UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
----------
COMMISSION FILE #0-16640
UNITED BANCORP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2606280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
205 E. CHICAGO BOULEVARD, TECUMSEH, MI 49286
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (517) 423-8373
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated Filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company as defined in
Rule 12b-2 of the Exchange Act.
Yes [ ] No [X]
As of October 31, 2006, there were outstanding 2,623,666 shares of the
registrant's common stock, no par value.
1
CROSS REFERENCE TABLE
ITEM NO. DESCRIPTION PAGE NO.
- -------- ----------- --------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Condensed Consolidated Balance Sheets 3
(b) Condensed Consolidated Statements of Income 4
(c) Condensed Consolidated Statements of Shareholders'
Equity 5
(d) Condensed Consolidated Statements of Cash Flows 6
(e) Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Background 10
Executive Summary 10
Financial Condition 11
Liquidity and Capital Resources 14
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits 21
Signatures 21
Exhibits 22
Page 2
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
(A) CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (unaudited)
September 30, December 31, September 30,
In thousands of dollars 2006 2005 2005
------------- ------------ -------------
ASSETS
Cash and demand balances in other banks $ 20,207 $ 20,416 $ 23,011
Federal funds sold 1,700 -- 11,500
-------- -------- --------
Total cash and cash equivalents 21,907 20,416 34,511
Securities available for sale 94,442 103,432 101,790
Loans held for sale 2,376 1,060 2,359
Portfolio loans 590,006 557,052 535,182
-------- -------- --------
Total loans 592,382 558,112 537,541
Less allowance for loan losses 6,994 6,361 6,266
-------- -------- --------
Net loans 585,388 551,751 531,275
Premises and equipment, net 12,744 12,998 13,095
Goodwill 3,469 3,469 3,469
Bank-owned life insurance 11,394 11,091 10,991
Accrued interest receivable and other assets 10,552 10,622 10,686
-------- -------- --------
TOTAL ASSETS $739,896 $713,779 $705,817
======== ======== ========
LIABILITIES
Deposits
Noninterest bearing $ 86,364 $ 88,404 $ 85,904
Interest bearing deposits 534,408 502,248 503,832
-------- -------- --------
Total deposits 620,772 590,652 589,736
Federal funds purchased and other short term borrowings 76 6,376 76
Other borrowings 39,608 42,228 43,228
Accrued interest payable and other liabilities 6,129 6,901 6,412
-------- -------- --------
TOTAL LIABILITIES 666,585 646,157 639,452
COMMITMENT AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value;
5,000,000 shares authorized; 2,623,724, 2,493,238, and
2,492,356 shares issued and outstanding 70,937 63,186 63,106
Retained earnings 2,204 4,705 3,319
Accumulated other comprehensive income (loss), net of tax 170 (269) (60)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 73,311 67,622 66,365
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $739,896 $713,779 $705,817
======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
(B) CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
In thousands of dollars, except per share data 2006 2005 2006 2005
------- ------ -------- --------
INTEREST INCOME
Interest and fees on loans $11,085 $9,124 $ 31,621 $ 25,602
Interest on securities
Taxable 638 483 1,746 1,524
Tax exempt 345 314 1,024 840
Interest on federal funds sold 99 78 291 116
------- ------ -------- --------
Total interest income 12,167 9,999 34,682 28,082
INTEREST EXPENSE
Interest on deposits 4,269 2,809 11,434 7,207
Interest on short term and other borrowings 470 480 1,418 1,496
------- ------ -------- --------
Total interest expense 4,739 3,289 12,852 8,703
------- ------ -------- --------
NET INTEREST INCOME 7,428 6,710 21,830 19,379
Provision for loan losses 396 329 1,202 954
------- ------ -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,032 6,381 20,628 18,425
NONINTEREST INCOME
Service charges on deposit accounts 888 809 2,483 2,210
Trust & Investment fee income 915 984 2,821 2,928
Gains (losses) on securities transactions -- -- (2) (1)
Income from loan sales and servicing 237 337 629 905
ATM, debit and credit card fee income 493 448 1,409 1,242
Income from sale of nondeposit investment products 304 232 787 617
Income from bank-owned life insurance 102 100 302 297
Other income 185 150 635 510
------- ------ -------- --------
Total noninterest income 3,124 3,060 9,064 8,708
NONINTEREST EXPENSE
Salaries and employee benefits 3,800 3,668 11,497 11,092
Occupancy and equipment expense, net 1,103 1,055 3,280 3,143
External data processing 380 338 1,061 924
Advertising and marketing 282 277 819 804
Professional fees 212 57 702 160
Other expense 967 900 2,957 2,713
------- ------ -------- --------
Total noninterest expense 6,744 6,295 20,316 18,836
------- ------ -------- --------
INCOME BEFORE FEDERAL INCOME TAX 3,412 3,146 9,376 8,297
Federal income tax 967 882 2,602 2,292
------- ------ -------- --------
NET INCOME $ 2,445 $2,264 $ 6,774 $ 6,005
======= ====== ======== ========
Basic earnings per share $ 0.922 $0.856 $ 2.556 $ 2.276
Diluted earnings per share $ 0.922 $0.855 $ 2.556 $ 2.263
Cash dividends declared per share of common stock $ 0.370 $0.352 $ 0.722 $ 1.003
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
(C) CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
In thousands of dollars 2006 2005 2006 2005
------- -------- ------- -------
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of period $70,827 $65,125 $67,622 $62,224
Net Income 2,445 2,264 6,774 6,005
Other comprehensive income:
Net change in unrealized gains (losses) on securities
available for sale, net of reclass adjustments for
realized gains (losses) and related taxes 913 (142) 439 (159)
------- ------- ------- -------
Total comprehensive income 3,358 2,122 7,213 5,846
Cash dividends declared (971) (922) (1,896) (2,622)
Common stock transactions 97 40 372 917
------- ------- ------- -------
Balance at end of period $73,311 $66,365 $73,311 $66,365
======= ======= ======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5
(D) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
-------------------
In thousands of dollars 2006 2005
-------- --------
Cash Flows from Operating Activities
Net income $ 6,774 $ 6,005
Adjustments to Reconcile Net Income to Net Cash
from Operating Activities
Depreciation and amortization 1,176 1,575
Provision for loan losses 1,202 954
Gain on sale of loans (368) (701)
Proceeds from sales of loans originated for
sale 21,476 45,580
Loans originated for sale (22,424) (44,879)
Losses on securities transactions 2 1
Change in accrued interest receivable and other
assets (342) (705)
Increase in cash surrender value on bank-owned
life insurance (302) (297)
Change in investment in limited partnership 39 142
Excess tax benefits from exercised stock
options (28) --
Change in accrued interest payable and other
liabilities 350 (286)
-------- --------
Net cash from operating activities 7,555 7,389
Cash Flows from Investing Activities
Securities available for sale
Purchases (23,955) (17,928)
Sales -- --
Maturities and calls 29,108 12,159
Principal payments 4,466 7,236
Net change in portfolio loans (33,791) (41,488)
Premises and equipment expenditures, net (673) (1,027)
-------- --------
Net cash used in investing activities (24,845) (41,048)
Cash Flows from Financing Activities
Net change in deposits 30,120 59,858
Net change in short term borrowings (6,300) (8,650)
Proceeds from other borrowings 3,000 950
Principal payments on other borrowings (5,620) (569)
Proceeds from common stock transactions 372 917
Excess tax benefits from exercised stock
options 28 --
Dividends paid (2,819) (2,524)
-------- --------
Net cash from financing activities 18,781 49,982
-------- --------
Net change in cash and cash equivalents 1,491 16,323
Cash and cash equivalents at beginning of year 20,416 18,188
-------- --------
Cash and cash equivalents at end of period $ 21,907 $ 34,511
======== ========
Supplement Disclosure of Cash Flow Information:
Interest paid $ 12,400 $ 8,302
Income tax paid 2,455 2,050
Loans transferred to other real estate 268 391
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 6
(E) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of United Bancorp,
Inc. (the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The condensed consolidated balance sheet of the
Company as of December 31, 2005 has been derived from the audited consolidated
balance sheet of the Company as of that date. Operating results for the three
and nine month periods ending September 30, 2006 are not necessarily indicative
of the results that may be expected for the year ended December 31, 2006. 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, 2005. Certain amounts for 2005 have been reclassified to
conform to 2006 classifications.
STOCK OPTIONS
In 2004, shareholders approved the Company's 2005 Stock Option Plan (the "2005
Plan"). The plan is a non-qualified stock option plan as defined under Internal
Revenue Service regulations. Under the plan, directors and management of the
Company and subsidiaries are given the right to purchase stock of the Company at
a stipulated price, adjusted for stock dividends, over a specific period of
time. The 2005 Plan will continue in effect until the end of 2009, and is the
only plan in effect in 2006. The 2005 Plan is the successor to the Company's
1999 Stock Option Plan (the "1999 Plan") that continued in effect until the end
of 2004.
The stock subject to the options are shares of authorized and unissued common
stock of the Company. Options under the 1999 and 2005 Plans (the "Plans") are
granted to directors and certain key members of management at the then-current
market price at the time the option is granted. The options have a three- year
vesting period, and with certain exceptions, expire at the end of ten years, or
three years after retirement. The following is summarized option activity for
the 1999 and 2005 Plans, adjusted for stock dividends:
Stock Options
----------------------------
Options Weighted Avg.
Outstanding Exercise Price
----------- --------------
Balance at January 1, 2006 127,192 $51.92
Options granted 29,525 57.72
Options exercised (6,344) 43.02
Options forfeited (2,486) 58.91
-------
Balance at September 30, 2006 147,887 $53.34
=======
Total options granted during the nine-month period ended September 30, 2006 were
29,525, and the weighted fair value of the options granted was $7.11. For stock
options outstanding at September 30, 2006, the range of average exercise prices
was $34.11 to $64.29 and the weighted average remaining contractual term was
7.42 years. At September 30, 2006, 74,813 options are exercisable under the
Plans.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123(R) Share-Based Payment ("SFAS 123(R)"). SFAS 123(R) addresses
all forms of share-based payment awards, including shares under employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
SFAS 123(R) requires all share-based payments to be recognized as expense, based
upon their fair values, in the financial statements over the vesting period of
the awards. The Company has
Page 7
elected the modified prospective application method and, as a result, has
recorded approximately $164,005 in compensation expense related to vested stock
options less estimated forfeitures for the nine month period ended September 30,
2006. As of September 30, 2006, unrecognized compensation expense related to the
stock options totaled $311,527 and is expected to be recognized over 3 years.
At September 30, 2006, the aggregate intrinsic value of options outstanding
totaled $213,861. This value represents the difference between the Company's
closing stock price on the last day of trading for the third quarter and the
exercise price multiplied by the number of in-the-money options assuming all
option holders had exercised their stock options on September 30, 2006. No
options were exercised during the quarter ending September 30, 2006.
The following pro forma information presents net income and earnings per share
had SFAS 123 been used to measure compensation cost for stock option grants as
of September 30, 2005. The exercise price of the option grants is equivalent to
the market value of the underlying stock at the grant date, adjusted for stock
dividends. Accordingly, no compensation cost was recorded for the period ended
September 30, 2005.
Nine months ended
In thousands of dollars, except per share data September 30, 2005
------------------
Net income, as reported $6,005
Less: Total stock-based
compensation cost, net of taxes 93
------
Pro forma net income $5,912
======
As Reported Pro Forma
----------- ---------
Earnings per share:
Basic $2.276 $2.240
Diluted $2.263 $2.228
NOTE 2 - LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. The unpaid principal balance of mortgage
loans serviced for others was $229,561,000 and $240,640,000 at the end of
September, 2006 and 2005. The balance of loans serviced for others related to
servicing rights that have been capitalized was $228,425,000 and $239,041,000 at
September 30, 2006 and 2005. Mortgage servicing rights activity in thousands of
dollars for the nine months ended September 30, 2006 and 2005 follows:
2006 2005
------ ------
Balance at January 1 $1,645 $1,820
Amount capitalized year to date 95 118
Amount amortized year to date (171) (262)
------ ------
Balance at September 30 $1,569 $1,676
====== ======
No valuation allowance was considered necessary for mortgage servicing rights at
period end 2006 and 2005.
NOTE 3 - COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share are based upon the weighted average number of shares
outstanding plus contingently issuable shares during the year. Diluted earnings
per share further assumes the dilutive effect of additional common shares
issuable under stock options. During April of 2006 and March of 2005, the
Company declared a 5% stock dividend payable in May 2006 and 2005. Earnings per
share, dividends per share and weighted average shares have been restated to
reflect these stock dividends. A reconciliation of basic and diluted earnings
per share follows:
Page 8
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
In thousands of dollars, except per share data 2006 2005 2006 2005
---------- ---------- ---------- ----------
Net income $ 2,445 $ 2,264 $ 6,774 $ 6,005
========== ========== ========== ==========
Basic earnings:
Weighted average common shares outstanding 2,623,586 2,617,238 2,623,394 2,612,781
Weighted average contingently issuable shares 28,220 26,137 26,547 26,089
---------- ---------- ---------- ----------
Total weighted average shares outstanding 2,651,806 2,643,375 2,649,941 2,638,870
========== ========== ========== ==========
Basic earnings per share $ 0.922 $ 0.856 $ 2.556 $ 2.276
========== ========== ========== ==========
Diluted earnings:
Weighted average common shares outstanding
from basic earnings per share 2,651,806 2,643,375 2,649,941 2,638,870
Dilutive effect of stock options -- 5,584 -- 14,676
---------- ---------- ---------- ----------
Total weighted average shares outstanding 2,651,806 2,648,959 2,649,941 2,653,546
========== ========== ========== ==========
Diluted earnings per share $ 0.922 $ 0.855 $ 2.556 $ 2.263
========== ========== ========== ==========
A total of 105,561 and 222 shares for the three month period ended and 104,024
and 7 shares for the nine month periods ended September 30, 2006 and 2005,
represented by stock options granted, are not included in the above calculations
as they are non-dilutive as of the date of this report.
In years prior to 2006, cash dividends were declared in the last month of the
quarter, payable the end of the month following quarter-end. Effective with the
first quarter of 2006, cash dividends are declared and are payable in the month
following the end of the quarter. As a result of this change in schedule, the
cash dividend declared in December of 2005 was paid in January, 2006, but no
dividends were declared in the first quarter of 2006. Subsequently, cash
dividends of $0.37 per share were declared and paid in April and July, 2006.
While this change in procedure has not changed the number of dividends to be
paid during the calendar year, for 2006 the number of cash dividends declared
during the calendar year has been reduced by one.
NOTE 4 - ACCOUNTING DEVELOPMENTS
In March 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 156. This Statement amends SFAS 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, with respect to the accounting for separately recognized
servicing assets and servicing liabilities.
SFAS No. 156 requires an entity to initially recognize a servicing asset or
servicing liability at fair value each time it undertakes an obligation to
service a financial asset by entering into a servicing contract in other
specific situations. In addition, SFAS No. 156 permits an entity to choose
either of the following subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities.
Amortization Method - Amortize servicing assets or servicing liabilities in
proportion to and over the period of estimated net servicing income or net
servicing loss and assess servicing assets or servicing liabilities for
impairment or increased obligation based on fair value at each reporting
date.
Fair value measurement method - Measure servicing assets or servicing
liabilities at fair value at each reporting date and report changes in fair
value in earnings in the period in which the change occurs.
SFAS No. 156 is effective at the beginning of an entity's fiscal year that
begins after September 15, 2006 and should be applied prospectively for
recognition and initial measurement of servicing assets and servicing
liabilities. Earlier adoption is permitted as of the beginning of an entity's
fiscal year, provided the
Page 9
entity has not yet issued financial statements, including interim financial
statements, for any period of that fiscal year.
The Company did not elect to adopt SFAS No. 156 on January 1, 2006. The Company
is currently evaluating the effect of adopting this Statement on the Company's
financial condition and 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 for United Bancorp, Inc. and its subsidiary banks,
United Bank & Trust ("UBT") and United Bank & Trust - Washtenaw ("UBTW") for the
three and nine month periods ended September 30, 2006 and 2005.
BACKGROUND
The Company is a financial holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") under the
Bank Holding Company Act. The Company has corporate power to engage in such
activities as permitted to business corporations under the Michigan Business
Corporation Act, subject to the limitations of the Bank Holding Company Act and
regulations of the Federal Reserve System. The Company's subsidiary banks (the
"Banks") offer a full range of services to individuals, corporations,
fiduciaries and other institutions. Banking services include checking, NOW
accounts, savings, time deposit accounts, money market deposit accounts, safe
deposit facilities and money transfers. Lending operations provide real estate
loans, secured and unsecured business and personal loans, consumer installment
loans, and check-credit loans, home equity loans, accounts receivable and
inventory financing, equipment lease financing and construction financing.
The Banks offer the sale of nondeposit investment products through licensed
representatives in their banking offices, and sell credit and life insurance
products. In addition, the Company and/or the Banks are co-owners of Michigan
Banker's Title Insurance Company of Mid-Michigan LLC, and derive income from the
sale of various insurance products to banking clients. UBT operates a trust
department, and provides trust services to UBTW on a contract basis. The trust
department offers a wide variety of fiduciary services to individuals,
corporations and governmental entities, including services as trustee for
personal, corporate, pension, profit sharing and other employee benefit trusts.
The department provides securities custody services as an agent, acts as the
personal representative for estates and as a fiscal, paying and escrow agent for
corporate customers and governmental entities, and provides trust services for
clients of the Banks. These products help to diversify the Company's sources of
income.
Unemployment for the State of Michigan at the end of August, 2006 was 7.1%,
which places it in a tie for the highest rate among the fifty states. The
Lenawee County unemployment rate matches the State's level, while the Washtenaw
County unemployment rate of 4.9% is among the lowest in the State. The Banks
have experienced some slowing of loan growth relating to current economic
conditions. In addition, the Company's loan quality had experienced some
declines toward the end of 2005, but improvement has been noted the past three
quarters. We continue to keep an eye on the softening economy while continuing
our efforts to gain market share.
EXECUTIVE SUMMARY
Net income for the third quarter of 2006 was $2,445,449, or $0.922 per share,
representing the Company's best quarter ever, and was 8.0% ahead of the third
quarter of 2005. For the first nine months of 2006, earnings were a record
$6,774,419, or $2.556 per share, increasing 12.8% over the same period of 2005.
Page 10
The Company's strong quarter and year to date performance reflects continued
loan growth and the resulting increase in net interest income. Net interest
income increased 3.2% over the second quarter of 2006, and year to date is 12.6%
over the same period of 2005. Noninterest income was up slightly for the
quarter, and noninterest expense was down modestly.
Return on Average Assets ("ROA") and Return on Average Shareholders' Equity
("ROE") improved from the prior two quarters, with ROA for the quarter reaching
the highest quarterly level in recent quarters. At the same time, ROE for the
quarter was below the levels achieved in the third and fourth quarters of 2005,
but was above the levels achieved in the first and second quarters of this year.
The chart below shows the trends in the major components of earnings for the
past five quarters.
2006 2005
--------------------------- -----------------
in thousands of dollars, where appropriate 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr
------- ------- ------- ------- -------
Net interest income $7,428 $7,199 $7,203 $6,984 $6,710
Provision for loan losses 396 440 366 378 329
Noninterest income 3,124 3,051 2,891 2,961 3,060
Noninterest expense 6,744 6,791 6,782 6,359 6,294
Federal income tax provision 967 835 801 889 882
Net income $2,445 $2,184 $2,145 $2,319 $2,265
Earnings per share (a) $0.922 $0.824 $0.809 $0.876 $0.856
Return on average assets (b) 1.32% 1.20% 1.21% 1.30% 1.27%
Return on average shareholders' equity (b) 13.52% 12.48% 12.62% 13.77% 13.64%
(a) Basic earnings per share, adjusted for stock dividends paid
(b) annualized
The Company's balance sheet increased by $8.9 million in the third quarter, as
total assets reached $739.9 million at September 30, 2006. This resulted in an
increase of $26.1 million since December 31, 2005, bringing the year to date
annualized asset growth rate to 4.88%. During the current quarter, the Company's
gross loans grew by $17.4 million, deposits increased by $9.1 million, and total
assets were up 4.86% from June 30.
During the second quarter of 2006, the Wealth Management Group of United Bank &
Trust made the decision to exit the business of providing administrative
services for employee benefit accounts, effective September 30, 2006. This
change, along with the decline in market value of assets, has contributed to a
1.8% decrease in total assets managed by the Bank's trust department during the
third quarter of 2006. Assets under management by the trust department declined
$10.7 million during the quarter, with a balance of $568.5 million at September
30, 2006.
FINANCIAL CONDITION
SECURITIES
The Company's investment securities portfolio declined by $1.8 million in the
third quarter of 2006, and balances have decrease by $9.0 million since December
31, 2005 as the Company has elected not to replace some maturing investments.
The mix of the Company's investment portfolio has shifted modestly during the
past twelve months, as the percentage of investments held in Treasury, agency
and mortgage backed agency securities has declined and the percentage of
municipal obligations and other investments has increased slightly.
Page 11
The chart below shows the percentage composition of the Company's investment
portfolio as of the end of the current quarter for 2006 and 2005, and at
December 31, 2005.
9/30/06 12/31/05 9/30/05
------- -------- -------
U.S. Treasury and agency securities 40.2% 42.2% 40.3%
Mortgage backed agency securities 15.7% 14.4% 16.8%
Obligations of states and political subdivisions 40.7% 40.2% 39.7%
Corporate, asset backed, and other securities 3.4% 3.2% 3.2%
----- ----- -----
Total Securities 100.0% 100.0% 100.0%
===== ===== =====
The Company is conservative in its investments, preferring to concentrate its
risks within the loan portfolio. Investments in U.S. Treasury and agency
securities are considered to possess low credit risk. Obligations of U.S.
government agency mortgage-backed securities possess a somewhat higher interest
rate risk due to certain prepayment risks. The corporate, asset backed and other
securities portfolio also contains a moderate level of credit risk. The
municipal portfolio contains a small amount of geographic risk, as less than 11%
of that portfolio is issued by political subdivisions located within Lenawee
County, Michigan. The Company's portfolio contains no "high risk" mortgage
securities or structured notes.
The Company's current and projected tax position continues to make carrying
tax-exempt securities beneficial, and the Company does not anticipate being
subject to the alternative minimum tax in the near future. The investment in
local municipal issues also reflects the Company's commitment to the development
of the local area through support of its local political subdivisions.
LOANS
Gross loans increased by $17.4 million in the third quarter of 2006, bringing
the twelve-month loan growth to $54.8 million, for an increase of 10.2% over the
previous twelve months. All categories of the loan portfolio have experienced
growth during the first nine months of 2006, with business loans and commercial
and residential mortgages providing the largest portion of that growth.
The portfolio continues to evolve and the trend of the portfolio mix has changed
during the first nine months of the year. Personal loans and residential
mortgage balances increased as a percentage of total loans since December 31,
2005 while business loans and construction and development loans experienced a
decline in their overall percentages during the same period.
The table below shows total loans outstanding, in thousands of dollars, and
their percentage of the total loan portfolio. All loans are domestic and contain
no significant concentrations by industry or client.
September 30, 2006 December 31, 2005 September 30, 2005
--------------------- --------------------- ---------------------
Balance % of total Balance % of total Balance % of total
-------- ---------- -------- ---------- -------- ----------
Total loans:
Personal $ 87,703 14.8% $ 81,571 14.6% $ 81,078 15.1%
Business loans and
commercial mortgages 331,846 56.0% 320,188 57.4% 305,904 56.9%
Tax exempt 2,898 0.5% 3,133 0.6% 3,255 0.6%
Residential mortgage 82,414 13.9% 67,246 12.0% 66,943 12.5%
Construction & development 87,521 14.8% 85,975 15.4% 80,361 14.9%
-------- ----- -------- ------ -------- -----
Total loans $592,382 100.0% $558,112 100.00% $537,541 100.0%
======== ===== ======== ====== ======== =====
CREDIT QUALITY
United's loan quality remains strong, in spite of the challenges facing the
Michigan economy. The Company continues to maintain a process of actively
monitoring delinquencies, nonperforming assets and potential problem loans. The
aggregate amount of nonperforming loans is presented in the table below. For
purposes of this summary, loans renewed on market terms existing at the time of
renewal are not considered troubled
Page 12
debt restructurings. The accrual of interest income is discontinued when a loan
becomes ninety days past due unless it is both well secured and in the process
of collection, or the borrower's capacity to repay the loan and the collateral
value appear sufficient.
The Company's total nonperforming assets have declined by more than $4 million
from year-end 2005 totals, with the reduction in all categories of nonperforming
assets. While nonaccrual loan balances increased slightly during the quarter,
delinquent loans and troubled debt restructurings declined by $1.8 million in
the third quarter. Balances of property held as other real estate has also
declined, and the percent of non-performing assets has moved from 1.07% of loans
at December 31, 2005 to 0.48% at September 30, 2006. Collection efforts are
underway with past due and nonaccrual loans, and the Company remains adequately
secured.
The following chart shows the aggregate amount of the Company's nonperforming
assets by type, in thousands of dollars.
9/30/06 12/31/05 9/30/05
------- -------- -------
Nonaccrual loans $2,869 $5,609 $4,378
Loans past due 90 days or more 160 1,153 570
Troubled debt restructurings -- -- 898
------ ------ ------
Total nonperforming loans 3,028 6,762 5,846
Other real estate (ORE) 551 871 1,234
------ ------ ------
Total nonperforming assets $3,579 $7,633 $7,080
====== ====== ======
Percent of nonperforming loans to total loans 0.51% 1.21% 1.09%
Percent of nonperforming assets to total assets 0.48% 1.07% 1.00%
As of September 30, 2006, the Company has no loans classified as a troubled debt
restructuring. The amount listed in the table above as other real estate
reflects a small number of properties that were acquired in lieu of foreclosure.
Properties have been leased to a third party with an option to purchase or are
listed for sale, and no significant losses are anticipated.
The Company's allowance for loan losses remains at a level consistent with its
estimated losses, and the allowance provides for currently estimated losses
inherent in the portfolio. An analysis of the allowance for loan losses, in
thousands of dollars, for the nine months ended September 30, 2006 and 2005
follows:
2006 2005
------ ------
Balance at January 1 $6,361 $5,766
Loans charged off (681) (573)
Recoveries credited to allowance 112 119
Provision charged to operations 1,202 954
------ ------
Balance at September 30 $6,994 $6,266
====== ======
The following table presents the allocation of the allowance for loan losses
applicable to each loan category in thousands of dollars, as of September 30,
2006 and 2005, and December 31, 2005.
9/30/06 12/31/05 9/30/05
------- -------- -------
Business and commercial mortgage $6,067 $5,471 $5,452
Tax exempt -- -- --
Residential mortgage 18 14 13
Personal 853 777 776
Construction -- -- --
Unallocated 56 99 25
------ ------ ------
Total $6,994 $6,361 $6,266
====== ====== ======
Page 13
Business loans carry the largest balances per loan, and therefore, any single
loss would be proportionally larger than losses in other portfolios. Because of
this, the Company uses an independent loan review firm to assess the continued
quality of its business loan portfolios. This is in addition to the precautions
taken with credit quality in the other loan portfolios. Business loans contain
no significant concentrations other than geographic concentrations within the
market areas served by the Banks.
Loans to finance residential mortgages make up 13.9% of the portfolio at
September 30, 2006, and are well-secured and have had historically low levels of
net losses. Personal and business loans, including business mortgages and
construction and development loans, make up the balance of the portfolio. The
personal loan portfolio consists of direct and indirect installment, credit
cards, home equity and unsecured revolving line of credit loans. Installment
loans consist primarily of loans for consumer durable goods, principally
automobiles. Indirect personal loans consist of loans for automobiles, marine
and manufactured housing.
DEPOSITS
Deposit growth continued during the third quarter of 2006, as total deposits
increased by more than $9 million. This represents an annualized rate of 5.9%,
compared to deposit growth over the past twelve months of 5.3%. Short-term
interest bearing accounts continue to be very popular with clients, and demand
deposit balances increased modestly. The Banks continue to experience interest
by consumers in certificates of deposit, and traditional banking products
continue to be an important part of the Company's product line. In addition, the
Banks have increased their emphasis on gathering core deposits within their
market areas, in order to fund anticipated future loan growth. The Banks'
deposit rates are consistently competitive with other banks in their market
areas.
The majority of the Company's deposits are derived from core client sources,
relating to long term relationships with local personal, business and public
clients. The Banks do not support their growth through brokered deposits,
although they do participate in gathering out-of-market certificates of deposit
through an automated network.
The chart below shows the percentage makeup of the deposit portfolio as of
September 30, 2006 and 2005, and December 31, 2005.
9/30/06 12/31/05 9/30/05
------- -------- -------
Noninterest bearing deposits 13.9% 15.0% 14.6%
Interest bearing deposits 86.1% 85.0% 85.4%
----- ----- -----
Total deposits 100.0% 100.0% 100.0%
===== ===== =====
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY, CASH EQUIVALENTS AND BORROWED FUNDS
The Company maintains correspondent accounts with a number of other banks for
various purposes. In addition, cash sufficient to meet the operating needs of
its banking offices is maintained at its lowest practical levels. At times, the
Banks are a participant in the federal funds market, either as a borrower or
seller. Federal funds are generally borrowed or sold for one-day periods. The
Banks also have the ability to utilize short-term advances from the Federal Home
Loan Bank ("FHLB") and borrowings at the discount window of the Federal Reserve
Bank as additional short-term funding sources. Federal funds were used during
2005 and 2006. Short-term advances and discount window borrowings were not
utilized during either year.
Page 14
The Company periodically finds it advantageous to utilize longer term borrowings
from the Federal Home Loan Bank of Indianapolis. These long-term borrowings
serve primarily to provide a balance to some of the interest rate risk inherent
in the Company's balance sheet. No advances matured and no new advances were
obtained during the third quarter of 2006, and the amount of FHLB borrowings
outstanding at September 30 remained substantially unchanged from June 30.
CAPITAL RESOURCES
The capital ratios of the Company exceed the regulatory guidelines for well
capitalized institutions at September 30, 2006 and 2005 and December 31, 2005.
The following table shows the Company's capital ratios and ratio calculations as
of September 30, 2006 and 2005, and December 31, 2005. Dollars are shown in
thousands.
Regulatory
Guidelines United Bancorp, Inc.
--------------- ----------------------------
Adequate Well 9/30/06 12/31/05 9/30/05
-------- ---- ------- -------- -------
Tier 1 capital to average assets 4% 5% 9.6% 9.4% 9.3%
Tier 1 capital to risk weighted assets 4% 6% 11.5% 11.1% 11.2%
Total capital to risk weighted assets 8% 10% 12.6% 12.2% 12.3%
Total shareholders' equity $73,311 $67,622 $66,365
Intangible assets (3,469) (3,469) (3,469)
Disallowed servicing assets -- -- --
Unrealized (gain) loss on securities
available for sale (170) 269 60
------- ------- -------
Tier 1 capital 69,672 64,422 62,956
Allowable loan loss reserves 6,994 6,361 6,266
------- ------- -------
Tier 1 and 2 capital $76,666 $70,783 $69,222
======= ======= =======
RESULTS OF OPERATIONS
Consolidated net income for the third quarter of 2006 resulted in the best
quarter in the Company's history. Net income for the quarter surpassed the
earnings of the second quarter of 2006 by 12.0%, and year to date earnings are
up 12.8% from the same period in 2005. The following discussion provides an
analysis of the various components of these changes.
NET INTEREST INCOME
Net interest income continues to increase, as the Banks continue to benefit from
asset growth and in spite of tightening interest spreads. During the third
quarter, interest income increased by 5.9%, while interest expense grew 10.6%,
resulting in an increase in net interest income of 3.2%. While the Company's
yield on earning assets increased during the quarter, deposit costs increased at
a faster rate, resulting in a slight decrease in spread. Total interest income
was up $683,000 over the second quarter of the year, with most of the
improvement in loan income. Deposit costs provided most of the $454,000 increase
in interest expense, and net interest income was up $229,000 for the quarter.
The Company's year to date yield on earning assets was up ninety-one basis
points from the same period of 2005, while its cost of funds increased from the
nine-month 2005 levels by eighty-three basis points, resulting in an improvement
of seven basis points in the tax equivalent spread. Spread declined from the
second quarter of 2006 by two basis points. Year to date net interest income is
up $2,203,000 over the same period of 2005, or 12.0%.
Page 15
The following table shows the year to date daily average consolidated balance
sheets, interest earned (on a taxable equivalent basis) or paid, and the
annualized effective yield or rate, for the periods ended September 30, 2006 and
2005.
Nine Months Ended September 30,
---------------------------------------------------------------
9/30/06 9/30/05
------------------------------ ------------------------------
Average Interest Yield/ Average Interest Yield/
dollars in thousands Balance (b) Rate (c) Balance (b) Rate (c)
-------- -------- -------- -------- -------- --------
ASSETS
Interest earning assets (a)
Federal funds sold $ 7,838 $ 291 4.95% $ 5,090 $ 116 3.04%
Taxable securities 62,076 1,746 3.75% 72,042 1,524 2.82%
Tax exempt securities (b) 34,963 1,509 5.76% 29,832 1,246 5.57%
Taxable loans 565,577 31,523 7.43% 517,584 25,497 6.57%
Tax exempt loans (b) 3,051 145 6.33% 3,270 156 6.35%
-------- ------- -------- -------
Total int. earning assets (b) 673,505 35,214 6.97% 627,818 28,539 6.06%
Less allowance for loan losses (6,712) (5,977)
Other assets 59,247 59,940
-------- --------
TOTAL ASSETS $726,040 $681,781
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $104,704 997 1.27% $122,191 1,037 1.13%
Savings deposits 180,308 3,343 2.47% 174,929 1,931 1.47%
CDs $100,000 and over 91,016 2,979 4.36% 56,659 1,398 3.29%
Other interest bearing deposits 141,839 4,115 3.87% 122,426 2,840 3.09%
-------- ------- -------- -------
Total int. bearing deposits 517,867 11,434 2.94% 476,205 7,206 2.02%
Short term borrowings 1,300 47 4.87% 2,541 59 3.09%
Other borrowings 39,980 1,371 4.57% 42,620 1,437 4.50%
-------- ------- -------- -------
Total int. bearing liabilities 559,147 12,852 3.06% 521,366 8,702 2.23%
------- -------
Noninterest bearing deposits 87,459 86,567
Other liabilities 9,155 9,218
Shareholders' equity 70,279 64,633
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $726,040 $681,781
======== ========
Net interest income (b) 22,362 19,837
------- -------
Net spread (b) 3.91% 3.84%
==== ====
Net yield on interest earning assets (b) 4.43% 4.21%
==== ====
Tax equivalent adjustment on interest income (532) (458)
------- -------
Net interest income per income statement $21,830 $19,379
======= =======
Ratio of interest earning assets to
interest bearing liabilities 1.20 1.20
==== ====
(a) Non-accrual loans and overdrafts are included in the average balances of
loans.
(b) Fully tax-equivalent basis, net of nondeductible interest impact; 34% tax
rate.
(c) Annualized
As noted from the data in the following table, interest income and expense for
the first nine months of 2006 increased from the same period of 2005, and net
interest income improved by just over $2.5 million. During that time, interest
income and interest expense both increased as a result of volume and rate
increases. The improvement in net interest income for the first nine months of
2006 was evenly divided between volume and rate.
Page 16
The following table shows the effect of volume and rate changes on net interest
income for the nine months ended September 30, 2006 and 2005 on a taxable
equivalent basis, in thousands of dollars.
2006 Compared to 2005 2005 Compared to 2004
Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a)
------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
------ ------ ------ ------ ------ ------
Interest earned on:
Federal funds sold $ 81 $ 94 $ 175 $ 11 $ 72 $ 83
Taxable securities (231) 453 222 (76) 54 (22)
Tax exempt securities 220 43 263 31 (60) (29)
Taxable loans 2,493 3,533 6,026 2,573 2,049 4,622
Tax exempt loans (10) (1) (11) 94 -- 94
------ ------ ------ ------ ------ ------
Total interest income $2,553 $4,122 $6,675 $2,633 $2,115 $4,748
====== ====== ====== ====== ====== ======
Interest paid on:
NOW accounts $ (158) $ 118 $ (40) $ 36 $ 568 $ 604
Savings deposits 61 1,351 1,412 (11) 766 755
CDs $100,000 and over 1,028 553 1,581 483 100 583
Other interest bearing deposits 494 781 1,275 365 287 652
Short term borrowings (36) 25 (11) (1) 33 32
Other borrowings (90) 24 (66) 15 (20) (5)
------ ------ ------ ------ ------ ------
Total interest expense $1,299 $2,852 $4,151 $ 887 $1,734 $2,621
====== ====== ====== ====== ====== ======
Net change in net interest income $1,254 $1,270 $2,524 $1,746 $ 381 $2,127
====== ====== ====== ====== ====== ======
(a) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
PROVISION FOR LOAN LOSS
The provision for loan losses for the third quarter of 2006 was $396,000, down
from $440,000 for the second quarter of 2006 and up from $329,000 for the third
quarter of last year. Through nine months, the provision is $248,000 higher than
the first nine months of 2005, for an increase of 26.0%. The increase in the
provision for loan losses for the quarter and year to date is directly related
to the continued growth of the Company's loan portfolio.
NONINTEREST INCOME
Noninterest income increased 2.4% from the second quarter of 2006 and improved
2.1% over the third quarter of 2005. Service charges on deposits, income from
the sale of nondeposit investment products and income from loan sales and
servicing provided the improvement for the quarter, while Trust & Investment fee
income was flat and other income was down from the prior quarter.
Year to date, noninterest income is up 4.1% from the same period of 2005, with
improvement in all categories of noninterest income other than Trust and
investment fee income and income from loan sales and servicing. The declines in
Trust income are a result of a number of items, including the department's exit
of the employee benefits business during the second and third quarters. The
decline in income from the sale and servicing of mortgage loans reflects lower
volumes of loans sold on the secondary market. The largest dollars of increase
were from deposit service charges, ATM, debit and credit card income and income
from the sale of nondeposit investment products.
Page 17
The Banks generally market their production of fixed rate long-term mortgages in
the secondary market, and retain adjustable rate mortgages for their portfolios.
The Company maintains a portfolio of sold residential real estate mortgages,
which it continues to service. This servicing provides ongoing income for the
life of the loans. No write downs in mortgage servicing rights were required in
2006 or 2005.
NONINTEREST EXPENSES
Total noninterest expense decreased slightly during the third quarter compared
to the second quarter of 2006, with no significant changes in any one category.
Total year to date noninterest expense is up 7.9% from the same period of 2005.
Most categories of noninterest expense have increased during that period, with
compensation expense, professional fees and external data processing providing
the largest increases. Professional fees have grown in 2006 as a result of
additional consulting expenses and the Company's branding initiative. Increases
in external data processing costs relate primarily to the costs of ATM, debit
card, credit card and merchant processing, but also reflect a shift to
outsourcing of the Company's Trust processing during the third quarter of 2006.
The increase in expenses generally reflects the continued growth of the Company.
FEDERAL INCOME TAX
The Company's effective tax rate for the third quarter was up slightly, at
28.3%; compared to 27.7% for the second quarter. The Company's effective tax
rate for the first nine months of the year increased slightly from 2005 to 2006,
at 27.8% for 2006, compared to 27.6% for 2005.
NET INCOME
Overall, net interest income continues to be the major factor behind the
Company's strong net income. Noninterest income growth will likely slow as the
Company's income from loan sales and servicing and trust and investment fee
income flattens and overall noninterest income levels become more dependent on
other categories of income. Expenses remain at acceptable levels, but will also
increase during the remainder of the year as the Company expands its markets and
fills currently-vacant staff positions.
CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require management to
apply significant judgments to various accounting, reporting and disclosure
matters. The Company's Management must use assumptions and estimates to apply
these principles where actual measurement is not possible or practical. For a
complete discussion of the Company's significant accounting policies, see "Notes
to the Consolidated Financial Statements" on pages A-26 to A-29 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2005. Certain
policies are considered critical because they are highly dependent upon
subjective or complex judgments, assumptions and estimates. Changes in such
estimates may have a significant impact on the financial statements. Management
has reviewed the application of these policies with the Audit Committee of the
Company's Board of Directors.
FORWARD-LOOKING STATEMENTS
Statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations include forward-looking statements that are
based on management's beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about the
Company itself. Words such as "anticipate," "believe," "determine," "estimate,"
"expect," "forecast," "intend," "is likely," "plan," "project," "opinion,"
variations of such terms, and similar expressions are intended to identify such
forward-looking statements. The presentations and discussions of the provision
Page 18
and allowance for loan losses, and determinations as to the need for other
allowances presented in this report are inherently forward-looking statements in
that they involve judgments and statements of belief as to the outcome of future
events. These statements are not guarantees of future performance and involve
certain risks, uncertainties, and assumptions that are difficult to predict with
regard to timing, extent, likelihood, and degree of occurrence. Therefore,
actual results and outcomes may materially differ from what may be expressed or
forecasted in such forward-looking statements. Internal and external factors
that may cause such a difference include those discussed under "Risk Factors" in
Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, and generally include changes in interest rates and interest
rate relationships; demand for products and services; the degree of competition
by traditional and non-traditional competitors; changes in banking laws and
regulations; changes in tax laws; changes in prices, levies, and assessments;
the impact of technological advances; governmental and regulatory policy
changes; the outcomes of pending and future litigation and contingencies; trends
in customer behavior and customer ability to repay loans; software failure,
errors or miscalculations; and the vicissitudes of the national economy. The
Company undertakes no obligation to update, amend or clarify forward-looking
statements, whether as a result of new information, future events, or otherwise.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FUNDS MANAGEMENT AND INTEREST RATE RISK
The composition of the Company's balance sheet consists of investments in
interest earning assets (loans and investment securities) that are funded by
interest bearing liabilities (deposits and borrowings). These financial
instruments have varying levels of sensitivity to changes in market interest
rates resulting in market risk. Policies place strong emphasis on stabilizing
net interest margin, with the goal of providing a sustained level of
satisfactory earnings. The Funds Management, Investment and Loan policies
provide direction for the flow of funds necessary to supply the needs of
depositors and borrowers. Management of interest sensitive assets and
liabilities is also necessary to reduce interest rate risk during times of
fluctuating interest rates.
A number of measures are used to monitor and manage interest rate risk,
including interest sensitivity and income simulation analyses. An interest
sensitivity model is the primary tool used to assess this risk with supplemental
information supplied by an income simulation model. The simulation model is used
to estimate the effect that specific interest rate changes would have on twelve
months of pretax net interest income assuming an immediate and sustained up or
down parallel change in interest rates of 200 basis points. Key assumptions in
the models include prepayment speeds on mortgage related assets; cash flows and
maturities of financial instruments held for purposes other than trading;
changes in market conditions, loan volumes and pricing; and management's
determination of core deposit sensitivity. These assumptions are inherently
uncertain and, as a result, the models cannot precisely estimate net interest
income or precisely predict the impact of higher or lower interest rates on net
interest income. Actual results will differ from simulated results due to
timing, magnitude, and frequency of interest rate changes and changes in market
conditions.
Based on the results of the simulation model as of September 30, 2006, the
Company would expect a maximum potential reduction in net interest margin of
less than 6% if market rates decreased under an immediate and sustained parallel
shift of 200 basis points. The interest sensitivity position of the Company is
now slightly liability sensitive, a change in trend from the asset sensitive
position the Company had experienced.
Page 19
The Company and each Bank maintains Funds Management Committees, which review
exposure to market risk on a regular basis. The Committees' overriding policy
objective is to manage assets and liabilities to provide an optimum and
consistent level of earnings within the framework of acceptable risk standards.
The Funds Management Committees are also responsible for evaluating and
anticipating various risks other than interest rate risk. Those risks include
prepayment risk, credit risk and liquidity risk. The Committees are made up of
senior members of management, and monitor the makeup of interest sensitive
assets and liabilities to assure appropriate liquidity, maintain interest
margins and to protect earnings in the face of changing interest rates and other
economic factors.
The Funds Management policies provide for a level of interest sensitivity which,
Management believes, allows the Banks to take advantage of opportunities within
their markets relating to liquidity and interest rate risk, allowing flexibility
without subjecting the Company to undue exposure to risk. In addition, other
measures are used to evaluate and project the anticipated results of
Management's decisions.
ITEM 4 - CONTROLS AND PROCEDURES
INTERNAL CONTROL
The Company maintains internal controls that contain self-monitoring mechanisms,
and actions are taken to correct deficiencies as they are identified. The Board
of Directors of the Company, operating through its Audit and Compliance
Committee, provides oversight to the financial reporting process. Even effective
internal controls, no matter how well designed, have inherent limitations,
including the possibility of circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only reasonable
assurance with respect to financial statement preparation. Furthermore, the
effectiveness of internal controls may vary over time. The Company's Audit and
Compliance Committee is composed entirely of Directors who are not officers or
employees of the Company.
As of September 30, 2006, an evaluation was carried out under the supervision
and with the participation of United Bancorp's management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934). Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that United Bancorp's disclosure controls and procedures as of the end
of the quarter ended September 30, 2006 are, to the best of their knowledge,
effective to reasonably ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act are recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. There have been no changes
in the Company's internal controls over financial reporting that occurred during
the quarter ended September 30, 2006 that materially affected, or are likely to
materially affect, the Company's internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1- LEGAL PROCEEDINGS
On September 22, 2006, Annette Theisen and various entities controlled by her,
filed a complaint in Washtenaw Circuit Court against a number of defendants,
including UBTW and its President, Todd C. Clark. The complaint alleges that UBTW
and its President had a fiduciary duty and a duty of good faith to plaintiffs
and that UBTW and its President breached those duties in connection with secured
loans made to plaintiffs by, among other things, allegedly allowing plaintiffs
to make imprudent investments with such loans, causing transfers of, and
mortgages to be placed on, certain of plaintiffs' assets contrary to plaintiffs'
interests, not disclosing certain alleged conflicts of interest, and failing to
pay the premium on, and causing
Page 20
the cancellation of, Ms. Theisen's long-term supplemental medical insurance
policy. Plaintiffs seek damages of $6 million. The Company intends to vigorously
defend such claims.
The Company is not involved in any material legal proceedings. In addition to
the foregoing litigation, the Company and the Banks are involved in ordinary
routine litigation incident to its business; however, no such routine
proceedings are expected to result in any material adverse effect on the
operations or earnings of the Company or the Banks. Neither the Company nor the
Banks are involved in any proceedings to which any director, principal officer,
affiliate thereof, or person who owns of record or beneficially five percent
(5%) or more of the outstanding stock of the Company, or any associate of the
foregoing, is a party or has a material interest adverse to the Company or the
Banks.
ITEM 6- EXHIBITS
Listing of Exhibits (numbered as in Item 601 of Regulation S-K):
Exhibit 31.1 Certification of principal executive officer pursuant to
Rule 13a - 14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 31.2 Certification of principal financial officer pursuant to
Rule 13a - 14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED BANCORP, INC.
November 8, 2006
/S/ Robert K. Chapman /S/ Dale L. Chadderdon
- ------------------------------------- ----------------------------------------
Robert K. Chapman Dale L. Chadderdon
President and Chief Executive Officer Executive Vice President &
(Principal Executive Officer) Chief Financial Officer
(Principal Financial Officer)
Page 21