% for 2007, up from 7.05% for 2006, with the improvement occurring in both the investment and tax-exempt loan portfolios, while the yields on taxable loans remained unchanged from 2006. The Company's average cost of funds increased by 41 basis points, and tax equivalent spread declined from 3.88% in 2006 to 3.61% for 2007. Net interest margin experienced similar declines, moving from 4.42% in 2006 to 4.18% for 2007. The table on the following page provides insight into the various components of net interest income, as well as the results of changes in balance sheet makeup that have resulted in the compression of spread and net interest margin. Page A-4 YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
Dollars in Thousands 2007 2006 2005 ------------------------- ------------------------ ------------------------ Average Yield/ Average Yield/ Average Yield/ ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate --------- -------- ------ -------- -------- ------ -------- -------- ------ Interest earning assets (a) Federal funds sold $ 6,211 $ 271 4.36% $ 6,968 $ 359 5.15% $ 5,762 $ 193 3.35% Taxable securities 52,799 2,593 4.91% 60,602 2,392 3.95% 70,375 2,032 2.89% Tax exempt securities (b) 36,561 2,145 5.87% 35,824 2,069 5.77% 31,937 1,778 5.57% Taxable loans 630,887 47,168 7.48% 571,705 42,771 7.48% 524,156 35,085 6.69% Tax exempt loans (b) 2,967 195 6.58% 3,003 191 6.35% 3,259 207 6.37% -------- -------- -------- -------- -------- -------- Total interest earning assets (b) 729,425 $52,372 7.18% 678,102 $ 47,781 7.05% 635,489 $ 39,297 6.18% Cash and due from banks 14,202 18,792 19,024 Premises and equipment, net 14,149 13,534 10,913 Intangible assets 3,469 3,469 3,469 Other assets 23,831 23,271 26,795 Unrealized gain on securities available for sale 74 (371) (137) Allowance for loan losses (7,907) (6,822) (6,029) -------- -------- -------- Total Assets $777,243 $729,975 $689,524 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities NOW accounts $110,754 $ 1,652 1.49% $105,396 $ 1,381 1.31% $122,904 $ 1,478 1.20% Savings deposits 178,171 4,989 2.80% 179,474 4,612 2.57% 176,582 2,805 1.59% CDs $100,000 and over 120,653 5,924 4.91% 93,354 4,187 4.49% 59,047 2,030 3.44% Other int. bearing deposits 156,062 7,065 4.53% 143,197 5,711 3.99% 124,399 3,971 3.19% -------- -------- -------- -------- -------- -------- Total int. bearing deposits 565,640 19,631 3.47% 521,421 15,891 3.05% 482,932 10,285 2.13% Short term borrowings 3,757 175 4.67% 1,032 62 6.01% 2,283 74 3.24% Other borrowings 43,580 2,067 4.74% 40,064 1,850 4.62% 42,729 1,927 4.51% -------- -------- -------- -------- -------- -------- Total int. bearing liab. 612,977 21,873 3.57% 562,517 17,803 3.16% 527,944 12,286 2.33% -------- -------- -------- Nonint. bearing deposits 81,701 86,919 86,779 Other liabilities 7,523 9,445 9,539 Shareholders' equity 75,042 71,097 65,262 -------- -------- -------- Total Liabilities and Shareholders' Equity $777,243 $729,978 $689,524 ======== ======== ======== Net interest income (b) 30,499 29,979 27,011 Tax-equivalent adjustment 738 725 648 -------- -------- -------- Net interest income, GAAP basis $29,761 $ 29,254 $ 26,363 ======== ======== ======== Net spread 3.61% 3.88% 3.86% Net yield on interest earning assets (b) 4.18% 4.42% 4.25% Ratio of interest earning assets to interest bearing liabilities 1.19 1.21 1.20
(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. Page A-5 The following tables demonstrate the effect of volume and rate changes on net interest income on a taxable equivalent basis for the past two years. The data reflects the fact that the increase in the Company's net interest income during 2007 was primarily a result of balance sheet growth, with much of that improvement offset by a reduction as a result of changes in yields and rate. For the year, the net increase in net interest income as a result of changes in volume was 38% larger than the decrease resulting from changes in rate. This contrasts to the change from 2005 to 2006, when the improvement was relatively balanced between growth and changes in yields and rates. 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. Nonaccrual loans are included in total loans.
2007 compared to 2006 2006 compared to 2005 Increase Increase (decrease) due to: (decrease) due to: ------------------------ ----------------------- In thousands of dollars Volume Rate Net Volume Rate Net ------- ------- ------ ------ ------- ------ Interest earned on: Federal funds sold $ (37) $ (51) $ (88) $ 46 $ 120 $ 166 Taxable securities (334) 535 201 (311) 671 360 Tax exempt securities 43 33 76 223 67 290 Taxable loans 4,425 (28) 4,397 3,346 4,340 7,686 Tax exempt loans (2) 7 5 (16) (1) (17) ------ ------- ------ ------ ------ ------ Total interest income $4,095 $ 496 $4,591 $3,288 $5,197 $8,485 Interest expense on: NOW accounts $ 73 $ 198 $ 271 $ (222) $ 125 $ (97) Savings deposits (34) 411 377 47 1,759 1,806 Interest bearing CDs of 100,000 or greater 1,312 425 1,737 1,415 742 2,157 Other int. bearing deposits 541 813 1,354 657 1,083 1,740 Short term borrowings 130 (17) 113 (54) 42 (12) Other borrowings 166 51 217 (122) 45 (77) ------ ------- ------ ------ ------ ------ Total interest expense $2,188 $ 1,881 $4,069 $1,721 $3,796 $5,517 ------ ------- ------ ------ ------ ------ Net change in net interest income $1,907 $(1,385) $ 522 $1,567 $1,401 $2,968
Provision for Loan Losses In December of 2007, the Company identified adverse developments with respect to certain loans in the loan portfolios of its subsidiary banks. In response to this determination, the Company increased its provision for loan losses during the fourth quarter, to address the risks within its loan portfolio. The action taken followed a thorough evaluation of the Company's entire commercial loan portfolio, and reflects the negative impact of the continued deterioration in the Southeast Michigan real estate markets and the economy in general. The review specifically included several of the Banks' residential real estate development and construction borrowers. In addition, certain other commercial borrowers not directly related to real estate development were identified as negatively impacted by the weakness in the housing sector. Management's analysis of impaired loans and their underlying collateral values revealed the continued deterioration in the level of property values as well as reduced borrower ability to make regularly scheduled payments. Loans in the Banks' residential land development and construction portfolios are secured by unimproved and improved land, residential lots, and single-family homes and condominium units. Generally, current lot sales by the developers/ borrowers are taking place at a greatly reduced pace and at reduced prices. As home sales volumes have declined, income of residential developers, Page A-6 contractors and other real estate-dependent borrowers have also been reduced. This difficult operating environment, along with the additional loan carrying time has caused some borrowers to exhaust payment sources. Within the last few months, several of the Banks' clients have reached the point where payment sources have been exhausted. Within the Banks' loan portfolios, $24.7 million of impaired loans have been identified as of December 31, 2007, compared with $10.2 million as of December 31, 2006. The specific allowance for impaired loans was $6.1 million at December 31, 2007, and $2.0 million at December 31, 2006. The ultimate amount of the impairment and the potential losses to the Company may be higher or lower than estimated, depending on the realizable value of the collateral. The level of the provision made in connection with the loans reflects the amount necessary to maintain the allowance for loan losses at an adequate level, based upon the Banks' current analysis of losses inherent in their loan portfolios. Management will continue to monitor the performance of the loan portfolios and will react to conditions as they develop. The provision for 2007 was $8.6 million, up from $2.1 million for 2006. This provision provides for currently anticipated losses inherent in the current portfolio, and Management continues to evaluate its allocation methodology to assure that the Banks are adequately protected against these losses. The Company has typically had low to moderate levels of nonperforming loans, but the current economic conditions have increased those levels considerably. The use of third-party independent loan review for business loans and careful monitoring of loans by Management allows the Banks to identify potential issues within their loan portfolios. These factors help to support an allowance as a percent of total loans at a level that Management believes is appropriate for the risks in its loan portfolio. Noninterest Income Total noninterest income improved 12.1% in 2007 over 2006, compared to an increase of 4.3% in 2006. The following table summarizes changes in noninterest income by category for 2007 and 2006, in thousands of dollars where appropriate. Change in Categories of Noninterest Income
2007 2006 Change 2005 Change ------- ------- ------ ------- ------- Service charges on deposit accounts $ 3,579 $ 3,364 6.4% $ 3,017 11.5% Wealth Management fee income 4,801 4,762 0.8% 4,672 1.9% Gains (losses) on securities transactions 9 12 -25.0% (1) -1300.0% Income from loan sales and servicing 1,749 906 93.0% 1,215 -25.4% ATM, debit and credit card fee income 2,118 1,905 11.2% 1,677 13.6% Bank owned life insurance 461 408 13.0% 398 2.5% Other fee income 935 818 14.3% 691 18.4% ------- ------- ------- Total Noninterest Income $13,652 $12,175 12.1% $11,669 4.3%
Service charges on deposit accounts were up 6.4% in 2007 compared to 11.5% in 2006. This is consistent with the Company's deposit growth of 6.9% in 2007. No significant changes to service charge structure were implemented in 2007. The Wealth Management Group of UBT continues to provide a steady contribution to the Company's income statement. Wealth Management income includes Trust fee income and income from the sale of nondeposit investment products within the banking offices. Wealth Management income was up 0.8% in 2007 over 2006, with Trust income remaining flat and brokerage fee income improving modestly. This compares to an increase of 1.9% in 2006 over 2005. Income from the sale of nondeposit Page A-7 investment products is derived from the sale of investments and insurance products to clients, including annuities, mutual funds and other investment vehicles. Assets managed by the department at December 31, 2007 were $729.7 million, down from $740.7 million at the end of 2006 and $752.3 million at the end of 2005. The Banks generally market their production of fixed rate long-term residential 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. As the Company is conservative in its approach to valuation of mortgage servicing rights, no write-downs in mortgage servicing rights were required in 2007, 2006 or 2005 as a result of impairment or other reasons. Late in 2006, the Company initiated significant revisions to its mortgage business, including the hiring of a seasoned mortgage professional as head of the Company's mortgage department. That change contributed to a substantial increase in mortgage volume in 2007, particularly in the volume of loans sold on the secondary market. Income from loan sales and servicing was up 93.0% in 2007 compared to 2006, following a decline of 25.4% in 2006 compared to 2005. During the third quarter of 2007, the Company entered into a new line of business. United Structured Finance ("USFC") is a finance company that offers simple, effective financing solutions to small businesses, primarily by engaging in SBA 504 and 7(a) lending. The loans generated by USFC are typically sold on the secondary market. Gains on the sale of those loans are included in income from loan sales and servicing. USFC revenue will provide additional diversity to the Company's income stream going forward, and will provide additional financing alternatives to clients of the Banks as well as non-bank clients. ATM, debit and credit card fee income continues to provide a steady source of noninterest income for the Company. The Banks operate nineteen ATMs throughout their market areas, and Bank clients are active users of debit cards. The Banks continue to receive ongoing fee income from credit card referrals and operation of its credit card merchant business. Income from these areas was up 11.2% in 2007 over 2006, compared to an increase of 13.6% in 2006 over 2005. Income from bank-owned life insurance increased 13.0% in 2007 compared to 2006, following a modest increase in 2006. The improvement reflects increases in interest crediting rates during the year and some minor restructuring of BOLI holdings, as well as some changes in the amount of their BOLI holdings. Other fee income during the year consisted of income from various fee-based banking services, such as sale of official checks, wire transfer fees, safe deposit box income, sweep account and other fees. This category of noninterest income improved 14.3% from 2006 to 2007, following growth of 18.4% from 2005 to 2006, with no one area contributing significantly more than others to the improvement. Overall, total noninterest income increased by $1.48 million, or 12.1% in 2007, following an increase of $506,000 from 2005 to 2006. This continued improvement reflects the diversity of the Company's noninterest income sources. Management anticipates continued emphasis on the sources of noninterest income so as to remain an important component of the Company's overall revenue growth. Noninterest Expense The following table summarizes changes in the Company's noninterest expense by category for 2007 and 2006, in thousands of dollars where applicable. Page A-8 Change in Categories of Noninterest Expense
2007 2006 Change 2005 Change ------- ------- ------ ------- ------- Salaries and employee benefits $14,862 $15,037 -1.2% $14,662 2.6% Occupancy and equipment expense 4,724 4,344 8.7% 4,074 6.6% External data processing 1,605 1,537 4.4% 1,283 19.8% Advertising and marketing 1,193 1,063 12.2% 1,106 -3.9% Attorney, accounting and other professional fees 1,070 1,266 -15.5% 545 132.3% Director fees 413 447 -7.6% 384 16.4% Other losses 356 92 285.4% 171 -45.9% Other expense 3,336 3,128 6.7% 2,970 5.3% ------- ------- ----- ------- ----- Total Noninterest Expense $27,559 $26,914 2.4% $25,195 6.8% ======= ======= ===== ======= =====
Total noninterest expenses were up 2.4% in 2007, compared to an increase of 6.8% in 2006 over 2005. Salaries and benefits are the organization's largest single area of expense. During 2007, this category of expense declined 1.2% from 2006 levels, compared to an increase of 2.6% in 2006. Staff additions and benefits costs continue to be a significant contributor to personnel expense, while the increases in those areas were offset by reductions in the amounts paid to co-workers for bonuses and 401(k) profit sharing contributions, as a result of the reduced earnings in 2007. The increase in occupancy and equipment expense in 2007 over 2006 levels resulted in part from full-year operation of a new banking office by UBTW and expansion of office space at its Ann Arbor office in 2006, combined with ongoing investment in technology and equipment. External data processing costs were up modestly in 2007, with a portion of the increases reflecting a full year of expenses for outsourcing of accounting and processing for the Company's Wealth Management Group, following a data processing conversion during 2006. Additional increases were primarily related to processing of ATM, credit card and internet banking transactions, resulting from increased volume in these areas. Advertising and marketing expenses increased by 12.2% over 2006 levels, following a modest decline in 2006. The increase reflects the cost of increased marketing and advertising presence in the communities served by the Banks, as well as continued development of the Company's brand. Attorney, accounting and other professional fees were down 15.5% from 2006 levels. The decline was primarily a result of unusually high expenditures in 2006 relating to a change in processing within the Wealth Management group, as back office processing functions of the department were outsourced. Other losses include fraud losses, losses on closed accounts and write-offs on the sale of property held as other real estate. These losses increased broadly across all categories in 2007, and the increase reflects a general trend in the economy and the industry. Other expenses were up 6.7% over 2007, with increases in FDIC insurance costs, shareholder and compliance expense contributing some of the larger increases for the year. Federal Income Tax The following chart shows the effective federal tax rates of the Company for the past three years, in thousands of dollars where applicable.
Effective Tax Rates 2007 2006 2005 ------------------- ------ ------- ------- Income before tax $7,217 $12,392 $11,505 Federal income tax $1,635 $ 3,420 $ 3,181 Effective federal tax rate 22.7% 27.6% 27.6%
Page A-9 As is apparent by the above table, the Company's effective federal tax rate improved significantly in 2007 over 2006. This improvement resulted as the tax-exempt income made up a larger percentage of total pre-tax income. Income from bank owned life insurance and tax credits from participation in a low- income housing partnership helps to reduce the Company's federal income taxes. Tax exempt income continues to be a significant factor in the tax calculation for the Company, due to the percentage of the investment portfolio carried in tax exempt municipal securities and loans. The Banks intend to continue to invest in tax-exempt assets as long as liquidity, safety and tax equivalent yields make them an attractive alternative. Financial Condition Securities Dollars of loan growth in excess of deposit growth resulted in a decline of $9.9 million in the Company's securities portfolio during 2007. The makeup of the Company's investment portfolio continues to evolve with the growth of the Company, and the mix of the consolidated investment portfolio has continued to shift to meet liquidity and interest rate risk needs. On a consolidated basis, investment in all categories of securities declined in 2007, with the largest decreases in U.S. agency investments and obligations of states and political subdivisions. Changes in the various categories of the Company's investment portfolio are shown in the chart below.
Change in Categories of Securities Portfolio, in thousands of dollars 2007 2006 ------------------------------------------------ ------- ------- U.S. Treasury and agency securities $(4,848) $(5,312) Mortgage backed agency securities (894) (920) Obligations of states and political subdivisions (4,241) (1,241) Corporate, asset backed and other securities 70 (148) Change in total securities $(9,913) $(7,621)
These changes are also reflected in the percentage makeup of the portfolio. The following chart shows the percentage mix of the securities portfolio.
Percentage Makeup of Securities Portfolio at December 31, 2007 2006 --------------------------------------------------------- ----- ----- U.S. Treasury and agency securities 39.0% 40.1% Mortgage backed agency securities 15.2% 14.6% Obligations of states and political subdivisions 42.1% 42.1% Corporate, asset backed and other securities 3.7% 3.3% ----- ----- Total investment securities 100.0% 100.0% ===== =====
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 municipal portfolio contains a small amount of geographic risk, as approximately 6% 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. The Company's current and projected tax position continues to make carrying tax-exempt securities valuable to the Banks, and the Company does not anticipate being subject to alternative minimum tax in the near future. The Banks' investment in local municipal issues also reflects their commitment to the development of the local area through support of its local political subdivisions. Page A-10 Unrealized gains and losses within the investment portfolio are temporary, since they are a result of market changes, rather than a reflection of credit quality. Management has no specific intent to sell any securities, although the entire investment portfolio is classified as available for sale. The chart below summarizes unrealized gains and losses in each category of the portfolio at the end of 2007 and 2006, in thousands of dollars.
Unrealized Gains and Losses in the Investment Portfolio 2007 2006 Change ------------------------------------------------------- ---- ---- ------ U.S. Treasury and agency securities $158 $(54) $212 Mortgage backed agency securities 7 (62) 69 Obligations of states and political subdivisions 225 143 82 Corporate, asset backed and other securities 45 75 (30) ---- ---- ---- Total investment securities $435 $102 $333 ==== ==== ====
Loans The chart below shows the percentage change in each category of the loan portfolio for 2007 and 2006.
Percentage Change in Categories of Loan Portfolio 2007 2006 ------------------------------------------------- ----- ---- Personal 7.8% 11.6% Business, including commercial mortgages 14.9% 2.4% Tax exempt -4.6% -9.3% Residential mortgage, including loans held for sale 7.2% 27.3% Commercial construction and development -14.1% 9.7% ----- ---- Total loans 8.1% 7.8% ===== ====
As full service lenders, the Banks offer a variety of loan products in their markets. Loan growth was 8.1% in 2007. Personal loan balances grew 7.8% for the year, following an increase of 11.6% in 2006 over 2005. Activity in 2007 was in all categories of personal loans, but the largest growth was in home equity loans and personal lines of credit. Personal loans on the Company's balance sheet include direct and indirect loans for automobiles, boats and recreational vehicles, and other items for personal use. In addition, amounts outstanding in personal lines of credit and home equity loans are included in this loan category. Business loan growth increased considerably in 2007, following slower growth in 2006. Total loans outstanding to businesses increased 14.9% in 2007, compared to an increase of 2.4% in 2006 over 2005. The growth in loans to commercial enterprises is derived from all of the markets the Banks serve. In addition, the Banks purchase and sell participations in business loans, in order to diversify their geographic risk. Participation in tax exempt financing reflects continued involvement in funding local community expansion at local municipalities and school districts, reduced by normal amortizations of loan balances. Tax-exempt loan balances declined in 2007 and 2006, as a result of scheduled amortizations and maturities, as well as decreased demand for this type of loans within the market areas of the Banks. The Banks generally sell their production of fixed-rate mortgages on the secondary market, and retain nonconforming loans and shorter-term adjustable rate mortgages in their portfolios. As a result, the mix of mortgage production for any given year will have an impact on the amount of mortgages held in the portfolios of the Banks. While growth of residential mortgage balances on the Banks' portfolios slowed compared to 2006, growth of 7.2% in 2007 reflects continued retention of ARM products and large non-conforming residential mortgages, which are generally retained in the loan portfolios of the Banks. Page A-11 Loans for commercial construction and development declined by 14.1% in 2007, following an increase of 9.7% in 2006. The decline in balances reflects both a reduction of the amount of construction loan volume as a result of a slowing of the commercial mortgage and residential housing activity in the Company's market area, but also reflects the payoff or charge-off of a number of construction and development loans during the year. Residential construction loans will convert to residential mortgages to be retained in the Banks' portfolios or to be sold in the secondary market, while commercial construction loans will eventually be converted to commercial mortgages. Credit Quality The Company continues to actively monitor delinquencies, nonperforming assets and potential problem loans. The aggregate amount of non-performing 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 amount of nonperforming assets by category at December 31 for each of the past five years.
Nonperforming Assets, in thousands of dollars 2007 2006 2005 2004 2003 --------------------------------------------- ------- ------ ------ ------ ------ Nonaccrual loans $13,695 $5,427 $5,609 $3,709 $3,635 Accruing loans past due 90 days or more 1,455 855 1,153 1,674 761 Troubled debt restructurings -- -- -- -- -- ------- ------ ------ ------ ------ Total nonperforming loans 15,150 6,282 6,762 5,383 4,396 Other real estate 2,253 1,063 871 844 593 ------- ------ ------ ------ ------ Total nonperforming assets $17,403 $7,345 $7,633 $6,227 $4,989 ======= ====== ====== ====== ====== Percent of nonperforming loans to total loans 2.33% 1.04% 1.21% 1.08% 0.98% ======= ====== ====== ====== ====== Percent of nonperforming assets to total assets 2.19% 0.98% 1.07% 0.96% 0.82% ======= ====== ====== ====== ======
Total nonperforming assets increased significantly during the fourth quarter of 2007. Nonaccrual loans increased by $8.3 million from the end of 2006, and delinquent loans were at the highest level since the end of 2004. The increase in nonaccrual loans and delinquency reflects a deterioration of the residential real estate development business in the Banks' markets. In addition, the economic conditions have resulted in challenges for other of the Banks' business clients. Collection efforts continue with all delinquent clients, to bring them back to performing status. Total nonperforming loans as a percent of total loans moved from 1.04% at the end of 2006 to 2.33% at the end of 2007. Holdings of other real estate increased by $1.2 million in 2007. These holdings include eleven properties that were acquired through foreclosure or in lieu of foreclosure. The properties include residential homes and lots, as well as commercial properties. One property is leased, and all are for sale. Credit quality is dependent in part on the makeup of the loan portfolio. The following chart shows the percentage makeup of the loan portfolio.
Percentage Makeup of Loan Portfolio at December 31, 2007 2006 --------------------------------------------------- ----- ----- Personal 15.1% 15.1% Business, including commercial mortgages 57.9% 54.5% Tax exempt 0.4% 0.5% Residential mortgage, including loans held for sale 14.1% 14.2% Commercial construction and development 12.5% 15.7% ----- ----- Total loans 100.0% 100.0% ===== =====
Page A-12 The personal loan portfolio consists of direct and indirect installment, home equity and unsecured revolving line of credit loans. Installment loans consist primarily of home equity loans and loans for consumer durable goods, principally automobiles. Indirect personal loans consist of loans for automobiles, boats and manufactured housing, but make up a small percent of the personal loans. Business loans carry the largest balances per loan, and therefore, any single loss would be proportionally larger than losses in other portfolios. Because of this, the Banks use an independent loan review firm to assess the continued quality of its business loan portfolio. This is in addition to the precautions taken with credit quality in the other loan portfolios. Business loans consist of approximately 64.2% of loans secured by nonfarm, nonresidential real estate. There are no other significant concentrations in the business loan portfolio. Further information concerning credit quality is contained in Note 5 of the Notes to Consolidated Financial Statements. Deposits Deposit totals increased $43.5 million in 2007, or 6.9% for the year, compared to deposit growth of $37.4 million in 2006, or 6.3% in 2006. Much of the deposit growth during 2007 was in certificates of deposit. While the Banks maintain a small amount of purchased or brokered deposits, they do not support their growth through the use of those products. The Banks' deposit rates are consistently competitive with other banks in its market area. 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 following chart shows the percentage change in deposits by category for 2007 and 2006.
Percentage Change in Deposits by Category 2007 2006 ----------------------------------------- ---- ---- Noninterest bearing deposits -4.3% -8.0% Interest bearing deposits 8.6% 8.8% Total deposits 6.9% 6.3% ==== ====
The chart below shows the percentage makeup of the deposit portfolio in 2007 and 2006.
Percentage Breakdown of Deposit Portfolio as of December 31, 2007 2006 ------------------------------------------------------------ ----- ----- Noninterest bearing deposits 11.6% 13.0% Interest bearing deposits 88.4% 87.0% ----- ----- Total deposits 100.0% 100.0% ===== =====
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. The Banks are also participants in the federal funds market, either as borrowers or sellers. 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 of Indianapolis ("FHLBI") and borrowings at the discount window of the Federal Reserve Bank as additional short-term funding sources. Federal funds were used during 2007 and 2006, while 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 FHLBI. These long-term borrowings, as detailed in Note 11 of the Notes to Consolidated Financial Statements, serve to provide a balance to some of the interest rate risk inherent in the Company's balance sheet. Additional information regarding borrowed funds is found in the section below. Page A-13 LIQUIDITY, FUNDS MANAGEMENT AND MARKET RISK Liquidity During 2007, the Company's cash and cash equivalents increased as a result of normal activities within the balance sheet and income statement. Throughout 2007, the Company participated in the federal funds market; at times as a provider of funds and at other times as a purchaser. Funding needs varied throughout the year, and overall, the Company's average net excess funds during 2007 were lower than in 2006. The Company averaged net federal funds sold of $2.5 million during 2007, compared to $5.9 million for 2006. These changes were primarily a result of timing differences between loan, investment and deposit growth. Deposits grew $43.5 million in 2007, and FHLB advances increased by $3.7 million as a result of new borrowings in excess of maturities. Net loans increased by $44.1 million, and total investments declined by $9.9 million. All of these changes contributed to the Company's increase in excess funds at the end of 2007 compared to 2006. The Banks monitor their liquidity position regularly, and are in compliance with regulatory guidelines for liquidity. The cash flows of the Company are relatively predictable. While loan and deposit cash flows are determined to a large extent by the actions of its clients, the Company is able to control its cash flows with regard to borrowings and investments. The Company has a number of liquidity sources other than deposits, including federal funds and other lines of credit with correspondent banks, securities available for sale, and lines of credit with the FHLB. Information concerning available lines is contained in Note 10 of the Notes to Consolidated Financial Statements. Funds Management and Market 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 of the Company place strong emphasis on stabilizing net interest margin while managing interest rate, liquidity and market risks, 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. Interest rate risk is the exposure of the Company's financial condition to adverse movements in interest rates. It results from differences in the maturities or timing of interest adjustments of the Company's assets, liabilities and off-balance-sheet instruments; from changes in the slope of the yield curve; from imperfect correlations in the adjustment of interest rates earned and paid on different financial instruments with otherwise similar repricing characteristics; and from interest rate related options embedded in the Company's products such as prepayment and early withdrawal options. 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 Page A-14 points. Key assumptions in the models include prepayment speeds on mortgage related assets; cash flows and maturities of financial instruments; 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 December 31, 2007, the Company would expect a maximum potential reduction in net interest margin of 2% if market rates increased or decreased under an immediate and sustained parallel shift of 200 basis points. During 2007, the Company increased its usage of long-term fixed rate FHLB advances, following declines in 2006 and 2005. In addition, the Company remained in a liability-sensitive position in the twelve-month timeframe based on internal interest sensitivity measures. The following table provides information about the Company's financial instruments used for purposes other than trading that are sensitive to changes in interest rates. For loans, securities, and liabilities with contractual maturities, the table presents principal cash flows and related weighted average interest rates by the earlier of the contractual maturity or call dates as well as market and historical experience of the impact of interest rate fluctuations on the prepayment of mortgage-backed securities. Weighted average variable rates are based on current rates and indexes. The Company currently has no market sensitive instruments entered into for trading purposes and no off-balance-sheet interest rate swaps or caps. The information is in thousands of dollars as of December 31, 2007 and 2006. FINANCIAL INSTRUMENTS AT DECEMBER 31, 2007
Principal Amount Maturing In: ------------------------------------------------ Fair 2008 2009 2010 2011 2012 Thereafter Total Value -------- ------- ------- ------- ------- ---------- -------- -------- RATE-SENSITIVE ASSETS: Fixed Rate: Loans $ 53,901 $53,241 $42,059 $44,809 $34,565 $139,570 $369,377 $368,937 Average Rate 7.3% 7.1% 7.3% 7.7% 7.6% 6.0% 6.8% Investments $ 38,876 $ 8,997 $ 5,103 $ 5,951 $ 3,125 $ 15,648 $ 77,699 $ 77,699 Average Rate 4.7% 4.7% 4.8% 4.2% 4.7% 4.2% 4.6% Variable Rate: Loans $123,545 $31,465 $16,518 $13,416 $14,406 $ 82,805 $282,154 $282,549 Average Rate 7.5% 6.8% 6.0% 5.7% 5.8% 8.6% 7.5% Investments $ 1,950 $ 1,401 $ 603 $ 78 $ 74 $ 514 $ 4,620 $ 7,781 Average Rate 5.1% 5.0% 4.9% 6.2% 6.2% 4.8% 5.0% Other interest earning assets $ 14,272 $ 14,272 $ 14,272 Average interest rate 3.2% 3.2% RATE-SENSITIVE LIABILITIES: Noninterest bearing demand $ 77,878 $ 77,878 $ 77,863 Savings & interest bearing demand $326,801 $ 326,801 $326,801 Average interest rate 2.1% 2.1% Time deposits $200,832 $46,961 $14,180 $ 2,061 $ 2,824 $ -- $266,858 $267,140 Average interest rate 4.8% 4.6% 5.0% 4.7% 4.9% 0.0% 4.7% Fixed rate borrowings $ 10,428 $18,530 $11,500 $ -- $ 2,000 $ 2,153 $ 44,611 $ 45,252 Average interest rate 4.1% 4.8% 4.9% 4.0% 5.4% 5.3% 4.7% Other interest bearing liabilities $ -- $ -- $ -- Average interest rate 0.0% 0.0%
Page A-15 FINANCIAL INSTRUMENTS AT DECEMBER 31, 2006
Principal Amount Maturing In: ------------------------------------------------ Fair 2006 2007 2008 2009 2010 Thereafter Total Value -------- ------- ------- ------- ------- ---------- -------- -------- RATE-SENSITIVE ASSETS: Fixed Rate: Loans $ 63,826 $39,631 $35,830 $37,106 $36,879 $ 94,078 $307,350 $304,931 Average Rate 7.3% 7.2% 7.1% 7.0% 7.6% 6.2% 6.9% Investments $ 33,725 $22,268 $ 5,016 $ 4,369 $ 3,806 $ 15,690 $ 84,874 $ 85,360 Average Rate 4.4% 4.8% 4.7% 5.1% 4.0% 4.1% 4.5% Variable Rate: Loans $112,291 $36,044 $26,096 $17,717 $15,729 $ 86,536 $294,413 $293,963 Average Rate 8.5% 7.8% 6.8% 5.8% 6.0% 8.6% 8.0% Investments $ 1,945 $ 1,184 $ 988 $ 819 $ 359 $ 2,498 $ 7,793 $ 7,781 Average Rate 3.6% 4.0% 3.6% 3.6% 4.4% 4.0% 3.9% Other interest earning assets $ 6,812 $ 6,812 $ 6,812 Average interest rate 4.5% 4.5% RATE-SENSITIVE LIABILITIES: Noninterest bearing demand $ 81,373 $ 81,373 $ 81,373 Savings & interest bearing demand $317,340 $317,340 $317,340 Average interest rate 2.4% 2.4% Time deposits $160,766 $46,583 $19,501 $ 1,115 $ 1,269 $ 55 $229,289 $230,232 Average interest rate 4.6% 4.6% 4.4% 3.2% 5.0% 5.0% 4.6% Fixed rate borrowings $ 21,339 $10,429 $ 6,000 $ 1,000 $ -- $ 2,177 $ 40,945 $ 40,656 Average interest rate 5.0% 4.1% 4.4% 4.0% 0.0% 5.3% 4.7% Other interest bearing liabilities $ 77 $ 77 $ 77 Average interest rate 0.5% 0.5%
The Company's primary market risk exposure decreased from 2006 to 2007, based on data supplied by its measurement systems. This market risk exposure is if rates decline. The Company's exposure to market risk is reviewed on a regular basis by the Funds Management Committee. The policy objective is to manage the Company's assets and liabilities to provide an optimum and consistent level of earnings within the framework of acceptable risk standards. The Funds Management Committee is also responsible for evaluating and anticipating various risks other than interest rate risk. Those risks include prepayment risk, credit risk and liquidity risk. The Committee is made up of senior members of management, and continually monitors the makeup of interest sensitive assets and liabilities to assure appropriate liquidity, maintain interest margins and to protect earnings in the face of changing interest rates and other economic factors. The Funds Management policy provides for a level of interest sensitivity which, Management believes, allows the Company to take advantage of opportunities within the market 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. The following table shows the rate sensitivity of earning assets and interest bearing liabilities as of December 31, 2007. Loans and investments are categorized using the earlier of their scheduled payment, call, or repricing dates, where applicable. Savings, NOW and money market deposit accounts are considered to be immediately repriceable. All other liabilities are reported by their scheduled maturities, and no adjustments for possible prepayments are included in the table. Page A-16 Interest Sensitivity Summary
Over 10 In thousands of dollars 0-3 Mo. 4-12 Mo. 1-5 Yrs 5-10 Yrs Years Total ----------------------- --------- --------- -------- -------- ------- -------- Securities $ 21,759 $ 24,925 $ 23,176 $14,733 $ 1,305 $ 85,898 Loans 228,751 60,080 291,267 57,208 12,994 650,300 --------- --------- -------- ------- ------- -------- Total earning assets $ 250,510 $ 85,005 $314,443 $71,941 $14,299 $736,198 Interest bearing deposits $ 401,783 $ 125,850 $ 66,026 $ -- $ -- $593,659 Other borrowings 4,500 5,928 32,030 -- 2,153 44,611 --------- --------- -------- ------- ------- -------- Total interest bearing liabilities $ 406,283 $ 131,778 $ 98,056 $ -- $ 2,153 $638,270 --------- --------- -------- ------- ------- -------- Net asset (liability) interest sensitivity exposure $(155,773) $ (46,773) $216,387 $71,941 $12,146 $ 97,928 Cumulative net asset (liability) exposure $(155,773) $(202,546) $ 13,841 $85,782 $97,928 Cumulative ratio of asset to liability exposure 0.62 0.62 1.02 1.13 1.15 to one Cumulative exposure as a percent of total assets -19.6% -25.5% 1.7% 10.8% 12.3%
CAPITAL RESOURCES The common stock of the Company is traded on the Over The Counter Bulletin Board as UBMI. It is the policy of the Company to pay 30% to 45% of net earnings as cash dividends to shareholders. The payout ratio for 2007 was 73.7%, compared to 42.5% for 2006. The increased payout ratio for 2007 was due primarily to the net income impact of the charge to the Company's provision for loan losses in the fourth quarter. Cash dividends per share have continued to increase, providing steady return to shareholders. Book value of the Company's stock increased from $14.20 at the end of 2006 to $14.33 at December 31, 2007. A 100% stock dividend was paid in 2007, and a 5% stock dividend was paid to shareholders in 2006. The ratios of average equity to average assets of the Banks and the Company declined from 2006 levels, as a result of a stock buyback program initiated in 2007, combined with slower growth in capital as a result of the reduction of earnings in 2007. The Company's capital ratios exceed the levels required by its regulators, and Management continues to evaluate methods to optimize the high levels of equity of the Company. The table in Note 18 of the Notes to Consolidated Financial Statements details the capital ratios of the Company. The Company and the Banks are considered to be well-capitalized by the regulators. The Company maintains a short-term strategic plan and a five year plan, and utilizes a formal strategic planning process. Management and the Board continue to monitor long term goals, which include maintaining capital growth in relation to asset growth, and the retention of a portion of earnings to fund growth while providing a reasonable return to shareholders. CONTRACTUAL OBLIGATIONS The following table details the Company's known contractual obligations at December 31, 2007, in thousands of dollars: Payments due by period
Less than More than Contractual Obligations 1 year 1-3 years 3-5 years 5 years Total ----------------------- --------- --------- --------- --------- ------- Long term debt (FHLB advances) $10,428 $30,030 $2,000 $2,153 $44,611 Operating lease arrangements 970 1,858 1,861 3,043 7,732 Purchase agreements -- -- -- -- -- ------- ------- ------ ------ ------- Total $11,398 $31,888 $3,861 $5,196 $52,343 ======= ======= ====== ====== =======
Page A-17 PROSPECTIVE ACCOUNTING AND REGULATORY CHANGES On September 6, 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements. SFAS 157 clarifies the fair value measurement objective, its application in GAAP and establishes a framework that builds on current practice and requirements. The framework simplifies and, where appropriate, codifies the similar guidance in existing pronouncements and applies broadly to financial and non financial assets and liabilities. The Statement clarifies the definition of fair values as a price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, known as an exit-price definition of fair value. It also provides further guidance on the valuation techniques to be used in estimating fair value. Current disclosures about the use of fair value to measure assets and liabilities are expanded in this Statement. The disclosures focus on the methods used for fair value measurements and apply whether the assets and liabilities are measured at fair value in all periods, such as trading securities, or in only some periods, such as impaired assets. The Statement is effective for all financial statements issued for fiscal years beginning after November 15, 2007 as well as for interim periods within such fiscal years. The Company is currently evaluating the impact of this Statement on its financial statements. In February, 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS 159 allows companies to report selected financial assets and liabilities at fair value. The changes in fair value are recognized in earnings and the assets and liabilities measured under this methodology are required to be displayed separately in the balance sheet. The main intent of the Statement is to mitigate the difficulty in determining reported earnings caused by a "mixed-attribute model" (or reporting some assets at fair value and others using a different valuation attribute such as amortized cost). The project is separated into two phases. The first phase addresses the creation of a fair value option for financial assets and liabilities. A second phase will address creating a fair value option for selected non-financial items. SFAS 159 is effective for all financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of this Statement on its financial statements and did not elect to early adopt. In December, 2007, FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements and SFAS 141R, Business Combinations. Both are effective for annual periods beginning after December 15, 2008. The Company is currently evaluating the impact of these Statements, but does not believe that either will have a measurable impact on its financial statements. Management is not aware of any other trends, events or uncertainties that are likely to have a material effect on the Company's liquidity, capital resources, or operations. In addition, Management is not aware of any current recommendations by regulatory authorities, other than those previously discussed, which would have such an effect. CRITICAL ACCOUNTING POLICIES The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The Company's significant accounting policies are described in detail in the notes to the Company's consolidated financial statements for the year ended December 31, 2007. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting Page A-18 policies are those policies that management believes are the most important to the portrayal of the Company's financial condition and results, and they require management to make estimates that are difficult, subjective, or complex. Allowance for Credit Losses The allowance for credit losses provides coverage for probable losses inherent in the Company's loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management's estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs. The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan's observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan's effective interest rate. Regardless of the extent of the Company's analysis of client performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a client's financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or client-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company's evaluation of imprecision risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment. Mortgage Servicing Rights Mortgage servicing rights ("MSRs") associated with loans originated and sold, where servicing is retained, are capitalized and included in other intangible assets in the consolidated balance sheet. The value of the capitalized servicing rights represents the present value of the future servicing fees arising from the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as amortization of intangible assets. Page A-19 Goodwill and Other Intangibles The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair value as required by SFAS 141. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using straight-line and accelerated methods, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition. 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 those discussed under "Risk Factors" in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2007 and generally 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. Page A-20 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM United Bancorp, Inc. and Subsidiaries (BKD LLP LOGO) Audit Committee, Board of Directors and Shareholders United Bancorp, Inc. Tecumseh, Michigan We have audited the accompanying consolidated balance sheets of United Bancorp, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of income, cash flows, and changes in shareholders' equity for each of the years in the three-year period ended December 31, 2007. The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Bancorp, Inc. as of December 31, 2007, and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the Unites States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), United Bancorp, Inc.'s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February, 15, 2008, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. /s/ BKD, LLP BKD, LLP Indianapolis, Indiana February 15, 2008 Page A-21 CONSOLIDATED BALANCE SHEETS United Bancorp, Inc. and Subsidiaries
December 31, ------------------- In thousands of dollars 2007 2006 ----------------------- -------- -------- ASSETS Cash and demand balances in other banks $ 17,996 $ 17,606 Federal funds sold 11,130 3,770 -------- -------- Total cash and cash equivalents 29,126 21,376 Securities available for sale 85,898 95,811 Loans held for sale 5,770 5,772 Portfolio loans 644,530 595,991 Less allowance for loan losses 12,306 7,849 -------- -------- Net loans 632,224 588,142 Premises and equipment, net 13,160 13,215 Goodwill 3,469 3,469 Bank-owned life insurance 11,961 11,499 Accrued interest receivable and other assets 14,079 11,705 -------- -------- TOTAL ASSETS $795,687 $750,989 ======== ======== LIABILITIES Deposits Noninterest bearing deposits $ 77,878 $ 81,373 Interest bearing deposits 593,659 546,629 -------- -------- Total deposits 671,537 628,002 Short term borrowings -- 77 Other borrowings 44,611 40,945 Accrued interest payable and other liabilities 6,572 7,429 -------- -------- TOTAL LIABILITIES 722,720 676,453 -------- -------- COMMITMENTS AND CONTINGENT LIABILITIES SHAREHOLDERS' EQUITY Common stock and paid in capital, no par value; 10,000,000 shares authorized, 5,092,230 shares issued and outstanding in 2007 and 5,247,432 in 2006 67,860 71,075 Retained earnings 4,814 3,393 Accumulated other comprehensive income, net of tax 293 68 -------- -------- TOTAL SHAREHOLDERS' EQUITY 72,967 74,536 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $795,687 $750,989 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page A-22 CONSOLIDATED STATEMENTS OF INCOME United Bancorp, Inc. and Subsidiaries
For the years ended December 31, --------------------------- In thousands of dollars, except per share data 2007 2006 2005 ---------------------------------------------- ------- ------- ------- INTEREST INCOME Loans $47,301 $42,900 $35,225 Securities Taxable 2,593 2,392 2,032 Tax exempt 1,469 1,405 1,199 Federal funds sold 271 359 193 ------- ------- ------- Total interest income 51,634 47,056 38,649 ------- ------- ------- INTEREST EXPENSE Deposits 19,631 15,890 10,285 Short term borrowings 175 62 74 Other borrowings 2,067 1,850 1,927 ------- ------- ------- Total interest expense 21,873 17,802 12,286 ------- ------- ------- NET INTEREST INCOME 29,761 29,254 26,363 Provision for loan losses 8,637 2,123 1,332 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 21,124 27,131 25,031 ------- ------- ------- NONINTEREST INCOME Service charges on deposit accounts 3,579 3,364 3,017 Wealth Management fee income 4,801 4,762 4,672 Gains (losses) on securities transactions 9 12 (1) Income from loan sales and servicing 1,749 906 1,215 ATM, debit and credit card fee income 2,118 1,905 1,677 Income from bank-owned life insurance 461 408 398 Other fee income 935 818 691 ------- ------- ------- Total noninterest income 13,652 12,175 11,669 ------- ------- ------- NONINTEREST EXPENSE Salaries and employee benefits 14,862 15,037 14,662 Occupancy and equipment expense 4,724 4,344 4,074 External data processing 1,605 1,537 1,283 Advertising and marketing 1,193 1,063 1,106 Attorney, accounting and other professional fees 1,070 1,266 545 Director fees 413 447 384 Other expense 3,692 3,220 3,141 ------- ------- ------- Total noninterest expense 27,559 26,914 25,195 ------- ------- ------- INCOME BEFORE FEDERAL INCOME TAX 7,217 12,392 11,505 Federal income tax 1,635 3,420 3,181 ------- ------- ------- NET INCOME $ 5,582 $ 8,972 $ 8,324 ======= ======= ======= Basic earnings per share $ 1.06 $ 1.69 $ 1.58 Diluted earnings per share 1.06 1.69 1.57 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. Page A-23 CONSOLIDATED STATEMENTS OF CASH FLOWS United Bancorp, Inc. and Subsidiaries
For the years ended December 31, ------------------------------ In thousands of dollars 2007 2006 2005 ----------------------- -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,582 $ 8,972 $ 8,324 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES Depreciation and amortization 1,390 1,520 1,892 Provision for loan losses 8,637 2,123 1,332 Gain on sale of loans (1,248) (563) (940) Proceeds from sales of loans originated for sale 70,931 39,627 57,961 Loans originated for sale (69,681) (43,776) (56,979) (Gain) Loss on securities transactions (9) (12) 1 Deferred income taxes (1,290) (414) 313 Stock option expense 205 222 -- Increase in cash surrender value on bank owned life insurance (461) (408) (398) Change in investment in limited partnership (36) 107 234 Excess tax benefits from exercised stock options (20) (28) (265) Change in accrued interest receivable and other assets 588 (632) (898) Change in accrued interest payable and other liabilities (759) 1,650 204 -------- -------- -------- Total adjustments 8,247 (584) 2,457 -------- -------- -------- Net cash from operating activities 13,829 8,388 10,781 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale Purchases (13,980) (40,177) (30,664) Sales -- 164 -- Maturities and calls 19,495 42,711 20,688 Principal payments 4,898 5,439 9,423 Net increase in loans (54,829) (40,353) (62,484) Net premises and equipment expenditures (1,226) (1,468) (1,126) -------- -------- -------- Net cash from investing activities (45,642) (33,684) (64,163) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits 43,535 37,350 60,774 Net change in short term borrowings (77) (6,299) (2,350) Principal payments on other borrowings (21,364) (8,033) (1,569) Proceeds from other borrowings 25,030 6,750 950 Proceeds from common stock transactions 405 277 987 Purchase of common stock (3,873) -- -- Excess tax benefits from exercised stock options 20 28 265 Dividends paid (4,113) (3,817) (3,447) -------- -------- -------- Net cash from financing activities 39,563 26,256 55,610 -------- -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS 7,750 960 2,228 Cash and cash equivalents at beginning of year 21,376 20,416 18,188 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 29,126 $ 21,376 $ 20,416 ======== ======== ======== SUPPLEMENTAL DISCLOSURES: Interest paid $ 20,677 $ 17,186 $ 11,571 Income tax paid 3,271 3,655 3,100 Loans transferred to other real estate 2,110 779 491
The accompanying notes are an integral part of these consolidated financial statements. Page A-24 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY United Bancorp, Inc. and Subsidiaries For the years ended December 31, 2007, 2006, 2005
IN THOUSANDS OF DOLLARS, Common Retained EXCEPT PER SHARE DATA Shares Stock (1) Earnings AOCI (2) Total ------------------------ --------- --------- -------- -------- -------- Balance, January 1, 2005 4,710,194 $54,133 $ 7,992 $ 99 $ 62,224 Net income, 2005 8,324 8,324 Other comprehensive income (loss): Net change in unrealized gains (losses) on securities available for sale, net of reclass adjustments for realized gains (losses) and related taxes (368) (368) -------- Total comprehensive income 7,956 Cash dividends declared, $0.678 per share (3,545) (3,545) Five percent stock dividend declared 237,362 7,952 (7,952) -- Common stock transactions 38,920 527 527 Tax effect of options exercised 265 265 Director and management deferred stock plans 309 (114) 195 --------- ------- ------- ----- -------- Balance, December 31, 2005 4,986,476 $63,186 $ 4,705 $(269) $ 67,622 Net income, 2006 8,972 8,972 Other comprehensive income (loss): Net change in unrealized gains (losses) on securities available for sale, net of reclass adjustments for realized gains (losses) and related taxes 337 337 -------- Total comprehensive income 9,309 Cash dividends declared, $0.551 per share (2,894) (2,894) Five percent stock dividend declared 249,944 7,280 (7,280) -- Common stock transactions 11,012 277 277 Tax effect of options exercised 28 28 Director and management deferred stock plans 304 (110) 194 --------- ------- ------- ----- -------- Balance, December 31, 2006 5,247,432 $71,075 $ 3,393 $ 68 $ 74,536 Net income, 2007 5,582 5,582 Other comprehensive income (loss): Net change in unrealized gains (losses) on securities available for sale, net of reclass adjustments for realized gains (losses) and related taxes 225 225 -------- Total comprehensive income 5,807 Cash dividends declared, $0.79 per share (4,113) (4,113) Common stock transactions 25,551 423 423 Purchase of common stock (180,753) (3,873) (3,873) Tax effect of options exercised 20 20 Director and management deferred stock plans 215 (48) 167 --------- ------- ------- ----- -------- Balance, December 31, 2007 5,092,230 $67,860 $ 4,814 $ 293 $ 72,967 ========= ======= ======= ===== ========
(1) Includes Paid In Capital (2) Accumulated Other Comprehensive Income (Loss), Net of Tax The accompanying notes are an integral part of these consolidated financial statements. Page A-25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS United Bancorp, Inc. and Subsidiaries NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS AND BASIS OF PRESENTATION The consolidated financial statements include the accounts of United Bancorp, Inc. and its wholly owned subsidiaries, United Bank & Trust, United Bank & Trust - Washtenaw and United Structured Finance Company, after elimination of significant intercompany transactions and accounts. The Company is engaged 100% in the business of commercial and retail banking, including insurance, and trust and investment services, with operations conducted through its offices located in Lenawee, Washtenaw, and Monroe Counties in southeastern Michigan. These counties are the source of substantially all of the Company's deposit, loan, insurance and trust activities. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period as well as affecting the disclosures provided. Actual results could differ from those estimates. The allowance for loan losses and the fair values of financial instruments are particularly subject to change. SECURITIES Securities available for sale consist of bonds and notes which might be sold prior to maturity. Securities classified as available for sale are reported at their fair values and the related net unrealized holding gain or loss is reported in other comprehensive income. Other securities such as Federal Home Loan Bank stock are carried at cost. Premiums and discounts on securities are recognized in interest income using the interest method over the period to maturity. Realized gains or losses are based upon the amortized cost of the specific securities sold. LOANS HELD FOR SALE Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or market value in the aggregate. Net unrealized losses, if any, are recognized in a valuation allowance by charges to income. LOANS Loans that Management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and the allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Loans are placed on non-accrual status at ninety days or more past due and interest is considered a loss, unless the loan is well-secured and in the process of collection. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level believed adequate by Management to absorb probable incurred credit losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, amount and composition of the loan portfolio, and other factors. The allowance is increased by provisions for loan losses charged to income. Loan losses are charged against the allowance when Management believes the uncollectability of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance. Page A-26 Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate, or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require increase, such increase is reported as a component of the provision for loan losses. Loans are evaluated for impairment when payments are delayed or when the internal grading system indicates a substandard or doubtful classification. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, including the Banks' loans to the borrower, the loan is evaluated for impairment. Often this is associated with a delay or shortfall of payments of thirty days or more. Loans are generally moved to nonaccrual status when ninety days or more past due or in bankruptcy. These loans are often also considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. This typically occurs when the loan is 120 or more days past due unless the loan is both well-secured and in the process of collection. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation. The provisions for depreciation are computed principally by the straight line method, based on useful lives of ten to forty years for premises and three to eight years for equipment. OTHER REAL ESTATE OWNED Other real estate consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure and property acquired for possible future expansion. Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value, less estimated selling costs, at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed and the real estate is carried at the lower of cost basis or fair value, less estimated selling costs. The historical average holding period for such properties is less than eighteen months. As of December 31, 2007 and 2006, other real estate owned totaled $2,253,000 and $1,063,000, and is included in other assets on the consolidated balance sheets. GOODWILL Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. SERVICING RIGHTS Servicing rights are recognized as assets for the allocated value of retained servicing on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates, remaining loan terms and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. LONG-TERM ASSETS Long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are written down to discounted amounts. Page A-27 INCOME TAX The Company records income tax expense based on the amount of taxes due on its tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates, adjusted for allowances made for uncertainty regarding the realization of deferred tax assets. The Company has no uncertain tax positions as defined by Financial Accounting Standards Board Interpretation No. 48. EARNINGS PER SHARE Amounts reported as earnings per share are based upon the weighted average number of shares outstanding plus the weighted average number of contingently issuable shares associated with the Directors' and Senior Management Group's deferred stock plans. In 2007 the company paid a 100% stock dividend, and in 2006 and 2005, the Company paid five percent stock dividends. Earnings per share, dividends per share, and weighted average shares have been restated to reflect the stock dividends. In years prior to 2006, cash dividends were declared in the last month of the quarter, payable the end of the month following quarter-end. Effective with the first quarter of 2006, cash dividends are declared and are payable in the month following the end of the quarter. As a result of this change in schedule, the cash dividend declared in December of 2005 was paid in January, 2006, but no dividends were declared in the first quarter of 2006. While this change in procedure has not changed the number of dividends to be paid during the calendar year, for 2006 the number of cash dividends declared during the calendar year has been reduced by one. STOCK BASED COMPENSATION At December 31, 2007, the Company has a stock-based employee compensation plan, which is described more fully in Note 16. Prior to 2006, the Company accounted for this plan under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. Accordingly, in 2005, no stock based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock at the grant date. Effective January 1, 2006 the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, "Share Based Payment". The Company selected the modified prospective application. Accordingly, after December 31, 2005 the Company began expensing the fair value of stock options granted, modified, repurchased or cancelled. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation as of December 31, 2004.
In thousands of dollars, except per share data 2005 ---------------------------------------------- ------ Net income, as reported $8,324 Less: Total stock-based employee compensation cost determined under the fair value based method, net of taxes (128) ------ Pro forma net income $8,196 Earning per share: Basic As reported $ 1.58 Basic Pro forma 1.55 Diluted As reported 1.57 Diluted Pro forma 1.54 ------
Page A-28 For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Based on the use of estimates and the subjective nature of the assumptions used, the information presented above may not be representative of the pro forma impact in future years. STATEMENTS OF CASH FLOWS For purposes of this Statement, cash and cash equivalents include cash on hand, demand balances with banks, and federal funds sold. Federal funds are generally sold for one day periods. The Company reports net cash flows for client loan and deposit transactions, deposits made with other financial institutions, and short term borrowings with an original maturity of ninety days or less. COMPREHENSIVE INCOME Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes net unrealized gains and losses on securities available for sale, net of tax, which are also recognized as separate components of shareholders' equity. INDUSTRY SEGMENT The Company and its subsidiaries are primarily organized to operate in the banking industry. Substantially all revenues and services are derived from banking products and services in southeastern Michigan. While the Company's chief decision makers monitor various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company's banking operations are considered by Management to be aggregated in one business segment. NOTE 2 - RESTRICTIONS ON CASH AND DEMAND BALANCES IN OTHER BANKS The Banks are subject to average reserve and clearing balance requirements in the form of cash on hand or balances due from the Federal Reserve Bank. These reserve balances vary depending on the level of client deposits in the Banks. The amount of reserve and clearing balances required at December 31, 2007 totaled approximately $594,000. NOTE 3 - SECURITIES The fair value of securities as of December 31, 2007 and 2006 are as follows, in thousands of dollars:
SECURITIES AVAILABLE FOR SALE Fair Value Gains Losses ----------------------------- ---------- ----- ------ 2007 U.S. Treasury and agency securities $33,532 $183 $ (25) Mortgage backed agency securities 13,051 72 (65) Obligations of states and political subdivisions 36,128 356 (131) Corporate, asset backed and other securities 3,187 45 -- ------- ---- ------ Total $85,898 $656 $(221) ======= ==== ====== 2006 U.S. Treasury and agency securities $38,380 $ 62 $(116) Mortgage backed agency securities 13,945 19 (81) Obligations of states and political subdivisions 40,369 374 (231) Corporate, asset backed and other securities 3,117 75 -- ------- ---- ------ Total $95,811 $530 $(428) ======= ==== ======
Page A-29 The Company's temporarily impaired investment securities as of December 31, 2007 and 2006 are shown below.
Less than 12 Months 12 Months or Longer Total ------------------- ------------------- ------------------- In thousands of dollars Fair Value Losses Fair Value Losses Fair Value Losses ----------------------- ---------- ------ ---------- ------ ---------- ------ 2007 U.S. Treasury and agency securities $ 2,010 $(24) $ 2,997 $ (1) $ 5,007 $ (25) Mortgage backed agency securities -- -- 3,148 (65) 3,148 (65) Obligations of states and political subdivisions 660 (6) 10,687 (125) 11,347 (131) ------- ---- ------- ----- ------- ----- Total $ 2,670 $(30) $16,832 $(191) $19,502 $(221) ======= ==== ======= ===== ======= ===== 2006 U.S. Treasury and agency securities $ 9,386 $(28) $13,622 $ (87) $23,008 $(115) Mortgage backed agency securities 2,777 (28) 5,840 (53) 8,617 (81) Obligations of states and political subdivisions 3,874 (26) 17,836 (206) 21,710 (232) ------- ---- ------- ----- ------- ----- Total $16,037 $(82) $37,298 $(346) $53,335 $(428) ======= ==== ======= ===== ======= =====
Unrealized losses within the investment portfolio are temporary, as they are a result of market changes rather than a reflection of credit quality. Management has no specific intent to sell any securities, although the entire investment portfolio is classified as available for sale. Sales activities for securities for the years indicated are shown in the following table. All sales were of securities identified as available for sale.
In thousands of dollars 2007 2006 2005 ----------------------- ---- ---- ---- Sales proceeds $-- $164 $-- Gross gains on sales -- -- -- --- ---- --- Gross gains (losses) on calls 9 12 (1) === ==== ===
The fair value of securities available for sale by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities are included in periods based on their estimated lives.
In thousands of dollars Fair Value ----------------------- ---------- As of December 31, 2007 Due in one year or less $36,022 Due after one year through five years 32,651 Due after five years through ten years 12,678 Due after ten years 1,360 Equity securities 3,187 ------- Total securities $85,898 =======
Securities carried at $8,529,000 and $15,122,000 as of December 31, 2007 and 2006 were pledged to secure deposits of public funds, funds borrowed, repurchase agreements, and for other purposes as required by law. Page A-30 NOTE 4 - LOANS The table below shows total loans outstanding, including loans held for sale, at December 31. All loans are domestic and contain no concentrations by industry or client.
In thousands of dollars 2007 2006 ----------------------- -------- -------- Personal $ 98,075 $ 91,002 Business, including commercial mortgages 376,637 327,928 Tax exempt 2,709 2,841 Residential mortgage 86,023 79,864 Residential mortgages held for sale 5,770 5,772 Commercial construction and development 81,086 94,356 -------- -------- Total loans $650,300 $601,763 ======== ========
Accruing loans delinquent ninety days or more totaled $1,455,000 and $855,000 at December 31, 2007 and 2006. Non-accruing loans at December 31, 2007 and 2006 were $13,695,000 and $5,427,000. NOTE 5 - ALLOWANCE FOR LOAN LOSSES An analysis of the allowance for loan losses for the years ended December 31 follows:
In thousands of dollars 2007 2006 2005 ----------------------- ------- ------ ------ Balance, January 1 $ 7,849 $6,361 $5,766 Loans charged off (4,290) (762) (879) Recoveries credited to allowance 110 127 142 Provision charged to operations 8,637 2,123 1,332 ------- ------ ------ Balance, December 31 $12,306 $7,849 $6,361 ======= ====== ======
Information regarding impaired loans for the years ended December 31 follows:
In thousands of dollars 2007 2006 2005 ----------------------- ------- ------- ------ Average investment in impaired loans $17,031 $ 8,439 $8,295 Interest income recognized on impaired loans 545 481 216 Interest income recognized on a cash basis 545 481 216 Balance of impaired loans at December 31 $24,692 $10,219 $7,957 Portion for which no allowance for loan losses is allocated 1,121 2,101 2,394 Portion for which an allowance for loan losses is allocated 23,571 8,118 5,563 Portion of allowance for loan losses allocated to impaired loans 6,055 2,044 1,087
NOTE 6 - LOAN SERVICING Loans serviced for others are not included in the accompanying consolidated financial statements. The unpaid principal balance of loans serviced for others was $248,922,000 and $230,066,000 at December 31, 2007 and 2006. The balance of loans serviced for others related to servicing rights that have been capitalized was $249,270,000 and $225,629,000 at December 31, 2007 and 2006. No valuation allowance was considered necessary at December 31, 2007 and 2006. Unamortized cost of mortgage servicing rights included in accrued interest receivable and other assets on the consolidated balance sheet, for the years ended December 31 was as follows:
In thousands of dollars 2007 2006 2005 ----------------------- ------ ------ ------ Balance, January 1 $1,541 $1,645 $1,820 Amount capitalized 386 131 171 Amount amortized (204) (235) (346) ------ ------ ------ Balance, December 31 $1,723 $1,541 $1,645 ====== ====== ======
Page A-31 NOTE 7 - PREMISES AND EQUIPMENT Depreciation expense was approximately $1,281,000 in 2007, $1,251,000 in 2006 and $1,275,000 in 2005. Premises and equipment as of December 31 consisted of the following:
In thousands of dollars 2007 2006 ----------------------- -------- -------- Land $ 1,863 $ 1,580 Buildings and improvements 14,536 14,452 Furniture and equipment 13,601 13,076 -------- -------- Total cost 30,000 29,108 Less accumulated depreciation (16,840) (15,893) -------- -------- Premises and equipment, net $ 13,160 $ 13,215 ======== ========
The company has several noncancellable operating leases, primarily for banking facilities, that expire over the next fifteen years. The leases generally contain renewal options for periods ranging from one to five years. Rental expense for these leases was $885,000, $759,000 and $710,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Future minimum lease payments under operating leases are shown in the table below: In thousands of dollars 2008 $ 970 2009 943 2010 915 2011 923 2012 938 Thereafter 3,043 ------ Total Minimum Lease Payments $7,732 ======
NOTE 8 - GOODWILL The Company follows the provisions of Statement of Financial Accounting Standards No. 142 and Statement of Financial Accounting Standards No. 147 with regard to accounting and financial reporting for goodwill and other intangible assets. There was no impairment of goodwill in 2007, 2006 or 2005. NOTE 9 - DEPOSITS Information relating to maturities of time deposits as of December 31 is summarized below:
In thousands of dollars 2007 2006 ----------------------- -------- -------- Within one year $200,832 $160,815 Between one and two years 46,961 46,583 Between two and three years 14,179 19,501 Between three and four years 2,061 1,116 Between four and five years 2,857 1,274 More than five years -- -- -------- -------- Total time deposits $266,890 $229,289 ======== ======== Interest bearing time deposits in denominations of $100,000 or more $122,266 $102,492 ======== ========
NOTE 10 - SHORT TERM BORROWINGS The Company has several credit facilities in place for short term borrowing which are used on occasion as a source of liquidity. These facilities consist of borrowing authority totaling $47.9 million from correspondent banks to purchase federal funds on a daily basis. There were no fed funds purchased outstanding at December 31, 2007 and 2006. Page A-32 The Banks may also enter into sales of securities under agreements to repurchase ("repurchase agreements"). These agreements generally mature within one to 120 days from the transaction date. U.S. Treasury, agency and other securities involved with the agreements are recorded as assets and are generally held in safekeeping by correspondent banks. Repurchase agreements are offered principally to certain clients as an investment alternative to deposit products. The maximum amount of outstanding agreements at any month end during 2007 and 2006 totaled $77,000 and $77,000 and the daily average of such agreements totaled $30,000 and $76,000. The balance outstanding at December 31, 2007 and 2006 was $0 and $77,000. NOTE 11 - OTHER BORROWINGS The Banks carried fixed rate, noncallable advances from the Federal Home Loan Bank of Indianapolis totaling $44.6 million and $40.9 million at December 31, 2007 and 2006. As of December 31, 2007, the rates on the advances ranged from 2.93% to 6.18% with a weighted average rate of 4.69%. These advances are primarily collateralized by residential mortgage loans under a blanket security agreement. The unpaid principal balance of the loans pledged as collateral must equal at least 145% of the funds advanced. Interest payments are made monthly, with principal due annually and at maturity. If principal payments are paid prior to maturity, advances are subject to a prepayment penalties. Maturities and scheduled principal payments for other borrowings over the next five years as of December 31 are shown below.
In thousands of dollars 2007 ----------------------- ------- Within one year $10,428 Between one and two years 18,530 Between two and three years 11,500 Between three and four years -- Between four and five years 2,000 More than five years 2,153 ------- Total $44,611 =======
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Banks are party to financial instruments with off-balance-sheet risk in the normal course of business to meet financing needs of their clients. These financial instruments include commitments to make loans, unused lines of credit, and letters of credit. The Banks' exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Banks follow the same credit policy to make such commitments as is followed for loans and investments recorded in the consolidated financial statements. The Banks' commitments to extend credit are agreements at predetermined terms, as long as the client continues to meet specified criteria, with fixed expiration dates or termination clauses. The following table shows the commitments to make loans and the unused lines of credit available to clients at December 31:
2007 2006 ------------------ ------------------ Variable Fixed Variable Fixed In thousands of dollars Rate Rate Rate Rate ----------------------- -------- ------- -------- ------- Commitments to make loans $ 9,260 $ 7,628 $ 11,006 $13,760 Unused lines of credit 100,502 21,245 116,449 9,614 Standby letters of credit 15,937 -- 12,882 --
Commitments to make loans generally expire within thirty to ninety days, while unused lines of credit expire at the maturity date of the individual loans. At December 31, 2007, the rates for amounts in the fixed rate category ranged from 5.62% to 8.07%. Page A-33 In December 2001, United Bank & Trust entered into a limited partnership agreement to purchase tax credits awarded from the construction, ownership and management of an affordable housing project and a residual interest in the real estate. As of December 31, 2007 and 2006, the total recorded investment including the obligation to make additional future investments amounted to $1,365,000 and $1,589,000 and was included in other assets. As of December 31, 2007 and 2006, the obligation of UBT to the limited partnership amounted to $1,372,000 and $1,632,000 which was reported in other liabilities. While UBT is a 99% partner, the investment is accounted for on the equity method as UBT is a limited partner and has no control over the operation and management of the partnership or the affordable housing project. NOTE 13 - FEDERAL INCOME TAX Income tax expense consists of the following for the years ended December 31:
In thousands of dollars 2007 2006 2005 ----------------------- ------- ------ ------ Current $ 2,925 $3,834 $2,868 Deferred (1,290) (414) 313 ------- ------ ------ Total income tax expense $ 1,635 $3,420 $3,181 ======= ====== ======
The components of deferred tax assets and liabilities at December 31, are as follows:
In thousands of dollars 2007 2006 ----------------------- ------- ------- Deferred tax assets: Allowance for loan losses $4,184 $2,669 Deferred compensation 547 592 Other 274 179 ------ ------ Total deferred tax assets 5,005 3,440
2007 2006 ------- ------- Deferred tax liabilities: Property and equipment (403) (428) Mortgage servicing rights (576) (524) Unrealized appreciation on securities available for sale (143) (35) Other (1,509) (1,269) ------- ------- Total deferred tax liabilities (2,631) (2,256) ------- ------- Net deferred tax asset $ 2,374 $ 1,184 ======= =======
No valuation allowance was considered necessary at December 31, 2007 and 2006. A reconciliation between total federal income tax and the amount computed through the use of the federal statutory tax rate for the years ended is as follows:
In thousands of dollars 2007 2006 2005 ----------------------- ------ ------ ------ Income taxes at statutory rate of 34% $2,454 $4,213 $3,912 Non-taxable income, net of nondeductible interest expense (487) (479) (427) Income on non-taxable bank owned life insurance (157) (139) (135) Affordable housing credit (188) (188) (184) Other 13 13 15 ------ ------ ------ Total federal income tax $1,635 $3,420 $3,181 ====== ====== ======
NOTE 14 - RELATED PARTY TRANSACTIONS Certain directors and executive officers of the Company and the Banks, including their immediate families and companies in which they are principal owners, are clients of the Banks. Loans to these parties did not, in the opinion of Management, involve more than normal credit risk or present other Page A-34 unfavorable features. The aggregate amount of these loans at December 31, 2006 was $37,851,000. During 2007, new and newly reportable loans to such related parties amounted to $11,818,000 and repayments amounted to $11,098,000, resulting in a balance at December 31, 2007 of $38,571,000. Related party deposits totaled $9,526,000 and $14,577,000 at December 31, 2007 and 2006. NOTE 15 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES Banking laws and regulations restrict the amount the Banks can transfer to the Company in the form of cash dividends and loans. At December 31, 2007, $17.4 million of retained earnings of the Banks were available for distribution to the Company as dividends without prior regulatory approval. It is not the intent of Management to pay dividends in amounts which would reduce the capital of the Banks to a level below that which is considered prudent by Management and in accordance with the guidelines of regulatory authorities. NOTE 16 - EMPLOYEE BENEFIT PLANS EMPLOYEE SAVINGS PLAN The Company maintains a 401(k) employee savings plan ("plan") which is available to substantially all employees. Individual employees may make contributions to the plan up to 100% of their compensation up to a maximum of $15,500 for 2007 and $15,000 for 2006 and 2005. The Banks offers discretionary matching of funds for a percentage of the employee contribution, plus an amount based on Company earnings. The expense for the plan for 2007, 2006, and 2005 was $486,000, $974,000 and $918,000. The plan offers employees the option of purchasing Company stock with the match portion of their 401(k) contribution. On that basis 4,136 shares in 2007, 4,386 shares in 2006 and 4,712 shares in 2005 of United Bancorp, Inc. common stock were issued to the 401(k) plan for the benefit of plan participants who so elected Company stock for their match. DIRECTOR RETAINER STOCK PLAN The Company maintains a deferred compensation plan designated as the Director Retainer Stock Plan ("Director Plan"). The plan provides eligible directors of the Company and the Banks with a means of deferring payment of retainers and certain fees payable to them for Board service. Under the Director Plan, any retainers or fees elected to be deferred under the plan by an eligible director ultimately will be payable in common stock at the time of payment. SENIOR MANAGEMENT BONUS DEFERRAL STOCK PLAN The Company maintains a deferred compensation plan designated as the Senior Management Bonus Deferral Stock Plan ("Management Plan"). The Management Plan has essentially the same purposes as the Director Plan discussed above and permits eligible employees of the Company and its affiliates to elect cash bonus deferrals and, after employment termination, to receive payouts in whole or in part in the form of common stock on terms substantially similar to those of the Director Plan. STOCK OPTIONS In 2004, Shareholders approved the Company's 2005 Stock Option Plan (the "2005 Plan"), which became effective January 1, 2005. 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 the market price at the time the options are granted. The 2005 Plan replaced the 1999 Stock Option Plan ("the 1999 Plan"), under which no more options are to be granted. Page A-35 The stock subject to the options are shares of authorized and unissued common stock of the Company. As defined in the 2005 Plan, options representing no more than 385,875 shares (adjusted for stock dividends declared) are to be made available to the plan. 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 table summarizes option activity for the 1999 Plan and the 2005 Plan during 2007, 2006 and 2005, adjusted for stock dividends:
2007 2006 2005 ----------------------- ----------------------- ----------------------- Weighted Weighted Weighted Average Average Average Options Exercise Price Options Exercise Price Options Exercise Price ------- -------------- ------- -------------- ------- -------------- Balance, January 1 286,986 $26.60 254,384 $25.96 222,652 $21.79 Options granted 49,200 22.43 59,050 28.86 112,350 30.42 Options exercised (15,076) 18.54 (12,788) 21.49 (76,026) 20.30 Options forfeited (15,997) 28.23 (13,660) 29.31 (4,592) 26.53 ------- ------ ------- ------ ------- ------ Balance, December 31 305,113 $26.22 286,986 $26.60 254,384 $25.96 ======= ====== ======= ====== ======= ====== Options exercisable at year-end 190,431 $25.98 146,934 $23.90 91,248 $20.74 Weighted average fair value of options granted during the year $ 2.58 $ 3.56 $ 3.24 ====== ====== ======
The following table provides information regarding stock options under the 2005 Plan at December 31, 2007:
Options Outstanding Options Exercisable ------------------------------------------------ ---------------------------- Weighted Weighted Weighted Number Average Remaining Average Number Average Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price ------------------------ ----------- ----------------- -------------- ----------- -------------- $17.06 to $32.14 305,113 6.70 Years $26.22 190,431 $25.98
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
2007 2006 2005 ------- ------- ------- Dividend yield 3.26% 2.45% 2.08% Expected life 5 years 5 years 5 years Expected volatility 11.61% 10.17% 8.67% Risk-free interest rate 4.68% 4.36% 3.64%
The Company has recorded approximately $205,000 and $222,000 in compensation expense related to vested stock options less estimated forfeitures for the periods ended December 31, 2007 and 2006, respectively. As of December 31, 2007, unrecognized compensation expense related to the stock options totaled $148,000 and is expected to be recognized over three years. At December 31, 2007, the total options outstanding had no aggregate intrinsic value. Intrinsic value represents the difference between the Company's closing stock price on the last day of trading for 2007 and the exercise price multiplied by the number of in-the-money options assuming all option holders had exercised their stock options on December 31, 2007. The aggregate intrinsic value of stock options exercised during 2007 was $59,000. Exercise of options during this same period resulted in cash receipts of $137,000 and the Company recognized a tax benefit of approximately $20,000 on the exercise of these options and has been recorded as an increase in equity. Page A-36 NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair value of principal financial assets and liabilities were as follows:
As of December 31, 2007 2006 ---------------------- ---------------------- Carrying Carrying In thousands of dollars Value Fair Value Value Fair Value ----------------------- --------- ---------- --------- ---------- Financial Assets Cash and cash equivalents $ 29,126 $ 29,126 $ 21,376 $ 21,376 Securities available for sale 85,898 85,898 95,811 95,811 Loans held for sale 5,770 5,770 5,772 5,772 Net loans 632,224 639,181 588,142 591,045 Accrued interest receivable 4,097 4,097 4,523 4,523 Financial Liabilities Total deposits $(671,537) $(671,804) $(628,002) $(628,945) Short term borrowings -- -- (77) (77) Other borrowings (44,611) (45,252) (40,945) (40,656) Accrued interest payable 3,149 3,149 1,952 1,952
Estimated fair values require subjective judgments and are approximate. The above estimates of fair value are not necessarily representative of amounts that could be realized in actual market transactions, nor of the underlying value of the Company. Changes in the following methodologies and assumptions could significantly affect the estimated fair value: Cash and cash equivalents, accrued interest receivable and accrued interest payable - Due to the short periods to maturity, the carrying amounts are reasonable estimates of the fair values of these instruments at the respective balance sheet dates. Securities available for sale - Fair values for securities available for sale are based on quoted market prices, if available. If quoted values are not available, the estimated fair value is determined by using quoted market prices for similar securities. Net loans - The carrying amount is a reasonable estimate of fair value for personal loans for which rates adjust quarterly or more frequently, and for business and tax exempt loans which are prime related and for which rates adjust immediately or quarterly. The fair value for residential mortgage loans which are held for sale on the secondary market is the price offered by the secondary market purchaser. The fair value of all other loans is estimated by discounting future cash flows using current rates for loans with similar characteristics and maturities. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. Total deposits - With the exception of certificates of deposit, the carrying value is deemed to be the fair value due to the demand nature of the deposits. The fair value of fixed maturity certificates of deposit is estimated by discounting future cash flows using the current rates paid on certificates of deposit with similar maturities. Short term borrowings - The carrying value is a reasonable approximation of fair value. Other borrowings - The fair value is estimated by discounting future cash flows using current rates on advances with similar maturities. Off-balance-sheet financial instruments - Commitments to extend credit, standby letters of credit and undisbursed loans are deemed to have no material fair value as such commitments are generally fulfilled at current market rates. Page A-37 NOTE 18 - REGULATORY CAPITAL REQUIREMENTS The Company and Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum ratios of Total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. The Company and the Banks were categorized as well-capitalized at year end 2007 and 2006 by their regulators. Management is not aware of any conditions or events that have occurred since year end that would change this classification. The following table shows the Company's and the Banks' capital ratios and the Company's amounts compared to regulatory requirements at year end, and the amounts by which the Company's capital, on a consolidated basis, exceeds regulatory requirements. Dollars are shown in thousands of dollars where appropriate.
Tier I Capital to: ------------------ Risk Total Capital to Average Weighted Risk Weighted Assets Assets Assets ------- -------- ---------------- Regulatory Minimum for Capital Adequacy (1) 4.0% 4.0% 8.0% Regulatory Minimum to be Well Capitalized (2) 5.0% 6.0% 10.0% ------- ------- ------- As of December 31, 2007 United Bancorp, Inc. (consolidated) 8.7% 10.5% 11.8% United Bank & Trust 8.0% 10.5% 11.8% United Bank & Trust - Washtenaw 8.7% 9.4% 10.6% United Bancorp, Inc. consolidated equity $69,205 $69,205 $77,462 Regulatory requirement for minimum capital adequacy (1) 31,827 26,306 52,613 ------- ------- ------- Capital in excess of regulatory minimums 37,378 $42,899 $24,849 ======= ======= ======= As of December 31, 2006 United Bancorp, Inc. (consolidated) 9.8% 11.6% 12.9% United Bank & Trust 9.2% 12.0% 13.4% United Bank & Trust - Washtenaw 9.5% 9.9% 11.1% United Bancorp, Inc. consolidated equity $70,999 $70,999 $78,848 Regulatory requirement for minimum capital adequacy (1) 29,199 24,497 48,994 ------- ------- ------- Capital in excess of regulatory minimums 41,800 $46,502 $29,854 ======= ======= =======
(1) Represents minimum required to be considered adequately capitalized under Federal regulatory requirements. (2) Represents minimum required to be considered well-capitalized under Federal regulatory prompt corrective action provisions. Page A-38 NOTE 19 - EARNINGS PER SHARE A reconciliation of basic and diluted earnings per share follows:
In thousands of dollars, except per share data 2007 2006 2005 ---------------------------------------------- ---------- ---------- ---------- Net income $ 5,582 $ 8,972 $ 8,324 Basic earnings per share: Weighted average common shares outstanding 5,190,868 5,246,938 5,228,138 Weighted average contingently issuable shares 59,743 55,920 54,204 ---------- ---------- ---------- 5,250,611 5,302,858 5,282,342 Basic earnings per share $ 1.06 $ 1.69 $ 1.58 ---------- ---------- ---------- Diluted earnings per share: Weighted average common shares outstanding from basic earnings per share 5,250,611 5,302,858 5,282,342 Dilutive effect of stock options -- -- 33,004 ---------- ---------- ---------- 5,250,611 5,302,858 5,315,346 Diluted earnings per share $ 1.06 $ 1.69 $ 1.57 ========== ========== ==========
Stock options for 263,808, 200,392 and 2,000 shares of common stock were not considered in computing diluted earnings per share for 2007, 2006 and 2005 because they were not dilutive. NOTE 20 - OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related taxes were as follows:
In thousands of dollars 2007 2006 2005 ----------------------- ---- ---- ----- Unrealized gains (losses) on securities available for sale $350 $523 $(559) Reclassification for realized amount included in income 9 12 (1) ---- ---- ----- Other comprehensive income (loss), before tax effect 341 511 (558) Tax expense (benefit) 116 174 (190) ---- ---- ----- Other comprehensive income (loss) $225 $337 $(368) ==== ==== =====
NOTE 21 - PARENT COMPANY ONLY FINANCIAL INFORMATION The condensed financial information for United Bancorp, Inc. is summarized below. CONDENSED BALANCE SHEETS
December 31, ----------------- In thousands of dollars 2007 2006 ----------------------- ------- ------- ASSETS Cash and cash equivalents $ 602 $ 715 Investment in subsidiaries 69,599 72,012 Other assets 3,684 3,351 ------- ------- TOTAL ASSETS $73,885 $76,078 ======= ======= Liabilities and Shareholders' Equity Liabilities $ 918 $ 1,542 Shareholders' equity 72,967 74,536 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $73,885 $76,078 ======= =======
Page A-39 CONDENSED STATEMENTS OF INCOME
For the years ended December 31, --------------------------- In thousands of dollars 2007 2006 2005 ----------------------- ------- ------- ------- INCOME Dividends from subsidiaries $ 9,250 $ 4,425 $ 6,775 Other income 8,664 7,991 6,758 ------- ------- ------- TOTAL INCOME 17,914 12,416 13,533 TOTAL NONINTEREST EXPENSE 8,679 8,418 7,125 ------- ------- ------- Income before undistributed net income of subsidiaries and income taxes 9,235 3,998 6,408 Income tax benefit (1) (141) (121) ------- ------- ------- Net income before undistributed net income of subsidiaries 9,236 4,139 6,529 Equity in undistributed (excess distributed) net income of subsidiaries (3,654) 4,833 1,795 ------- ------- ------- NET INCOME 5,582 8,972 8,324 Net change in unrealized gains on securities available for sale 225 337 (368) ------- ------- ------- Other comprehensive income (loss) 225 337 (368) ------- ------- ------- COMPREHENSIVE INCOME $ 5,807 $ 9,309 $ 7,956 ======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, --------------------------- In thousands of dollars 2007 2006 2005 ----------------------- ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 5,582 $ 8,972 $ 8,324 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES (Undistributed) excess distributed net income of subsidiaries 3,654 (4,833) (1,795) Stock option expense 205 222 -- Change in other assets (104) (232) 2,571 Change in other liabilities (626) 236 418 ------- ------- ------- Total adjustments 3,129 (4,607) 1,194 ------- ------- ------- Net cash from operating activities 8,711 4,365 9,518 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available for sale -- -- -- Investments in subsidiaries (1,000) (1,500) (3,900) Net premises and equipment expenditures (243) 233 (2,008) ------- ------- ------- Net cash from investing activities (1,243) (1,267) (5,908) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from common stock transactions 405 277 987 Purchase of common stock (3,873) -- -- Dividends paid (4,113) (3,817) (3,447) ------- ------- ------- Net cash from financing activities (7,581) (3,540) (2,460) ------- ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (113) (442) 1,150 Cash and cash equivalents at beginning of year 715 1,157 7 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 602 $ 715 $ 1,157 ======= ======= =======
Page A-40 NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial information is summarized below.
Earnings (Loss) Per Share In thousands of dollars, Interest Net Interest Net ---------------- except per share data Income Income Income (Loss) Basic Diluted ------------------------ -------- ------------ ------------- ------ ------- 2007 First Quarter $12,353 $ 7,291 $1,726 $ 0.33 $ 0.33 Second Quarter 12,880 7,478 2,267 0.43 0.43 Third Quarter 13,322 7,580 2,338 0.45 0.45 Fourth Quarter 13,078 7,411 (750) (0.15) (0.15) ------- ------- ------ ------ ------ Full Year $51,634 $29,761 $5,582 $ 1.06 $ 1.06 2006 First Quarter $11,031 $ 7,203 $2,145 $ 0.40 $ 0.40 Second Quarter 11,484 7,199 2,184 0.41 0.41 Third Quarter 12,167 7,428 2,446 0.46 0.46 Fourth Quarter 12,374 7,424 2,197 0.41 0.41 ------- ------- ------ ------ ------ Full Year $47,056 $29,254 $8,972 $ 1.69 $ 1.69 ======= ======= ====== ====== ======
The significant decrease in net income for the fourth quarter of 2007 is primarily a result of the additional expense related to the Company's provision for loan losses. Page A-41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. /s/ Robert K. Chapman February 22, 2008 ------------------------------------- Date Robert K. Chapman, President and Chief Executive Officer, Director Page 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert K. Chapman and Randal J. Rabe, and each of them, his true and lawful attorney(s)- in-fact and agent(s), with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this report and to file the same, with all exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney(s)-in-fact and agent(s) full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney(s)- in-fact and agent(s), or their substitute(s), may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on February 22, 2008. /s/ Stephanie H. Boyse /s/ James C. Lawson --------------------------------------- -------------------------------------------- Stephanie H. Boyse, Director James C. Lawson, Director /s/ James D. Buhr /s/ Donald J. Martin --------------------------------------- -------------------------------------------- James D. Buhr, Director Donald J. Martin, Director /s/ Joseph D. Butcko /s/ Robert G. Macomber --------------------------------------- -------------------------------------------- Joseph D. Butcko, Director Robert G. Macomber, Director /s/ Robert K. Chapman /s/ David E. Maxwell --------------------------------------- -------------------------------------------- Robert K. Chapman (Principal Executive David E. Maxwell, Director Officer) Director, President and Chief Executive Officer /s/ Kathryn M. Mohr -------------------------------------------- /s/ John H. Foss Kathryn M. Mohr, Director --------------------------------------- John H. Foss, Director /s/ Randal J. Rabe -------------------------------------------- /s/ David S. Hickman Randal J. Rabe (Principal Financial Officer) --------------------------------------- Executive Vice President & Chief Financial David S. Hickman, Chairman of the Board Officer
Page 25 EXHIBIT INDEX
Exhibit No. Description Page No. ----------- ------------ -------- 3(a) Restated Articles of Incorporation of United Bancorp, Inc., filed as Exhibit (4)(a) to registrant's registration statement on Form S-8 (File Number 333-03305) dated May 8, 1996, and incorporated herein by reference. 3(b) Bylaws of United Bancorp, Inc., filed as Exhibit (4)(b) to registrant's registration statement on Form S-8 (File Number 333-03305) dated May 8, 1996, and incorporated herein by reference. 4(c) United Bancorp, Inc. Director Retainer Stock Plan, filed as Appendix A to registrant's proxy statement dated March 25, 1996 (file number 0-16640) and incorporated herein by reference. 4(d) United Bancorp, Inc. Senior Management Bonus Deferral Stock Plan, filed as Appendix B to registrant's proxy statement dated March 25, 1996 (file number 0-16640) and incorporated herein by reference. 4(e) United Bancorp, Inc. 1999 Stock Option Plan, filed as Appendix B to the Company's proxy statement dated March 24, 2000 (file number 0-16640) and incorporated herein by reference. 4(f) United Bancorp, Inc. 2005 Stock Option Plan, filed as Appendix B to the Company's proxy statement dated March 15, 2004 (file number 0-16640) and incorporated herein by reference. 10.1 Management Agreement effective January 1, 2006, between United Bancorp, Inc. and David S. Hickman, filed as Exhibit C to the Company's Form 8-K dated December 3, 2005 (file number 0-16640) and incorporated herein by reference. 10.2 Employment Agreement effective January 1, 2007, between United Bancorp, Inc. and Robert K. Chapman, filed as Exhibit 10.1 to the Company's Form 8-K dated January 10, 2007 (file number 0-16640) and incorporated herein by reference. 10.3 Employment Agreement effective January 1, 2007, between United Bancorp, Inc. and Randal J. Rabe, filed as Exhibit 10.2 to the Company's Form 8-K dated January 10, 2007 (file number 0-16640) and incorporated herein by reference. 10.4 Employment Agreement effective January 1, 2007, between United Bancorp, Inc. and Dale L. Chadderdon, filed as Exhibit 10.3 to the Company's Form 8-K dated January 10, 2007 (file number 0-16640) and incorporated herein by reference. 10.5 Employment Agreement effective January 1, 2007, between United Bancorp, Inc. and Todd C. Clark, filed as Exhibit 10.4 to the Company's Form 8-K dated January 10, 2007 (file number 0-16640) and incorporated herein by reference. 11 Statement re Computation of Per Share Earnings - this information is incorporated by reference in Note 1 on Page A-28 and Note 19 on Page A-39 hereof.
Page 26 Exhibits (continued) 14 Registrant's Code of Business Conduct and Ethics as adopted 28 December 9, 2003, in accordance with Section 406 of the Sarbanes-Oxley Act as amended. 21 Subsidiaries 31 23 Consent of Independent Registered Public Accounting Firm 32 24 Power of Attorney contained on the signature pages of the 2008 25 Annual Report on Form 10-K. 31.1 Certification of Principal Executive Officer 33 31.2 Certification of Principal Financial Officer 34 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted 35 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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