UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
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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, 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 Exchange Act. Yes [ ] No [X]
As of October 14, 2008, there were outstanding 5,052,573 shares of the
registrant's common stock, no par value.
Page 1
CROSS REFERENCE TABLE
Item No. DESCRIPTION PAGE NO
- ---------- ------------------------------------------------------------------- -------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
(a) Condensed Consolidated Balance Sheets 3
(b) Condensed Consolidated Statements of Income 4
(c) Condensed Consolidated Statements of Shareholders' Equity 5
(d) Condensed Consolidated Statements of Cash Flows 6
(e) Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Background 11
Executive Summary 11
Results of Operations 12
Financial Condition 17
Liquidity and Capital Resources 20
Critical Accounting Policies 21
Forward-Looking Statements 22
Item 3 Quantitative and Qualitative Disclosures about Market Risk 22
Item 4 Controls and Procedures 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 6. Exhibits 24
Signatures 25
Exhibits 26
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Page 2
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
(A) CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (unaudited)
September 30, December 31, September 30,
2008 2007 2007
------------- ------------ --------------
In thousands of dollars
ASSETS
Cash and demand balances in other banks $ 16,856 $ 17,996 $ 14,729
Federal funds sold -- 11,130 --
-------- -------- --------
Total cash and cash equivalents 16,856 29,126 14,729
Securities available for sale 78,013 85,898 87,691
Loans held for sale 7,107 5,770 3,885
Portfolio loans 683,064 644,530 648,626
Less allowance for loan losses 14,335 12,306 7,714
-------- -------- --------
Net portfolio loans 668,729 632,224 640,912
Premises and equipment, net 12,621 13,160 13,205
Goodwill 3,469 3,469 3,469
Bank-owned life insurance 12,319 11,961 11,840
Accrued interest receivable and other assets 16,233 14,079 12,566
-------- -------- --------
Total Assets $815,347 $795,687 $788,297
======== ======== ========
LIABILITIES
Deposits
Noninterest bearing $ 88,212 $ 77,878 $ 78,333
Interest bearing 598,341 593,659 580,327
-------- -------- --------
Total Deposits 686,553 671,537 658,660
Federal funds purchased and other short term borrowings -- -- 4,830
FHLB advances payable 51,951 44,611 44,625
Accrued interest payable and other liabilities 4,077 6,572 4,648
-------- -------- --------
Total Liabilities 742,581 722,720 712,763
Commitment and Contingent Liabilities
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value; 10,000,000 shares
authorized; 5,052,573, 5,092,230, and 5,133,444 shares issued
and outstanding 67,260 67,860 68,719
Retained earnings 5,720 4,814 6,603
Accumulated other comprehensive income (loss), net of tax (214) 293 212
-------- -------- --------
Total Shareholders' Equity 72,766 72,967 75,534
-------- -------- --------
Total Liabilities and Shareholders' Equity $815,347 $795,687 $788,297
======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
(B) CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2008 2007 2008 2007
------- -------- ------- -------
In thousands of dollars, except per share data
INTEREST INCOME
Interest and fees on loans $10,747 $12,313 $32,645 $35,319
Interest on securities
Taxable 499 636 1,653 1,962
Tax exempt 369 361 1,102 1,120
Interest on federal funds sold 3 12 125 155
------- ------- ------- -------
Total interest income 11,618 13,322 35,525 38,556
INTEREST EXPENSE
Interest on deposits 3,477 5,149 11,367 14,514
Interest on fed funds and other short term borrowings 20 73 95 160
Interest on FHLB advances 583 520 1,661 1,532
------- ------- ------- -------
Total interest expense 4,080 5,742 13,123 16,206
------- ------- ------- -------
NET INTEREST INCOME 7,538 7,580 22,402 22,350
Provision for loan losses 3,300 618 5,610 2,836
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,238 6,962 16,792 19,514
NONINTEREST INCOME
Service charges on deposit accounts 883 935 2,600 2,623
Wealth Management fee income 1,074 1,182 3,387 3,570
Gains on securities transactions 2 -- 106 1
Income from loan sales and servicing 724 473 2,140 1,242
ATM, debit and credit card fee income 579 545 1,699 1,549
Income from bank-owned life insurance 124 119 359 341
Other income 281 284 681 760
------- ------- ------- -------
Total noninterest income 3,667 3,538 10,972 10,086
NONINTEREST EXPENSE
Salaries and employee benefits 3,962 3,988 12,432 11,330
Occupancy and equipment expense, net 1,257 1,228 3,716 3,646
External data processing 435 431 1,311 1,154
Advertising and marketing 282 279 972 942
Attorney, accounting and other professional fees 239 226 707 798
Director fees 107 116 322 349
Expenses relating to ORE property 468 92 544 98
Other expenses 873 907 2,668 2,631
------- ------- ------- -------
Total noninterest expense 7,623 7,267 22,672 20,948
------- ------- ------- -------
INCOME BEFORE FEDERAL INCOME TAX 282 3,233 5,092 8,652
Federal income tax (114) 895 1,112 2,321
------- ------- ------- -------
NET INCOME $ 396 $ 2,338 $ 3,980 $ 6,331
======= ======= ======= =======
Basic and diluted earnings per share $ 0.08 $ 0.45 $ 0.78 $ 1.20
Cash dividends declared per share of common stock $ 0.20 $ 0.20 $ 0.60 $ 0.59
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
(C) CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2008 2007 2008 2007
------- -------- ------- -------
In thousands of dollars
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of period $73,452 $75,501 $72,967 $74,536
Net Income 396 2,338 3,980 6,331
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 (141) 437 (507) 144
------- ------- ------- -------
Total comprehensive income 255 2,775 3,473 6,475
Cash dividends paid (1,011) (1,042) (3,039) (3,085)
Purchase of common stock -- (1,807) (831) (2,893)
Other common stock transactions 70 107 196 501
------- ------- ------- -------
Balance at end of period $72,766 $75,534 $72,766 $75,534
======= ======= ======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5
(D) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
-------------------
2008 2007
-------- --------
In thousands of dollars
Cash Flows from Operating Activities
Net income $ 3,980 $ 6,331
Adjustments to Reconcile Net Income to Net Cash from
Operating Activities
Depreciation and amortization 1,234 1,000
Provision for loan losses 5,610 2,836
Gain on sale of loans (1,792) (964)
Proceeds from sales of loans originated for sale 96,493 55,640
Loans originated for sale (96,038) (52,789)
(Gains) on securities transactions (106) (1)
Deferred income taxes (452) (113)
Stock option expense 113 153
Increase in cash surrender value of bank-owned life
insurance (359) (341)
Change in investment in limited partnership (196) 156
Change in accrued interest receivable and other
assets (146) 147
Change in accrued interest payable and other
liabilities (2,249) (2,521)
-------- --------
Net cash from operating activities 6,092 9,534
Cash Flows from Investing Activities
Securities available for sale
Purchases (37,447) (9,658)
Sales 214 --
Maturities and calls 41,222 14,066
Principal payments 3,224 4,045
Net change in portfolio loans (43,688) (56,951)
Premises and equipment expenditures (456) (884)
-------- --------
Net cash used in investing activities (36,931) (49,382)
Cash Flows from Financing Activities
Net change in deposits 15,016 30,658
Net change in short term borrowings -- 4,753
Proceeds from other borrowings 16,000 25,030
Principal payments on other borrowings (8,660) (21,610)
Purchase of common stock (831) (2,893)
Proceeds from other common stock transactions 83 348
Cash dividends paid (3,039) (3,085)
-------- --------
Net cash from financing activities 18,569 33,201
-------- --------
Net change in cash and cash equivalents (12,270) (6,647)
Cash and cash equivalents at beginning of year 29,126 21,376
-------- --------
Cash and cash equivalents at end of period $ 16,856 $ 14,729
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 14,908 $ 18,155
Income tax paid 1,913 2,822
Loans transferred to other real estate 1,573 1,345
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
and nine month periods ended September 30, 2008 are not necessarily indicative
of the results that may be expected for the year ending 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.
NOTE 2 - STOCK OPTIONS
The Company's 2005 Stock Option Plan (the "2005 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.
Outstanding Exercise Price
----------- --------------
Stock Options
Balance at January 1, 2008 305,113 $26.22
Options granted 66,800 19.20
Options exercised -- --
Options forfeited (18,852) 24.78
-------
Balance at September 30, 2008 353,061 $24.97
=======
Total options granted during the nine-month period ended September 30, 2008 were
66,800, and the weighted fair value of the options granted was $1.98. For stock
options outstanding at September 30, 2008, the range of average exercise prices
was $11.05 to $32.14 and the weighted average remaining contractual term was
6.61 years. At September 30, 2008, 241,828 options are exercisable under the
Plans. The Company has recorded $112,500 in compensation expense related to
vested stock options
Page 7
less estimated forfeitures for the nine-month period ended September 30, 2008.
As of the end of the third quarter of 2008, unrecognized compensation expense
related to the stock options totaled $166,625 and is expected to be recognized
over three years.
At September 30, 2008, 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 the third quarter and the exercise
price, multiplied by the number of in-the-money options assuming all option
holders had exercised their stock options on September 30, 2008. No options were
exercised during the quarter ended September 30, 2008.
NOTE 3 - 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 $314,846,000 and $240,634,000 at the end of September 2008 and 2007, and the
balance of loans serviced for others related to servicing rights that have been
capitalized was $313,370,000 and $239,431,000 at September 30, 2008 and 2007.
Loans servicing rights consist primarily of mortgage servicing rights, but
include a number of commercial loans which the Company has sold but retains
servicing. Loan servicing rights activity for the nine months ended September
30, 2008 and 2007 is shown in the table below.
2008 2007
------ ------
In thousands of dollars
Balance at January 1 $1,723 $1,541
Amount capitalized year to date 617 248
Amount amortized year to date (201) (154)
------ ------
Balance at September 30 $2,139 $1,635
====== ======
No valuation allowance was considered necessary for loan servicing rights at
period end 2008 and 2007.
NOTE 4 - 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:
Page 8
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
In thousands of dollars, except share data
Net income $ 396 $ 2,338 $ 3,980 $ 6,331
========== ========== ========== ==========
Basic earnings:
Weighted average common shares outstanding 5,052,555 5,180,127 5,064,556 5,218,909
Weighted average contingently issuable shares 60,506 60,470 58,244 60,213
---------- ---------- ---------- ----------
Total weighted average shares outstanding 5,113,061 5,240,597 5,122,800 5,279,122
========== ========== ========== ==========
Basic earnings per share $ 0.08 $ 0.45 $ 0.78 $ 1.20
========== ========== ========== ==========
Diluted earnings:
Weighted average common shares outstanding
from basic earnings per share 5,113,061 5,240,597 5,122,800 5,279,122
Dilutive effect of stock options -- -- -- --
---------- ---------- ---------- ----------
Total weighted average shares outstanding 5,113,061 5,240,597 5,122,800 5,279,122
========== ========== ========== ==========
Diluted earnings per share $ 0.08 $ 0.45 $ 0.78 $ 1.20
========== ========== ========== ==========
A total of 349,061 and 268,342 shares for the three month periods ended
September 30, 2008 and 2007, and 338,408 and 267,348 shares for the nine month
periods ended September 30, 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.
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 5 - DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES
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. The Company has applied FAS
157 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 that
emphasizes use of observable inputs and minimizes 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
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
Page 9
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 those instruments under
the valuation hierarchy.
Available-for-sale Securities
Level 2 securities include U.S. Treasury and agency securities,
mortgage-backed agency securities, obligations of states and political
subdivisions and certain corporate, asset backed and other securities.
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 those
instruments under the valuation hierarchy.
Impaired Loans
Loan impairment is reported when scheduled payments under contractual
terms are deemed uncollectible. 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. Loan losses are charged against the
allowance when Management believes the uncollectability of a loan is
confirmed.
During the third quarter and first nine months of 2008, certain loans
became impaired, while certain loans previously identified as impaired
were partially charged-off or re-evaluated. These changes during the
third quarter of 2008 resulted in a balance for these loans, net of
specific allowance, of $15.7 million. Year to date changes resulted in
a balance, net of specific allowance, of $16.7 million at September
30, 2008. This valuation would be considered Level 3, consisting of
appraisals of underlying collateral and discounted cash flow analysis.
On construction and development loans, the Company uses the loan's
effective interest rate to discount future cash flows except for
situations when the Company determines that foreclosure is probable.
In those cases, the Company uses appraised values and the discount
rates contained in the appraisals. Had the Company used appraised
values for all identified impaired loans, the resulting balance, net
of specific allowance, would have been reduced by $1.1 million from
the amounts reflected in the financial statements.
NOTE 6 - 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 material impact on its financial statements.
Page 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
This discussion provides information about the consolidated financial condition
and results of operations for United Bancorp, Inc. and its subsidiary banks,
United Bank & Trust ("UBT") and United Bank & Trust - Washtenaw ("UBTW") for the
three and nine month periods ended September 30, 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 (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, 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.
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 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 provides additional diversity to the
Company's income stream, and provides additional financing alternatives to
clients of the Banks as well as non-bank clients.
EXECUTIVE SUMMARY
Unemployment for the State of Michigan at the end of August 2008 of 8.9%
resulted in the State retaining its position of the highest unemployment level
among the fifty states. The Lenawee County unemployment rate of 10.3% is above
the State's average level, while the Washtenaw County unemployment rate of 6.4%
ranks the County as the fifth lowest in the State. The ongoing economic issues
in Michigan have continued to have an impact on earnings of the Company. The
Company's 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
maintain market share in challenging local economic conditions.
Page 11
United Bancorp, Inc. net income for the third quarter of 2008 declined by 83.1%
from the level achieved in the same quarter of 2007, and for the first nine
months of 2008, net income is 37.1% below that of the same period of 2007.
Earnings per share of $.08 for the quarter was down from $0.45 per share for the
same period last year. Year to date basic and diluted earnings per share for
2008 are $.78, down from $1.20 for the same period of 2007. Year to date return
on average assets of 0.66% is below 2007 levels of 1.10%, and year to date
return on average equity of 7.24% is below the 11.28% level of last year.
Total consolidated assets of the Company of $815.3 million at September 30, 2008
were up 3.4% from the same period last year, and increased by $16.4 million
during the most recent quarter. At the end of September, gross portfolio loan
balances reached $683.1 million, while deposits grew to $686.6 million.
After the additional charges to the allowance for loan losses for the third
quarter, the Company and its subsidiary banks continue to be "well-capitalized"
under regulatory capital requirements. The Company does not have any exposure to
sub-prime mortgage loans, Fannie Mae and Freddie Mac equity securities, or
non-agency mortgage-backed securities that have been the topic of much recent
public discussion. The Company's core business remains strong and growing, and
includes a diversity of sources of noninterest income that provide approximately
one-third of total revenue.
RESULTS OF OPERATIONS
EARNINGS SUMMARY AND KEY RATIOS
Consolidated net income for the third quarter of 2008 of $396,000 was down from
$2.338 million for the same quarter of last year, and year to date net income of
$3.980 million is down from $6.331 million for the first nine months 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 third quarter of this year was significantly
higher than the levels for the first two quarters of this year and the third
quarter of last year, and was surpassed only by the fourth quarter of 2007.
Noninterest income declined from the prior quarter but was up over the previous
three quarters. Noninterest expenses have increased compared to last quarter and
to the same quarter of last year. The following table shows the trends of the
major components of earnings for the five most recent quarters.
2008 2007
--------------------------- -----------------
3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr
------- ------- ------- ------- -------
in thousands of dollars, where appropriate
Net interest income $7,538 $7,387 $7,478 $7,411 $7,580
Provision for loan losses 3,300 1,650 660 5,801 618
Noninterest income 3,667 3,766 3,537 3,567 3,538
Noninterest expense 7,623 7,248 7,802 6,613 7,267
Federal income tax provision (114) 560 665 (686) 895
Net income (loss) 396 1,695 1,888 (750) 2,338
Earnings (loss) per share (a) $ 0.08 $ 0.33 $ 0.37 $(0.15) $ 0.45
Return on average assets (b) 0.20% 0.86% 0.94% -0.37% 1.18%
Return on average shareholders' equity (b) 2.14% 9.29% 10.35% -3.97% 12.32%
(a) Basic earnings per share, adjusted for stock dividends paid
(b) annualized
Page 12
NET INTEREST INCOME
As a financial services holding company, United Bancorp, Inc. derives the
greatest portion of its income from net interest income, which is impacted
significantly by interest rate changes within the market. In part as a result of
interest rate volatility over the past two years, the Company has experienced
fluctuation in its net interest income. The Company's interest income decreased
12.8% in the third quarter of 2008 over the same quarter of 2007, while interest
expense decreased 28.9% over the same timeframe. The net result was a decrease
of 0.6% in net interest income. Year to date net interest income grew 0.2% from
the first nine months of 2007, with interest income declining 7.9% while
interest expense declined 19.0%.
Tax-equivalent yields on earning assets declined to 6.39% for the first nine
months of 2008, down from 7.23% for the same period of 2007. During that same
timeframe, the Company's average cost of funds declined by eighty-one basis
points, and tax equivalent spread declined from 3.67% to 3.63%. Net interest
margin experienced similar declines, moving from 4.23% to 4.10% for comparable
nine-month periods 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 table shows
the year to date daily average consolidated balance sheets, interest earned (on
a taxable equivalent basis) or paid, and the annualized effective yield or rate,
for the periods ended September 30, 2008 and 2007.
Nine Months Ended September 30,
---------------------------------------------------------------
2008 2007
------------------------------ ------------------------------
Average Interest Yield/ Average Interest Yield/
Balance (b) Rate (c) Balance (b) Rate (c)
-------- -------- -------- -------- -------- --------
dollars in thousands
ASSETS
Interest earning assets (a)
Federal funds sold $ 5,188 $ 125 3.21% $ 4,585 $ 155 4.50%
Taxable securities 47,110 1,653 4.69% 53,547 1,962 4.89%
Tax exempt securities (b) 49,247 2,162 5.86% 35,277 1,637 6.19%
Taxable loans 661,873 32,558 6.57% 625,225 35,217 7.51%
Tax exempt loans (b) 2,625 128 6.52% 3,049 151 6.61%
-------- -------- -------- -------
Total int. earning assets (b) 766,043 36,626 6.39% 721,683 39,121 7.23%
Less allowance for loan losses (12,564) (7,980)
Other assets 45,228 57,728
-------- --------
TOTAL ASSETS $798,707 $771,431
======== ========
Page 13
Nine Months Ended September 30,
---------------------------------------------------------------
2008 2007
------------------------------ ------------------------------
Average Interest Yield/ Average Interest Yield/
Balance (b) Rate (c) Balance (b) Rate (c)
-------- -------- -------- -------- -------- --------
dollars in thousands
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW and savings deposits 309,316 3,188 1.38% 287,969 5,011 2.33%
CDs $100,000 and over 119,032 3,809 4.27% 117,997 4,338 4.90%
Other interest bearing deposits 154,602 4,370 3.78% 153,274 5,165 4.49%
-------- ------- -------- -------
Total int. bearing deposits 582,950 11,367 2.60% 559,240 14,514 3.46%
Short term borrowings 5,351 95 2.37% 4,533 160 4.71%
Other borrowings 48,060 1,661 4.62% 43,235 1,532 4.72%
-------- ------- -------- -------
Total int. bearing liabilities 636,361 13,123 2.75% 607,008 16,206 3.56%
------- -------
Noninterest bearing deposits 83,461 82,112
Other liabilities 5,936 7,265
Shareholders' equity 72,948 75,046
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $798,707 $771,431
======== ========
Net interest income (b) 23,503 22,915
------- -------
Net spread (b) 3.63% 3.67%
==== ====
Net yield on interest earning assets (b) 4.10% 4.23%
==== ====
Tax equivalent adjustment on interest income (1,101) (565)
------- -------
Net interest income per income statement $22,402 $22,350
======= =======
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 nine months ended September 30, 2008 and 2007 on a taxable
equivalent basis, in thousands of dollars.
2008 Compared to 2007 2007 Compared to 2006
Increase (Decrease) Due To: (a) Increase (Decrease) Due To: (a)
------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
------ ------- ------- ------ ------ ----------
Interest earned on:
Federal funds sold $ 18 $ (48) $ (30) $ (112) $ (24) $ (136)
Taxable securities (231) (78) (309) (263) 479 216
Tax exempt securities 614 (89) 525 14 113 127
Taxable loans 1,963 (4,621) (2,658) 3,356 337 3,693
Tax exempt loans (21) (2) (23) -- 6 6
------ ------- ------- ------ ------ ------
Total interest income $2,343 $(4,838) $(2,495) $2,995 $ 911 $3,906
====== ======= ======= ====== ====== ======
Interest paid on:
Now and savings deposits 350 (2,173) (1,823) 17 654 671
CDs $100,000 and over 37 (566) (529) 960 400 1,360
Other interest bearing deposits 44 (840) (796) 350 700 1,050
Short term borrowings 25 (90) (65) 115 (2) 113
Other borrowings 165 (36) 129 114 47 161
------ ------- ------- ------ ------ ------
Total interest expense $ 621 $(3,705) $(3,084) $1,556 $1,799 $3,355
====== ======= ======= ====== ====== ======
Net change in net interest income $1,722 $(1,133) $ 589 $1,439 $ (888) $ 551
====== ======= ======= ====== ====== ======
(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.
Page 14
PROVISION FOR LOAN LOSS
As the Southeast Michigan real estate markets and the economy in general
continue to deteriorate, the loan portfolios of the Company's subsidiary banks
continue to be affected by loans to a number of residential real estate
developers that are struggling to meet their financial obligations. Primarily as
a result of this economic deterioration, the Company's provision for loan losses
for the third quarter was $3.3 million, which is $1.65 million higher than the
amount recorded by the Company in the second quarter of 2008. While the
Company's loans to residential real estate developers make up only 11% of its
loan portfolio, current economic conditions have disproportionately impacted
this sector of the economy.
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 has also been reduced. The Banks have
continued to closely monitor the impact of economic circumstances on their loan
clients, and are working with these clients to minimize losses.
NONINTEREST INCOME
Noninterest income continues to contribute to the earnings of the Company. Total
noninterest income improved 3.6% over the same quarter of 2007, and for the
first nine months of this year, is 8.8% higher than the same period of 2007.
Income from loan sales and servicing and ATM, debit and credit card fee income
provided most of the increase over the same quarter of last year, while service
charges on deposits and wealth management income are down for the quarter and
year to date.
Service charges on deposit accounts were down 5.6% in the third quarter compared
to the same quarter last year, and year to date service charges are virtually
flat compared to the first nine months of 2007. No significant changes to
service charge structure were implemented in the third quarter of 2008, although
improvements in the Banks' reporting systems have made balance information more
readily available to clients by electronic means. This has allowed clients to
watch their balances more closely, helping them to avoid overdraft and NSF fees
if they so choose.
The Wealth Management Group of UBT continues to provide an important source of
noninterest income for the Company. 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 9.1% in the third quarter of
2008 compared to 2007, and was down 5.1% year to date. Substantially all of the
decrease is a result of a decline in market values of assets under management,
as financial markets declined significantly over the past twelve months. Assets
managed by the department at September 30, 2008 were $653.4 million, down from
$759.3 at the end of the same quarter of 2007 and down from $729.7 million at
the end of 2007.
Income from loan sales and servicing was up 53.1% in the third quarter of 2008
compared to the same period of 2007, and year to date, is up 72.3% over the same
period of 2007. The Banks continue to experience strong volume in conventional
residential real estate mortgage loans, particularly with regard to the volume
of loans sold on the secondary market. During the third quarter of 2007, the
Company formed United Structured Finance, a finance company that offers
financing solutions to small businesses, primarily by engaging in SBA 504 and
7(a) lending. The loans generated by USFC
Page 15
are typically sold on the secondary market, and gains on the sale of those loans
contributed to the increase income from loan sales and servicing for the current
quarter.
The table below shows the breakdown of income from loan sales and servicing
between residential mortgages and United Structured Finance, in thousands of
dollars:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2008 2007 2008 2007
---- ---- ------ --------
In thousands of dollars
Residential mortgage sales and servicing $579 $471 $1,684 $1,227
United Structured Finance income 145 2 456 15
---- ---- ------ ------
Total income from loan sales and servicing $724 $473 $2,140 $1,242
==== ==== ====== ======
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. No write-downs in mortgage servicing rights
were required in 2008 or 2007 as a result of impairment or other reasons.
ATM, debit and credit card fee income continues to provide a steady source of
noninterest income for the Company. The Banks operate twenty ATMs throughout
their market areas, and Bank clients are active users of debit cards. The Banks
continue to earn ongoing fee income from credit card referrals and operation of
its credit card merchant business. Income from these areas was up 6.2% in the
most recent quarter compared to the same quarter of 2007, and is up 9.7% year to
date over 2007. At the same time, income from bank owned life insurance has
increased, and other income has declined. Other income generally includes other
service charges and fees, as well as nonrecurring income.
NONINTEREST EXPENSE
Total noninterest expenses were up 4.9% in the third quarter of 2008 compared to
the same quarter of last year, and are up 8.2% year to date. Salaries and
benefits are the organization's largest single area of expense, and for the
quarter, were down from the prior quarter and the same quarter of 2007. Reduced
earnings levels in the recent quarter resulted in a decrease in the amount of
the Company's expense relating to incentive compensation. The Company has
selectively expanded 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 declined 0.7% from the same quarter of 2007 but
remain 9.7% above the first nine months of last year.
Occupancy and equipment expense increased modestly in the third quarter and year
to date compared to 2007 levels, and reflects the Company's ongoing investment
in technology and equipment. External data processing costs were substantially
unchanged from the same quarter of last year, but are up 13.6% over the first
three quarters of 2007, which included a large cost recovery from a vendor.
Advertising and marketing expenses increased by 1.1% for the quarter and 3.2%
year to date compared to the comparable periods last year. Director fees and
attorney, accounting and other professional fees were down from the comparable
quarter and nine month periods of 2007.
Costs relating to assets carried as Other Real Estate Owned include property
taxes, maintenance and utility costs related to those properties. In addition,
net losses from the write-down or sale of those properties is included in that
category of expense. Deterioration in the value of certain of these
Page 16
properties resulted in additional losses of $367,000 during the most recent
quarter, as those assets were written down to their estimated fair value
reflecting a decline in prevailing real estate prices.
Other expenses, which include FDIC insurance costs, fraud losses and losses on
closed accounts, were not significantly changed for the quarter and year to date
compared to 2007 levels.
FEDERAL INCOME TAX
The Company's effective tax rate for the first nine months of 2008 was 21.8%,
compared to 26.8% for the same period of 2007. The decrease in the effective tax
rate is the result of the benefits received from the Company's investment in tax
exempt assets and resulting tax exempt income, as well as an increase in the
proportional level of tax-exempt income to total income as a result of declining
earnings.
FINANCIAL CONDITION
SECURITIES
The Company's investment securities portfolio decreased by $9.7 million from
September 30, 2007 and $7.9 million from the end of last year. During recent
quarters, the Company has elected not to replace some maturing investments to
fund additional loan growth. The mix of the Company's investment portfolio has
shifted during the past twelve months, as the percentage of investments held in
treasury and agency securities has declined while the percentages of mortgage
backed agencies, municipal obligations and corporate securities have increased.
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.
September 30, 2008 December 31, 2007 September 30, 2007
-------------------- -------------------- --------------------
Balance % of total Balance % of total Balance % of total
------- ---------- ------- ---------- ------- ----------
In thousands of dollars
U.S. Treasury and agency
securities $18,526 23.8% $33,532 39.0% $34,430 39.3%
Mortgage backed agency
securities 15,421 19.8% 13,051 15.2% 13,956 15.9%
Obligations of states and
political subdivisions 38,574 49.4% 36,128 42.1% 36,090 41.1%
Corporate, asset backed, and
other securities 5,492 7.0% 3,187 3.7% 3,215 3.7%
------- ----- ------- ----- ------- -----
Total Investment Securities $78,013 100.0% $85,898 100.0% $87,691 100.0%
======= ===== ======= ===== ======= =====
The Company concentrates its credit risk within the loan portfolio rather than
in the investment portfolio. Investments in U.S. Treasury and agency securities
are considered to possess low credit risk. Obligations of U.S. government agency
mortgage-backed securities possess a somewhat higher interest rate risk due to
certain prepayment risks. The corporate, asset backed and other securities
portfolio also contains a moderate level of credit risk. The municipal portfolio
contains a small amount of geographic risk, as approximately 48% 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, and the Company does not have any exposure
Fannie Mae and Freddie Mac equity securities or non-agency mortgage-backed
securities that have been the topic of much recent public discussion.
Page 17
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 table below
summarizes unrealized gains and losses in each category of the portfolio at
September 30, 2008 and 2007, in thousands of dollars.
2008 2007 Change
----- ---- ------
Unrealized gains (losses) in:
U.S. Treasury and agency securities $ 71 $139 $ (68)
Mortgage backed agency securities 153 60 93
Obligations of states and political subdivisions (247) 49 (296)
Corporate, asset backed and other securities (300) 73 (373)
----- ---- -----
Total investment securities $(323) $321 $(644)
===== ==== =====
LOANS
Gross portfolio loans have increased by $21.0 million in the third quarter of
2008 and $34.4 million from September 30, 2007, and the growth over the past
twelve months is 5.3%. This growth has resulted from a 7.0% increase in the
Company's business loan portfolio and growth of 12.9% in personal loan balances,
primarily in home equity lines of credit. Residential mortgage balances have
declined by 1.0% and construction and land development loans are down 4.0% over
the past twelve months.
The makeup of the Company's portfolio continues to evolve, and the portfolio mix
has changed modestly during the nine months of the year. The table below shows
total loans outstanding, in thousands of dollars, and their percentage of the
total loan portfolio. All loans are domestic and contain no significant
concentrations by industry or client.
September 30, 2008 December 31, 2007 September 30, 2007
--------------------- ---------------------- ---------------------
Balance % of total Balance % of total Balance % of total
-------- ---------- -------- ----------- -------- ----------
In thousands of dollars
Total loans:
Personal $110,136 16.1% $ 98,075 15.2% $ 97,568 15.0%
Business loans, including
commercial mortgages 401,559 58.8% 376,637 58.5% 375,209 57.9%
Tax exempt 2,582 0.4% 2,709 0.4% 2,747 0.4%
Residential mortgage 85,530 12.5% 86,023 13.3% 86,374 13.3%
Construction and
development loans 83,257 12.2% 81,086 12.6% 86,728 13.4%
-------- ----- -------- ----- -------- -----
Total portfolio loans $683,064 100.0% $644,530 100.0% $648,626 100.0%
======== ===== ======== ===== ======== =====
CREDIT QUALITY
The Company continues to actively monitor delinquencies, nonperforming assets
and potential problem loans. 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 appears sufficient. The following table shows the aggregate
amount of the Company's nonperforming assets by type, in thousands of dollars.
For purposes of this summary,
Page 18
loans renewed on market terms existing at the time of renewal are not considered
troubled debt restructurings.
9/30/08 12/31/07 9/30/07
------- -------- --------
In thousands of dollars
Nonaccrual loans $13,986 $13,695 $ 7,467
Accruing loans past due 90 days or more 1,481 1,455 1,532
Troubled debt restructurings 1,250 -- --
------- ------- -------
Total nonperforming loans 16,717 15,150 8,999
Other assets owned 3,553 2,253 1,938
------- ------- -------
Total nonperforming assets $20,270 $17,403 $10,937
======= ======= =======
Percent of nonperforming loans to total portfolio loans 2.45% 2.35% 1.39%
Percent of nonperforming assets to total assets 2.49% 2.19% 1.39%
Total nonaccrual loans have increased by $291,000 since the end of 2007, while
loans delinquent 90 days or more have increased by $26,000. The modest increase
in nonaccrual loans reflects the move of some loans to nonaccrual status, net of
payoff or charge-off of some nonperforming loans. Troubled debt restructurings
consist of loans to one borrower. Those loans were renewed at lower than market
rates as a result of efforts to help the cashflows of the client. Those loans
are current as of September 30, 2008. 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 2.45% at the end of the third quarter of 2008, but are down
from 2.65% at the end of the second quarter of this year.
Holdings of other assets owned increased by $1.3 million since the end of 2007.
Other real estate owned includes eighteen properties that were acquired through
foreclosure or in lieu of foreclosure. The properties include residential homes
and lots, as well as commercial properties. Two properties are 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 year to date increase reflects in part the
recognition of additional loans identified as impaired, as well as a combination
of an increasing historical charge-off rate and an increase in loan balances. An
analysis of the allowance for loan losses, in thousands of dollars, for the nine
months ended September 30, 2008 and 2007 follows:
2008 2007
-------- -------
Balance at January 1 $12,306 $ 7,849
Loans charged off (3,644) (3,041)
Recoveries credited to allowance 63 70
Provision charged to operations 5,610 2,836
------- -------
Balance at September 30 $14,335 $ 7,714
======= =======
The following table presents the allocation of the allowance for loan losses
applicable to each loan category in thousands of dollars, as of September 30,
2008 and 2007, and December 31, 2007. 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.
Page 19
9/30/08 12/31/07 9/30/07
------- -------- -------
Business and commercial mortgage (1) $12,422 $10,924 $6,571
Residential mortgage 372 368 189
Personal 1,263 974 954
Unallocated 278 40 --
------- ------- ------
Total $14,335 $12,306 $7,714
======= ======= ======
(1) Includes commercial construction and development loans
Within the Banks' loan portfolios, $27.9 million of impaired loans have been
identified as of September 30, 2008, compared with $24.7 million as of December
31, 2007, and the specific allowance for impaired loans was $6.1 million at both
September 30, 2008 and 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 increased by $17.5 million during the most recent quarter, and
have grown $15.0 million since the end of 2007. Noninterest bearing deposit
balances have grown by $10.3 million since the end of 2007, while interest
bearing deposits have increased $4.7 million during the same period. Compared to
September 30, 2007, demand deposits are up $9.9 million, while interest bearing
deposits have increased by $18.0 million. 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
September 30, 2008 and 2007, and December 31, 2007.
9/30/08 12/31/07 9/30/07
------- -------- --------
Noninterest bearing deposits 12.8% 11.6% 11.9%
Interest bearing deposits 87.2% 88.4% 88.1%
----- ----- -----
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
Page 20
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.
The Company periodically finds it advantageous to utilize longer term borrowings
from the FHLBI. These long-term borrowings serve primarily to provide a balance
to some of the interest rate risk inherent in the Company's balance sheet.
During the third quarter of 2008, the Banks procured $3.0 million in new
advances and repaid $2,511,000 in matured borrowings, resulting in a small
increase in total FHLB borrowings outstanding at September 30, 2008.
CAPITAL RESOURCES
The Company and the Banks were categorized as well-capitalized at September 30,
2008 and 2007, and December 31, 2007 by their regulators. The following table
shows the Company's capital ratios and ratio calculations as of September 30,
2008 and 2007, and December 31, 2007. Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc.
--------------------- -----------------------------
Adequate Well 9/30/08 12/31/07 9/30/07
-------- ---------- -------- -------- -------
Tier 1 capital to average assets 4% 5% 8.7% 8.7% 9.4%
Tier 1 capital to risk weighted assets 4% 6% 10.1% 10.5% 10.9%
Total capital to risk weighted assets 8% 10% 11.4% 11.8% 12.1%
Total shareholders' equity $72,766 $72,967 $75,534
Intangible assets (3,469) (3,469) (3,469)
Disallowed servicing assets -- -- --
Unrealized (gain) loss on securities
available for sale 214 (293) (212)
------- ------- -------
Tier 1 capital 69,511 69,205 71,853
Allowable loan loss reserves 8,663 8,257 7,626
------- ------- -------
Tier 1 and 2 capital $78,174 $77,462 $79,479
======= ======= =======
On October 8, 2008, the Company declared a cash dividend of $.10 per share
payable October 31 to shareholders of record October 20. The cash dividend
represents a decrease from $.20 per share paid in each of the first three
quarters of 2008. The decrease will allow the Company to retain approximately
$500,000 of capital per quarter. The Company believes this additional capital
will position it to capitalize on sound business opportunities while prudently
balancing the risks that exist in today's market. The Board of Directors will
continue to monitor capital growth, earnings and economic conditions in order to
determine future dividend payments.
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.
Page 21
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are based on management's
beliefs, assumptions, current expectations, estimates and projections about the
financial services industry, the economy, and United Bancorp, Inc.
Forward-looking statements are identifiable by words or phrases such as that an
event or trend "will" occur or "continue" or that United Bancorp, Inc. or its
management "believes", "anticipates", "determined", "estimated", "expects" or
"projected" that a particular result or event will occur, and variations of such
words and similar expressions. Management's determination of the provision and
allowance for loan losses involves judgments that are inherently
forward-looking. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions ("risk factors") 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. United
Bancorp, Inc. undertakes no obligation to update, amend or clarify
forward-looking statements, whether as a result of new information, future
events or otherwise.
Risk factors include, but are not limited to, the risk factors described in
"Item 1A - Risk Factors" of United Bancorp, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 2007; the timing and level of asset growth;
changes in banking laws and regulations; changes in tax laws; changes in prices,
levies and assessments; the impact of technological advances and issues;
governmental and regulatory policy changes; opportunities for acquisitions and
the effective completion of acquisitions and integration of acquired entities;
the possibility that anticipated cost savings and revenue enhancements from
acquisitions, restructurings, reorganizations and bank consolidations may not be
realized at amounts projected, at all or within expected time frames; the local
and global effects of the ongoing war on terrorism and other military actions,
including actions in Iraq; and current uncertainties and fluctuations in the
financial markets and stocks of financial services providers due to concerns
about credit availability and concerns about the Michigan economy in particular.
These and other factors are representative of the risk factors that may emerge
and could cause a difference between an ultimate actual outcome and a preceding
forward-looking statement.
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
Page 22
of 200 basis points. Key assumptions in the models include prepayment speeds on
mortgage related assets; cash flows and maturities of financial instruments held
for purposes other than trading; changes in market conditions, loan volumes and
pricing; and management's determination of core deposit sensitivity. These
assumptions are inherently uncertain and, as a result, the models cannot
precisely estimate net interest income or precisely predict the impact of higher
or lower interest rates on net interest income. Actual results will differ from
simulated results due to timing, magnitude, and frequency of interest rate
changes and changes in market conditions.
Based on the results of the simulation model as of September 30, 2008, the
Company would expect a maximum potential reduction in net interest margin of
less than 8% if market rates decreased under an immediate and sustained parallel
shift of 200 basis points. The interest sensitivity position of the Company
continues to be liability sensitive based on internal measures.
The Company and each Bank maintains Funds Management Committees, which review
exposure to market risk on a regular basis. The Committees' overriding policy
objective is to manage assets and liabilities to provide an optimum and
consistent level of earnings within the framework of acceptable risk standards.
The Funds Management Committees are also responsible for evaluating and
anticipating various risks other than interest rate risk. Those risks include
prepayment risk, credit risk and liquidity risk. The Committees include senior
members of management, and monitor the makeup of interest sensitive assets and
liabilities to assure appropriate liquidity, maintain interest margins and to
protect earnings in the face of changing interest rates and other economic
factors.
The Funds Management policies provide for a level of interest sensitivity that,
Management believes, allows the Banks to take advantage of opportunities within
their markets relating to liquidity and interest rate risk, allowing flexibility
without subjecting the Company to undue exposure to risk. In addition, other
measures are used to evaluate and project the anticipated results of
Management's decisions.
ITEM 4 - CONTROLS AND PROCEDURES
INTERNAL CONTROL
The Company maintains internal controls that contain self-monitoring mechanisms,
and actions are taken to correct deficiencies as they are identified. The Board
of Directors of the Company, operating through its Audit and Compliance
Committee, provides oversight to the financial reporting process. Even effective
internal controls, no matter how well designed, have inherent limitations,
including the possibility of circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only reasonable
assurance with respect to financial statement preparation. Furthermore, the
effectiveness of internal controls may vary over time. The Company's Audit and
Compliance Committee is composed entirely of Directors who are not officers or
employees of the Company.
As of September 30, 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 September 30, 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,
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processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. There have been no changes
in the Company's internal controls over financial reporting that occurred during
the quarter ended September 30, 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. There were no
purchases by the Company during the quarter ended September 30, 2008 of
equity securities that are registered by the Company pursuant to Section 12
of the Exchange Act. There is a maximum of 69,106 shares that may yet be
purchased under the plan.
ITEM 6- EXHIBITS
Listing of Exhibits (numbered as in Item 601 of Regulation S-K):
Exhibit 31.1 Certification of principal executive officer pursuant to
Rule 13a - 14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 31.2 Certification of principal financial officer pursuant to
Rule 13a - 14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
United Bancorp, Inc.
October 24, 2008
/s/ Robert K. Chapman /s/ Randal J. Rabe
- ------------------------------------- ----------------------------------------
Robert K. Chapman Randal J. Rabe
President and Chief Executive Officer Executive Vice President and
(Principal Executive Officer) Chief Financial Officer
(Principal Financial Officer)
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