UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
Registrant's telephone number, including area code: (517) 423-8373
Securities registered pursuant to Section 12(b) of the Act: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE OTCBB
(Title of Class) (Name of Exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined by Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
As of June 30, 2007, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $92,026,000, based on a closing price of
$21.75 as reported on the OTC Bulletin Board.
As of January 31, 2008, there were 5,089,507 outstanding shares of registrant's
common stock, no par value.
Documents Incorporated By Reference:
Portions of the registrant's definitive 2008 Proxy Statement in connection with
the 2008 Annual Meeting of Shareholders are incorporated by reference into Part
III.
Page 1
CROSS REFERENCE TABLE
Page
ITEM NO. DESCRIPTION Numbers
- -------- ---------------------------------------------------------- -------
PART I
1. Business 3
I Selected Statistical Information 9
(A) Distribution of Assets, Liabilities and Shareholders'
Equity 9
(B) Interest Rates and Interest Differential 9
II Investment Portfolio 10
III Loan Portfolio 10
(A) Types of Loans 10
(B) Maturities and Sensitivities of Loans to Changes in
Interest Rates 11
(C) Risk Elements 11
(D) Other Interest Bearing Assets 12
IV Summary of Loan Loss Experience 12
(A) Changes in Allowance for Loan Losses 12
(B) Allocation of Allowance for Loan Losses 12
V Deposits 13
VI Return on Equity and Assets 13
VII Short-Term Borrowings 13
1A. Risk Factors 13
1B. Unresolved Staff Comments 16
2. Properties 16
3. Legal Proceedings 17
4. Submission of Matters to a Vote of Security Holders 17
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 17
6. Selected Financial Data 19
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
7A. Quantitative and Qualitative Disclosures About Market Risk 20
8. Financial Statements and Supplementary Data 20
9. Changes in and Disagreements With Accountants on Accounting &
Financial Disclosure 20
9A. Controls and Procedures 20
9B. Other Information 22
PART III
10. Directors, Executive Officers and Corporate Governance 22
11. Executive Compensation 23
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 23
13. Certain Relationships and Related Transactions and Director
Independence 23
14. Principal Accounting Fees and Services 23
PART IV
15. Exhibits and Financial Statement Schedules 23
Signatures 24
Power of Attorney 25
Exhibit Index 26
Page 2
PART I
ITEM 1 - BUSINESS
United Bancorp, Inc. (the "Company") was incorporated on May 31, 1985 as a
business corporation under the Michigan Business Corporation Act, pursuant to
the authorization and direction of the Directors of United Bank & Trust ("UBT").
The Company is a financial holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") under the
Bank Holding Company Act of 1956, as amended (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. In general, the Bank Holding Company Act and regulations
restrict the Company with respect to its own activities and activities of any
subsidiaries to the business of banking or such other activities which are
closely related to the business of banking.
The Company was formed by Directors of UBT, and the bank was acquired by the
Company on January 1, 1986. In November of 2000, the Company filed applications
with its regulators for permission to establish a second bank as a subsidiary of
the Company. United Bank & Trust - Washtenaw ("UBTW") opened for business on
April 2, 2001, and is headquartered in Ann Arbor. UBTW operates with its own
local management and board of directors, and targets the Washtenaw County market
for its growth. In 2003, UBT sold its three Washtenaw County offices to UBTW.
UBT delivers financial services through a system of twelve banking offices and
one Trust office, plus fourteen automated teller machines, located in Lenawee
and Monroe Counties, Michigan. The business base of the area is primarily
agricultural and light manufacturing, with its manufacturing sector exhibiting
moderate dependence on the automotive and refrigeration and air conditioning
industries.
Banking services are delivered by UBTW through five banking offices and five
automated teller machines in Washtenaw County, Michigan. The employment base of
Washtenaw County is centered around health care, education and automotive high
technology. Economic stability is provided to a great extent by the University
of Michigan, which is a major employer and is not as economically sensitive to
the fluctuations of the automotive industry. The services and public sectors
account for a substantial percentage of total industry employment, in a large
part due to the University of Michigan and the University of Michigan Medical
Center.
The Company's subsidiary banks (the "Banks") offer a full range of services to
individuals, corporations, fiduciaries and other institutions. Banking services
include checking, NOW accounts, savings, time deposit accounts, money market
deposit accounts, safe deposit facilities and money transfers. Lending
operations provide real estate loans, secured and unsecured business and
personal loans, consumer installment loans, credit card and check-credit loans,
home equity loans, accounts receivable and inventory financing, equipment lease
financing and construction financing.
The Banks maintain correspondent bank relationships with a small number of
larger banks, which involve check clearing operations, securities safekeeping,
transfer of funds, loan participation, and the purchase and sale of federal
funds and other similar services. UBTW also maintains a correspondent banking
relationship with UBT.
Page 3
The following table shows comparative information concerning the Banks as of
December 31, 2007, in thousands of dollars:
Assets Loans Deposits
-------- -------- --------
United Bank & Trust $496,318 $370,690 $419,757
United Bank & Trust - Washtenaw 302,377 279,611 256,069
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 Banks offer the sale of nondeposit investment
products through licensed representatives in their banking offices, and sell
credit and life insurance products.
The Company owns a structured finance company that was established in the third
quarter of 2007. United Structured Finance ("USFC") is a finance company that
offers 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. Gains on the sale of those loans is included in
income from loan sales and servicing. USFC revenue will provide additional
diversity to the Company's income stream going forward, and will provide
additional financing alternatives to clients of the Banks as well as non-bank
clients.
Supervision and Regulation
General. The Company and the Banks are subject to extensive regulation under
federal and state laws. The regulatory framework is intended primarily for the
protection of depositors, federal deposit insurance funds and the banking system
as a whole and not for the protection of security holders.
Set forth below is a description of the significant elements of some of the laws
and regulations applicable to the Company and the Banks. The description is
qualified in its entirety by reference to the full text of the statutes,
regulations and policies that are described. Also, such statutes, regulations
and policies are continually under review by Congress and state legislatures and
federal and state regulatory agencies. A change in statutes, regulations or
regulatory policies applicable to the Company and the Banks could have a
material effect on the business of the Company and the Banks.
As a bank holding company within the meaning of the Bank Holding Company Act,
the Company is required to file quarterly and annual reports of its operations
and such additional information as the Federal Reserve Board may require and is
subject, along with its subsidiaries, to examination by the Federal Reserve
Board. The Federal Reserve Board is the primary regulator of the Company.
The Bank Holding Company Act requires every bank holding company to obtain prior
approval of the Federal Reserve Board before it may merge with or consolidate
into another bank holding company, acquire substantially all the assets of any
bank, or acquire ownership or control of any voting shares of any bank if after
such acquisition it would own or control, directly or indirectly, more than 5%
of the voting shares of such bank holding company or bank. The Federal Reserve
Board may not approve the acquisition by the Company of voting shares or
substantially all the assets of any bank located in any state other than
Michigan unless the laws of such other state specifically authorize such an
acquisition. The Bank Holding Company Act also prohibits a bank holding company,
with certain exceptions, from acquiring direct or indirect ownership or control
of more than 5% of the voting shares of any company which is not a bank and from
engaging in any business other than that of banking, managing and controlling
banks or furnishing
Page 4
services to banks and their subsidiaries. However, holding companies may engage
in, and may own shares of companies engaged in, certain businesses found by the
Federal Reserve Board to be so closely related to banking or the management or
control of banks as to be a proper incident thereto.
Under current regulations of the Federal Reserve Board, a holding company and
its nonbank subsidiaries are permitted, among other activities, to engage,
subject to certain specified limitations, in such banking related business
ventures as sales and consumer finance, equipment leasing, credit bureau
services and software operations, data processing and services transmission,
discount securities brokerage, insurance, mortgage banking and brokerage, sale
and leaseback and other forms of real estate banking. The Bank Holding Company
Act does not place territorial restrictions on the activities of nonbank
subsidiaries of bank holding companies. In addition, federal legislation
prohibits acquisition of "control" of a bank or bank holding company without
prior notice to certain federal bank regulators. "Control" in certain cases may
include the acquisition of as little as 10% of the outstanding shares of capital
stock.
In March of 2000, the Gramm-Leach-Bliley Act of 1999 (the "GLB Act") was
enacted. Under the GLB Act, new opportunities became available for bank holding
companies, banks and other depository institutions, insurance companies and
securities firms to enter into combinations that permit a single financial
services organization to offer customers a more complete array of financial
products and services. The GLB Act provided a new regulatory framework for
regulation through the "financial holding company," with the Federal Reserve
Board as the umbrella regulator. Functional regulation of the separately
regulated subsidiaries of a financial holding company are conducted by their
primary functional regulator. The Company became a financial holding company in
2000.
UBT and UBTW are Michigan banking corporations, and as such are subject to the
regulation of, and supervision and regular examination by, the Michigan Office
of Financial and Insurance Services ("OFIS") and the FDIC. OFIS is the primary
regulator of the Banks. Deposit accounts of the Banks are insured by the FDIC.
Requirements and restrictions under the laws of the United States and the State
of Michigan include the requirement that banks maintain reserves against certain
deposits, restrictions on the nature and amount of loans which may be made by a
bank and the interest that may be charged thereon, restrictions on the payment
of interest on certain deposits and restrictions relating to investments and
other activities of a bank.
Dividends. The Company is a legal entity, separate and distinct from the Banks.
While the Banks contract with the Company and pay for services provided, much of
the Company's revenue will be received in the form of dividends, if any, paid by
UBT and UBTW. Thus, the Company's ability to pay dividends to its shareholders
will be limited by statutory and regulatory restrictions on UBT and UBTW
concerning dividends. Michigan's banking laws restrict the payment of cash
dividends by a state bank by providing, subject to certain exceptions, that
dividends may be paid only out of net profits then on hand after deducting
therefrom its losses and bad debts and no dividends may be paid unless the bank
will have a surplus amounting to not less than twenty percent (20%) of its
capital after the payment of the dividend. Federal law generally prohibits a
bank from making any capital distribution (including payment of a dividend) or
paying any management fee to its parent company if the depository institution
would thereafter be undercapitalized.
The Federal Deposit Insurance Corporation ("FDIC") may prevent an insured bank
from paying dividends if the Bank is in default of payment of any assessment due
to the FDIC. In addition, the FDIC may prohibit the payment of dividends by a
bank, if such payment is determined, by reason of the financial conditions of
the bank, to be an unsafe and unsound banking practice.
Page 5
Holding Company Support of Subsidiary Banks. Under Federal Reserve Board policy,
the Company is expected to act as a source of financial and managerial strength
to its Banks and to commit resources to support such subsidiaries. This support
of its subsidiary banks may be required at times when, absent such Federal
Reserve Board policy, the Company might not otherwise be inclined to provide it.
In addition, any capital loans by a bank holding company to any of its
subsidiary banks are subordinate in right of payment to deposits and certain
other indebtedness of such subsidiary banks.
Liability of Commonly Controlled Depository Institutions. Under the Federal
Deposit Insurance Act, as amended ("FDIA"), FDIC-insured depository
institutions, such as either Bank, can be held liable for any loss incurred by,
or reasonably expected to be incurred by, the FDIC in connection with (i) the
"default" of a commonly controlled FDIC-insured depository institution, or (ii)
any assistance provided by the FDIC to any commonly controlled depository
institution in "danger of default." For these purposes, the term "default" is
defined generally as the appointment of a conservator or receiver and "in danger
of default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur without federal regulatory
assistance.
Capital Adequacy and Prompt Corrective Action. The Federal Reserve Board and the
FDIC have established guidelines for risk-based capital by bank holding
companies and banks. These guidelines establish a risk adjusted ratio relating
capital to risk-weighted assets and off-balance-sheet exposures. These capital
guidelines primarily define the components of capital, categorize assets into
different risk classes, and include certain off-balance-sheet items in the
calculation of capital requirements. Generally, Tier 1 capital consists of
shareholders' equity less intangible assets and unrealized gain or loss on
securities available for sale, and Tier 2 capital consists of Tier 1 capital
plus qualifying loan loss reserves.
The FDIC Improvement Act of 1991 established a system of prompt corrective
action to resolve the problems of undercapitalized financial institutions. Under
this system, federal banking regulators have established five capital
categories, well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, in which all
institutions are placed. The federal banking agencies have also specified by
regulation the relevant capital levels for each of the categories.
Federal banking regulators are required to take specified mandatory supervisory
actions and are authorized to take other discretionary actions with respect to
institutions in the three undercapitalized categories. The severity of the
action depends upon the capital category in which the institution is placed.
Generally, subject to a narrow exception, the banking regulator must appoint a
receiver or conservator for an institution that is critically undercapitalized.
An institution in any of the under- capitalized categories is required to submit
an acceptable capital restoration plan to its appropriate federal banking
agency. An undercapitalized institution is also generally prohibited from paying
any dividends, increasing its average total assets, making acquisitions,
establishing any branches or engaging in any new line of business, except under
an accepted capital restoration plan or with FDIC approval.
Failure to meet capital guidelines could subject a bank or bank holding company
to a variety of enforcement remedies, including issuance of a capital directive,
the termination of deposit insurance by the FDIC, a prohibition on accepting
brokered deposits, and other restrictions on its business. In addition, such a
bank would generally not receive regulatory approval of any application that
requires the consideration of capital adequacy, such as a branch or merger
application, unless the bank could demonstrate a reasonable plan to meet the
capital requirement within a reasonable period of time. The capital ratios of
the Company and the Banks exceed the regulatory guidelines for well capitalized
institutions. Information in Note 18 on Page A-38 hereof provides additional
information regarding the Company's capital ratios, and is incorporated herein
by reference.
Page 6
The federal regulatory authorities' risk-based capital guidelines are based upon
the 1988 capital accord of the Basel Committee on Banking Supervision (the
"BIS"). The BIS is a committee of central banks and bank supervisors/regulators
from the major industrialized countries that develops broad policy guidelines
for use by each country's supervisors in determining the supervisory policies
they apply. In 2004, the BIS published a new capital accord to replace its 1988
capital accord. The new capital accord would, among other things, set capital
requirements for operational risk and refine the existing capital requirements
for credit risk and market risk. Operational risk is defined to mean the risk of
direct or indirect loss resulting from inadequate or failed internal processes,
people and systems in connection with external events. The 1988 capital accord
does not include separate capital requirements for operational risk. The United
States federal banking regulators reached an agreement in the third quarter of
2007 regarding the implementation of Basel II in the United States. The
agreement will lead to finalization of a rule implementing the methodology for
computing large banks' risk-based capital requirements. The Company cannot
predict the timing or final form of the United States rules implementing the new
capital accord and their impact on the Company. The new capital requirements
that may arise from the final rules could increase the minimum capital
requirements applicable to the Company and the Banks.
Affiliate Transactions. Banks are subject to restrictions imposed by federal law
on extensions of credit to, purchases of assets from, and certain other
transactions with affiliates and on investments in stock or other securities
issued by affiliates. Such restrictions prevent the Banks from making loans to
affiliates unless the loans are secured by collateral in specified amounts and
have terms at least as favorable to the Banks as the terms of comparable
transactions between the Banks and non-affiliates. Further, applicable federal
and state laws significantly restrict extensions of credit by the Banks to
directors, executive officers and principal stockholders and related interests
of such persons.
Deposit Insurance. Substantially all of the deposits of the Banks are insured up
to applicable limits by the Deposit Insurance Fund ("DIF") of the FDIC and are
subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes
a risk-based assessment system that imposes insurance premiums based upon a
matrix that takes into account a bank's capital level and supervisory rating.
Pursuant to the Federal Deposit Insurance Reform Act of 2005, the FDIC modified
its method of calculating FDIC insurance assessments effective November 2006,
and provided credits to certain banks for the calendar year 2007, to be applied
to future assessments. UBT has earned assessment credits, while UBTW has not,
since it is a relatively new institution. These changes have resulted in
increased FDIC insurance premiums for UBTW, while UBT will be able to offset all
of its FDIC insurance assessments for 2007 and much of 2008 using credits it has
earned. The assessment methodology allows the FDIC to set its assessment rates
in the future in connection with declines in the insurance funds or increases in
the amount of insurance coverage. An increase in the assessment rate could have
a material adverse effect on the Company's earnings, depending on the amount of
the increase.
During 2007, the Banks paid $74,795 in Financing Corporation ("FICO")
assessments related to outstanding FICO bonds to the FDIC as collection agent.
The FICO is a mixed-ownership government corporation established by the
Competitive Equality Banking Act of 1987 whose sole purpose was to function as a
financing vehicle for the now defunct Federal Savings and Loan Insurance
Corporation. FICO assessments will continue in the future for both banks.
Page 7
Depositor Preference. The FDIA provides that, in the event of the "liquidation
or other resolution" of an insured depository institution, the claims of
depositors of the institution, including the claims of the FDIC as a receiver,
will have priority over other general unsecured claims against the institution.
If an insured depository institution fails, insured and uninsured depositors,
along with the FDIC, will have priority in payment ahead of unsecured,
non-deposit creditors, including the parent bank holding company, with respect
to any extensions of credit they have made to such insured depository
institution.
Community Reinvestment Act. The Community Reinvestment Act of 1977 ("CRA")
requires depository institutions to assist in meeting the credit needs of their
market areas consistent with safe and sound banking practice. Under the CRA,
each depository institution is required to help meet the credit needs of its
market areas by, among other things, providing credit to low- and
moderate-income individuals and communities. Depository institutions are
periodically examined for compliance with the CRA and are assigned ratings. In
order for a financial holding company to commence any new activity permitted by
the Bank Holding Company Act, or to acquire any company engaged in any new
activity permitted by the Bank Holding Company Act, each insured depository
institution subsidiary of the financial holding company must have received a
rating of at least "satisfactory" in its most recent examination under the CRA.
Furthermore, banking regulators take into account CRA ratings when considering
approval of a proposed transaction.
Financial Privacy. In accordance with the GLB Act, federal banking regulators
adopted rules that limit the ability of banks and other financial institutions
to disclose non-public information about consumers to nonaffiliated third
parties. These limitations require disclosure of privacy policies to consumers
and, in some circumstances, allow consumers to prevent disclosure of certain
personal information to a nonaffiliated third party. The privacy provisions of
the GLB Act affect how consumer information is transmitted and conveyed to
outside vendors.
Anti-Money Laundering Initiatives and the USA Patriot Act. A major focus of
governmental policy on financing institutions in recent years has been aimed at
combating money laundering and terrorist financing. The USA PATRIOT Act of 2001
(the "USA Patriot Act"), which was renewed in substantially the same form on
March 9, 2006, substantially broadened the scope of the United States and
anti-money laundering laws and regulations by imposing significant new
compliance and due diligence obligations, creating new crimes and penalties and
expanding the extra-territorial jurisdiction of the United States. The United
States Treasury Department has issued a number of regulations that apply various
requirements of the USA Patriot Act to financial institutions such as the Banks.
These regulations impose obligations on financial institutions to maintain
appropriate policies, procedures and controls to detect, prevent and report
money laundering and terrorist financing by verifying the identity of their
customers. Failure of a financial institution to maintain and implement adequate
programs to combat money laundering and terrorist financing, or to comply with
all of the relevant laws or regulations, could have serious legal and
reputational consequences for the institutions.
Legislative Initiatives. From time to time, various legislative and regulatory
initiatives are introduced in Congress and state legislatures, as well as by
regulatory agencies. such initiatives may include proposals to expand or
contract the powers of bank holding companies and depository institutions or
proposals to substantially change the financial institution regulatory system.
Such legislation could change banking statutes and the operating environment of
the Company in substantial and unpredictable ways. If enacted, such legislation
could increase or decrease the cost of doing business, limit or expand
permissible activities or affect the competitive balance among banks, savings
associations, credit unions, and other financial institutions. The Company
cannot predict whether any such legislation will be enacted,
Page 8
and, if enacted, the effect that it, or any implementing regulations, would have
on the financial condition or results of operations of the Company. A change in
statutes, regulations or regulatory policies applicable to the Company or the
Banks could have a material effect on the business of the Company.
Consumer Protection Regulation. Other aspects of the lending and deposit
businesses of the Banks that are subject to federal and state regulation include
disclosure requirements with respect to interest, payment and other terms of
consumer and residential mortgage loans, disclosure of interest and fees and
other terms of, and the availability of, funds for withdrawal from consumer
deposit accounts, prohibiting certain forms of discrimination in credit
transactions, and imposing certain recordkeeping, reporting and disclosure
requirements with respect to residential mortgage loan applications.
Accounting Standards
Information regarding accounting standards adopted by the Company are discussed
beginning on Page A-26 hereof, and is incorporated herein by reference.
Competition
The banking business in the Company's service area is highly competitive. In
their markets, the Banks compete with a number of community banks and
subsidiaries of large multi-state, multi-bank holding companies. In addition,
the banks face competition from credit unions, savings associations, finance
companies, loan production offices and other financial services companies.
The Company believes that the market perceives a competitive benefit to an
independent, locally controlled commercial bank. Much of the Company's
competition comes from affiliates of organizations controlled from outside the
area. Against these competitors, the subsidiary banks continue to expand their
loan and deposit portfolios.
Employees
On December 31, 2007, the Company and its subsidiaries employed 219 full-time
and 43 part-time employees. This compares to 202 full-time and 42 part-time
employees at December 31, 2006.
Available Information
You can find more information about us at our website, located at www.ubat.com.
Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current
Reports on Form 8-K, and any amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available as soon as reasonably practicable after such forms have been filed
with or furnished to the Securities and Exchange Commission (the "SEC") free of
charge on our website through a link to the SEC website.
I SELECTED STATISTICAL INFORMATION
(A) DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
(B) INTEREST RATES AND INTEREST DIFFERENTIAL:
The information required by these sections are contained on Pages A-3 through
A-9 hereof, and is incorporated herein by reference.
Page 9
II INVESTMENT PORTFOLIO
(A) BOOK VALUE OF INVESTMENT SECURITIES
The following table reflects the book value of various categories of investment
securities of the Company at December 31:
In thousands of dollars 2007 2006
- ----------------------- ------- -------
U.S. Treasury and government agencies $46,748 $52,209
Obligations of states and political subdivisions 36,353 40,512
Equity and other securities 3,232 3,192
------- -------
Total Investment Securities $86,333 $95,913
(B) CARRYING VALUES AND YIELDS OF INVESTMENT SECURITIES
The following table reflects the carrying values and yields of the Company's
securities portfolio for 2007. Average yields are based on amortized costs and
the average yield on tax exempt securities of states and political subdivisions
is adjusted to a taxable equivalent basis, assuming a 34% marginal tax rate.
Carrying Values and Yields of Investments
In thousands of dollars where applicable 0 - 1 1 - 5 5 - 10 Over 10
Available For Sale Year Years Years Years Total
- ---------------------------------------- ------- ------- ------- ------- -------
U.S. Treasury and government agencies (1) $27,173 $ 6,359 $ -- $ -- $33,532
Weighted average yield 5.17% 5.04% -- -- 5.12%
Obligations of states and political subdivisions $ 8,850 $26,292 $12,678 $1,359 $49,179
Weighted average yield 4.06% 4.02% 4.02% 4.72% 4.06%
Equity and other securities (2) $ 3,187 $ -- $ -- $ -- $ 3,187
Weighted average yield 4.50% -- -- -- 4.50%
Total securities $39,210 $32,651 $12,678 $1,359 $85,898
Weighted average yield 4.87% 4.63% 4.02% 4.72% 4.65%
(1) Reflects the scheduled amortization and an estimate of future prepayments
based on past and current experience of amortizing U.S. agency securities.
(2) Reflects the scheduled amortization and an estimate of future prepayments
based on past and current experience of the issuer for various
collateralized mortgage obligations.
As of December 31, 2007, the Company's securities portfolio contains no
concentrations by issuer greater than 10% of shareholders' equity. Additional
information concerning the Company's securities portfolio is included on Page
A-10, and in Note 3 on Page A-29 hereof, and is incorporated herein by
reference.
III LOAN PORTFOLIO
(A) TYPES OF LOANS
The tables below show loans outstanding (net of unearned interest) at December
31, and the percentage makeup of the portfolios. All loans are domestic and
contain no concentrations by industry or customer. Balances are stated in
thousands of dollars.
Page 10
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
Personal $ 98,075 $ 91,002 $ 81,571 $ 74,142 $ 70,301
Business and commercial mortgage 376,637 327,928 320,188 278,838 256,778
Tax exempt 2,709 2,841 3,133 3,325 1,476
Residential mortgage (1) 91,793 85,636 67,246 76,228 85,156
Commercial construction & development 81,086 94,356 85,974 64,365 33,109
-------- -------- -------- -------- --------
Total loans (1) $650,300 $601,763 $558,112 $496,898 $446,820
======== ======== ======== ======== ========
Personal 15.1% 15.1% 14.6% 14.9% 15.7%
Business and commercial mortgage 57.9% 54.5% 57.4% 56.1% 57.5%
Tax exempt 0.4% 0.5% 0.6% 0.7% 0.3%
Residential mortgage (1) 14.1% 14.2% 12.0% 15.3% 19.1%
Commercial construction & development 12.5% 15.7% 15.4% 13.0% 7.4%
-------- -------- -------- -------- --------
Total loans (1) 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
(1) Includes loans held for sale
(B) MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table presents the maturity of total loans outstanding, other than
residential mortgages and personal loans, as of December 31, 2007, according to
scheduled repayments of principal. All figures are stated in thousands of
dollars.
0 - 1 1 - 5 After 5
Year Years Years Total
-------- -------- ------- --------
Business and commercial mortgage - fixed rate $ 43,399 $129,094 $25,464 $197,957
Business and commercial mortgage - variable rate 63,140 61,973 53,567 178,680
Tax exempt - fixed rate 214 2,430 65 2,709
Tax exempt - variable rate -- -- -- --
Construction -fixed rate 5,318 10,806 -- 16,124
Construction -variable rate 56,985 7,977 -- 64,962
-------- -------- ------- --------
Total $169,056 $212,280 $79,096 $460,432
======== ======== ======= ========
Total fixed rate 48,931 142,330 25,529 216,790
Total variable rate 120,125 69,950 53,567 243,642
(C) RISK ELEMENTS
Non-Accrual, Past Due and Restructured Loans
The following shows the effect on interest revenue of nonaccrual and troubled
debt restructured loans as of December 31, 2007, in thousands of dollars:
Gross amount of interest that would have been recorded at original rate $771
Interest that was included in revenue --
----
Net impact on interest revenue $771
====
Additional information concerning nonperforming loans, the Company's nonaccrual
policy, and loan concentrations is provided on Pages A-12 and A-13, in Note 1 on
Pages A-26 and A-27 and Notes 4 and 5 on Page A-31 hereof, and is incorporated
herein by reference
At December 31, 2007, the Banks had fifteen loans, other than those disclosed
above, for a total of $8,682,000 which would cause management to have serious
doubts as to the ability of the borrowers to comply with the present loan
repayment terms. These loans were included on the Banks' "watch lists" and were
classified as impaired; however, payments are current.
Page 11
(D) OTHER INTEREST BEARING ASSETS
As of December 31, 2007, other than $2,253,000 in other real estate, there were
no other interest bearing assets that would be required to be disclosed under
Item III, Parts (C)(1) or (C)(2) of the Loan Portfolio listing if such assets
were loans.
IV SUMMARY OF LOAN LOSS EXPERIENCE
(A) CHANGES IN ALLOWANCE FOR LOAN LOSSES
The table below summarizes changes in the allowance for loan losses for the
years 2003 through 2007, in thousands of dollars.
CHANGES IN ALLOWANCE FOR LOAN LOSSES
2007 2006 2005 2004 2003
------- ------ ------ ------ ------
Balance at beginning of period $ 7,849 $6,361 $5,766 $5,497 $4,975
Charge-offs:
Business and commercial mortgage (1) 3,521 447 516 739 139
Residential mortgage 176 61 1 7 19
Personal 593 254 362 320 512
------- ------ ------ ------ ------
Total charge-offs 4,290 762 879 1,066 670
------- ------ ------ ------ ------
Recoveries:
Business and commercial mortgage (1) 61 13 58 188 20
Residential mortgage -- 13 2 -- 3
Personal 49 101 82 99 100
------- ------ ------ ------ ------
Total recoveries 110 127 142 287 123
------- ------ ------ ------ ------
Net charge-offs 4,180 635 737 779 547
------- ------ ------ ------ ------
Additions charged to operations 8,637 2,123 1,332 1,048 1,069
Balance at end of period $12,306 $7,849 $6,361 $5,766 $5,497
======= ====== ====== ====== ======
Ratio of net charge-offs to average loans 0.66% 0.11% 0.14% 0.17% 0.13%
Allowance as percent of total loans 1.89% 1.30% 1.14% 1.16% 1.23%
(1) Includes commercial construction and development loans
The allowance for loan losses is maintained at a level believed adequate by
Management to absorb losses inherent in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
amount and composition of the loan portfolio, and other factors. The provision
charged to earnings was $8,637,000 in 2007, compared to $2,123,000 in 2006 and
$1,332,000 in 2005. The allowance is based on the analysis of the loan portfolio
and a three year historical average of net charge offs to average loans of 0.32%
of the portfolio.
(B) ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The following table presents the portion of the allowance for loan losses
applicable to each loan category in thousands of dollars, as of December 31. A
table showing the percent of loans in each category to total loans is included
in Section III (A), above.
2007 2006 2005 2004 2003
------- ------ ------ ------ ------
Business and commercial mortgage (1) $10,924 $6,911 $5,471 $5,036 $4,775
Residential mortgage 368 24 14 20 37
Personal 974 889 777 710 685
Unallocated 40 25 99 -- --
------- ------ ------ ------ ------
Total $12,306 $7,849 $6,361 $5,766 $5,497
======= ====== ====== ====== ======
(1) Includes commercial construction and development loans
Page 12
The allocation method used takes into account specific allocations for
identified credits and a three year historical loss average in determining the
allocation for the balance of the portfolio.
V DEPOSITS
The information concerning average balances of deposits and the weighted-average
rates paid thereon, is included on Page A-5 and maturities of time deposits is
provided in Note 9 on Page A-32 hereof, and is incorporated herein by reference.
There were no foreign deposits. As of December 31, 2007, outstanding time
certificates of deposit in amounts of $100,000 or more were scheduled to mature
as shown below. All amounts are in thousands of dollars.
Time Certificates
-----------------
Within three months $ 38,221
Over three through six months 21,531
Over six through twelve months 24,037
Over twelve months 38,477
--------
Total $122,266
========
VI RETURN ON EQUITY AND ASSETS
Various ratios required by this section and other ratios commonly used in
analyzing bank holding company financial statements are included on Page A-3 and
A-4 hereof, and are incorporated herein by reference.
VII SHORT-TERM BORROWINGS
Some of the information required by this section is contained in Note 10 on Page
A-32 hereof, and is incorporated herein by reference. No additional information
is required, as for all reporting periods, there were no categories of
short-term borrowings for which the average balance outstanding during the
period was 30% or more of shareholders' equity at the end of the period.
ITEM 1A - RISK FACTORS
An investment in the Company's common stock is subject to risks inherent to the
Company's business. The material risks and uncertainties that management
believes affect the Corporation are described below. Before making an investment
decision, you should carefully consider the risks and uncertainties described
below together with all of the other information included or incorporated by
reference in this report. The risks and uncertainties described below are not
the only ones facing the Company. Additional risks and uncertainties that
management is not aware of or focused on or that management currently deems
immaterial may also impair the Company's business operations. This report is
qualified in its entirety by these risk factors.
If any of the following risks actually occur, the Company's financial condition
and results of operations could be materially and adversely affected. If this
were to happen, the value of the Company's common stock could decline
significantly, and you could lose all or part of your investment.
RISKS RELATED TO THE COMPANY'S BUSINESS
The Company Is Subject To Interest Rate Risk
The Company's earnings and cash flows are largely dependent upon its net
interest income. Net interest income is the difference between interest income
earned on interest-earning assets such as loans and
Page 13
securities and interest expense paid on interest-bearing liabilities such as
deposits and borrowed funds. Interest rates are highly sensitive to many factors
that are beyond the Company's control, including general economic conditions and
policies of various governmental and regulatory agencies and, in particular, the
Federal Reserve Board. Changes in monetary policy, including changes in interest
rates, could influence not only the interest the Company receives on loans and
securities and the amount of interest it pays on deposits and borrowings, but
such changes could also affect (i) the Company's ability to originate loans and
obtain deposits, and (ii) the fair value of the Company's financial assets and
liabilities. If the interest rates paid on deposits and other borrowings
increase at a faster rate than the interest rates received on loans and other
investments, the Company's net interest income, and therefore earnings, could be
adversely affected. Earnings could also be adversely affected if the interest
rates received on loans and other investments fall more quickly than the
interest rates paid on deposits and other borrowings.
The Company Is Subject To Lending Risk
There are inherent risks associated with the Company's lending activities. These
risks include, among other things, the impact of changes in interest rates and
changes in the economic conditions in the markets where the Company operates.
Increases in interest rates and/or weakening economic conditions could adversely
impact the ability of borrowers to repay outstanding loans or the value of the
collateral securing these loans. The Company is also subject to various laws and
regulations that affect its lending activities. Failure to comply with
applicable laws and regulations could subject the Company to regulatory
enforcement action that could result in the assessment of significant civil
money penalties against the Company.
As of December 31, 2007, approximately 71% of the Company's loan portfolio
consisted of business and commercial mortgage and construction loans. Because
the Company's loan portfolio contains a significant number of business and
commercial mortgage and construction loans with relatively large balances, the
deterioration of one or a few of these loans could cause a significant increase
in non- performing loans. An increase in non-performing loans could result in a
net loss of earnings from these loans, an increase in the provision for possible
loan losses and an increase in loan charge-offs, all of which could have a
material adverse effect on the Company's financial condition and results of
operations.
The Company's Allowance For Possible Loan Losses May Be Insufficient
The Company maintains an allowance for possible loan losses, which is a reserve
established through a provision for possible loan losses charged to expense,
that represents management's best estimate of probable losses that may be
incurred within the existing portfolio of loans. The allowance, in the judgment
of management, is necessary to reserve for estimated loan losses and risks
inherent in the loan portfolio. The level of the allowance reflects management's
continuing evaluation of industry concentrations; specific credit risks; loan
loss experience; current loan portfolio quality; present economic, political and
regulatory conditions and unidentified losses inherent in the current loan
portfolio. The determination of the appropriate level of the allowance for
possible loan losses inherently involves a high degree of subjectivity and
requires the Company to make significant estimates of current credit risks and
future trends, all of which may undergo material changes. Changes in economic
conditions affecting borrowers, new information regarding existing loans,
identification of additional problem loans and other factors, both within and
outside of the Company's control, may require an increase in the allowance for
possible loan losses. In addition, bank regulatory agencies periodically review
the Company's allowance for loan losses and may require an increase in the
provision for possible loan losses or the recognition of further loan
charge-offs, based on judgments different than those of management. Any
increases in the allowance for possible loan losses will result in a decrease in
net income and, possibly, capital, and may have a material adverse effect on the
Company's financial condition and results of operations.
Page 14
The Company's Profitability Depends Significantly On Economic Conditions In The
State Of Michigan
The Company's success depends primarily on the general economic conditions of
the State of Michigan and the specific local markets in which the Company
operates. Unlike larger national or other regional banks that are more
geographically diversified, the Company provides banking and financial services
to customers primarily in the Lenawee, Monroe and Washtenaw Counties, Michigan.
The local economic conditions in these areas have a significant impact on the
demand for the Company's products and services as well as the ability of the
Company's customers to repay loans, the value of the collateral securing loans
and the stability of the Company's deposit funding sources. A significant
decline in general economic conditions, caused by inflation, recession, acts of
terrorism, outbreak of hostilities or other international or domestic
occurrences, unemployment, changes in securities markets or other factors could
impact these local economic conditions and, in turn, have a material adverse
effect on the Company's financial condition and results of operations. See,
however, the disclosure under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Background" on page A-2.
The Company Operates In A Highly Competitive Industry and Market Area
The Company faces substantial competition in all areas of its operations from a
variety of different competitors, many of which are larger and may have more
financial resources. Such competitors primarily include credit unions, savings
associations and various finance companies and loan production offices, in
addition to a number of community banks and subsidiaries of large multi-state
and multi-bank holding companies. The financial services industry could become
even more competitive as a result of legislative, regulatory and technological
changes and continued consolidation. Banks, securities firms and insurance
companies can merge under the umbrella of a financial holding company, which can
offer virtually any type of financial service, including banking, securities
underwriting, insurance (both agency and underwriting) and merchant banking.
Also, technology has lowered barriers to entry and made it possible for
non-banks to offer products and services traditionally provided by banks, such
as automatic transfer and automatic payment systems. Many of the Company's
competitors have fewer regulatory constraints and may have lower cost
structures. Additionally, due to their size, many competitors may be able to
achieve economies of scale and, as a result, may offer a broader range of
products and services as well as better pricing for those products and services
than the Company can.
The Company believes that the market perceives a competitive benefit to an
independent, locally controlled commercial bank. Much of the Company's
competition comes from affiliates of organizations controlled from outside the
area. Against these competitors, the subsidiary banks continue to expand their
loan and deposit portfolios.
The Company Is Subject To Extensive Government Regulation and Supervision
The Company and the Banks are subject to extensive federal and state regulation
and supervision as disclosed under "Item 1. Business - Supervision and
Regulation." Banking regulations are primarily intended to protect depositors'
funds, federal deposit insurance funds and the banking system as a whole, not
shareholders. These regulations affect the Company's lending practices, capital
structure, investment practices, dividend policy and growth, among other things.
Congress and federal regulatory agencies continually review banking laws,
regulations and policies for possible changes. Changes to statutes, regulations
or regulatory policies, including changes in interpretation or implementation of
statutes, regulations or policies, could affect the Company in substantial and
unpredictable ways.
Page 15
The Company Continually Encounters Technological Change
The financial services industry is continually undergoing rapid technological
change with frequent introductions of new technology-driven products and
services. The effective use of technology increases efficiency and enables
financial institutions to better serve customers and to reduce costs. The
Company's future success depends, in part, upon its ability to address the needs
of its customers by using technology to provide products and services that will
satisfy customer demands, as well as to create additional efficiencies in the
Company's operations. Many of the Company's competitors have substantially
greater resources to invest in technological improvements. The Company may not
be able to effectively implement new technology-driven products and services or
be successful in marketing these products and services to its customers.
The Company's Stock Price Can Be Volatile
Stock price volatility may make it more difficult for you to resell your common
stock when you want to and at prices you find attractive. The Company's stock
price can fluctuate significantly in response to a variety of factors.
General market fluctuations, industry factors and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes or credit loss trends, could also cause the Company's stock price to
decrease regardless of operating results. In addition, the trading volume in the
Company's common stock is significantly less than that of other larger financial
services companies. This can make the Company's stock price volatile as
significant sales of the Company's common stock, or the expectation of these
sales, could cause the Company's stock price to fall.
An Investment In The Company's Common Stock Is Not An Insured Deposit
The Company's common stock is not a bank deposit and, therefore, is not insured
against loss by the Federal Deposit Insurance Corporation (FDIC), any other
deposit insurance fund or by any other public or private entity. Investment in
the Company's common stock is inherently risky for the reasons described in this
"Risk Factors" section and elsewhere in this report and is subject to the same
market forces that affect the price of common stock in any company. As a result,
if you acquire the Company's common stock, you may lose some or all of your
investment.
The Company's Controls and Procedures May Fail or Be Circumvented
Management regularly reviews and updates the Company's internal controls,
disclosure controls and procedures, and corporate governance policies and
procedures. Any system of controls, however well designed and operated, is based
in part on certain assumptions and can provide only reasonable, not absolute,
assurances that the objectives of the system are met. Any failure or
circumvention of the Company's controls and procedures or failure to comply with
regulations related to controls and procedures could have a material adverse
effect on the Company's business, results of operations and financial condition.
ITEM 1B - UNRESOLVED STAFF COMMENTS
None.
ITEM 2 - PROPERTIES
The executive offices of the Company are located at the main office (Hickman
Financial Center) of United Bank & Trust, 205 East Chicago Boulevard, Tecumseh,
Michigan. UBT owns and occupies the entire two-story building, which was built
in 1980. UBT operates three other banking offices in the
Page 16
Tecumseh area, two in the city of Adrian, one each in the cities of Hudson and
Morenci, one in the village of Blissfield, and one each in Clinton, Rollin and
Raisin Townships, all in Lenawee County. In addition, the bank operates one
office in Dundee, Monroe County, Michigan. In 2005, the Bank moved its Trust &
Investment Group to a new leased facility in Tecumseh. The bank owns all of the
buildings except for the Trust facility, and leases the land for one office in
the city of Adrian. All offices other than the Hickman Financial Center offer
drive-up facilities. UBI owns and occupies a 12,000 square foot operations and
training center in Tecumseh.
United Bank & Trust - Washtenaw operates one banking office in the City of Ann
Arbor and one office each in the city of Saline, the villages of Dexter and
Manchester, and Scio Township, Washtenaw County, Michigan. The bank owns the
Saline and Dexter buildings, leases the buildings for the Manchester and Scio
Township offices, and leases the land for the Dexter office. UBTW holds a
long-term lease on the facilities for its administrative and banking offices,
which it moved into in 2003. All offices offer ATM services, and all offices
other than Manchester offer drive-up facilities.
ITEM 3 - LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any other material legal
proceedings. They are involved in ordinary routine litigation incident to its
business; however, no such proceedings are expected to result in any material
adverse effect on the operations or earnings of the Company. Neither the Company
nor it subsidiaries are involved in any proceedings to which any director,
principal officer, affiliate thereof, or person who owns of record or
beneficially more than five percent (5%) 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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2007.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE FOR COMMON STOCK
The following table shows the high and low selling prices of common stock of the
Company for each quarter of 2007 and 2006 as quoted on the OTC Bulletin Board,
under the symbol of UBMI. These prices do not reflect private trades not
involving brokers or dealers. Such over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. The Company had 1,287 shareholders of
record as of December 31, 2007. The prices and dividends per share have been
adjusted to reflect stock dividends paid in 2007 and 2006.
2007 2006
--------------------------- ---------------------------
Market price Cash Market price Cash
--------------- dividends --------------- dividends
Quarter High Low declared High Low declared
- ------- ------ ------ --------- ------ ------ ---------
1st $23.50 $21.88 $0.190 $29.31 $26.52 $ --
2nd 24.00 21.75 0.200 28.03 21.39 0.176
3rd 22.50 20.20 0.200 23.55 21.87 0.185
4th 22.00 17.00 0.200 22.50 22.00 0.190
Page 17
Banking laws and regulations restrict the amount the Banks can transfer to the
Company in the form of cash dividends and loans. Those restrictions are
discussed in Note 15 on Page A-35 hereof. As a result of a change in the timing
of declaration of cash dividends, only three cash dividends were declared in
2006, although four cash dividends were paid.
ISSUER PURCHASES OF EQUITY SECURITIES
In February of 2007, the Company announced a stock repurchase program for up to
260,000 shares of its common stock (adjusted for stock dividend). The following
table provides information about purchases by the Company during the quarter
ended December 31, 2007 of equity securities that are registered by the Company
pursuant to Section 12 of the Exchange Act:
Total Total Number of Maximum Number
Number Average Shares Purchased as of Shares that May
of Shares Price Paid a Part of Publicly yet be Purchased
Period Purchased per Share Announced Plans Under the Plan
- -------------------- --------- ---------- ------------------- ------------------
10/1/2007-10/31/2007 400 $20.31 400 127,521
11/1/2007-11/30/2007 46,774 20.20 46,774 80,747
12/1/2007-12/31/2007 1,000 18.06 1,000 79,747
------ ------
Total 48,174 $20.16 48,174
All purchases during the quarter were part of the publicly announced plan.
STOCK PERFORMANCE GRAPH
The following chart shows the yearly percentage change in the Company's
cumulative total shareholder return on its common stock. The change in stock
price is compared in the chart to similar changes in the NASDAQ Bank Index and
the Standard & Poor's 500 Stock Index. All prices are adjusted for stock splits
and stock dividends. The graph assumes $100 invested on December 31, 2002. The
total return assumes reinvestment of dividends.
The NASDAQ Bank Index is a broad-based capitalization- weighted index of
domestic and foreign common stocks of banks that are traded on the NASDAQ
National Market System as well as the Small Cap Market. The Index contains
various types of NASDAQ listed banks and savings institutions and related
holding companies, establishments performing functions closely related to
banking, such as check cashing agencies, currency exchanges, safe deposit
companies and corporations for banking abroad. The index is made up of 519
institutions at December 31, 2007.
(PERFORMANCE GRAPH)
Page 18
ITEM 6 - SELECTED FINANCIAL DATA
The following tables present five years of financial data for the Company, for
the years ended December 31 (In thousands, except per share data).
FINANCIAL CONDITION 2007 2006 2005 2004 2003
- ------------------- -------- -------- -------- -------- --------
ASSETS
Cash and demand balances in other banks $ 17,996 $ 17,606 $ 20,416 $ 18,188 $ 21,425
Federal funds sold 11,130 3,770 -- -- --
Securities available for sale 85,898 95,811 103,432 103,786 108,734
Net loans 637,994 593,914 551,751 491,132 441,323
Other assets 42,669 39,888 38,180 37,245 38,291
-------- -------- -------- -------- --------
Total Assets $795,687 $750,989 $713,779 $650,351 $609,773
======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest bearing deposits $ 77,878 $ 81,373 $ 88,404 $ 85,598 $ 78,184
Interest bearing certificates of deposit of
$100,000 or more 122,266 102,492 68,062 40,057 30,946
Other interest bearing deposits 471,393 444,137 434,186 404,223 393,453
-------- -------- -------- -------- --------
Total deposits 671,537 628,002 590,652 529,878 502,583
Short term borrowings -- 77 6,376 8,726 8,076
Other borrowings 44,611 40,945 42,228 42,847 35,375
Other liabilities 6,572 7,429 6,901 6,676 6,356
-------- -------- -------- -------- --------
Total Liabilities 722,720 676,453 646,157 588,127 552,390
Shareholders' Equity 72,967 74,536 67,622 62,224 57,383
-------- -------- -------- -------- --------
Total Liabilities and Shareholders' Equity $795,687 $750,989 $713,779 $650,351 $609,773
======== ======== ======== ======== ========
RESULTS OF OPERATIONS
Interest income $ 51,634 $ 47,056 $ 38,649 $ 31,720 $ 30,835
Interest expense 21,873 17,802 12,286 8,423 8,507
-------- -------- -------- -------- --------
Net Interest Income 29,761 29,254 26,363 23,297 22,328
Provision for loan losses 8,637 2,123 1,332 1,048 1,069
Noninterest income 13,652 12,175 11,669 11,010 11,822
Noninterest expense 27,559 26,914 25,195 22,646 22,669
-------- -------- -------- -------- --------
Income before Federal income tax 7,217 12,392 11,505 10,613 10,412
Federal income tax 1,635 3,420 3,181 2,960 3,024
-------- -------- -------- -------- --------
Net Income $ 5,582 $ 8,972 $ 8,324 $ 7,653 $ 7,388
======== ======== ======== ======== ========
Basic earnings per share (1) (2) $ 1.06 $ 1.69 $ 1.58 $ 1.46 $ 1.42
Diluted earnings per share (1) (2) 1.06 1.69 1.57 1.45 1.41
Cash dividends paid per share (2) 0.79 0.73 0.68 0.62 0.57
(1) Earnings per share data is based on average shares outstanding plus average
contingently issuable shares.
(2) Adjusted to reflect stock dividends paid in 2007, 2006, 2005, 2004 and
2003.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is contained on pages A-2 through A-20
hereof, and is incorporated by reference herein.
Page 19
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is contained on pages A-14 through A-17
hereof, and is incorporated by reference herein.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Selected Quarterly Financial Data - The information required by this item is
contained on page A-3 hereof, and is incorporated by reference herein.
Other information required by this item is contained on pages A-21 through A-41
hereof, and is incorporated by reference herein.
INDEX TO FINANCIAL STATEMENTS Page No.
- ----------------------------- --------
Report of Independent Registered Public Accounting Firm A-21
Consolidated Financial Statements
Consolidated Balance Sheets A-22
Consolidated Statements of Income A-23
Consolidated Statements of Cash Flow A-24
Consolidated Statements of Changes in Shareholders' Equity A-25
Notes to Consolidated Financial Statements A-26
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A - CONTROLS AND PROCEDURES
(a) The term "disclosure controls and procedures" is defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act").
These rules refer to the controls and other procedures of a company that
are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported, within required time periods. Our Chief
Executive Officer and Principal Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of the end of
the period covered by this report (the "Evaluation Date"), and have
concluded that, as of the Evaluation Date, our disclosure controls and
procedures are effective in providing them with material information
relating to the Company known to others within the Company which is
required to be included in our periodic reports filed under the Exchange
Act.
(b) The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. The
Company's internal control system was designed to provide reasonable
assurance to the Company's management and Board of Directors regarding the
preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
Page 20
The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2007. In
making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of Treadway Commission ("COSO") in "Internal
Control - Integrated Framework." Based on our assessment we believe that,
as of December 31, 2007, the Company's internal control over financial
reporting is effective based on those criteria.
The Company's independent auditors have issued an audit report on the
effectiveness of the Company's internal control over financial reporting.
The report immediately follows this report.
/s/ Robert K. Chapman /s/ Randal J. Rabe
- ------------------------------------- ----------------------------------------
Robert K. Chapman Randal J. Rabe
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer
(c) Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
United Bancorp, Inc.
Tecumseh, Michigan
We have audited United Bancorp, Inc.'s internal control over financial
reporting as of December 31, 2007, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management's
Report on Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a
material weakness exists and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
company's assets that could have a material effect on the financial
statements.
Page 21
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, United Bancorp, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
financial statements of United Bancorp, Inc. and our report dated February
15, 2008, expressed an unqualified opinion thereon.
BKD, LLP
Indianapolis, Indiana
February 15, 2008
(d) There has been no change in the Company's internal control over financial
reporting that occurred during the quarter ended December 31, 2007 that has
materially affected, or is reasonably likely to affect, the Company's
internal control over financial reporting.
ITEM 9B - OTHER INFORMATION
None
PART III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
On December 9, 2003, the Company adopted a Code of Business Conduct and Ethics
(the "Code") that applies to all co-workers, officers and Directors of the
Company and its subsidiaries. The Code is designed to deter wrongdoing and to
promote:
- Honest and ethical conduct, including the ethical handling of actual
or apparent conflicts of interest between personal and professional
relationships;
- Full, fair, accurate, timely and understandable disclosure in reports
and documents that the Company files with, or submits to, the
Commission and in other public communications made by the registrant;
- Compliance with applicable governmental laws, rules and regulations;
- Prompt internal reporting of violations of the Code to an appropriate
person or persons identified in the Code; and
- Accountability for adherence to the Code.
A copy of the Code is included in this report as Exhibit 14.
Page 22
The information required by this item, other than as set forth above, is
contained under the heading "Directors and Executive Officers, Committees and
Meetings of the Board of Directors" and "Beneficial Ownership Reporting
Compliance" in the Company's 2008 Proxy Statement and is incorporated herein by
reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is contained under the heading
"Compensation of Directors and Executive Officers" in the Company's 2008 Proxy
Statement and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this item is contained under the heading "Equity
Compensation Plan Information", "Security Ownership of Certain Beneficial
Owners," and "Security Ownership of Management" and under the headings
"Compensation Committee Report" and "Compensation and Governance Interlocks and
Insider Participation" in the Company's 2008 Proxy Statement and is incorporated
herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is contained under the headings "Directors
and Executive Officers" and "Directors, Executive Officers, Principal
Shareholders and their Related Interests - Transactions with the Banks" in the
Company's 2008 Proxy Statement and in Note 14 on Page A-34 hereof and is
incorporated herein by reference.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is contained under the heading
"Relationship With Independent Public Accountants" in the Company's 2008 Proxy
Statement and is incorporated herein by reference.
PART IV
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. The information required by this Item are included in Item 8 on Page 20
of this report, and are incorporated herein by reference.
2. Financial statement schedules are not applicable.
(b) The exhibits filed in response to Item 601 of Regulation S-K are listed in
the Exhibit Index, which is incorporated herein by reference.
(c) All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
Page 23
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AND
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
The Business of United Bancorp, Inc. A-1
Management's Discussion and Analysis of Financial Condition and
Results of Operations Background A-2
Executive Summary A-2
Results of Operations A-3
Financial Condition A-10
Liquidity, Funds Management and Market Risk A-14
Capital Resources A-17
Contractual Obligations A-17
Prospective Accounting and Regulatory Changes A-18
Critical Accounting Policies A-18
Forward-Looking Statements A-20
Report of Independent Registered Public Accounting Firm A-21
Consolidated Financial Statements
Consolidated Balance Sheets A-22
Consolidated Statements of Income A-23
Consolidated Statements of Cash Flows A-24
Consolidated Statements of Changes in Shareholders' Equity A-25
Notes to Consolidated Financial Statements A-26
NATURE OF BUSINESS
United Bancorp, Inc. (the "Company") is a Michigan Bank Holding Company
headquartered in Tecumseh, Michigan. The Company's subsidiary banks (the
"Banks") have local Boards of Directors and are locally managed. The Banks offer
a full range of financial services through a system of seventeen banking offices
located in Lenawee, Monroe and Washtenaw Counties. While the Company's chief
decision makers monitor the revenue streams of the various Company products and
services, operations are managed and financial performance is evaluated on a
Companywide basis. Accordingly, all of the Company's financial services
operations are considered by management to be aggregated in one reportable
operating segment.
Page A-1
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 of the Company and its subsidiary banks, United Bank &
Trust ("UBT") and United Bank & Trust - Washtenaw ("UBTW").
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 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. 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. These products help to diversify the Company's sources of income.
Unemployment for the State of Michigan at the end of December 2007 was 7.6%,
which places it highest among the fifty states, and 100 basis points higher than
the next highest state. The Lenawee County unemployment rate of 7.9% is above
the State's level, while the Washtenaw County unemployment rate of 4.7% is the
lowest in the State. The continued economic issues in Michigan have had an
impact on earnings of the Company. Growth continues to slow and loan quality has
deteriorated, particularly in the areas of construction and residential real
estate development. Management is actively addressing the quality issues in the
loan portfolios while continuing efforts to gain market share in tough local
economic conditions.
EXECUTIVE SUMMARY
United Bancorp, Inc. net income for 2007 declined by $3.39 million from the
level achieved in 2006. The decrease resulted primarily from a charge to the
Company's provision for loan losses in the fourth quarter of the year. Net
interest income improved by 1.7% over 2006 levels in spite of margin compression
and increasing costs of funding asset growth. Noninterest income improved by
12.1% from the prior year, and noninterest expenses for the year were up by
2.4%. Earnings per share of $1.06 was down from $1.69 per share for 2006. Return
on average shareholders' equity for 2007 was 7.44%, compared to 12.62% for 2006,
and return on average assets for the year ended December 31, 2007 was 0.72%,
compared to 1.23% for 2006.
Page A-2
While the Company is not involved in sub-prime loans and has not directly been
impacted by recent issues relating to the sub-prime mortgage market, the related
economic issues have taken their toll on the credit quality of the Banks' loan
portfolios. Segments of the portfolios reflect the negative impact of the
continued deterioration in the Southeast Michigan real estate markets and the
economy in general. In particular, several of the Company's residential real
estate development and construction borrowers and certain other real
estate-dependent commercial borrowers were identified as negatively impacted by
the weakness in the housing sector.
Gross loans increased by $48.5 million over 2006, representing growth of 8.1%
for the year. Investment balances declined while fed funds sold increased, and
total assets grew by 6.0% in 2007 over 2006. This growth was funded by deposit
growth of 6.9%, or $43.5 million, as well as an increase in borrowings of $3.6
million.
RESULTS OF OPERATIONS
Earnings Summary and Key Ratios
Consolidated net income declined by 37.8% in 2007 from the levels achieved in
2006, compared to an increase of 7.8% in 2006 over 2005. Both banks contributed
to the reduction of earnings. Tightening interest spreads were offset by
continued loan growth, resulting in a 1.7% increase in net interest income from
2006 to 2007. The net interest margins of the banks declined as a result of
increasing costs of funding loan growth, in part as a result of high
liquidity-driven deposit rates offered by competition in our markets.
At the same time, noninterest income increased by 12.1% over 2006. While
substantially all categories of noninterest income improved for the year, income
from the sale and servicing of residential real estate mortgages in the
secondary market provided much of that improvement, as income from the sale and
servicing of loans increased significantly over 2006 levels. Noninterest
expenses were up just 2.4% over 2006, compared to an increase of 6.8% in 2006
over 2005.
Net interest income improved each quarter except for the fourth quarter, when
nonaccrual loans and increased funding costs reduced the Company's margin.
Noninterest income provided continued improvement quarter over quarter, and
expenses remained relatively flat except for the third quarter. The significant
impact on earnings for the year was the result of additional charges to the
provision for loan losses in the first and fourth quarters of the year. The
following chart shows the trends of the major components of earnings for the
five most recent quarters.
2007 2006
----------------- -----------------
in thousands of dollars, where appropriate 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr
- ------------------------------------------ ------- ------- ------- ------- -------
Net interest income before provision $7,411 $7,580 $7,478 $7,291 $7,424
Provision for loan losses 5,801 618 710 1,509 921
Noninterest income 3,567 3,538 3,338 3,209 3,110
Noninterest expense 6,613 7,267 6,990 6,690 6,598
Federal income tax provision (686) 895 849 577 818
Net income (loss) $ (750) $2,339 $2,267 $1,725 $2,197
Earnings (loss) per share (a) $(0.15) $ 0.45 $ 0.43 $ 0.33 $ 0.41
Return on average assets (b) -0.37% 1.18% 1.18% 0.92% 1.18%
Return on average shareholders' equity (b) -3.97% 12.32% 12.11% 9.35% 11.85%
(a) Basic earnings per share, adjusted for stock dividends paid
(b) Annualized
Page A-3
Return on average assets declined to 0.72% for 2007, down from 1.23% for 2006.
Return on average average shareholders' equity for 2007 was 7.44%, compared to
12.62% for 2006. At the same time, book value per share and cash dividends per
share continue to improve. The following chart shows trends in these and other
ratios. As a result of a change in the timing of declaration of cash dividends,
only three cash dividends were declared in 2006, although four cash dividends
were paid. To facilitate comparison to prior periods, the figure shown in the
table represent the dividends actually paid during the year. All figures are
adjusted to reflect stock dividends.
Performance Ratios 2007 2006 2005 5 Year Average
- ------------------ ------ ------ ------ --------------
Return on average assets 0.72% 1.23% 1.21% 1.12%
Return on average shareholders' equity 7.44% 12.62% 12.75% 11.76%
Average equity to average total assets 9.65% 9.74% 9.46%
Dividend payout ratio 73.7% 42.5% 42.6%
Book value per share $14.33 $14.20 $12.92
Cash dividends per share $ 0.79 $ 0.73 $ 0.68
Book value per share is based on shares outstanding at December 31 of 5,092,230
for 2007, 5,247,432 for 2006 and 5,235,773 for 2005 as adjusted for stock
dividends. Dividends per share does not include contingently issuable shares,
and is based on average shares outstanding of 5,190,868 for 2007, 5,246,938 for
2006, and 5,228,137 for 2005, as adjusted for stock dividends.
Net Interest Income
As a financial services holding company, United Bancorp, Inc. derives the
greatest portion of its income from net interest income. During 2005 and much of
2006, rising short term interest rates caused the yield curve to flatten and
eventually to invert. During 2007, the prime rate was much more stable, and was
unchanged for eight of the twelve months of the year. During that period, the
yield curve regained its normal shape. While that would typically benefit the
Company and its Banks, the Company's cost of funds increased as a result of
increased competition for funding within its market. In spite of those
challenges, the Company managed to improve its net interest income in 2007 over
2006, with growth in net interest income of $508,000. That increase was the
result of the growth of the Company's balance sheet, during a period when
spreads and net interest margin have declined.
Interest income increased 9.7% in 2007 over 2006, compared to improvement of
21.8% in 2006 over 2005. At the same time, interest expense increased 22.9% for
2007, compared to an increase of 44.9% for 2006. The net result was an increase
of 1.7% in net interest income for 2007 over 2006. Tax- equivalent yields on
earning assets improved to 7.18% for 2007, up from 7.05% for 2006, with the
improvement occurring in both the investment and tax-exempt loan portfolios,
while the yields on taxable loans remained unchanged from 2006. The Company's
average cost of funds increased by 41 basis points, and tax equivalent spread
declined from 3.88% in 2006 to 3.61% for 2007. Net interest margin experienced
similar declines, moving from 4.42% in 2006 to 4.18% for 2007. The table on the
following page provides insight into the various components of net interest
income, as well as the results of changes in balance sheet makeup that have
resulted in the compression of spread and net interest margin.
Page A-4
YIELD ANALYSIS OF CONSOLIDATED AVERAGE ASSETS AND LIABILITIES
Dollars in Thousands 2007 2006 2005
------------------------- ------------------------ ------------------------
Average Yield/ Average Yield/ Average Yield/
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- -------- ------ -------- -------- ------ -------- -------- ------
Interest earning assets (a)
Federal funds sold $ 6,211 $ 271 4.36% $ 6,968 $ 359 5.15% $ 5,762 $ 193 3.35%
Taxable securities 52,799 2,593 4.91% 60,602 2,392 3.95% 70,375 2,032 2.89%
Tax exempt securities (b) 36,561 2,145 5.87% 35,824 2,069 5.77% 31,937 1,778 5.57%
Taxable loans 630,887 47,168 7.48% 571,705 42,771 7.48% 524,156 35,085 6.69%
Tax exempt loans (b) 2,967 195 6.58% 3,003 191 6.35% 3,259 207 6.37%
-------- -------- -------- -------- -------- --------
Total interest
earning assets (b) 729,425 $52,372 7.18% 678,102 $ 47,781 7.05% 635,489 $ 39,297 6.18%
Cash and due from banks 14,202 18,792 19,024
Premises and equipment, net 14,149 13,534 10,913
Intangible assets 3,469 3,469 3,469
Other assets 23,831 23,271 26,795
Unrealized gain on securities
available for sale 74 (371) (137)
Allowance for loan losses (7,907) (6,822) (6,029)
-------- -------- --------
Total Assets $777,243 $729,975 $689,524
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities
NOW accounts $110,754 $ 1,652 1.49% $105,396 $ 1,381 1.31% $122,904 $ 1,478 1.20%
Savings deposits 178,171 4,989 2.80% 179,474 4,612 2.57% 176,582 2,805 1.59%
CDs $100,000 and over 120,653 5,924 4.91% 93,354 4,187 4.49% 59,047 2,030 3.44%
Other int. bearing deposits 156,062 7,065 4.53% 143,197 5,711 3.99% 124,399 3,971 3.19%
-------- -------- -------- -------- -------- --------
Total int. bearing deposits 565,640 19,631 3.47% 521,421 15,891 3.05% 482,932 10,285 2.13%
Short term borrowings 3,757 175 4.67% 1,032 62 6.01% 2,283 74 3.24%
Other borrowings 43,580 2,067 4.74% 40,064 1,850 4.62% 42,729 1,927 4.51%
-------- -------- -------- -------- -------- --------
Total int. bearing liab. 612,977 21,873 3.57% 562,517 17,803 3.16% 527,944 12,286 2.33%
-------- -------- --------
Nonint. bearing deposits 81,701 86,919 86,779
Other liabilities 7,523 9,445 9,539
Shareholders' equity 75,042 71,097 65,262
-------- -------- --------
Total Liabilities and
Shareholders' Equity $777,243 $729,978 $689,524
======== ======== ========
Net interest income (b) 30,499 29,979 27,011
Tax-equivalent adjustment 738 725 648
-------- -------- --------
Net interest income, GAAP basis $29,761 $ 29,254 $ 26,363
======== ======== ========
Net spread 3.61% 3.88% 3.86%
Net yield on interest earning assets (b) 4.18% 4.42% 4.25%
Ratio of interest earning assets to
interest bearing liabilities 1.19 1.21 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.
Page A-5
The following tables demonstrate the effect of volume and rate changes on net
interest income on a taxable equivalent basis for the past two years. The data
reflects the fact that the increase in the Company's net interest income during
2007 was primarily a result of balance sheet growth, with much of that
improvement offset by a reduction as a result of changes in yields and rate. For
the year, the net increase in net interest income as a result of changes in
volume was 38% larger than the decrease resulting from changes in rate. This
contrasts to the change from 2005 to 2006, when the improvement was relatively
balanced between growth and changes in yields and rates.
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. Nonaccrual loans are included in total loans.
2007 compared to 2006 2006 compared to 2005
Increase Increase
(decrease) due to: (decrease) due to:
------------------------ -----------------------
In thousands of dollars Volume Rate Net Volume Rate Net
------- ------- ------ ------ ------- ------
Interest earned on:
Federal funds sold $ (37) $ (51) $ (88) $ 46 $ 120 $ 166
Taxable securities (334) 535 201 (311) 671 360
Tax exempt securities 43 33 76 223 67 290
Taxable loans 4,425 (28) 4,397 3,346 4,340 7,686
Tax exempt loans (2) 7 5 (16) (1) (17)
------ ------- ------ ------ ------ ------
Total interest income $4,095 $ 496 $4,591 $3,288 $5,197 $8,485
Interest expense on:
NOW accounts $ 73 $ 198 $ 271 $ (222) $ 125 $ (97)
Savings deposits (34) 411 377 47 1,759 1,806
Interest bearing CDs of
100,000 or greater 1,312 425 1,737 1,415 742 2,157
Other int. bearing deposits 541 813 1,354 657 1,083 1,740
Short term borrowings 130 (17) 113 (54) 42 (12)
Other borrowings 166 51 217 (122) 45 (77)
------ ------- ------ ------ ------ ------
Total interest expense $2,188 $ 1,881 $4,069 $1,721 $3,796 $5,517
------ ------- ------ ------ ------ ------
Net change in net
interest income $1,907 $(1,385) $ 522 $1,567 $1,401 $2,968
Provision for Loan Losses
In December of 2007, the Company identified adverse developments with respect to
certain loans in the loan portfolios of its subsidiary banks. In response to
this determination, the Company increased its provision for loan losses during
the fourth quarter, to address the risks within its loan portfolio. The action
taken followed a thorough evaluation of the Company's entire commercial loan
portfolio, and reflects the negative impact of the continued deterioration in
the Southeast Michigan real estate markets and the economy in general. The
review specifically included several of the Banks' residential real estate
development and construction borrowers. In addition, certain other commercial
borrowers not directly related to real estate development were identified as
negatively impacted by the weakness in the housing sector.
Management's analysis of impaired loans and their underlying collateral values
revealed the continued deterioration in the level of property values as well as
reduced borrower ability to make regularly scheduled payments. Loans in the
Banks' residential land development and construction portfolios are secured by
unimproved and improved land, residential lots, and single-family homes and
condominium units. Generally, current lot sales by the developers/ borrowers are
taking place at a greatly reduced pace and at reduced prices. As home sales
volumes have declined, income of residential developers,
Page A-6
contractors and other real estate-dependent borrowers have also been reduced.
This difficult operating environment, along with the additional loan carrying
time has caused some borrowers to exhaust payment sources. Within the last few
months, several of the Banks' clients have reached the point where payment
sources have been exhausted.
Within the Banks' loan portfolios, $24.7 million of impaired loans have been
identified as of December 31, 2007, compared with $10.2 million as of December
31, 2006. The specific allowance for impaired loans was $6.1 million at December
31, 2007, and $2.0 million at December 31, 2006. The ultimate amount of the
impairment and the potential losses to the Company may be higher or lower than
estimated, depending on the realizable value of the collateral. The level of the
provision made in connection with the loans reflects the amount necessary to
maintain the allowance for loan losses at an adequate level, based upon the
Banks' current analysis of losses inherent in their loan portfolios. Management
will continue to monitor the performance of the loan portfolios and will react
to conditions as they develop.
The provision for 2007 was $8.6 million, up from $2.1 million for 2006. This
provision provides for currently anticipated losses inherent in the current
portfolio, and Management continues to evaluate its allocation methodology to
assure that the Banks are adequately protected against these losses. The Company
has typically had low to moderate levels of nonperforming loans, but the current
economic conditions have increased those levels considerably. The use of
third-party independent loan review for business loans and careful monitoring of
loans by Management allows the Banks to identify potential issues within their
loan portfolios. These factors help to support an allowance as a percent of
total loans at a level that Management believes is appropriate for the risks in
its loan portfolio.
Noninterest Income
Total noninterest income improved 12.1% in 2007 over 2006, compared to an
increase of 4.3% in 2006. The following table summarizes changes in noninterest
income by category for 2007 and 2006, in thousands of dollars where appropriate.
Change in Categories of Noninterest Income
2007 2006 Change 2005 Change
------- ------- ------ ------- -------
Service charges on deposit accounts $ 3,579 $ 3,364 6.4% $ 3,017 11.5%
Wealth Management fee income 4,801 4,762 0.8% 4,672 1.9%
Gains (losses) on securities transactions 9 12 -25.0% (1) -1300.0%
Income from loan sales and servicing 1,749 906 93.0% 1,215 -25.4%
ATM, debit and credit card fee income 2,118 1,905 11.2% 1,677 13.6%
Bank owned life insurance 461 408 13.0% 398 2.5%
Other fee income 935 818 14.3% 691 18.4%
------- ------- -------
Total Noninterest Income $13,652 $12,175 12.1% $11,669 4.3%
Service charges on deposit accounts were up 6.4% in 2007 compared to 11.5% in
2006. This is consistent with the Company's deposit growth of 6.9% in 2007. No
significant changes to service charge structure were implemented in 2007.
The Wealth Management Group of UBT continues to provide a steady contribution to
the Company's income statement. Wealth Management income includes Trust fee
income and income from the sale of nondeposit investment products within the
banking offices. Wealth Management income was up 0.8% in 2007 over 2006, with
Trust income remaining flat and brokerage fee income improving modestly. This
compares to an increase of 1.9% in 2006 over 2005. Income from the sale of
nondeposit
Page A-7
investment products is derived from the sale of investments and insurance
products to clients, including annuities, mutual funds and other investment
vehicles. Assets managed by the department at December 31, 2007 were $729.7
million, down from $740.7 million at the end of 2006 and $752.3 million at the
end of 2005.
The Banks generally market their production of fixed rate long-term residential
mortgages in the secondary market, and retain adjustable rate mortgages for
their portfolios. The Company maintains a portfolio of sold residential real
estate mortgages, which it continues to service. This servicing provides ongoing
income for the life of the loans. As the Company is conservative in its approach
to valuation of mortgage servicing rights, no write-downs in mortgage servicing
rights were required in 2007, 2006 or 2005 as a result of impairment or other
reasons.
Late in 2006, the Company initiated significant revisions to its mortgage
business, including the hiring of a seasoned mortgage professional as head of
the Company's mortgage department. That change contributed to a substantial
increase in mortgage volume in 2007, particularly in the volume of loans sold on
the secondary market. Income from loan sales and servicing was up 93.0% in 2007
compared to 2006, following a decline of 25.4% in 2006 compared to 2005.
During the third quarter of 2007, the Company entered into a new line of
business. United Structured Finance ("USFC") is a finance company that 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. Gains on the sale of those loans are included in income
from loan sales and servicing. USFC revenue will provide additional diversity to
the Company's income stream going forward, and will provide additional financing
alternatives to clients of the Banks as well as non-bank clients.
ATM, debit and credit card fee income continues to provide a steady source of
noninterest income for the Company. The Banks operate nineteen ATMs throughout
their market areas, and Bank clients are active users of debit cards. The Banks
continue to receive ongoing fee income from credit card referrals and operation
of its credit card merchant business. Income from these areas was up 11.2% in
2007 over 2006, compared to an increase of 13.6% in 2006 over 2005.
Income from bank-owned life insurance increased 13.0% in 2007 compared to 2006,
following a modest increase in 2006. The improvement reflects increases in
interest crediting rates during the year and some minor restructuring of BOLI
holdings, as well as some changes in the amount of their BOLI holdings. Other
fee income during the year consisted of income from various fee-based banking
services, such as sale of official checks, wire transfer fees, safe deposit box
income, sweep account and other fees. This category of noninterest income
improved 14.3% from 2006 to 2007, following growth of 18.4% from 2005 to 2006,
with no one area contributing significantly more than others to the improvement.
Overall, total noninterest income increased by $1.48 million, or 12.1% in 2007,
following an increase of $506,000 from 2005 to 2006. This continued improvement
reflects the diversity of the Company's noninterest income sources. Management
anticipates continued emphasis on the sources of noninterest income so as to
remain an important component of the Company's overall revenue growth.
Noninterest Expense
The following table summarizes changes in the Company's noninterest expense by
category for 2007 and 2006, in thousands of dollars where applicable.
Page A-8
Change in Categories of Noninterest Expense
2007 2006 Change 2005 Change
------- ------- ------ ------- -------
Salaries and employee benefits $14,862 $15,037 -1.2% $14,662 2.6%
Occupancy and equipment expense 4,724 4,344 8.7% 4,074 6.6%
External data processing 1,605 1,537 4.4% 1,283 19.8%
Advertising and marketing 1,193 1,063 12.2% 1,106 -3.9%
Attorney, accounting and
other professional fees 1,070 1,266 -15.5% 545 132.3%
Director fees 413 447 -7.6% 384 16.4%
Other losses 356 92 285.4% 171 -45.9%
Other expense 3,336 3,128 6.7% 2,970 5.3%
------- ------- ----- ------- -----
Total Noninterest Expense $27,559 $26,914 2.4% $25,195 6.8%
======= ======= ===== ======= =====
Total noninterest expenses were up 2.4% in 2007, compared to an increase of 6.8%
in 2006 over 2005. Salaries and benefits are the organization's largest single
area of expense. During 2007, this category of expense declined 1.2% from 2006
levels, compared to an increase of 2.6% in 2006. Staff additions and benefits
costs continue to be a significant contributor to personnel expense, while the
increases in those areas were offset by reductions in the amounts paid to
co-workers for bonuses and 401(k) profit sharing contributions, as a result of
the reduced earnings in 2007.
The increase in occupancy and equipment expense in 2007 over 2006 levels
resulted in part from full-year operation of a new banking office by UBTW and
expansion of office space at its Ann Arbor office in 2006, combined with ongoing
investment in technology and equipment. External data processing costs were up
modestly in 2007, with a portion of the increases reflecting a full year of
expenses for outsourcing of accounting and processing for the Company's Wealth
Management Group, following a data processing conversion during 2006. Additional
increases were primarily related to processing of ATM, credit card and internet
banking transactions, resulting from increased volume in these areas.
Advertising and marketing expenses increased by 12.2% over 2006 levels,
following a modest decline in 2006. The increase reflects the cost of increased
marketing and advertising presence in the communities served by the Banks, as
well as continued development of the Company's brand. Attorney, accounting and
other professional fees were down 15.5% from 2006 levels. The decline was
primarily a result of unusually high expenditures in 2006 relating to a change
in processing within the Wealth Management group, as back office processing
functions of the department were outsourced.
Other losses include fraud losses, losses on closed accounts and write-offs on
the sale of property held as other real estate. These losses increased broadly
across all categories in 2007, and the increase reflects a general trend in the
economy and the industry. Other expenses were up 6.7% over 2007, with increases
in FDIC insurance costs, shareholder and compliance expense contributing some of
the larger increases for the year.
Federal Income Tax
The following chart shows the effective federal tax rates of the Company for the
past three years, in thousands of dollars where applicable.
Effective Tax Rates 2007 2006 2005
- ------------------- ------ ------- -------
Income before tax $7,217 $12,392 $11,505
Federal income tax $1,635 $ 3,420 $ 3,181
Effective federal tax rate 22.7% 27.6% 27.6%
Page A-9
As is apparent by the above table, the Company's effective federal tax rate
improved significantly in 2007 over 2006. This improvement resulted as the
tax-exempt income made up a larger percentage of total pre-tax income. Income
from bank owned life insurance and tax credits from participation in a low-
income housing partnership helps to reduce the Company's federal income taxes.
Tax exempt income continues to be a significant factor in the tax calculation
for the Company, due to the percentage of the investment portfolio carried in
tax exempt municipal securities and loans. The Banks intend to continue to
invest in tax-exempt assets as long as liquidity, safety and tax equivalent
yields make them an attractive alternative.
Financial Condition
Securities
Dollars of loan growth in excess of deposit growth resulted in a decline of $9.9
million in the Company's securities portfolio during 2007. The makeup of the
Company's investment portfolio continues to evolve with the growth of the
Company, and the mix of the consolidated investment portfolio has continued to
shift to meet liquidity and interest rate risk needs. On a consolidated basis,
investment in all categories of securities declined in 2007, with the largest
decreases in U.S. agency investments and obligations of states and political
subdivisions.
Changes in the various categories of the Company's investment portfolio are
shown in the chart below.
Change in Categories of Securities Portfolio, in
thousands of dollars 2007 2006
- ------------------------------------------------ ------- -------
U.S. Treasury and agency securities $(4,848) $(5,312)
Mortgage backed agency securities (894) (920)
Obligations of states and political subdivisions (4,241) (1,241)
Corporate, asset backed and other securities 70 (148)
Change in total securities $(9,913) $(7,621)
These changes are also reflected in the percentage makeup of the portfolio. The
following chart shows the percentage mix of the securities portfolio.
Percentage Makeup of Securities Portfolio at December 31, 2007 2006
- --------------------------------------------------------- ----- -----
U.S. Treasury and agency securities 39.0% 40.1%
Mortgage backed agency securities 15.2% 14.6%
Obligations of states and political subdivisions 42.1% 42.1%
Corporate, asset backed and other securities 3.7% 3.3%
----- -----
Total investment securities 100.0% 100.0%
===== =====
Investments in U.S. Treasury and agency securities are considered to possess low
credit risk. Obligations of U.S. government agency mortgage-backed securities
possess a somewhat higher interest rate risk due to certain prepayment risks.
The municipal portfolio contains a small amount of geographic risk, as
approximately 6% 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 valuable to the Banks, and the Company does not anticipate
being subject to alternative minimum tax in the near future. The Banks'
investment in local municipal issues also reflects their commitment to the
development of the local area through support of its local political
subdivisions.
Page A-10
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 at the
end of 2007 and 2006, in thousands of dollars.
Unrealized Gains and Losses in the Investment Portfolio 2007 2006 Change
- ------------------------------------------------------- ---- ---- ------
U.S. Treasury and agency securities $158 $(54) $212
Mortgage backed agency securities 7 (62) 69
Obligations of states and political subdivisions 225 143 82
Corporate, asset backed and other securities 45 75 (30)
---- ---- ----
Total investment securities $435 $102 $333
==== ==== ====
Loans
The chart below shows the percentage change in each category of the loan
portfolio for 2007 and 2006.
Percentage Change in Categories of Loan Portfolio 2007 2006
- ------------------------------------------------- ----- ----
Personal 7.8% 11.6%
Business, including commercial mortgages 14.9% 2.4%
Tax exempt -4.6% -9.3%
Residential mortgage, including loans held for sale 7.2% 27.3%
Commercial construction and development -14.1% 9.7%
----- ----
Total loans 8.1% 7.8%
===== ====
As full service lenders, the Banks offer a variety of loan products in their
markets. Loan growth was 8.1% in 2007. Personal loan balances grew 7.8% for the
year, following an increase of 11.6% in 2006 over 2005. Activity in 2007 was in
all categories of personal loans, but the largest growth was in home equity
loans and personal lines of credit. Personal loans on the Company's balance
sheet include direct and indirect loans for automobiles, boats and recreational
vehicles, and other items for personal use. In addition, amounts outstanding in
personal lines of credit and home equity loans are included in this loan
category.
Business loan growth increased considerably in 2007, following slower growth in
2006. Total loans outstanding to businesses increased 14.9% in 2007, compared to
an increase of 2.4% in 2006 over 2005. The growth in loans to commercial
enterprises is derived from all of the markets the Banks serve. In addition, the
Banks purchase and sell participations in business loans, in order to diversify
their geographic risk. Participation in tax exempt financing reflects continued
involvement in funding local community expansion at local municipalities and
school districts, reduced by normal amortizations of loan balances. Tax-exempt
loan balances declined in 2007 and 2006, as a result of scheduled amortizations
and maturities, as well as decreased demand for this type of loans within the
market areas of the Banks.
The Banks generally sell their production of fixed-rate mortgages on the
secondary market, and retain nonconforming loans and shorter-term adjustable
rate mortgages in their portfolios. As a result, the mix of mortgage production
for any given year will have an impact on the amount of mortgages held in the
portfolios of the Banks. While growth of residential mortgage balances on the
Banks' portfolios slowed compared to 2006, growth of 7.2% in 2007 reflects
continued retention of ARM products and large non-conforming residential
mortgages, which are generally retained in the loan portfolios of the Banks.
Page A-11
Loans for commercial construction and development declined by 14.1% in 2007,
following an increase of 9.7% in 2006. The decline in balances reflects both a
reduction of the amount of construction loan volume as a result of a slowing of
the commercial mortgage and residential housing activity in the Company's market
area, but also reflects the payoff or charge-off of a number of construction and
development loans during the year. Residential construction loans will convert
to residential mortgages to be retained in the Banks' portfolios or to be sold
in the secondary market, while commercial construction loans will eventually be
converted to commercial mortgages.
Credit Quality
The Company continues to actively monitor delinquencies, nonperforming assets
and potential problem loans. The aggregate amount of non-performing loans is
presented in the table below. For purposes of that 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 chart below shows the amount of nonperforming assets by category at December
31 for each of the past five years.
Nonperforming Assets, in thousands of dollars 2007 2006 2005 2004 2003
- --------------------------------------------- ------- ------ ------ ------ ------
Nonaccrual loans $13,695 $5,427 $5,609 $3,709 $3,635
Accruing loans past due 90 days or more 1,455 855 1,153 1,674 761
Troubled debt restructurings -- -- -- -- --
------- ------ ------ ------ ------
Total nonperforming loans 15,150 6,282 6,762 5,383 4,396
Other real estate 2,253 1,063 871 844 593
------- ------ ------ ------ ------
Total nonperforming assets $17,403 $7,345 $7,633 $6,227 $4,989
======= ====== ====== ====== ======
Percent of nonperforming loans to total loans 2.33% 1.04% 1.21% 1.08% 0.98%
======= ====== ====== ====== ======
Percent of nonperforming assets to total assets 2.19% 0.98% 1.07% 0.96% 0.82%
======= ====== ====== ====== ======
Total nonperforming assets increased significantly during the fourth quarter of
2007. Nonaccrual loans increased by $8.3 million from the end of 2006, and
delinquent loans were at the highest level since the end of 2004. The increase
in nonaccrual loans and delinquency reflects a deterioration of the residential
real estate development business in the Banks' markets. In addition, the
economic conditions have resulted in challenges for other of the Banks' business
clients. Collection efforts continue with all delinquent clients, to bring them
back to performing status. Total nonperforming loans as a percent of total loans
moved from 1.04% at the end of 2006 to 2.33% at the end of 2007.
Holdings of other real estate increased by $1.2 million in 2007. These holdings
include eleven properties that were acquired through foreclosure or in lieu of
foreclosure. The properties include residential homes and lots, as well as
commercial properties. One property is leased, and all are for sale.
Credit quality is dependent in part on the makeup of the loan portfolio. The
following chart shows the percentage makeup of the loan portfolio.
Percentage Makeup of Loan Portfolio at December 31, 2007 2006
- --------------------------------------------------- ----- -----
Personal 15.1% 15.1%
Business, including commercial mortgages 57.9% 54.5%
Tax exempt 0.4% 0.5%
Residential mortgage, including loans held for sale 14.1% 14.2%
Commercial construction and development 12.5% 15.7%
----- -----
Total loans 100.0% 100.0%
===== =====
Page A-12
The personal loan portfolio consists of direct and indirect installment, home
equity and unsecured revolving line of credit loans. Installment loans consist
primarily of home equity loans and loans for consumer durable goods, principally
automobiles. Indirect personal loans consist of loans for automobiles, boats and
manufactured housing, but make up a small percent of the personal loans.
Business loans carry the largest balances per loan, and therefore, any single
loss would be proportionally larger than losses in other portfolios. Because of
this, the Banks use an independent loan review firm to assess the continued
quality of its business loan portfolio. This is in addition to the precautions
taken with credit quality in the other loan portfolios. Business loans consist
of approximately 64.2% of loans secured by nonfarm, nonresidential real estate.
There are no other significant concentrations in the business loan portfolio.
Further information concerning credit quality is contained in Note 5 of the
Notes to Consolidated Financial Statements.
Deposits
Deposit totals increased $43.5 million in 2007, or 6.9% for the year, compared
to deposit growth of $37.4 million in 2006, or 6.3% in 2006. Much of the deposit
growth during 2007 was in certificates of deposit. 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 following
chart shows the percentage change in deposits by category for 2007 and 2006.
Percentage Change in Deposits by Category 2007 2006
- ----------------------------------------- ---- ----
Noninterest bearing deposits -4.3% -8.0%
Interest bearing deposits 8.6% 8.8%
Total deposits 6.9% 6.3%
==== ====
The chart below shows the percentage makeup of the deposit portfolio in 2007 and
2006.
Percentage Breakdown of Deposit Portfolio as of December 31, 2007 2006
- ------------------------------------------------------------ ----- -----
Noninterest bearing deposits 11.6% 13.0%
Interest bearing deposits 88.4% 87.0%
----- -----
Total deposits 100.0% 100.0%
===== =====
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. The Banks are
also 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, while 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, as detailed in Note 11 of the Notes
to Consolidated Financial Statements, serve to provide a balance to some of the
interest rate risk inherent in the Company's balance sheet. Additional
information regarding borrowed funds is found in the section below.
Page A-13
LIQUIDITY, FUNDS MANAGEMENT AND MARKET RISK
Liquidity
During 2007, the Company's cash and cash equivalents increased as a result of
normal activities within the balance sheet and income statement. Throughout
2007, the Company participated in the federal funds market; at times as a
provider of funds and at other times as a purchaser. Funding needs varied
throughout the year, and overall, the Company's average net excess funds during
2007 were lower than in 2006. The Company averaged net federal funds sold of
$2.5 million during 2007, compared to $5.9 million for 2006. These changes were
primarily a result of timing differences between loan, investment and deposit
growth.
Deposits grew $43.5 million in 2007, and FHLB advances increased by $3.7 million
as a result of new borrowings in excess of maturities. Net loans increased by
$44.1 million, and total investments declined by $9.9 million. All of these
changes contributed to the Company's increase in excess funds at the end of 2007
compared to 2006.
The Banks monitor their liquidity position regularly, and are in compliance with
regulatory guidelines for liquidity. The cash flows of the Company are
relatively predictable. While loan and deposit cash flows are determined to a
large extent by the actions of its clients, the Company is able to control its
cash flows with regard to borrowings and investments. The Company has a number
of liquidity sources other than deposits, including federal funds and other
lines of credit with correspondent banks, securities available for sale, and
lines of credit with the FHLB. Information concerning available lines is
contained in Note 10 of the Notes to Consolidated Financial Statements.
Funds Management and Market 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 of the Company place strong emphasis on stabilizing net interest margin
while managing interest rate, liquidity and market risks, 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.
Interest rate risk is the exposure of the Company's financial condition to
adverse movements in interest rates. It results from differences in the
maturities or timing of interest adjustments of the Company's assets,
liabilities and off-balance-sheet instruments; from changes in the slope of the
yield curve; from imperfect correlations in the adjustment of interest rates
earned and paid on different financial instruments with otherwise similar
repricing characteristics; and from interest rate related options embedded in
the Company's products such as prepayment and early withdrawal options.
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
Page A-14
points. Key assumptions in the models include prepayment speeds on mortgage
related assets; cash flows and maturities of financial instruments; 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 December 31, 2007, the Company would
expect a maximum potential reduction in net interest margin of 2% if market
rates increased or decreased under an immediate and sustained parallel shift of
200 basis points.
During 2007, the Company increased its usage of long-term fixed rate FHLB
advances, following declines in 2006 and 2005. In addition, the Company remained
in a liability-sensitive position in the twelve-month timeframe based on
internal interest sensitivity measures.
The following table provides information about the Company's financial
instruments used for purposes other than trading that are sensitive to changes
in interest rates. For loans, securities, and liabilities with contractual
maturities, the table presents principal cash flows and related weighted average
interest rates by the earlier of the contractual maturity or call dates as well
as market and historical experience of the impact of interest rate fluctuations
on the prepayment of mortgage-backed securities. Weighted average variable rates
are based on current rates and indexes. The Company currently has no market
sensitive instruments entered into for trading purposes and no off-balance-sheet
interest rate swaps or caps. The information is in thousands of dollars as of
December 31, 2007 and 2006.
FINANCIAL INSTRUMENTS AT DECEMBER 31, 2007
Principal Amount Maturing In:
------------------------------------------------ Fair
2008 2009 2010 2011 2012 Thereafter Total Value
-------- ------- ------- ------- ------- ---------- -------- --------
RATE-SENSITIVE ASSETS:
Fixed Rate:
Loans $ 53,901 $53,241 $42,059 $44,809 $34,565 $139,570 $369,377 $368,937
Average Rate 7.3% 7.1% 7.3% 7.7% 7.6% 6.0% 6.8%
Investments $ 38,876 $ 8,997 $ 5,103 $ 5,951 $ 3,125 $ 15,648 $ 77,699 $ 77,699
Average Rate 4.7% 4.7% 4.8% 4.2% 4.7% 4.2% 4.6%
Variable Rate:
Loans $123,545 $31,465 $16,518 $13,416 $14,406 $ 82,805 $282,154 $282,549
Average Rate 7.5% 6.8% 6.0% 5.7% 5.8% 8.6% 7.5%
Investments $ 1,950 $ 1,401 $ 603 $ 78 $ 74 $ 514 $ 4,620 $ 7,781
Average Rate 5.1% 5.0% 4.9% 6.2% 6.2% 4.8% 5.0%
Other interest
earning assets $ 14,272 $ 14,272 $ 14,272
Average interest rate 3.2% 3.2%
RATE-SENSITIVE LIABILITIES:
Noninterest bearing demand $ 77,878 $ 77,878 $ 77,863
Savings & interest
bearing demand $326,801 $ 326,801 $326,801
Average interest rate 2.1% 2.1%
Time deposits $200,832 $46,961 $14,180 $ 2,061 $ 2,824 $ -- $266,858 $267,140
Average interest rate 4.8% 4.6% 5.0% 4.7% 4.9% 0.0% 4.7%
Fixed rate borrowings $ 10,428 $18,530 $11,500 $ -- $ 2,000 $ 2,153 $ 44,611 $ 45,252
Average interest rate 4.1% 4.8% 4.9% 4.0% 5.4% 5.3% 4.7%
Other interest bearing
liabilities $ -- $ -- $ --
Average interest rate 0.0% 0.0%
Page A-15
FINANCIAL INSTRUMENTS AT DECEMBER 31, 2006
Principal Amount Maturing In:
------------------------------------------------ Fair
2006 2007 2008 2009 2010 Thereafter Total Value
-------- ------- ------- ------- ------- ---------- -------- --------
RATE-SENSITIVE ASSETS:
Fixed Rate:
Loans $ 63,826 $39,631 $35,830 $37,106 $36,879 $ 94,078 $307,350 $304,931
Average Rate 7.3% 7.2% 7.1% 7.0% 7.6% 6.2% 6.9%
Investments $ 33,725 $22,268 $ 5,016 $ 4,369 $ 3,806 $ 15,690 $ 84,874 $ 85,360
Average Rate 4.4% 4.8% 4.7% 5.1% 4.0% 4.1% 4.5%
Variable Rate:
Loans $112,291 $36,044 $26,096 $17,717 $15,729 $ 86,536 $294,413 $293,963
Average Rate 8.5% 7.8% 6.8% 5.8% 6.0% 8.6% 8.0%
Investments $ 1,945 $ 1,184 $ 988 $ 819 $ 359 $ 2,498 $ 7,793 $ 7,781
Average Rate 3.6% 4.0% 3.6% 3.6% 4.4% 4.0% 3.9%
Other interest earning
assets $ 6,812 $ 6,812 $ 6,812
Average interest rate 4.5% 4.5%
RATE-SENSITIVE LIABILITIES:
Noninterest bearing demand $ 81,373 $ 81,373 $ 81,373
Savings & interest
bearing demand $317,340 $317,340 $317,340
Average interest rate 2.4% 2.4%
Time deposits $160,766 $46,583 $19,501 $ 1,115 $ 1,269 $ 55 $229,289 $230,232
Average interest rate 4.6% 4.6% 4.4% 3.2% 5.0% 5.0% 4.6%
Fixed rate borrowings $ 21,339 $10,429 $ 6,000 $ 1,000 $ -- $ 2,177 $ 40,945 $ 40,656
Average interest rate 5.0% 4.1% 4.4% 4.0% 0.0% 5.3% 4.7%
Other interest bearing
liabilities $ 77 $ 77 $ 77
Average interest rate 0.5% 0.5%
The Company's primary market risk exposure decreased from 2006 to 2007, based on
data supplied by its measurement systems. This market risk exposure is if rates
decline. The Company's exposure to market risk is reviewed on a regular basis by
the Funds Management Committee. The policy objective is to manage the Company's
assets and liabilities to provide an optimum and consistent level of earnings
within the framework of acceptable risk standards.
The Funds Management Committee is also responsible for evaluating and
anticipating various risks other than interest rate risk. Those risks include
prepayment risk, credit risk and liquidity risk. The Committee is made up of
senior members of management, and continually monitors 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 policy provides for a level of interest sensitivity which,
Management believes, allows the Company to take advantage of opportunities
within the market 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.
The following table shows the rate sensitivity of earning assets and interest
bearing liabilities as of December 31, 2007. Loans and investments are
categorized using the earlier of their scheduled payment, call, or repricing
dates, where applicable. Savings, NOW and money market deposit accounts are
considered to be immediately repriceable. All other liabilities are reported by
their scheduled maturities, and no adjustments for possible prepayments are
included in the table.
Page A-16
Interest Sensitivity Summary
Over 10
In thousands of dollars 0-3 Mo. 4-12 Mo. 1-5 Yrs 5-10 Yrs Years Total
- ----------------------- --------- --------- -------- -------- ------- --------
Securities $ 21,759 $ 24,925 $ 23,176 $14,733 $ 1,305 $ 85,898
Loans 228,751 60,080 291,267 57,208 12,994 650,300
--------- --------- -------- ------- ------- --------
Total earning assets $ 250,510 $ 85,005 $314,443 $71,941 $14,299 $736,198
Interest bearing deposits $ 401,783 $ 125,850 $ 66,026 $ -- $ -- $593,659
Other borrowings 4,500 5,928 32,030 -- 2,153 44,611
--------- --------- -------- ------- ------- --------
Total interest bearing liabilities $ 406,283 $ 131,778 $ 98,056 $ -- $ 2,153 $638,270
--------- --------- -------- ------- ------- --------
Net asset (liability) interest
sensitivity exposure $(155,773) $ (46,773) $216,387 $71,941 $12,146 $ 97,928
Cumulative net asset (liability) exposure $(155,773) $(202,546) $ 13,841 $85,782 $97,928
Cumulative ratio of asset to liability exposure 0.62 0.62 1.02 1.13 1.15 to one
Cumulative exposure as a percent
of total assets -19.6% -25.5% 1.7% 10.8% 12.3%
CAPITAL RESOURCES
The common stock of the Company is traded on the Over The Counter Bulletin Board
as UBMI. It is the policy of the Company to pay 30% to 45% of net earnings as
cash dividends to shareholders. The payout ratio for 2007 was 73.7%, compared to
42.5% for 2006. The increased payout ratio for 2007 was due primarily to the net
income impact of the charge to the Company's provision for loan losses in the
fourth quarter. Cash dividends per share have continued to increase, providing
steady return to shareholders. Book value of the Company's stock increased from
$14.20 at the end of 2006 to $14.33 at December 31, 2007. A 100% stock dividend
was paid in 2007, and a 5% stock dividend was paid to shareholders in 2006.
The ratios of average equity to average assets of the Banks and the Company
declined from 2006 levels, as a result of a stock buyback program initiated in
2007, combined with slower growth in capital as a result of the reduction of
earnings in 2007. The Company's capital ratios exceed the levels required by its
regulators, and Management continues to evaluate methods to optimize the high
levels of equity of the Company. The table in Note 18 of the Notes to
Consolidated Financial Statements details the capital ratios of the Company. The
Company and the Banks are considered to be well-capitalized by the regulators.
The Company maintains a short-term strategic plan and a five year plan, and
utilizes a formal strategic planning process. Management and the Board continue
to monitor long term goals, which include maintaining capital growth in relation
to asset growth, and the retention of a portion of earnings to fund growth while
providing a reasonable return to shareholders.
CONTRACTUAL OBLIGATIONS
The following table details the Company's known contractual obligations at
December 31, 2007, in thousands of dollars:
Payments due by period
Less than More than
Contractual Obligations 1 year 1-3 years 3-5 years 5 years Total
- ----------------------- --------- --------- --------- --------- -------
Long term debt (FHLB advances) $10,428 $30,030 $2,000 $2,153 $44,611
Operating lease arrangements 970 1,858 1,861 3,043 7,732
Purchase agreements -- -- -- -- --
------- ------- ------ ------ -------
Total $11,398 $31,888 $3,861 $5,196 $52,343
======= ======= ====== ====== =======
Page A-17
PROSPECTIVE ACCOUNTING AND REGULATORY CHANGES
On September 6, 2006, the Financial Accounting Standards Board ("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, FASB issued SFAS 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.
In December, 2007, FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements and SFAS 141R, Business Combinations. Both are
effective for annual periods beginning after December 15, 2008. The Company is
currently evaluating the impact of these Statements, but does not believe that
either will have a measurable impact on its financial statements.
Management is not aware of any other trends, events or uncertainties that are
likely to have a material effect on the Company's liquidity, capital resources,
or operations. In addition, Management is not aware of any current
recommendations by regulatory authorities, other than those previously
discussed, which would have such an effect.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted in the United States and conform to
general practices within the banking industry. The Company's significant
accounting policies are described in detail in the notes to the Company's
consolidated financial statements for the year ended December 31, 2007. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions. The
financial position and results of operations can be affected by these estimates
and assumptions and are integral to the understanding of reported results.
Critical accounting
Page A-18
policies are those policies that management believes are the most important to
the portrayal of the Company's financial condition and results, and they require
management to make estimates that are difficult, subjective, or complex.
Allowance for Credit Losses
The allowance for credit losses provides coverage for probable losses inherent
in the Company's loan portfolio. Management evaluates the adequacy of the
allowance for credit losses each quarter based on changes, if any, in
underwriting activities, the loan portfolio composition (including product mix
and geographic, industry or customer-specific concentrations), trends in loan
performance, regulatory guidance and economic factors. This evaluation is
inherently subjective, as it requires the use of significant management
estimates. Many factors can affect management's estimates of specific and
expected losses, including volatility of default probabilities, rating
migrations, loss severity and economic and political conditions. The allowance
is increased through provisions charged to operating earnings and reduced by net
charge-offs.
The Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio. The allowance recorded for commercial
loans is based on reviews of individual credit relationships and an analysis of
the migration of commercial loans and actual loss experience. The allowance
recorded for homogeneous consumer loans is based on an analysis of loan mix,
risk characteristics of the portfolio, fraud loss and bankruptcy experiences,
and historical losses, adjusted for current trends, for each homogeneous
category or group of loans. The allowance for credit losses relating to impaired
loans is based on the loan's observable market price, the collateral for certain
collateral-dependent loans, or the discounted cash flows using the loan's
effective interest rate.
Regardless of the extent of the Company's analysis of client performance,
portfolio trends or risk management processes, certain inherent but undetected
losses are probable within the loan portfolio. This is due to several factors
including inherent delays in obtaining information regarding a client's
financial condition or changes in their unique business conditions, the
judgmental nature of individual loan evaluations, collateral assessments and the
interpretation of economic trends. Volatility of economic or client-specific
conditions affecting the identification and estimation of losses for larger
non-homogeneous credits and the sensitivity of assumptions utilized to establish
allowances for homogenous groups of loans are among other factors. The Company
estimates a range of inherent losses related to the existence of these
exposures. The estimates are based upon the Company's evaluation of imprecision
risk associated with the commercial and consumer allowance levels and the
estimated impact of the current economic environment.
Mortgage Servicing Rights
Mortgage servicing rights ("MSRs") associated with loans originated and sold,
where servicing is retained, are capitalized and included in other intangible
assets in the consolidated balance sheet. The value of the capitalized servicing
rights represents the present value of the future servicing fees arising from
the right to service loans in the portfolio. Critical accounting policies for
MSRs relate to the initial valuation and subsequent impairment tests. The
methodology used to determine the valuation of MSRs requires the development and
use of a number of estimates, including anticipated principal amortization and
prepayments of that principal balance. Events that may significantly affect the
estimates used are changes in interest rates, mortgage loan prepayment speeds
and the payment performance of the underlying loans. The carrying value of the
MSRs is periodically reviewed for impairment based on a determination of fair
value. For purposes of measuring impairment, the servicing rights are compared
to a valuation prepared based on a discounted cash flow methodology, utilizing
current prepayment speeds and discount rates. Impairment, if any, is recognized
through a valuation allowance and is recorded as amortization of intangible
assets.
Page A-19
Goodwill and Other Intangibles
The Company records all assets and liabilities acquired in purchase
acquisitions, including goodwill and other intangibles, at fair value as
required by SFAS 141. Goodwill is subject, at a minimum, to annual tests for
impairment. Other intangible assets are amortized over their estimated useful
lives using straight-line and accelerated methods, and are subject to impairment
if events or circumstances indicate a possible inability to realize the carrying
amount. The initial goodwill and other intangibles recorded and subsequent
impairment analysis requires management to make subjective judgments concerning
estimates of how the acquired asset will perform in the future. Events and
factors that may significantly affect the estimates include, among others,
customer attrition, changes in revenue growth trends, specific industry
conditions and changes in competition.
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, 2007 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.
Page A-20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
United Bancorp, Inc. and Subsidiaries
(BKD LLP LOGO)
Audit Committee, Board of Directors and Shareholders
United Bancorp, Inc.
Tecumseh, Michigan
We have audited the accompanying consolidated balance sheets of United Bancorp,
Inc. as of December 31, 2007 and 2006, and the related consolidated statements
of income, cash flows, and changes in shareholders' equity for each of the years
in the three-year period ended December 31, 2007. The Company's management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. Our audits included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Bancorp, Inc.
as of December 31, 2007, and 2006, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
2007, in conformity with accounting principles generally accepted in the Unites
States of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), United Bancorp, Inc.'s internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
February, 15, 2008, expressed an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
/s/ BKD, LLP
BKD, LLP
Indianapolis, Indiana
February 15, 2008
Page A-21
CONSOLIDATED BALANCE SHEETS
United Bancorp, Inc. and Subsidiaries
December 31,
-------------------
In thousands of dollars 2007 2006
- ----------------------- -------- --------
ASSETS
Cash and demand balances in other banks $ 17,996 $ 17,606
Federal funds sold 11,130 3,770
-------- --------
Total cash and cash equivalents 29,126 21,376
Securities available for sale 85,898 95,811
Loans held for sale 5,770 5,772
Portfolio loans 644,530 595,991
Less allowance for loan losses 12,306 7,849
-------- --------
Net loans 632,224 588,142
Premises and equipment, net 13,160 13,215
Goodwill 3,469 3,469
Bank-owned life insurance 11,961 11,499
Accrued interest receivable and other assets 14,079 11,705
-------- --------
TOTAL ASSETS $795,687 $750,989
======== ========
LIABILITIES
Deposits
Noninterest bearing deposits $ 77,878 $ 81,373
Interest bearing deposits 593,659 546,629
-------- --------
Total deposits 671,537 628,002
Short term borrowings -- 77
Other borrowings 44,611 40,945
Accrued interest payable and other liabilities 6,572 7,429
-------- --------
TOTAL LIABILITIES 722,720 676,453
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value; 10,000,000 shares
authorized, 5,092,230 shares issued and outstanding in 2007 and
5,247,432 in 2006 67,860 71,075
Retained earnings 4,814 3,393
Accumulated other comprehensive income, net of tax 293 68
-------- --------
TOTAL SHAREHOLDERS' EQUITY 72,967 74,536
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $795,687 $750,989
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-22
CONSOLIDATED STATEMENTS OF INCOME
United Bancorp, Inc. and Subsidiaries
For the years ended
December 31,
---------------------------
In thousands of dollars, except per share data 2007 2006 2005
- ---------------------------------------------- ------- ------- -------
INTEREST INCOME
Loans $47,301 $42,900 $35,225
Securities
Taxable 2,593 2,392 2,032
Tax exempt 1,469 1,405 1,199
Federal funds sold 271 359 193
------- ------- -------
Total interest income 51,634 47,056 38,649
------- ------- -------
INTEREST EXPENSE
Deposits 19,631 15,890 10,285
Short term borrowings 175 62 74
Other borrowings 2,067 1,850 1,927
------- ------- -------
Total interest expense 21,873 17,802 12,286
------- ------- -------
NET INTEREST INCOME 29,761 29,254 26,363
Provision for loan losses 8,637 2,123 1,332
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 21,124 27,131 25,031
------- ------- -------
NONINTEREST INCOME
Service charges on deposit accounts 3,579 3,364 3,017
Wealth Management fee income 4,801 4,762 4,672
Gains (losses) on securities transactions 9 12 (1)
Income from loan sales and servicing 1,749 906 1,215
ATM, debit and credit card fee income 2,118 1,905 1,677
Income from bank-owned life insurance 461 408 398
Other fee income 935 818 691
------- ------- -------
Total noninterest income 13,652 12,175 11,669
------- ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 14,862 15,037 14,662
Occupancy and equipment expense 4,724 4,344 4,074
External data processing 1,605 1,537 1,283
Advertising and marketing 1,193 1,063 1,106
Attorney, accounting and other professional fees 1,070 1,266 545
Director fees 413 447 384
Other expense 3,692 3,220 3,141
------- ------- -------
Total noninterest expense 27,559 26,914 25,195
------- ------- -------
INCOME BEFORE FEDERAL INCOME TAX 7,217 12,392 11,505
Federal income tax 1,635 3,420 3,181
------- ------- -------
NET INCOME $ 5,582 $ 8,972 $ 8,324
======= ======= =======
Basic earnings per share $ 1.06 $ 1.69 $ 1.58
Diluted earnings per share 1.06 1.69 1.57
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-23
CONSOLIDATED STATEMENTS OF CASH FLOWS
United Bancorp, Inc. and Subsidiaries
For the years ended
December 31,
------------------------------
In thousands of dollars 2007 2006 2005
- ----------------------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,582 $ 8,972 $ 8,324
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM
OPERATING ACTIVITIES
Depreciation and amortization 1,390 1,520 1,892
Provision for loan losses 8,637 2,123 1,332
Gain on sale of loans (1,248) (563) (940)
Proceeds from sales of loans originated for sale 70,931 39,627 57,961
Loans originated for sale (69,681) (43,776) (56,979)
(Gain) Loss on securities transactions (9) (12) 1
Deferred income taxes (1,290) (414) 313
Stock option expense 205 222 --
Increase in cash surrender value on bank owned life insurance (461) (408) (398)
Change in investment in limited partnership (36) 107 234
Excess tax benefits from exercised stock options (20) (28) (265)
Change in accrued interest receivable and other assets 588 (632) (898)
Change in accrued interest payable and other liabilities (759) 1,650 204
-------- -------- --------
Total adjustments 8,247 (584) 2,457
-------- -------- --------
Net cash from operating activities 13,829 8,388 10,781
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (13,980) (40,177) (30,664)
Sales -- 164 --
Maturities and calls 19,495 42,711 20,688
Principal payments 4,898 5,439 9,423
Net increase in loans (54,829) (40,353) (62,484)
Net premises and equipment expenditures (1,226) (1,468) (1,126)
-------- -------- --------
Net cash from investing activities (45,642) (33,684) (64,163)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 43,535 37,350 60,774
Net change in short term borrowings (77) (6,299) (2,350)
Principal payments on other borrowings (21,364) (8,033) (1,569)
Proceeds from other borrowings 25,030 6,750 950
Proceeds from common stock transactions 405 277 987
Purchase of common stock (3,873) -- --
Excess tax benefits from exercised stock options 20 28 265
Dividends paid (4,113) (3,817) (3,447)
-------- -------- --------
Net cash from financing activities 39,563 26,256 55,610
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 7,750 960 2,228
Cash and cash equivalents at beginning of year 21,376 20,416 18,188
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 29,126 $ 21,376 $ 20,416
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 20,677 $ 17,186 $ 11,571
Income tax paid 3,271 3,655 3,100
Loans transferred to other real estate 2,110 779 491
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-24
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
United Bancorp, Inc. and Subsidiaries
For the years ended December 31, 2007, 2006, 2005
IN THOUSANDS OF DOLLARS, Common Retained
EXCEPT PER SHARE DATA Shares Stock (1) Earnings AOCI (2) Total
- ------------------------ --------- --------- -------- -------- --------
Balance, January 1, 2005 4,710,194 $54,133 $ 7,992 $ 99 $ 62,224
Net income, 2005 8,324 8,324
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net of
reclass adjustments for realized gains
(losses) and related taxes (368) (368)
--------
Total comprehensive income 7,956
Cash dividends declared, $0.678 per share (3,545) (3,545)
Five percent stock dividend declared 237,362 7,952 (7,952) --
Common stock transactions 38,920 527 527
Tax effect of options exercised 265 265
Director and management deferred
stock plans 309 (114) 195
--------- ------- ------- ----- --------
Balance, December 31, 2005 4,986,476 $63,186 $ 4,705 $(269) $ 67,622
Net income, 2006 8,972 8,972
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net of
reclass adjustments for realized gains
(losses) and related taxes 337 337
--------
Total comprehensive income 9,309
Cash dividends declared, $0.551 per share (2,894) (2,894)
Five percent stock dividend declared 249,944 7,280 (7,280) --
Common stock transactions 11,012 277 277
Tax effect of options exercised 28 28
Director and management deferred
stock plans 304 (110) 194
--------- ------- ------- ----- --------
Balance, December 31, 2006 5,247,432 $71,075 $ 3,393 $ 68 $ 74,536
Net income, 2007 5,582 5,582
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net of
reclass adjustments for realized gains
(losses) and related taxes 225 225
--------
Total comprehensive income 5,807
Cash dividends declared, $0.79 per share (4,113) (4,113)
Common stock transactions 25,551 423 423
Purchase of common stock (180,753) (3,873) (3,873)
Tax effect of options exercised 20 20
Director and management deferred
stock plans 215 (48) 167
--------- ------- ------- ----- --------
Balance, December 31, 2007 5,092,230 $67,860 $ 4,814 $ 293 $ 72,967
========= ======= ======= ===== ========
(1) Includes Paid In Capital
(2) Accumulated Other Comprehensive Income (Loss), Net of Tax
The accompanying notes are an integral part of these consolidated financial
statements.
Page A-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
United Bancorp, Inc. and Subsidiaries
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of United Bancorp,
Inc. and its wholly owned subsidiaries, United Bank & Trust, United Bank & Trust
- - Washtenaw and United Structured Finance Company, after elimination of
significant intercompany transactions and accounts. The Company is engaged 100%
in the business of commercial and retail banking, including insurance, and trust
and investment services, with operations conducted through its offices located
in Lenawee, Washtenaw, and Monroe Counties in southeastern Michigan. These
counties are the source of substantially all of the Company's deposit, loan,
insurance and trust activities.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires Management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period as
well as affecting the disclosures provided. Actual results could differ from
those estimates. The allowance for loan losses and the fair values of financial
instruments are particularly subject to change.
SECURITIES
Securities available for sale consist of bonds and notes which might be sold
prior to maturity. Securities classified as available for sale are reported at
their fair values and the related net unrealized holding gain or loss is
reported in other comprehensive income. Other securities such as Federal Home
Loan Bank stock are carried at cost. Premiums and discounts on securities are
recognized in interest income using the interest method over the period to
maturity. Realized gains or losses are based upon the amortized cost of the
specific securities sold.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or market value in the aggregate. Net unrealized
losses, if any, are recognized in a valuation allowance by charges to income.
LOANS
Loans that Management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are reported at the principal balance
outstanding, net of deferred loan fees and costs and the allowance for loan
losses. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. Loans are
placed on non-accrual status at ninety days or more past due and interest is
considered a loss, unless the loan is well-secured and in the process of
collection.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
Management to absorb probable incurred credit losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, amount and composition of the loan portfolio, and other
factors. The allowance is increased by provisions for loan losses charged to
income. Loan losses are charged against the allowance when Management believes
the uncollectability of a loan is confirmed. Subsequent recoveries, if any, are
credited to the allowance.
Page A-26
Loan impairment is reported when full payment under the loan terms is not
expected. Impaired loans are carried at the present value of estimated future
cash flows using the loan's existing rate, or the fair value of collateral if
the loan is collateral dependent. A portion of the allowance for loan losses is
allocated to impaired loans if the value of such loans is deemed to be less than
the unpaid balance. If these allocations cause the allowance for loan losses to
require increase, such increase is reported as a component of the provision for
loan losses. Loans are evaluated for impairment when payments are delayed or
when the internal grading system indicates a substandard or doubtful
classification.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, home equity and second mortgage loans.
Commercial loans and mortgage loans secured by other properties are evaluated
individually for impairment. When credit analysis of borrower operating results
and financial condition indicates that underlying cash flows of the borrower's
business are not adequate to meet its debt service requirements, including the
Banks' loans to the borrower, the loan is evaluated for impairment. Often this
is associated with a delay or shortfall of payments of thirty days or more.
Loans are generally moved to nonaccrual status when ninety days or more past due
or in bankruptcy. These loans are often also considered impaired. Impaired
loans, or portions thereof, are charged off when deemed uncollectible. This
typically occurs when the loan is 120 or more days past due unless the loan is
both well-secured and in the process of collection.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation. The
provisions for depreciation are computed principally by the straight line
method, based on useful lives of ten to forty years for premises and three to
eight years for equipment.
OTHER REAL ESTATE OWNED
Other real estate consists of properties acquired through foreclosure or
acceptance of a deed in lieu of foreclosure and property acquired for possible
future expansion. Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair value, less
estimated selling costs, at the date of foreclosure establishing a new cost
basis. After foreclosure, valuations are periodically performed and the real
estate is carried at the lower of cost basis or fair value, less estimated
selling costs. The historical average holding period for such properties is less
than eighteen months. As of December 31, 2007 and 2006, other real estate owned
totaled $2,253,000 and $1,063,000, and is included in other assets on the
consolidated balance sheets.
GOODWILL
Goodwill is tested annually for impairment. If the implied fair value of
goodwill is lower than its carrying amount, a goodwill impairment is indicated
and goodwill is written down to its implied fair value. Subsequent increases in
goodwill value are not recognized in the financial statements.
SERVICING RIGHTS
Servicing rights are recognized as assets for the allocated value of retained
servicing on loans sold. Servicing rights are expensed in proportion to, and
over the period of, estimated net servicing revenues. Impairment is evaluated
based on the fair value of the rights, using groupings of the underlying loans
as to interest rates, remaining loan terms and prepayment characteristics. Any
impairment of a grouping is reported as a valuation allowance.
LONG-TERM ASSETS
Long-term assets are reviewed for impairment when events indicate their carrying
amount may not be recoverable from future undiscounted cash flows. If impaired,
the assets are written down to discounted amounts.
Page A-27
INCOME TAX
The Company records income tax expense based on the amount of taxes due on its
tax return plus deferred taxes computed based on the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities, using enacted tax rates, adjusted for allowances made
for uncertainty regarding the realization of deferred tax assets. The Company
has no uncertain tax positions as defined by Financial Accounting Standards
Board Interpretation No. 48.
EARNINGS PER SHARE
Amounts reported as earnings per share are based upon the weighted average
number of shares outstanding plus the weighted average number of contingently
issuable shares associated with the Directors' and Senior Management Group's
deferred stock plans. In 2007 the company paid a 100% stock dividend, and in
2006 and 2005, the Company paid five percent stock dividends. Earnings per
share, dividends per share, and weighted average shares have been restated to
reflect the stock dividends.
In years prior to 2006, cash dividends were declared in the last month of the
quarter, payable the end of the month following quarter-end. Effective with the
first quarter of 2006, cash dividends are declared and are payable in the month
following the end of the quarter. As a result of this change in schedule, the
cash dividend declared in December of 2005 was paid in January, 2006, but no
dividends were declared in the first quarter of 2006. While this change in
procedure has not changed the number of dividends to be paid during the calendar
year, for 2006 the number of cash dividends declared during the calendar year
has been reduced by one.
STOCK BASED COMPENSATION
At December 31, 2007, the Company has a stock-based employee compensation plan,
which is described more fully in Note 16. Prior to 2006, the Company accounted
for this plan under the recognition and measurement principles of APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and related Interpretations.
Accordingly, in 2005, no stock based employee compensation cost is reflected in
net income, as all options granted under this plan had an exercise price equal
to the market value of the underlying common stock at the grant date.
Effective January 1, 2006 the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123R,
"Share Based Payment". The Company selected the modified prospective
application. Accordingly, after December 31, 2005 the Company began expensing
the fair value of stock options granted, modified, repurchased or cancelled.
The following table illustrates the effect on net income and earnings per share
if the company had applied the fair value provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation
as of December 31, 2004.
In thousands of dollars, except per share data 2005
- ---------------------------------------------- ------
Net income, as reported $8,324
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of taxes (128)
------
Pro forma net income $8,196
Earning per share:
Basic As reported $ 1.58
Basic Pro forma 1.55
Diluted As reported 1.57
Diluted Pro forma 1.54
------
Page A-28
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Based on the
use of estimates and the subjective nature of the assumptions used, the
information presented above may not be representative of the pro forma impact in
future years.
STATEMENTS OF CASH FLOWS
For purposes of this Statement, cash and cash equivalents include cash on hand,
demand balances with banks, and federal funds sold. Federal funds are generally
sold for one day periods. The Company reports net cash flows for client loan and
deposit transactions, deposits made with other financial institutions, and short
term borrowings with an original maturity of ninety days or less.
COMPREHENSIVE INCOME
Comprehensive income consists of net income and other comprehensive income
(loss). Other comprehensive income (loss) includes net unrealized gains and
losses on securities available for sale, net of tax, which are also recognized
as separate components of shareholders' equity.
INDUSTRY SEGMENT
The Company and its subsidiaries are primarily organized to operate in the
banking industry. Substantially all revenues and services are derived from
banking products and services in southeastern Michigan. While the Company's
chief decision makers monitor various products and services, operations are
managed and financial performance is evaluated on a Company-wide basis.
Accordingly, all of the Company's banking operations are considered by
Management to be aggregated in one business segment.
NOTE 2 - RESTRICTIONS ON CASH AND DEMAND BALANCES IN OTHER BANKS
The Banks are subject to average reserve and clearing balance requirements in
the form of cash on hand or balances due from the Federal Reserve Bank. These
reserve balances vary depending on the level of client deposits in the Banks.
The amount of reserve and clearing balances required at December 31, 2007
totaled approximately $594,000.
NOTE 3 - SECURITIES
The fair value of securities as of December 31, 2007 and 2006 are as follows, in
thousands of dollars:
SECURITIES AVAILABLE FOR SALE Fair Value Gains Losses
- ----------------------------- ---------- ----- ------
2007
U.S. Treasury and agency securities $33,532 $183 $ (25)
Mortgage backed agency securities 13,051 72 (65)
Obligations of states and political subdivisions 36,128 356 (131)
Corporate, asset backed and other securities 3,187 45 --
------- ---- ------
Total $85,898 $656 $(221)
======= ==== ======
2006
U.S. Treasury and agency securities $38,380 $ 62 $(116)
Mortgage backed agency securities 13,945 19 (81)
Obligations of states and political subdivisions 40,369 374 (231)
Corporate, asset backed and other securities 3,117 75 --
------- ---- ------
Total $95,811 $530 $(428)
======= ==== ======
Page A-29
The Company's temporarily impaired investment securities as of December 31, 2007
and 2006 are shown below.
Less than 12 Months 12 Months or Longer Total
------------------- ------------------- -------------------
In thousands of dollars Fair Value Losses Fair Value Losses Fair Value Losses
- ----------------------- ---------- ------ ---------- ------ ---------- ------
2007
U.S. Treasury and agency
securities $ 2,010 $(24) $ 2,997 $ (1) $ 5,007 $ (25)
Mortgage backed agency
securities -- -- 3,148 (65) 3,148 (65)
Obligations of states and
political subdivisions 660 (6) 10,687 (125) 11,347 (131)
------- ---- ------- ----- ------- -----
Total $ 2,670 $(30) $16,832 $(191) $19,502 $(221)
======= ==== ======= ===== ======= =====
2006
U.S. Treasury and agency
securities $ 9,386 $(28) $13,622 $ (87) $23,008 $(115)
Mortgage backed agency
securities 2,777 (28) 5,840 (53) 8,617 (81)
Obligations of states and
political subdivisions 3,874 (26) 17,836 (206) 21,710 (232)
------- ---- ------- ----- ------- -----
Total $16,037 $(82) $37,298 $(346) $53,335 $(428)
======= ==== ======= ===== ======= =====
Unrealized losses within the investment portfolio are temporary, as 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.
Sales activities for securities for the years indicated are shown in the
following table. All sales were of securities identified as available for sale.
In thousands of dollars 2007 2006 2005
- ----------------------- ---- ---- ----
Sales proceeds $-- $164 $--
Gross gains on sales -- -- --
--- ---- ---
Gross gains (losses) on calls 9 12 (1)
=== ==== ===
The fair value of securities available for sale by contractual maturity are
shown below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Asset-backed securities are included in periods based
on their estimated lives.
In thousands of dollars Fair Value
- ----------------------- ----------
As of December 31, 2007
Due in one year or less $36,022
Due after one year through five years 32,651
Due after five years through ten years 12,678
Due after ten years 1,360
Equity securities 3,187
-------
Total securities $85,898
=======
Securities carried at $8,529,000 and $15,122,000 as of December 31, 2007 and
2006 were pledged to secure deposits of public funds, funds borrowed, repurchase
agreements, and for other purposes as required by law.
Page A-30
NOTE 4 - LOANS
The table below shows total loans outstanding, including loans held for sale, at
December 31. All loans are domestic and contain no concentrations by industry or
client.
In thousands of dollars 2007 2006
- ----------------------- -------- --------
Personal $ 98,075 $ 91,002
Business, including commercial mortgages 376,637 327,928
Tax exempt 2,709 2,841
Residential mortgage 86,023 79,864
Residential mortgages held for sale 5,770 5,772
Commercial construction and development 81,086 94,356
-------- --------
Total loans $650,300 $601,763
======== ========
Accruing loans delinquent ninety days or more totaled $1,455,000 and $855,000 at
December 31, 2007 and 2006. Non-accruing loans at December 31, 2007 and 2006
were $13,695,000 and $5,427,000.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses for the years ended December 31
follows:
In thousands of dollars 2007 2006 2005
- ----------------------- ------- ------ ------
Balance, January 1 $ 7,849 $6,361 $5,766
Loans charged off (4,290) (762) (879)
Recoveries credited to allowance 110 127 142
Provision charged to operations 8,637 2,123 1,332
------- ------ ------
Balance, December 31 $12,306 $7,849 $6,361
======= ====== ======
Information regarding impaired loans for the years ended December 31 follows:
In thousands of dollars 2007 2006 2005
- ----------------------- ------- ------- ------
Average investment in impaired loans $17,031 $ 8,439 $8,295
Interest income recognized on impaired loans 545 481 216
Interest income recognized on a cash basis 545 481 216
Balance of impaired loans at December 31 $24,692 $10,219 $7,957
Portion for which no allowance for loan losses is allocated 1,121 2,101 2,394
Portion for which an allowance for loan losses is allocated 23,571 8,118 5,563
Portion of allowance for loan losses allocated to impaired loans 6,055 2,044 1,087
NOTE 6 - LOAN SERVICING
Loans serviced for others are not included in the accompanying consolidated
financial statements. The unpaid principal balance of loans serviced for others
was $248,922,000 and $230,066,000 at December 31, 2007 and 2006. The balance of
loans serviced for others related to servicing rights that have been capitalized
was $249,270,000 and $225,629,000 at December 31, 2007 and 2006.
No valuation allowance was considered necessary at December 31, 2007 and 2006.
Unamortized cost of mortgage servicing rights included in accrued interest
receivable and other assets on the consolidated balance sheet, for the years
ended December 31 was as follows:
In thousands of dollars 2007 2006 2005
- ----------------------- ------ ------ ------
Balance, January 1 $1,541 $1,645 $1,820
Amount capitalized 386 131 171
Amount amortized (204) (235) (346)
------ ------ ------
Balance, December 31 $1,723 $1,541 $1,645
====== ====== ======
Page A-31
NOTE 7 - PREMISES AND EQUIPMENT
Depreciation expense was approximately $1,281,000 in 2007, $1,251,000 in 2006
and $1,275,000 in 2005. Premises and equipment as of December 31 consisted of
the following:
In thousands of dollars 2007 2006
- ----------------------- -------- --------
Land $ 1,863 $ 1,580
Buildings and improvements 14,536 14,452
Furniture and equipment 13,601 13,076
-------- --------
Total cost 30,000 29,108
Less accumulated depreciation (16,840) (15,893)
-------- --------
Premises and equipment, net $ 13,160 $ 13,215
======== ========
The company has several noncancellable operating leases, primarily for banking
facilities, that expire over the next fifteen years. The leases generally
contain renewal options for periods ranging from one to five years. Rental
expense for these leases was $885,000, $759,000 and $710,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
Future minimum lease payments under operating leases are shown in the table
below:
In thousands of dollars
2008 $ 970
2009 943
2010 915
2011 923
2012 938
Thereafter 3,043
------
Total Minimum Lease Payments $7,732
======
NOTE 8 - GOODWILL
The Company follows the provisions of Statement of Financial Accounting
Standards No. 142 and Statement of Financial Accounting Standards No. 147 with
regard to accounting and financial reporting for goodwill and other intangible
assets. There was no impairment of goodwill in 2007, 2006 or 2005.
NOTE 9 - DEPOSITS
Information relating to maturities of time deposits as of December 31 is
summarized below:
In thousands of dollars 2007 2006
- ----------------------- -------- --------
Within one year $200,832 $160,815
Between one and two years 46,961 46,583
Between two and three years 14,179 19,501
Between three and four years 2,061 1,116
Between four and five years 2,857 1,274
More than five years -- --
-------- --------
Total time deposits $266,890 $229,289
======== ========
Interest bearing time deposits in denominations of $100,000 or more $122,266 $102,492
======== ========
NOTE 10 - SHORT TERM BORROWINGS
The Company has several credit facilities in place for short term borrowing
which are used on occasion as a source of liquidity. These facilities consist of
borrowing authority totaling $47.9 million from correspondent banks to purchase
federal funds on a daily basis. There were no fed funds purchased outstanding at
December 31, 2007 and 2006.
Page A-32
The Banks may also enter into sales of securities under agreements to repurchase
("repurchase agreements"). These agreements generally mature within one to 120
days from the transaction date. U.S. Treasury, agency and other securities
involved with the agreements are recorded as assets and are generally held in
safekeeping by correspondent banks. Repurchase agreements are offered
principally to certain clients as an investment alternative to deposit products.
The maximum amount of outstanding agreements at any month end during 2007 and
2006 totaled $77,000 and $77,000 and the daily average of such agreements
totaled $30,000 and $76,000. The balance outstanding at December 31, 2007 and
2006 was $0 and $77,000.
NOTE 11 - OTHER BORROWINGS
The Banks carried fixed rate, noncallable advances from the Federal Home Loan
Bank of Indianapolis totaling $44.6 million and $40.9 million at December 31,
2007 and 2006. As of December 31, 2007, the rates on the advances ranged from
2.93% to 6.18% with a weighted average rate of 4.69%. These advances are
primarily collateralized by residential mortgage loans under a blanket security
agreement. The unpaid principal balance of the loans pledged as collateral must
equal at least 145% of the funds advanced. Interest payments are made monthly,
with principal due annually and at maturity. If principal payments are paid
prior to maturity, advances are subject to a prepayment penalties.
Maturities and scheduled principal payments for other borrowings over the next
five years as of December 31 are shown below.
In thousands of dollars 2007
- ----------------------- -------
Within one year $10,428
Between one and two years 18,530
Between two and three years 11,500
Between three and four years --
Between four and five years 2,000
More than five years 2,153
-------
Total $44,611
=======
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Banks are party to financial instruments with off-balance-sheet risk in the
normal course of business to meet financing needs of their clients. These
financial instruments include commitments to make loans, unused lines of credit,
and letters of credit. The Banks' exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual amount of those instruments. The
Banks follow the same credit policy to make such commitments as is followed for
loans and investments recorded in the consolidated financial statements. The
Banks' commitments to extend credit are agreements at predetermined terms, as
long as the client continues to meet specified criteria, with fixed expiration
dates or termination clauses. The following table shows the commitments to make
loans and the unused lines of credit available to clients at December 31:
2007 2006
------------------ ------------------
Variable Fixed Variable Fixed
In thousands of dollars Rate Rate Rate Rate
- ----------------------- -------- ------- -------- -------
Commitments to make loans $ 9,260 $ 7,628 $ 11,006 $13,760
Unused lines of credit 100,502 21,245 116,449 9,614
Standby letters of credit 15,937 -- 12,882 --
Commitments to make loans generally expire within thirty to ninety days, while
unused lines of credit expire at the maturity date of the individual loans. At
December 31, 2007, the rates for amounts in the fixed rate category ranged from
5.62% to 8.07%.
Page A-33
In December 2001, United Bank & Trust entered into a limited partnership
agreement to purchase tax credits awarded from the construction, ownership and
management of an affordable housing project and a residual interest in the real
estate. As of December 31, 2007 and 2006, the total recorded investment
including the obligation to make additional future investments amounted to
$1,365,000 and $1,589,000 and was included in other assets. As of December 31,
2007 and 2006, the obligation of UBT to the limited partnership amounted to
$1,372,000 and $1,632,000 which was reported in other liabilities. While UBT is
a 99% partner, the investment is accounted for on the equity method as UBT is a
limited partner and has no control over the operation and management of the
partnership or the affordable housing project.
NOTE 13 - FEDERAL INCOME TAX
Income tax expense consists of the following for the years ended December 31:
In thousands of dollars 2007 2006 2005
- ----------------------- ------- ------ ------
Current $ 2,925 $3,834 $2,868
Deferred (1,290) (414) 313
------- ------ ------
Total income tax expense $ 1,635 $3,420 $3,181
======= ====== ======
The components of deferred tax assets and liabilities at December 31, are as
follows:
In thousands of dollars 2007 2006
- ----------------------- ------- -------
Deferred tax assets:
Allowance for loan losses $4,184 $2,669
Deferred compensation 547 592
Other 274 179
------ ------
Total deferred tax assets 5,005 3,440
2007 2006
------- -------
Deferred tax liabilities:
Property and equipment (403) (428)
Mortgage servicing rights (576) (524)
Unrealized appreciation on securities available for sale (143) (35)
Other (1,509) (1,269)
------- -------
Total deferred tax liabilities (2,631) (2,256)
------- -------
Net deferred tax asset $ 2,374 $ 1,184
======= =======
No valuation allowance was considered necessary at December 31, 2007 and 2006.
A reconciliation between total federal income tax and the amount computed
through the use of the federal statutory tax rate for the years ended is as
follows:
In thousands of dollars 2007 2006 2005
- ----------------------- ------ ------ ------
Income taxes at statutory rate of 34% $2,454 $4,213 $3,912
Non-taxable income, net of nondeductible interest expense (487) (479) (427)
Income on non-taxable bank owned life insurance (157) (139) (135)
Affordable housing credit (188) (188) (184)
Other 13 13 15
------ ------ ------
Total federal income tax $1,635 $3,420 $3,181
====== ====== ======
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and the Banks, including
their immediate families and companies in which they are principal owners, are
clients of the Banks. Loans to these parties did not, in the opinion of
Management, involve more than normal credit risk or present other
Page A-34
unfavorable features. The aggregate amount of these loans at December 31, 2006
was $37,851,000. During 2007, new and newly reportable loans to such related
parties amounted to $11,818,000 and repayments amounted to $11,098,000,
resulting in a balance at December 31, 2007 of $38,571,000. Related party
deposits totaled $9,526,000 and $14,577,000 at December 31, 2007 and 2006.
NOTE 15 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Banking laws and regulations restrict the amount the Banks can transfer to the
Company in the form of cash dividends and loans. At December 31, 2007, $17.4
million of retained earnings of the Banks were available for distribution to the
Company as dividends without prior regulatory approval. It is not the intent of
Management to pay dividends in amounts which would reduce the capital of the
Banks to a level below that which is considered prudent by Management and in
accordance with the guidelines of regulatory authorities.
NOTE 16 - EMPLOYEE BENEFIT PLANS
EMPLOYEE SAVINGS PLAN
The Company maintains a 401(k) employee savings plan ("plan") which is available
to substantially all employees. Individual employees may make contributions to
the plan up to 100% of their compensation up to a maximum of $15,500 for 2007
and $15,000 for 2006 and 2005. The Banks offers discretionary matching of funds
for a percentage of the employee contribution, plus an amount based on Company
earnings. The expense for the plan for 2007, 2006, and 2005 was $486,000,
$974,000 and $918,000.
The plan offers employees the option of purchasing Company stock with the match
portion of their 401(k) contribution. On that basis 4,136 shares in 2007, 4,386
shares in 2006 and 4,712 shares in 2005 of United Bancorp, Inc. common stock
were issued to the 401(k) plan for the benefit of plan participants who so
elected Company stock for their match.
DIRECTOR RETAINER STOCK PLAN
The Company maintains a deferred compensation plan designated as the Director
Retainer Stock Plan ("Director Plan"). The plan provides eligible directors of
the Company and the Banks with a means of deferring payment of retainers and
certain fees payable to them for Board service. Under the Director Plan, any
retainers or fees elected to be deferred under the plan by an eligible director
ultimately will be payable in common stock at the time of payment.
SENIOR MANAGEMENT BONUS DEFERRAL STOCK PLAN
The Company maintains a deferred compensation plan designated as the Senior
Management Bonus Deferral Stock Plan ("Management Plan"). The Management Plan
has essentially the same purposes as the Director Plan discussed above and
permits eligible employees of the Company and its affiliates to elect cash bonus
deferrals and, after employment termination, to receive payouts in whole or in
part in the form of common stock on terms substantially similar to those of the
Director Plan.
STOCK OPTIONS
In 2004, Shareholders approved the Company's 2005 Stock Option Plan (the "2005
Plan"), which became effective January 1, 2005. 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 the market price at the time the
options are granted. The 2005 Plan replaced the 1999 Stock Option Plan ("the
1999 Plan"), under which no more options are to be granted.
Page A-35
The stock subject to the options are shares of authorized and unissued common
stock of the Company. As defined in the 2005 Plan, options representing no more
than 385,875 shares (adjusted for stock dividends declared) are to be made
available to the plan. 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 table summarizes option activity for the 1999 Plan and the 2005
Plan during 2007, 2006 and 2005, adjusted for stock dividends:
2007 2006 2005
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
Balance, January 1 286,986 $26.60 254,384 $25.96 222,652 $21.79
Options granted 49,200 22.43 59,050 28.86 112,350 30.42
Options exercised (15,076) 18.54 (12,788) 21.49 (76,026) 20.30
Options forfeited (15,997) 28.23 (13,660) 29.31 (4,592) 26.53
------- ------ ------- ------ ------- ------
Balance, December 31 305,113 $26.22 286,986 $26.60 254,384 $25.96
======= ====== ======= ====== ======= ======
Options exercisable at
year-end 190,431 $25.98 146,934 $23.90 91,248 $20.74
Weighted average fair value of
options granted during the year $ 2.58 $ 3.56 $ 3.24
====== ====== ======
The following table provides information regarding stock options under the 2005
Plan at December 31, 2007:
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------
Weighted Weighted Weighted
Number Average Remaining Average Number Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------ ----------- ----------------- -------------- ----------- --------------
$17.06 to $32.14 305,113 6.70 Years $26.22 190,431 $25.98
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
2007 2006 2005
------- ------- -------
Dividend yield 3.26% 2.45% 2.08%
Expected life 5 years 5 years 5 years
Expected volatility 11.61% 10.17% 8.67%
Risk-free interest rate 4.68% 4.36% 3.64%
The Company has recorded approximately $205,000 and $222,000 in compensation
expense related to vested stock options less estimated forfeitures for the
periods ended December 31, 2007 and 2006, respectively. As of December 31, 2007,
unrecognized compensation expense related to the stock options totaled $148,000
and is expected to be recognized over three years.
At December 31, 2007, the total options outstanding had no aggregate intrinsic
value. Intrinsic value represents the difference between the Company's closing
stock price on the last day of trading for 2007 and the exercise price
multiplied by the number of in-the-money options assuming all option holders had
exercised their stock options on December 31, 2007.
The aggregate intrinsic value of stock options exercised during 2007 was
$59,000. Exercise of options during this same period resulted in cash receipts
of $137,000 and the Company recognized a tax benefit of approximately $20,000 on
the exercise of these options and has been recorded as an increase in equity.
Page A-36
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair value of principal financial assets and
liabilities were as follows:
As of December 31, 2007 2006
---------------------- ----------------------
Carrying Carrying
In thousands of dollars Value Fair Value Value Fair Value
- ----------------------- --------- ---------- --------- ----------
Financial Assets
Cash and cash equivalents $ 29,126 $ 29,126 $ 21,376 $ 21,376
Securities available for sale 85,898 85,898 95,811 95,811
Loans held for sale 5,770 5,770 5,772 5,772
Net loans 632,224 639,181 588,142 591,045
Accrued interest receivable 4,097 4,097 4,523 4,523
Financial Liabilities
Total deposits $(671,537) $(671,804) $(628,002) $(628,945)
Short term borrowings -- -- (77) (77)
Other borrowings (44,611) (45,252) (40,945) (40,656)
Accrued interest payable 3,149 3,149 1,952 1,952
Estimated fair values require subjective judgments and are approximate. The
above estimates of fair value are not necessarily representative of amounts that
could be realized in actual market transactions, nor of the underlying value of
the Company. Changes in the following methodologies and assumptions could
significantly affect the estimated fair value:
Cash and cash equivalents, accrued interest receivable and accrued interest
payable - Due to the short periods to maturity, the carrying amounts are
reasonable estimates of the fair values of these instruments at the
respective balance sheet dates.
Securities available for sale - Fair values for securities available for
sale are based on quoted market prices, if available. If quoted values are
not available, the estimated fair value is determined by using quoted
market prices for similar securities.
Net loans - The carrying amount is a reasonable estimate of fair value for
personal loans for which rates adjust quarterly or more frequently, and for
business and tax exempt loans which are prime related and for which rates
adjust immediately or quarterly. The fair value for residential mortgage
loans which are held for sale on the secondary market is the price offered
by the secondary market purchaser. The fair value of all other loans is
estimated by discounting future cash flows using current rates for loans
with similar characteristics and maturities. The allowance for loan losses
is considered to be a reasonable estimate of discount for credit quality
concerns.
Total deposits - With the exception of certificates of deposit, the
carrying value is deemed to be the fair value due to the demand nature of
the deposits. The fair value of fixed maturity certificates of deposit is
estimated by discounting future cash flows using the current rates paid on
certificates of deposit with similar maturities.
Short term borrowings - The carrying value is a reasonable approximation of
fair value.
Other borrowings - The fair value is estimated by discounting future cash
flows using current rates on advances with similar maturities.
Off-balance-sheet financial instruments - Commitments to extend credit,
standby letters of credit and undisbursed loans are deemed to have no
material fair value as such commitments are generally fulfilled at current
market rates.
Page A-37
NOTE 18 - REGULATORY CAPITAL REQUIREMENTS
The Company and Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Banks must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. Capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. Quantitative measures established by regulation to ensure capital
adequacy require the Company and Banks to maintain minimum ratios of Total and
Tier I capital to risk-weighted assets, and of Tier I capital to average assets.
The Company and the Banks were categorized as well-capitalized at year end 2007
and 2006 by their regulators. Management is not aware of any conditions or
events that have occurred since year end that would change this classification.
The following table shows the Company's and the Banks' capital ratios and the
Company's amounts compared to regulatory requirements at year end, and the
amounts by which the Company's capital, on a consolidated basis, exceeds
regulatory requirements. Dollars are shown in thousands of dollars where
appropriate.
Tier I Capital to:
------------------
Risk Total Capital to
Average Weighted Risk Weighted
Assets Assets Assets
------- -------- ----------------
Regulatory Minimum for Capital Adequacy (1) 4.0% 4.0% 8.0%
Regulatory Minimum to be Well Capitalized (2) 5.0% 6.0% 10.0%
------- ------- -------
As of December 31, 2007
United Bancorp, Inc. (consolidated) 8.7% 10.5% 11.8%
United Bank & Trust 8.0% 10.5% 11.8%
United Bank & Trust - Washtenaw 8.7% 9.4% 10.6%
United Bancorp, Inc. consolidated equity $69,205 $69,205 $77,462
Regulatory requirement for minimum capital adequacy (1) 31,827 26,306 52,613
------- ------- -------
Capital in excess of regulatory minimums 37,378 $42,899 $24,849
======= ======= =======
As of December 31, 2006
United Bancorp, Inc. (consolidated) 9.8% 11.6% 12.9%
United Bank & Trust 9.2% 12.0% 13.4%
United Bank & Trust - Washtenaw 9.5% 9.9% 11.1%
United Bancorp, Inc. consolidated equity $70,999 $70,999 $78,848
Regulatory requirement for minimum capital adequacy (1) 29,199 24,497 48,994
------- ------- -------
Capital in excess of regulatory minimums 41,800 $46,502 $29,854
======= ======= =======
(1) Represents minimum required to be considered adequately capitalized under
Federal regulatory requirements.
(2) Represents minimum required to be considered well-capitalized under Federal
regulatory prompt corrective action provisions.
Page A-38
NOTE 19 - EARNINGS PER SHARE
A reconciliation of basic and diluted earnings per share follows:
In thousands of dollars, except per share data 2007 2006 2005
- ---------------------------------------------- ---------- ---------- ----------
Net income $ 5,582 $ 8,972 $ 8,324
Basic earnings per share:
Weighted average common shares outstanding 5,190,868 5,246,938 5,228,138
Weighted average contingently issuable shares 59,743 55,920 54,204
---------- ---------- ----------
5,250,611 5,302,858 5,282,342
Basic earnings per share $ 1.06 $ 1.69 $ 1.58
---------- ---------- ----------
Diluted earnings per share:
Weighted average common shares outstanding
from basic earnings per share 5,250,611 5,302,858 5,282,342
Dilutive effect of stock options -- -- 33,004
---------- ---------- ----------
5,250,611 5,302,858 5,315,346
Diluted earnings per share $ 1.06 $ 1.69 $ 1.57
========== ========== ==========
Stock options for 263,808, 200,392 and 2,000 shares of common stock were not
considered in computing diluted earnings per share for 2007, 2006 and 2005
because they were not dilutive.
NOTE 20 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
In thousands of dollars 2007 2006 2005
- ----------------------- ---- ---- -----
Unrealized gains (losses) on securities available for sale $350 $523 $(559)
Reclassification for realized amount included in income 9 12 (1)
---- ---- -----
Other comprehensive income (loss), before tax effect 341 511 (558)
Tax expense (benefit) 116 174 (190)
---- ---- -----
Other comprehensive income (loss) $225 $337 $(368)
==== ==== =====
NOTE 21 - PARENT COMPANY ONLY FINANCIAL INFORMATION
The condensed financial information for United Bancorp, Inc. is summarized
below.
CONDENSED BALANCE SHEETS
December 31,
-----------------
In thousands of dollars 2007 2006
- ----------------------- ------- -------
ASSETS
Cash and cash equivalents $ 602 $ 715
Investment in subsidiaries 69,599 72,012
Other assets 3,684 3,351
------- -------
TOTAL ASSETS $73,885 $76,078
======= =======
Liabilities and Shareholders' Equity
Liabilities $ 918 $ 1,542
Shareholders' equity 72,967 74,536
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $73,885 $76,078
======= =======
Page A-39
CONDENSED STATEMENTS OF INCOME
For the years ended
December 31,
---------------------------
In thousands of dollars 2007 2006 2005
- ----------------------- ------- ------- -------
INCOME
Dividends from subsidiaries $ 9,250 $ 4,425 $ 6,775
Other income 8,664 7,991 6,758
------- ------- -------
TOTAL INCOME 17,914 12,416 13,533
TOTAL NONINTEREST EXPENSE 8,679 8,418 7,125
------- ------- -------
Income before undistributed net income of subsidiaries
and income taxes 9,235 3,998 6,408
Income tax benefit (1) (141) (121)
------- ------- -------
Net income before undistributed net income of subsidiaries 9,236 4,139 6,529
Equity in undistributed (excess distributed) net income
of subsidiaries (3,654) 4,833 1,795
------- ------- -------
NET INCOME 5,582 8,972 8,324
Net change in unrealized gains on securities available for sale 225 337 (368)
------- ------- -------
Other comprehensive income (loss) 225 337 (368)
------- ------- -------
COMPREHENSIVE INCOME $ 5,807 $ 9,309 $ 7,956
======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended
December 31,
---------------------------
In thousands of dollars 2007 2006 2005
- ----------------------- ------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,582 $ 8,972 $ 8,324
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
(Undistributed) excess distributed net income of subsidiaries 3,654 (4,833) (1,795)
Stock option expense 205 222 --
Change in other assets (104) (232) 2,571
Change in other liabilities (626) 236 418
------- ------- -------
Total adjustments 3,129 (4,607) 1,194
------- ------- -------
Net cash from operating activities 8,711 4,365 9,518
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale -- -- --
Investments in subsidiaries (1,000) (1,500) (3,900)
Net premises and equipment expenditures (243) 233 (2,008)
------- ------- -------
Net cash from investing activities (1,243) (1,267) (5,908)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock transactions 405 277 987
Purchase of common stock (3,873) -- --
Dividends paid (4,113) (3,817) (3,447)
------- ------- -------
Net cash from financing activities (7,581) (3,540) (2,460)
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (113) (442) 1,150
Cash and cash equivalents at beginning of year 715 1,157 7
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 602 $ 715 $ 1,157
======= ======= =======
Page A-40
NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information is summarized below.
Earnings (Loss)
Per Share
In thousands of dollars, Interest Net Interest Net ----------------
except per share data Income Income Income (Loss) Basic Diluted
- ------------------------ -------- ------------ ------------- ------ -------
2007
First Quarter $12,353 $ 7,291 $1,726 $ 0.33 $ 0.33
Second Quarter 12,880 7,478 2,267 0.43 0.43
Third Quarter 13,322 7,580 2,338 0.45 0.45
Fourth Quarter 13,078 7,411 (750) (0.15) (0.15)
------- ------- ------ ------ ------
Full Year $51,634 $29,761 $5,582 $ 1.06 $ 1.06
2006
First Quarter $11,031 $ 7,203 $2,145 $ 0.40 $ 0.40
Second Quarter 11,484 7,199 2,184 0.41 0.41
Third Quarter 12,167 7,428 2,446 0.46 0.46
Fourth Quarter 12,374 7,424 2,197 0.41 0.41
------- ------- ------ ------ ------
Full Year $47,056 $29,254 $8,972 $ 1.69 $ 1.69
======= ======= ====== ====== ======
The significant decrease in net income for the fourth quarter of 2007 is
primarily a result of the additional expense related to the Company's provision
for loan losses.
Page A-41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Robert K. Chapman February 22, 2008
- ------------------------------------- Date
Robert K. Chapman, President and
Chief Executive Officer, Director
Page 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Robert K. Chapman and Randal J. Rabe, and each of them,
his true and lawful attorney(s)- in-fact and agent(s), with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this report and to file
the same, with all exhibits and schedules thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney(s)-in-fact and agent(s) full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney(s)- in-fact and agent(s), or their
substitute(s), may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated, on February 22, 2008.
/s/ Stephanie H. Boyse /s/ James C. Lawson
- --------------------------------------- --------------------------------------------
Stephanie H. Boyse, Director James C. Lawson, Director
/s/ James D. Buhr /s/ Donald J. Martin
- --------------------------------------- --------------------------------------------
James D. Buhr, Director Donald J. Martin, Director
/s/ Joseph D. Butcko /s/ Robert G. Macomber
- --------------------------------------- --------------------------------------------
Joseph D. Butcko, Director Robert G. Macomber, Director
/s/ Robert K. Chapman /s/ David E. Maxwell
- --------------------------------------- --------------------------------------------
Robert K. Chapman (Principal Executive David E. Maxwell, Director
Officer) Director, President and Chief
Executive Officer
/s/ Kathryn M. Mohr
--------------------------------------------
/s/ John H. Foss Kathryn M. Mohr, Director
- ---------------------------------------
John H. Foss, Director
/s/ Randal J. Rabe
--------------------------------------------
/s/ David S. Hickman Randal J. Rabe (Principal Financial Officer)
- --------------------------------------- Executive Vice President & Chief Financial
David S. Hickman, Chairman of the Board Officer
Page 25
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ------------ --------
3(a) Restated Articles of Incorporation of United Bancorp, Inc., filed
as Exhibit (4)(a) to registrant's registration statement on Form
S-8 (File Number 333-03305) dated May 8, 1996, and incorporated
herein by reference.
3(b) Bylaws of United Bancorp, Inc., filed as Exhibit (4)(b) to
registrant's registration statement on Form S-8 (File Number
333-03305) dated May 8, 1996, and incorporated herein by
reference.
4(c) United Bancorp, Inc. Director Retainer Stock Plan, filed as
Appendix A to registrant's proxy statement dated March 25, 1996
(file number 0-16640) and incorporated herein by reference.
4(d) United Bancorp, Inc. Senior Management Bonus Deferral Stock Plan,
filed as Appendix B to registrant's proxy statement dated March
25, 1996 (file number 0-16640) and incorporated herein by
reference.
4(e) United Bancorp, Inc. 1999 Stock Option Plan, filed as Appendix B
to the Company's proxy statement dated March 24, 2000 (file number
0-16640) and incorporated herein by reference.
4(f) United Bancorp, Inc. 2005 Stock Option Plan, filed as Appendix B
to the Company's proxy statement dated March 15, 2004 (file number
0-16640) and incorporated herein by reference.
10.1 Management Agreement effective January 1, 2006, between United
Bancorp, Inc. and David S. Hickman, filed as Exhibit C to the
Company's Form 8-K dated December 3, 2005 (file number 0-16640)
and incorporated herein by reference.
10.2 Employment Agreement effective January 1, 2007, between United
Bancorp, Inc. and Robert K. Chapman, filed as Exhibit 10.1 to the
Company's Form 8-K dated January 10, 2007 (file number 0-16640)
and incorporated herein by reference.
10.3 Employment Agreement effective January 1, 2007, between United
Bancorp, Inc. and Randal J. Rabe, filed as Exhibit 10.2 to the
Company's Form 8-K dated January 10, 2007 (file number 0-16640)
and incorporated herein by reference.
10.4 Employment Agreement effective January 1, 2007, between United
Bancorp, Inc. and Dale L. Chadderdon, filed as Exhibit 10.3 to the
Company's Form 8-K dated January 10, 2007 (file number 0-16640)
and incorporated herein by reference.
10.5 Employment Agreement effective January 1, 2007, between United
Bancorp, Inc. and Todd C. Clark, filed as Exhibit 10.4 to the
Company's Form 8-K dated January 10, 2007 (file number 0-16640)
and incorporated herein by reference.
11 Statement re Computation of Per Share Earnings - this information
is incorporated by reference in Note 1 on Page A-28 and Note 19 on
Page A-39 hereof.
Page 26
Exhibits (continued)
14 Registrant's Code of Business Conduct and Ethics as adopted 28
December 9, 2003, in accordance with Section 406 of the
Sarbanes-Oxley Act as amended.
21 Subsidiaries 31
23 Consent of Independent Registered Public Accounting Firm 32
24 Power of Attorney contained on the signature pages of the 2008 25
Annual Report on Form 10-K.
31.1 Certification of Principal Executive Officer 33
31.2 Certification of Principal Financial Officer 34
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted 35
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Page 27