United States
Securities and Exchange Commission
Washington, D.C. 20549
_______________________________
Form 10-Q
| þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2010
_________________________
Commission File #0-16640
(Exact name of registrant as specified in its charter)
| Michigan | 38-2606280 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2723 South State Street, Ann Arbor, MI 48104
(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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes oNo o
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 o
Non-accelerated filer o (do not check if a smaller reporting company)
Accelerated filer o
Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No þ
As of October 22, 2010, there were outstanding 5,083,311 shares of the registrant's common stock, no par value.
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 "outlook" or "strategy"; that an event or trend "may", "should", "will", "is likely", or is "probable" to occur or "continue" or "is scheduled" or "on track" or that the Company or its management "anticipates", "believes", "estimates", "plans", "forecasts", "intends", "predicts", "projects", or "expects" a particular result, or is "confident," "optimistic" or has an "opinion" that an event will occur, or other words or phrases such as "ongoing", "future", or "tend" and variations of such words and similar expressions. 0;Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, statements related to real estate valuation, future recognition of income, future levels of non-performing loans, the rate of asset dispositions, future capital levels, capital raising activities (including the successful completion of the proposed offering of our common stock), dividends, future growth and funding sources, future liquidity levels, future profitability levels, our ability to successfully consolidate our subsidiary banks, the benefits of the bank consolidation on our clients, bank co-workers and the local communities in which we operate, our ability to comply with our memorandum of understanding, the potential results of the Bank’s recently completed regulatory examination as of June 1, 2010, the effects on earnings of changes in interest rates and the future level of other revenue sources. All of the information concerning interest rate sensitivity is forward-looking.
Management's determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including goodwill, mortgage servicing rights and deferred tax assets) and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. There can be no assurance that future loan losses will be limited to the amounts estimated. Our ability to fully comply with all of the provisions of our memorandum of understanding, improve regulatory capital ratios, raise additional capital, successfully implement new programs and initiatives, increase efficiencies, utilize our deferred tax asset, address regulatory issues, respond to declines i n collateral values and credit quality, and improve profitability is not entirely within our control and is not assured. The future effect of changes in the financial and credit markets and the national and regional economy on the banking industry, generally, and on United Bancorp, Inc., specifically, are also inherently uncertain. 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, clarify or revise forward-looking statements to reflect developments that occur or information obtained after the date of this report.
Risk factors include, but are not limited to, the risk factors described in "Item 1A – Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2009, in our Form S-1 Registration Statement filed with the Commission on October 1, 2010 under the heading “Risk Factors,” and in “Part II, Item 1A – Risk Factors” of this report; the timing and level of asset
growth; changes in market interest rates, changes in FDIC assessment rates, changes in banking laws and regulations; changes in property values, asset quality and the financial capability of borrowers; actions of bank regulatory authorities; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances and issues; the impact of possible future litigation; governmental and regulatory policy changes; opportunities for acquisitions and the effective completion of acquisitions and integration of acquired entities; changes in value and credit quality of investment securities; the local and global effects of current and future military actions; and current uncertainties and fluctuations in the financial markets and stocks of financial services providers due to concerns about credit avail ability 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 | Description | Page | |
| Exhibit 31.1 | 46 | ||
| Exhibit 31.2 | 47 | ||
| Exhibit 32.1 | 48 | ||
Item 1 – Financial Statements
| (a) | Condensed Consolidated Balance Sheets |
| In thousands of dollars | (unaudited) | |||||||
| September 30, | December 31, | |||||||
| Assets | 2010 | 2009 | ||||||
| Cash and demand balances in other banks | $ | 14,761 | $ | 10,047 | ||||
| Interest bearing balances with banks | 80,053 | 115,247 | ||||||
| Federal funds sold | - | 295 | ||||||
| Total cash and cash equivalents | 94,814 | 125,589 | ||||||
| Securities available for sale | 109,489 | 92,146 | ||||||
| FHLB Stock | 2,992 | 2,992 | ||||||
| Loans held for sale | 15,674 | 7,979 | ||||||
| Portfolio loans | 604,284 | 650,053 | ||||||
| Less allowance for loan losses | 23,491 | 20,020 | ||||||
| Net portfolio loans | 580,793 | 630,033 | ||||||
| Premises and equipment, net | 11,443 | 12,332 | ||||||
| Bank-owned life insurance | 13,279 | 12,939 | ||||||
| Accrued interest receivable and other assets | 24,184 | 25,318 | ||||||
| Total Assets | $ | 852,668 | $ | 909,328 | ||||
| Liabilities | ||||||||
| Deposits | ||||||||
| Noninterest bearing | $ | 100,381 | $ | 99,893 | ||||
| Interest bearing deposits | 640,121 | 682,908 | ||||||
| Total deposits | 740,502 | 782,801 | ||||||
| Federal funds purchased and other short term borrowings | 1,625 | - | ||||||
| FHLB advances payable | 30,339 | 42,098 | ||||||
| Accrued interest payable and other liabilities | 2,807 | 3,562 | ||||||
| Total Liabilities | 775,273 | 828,461 | ||||||
| Commitments and Contingent Liabilities | ||||||||
| Shareholders' Equity | ||||||||
| Preferred stock, no par value; 2,000,000 shares authorized, 20,600 shares outstanding; liquidation preference $1,000 per share | 20,232 | 20,158 | ||||||
| Common stock and paid in capital, no par value; 30,000,000 shares authorized; 5,083,311 and 5,066,384 shares issued and outstanding, respectively | 68,269 | 68,122 | ||||||
| Accumulated deficit | (12,816 | ) | (8,689 | ) | ||||
| Accumulated other comprehensive income, net of tax | 1,710 | 1,276 | ||||||
| Total Shareholders' Equity | 77,395 | 80,867 | ||||||
| Total Liabilities and Shareholders' Equity | $ | 852,668 | $ | 909,328 | ||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | ||||||||
| Condensed Consolidated Statements of Operations (unaudited) |
| In thousands of dollars, except per share data | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| Interest Income | 2010 | 2009 | 2010 | 2009 | ||||||||||||
| Interest and fees on loans | $ | 9,157 | $ | 9,943 | $ | 27,667 | $ | 30,275 | ||||||||
| Interest on securities | ||||||||||||||||
| Taxable | 572 | 462 | 1,587 | 1,429 | ||||||||||||
| Tax exempt | 218 | 329 | 772 | 1,015 | ||||||||||||
| Interest on federal funds sold and balances with banks | 46 | 41 | 177 | 92 | ||||||||||||
| Total interest income | 9,993 | 10,775 | 30,203 | 32,811 | ||||||||||||
| Interest Expense | ||||||||||||||||
| Interest on deposits | 1,680 | 2,475 | 5,827 | 8,046 | ||||||||||||
| Interest on fed funds and other short term borrowings | 68 | - | 123 | - | ||||||||||||
| Interest on FHLB advances | 281 | 440 | 905 | 1,430 | ||||||||||||
| Total interest expense | 2,029 | 2,915 | 6,855 | 9,476 | ||||||||||||
| Net Interest Income | 7,964 | 7,860 | 23,348 | 23,335 | ||||||||||||
| Provision for loan losses | 3,150 | 8,200 | 16,600 | 20,470 | ||||||||||||
| Net Interest Income (Loss) after Provision for Loan Losses | 4,814 | (340 | ) | 6,748 | 2,865 | |||||||||||
| Noninterest Income | ||||||||||||||||
| Service charges on deposit accounts | 549 | 694 | 1,636 | 2,076 | ||||||||||||
| Wealth Management fee income | 1,177 | 1,045 | 3,327 | 2,989 | ||||||||||||
| Gains (losses) on securities transactions | - | - | 31 | (13 | ) | |||||||||||
| Income from loan sales and servicing | 2,219 | 1,405 | 4,270 | 5,161 | ||||||||||||
| ATM, debit and credit card fee income | 491 | 601 | 1,435 | 1,699 | ||||||||||||
| Income from bank-owned life insurance | 114 | 125 | 340 | 370 | ||||||||||||
| Other income | 262 | 211 | 706 | 595 | ||||||||||||
| Total noninterest income | 4,812 | 4,081 | 11,745 | 12,877 | ||||||||||||
| Noninterest Expense | ||||||||||||||||
| Salaries and employee benefits | 4,502 | 4,268 | 12,493 | 13,635 | ||||||||||||
| Occupancy and equipment expense, net | 1,296 | 1,323 | 3,929 | 3,979 | ||||||||||||
| External data processing | 304 | 439 | 899 | 1,277 | ||||||||||||
| Advertising and marketing | 154 | 174 | 474 | 572 | ||||||||||||
| Attorney, accounting and other professional fees | 424 | 354 | 1,370 | 837 | ||||||||||||
| Director fees | 88 | 112 | 265 | 336 | ||||||||||||
| Expenses relating to ORE property | 394 | 828 | 1,248 | 1,496 | ||||||||||||
| FDIC insurance premiums | 456 | 332 | 1,405 | 1,334 | ||||||||||||
| Goodwill impairment | - | - | - | 3,469 | ||||||||||||
| Other expenses | 697 | 613 | 2,189 | 2,228 | ||||||||||||
| Total noninterest expense | 8,315 | 8,443 | 24,272 | 29,163 | ||||||||||||
| Income (Loss) Before Federal Income Tax | 1,311 | (4,702 | ) | (5,779 | ) | (13,421 | ) | |||||||||
| Federal income tax (benefit) | 284 | (1,812 | ) | (2,498 | ) | (5,070 | ) | |||||||||
| Net Income (Loss) | $ | 1,027 | $ | (2,890 | ) | $ | (3,281 | ) | $ | (8,351 | ) | |||||
| Preferred stock dividends and amortization | (283 | ) | (282 | ) | (847 | ) | (797 | ) | ||||||||
| Income (Loss) Available to Common Shareholders | $ | 744 | $ | (3,172 | ) | $ | (4,128 | ) | $ | (9,148 | ) | |||||
| Basic and diluted earnings (loss) per share | $ | 0.14 | $ | (0.62 | ) | $ | (0.81 | ) | $ | (1.78 | ) | |||||
| Cash dividends declared per share of common stock | $ | - | $ | - | $ | - | $ | 0.02 | ||||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | ||||||||||||||||
| Condensed Consolidated Statements of Shareholders’ Equity (unaudited) |
| In thousands of dollars | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| Total Shareholders' Equity | 2010 | 2009 | 2010 | 2009 | ||||||||||||
| Balance at beginning of period | $ | 76,397 | $ | 84,287 | $ | 80,867 | $ | 69,451 | ||||||||
| Net income (loss) | 1,027 | (2,890 | ) | (3,281 | ) | (8,351 | ) | |||||||||
| Other comprehensive income: | ||||||||||||||||
| Net change in unrealized gains on securities available for sale, net of reclass adjustments for realized gains (losses) and related taxes | 173 | 763 | 433 | 790 | ||||||||||||
| Total comprehensive income (loss) | 1,200 | (2,127 | ) | (2,848 | ) | (7,561 | ) | |||||||||
| Preferred stock and warrants issued | - | - | - | 20,600 | ||||||||||||
| Cash dividends paid on preferred shares | (258 | ) | (258 | ) | (772 | ) | (598 | ) | ||||||||
| Cash dividends paid on common shares | - | - | - | (101 | ) | |||||||||||
| Other common stock transactions | 56 | 63 | 148 | 174 | ||||||||||||
| Balance at end of period | $ | 77,395 | $ | 81,965 | $ | 77,395 | $ | 81,965 | ||||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | ||||||||||||||||
| Condensed Consolidated Statements of Cash Flows (unaudited) |
| In thousands of dollars | Nine Months Ended September 30, | |||||||
| 2010 | 2009 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | (3,281 | ) | $ | (8,351 | ) | ||
| Adjustments to Reconcile Net Income to Net Cash from Operating Activities | ||||||||
| Depreciation and amortization | 1,894 | 1,581 | ||||||
| Provision for loan losses | 16,600 | 20,470 | ||||||
| Gain on sale of loans | (3,624 | ) | (4,607 | ) | ||||
| Proceeds from sales of loans originated for sale | 163,090 | 256,695 | ||||||
| Loans originated for sale | (167,161 | ) | (254,998 | ) | ||||
| (Gains) losses on securities transactions | (31 | ) | 13 | |||||
| Change in deferred income taxes | (1,544 | ) | (3,477 | ) | ||||
| Stock option expense | 113 | 112 | ||||||
| Increase in cash surrender value of bank-owned life insurance | (340 | ) | (370 | ) | ||||
| Change in investment in limited partnership | (13 | ) | (180 | ) | ||||
| Goodwill impairment | - | 3,469 | ||||||
| Change in accrued interest receivable and other assets | 4,267 | (833 | ) | |||||
| Change in accrued interest payable and other liabilities | (529 | ) | (1,051 | ) | ||||
| Net cash from operating activities | 9,441 | 8,473 | ||||||
| Cash Flows from Investing Activities | ||||||||
| Securities available for sale | ||||||||
| Purchases | (58,764 | ) | (34,028 | ) | ||||
| Sales | 4,376 | - | ||||||
| Maturities and calls | 29,360 | 10,000 | ||||||
| Principal payments | 7,661 | 4,774 | ||||||
| Net change in portfolio loans | 30,393 | 7,954 | ||||||
| Premises and equipment expenditures | (72 | ) | (333 | ) | ||||
| Net cash from investing activities | 12,954 | (11,633 | ) | |||||
| Cash Flows from Financing Activities | ||||||||
| Net change in deposits | (42,299 | ) | 74,150 | |||||
| Net change in fed funds sold and short term borrowings | 1,625 | - | ||||||
| Proceeds from FHLB advances | - | 10,500 | ||||||
| Principal payments on FHLB advances | (11,759 | ) | (18,422 | ) | ||||
| Proceeds from issuance of preferred stock | - | 20,600 | ||||||
| Proceeds from other common stock transactions | 35 | 62 | ||||||
| Cash dividends paid on common and preferred | (772 | ) | (699 | ) | ||||
| Net cash from financing activities | (53,170 | ) | 86,191 | |||||
| Net change in cash and cash equivalents | (30,775 | ) | 83,031 | |||||
| Cash and cash equivalents at beginning of year | 125,589 | 18,472 | ||||||
| Cash and cash equivalents at end of period | $ | 94,814 | $ | 101,503 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Interest paid | $ | 7,078 | $ | 9,883 | ||||
| Loans transferred to other real estate | 2,247 | 980 | ||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | ||||||||
| Notes to Condensed Consolidated Financial Statements (unaudited) |
Note 1 - Basis of Presentation
The unaudited condensed consolidated financial statements of United Bancorp, Inc. (the "Company" or “United”) have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") 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 GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) believed necessary for a fair presentation have been included. The condensed consolidated balance sheet of the Company as of December 31, 2009 has been derived from the audited consolidated balance sheet of the Company as of that date. Operating results for the three and ni ne month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. 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, 2009.
Bank Consolidation – Effective April 1, 2010, the Company completed the consolidation of its subsidiary banks, United Bank & Trust and United Bank & Trust – Washtenaw. Under the consolidation, United Bank & Trust – Washtenaw was consolidated and merged with and into United Bank & Trust, and the consolidated bank operates under the charter and name of United Bank & Trust.
Note 2 – Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred credit losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume of loans, amount and composition of the loan portfolio, and other factors management believes to be relevant. The Company's past loan loss experience is determined by evaluating the average charge-offs over the most recent eight quarters. Prior to the fourth quarter of 2009, the Company determined its past loan loss experience by using a rolling twelve quarter historical approach. The allowance is increased by provisions for loan losses charged to income. Loan losses are charged against the allowance when m anagement believes a loan is uncollectible. Subsequent recoveries, if any, are credited to the allowance.
Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate, or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations require an increase in the allowance for loan losses, that increase is recorded as a component of the provision for loan losses. Loans are evaluated for impairment when payments are delayed or when the internal grading system indicates a substandard or doubtful classification.
Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, home equity and second mortgage loans. Commercial loans and mortgage
loans secured by other properties are evaluated individually for impairment. When credit analysis of the borrower's operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, including the Company's subsidiary bank's loans to the borrower, the loan is evaluated for impairment. Often this is associated with a delay or shortfall of payments of thirty days or more. Loans are generally moved to nonaccrual status when ninety days or more past due or when the borrower is in bankruptcy. Loans in nonaccrual status are often also considered impaired. Impaired loans, or portions thereof, are charged off when management believes they are uncollectible. This typically occurs when the loan is 120 or more days past due unless the lo an is both well-secured and in the process of collection.
Note 3 - Securities
Securities classified as available for sale are reported at their fair values and the related net unrealized holding gains or losses are reported in other comprehensive income. Premiums and discounts on securities are recognized in interest income using the interest method over the period to maturity. Realized gains or losses are based upon the amortized cost of the specific securities sold. Balances of securities by category are shown below at September 30, 2010 and December 31, 2009. All securities are classified as available for sale.
| At September 30, 2010 | Amortized Cost | Gains | Losses | Fair Value | ||||||||||||
| U.S. Treasury and agency securities | $ | 26,266 | $ | 347 | $ | (12 | ) | $ | 26,601 | |||||||
| Mortgage backed agency securities | 54,754 | 984 | (168 | ) | 55,570 | |||||||||||
| Obligations of states and political subdivisions | 24,226 | 1,431 | - | 25,657 | ||||||||||||
| Corporate, asset backed and other debt securities | 1,627 | 6 | - | 1,633 | ||||||||||||
| Equity securities | 26 | 2 | - | 28 | ||||||||||||
| Total | $ | 106,899 | $ | 2,770 | $ | (180 | ) | $ | 109,489 | |||||||
| At December 31, 2009 | ||||||||||||||||
| U.S. Treasury and agency securities | $ | 31,846 | $ | 412 | $ | (19 | ) | $ | 32,239 | |||||||
| Mortgage backed agency securities | 22,457 | 713 | (28 | ) | 23,142 | |||||||||||
| Obligations of states and political subdivisions | 33,255 | 997 | (141 | ) | 34,111 | |||||||||||
| Corporate, asset backed and other debt securities | 2,628 | - | (5 | ) | 2,623 | |||||||||||
| Equity securities | 26 | 5 | - | 31 | ||||||||||||
| Total | $ | 90,212 | $ | 2,127 | $ | (193 | ) | $ | 92,146 | |||||||
The following tables show fair value and the gross unrealized losses of the Company's investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2010 and December 31, 2009.
| At September 30, 2010 | Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||
| In thousands of dollars | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
| U.S. Treasury and agency securities | $ | 6,130 | $ | (12 | ) | $ | - | $ | - | $ | 6,130 | $ | (12 | ) | ||||||||||
| Mortgage backed agency securities | $ | 22,524 | $ | (168 | ) | $ | - | $ | - | $ | 22,524 | $ | (168 | ) | ||||||||||
| Total | $ | 28,654 | $ | (180 | ) | $ | - | $ | - | $ | 28,654 | $ | (180 | ) | ||||||||||
| At December 31, 2009 | Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||
| In thousands of dollars | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
| U.S. Treasury and agency securities | $ | 10,105 | $ | (19 | ) | $ | - | $ | - | $ | 10,105 | $ | (19 | ) | ||||||||||
| Mortgage backed agency securities | 5,123 | (28 | ) | - | - | 5,123 | (28 | ) | ||||||||||||||||
| Obligations of states and political subdivisions | 1,156 | (41 | ) | 2,089 | (100 | ) | 3,245 | (141 | ) | |||||||||||||||
| Corporate, asset backed and other debt securities | - | - | 2,496 | (5 | ) | 2,496 | (5 | ) | ||||||||||||||||
| Total | $ | 16,384 | $ | (88 | ) | $ | 4,585 | $ | (105 | ) | $ | 20,969 | $ | (193 | ) | |||||||||
Unrealized gains and losses within the investment portfolio are determined to be temporary. The Company has performed an evaluation of its investments for other than temporary impairment, and no losses were recognized during 2010. Loss from other than temporary impairment for 2009 consisted of a write-down of one equity security that was deemed to be impaired.
Sales activity for securities for the three and nine month periods ended September 30, 2010 and 2009 is shown in the following table. All sales were of securities identified as available for sale.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| In thousands of dollars | 2010 | 2009 | 2010 | 2009 | ||||||||||||
| Sales proceeds | $ | - | $ | - | $ | 4,376 | $ | - | ||||||||
| Gross gains on sales | - | - | 38 | - | ||||||||||||
| Gross loss on sales | - | - | (7 | ) | - | |||||||||||
| Loss from other than temporary impairment | - | - | - | (13 | ) | |||||||||||
The fair value of securities available for sale by contractual maturity as of September 30, 2010 is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities are included in the “Due in one year or less” category.
| In thousands of dollars | Amortized Cost | Fair Value | ||||||
| Due in one year or less | $ | 14,018 | $ | 14,314 | ||||
| Due after one year through five years | 88,235 | 90,040 | ||||||
| Due after five years through ten years | 4,050 | 4,441 | ||||||
| Due after ten years | 570 | 666 | ||||||
| Equity securities | 26 | 28 | ||||||
| Total securities | $ | 106,899 | $ | 109,489 | ||||
Securities carried at $5,002,000 as of September 30, 2010 were pledged to secure deposits of public funds, funds borrowed, repurchase agreements, and for other purposes as required by law.
Note 4 – Loans
The following table shows the balances of the various categories of loans of the Company, along with the percentage composition of the portfolio by type at September 30, 2010 and December 31, 2009.
| September 30, 2010 | December 31, 2009 | |||||||||||||||
| In thousands of dollars | Balance | % of total | Balance | % of total | ||||||||||||
| Personal | $ | 109,856 | 18.2 | % | $ | 110,702 | 17.0 | % | ||||||||
| Business, including commercial mortgages | 363,056 | 60.0 | % | 392,495 | 60.4 | % | ||||||||||
| Tax exempt | 2,189 | 0.4 | % | 3,005 | 0.5 | % | ||||||||||
| Residential mortgage | 84,682 | 14.0 | % | 86,417 | 13.3 | % | ||||||||||
| Construction and development | 43,909 | 7.3 | % | 56,706 | 8.7 | % | ||||||||||
| Deferred loan fees and costs | 592 | 0.1 | % | 728 | 0.1 | % | ||||||||||
| Total portfolio loans | $ | 604,284 | 100.0 | % | $ | 650,053 | 100.0 | % | ||||||||
Note 5 - Stock Options and Other Equity Awards
Through December 31, 2009, the Company granted stock options under its 2005 Stock Option Plan (the "2005 Plan"), which is a non-qualified stock option plan as defined under Internal Revenue Service regulations. The shares of stock that are subject to options are the authorized and unissued shares of common stock of the Company. Under the 2005 Plan, directors and management of the Company and subsidiaries were given the right to purchase stock of the Company at the then-current market price at the time the option was 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 2005 Stock Option Plan expired effective January 1, 2010, and no additional options may be granted under the plan.
On April 27, 2010, shareholders of the Company approved the United Bancorp, Inc. Stock Incentive Plan of 2010 (the "Incentive Plan"). The Incentive Plan permits the grant and award of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards and other stock-based and stock-related awards (collectively referred to as "incentive awards") to directors, consultative board members, officers and other key employees of the Company and its subsidiaries. The purpose of the plan is to provide participants with an increased incentive to contribute to the long-term performance and growth of the Company and its subsidiaries, to join the interests of participants with the interests of the Company's shareholders through the opportunity for increased stock ownership and to attract and retain parti cipants. The plan is further intended to provide flexibility to the Company in structuring long-term incentive compensation to best promote these objectives.
No incentive awards may be granted under the Incentive Plan after February 25, 2020. Incentive awards may be granted under the Incentive Plan to participants for no cash consideration or for such minimum consideration as determined by the Company’s Compensation & Governance Committee. The Incentive Plan is not qualified under Section 401(a) of the Internal Revenue Code and is not subject to the Employee Retirement Income Security Act of 1974 (ERISA).
The following is summarized option activity for the nine months ended September 30, 2010 for the Company’s equity compensation plans:
| Stock Options | Options Outstanding | Weighted Avg. Exercise Price | ||||||
| Balance at January 1, 2010 | 435,561 | $ | 20.98 | |||||
| Options granted | - | - | ||||||
| Options exercised | - | - | ||||||
| Options forfeited | (20,187 | ) | 22.61 | |||||
| Balance at September 30, 2010 | 415,374 | $ | 20.90 | |||||
No incentive awards were granted, and no outstanding stock options were exercised, during the nine-month period ended September 30, 2010. For stock options outstanding at September 30, 2010, the range of average exercise prices was $6.00 to $32.14 and the weighted average remaining contractual term was 5.53 years. At September 30, 2010, 330,732 options were vested. None of these options were “in-the-money” as of September 30, 2010, as the exercise price on each of these options was higher than the market value of United common stock. The Company recorded $112,500 in compensation expense related to vested stock options, less estimated forfeitures, for the nine-month periods ended September 30, 2010 and 2009. As of the end of the third quarter of 2010, unrecognized compensation expense related to the stock opt ions totaled $133,911 and is expected to be recognized over three years.
At September 30, 2010, the total options outstanding had no intrinsic value. Intrinsic value was determined by calculating the difference between the Company's closing stock price on September 30, 2010 and the exercise price of each option, multiplied by the number of in-the-money options held by each holder, assuming all option holders had exercised their stock options on September 30, 2010.
Note 6 - Loan Servicing
Loans serviced for others are not included in the accompanying consolidated financial statements. The unpaid principal balance of loans serviced for others was $608.3 million and $522.5 million at September 30, 2010 and December 31, 2009, respectively. The balance of loans serviced for others related to servicing rights that have been capitalized was $605.0 million at September 30, 2010 and $521.1 million at December 31, 2009, respectively.
Unamortized cost of loan servicing rights included in accrued interest receivable and other assets on the consolidated balance sheet, for the three and nine-month periods ended September 30, 2010 and 2009 are shown below.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| In thousands of dollars | 2010 | 2009 | 2010 | 2009 | ||||||||||||
| Balance at beginning of period | $ | 4,130 | $ | 2,937 | $ | 3,775 | $ | 1,773 | ||||||||
| Amount capitalized | 554 | 500 | 1,128 | 1,881 | ||||||||||||
| Amount amortized | (277 | ) | (144 | ) | (497 | ) | (686 | ) | ||||||||
| Change in valuation allowance | - | 148 | 1 | 473 | ||||||||||||
| Balance at September 30 | $ | 4,407 | $ | 3,441 | $ | 4,407 | $ | 3,441 | ||||||||
Activity in the valuation allowance was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| In thousands of dollars | 2010 | 2009 | 2010 | 2009 | ||||||||||||
| Balance at beginning of period | $ | - | $ | 196 | $ | 1 | $ | 521 | ||||||||
| Additions | - | 1 | - | 1 | ||||||||||||
| Reductions | - | (149 | ) | (1 | ) | (474 | ) | |||||||||
| Balance at September 30 | $ | - | $ | 48 | $ | - | $ | 48 | ||||||||
The fair value of servicing rights was as follows:
| In thousands of dollars | 9/30/10 | 12/31/09 | ||||||
| Fair value, January 1 | $ | 4,535 | $ | 1,772 | ||||
| Fair value, end of period | $ | 5,123 | $ | 4,535 | ||||
Note 7 - Common Stock and Earnings Per Share
Basic earnings per common share is determined by dividing net income available to common shareholders by the weighted average number of common shares outstanding plus contingently issuable shares during the period. Diluted earnings per share further assumes the dilutive effect of additional common shares issuable under stock options and warrants. A reconciliation of basic and diluted earnings per share follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| In thousands of dollars, except share data | 2010 | 2009 | 2010 | 2009 | ||||||||||||
| Net income (loss) | $ | 1,027 | $ | (2,890 | ) | $ | (3,281 | ) | $ | (8,351 | ) | |||||
| Less: | ||||||||||||||||
| Accretion of discount on preferred stock | (25 | ) | (24 | ) | (74 | ) | (67 | ) | ||||||||
| Dividends on preferred stock | (258 | ) | (258 | ) | (773 | ) | (730 | ) | ||||||||
| Income (loss) available to common shareholders | $ | 744 | $ | (3,172 | ) | $ | (4,128 | ) | $ | (9,148 | ) | |||||
| Basic income (loss): | ||||||||||||||||
| Weighted avg. common shares outstanding | 5,083,311 | 5,059,340 | 5,076,590 | 5,057,661 | ||||||||||||
| Weighted avg. contingently issuable shares | 54,666 | 69,706 | 60,479 | 67,351 | ||||||||||||
| Total weighted avg. shares outstanding | 5,137,977 | 5,129,046 | 5,137,069 | 5,125,012 | ||||||||||||
| Basic income (loss) per share | $ | 0.14 | $ | (0.62 | ) | $ | (0.81 | ) | $ | (1.78 | ) | |||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Diluted income (loss): | ||||||||||||||||
| Weighted avg. common shares outstanding from basic earnings per share | 5,137,977 | 5,129,046 | 5,137,069 | 5,125,012 | ||||||||||||
| Dilutive effect of stock options | - | - | - | - | ||||||||||||
| Dilutive effect of warrants | - | - | - | - | ||||||||||||
| Total weighted avg. shares outstanding | 5,137,977 | 5,129,046 | 5,137,069 | 5,125,012 | ||||||||||||
| Diluted income (loss) per share | $ | 0.14 | $ | (0.62 | ) | $ | (0.81 | ) | $ | (1.78 | ) | |||||
A total of 415,374 and 438,571 shares, respectively, for the three month periods, and 415,374 and 417,223 shares, respectively, for the nine month periods, ended September 30, 2010 and 2009, subject to stock options granted, and 311,492 shares subject to warrants, are not included in the above calculations as they were non-dilutive as of September 30, 2010.
Note 8 – Other Comprehensive Income
Other comprehensive income components and related taxes for the three and nine month periods ended September 30, 2010 and 2009 were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| In thousands of dollars | 2010 | 2009 | 2010 | 2009 | ||||||||||||
| Net unrealized gain on securities available for sale (net of reclassification adjustments of $0, $0, $31 and ($13), respectively) | $ | 262 | $ | 1,157 | $ | 657 | 1,197 | |||||||||
| Tax expense | 89 | 394 | 224 | 407 | ||||||||||||
| Other comprehensive income (loss) | $ | 173 | $ | 763 | $ | 433 | $ | 790 | ||||||||
The components of accumulated other comprehensive income included in shareholders’ equity at September 30, 2010 and December 31, 2009 were as follows:
| In thousands of dollars | 9/30/10 | 12/31/09 | ||||||
| Net unrealized gains on securities available for sale | $ | 2,590 | $ | 1,934 | ||||
| Tax expense | 880 | 658 | ||||||
| Accumulated other comprehensive income | $ | 1,710 | $ | 1,276 | ||||
Note 9 - Disclosures About Fair Value of Assets and Liabilities
Fair Value Measurements. The Fair Value Measurements Topic of the FASB Accounting Standards Codification (“FASB ASC”) defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC Topic 820-10-20 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. Topic 820-10-55 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 |
Following is a description of the inputs and valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of those instruments under 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. 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. Government agency securities, mortgage backed securities, obligations of states and municipalities, and certain corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities, but rather, relying on the investment securities’ relationship to other benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements were classified at September 30, 2010 and December 31, 2009:
| In thousands of dollars | Fair Value Measurements Using | |||||||||||||||
| September 30, 2010 | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Available for sale securities: | ||||||||||||||||
| U.S. Treasury and agency securities | $ | 26,601 | $ | - | $ | 26,601 | $ | - | ||||||||
| Mortgage backed agency securities | 55,570 | - | 55,570 | - | ||||||||||||
| Obligations of states and political subdivisions | 25,657 | - | 25,657 | - | ||||||||||||
| Corporate, asset backed and other debt securities | 1,633 | - | 1,633 | - | ||||||||||||
| Equity securities | 28 | 28 | - | - | ||||||||||||
| Total available for sale securities | $ | 109,489 | $ | 28 | $ | 109,461 | $ | - | ||||||||
| December 31, 2009 | ||||||||||||||||
| Available for sale securities: | ||||||||||||||||
| U.S. Treasury and agency securities | $ | 32,239 | $ | - | $ | 32,239 | $ | - | ||||||||
| Mortgage backed agency securities | 23,142 | - | 23,142 | - | ||||||||||||
| Obligations of states and political subdivisions | 34,111 | - | 34,111 | - | ||||||||||||
| Corporate, asset backed and other debt securities | 2,623 | - | 2,623 | - | ||||||||||||
| Equity securities | 31 | 31 | - | - | ||||||||||||
| Total available for sale securities | $ | 92,146 | $ | 31 | $ | 92,115 | $ | - | ||||||||
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 sheets, as well as the general classification of those instruments under the valuation hierarchy.
Impaired Loans (Collateral Dependent)
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans. If the impaired loan is identified as collateral dependent, the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a non-recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at September 30, 2010 and December 31, 2009:
| Fair Value Measurements Using | ||||||||||||||||
| In thousands of dollars | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Impaired Loans (Collateral Dependent) | ||||||||||||||||
| September 30, 2010 | $ | 36,915 | $ | - | $ | - | $ | 36,915 | ||||||||
| December 31, 2009 | 26,881 | - | - | 26,881 | ||||||||||||
The carrying amounts and estimated fair value of principal financial assets and liabilities at September 30, 2010 and December 31, 2009 were as follows:
| September 30, 2010 | December 31, 2009 | |||||||||||||||
| In thousands of dollars | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
| Financial Assets | ||||||||||||||||
| Cash and cash equivalents | $ | 94,814 | $ | 94,814 | $ | 125,589 | $ | 125,589 | ||||||||
| Securities available for sale | 109,489 | 109,489 | 92,146 | 92,146 | ||||||||||||
| FHLB Stock | 2,992 | 2,992 | 2,992 | 2,992 | ||||||||||||
| Loans held for sale | 15,674 | 15,674 | 7,979 | 7,979 | ||||||||||||
| Net portfolio loans | 580,793 | 588,385 | 630,033 | 632,831 | ||||||||||||
| Accrued interest receivable | 2,900 | 2,900 | 3,349 | 3,349 | ||||||||||||
| Financial Liabilities | ||||||||||||||||
| Total deposits | $ | (740,502 | ) | $ | (746,117 | ) | $ | (782,801 | ) | $ | (787,443 | ) | ||||
| Short term borrowings | (1,625 | ) | (1,625 | ) | - | - | ||||||||||
| FHLB advances | (30,339 | ) | (32,255 | ) | (42,098 | ) | (43,167 | ) | ||||||||
| Accrued interest payable | (706 | ) | (706 | ) | (930 | ) | (930 | ) | ||||||||
Estimated fair values require subjective judgments and are approximate. The above estimates of fair value are not necessarily representative of amounts that could be realized in actual market transactions, or of the underlying value of the Company. Changes in the following methodologies and assumptions could significantly affect the estimated fair value:
Cash and cash equivalents, FHLB stock, loans held for sale, accrued interest receivable and accrued interest payable – The carrying amounts are reasonable estimates of the fair values of these instruments at the respective balance sheet dates.
Net portfolio loans – The carrying amount is a reasonable estimate of fair value for personal loans for which rates adjust quarterly or more frequently, and for business and tax exempt loans that are prime related and for which rates adjust immediately or quarterly. The fair value for residential mortgage loans that are held for sale on the secondary market is the price offered by the secondary market purchaser. The fair value of all other loans is estimated by discounting future cash flows using current rates for loans with similar characteristics and maturities. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns.
Total deposits – With the exception of certificates of deposit, the carrying value is deemed to be the fair value due to the demand nature of the deposits. The fair value of fixed maturity certificates of deposit is estimated by discounting future cash flows using the current rates paid on certificates of deposit with similar maturities.
Short Term Borrowings – The carrying amounts are reasonable estimates of the fair values of these instruments at the respective balance sheet dates.
FHLB Advances – The fair value is estimated by discounting future cash flows using current rates on advances with similar maturities.
Off-balance-sheet financial instruments – Commitments to extend credit, standby letters of credit and undisbursed loans are deemed to have no material fair value as such commitments are generally fulfilled at current market rates.
Note 10 – Intangible Assets
In 2009, management performed an impairment evaluation to identify potential impairment of goodwill carried by the Company’s subsidiary banks. As a result of the impairment evaluation, a goodwill impairment charge was taken in the first quarter of 2009 for the Company’s entire book value of goodwill of $3.469 million. This non-cash charge was recorded as a component of noninterest expense. The goodwill on the books of the banks originally resulted from the acquisition of various banking offices between 1992 and 1999.
Note 11 – Accounting Developments
FASB ASU 2009-16, Transfers and Servicing (Topic 860); Accounting for Transfers of Financial Assets – In June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB ASC Topic 860, Accounting for Transfers of Financial Assets, which pertains to securitizations. ASU 2009-16 requires more information about transfers of financial assets, including securitization
transactions, and where entities have continued exposure to the risks related to transferred assets. The Company adopted ASU 2009-16 effective January 1, 2010 and adoption did not have a material effect on its financial position or results of operations.
ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances, and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be di saggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. The Company’s disclosures about fair value measurements are presented in Note 9 - Disclosures About Fair Value of Assets and Liabilities. These new disclosure requirements were effective for the period ended March 31, 2010, except for the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. There was no significant effect to the Company’s financial statement disclosure upon adoption of this ASU.
FASB ASU 2010-18 - Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset. In April, 2010, FASB issued ASU 2010-18 - Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset. This Update clarifies that modifications of loans that are accounted for within a pool under Subtopic 310-30, which provides guidance on accounting for acquired loans that have evidence of credit deterioration upon acquisition, do not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cas h flows for the pool change. The amendments do not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40. The Company has adopted ASU 2010-18, but does not anticipate that its adoption will have an impact on its financial statements.
ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires that more information be disclosed about the credit quality of a company’s loans and the allowance for loan losses held against those loans. A company will need to disaggregate new and existing disclosure based on how it develops its allowance for loan losses and how it manages credit exposures. Existi ng disclosures to be presented on a disaggregated basis include a roll-forward of the allowance for loan losses, the related recorded investment in such loans, the nonaccrual status of loans, and impaired loans. Additional disclosure is also required about the credit quality indicators of loans by class at the end of the reporting period, the aging of past due loans, information about troubled debt restructurings, and significant purchases and sales of loans during the reporting period by class.
For public companies, ASU 2010-20 requires certain disclosures as of the end of a reporting period effective for periods ending on or after December 15, 2010. Other required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The Company anticipates that adoption of these additional disclosures will not have a material effect on its financial position or results of operations.
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 forUnited Bancorp, Inc. (“United” or the “Company”) and its subsidiary bank, United Bank & Trust ("UBT" or the "Bank"), for the three and nine month periods ended September 30, 2010 and 2009.
The Company is a Michigan corporation and is a bank holding company registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve") under the Bank Holding Company Act of 1956. The Company has corporate power to engage in activities 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.
United is a community based financial services company that strives to provide financial solutions to the markets and clients that we serve based on their unique circumstances and needs. The Company provides services through the Bank's system of sixteen banking offices, one trust office, and twenty automated teller machines, located in Washtenaw, Lenawee and Monroe Counties, Michigan. United’s corporate headquarters are located in Ann Arbor, Michigan.
The Bank offers a full range of services to individuals, corporations, fiduciaries and other institutions. Banking services include checking, NOW accounts, savings, time deposit accounts, money market deposit accounts, safe deposit facilities and money transfers. Lending operations provide real estate loans, secured and unsecured business and personal loans, consumer installment loans, credit card and check-credit loans, home equity loans, accounts receivable and inventory financing, and construction financing.. Our mortgage company, United Mortgage Company, offers our customers a full array of conventional residential mortgage products, including purchase, refinance and construction loans.
The Bank’s Wealth Management Group is a key focus of the Company’s growth and diversification strategy and offers a variety of investment services to individuals, corporations and governmental entities.
The Bank operates United Structured Finance Company ("USFC"). USFC offers simple, effective financing solutions to small businesses and commercial property owners, primarily by utilizing various government guaranteed loan programs and other off-balance sheet finance solutions through secondary market sources.
United’s primary market area is in Washtenaw, Lenawee, and Monroe Counties in southeastern Michigan, and generally encompasses the Ann Arbor metropolitan area.
While Michigan has the second highest unemployment rate in the United States (as of August 2010), the unemployment rate has shown an improving trend for the past several quarters. In addition, nonfarm payrolls for August 2010 have remained relatively stable over the past three months and as compared to August 2009. The Michigan August 2010 seasonally-adjusted unemployment rate of 13.1% was the lowest monthly rate since March 2009 and the August 2010 unadjusted rate of 12.9% was the second lowest monthly rate since February 2009. Despite the loss of 50,300 nonfarm payroll jobs in August 2010, offsetting job gains made in July 2010, Michigan lost only 13,400 jobs between January 2010 and August 2010, representing a significant decrease from the 212,700 jobs lost during the same period of 2009. Washtenaw County had the thi rd lowest unadjusted unemployment rate in the state and the second lowest unadjusted unemployment rate in the Lower Peninsula at 8.8% for August 2010. The City of Ann Arbor also maintained a lower unadjusted unemployment rate than the entire state at 9.3% for August 2010. Both Washtenaw County and the City of Ann Arbor have maintained lower unadjusted unemployment rates than the entire state throughout the last decade, and continue to do so. In addition, University of Michigan economists expect positive private sector job growth in 2011, which would be the first year of positive private sector employment growth in a decade.
It appears that the Michigan housing market is beginning to show signs of stabilization. Based on U.S. Census data, Michigan housing building permits through July 2010 are up approximately 37.7% from the same period last year. In the Ann Arbor metropolitan area, housing building permits are up approximately 75% through August 2010 compared to the same period in 2009.
The Michigan Economic Activity Index equally weighs nine, seasonally adjusted coincident indicators of real economic activity that reflect activity in the construction, manufacturing and service sectors as well as job growth and consumer outlays. The index is measured on a scale of 110. The index rose three points in July 2010 reaching a level of 87, representing the index's highest value in over two years. The index has also experienced a 16 point growth over the last year, which is the largest year-to-year growth since December 2004.
Washtenaw County had a population of approximately 347,563 for 2009 and is projected to grow by approximately 2.58% from 2009-2020 and approximately 9.38% from 2009-2035. Washtenaw County had a median household income of approximately $59,000 for 2008, which was the third highest in the state.
The economic base of Washtenaw County is centered around health care, education and automotive high technology. Economic stability is provided to a great extent by the University of Michigan, which is a major employer and is not as economically sensitive to the fluctuations of the automotive industry. The services and public sectors account for a substantial percentage of total employment, in large part due to the University of Michigan and the University of Michigan Medical Center.
The economic base of Lenawee and Monroe Counties is primarily agricultural and light manufacturing, with their manufacturing sectors exhibiting moderate dependence on the automotive industry. Lenawee County had a population of approximately 100,000 for 2009 and a median household income of approximately $51,000 for 2008. Monroe County had a population of approximately 153,000 for 2009 and a median household income of approximately $58,000 for 2008. Lenawee County had an unadjusted unemployment rate of 14.7% for August 2010 and Monroe County had an unadjusted unemployment rate of 12.9% for that same month.
While some improvement has been noted in the economy, the Company's loan demand (other than for residential mortgages) continues to contract and loan quality has not improved significantly. Loan quality concerns are primarily concentrated in the areas of construction and residential real estate development, but also include a broader base of the Bank’s loan portfolios.
Memorandum of Understanding
On January 15, 2010, UBT entered into a Memorandum of Understanding ("MOU") with the FDIC and the Michigan Office of Financial and Insurance Regulation (“OFIR”). The MOU is not a "written agreement" for purposes of Section 8 of the Federal Deposit Insurance Act. The MOU documents an understanding among UBT, the FDIC and OFIR that, among other things: (i) UBT will not declare or pay any dividend to the Company without the prior consent of the FDIC and OFIR; and (ii) UBT will have and maintain its Tier 1 capital ratio at a minimum of 9% within six months from the date of the MOU and for the duration of the MOU, and will maintain its total risk-based capital ratio at a minimum of 12% for the duration of the MOU. At September30, 2010, United was not in compliance with the minimum Tier 1 capital ratio required by the MOU.
For additional information about the capital ratios of UBT, see the information under the heading "Regulatory Capital" below, which information is incorporated here by reference.
UBT’s primary regulators, OFIR and the FDIC, recently conducted a regulatory examination of UBT as of June 1, 2010. While we have had our exit meeting and continue to have conversations with our regulators, we do not yet know the final results of the regulatory examination. As a result of the regulatory examination, it is possible that the terms of UBT's MOU could be revised to impose additional or more restrictive requirements on it. It is also possible that UBT could be required to enter into a negotiated Consent Order with OFIR and the FDIC or be subject to other, potentially more severe, regulatory actions.
Registration Statement
At a special meeting of shareholders on September 23, 2010, United shareholders overwhelmingly approved an amendment to the Company’s articles of incorporation to increase the number of authorized shares of common stock from 10,000,000 shares to 30,000,000 shares. In order to obtain additional capital necessary to, among other things, provide a foundation for future growth and the capital necessary to comply with the terms of the MOU, on October 1, 2010, the Company filed a Form S-1 registration statement with the Securities and Exchange Commission in connection with a proposed $25,000,000 offering of its common stock. The registration statement relating to these securities is not yet effective, and the Company cannot
provide assurance as to the timing or success of the proposed offering or the amount of proceeds, if any, that the Company will be able to raise from it. This report does not constitute an offer of any securities for sale.
The Company produced consolidated net income of $1.027 million in the third quarter of 2010, as a result of strong pre-tax, pre-provision income and reduced levels of provision to the Company’s allowance for loan losses. The net loss for the first nine months of 2010 was $3.281 million, which is an improvement from the net loss of $8.351 million incurred during the first nine months of 2009. An after-tax goodwill impairment charge of $2.44 million was taken in the first quarter of 2009.
Net income per share for the third quarter of 2010 was $0.14, and net loss per share for the first nine months of 2010 was $0.81. Return on average shareholders’ equity for the third quarter of 2010 was 5.25% and was -5.52% for the first nine months of 2010. Pre-tax, pre-provision return on average assets was 1.64% for the nine month period ended September 30, 2010.
Net revenue consists of net interest income plus noninterest income. The Company’s net revenue was up 7.0% in the third quarter of 2010 as compared to the same quarter of 2009, and was down 3.1% for the first nine months of 2010 compared to the same period in 2009. Noninterest income for the third quarter of 2010 improved by 17.9% compared to the same quarter of 2009. During the nine month period ended September 30, 2010, United’s non-interest income equaled 33.5% of operating revenues.
The Company’s expenses for the three and nine month periods ended September 30, 2010 were lower than during the same periods in 2009, in spite of elevated costs related to ORE property and other professional fees. Noninterest expenses were down 1.5% in the third quarter of 2010 compared to the quarter ended September 30, 2009, and were down 5.5% for the first nine months of 2010 compared to the same period in 2009, excluding goodwill impairment.
The Company’s provision for loan losses of $3.15 million for the third quarter of 2010 was at its lowest level in eight quarters. The Company’s provision for loan losses for the third quarter of 2010 continued its trend of covering net charge-offs.
Gross portfolio loans declined by $18.5 million, or 3.0%, from June 30, 2010. For the first nine months of 2010, loans have decreased by $45.8 million, or 7.0%. During that same period, $13.1 million of the reduction was the result of net charge-offs within the Company’s loan portfolio. The remaining decline was a result of our continued focus of improving our capital ratios and the slowing of loan demand related to the troubled economic conditions in the region. At the same time, the Company continued to maintain high levels of liquidity, with investments, federal funds and cash equivalents held to improve the liquidity of the balance sheet during this period of economic uncertainty. The Company expects to maintain higher than normal levels of liquidity until economic conditions improve and more attractive invest ment opportunities emerge. The reduction in average balances of liquid assets during the third quarter of 2010, which resulted in part from a year to date decline of $54.1 million in total deposits and FHLB advances, also resulted in improved net interest margin. As part of its capital ratio improvement initiatives,
United has not replaced maturing FHLB advances or wholesale deposits in the first nine months of 2010.
Securities
Balances in the Company’s securities portfolio increased in the third quarter of 2010, reflecting a number of purchases in excess of maturities, calls and sales. The makeup of the Company’s investment portfolio evolves with the changing price and risk structure of the portfolio, and liquidity needs of the Company. The table below reflects the percentage composition of the investment securities portfolio of the Company by type at September 30, 2010 and December 31, 2009.
| In thousands of dollars | 9/30/10 | 12/31/09 | ||||||
| U.S. Treasury and agency securities | 24.3 | % | 35.0 | % | ||||
| Mortgage backed agency securities | 50.8 | % | 25.1 | % | ||||
| Obligations of states and political subdivisions | 23.4 | % | 37.1 | % | ||||
| Corporate, asset backed, and other debt securities | 1.5 | % | 2.8 | % | ||||
| Equity securities | 0.0 | % | 0.0 | % | ||||
| Total Investment Securities | 100.0 | % | 100.0 | % | ||||
Investments in U.S. Treasury and agency securities are considered to possess low credit risk. Obligations of U.S. government agency mortgage-backed securities possess a somewhat higher interest rate risk due to certain prepayment risks. The Company's portfolio contains no mortgage securities or structured notes that the Company believes to be “high risk.”
Changes in unrealized gains and losses are a result of changes in market interest rates on similar investments. The table below summarizes unrealized gains and losses in each category of the portfolio at September 30, 2010 and December 31, 2009.
| Unrealized gains (losses)in thousands of dollars | 9/30/10 | 12/31/09 | Change | |||||||||
| U.S. Treasury and agency securities | $ | 335 | $ | 393 | $ | (58 | ) | |||||
| Mortgage backed agency securities | 816 | 685 | 131 | |||||||||
| Obligations of states and political subdivisions | 1,431 | 856 | 575 | |||||||||
| Corporate, asset backed and other debt securities | 6 | (5 | ) | 11 | ||||||||
| Equity securities | 2 | 5 | (3 | ) | ||||||||
| Total investment securities | $ | 2,590 | $ | 1,934 | $ | 656 | ||||||
FHLB Stock
The Bank is a member of the Federal Home Loan Bank of Indianapolis (“FHLBI”) and holds a $3.0 million investment in stock of the FHLBI. The investment is carried at par value, as there is not an active market for FHLBI stock. The Federal Home Loan Banks continue to record accounting impairments on their private label mortgage-backed securities portfolios, which they hold as long-term investments, and account for them on an amortized cost basis. If total Federal Home Loan Bank gross unrealized losses were deemed “other than temporary” for accounting
purposes, this would significantly impair the Federal Home Loan Bank capital levels and the resulting value of FHLBI stock. The Company regularly reviews the credit quality of FHLBI stock for impairment, and determined that no impairment of FHLBI stock was necessary as of September 30, 2010.
Loans
The following table shows the dollar and percent change in each category of loans for the periods reported. All loans are domestic and contain no significant concentrations by industry or client.
| Change this Quarter | YTD Change | 12-Month Change | ||||||||||||||||||||||
| In thousands of dollars | $ | % | $ | % | $ | % | ||||||||||||||||||
| Personal | $ | (434 | ) | -0.4 | % | $ | (846 | ) | -0.8 | % | $ | (893 | ) | -0.8 | % | |||||||||
| Business, including commercial mortgages | (11,553 | ) | -3.1 | % | (29,439 | ) | -7.5 | % | (42,885 | ) | -10.6 | % | ||||||||||||
| Tax exempt | 294 | 15.5 | % | (816 | ) | -27.2 | % | (867 | ) | -28.4 | % | |||||||||||||
| Residential mortgage | (901 | ) | -1.1 | % | (1,735 | ) | -2.0 | % | (2,526 | ) | -2.9 | % | ||||||||||||
| Construction and development | (5,852 | ) | -11.8 | % | (12,797 | ) | -22.6 | % | (23,686 | ) | -35.0 | % | ||||||||||||
| Deferred loan fees and costs | (82 | ) | -12.2 | % | (136 | ) | -18.7 | % | (165 | ) | -21.8 | % | ||||||||||||
| Total portfolio loans | $ | (18,528 | ) | -3.0 | % | $ | (45,769 | ) | -7.0 | % | $ | (71,022 | ) | -10.5 | % | |||||||||
Loan balances have declined by $18.5 million, or 3.0%, in the third quarter of 2010. Loan balances for the first nine months of 2010 were down $45.8 million, or 7.0%, and were down $71.0 million, or 10.5%, over the twelve months ended September 30, 2010. Personal loans on the Company’s balance sheet included home equity lines of credit, direct and indirect loans for automobiles, boats and recreational vehicles, and other items for personal use. Personal loan balances have declined by 0.4% for the third quarter of 2010 and 0.8% year to date. Business loan balances were down 3.1% during the three months ended September 30, 2010, bringing decline for the first nine months of 2010 to 7.5% and decline for the twelve months ended September 30, 2010 to 10.6%. The decline in business loans reflects a reduction i n demand, primarily relating to the current economic conditions, as well as write-downs, charge-offs and payoffs.
The Bank generally sells its production of fixed-rate mortgages on the secondary market, and retains high credit quality mortgage loans that are not otherwise eligible to be sold on the secondary market and shorter-term adjustable rate mortgages in its portfolio. As a result, the mix of mortgage production for any given year will have an impact on the amount of mortgages held in the portfolio of the Bank. The Bank experienced significant volume in residential real estate mortgage financing during 2009, and this included the refinancing of some portfolio loans and sale of those loans on the secondary market. Refinancing activity had slowed in the first two quarters of 2010, but increased significantly in the third quarter of 2010. Portfolio balances of residential mortgages decreased by 1.1% in the third quarter of 2010 and 2.0% in the first nine months of 2010.
The Bank’s loan portfolio includes $11.0 million of purchased participations in loans originated by other institutions. These participations represent 1.8% of total loans. Of those participation loans, 69.1% of the outstanding balances are the result of participations purchased from other Michigan community banks.
Outstanding balances of loans for construction and development declined by $5.9 million, or 11.8%, in the third quarter of 2010, $12.8 million, or 22.6%, in the first nine months of 2010, and $23.7 million, or 35.0%, since September 30, 2009. The change in balances reflects a decrease in the amount of individual construction loan volume, the shift of some construction loans to permanent financing, and the payoff or charge-off of a number of construction and development loans. Residential construction loans generally convert to residential mortgages to be retained in the Bank's portfolios or to be sold in the secondary market, while commercial construction loans generally will be converted to commercial mortgages.
Credit Quality
The Company actively monitors delinquencies, nonperforming assets and potential problem loans. The accrual of interest income is discontinued when a loan becomes ninety days past due unless the loan 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 chart below shows the amount of nonperforming assets by category.
| In thousands of dollars | 9/30/10 | 6/30/10 | 3/31/10 | 12/31/09 | 09/30/09 | ||||||||||||||||
| Nonaccrual loans | $ | 27,680 | $ | 30,319 | $ | 29,712 | $ | 26,188 | $ | 30,017 | |||||||||||
| Accruing loans past due 90 days or more | 1,926 | 1,557 | 1,930 | 5,474 | 3,711 | ||||||||||||||||
| Total nonperforming loans | 29,606 | 31,876 | 31,642 | 31,662 | 33,728 | ||||||||||||||||
| Nonperforming loans % of total portfolio loans | 4.90 | % | 5.12 | % | 4.99 | % | 4.87 | % | 4.99 | % | |||||||||||
| Allowance coverage of nonperforming loans | 79.3 | % | 73.3 | % | 67.5 | % | 63.2 | % | 77.1 | % | |||||||||||
| Other assets owned | 3,686 | 3,080 | 3,353 | 2,803 | 2,986 | ||||||||||||||||
| Total nonperforming assets | $ | 33,292 | $ | 34,956 | $ | 34,995 | $ | 34,465 | $ | 36,714 | |||||||||||
| Nonperforming assets % of total assets | 3.90 | % | 4.12 | % | 3.88 | % | 3.79 | % | 4.04 | % | |||||||||||
| Loans delinquent 30-89 days | $ | 10,019 | $ | 11,048 | $ | 11,369 | $ | 7,814 | $ | 11,059 | |||||||||||
| Accruing restructured loans (1) | |||||||||||||||||||||
| Business, including commercial mortgages | $ | 11,275 | $ | 11,425 | $ | 11,546 | $ | 11,268 | $ | 11,776 | |||||||||||
| Construction and development | 4,058 | 4,058 | 4,086 | 3,281 | 3,281 | ||||||||||||||||
| Residential mortgage | 1,911 | 1,916 | 1,885 | 1,035 | - | ||||||||||||||||
| Total accruing restructured loans | $ | 17,244 | $ | 17,399 | $ | 17,517 | $ | 15,584 | $ | 15,057 | |||||||||||
| (1) | Prior period amounts have been revised to reflect the retrospective application of more definitive regulatory guidance. | ||||||||||||||||||||
Total nonaccrual loans have increased by $1.5 million, or 5.7%, since the end of 2009, while accruing loans past due 90 days or more have decreased by $3.5 million, or 64.8%, for the same period. The increase in nonaccrual loans reflects the move of some loans to nonaccrual status, net of payoff or charge-off of some nonperforming loans. While the decrease in delinquency primarily reflects the move of delinquent borrowers to nonaccrual status, improvement was also a result of the move of some clients to current status. Loan workout and collection efforts continue with all delinquent clients, in an effort to bring them back to performing status.
Total nonperforming loans declined by $2.1 million, or 6.5%, since December 31, 2009. Total nonperforming loans as a percent of total portfolio loans moved from 4.87% at the end of 2009 to 4.90% at September 30, 2010, and the allowance coverage of nonperforming loans improved from 63.2% at December 31, 2009 to 79.3% at September 30, 2010.
Other assets owned includes other real estate owned and other repossessed assets, including automobiles, boats and other personal property. Holdings of other assets owned increased by $883,000 since the end of 2009. At September 30, 2010, other real estate owned included thirty-six properties that were acquired through foreclosure or in lieu of foreclosure. The properties included twenty-three commercial properties, eight of which were the result of out-of-state loan participations, and thirteen residential properties. Three commercial properties are leased, and all are for sale. All of the Bank’s balances in other assets owned at September 30, 2010 were of other real estate owned.
The following table reflects the changes in other assets owned during 2010.
| In thousands of dollars | ORE | Other Assets | Total | |||||||||
| Balance at January 1 | $ | 2,774 | $ | 29 | $ | 2,803 | ||||||
| Additions | 2,247 | 256 | 2,503 | |||||||||
| Sold | (582 | ) | (94 | ) | (676 | ) | ||||||
| Write-downs | (753 | ) | (191 | ) | (944 | ) | ||||||
| Balance at September 30 | $ | 3,686 | $ | - | $ | 3,686 | ||||||
Accruing restructured loans of $17.2 million at September 30, 2010 are comprised of two categories of loans on which interest is being accrued under their restructured terms, and the loans are current or less than ninety days past due. The first category consists of $15.3 million of commercial loans, primarily comprised of business loans that have been temporarily modified as interest-only loans, generally for a period of up to one year, without a sufficient corresponding increase in the interest rate. This category also includes $4.1 million of construction and development loans that have been renewed as interest only, generally for a period of up to one year, to assist the borrower. United does not typically lower the interest rate and does not forgive principal or interest as part of the modification. United frequent ly obtains additional collateral, guarantor support or an increase in the rate when granting a principal deferral. The average yield on these modified commercial loans was 5.91%, compared to 5.75% earned on the entire commercial loan portfolio in the third quarter of 2010.
The second category included in accruing restructured loans are mortgage loans whose terms have been restructured at less than market terms and include rate modifications and forbearance. These totals consist of ten loans for a total of $1.9 million at September 30, 2010, all of which are the result of residential mortgage loans modified as part of United’s mortgage modification program implemented in 2009.
An analysis of the allowance for loan losses for the nine months ended September 30, 2010 and 2009 follows:
| In thousands of dollars | 2010 | 2009 | ||||||
| Balance at January 1 | $ | 20,020 | $ | 18,312 | ||||
| Loans charged off | (13,738 | ) | (13,000 | ) | ||||
| Recoveries credited to allowance | 609 | 221 | ||||||
| Provision charged to operations | 16,600 | 20,470 | ||||||
| Balance at September 30 | $ | 23,491 | $ | 26,003 | ||||
| Allowance as % of total loans | 3.89 | % | 3.85 | % | ||||
For the first nine months of 2010, net charge-offs of $13.1 million resulted in a 2.73% annualized net charge-off rate, compared with 3.47% for all of 2009. The Company’s allowance for loan losses increased by $3.5 million during the first nine months of 2010. A significant portion of the increase occurred in the second quarter of 2010, primarily as a result of increases in certain loss factors assumed in the Company’s general valuation allowance analysis. The allowance as a percent of total loans has increased from 3.08% at December 31, 2009 to 3.89% at September 30, 2010. Management believes that the Company's allowance for loan losses provides for currently estimated losses inherent in its portfolio.
A loan is classified as impaired when it is probable that the Bank will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement. Within the Bank’s loan portfolio, $52.7 million of impaired loans have been identified as of September 30, 2010, compared with $44.5 million as of September 30, 2009, and the specific allowance for impaired loans was $7.3 million at September 30, 2010, compared to $12.0 million at September 30, 2009. 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 impaired loans reflects the amount management believes to be necessary to maintain the allowanc e for loan losses at an adequate level, based upon the Bank’s current analysis of losses inherent in its loan portfolios.
In 2009, the Company modified its method of estimating allocation of the allowance for loan losses for non-impaired loans. The Company has identified pools of loans on which to apply historical loss experience methodology. For each of these pools, the Company calculated a historical base rate and then attempted to bring the historical charge-off rate up to current conditions through various qualitative adjustments. Beginning in 2007, the historical period used was a three-year period. Effective with the first quarter of 2009, the Company slightly modified this approach by using a rolling twelve quarter historical approach.
The Interagency Policy Statement on the Allowance for Loan and Lease Losses issued in 2006 by Federal banking regulators indicates that “during periods of significant economic expansion or contraction, the relevance of data that are several years old may be limited.” Current economic conditions have resulted in significantly increasing charge-offs. Total net charge-offs as a percent of average loans for 2007 were 0.66%, increased to 1.28% in 2008, and increased further to 3.47% in 2009. For these reasons, the Company began using a rolling eight-quarter historical base effective with the fourth quarter of 2009.
Historically, the Company used three pools on which to apply historical loss experience methodology, those being business, residential mortgage and consumer loans. The Company’s construction and land development (“CLD”) portfolio has incurred significantly higher losses than the overall business portfolio, due to the more severe impact of the recession on the real estate development segment and the more pronounced drop in collateral value (i.e. raw land and residential real estate developments). It became apparent that the CLD loans were not representative of the overall business loan portfolio and should be analyzed separately. As a result, a fourth pool covering CLD loans for allocation of the allowance for loan losses was implemented as of December 31, 2009.
The following table presents the allocation of the allowance for loan losses applicable to each loan category as of September 30, 2010 and December 31, 2009. The allocation method used takes into account specific allocations for identified credits and a historical loss average, adjusted for certain qualitative factors, in determining the allocation for the balance of the portfolio. The percentages shown reflect the total allocation for each category as a percent of the outstanding loan balances in that category.
| September 30, 2010 | December 31, 2009 | |||||||||||||||
| Dollars in thousands | Allocation | % of Loans | Allocation | % of Loans | ||||||||||||
| Business and commercial mortgage | $ | 14,764 | 4.16 | % | $ | 12,221 | 3.10 | % | ||||||||
| Construction and development loans | 3,675 | 9.53 | % | 5,164 | 10.10 | % | ||||||||||
| Residential mortgage | 2,618 | 2.91 | % | 760 | 0.82 | % | ||||||||||
| Personal | 2,434 | 2.01 | % | 1,875 | 1.67 | % | ||||||||||
| Total | $ | 23,491 | 3.89 | % | $ | 20,020 | 3.08 | % | ||||||||
The personal loan portfolio consists of direct and indirect installment, home equity and unsecured revolving line of credit loans. Installment loans consist primarily of home equity loans and loans for consumer durable goods, principally automobiles. Indirect personal loans consist of loans for automobiles, boats and manufactured housing, and make up a small percent of the personal loans.
Business loans carry the largest balances per loan, and therefore, any single loss would be proportionally larger than losses in other portfolios. In addition to internal loan rating systems and active monitoring of loan trends, the Bank uses an independent loan review firm to assess the quality of its business loan portfolio.
CLD loans include residential and non-residential construction and development loans. Residential construction and development portfolio consists mainly of loans for the construction, development, and improvement of residential lots, homes, and subdivisions. Non-residential construction and development portfolio consists mainly of loans for the construction and development of office buildings and other non-residential commercial properties. This type of lending is generally considered to have more complex credit risks than traditional single-family residential lending because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and sales of the related real estate project. Consequently, these loans are often more sensitive to adverse conditions in the real esta te market or the general economy than other real estate loans. These loans are generally less predictable and more difficult to evaluate and monitor and collateral may be difficult to dispose of in a
market decline. Additionally, we may experience significant construction loan losses because independent appraisers or project engineers inaccurately estimate the cost and value of construction loan projects.
CLD loans made up 7.3% of the Company’s loan portfolio at September 30, 2010. This sector of the economy has been particularly negatively impacted by declines in housing activity, and has had a disproportionate negative impact on the credit quality of the Company. The following table shows trends of CLD loans, along with ratios relating to their relative credit quality at September 30, 2010 and December 31, 2009.
| September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Total Loans | CLD Loans | Total Loans | CLD Loans | |||||||||||||||||||||
| Dollars in thousands | Balance | % of Total | Balance | % of Total | ||||||||||||||||||||
| Balances | $ | 604,284 | $ | 43,909 | 7.3 | % | $ | 650,053 | $ | 56,706 | 8.7 | % | ||||||||||||
| Impaired loans | 52,655 | 15,625 | 29.7 | % | 36,160 | 14,441 | 39.9 | % | ||||||||||||||||
| Specific allowance | 7,341 | 1,758 | 23.9 | % | 5,775 | 2,097 | 36.3 | % | ||||||||||||||||
| YTD Net Charge-offs | 13,129 | 4,786 | 36.5 | % | 24,063 | 14,379 | 59.8 | % | ||||||||||||||||
| Nonperforming loans ("NPL") | 29,606 | 11,286 | 38.1 | % | 31,662 | 14,138 | 44.7 | % | ||||||||||||||||
| NPL as % of loans | 4.9 | % | 25.7 | % | 4.9 | % | 24.9 | % | ||||||||||||||||
While balances of CLD loans totaled $43.9 million at September 30, 2010 and made up 7.3% of total portfolio loans, they represented 38.1% of the Company’s nonperforming loans. Charge-offs of CLD loans were 36.5% of total charge-offs in the first nine months of 2010. Currently impaired CLD loans, in addition to the specific allowance of $1.8 million, have been partially charged down by $11.9 million. As can be seen in the following tables, currently impaired loans represented 49.3% of the total CLD loans, and the Company has provided for loan losses on impaired CLD loans of 49.6% of the balance of such loans at September 30, 2010.
| CLD Loans | ||||||||||||
| Dollars in thousands | Total | Impaired | % of Total | |||||||||
| Balances at September 30, 2010 | $ | 43,909 | $ | 15,625 | ||||||||
| Cumulative partial charge-offs | 11,880 | 11,880 | ||||||||||
| Loan balance before charge-offs | $ | 55,789 | $ | 27,505 | 49.3 | % | ||||||
Cumulative loss on impaired CLD loans is shown below.
| Dollars in thousands | CLD | |||
| Cumulative partial charge-offs | $ | 11,880 | ||
| Specific allowance at September 30, 2010 | 1,758 | |||
| Cumulative loss on impaired loans | $ | 13,638 | ||
| Percent of impaired loans | 49.6 | % | ||
Deposits
United internally funds its operations through a large, stable base of core deposits that provides cost-effective funding for its lending operations. The majority of deposits are derived from core client sources, relating to long term relationships with local individual, business and public clients. Public clients include local governments and municipal bodies, hospitals, universities and other educational institutions. At September 30, 2010, core deposits accounted for 96.8% of total deposits, as compared to 95.2% at December 31, 2009. For this presentation, core deposits consist of total deposits less national certificates of deposit and brokered deposits. Core deposits include CDARS deposits as they represent deposits originated in the Bank’s market area.
The table below shows the change in the various categories of the deposit portfolio for the reported periods.
| In thousands of dollars | Change this Quarter | YTD Change | ||||||||||||||
| Noninterest bearing | $ | (5,890 | ) | -5.5 | % | $ | 488 | 0.5 | % | |||||||
| Interest bearing deposits | 16,188 | 2.6 | % | (42,787 | ) | -6.3 | % | |||||||||
| Total deposits | $ | 10,298 | 1.4 | % | $ | (42,299 | ) | -5.4 | % | |||||||
Deposit balances have grown by $10.3 million, or 1.4% in the third quarter of 2010, but have declined by $42.3 million, or 5.4% during the first nine months of 2010. Of that, substantially all of the decline was in the second quarter of 2010. In the most recent quarter, demand deposit balances decreased by $5.9 million while all other categories of deposits grew by $16.2 million.
The Bank utilizes purchased or brokered deposits for interest rate risk management purposes, but does not support its growth through the use of those products. In addition, the Bank participates in the CDARS program, which allows it to provide competitive CD products while maintaining FDIC insurance for clients with larger balances. The Bank's deposit rates are consistently competitive with other banks in its market areas.
Earnings Summary and Key Ratios
The Company achieved consolidated net income of $1.027 million in the third quarter of 2010, as a result of strong pre-tax, pre-provision income and reduced levels of provision to the Company’s allowance for loan losses. The net loss for the first nine months of 2010 was $3.281 million, which is an improvement from the net loss of $8.351 million incurred during the first nine months of 2009. An after-tax goodwill impairment charge of $2.44 million was taken in the first quarter of 2009.
Net interest margin improved from 3.76% for the quarter ended June 30, 2010 to 3.97% for the quarter ended September 30, 2010. Strong net interest margin for the third quarter of 2010 more than offset a decline in loan balances, and resulted in net interest income improvement over the levels achieved in the second quarter of 2010 and the third quarter of 2009. For the first nine months of 2010, net interest income was up 0.1% compared to the same period of 2009. Noninterest income for the most recent quarter improved by 17.9% from the third quarter of
2009, but was down 8.8% for the first nine months of 2010 compared to the same period in 2009. Noninterest income represented 37.7% of the Company’s net revenues for the third quarter of 2010 and 33.5% for the first nine months of 2010, compared to 34.2% and 35.6%, respectively, for the same periods of 2009.
Total noninterest expenses for the third quarter of 2010 were down 1.5% and were down 5.5% for the first nine months of 2010 from the same period in 2009, excluding the first quarter 2009 goodwill impairment charge. While professional fees and expenses related to nonperforming loans have increased, reductions in other categories of expense have more than offset those increases. In particular, year to date salaries and employee benefit costs reflect cost containment and reduction measures previously mentioned, including a number of staff reductions undertaken in December, 2009. At the same time, compensation costs increased in the third quarter of 2010 as a result of commission expense relating to an increased volume of loans originated and sold on the secondary market durin g the quarter.
The Company’s provision for loan losses of $3.15 million in the third quarter of 2010 was down from $8.20 million for the third quarter of 2009. For the first nine months of 2010, the Company’s provision for loan losses of $16.60 million was 18.9% lower than the provision for the same period of 2009. For the third quarter of 2010, the Company’s provision for loan losses of $3.15 million exceeded its net charge-offs of $3.02 million.
Return on average assets (“ROA”) for the third quarter of 2010 was 0.47%, compared to
-1.28% for the third quarter of 2009. ROA for the first nine months of 2010 of -0.50% was improved from -1.26% for the same period in 2009. Return on average shareholders’ equity (“ROE”) for the most recent quarter was 5.25%, compared to -13.48% for the same quarter of 2009. ROE for the first nine months of 2010 of -5.52% was improved from -13.11% for the same period in 2009, which included a charge for goodwill impairment.
The following chart shows trends in these and other ratios, along with trends of the major components of earnings for the five most recent quarters.
| 2010 | 2009 | ||||||||||||||||||||
| in thousands of dollars, where appropriate | 3rd Qtr | 2nd Qtr | 1st Qtr | 4th Qtr | 3rd Qtr | ||||||||||||||||
| Net interest income | $ | 7,964 | $ | 7,677 | $ | 7,707 | $ | 8,180 | $ | 7,860 | |||||||||||
| Provision for loan losses | 3,150 | 8,650 | 4,800 | 5,300 | 8,200 | ||||||||||||||||
| Noninterest income | 4,812 | 3,709 | 3,224 | 4,022 | 4,081 | ||||||||||||||||
| Noninterest expense | 8,315 | 8,298 | 7,659 | 7,953 | 8,443 | ||||||||||||||||
| Federal income tax provision | 284 | (2,063 | ) | (719 | ) | (569 | ) | (1,812 | ) | ||||||||||||
| Net income (loss) | 1,027 | (3,499 | ) | (809 | ) | (482 | ) | (2,890 | ) | ||||||||||||
| Earnings (loss) per common share | $ | 0.14 | $ | (0.74 | ) | $ | (0.21 | ) | $ | (0.15 | ) | $ | (0.62 | ) | |||||||
| Return on average assets (a) | 0.47 | % | -1.60 | % | -0.36 | % | -0.21 | % | -1.28 | % | |||||||||||
| Return on average shareholders' equity (a) | 5.25 | % | -17.56 | % | -4.05 | % | -2.34 | % | -13.48 | % | |||||||||||
| Net interest margin | 3.97 | % | 3.76 | % | 3.69 | % | 3.84 | % | 3.77 | % | |||||||||||
| Efficiency Ratio (On tax equivalent basis) | 64.5 | % | 72.1 | % | 69.0 | % | 64.9 | % | 69.3 | % | |||||||||||
| (a) | annualized | ||||||||||||||||||||
In order to evaluate the trends of net interest income, noninterest income and noninterest expense, the Company calculates pre-tax, pre-provision income and return on average assets. This calculation adjusts net income before tax by the amount of the Company’s provision for loan losses and one-time goodwill impairment charge. While this information is not consistent with, or intended to replace, presentation under GAAP, it is presented here for comparison. The Company's pre-tax, pre-provision ROA improved from 1.56% for the third quarter of 2009 to 2.08% for the quarter ended September 30, 2010. Pre-tax, pre-provision ROA for the first nine months of 2010 was 1.64%, compared to 1.60% for the same period of 2009. The following table shows the calculation and trend of pre-tax, pre-provision income and return on aver age assets for the three and nine month periods ended September 30, 2010 and 2009.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
| In thousands of dollars | 2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
| Interest income | $ | 9,993 | $ | 10,775 | -7.3 | % | $ | 30,203 | $ | 32,811 | -7.9 | % | |||||||||||||
| Interest expense | 2,029 | 2,915 | -30.4 | % | 6,855 | 9,476 | -27.7 | % | |||||||||||||||||
| Net interest income | 7,964 | 7,860 | 1.3 | % | 23,348 | 23,335 | 0.1 | % | |||||||||||||||||
| Noninterest income | 4,812 | 4,081 | 17.9 | % | 11,745 | 12,877 | -8.8 | % | |||||||||||||||||
Noninterest expense (1) | 8,315 | 8,443 | -1.5 | % | 24,272 | 25,694 | -5.5 | % | |||||||||||||||||
| Pre-tax, pre-provision income | 4,461 | 3,498 | 27.5 | % | 10,821 | 10,518 | 2.9 | % | |||||||||||||||||
| Pre-tax, pre-provision ROA | 2.08 | % | 1.56 | % | 0.52 | % | 1.64 | % | 1.60 | % | 0.04 | % | |||||||||||||
| Reconcilement to GAAP income: | |||||||||||||||||||||||||
| Provision for loan losses | 3,150 | 8,200 | 16,600 | 20,470 | |||||||||||||||||||||
| Goodwill impairment | - | - | - | 3,469 | |||||||||||||||||||||
| Income tax (benefit) | 284 | (1,812 | ) | (2,498 | ) | (5,070 | ) | ||||||||||||||||||
| Net income (loss) | $ | 1,027 | $ | (2,890 | ) | $ | (3,281 | ) | $ | (8,351 | ) | ||||||||||||||
| (1) | Excludes goodwill impairment charge in 1st quarter of 2009 | ||||||||||||||||||||||||
Net Interest Income
Declining interest rates over the past two years have reduced the Company’s yield on earning assets, but have also resulted in a reduction in its cost of funds. Interest income decreased by 7.3% in the third quarter of 2010 and 7.9% in the first nine months of 2010 compared to the same periods in 2009, while interest expense decreased 30.4% and 27.7%, respectively, for the same periods. This resulted in an improvement in net interest income of 1.3% for the third quarter of 2010 and 0.1% for the first nine months of 2010 when compared to the comparable periods of 2009.
The Company’s net interest margin has decreased modestly over the past several quarters, but experienced an improvement in the third quarter of 2010, as a result of continued reduction in FHLB advances and higher-cost deposits, combined with a corresponding reduction in short-term interest bearing assets. Net interest margin of 3.97% for the third quarter of 2010 was up from 3.76% from the second quarter of 2010 and from 3.77% for the third quarter of 2009, while net interest margin of 3.78% for the first nine months of 2010 was relatively unchanged from 3.80% from the same period of 2009.
The following tables provide a summary of the various components of net interest income, as well as the results of changes in balance sheet makeup that have resulted in the changes in spread and net interest margin for the three and nine month periods ended September 30, 2010 and 2009.
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
| dollars in thousands | Average Balance | Interest (b) | Yield/ Rate (c) | Average Balance | Interest (b) | Yield/ Rate (c) | ||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Interest earning assets (a) | ||||||||||||||||||||||||
| Federal funds & equivalents | $ | 72,121 | $ | 46 | 0.25 | % | $ | 64,317 | $ | 41 | 0.25 | % | ||||||||||||
| Taxable investments | 81,236 | 572 | 2.86 | % | 66,231 | 462 | 2.77 | % | ||||||||||||||||
| Tax exempt securities (b) | 25,540 | 319 | 5.69 | % | 33,129 | 490 | 5.87 | % | ||||||||||||||||
| Taxable loans | 626,911 | 9,127 | 5.90 | % | 686,969 | 9,902 | 5.72 | % | ||||||||||||||||
| Tax exempt loans (b) | 2,156 | 44 | 8.33 | % | 2,989 | 61 | 8.14 | % | ||||||||||||||||
| Total int. earning assets (b) | 807,964 | 10,108 | 5.07 | % | 853,635 | 10,956 | 5.10 | % | ||||||||||||||||
| Less allowance for loan losses | (23,313 | ) | (22,650 | ) | ||||||||||||||||||||
| Other assets | 62,105 | 67,441 | ||||||||||||||||||||||
| Total Assets | $ | 846,756 | $ | 898,426 | ||||||||||||||||||||
| Liabilities and Shareholders' Equity | ||||||||||||||||||||||||
| NOW and savings deposits | $ | 352,047 | 324 | 0.37 | % | $ | 330,774 | 415 | 0.50 | % | ||||||||||||||
| Other interest bearing deposits | 273,985 | 1,356 | 2.01 | % | 323,948 | 2,060 | 2.52 | % | ||||||||||||||||
| Total int. bearing deposits | 626,032 | 1,680 | 1.09 | % | 654,722 | 2,475 | 1.50 | % | ||||||||||||||||
| Short term borrowings | 5,002 | 68 | 5.51 | % | - | - | 0.00 | % | ||||||||||||||||
| Other borrowings | 31,002 | 281 | 3.68 | % | 43,624 | 440 | 4.00 | % | ||||||||||||||||
| Total int. bearing liabilities | 662,036 | 2,029 | 1.24 | % | 698,346 | 2,915 | 1.66 | % | ||||||||||||||||
| Noninterest bearing deposits | 106,307 | 105,364 | ||||||||||||||||||||||
| Other liabilities | 816 | 9,650 | ||||||||||||||||||||||
| Shareholders' equity | 77,597 | 85,066 | ||||||||||||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 846,756 | $ | 898,426 | ||||||||||||||||||||
| Net interest income (b) | 8,079 | 8,041 | ||||||||||||||||||||||
| Net spread (b) | 3.83 | % | 3.44 | % | ||||||||||||||||||||
| Net yield on interest earning assets (b) | 3.97 | % | 3.77 | % | ||||||||||||||||||||
| Tax equivalent adjustment on interest income | (115 | ) | (181 | ) | ||||||||||||||||||||
| Net interest income per income statement | $ | 7,964 | $ | 7,860 | ||||||||||||||||||||
| Ratio of interest earning assets to interest bearing liabilities | 1.22 | 1.22 | ||||||||||||||||||||||
The Company’s tax-equivalent yield on interest-earning assets decreased from 5.10% for the third quarter of 2009 to 5.07% for the quarter ended September 30, 2010. At the same time, the Company’s cost of funds decreased from 1.66% to 1.24% in the same periods, resulting in an improvement in net spread from 3.44% for the third quarter of 2009 to 3.83% for the three months ended September 30, 2010.
| Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2010 | 2009 | ||||||||||||||||||||||||
| dollars in thousands | Average Balance | Interest (b) | Yield/ Rate (c) | Average Balance | Interest (b) | Yield/ Rate (c) | |||||||||||||||||||
| Assets | |||||||||||||||||||||||||
| Interest earning assets (a) | |||||||||||||||||||||||||
| Federal funds & equivalents | $ | 93,201 | $ | 177 | 0.25 | % | $ | 49,722 | $ | 92 | 0.25 | % | |||||||||||||
| Taxable investments | 74,495 | 1,587 | 2.85 | % | 58,972 | 1,429 | 3.24 | % | |||||||||||||||||
| Tax exempt securities (b) | 26,171 | 1,133 | 5.71 | % | 34,110 | 1,508 | 5.91 | % | |||||||||||||||||
| Taxable loans | 639,719 | 27,566 | 5.76 | % | 695,099 | 30,177 | 5.80 | % | |||||||||||||||||
| Tax exempt loans (b) | 2,421 | 149 | 8.24 | % | 2,677 | 146 | 7.30 | % | |||||||||||||||||
| Total int. earning assets (b) | 836,007 | 30,612 | 4.88 | % | 840,580 | 33,352 | 5.30 | % | |||||||||||||||||
| Less allowance for loan losses | (21,705 | ) | (21,311 | ) | |||||||||||||||||||||
| Other assets | 64,782 | 59,460 | |||||||||||||||||||||||
| Total Assets | $ | 879,084 | $ | 878,729 | |||||||||||||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||||||||||
| NOW and savings deposits | $ | 354,786 | 1,089 | 0.41 | % | $ | 335,625 | 1,335 | 0.53 | % | |||||||||||||||
| Other interest bearing deposits | 301,968 | 4,737 | 2.10 | % | 306,577 | 6,711 | 2.93 | % | |||||||||||||||||
| Total int. bearing deposits | 656,754 | 5,826 | 1.19 | % | 642,202 | 8,046 | 1.68 | % | |||||||||||||||||
| Short term borrowings | 2,023 | 123 | 5.45 | % | 12 | - | 0.00 | % | |||||||||||||||||
| Other borrowings | 33,263 | 905 | 3.64 | % | 45,836 | 1,430 | 4.17 | % | |||||||||||||||||
| Total int. bearing liabilities | 692,040 | 6,854 | 1.32 | % | 688,050 | 9,476 | 1.84 | % | |||||||||||||||||
| Noninterest bearing deposits | 104,010 | 102,955 | |||||||||||||||||||||||
| Other liabilities | 3,578 | 2,575 | |||||||||||||||||||||||
| Shareholders' equity | 79,456 | 85,149 | |||||||||||||||||||||||
| Total Liabilities and | |||||||||||||||||||||||||
| Shareholders' Equity | $ | 879,084 | $ | 878,729 | |||||||||||||||||||||
| Net interest income (b) | 23,758 | 23,876 | |||||||||||||||||||||||
| Net spread (b) | 3.56 | % | 3.46 | % | |||||||||||||||||||||
| Net yield on interest earning assets (b) | 3.79 | % | 3.80 | % | |||||||||||||||||||||
| Tax equivalent adjustment on interest income | (410 | ) | (541 | ) | |||||||||||||||||||||
| Net interest income per income statement | $ | 23,348 | $ | 23,335 | |||||||||||||||||||||
| Ratio of interest earning assets to interest bearing liabilities | 1.21 | 1.22 | |||||||||||||||||||||||
| (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 Company’s tax-equivalent yield on earning assets declined from 5.30% for the first nine months of 2009 to 4.86% for the same period of 2010, for a reduction of 44 basis points. The Company's average cost of funds decreased 52 basis points from 1.84% to 1.32%, and tax equivalent spread increased from 3.46% to 3.54% in the same periods.
Provision for Loan Losses
The Company’s provision for loan losses for the third quarter of 2010 was $3.15 million, down 63.6% from $8.65 million for the second quarter of 2010 and down 61.6% from $8.20 million for the third quarter of 2009. For each of these periods, the Company’s provision for loan losses
exceed its net charge offs during those periods. The provision provides for probable incurred losses inherent in the current portfolio.
While the local real estate markets and the economy in general have experienced some signs of stabilization, the loan portfolio of the Bank is affected by loans to a number of residential real estate developers that continue to struggle to meet their financial obligations. Loans in the Bank's residential land development and construction portfolios are secured by unimproved and improved land, residential lots, and single-family homes and condominium units. In addition, loans secured by commercial real estate are continuing to experience stresses resulting from the current economic conditions.
Generally, 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 Bank has continued to closely monitor the impact of economic circumstances on its lending clients, and is working with these clients to minimize losses. Additional information regarding the provision for loan losses is included in the Credit Quality discussion above.
Noninterest Income
Total noninterest income improved by 17.9% for the third quarter of 2010 but decreased by 8.8% for the first nine months of 2010 compared to the same periods of 2009. The following table summarizes changes in noninterest income by category for the three and nine month periods ended September 30, 2010 and 2009.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
| In thousands of dollars | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
| Service charges on deposit accounts | $ | 549 | $ | 694 | -20.9 | % | $ | 1,636 | $ | 2,076 | -21.2 | % | ||||||||||||
| Wealth Management fee income | 1,177 | 1,045 | 12.6 | % | 3,327 | 2,989 | 11.3 | % | ||||||||||||||||
| Gains (losses) on securities transactions | - | - | 0.0 | % | 31 | (13 | ) | 338.5 | % | |||||||||||||||
| Income from loan sales and servicing | 2,219 | 1,405 | 57.9 | % | 4,270 | 5,161 | -17.3 | % | ||||||||||||||||
| ATM, debit and credit card fee income | 491 | 601 | -18.3 | % | 1,435 | 1,699 | -15.5 | % | ||||||||||||||||
| Income from bank-owned life insurance | 114 | 125 | -8.8 | % | 340 | 370 | -8.1 | % | ||||||||||||||||
| Other income | 262 | 211 | 24.2 | % | 706 | 595 | 18.7 | % | ||||||||||||||||
| Total noninterest income | $ | 4,812 | $ | 4,081 | 17.9 | % | $ | 11,745 | $ | 12,877 | -8.8 | % | ||||||||||||
Service charges on deposit accounts were down 20.9% in the third quarter of 2010 and 21.2% in the first nine months of 2010 compared to the same periods a year earlier. Substantially all of the decline in service charges in the current quarter and the first nine months of 2010 was due to a reduction in NSF and overdraft fees collected.
The Wealth Management Group of UBT provides a relatively large component of the Company's noninterest income. Wealth Management Group income includes trust and investment management fee income and income from the sale of non-deposit investment products within the
Bank’s offices. Wealth Management Group income was improved by 12.6% in the third quarter of 2010 and 11.3% for the nine months ended September 30, 2010 compared to 2009.
Income from loan sales and servicing increased considerably during the third quarter of 2010, and was 91.5% above the levels achieved in the second quarter of 2010. While the Company’s volume of rate-driven refinancing of residential mortgages had slowed in the fourth quarter of 2009 and the first half of 2010, mortgage origination and sale activity increased significantly in the third quarter of 2010, resulting in improved levels of income from the sales and servicing of residential mortgage loans for the quarter. The Bank generally sells the fixed rate long-term residential mortgages it originates on the secondary market, and retains adjustable rate mortgages for its portfolios.
The Bank originates, sells and services SBA loans through its structured finance group, United Structured Finance Company (“USFC”). SBA loan origination volume has increased in the second and third quarters of 2010, resulting in an increase in the Company’s income from the origination, sales and servicing of SBA loans. Implementation of Accounting Standards Update ASU 2009-16, Accounting for Transfers of Financial Assets, by the Company effective January 1, 2010 resulted in 90-day delay in recognition of income on the sale of SBA 7a loans. Revenue of $674,000 was deferred in the second quarter of 2010 and was recognized in the third quarter of 2010. At September 30, 2010, $240,000 of similar fee income was deferred and will be recognized in the fourth quarter of 2010.
The Company maintains a portfolio of sold residential real estate mortgages that it services, and this servicing provides ongoing income for the life of the loans. Loans serviced consist primarily of residential mortgages sold on the secondary market. In addition, the guaranteed portion of SBA loans originated by USFC is typically sold on the secondary market, and gains on the sale of those loans contribute to income from loan sales and servicing. The following table shows the breakdown of income from loan sales and servicing between residential mortgages and USFC.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| In thousands of dollars | 2010 | 2009 | 2010 | 2009 | ||||||||||||
| Residential mortgage sales and servicing | $ | 1,497 | $ | 1,196 | $ | 3,490 | $ | 4,764 | ||||||||
| USFC commercial loan sales and servicing | 722 | 209 | 780 | 397 | ||||||||||||
| Total income from loan sales and servicing | $ | 2,219 | $ | 1,405 | $ | 4,270 | $ | 5,161 | ||||||||
ATM, debit and credit card fee income provides a source of noninterest income for the Company. The Bank operates twenty ATMs throughout its market areas, and Bank clients are active users of debit cards. The Bank receives ongoing fee income from credit card referrals and operation of its credit card merchant business. Income from these areas was down overall in the third quarter and first nine months of 2010 compared to the same periods of 2009.
Income from bank-owned life insurance (“BOLI”) decreased 8.8% in the third quarter of 2010 and 8.1% in the first nine months of 2010 as compared to the same periods of 2009. The change reflects decreases in interest crediting rates during the last half of 2009. Other fee income consisted primarily of income from various fee-based banking services, such as sale of official checks, wire transfer fees, safe deposit box income, sweep account and other fees. This category
of noninterest income improved by $51,000 in the third quarter of 2010 and $111,000 in the first nine months of 2010 compared to the same periods of 2009.
Noninterest Expense
The following table summarizes changes in the Company's noninterest expense by category for the three and nine month periods ended September 30, 2010 and 2009.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
| In thousands of dollars | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
| Salaries and employee benefits | $ | 4,502 | $ | 4,268 | 5.5 | % | $ | 12,493 | $ | 13,635 | -8.4 | % | ||||||||||||
| Occupancy and equipment expense, net | 1,296 | 1,323 | -2.0 | % | 3,929 | 3,979 | -1.3 | % | ||||||||||||||||
| External data processing | 304 | 439 | -30.8 | % | 899 | 1,277 | -29.6 | % | ||||||||||||||||
| Advertising and marketing | 154 | 174 | -11.5 | % | 474 | 572 | -17.1 | % | ||||||||||||||||
| Attorney, accounting and other professional fees | 424 | 354 | 19.8 | % | 1,370 | 837 | 63.7 | % | ||||||||||||||||
| Director fees | 88 | 112 | -21.4 | % | 265 | 336 | -21.1 | % | ||||||||||||||||
| Expenses relating to ORE property | 394 | 828 | -52.4 | % | 1,248 | 1,496 | -16.6 | % | ||||||||||||||||
| FDIC insurance premiums | 456 | 332 | 37.3 | % | 1,405 | 1,334 | 5.3 | % | ||||||||||||||||
| Goodwill impairment | - | - | 0.0 | % | - | 3,469 | -100.0 | % | ||||||||||||||||
| Other expenses | 697 | 613 | 13.7 | % | 2,189 | 2,228 | -1.8 | % | ||||||||||||||||
| Total noninterest expense | $ | 8,315 | $ | 8,443 | -1.5 | % | $ | 24,272 | $ | 29,163 | -16.8 | % | ||||||||||||
Most categories of noninterest expense declined during the third quarter and first nine months of 2010 compared to the same periods of 2009. Salaries and employee benefits were $1.1 million lower, or 8.4%, less than the nine month period one year earlier, primarily as a result of the Company’s cost containment initiatives implemented late in 2009 and in 2010. In the third quarter of 2010, salaries and benefits increased by 5.5% over the same quarter of 2009, as a result of commissions and other compensation costs related to the generation of income from loan sales and servicing.
Occupancy and equipment expenses were down in the third quarter and first nine months of 2010 compared to the same periods of 2009. External data processing costs also declined, reflecting changes made in providers of some specific services for the Bank late in 2009. Advertising and marketing expenses decreased by 11.5% for the quarter and 17.1% for the first nine months of 2010 compared to the same periods last year, as a result of the Company’s ongoing cost-containment efforts. Attorney, accounting and other professional fees were up 19.8% for the third quarter of 2010 and 63.7% for the first nine months of 2010 compared to the same periods of 2009. While much of the increase represents attorney and appraisal fees related to the Bank’s credit issues, the Company also incurred data processing conversion cos ts during the second and third quarters of 2010 relating to the consolidation of the Company’s subsidiary banks.
Expenses related to ORE property continue to make up a significant portion of the Company’s expenses. However, the rate of growth of those expenses slowed during the third quarter of 2010, decreasing by 52.4% compared to the third quarter of 2009. For the nine months ended September 30, 2010, expenses related to ORE properties have declined by 16.6% compared to the first nine months of 2009. Those expenses included write-downs of the value and losses on the sale of property held as ORE, along with costs to maintain and carry those properties. Deterioration in the value of these properties resulted in losses of $170,000 in the third quarter of
2010 and $772,000 for the nine months ended September 30, 2010. Assets were written down to their estimated fair value as a result of a decline in prevailing real estate prices and the Bank’s experience with increased foreclosures resulting from the weakened economy.
FDIC insurance costs for the third quarter of 2010 increased by 37.3% compared to the third quarter of 2009 and nine-month 2010 costs are 5.3% above the same period of 2009, primarily as a result of increases in base charges. As a result of an evaluation of the value of its goodwill, United took an impairment charge of $3.47 million during the first quarter of 2009. Additional information regarding the goodwill impairment charge is included in Note 10 to the condensed consolidated financial statements above.
Federal Income Tax
The Company's effective tax rate was 21.7% for the third quarter of 2010 and 43.2% for the first nine months of 2010, compared with 38.5% and 37.8% for the same periods in 2009. The effective tax rates for year to date 2010 and both periods of 2009 were a calculated benefit based upon a pre-tax loss. The differences between the effective rates and the Company’s expected tax rate were primarily due to the benefit from tax-exempt income.
While the Company had a loss for both book and tax purposes for 2009, the Company had taxable income from 2007 and 2008 that was utilized for the Company’s tax loss in 2009. The Company’s net deferred tax asset was $7.9 million at September 30, 2010, $3.1 million of which was disallowed for regulatory capital purposes. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. Based on the levels of taxable income in prior years and the Company’s expectation of a return to profitability in future years, Management has determined that no valuation allowance was required at September 30, 2010.
Liquidity, Cash Equivalents and Borrowed Funds
The Company maintains correspondent accounts with a number of 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 Bank is a participant in the federal funds market, either as a borrower or seller. Federal funds are generally borrowed or sold for one-day periods. At times, the Bank utilizes short-term interest-bearing balances with banks as a substitute for excess federal funds.
The Company’s balances in federal funds sold and other short-term investments were $80.1 million at September 30, 2010, compared to $115.5 million at December 31, 2009 and $88.8 million at September 30, 2009. Short-term investments increased from $54.7 at June 30, 2010, with the increase resulting primarily from a decrease in balances of portfolio loans and loans held for sale, while deposits increased as a result of seasonal fluctuations in public funds. Liquidity levels remain relatively strong during this period of economic uncertainty.
The Company’s funding is primarily provided by deposits and FHLB advances. The Bank also has the ability to utilize short-term advances from the FHLBI and borrowings at the discount window of the Federal Reserve Bank as additional short-term funding sources. Short-term advances and discount window borrowings were not utilized during 2009 or the first nine months of 2010.
The majority of the Bank’s deposits are derived from core client sources, relating to long term relationships with local individual, business and public clients. Public clients include local government and municipal bodies, hospitals, universities and other educational institutions. At September 30, 2010, core deposits accounted for 96.9% of total deposits. For purposes of this presentation, core deposits consist of total deposits less national certificates of deposit and brokered deposits. CDARS deposits are considered to be core deposits by the Company, as they represent deposits originated in the Bank’s market area.
The Company’s balance sheet includes short-term borrowings of $1.6 million at September 30, 2010. This figure represents the secured borrowing portion of SBA 7a loans held for sale, as a result of adoption of ASU 2009-16. Those changes result in qualifying loans being carried as loans held for sale, while the sold portion of the loans is carried as secured borrowing for a 90-day period.
The Company periodically finds it advantageous to utilize longer term borrowings from the FHLBI. Theselong-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 2010, the Bank procured no new advances and repaid $1.0 million in matured borrowings and scheduled principal payments, resulting in a decrease in total FHLBI borrowings outstanding of $11.8 million since December 31, 2009.
Regulatory Capital
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios of Total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets.
On January 15, 2010, UBT entered into the MOU with the FDIC and OFIR. The MOU is not a “written agreement” for purposes of Section 8 of the Federal Deposit Insurance Act. The MOU documents an understanding among UBT, the FDIC and OFIR, that, among other things, (i) UBT will not declare or pay any dividend to the Company without the prior consent of the FDIC and OFIR; and (ii) UBT will have and maintain its Tier 1 capital ratio at a minimum of 9% within six months from the date of the MOU and for the duration of the MOU, and will maintain its ratio of total capital to risk-weighted assets at a minimum of 12% for the duration of the MOU.
The Bank has continued to maintain its ratio of total capital to risk-weighted assets above the prescribed minimum level of 12%. The Bank did not reach the Tier 1 capital ratio level required to comply with the MOU within the timeframe provided by the MOU and did not meet the minimum Tier 1 capital ratio at September 30, 2010.
United has developed a capital plan and is actively identifying available alternatives to increase the Company’s capital and bring the Bank’s regulatory capital to the level prescribed in the MOU. Management engaged an independent consulting firm to help the Bank assess the risk in its loan portfolio, an important step in supporting our capital planning efforts.
The Company has consulted with legal counsel regarding capital alternatives, and has engaged an investment banking firm to advise the Board of Directors in connection with the company’s strategic planning and consideration of possible strategies to improve the Company’s capital position. At a special meeting of shareholders on September 23, 2010, United shareholders overwhelmingly approved an amendment to the Company’s articles of incorporation to increase the number of authorized shares of common stock from 10,000,000 shares to 30,000,000 shares. On October 1, the Company filed a registration statement with the Securities and Exchange Commission in conjunction with a proposed $25 million offering of its common stock. The registration statement relating to these securities is not yet effective, and the Company cannot provide assurance as to the timing or success of the proposed offering or the amount of proceeds, if any, that the Company will be able to raise from it. This report does not constitute an offer of any securities for sale.
The Company continues to communicate its efforts to the FDIC and OFIR. Failure of the Bank to comply with the terms of its MOU could result in additional regulatory actions against the Bank. These actions could include requiring the Bank to enter into a consent order or other written agreement, removal of directors, officers and employees, imposition of civil money penalties, and other regulatory actions. Without additional capital, the Bank could also be forced to curtail operations and reduce its assets and deposits, which could diminish the value of the Bank’s franchise and cause it to be unable to respond to business opportunities. The Board of Directors is committed to the goal of returning the Bank’s capital levels to those prescribed by the MOU. For additional information, about the potential effects of United not being in compliance with the MOU, see the risk factor entitled “We are not in compliance with the terms of our MOU with the FDIC and OFIR, which could result in enforcement actions against us” under Part II, Item IA below, which information is here incorporated by reference.
The Bank's primary regulators, OFIR and the FDIC, recently conducted a regulatory examination of the Bank as of June 1, 2010. The Bank has not yet received the final results from our most recent regulatory examination. As a result of the regulatory examination, it is possible that the terms of the Bank's MOU could be revised to impose additional or more restrictive requirements on the Bank. It is also possible that the Bank could be required to enter into a negotiated Consent Order with OFIR and the FDIC or be subject to other, potentially more severe, regulatory actions. For additional information about the potential results of the regulatory examination, see the risk factor entitled "We have not yet received the final results from our most recent regulatory examination. We could be subject to additional regulatory act ion once the results are finalized" der Part II, Item 1A below, which information is here incorporated by reference.
The following table shows information about the Company's and the Banks’ capital ratios and amounts compared to regulatory requirements at September 30, 2010 and December 31, 2009. Effective April 1, 2010, United Bank & Trust – Washtenaw was consolidated and merged with and into United Bank & Trust, and the consolidated bank operates under the charter and name of United Bank & Trust.
| Actual | Regulatory Minimum for Capital Adequacy (1) | Regulatory Minimum to be Well Capitalized (2) | Required by MOU (3) | ||||||||||||||||||||||||||||||
| $ | 000 | % | $ | 000 | % | $ | 000 | % | $ | 000 | % | ||||||||||||||||||||||
| As of September 30, 2010 | |||||||||||||||||||||||||||||||||
| Tier 1 Capital to Average Assets | |||||||||||||||||||||||||||||||||
| Consolidated | $ | 72,616 | 8.5 | % | $ | 34,252 | 4.0 | % | N/A | N/A | N/A | N/A | |||||||||||||||||||||
| Bank | 70,150 | 8.3 | % | 33,786 | 4.0 | % | 42,232 | 5.0 | % | 76,018 | 9.0 | % | |||||||||||||||||||||
| Tier 1 Capital to Risk Weighted Assets | |||||||||||||||||||||||||||||||||
| Consolidated | 72,616 | 12.0 | % | 24,207 | 4.0 | % | N/A | N/A | N/A | N/A | |||||||||||||||||||||||
| Bank | 70,150 | 11.6 | % | 24,218 | 4.0 | % | 36,327 | 6.0 | % | N/A | N/A | ||||||||||||||||||||||
| Total Capital to Risk Weighted Assets | |||||||||||||||||||||||||||||||||
| Consolidated | 80,377 | 13.3 | % | 48,414 | 8.0 | % | N/A | N/A | N/A | N/A | |||||||||||||||||||||||
| Bank | 77,915 | 12.9 | % | 48,436 | 8.0 | % | 60,546 | 10.0 | % | 72,655 | 12.0 | % | |||||||||||||||||||||
| As of December 31, 2009 | |||||||||||||||||||||||||||||||||
| Tier 1 Capital to Average Assets | |||||||||||||||||||||||||||||||||
| Consolidated | $ | 78,076 | 8.6 | % | $ | 36,108 | 4.0 | % | N/A | N/A | N/A | N/A | |||||||||||||||||||||
| UBT | 37,590 | 7.3 | % | 20,495 | 4.0 | % | 25,618 | 5.0 | % | N/A | N/A | ||||||||||||||||||||||
| UBTW | 33,506 | 8.7 | % | 15,487 | 4.0 | % | 19,358 | 5.0 | % | N/A | N/A | ||||||||||||||||||||||
| Tier 1 Capital to Risk Weighted Assets | |||||||||||||||||||||||||||||||||
| Consolidated | 78,076 | 11.9 | % | 26,219 | 4.0 | % | N/A | N/A | N/A | N/A | |||||||||||||||||||||||
| UBT | 37,590 | 11.2 | % | 13,376 | 4.0 | % | 20,064 | 6.0 | % | N/A | N/A | ||||||||||||||||||||||
| UBTW | 33,506 | 10.6 | % | 12,694 | 4.0 | % | 19,041 | 6.0 | % | N/A | N/A | ||||||||||||||||||||||
| Total Capital to Risk Weighted Assets | |||||||||||||||||||||||||||||||||
| Consolidated | 86,416 | 13.2 | % | 52,438 | 8.0 | % | N/A | N/A | N/A | N/A | |||||||||||||||||||||||
| UBT | 41,872 | 12.5 | % | 26,752 | 8.0 | % | 33,440 | 10.0 | % | N/A | N/A | ||||||||||||||||||||||
| UBTW | 37,517 | 11.8 | % | 25,388 | 8.0 | % | 31,735 | 10.0 | % | N/A | N/A | ||||||||||||||||||||||
| (1) | Represents minimum required to be categorized as adequately capitalized under Federal regulatory requirements. | ||||||||||||||||||||||||||||||||
(2) | Represents minimum generally required to be categorized as well-capitalized under Federal regulatory prompt corrective action provisions. The bank is currently subject to higher requirements by its regulators. | ||||||||||||||||||||||||||||||||
| (3) | Represents requirements by the Bank's regulators under terms of the MOU. | ||||||||||||||||||||||||||||||||
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 “Note 1 – Significant Accounting Policies” to the Company’s Consolidated Financial Statements beginning on page A-22 of the Company's Annual Report onForm 10-K for the year ended December 31, 2009. 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 Company’s financial statements. See “Forward-Looking Statements.”
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4 – Controls and Procedures
Internal Control
Our management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (the "Evaluation Date"), and have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.
There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2010 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Item 1A – Risk Factors
The following risk factor updates the disclosure of risk factors included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.
We have not yet received the final results from our most recent regulatory examination. We could be subject to additional regulatory action once the results are finalized.
The Bank's primary regulators, OFIR and the FDIC, recently conducted a regulatory examination of the Bank as of June 1, 2010. We do not yet know the final results of the regulatory examination. As a result of the regulatory examination, it is possible that the terms of the Bank's MOU could be revised to impose additional or more restrictive requirements on the Bank. It is also possible that the Bank could be required to enter into a negotiated Consent Order with OFIR and the FDIC or be subject to other, potentially more severe, regulatory actions. While the form, terms and effects of a Consent Order cannot be predicted with certainty, we expect that a Consent Order would address capital levels, liquidity, dividends, debt restrictions, stock redemptions and compliance with laws. In addition, if the Bank were to become su bject to a Consent Order or be deemed to be in "troubled condition," federal laws would result in additional requirements or
effects on the Bank, such as the Bank could not be categorized as "well capitalized" regardless of actual capital levels, the Bank would be restricted in the rates of interest that it could pay, and the Bank would be required to obtain advance regulatory approval to accept, renew or roll over any brokered deposits, appoint new directors or senior executive officers or change the responsibilities of existing senior executive officers. If the Bank is required to enter into a Consent Order, the failure of the Bank to comply with the terms of a Consent Order could result in proceedings to enforce the Consent Order. Such proceedings could result in removal of directors, officers, employees and institution affiliated parties, the imposition of civil money penalties and even ultimately closure of the Bank.
We are not in compliance with the terms of our MOU with the FDIC and OFIR, which could result in enforcement actions against us.
Under the terms of the MOU that we entered into with the FDIC and OFIR, the Bank is required to have and maintain its Tier 1 capital ratio at a minimum of 9% within six months from the date of the MOU and for the duration of the MOU and its total risk-based capital ratio at a minimum of 12% for the duration of the MOU. At September 30, 2010, UBT was not in compliance with the minimum Tier 1 capital ratio required by the MOU. Failure to comply with the terms of the MOU could result in enforcement orders or penalties from our regulators, under the terms of which we could, among other things, become subject to restrictions on our ability to develop any new business, as well as restrictions on our existing business, and we could be required to raise additional capital, dispose of certain assets and liabilities within a prescribed period of time, or both. The terms of any such enforcement action could have a material negative effect on our business, operations, financial condition, results of operations or the value of our common stock.
A substantial decline in the value of our Federal Home Loan Bank of Indianapolis common stock may adversely affect our financial condition.
We own common stock of the Federal Home Loan Bank of Indianapolis (the "FHLB"), in order to qualify for membership in the Federal Home Loan Bank system, which enables us to borrow funds under the Federal Home Loan Bank advance program. The carrying value of our FHLB common stock was approximately $3.0 million as of September 30, 2010.
Published reports indicate that certain member banks of the Federal Home Loan Bank system may be subject to asset quality risks that could result in materially lower regulatory capital levels. In December 2008, certain member banks of the Federal Home Loan Bank system (including the FHLB) suspended dividend payments and the repurchase of capital stock until further notice. In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the FHLB, could be substantially diminished or reduced to zero. Consequently, given that there is no market for our FHLB common stock, we believe that there is a risk that our investment could be deemed other-than-temporarily impaired at some time in the future. If this occurs, it may adversely affect our results of operations and financial condition . If the FHLB were to cease operations, or if we were required to write-off our investment in the FHLB, our business, financial condition, liquidity, capital and results of operations may be materially adversely affected.
The recently enacted Dodd-Frank Act may adversely impact the Company's results of operations, financial condition or liquidity.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), was signed into law by President Obama. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection (the “BCFP”), and will require the BCFP and other federal agencies to implement many new and significant rules and regulations. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting rules and regulations will impact the Company's and the Bank's business. Compliance with these new laws and regulations will likely result in additional costs, which could be significant and could adversely impact the Company's results of operations, financi al condition or liquidity.
Other than as set forth above, there have been no other material changes in the risk factors applicable to the Company from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.
The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index, which is here incorporated by reference.
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 22, 2010
| /s/ Robert K. Chapman | /s/ Randal J. Rabe | |
| Robert K. Chapman | Randal J. Rabe | |
| President and Chief Executive Officer (Principal Executive Officer) | Executive Vice President and Chief Financial Officer | |
| (Principal Financial Officer) |
| Exhibit | Description | |
2.1 | Agreement of Consolidation. Previously filed with the Commission on January 15, 2010 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 2.1. Incorporated here by reference. | |
3.1 | Restated Articles of Incorporation of United Bancorp, Inc. Previously filed with the Commission on October 1, 2010 in United Bancorp, Inc.'s Form S-1 Registration Statement, Exhibit 3.1. Incorporated here by reference. | |
3.2 | Amended and Restated Bylaws of United Bancorp, Inc. Previously filed with the Commission on December 9, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 3.1. Incorporated here by reference. | |
3.3 | Certificate of Designations for Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Previously filed with the Commission on January 16, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 3.1. Incorporated here by reference. | |
4.1 | Restated Articles of Incorporation of United Bancorp, Inc. Exhibit 3.1 is incorporated here by reference. | |
4.2 | Amended and Restated Bylaws of United Bancorp, Inc. Exhibit 3.2 is incorporated here by reference. | |
4.3 | Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Previously filed with the Commission on January 16, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 4.1. Incorporated here by reference. | |
4.4 | Warrant, dated January 16, 2009, issued to the United States Department of the Treasury. Previously filed with the Commission on January 16, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 4.2. Incorporated here by reference. | |
4.5 | Certificate of Designations for Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Exhibit 3.3 is incorporated here by reference. | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350. | |