-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BjQcNo5to6PYAvco+tLaBrYP8P5TPX4L/p1xKI/E1jHarjLNyaDup1PjcYDhEoIb qvDZZbafIgRvR6DsJoUZNw== 0000950124-08-002033.txt : 20080425 0000950124-08-002033.hdr.sgml : 20080425 20080425163126 ACCESSION NUMBER: 0000950124-08-002033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20080331 FILED AS OF DATE: 20080425 DATE AS OF CHANGE: 20080425 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED BANCORP INC /MI/ CENTRAL INDEX KEY: 0000775345 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382606280 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16640 FILM NUMBER: 08778061 BUSINESS ADDRESS: STREET 1: 205 E CHICAGO BLVD STREET 2: PO BOX 248 CITY: TECUMSEH STATE: MI ZIP: 49286 BUSINESS PHONE: 5174238373 MAIL ADDRESS: STREET 1: 205 E CHICAGO BLVD STREET 2: P O BOX 248 CITY: TECUMSEH STATE: MI ZIP: 49286 10-Q 1 k26022e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED MARCH 31, 2008 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008 ---------- COMMISSION FILE #0-16640 UNITED BANCORP, INC. (Exact name of registrant as specified in its charter) MICHIGAN 38-2606280 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
205 E. CHICAGO BOULEVARD, TECUMSEH, MI 49286 (Address of principal executive offices, including Zip Code) Registrant's telephone number, including area code: (517) 423-8373 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. 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 Exchange Act. Yes [ ] No [X] As of April 11, 2008, there were outstanding 5,052,443 shares of the registrant's common stock, no par value. CROSS REFERENCE TABLE
PAGE ITEM NO. DESCRIPTION NO. - -------- ------------------------------------------------------------ ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) (a) Condensed Consolidated Balance Sheets 3 (b) Condensed Consolidated Statements of Income 4 (c) Condensed Consolidated Statements of Shareholders' Equity 5 (d) Condensed Consolidated Statements of Cash Flows 6 (e) Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Background 10 Executive Summary 11 Results of Operations 12 Financial Condition 16 Liquidity and Capital Resources 19 Critical Accounting Policies 20 Forward-Looking Statements 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk 21 Item 4. Controls and Procedures 22 PART II - OTHER INFORMATION Item 1. Legal Proceedings 22 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22 Item 6. Exhibits 23 Signatures 23 Exhibits 24
Exhibit 31.1 Exhibit 31.2 Exhibit 32.1 Page 2 PART I FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS (A) CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (unaudited) March 31 December 31, March 31, In thousands of dollars 2008 2007 2007 ----------- ------------ ----------- ASSETS Cash and demand balances in other banks $ 15,757 $ 17,996 $ 18,348 Federal funds sold -- 11,130 4,020 -------- -------- -------- Total cash and cash equivalents 15,757 29,126 22,368 Securities available for sale 90,739 85,898 90,991 Loans held for sale 6,070 5,770 3,258 Portfolio loans 654,965 644,530 611,845 Less allowance for loan losses 12,047 12,306 9,229 -------- -------- -------- Net portfolio loans 642,918 632,224 602,616 Premises and equipment, net 13,212 13,160 13,358 Goodwill 3,469 3,469 3,469 Bank-owned life insurance 12,076 11,961 11,605 Accrued interest receivable and other assets 13,633 14,079 12,808 -------- -------- -------- TOTAL ASSETS $797,874 $795,687 $760,473 ======== ======== ======== LIABILITIES Deposits Noninterest bearing $ 82,596 $ 77,878 $ 81,565 Interest bearing 584,927 593,659 554,848 -------- -------- -------- Total deposits 667,523 671,537 636,413 Federal funds purchased and other short term borrowings 7,500 -- 77 FHLB advances payable 42,991 44,611 42,627 Accrued interest payable and other liabilities 5,767 6,572 6,079 -------- -------- -------- TOTAL LIABILITIES 723,781 722,720 685,196 COMMITMENT AND CONTINGENT LIABILITIES SHAREHOLDERS' EQUITY Common stock and paid in capital, no par value; 10,000,000 shares authorized; 5,084,943, 5,092,230, and 5,242,472 shares issued and outstanding 67,733 67,860 71,030 Retained earnings 5,673 4,814 4,110 Accumulated other comprehensive income, net of tax 687 293 137 -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY 74,093 72,967 75,277 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $797,874 $795,687 $760,473 ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3 (B) CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, ----------------- In thousands of dollars, except per share data 2008 2007 -------- ------- INTEREST INCOME Interest and fees on loans $11,332 $11,153 Interest on securities Taxable 600 693 Tax exempt 364 381 Interest on federal funds sold 120 126 ------- ------- Total interest income 12,416 12,353 INTEREST EXPENSE Interest on deposits 4,408 4,558 Interest on fed funds and other short term borrowings 7 7 Interest on FHLB advances 523 497 ------- ------- Total interest expense 4,938 5,062 ------- ------- NET INTEREST INCOME 7,478 7,291 Provision for loan losses 660 1,509 ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,818 5,782 NONINTEREST INCOME Service charges on deposit accounts 823 810 Wealth Management fee income 1,169 1,214 Gains on securities transactions 53 1 Income from loan sales and servicing 608 376 ATM, debit and credit card fee income 529 472 Income from bank-owned life insurance 116 106 Other income 239 231 ------- ------- Total noninterest income 3,537 3,210 NONINTEREST EXPENSE Salaries and employee benefits 4,407 3,607 Occupancy and equipment expense, net 1,244 1,221 External data processing 416 291 Advertising and marketing 375 361 Attorney, accounting and other professional fees 233 248 Director fees 107 116 Other expense 1,020 845 ------- ------- Total noninterest expense 7,802 6,689 ------- ------- INCOME BEFORE FEDERAL INCOME TAX 2,553 2,303 Federal income tax 665 577 ------- ------- NET INCOME $ 1,888 $ 1,726 ======= ======= Basic and diluted earnings per share $ 0.37 $ 0.33 Cash dividends declared per share of common stock $ 0.20 $ 0.19 The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 4 (C) CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
Three Months Ended In thousands of dollars March 31, ------------------ TOTAL SHAREHOLDERS' EQUITY 2008 2007 ------- ------- Balance at beginning of period $72,967 $74,536 Net Income 1,888 1,726 Other comprehensive income: Net change in unrealized gains (losses) on securities available for sale, net of reclass adjustments for realized gains (losses) and related taxes 394 69 ------- ------- Total comprehensive income 2,282 1,795 Cash dividends paid (1,018) (997) Purchase of common stock (195) (221) Other common stock transactions 57 164 ------- ------- Balance at end of period $74,093 $75,277 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 5 (D) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In thousands of dollars Three Months Ended March 31, ------------------- 2008 2007 -------- -------- Cash Flows from Operating Activities Net income $ 1,888 $ 1,726 Adjustments to Reconcile Net Income to Net Cash from Operating Activities Depreciation and amortization 385 372 Provision for loan losses 660 1,509 Gain on sale of loans (503) (286) Proceeds from sales of loans originated for sale 32,758 16,888 Loans originated for sale (32,555) (14,375) (Gains) on securities transactions (53) (1) Deferred income taxes (161) (459) Stock option expense 38 47 Increase in cash surrender value of bank-owned life insurance (116) (106) Change in investment in limited partnership (158) (200) Change in accrued interest receivable and other assets 120 (627) Change in accrued interest payable and other liabilities (585) (1,120) -------- -------- Net cash from operating activities 1,718 3,368 Cash Flows from Investing Activities Securities available for sale Purchases (25,378) (100) Sales 15,045 -- Maturities and calls 5,320 3,965 Principal payments 843 1,096 Net change in portfolio loans (11,214) (15,852) Premises and equipment expenditures (375) (477) -------- -------- Net cash from (used in) investing activities (15,759) (11,368) Cash Flows from Financing Activities Net change in deposits (4,014) 8,411 Net change in short term borrowings 7,500 -- Proceeds from other borrowings 3,000 15,030 Principal payments on other borrowings (4,620) (13,348) Purchase of common stock (195) (221) Proceeds from other common stock transactions 19 117 Dividends paid (1,018) (997) -------- -------- Net cash from financing activities 672 8,992 -------- -------- Net change in cash and cash equivalents (13,369) 992 Cash and cash equivalents at beginning of year 29,126 21,376 -------- -------- Cash and cash equivalents at end of period $ 15,757 $ 22,368 ======== ======== Supplemental Disclosure of Cash Flow Information: Interest paid $ 5,760 $ 4,774 Income tax paid -- 237 Loans transferred to other real estate 140 155
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 6 (E) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The unaudited condensed consolidated financial statements of United Bancorp, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated balance sheet of the Company as of December 31, 2007 has been derived from the audited consolidated balance sheet of the Company as of that date. Operating results for the three month period ending March 31, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. The Company paid a 100% stock dividend on May 31, 2007. Accordingly all share and per-share data has been restated to reflect the stock dividend for the periods presented. STOCK OPTIONS In 2004, shareholders approved the Company's 2005 Stock Option Plan (the "2005 Plan"). The plan is a non-qualified stock option plan as defined under Internal Revenue Service regulations. Under the plan, directors and management of the Company and subsidiaries are given the right to purchase stock of the Company at a stipulated price, adjusted for stock dividends, over a specific period of time. The 2005 Plan will continue in effect until the end of 2009, and is the only plan in effect in 2008. The 2005 Plan replaced the 1999 Stock Option Plan (the "1999 Plan"), under which no more options are to be granted. The stock subject to the options are shares of authorized and unissued common stock of the Company. Options under the 1999 and 2005 Plans (the "Plans") are granted to directors and certain key members of management at the then-current market price at the time the option is granted. The options have a three-year vesting period, and with certain exceptions, expire at the end of ten years, three years after retirement or ninety days after other separation from the Company. The following is summarized year to date option activity for the Plans:
Options Weighted Avg. Stock Options Outstanding Exercise Price - ------------- ----------- -------------- Balance at January 1, 2008 305,113 $26.22 Options granted 59,800 19.75 Options exercised -- -- Options forfeited (9,827) 24.71 ------- Balance at March 31, 2008 355,086 $25.18 =======
Total options granted during the three-month period ended March 31, 2008 were 59,800, and the weighted fair value of the options granted was $2.09. For stock options outstanding at March 31, 2008, the range of average exercise prices was $17.06 to $32.14 and the weighted average remaining contractual term was 7.06 years. At March 31, 2008, 243,745 options are exercisable under the Plans. The Company has recorded approximately $37,500 in compensation expense related to vested stock options less estimated forfeitures for the three month period ended March 31, 2008. As of the end of the first quarter of 2008, unrecognized compensation expense related to the stock options totaled $238,966 and is expected to be recognized over three years. Page 7 At March 31, 2008, the aggregate intrinsic value of options outstanding totaled $9,854. This value represents the difference between the Company's closing stock price on the last day of trading for the first quarter and the exercise price multiplied by the number of in-the-money options assuming all option holders had exercised their stock options on March 31, 2008. No options were exercised during the quarter ended March 31, 2008. NOTE 2 - 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 $269,875,000 and $228,024,000 at the end of March, 2008 and 2007. The balance of loans serviced for others related to servicing rights that have been capitalized was $270,800,000 and $226,355,000 at March 31, 2008 and 2007. Loans servicing rights consist primarily of mortgage servicing rights, but include a small number of commercial loans which the Company has sold but retains servicing. Loan servicing rights activity in thousands of dollars for the three months ended March 31, 2008 and 2007 are shown in the table below.
2008 2007 ------ ------ Balance at January 1 $1,723 $1,541 Amount capitalized year to date 227 49 Amount amortized year to date (72) (53) ------ ------ Balance at March 31 $1,878 $1,537 ====== ======
No valuation allowance was considered necessary for loan servicing rights at period end 2008 and 2007. NOTE 3 - COMMON STOCK AND EARNINGS PER SHARE Basic earnings per share are based upon the weighted average number of shares outstanding plus contingently issuable shares during the year. Diluted earnings per share further assumes the dilutive effect of additional common shares issuable under stock options. During May of 2007, the Company declared and paid a 100% stock dividend, and earnings per share, dividends per share and weighted average shares have been restated to reflect the 100% stock dividend. A reconciliation of basic and diluted earnings per share follows:
Three Months Ended March 31, ----------------------- 2008 2007 ---------- ---------- In thousands of dollars, except per share data Net income $ 1,888 $ 1,726 ========== ========== Basic earnings: Weighted average common shares outstanding 5,088,802 5,248,974 Weighted average contingently issuable shares 56,537 60,438 ---------- ---------- Total weighted average shares outstanding 5,145,339 5,309,412 ========== ========== Basic earnings per share $ 0.37 $ 0.33 ========== ========== Diluted earnings: Weighted average common shares outstanding from basic earnings per share 5,145,339 5,309,412 Dilutive effect of stock options -- -- ---------- ---------- Total weighted average shares outstanding 5,145,339 5,309,412 ========== ========== Diluted earnings per share $ 0.37 $ 0.33 ========== ==========
A total of 302,968 and 253,114 shares for the three months ended March 31, 2008 and 2007, represented by stock options granted, are not included in the above calculations as they are non-dilutive as of the date of this report. Cash dividends of $0.20 and $0.19 were declared and paid in January of 2008 and 2007, respectively. Page 8 In February of 2007, the Company announced a program to repurchase up to 260,000 shares (adjusted for stock dividend) of its common stock through open market purchases. Information regarding activity in this program is included in Part II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds." NOTE 4 - DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the year. FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a fair value hierarchy which requires the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy. Available-for-sale Securities Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Currently, all of the Company's securities are considered to be Level 2 securities. Following is a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy. Impaired Loans 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 Page 9 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. Loan losses are charged against the allowance when Management believes the uncollectability of a loan is confirmed. During the 2008 first quarter, certain impaired loans were partially charged-off or re-evaluated resulting in a remaining balance for these loans, net of specific allowance, of $10,636,000 as of March 31, 2008. This valuation would be considered Level 3, consisting of appraisals of underlying collateral and discounted cash flow analysis. NOTE 5 - ACCOUNTING DEVELOPMENTS 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. NOTE 6 - CHANGE IN ACCOUNTING PRINCIPLE In February, 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115. FAS 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. While FAS 159 is effective for the Company beginning January 1, 2008, the Company has not elected the fair value option that is offered by this statement. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion provides information about the consolidated financial condition and results of operations for United Bancorp, Inc. and its subsidiary banks, United Bank & Trust ("UBT") and United Bank & Trust - Washtenaw ("UBTW") for the three month periods ended March 31, 2008 and 2007. 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. Page 10 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 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. 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. Unemployment for the State of Michigan at the end of February, 2008 was 7.8%, which places it highest among the fifty states. The Lenawee County unemployment rate of 9.2% is significantly above the State's average level, while the Washtenaw County unemployment rate of 5.0% 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 the first quarter of 2008 improved by 9.4% from the level achieved in the same quarter of 2007. The increase resulted primarily from a decrease in the amount of provision for loan losses, but was also aided by a double-digit increase in non-interest income. Net interest income grew at a slower rate than asset growth, as a result of continued tightening of the Company's net interest margin and spread. Expenses have also increased considerably over recent quarters, primarily as a result of the accrual of bonus and profit sharing expenses relating to the improved financial performance of the Company. Earnings per share was $.37 for the quarter, up from $.33 from the same period last year. Return on average assets improved to 0.94% for the quarter, up from ..92% for the first quarter of 2007. Return on average average shareholders' equity for the first quarter of this year was 10.35%, compared to 9.35% for the same period of 2007. Total consolidated assets of the Company of $797.9 million at March 31, 2008 were up 4.9% from the same period last year, and increased by $2.2 million during the most recent quarter. At the end of March, loan balances reached $655.0 million, while deposits declined to $667.5 million. Page 11 RESULTS OF OPERATIONS EARNINGS SUMMARY AND KEY RATIOS Consolidated net income for the first quarter of 2008 of $1.888 million was 9.4% above the first quarter of last year, and was an improvement over the loss of $750,000 in the fourth quarter of 2007. The Company's net interest income has remained relatively flat over the past five quarters, in spite of continued growth of the Company. The Company's provision for loan losses for the first quarter of this year was significantly lower than the levels for the first and fourth quarters of last year, but is at a level consistent with the second and third quarters of 2007. Noninterest income also remains consistent with the prior quarter, while noninterest expenses have increased. The following chart shows the trends of the major components of earnings for the five most recent quarters.
2008 2007 ------- ------------------------------------- in thousands of dollars, where appropriate 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr ------- ------- ------- ------- ------- Net interest income $7,478 $ 7,411 $7,580 $7,478 $7,291 Provision for loan losses 660 5,801 618 710 1,509 Noninterest income 3,537 3,567 3,538 3,338 3,210 Noninterest expense 7,802 6,613 7,267 6,990 6,689 Federal income tax provision 665 (686) 895 849 577 Net income (loss) 1,888 (750) 2,339 2,267 1,725 Earnings (loss) per share (a) $ 0.37 $ (0.15) $ 0.45 $ 0.43 $ 0.33 Return on average assets (b) 0.94% -0.37% 1.18% 1.18% 0.92% Return on average shareholders' equity (b) 10.35% -3.97% 12.32% 12.11% 9.35%
(a) Basic earnings per share, adjusted for stock dividends paid (b) annualized NET INTEREST INCOME As a financial services holding company, United Bancorp, Inc. derives the greatest portion of its income from net interest income. During 2007, short-term rates were unchanged for the first eight months of the year. However, beginning in September of 2007, the Federal Open Market Committee began lowering short-term rates, and in the fourth quarter of 2007, the yield curve regained its normal shape. In the first quarter of 2008, short-term rates were lowered further, and the yield curve continued to steepen. The Company has been able to lower its cost of deposits, but not to the degree that the shifting yield curve would indicate. As a result, the Company's dollars of net interest income have increased as a result of the growth of the Company's balance sheet, partially offset by a decline in spreads and net interest margin. Interest income increased 0.5% in the first quarter of 2008 over the same quarter of 2007, and interest expense decreased 2.4% over the same timeframe. The net result was an increase of 2.5% in net interest income. Tax-equivalent yields on earning assets declined to 6.69% for the quarter, down from 7.07% for the same quarter of 2007. The Company's average cost of funds declined by 31 basis points, and tax equivalent spread declined from 3.66% to 3.59%. Net interest margin experienced similar declines, moving from 4.22% to 4.10% for comparable quarters of 2008 and 2007. The table below 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. The following table shows the year to date daily average consolidated balance sheets, interest earned (on a taxable equivalent basis) or paid, and the annualized effective yield or rate, for the periods ended March 31 2008 and 2007. Page 12
Three Months Ended March 31, ---------------------------------------------------------------- 2008 2007 ------------------------------- ------------------------------ Average Interest Yield/ Average Interest Yield/ dollars in thousands Balance (b) Rate (c) Balance (b) Rate (c) --------- -------- -------- -------- -------- -------- ASSETS Interest earning assets (a) Federal funds sold $ 13,806 $ 119 3.47% $ 9,955 $ 126 5.07% Taxable securities 51,150 601 4.73% 55,546 693 4.99% Tax exempt securities (b) 48,392 707 5.88% 38,278 557 5.82% Taxable loans 652,255 11,302 6.97% 603,032 11,123 7.38% Tax exempt loans (b) 2,685 44 6.56% 2,838 45 6.33% --------- ------- -------- ------- Total int. earning assets (b) 768,288 12,773 6.69% 709,649 12,544 7.07% Less allowance for loan losses (12,447) (7,868) Other assets 45,460 57,487 --------- -------- TOTAL ASSETS $ 801,301 $759,268 ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY NOW accounts $ 128,806 378 1.18% $114,651 407 1.42% Savings deposits 182,061 896 1.98% 176,772 1,228 2.78% CDs $100,000 and over 122,874 1,415 4.63% 110,702 1,320 4.77% Other interest bearing deposits 162,691 1,719 4.25% 148,753 1,603 4.31% --------- ------- -------- ------- Total int. bearing deposits 596,432 4,408 2.97% 550,878 4,558 3.31% Short term borrowings 1,046 7 2.69% 580 7 4.72% Other borrowings 44,039 523 4.79% 42,436 497 4.68% --------- ------- ------- ------- Total int. bearing liabilities 641,517 4,938 3.10% 593,894 5,062 3.41% ------- ------- Noninterest bearing deposits 80,591 81,633 Other liabilities 6,595 8,908 Shareholders' equity 72,757 74,833 --------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $801,460 $759,268 ========= ======== Net interest income (b) 7,835 7,482 ------- ------- Net spread (b) 3.59% 3.66% ===== ==== Net yield on interest earning assets (b) 4.10% 4.22% ===== ==== Tax equivalent adjustment on interest income (357) (191) ------- ------- Net interest income per income statement $ 7,478 $ 7,291 ======= ======= Ratio of interest earning assets to interest bearing liabilities 1.20 1.19 ===== ====
(a) Non-accrual loans and overdrafts are included in the average balances of loans. (b) Fully tax-equivalent basis, net of nondeductible interest impact; 34% tax rate. (c) Annualized The following table shows the effect of volume and rate changes on net interest income for the three months ended March 31, 2008 and 2007 on a taxable equivalent basis, in thousands of dollars.
2008 Compared to 2007 2007 Compared to 2006 Increase (Decrease) Increase (Decrease) Due To: (a) Due To: (a) --------------------- ---------------------- Volume Rate Net Volume Rate Net ------ ----- ---- ------ ---- ------ Interest earned on: Federal funds sold $ 40 $ (47) $ (7) $ 45 $ 10 $ 55 Taxable securities (55) (37) (92) (67) 229 162 Tax exempt securities 145 5 150 18 16 34 Taxable loans 841 (662) 179 870 210 1,080 Tax exempt loans (3) 2 (1) (4) -- (4) ---- ----- ---- ---- ---- ------ Total interest income $968 $(739) $229 $862 $465 $1,327 ==== ===== ==== ==== ==== ======
Page 13 (continued)
2008 Compared to 2007 2007 Compared to 2006 Increase (Decrease) Increase (Decrease) Due To: (a) Due To: (a) ---------------------- ----------------------- Volume Rate Net Volume Rate Net ------ ----- ----- ------ ---- ------ Interest paid on: NOW accounts $ 46 $ (75) $ (29) $ (4) $ 57 $ 53 Savings deposits 35 (367) (332) (25) 259 234 CDs $100,000 and over 136 (41) 95 357 168 525 Other interest bearing deposits 140 (24) 116 128 274 402 Short term borrowings 4 (4) -- (33) (1) (34) Other borrowings 17 9 26 33 20 53 ---- ----- ----- ----- ----- ------ Total interest expense $378 $(502) $(124) $ 456 $ 777 $1,233 ==== ===== ===== ===== ===== ====== Net change in net interest income $590 $(237) $ 353 $ 406 $(312) $ 94 ==== ===== ===== ===== ===== ======
(a) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. PROVISION FOR LOAN LOSS Management continues to be concerned for economic conditions within the Nation, State of Michigan and the market areas of the Banks. In December of 2007, the Company identified adverse developments with respect to certain loans in the loan portfolios of its subsidiary banks, and in response to that 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. 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, 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 repayment sources. For the first quarter of 2008, the Banks have continued to closely watch the impact of economic circumstances on its loan clients. The Company's provision for loan loss for the first quarter of 2008 was $660,000, down $1.509 million for the first quarter of 2007, which included a special charge for one specific credit. NONINTEREST INCOME Noninterest income continues to contribute to the earnings growth of the Company. Total noninterest income improved 10.2% over the first quarter of 2007. Income from loan sales and servicing and ATM, debit and credit card fee income provided the largest percentage increases, improving 61.7% and 12.2%, respectively, over first quarter 2007 levels. Most other categories of noninterest income experienced modest growth during the quarter compared to the same period of 2007. Service charges on deposit accounts were up 1.6% in the first quarter compared to the same quarter last year. This is consistent with the Company's growth in noninterest bearing deposits of 1.3% in the same period. No significant changes to service charge structure were implemented in the first quarter of 2008. Page 14 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 down 3.7% in the first quarter of 2008 compared to 2007, and was down 5.0% from the fourth quarter of last year. Substantially all of the decline since the previous quarter is a result of a decrease in market values of assets under management, as financial markets continue to experience turmoil. Assets managed by the department at March 31, 2008 were $717.2 million, up from $689.0 million at the end of the same quarter of 2007, but were down from $729.7 million at the end of 2007. Income from the sale of nondeposit investment products is derived from the sale of investments and insurance products to clients, including annuities, mutual funds and other investment vehicles. 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 or 2006 as a result of impairment or other reasons. The Banks have continued to experience strong volume in conventional residential real estate mortgage loans, particularly in the volume of loans sold on the secondary market. Income from loan sales and servicing was up 61.7% in the first quarter of 2008 compared to the same period of 2007, and was up 19.9% over the fourth quarter of 2007. During the third quarter of 2007, the Company formed United Structured Finance ("USFC"), 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 12.2% in the most recent quarter compared to the same quarter of 2007, but were down 7.0% from the last quarter of 2007 due to seasonal activity fluctuations. NONINTEREST EXPENSE Total noninterest expenses were up 16.6% in the first quarter of 2008 compared to the same quarter of last year. Salaries and benefits are the organization's largest single area of expense, and for the quarter, provided the largest dollars of increase. During 2007, this category of expense was reduced due to lower amounts paid to co-workers for bonuses and 401(k) profit sharing contributions as a result of reduced earnings for 2007. For the first quarter of 2008, the Company's financial performance has allowed us to increase accruals for incentive compensation compared to prior year. In addition to the increased cost of benefits, the Company continues to selectively expand its staff, in order to provide for continued growth and client service within its market areas. As a result of all of these changes, salaries and employee benefits increased 22.2% over the same quarter of 2007 and 24.8% over the fourth quarter of last year. Page 15 Occupancy and equipment expense increased modestly in the first quarter of this year compared to 2007 levels, and reflects the Company's ongoing investment in technology and equipment. External data processing costs were up significantly over the same period of 2007, which included a large cost recovery from a vendor. Advertising and marketing expenses increased by 3.9% compared to the comparable quarter last year. The increase reflects the cost of expanded marketing and advertising presence in the communities served by the Banks, as well as continued development of the Company's brand. Director fees declined, and attorney, accounting and other professional fees were down 6.1% from 2007 levels. Other expenses continue to increase over prior periods. Those expenses include FDIC insurance costs, 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 compared to 2007, and the increase reflects a general trend in the economy and the industry. FEDERAL INCOME TAX The Company's effective tax rate for the first three months of 2008 was 26.1%, compared to 25.1% for the same period of 2007. The increase in the effective tax rate is relatively insignificant, and reflects variations in the percentage of total income that is comprised of tax-exempt income. FINANCIAL CONDITION SECURITIES The Company's investment securities portfolio decreased by $252,000 compared to the same period of 2007, but increased $4.8 million during the most recent quarter. During much of 2007, the Company has elected not to replace some maturing investments to fund additional loan growth. As a result of increased funding availability, a number of those investments were replaced in the first quarter of this year. The mix of the Company's investment portfolio has changed modestly during the past twelve months, as the percentage of investments held in treasury and agency securities have decreased while the percentages of mortgage backed agencies, municipal obligations and corporate securities have increased slightly. The table below reflects the fair value of various categories of investment securities of the Company, along with the percentage composition of the portfolio by type as of the end of the current quarter for 2008 and 2007, and December 31, 2007.
March 31, 2008 December 31, 2007 March 31, 2007 -------------------- -------------------- -------------------- In thousands of dollars Balance % of total Balance % of total Balance % of total ------- ---------- ------- ---------- ------- ---------- U.S. Treasury and agency securities $26,267 28.9% $33,532 39.0% $35,349 38.8% Mortgage backed agency securities 18,272 20.1% 13,051 15.2% $12,858 14.1% Obligations of states and political subdivisions 39,625 43.8% 36,128 42.1% 39,561 43.6% Corporate, asset backed, and other securities 6,575 7.2% 3,187 3.7% 3,223 3.5% ------- ----- ------- ----- ------- ----- Total Investment Securities $90,739 100.0% $85,898 100.0% $90,991 100.0% ======= ===== ======= ===== ======= =====
The Company is conservative in its investments, preferring to concentrate its risks within the loan portfolio. 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 Page 16 certain prepayment risks. The corporate, asset backed and other securities portfolio also contains a moderate level of credit risk. The municipal portfolio contains a small amount of geographic risk, as approximately 36% of the municipal bond portfolio is issued by political subdivisions located within the Banks' market areas of Lenawee and Washtenaw Counties and Dundee, Michigan. There are currently no credit issues with any of the municipal bonds held in the Company's portfolio. 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 beneficial, and the Company does not anticipate being subject to the alternative minimum tax in the near future. The investment in local municipal issues also reflects the Company's commitment to the development of the local area through support of its local political subdivisions. 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 March 31, 2008 and 2007, in thousands of dollars.
2008 2007 Change ------- ----- ------ Unrealized gains (losses) in: U.S. Treasury and agency securities $ 286 $ 13 $ 273 Mortgage backed agency securities 241 (35) 276 Obligations of states and political subdivisions 584 149 435 Corporate, asset backed and other securities (69) 81 (150) ------- ----- ----- Total investment securities $ 1,042 $ 208 $ 834 ======= ===== =====
LOANS Gross portfolio loans have increased by $10.4 million in the first quarter of 2008, and $43.1 million from March 31, 2007, and the growth over the past twelve months is 7.0%. This increase has been caused by a 16.3% increase in the Company's business loan portfolio, partially offset by a 20.0% decline in construction and development loans over the past twelve months. The makeup of the Company's portfolio continues to evolve, and the portfolio mix has changed modestly during the first three months of the year. Business loans and commercial mortgages increased as a percentage of total loans since December 31, 2007, while the percentages of the portfolio held in personal loans, residential mortgages and construction and development loans have declined. The table below shows total loans outstanding, in thousands of dollars, and their percentage of the total loan portfolio. All loans are domestic and contain no significant concentrations by industry or client.
March 31, 2008 December 31, 2007 March 31, 2007 --------------------- --------------------- --------------------- Balance % of total Balance % of total Balance % of total -------- ---------- -------- ---------- -------- ---------- Total loans: Personal $ 98,293 15.0% $ 98,075 15.2% $ 91,840 15.0% Business loans, including commercial mortgages 389,332 59.4% 376,637 58.5% 334,628 54.7% Tax exempt 2,648 0.4% 2,709 0.4% 3,054 0.5% Residential mortgage 83,746 12.8% 86,023 13.3% 81,283 13.3% Construction and development loans 80,946 12.4% 81,086 12.6% 101,040 16.5% -------- ----- -------- ----- -------- ----- Total portfolio loans $654,965 100.0% $644,530 100.0% $611,845 100.0% ======== ===== ======== ===== ======== =====
Page 17 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 following chart shows the aggregate amount of the Company's nonperforming assets by type, in thousands of dollars.
3/31/08 12/31/07 3/31/07 ------- -------- ------- Nonaccrual loans $13,253 $13,695 $10,629 Accruing loans past due 90 days or more 2,981 1,455 226 Troubled debt restructurings -- -- -- ------- ------- ------- Total nonperforming loans 16,234 15,150 10,855 Other real estate owned 2,392 2,253 1,081 ------- ------- ------- Total nonperforming assets $18,626 $17,403 $11,936 ======= ======= ======= Percent of nonperforming loans to total loans 2.48% 2.35% 1.77% Percent of nonperforming assets to total assets 2.33% 2.19% 1.57%
Total nonperforming assets increased during the first quarter of 2008. Since December 31, 2007, nonaccrual loans have declined by $442,000 while delinquent loans increased by $1.5 million. The improvement in nonaccrual loans reflects the payoff or charge-off of some nonperforming loans during the quarter, while the increase in delinquency reflects the difficult operating environment facing certain borrowers of the Company. Collection efforts continue with all delinquent clients, in order to bring them back to performing status. Total nonperforming loans as a percent of total portfolio loans moved from 2.35% at the end of 2007 to 2.48% at the end of the first quarter of 2008. Holdings of other real estate increased by $139,000 in the first quarter of the year. 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. The Company's allowance for loan losses remains at a level consistent with its estimated losses, and the allowance provides for currently estimated losses inherent in the portfolio. The decline during the quarter reflects the charge-off of loans previously identified as impaired and specifically reserved. This resulted in a decline in the specific allowance on impaired loans of $617,000. The allowance was increased for the balance of the portfolio by $358,000 due to a combination of an increasing historical charge-off rate as well as an increase in loan balances, and that increase was slightly offset by an improvement in the concentration of construction and land development loans. The decrease in the specific reserves was the primary reason for the slight decrease in the allowance. An analysis of the allowance for loan losses, in thousands of dollars, for the three months ended March 31, 2008 and 2007 follows:
2008 2007 ------- ------ Balance at January 1 $12,306 $7,849 Loans charged off (945) (137) Recoveries credited to allowance 26 8 Provision charged to operations 660 1,509 ------- ------ Balance at March 31 $12,047 $9,229 ======= ======
The following table presents the allocation of the allowance for loan losses applicable to each loan category in thousands of dollars, as of March 31, 2008 and 2007, and December 31, 2007.
3/31/08 12/31/07 3/31/07 ------- -------- ------- Business and commercial mortgage (1) $10,688 $10,924 $8,223 Residential mortgage 341 368 113 Personal 1,002 974 888 Unallocated 16 40 5 ------- ------- ------ Total $12,047 $12,306 $9,229 ======= ======= ======
(1) Includes commercial construction and development loans Page 18 The allocation method used takes into account specific allocations for identified credits and a three year historical loss average, adjusted for certain qualitative factors, in determining the allocation for the balance of the portfolio. Within the Banks' loan portfolios, $22.1 million of impaired loans have been identified as of March 31, 2008, compared with $24.7 million as of December 31, 2007. The specific allowance for impaired loans was $5.4 million at March 31, 2008 and $6.1 million at December 31, 2007. 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 continues to monitor the performance of the loan portfolios and will react to conditions as they develop. 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. DEPOSITS Deposit balances declined slightly during the first quarter of 2008, as the Company shifted its funding mix. Total deposits are 0.6% below year-end levels, but are $31.1 million, or 4.9%, above balances at March 31, 2007. Demand deposit balances increased during the quarter, while interest bearing deposits declined, contributing to a decrease in the Company's cost of funds for the quarter. Traditional deposit products continue to be an important part of the Company's product line, and the Banks continue their emphasis on gathering core deposits within their market areas without seeking substantial out of market funds. 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 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 table below shows the percentage makeup of the deposit portfolio as of March 31, 2008 and 2007, and December 31, 2007.
3/31/08 12/31/07 3/31/07 ------- -------- ------- Noninterest bearing deposits 12.4% 11.6% 12.8% Interest bearing deposits 87.6% 88.4% 87.2% ----- ----- ----- Total deposits 100.0% 100.0% 100.0% ===== ===== =====
LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY, CASH EQUIVALENTS AND BORROWED FUNDS The Company maintains correspondent accounts with a number of other banks for various purposes. In addition, cash sufficient to meet the operating needs of its banking offices is maintained at its lowest practical levels. At times, the Banks are 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 2008 and 2007. Short-term advances and discount window borrowings were not utilized during either year. Page 19 The Company periodically finds it advantageous to utilize longer term borrowings from the FHLBI. These long-term borrowings serve primarily to provide a balance to some of the interest rate risk inherent in the Company's balance sheet. During the first quarter of 2008, the Company procured $3.0 million in new advances and repaid $4,500,000 in matured borrowings, resulting in a decrease in total FHLB borrowings outstanding at March 31, 2008. CAPITAL RESOURCES The Company and the Banks were categorized as well-capitalized at March 31, 2008 and 2007, and December 31, 2007 by their regulators. The following table shows the Company's capital ratios and ratio calculations as of March 31, 2008 and 2007, and December 31, 2007. Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc. ----------------------- ---------------------------- Adequate Well 3/31/08 12/31/07 3/31/07 ---------- ---------- ------- -------- ------- Tier 1 capital to average assets 4% 5% 8.8% 8.7% 9.5% Tier 1 capital to risk weighted assets 4% 6% 10.4% 10.5% 11.6% Total capital to risk weighted assets 8% 10% 11.7% 11.8% 13.0% Total shareholders' equity $74,093 $72,967 $75,277 Intangible assets (3,469) (3,469) (3,469) Disallowed servicing assets -- -- -- Unrealized (gain) loss on securities available for sale (687) (293) (137) ------- ------- ------- Tier 1 capital 69,937 69,205 71,671 Allowable loan loss reserves 8,438 8,257 7,768 ------- ------- ------ Tier 1 and 2 capital $78,375 $77,462 $79,439 ======= ======= ======
CRITICAL ACCOUNTING POLICIES Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. The Company's Management must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of the Company's significant accounting policies, see "Notes to the Consolidated Financial Statements" on pages A-26 to A-29 of the Company's Annual Report on Form 10-K for the year ended December 31, 2007. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of the Company's Board of Directors. 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 Page 20 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. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FUNDS MANAGEMENT AND INTEREST RATE RISK The composition of the Company's balance sheet consists of investments in interest earning assets (loans and investment securities) that are funded by interest bearing liabilities (deposits and borrowings). These financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. Policies place strong emphasis on stabilizing net interest margin, with the goal of providing a sustained level of satisfactory earnings. The Funds Management, Investment and Loan policies provide direction for the flow of funds necessary to supply the needs of depositors and borrowers. Management of interest sensitive assets and liabilities is also necessary to reduce interest rate risk during times of fluctuating interest rates. A number of measures are used to monitor and manage interest rate risk, including interest sensitivity and income simulation analyses. An interest sensitivity model is the primary tool used to assess this risk with supplemental information supplied by an income simulation model. The simulation model is used to estimate the effect that specific interest rate changes would have on twelve months of pretax net interest income assuming an immediate and sustained up or down parallel change in interest rates of 200 basis points. Key assumptions in the models include prepayment speeds on mortgage related assets; cash flows and maturities of financial instruments held for purposes other than trading; changes in market conditions, loan volumes and pricing; and management's determination of core deposit sensitivity. These assumptions are inherently uncertain and, as a result, the models cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions. Based on the results of the simulation model as of March 31, 2008, the Company would expect a maximum potential reduction in net interest margin of less than 6% if market rates decreased under an immediate and sustained parallel shift of 200 basis points. The interest sensitivity position of the Company continues to be liability sensitive based on internal measures. The Company and each Bank maintains Funds Management Committees, which review exposure to market risk on a regular basis. The Committees' overriding policy objective is to manage assets and liabilities to provide an optimum and consistent level of earnings within the framework of acceptable risk standards. The Funds Management Committees are also responsible for evaluating and anticipating various risks other than interest rate risk. Those risks include prepayment risk, credit risk and liquidity risk. The Committees include senior members of management, and monitor the makeup of interest sensitive assets and liabilities to assure appropriate liquidity, maintain interest margins and to protect earnings in the face of changing interest rates and other economic factors. Page 21 The Funds Management policies provide for a level of interest sensitivity which, Management believes, allows the Banks to take advantage of opportunities within their markets relating to liquidity and interest rate risk, allowing flexibility without subjecting the Company to undue exposure to risk. In addition, other measures are used to evaluate and project the anticipated results of Management's decisions. ITEM 4 - CONTROLS AND PROCEDURES INTERNAL CONTROL The Company maintains internal controls that contain self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. The Board of Directors of the Company, operating through its Audit and Compliance Committee, provides oversight to the financial reporting process. Even effective internal controls, no matter how well designed, have inherent limitations, including the possibility of circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Furthermore, the effectiveness of internal controls may vary over time. The Company's Audit and Compliance Committee is composed entirely of Directors who are not officers or employees of the Company. As of March 31, 2008, an evaluation was carried out under the supervision and with the participation of United Bancorp's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that United Bancorp's disclosure controls and procedures as of the end of the quarter ended March 31, 2008 are, to the best of their knowledge, effective to reasonably ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There have been no changes in the Company's internal controls over financial reporting that occurred during the quarter ended March 31, 2008 that materially affected, or are likely to materially affect, the Company's internal control over financial reporting. PART II OTHER INFORMATION ITEM 1- LEGAL PROCEEDINGS The Company is not involved in any material legal proceedings. The Company and the Banks are involved in ordinary routine litigation incident to its business; however, no such routine proceedings are expected to result in any material adverse effect on the operations or earnings of the Company or the Banks. Neither the Company nor the Banks are involved in any proceedings to which any director, principal officer, affiliate thereof, or person who owns of record or beneficially five percent (5%) or more of the outstanding stock of the Company, or any associate of the foregoing, is a party or has a material interest adverse to the Company or the Banks. ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (c) 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 number and timing of the repurchases are at the Company's sole discretion and the plan is periodically re-evaluated depending on market conditions, capital needs and other factors. In connection with this, the Company temporarily suspended activity in the plan in April 2008. The following table provides information about purchases by the Company during Page 22 the quarter ended March 31, 2008 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 in 2008 Purchased per Share Announced Plans Under the Plan -------------- --------- ---------- ------------------- ------------------ January 1 - 31 2,633 $18.41 2,633 76,614 February 1 - 29 2,208 19.70 2,208 74,406 March 1 - 31 5,300 19.44 5,300 69,106 ------ ------ Total this quarter 10,141 $19.23 10,141
ITEM 6- EXHIBITS Listing of Exhibits (numbered as in Item 601 of Regulation S-K): Exhibit 31.1 Certification of principal executive officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of principal financial officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED BANCORP, INC. April 25, 2008 /s/ Robert K. Chapman /s/ Randal J. Rabe - ------------------------------------- ---------------------------------------- Robert K. Chapman Randal J. Rabe President and Chief Executive Officer Executive Vice President and Chief (Principal Executive Officer) Financial Officer (Principal Financial Officer) Page 23 EX-31.1 2 k26022exv31w1.txt SECTION 302 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER DISCLOSURE PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert K. Chapman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of United Bancorp, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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. c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation and d) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Robert K. Chapman April 25, 2008 - ------------------------------------- Date Robert K. Chapman (Principal Executive Officer) President and Chief Executive Officer EX-31.2 3 k26022exv31w2.txt SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER DISCLOSURE PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Randal J. Rabe, certify that: 1. I have reviewed this quarterly report on Form 10-Q of United Bancorp, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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. c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation and d) Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Randal J. Rabe April 25, 2008 - ------------------------------------- Date Randal J. Rabe (Principal Financial Officer) Executive Vice President and Chief Financial Officer EX-32.1 4 k26022exv32w1.txt SECTION 309 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER EXHIBIT 32.1 DISCLOSURE PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Quarterly Report on Form 10-Q of United Bancorp, Inc. ('"Company") for the quarter ended March 31, 2008 ("Report"), each of the undersigned, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his respective knowledge and belief, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert K. Chapman April 25, 2008 - ------------------------------------- Date Robert K. Chapman President and Chief Executive Officer (Principal Executive Officer) /s/ Randal J. Rabe April 25, 2008 - ------------------------------------- Date Randal J. Rabe Executive Vice President and Chief Financial Officer (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----