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 JUNE 30, 2007
-------------------------
COMMISSION FILE #0-16640
UNITED BANCORP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2606280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
205 E. CHICAGO BOULEVARD, TECUMSEH, MI 49286
(Address of principal executive offices, 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 July 31, 2007, there were outstanding 5,198,783 shares of the registrant's
common stock, no par value.
CROSS REFERENCE TABLE
ITEM NO. DESCRIPTION PAGE NO.
- -------- ----------- --------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
(a) Condensed Consolidated Balance Sheets 3
(b) Condensed Consolidated Statements of Income 4
(c) Condensed Consolidated Statements of Shareholders' Equity 5
(d) Condensed Consolidated Statements of Cash Flows 6
(e) Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Background 10
Executive Summary 10
Financial Condition 11
Liquidity and Capital Resources 15
Results of Operations 15
Critical Accounting Policies 18
Forward-Looking Statements 18
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 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits 22
Signatures 22
Exhibits 22
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Page 2
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
(A) CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (unaudited)
June 30, December 31, June 30,
In thousands of dollars 2007 2006 2006
---------- ----------- ----------
ASSETS
Cash and demand balances in other banks $ 19,139 $ 17,606 $ 23,785
Federal funds sold - 3,770 5,000
--------- --------- ---------
Total cash and cash equivalents 19,139 21,376 28,785
Securities available for sale 89,363 95,811 96,199
Loans held for sale 6,009 5,772 668
Portfolio loans 634,056 595,991 574,328
Less allowance for loan losses 7,561 7,849 6,868
--------- --------- ---------
Net portfolio loans 626,495 588,142 567,460
Premises and equipment, net 13,367 13,215 12,627
Goodwill 3,469 3,469 3,469
Bank-owned life insurance 11,721 11,499 11,291
Accrued interest receivable and other assets 12,077 11,705 10,520
--------- --------- ---------
TOTAL ASSETS $ 781,640 $ 750,989 $ 731,019
========= ========= =========
LIABILITIES
Deposits
Noninterest bearing $ 86,249 $ 81,373 $ 89,965
Interest bearing 570,618 546,629 521,740
--------- --------- ---------
Total deposits 656,867 628,002 611,705
Federal funds purchased and other short term borrowings 2,800 77 76
Other borrowings 42,136 40,945 39,617
Accrued interest payable and other liabilities 4,336 7,429 8,794
--------- --------- ---------
TOTAL LIABILITIES 706,139 676,453 660,192
COMMITMENT AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value;
10,000,000 shares authorized; 5,216,770, 5,247,432, and
5,246,384 shares issued and outstanding 70,407 71,075 70,830
Retained earnings 5,319 3,393 740
Accumulated other comprehensive income (loss), net of tax (225) 68 (743)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 75,501 74,536 70,827
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 781,640 $ 750,989 $ 731,019
========= ========= =========
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 Six Months Ended
-------------------- --------------------
June 30, June 30,
In thousands of dollars, except per share data 2007 2006 2007 2006
-------- -------- -------- --------
INTEREST INCOME
Interest and fees on loans $ 11,853 $ 10,460 $ 23,007 $ 20,536
Interest on securities
Taxable 633 577 1,326 1,108
Tax exempt 378 326 759 679
Interest on federal funds sold 16 121 142 192
-------- -------- -------- --------
Total interest income 12,880 11,484 25,234 22,515
INTEREST EXPENSE
Interest on deposits 4,807 3,821 9,366 7,165
Interest on short term and other borrowings 595 464 1,098 948
-------- -------- -------- --------
Total interest expense 5,402 4,285 10,464 8,113
-------- -------- -------- --------
NET INTEREST INCOME 7,478 7,199 14,770 14,402
Provision for loan losses 710 440 2,219 805
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,768 6,759 12,551 13,597
NONINTEREST INCOME
Service charges on deposit accounts 878 832 1,688 1,595
Trust and investment fee income 929 914 1,889 1,907
Gains (losses) on securities transactions - - 1 (2)
Income from loan sales and servicing 393 211 769 393
ATM, debit and credit card fee income 532 485 1,004 916
Income from sale of nondeposit investment products 245 256 499 483
Income from bank-owned life insurance 116 101 222 200
Other income 245 252 475 450
-------- -------- -------- --------
Total noninterest income 3,338 3,051 6,547 5,942
NONINTEREST EXPENSE
Salaries and employee benefits 3,735 3,823 7,342 7,697
Occupancy and equipment expense, net 1,197 1,085 2,418 2,177
External data processing 432 331 723 681
Advertising and marketing 301 268 662 537
Professional fees 114 221 232 490
Other expense 1,211 1,063 2,303 1,992
-------- -------- -------- --------
Total noninterest expense 6,990 6,791 13,680 13,574
-------- -------- -------- --------
INCOME BEFORE FEDERAL INCOME TAX 3,116 3,019 5,418 5,965
Federal income tax 849 835 1,425 1,636
-------- -------- -------- --------
NET INCOME $ 2,267 $ 2,184 $ 3,993 $ 4,329
======== ======== ======== ========
Basic and diluted earnings per share $ 0.43 $ 0.41 $ 0.75 $ 0.82
Cash dividends declared per share of common stock $ 0.20 $ 0.18 $ 0.39 $ 0.18
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 Six Months Ended
--------------------- ---------------------
June 30, June 30,
In thousands of dollars 2007 2006 2007 2006
-------- -------- -------- --------
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of period $ 75,277 $ 69,861 $ 74,536 $ 67,622
Net Income 2,267 2,184 3,993 4,329
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 (362) (334) (293) (474)
-------- -------- -------- --------
Total comprehensive income 1,905 1,850 3,700 3,855
Cash dividends declared (1,046) (925) (2,043) (925)
Purchase of common stock (865) - (1,086) -
Other common stock transactions 230 41 394 275
-------- -------- -------- --------
Balance at end of period $ 75,501 $ 70,827 $ 75,501 $ 70,827
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5
(D) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
---------------------
In thousands of dollars 2007 2006
-------- --------
Cash Flows from Operating Activities
Net income $ 3,993 $ 4,329
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization 750 810
Provision for loan losses 2,219 805
Gain on sale of loans (591) (212)
Proceeds from sales of loans originated for sale 40,388 12,440
Loans originated for sale (40,034) (11,836)
(Gains)/Losses on securities transactions (1) 2
Change in accrued interest receivable and other assets (109) 303
Increase in cash surrender value on bank-owned life insurance (222) (200)
Losses on investment in limited partnership 96 4
Excess tax benefits from exercised stock options - (28)
Change in accrued interest payable and other liabilities (2,864) 2,980
-------- --------
Net cash from operating activities 3,625 9,397
Cash Flows from Investing Activities
Securities available for sale
Purchases (1,848) (11,354)
Maturities and calls 5,200 14,724
Principal payments 2,725 3,094
Net change in portfolio loans (40,927) (17,842)
Premises and equipment expenditures, net (826) (247)
-------- --------
Net cash from (used in) investing activities (35,676) (11,625)
Cash Flows from Financing Activities
Net change in deposits 28,865 21,053
Net change in short term borrowings 2,723 (6,300)
Proceeds from other borrowings 22,030 3,000
Principal payments on other borrowings (21,069) (5,611)
Purchase of common stock (1,086) -
Proceeds from other common stock transactions 394 275
Excess tax benefits from exercised stock options - 28
Dividends paid (2,043) (1,848)
-------- --------
Net cash from financing activities 29,814 10,597
-------- --------
Net change in cash and cash equivalents (2,237) 8,369
Cash and cash equivalents at beginning of year 21,376 20,416
-------- --------
Cash and cash equivalents at end of period $ 19,139 $ 28,785
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 10,154 $ 7,783
Income tax paid 2,322 1,555
Loans transferred to other real estate 355 268
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, 2006 has been derived from the audited consolidated
balance sheet of the Company as of that date. Operating results for the three
and six month period ending June 30, 2007 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2007. 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, 2006.
The Company paid a 100% stock dividend on May 31, 2007. Accordingly all share
and per share data have been restated to reflect the stock dividend for periods
presented.
STOCK OPTIONS
In 2004, shareholders approved the Company's 2005 Stock Option Plan (the "2005
Plan"). The plan is a non-qualified stock option plan as defined under Internal
Revenue Service regulations. Under the plan, directors and management of the
Company and subsidiaries are given the right to purchase stock of the Company at
a stipulated price, adjusted for stock dividends, over a specific period of
time. The 2005 Plan will continue in effect until the end of 2009, and is the
only plan in effect in 2007. 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 Plans, adjusted for stock dividends:
Stock Options
------------------------------
Options Weighted Avg.
Outstanding Exercise Price
----------- --------------
Balance at January 1, 2007 286,986 $26.59
Options granted 47,200 22.50
Options exercised (15,076) 18.54
Options forfeited (3,445) 27.12
-------
Balance at June 30, 2007 315,665 $26.35
=======
Total options granted during the six-month period ended June 30, 2007 were
47,200, and the weighted fair value of the options granted was $2.62. For stock
options outstanding at June 30, 2007, the range of average exercise prices was
$17.06 to $32.14 and the weighted average remaining contractual term was 7.21
years. At June 30, 2007, 195,154 options are exercisable under the Plans.
The Company has recorded approximately $100,100 in compensation expense related
to vested stock options less estimated forfeitures for the six month period
ended June 30, 2007. As of June 30, 2007, unrecognized compensation expense
related to the stock options totaled $251,430 and is expected to be recognized
over 3 years.
Page 7
At June 30, 2007, the aggregate intrinsic value of options outstanding totaled
$116,428. This value represents the difference between the Company's closing
stock price on the last day of trading for the second quarter and the exercise
price multiplied by the number of in-the-money options assuming all option
holders had exercised their stock options on June 30, 2007.
The aggregate intrinsic value of stock options exercised during the second
quarter of 2007 was $48,456. Exercise of options during this same period
resulted in cash receipts of $136,776 and the Company did not recognize a tax
benefit on the exercise of these options.
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 $232,048,000 and $230,045,000 at the end of June,
2007 and 2006. The balance of loans serviced for others related to servicing
rights that have been capitalized was $230,172,000 and $228,838,000 at June 30,
2007 and 2006. Mortgage servicing rights activity in thousands of dollars for
the six months ended June 30, 2007 and 2006 follows:
2007 2006
------- -------
Balance at January 1 $ 1,541 $ 1,645
Amount capitalized year to date 132 44
Amount amortized year to date (110) (111)
------- -------
Balance at June 30 $ 1,563 $ 1,578
======= =======
No valuation allowance was considered necessary for mortgage servicing rights at
period end 2007 and 2006
NOTE 3 - COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share are based upon the weighted average number of shares
outstanding plus contingently issuable shares during the year. Diluted earnings
per share further assumes the dilutive effect of additional common shares
issuable under stock options. During May of 2007, the Company declared a 100%
stock dividend payable in May of 2007. Earnings per share, dividends per share
and weighted average shares have been restated to reflect the 100% stock
dividend. A reconciliation of basic and diluted earnings per share follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
In thousands of dollars, except per share data 2007 2006 2007 2006
---------- ---------- ---------- ----------
Net income $ 2,267 $ 2,184 $ 3,993 $ 4,329
========== ========== ========== ==========
Basic earnings:
Weighted average common shares outstanding 5,228,383 5,247,486 5,238,622 5,246,594
Weighted average contingently issuable shares 59,731 54,638 60,083 54,242
---------- ---------- ---------- ----------
Total weighted average shares outstanding 5,288,114 5,302,124 5,298,705 5,300,836
========== ========== ========== ==========
Basic earnings per share $ 0.43 $ 0.41 $ 0.75 $ 0.82
========== ========== ========== ==========
Diluted earnings:
Weighted average common shares outstanding
from basic earnings per share 5,288,114 5,302,124 5,298,705 5,300,836
Dilutive effect of stock options - - - 2,116
---------- ---------- ---------- ----------
Total weighted average shares outstanding 5,288,114 5,302,124 5,298,705 5,302,952
========== ========== ========== ==========
Diluted earnings per share $ 0.43 $ 0.41 $ 0.75 $ 0.82
========== ========== ========== ==========
A total of 197,851 and 206,368 shares for the three month period ended and
275,524 and 158,030 shares for the six months ended June 30, 2007 and 2006,
represented by stock options granted, are not included in the above calculations
as they are non-dilutive as of the date of this report.
Page 8
Effective with the first quarter of 2006, cash dividends are declared and are
payable in the month following the end of the quarter, and as a result of this
change, there was no cash dividend declared during the first quarter of 2006. A
cash dividend of $0.19 per share was declared and paid in January, 2007 and cash
dividends of $0.20 and $0.18 were declared and paid in April of 2007 and 2006,
respectively.
In February of 2007, the Company announced a program to repurchase up to 260,000
shares (adjusted for stock dividend) of its common stock through open market
purchases. Information regarding activity in this program is included in Part
II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds."
NOTE 4 - ACCOUNTING DEVELOPMENTS
On September 6, 2006, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurements. SFAS 157 clarifies the fair
value measurement objective, its application in GAAP and establishes a framework
that builds on current practice and requirements. The framework simplifies and,
where appropriate, codifies the similar guidance in existing pronouncements and
applies broadly to financial and non financial assets and liabilities. The
Statement clarifies the definition of fair values as a price that would be
received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date, known as an
exit-price definition of fair value. It also provides further guidance on the
valuation techniques to be used in estimating fair value. Current disclosures
about the use of fair value to measure assets and liabilities are expanded in
this Statement. The disclosures focus on the methods used for fair value
measurements and apply whether the assets and liabilities are measured at fair
value in all periods, such as trading securities, or in only some periods, such
as impaired assets. The Statement is effective for all financial statements
issued for fiscal years beginning after November 15, 2007 as well as for interim
periods within such fiscal years. The Company is currently evaluating the impact
of this Statement on its financial statements.
In February, 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities -
including an amendment of FASB Statement No. 115. SFAS 159 allows companies to
report selected financial assets and liabilities at fair value. The changes in
fair value are recognized in earnings and the assets and liabilities measured
under this methodology are required to be displayed separately in the balance
sheet. The main intent of the Statement is to mitigate the difficulty in
determining reported earnings caused by a "mixed-attribute model" (or reporting
some assets at fair value and others using a different valuation attribute such
as amortized cost). The project is separated into two phases. The first phase
addresses the creation of a fair value option for financial assets and
liabilities. A second phase will address creating a fair value option for
selected non-financial items. SFAS 159 is effective for all financial statements
issued for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact of this Statement on its financial Statements
and did not elect to early adopt.
NOTE 5 - CHANGE IN ACCOUNTIING PRINCIPLE
The Company adopted the provisions of the Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. As a result of the
implementation of FIN 48, the Company did not identify any uncertain tax
positions that it believes should be recognized in the financial statements.
The Company or one of its subsidiaries files income tax returns in the U.S.
federal and Michigan jurisdictions. With few exceptions, the Company is no
longer subject to U.S. federal, state and local examination by tax authorities
for years before 2004.
Page 9
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 six month periods ended June 30, 2007 and 2006.
BACKGROUND
The Company is a financial holding company registered with the Board of
Governors of the Federal Reserve System under the Bank Holding Company Act. The
Company has corporate power to engage in such activities as permitted to
business corporations under the Michigan Business Corporation Act, subject to
the limitations of the Bank Holding Company Act and regulations of the Federal
Reserve System. The Company's subsidiary banks offer a full range of services to
individuals, corporations, fiduciaries and other institutions. Banking services
include checking, NOW accounts, savings, time deposit accounts, money market
deposit accounts, safe deposit facilities, electronic banking and bill payment,
and money transfers. Lending operations provide real estate loans, secured and
unsecured business and personal loans, consumer installment loans, check-credit
loans, home equity loans, accounts receivable and inventory financing, equipment
lease financing and construction financing.
The Banks offer the sale of nondeposit investment products through licensed
representatives in their banking offices, and sell credit and life insurance
products. In addition, the Company and/or the Banks 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 Wealth
Management Group offers a variety of fiduciary services to individuals,
corporations and governmental entities, including services as trustee for
personal, pension, and employee benefit trusts. The department provides trust
services, financial planning services, investment services, custody services,
pension paying agent services and acts as the personal representative for
estates. These products help to diversify the Company's sources of income.
Economic growth in the State of Michigan continues to struggle while
unemployment ranks among the highest in the nation. Due to the economic
conditions affecting the State and market areas, the Company has experienced a
decline in its loan quality. However, the Company has experienced record
earnings and strong loan growth in the second quarter of 2007.
EXECUTIVE SUMMARY
Consolidated net income for the second quarter of 2007 was $2,267,155, or $0.43
per share, an increase of 3.8 % over the second quarter of 2006 and the best
second quarter in the Company's history. During the first six months of 2007,
consolidated net income was $3,993,171 or $0.75 per share, a decrease of 7.8%
compared to the same period in 2006. Net interest income of the Company remains
strong and has increased 3.9% over the second quarter of 2006 and is 2.6% ahead
of the six month period in 2006. Non-interest income also reported improvements
over 2006 totals with a 9.4% and 10.2% increase during the quarter and six month
periods, respectively. At the same time, the Company has experienced a decline
in loan quality, and as a result has recorded additional provision for loan
losses which has negatively impacted its earnings during the first half of the
year. Non-interest expense for the first half of 2007 has remained relatively
flat compared to the same period last year, and is up slightly over the second
quarter of 2006.
Return on average assets and return on average shareholders' equity improved
from the first quarter of 2007 but are still behind the levels reached in the
second quarter of 2006. Net interest income and net income
Page 10
for the second quarter of 2007 are ahead of the totals reported during the same
period last year, and net interest income during the quarter is the highest
among the previous five quarters. The following chart shows the trends in the
major components of earnings for the past five quarters.
2007 2006
----------------- ---------------------------
in thousands of dollars, where appropriate 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr
------- ------- ------- ------- -------
Net interest income $7,478 $7,291 $7,424 $7,428 $7,199
Provision for loan losses 710 1,509 921 396 440
Noninterest income 3,338 3,210 3,110 3,123 3,051
Noninterest expense 6,990 6,689 6,598 6,742 6,791
Federal income tax provision 849 577 818 967 835
Net income $2,267 $1,726 $2,197 $2,446 $2,184
Earnings per share (a) $ 0.43 $ 0.33 $ 0.41 $ 0.46 $ 0.41
Return on average assets (b) 1.18% 0.92% 1.18% 1.32% 1.20%
Return on average shareholders' equity (b) 12.11% 9.35% 11.85% 13.52% 12.48%
- ----------
(a) Basic earnings per share, adjusted for stock dividends paid
(b) annualized
Total consolidated assets of the Company at June 30, 2007 were $781.6 million, a
6.9% improvement over the same period last year. Loan balances increased 11.3%
to $640.1 million during the preceding twelve months, while deposits grew to
$656.9 million, an increase of 7.4% since June 30, 2006. During the quarter,
total loans have grown $25.0 million and deposits are up 3.2%, while total
assets have improved by $21.2 million.
FINANCIAL CONDITION
SECURITIES
The Company's investment securities portfolio declined by $6.4 million during
the first six months of 2007, and balances have decreased 1.8% during the second
quarter as the Company has elected not to replace some maturing investments to
fund additional loan growth. The mix of the Company's investment portfolio has
changed slightly during the past six months, as the percentage of investments
held in municipal obligations increased, treasury, agency and corporate
securities have remained flat and mortgage backed agencies have declined
slightly.
The table below reflects the fair value of various categories of investment
securities of the Company:
In thousands of dollars 6/30/07 12/31/06 6/30/06
------- ------- -------
U.S. Treasury and agency securities $36,158 $38,380 $43,157
Mortgage backed agency securities $11,217 $13,945 $16,032
Obligations of states and political subdivisions 38,743 40,369 33,637
Corporate, asset backed, and other securities 3,245 3,117 3,373
------- ------- -------
Total Investment Securities $89,363 $95,811 $96,199
======= ======= =======
The chart below shows the percentage composition of the Company's investment
portfolio as of the end of the current quarter for 2007 and 2006, and at
December 31, 2006.
6/30/07 12/31/06 6/30/06
------- -------- -------
U.S. Treasury and agency securities 40.5% 40.0% 44.9%
Mortgage backed agency securities 12.6% 14.6% 16.7%
Obligations of states and political subdivisions 43.3% 42.1% 34.9%
Corporate, asset backed, and other securities 3.6% 3.3% 3.5%
------- ------- -------
Total Securities 100.0% 100.0% 100.0%
======= ======= =======
Page 11
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 27%
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.
Unrealized gains and losses within the investment portfolio are temporary, since
they are a result of market changes, rather than a reflection of credit quality.
Management has no specific intent to sell any securities, although the entire
investment portfolio is classified as available for sale. The chart below
summarizes unrealized gains and losses in each category of the portfolio for the
six month period, in thousands of dollars.
2007 2006 Change
------- ------- -------
Unrealized gains (losses) in:
U.S. Treasury and agency securities $ (78) $ (400) $ 322
Mortgage backed agency securities (38) (333) 295
Obligations of states and political subdivisions (328) (450) 122
Corporate, asset backed and other securities 103 57 46
------- ------- -------
Total investment securities $ (341) $(1,126) $ 785
======= ======= =======
LOANS
Gross loans increased by $38.3 million in the first half of 2007, bringing the
twelve-month loan growth to $65.1 million, for an increase of 11.3% over the
previous twelve months. The residential loan portfolio experienced modest growth
during the first six months of 2007, with business loans and commercial
mortgages and personal loans providing the largest portion of growth in the loan
portfolio during the first half of 2007. Construction and development loans were
down from the previous quarter, but are flat compared to the same period of a
year ago.
The portfolio continues to evolve and the trend of the portfolio mix has changed
during the first six months of the year. Residential mortgage and construction
and development loan balances decreased as a percentage of total loans since
December 31, 2006. Business loans reported strong growth during the first six
months of 2007, while personal loans have remained flat.
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.
June 30, 2007 December 31, 2006 June 30, 2006
----------------------- ----------------------- -----------------------
Balance % of total Balance % of total Balance % of total
-------- --------- -------- ---------- -------- ----------
Total loans:
Personal $ 96,556 15.1% $ 91,002 15.1% $ 85,276 14.8%
Business loans and
commercial mortgages 364,916 57.0% 327,928 54.5% 325,404 56.6%
Tax exempt 2,944 0.5% 2,841 0.5% 3,023 0.5%
Residential mortgage 88,891 13.9% 85,636 14.2% 75,169 13.1%
Construction & development 86,758 13.5% 94,356 15.7% 86,124 15.0%
-------- ------- -------- ------- -------- -------
Total loans $640,065 100.0% $601,763 100.0% $574,996 100.0%
======== ======= ======== ======= ======== =======
Page 12
CREDIT QUALITY
The Company maintains a process of actively monitoring delinquencies,
nonperforming assets and problem loans and continues to address the credit
quality issues concerning its loan portfolio. During the second quarter of 2007,
United charged off two large business loans associated with the additional
provision recognized during the first three months of year. The Company also
increased its provision for loan loss during the second quarter in anticipation
of potential future losses relating to other credit issues in its loan
portfolio.
The Company's total nonperforming assets decreased by $3.3 million from the
first quarter of 2007 due to net charge-offs, but increased by $1.3 million from
December 31, 2006 totals, with all of the increase isolated to nonaccrual loans.
The increase in nonaccrual loans is attributable to the credit quality problems
evidenced in a small number of commercial credits in the loan portfolio.
Delinquent loans and property held as other real estate remained relatively flat
during the quarter, while loans past due ninety days have declined significantly
from year end. As of June 30, 2007, non-performing loans as a percentage of
total loans was 1.17%, up from 0.80% as of June 30, 2006. This increase
continues the trend the Company has experienced during the past twelve months.
Collection efforts are underway with past due and nonaccrual loans, and the
Company continues to monitor the level of its nonperforming assets.
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 debt restructurings. The accrual of interest
income is discontinued when a loan becomes ninety days past due unless it is
both well secured and in the process of collection, or the borrower's capacity
to repay the loan and the collateral value appear sufficient. The following
chart shows the aggregate amount of the Company's nonperforming assets by type,
in thousands of dollars.
6/30/07 3/31/07 12/31/06 6/30/06
------- ------- ------- -------
Nonaccrual loans $ 7,261 $10,629 $ 5,427 $ 2,620
Loans past due 90 days or more 253 226 855 1,066
Troubled debt restructurings - - - 928
------- ------- ------- -------
Total nonperforming loans 7,514 10,855 6,282 4,614
Other real estate owned 1,146 1,081 1,063 759
------- ------- ------- -------
Total nonperforming assets $ 8,660 $11,936 $ 7,345 $ 5,373
======= ======= ======= =======
Percent of nonperforming loans to total loans 1.17% 1.76% 1.04% 0.80%
Percent of nonperforming assets to total assets 1.11% 1.57% 0.98% 0.74%
As of June 30, 2007, 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 six months ended June 30, 2007 and 2006 follows:
2007 2006
------- -------
Balance at January 1 $ 7,849 $ 6,361
Loans charged off (2,565) (342)
Recoveries credited to allowance 58 44
Provision charged to operations 2,219 805
------- -------
Balance at June 30 $ 7,561 $ 6,868
======= =======
Page 13
The following table presents the allocation of the allowance for loan losses
applicable to each loan category in thousands of dollars, as of June 30, 2007
and 2006, and December 31, 2006.
6/30/07 12/31/06 6/30/06
------- -------- -------
Business and commercial mortgage $ 6,435 $ 6,911 $ 5,999
Residential mortgage 126 24 22
Personal 1,022 889 823
Unallocated (23) 25 24
------- ------- -------
Total $ 7,561 $ 7,849 $ 6,868
======= ======= =======
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 June
30, 2007, 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 second quarter and year to date 2007, as
total deposits increased $28.9 million from December 31, 2006, representing an
annualized growth rate of 9.2%. Deposits are up $45.2 million from a year ago,
for an increase of 7.4%. 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 its emphasis on
gathering core deposits within their market areas, in order to fund anticipated
future loan growth. While the Banks maintain a small amount of purchased or
brokered deposits, they do not support their growth through the use of those
products. The Banks' deposit rates are consistently competitive with other banks
in its market area. The majority of the Company's deposits are derived from core
client sources, relating to long term relationships with local personal,
business and public clients.
The chart below shows the percentage makeup of the deposit portfolio as of June
30, 2007 and 2006, and December 31, 2006.
6/30/07 12/31/06 6/30/06
------- -------- --------
Noninterest bearing deposits 13.1% 13.0% 14.7%
Interest bearing deposits 86.9% 87.0% 85.3%
----- ----- -----
Total deposits 100.0% 100.0% 100.0%
===== ===== =====
Page 14
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 of Indianapolis ("FHLBI") and borrowings at the discount window of the
Federal Reserve Bank as additional short-term funding sources. Federal funds
were used during 2007 and 2006. Short-term advances and discount window
borrowings were not utilized during either year.
The Company periodically finds it advantageous to utilize longer term borrowings
from the FHLBI. These long-term borrowings serve primarily to provide a balance
to some of the interest rate risk inherent in the Company's balance sheet.
During the second quarter of 2007, the Company procured $7.0 million in new
advances and repaid $7.5 million in matured borrowings, resulting in a decrease
in total FHLB borrowings outstanding at June 30, 2007.
CAPITAL RESOURCES
The Company and the Banks were categorized as well-capitalized at June 30, 2007
and 2006 and December 31, 2006 by their regulators. The following table shows
the Company's capital ratios and ratio calculations as of June 30, 2007 and
2006, and December 31, 2006. Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc.
--------------------- ----------------------------------
Adequate Well 6/30/07 12/31/06 6/30/06
-------- ---- -------- -------- ---------
Tier 1 capital to average assets 4% 5% 9.5% 9.8% 9.5%
Tier 1 capital to risk weighted assets 4% 6% 11.2% 11.6% 11.4%
Total capital to risk weighted assets 8% 10% 12.3% 12.9% 12.6%
Total shareholders' equity $ 75,501 $ 74,536 $ 70,827
Intangible assets (3,469) (3,469) (3,469)
Disallowed servicing assets - - -
Unrealized (gain) loss on securities available for sale 225 (68) 743
-------- -------- --------
Tier 1 capital 72,257 70,999 68,101
Allowable loan loss reserves 7,561 7,849 6,868
-------- -------- --------
Tier 1 and 2 capital $ 79,818 $ 78,848 $ 74,969
======== ======== ========
RESULTS OF OPERATIONS
Consolidated net income for the quarter was $2.267 million, an increase of 3.8%
from the second quarter of 2006 and the best second quarter in the Company's
history. Year to date net income decreased 7.8% from the same period in 2006.
The decline is a result of the additional provision for loan loss related to
credit quality issues within the Company's loan portfolio. The following
discussion provides an analysis of the various components of these changes.
NET INTEREST INCOME
Higher asset yields and earning asset growth helped to increase the Company's
net interest income, despite margin compression. Net interest income for the
quarter improved 3.9% compared to the second quarter of 2006, and year to date
net interest income increased $367,636 over the same period last year. Although
the Company's yield on earning assets continue to increase, deposit costs have
increased at a faster rate. The Company's year to date yield on earning assets
was up thirty-one basis points from the same period of
Page 15
2006, while its cost of funds increased from the six-month 2006 levels by
fifty-seven basis points, resulting in a decrease of twenty-six basis points in
the tax equivalent spread in the past year.
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 June 30, 2007 and
2006.
Six Months Ended June 30,
---------------------------------------------------------------------------
2007 2006
------------------------------------- ----------------------------------
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 $ 5,542 $ 142 5.12% $ 8,098 $ 192 4.74%
Taxable securities 54,118 1,326 4.90% 62,812 1,108 3.53%
Tax exempt securities (b) 37,992 1,109 5.84% 35,026 1,005 5.74%
Taxable loans 615,024 22,936 7.46% 559,225 20,470 7.32%
Tax exempt loans (b) 3,132 104 6.63% 3,084 97 6.31%
--------- --------- --------- ---------
Total int. earning assets (b) 715,808 25,617 7.16% 668,245 22,872 6.85%
Less allowance for loan losses (8,144) (6,567)
Other assets 55,758 58,900
--------- ---------
TOTAL ASSETS $ 763,422 $ 720,578
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 109,113 780 1.43% $ 106,975 661 1.24%
Savings deposits 178,983 2,506 2.80% 180,170 2,092 2.32%
CDs $100,000 and over 114,061 2,759 4.84% 86,995 1,826 4.20%
Other interest bearing deposits 150,503 3,320 4.41% 139,490 2,586 3.71%
--------- --------- --------- ---------
Total int. bearing deposits 552,660 9,365 3.39% 513,630 7,165 2.79%
Short term borrowings 3,237 87 5.37% 1,704 41 4.78%
Other borrowings 43,031 1,012 4.70% 40,086 907 4.53%
--------- --------- --------- ---------
Total int. bearing liabilities 598,928 10,464 3.49% 555,420 8,113 2.92%
--------- ---------
Noninterest bearing deposits 82,113 86,983
Other liabilities 7,452 9,095
Shareholders' equity 74,929 69,080
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 763,422 $ 720,578
========= =========
Net interest income (b) 15,153 14,759
--------- ---------
Net spread (b) 3.66% 3.92%
==== ====
Net yield on interest earning assets (b) 4.23% 4.42%
==== ====
Tax equivalent adjustment on interest income (383) (357)
---------- ----------
Net interest income per income statement $ 14,770 $ 14,402
========= =========
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 six months of 2007 increased over the same period of 2006, and net
interest income improved by $394,000 over the same period. 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 six months
of 2007 was positively impacted due to volume changes but negatively affected by
rate changes in the interest expense categories.
Page 16
The following table shows the effect of volume and rate changes on net interest
income for the six months ended June 30, 2007 and 2006 on a taxable equivalent
basis, in thousands of dollars.
2007 Compared to 2006 2006 Compared to 2005
--------------------------------- --------------------------------
Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a)
--------------------------------- --------------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
Interest earned on:
Federal funds sold $ (64) $ 14 $ (50) $ 96 $ 58 $ 154
Taxable securities (169) 387 218 (167) 233 66
Tax exempt securities 86 18 104 202 39 241
Taxable loans 2,075 391 2,466 1,671 2,391 4,062
Tax exempt loans 2 5 7 (5) - (5)
------- ------- ------- ------- ------- -------
Total interest income $ 1,930 $ 815 $ 2,745 $ 1,797 $ 2,721 $ 4,518
======= ======= ======= ======= ======= =======
Interest paid on:
NOW accounts $ 13 $ 106 $ 119 $ (77) $ 112 $ 35
Savings deposits (14) 428 414 38 859 897
CDs $100,000 and over 626 307 933 674 339 1,013
Other interest bearing deposits 215 519 734 339 483 822
Short term borrowings 40 6 46 (41) 23 (18)
Other borrowings 69 36 105 (60) 10 (50)
------- ------- ------- ------- ------- -------
Total interest expense $ 949 $ 1,402 $ 2,351 $ 873 $ 1,826 $ 2,699
======= ======= ======= ======= ======= =======
Net change in net interest
income $ 981 $ (587) $ 394 $ 924 $ 895 $ 1,819
======= ======= ======= ======= ======= =======
(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 second quarter of 2007 was $710,000,
compared to $1.509 million in the first quarter of 2007 and $439,544 for the
second quarter of last year. The increase in the provision in 2007 is a result
of the Company's recognition of impairment issues on a few large commercial
loans. United continues to monitor the allowance for loan loss and make
additional adjustments to the provision for potential losses on problem loans as
deemed appropriate.
NONINTEREST INCOME
Noninterest income continues to contribute to the earnings growth of the
Company. Total noninterest income increased 4.0% from the first quarter of 2007
and improved 9.4% over the second quarter of 2006. Service charges on deposit
accounts and ATM, debit and credit card fee income provided the largest
increase, improving 8.4% and 12.7% respectively over March 31, 2007 totals.
Income from loan sales and servicing, bank-owned life insurance and other income
experienced modest growth during the quarter. The increase in loan sales and
servicing income during the quarter is a result of increased volume in the sale
of mortgage loans in the secondary market. Trust and investment fee income and
sales of nondeposit investment products declined compared to the previous
quarter, as a result of lower volumes and declining asset balances. Compared to
the same period in 2006, all categories of noninterest income improved except
sales of nondeposit investment products and other income, both of which declined
slightly.
Year to date noninterest income increased 10.2% over 2006 with all categories
improving except for trust and investment fee income. The largest increase was
income from loan sales and servicing, improving 95.7% due to increased volumes
over 2006.
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
2007 or 2006.
NONINTEREST EXPENSES
Total noninterest expense increased 4.5% from the first quarter of 2007 and 2.9%
from the second quarter of 2006. Some categories increased during the quarter
while the Company experienced a reduction in other areas. Salaries and employee
benefits and external data processing both increased over the first quarter,
while advertising and marketing expenses declined and occupancy and equipment
and professional fees remained flat. The increase in salaries and employee
benefits is a result of the continued growth of the company and the addition of
new staff in the second quarter of 2007, while external data processing
increased not as a result of additional expense but due to a large rebate
received by the Company in the first quarter of 2007.
Year to date total noninterest expense was relatively unchanged compared to the
first six months of 2006, increasing just 0.8% during that time. However various
components of total noninterest expense experienced changes. Salaries and
employee benefits and professional fees decreased significantly, while occupancy
and equipment expense and advertising and marketing costs increased. The
decrease in salaries and employee benefits was a result of the reduction in
bonus and profit sharing costs as a result of net income below earnings
objectives. Professional fees for the year have declined from the previous
period due to the additional expenses incurred in 2006 for outsourcing certain
processing functions of the Wealth Management group. Occupancy and equipment and
advertising and marketing expense provided for the largest increase during the
first six months, as a result of the continued growth of the Company and new
marketing initiatives
FEDERAL INCOME TAX
The Company's effective tax rate for the first six months of 2007 was 26.3%,
compared to 27.4% in 2006. The decrease in the effective tax rate is the result
of the benefits received from the Company's investment in tax exempt assets and
resulting tax exempt income.
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-27 to A-30 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2006. 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
Page 18
Company itself. Words such as "anticipate," "believe," "determine," "estimate,"
"expect," "forecast," "intend," "is likely," "plan," "project," "opinion,"
variations of such terms, and similar expressions are intended to identify such
forward-looking statements. The presentations and discussions of the provision
and allowance for loan losses, and determinations as to the need for other
allowances presented in this report are inherently forward-looking statements in
that they involve judgments and statements of belief as to the outcome of future
events. These statements are not guarantees of future performance and involve
certain risks, uncertainties, and assumptions that are difficult to predict with
regard to timing, extent, likelihood, and degree of occurrence. Therefore,
actual results and outcomes may materially differ from what may be expressed or
forecasted in such forward-looking statements. Internal and external factors
that may cause such a difference include those discussed under "Risk Factors" in
Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended
December 31, 2006, 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 June 30, 2007, the Company
would expect a maximum potential reduction in net interest margin of slightly
more than 4% if market rates decreased under an immediate and sustained parallel
shift of 200 basis points. The interest sensitivity position of the Company
continues to be liability sensitive based on internal measures.
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 include senior
members of management, and monitor the makeup of interest sensitive assets and
liabilities to assure appropriate liquidity, maintain interest margins and to
protect earnings in the face of changing interest rates and other economic
factors.
The Funds Management policies provide for a level of interest sensitivity 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 June 30, 2007, 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 June 30, 2007 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 June 30, 2007 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
In September of 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, alleging UBTW and Clark had
violated their fiduciary duty. After the preliminary proceedings, UBTW and Mr.
Clark reached a settlement with the plaintiff that resulted in them being
released on all aspects of the claim except for an allegation regarding
Theisen's long term care policy. The Company incurred minimal liability
associated with the dismissed claims and believes that any additional material
exposure is unlikely.
Page 20
The Company is not involved in any material legal proceedings other than
previously discussed. 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 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) In February of 2007, the Company announced a stock repurchase program for
up to 260,000 shares of its common stock (adjusted for stock dividend).
During the three month period ended June 30, 2007, the Company repurchased
38,753 shares at an average price of $22.33. At June 30, 2007, the Company
had 211,247 shares remaining to be purchased under the program. Since the
announcement of the repurchase program, the Company has repurchased an
aggregate of 48,753 shares of its common stock at an average share price
of $22.28. All purchases during the quarter were part of the publicly
announced plan.
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on April 17, 2007. At
that meeting, election of directors and amendment of the Articles of
Incorporation, Director Retainer Stock Plan and Senior Management Bonus Deferral
Stock Plan were the only matters submitted to a vote of the shareholders. There
were 2,616,286 voting shares outstanding on April 17, 2007. The following
incumbent directors were re-elected to three-year terms:
Action For Against Abstain
---------- --------- ------- -------
James D. Buhr re-elected 1,783,597 70,530 -
James C. Lawson re-elected 1,795,322 58,805 -
Robert G. Macomber elected 1,808,993 45,134 -
Donald J. Martin re-elected 1,806,568 47,559 -
David E. Maxwell re-elected 1,807,466 46,661 -
Directors Joseph D. Butcko, Robert K. Chapman, John H. Foss, James G. Haeussler,
David S. Hickman, and Kathryn M. Mohr hold terms that continue after the
meeting. Director Cress retired as a Director effective with the 2007 annual
meeting of shareholders.
Other votes by shareholders were as follows:
Amend articles of Incorporation approved 1,671,296 138,617 44,214
Amend Director Retainer Stock Plan approved 1,453,025 142,306 258,796
Amend Senior Management Bonus
Deferral Stock Plan approved 1,369,182 228,434 256,511
No other matters were considered by shareholders at that meeting or at any other
time during the quarter.
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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.
August 3, 2007
/s/ Robert K. Chapman /s/ Dale L. Chadderdon
- ------------------------------------- ------------------------------------
Robert K. Chapman Dale L. Chadderdon
President and Chief Executive Officer Executive Vice President & Chief
(Principal Executive Officer) Financial Officer
(Principal Financial Officer)
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