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 JUNE 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, 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 July 14, 2008, there were outstanding 5,052,443 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 10
Executive Summary 10
Results of Operations 11
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 20
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 4. Submission of Matters to a Vote of Security Holders 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)
June 30, December 31, June 30,
In thousands of dollars 2008 2007 2007
- ----------------------- ----------- ------------ -----------
ASSETS
Cash and demand balances in other banks $ 16,481 $ 17,996 $ 19,139
Federal funds sold 2,050 11,130 --
-------- -------- --------
Total cash and cash equivalents 18,531 29,126 19,139
Securities available for sale 83,204 85,898 89,363
Loans held for sale 5,249 5,770 6,009
Portfolio loans 662,014 644,530 634,056
Less allowance for loan losses 13,008 12,306 7,561
-------- -------- --------
Net portfolio loans 649,006 632,224 626,495
Premises and equipment, net 12,862 13,160 13,367
Goodwill 3,469 3,469 3,469
Bank-owned life insurance 12,194 11,961 11,721
Accrued interest receivable and other assets 14,407 14,079 12,077
-------- -------- --------
TOTAL ASSETS $798,922 $795,687 $781,640
======== ======== ========
LIABILITIES
Deposits
Noninterest bearing $ 89,088 $ 77,878 $ 86,249
Interest bearing 579,966 593,659 570,618
-------- -------- --------
Total deposits 669,054 671,537 656,867
Federal funds purchased and other short term borrowings -- -- 2,800
FHLB advances payable 51,462 44,611 42,136
Accrued interest payable and other liabilities 4,954 6,572 4,336
-------- -------- --------
TOTAL LIABILITIES 725,470 722,720 706,139
COMMITMENT AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Common stock and paid in capital, no par value; 10,000,000 shares
authorized; 5,052,443, 5,092,230, and 5,216,770 shares issued
and outstanding 67,179 67,860 70,407
Retained earnings 6,346 4,814 5,319
Accumulated other comprehensive income (loss), net of tax (73) 293 (225)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 73,452 72,967 75,501
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $798,922 $795,687 $781,640
======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
(B) CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended
In thousands of dollars, except per share data June 30, June 30,
------------------ -----------------
2008 2007 2008 2007
------- -------- ------ --------
INTEREST INCOME
Interest and fees on loans $10,567 $11,853 $21,899 $23,007
Interest on securities
Taxable 554 633 1,154 1,326
Tax exempt 368 378 732 759
Interest on federal funds sold 2 16 122 142
------- ------- ------- -------
Total interest income 11,491 12,880 23,907 25,234
INTEREST EXPENSE
Interest on deposits 3,480 4,807 7,888 9,366
Interest on fed funds and other short term borrowings 69 80 76 87
Interest on FHLB advances 555 515 1,078 1,011
------- ------- ------- -------
Total interest expense 4,104 5,402 9,042 10,464
------- ------- ------- -------
NET INTEREST INCOME 7,387 7,478 14,865 14,770
Provision for loan losses 1,650 710 2,310 2,219
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,737 6,768 12,555 12,551
NONINTEREST INCOME
Service charges on deposit accounts 894 878 1,717 1,688
Wealth Management fee income 1,144 1,174 2,313 2,388
Gains on securities transactions 51 -- 104 1
Income from loan sales and servicing 808 393 1,417 769
ATM, debit and credit card fee income 591 532 1,120 1,004
Income from bank-owned life insurance 118 116 233 222
Other income 160 245 400 475
------- ------- ------- -------
Total noninterest income 3,766 3,338 7,304 6,547
NONINTEREST EXPENSE
Salaries and employee benefits 4,063 3,735 8,470 7,342
Occupancy and equipment expense, net 1,215 1,197 2,459 2,417
External data processing 460 432 876 723
Advertising and marketing 316 301 691 662
Attorney, accounting and other professional fees 235 324 468 573
Director fees 107 116 215 233
Other expenses 852 885 1,871 1,730
------- ------- ------- -------
Total noninterest expense 7,248 6,990 15,050 13,680
------- ------- ------- -------
INCOME BEFORE FEDERAL INCOME TAX 2,255 3,116 4,809 5,418
Federal income tax 560 849 1,226 1,425
------- ------- ------- -------
NET INCOME $ 1,695 $ 2,267 $ 3,583 $ 3,993
======= ======= ======= =======
Basic and diluted earnings per share $ 0.33 $ 0.43 $ 0.70 $ 0.75
Cash dividends declared per share of common stock $ 0.20 $ 0.20 $ 0.40 $ 0.39
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
(C) CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
Three Months Ended Six Months Ended
In thousands of dollars June 30, June 30,
------------------- -------------------
2008 2007 2008 2007
-------- -------- -------- --------
TOTAL SHAREHOLDERS' EQUITY
Balance at beginning of period $ 74,093 $ 75,277 $ 72,967 $ 74,536
Net Income 1,695 2,267 3,583 3,993
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 (760) (362) (366) (293)
-------- -------- -------- --------
Total comprehensive income 935 1,905 3,217 3,700
Cash dividends paid (1,010) (1,046) (2,028) (2,043)
Purchase of common stock (636) (865) (831) (1,086)
Other common stock transactions 70 230 127 394
-------- -------- -------- --------
Balance at end of period $ 73,452 $ 75,501 $ 73,452 $ 75,501
======== ======== ======== ========
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 Six Months Ended
June 30,
--------------------
2008 2007
-------- ---------
Cash Flows from Operating Activities
Net income $ 3,583 $ 3,993
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Depreciation and amortization 737 750
Provision for loan losses 2,310 2,219
Gain on sale of loans (1,208) (591)
Proceeds from sales of loans originated for sale 67,772 40,388
Loans originated for sale (66,043) (40,034)
(Gains) on securities transactions (104) (1)
Deferred income taxes 18 (109)
Stock option expense 75 100
Increase in cash surrender value of bank-owned life insurance (233) (222)
Change in investment in limited partnership (178) (134)
Change in accrued interest receivable and other assets (736) (109)
Change in accrued interest payable and other liabilities (1,398) (2,755)
-------- --------
Net cash from operating activities 4,595 3,495
Cash Flows from Investing Activities
Securities available for sale
Purchases (31,984) (1,848)
Sales 203 --
Maturities and calls 31,507 5,200
Principal payments 2,525 2,725
Net change in portfolio loans (18,637) (40,927)
Premises and equipment expenditures (365) (826)
-------- --------
Net cash from (used in) investing activities (16,751) (35,676)
Cash Flows from Financing Activities
Net change in deposits (2,483) 28,865
Net change in short term borrowings -- 2,723
Proceeds from other borrowings 13,000 22,030
Principal payments on other borrowings (6,149) (20,839)
Purchase of common stock (831) (1,086)
Proceeds from other common stock transactions 52 294
Cash dividends paid (2,028) (2,043)
-------- --------
Net cash from financing activities 1,561 29,944
-------- --------
Net change in cash and cash equivalents (10,595) (2,237)
Cash and cash equivalents at beginning of year 29,126 21,376
-------- --------
Cash and cash equivalents at end of period $ 18,531 $ 19,139
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 9,864 $ 10,154
Income tax paid 913 2,322
Loans transferred to other real estate 455 355
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 six month periods ending June 30, 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.
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.
Stock Options Outstanding Exercise Price
- ------------- ----------- --------------
Balance at January 1, 2008 305,113 $26.22
Options granted 62,800 19.71
Options exercised -- --
Options forfeited (16,802) 24.73
-------
Balance at June 30, 2008 351,111 $25.13
=======
Total options granted during the six-month period ended June 30, 2008 were
62,800, and the weighted fair value of the options granted was $2.07. For stock
options outstanding at June 30, 2008, the range of average exercise prices was
$17.06 to $32.14 and the weighted average remaining contractual term was 6.83
years. At June 30, 2008, 239,662 options are exercisable under the Plans. The
Company has recorded $75,000 in compensation expense related to vested stock
options less estimated forfeitures for the six month period ended June 30, 2008.
As of the end of the second quarter of 2008, unrecognized compensation expense
related to the stock options totaled $201,505 and is expected to be recognized
over three years.
Page 7
At June 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 second quarter and the exercise
price, multiplied by the number of in-the-money options assuming all option
holders had exercised their stock options on June 30, 2008. No options were
exercised during the quarter ended June 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 $296,687,000 and $232,048,000 at the end of June, 2008 and 2007, and the
balance of loans serviced for others related to servicing rights that have been
capitalized was $294,358,000 and $230,172,000 at June 30, 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 for the six months ended June 30, 2008
and 2007 is shown in the table below.
In thousands of dollars 2008 2007
- ----------------------- ------- ------
Balance at January 1 $1,723 $1,541
Amount capitalized year to date 497 132
Amount amortized year to date (149) (110)
------ ------
Balance at June 30 $2,071 $1,563
====== ======
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:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
In thousands of dollars, except share data 2008 2007 2008 2007
- ------------------------------------------ ---------- ---------- ---------- ----------
Net income $ 1,695 $ 2,267 $ 3,583 $ 3,993
========== ========== ========== ==========
Basic earnings:
Weighted average common shares outstanding 5,052,443 5,228,383 5,070,622 5,238,622
Weighted average contingently issuable shares 57,241 59,731 56,889 60,083
---------- ---------- ---------- ----------
Total weighted average shares outstanding 5,109,684 5,288,114 5,127,511 5,298,705
========== ========== ========== ==========
Basic earnings per share $ 0.33 $ 0.43 $ 0.70 $ 0.75
========== ========== ========== ==========
Diluted earnings:
Weighted average common shares outstanding
from basic earnings per share 5,109,684 5,288,114 5,127,511 5,298,705
Dilutive effect of stock options -- -- -- --
---------- ---------- ---------- ----------
Total weighted average shares outstanding 5,109,684 5,288,114 5,127,511 5,298,705
========== ========== ========== ==========
Diluted earnings per share $ 0.33 $ 0.43 $ 0.70 $ 0.75
========== ========== ========== ==========
A total of 340,175 and 197,851 shares for the three month periods ended June 30,
2008 and 2007 and 324,631 and 275,524 shares for the six month periods ended
June 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.
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 5 - 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 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 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 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 second quarter and
first six 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 second
Page 9
quarter of 2008 resulted in a balance for these loans, net of specific
allowance, of $9.5 million. Year to date changes resulted in a balance, net
of specific allowance, of $10.2 million at June 30, 2008. This valuation
would be considered Level 3, consisting of appraisals of underlying
collateral and discounted cash flow analysis.
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.
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.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion provides information about the consolidated financial condition
and results of operations for United Bancorp, Inc. and its subsidiary banks,
United Bank & Trust ("UBT") and United Bank & Trust - Washtenaw ("UBTW") for the
three and six month periods ended June 30, 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.
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
Page 10
sold on the secondary market. Gains on the sale of those loans is 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.
Unemployment for the State of Michigan at the end of May, 2008 was 8.5%, and as
a result, the State retains its position with the highest unemployment level
among the fifty states. The Lenawee County unemployment rate of 9.7% is above
the State's average level, while the Washtenaw County unemployment rate of 6.0%
increased from 5.0% at the end of February. This caused the Washtenaw County
ranking to move from the lowest in the State to the fifth-lowest. The ongoing
economic issues in Michigan have continued to have an impact on earnings of the
Company. The Company's rate of 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 challenging
local economic conditions.
EXECUTIVE SUMMARY
United Bancorp, Inc. net income for the second quarter of 2008 declined by 25.2%
from the level achieved in the same quarter of 2007. For the first six months of
2008, net income is 10.3% below that of the same period of 2007. Economic
conditions continue to impact earnings of the Company, as net interest income
continues to tighten and credit quality concerns have resulted in additional
increases in the provision for loan losses.
Earnings per share of $.33 for the quarter was down from $.43 per share for the
same period last year. Year to date basic and diluted earnings per share for
2008 is $.70, down from $.75 for the same period of 2007. Return on average
assets declined to 0.86% for the quarter, down from 1.18% last year, and year to
date ROA of 0.90% is below 2007 levels of 1.05%. Return on average shareholders'
equity for the second quarter of this year was 9.29%, compared to 12.11% for the
same period of 2007, and year to date ROE of 9.82% is below the 10.75% level of
last year.
Total consolidated assets of the Company of $798.9 million at June 30, 2008 were
up 2.2% from the same period last year, and increased by $1.0 million during the
most recent quarter. At the end of June, gross portfolio loan balances reached
$662.0 million, while deposits grew to $669.1 million.
RESULTS OF OPERATIONS
EARNINGS SUMMARY AND KEY RATIOS
Consolidated net income for the second quarter of 2008 of $1.695 million was
down from $2.267 million for the same quarter of last year, and year to date net
income of $3.583 million is down from $3.993 million for the first six 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 second quarter of this year was significantly
higher than the levels for the first quarter of this year and the second quarter
of last year. Noninterest income improved over prior periods, while noninterest
expenses have increased compared 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.
Page 11
2008 2007
----------------- ---------------------------
in thousands of dollars, where appropriate 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr
------- ------- ------- ------- -------
Net interest income $7,387 $7,478 $ 7,411 $7,580 $7,478
Provision for loan losses 1,650 660 5,801 618 710
Noninterest income 3,766 3,537 3,567 3,538 3,338
Noninterest expense 7,248 7,802 6,613 7,267 6,990
Federal income tax provision 560 665 (686) 895 849
Net income (loss) 1,695 1,888 (750) 2,339 2,267
Earnings (loss) per share (a) $ 0.33 $ 0.37 $ (0.15) $ 0.45 $ 0.43
Return on average assets (b) 0.86% 0.94% -0.37% 1.18% 1.18%
Return on average shareholders' equity (b) 9.29% 10.35% -3.97% 12.32% 12.11%
(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. During the first half of 2008, the FOMC continued its lowering
of short-term rates, with declines of 225 basis points within a four-month
period. During that period, the Company has been able to lower its cost of
deposits, but not to the degree that the shifting yield curve would indicate.
The Company's interest income decreased 10.8% in the second quarter of 2008 over
the same quarter of 2007, while interest expense decreased 24.0% over the same
timeframe. The net result was a decrease of 1.2% in net interest income. Year to
date net interest income grew less than 1% from the first six months of 2007,
with interest income declining 5.3% while interest expense declined 13.6%.
Tax-equivalent yields on earning assets declined to 6.47% for the first six
months of 2008, down from 7.16% for the same period of 2007. During that same
timeframe, the Company's average cost of funds declined by sixty-four basis
points, and tax equivalent spread declined from 3.66% to 3.61%. Net interest
margin experienced similar declines, moving from 4.23% to 4.10% for comparable
six-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 June 30 2008 and 2007.
Six Months Ended June 30,
--------------------------------------------------------------
dollars in thousands 2008 2007
- -------------------- ------------------------------ ------------------------------
Average Interest Yield/ Average Interest Yield/
ASSETS Balance (b) Rate (c) Balance (b) Rate (c)
- ------ -------- -------- -------- -------- -------- --------
Interest earning assets (a)
Federal funds sold $ 7,149 $ 121 3.42% 5,542 $ 142 5.12%
Taxable securities 49,295 1,154 4.71% 54,118 1,326 4.90%
Tax exempt securities (b) 48,890 1,427 5.87% 37,992 1,109 5.84%
Taxable loans 657,277 21,841 6.68% 615,024 22,936 7.46%
Tax exempt loans (b) 2,646 85 6.47% 3,132 104 6.63%
-------- ------- ------- -------
Total int. earning assets (b) 765,257 24,629 6.47% 715,808 25,617 7.16%
Less allowance for loan losses (12,296) (8,144)
Other assets 44,853 55,758
-------- -------
TOTAL ASSETS $797,815 $763,422
======== ========
Page 12
Six Months Ended June 30,
--------------------------------------------------------------
2008 2007
------------------------------ -----------------------------
dollars in thousands Average Interest Yield/ Average Interest Yield/
(CONTINUED) Balance (b) Rate (c) Balance (b) Rate (c)
- -------------------- -------- -------- -------- ------- -------- --------
LIABILITIES AND SHAREHOLDERS'
EQUITY
NOW and savings deposits 307,781 2,200 1.44% 288,096 3,286 2.30%
CDs $100,000 and over 118,463 2,596 4.41% 114,061 2,759 4.84%
Other interest bearing deposits 157,486 3,092 3.95% 150,503 3,320 4.41%
-------- ------- -------- -------
Total int. bearing deposits 583,730 7,888 2.72% 552,660 9,365 3.39%
Short term borrowings 6,311 76 2.41% 3,237 87 5.37%
Other borrowings 46,246 1,079 4.69% 43,031 1,012 4.70%
-------- ------- -------- -------
Total int. bearing liabilities 636,287 9,042 2.86% 598,928 10,464 3.49%
------- -------
Noninterest bearing deposits 82,439 82,113
Other liabilities 6,265 7,452
Shareholders' equity 72,823 74,929
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $797,815 $763,422
======== ========
Net interest income (b) 15,587 15,153
------- -------
Net spread (b) 3.61% 3.66%
==== ====
Net yield on interest earning
assets (b) 4.10% 4.23%
==== ====
Tax equivalent adjustment on
interest income (722) (383)
------- -------
Net interest income per income
statement $14,865 $14,770
======= =======
Ratio of interest earning assets to
interest bearing liabilities 1.20 1.20
==== ====
(a) Non-accrual loans and overdrafts are included in the average balances of
loans.
(b) Fully tax-equivalent basis, net of nondeductible interest impact; 34% tax
rate.
(c) Annualized
The following table shows the effect of volume and rate changes on net interest
income for the six months ended June 30, 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 $ 35 $ (55) $ (20) $ (64) $ 14 $ (50)
Taxable securities (119) (53) (172) (169) 387 218
Tax exempt securities 312 6 318 86 18 104
Taxable loans 1,463 (2,557) (1,094) 2,075 391 2,466
Tax exempt loans (16) (3) (19) 2 5 7
------ ------- ------- ------ ------ ------
Total interest income $1,675 $(2,662) $ (987) $1,930 $ 815 $2,745
====== ======= ======= ====== ====== ======
Interest paid on:
Now and savings deposits 216 (1,302) (1,086) (1) 534 533
CDs $100,000 and over 99 (262) (163) 626 307 933
Other interest bearing deposits 144 (373) (229) 215 519 734
Short term borrowings 54 (65) (11) 40 6 46
Other borrowings 70 (3) 67 69 36 105
------ ------- ------- ------ ------ ------
Total interest expense $ 583 $(2,005) $(1,422) $ 949 $1,402 $2,351
====== ======= ======= ====== ====== ======
Net change in net interest income $1,092 $ (657) $ 435 $ 981 $ (587) $ 394
====== ======= ======= ====== ====== ======
(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 13
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, as the Michigan economy
endures its third year of recession. In the second quarter of 2008, 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 quarter, to address
the risks within its loan portfolio. The action reflects the negative impact of
the continued deterioration in the Southeast Michigan real estate markets and
the economy in general.
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. This difficult
operating environment, along with the additional loan carrying time has caused
some borrowers to exhaust repayment sources. For the second quarter of 2008, the
impact of these economic conditions have spread to other borrowers, less
directly related to real estate development. The Banks have continued to closely
watch the impact of economic circumstances on their loan clients. The Company's
provision for loan loss for the second quarter of 2008 was $1.65 million, up
from $710,000 for the second quarter of 2007. The Company's year to date
provision of $2.31 million is 4.1% higher than its provision for the first half
of 2007.
NONINTEREST INCOME
Noninterest income continues to contribute to the earnings of the Company. Total
noninterest income improved 12.8% over the same quarter of 2007, and for the
first six months of this year, is 11.6% higher than the first half of 2007.
Income from loan sales and servicing and ATM, debit and credit card fee income
provided considerable increases over the same quarter of last year. Most other
categories of noninterest income experienced modest growth during the quarter
and year to date compared to the same periods of 2007.
Service charges on deposit accounts were up 1.8% in the second quarter compared
to the same quarter last year, and year to date service charges are up 1.7% over
the first six months of 2007. This is consistent with the Company's growth in
total deposits of 1.9% over the past year. No significant changes to service
charge structure were implemented in the second quarter of 2008.
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 2.6% in the second quarter of
2008 compared to 2007, and was down 3.1% year to date. Substantially all of the
decline is a result of a decrease in market values of assets under management,
as financial markets continue to experience declines. Assets managed by the
department at June 30, 2008 were $701.4 million, down from $727.6 million at the
end of the same quarter of 2007 and 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 products.
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.
Page 14
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. Income from loan sales and servicing was up 105.6% in the
second quarter of 2008 compared to the same period of 2007, and year to date, is
up 84.3% over the first half 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, and gains on the sale of those loans contributed to the
increase income from loan sales and servicing for the current quarter. USFC
revenue provides additional diversity to the Company's income stream, and
provides additional financing alternatives to clients and non-clients of the
Banks.
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 receive ongoing fee income from credit card referrals and operation
of its credit card merchant business. Income from these areas was up 11.1% in
the most recent quarter compared to the same quarter of 2007, and are up 11.6%
year to date over 2007. At the same time, income from bank owned life insurance
has increased slightly, 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 3.7% in the second quarter of 2008 compared
to the same quarter of last year, and are up 10.0% year to date. Salaries and
benefits are the organization's largest single area of expense, and for the
quarter, provided the largest dollars of increase. In addition to the increased
cost of employee 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 8.8% over the same quarter of 2007 and 15.4% over the first
half of last year.
Occupancy and equipment expense increased modestly in the second 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 up
significantly over the first half of 2007, which included a large cost recovery
from a vendor. Advertising and marketing expenses increased by 5.0% for the
quarter and 4.4% year to date compared to the comparable periods 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 and attorney, accounting and other professional
fees were down from the comparable quarter and six month periods of 2007.
Other expenses were also down for the quarter, but were up year to date compared
to 2007 levels. 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 six months of 2008 was 25.5%,
compared to 26.3% 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.
Page 15
FINANCIAL CONDITION
SECURITIES
The Company's investment securities portfolio decreased by $6.2 million from
June 30, 2007 and $2.7 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.
In thousands of dollars June 30, 2008 December 31, 2007 June 30, 2007
-------------------- -------------------- --------------------
Balance % of total Balance % of total Balance % of total
------- ---------- ------- ---------- ------- ----------
U.S. Treasury and agency
securities $22,240 26.7% $33,532 39.0% $36,158 40.5%
Mortgage backed agency
securities 15,853 19.1% 13,051 15.2% $11,217 12.6%
Obligations of states and
political subdivisions 39,460 47.4% 36,128 42.1% 38,743 43.3%
Corporate, asset backed, and
other securities 5,651 6.8% 3,187 3.7% 3,245 3.6%
------- ---------- ------- ---------- ------- ----------
Total Investment Securities $83,204 100.0% $85,898 100.0% $89,363 100.0%
======= ========== ======= ========== ======= ==========
The Company is conservative in its investments, preferring to concentrate its
risks within the loan portfolio. Investments in U.S. Treasury and agency
securities are considered to possess low credit risk. Obligations of U.S.
government agency mortgage-backed securities possess a somewhat higher interest
rate risk due to certain prepayment risks. The corporate, asset backed and other
securities portfolio also contains a moderate level of credit risk. The
municipal portfolio contains a small amount of geographic risk, as 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.
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 June
30, 2008 and 2007, in thousands of dollars.
2008 2007 Change
----- ----- ------
Unrealized gains (losses) in:
U.S. Treasury and agency securities $ 102 $ (78) $ 180
Mortgage backed agency securities (51) (38) (13)
Obligations of states and political subdivisions (37) (328) 291
Corporate, asset backed and other securities (125) 103 (228)
----- ----- -----
Total investment securities $(111) $(341) $ 230
===== ===== =====
Page 16
LOANS
Gross portfolio loans have increased by $7.0 million in the second quarter of
2008, and $28.0 million from June 30, 2007, and the growth over the past twelve
months is 4.4%. This increase has resulted from a 7.6% increase in the Company's
business loan portfolio and growth of 5.8% in personal loan balances, while
residential mortgage balances are relatively unchanged and construction and land
development loans are down 4.1% 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 half 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.
In thousands of dollars June 30, 2008 December 31, 2007 June 30, 2007
--------------------- --------------------- ---------------------
Total loans: Balance % of total Balance % of total Balance % of total
-------- ---------- -------- ---------- -------- ---------
Personal $102,186 15.4% $ 98,075 15.2% $ 96,556 15.2%
Business loans, including
commercial mortgages 389,386 58.8% 376,637 58.5% 361,916 57.1%
Tax exempt 2,590 0.4% 2,709 0.4% 2,944 0.5%
Residential mortgage 84,676 12.8% 86,023 13.3% 85,391 13.5%
Construction and
development loans 83,176 12.6% 81,086 12.6% 86,758 13.7%
-------- ---------- -------- ---------- -------- ---------
Total portfolio loans $662,014 100.0% $644,530 100.0% $634,056 100.0%
======== ========== ======== ========== ======== =========
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, loans renewed on market terms existing at the time
of renewal are not considered troubled debt restructurings.
In thousands of dollars 6/30/08 12/31/07 6/30/07
------- -------- -------
Nonaccrual loans $15,716 $13,695 $7,261
Accruing loans past due 90 days or more 1,812 1,455 253
Troubled debt restructurings -- -- --
------- -------- -------
Total nonperforming loans 17,528 15,150 7,514
Other assets owned 2,735 2,253 1,146
------- -------- -------
Total nonperforming assets $20,263 $17,403 $8,660
======= ======== =======
Percent of nonperforming loans to total portfolio loans 2.65% 2.35% 1.19%
Percent of nonperforming assets to total assets 2.54% 2.19% 1.11%
Total nonaccrual loans have increased by $2.0 million since the end of 2007,
while delinquent loans have increased by $357,000. The increase in nonaccrual
loans reflects the move of some loans to nonaccrual status, net of payoff or
charge-off of some nonperforming loans, 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 2.65% at the end of
the second quarter of 2008.
Page 17
Holdings of other assets owned increased by $482,000 since the end of 2007.
Other real estate owned includes sixteen 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. Also included in these totals are other assets owned of $27,400,
consisting of motor vehicles and one mobile home. These assets are also 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 six
months ended June 30, 2008 and 2007 follows:
2008 2007
-------- -------
Balance at January 1 $ 12,306 $ 7,849
Loans charged off (1,659) (2,565)
Recoveries credited to allowance 51 58
Provision charged to operations 2,310 2,219
-------- -------
Balance at June 30 $ 13,008 $ 7,561
======== =======
The following table presents the allocation of the allowance for loan losses
applicable to each loan category in thousands of dollars, as of June 30, 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.
6/30/08 12/31/07 6/30/07
------- -------- -------
Business and commercial mortgage (1) $11,448 $ 10,924 $ 6,435
Residential mortgage 357 368 126
Personal 1,203 974 1,022
Unallocated -- 40 (22)
------- -------- -------
Total $13,008 $ 12,306 $ 7,561
======= ======== =======
(1) Includes commercial construction and development loans
Within the Banks' loan portfolios, $23.0 million of impaired loans have been
identified as of June 30, 2008, compared with $24.7 million as of December 31,
2007, and the specific allowance for impaired loans was $5.7 million at June 30,
2008, compared to $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 increased by $1.5 million during the most recent quarter, but
have declined $2.5 million since the end of 2007, as the Company continues to
shift its funding mix. Noninterest bearing deposit balances have grown by $11.2
million since the end of 2007, while interest bearing deposits have declined
$13.7 million during the same period. However, compared to June 30, 2007, demand
deposits are up just $2.8 million, while interest bearing deposits have
increased by $9.3 million. Traditional deposit products continue to be an
important part of the Company's product line, and the Banks continue their
emphasis on
Page 18
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 June
30, 2008 and 2007, and December 31, 2007.
6/30/08 12/31/07 6/30/07
------- -------- -------
Noninterest bearing deposits 13.3% 11.6% 13.1%
Interest bearing deposits 86.7% 88.4% 86.9%
------- -------- -------
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.
The Company periodically finds it advantageous to utilize longer term borrowings
from the FHLBI. These long-term borrowings serve primarily to provide a balance
to some of the interest rate risk inherent in the Company's balance sheet.
During the second quarter of 2008, the Banks procured $10.0 million in new
advances and repaid $1,000,000 in matured borrowings, resulting in an increase
in total FHLB borrowings outstanding at June 30, 2008.
CAPITAL RESOURCES
The Company and the Banks were categorized as well-capitalized at June 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 June 30, 2008 and
2007, and December 31, 2007. Dollars are shown in thousands.
Regulatory Guidelines United Bancorp, Inc.
--------------------- ----------------------------
Adequate Well 6/30/08 12/31/07 6/30/07
---------- -------- ------- -------- -------
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% 11.2%
Total capital to risk weighted assets 8% 10% 11.6% 11.8% 12.3%
Total shareholders' equity $73,452 $ 72,967 $75,501
Intangible assets (3,469) (3,469) (3,469)
Disallowed servicing assets -- -- --
Unrealized (gain) loss on securities
available for sale 73 (293) 225
------- -------- -------
Tier 1 capital 70,056 69,205 72,257
Allowable loan loss reserves 8,507 8,257 7,561
------- -------- -------
Tier 1 and 2 capital $78,563 $ 77,462 $79,818
======= ======== =======
Page 19
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 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.
Page 20
A number of measures are used to monitor and manage interest rate risk,
including interest sensitivity and income simulation analyses. An interest
sensitivity model is the primary tool used to assess this risk with supplemental
information supplied by an income simulation model. The simulation model is used
to estimate the effect that specific interest rate changes would have on twelve
months of pretax net interest income assuming an immediate and sustained up or
down parallel change in interest rates of 200 basis points. Key assumptions in
the models include prepayment speeds on mortgage related assets; cash flows and
maturities of financial instruments held for purposes other than trading;
changes in market conditions, loan volumes and pricing; and management's
determination of core deposit sensitivity. These assumptions are inherently
uncertain and, as a result, the models cannot precisely estimate net interest
income or precisely predict the impact of higher or lower interest rates on net
interest income. Actual results will differ from simulated results due to
timing, magnitude, and frequency of interest rate changes and changes in market
conditions.
Based on the results of the simulation model as of June 30, 2008, the Company
would expect a maximum potential reduction in net interest margin of less than
5% if market rates decreased under an immediate and sustained parallel shift of
200 basis points. The interest sensitivity position of the Company continues to
be liability sensitive based on internal measures.
The Company and each Bank maintains Funds Management Committees, which review
exposure to market risk on a regular basis. The Committees' overriding policy
objective is to manage assets and liabilities to provide an optimum and
consistent level of earnings within the framework of acceptable risk standards.
The Funds Management Committees are also responsible for evaluating and
anticipating various risks other than interest rate risk. Those risks include
prepayment risk, credit risk and liquidity risk. The Committees include senior
members of management, and monitor the makeup of interest sensitive assets and
liabilities to assure appropriate liquidity, maintain interest margins and to
protect earnings in the face of changing interest rates and other economic
factors.
The Funds Management policies provide for a level of interest sensitivity which,
Management believes, allows the Banks to take advantage of opportunities within
their markets relating to liquidity and interest rate risk, allowing flexibility
without subjecting the Company to undue exposure to risk. In addition, other
measures are used to evaluate and project the anticipated results of
Management's decisions.
ITEM 4 - CONTROLS AND PROCEDURES
INTERNAL CONTROL
The Company maintains internal controls that contain self-monitoring mechanisms,
and actions are taken to correct deficiencies as they are identified. The Board
of Directors of the Company, operating through its Audit and Compliance
Committee, provides oversight to the financial reporting process. Even effective
internal controls, no matter how well designed, have inherent limitations,
including the possibility of circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only reasonable
assurance with respect to financial statement preparation. Furthermore, the
effectiveness of internal controls may vary over time. The Company's Audit and
Compliance Committee is composed entirely of Directors who are not officers or
employees of the Company.
As of June 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 June 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
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Exchange Act are recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. There
have been no changes in the Company's internal controls over financial reporting
that occurred during the quarter ended June 30, 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 the
quarter ended June 30, 2008 of equity securities that are registered by the
Company pursuant to Section 12 of the Exchange Act:
Total No. Average
of Shares Price Paid
Period in 2008 Purchased per Share Total (1) Maximum (2)
- -------------- --------- ---------- --------- -----------
April 1 - 30 32,500 $19.56 32,500 36,606
May 1 - 31 0 -- 0 36,606
June 1 - 30 -- -- -- 36,606
------ ------
Total this quarter 32,500 $19.56 32,500 36,606
(1) Total number of shares purchased as a part of publicly announced plans
(2) Maximum number of shares that may yet be purchased under the plan
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on April 15, 2008. At
that meeting, election of directors was the only matter submitted to a vote of
the shareholders. There were 5,091,451 voting shares outstanding on April 15,
2008. The following incumbent directors were re-elected to three-year terms:
Action For Withheld
---------- --------- --------
Stephanie H. Boyse re-elected 3,476,877 109,120
John H. Foss re-elected 3,456,993 132,420
David S. Hickman re-elected 3,452,637 133,360
Directors James D. Buhr, Joseph D. Butcko, Robert K. Chapman, James C. Lawson,
Robert G. Macomber, Donald J. Martin, David E. Maxwell, and Kathryn M. Mohr hold
terms that continue after the meeting.
No other matters were considered by shareholders at that meeting or at any other
time during the quarter.
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ITEM 6- EXHIBITS
Listing of Exhibits (numbered as in Item 601 of Regulation S-K):
Exhibit 31.1 Certification of principal executive officer pursuant to Rule 13a
- 14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of principal financial officer pursuant to Rule 13a
- 14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED BANCORP, INC.
July 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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