-----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, Um4uNrUIAsD3G54baXHyN8YXSxEVaEwFWtY5qvFKrp15v6HYIDcfVt9s687Ajsv/ //OwzLmG0aA9j8EF49qVAg== 0000950134-08-018413.txt : 20081024 0000950134-08-018413.hdr.sgml : 20081024 20081024060114 ACCESSION NUMBER: 0000950134-08-018413 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081024 DATE AS OF CHANGE: 20081024 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: 081138276 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 k46803e10vq.txt 10-Q 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 SEPTEMBER 30, 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, 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 Exchange Act. Yes [ ] No [X] As of October 14, 2008, there were outstanding 5,052,573 shares of the registrant's common stock, no par value. Page 1 CROSS REFERENCE TABLE
Item No. DESCRIPTION PAGE NO - ---------- ------------------------------------------------------------------- ------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (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 11 Executive Summary 11 Results of Operations 12 Financial Condition 17 Liquidity and Capital Resources 20 Critical Accounting Policies 21 Forward-Looking Statements 22 Item 3 Quantitative and Qualitative Disclosures about Market Risk 22 Item 4 Controls and Procedures 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings 24 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24 Item 6. Exhibits 24 Signatures 25 Exhibits 26 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) September 30, December 31, September 30, 2008 2007 2007 ------------- ------------ -------------- In thousands of dollars ASSETS Cash and demand balances in other banks $ 16,856 $ 17,996 $ 14,729 Federal funds sold -- 11,130 -- -------- -------- -------- Total cash and cash equivalents 16,856 29,126 14,729 Securities available for sale 78,013 85,898 87,691 Loans held for sale 7,107 5,770 3,885 Portfolio loans 683,064 644,530 648,626 Less allowance for loan losses 14,335 12,306 7,714 -------- -------- -------- Net portfolio loans 668,729 632,224 640,912 Premises and equipment, net 12,621 13,160 13,205 Goodwill 3,469 3,469 3,469 Bank-owned life insurance 12,319 11,961 11,840 Accrued interest receivable and other assets 16,233 14,079 12,566 -------- -------- -------- Total Assets $815,347 $795,687 $788,297 ======== ======== ======== LIABILITIES Deposits Noninterest bearing $ 88,212 $ 77,878 $ 78,333 Interest bearing 598,341 593,659 580,327 -------- -------- -------- Total Deposits 686,553 671,537 658,660 Federal funds purchased and other short term borrowings -- -- 4,830 FHLB advances payable 51,951 44,611 44,625 Accrued interest payable and other liabilities 4,077 6,572 4,648 -------- -------- -------- Total Liabilities 742,581 722,720 712,763 Commitment and Contingent Liabilities SHAREHOLDERS' EQUITY Common stock and paid in capital, no par value; 10,000,000 shares authorized; 5,052,573, 5,092,230, and 5,133,444 shares issued and outstanding 67,260 67,860 68,719 Retained earnings 5,720 4,814 6,603 Accumulated other comprehensive income (loss), net of tax (214) 293 212 -------- -------- -------- Total Shareholders' Equity 72,766 72,967 75,534 -------- -------- -------- Total Liabilities and Shareholders' Equity $815,347 $795,687 $788,297 ======== ======== ========
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 Nine Months Ended September 30, September 30, ------------------ ----------------- 2008 2007 2008 2007 ------- -------- ------- ------- In thousands of dollars, except per share data INTEREST INCOME Interest and fees on loans $10,747 $12,313 $32,645 $35,319 Interest on securities Taxable 499 636 1,653 1,962 Tax exempt 369 361 1,102 1,120 Interest on federal funds sold 3 12 125 155 ------- ------- ------- ------- Total interest income 11,618 13,322 35,525 38,556 INTEREST EXPENSE Interest on deposits 3,477 5,149 11,367 14,514 Interest on fed funds and other short term borrowings 20 73 95 160 Interest on FHLB advances 583 520 1,661 1,532 ------- ------- ------- ------- Total interest expense 4,080 5,742 13,123 16,206 ------- ------- ------- ------- NET INTEREST INCOME 7,538 7,580 22,402 22,350 Provision for loan losses 3,300 618 5,610 2,836 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,238 6,962 16,792 19,514 NONINTEREST INCOME Service charges on deposit accounts 883 935 2,600 2,623 Wealth Management fee income 1,074 1,182 3,387 3,570 Gains on securities transactions 2 -- 106 1 Income from loan sales and servicing 724 473 2,140 1,242 ATM, debit and credit card fee income 579 545 1,699 1,549 Income from bank-owned life insurance 124 119 359 341 Other income 281 284 681 760 ------- ------- ------- ------- Total noninterest income 3,667 3,538 10,972 10,086 NONINTEREST EXPENSE Salaries and employee benefits 3,962 3,988 12,432 11,330 Occupancy and equipment expense, net 1,257 1,228 3,716 3,646 External data processing 435 431 1,311 1,154 Advertising and marketing 282 279 972 942 Attorney, accounting and other professional fees 239 226 707 798 Director fees 107 116 322 349 Expenses relating to ORE property 468 92 544 98 Other expenses 873 907 2,668 2,631 ------- ------- ------- ------- Total noninterest expense 7,623 7,267 22,672 20,948 ------- ------- ------- ------- INCOME BEFORE FEDERAL INCOME TAX 282 3,233 5,092 8,652 Federal income tax (114) 895 1,112 2,321 ------- ------- ------- ------- NET INCOME $ 396 $ 2,338 $ 3,980 $ 6,331 ======= ======= ======= ======= Basic and diluted earnings per share $ 0.08 $ 0.45 $ 0.78 $ 1.20 Cash dividends declared per share of common stock $ 0.20 $ 0.20 $ 0.60 $ 0.59
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 Nine Months Ended September 30, September 30, ------------------ ----------------- 2008 2007 2008 2007 ------- -------- ------- ------- In thousands of dollars TOTAL SHAREHOLDERS' EQUITY Balance at beginning of period $73,452 $75,501 $72,967 $74,536 Net Income 396 2,338 3,980 6,331 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 (141) 437 (507) 144 ------- ------- ------- ------- Total comprehensive income 255 2,775 3,473 6,475 Cash dividends paid (1,011) (1,042) (3,039) (3,085) Purchase of common stock -- (1,807) (831) (2,893) Other common stock transactions 70 107 196 501 ------- ------- ------- ------- Balance at end of period $72,766 $75,534 $72,766 $75,534 ======= ======= ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 5 (D) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, ------------------- 2008 2007 -------- -------- In thousands of dollars Cash Flows from Operating Activities Net income $ 3,980 $ 6,331 Adjustments to Reconcile Net Income to Net Cash from Operating Activities Depreciation and amortization 1,234 1,000 Provision for loan losses 5,610 2,836 Gain on sale of loans (1,792) (964) Proceeds from sales of loans originated for sale 96,493 55,640 Loans originated for sale (96,038) (52,789) (Gains) on securities transactions (106) (1) Deferred income taxes (452) (113) Stock option expense 113 153 Increase in cash surrender value of bank-owned life insurance (359) (341) Change in investment in limited partnership (196) 156 Change in accrued interest receivable and other assets (146) 147 Change in accrued interest payable and other liabilities (2,249) (2,521) -------- -------- Net cash from operating activities 6,092 9,534 Cash Flows from Investing Activities Securities available for sale Purchases (37,447) (9,658) Sales 214 -- Maturities and calls 41,222 14,066 Principal payments 3,224 4,045 Net change in portfolio loans (43,688) (56,951) Premises and equipment expenditures (456) (884) -------- -------- Net cash used in investing activities (36,931) (49,382) Cash Flows from Financing Activities Net change in deposits 15,016 30,658 Net change in short term borrowings -- 4,753 Proceeds from other borrowings 16,000 25,030 Principal payments on other borrowings (8,660) (21,610) Purchase of common stock (831) (2,893) Proceeds from other common stock transactions 83 348 Cash dividends paid (3,039) (3,085) -------- -------- Net cash from financing activities 18,569 33,201 -------- -------- Net change in cash and cash equivalents (12,270) (6,647) Cash and cash equivalents at beginning of year 29,126 21,376 -------- -------- Cash and cash equivalents at end of period $ 16,856 $ 14,729 ======== ======== Supplemental Disclosure of Cash Flow Information: Interest paid $ 14,908 $ 18,155 Income tax paid 1,913 2,822 Loans transferred to other real estate 1,573 1,345
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 and nine month periods ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending 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. NOTE 2 - STOCK OPTIONS The Company's 2005 Stock Option Plan (the "2005 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. Outstanding Exercise Price ----------- -------------- Stock Options Balance at January 1, 2008 305,113 $26.22 Options granted 66,800 19.20 Options exercised -- -- Options forfeited (18,852) 24.78 ------- Balance at September 30, 2008 353,061 $24.97 =======
Total options granted during the nine-month period ended September 30, 2008 were 66,800, and the weighted fair value of the options granted was $1.98. For stock options outstanding at September 30, 2008, the range of average exercise prices was $11.05 to $32.14 and the weighted average remaining contractual term was 6.61 years. At September 30, 2008, 241,828 options are exercisable under the Plans. The Company has recorded $112,500 in compensation expense related to vested stock options Page 7 less estimated forfeitures for the nine-month period ended September 30, 2008. As of the end of the third quarter of 2008, unrecognized compensation expense related to the stock options totaled $166,625 and is expected to be recognized over three years. At September 30, 2008, 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 the third quarter and the exercise price, multiplied by the number of in-the-money options assuming all option holders had exercised their stock options on September 30, 2008. No options were exercised during the quarter ended September 30, 2008. NOTE 3 - 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 $314,846,000 and $240,634,000 at the end of September 2008 and 2007, and the balance of loans serviced for others related to servicing rights that have been capitalized was $313,370,000 and $239,431,000 at September 30, 2008 and 2007. Loans servicing rights consist primarily of mortgage servicing rights, but include a number of commercial loans which the Company has sold but retains servicing. Loan servicing rights activity for the nine months ended September 30, 2008 and 2007 is shown in the table below.
2008 2007 ------ ------ In thousands of dollars Balance at January 1 $1,723 $1,541 Amount capitalized year to date 617 248 Amount amortized year to date (201) (154) ------ ------ Balance at September 30 $2,139 $1,635 ====== ======
No valuation allowance was considered necessary for loan servicing rights at period end 2008 and 2007. NOTE 4 - 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: Page 8
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2008 2007 2008 2007 ---------- ---------- ---------- ---------- In thousands of dollars, except share data Net income $ 396 $ 2,338 $ 3,980 $ 6,331 ========== ========== ========== ========== Basic earnings: Weighted average common shares outstanding 5,052,555 5,180,127 5,064,556 5,218,909 Weighted average contingently issuable shares 60,506 60,470 58,244 60,213 ---------- ---------- ---------- ---------- Total weighted average shares outstanding 5,113,061 5,240,597 5,122,800 5,279,122 ========== ========== ========== ========== Basic earnings per share $ 0.08 $ 0.45 $ 0.78 $ 1.20 ========== ========== ========== ========== Diluted earnings: Weighted average common shares outstanding from basic earnings per share 5,113,061 5,240,597 5,122,800 5,279,122 Dilutive effect of stock options -- -- -- -- ---------- ---------- ---------- ---------- Total weighted average shares outstanding 5,113,061 5,240,597 5,122,800 5,279,122 ========== ========== ========== ========== Diluted earnings per share $ 0.08 $ 0.45 $ 0.78 $ 1.20 ========== ========== ========== ==========
A total of 349,061 and 268,342 shares for the three month periods ended September 30, 2008 and 2007, and 338,408 and 267,348 shares for the nine month periods ended September 30, 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. 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 5 - DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES 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. The Company has applied FAS 157 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 that emphasizes use of observable inputs and minimizes 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 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 Page 9 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 those instruments under the valuation hierarchy. Available-for-sale Securities Level 2 securities include U.S. Treasury and agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. 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 those instruments under the valuation hierarchy. Impaired Loans Loan impairment is reported when scheduled payments under contractual terms are deemed uncollectible. 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. Loan losses are charged against the allowance when Management believes the uncollectability of a loan is confirmed. During the third quarter and first nine months of 2008, certain loans became impaired, while certain loans previously identified as impaired were partially charged-off or re-evaluated. These changes during the third quarter of 2008 resulted in a balance for these loans, net of specific allowance, of $15.7 million. Year to date changes resulted in a balance, net of specific allowance, of $16.7 million at September 30, 2008. This valuation would be considered Level 3, consisting of appraisals of underlying collateral and discounted cash flow analysis. On construction and development loans, the Company uses the loan's effective interest rate to discount future cash flows except for situations when the Company determines that foreclosure is probable. In those cases, the Company uses appraised values and the discount rates contained in the appraisals. Had the Company used appraised values for all identified impaired loans, the resulting balance, net of specific allowance, would have been reduced by $1.1 million from the amounts reflected in the financial statements. NOTE 6 - 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 material impact on its financial statements. Page 10 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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 and nine month periods ended September 30, 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 (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, 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. 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 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 provides additional diversity to the Company's income stream, and provides additional financing alternatives to clients of the Banks as well as non-bank clients. EXECUTIVE SUMMARY Unemployment for the State of Michigan at the end of August 2008 of 8.9% resulted in the State retaining its position of the highest unemployment level among the fifty states. The Lenawee County unemployment rate of 10.3% is above the State's average level, while the Washtenaw County unemployment rate of 6.4% ranks the County as the fifth lowest in the State. The ongoing economic issues in Michigan have continued to have an impact on earnings of the Company. The Company's 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 maintain market share in challenging local economic conditions. Page 11 United Bancorp, Inc. net income for the third quarter of 2008 declined by 83.1% from the level achieved in the same quarter of 2007, and for the first nine months of 2008, net income is 37.1% below that of the same period of 2007. Earnings per share of $.08 for the quarter was down from $0.45 per share for the same period last year. Year to date basic and diluted earnings per share for 2008 are $.78, down from $1.20 for the same period of 2007. Year to date return on average assets of 0.66% is below 2007 levels of 1.10%, and year to date return on average equity of 7.24% is below the 11.28% level of last year. Total consolidated assets of the Company of $815.3 million at September 30, 2008 were up 3.4% from the same period last year, and increased by $16.4 million during the most recent quarter. At the end of September, gross portfolio loan balances reached $683.1 million, while deposits grew to $686.6 million. After the additional charges to the allowance for loan losses for the third quarter, the Company and its subsidiary banks continue to be "well-capitalized" under regulatory capital requirements. The Company does not have any exposure to sub-prime mortgage loans, Fannie Mae and Freddie Mac equity securities, or non-agency mortgage-backed securities that have been the topic of much recent public discussion. The Company's core business remains strong and growing, and includes a diversity of sources of noninterest income that provide approximately one-third of total revenue. RESULTS OF OPERATIONS EARNINGS SUMMARY AND KEY RATIOS Consolidated net income for the third quarter of 2008 of $396,000 was down from $2.338 million for the same quarter of last year, and year to date net income of $3.980 million is down from $6.331 million for the first nine months 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 third quarter of this year was significantly higher than the levels for the first two quarters of this year and the third quarter of last year, and was surpassed only by the fourth quarter of 2007. Noninterest income declined from the prior quarter but was up over the previous three quarters. Noninterest expenses have increased compared to last quarter and to the same quarter of last year. The following table shows the trends of the major components of earnings for the five most recent quarters.
2008 2007 --------------------------- ----------------- 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr ------- ------- ------- ------- ------- in thousands of dollars, where appropriate Net interest income $7,538 $7,387 $7,478 $7,411 $7,580 Provision for loan losses 3,300 1,650 660 5,801 618 Noninterest income 3,667 3,766 3,537 3,567 3,538 Noninterest expense 7,623 7,248 7,802 6,613 7,267 Federal income tax provision (114) 560 665 (686) 895 Net income (loss) 396 1,695 1,888 (750) 2,338 Earnings (loss) per share (a) $ 0.08 $ 0.33 $ 0.37 $(0.15) $ 0.45 Return on average assets (b) 0.20% 0.86% 0.94% -0.37% 1.18% Return on average shareholders' equity (b) 2.14% 9.29% 10.35% -3.97% 12.32%
(a) Basic earnings per share, adjusted for stock dividends paid (b) annualized Page 12 NET INTEREST INCOME As a financial services holding company, United Bancorp, Inc. derives the greatest portion of its income from net interest income, which is impacted significantly by interest rate changes within the market. In part as a result of interest rate volatility over the past two years, the Company has experienced fluctuation in its net interest income. The Company's interest income decreased 12.8% in the third quarter of 2008 over the same quarter of 2007, while interest expense decreased 28.9% over the same timeframe. The net result was a decrease of 0.6% in net interest income. Year to date net interest income grew 0.2% from the first nine months of 2007, with interest income declining 7.9% while interest expense declined 19.0%. Tax-equivalent yields on earning assets declined to 6.39% for the first nine months of 2008, down from 7.23% for the same period of 2007. During that same timeframe, the Company's average cost of funds declined by eighty-one basis points, and tax equivalent spread declined from 3.67% to 3.63%. Net interest margin experienced similar declines, moving from 4.23% to 4.10% for comparable nine-month periods 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 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 September 30, 2008 and 2007.
Nine Months Ended September 30, --------------------------------------------------------------- 2008 2007 ------------------------------ ------------------------------ Average Interest Yield/ Average Interest Yield/ Balance (b) Rate (c) Balance (b) Rate (c) -------- -------- -------- -------- -------- -------- dollars in thousands ASSETS Interest earning assets (a) Federal funds sold $ 5,188 $ 125 3.21% $ 4,585 $ 155 4.50% Taxable securities 47,110 1,653 4.69% 53,547 1,962 4.89% Tax exempt securities (b) 49,247 2,162 5.86% 35,277 1,637 6.19% Taxable loans 661,873 32,558 6.57% 625,225 35,217 7.51% Tax exempt loans (b) 2,625 128 6.52% 3,049 151 6.61% -------- -------- -------- ------- Total int. earning assets (b) 766,043 36,626 6.39% 721,683 39,121 7.23% Less allowance for loan losses (12,564) (7,980) Other assets 45,228 57,728 -------- -------- TOTAL ASSETS $798,707 $771,431 ======== ========
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Nine Months Ended September 30, --------------------------------------------------------------- 2008 2007 ------------------------------ ------------------------------ Average Interest Yield/ Average Interest Yield/ Balance (b) Rate (c) Balance (b) Rate (c) -------- -------- -------- -------- -------- -------- dollars in thousands LIABILITIES AND SHAREHOLDERS' EQUITY NOW and savings deposits 309,316 3,188 1.38% 287,969 5,011 2.33% CDs $100,000 and over 119,032 3,809 4.27% 117,997 4,338 4.90% Other interest bearing deposits 154,602 4,370 3.78% 153,274 5,165 4.49% -------- ------- -------- ------- Total int. bearing deposits 582,950 11,367 2.60% 559,240 14,514 3.46% Short term borrowings 5,351 95 2.37% 4,533 160 4.71% Other borrowings 48,060 1,661 4.62% 43,235 1,532 4.72% -------- ------- -------- ------- Total int. bearing liabilities 636,361 13,123 2.75% 607,008 16,206 3.56% ------- ------- Noninterest bearing deposits 83,461 82,112 Other liabilities 5,936 7,265 Shareholders' equity 72,948 75,046 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $798,707 $771,431 ======== ======== Net interest income (b) 23,503 22,915 ------- ------- Net spread (b) 3.63% 3.67% ==== ==== Net yield on interest earning assets (b) 4.10% 4.23% ==== ==== Tax equivalent adjustment on interest income (1,101) (565) ------- ------- Net interest income per income statement $22,402 $22,350 ======= ======= 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 nine months ended September 30, 2008 and 2007 on a taxable equivalent basis, in thousands of dollars.
2008 Compared to 2007 2007 Compared to 2006 Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a) ------------------------------- ------------------------------- Volume Rate Net Volume Rate Net ------ ------- ------- ------ ------ ---------- Interest earned on: Federal funds sold $ 18 $ (48) $ (30) $ (112) $ (24) $ (136) Taxable securities (231) (78) (309) (263) 479 216 Tax exempt securities 614 (89) 525 14 113 127 Taxable loans 1,963 (4,621) (2,658) 3,356 337 3,693 Tax exempt loans (21) (2) (23) -- 6 6 ------ ------- ------- ------ ------ ------ Total interest income $2,343 $(4,838) $(2,495) $2,995 $ 911 $3,906 ====== ======= ======= ====== ====== ====== Interest paid on: Now and savings deposits 350 (2,173) (1,823) 17 654 671 CDs $100,000 and over 37 (566) (529) 960 400 1,360 Other interest bearing deposits 44 (840) (796) 350 700 1,050 Short term borrowings 25 (90) (65) 115 (2) 113 Other borrowings 165 (36) 129 114 47 161 ------ ------- ------- ------ ------ ------ Total interest expense $ 621 $(3,705) $(3,084) $1,556 $1,799 $3,355 ====== ======= ======= ====== ====== ====== Net change in net interest income $1,722 $(1,133) $ 589 $1,439 $ (888) $ 551 ====== ======= ======= ====== ====== ======
(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. Page 14 PROVISION FOR LOAN LOSS As the Southeast Michigan real estate markets and the economy in general continue to deteriorate, the loan portfolios of the Company's subsidiary banks continue to be affected by loans to a number of residential real estate developers that are struggling to meet their financial obligations. Primarily as a result of this economic deterioration, the Company's provision for loan losses for the third quarter was $3.3 million, which is $1.65 million higher than the amount recorded by the Company in the second quarter of 2008. While the Company's loans to residential real estate developers make up only 11% of its loan portfolio, current economic conditions have disproportionately impacted this sector of the economy. 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 has also been reduced. The Banks have continued to closely monitor the impact of economic circumstances on their loan clients, and are working with these clients to minimize losses. NONINTEREST INCOME Noninterest income continues to contribute to the earnings of the Company. Total noninterest income improved 3.6% over the same quarter of 2007, and for the first nine months of this year, is 8.8% higher than the same period of 2007. Income from loan sales and servicing and ATM, debit and credit card fee income provided most of the increase over the same quarter of last year, while service charges on deposits and wealth management income are down for the quarter and year to date. Service charges on deposit accounts were down 5.6% in the third quarter compared to the same quarter last year, and year to date service charges are virtually flat compared to the first nine months of 2007. No significant changes to service charge structure were implemented in the third quarter of 2008, although improvements in the Banks' reporting systems have made balance information more readily available to clients by electronic means. This has allowed clients to watch their balances more closely, helping them to avoid overdraft and NSF fees if they so choose. The Wealth Management Group of UBT continues to provide an important source of noninterest income for the Company. 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 9.1% in the third quarter of 2008 compared to 2007, and was down 5.1% year to date. Substantially all of the decrease is a result of a decline in market values of assets under management, as financial markets declined significantly over the past twelve months. Assets managed by the department at September 30, 2008 were $653.4 million, down from $759.3 at the end of the same quarter of 2007 and down from $729.7 million at the end of 2007. Income from loan sales and servicing was up 53.1% in the third quarter of 2008 compared to the same period of 2007, and year to date, is up 72.3% over the same period of 2007. The Banks continue to experience strong volume in conventional residential real estate mortgage loans, particularly with regard to the volume of loans sold on the secondary market. During the third quarter of 2007, the Company formed United Structured Finance, a finance company that offers financing solutions to small businesses, primarily by engaging in SBA 504 and 7(a) lending. The loans generated by USFC Page 15 are typically sold on the secondary market, and gains on the sale of those loans contributed to the increase income from loan sales and servicing for the current quarter. The table below shows the breakdown of income from loan sales and servicing between residential mortgages and United Structured Finance, in thousands of dollars:
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2008 2007 2008 2007 ---- ---- ------ -------- In thousands of dollars Residential mortgage sales and servicing $579 $471 $1,684 $1,227 United Structured Finance income 145 2 456 15 ---- ---- ------ ------ Total income from loan sales and servicing $724 $473 $2,140 $1,242 ==== ==== ====== ======
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. No write-downs in mortgage servicing rights were required in 2008 or 2007 as a result of impairment or other reasons. ATM, debit and credit card fee income continues to provide a steady source of noninterest income for the Company. The Banks operate twenty ATMs throughout their market areas, and Bank clients are active users of debit cards. The Banks continue to earn ongoing fee income from credit card referrals and operation of its credit card merchant business. Income from these areas was up 6.2% in the most recent quarter compared to the same quarter of 2007, and is up 9.7% year to date over 2007. At the same time, income from bank owned life insurance has increased, and other income has declined. Other income generally includes other service charges and fees, as well as nonrecurring income. NONINTEREST EXPENSE Total noninterest expenses were up 4.9% in the third quarter of 2008 compared to the same quarter of last year, and are up 8.2% year to date. Salaries and benefits are the organization's largest single area of expense, and for the quarter, were down from the prior quarter and the same quarter of 2007. Reduced earnings levels in the recent quarter resulted in a decrease in the amount of the Company's expense relating to incentive compensation. The Company has selectively expanded 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 declined 0.7% from the same quarter of 2007 but remain 9.7% above the first nine months of last year. Occupancy and equipment expense increased modestly in the third quarter and year to date compared to 2007 levels, and reflects the Company's ongoing investment in technology and equipment. External data processing costs were substantially unchanged from the same quarter of last year, but are up 13.6% over the first three quarters of 2007, which included a large cost recovery from a vendor. Advertising and marketing expenses increased by 1.1% for the quarter and 3.2% year to date compared to the comparable periods last year. Director fees and attorney, accounting and other professional fees were down from the comparable quarter and nine month periods of 2007. Costs relating to assets carried as Other Real Estate Owned include property taxes, maintenance and utility costs related to those properties. In addition, net losses from the write-down or sale of those properties is included in that category of expense. Deterioration in the value of certain of these Page 16 properties resulted in additional losses of $367,000 during the most recent quarter, as those assets were written down to their estimated fair value reflecting a decline in prevailing real estate prices. Other expenses, which include FDIC insurance costs, fraud losses and losses on closed accounts, were not significantly changed for the quarter and year to date compared to 2007 levels. FEDERAL INCOME TAX The Company's effective tax rate for the first nine months of 2008 was 21.8%, compared to 26.8% for the same period of 2007. The decrease in the effective tax rate is the result of the benefits received from the Company's investment in tax exempt assets and resulting tax exempt income, as well as an increase in the proportional level of tax-exempt income to total income as a result of declining earnings. FINANCIAL CONDITION SECURITIES The Company's investment securities portfolio decreased by $9.7 million from September 30, 2007 and $7.9 million from the end of last year. During recent quarters, the Company has elected not to replace some maturing investments to fund additional loan growth. The mix of the Company's investment portfolio has shifted during the past twelve months, as the percentage of investments held in treasury and agency securities has declined while the percentages of mortgage backed agencies, municipal obligations and corporate securities have increased. 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.
September 30, 2008 December 31, 2007 September 30, 2007 -------------------- -------------------- -------------------- Balance % of total Balance % of total Balance % of total ------- ---------- ------- ---------- ------- ---------- In thousands of dollars U.S. Treasury and agency securities $18,526 23.8% $33,532 39.0% $34,430 39.3% Mortgage backed agency securities 15,421 19.8% 13,051 15.2% 13,956 15.9% Obligations of states and political subdivisions 38,574 49.4% 36,128 42.1% 36,090 41.1% Corporate, asset backed, and other securities 5,492 7.0% 3,187 3.7% 3,215 3.7% ------- ----- ------- ----- ------- ----- Total Investment Securities $78,013 100.0% $85,898 100.0% $87,691 100.0% ======= ===== ======= ===== ======= =====
The Company concentrates its credit risk within the loan portfolio rather than in the investment 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 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 48% 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, and the Company does not have any exposure Fannie Mae and Freddie Mac equity securities or non-agency mortgage-backed securities that have been the topic of much recent public discussion. Page 17 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 table below summarizes unrealized gains and losses in each category of the portfolio at September 30, 2008 and 2007, in thousands of dollars.
2008 2007 Change ----- ---- ------ Unrealized gains (losses) in: U.S. Treasury and agency securities $ 71 $139 $ (68) Mortgage backed agency securities 153 60 93 Obligations of states and political subdivisions (247) 49 (296) Corporate, asset backed and other securities (300) 73 (373) ----- ---- ----- Total investment securities $(323) $321 $(644) ===== ==== =====
LOANS Gross portfolio loans have increased by $21.0 million in the third quarter of 2008 and $34.4 million from September 30, 2007, and the growth over the past twelve months is 5.3%. This growth has resulted from a 7.0% increase in the Company's business loan portfolio and growth of 12.9% in personal loan balances, primarily in home equity lines of credit. Residential mortgage balances have declined by 1.0% and construction and land development loans are down 4.0% over the past twelve months. The makeup of the Company's portfolio continues to evolve, and the portfolio mix has changed modestly during the nine months of the year. 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.
September 30, 2008 December 31, 2007 September 30, 2007 --------------------- ---------------------- --------------------- Balance % of total Balance % of total Balance % of total -------- ---------- -------- ----------- -------- ---------- In thousands of dollars Total loans: Personal $110,136 16.1% $ 98,075 15.2% $ 97,568 15.0% Business loans, including commercial mortgages 401,559 58.8% 376,637 58.5% 375,209 57.9% Tax exempt 2,582 0.4% 2,709 0.4% 2,747 0.4% Residential mortgage 85,530 12.5% 86,023 13.3% 86,374 13.3% Construction and development loans 83,257 12.2% 81,086 12.6% 86,728 13.4% -------- ----- -------- ----- -------- ----- Total portfolio loans $683,064 100.0% $644,530 100.0% $648,626 100.0% ======== ===== ======== ===== ======== =====
CREDIT QUALITY The Company continues to actively monitor delinquencies, nonperforming assets and potential problem loans. 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 appears sufficient. The following table shows the aggregate amount of the Company's nonperforming assets by type, in thousands of dollars. For purposes of this summary, Page 18 loans renewed on market terms existing at the time of renewal are not considered troubled debt restructurings.
9/30/08 12/31/07 9/30/07 ------- -------- -------- In thousands of dollars Nonaccrual loans $13,986 $13,695 $ 7,467 Accruing loans past due 90 days or more 1,481 1,455 1,532 Troubled debt restructurings 1,250 -- -- ------- ------- ------- Total nonperforming loans 16,717 15,150 8,999 Other assets owned 3,553 2,253 1,938 ------- ------- ------- Total nonperforming assets $20,270 $17,403 $10,937 ======= ======= ======= Percent of nonperforming loans to total portfolio loans 2.45% 2.35% 1.39% Percent of nonperforming assets to total assets 2.49% 2.19% 1.39%
Total nonaccrual loans have increased by $291,000 since the end of 2007, while loans delinquent 90 days or more have increased by $26,000. The modest increase in nonaccrual loans reflects the move of some loans to nonaccrual status, net of payoff or charge-off of some nonperforming loans. Troubled debt restructurings consist of loans to one borrower. Those loans were renewed at lower than market rates as a result of efforts to help the cashflows of the client. Those loans are current as of September 30, 2008. 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 2.45% at the end of the third quarter of 2008, but are down from 2.65% at the end of the second quarter of this year. Holdings of other assets owned increased by $1.3 million since the end of 2007. Other real estate owned includes eighteen properties that were acquired through foreclosure or in lieu of foreclosure. The properties include residential homes and lots, as well as commercial properties. Two properties are 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 year to date increase reflects in part the recognition of additional loans identified as impaired, as well as a combination of an increasing historical charge-off rate and an increase in loan balances. An analysis of the allowance for loan losses, in thousands of dollars, for the nine months ended September 30, 2008 and 2007 follows:
2008 2007 -------- ------- Balance at January 1 $12,306 $ 7,849 Loans charged off (3,644) (3,041) Recoveries credited to allowance 63 70 Provision charged to operations 5,610 2,836 ------- ------- Balance at September 30 $14,335 $ 7,714 ======= =======
The following table presents the allocation of the allowance for loan losses applicable to each loan category in thousands of dollars, as of September 30, 2008 and 2007, and December 31, 2007. 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. Page 19
9/30/08 12/31/07 9/30/07 ------- -------- ------- Business and commercial mortgage (1) $12,422 $10,924 $6,571 Residential mortgage 372 368 189 Personal 1,263 974 954 Unallocated 278 40 -- ------- ------- ------ Total $14,335 $12,306 $7,714 ======= ======= ======
(1) Includes commercial construction and development loans Within the Banks' loan portfolios, $27.9 million of impaired loans have been identified as of September 30, 2008, compared with $24.7 million as of December 31, 2007, and the specific allowance for impaired loans was $6.1 million at both September 30, 2008 and 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 increased by $17.5 million during the most recent quarter, and have grown $15.0 million since the end of 2007. Noninterest bearing deposit balances have grown by $10.3 million since the end of 2007, while interest bearing deposits have increased $4.7 million during the same period. Compared to September 30, 2007, demand deposits are up $9.9 million, while interest bearing deposits have increased by $18.0 million. 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 September 30, 2008 and 2007, and December 31, 2007.
9/30/08 12/31/07 9/30/07 ------- -------- -------- Noninterest bearing deposits 12.8% 11.6% 11.9% Interest bearing deposits 87.2% 88.4% 88.1% ----- ----- ----- 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 Page 20 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. 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 third quarter of 2008, the Banks procured $3.0 million in new advances and repaid $2,511,000 in matured borrowings, resulting in a small increase in total FHLB borrowings outstanding at September 30, 2008. CAPITAL RESOURCES The Company and the Banks were categorized as well-capitalized at September 30, 2008 and 2007, and December 31, 2007 by their regulators. The following table shows the Company's capital ratios and ratio calculations as of September 30, 2008 and 2007, and December 31, 2007. Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc. --------------------- ----------------------------- Adequate Well 9/30/08 12/31/07 9/30/07 -------- ---------- -------- -------- ------- Tier 1 capital to average assets 4% 5% 8.7% 8.7% 9.4% Tier 1 capital to risk weighted assets 4% 6% 10.1% 10.5% 10.9% Total capital to risk weighted assets 8% 10% 11.4% 11.8% 12.1% Total shareholders' equity $72,766 $72,967 $75,534 Intangible assets (3,469) (3,469) (3,469) Disallowed servicing assets -- -- -- Unrealized (gain) loss on securities available for sale 214 (293) (212) ------- ------- ------- Tier 1 capital 69,511 69,205 71,853 Allowable loan loss reserves 8,663 8,257 7,626 ------- ------- ------- Tier 1 and 2 capital $78,174 $77,462 $79,479 ======= ======= =======
On October 8, 2008, the Company declared a cash dividend of $.10 per share payable October 31 to shareholders of record October 20. The cash dividend represents a decrease from $.20 per share paid in each of the first three quarters of 2008. The decrease will allow the Company to retain approximately $500,000 of capital per quarter. The Company believes this additional capital will position it to capitalize on sound business opportunities while prudently balancing the risks that exist in today's market. The Board of Directors will continue to monitor capital growth, earnings and economic conditions in order to determine future dividend payments. 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. Page 21 FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and United Bancorp, Inc. Forward-looking statements are identifiable by words or phrases such as that an event or trend "will" occur or "continue" or that United Bancorp, Inc. or its management "believes", "anticipates", "determined", "estimated", "expects" or "projected" that a particular result or event will occur, and variations of such words and similar expressions. Management's determination of the provision and allowance for loan losses involves judgments that are inherently forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("risk factors") 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. United Bancorp, Inc. undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise. Risk factors include, but are not limited to, the risk factors described in "Item 1A - Risk Factors" of United Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007; the timing and level of asset growth; changes in banking laws and regulations; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances and issues; governmental and regulatory policy changes; opportunities for acquisitions and the effective completion of acquisitions and integration of acquired entities; the possibility that anticipated cost savings and revenue enhancements from acquisitions, restructurings, reorganizations and bank consolidations may not be realized at amounts projected, at all or within expected time frames; the local and global effects of the ongoing war on terrorism and other military actions, including actions in Iraq; and current uncertainties and fluctuations in the financial markets and stocks of financial services providers due to concerns about credit availability and concerns about the Michigan economy in particular. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. 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 Page 22 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 September 30, 2008, the Company would expect a maximum potential reduction in net interest margin of less than 8% 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. The Funds Management policies provide for a level of interest sensitivity that, 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 September 30, 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 September 30, 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, Page 23 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 September 30, 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. There were no purchases by the Company during the quarter ended September 30, 2008 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act. There is a maximum of 69,106 shares that may yet be purchased under the plan. 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. Page 24 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. October 24, 2008 /s/ Robert K. Chapman /s/ Randal J. Rabe - ------------------------------------- ---------------------------------------- Robert K. Chapman Randal J. Rabe President and Chief Executive Officer Executive Vice President and (Principal Executive Officer) Chief Financial Officer (Principal Financial Officer) Page 25 EX-31.1 2 k46803exv31w1.txt EX-31.1 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 October 24, 2008 - ------------------------------------- ---------------- Robert K. Chapman (Principal Executive Officer) President and Chief Executive Officer Page 26 EX-31.2 3 k46803exv31w2.txt EX-31.2 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 October 24, 2008 - ------------------------------------ ---------------- Randal J. Rabe Date (Principal Financial Officer) Executive Vice President and Chief Financial Officer Page 27 EX-32.1 4 k46803exv32w1.txt EX-32.1 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 September 30, 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 October 24, 2008 - ------------------------------------- ---------------- Robert K. Chapman Date (Principal Executive Officer) President and Chief Executive Officer /s/ Randal J. Rabe October 24, 2008 - ------------------------------------- ---------------- Randal J. Rabe Date (Principal Financial Officer) Executive Vice President and Chief Financial Officer Page 28 -----END PRIVACY-ENHANCED MESSAGE-----