UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
----------
COMMISSION FILE #0-16640
UNITED BANCORP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2606280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
205 E. CHICAGO BOULEVARD, TECUMSEH, MI 49286
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (517) 423-8373
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated Filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] 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 Exchange Act. Yes [ ] No [X]
As of April 11, 2008, there were outstanding 5,052,443 shares of the
registrant's common stock, no par value.
CROSS REFERENCE TABLE
PAGE
ITEM NO. DESCRIPTION NO.
- -------- ------------------------------------------------------------ ----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
(a) Condensed Consolidated Balance Sheets 3
(b) Condensed Consolidated Statements of Income 4
(c) Condensed Consolidated Statements of Shareholders'
Equity 5
(d) Condensed Consolidated Statements of Cash Flows 6
(e) Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Background 10
Executive Summary 11
Results of Operations 12
Financial Condition 16
Liquidity and Capital Resources 19
Critical Accounting Policies 20
Forward-Looking Statements 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 6. Exhibits 23
Signatures 23
Exhibits 24
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Page 2
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
(A) CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (unaudited)
March 31 December 31, March 31,
In thousands of dollars 2008 2007 2007
----------- ------------ -----------
ASSETS
Cash and demand balances in other banks $ 15,757 $ 17,996 $ 18,348
Federal funds sold -- 11,130 4,020
-------- -------- --------
Total cash and cash equivalents 15,757 29,126 22,368
Securities available for sale 90,739 85,898 90,991
Loans held for sale 6,070 5,770 3,258
Portfolio loans 654,965 644,530 611,845
Less allowance for loan losses 12,047 12,306 9,229
-------- -------- --------
Net portfolio loans 642,918 632,224 602,616
Premises and equipment, net 13,212 13,160 13,358
Goodwill 3,469 3,469 3,469
Bank-owned life insurance 12,076 11,961 11,605
Accrued interest receivable and other assets 13,633 14,079 12,808
-------- -------- --------
TOTAL ASSETS $797,874 $795,687 $760,473
======== ======== ========
LIABILITIES
Deposits
Noninterest bearing $ 82,596 $ 77,878 $ 81,565
Interest bearing 584,927 593,659 554,848
-------- -------- --------
Total deposits 667,523 671,537 636,413
Federal funds purchased and other short term borrowings 7,500 -- 77
FHLB advances payable 42,991 44,611 42,627
Accrued interest payable and other liabilities 5,767 6,572 6,079
-------- -------- --------
TOTAL LIABILITIES 723,781 722,720 685,196
COMMITMENT AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value;
10,000,000 shares authorized; 5,084,943, 5,092,230, and
5,242,472 shares issued and outstanding 67,733 67,860 71,030
Retained earnings 5,673 4,814 4,110
Accumulated other comprehensive income, net of tax 687 293 137
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 74,093 72,967 75,277
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $797,874 $795,687 $760,473
======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
(B) CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 31,
-----------------
In thousands of dollars, except per share data 2008 2007
-------- -------
INTEREST INCOME
Interest and fees on loans $11,332 $11,153
Interest on securities
Taxable 600 693
Tax exempt 364 381
Interest on federal funds sold 120 126
------- -------
Total interest income 12,416 12,353
INTEREST EXPENSE
Interest on deposits 4,408 4,558
Interest on fed funds and other short term borrowings 7 7
Interest on FHLB advances 523 497
------- -------
Total interest expense 4,938 5,062
------- -------
NET INTEREST INCOME 7,478 7,291
Provision for loan losses 660 1,509
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,818 5,782
NONINTEREST INCOME
Service charges on deposit accounts 823 810
Wealth Management fee income 1,169 1,214
Gains on securities transactions 53 1
Income from loan sales and servicing 608 376
ATM, debit and credit card fee income 529 472
Income from bank-owned life insurance 116 106
Other income 239 231
------- -------
Total noninterest income 3,537 3,210
NONINTEREST EXPENSE
Salaries and employee benefits 4,407 3,607
Occupancy and equipment expense, net 1,244 1,221
External data processing 416 291
Advertising and marketing 375 361
Attorney, accounting and other professional fees 233 248
Director fees 107 116
Other expense 1,020 845
------- -------
Total noninterest expense 7,802 6,689
------- -------
INCOME BEFORE FEDERAL INCOME TAX 2,553 2,303
Federal income tax 665 577
------- -------
NET INCOME $ 1,888 $ 1,726
======= =======
Basic and diluted earnings per share $ 0.37 $ 0.33
Cash dividends declared per share of common stock $ 0.20 $ 0.19
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
(C) CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
Three Months Ended
In thousands of dollars March 31,
------------------
TOTAL SHAREHOLDERS' EQUITY 2008 2007
------- -------
Balance at beginning of period $72,967 $74,536
Net Income 1,888 1,726
Other comprehensive income:
Net change in unrealized gains (losses) on securities
available for sale, net of reclass adjustments for
realized gains (losses) and related taxes 394 69
------- -------
Total comprehensive income 2,282 1,795
Cash dividends paid (1,018) (997)
Purchase of common stock (195) (221)
Other common stock transactions 57 164
------- -------
Balance at end of period $74,093 $75,277
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5
(D) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In thousands of dollars Three Months Ended
March 31,
-------------------
2008 2007
-------- --------
Cash Flows from Operating Activities
Net income $ 1,888 $ 1,726
Adjustments to Reconcile Net Income to Net Cash from
Operating Activities
Depreciation and amortization 385 372
Provision for loan losses 660 1,509
Gain on sale of loans (503) (286)
Proceeds from sales of loans originated for sale 32,758 16,888
Loans originated for sale (32,555) (14,375)
(Gains) on securities transactions (53) (1)
Deferred income taxes (161) (459)
Stock option expense 38 47
Increase in cash surrender value of bank-owned life insurance (116) (106)
Change in investment in limited partnership (158) (200)
Change in accrued interest receivable and other assets 120 (627)
Change in accrued interest payable and other liabilities (585) (1,120)
-------- --------
Net cash from operating activities 1,718 3,368
Cash Flows from Investing Activities
Securities available for sale
Purchases (25,378) (100)
Sales 15,045 --
Maturities and calls 5,320 3,965
Principal payments 843 1,096
Net change in portfolio loans (11,214) (15,852)
Premises and equipment expenditures (375) (477)
-------- --------
Net cash from (used in) investing activities (15,759) (11,368)
Cash Flows from Financing Activities
Net change in deposits (4,014) 8,411
Net change in short term borrowings 7,500 --
Proceeds from other borrowings 3,000 15,030
Principal payments on other borrowings (4,620) (13,348)
Purchase of common stock (195) (221)
Proceeds from other common stock transactions 19 117
Dividends paid (1,018) (997)
-------- --------
Net cash from financing activities 672 8,992
-------- --------
Net change in cash and cash equivalents (13,369) 992
Cash and cash equivalents at beginning of year 29,126 21,376
-------- --------
Cash and cash equivalents at end of period $ 15,757 $ 22,368
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 5,760 $ 4,774
Income tax paid -- 237
Loans transferred to other real estate 140 155
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 6
(E) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of United Bancorp,
Inc. (the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The condensed consolidated balance sheet of the
Company as of December 31, 2007 has been derived from the audited consolidated
balance sheet of the Company as of that date. Operating results for the three
month period ending March 31, 2008 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2008. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2007.
The Company paid a 100% stock dividend on May 31, 2007. Accordingly all share
and per-share data has been restated to reflect the stock dividend for the
periods presented.
STOCK OPTIONS
In 2004, shareholders approved the Company's 2005 Stock Option Plan (the "2005
Plan"). The plan is a non-qualified stock option plan as defined under Internal
Revenue Service regulations. Under the plan, directors and management of the
Company and subsidiaries are given the right to purchase stock of the Company at
a stipulated price, adjusted for stock dividends, over a specific period of
time. The 2005 Plan will continue in effect until the end of 2009, and is the
only plan in effect in 2008. The 2005 Plan replaced the 1999 Stock Option Plan
(the "1999 Plan"), under which no more options are to be granted.
The stock subject to the options are shares of authorized and unissued common
stock of the Company. Options under the 1999 and 2005 Plans (the "Plans") are
granted to directors and certain key members of management at the then-current
market price at the time the option is granted. The options have a three-year
vesting period, and with certain exceptions, expire at the end of ten years,
three years after retirement or ninety days after other separation from the
Company. The following is summarized year to date option activity for the Plans:
Options Weighted Avg.
Stock Options Outstanding Exercise Price
- ------------- ----------- --------------
Balance at January 1, 2008 305,113 $26.22
Options granted 59,800 19.75
Options exercised -- --
Options forfeited (9,827) 24.71
-------
Balance at March 31, 2008 355,086 $25.18
=======
Total options granted during the three-month period ended March 31, 2008 were
59,800, and the weighted fair value of the options granted was $2.09. For stock
options outstanding at March 31, 2008, the range of average exercise prices was
$17.06 to $32.14 and the weighted average remaining contractual term was 7.06
years. At March 31, 2008, 243,745 options are exercisable under the Plans. The
Company has recorded approximately $37,500 in compensation expense related to
vested stock options less estimated forfeitures for the three month period ended
March 31, 2008. As of the end of the first quarter of 2008, unrecognized
compensation expense related to the stock options totaled $238,966 and is
expected to be recognized over three years.
Page 7
At March 31, 2008, the aggregate intrinsic value of options outstanding totaled
$9,854. This value represents the difference between the Company's closing stock
price on the last day of trading for the first quarter and the exercise price
multiplied by the number of in-the-money options assuming all option holders had
exercised their stock options on March 31, 2008. No options were exercised
during the quarter ended March 31, 2008.
NOTE 2 - 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 $269,875,000 and $228,024,000 at the end of March, 2008 and 2007. The
balance of loans serviced for others related to servicing rights that have been
capitalized was $270,800,000 and $226,355,000 at March 31, 2008 and 2007. Loans
servicing rights consist primarily of mortgage servicing rights, but include a
small number of commercial loans which the Company has sold but retains
servicing. Loan servicing rights activity in thousands of dollars for the three
months ended March 31, 2008 and 2007 are shown in the table below.
2008 2007
------ ------
Balance at January 1 $1,723 $1,541
Amount capitalized year to date 227 49
Amount amortized year to date (72) (53)
------ ------
Balance at March 31 $1,878 $1,537
====== ======
No valuation allowance was considered necessary for loan servicing rights at
period end 2008 and 2007.
NOTE 3 - COMMON STOCK AND EARNINGS PER SHARE
Basic earnings per share are based upon the weighted average number of shares
outstanding plus contingently issuable shares during the year. Diluted earnings
per share further assumes the dilutive effect of additional common shares
issuable under stock options. During May of 2007, the Company declared and paid
a 100% stock dividend, and earnings per share, dividends per share and weighted
average shares have been restated to reflect the 100% stock dividend. A
reconciliation of basic and diluted earnings per share follows:
Three Months Ended
March 31,
-----------------------
2008 2007
---------- ----------
In thousands of dollars, except per share data
Net income $ 1,888 $ 1,726
========== ==========
Basic earnings:
Weighted average common shares outstanding 5,088,802 5,248,974
Weighted average contingently issuable shares 56,537 60,438
---------- ----------
Total weighted average shares outstanding 5,145,339 5,309,412
========== ==========
Basic earnings per share $ 0.37 $ 0.33
========== ==========
Diluted earnings:
Weighted average common shares outstanding
from basic earnings per share 5,145,339 5,309,412
Dilutive effect of stock options -- --
---------- ----------
Total weighted average shares outstanding 5,145,339 5,309,412
========== ==========
Diluted earnings per share $ 0.37 $ 0.33
========== ==========
A total of 302,968 and 253,114 shares for the three months ended March 31, 2008
and 2007, represented by stock options granted, are not included in the above
calculations as they are non-dilutive as of the date of this report. Cash
dividends of $0.20 and $0.19 were declared and paid in January of 2008 and 2007,
respectively.
Page 8
In February of 2007, the Company announced a program to repurchase up to 260,000
shares (adjusted for stock dividend) of its common stock through open market
purchases. Information regarding activity in this program is included in Part
II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds."
NOTE 4 - DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES
Effective January 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. FAS 157 has been applied prospectively as of the
beginning of the year.
FAS 157 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. FAS 157 also establishes a fair value
hierarchy which requires the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or
liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities; quoted prices in
active markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities
Level 3 Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the
assets or liabilities
Following is a description of the valuation methodologies used for instruments
measured at fair value on a recurring basis and recognized in the accompanying
balance sheet, as well as the general classification of such instruments
pursuant to the valuation hierarchy.
Available-for-sale Securities
Where quoted market prices are available in an active market, securities
are classified within Level 1 of the valuation hierarchy. Level 1
securities would include highly liquid government bonds, mortgage products
and exchange traded equities. If quoted market prices are not available,
then fair values are estimated by using pricing models, quoted prices of
securities with similar characteristics or discounted cash flows. Level 2
securities include U.S. agency securities, mortgage-backed
agency securities, obligations of states and political subdivisions and
certain corporate, asset backed and other securities. In certain cases
where Level 1 or Level 2 inputs are not available, securities are
classified within Level 3 of the hierarchy. Currently, all of the Company's
securities are considered to be Level 2 securities.
Following is a description of the valuation methodologies used for instruments
measured at fair value on a non-recurring basis and recognized in the
accompanying balance sheet, as well as the general classification of such
instruments pursuant to the valuation hierarchy.
Impaired Loans
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
Page 9
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. Loan
losses are charged against the allowance when Management believes the
uncollectability of a loan is confirmed. During the 2008 first quarter,
certain impaired loans were partially charged-off or re-evaluated
resulting in a remaining balance for these loans, net of specific
allowance, of $10,636,000 as of March 31, 2008. This valuation would be
considered Level 3, consisting of appraisals of underlying collateral and
discounted cash flow analysis.
NOTE 5 - ACCOUNTING DEVELOPMENTS
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.
NOTE 6 - CHANGE IN ACCOUNTING PRINCIPLE
In February, 2007, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities,
including an amendment of FASB Statement No. 115. FAS 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. While FAS 159 is effective for the Company beginning January 1, 2008, the
Company has not elected the fair value option that is offered by this statement.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion provides information about the consolidated financial condition
and results of operations for United Bancorp, Inc. and its subsidiary banks,
United Bank & Trust ("UBT") and United Bank & Trust - Washtenaw ("UBTW") for the
three month periods ended March 31, 2008 and 2007.
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.
Page 10
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 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.
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.
Unemployment for the State of Michigan at the end of February, 2008 was 7.8%,
which places it highest among the fifty states. The Lenawee County unemployment
rate of 9.2% is significantly above the State's average level, while the
Washtenaw County unemployment rate of 5.0% 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 the first quarter of 2008 improved by 9.4%
from the level achieved in the same quarter of 2007. The increase resulted
primarily from a decrease in the amount of provision for loan losses, but was
also aided by a double-digit increase in non-interest income. Net interest
income grew at a slower rate than asset growth, as a result of continued
tightening of the Company's net interest margin and spread. Expenses have also
increased considerably over recent quarters, primarily as a result of the
accrual of bonus and profit sharing expenses relating to the improved financial
performance of the Company.
Earnings per share was $.37 for the quarter, up from $.33 from the same period
last year. Return on average assets improved to 0.94% for the quarter, up from
..92% for the first quarter of 2007. Return on average average shareholders'
equity for the first quarter of this year was 10.35%, compared to 9.35% for the
same period of 2007.
Total consolidated assets of the Company of $797.9 million at March 31, 2008
were up 4.9% from the same period last year, and increased by $2.2 million
during the most recent quarter. At the end of March, loan balances reached
$655.0 million, while deposits declined to $667.5 million.
Page 11
RESULTS OF OPERATIONS
EARNINGS SUMMARY AND KEY RATIOS
Consolidated net income for the first quarter of 2008 of $1.888 million was 9.4%
above the first quarter of last year, and was an improvement over the loss of
$750,000 in the fourth quarter of 2007. The Company's net interest income has
remained relatively flat over the past five quarters, in spite of continued
growth of the Company. The Company's provision for loan losses for the first
quarter of this year was significantly lower than the levels for the first and
fourth quarters of last year, but is at a level consistent with the second and
third quarters of 2007. Noninterest income also remains consistent with the
prior quarter, while noninterest expenses have increased. The following chart
shows the trends of the major components of earnings for the five most recent
quarters.
2008 2007
------- -------------------------------------
in thousands of dollars, where appropriate 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
------- ------- ------- ------- -------
Net interest income $7,478 $ 7,411 $7,580 $7,478 $7,291
Provision for loan losses 660 5,801 618 710 1,509
Noninterest income 3,537 3,567 3,538 3,338 3,210
Noninterest expense 7,802 6,613 7,267 6,990 6,689
Federal income tax provision 665 (686) 895 849 577
Net income (loss) 1,888 (750) 2,339 2,267 1,725
Earnings (loss) per share (a) $ 0.37 $ (0.15) $ 0.45 $ 0.43 $ 0.33
Return on average assets (b) 0.94% -0.37% 1.18% 1.18% 0.92%
Return on average shareholders' equity (b) 10.35% -3.97% 12.32% 12.11% 9.35%
(a) Basic earnings per share, adjusted for stock dividends paid
(b) annualized
NET INTEREST INCOME
As a financial services holding company, United Bancorp, Inc. derives the
greatest portion of its income from net interest income. During 2007, short-term
rates were unchanged for the first eight months of the year. However, beginning
in September of 2007, the Federal Open Market Committee began lowering
short-term rates, and in the fourth quarter of 2007, the yield curve regained
its normal shape. In the first quarter of 2008, short-term rates were lowered
further, and the yield curve continued to steepen. The Company has been able to
lower its cost of deposits, but not to the degree that the shifting yield curve
would indicate. As a result, the Company's dollars of net interest income have
increased as a result of the growth of the Company's balance sheet, partially
offset by a decline in spreads and net interest margin.
Interest income increased 0.5% in the first quarter of 2008 over the same
quarter of 2007, and interest expense decreased 2.4% over the same timeframe.
The net result was an increase of 2.5% in net interest income. Tax-equivalent
yields on earning assets declined to 6.69% for the quarter, down from 7.07% for
the same quarter of 2007.
The Company's average cost of funds declined by 31 basis points, and tax
equivalent spread declined from 3.66% to 3.59%. Net interest margin experienced
similar declines, moving from 4.22% to 4.10% for comparable quarters of 2008 and
2007. The table below 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. The
following table shows the year to date daily average consolidated balance
sheets, interest earned (on a taxable equivalent basis) or paid, and the
annualized effective yield or rate, for the periods ended March 31 2008 and
2007.
Page 12
Three Months Ended March 31,
----------------------------------------------------------------
2008 2007
------------------------------- ------------------------------
Average Interest Yield/ Average Interest Yield/
dollars in thousands Balance (b) Rate (c) Balance (b) Rate (c)
--------- -------- -------- -------- -------- --------
ASSETS
Interest earning assets (a)
Federal funds sold $ 13,806 $ 119 3.47% $ 9,955 $ 126 5.07%
Taxable securities 51,150 601 4.73% 55,546 693 4.99%
Tax exempt securities (b) 48,392 707 5.88% 38,278 557 5.82%
Taxable loans 652,255 11,302 6.97% 603,032 11,123 7.38%
Tax exempt loans (b) 2,685 44 6.56% 2,838 45 6.33%
--------- ------- -------- -------
Total int. earning assets (b) 768,288 12,773 6.69% 709,649 12,544 7.07%
Less allowance for loan losses (12,447) (7,868)
Other assets 45,460 57,487
--------- --------
TOTAL ASSETS $ 801,301 $759,268
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 128,806 378 1.18% $114,651 407 1.42%
Savings deposits 182,061 896 1.98% 176,772 1,228 2.78%
CDs $100,000 and over 122,874 1,415 4.63% 110,702 1,320 4.77%
Other interest bearing deposits 162,691 1,719 4.25% 148,753 1,603 4.31%
--------- ------- -------- -------
Total int. bearing deposits 596,432 4,408 2.97% 550,878 4,558 3.31%
Short term borrowings 1,046 7 2.69% 580 7 4.72%
Other borrowings 44,039 523 4.79% 42,436 497 4.68%
--------- ------- ------- -------
Total int. bearing liabilities 641,517 4,938 3.10% 593,894 5,062 3.41%
------- -------
Noninterest bearing deposits 80,591 81,633
Other liabilities 6,595 8,908
Shareholders' equity 72,757 74,833
--------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $801,460 $759,268
========= ========
Net interest income (b) 7,835 7,482
------- -------
Net spread (b) 3.59% 3.66%
===== ====
Net yield on interest earning
assets (b) 4.10% 4.22%
===== ====
Tax equivalent adjustment on
interest income (357) (191)
------- -------
Net interest income per income
statement $ 7,478 $ 7,291
======= =======
Ratio of interest earning assets to
interest bearing liabilities 1.20 1.19
===== ====
(a) Non-accrual loans and overdrafts are included in the average balances of
loans.
(b) Fully tax-equivalent basis, net of nondeductible interest impact; 34% tax
rate.
(c) Annualized
The following table shows the effect of volume and rate changes on net interest
income for the three months ended March 31, 2008 and 2007 on a taxable
equivalent basis, in thousands of dollars.
2008 Compared to 2007 2007 Compared to 2006
Increase (Decrease) Increase (Decrease)
Due To: (a) Due To: (a)
--------------------- ----------------------
Volume Rate Net Volume Rate Net
------ ----- ---- ------ ---- ------
Interest earned on:
Federal funds sold $ 40 $ (47) $ (7) $ 45 $ 10 $ 55
Taxable securities (55) (37) (92) (67) 229 162
Tax exempt securities 145 5 150 18 16 34
Taxable loans 841 (662) 179 870 210 1,080
Tax exempt loans (3) 2 (1) (4) -- (4)
---- ----- ---- ---- ---- ------
Total interest income $968 $(739) $229 $862 $465 $1,327
==== ===== ==== ==== ==== ======
Page 13
(continued)
2008 Compared to 2007 2007 Compared to 2006
Increase (Decrease) Increase (Decrease)
Due To: (a) Due To: (a)
---------------------- -----------------------
Volume Rate Net Volume Rate Net
------ ----- ----- ------ ---- ------
Interest paid on:
NOW accounts $ 46 $ (75) $ (29) $ (4) $ 57 $ 53
Savings deposits 35 (367) (332) (25) 259 234
CDs $100,000 and over 136 (41) 95 357 168 525
Other interest bearing
deposits 140 (24) 116 128 274 402
Short term borrowings 4 (4) -- (33) (1) (34)
Other borrowings 17 9 26 33 20 53
---- ----- ----- ----- ----- ------
Total interest expense $378 $(502) $(124) $ 456 $ 777 $1,233
==== ===== ===== ===== ===== ======
Net change in net interest
income $590 $(237) $ 353 $ 406 $(312) $ 94
==== ===== ===== ===== ===== ======
(a) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
PROVISION FOR LOAN LOSS
Management continues to be concerned for economic conditions within the Nation,
State of Michigan and the market areas of the Banks. In December of 2007, the
Company identified adverse developments with respect to certain loans in the
loan portfolios of its subsidiary banks, and in response to that 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.
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, 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 repayment sources. For the first quarter of 2008, the
Banks have continued to closely watch the impact of economic circumstances on
its loan clients. The Company's provision for loan loss for the first quarter of
2008 was $660,000, down $1.509 million for the first quarter of 2007, which
included a special charge for one specific credit.
NONINTEREST INCOME
Noninterest income continues to contribute to the earnings growth of the
Company. Total noninterest income improved 10.2% over the first quarter of 2007.
Income from loan sales and servicing and ATM, debit and credit card fee income
provided the largest percentage increases, improving 61.7% and 12.2%,
respectively, over first quarter 2007 levels. Most other categories of
noninterest income experienced modest growth during the quarter compared to the
same period of 2007.
Service charges on deposit accounts were up 1.6% in the first quarter compared
to the same quarter last year. This is consistent with the Company's growth in
noninterest bearing deposits of 1.3% in the same period. No significant changes
to service charge structure were implemented in the first quarter of 2008.
Page 14
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 down 3.7% in the first quarter of
2008 compared to 2007, and was down 5.0% from the fourth quarter of last year.
Substantially all of the decline since the previous quarter is a result of a
decrease in market values of assets under management, as financial markets
continue to experience turmoil. Assets managed by the department at March 31,
2008 were $717.2 million, up from $689.0 million at the end of the same quarter
of 2007, but were down from $729.7 million at the end of 2007. Income from the
sale of nondeposit investment products is derived from the sale of investments
and insurance products to clients, including annuities, mutual funds and other
investment vehicles.
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 or 2006 as a result of impairment or other reasons.
The Banks have continued to experience strong volume in conventional residential
real estate mortgage loans, particularly in the volume of loans sold on the
secondary market. Income from loan sales and servicing was up 61.7% in the first
quarter of 2008 compared to the same period of 2007, and was up 19.9% over the
fourth quarter of 2007. During the third quarter of 2007, the Company formed
United Structured Finance ("USFC"), 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 12.2% in
the most recent quarter compared to the same quarter of 2007, but were down 7.0%
from the last quarter of 2007 due to seasonal activity fluctuations.
NONINTEREST EXPENSE
Total noninterest expenses were up 16.6% in the first quarter of 2008 compared
to the same quarter of last year. Salaries and benefits are the organization's
largest single area of expense, and for the quarter, provided the largest
dollars of increase. During 2007, this category of expense was reduced due to
lower amounts paid to co-workers for bonuses and 401(k) profit sharing
contributions as a result of reduced earnings for 2007. For the first quarter of
2008, the Company's financial performance has allowed us to increase accruals
for incentive compensation compared to prior year. In addition to the increased
cost of benefits, the Company continues to selectively expand its staff, in
order to provide for continued growth and client service within its market
areas. As a result of all of these changes, salaries and employee benefits
increased 22.2% over the same quarter of 2007 and 24.8% over the fourth quarter
of last year.
Page 15
Occupancy and equipment expense increased modestly in the first quarter of this
year compared to 2007 levels, and reflects the Company's ongoing investment in
technology and equipment. External data processing costs were up significantly
over the same period of 2007, which included a large cost recovery from a
vendor. Advertising and marketing expenses increased by 3.9% compared to the
comparable quarter last year. The increase reflects the cost of expanded
marketing and advertising presence in the communities served by the Banks, as
well as continued development of the Company's brand. Director fees declined,
and attorney, accounting and other professional fees were down 6.1% from 2007
levels.
Other expenses continue to increase over prior periods. Those expenses include
FDIC insurance costs, 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 compared to 2007, and the increase reflects a general
trend in the economy and the industry.
FEDERAL INCOME TAX
The Company's effective tax rate for the first three months of 2008 was 26.1%,
compared to 25.1% for the same period of 2007. The increase in the effective tax
rate is relatively insignificant, and reflects variations in the percentage of
total income that is comprised of tax-exempt income.
FINANCIAL CONDITION
SECURITIES
The Company's investment securities portfolio decreased by $252,000 compared to
the same period of 2007, but increased $4.8 million during the most recent
quarter. During much of 2007, the Company has elected not to replace some
maturing investments to fund additional loan growth. As a result of increased
funding availability, a number of those investments were replaced in the first
quarter of this year. The mix of the Company's investment portfolio has changed
modestly during the past twelve months, as the percentage of investments held in
treasury and agency securities have decreased while the percentages of mortgage
backed agencies, municipal obligations and corporate securities have increased
slightly.
The table below reflects the fair value of various categories of investment
securities of the Company, along with the percentage composition of the
portfolio by type as of the end of the current quarter for 2008 and 2007, and
December 31, 2007.
March 31, 2008 December 31, 2007 March 31, 2007
-------------------- -------------------- --------------------
In thousands of dollars Balance % of total Balance % of total Balance % of total
------- ---------- ------- ---------- ------- ----------
U.S. Treasury and agency
securities $26,267 28.9% $33,532 39.0% $35,349 38.8%
Mortgage backed agency
securities 18,272 20.1% 13,051 15.2% $12,858 14.1%
Obligations of states and
political subdivisions 39,625 43.8% 36,128 42.1% 39,561 43.6%
Corporate, asset backed, and
other securities 6,575 7.2% 3,187 3.7% 3,223 3.5%
------- ----- ------- ----- ------- -----
Total Investment Securities $90,739 100.0% $85,898 100.0% $90,991 100.0%
======= ===== ======= ===== ======= =====
The Company is conservative in its investments, preferring to concentrate its
risks within the loan portfolio. Investments in U.S. Treasury and agency
securities are considered to possess low credit risk. Obligations of U.S.
government agency mortgage-backed securities possess a somewhat higher interest
rate risk due to
Page 16
certain prepayment risks. The corporate, asset backed and other securities
portfolio also contains a moderate level of credit risk. The municipal portfolio
contains a small amount of geographic risk, as approximately 36% of the
municipal bond portfolio is issued by political subdivisions located within the
Banks' market areas of Lenawee and Washtenaw Counties and Dundee, Michigan.
There are currently no credit issues with any of the municipal bonds held in the
Company's portfolio. The Company's portfolio contains no "high risk" mortgage
securities or structured notes.
The Company's current and projected tax position continues to make carrying
tax-exempt securities beneficial, and the Company does not anticipate being
subject to the alternative minimum tax in the near future. The investment in
local municipal issues also reflects the Company's commitment to the development
of the local area through support of its local political subdivisions.
Unrealized gains and losses within the investment portfolio are temporary, since
they are a result of market changes, rather than a reflection of credit quality.
Management has no specific intent to sell any securities, although the entire
investment portfolio is classified as available for sale. The chart below
summarizes unrealized gains and losses in each category of the portfolio at
March 31, 2008 and 2007, in thousands of dollars.
2008 2007 Change
------- ----- ------
Unrealized gains (losses) in:
U.S. Treasury and agency securities $ 286 $ 13 $ 273
Mortgage backed agency securities 241 (35) 276
Obligations of states and political subdivisions 584 149 435
Corporate, asset backed and other securities (69) 81 (150)
------- ----- -----
Total investment securities $ 1,042 $ 208 $ 834
======= ===== =====
LOANS
Gross portfolio loans have increased by $10.4 million in the first quarter of
2008, and $43.1 million from March 31, 2007, and the growth over the past twelve
months is 7.0%. This increase has been caused by a 16.3% increase in the
Company's business loan portfolio, partially offset by a 20.0% decline in
construction and development loans over the past twelve months.
The makeup of the Company's portfolio continues to evolve, and the portfolio mix
has changed modestly during the first three months of the year. Business loans
and commercial mortgages increased as a percentage of total loans since December
31, 2007, while the percentages of the portfolio held in personal loans,
residential mortgages and construction and development loans have declined.
The table below shows total loans outstanding, in thousands of dollars, and
their percentage of the total loan portfolio. All loans are domestic and contain
no significant concentrations by industry or client.
March 31, 2008 December 31, 2007 March 31, 2007
--------------------- --------------------- ---------------------
Balance % of total Balance % of total Balance % of total
-------- ---------- -------- ---------- -------- ----------
Total loans:
Personal $ 98,293 15.0% $ 98,075 15.2% $ 91,840 15.0%
Business loans, including
commercial mortgages 389,332 59.4% 376,637 58.5% 334,628 54.7%
Tax exempt 2,648 0.4% 2,709 0.4% 3,054 0.5%
Residential mortgage 83,746 12.8% 86,023 13.3% 81,283 13.3%
Construction and
development loans 80,946 12.4% 81,086 12.6% 101,040 16.5%
-------- ----- -------- ----- -------- -----
Total portfolio loans $654,965 100.0% $644,530 100.0% $611,845 100.0%
======== ===== ======== ===== ======== =====
Page 17
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 following chart shows the aggregate amount of the Company's nonperforming
assets by type, in thousands of dollars.
3/31/08 12/31/07 3/31/07
------- -------- -------
Nonaccrual loans $13,253 $13,695 $10,629
Accruing loans past due 90 days or more 2,981 1,455 226
Troubled debt restructurings -- -- --
------- ------- -------
Total nonperforming loans 16,234 15,150 10,855
Other real estate owned 2,392 2,253 1,081
------- ------- -------
Total nonperforming assets $18,626 $17,403 $11,936
======= ======= =======
Percent of nonperforming loans to total loans 2.48% 2.35% 1.77%
Percent of nonperforming assets to total assets 2.33% 2.19% 1.57%
Total nonperforming assets increased during the first quarter of 2008. Since
December 31, 2007, nonaccrual loans have declined by $442,000 while delinquent
loans increased by $1.5 million. The improvement in nonaccrual loans reflects
the payoff or charge-off of some nonperforming loans during the quarter, while
the increase in delinquency reflects the difficult operating environment facing
certain borrowers of the Company. Collection efforts continue with all
delinquent clients, in order to bring them back to performing status. Total
nonperforming loans as a percent of total portfolio loans moved from 2.35% at
the end of 2007 to 2.48% at the end of the first quarter of 2008.
Holdings of other real estate increased by $139,000 in the first quarter of the
year. 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.
The Company's allowance for loan losses remains at a level consistent with its
estimated losses, and the allowance provides for currently estimated losses
inherent in the portfolio. The decline during the quarter reflects the
charge-off of loans previously identified as impaired and specifically reserved.
This resulted in a decline in the specific allowance on impaired loans of
$617,000. The allowance was increased for the balance of the portfolio by
$358,000 due to a combination of an increasing historical charge-off rate as
well as an increase in loan balances, and that increase was slightly offset by
an improvement in the concentration of construction and land development loans.
The decrease in the specific reserves was the primary reason for the slight
decrease in the allowance. An analysis of the allowance for loan losses, in
thousands of dollars, for the three months ended March 31, 2008 and 2007
follows:
2008 2007
------- ------
Balance at January 1 $12,306 $7,849
Loans charged off (945) (137)
Recoveries credited to allowance 26 8
Provision charged to operations 660 1,509
------- ------
Balance at March 31 $12,047 $9,229
======= ======
The following table presents the allocation of the allowance for loan losses
applicable to each loan category in thousands of dollars, as of March 31, 2008
and 2007, and December 31, 2007.
3/31/08 12/31/07 3/31/07
------- -------- -------
Business and commercial mortgage (1) $10,688 $10,924 $8,223
Residential mortgage 341 368 113
Personal 1,002 974 888
Unallocated 16 40 5
------- ------- ------
Total $12,047 $12,306 $9,229
======= ======= ======
(1) Includes commercial construction and development loans
Page 18
The allocation method used takes into account specific allocations for
identified credits and a three year historical loss average, adjusted for
certain qualitative factors, in determining the allocation for the balance of
the portfolio.
Within the Banks' loan portfolios, $22.1 million of impaired loans have been
identified as of March 31, 2008, compared with $24.7 million as of December 31,
2007. The specific allowance for impaired loans was $5.4 million at March 31,
2008 and $6.1 million at December 31, 2007. 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
continues to monitor the performance of the loan portfolios and will react to
conditions as they develop. 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.
DEPOSITS
Deposit balances declined slightly during the first quarter of 2008, as the
Company shifted its funding mix. Total deposits are 0.6% below year-end levels,
but are $31.1 million, or 4.9%, above balances at March 31, 2007. Demand deposit
balances increased during the quarter, while interest bearing deposits declined,
contributing to a decrease in the Company's cost of funds for the quarter.
Traditional deposit products continue to be an important part of the Company's
product line, and the Banks continue their emphasis on gathering core deposits
within their market areas without seeking substantial out of market funds. While
the Banks maintain a small amount of purchased or brokered deposits, they do not
support their growth through the use of those products. The majority of the
Company's deposits are derived from core client sources, relating to long term
relationships with local personal, business and public clients.
The table below shows the percentage makeup of the deposit portfolio as of March
31, 2008 and 2007, and December 31, 2007.
3/31/08 12/31/07 3/31/07
------- -------- -------
Noninterest bearing deposits 12.4% 11.6% 12.8%
Interest bearing deposits 87.6% 88.4% 87.2%
----- ----- -----
Total deposits 100.0% 100.0% 100.0%
===== ===== =====
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY, CASH EQUIVALENTS AND BORROWED FUNDS
The Company maintains correspondent accounts with a number of other banks for
various purposes. In addition, cash sufficient to meet the operating needs of
its banking offices is maintained at its lowest practical levels. At times, the
Banks are 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 2008 and 2007. Short-term advances and discount window
borrowings were not utilized during either year.
Page 19
The Company periodically finds it advantageous to utilize longer term borrowings
from the FHLBI. These long-term borrowings serve primarily to provide a balance
to some of the interest rate risk inherent in the Company's balance sheet.
During the first quarter of 2008, the Company procured $3.0 million in new
advances and repaid $4,500,000 in matured borrowings, resulting in a decrease in
total FHLB borrowings outstanding at March 31, 2008.
CAPITAL RESOURCES
The Company and the Banks were categorized as well-capitalized at March 31, 2008
and 2007, and December 31, 2007 by their regulators. The following table shows
the Company's capital ratios and ratio calculations as of March 31, 2008 and
2007, and December 31, 2007. Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc.
----------------------- ----------------------------
Adequate Well 3/31/08 12/31/07 3/31/07
---------- ---------- ------- -------- -------
Tier 1 capital to average assets 4% 5% 8.8% 8.7% 9.5%
Tier 1 capital to risk weighted assets 4% 6% 10.4% 10.5% 11.6%
Total capital to risk weighted assets 8% 10% 11.7% 11.8% 13.0%
Total shareholders' equity $74,093 $72,967 $75,277
Intangible assets (3,469) (3,469) (3,469)
Disallowed servicing assets -- -- --
Unrealized (gain) loss on securities
available for sale (687) (293) (137)
------- ------- -------
Tier 1 capital 69,937 69,205 71,671
Allowable loan loss reserves 8,438 8,257 7,768
------- ------- ------
Tier 1 and 2 capital $78,375 $77,462 $79,439
======= ======= ======
CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require management to
apply significant judgments to various accounting, reporting and disclosure
matters. The Company's Management must use assumptions and estimates to apply
these principles where actual measurement is not possible or practical. For a
complete discussion of the Company's significant accounting policies, see "Notes
to the Consolidated Financial Statements" on pages A-26 to A-29 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2007. Certain
policies are considered critical because they are highly dependent upon
subjective or complex judgments, assumptions and estimates. Changes in such
estimates may have a significant impact on the financial statements. Management
has reviewed the application of these policies with the Audit Committee of the
Company's Board of Directors.
FORWARD-LOOKING STATEMENTS
Statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations include forward-looking statements that are
based on management's beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about the
Company itself. Words such as "anticipate," "believe," "determine," "estimate,"
"expect," "forecast," "intend," "is likely," "plan," "project," "opinion,"
variations of such terms, and similar expressions are intended to identify such
forward-looking statements. The presentations and discussions of the provision
and allowance for loan losses, and determinations as to the need for other
allowances presented in this report are inherently forward-looking statements in
that they involve judgments and statements of belief as to the outcome of future
events. These statements are not guarantees of future performance and involve
certain risks, uncertainties, and assumptions that are difficult to predict with
regard to timing, extent, likelihood, and degree of occurrence. Therefore,
actual results and outcomes may materially differ from what may be expressed or
forecasted in such forward-looking statements. Internal and external factors
that may cause such a difference include those discussed under "Risk Factors" in
Part I, Item 1A of the
Page 20
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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FUNDS MANAGEMENT AND INTEREST RATE RISK
The composition of the Company's balance sheet consists of investments in
interest earning assets (loans and investment securities) that are funded by
interest bearing liabilities (deposits and borrowings). These financial
instruments have varying levels of sensitivity to changes in market interest
rates resulting in market risk. Policies place strong emphasis on stabilizing
net interest margin, with the goal of providing a sustained level of
satisfactory earnings. The Funds Management, Investment and Loan policies
provide direction for the flow of funds necessary to supply the needs of
depositors and borrowers. Management of interest sensitive assets and
liabilities is also necessary to reduce interest rate risk during times of
fluctuating interest rates.
A number of measures are used to monitor and manage interest rate risk,
including interest sensitivity and income simulation analyses. An interest
sensitivity model is the primary tool used to assess this risk with supplemental
information supplied by an income simulation model. The simulation model is used
to estimate the effect that specific interest rate changes would have on twelve
months of pretax net interest income assuming an immediate and sustained up or
down parallel change in interest rates of 200 basis points. Key assumptions in
the models include prepayment speeds on mortgage related assets; cash flows and
maturities of financial instruments held for purposes other than trading;
changes in market conditions, loan volumes and pricing; and management's
determination of core deposit sensitivity. These assumptions are inherently
uncertain and, as a result, the models cannot precisely estimate net interest
income or precisely predict the impact of higher or lower interest rates on net
interest income. Actual results will differ from simulated results due to
timing, magnitude, and frequency of interest rate changes and changes in market
conditions.
Based on the results of the simulation model as of March 31, 2008, the Company
would expect a maximum potential reduction in net interest margin of less than
6% if market rates decreased under an immediate and sustained parallel shift of
200 basis points. The interest sensitivity position of the Company continues to
be liability sensitive based on internal measures.
The Company and each Bank maintains Funds Management Committees, which review
exposure to market risk on a regular basis. The Committees' overriding policy
objective is to manage assets and liabilities to provide an optimum and
consistent level of earnings within the framework of acceptable risk standards.
The Funds Management Committees are also responsible for evaluating and
anticipating various risks other than interest rate risk. Those risks include
prepayment risk, credit risk and liquidity risk. The Committees include senior
members of management, and monitor the makeup of interest sensitive assets and
liabilities to assure appropriate liquidity, maintain interest margins and to
protect earnings in the face of changing interest rates and other economic
factors.
Page 21
The Funds Management policies provide for a level of interest sensitivity which,
Management believes, allows the Banks to take advantage of opportunities within
their markets relating to liquidity and interest rate risk, allowing flexibility
without subjecting the Company to undue exposure to risk. In addition, other
measures are used to evaluate and project the anticipated results of
Management's decisions.
ITEM 4 - CONTROLS AND PROCEDURES
INTERNAL CONTROL
The Company maintains internal controls that contain self-monitoring mechanisms,
and actions are taken to correct deficiencies as they are identified. The Board
of Directors of the Company, operating through its Audit and Compliance
Committee, provides oversight to the financial reporting process. Even effective
internal controls, no matter how well designed, have inherent limitations,
including the possibility of circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only reasonable
assurance with respect to financial statement preparation. Furthermore, the
effectiveness of internal controls may vary over time. The Company's Audit and
Compliance Committee is composed entirely of Directors who are not officers or
employees of the Company.
As of March 31, 2008, an evaluation was carried out under the supervision and
with the participation of United Bancorp's management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934). Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that United Bancorp's disclosure controls and procedures as of the end
of the quarter ended March 31, 2008 are, to the best of their knowledge,
effective to reasonably ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act are recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. There have been no changes
in the Company's internal controls over financial reporting that occurred during
the quarter ended March 31, 2008 that materially affected, or are likely to
materially affect, the Company's internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1- LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings. The Company and
the Banks are involved in ordinary routine litigation incident to its business;
however, no such routine proceedings are expected to result in any material
adverse effect on the operations or earnings of the Company or the Banks.
Neither the Company nor the Banks are involved in any proceedings to which any
director, principal officer, affiliate thereof, or person who owns of record or
beneficially five percent (5%) or more of the outstanding stock of the Company,
or any associate of the foregoing, is a party or has a material interest adverse
to the Company or the Banks.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) In February of 2007, the Company announced a stock repurchase program for
up to 260,000 shares of its common stock (adjusted for stock dividend). The
number and timing of the repurchases are at the Company's sole discretion
and the plan is periodically re-evaluated depending on market conditions,
capital needs and other factors. In connection with this, the Company
temporarily suspended activity in the plan in April 2008. The following
table provides information about purchases by the Company during
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the quarter ended March 31, 2008 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 in 2008 Purchased per Share Announced Plans Under the Plan
-------------- --------- ---------- ------------------- ------------------
January 1 - 31 2,633 $18.41 2,633 76,614
February 1 - 29 2,208 19.70 2,208 74,406
March 1 - 31 5,300 19.44 5,300 69,106
------ ------
Total this quarter 10,141 $19.23 10,141
ITEM 6- EXHIBITS
Listing of Exhibits (numbered as in Item 601 of Regulation S-K):
Exhibit 31.1 Certification of principal executive officer pursuant to Rule 13a
- 14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of principal financial officer pursuant to Rule 13a
- 14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED BANCORP, INC.
April 25, 2008
/s/ Robert K. Chapman /s/ Randal J. Rabe
- ------------------------------------- ----------------------------------------
Robert K. Chapman Randal J. Rabe
President and Chief Executive Officer Executive Vice President and Chief
(Principal Executive Officer) Financial Officer
(Principal Financial Officer)
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