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, 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 October 26, 2007, there were outstanding 5,137,940 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 19
Forward-Looking Statements 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 6. Exhibits 21
Signatures 22
Exhibits 23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Page 2
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
(A) CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (unaudited)
September 30, December 31, September 30,
In thousands of dollars 2007 2006 2006
------------- ------------ -------------
ASSETS
Cash and demand balances in other banks $ 14,729 $ 17,606 $ 20,207
Federal funds sold -- 3,770 1,700
-------- -------- --------
Total cash and cash equivalents 14,729 21,376 21,907
Securities available for sale 87,691 95,811 94,442
Loans held for sale 3,885 5,772 2,376
Portfolio loans 648,626 595,991 590,006
Less allowance for loan losses 7,714 7,849 6,994
-------- -------- --------
Net portfolio loans 640,912 588,142 585,388
Premises and equipment, net 13,205 13,215 12,744
Goodwill 3,469 3,469 3,469
Bank-owned life insurance 11,840 11,499 11,394
Accrued interest receivable and other assets 12,566 11,705 10,552
-------- -------- --------
TOTAL ASSETS $788,297 $750,989 $739,896
======== ======== ========
LIABILITIES
Deposits
Noninterest bearing $ 78,333 $ 81,373 $ 86,364
Interest bearing 580,327 546,629 534,408
-------- -------- --------
Total deposits 658,660 628,002 620,772
Federal funds purchased and other short term borrowings 4,830 77 76
Other borrowings 44,625 40,945 39,608
Accrued interest payable and other liabilities 4,648 7,429 6,129
-------- -------- --------
TOTAL LIABILITIES 712,763 676,453 666,585
COMMITMENT AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value;
10,000,000 shares authorized; 5,133,444, 5,247,432,
and 5,247,448 shares issued and outstanding 68,719 71,075 70,937
Retained earnings 6,603 3,393 2,204
Accumulated other comprehensive income, net of tax 212 68 170
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 75,534 74,536 73,311
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $788,297 $750,989 $739,896
======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
(B) CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Nine Months
Ended Ended
September 30, September 30,
----------------- -----------------
In thousands of dollars, except per share data 2007 2006 2007 2006
------- ------- ------- -------
INTEREST INCOME
Interest and fees on loans $12,313 $11,085 $35,319 $31,621
Interest on securities
Taxable 636 638 1,962 1,746
Tax exempt 361 345 1,120 1,024
Interest on federal funds sold 12 99 155 291
------- ------- ------- -------
Total interest income 13,322 12,167 38,556 34,682
INTEREST EXPENSE
Interest on deposits 5,149 4,269 14,514 11,434
Interest on short term and other borrowings 593 470 1,692 1,418
------- ------- ------- -------
Total interest expense 5,742 4,739 16,206 12,852
------- ------- ------- -------
NET INTEREST INCOME 7,580 7,428 22,350 21,830
Provision for loan losses 618 396 2,836 1,202
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,962 7,032 19,514 20,628
NONINTEREST INCOME
Service charges on deposit accounts 935 888 2,623 2,483
Trust and investment fee income 933 915 2,822 2,821
Gains (losses) on securities transactions -- -- 1 (2)
Income from loan sales and servicing 473 237 1,242 629
ATM, debit and credit card fee income 545 493 1,549 1,409
Income from sale of nondeposit investment products 249 304 748 787
Income from bank-owned life insurance 119 102 341 302
Other fee income 284 185 760 635
------- ------- ------- -------
Total noninterest income 3,538 3,124 10,086 9,064
NONINTEREST EXPENSE
Salaries and employee benefits 3,988 3,800 11,330 11,497
Occupancy and equipment expense, net 1,228 1,103 3,646 3,280
External data processing 431 380 1,154 1,061
Advertising and marketing 279 282 942 819
Professional fees 98 212 330 702
Other expense 1,243 967 3,546 2,957
------- ------- ------- -------
Total noninterest expense 7,267 6,744 20,948 20,316
------- ------- ------- -------
INCOME BEFORE FEDERAL INCOME TAX 3,233 3,412 8,652 9,376
Federal income tax 895 967 2,321 2,602
------- ------- ------- -------
NET INCOME $ 2,338 $ 2,445 $ 6,331 $ 6,774
======= ======= ======= =======
Basic and diluted earnings per share $ 0.45 $ 0.46 $ 1.20 $ 1.28
Cash dividends declared per share of common stock $ 0.20 $ 0.19 $ 0.59 $ 0.54
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 Nine Months
Ended Ended
September 30, September 30,
----------------- -----------------
In thousands of dollars 2007 2006 2007 2006
------- ------- ------- -------
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of period $75,501 $70,827 $74,536 $67,622
Net Income 2,338 2,445 6,331 6,774
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 437 913 144 439
------- ------- ------- -------
Total comprehensive income 2,775 3,358 6,475 7,213
Cash dividends declared (1,042) (971) (3,085) (1,896)
Purchase of common stock (1,807) -- (2,893) --
Other common stock transactions 107 97 501 372
------- ------- ------- -------
Balance at end of period $75,534 $73,311 $75,534 $73,311
======= ======= ======= =======
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 2007 2006
-------- --------
Cash Flows from Operating Activities
Net income $ 6,331 $ 6,774
Adjustments to Reconcile Net Income to Net Cash from
Operating Activities
Depreciation and amortization 1,000 1,176
Provision for loan losses 2,836 1,202
Gain on sale of loans (964) (368)
Proceeds from sales of loans originated for sale 55,640 21,476
Loans originated for sale (52,789) (22,424)
(Gains)/Losses on securities transactions (1) 2
Change in accrued interest receivable and other assets 34 (342)
Increase in cash surrender value on bank-owned life insurance (341) (302)
Losses on investment in limited partnership 156 39
Excess tax benefits from exercised stock options -- (28)
Change in accrued interest payable and other liabilities (2,521) 350
-------- --------
Net cash from operating activities 9,381 7,555
Cash Flows from Investing Activities
Securities available for sale
Purchases (9,658) (23,955)
Maturities and calls 14,066 29,108
Principal payments 4,045 4,466
Net change in portfolio loans (56,951) (33,791)
Premises and equipment expenditures (884) (673)
-------- --------
Net cash from (used in) investing activities (49,382) (24,845)
Cash Flows from Financing Activities
Net change in deposits 30,658 30,120
Net change in short term borrowings 4,753 (6,300)
Proceeds from other borrowings 25,030 3,000
Principal payments on other borrowings (21,610) (5,620)
Purchase of common stock (2,893) --
Proceeds from other common stock transactions 501 372
Excess tax benefits from exercised stock options -- 28
Dividends paid (3,085) (2,819)
-------- --------
Net cash from financing activities 33,354 18,781
-------- --------
Net change in cash and cash equivalents (6,647) 1,491
Cash and cash equivalents at beginning of year 21,376 20,416
-------- --------
Cash and cash equivalents at end of period $ 14,729 $ 21,907
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 18,155 $ 12,400
Income tax paid 2,822 2,455
Loans transferred to other real estate 1,345 268
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 nine month period ending September 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:
Weighted
Avg.
Options Exercise
Stock Options Outstanding Price
- ------------- ----------- --------
Balance at January 1, 2007 286,986 $26.59
Options granted 49,200 22.43
Options exercised (15,076) 18.54
Options forfeited (11,587) 27.45
-------
Balance at September 30, 2007 309,523 $26.28
=======
Total options granted during the nine-month period ended September 30, 2007 were
49,200, and the weighted fair value of the options granted was $2.62. For stock
options outstanding at September 30, 2007, the range of average exercise prices
was $17.06 to $32.14 and the weighted average remaining contractual term was
6.96 years. At September 30, 2007, 193,341 options are exercisable under the
Plans. The Company has recorded approximately $153,200 in compensation expense
related to vested stock options less estimated forfeitures for the nine month
period ended September 30, 2007. As of September 30, 2007, unrecognized
compensation expense related to the stock options totaled $200,180 and is
expected to be recognized over three years.
Page 7
At September 30, 2007, the aggregate intrinsic value of options outstanding
totaled $77,237. 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, 2007. No
options were exercised during the quarter ended September 30, 2007.
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 $240,634,000 and $229,561,000 at the end of
September, 2007 and 2006. The balance of loans serviced for others related to
servicing rights that have been capitalized was $239,431,000 and $228,425,000 at
September 30, 2007 and 2006. Mortgage servicing rights activity in thousands of
dollars for the nine months ended September 30, 2007 and 2006 follows:
2007 2006
------ ------
Balance at January 1 $1,541 $1,645
Amount capitalized year to date 248 95
Amount amortized year to date (154) (171)
------ ------
Balance at September 30 $1,635 $1,569
====== ======
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 and paid
a 100% stock dividend. 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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
In thousands of dollars, except per share data 2007 2006 2007 2006
---------- ---------- ---------- ----------
Net income $ 2,338 $ 2,445 $ 6,331 $ 6,774
========== ========== ========== ==========
Basic earnings:
Weighted average common shares outstanding 5,180,127 5,247,172 5,218,909 5,246,788
Weighted average contingently issuable shares 60,470 56,440 60,213 53,094
---------- ---------- ---------- ----------
Total weighted average shares outstanding 5,240,597 5,303,612 5,279,122 5,299,882
========== ========== ========== ==========
Basic earnings per share $ 0.45 $ 0.46 $ 1.20 $ 1.28
========== ========== ========== ==========
Diluted earnings:
Weighted average common shares outstanding
from basic earnings per share 5,240,597 5,303,612 5,279,122 5,299,882
Dilutive effect of stock options -- -- -- --
---------- ---------- ---------- ----------
Total weighted average shares outstanding 5,240,597 5,303,612 5,279,122 5,299,882
========== ========== ========== ==========
Diluted earnings per share $ 0.45 $ 0.46 $ 1.20 $ 1.28
========== ========== ========== ==========
A total of 268,342 and 211,122 shares for the three month period ended and
267,348 and 208,047 shares for the nine months ended September 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. Cash
dividends of $0.20 and $0.19 were declared and paid in July of 2007 and 2006,
respectively.
Page 8
In February of 2007, the Company announced a program to repurchase up to 260,000
shares (adjusted for stock dividend) of its common stock through open market
purchases. Information regarding activity in this program is included in Part
II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds."
NOTE 4 - 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 ACCOUNTING 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 nine month periods ended September 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. The
company owns a structured finance company that was established in the third
quarter of 2007. The structured finance company offers financing solutions to
small businesses, primarily by generating SBA 504 and 7(a) loans that are
typically sold on the secondary market.
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 continues to
experience a decline in its loan quality. However, the Company's core earnings
and loan growth remained strong in the third quarter of 2007.
EXECUTIVE SUMMARY
Consolidated net income for the third quarter of 2007 was $2,338,000, or $0.45
per share, for an increase of 3.1% over the second quarter of the year. Earnings
represented the second-best quarter in the Company's history, with only the
third quarter of 2006 exceeding this quarter's earnings levels. During the first
nine months of 2007, consolidated net income of $6,331,000, or $1.20 per share,
is 6.5% below the same period of 2006.
Net interest income for the third quarter of 2007 increased over the same period
of 2006, and for the first nine months of the year, is 2.4% above year to date
2006 levels. Noninterest income also continues to be strong, with improvements
of 13.3% and 11.3% over 2006 levels for the quarter and year to date,
Page 10
respectively. At the same time, expenses are up from comparable periods of 2006,
as a result of the continued growth of the Company.
The Company continues to focus on credit quality issues with a small number of
commercial borrowers, reflecting the troubled conditions of the Michigan
economy. The Company's provision for loan loss for the quarter was lower than in
the second quarter of this year, but increased from the prior quarter and the
same period of 2006, bringing the year to date provision to a level that is
135.9% higher than the first nine months of 2006.
Return on average assets and return on average shareholders' equity for the
third quarter remain below the levels of the third quarter of last year. At the
same time, quarterly ROA of 1.18% matched or exceeded the levels achieved in
each of the past three quarters. During that same period, return on average
equity has surpassed that of the prior three quarters. Return on average equity
and earnings per share have improved in part as a result of the stock buyback
program implemented early in 2007. The following chart shows the trends in the
major components of earnings for the most recent five quarters.
2007 2006
--------------------------- -----------------
In thousands of dollars, where appropriate 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr
------- ------- ------- ------- -------
Net interest income $7,580 $7,478 $7,291 $7,424 $7,428
Provision for loan losses 618 710 1,509 921 396
Noninterest income 3,538 3,338 3,210 3,110 3,124
Noninterest expense 7,267 6,990 6,689 6,598 6,742
Federal income tax provision 895 849 577 818 967
Net income $2,338 $2,266 $1,725 $2,197 $2,446
Earnings per share (a) $ 0.45 $ 0.43 $ 0.33 $ 0.41 $ 0.46
Return on average assets (b) 1.18% 1.18% 0.92% 1.18% 1.32%
Return on average shareholders' equity (b) 12.32% 12.11% 9.35% 11.85% 13.52%
(a) Basic earnings per share, adjusted for stock dividends paid
(b) annualized
Total consolidated assets of the Company of $788.3 million at September 30, 2007
were up 6.5% from the same period last year, and increased by $6.6 million
during the most recent quarter. At the end of September, loan balances reached
$652.5 million, while deposits were $658.7 million.
FINANCIAL CONDITION
SECURITIES
The Company's investment securities portfolio decreased $1.67 million in the
third quarter and balances declined by $8.1 million during the first nine months
of 2007, 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 modestly during the past twelve months, as the percentage of investments
held in treasury and agency securities has decreased while the percentages of
mortgage backed agencies, municipal obligations and corporate securities have
increased slightly. The table below reflects the fair value of various
categories of investment securities of the Company:
In thousands of dollars 9/30/07 12/31/06 9/30/06
------- -------- -------
U.S. Treasury and agency securities $34,430 $38,380 $37,974
Mortgage backed agency securities $13,956 $13,945 $14,856
Obligations of states and political subdivisions 36,090 40,369 38,397
Corporate, asset backed, and other securities 3,215 3,117 3,215
------- ------- -------
Total Investment Securities $87,691 $95,811 $94,442
======= ======= =======
Page 11
The following table 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.
9/30/07 12/31/06 9/30/06
------- -------- -------
U.S. Treasury and agency securities 39.3% 40.0% 40.2%
Mortgage backed agency securities 15.9% 14.6% 15.7%
Obligations of states and political subdivisions 41.1% 42.1% 40.7%
Corporate, asset backed, and other securities 3.7% 3.3% 3.4%
----- ----- -----
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
14.5% 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
first nine months of 2007 and 2006, in thousands of dollars.
Unrealized gains (losses) in: 2007 2006 Change
---- ----- ------
U.S. Treasury and agency securities $139 $ (33) $ 172
Mortgage backed agency securities 60 (125) 185
Obligations of states and political subdivisions 49 341 (292)
Corporate, asset backed and other securities 73 75 (2)
---- ----- -----
Total investment securities $321 $ 258 $ 63
==== ===== =====
LOANS
Gross loans have increased by $12.4 million in third quarter of 2007, bringing
the twelve-month loan growth to $60.1 million, for an increase of 10.2% over the
previous twelve months. Most categories of the Company's loan portfolio have
experienced growth during the first nine months of 2007, with business loans,
commercial mortgages and personal loans providing the largest dollars of growth
in that period. Residential mortgage balances have also increased, while
construction and development loans were down from the third quarter of 2006.
The makeup of the Company's portfolio continues to evolve, and the portfolio mix
has changed modestly during the first nine months of the year. Business loans
and commercial mortgages increased as a percentages of total loans since
December 31, 2006, while the percentage of the portfolio held in other
categories, including construction and development loans, has declined.
Page 12
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, 2007 December 31, 2006 September 30, 2006
--------------------- --------------------- ---------------------
Balance % of total Balance % of total Balance % of total
-------- ---------- -------- ---------- -------- ----------
Total loans:
Personal $ 97,568 15.0% $ 91,002 15.1% $ 87,703 14.8%
Business loans and
commercial mortgages 375,209 57.5% 327,928 54.5% 331,846 56.0%
Tax exempt 2,747 0.4% 2,841 0.5% 2,898 0.5%
Residential mortgage 90,259 13.8% 85,636 14.2% 82,414 13.9%
Commercial construction
and development 86,728 13.3% 94,356 15.7% 87,521 14.8%
-------- ----- -------- ----- -------- -----
Total loans $652,511 100.0% $601,763 100.0% $592,382 100.0%
======== ===== ======== ===== ======== =====
CREDIT QUALITY
The Company maintains a process of actively monitoring delinquencies,
nonperforming assets and problem loans and continues to address credit quality
issues within its loan portfolio. During the third quarter of 2007, the Company
once again increased its provision for loan loss in recognition of potential
future losses relating to credit issues in its loan portfolio.
The Company's total nonperforming assets increased by $2.3 million from the
second quarter of 2007, with increases in all categories of nonperforming
assets. Nonaccrual loans increased modestly, and the increase reflects the
credit quality problems evidenced in a small number of commercial credits in the
loan portfolio. The increase in delinquent loans resulted primarily from one
commercial loan that has subsequently been moved to nonaccrual status. Property
held as other real estate increased as a result of the addition of one
commercial property, while other properties were sold during the quarter.
As of September 30, 2007, nonperforming loans as a percentage of total loans was
1.38%, up from 1.17% at June 30, 2007. 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.
9/30/07 6/30/07 12/31/06 9/30/06
------- ------- -------- -------
Nonaccrual loans $ 7,467 $7,261 $5,427 $2,869
Loans past due 90 days or more 1,532 253 855 160
Troubled debt restructurings -- -- -- --
------- ------ ------ ------
Total nonperforming loans 8,999 7,514 6,282 3,029
Other real estate owned 1,938 1,146 1,063 551
------- ------ ------ ------
Total nonperforming assets $10,937 $8,660 $7,345 $3,580
======= ====== ====== ======
Percent of nonperforming loans
to total loans 1.38% 1.17% 1.04% 0.51%
Percent of nonperforming assets
to total assets 1.39% 1.11% 0.98% 0.48%
As of September 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 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
Page 13
sale. The Company's allowance for loan losses remains at a level consistent with
its estimated losses, and the allowance provides for currently estimated losses
inherent in the portfolio. An analysis of the allowance for loan losses, in
thousands of dollars, for the nine months ended September 30, 2007 and 2006
follows:
2007 2006
------- ------
Balance at January 1 $ 7,849 $6,361
Loans charged off (3,041) (681)
Recoveries credited to allowance 70 112
Provision charged to operations 2,836 1,202
------- ------
Balance at September 30 $ 7,714 $6,994
======= ======
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,
2007 and 2006, and December 31, 2006.
9/30/07 12/31/06 9/30/06
------- -------- -------
Business and commercial mortgage $6,572 $6,911 $6,067
Residential mortgage 189 24 18
Personal 953 889 853
Unallocated -- 25 56
------ ------ ------
Total $7,714 $7,849 $6,994
====== ====== ======
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 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 13.8% of the portfolio at
September 30, 2007, 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 slowed somewhat during the third quarter. Total deposits
increased 0.3% from the end of June, and have grown $30.7 million from December
31, 2006, representing an annualized growth rate of 6.5%. Deposits are up $37.9
million from a year ago, for an increase of 6.1%. Demand deposit balances have
declined for the quarter, year-to-date and from the same quarter last year,
while other categories of deposits have grown during the same period.
Traditional deposit 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 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 majority of the
Company's deposits are derived from core client sources, relating to long term
relationships with local personal, business and public clients. The table below
shows the percentage makeup of the deposit portfolio as of September 30, 2007
and 2006, and December 31, 2006.
9/30/07 12/31/06 9/30/06
------- -------- -------
Noninterest bearing deposits 11.9% 13.0% 13.9%
Interest bearing deposits 88.1% 87.0% 86.1%
----- ----- -----
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 participants in the federal funds market, either as borrowers or
sellers. Federal funds are generally borrowed or sold for one-day periods. The
Banks also have the ability to utilize short-term advances from the Federal Home
Loan Bank of Indianapolis ("FHLBI") and borrowings at the discount window of the
Federal Reserve Bank as additional short-term funding sources. Federal funds
were used during 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 third quarter of 2007, the Company procured $3.0 million in new
advances and repaid $500,000 in matured borrowings, resulting in a increase in
total FHLB borrowings outstanding at September 30, 2007.
CAPITAL RESOURCES
The Company and the Banks were categorized as well-capitalized at September 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 September 30,
2007 and 2006, and December 31, 2006. Dollars are shown in thousands.
Regulatory
Guidelines United Bancorp, Inc.
--------------- ----------------------------
Adequate Well 9/30/07 12/31/06 9/30/06
-------- ---- ------- -------- -------
Tier 1 capital to average assets 4% 5% 9.4% 9.8% 9.6%
Tier 1 capital to risk weighted assets 4% 6% 10.9% 11.6% 11.5%
Total capital to risk weighted assets 8% 10% 12.1% 12.9% 12.6%
Total shareholders' equity $75,534 $74,536 $73,311
Intangible assets (3,469) (3,469) (3,469)
Disallowed servicing assets -- -- --
Unrealized (gain) loss on securities
available for sale (212) (68) (170)
------- ------- -------
Tier 1 capital 71,853 70,999 69,672
Allowable loan loss reserves 7,626 7,849 6,994
------- ------- -------
Tier 1 and 2 capital $79,479 $78,848 $76,666
======= ======= =======
RESULTS OF OPERATIONS
Consolidated net income for the third quarter of 2007 of $2.338 million was 3.1%
above the second quarter of this year, and represented the second-best quarterly
earnings in the Company's history. Third quarter earnings fell 4.4% below the
Company's best quarter earnings, which were achieved in the third quarter of
2006. Year to date earnings of $6.331 million are 6.5% below the same period of
2006, with substantially all of the decline as a result of increased provision
for loan losses. Noninterest income remains strong compared to 2006 levels, and
expenses have increased modestly. 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 tightening of interest spreads and compression of
the net interest margin. Net interest income for the quarter improved 2.0% over
the third quarter of 2006, and year to date net interest income increased
Page 15
$520,000 over the same period last year. Although the Company's yield on earning
assets continues to increase, deposit and borrowing costs have risen at a faster
rate. The Company's year to date yield on earning assets was up twenty-six basis
points from the same period of 2006, while its cost of funds increased from the
nine-month 2006 levels by fifty basis points, resulting in a decrease of
twenty-four basis points in the tax equivalent spread in the past year. This
narrowing of the Company's spread has also resulted in a decline in year to date
net interest margin, from 4.43% for 2006 to 4.23% for 2007.
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, 2007 and
2006.
Nine Months Ended September 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 $ 4,585 $ 177 5.14% $ 7,838 $ 291 4.95%
Taxable securities 53,547 1,962 4.89% 62,076 1,746 3.75%
Tax exempt securities (b) 35,277 1,637 6.19% 34,963 1,509 5.76%
Taxable loans 625,225 35,217 7.51% 565,577 31,523 7.43%
Tax exempt loans (b) 3,049 151 6.61% 3,051 145 6.33%
-------- ------- -------- -------
Total int. earning assets (b) 721,683 39,143 7.23% 673,505 35,214 6.97%
Less allowance for loan losses (7,980) (6,712)
Other assets 57,728 59,247
-------- --------
TOTAL ASSETS $771,431 $726,040
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $109,127 1,204 1.47% $104,704 997 1.27%
Savings deposits 178,842 3,808 2.84% 180,308 3,343 2.47%
CDs $100,000 and over 117,997 4,338 4.90% 91,016 2,979 4.36%
Other interest bearing deposits 153,274 5,165 4.49% 141,839 4,115 3.87%
-------- ------- -------- -------
Total int. bearing deposits 559,240 14,514 3.46% 517,867 11,434 2.94%
Short term borrowings 4,533 182 5.35% 1,300 47 4.87%
Other borrowings 43,235 1,532 4.72% 39,980 1,371 4.57%
-------- ------- -------- -------
Total int. bearing liabilities 607,008 16,228 3.56% 559,147 12,852 3.06%
------- -------
Noninterest bearing deposits 82,112 87,459
Other liabilities 7,265 9,155
Shareholders' equity 75,046 70,279
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $771,431 $726,040
======== ========
Net interest income (b) 22,915 22,362
------- -------
Net spread (b) 3.67% 3.91%
==== ====
Net yield on interest earning
assets (b) 4.23% 4.43%
==== ====
Tax equivalent adjustment on interest
income (565) (532)
------- -------
Net interest income per income
statement $22,350 $21,830
======= =======
Ratio of interest earning assets to
interest bearing liabilities 1.19 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
Page 16
As noted from the data in the following table, tax-equivalent interest income
and expense for the first nine months of 2007 increased over the same period of
2006, and net interest income improved by $551,000 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 tax equivalent net interest income
for the first nine months of 2007 was positively impacted due to volume changes
but negatively affected by changes in rate.
The following table shows the effect of volume and rate changes on net interest
income for the nine months ended September 30, 2007 and 2006 on a taxable
equivalent basis, in thousands of dollars.
2007 Compared to 2006 2006 Compared to 2005
------------------------ ------------------------
Increase (Decrease) Increase (Decrease)
Due To: (a) Due To: (a)
------------------------ ------------------------
Volume Rate Net Volume Rate Net
------ ------ ------ ------ ------ ------
Interest earned on:
Federal funds sold $ (125) $ 11 $ (114) $ 81 $ 94 $ 175
Taxable securities (263) 479 216 (231) 453 222
Tax exempt securities 14 113 127 219 44 263
Taxable loans 3,356 337 3,693 2,493 3,533 6,026
Tax exempt loans -- 6 6 (11) -- (11)
------ ------ ------ ------ ------ ------
Total interest income $2,982 $ 946 $3,928 $2,551 $4,124 $6,675
====== ====== ====== ====== ====== ======
Interest paid on:
NOW accounts $ 44 $ 162 $ 206 $ (158) $ 118 $ (40)
Savings deposits (27) 492 465 61 1,351 1,412
CDs $100,000 and over 960 400 1,360 1,028 553 1,581
Other interest bearing deposits 350 700 1,050 494 781 1,275
Short term borrowings 130 5 135 (36) 25 (11)
Other borrowings 114 47 161 (90) 24 (66)
------ ------ ------ ------ ------ ------
Total interest expense $1,571 $1,806 $3,377 $1,299 $2,852 $4,151
====== ====== ====== ====== ====== ======
Net change in net interest
income $1,411 $ (860) $ 551 $1,252 $1,272 $2,524
====== ====== ====== ====== ====== ======
(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 Company's provision for loan losses for the third quarter of 2007 was
$618,000, compared to $710,000 in the second quarter of 2007 and $396,000 for
the third 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. In addition, general allocations within the allowance relating
to increased risk resulting from deterioration of the Michigan economy have
resulted in further increases in the provision. 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 6.0% from the second quarter of 2007
and improved 13.3% over the third quarter of 2006. Income from loan sales and
servicing and fee income provided the largest percentage increases, improving
20.4% and 15.9% respectively over second quarter levels. All other categories of
noninterest income experienced modest growth during the quarter.
Page 17
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. The
improvement in trust and investment fee income for the quarter has brought this
category even with 2006 levels for the first nine months of the year. Income
from the sale of nondeposit investment products is down from 2006 levels, as a
result of lower volumes and changing product mix. All other categories of
noninterest income are above 2006 year to date levels, and year to date
noninterest income is 11.3% higher than 2006.
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.
During the third quarter of 2007, the Company entered into a new line of
business. United Structured Finance (USFC) is a finance company that is a
wholly-owned subsidiary of the Company. USFC offers simple, effective financing
solutions to small businesses, primarily by engaging in SBA 504 and 7(a)
lending. The loans generated by USFC are typically sold on the secondary market.
USFC has begun generating fee income, and this additional revenue will provide
additional diversity to the Company's income stream going forward and will
provide additional financing alternatives to clients and non-clients.
NONINTEREST EXPENSES
Total noninterest expenses increased 4.0% from the second quarter of 2007 and
are up 7.8% over the third quarter of 2006. Some categories increased during the
quarter while the Company achieved reductions in other areas. Salaries and
employee benefits and external data processing both increased over the second
quarter of this year, while advertising and marketing expenses and professional
fees declined slightly. The increase in salaries and employee benefits is a
result of the continued growth of the company and the resulting addition of new
staff. Other expenses have increased during the quarter, in part as a result of
debit card fraud losses and losses on the write-down or sale of other real
estate owned.
Year to date total noninterest expense increased modestly compared to the first
nine months of 2006, increasing by 3.1% during that time, with variances noted
in a number of categories. Salaries and employee benefits and professional fees
are down considerably, while occupancy and equipment expense, advertising and
marketing costs and other expenses have increased. The decrease in salaries and
employee benefits is primarily a result of the reduction in bonus and profit
sharing costs as net income remains 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, advertising and marketing
expense and other expenses, including attorney fees and fraud losses, provided
the largest increase during the first nine months of 2007.
FEDERAL INCOME TAX
The Company's effective tax rate for the first nine months of 2007 was 26.8%,
compared to 27.8% for the same period of 2006. The decrease in the effective tax
rate is the result of the benefits received from the Company's investment in tax
exempt assets, including bank-owned life insurance, and resulting tax exempt
income.
Page 18
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
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.
Page 19
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, 2007, the
Company would expect a maximum potential reduction in net interest margin of
slightly more than 3% if market rates decreased under an immediate and sustained
parallel shift of 200 basis points. The interest sensitivity position of the
Company continues to be liability sensitive based on internal measures.
The Company and each Bank maintains Funds Management Committees, which review
exposure to market risk on a regular basis. The Committees' overriding policy
objective is to manage assets and liabilities to provide an optimum and
consistent level of earnings within the framework of acceptable risk standards.
The Funds Management Committees are also responsible for evaluating and
anticipating various risks other than interest rate risk. Those risks include
prepayment risk, credit risk and liquidity risk. The Committees include senior
members of management, and monitor the makeup of interest sensitive assets and
liabilities to assure appropriate liquidity, maintain interest margins and to
protect earnings in the face of changing interest rates and other economic
factors.
The Funds Management policies provide for a level of interest sensitivity 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, 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 September 30, 2007 are, to the best of their knowledge,
Page 20
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, 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
The Company is not involved in any material legal proceedings. The Company and
the Banks are involved in ordinary routine litigation incident to its business;
however, no such routine proceedings are expected to result in any material
adverse effect on the operations or earnings of the Company or the Banks.
Neither the Company nor the Banks are involved in any proceedings to which any
director, principal officer, affiliate thereof, or person who owns of record or
beneficially five percent (5%) or more of the outstanding stock of the Company,
or any associate of the foregoing, is a party or has a material interest adverse
to the Company or the Banks.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) In February of 2007, the Company announced a stock repurchase program for
up to 260,000 shares of its common stock (adjusted for stock dividend).
During the three month period ended September 30, 2007, the Company
repurchased 38,753 shares at an average price of $21.69. At September 30,
2007, the Company had 127,921 shares remaining to be purchased under the
program. Since the announcement of the repurchase program, the Company has
repurchased an aggregate of 132,079 shares of its common stock at an
average share price of $21.91. All purchases during the quarter were part
of the publicly announced plan.
ITEM 6 - EXHIBITS
Listing of Exhibits (numbered as in Item 601 of Regulation S-K):
Exhibit 31.1 Certification of principal executive officer pursuant to Rule
13a - 14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of principal financial officer pursuant to Rule
13a - 14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Page 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED BANCORP, INC.
October 25, 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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