Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
þ
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the fiscal year ended December 31, 2009
Commission
File #0-16640
(Exact
name of registrant as specified in its charter)
|
Michigan
|
38-2606280
|
|
(State
or other jurisdiction of incorporation or organization)
|
(
I.R.S. Employer Identification No.)
|
205
E. Chicago Boulevard, Tecumseh, MI 49286
(Address
of principal executive offices)
Registrant's
telephone number, including area code: (517) 423-8373
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, no par value
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.Yes o No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.Yesþ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such file).Yes oNo o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large
Accelerated Filer
o Accelerated
Filer o
Non-Accelerated
Filer o (do not check if a
smaller reporting company) Smaller reporting company
þ
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
o
No þ
As of
June 30, 2009, the aggregate market value of the common stock held by
non-affiliates of the registrant was $28,468,000, based on a closing price of
$6.10 as reported on the OTC Bulletin Board.
As of
January 31, 2010, there were 5,066,384 outstanding shares of registrant's common
stock, no par value.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive Proxy Statement in connection with the 2010
Annual Meeting of Shareholders are incorporated by reference into Part III of
this report.
FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking statements that are based on management's
beliefs, assumptions, current expectations, estimates, plans and projections
about the financial services industry, the economy, and United Bancorp, Inc.
Forward-looking statements are identifiable by words or phrases such as
"outlook," or "strategy"; that an event or trend "may," "should," "will," or "is
likely" to occur or "continue" or "is scheduled" or "on track" or that United
Bancorp, Inc. or its management "anticipates," "believes," "estimates," "plans,"
"forecasts," "intends," "predicts," "projects," or "expects" a particular
result, or is "confident" or "optimistic" that an event will occur, and
variations of such words and similar expressions. All of the information
concerning interest rate sensitivity is forward-looking. Accounting estimates,
including among others, determination of the provision and allowance for loan
losses, the carrying value of goodwill, mortgage servicing rights, deferred tax
assets, and investment securities (including whether any impairment is temporary
or other than temporary and the amount of any impairment) involves judgments
that are inherently forward-looking. Our ability to fully comply with all of the
provisions of our memoranda of understanding, improve regulatory capital ratios,
successfully implement new programs and initiatives, increase efficiencies,
address regulatory issues, respond to declines in collateral values and credit
quality, and improve profitability is not entirely within our control and is not
assured. The future effect of changes in the financial and credit markets and
the national and regional economy on the banking industry, generally, and on
United Bancorp, Inc., specifically, are also inherently uncertain. 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, clarify or revise forward-looking statements to reflect
developments that occur or information obtained after the date of this
report.
Risk
factors include, but are not limited to, the risk factors described in "Item 1A - Risk Factors" of this report; the timing and level of
asset growth; changes in market interest rates, 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; changes in value and credit
quality of investment securities; 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.
Page
2
|
|
||||
|
Item No.
|
Description
|
Page
|
||
|
PART
I
|
||||
|
1.
|
Business
|
4
|
||
|
I
|
10
|
|||
|
(A)
|
Distribution
of Assets, Liabilities and Shareholders' Equity
|
10
|
||
|
(B)
|
Interest
Rates and Interest Differential
|
10
|
||
|
II
|
10
|
|||
|
III
|
11
|
|||
|
(A)
|
Types
of Loans
|
11
|
||
|
(B)
|
Maturities
and Sensitivities of Loans to Changes in Interest Rates
|
11
|
||
|
(C)
|
Risk
Elements
|
11
|
||
|
(D)
|
Other
Interest Bearing Assets
|
12
|
||
|
IV
|
12
|
|||
|
(A)
|
Changes
in Allowance for Loan Losses
|
12
|
||
|
(B)
|
Allocation
of Allowance for Loan Losses
|
13
|
||
|
V
|
13
|
|||
|
VI
|
13
|
|||
|
VII
|
13
|
|||
|
1A.
|
14
|
|||
|
1B.
|
23
|
|||
|
2.
|
24
|
|||
|
3.
|
24
|
|||
|
4.
|
24
|
|||
|
PART
II
|
||||
|
5.
|
24
|
|||
|
6.
|
25
|
|||
|
7.
|
26
|
|||
|
7B
|
26
|
|||
|
8.
|
27
|
|||
|
9.
|
27
|
|||
|
9A
|
27
|
|||
|
9B
|
28
|
|||
|
PART
III
|
||||
|
10.
|
28
|
|||
|
11.
|
28
|
|||
|
12.
|
28
|
|||
|
13.
|
29
|
|||
|
14.
|
29
|
|||
|
PART
IV
|
||||
|
15.
|
29
|
|||
|
30
|
||||
|
30
|
||||
|
31
|
||||
PART
I
|
ITEM
1
|
United
Bancorp, Inc. (the "Company") was incorporated on May 31, 1985 as a business
corporation under the Michigan Business Corporation Act, pursuant to the
authorization and direction of the Directors of United Bank & Trust
("UBT").
The
Company is a bank holding company registered with the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") under the Bank Holding
Company Act of 1956, as amended (the "Bank Holding Company Act"). The Company's
business is concentrated in a single industry segment – commercial banking. The
Company has corporate power to engage in such activities as permitted to
business corporations under the Michigan Business Corporation Act, subject to
the limitations of the Bank Holding Company Act and regulations of the Federal
Reserve System. In general, the Bank Holding Company Act and regulations
restrict the Company with respect to its own activities and activities of any
subsidiaries to the business of banking or such other activities that are
closely related to the business of banking.
The
Company was formed by Directors of UBT to acquire all of the capital stock of
UBT, which it did on January 1, 1986. In November of 2000, the Company filed
applications with its regulators for permission to establish a second bank as a
subsidiary of the Company. United Bank & Trust – Washtenaw ("UBTW") opened
for business on April 2, 2001, and is headquartered in Ann Arbor. UBTW operates
with its own local management and board of directors, and targets the Washtenaw
County market for its growth. In 2003, UBT sold its three Washtenaw County
offices to UBTW.
Currently,
UBT delivers financial services through a system of eleven banking offices and
one Trust office, and fifteen automated teller machines, located in Lenawee and
Monroe Counties, Michigan. The business base of the area is primarily
agricultural and light manufacturing, with its manufacturing sector exhibiting
moderate dependence on the automotive industry.
UBTW
delivers banking services through five banking offices and five automated teller
machines in Washtenaw County, Michigan. The employment base of Washtenaw County
is centered around health care, education and automotive high technology.
Economic stability is provided to a great extent by the University of Michigan,
which is a major employer and is not as economically sensitive to the
fluctuations of the automotive industry. The services and public sectors account
for a substantial percentage of total industry employment, in a large part due
to the University of Michigan and the University of Michigan Medical
Center.
UBT and
UBTW (the "Banks") offer a full range of services to individuals, corporations,
fiduciaries and other institutions. Banking services include checking, NOW
accounts, savings, time deposit accounts, money market deposit accounts, safe
deposit facilities and money transfers. Lending operations provide real estate
loans, secured and unsecured business and personal loans, consumer installment
loans, credit card and check-credit loans, home equity loans, accounts
receivable and inventory financing, equipment lease financing and construction
financing.
The Banks
maintain correspondent bank relationships with a small number of larger banks,
which involve check clearing operations, securities safekeeping, transfer of
funds, loan participation, and the purchase and sale of federal funds and other
similar services. UBTW also maintains a correspondent banking relationship with
UBT.
The
following table shows comparative information concerning the Banks as of
December 31, 2009, in thousands of dollars:
|
Assets
|
Loans
|
Deposits
|
||||||||||
|
United
Bank & Trust
|
$ | 512,610 | $ | 332,996 | $ | 445,033 | ||||||
|
United
Bank & Trust – Washtenaw
|
393,293 | 325,037 | 339,573 | |||||||||
UBT
operates a trust department, and provides trust services to UBTW on a contract
basis. The Wealth Management Group offers a variety of fiduciary services to
individuals, corporations and governmental entities, including services as
trustee for personal, pension, and employee benefit trusts. The department
provides trust services, financial planning services, investment services,
custody services, pension paying agent services and acts as the personal
representative for estates. These products help to diversify the Company's
sources of income. The Banks offer the sale of nondeposit investment products
through licensed representatives in their banking offices, and sell credit and
life insurance products.
As
previously announced, on January 15, 2010, the Company filed applications with
its regulators for permission to consolidate and merge UBTW with and into UBT,
with the consolidated bank operating under the charter of UBT. The proposed bank
consolidation is subject to the receipt of all applicable federal and state
regulatory approvals. It is anticipated that the proposed bank consolidation
will be completed during the second quarter of 2010. Following the transaction,
the consolidated bank will continue to operate the same banking offices in the
same markets that UBT and UBTW currently operate.
The
Company owns a structured finance company that was established in 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, to the
extent allowed by the applicable SBA programs. 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.
Supervision and
Regulation
General
The
Company and the Banks are extensively regulated and are subject to a
comprehensive regulatory framework that imposes restrictions on their
activities, minimum capital requirements, lending and deposit restrictions, and
numerous other requirements. This system of regulation is primarily intended for
the protection of depositors, federal deposit insurance funds and the banking
system as a whole, rather than for the protection of shareholders and creditors.
Many of these laws and regulations have undergone significant change in recent
years and are likely to change in the future. Future legislative or regulatory
change, or changes in enforcement practices or court rulings, may have a
significant and potentially adverse impact on the Company's operations and
financial condition. Our non-bank subsidiaries are also subject to various
federal and state laws and regulations.
The
Company
The
Company is subject to supervision and regulation by the Federal Reserve System.
Its activities are generally limited to owning or controlling banks and engaging
in such other activities as the Federal Reserve System may determine to be
closely related to banking. Prior approval of the Federal Reserve System, and in
some cases various other government agencies,
is
required for the Company to acquire control of any additional bank holding
companies, banks or other operating subsidiaries. The Company is subject to
periodic examination by the Federal Reserve System, and is required to file with
the Federal Reserve System periodic reports of its operations and such
additional information as the Federal Reserve System may require.
The
Company is a legal entity separate and distinct from the Banks. There are legal
limitations on the extent to which the Banks may lend or otherwise supply funds
to the Company. Payment of dividends to the Company by the Banks, the Company's
principal source of funds, is subject to various state and federal regulatory
limitations. Under the Michigan Banking Code of 1999, the Banks' ability to pay
dividends to the Company is subject to the following restrictions:
|
·
|
A
bank may not declare or pay a dividend if a bank's surplus would be less
than 20% of its capital after payment of the dividend.
|
|
|
·
|
A
bank may not declare a dividend except out of net income then on hand
after deducting its losses and bad debts.
|
|
|
·
|
A
bank may not declare or pay a dividend until cumulative dividends on
preferred stock, if any, are paid in full.
|
|
|
·
|
A
bank may not pay a dividend from capital or
surplus.
|
Federal
law generally prohibits a bank from making any capital distribution (including
payment of a dividend) or paying any management fee to its parent company if the
depository institution would thereafter be undercapitalized. The Federal Deposit
Insurance Corporation ("FDIC") may prevent an insured bank from paying dividends
if the bank is in default of payment of any assessment due to the FDIC. In
addition, the FDIC may prohibit the payment of dividends by a bank, if such
payment is determined, by reason of the financial conditions of the bank, to be
an unsafe and unsound banking practice. UBT and UBTW are parties to
understandings with the FDIC and OFIR, described in "Recent Developments" below,
that they will not declare or pay any dividends without the prior consent of the
FDIC and OFIR.
Additional
information on restrictions on payment of dividends by the Company and the Banks
may be found in this Item 1 under the heading "Recent
Developments" below, under Item 5 of this
report, and under Note 15 on Page A-41 hereof, all of
which information is incorporated here by reference.
Under
Federal Reserve Board policy, the Company is expected to act as a source of
financial strength to the Banks and to commit resources to support the Banks. In
addition, if the Michigan Office of Financial and Insurance Regulation ("OFIR")
deems a Bank's capital to be impaired, OFIR may require the Bank to restore its
capital by a special assessment on the Company as the Bank's only shareholder.
If the Company failed to pay any assessment, the Company's directors would be
required, under Michigan law, to sell the shares of the Bank's stock owned by
the Company to the highest bidder at either a public or private auction and use
the proceeds of the sale to restore the Bank's capital.
The
Federal Reserve Board and the FDIC have established guidelines for risk-based
capital by bank holding companies and banks. These guidelines establish a
risk-adjusted ratio relating capital to risk-weighted assets and
off-balance-sheet exposures. These capital guidelines primarily define the
components of capital, categorize assets into different risk classes, and
include certain off-balance-sheet items in the calculation of capital
requirements.
The FDIC
Improvement Act of 1991 established a system of prompt corrective action to
resolve the problems of undercapitalized financial institutions. Under this
system, federal banking
regulators
have established five capital categories – well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized, in which all institutions are placed. The federal banking
agencies have also specified by regulation the relevant capital levels for each
of the categories.
Federal
banking regulators are required to take specified mandatory supervisory actions
and are authorized to take other discretionary actions with respect to
institutions in the three undercapitalized categories. The severity of the
action depends upon the capital category in which the institution is placed.
Subject to a narrow exception, the banking regulator must generally appoint a
receiver or conservator for an institution that is critically undercapitalized.
An institution in any of the under-capitalized categories is required to submit
an acceptable capital restoration plan to its appropriate federal banking
agency. An undercapitalized institution is also generally prohibited from paying
any dividends, increasing its average total assets, making acquisitions,
establishing any branches or engaging in any new line of business, except under
an accepted capital restoration plan or with FDIC approval.
Failure
to meet capital guidelines could subject a bank or bank holding company to a
variety of enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on accepting
brokered deposits, and other restrictions on its business. In addition, such a
bank would generally not receive regulatory approval of any application that
requires the consideration of capital adequacy, such as a branch or merger
application, unless the bank could demonstrate a reasonable plan to meet the
capital requirement within a reasonable period of time. The capital ratios of
the Company and the Banks exceed the regulatory guidelines for an institution to
be categorized as "well-capitalized.” Additional information on the capital
requirements applicable to the Banks may be found in this Item 1 under the
heading "Recent Developments," and is incorporated here by
reference. Information in Note 18 on Page A-46 hereof
provides additional information regarding the Company's and the Banks’ capital
ratios, and is incorporated here by reference.
The
Banks
The Banks
are chartered under Michigan law and are subject to regulation by OFIR. Michigan
banking laws place restrictions on various aspects of banking, including
permitted activities, loan interest rates, branching, payment of dividends, and
capital and surplus requirements.
Substantially
all of the deposits of the Banks are insured up to applicable limits by the
Deposit Insurance Fund ("DIF") of the FDIC and are subject to deposit insurance
assessments to maintain the DIF. The FDIC utilizes a risk-based assessment
system that imposes insurance premiums based upon a matrix that takes into
account a bank's capital level and supervisory rating.
On
February 27, 2009, the FDIC adopted a final rule modifying the risk-based
assessment system and setting initial base assessment rates beginning April 1,
2009, at 12 to 45 basis points; and due to extraordinary circumstances, extended
the time within which the reserve ratio must be returned to 1.15 percent from
five to seven years. On May 22, 2009, the FDIC adopted a final rule imposing a 5
basis point special assessment on each insured depository institution's assets
minus Tier 1 capital as of June 30, 2009. The Banks incurred expenses of
$405,400 as a result of the special assessment in the second quarter of
2009.
On
November 12, 2009, the FDIC amended its regulations requiring certain insured
institutions to prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009, and for all of 2010, 2011, and 2012. The prepaid
assessment for these periods was collected on December 30, 2009, along with each
institution’s regular quarterly risk-based deposit insurance
assessment
for the third quarter of 2009. The prepayment has been treated as a prepaid
expense on the books of the Company, and will be recognized as expense in the
period for which the assessments are effective.
During
2009, the Banks paid $77,800 in Financing Corporation ("FICO") assessments
related to outstanding FICO bonds to the FDIC as collection agent. The FICO is a
mixed-ownership government corporation established by the Competitive Equality
Banking Act of 1987 whose sole purpose was to function as a financing vehicle
for the now defunct Federal Savings and Loan Insurance Corporation. FICO
assessments will continue in the future for both banks.
The Banks
are subject to a number of federal and state laws and regulations, which have a
material impact on their business. These include, among others, minimum capital
requirements, state usury laws, state laws relating to fiduciaries, the Truth in
Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the
Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community
Reinvestment Act, the Real Estate Settlement Procedures Act, the USA PATRIOT
Act, The Bank Secrecy Act, Office of Foreign Assets Control regulations,
electronic funds transfer laws, redlining laws, predatory lending laws,
antitrust laws, environmental laws, money laundering laws and privacy
laws. The instruments of monetary policy of authorities, such as the
Federal Reserve System, may influence the growth and distribution of bank loans,
investments and deposits, and may also affect interest rates on loans and
deposits. These policies may have a significant effect on the operating results
of banks.
Bank
holding companies may acquire banks and other bank holding companies located in
any state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state banking law. Banks may also establish
interstate branch networks through acquisitions of and mergers with other banks.
The establishment of de novo interstate branches or the acquisition of
individual branches of a bank in another state (rather than the acquisition of
an out-of-state bank in its entirety) is allowed only if specifically authorized
by state law.
Michigan
banking laws do not significantly restrict interstate banking. The Michigan
Banking Code of 1999 permits, in appropriate circumstances and with the approval
of the OFIR, (1) acquisition of Michigan banks by FDIC-insured banks,
savings banks or savings and loan associations located in other states,
(2) sale by a Michigan bank of branches to an FDIC-insured bank, savings
bank or savings and loan association located in a state in which a Michigan bank
could purchase branches of the purchasing entity, (3) consolidation of
Michigan banks and FDIC-insured banks, savings banks or savings and loan
associations located in other states having laws permitting such consolidation,
(4) establishment of branches in Michigan by FDIC-insured banks located in
other states, the District of Columbia or U.S. territories or protectorates
having laws permitting a Michigan bank to establish a branch in such
jurisdiction, and (5) establishment by foreign banks of branches located in
Michigan. A Michigan bank holding company may acquire a non-Michigan
bank and a non-Michigan bank holding company may acquire a Michigan
bank.
Memoranda of
Understanding
On
January 15, 2010, UBT entered into a Memorandum of Understanding ("MOU") with
the FDIC and OFIR. The MOU is not a "written agreement" for purposes of Section
8 of the Federal Deposit Insurance Act. The MOU documents an understanding among
UBT, the FDIC and OFIR that, among other things: (i) UBT will not declare or pay
any dividend without the prior consent
of the
FDIC and OFIR; and (ii) UBT will have and maintain its Tier 1 capital ratio at a
minimum of 9% within six months from the date of the MOU and for the duration of
the MOU, and will maintain its total capital ratio at a minimum of 12% for the
duration of the MOU. UBTW is also a party to a Memorandum of Understanding with
the FDIC and OFIR, which documents an understanding that UBTW will have and
maintain its Tier 1 capital ratio at a minimum of 8%. For additional information
about the capital ratios of UBT and UBTW, see Note 18 on
Page A-46 hereof, which information is incorporated here by
reference.
Consolidation of
Banks
As
previously announced, on January 15, 2010, the Company filed applications with
its regulators for permission to consolidate and merge UBTW with and into UBT,
with the consolidated bank operating under the charter of UBT. The proposed bank
consolidation is subject to the receipt of all applicable federal and state
regulatory approvals. It is anticipated that the proposed bank consolidation
will be completed during the second quarter of 2010. Following the transaction,
the consolidated bank will continue to operate the same banking offices in the
same markets that UBT and UBTW currently operate.
Accounting
Standards
Information regarding accounting
standards adopted by the Company are discussed beginning on Page A-29 hereof, and is incorporated here by
reference.
Competition
The
banking business in the Company's service area is highly competitive. In their
markets, the Banks compete with a number of community banks and subsidiaries of
large multi-state, multi-bank holding companies. In addition, the banks face
competition from credit unions, savings associations, finance companies, loan
production offices and other financial services companies. The principal methods
of competition that we face are price (interest rates paid on deposits, interest
rates charged on borrowings and fees charged for services) and service
(convenience and quality of services rendered to customers).
The
Company believes that the market perceives a competitive benefit to an
independent, locally controlled commercial bank. Much of the Company's
competition comes from affiliates of organizations controlled from outside the
area. Against these competitors, the Banks continue to expand their client
relationships.
Employees
On
December 31, 2009, the Company and its subsidiaries employed 217 full-time and
31 part-time employees. This compares to 233 full-time and 41 part-time
employees at December 31, 2008.
Available
Information
You can
find more information about us at our website, located at www.ubat.com. Our
Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current
Reports on Form 8-K, and any amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available as soon as reasonably practicable after such forms have been filed
with or furnished to the Securities and Exchange Commission (the "SEC") free of
charge on our website through a link to the SEC website.
SELECTED STATISTICAL INFORMATION
Additional
statistical information describing our business appears in the following pages
and in Management's Discussion and Analysis of Financial Condition and Results
of Operations and in our consolidated financial statements and related notes
contained in this report.
|
I
|
DISTRIBUTION
OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL:
|
The
information required by these sections are contained on Pages A-1 through A-12
hereof, and is incorporated here by reference.
II INVESTMENT
PORTFOLIO
(A) Book
Value of Investment Securities
The book
value of securities as of December 31, 2009, 2008 and 2007 are as follows, in
thousands of dollars:
|
In
thousands of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
U.S.
Treasury and government agencies
|
$ | 55,381 | $ | 41,684 | $ | 46,583 | ||||||
|
Obligations
of states and political subdivisions
|
34,111 | 37,889 | 36,128 | |||||||||
|
Corporate,
asset backed and other debt securities
|
2,623 | 2,478 | - | |||||||||
|
Equity
securities
|
31 | 50 | 417 | |||||||||
|
Total
Investment Securities
|
$ | 92,146 | $ | 82,101 | $ | 83,128 | ||||||
(B) Carrying
Values and Yields of Investment Securities
The
following table reflects the carrying values and yields of the Company's
securities portfolio as of December 31, 2009. Average yields are based on
amortized costs and the average yield on tax exempt securities of states and
political subdivisions is adjusted to a taxable equivalent basis, assuming a 34%
marginal tax rate.
|
Carrying Values and Yields of
Investments
|
|||||||||||||||||||||
|
In
thousands of dollars where applicable
|
Over
10
|
||||||||||||||||||||
|
Available For Sale
|
0 - 1 Year
|
1 - 5 Years |
5 - 10 Years
|
Years
|
Total
|
||||||||||||||||
|
U.S.
Treasury and government agencies (1)
|
$ | 23,062 | $ | 9,177 | $ | - | $ | - | $ | 32,239 | |||||||||||
|
Weighted
average yield
|
1.89 | % | 3.13 | % | - | - | 2.23 | % | |||||||||||||
|
U.S.
Agency Mortgage Backed securities
|
- | 23,142 | - | - | $ | 23,142 | |||||||||||||||
|
Weighted
average yield
|
0.00 | % | 4.37 | % | 0.00 | % | 0.00 | % | 4.37 | % | |||||||||||
|
Obligations
of states and political subdivisions
|
$ | 9,165 | $ | 16,379 | $ | 7,708 | $ | 859 | $ | 34,111 | |||||||||||
|
Weighted
average yield
|
6.57 | % | 5.68 | % | 5.97 | % | 6.89 | % | 6.01 | % | |||||||||||
|
Equity
and other securities
|
$ | 2,654 | $ | - | $ | - | $ | - | $ | 2,654 | |||||||||||
|
Weighted
average yield
|
4.55 | % | - | - | - | 4.55 | % | ||||||||||||||
|
Total
securities
|
$ | 34,881 | $ | 48,698 | $ | 7,708 | $ | 859 | $ | 92,146 | |||||||||||
|
Weighted
average yield
|
3.31 | % | 4.57 | % | 5.97 | % | 6.89 | % | 4.23 | % | |||||||||||
|
(1)
|
Reflects
the scheduled amortization and an estimate of future prepayments based on
past and current experience of amortizing U.S. agency
securities.
|
||||||||||||||||||||
As of
December 31, 2009, the Company's securities portfolio contains no concentrations
by any single issuer of securities greater than 10% of shareholders' equity.
Additional information concerning the Company's securities portfolio is included
on Page A-6, in Note 3 on Page A-33
hereof and in the tables under “Credit Quality” on Pages A-8 through A-11, and is incorporated here by
reference.
III LOAN
PORTFOLIO
(A) Types
of Loans
The
tables below show loans outstanding (net of unearned interest) at December 31,
and the percentage makeup of the portfolios. All loans are domestic and contain
no concentrations by industry or customer.
|
Thousands
of dollars
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Personal
|
$ | 110,702 | $ | 112,095 | $ | 98,075 | $ | 91,002 | $ | 81,571 | ||||||||||
|
Business
and commercial mortgage
|
393,223 | 411,636 | 376,637 | 327,928 | 320,188 | |||||||||||||||
|
Tax
exempt
|
3,005 | 2,533 | 2,709 | 2,841 | 3,133 | |||||||||||||||
|
Residential
mortgage
|
86,417 | 90,343 | 86,023 | 85,636 | 67,246 | |||||||||||||||
|
Construction
& development
|
56,706 | 80,412 | 81,086 | 94,356 | 85,974 | |||||||||||||||
|
Total
portfolio loans
|
$ | 650,053 | $ | 697,019 | $ | 644,530 | $ | 601,763 | $ | 558,112 | ||||||||||
|
Personal
|
17.0 | % | 16.1 | % | 15.2 | % | 15.1 | % | 14.6 | % | ||||||||||
|
Business
and commercial mortgage
|
60.5 | % | 59.0 | % | 58.4 | % | 54.5 | % | 57.4 | % | ||||||||||
|
Tax
exempt
|
0.5 | % | 0.4 | % | 0.4 | % | 0.5 | % | 0.6 | % | ||||||||||
|
Residential
mortgage
|
13.3 | % | 13.0 | % | 13.4 | % | 14.2 | % | 12.0 | % | ||||||||||
|
Construction
& development
|
8.7 | % | 11.5 | % | 12.6 | % | 15.7 | % | 15.4 | % | ||||||||||
|
Total
portfolio loans
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
(B) Maturities
and Sensitivities of Loans to Changes in Interest Rates
The
following table presents the maturity of total loans outstanding, other than
residential mortgages and personal loans, as of December 31, 2009, according to
scheduled repayments of principal.
|
Thousands
of dollars
|
0 - 1 Year
|
1 - 5 Years
|
After 5 Years
|
Total
|
||||||||||||
|
Business
loans - fixed rate
|
$ | 33,769 | $ | 109,532 | $ | 16,571 | $ | 159,872 | ||||||||
|
Business
loans - variable rate
|
214,213 | 44,477 | 4 | 258,694 | ||||||||||||
|
Tax
exempt - fixed rate
|
124 | 794 | 2,087 | 3,005 | ||||||||||||
|
Total
|
$ | 248,106 | $ | 154,803 | $ | 18,662 | $ | 421,571 | ||||||||
|
Total
fixed rate
|
33,893 | 110,326 | 18,658 | 162,877 | ||||||||||||
|
Total
variable rate
|
214,213 | 44,477 | 4 | 258,694 | ||||||||||||
(C) Risk
Elements
Non-Accrual, Past Due and
Restructured Loans
The
following shows the effect on interest revenue of nonaccrual and troubled debt
restructured loans as of December 31, 2009, in thousands of
dollars:
|
Gross
amount of interest that would have been recorded at original
rate
|
$ | 2,191 | ||
|
Interest
that was included in revenue
|
- | |||
|
Net
impact on interest revenue
|
$ | 2,191 |
Additional
information concerning nonperforming loans, the Company's nonaccrual policy, and
loan concentrations is provided on Pages A-8, in Note 1 on
Pages A-29 through A-33, Note 4 on Page A-35 and
Note 5 on Page A-35 hereof, and is incorporated here by
reference.
At
December 31, 2009, the Banks had nine loans, other than those disclosed above,
for a total of $5,855,000, which would cause management to have serious doubts
as to the ability of the borrowers to comply with the present loan repayment
terms. These loans were included on the Banks' "watch lists" and were classified
as impaired; however, payments were current as of the date of this
report.
(D) Other
Interest Bearing Assets
As of
December 31, 2009, other than $2,774,000 in other real estate, there were no
other interest bearing assets that would be required to be disclosed under Item
III, Parts (C)(1) or (C)(2) of Industry Guide 3 if such assets were
loans.
IV SUMMARY
OF LOAN LOSS EXPERIENCE
(A) Changes
in Allowance for Loan Losses
The table
below summarizes changes in the allowance for loan losses for the years 2005
through 2009.
|
Thousands
of dollars
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Balance
at beginning of period
|
$ | 18,312 | $ | 12,306 | $ | 7,849 | $ | 6,361 | $ | 5,766 | |||||||||||
|
Charge-offs:
|
|||||||||||||||||||||
|
Business
and commercial mortgage (1)
|
8,257 | 7,298 | 3,521 | 447 | 516 | ||||||||||||||||
|
Construction
and land development
|
14,379 | ||||||||||||||||||||
|
Residential
mortgage
|
229 | 450 | 176 | 61 | 1 | ||||||||||||||||
|
Personal
|
1,503 | 1,024 | 593 | 254 | 362 | ||||||||||||||||
|
Total
charge-offs
|
24,368 | 8,772 | 4,290 | 762 | 879 | ||||||||||||||||
|
Recoveries:
|
|||||||||||||||||||||
|
Business
and commercial mortgage (1)
|
185 | 98 | 61 | 13 | 58 | ||||||||||||||||
|
Construction
and land development
|
- | ||||||||||||||||||||
|
Residential
mortgage
|
50 | 11 | - | 13 | 2 | ||||||||||||||||
|
Personal
|
71 | 62 | 49 | 101 | 82 | ||||||||||||||||
|
Total
recoveries
|
306 | 171 | 110 | 127 | 142 | ||||||||||||||||
|
Net
charge-offs
|
24,062 | 8,601 | 4,180 | 635 | 737 | ||||||||||||||||
|
Additions
charged to operations
|
25,770 | 14,607 | 8,637 | 2,123 | 1,332 | ||||||||||||||||
|
Balance
at end of period
|
$ | 20,020 | $ | 18,312 | $ | 12,306 | $ | 7,849 | $ | 6,361 | |||||||||||
|
Ratio
of net charge-offs to average loans
|
3.47 | % | 1.28 | % | 0.66 | % | 0.11 | % | 0.14 | % | |||||||||||
|
Allowance
as % of total portfolio loans
|
3.08 | % | 2.63 | % | 1.91 | % | 1.32 | % | 1.14 | % | |||||||||||
|
(1)
|
Includes
construction and development loans for 2008 and prior
|
||||||||||||||||||||
The
allowance for loan losses is maintained at a level believed adequate by
management to absorb losses inherent in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
amount and composition of the loan portfolio, and other relevant factors. The
provision charged to earnings was $25,770,000 in 2009, compared to $14,607,000
in 2008 and $8,637,000 in 2007.
(B) Allocation
of Allowance for Loan Losses
The
following table presents the portion of the allowance for loan losses applicable
to each loan category as of December 31. A table showing the percent of loans in
each category to total loans is included in Section III (A), above.
|
Thousands
of dollars
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Business
and commercial mortgage (1)
|
$ | 12,221 | $ | 16,148 | $ | 10,924 | $ | 6,911 | $ | 5,471 | |||||||||||
|
Construction
and development loans
|
5,164 | ||||||||||||||||||||
|
Residential
mortgage
|
760 | 673 | 368 | 24 | 14 | ||||||||||||||||
|
Personal
|
1,875 | 1,491 | 974 | 889 | 777 | ||||||||||||||||
|
Unallocated
|
- | - | 40 | 25 | 99 | ||||||||||||||||
|
Total
|
$ | 20,020 | $ | 18,312 | $ | 12,306 | $ | 7,849 | $ | 6,361 | |||||||||||
|
(1)
|
Includes
construction and development loans for 2008 and prior
|
||||||||||||||||||||
The
allocation method used takes into account specific allocations for identified
credits and an eight-quarter historical loss average in determining the
allocation for the balance of the portfolio.
V DEPOSITS
The
information concerning average balances of deposits and the weighted-average
rates paid thereon, is included on Page A-13 and A-14 and
maturities of time deposits is provided in Note 9 on Page
A-38 hereof, and is incorporated here by reference. There were no foreign
deposits. As of December 31, 2009, outstanding time certificates of deposit in
amounts of $100,000 or more were scheduled to mature as shown
below.
|
Thousands
of dollars
|
As
of
|
|||
|
Time
Certificates maturing:
|
12/31/09
|
|||
|
Within
three months
|
25,323 | |||
|
Over
three through six months
|
19,127 | |||
|
Over
six through twelve months
|
23,594 | |||
|
Over
twelve months
|
39,898 | |||
|
Total
|
107,942 | |||
VI RETURN
ON EQUITY AND ASSETS
Various
ratios required by this section and other ratios commonly used in analyzing bank
holding company financial statements are included on Page A-12 hereof, and are incorporated here by
reference.
VII SHORT-TERM
BORROWINGS
All of
the information that the Company is required to disclose under this section is
contained in Note 10 on Page A-38 hereof, and is
incorporated here by reference. The Company is not required to disclose any
additional information, as for all reporting periods there were no categories of
short-term borrowings for which the average balance outstanding during the
period was 30% or more of shareholders' equity at the end of the
period.
ITEM
1A RISK
FACTORS
Risks
Related To The Company's Business
Difficult
market conditions have adversely affected the financial services
industry.
The
capital and credit markets have been experiencing unprecedented volatility and
disruption for an extended period of time. Dramatic declines in the housing
market, falling home prices, increased foreclosures and unemployment have
negatively impacted the credit performance of mortgage loans and construction
and development loans, and resulted in significant write-downs of asset values
by financial institutions. These write-downs have caused many financial
institutions to seek additional capital, to merge with larger and stronger
institutions and, in some cases, to fail. Reflecting concern about the stability
of the financial markets generally and the strength of counterparties, many
lenders and institutional investors have reduced or ceased providing funding to
borrowers, including to other financial institutions.
This
market turmoil and tightening of credit have led to an increased level of
commercial and consumer delinquencies, lack of consumer confidence, increased
market volatility and widespread reduction of business activity generally. The
resulting economic pressure on consumers and commercial borrowers and lack of
confidence in the financial markets has adversely affected the Company's
business, results of operations and financial condition. A worsening of these
conditions would likely exacerbate the adverse effects of these difficult market
conditions on the Company and others in the financial institutions industry. If
current levels of market disruption and volatility continue or worsen, there can
be no assurance that the Company will not experience adverse effects, which may
be material, on its ability to access capital and on its business, results of
operations and financial condition.
If
the Company's allowance for possible loan losses is not sufficient to cover
actual loan losses, the Company's earnings could decrease.
The
Company maintains an allowance for possible loan losses, which is a reserve
established through a provision for possible loan losses charged to expense,
that represents management's estimate of probable incurred losses within the
existing portfolio of loans. The allowance, in the judgment of management, is
necessary to reserve for estimated loan losses and risks inherent in the loan
portfolio. The level of the allowance reflects management's continuing
evaluation of industry concentrations; specific credit risks; loan loss
experience; current loan portfolio quality; collateral values; present economic,
political and regulatory conditions and unidentified losses inherent in the
current loan portfolio. The determination of the appropriate level of the
allowance for possible loan losses inherently involves a high degree of
subjectivity and requires the Company to make significant estimates of current
credit risks and future trends, all of which may undergo material
changes.
Changes
in economic conditions affecting borrowers, new information regarding existing
loans, reassessment of the value of properties securing loans, identification of
additional problem loans and other factors, both within and outside of the
Company's control, may require an increase in the allowance for possible loan
losses. In addition, bank regulatory agencies periodically review the Company's
allowance for loan losses and may require an increase in the provision for
possible loan losses or the recognition of further loan charge-offs, based on
judgments different from those of management. Any increases in the allowance for
possible loan losses will result in a decrease in net income, and possibly
capital, and could have a material adverse effect on the Company's results of
operations and financial condition.
The
Company is subject to lending risk, which could materially adversely affect the
Company's results of operations and financial condition.
There are
inherent risks associated with the Company's lending activities. These risks
include, among other things, the impact of changes in interest rates and changes
in the economic conditions in the markets where the Company operates. Increases
in interest rates or weakening economic conditions could adversely impact the
ability of borrowers to repay outstanding loans or the value of the collateral
securing these loans, which could have a material adverse effect on the
Company's results of operations and financial condition.
As of
December 31, 2009, approximately 69% of the Company's loan portfolio consisted
of business and commercial mortgage and construction loans. Because the
Company's loan portfolio contains a significant number of business and
commercial mortgage and construction loans with relatively large balances, the
deterioration of one or more of these loans could cause a significant increase
in non-performing loans. An increase in non-performing loans could result in a
net loss of earnings from these loans, an increase in the provision for possible
loan losses and an increase in loan charge-offs, all of which could have a
material adverse effect on the Company's results of operations and financial
condition.
The
Company is subject to interest rate risk, which may negatively affect the
Company's earnings and the value of its assets.
The
Company's earnings and cash flows are largely dependent upon its net interest
income. Net interest income is the difference between interest income earned on
interest-earning assets, such as loans and securities, and interest expense paid
on interest-bearing liabilities, such as deposits and borrowed funds. Interest
rates are highly sensitive to many factors that are beyond the Company's
control, including general economic conditions and policies of various
governmental and regulatory agencies and, in particular, the Federal Reserve
Board. Changes in monetary policy, including changes in interest rates, could
influence the interest the Company receives on loans and securities and the
amount of interest it pays on deposits and borrowings. Such changes could also
affect the Company's ability to originate loans and obtain deposits and the fair
value of the Company's financial assets and liabilities. If the interest rates
paid on deposits and other borrowings increase at a faster rate than the
interest rates received on loans and other investments, the Company's net
interest income, and therefore earnings, could be adversely affected. Earnings
could also be adversely affected if the interest rates received on loans and
other investments fall more quickly than the interest rates paid on deposits and
other borrowings.
The
Company is subject to liquidity risk in its operations, which could adversely
affect its ability to fund various obligations.
Liquidity
risk is the possibility of being unable to meet obligations as they come due,
capitalize on growth opportunities as they arise, or pay regular dividends
because of an inability to liquidate assets or obtain adequate funding on a
timely basis, at a reasonable cost and within acceptable risk tolerances.
Liquidity is required to fund various obligations, including credit obligations
to borrowers, mortgage originations, withdrawals by depositors, repayment of
debt, dividends to shareholders, operating expenses and capital expenditures.
Liquidity is derived primarily from retail deposit growth and retention,
principal and interest payments on loans and investment securities, net cash
provided from operation and access to other funding sources. Liquidity is
essential to the Company's business. The Company must maintain sufficient funds
to respond to the needs of depositors and borrowers. An inability to raise funds
through deposits, borrowings, the sale or pledging as collateral of loans and
other assets could have a material adverse effect on the Company's liquidity.
The Company's access to funding sources in amounts
adequate
to finance the Company's activities could be impaired by factors that affect the
Company specifically or the financial services industry in general. Factors that
could detrimentally impact the Company's access to liquidity sources include a
decrease in the level of the Company's business activity due to a market down
turn or regulatory action that limits or eliminates the Company's access to
alternate funding sources. The Company's ability to borrow could also be
impaired by factors that are nonspecific to the Company, such as severe
disruption of the financial markets or negative expectations about the prospects
for the financial services industry as a whole, as evidenced by recent turmoil
in the domestic and worldwide credit markets.
If
the Company cannot raise additional capital when needed, its ability to further
expand its operations through organic growth and acquisitions could be
materially impaired.
The
Company is required by federal and state regulatory authorities to maintain
specified levels of capital to support its operations. The Company may need to
raise additional capital to support its current level of assets or its continued
growth. The Company's ability to raise additional capital will depend on
conditions in the capital markets at that time, which are outside the Company's
control, and on its financial performance. The Company cannot assure that it
will be able to raise additional capital in the future on terms acceptable to
the Company. If the Company cannot raise additional capital when needed, its
ability to maintain its current level of assets or to further expand its
operations through organic growth and acquisitions could be materially limited.
Additional information on the capital requirements applicable to the Bank may be
found in Item 1 under the heading “Recent Developments,”
and is incorporated here by reference.
The
Company is subject to risks related to the prepayments of loans, which may
negatively impact the Company's business.
Generally,
customers of the Company may prepay the principal amount of their outstanding
loans at any time. The speed at which prepayments occur, and the size of
prepayments, are within customers' discretion. If customers prepay the principal
amount of their loans, and the Company is unable to lend those funds to other
borrowers or invest the funds at the same or higher interest rates, the
Company's interest income will be reduced. A significant reduction in interest
income could have an adverse effect impact on the Company's results of
operations and financial condition.
The
Company may be required to pay additional insurance premiums to the FDIC, which
could negatively impact earnings.
Recent
insured institution failures, as well as deterioration in banking and economic
conditions, have significantly increased FDIC loss provisions, resulting in a
decline in the designated reserve ratio to historical lows. The FDIC expects a
higher rate of insured institution failures in the next few years compared to
recent years; thus, the reserve ratio may continue to decline. In addition, the
limit on FDIC coverage has been increased to $250,000 through December 31, 2013.
These developments have caused the premiums assessed to the Company by the FDIC
to increase.
The
Company is a participant in the FDIC Temporary Liquidity Guarantee Program.
Participating in this program requires the payment of additional insurance
premiums to the FDIC.
Further,
depending upon any future losses that the FDIC insurance fund may suffer, there
can be no assurance that there will not be additional premium increases in order
to replenish the fund. The FDIC may need to set a higher base rate schedule or
impose special assessments due to future financial institution failures and
updated failure and loss projections. Potentially higher
FDIC
assessment rates than those currently projected could have an adverse impact on
the Company's results of operations.
A
failure to fully comply with our memoranda of understanding could subject us to
regulatory actions.
UBT and
UBTW are each a party to a Memorandum of Understanding, which documents an
understanding among the Banks, the FDIC and OFIR. See "Recent Developments" in
Item I of this report above. A failure by either Bank to fully comply with the
understandings in its Memorandum of Understanding could result in the entry of a
consent order or a cease and desist order, which would mandate further action by
the Banks. Failure or inability to comply with such an order could result in
enforcement actions by the FDIC or OFIR.
The
economic conditions in the State of Michigan could have a material adverse
effect on the Company's results of operations and financial
condition.
The
Company's success depends primarily on the general economic conditions in the
State of Michigan and the specific local markets in which the Company operates.
Unlike larger national or other regional banks that are more geographically
diversified, the Company provides banking and financial services to customers
primarily in the Lenawee, Monroe and Washtenaw Counties, Michigan. The local
economic conditions in these areas have a significant impact on the demand for
the Company's products and services as well as the ability of the Company's
customers to repay loans, the value of the collateral securing loans and the
stability of the Company's deposit funding sources. A significant decline in
general economic conditions, caused by inflation, recession, acts of terrorism,
outbreak of hostilities or other international or domestic occurrences,
unemployment, changes in securities, financial, or credit markets or other
factors could impact these local economic conditions and, in turn, have a
material adverse effect on the Company's results of operations and financial
condition. See the disclosure under "Management's Discussion and Analysis of
Financial Condition and Results of Operations – Background" on Page A-2.
The
Company could be adversely affected by the soundness of other financial
institutions, including defaults by larger financial institutions.
The
Company's ability to engage in routine funding transactions could be adversely
affected by the actions and commercial soundness of other financial
institutions. Financial services institutions are interrelated as a result of
credit, trading, clearing, counterparty or other relationships between financial
institutions. The Company has exposure to many different industries and
counterparties, and the Company routinely executes transactions with
counterparties in the financial industry. As a result, defaults by, or even
rumors or questions about, one or more financial services institutions, or the
financial services industry generally, have led to market-wide liquidity
problems and could lead to losses or defaults by the Company or by other
institutions. This is sometimes referred to as "systemic risk" and may adversely
affect financial intermediaries, such as clearing agencies, clearing houses,
banks, securities firms and exchanges, with which the Company interacts on a
daily basis, and therefore could adversely affect the Company.
Many of
these transactions expose the Company to credit risk in the event of default of
a counterparty. In addition, the Company's credit risk may be exacerbated when
the collateral held by the Company cannot be realized upon or is liquidated at
prices not sufficient to recover the full amount of the financial instrument
exposure due to the Company. There is no assurance that any such losses would
not materially and adversely affect the Company's business, results of
operations or financial condition.
Loss
of the Company's Chief Executive Officer or other executive officers could
adversely affect its business.
The
Company's success is dependent upon the Company's continued service and skills
of its executive officers and senior management. If the Company loses the
services of these key personnel, it could adversely affect the Company's
business because of their skills, years of industry experience and the
difficulty of promptly finding qualified replacement personnel. The services of
Robert K. Chapman, the Company's President and Chief Executive Officer, would be
particularly difficult to replace.
The
Company's past operating results may not be indicative of its future operating
results.
The
Company may not be able to sustain its historical rate of growth or may not even
be able to grow its business at all. In the future, the Company may not have the
benefit of a favorable interest rate environment, a strong residential mortgage
market or the ability to find suitable candidates for acquisition. Various
factors, such as economic conditions, regulatory and legislative considerations
and competition, may also impede or prohibit the Company's ability to expand its
market presence. If the Company experiences a significant decrease in its
historical rate of growth, the Company's results of operations and financial
condition could be adversely affected due to a high percentage of its operating
costs being fixed expenses.
The
Company operates in a highly competitive industry and market area, which may
adversely affect the Company's profitability.
The
Company faces substantial competition in all areas of its operations from a
variety of different competitors, many of which are larger and may have more
financial resources. Such competitors primarily include a number of community
banks and subsidiaries of large multi-state and multi-bank holding companies in
addition to credit unions, savings associations and various finance companies
and loan production offices. The financial services industry could become even
more competitive as a result of legislative, regulatory and technological
changes and continued consolidation. Banks, securities firms and insurance
companies can merge under the umbrella of a financial holding company, which can
offer virtually any type of financial service, including banking, securities
underwriting, insurance (both agency and underwriting) and merchant banking. The
Company competes with these institutions both in attracting deposits and in
making loans. Price competition for loans might result in the Company
originating fewer loans, or earning less on its loans, and price competition for
deposits might result in a decrease in the Company's total deposits or higher
rates on its deposits. In addition, the Company has to attract its customer base
from other existing financial institutions and from new residents. Many of the
Company's competitors have fewer regulatory constraints and may have lower cost
structures. Due to their size, many competitors may be able to achieve economies
of scale and, as a result, may offer a broader range of products and services as
well as better pricing for those products and services than the Company
can.
Evaluation of investment securities
for other-than-temporary impairment involves subjective determinations and could
materially impact the Company's results of operations and financial
condition.
The
evaluation of impairments is a quantitative and qualitative process, which is
subject to risks and uncertainties and is intended to determine whether declines
in the fair value of investments should be recognized in current period
earnings. The risks and uncertainties include changes in general economic
conditions, the issuer's financial condition or future recovery prospects, the
effects of changes in interest rates or credit spreads and the expected recovery
period. Estimating
future
cash flows involves incorporating information received from third-party sources
and making internal assumptions and judgments regarding the future performance
of the underlying collateral and assessing the probability that an adverse
change in future cash flows has occurred. The determination of the amount of
other-than-temporary impairments is based upon the Company's quarterly
evaluation and assessment of known and inherent risks associated with the
respective asset class. Such evaluations and assessments are revised as
conditions change and new information becomes available.
Additionally,
the Company's management considers a wide range of factors about the security
issuer and uses its reasonable judgment in evaluating the cause of the decline
in the estimated fair value of the security and in assessing the prospects for
recovery. Inherent in management's evaluation of the security are assumptions
and estimates about the operations of the issuer and its future earnings
potential. Impairments to the carrying value of our investment securities may
need to be taken in the future, which could have a material adverse effect on
our results of operations and financial condition.
If
the Company is required to take a valuation allowance with respect to its
deferred tax assets, its financial condition and results of operations would be
negatively affected.
The
Company's net deferred tax asset was $6.6 million at December 31, 2009. A
valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefit related to such
assets will not be realized. Based on the levels of taxable income in prior
years and the Company's expectation of a return to profitability in future
years, Management has determined that no valuation allowance was required at
December 31, 2009. If the Company is required in the future to take a valuation
allowance with respect to its deferred tax assets, its financial condition and
results of operations would be negatively affected.
The
Company may continue to face increased or changing regulation under the
Emergency Economic Stabilization Act of 2008 and its implementing regulations,
which could adversely affect its results of operations.
The
programs established or to be established under EESA and the TARP could have
adverse effects upon the Company. The Company may continue to face increased or
changing regulation under EESA and the TARP. Compliance with such regulation may
increase the Company's costs, limit the Company's ability to pursue business
opportunities and limit the Company's ability to attract and retain key
executives, and could adversely affect the Company's results of
operations.
The
Company is subject to extensive government regulation and supervision that could
limit or restrict its activities and adversely affect its
profitability.
The
Company and the Banks operate in a highly regulated industry and are subject to
examination, supervision, and comprehensive regulation by federal and state
regulators. Compliance with these regulations is costly and restricts certain of
the Company's activities, including payment of dividends, mergers and
acquisitions, investments, loans and interest rates charged, interest rates paid
on deposits and locations of offices. The Company is also subject to
capitalization guidelines established by its regulators, which require the
Company to maintain specific levels of capital to support its
assets.
The
Company is subject to various laws and regulations that affect its lending
activities. Failure to comply with applicable laws and regulations could subject
the Company to regulatory enforcement action that could result in the assessment
of significant civil money penalties against the Company.
The laws
and regulations applicable to the banking industry could change at any time, and
the Company cannot predict the effects of these changes on its business and
profitability. Because government regulation greatly affects the business and
financial results of all commercial banks and bank holding companies, the
Company’s cost of compliance could adversely affect its ability to operate
profitably.
Environmental
liability associated with commercial lending could result in
losses.
In the
course of its business, the Company may acquire, through foreclosure, properties
securing loans it has originated or purchased that are in default. Particularly
in commercial real estate lending, there is a risk that hazardous substances
could be discovered on these properties. In this event, the Company might be
required to remove these substances from the affected properties at the
Company's sole cost and expense. The cost of this removal could substantially
exceed the value of affected properties. The Company may not have adequate
remedies against the prior owner or other responsible parties and could find it
difficult or impossible to sell the affected properties. These events could have
an adverse effect on the Company's business, results of operations and financial
condition.
The
Company depends upon the accuracy and completeness of information about
customers.
In
deciding whether to extend credit to customers, the Company may rely on
information provided to it by its customers, including financial statements and
other financial information. The Company may also rely on representations of
customers as to the accuracy and completeness of that information and, with
respect to financial statements, on reports of independent auditors. The
Company's financial condition and results of operations could be negatively
impacted to the extent that the Company extends credit in reliance on financial
statements that do not comply with generally accepted accounting principles or
that are misleading or other information provided by customers that is false or
misleading.
The
Company may be a defendant in a variety of litigation and other actions, which
may have a material adverse effect on the Company's financial condition and
results of operations.
The
Company and its subsidiaries may be involved from time to time in a variety of
litigation arising out of its business. The Company's insurance may not cover
all claims that may be asserted against it, and any claims asserted against it,
regardless of merit or eventual outcome, may harm its reputation or cause it to
incur unexpected expenses, which could be material in amount. Should the
ultimate expenses, judgments or settlements in any litigation exceed the
Company's insurance coverage, they could have a material adverse effect on the
Company's financial condition and results of operations. In addition, the
Company may not be able to obtain appropriate types or levels of insurance in
the future, nor may it be able to obtain adequate replacement policies with
acceptable terms, if at all.
The
Company may face risks related to future expansion and acquisitions or mergers,
which include substantial acquisition costs, an inability to effectively
integrate an acquired business into the Company's operations, lower than
anticipated profit levels and economic dilution to shareholders.
The
Company may seek to acquire other financial institutions or parts of those
institutions and may engage in de novo branch expansion in the future. The
Company may incur substantial costs to expand. An expansion may not result in
the levels of profits it seeks or levels of profits comparable to or better than
the Company's historical experience. Integration efforts for any future mergers
or acquisitions may not be successful, which could have a material adverse
effect on the Company's results of operations and financial condition. Also, the
Company may issue
equity
securities, including the Company's common stock and securities convertible into
shares of the Company's common stock, in connection with future acquisitions,
which could cause ownership and economic dilution to its current
shareholders.
The
Company may not be able to effectively adapt to technological change, which
could adversely affect its profitability.
The
financial services industry is continually undergoing rapid technological change
with frequent introductions of new technology-driven products and services. The
effective use of technology increases efficiency and enables financial
institutions to better serve customers and to reduce costs. The Company's future
success depends, in part, upon its ability to address the needs of its customers
by using technology to provide products and services that will satisfy customer
demands, as well as to create additional efficiencies in the Company's
operations. Many of the Company's competitors have substantially greater
resources to invest in technological improvements. The Company may not be able
to effectively implement new technology-driven products and services or be
successful in marketing these products and services to its customers, all of
which could adversely affect its profitability.
The
Company's controls and procedures may fail or be circumvented, which could have
a material adverse effect on its business, results of operations and financial
condition.
Management
regularly reviews and updates the Company's internal controls, disclosure
controls and procedures, and corporate governance policies and procedures. Any
system of controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. Any failure or circumvention of the
Company's controls and procedures or failure to comply with regulations related
to controls and procedures could have a material adverse effect on the Company's
business, results of operations and financial condition.
Risks Associated With the Company's Stock
The
Company's participation in U.S. Treasury's TARP Capital Purchase Program
restricts the Company's ability to pay dividends to common shareholders,
restricts the Company's ability to repurchase shares of common stock, and could
have other negative effects.
On
January 16, 2009, the Company sold to the United States Department of the
Treasury 20,600 shares of the Company's Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, which will pay cumulative dividends at a rate of 5%
for the first five years and 9% thereafter. The Company also issued to Treasury
a 10-year Warrant to purchase 311,492 shares of Company common stock at an
exercise price of $9.92 per share. The Company will have the right to redeem the
preferred stock at any time after three years. The payment of dividends on the
TARP CPP preferred stock will reduce the amount of earnings available to pay
dividends to common shareholders. This could negatively affect the ability of
the Company to pay dividends on its common stock.
Under the
TARP CPP, the Company is subject to restrictions on the payment of dividends to
common shareholders and the repurchase of common stock. Until the earlier of
January 16, 2012 and the date on which Treasury no longer holds any shares of
the TARP CPP preferred stock, the Company may not, without Treasury's approval
increase common dividends above $0.10 per share or repurchase any of its common
shares (subject to limited exceptions). These restrictions may reduce or prevent
payment of dividends to common shareholders that would otherwise be paid if the
Company was not a participant in the TARP CPP and could have an adverse effect
on the market price of the Company's common stock
In
addition, the Company may not pay any dividends at all on its common stock
unless the Company is current on its dividend payments on the TARP CPP preferred
stock. If the Company fails to pay in full dividends on the TARP CPP preferred
stock for six dividend periods, whether consecutive or not, the holder of the
TARP CPP preferred stock would have the right to elect two directors to the
Company's board of directors. This right would terminate only upon the Company
paying dividends in full for four consecutive periods. This right could reduce
the level of influence existing common shareholders have in the management
policies of the Company.
If
Treasury (or a subsequent holder) exercised the Warrant and purchased shares of
common stock, each common shareholder's percentage of ownership of the Company
would be smaller. As a result, each shareholder might have less influence in the
management policies of the Company than before exercise of the Warrant. This
could also have an adverse effect on the market price of the Company's common
stock.
Unless
the Company is able to redeem the TARP CPP preferred stock before January 16,
2014, the cost of this capital will increase on that date, from 5.00%
(approximately $1,030,000 annually) to 9.00% (approximately $1,854,000
annually). Depending on the Company's financial condition at the time, this
increase in dividends on the TARP CPP preferred stock could have a negative
effect on the Company's capacity to pay common stock dividends.
Additional
restrictions and requirements may be imposed by the Treasury or Congress on the
Company at a later date. These restrictions may apply to the Company
retroactively and their imposition is outside of the Company's
control.
The
Company's ability to pay dividends is limited and it may be unable to pay future
dividends.
The
Company has suspended payment of dividends on its common stock in order to
preserve capital. The Company's ability to pay dividends is limited by
regulatory restrictions and the need to maintain sufficient consolidated
capital. The ability of the Company's subsidiary banks to pay dividends to the
Company is limited by their obligations to maintain sufficient capital and by
other general restrictions on dividends that are applicable to banks. If the
Company or its subsidiary banks do not satisfy these regulatory requirements,
the Company would be unable to continue to pay dividends on its common stock.
Additional information on restrictions on payment of dividends by the Company
and the Banks may be found in Item 1 under the heading "Recent
Developments," under Item 5 of this report, and under Note
15 on Page A-41 hereof, all of which information is incorporated here by
reference.
The
market price of the Company's common stock can be volatile, which may make it
more difficult to resell Company common stock at a desired time and
price.
Stock
price volatility may make it more difficult for a shareholder to resell common
stock when a shareholder wants to and at prices a shareholder finds attractive.
The Company's stock price can fluctuate significantly in response to a variety
of factors.
General
market fluctuations, industry factors and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes or credit loss trends, could also cause the Company's stock price to
decrease regardless of operating results. In addition, the trading volume in the
Company's common stock is significantly less than that of other larger financial
services companies. This can make the Company's stock price volatile as
significant sales of the Company's common stock, or the expectation of these
sales, could cause the Company's stock price to fall.
The
Company may issue additional shares of its common stock in the future, which
could dilute a shareholder's ownership of common stock.
The
Company's articles of incorporation authorize its board of directors, without
shareholder approval, to, among other things, issue additional shares of common
or preferred stock. The issuance of any additional shares of common or preferred
stock could be dilutive to a shareholder's ownership of Company common stock. To
the extent that the Company issues options or warrants to purchase common stock
in the future and the options or warrants are exercised, the Company's
shareholders may experience further dilution. Holders of shares of Company
common stock have no preemptive rights that entitle holders to purchase their
pro rata share of any offering of shares of any class or series and, therefore,
shareholders may not be permitted to invest in future issuances of Company
common or preferred stock.
Because
of its capital requirements, the Company may find it necessary to sell common
stock to raise capital under circumstances and at prices which result in extreme
dilution.
The
Company may issue debt and equity securities that are senior to Company common
stock as to distributions and in liquidation, which could negatively affect the
value of Company common stock.
In the
future, the Company may increase its capital resources by entering into debt or
debt-like financing or issuing debt or equity securities, which could include
issuances of senior notes, subordinated notes, preferred stock or common stock.
In the event of the Company's liquidation, its lenders and holders of its debt
securities would receive a distribution of the Company's available assets before
distributions to the holders of Company common stock. The Company's decision to
incur debt and issue securities in future offerings will depend on market
conditions and other factors beyond its control. The Company cannot predict or
estimate the amount, timing or nature of its future offerings and debt
financings. Future offerings could reduce the value of shares of Company common
stock and dilute a shareholder's interest in the Company.
ITEM
1B UNRESOLVED
STAFF COMMENTS
None
ITEM
2 PROPERTIES
The
executive offices of the Company are located at the main office (Hickman
Financial Center) of United Bank & Trust, 205 East Chicago Boulevard,
Tecumseh, Michigan. UBT owns and occupies the entire two-story building, which
was built in 1980. UBT operates one other banking office in the Tecumseh area,
two in the city of Adrian, one each in the cities of Hudson and Morenci, one in
the village of Blissfield, and one each in Clinton, Rollin and Raisin Townships,
all in Lenawee County. In addition, the bank operates one office in Dundee,
Monroe County, Michigan. The Bank’s Trust & Investment Group occupies a
leased facility in Tecumseh. The bank owns all of the buildings except for the
Trust facility, and leases the land for one office in the city of Adrian. All
offices offer ATM services, and all offices other than the Hickman Financial
Center offer drive-up facilities. UBI owns and occupies a 12,000 square foot
operations and training center in Tecumseh.
United
Bank & Trust – Washtenaw operates one banking office in the City of Ann
Arbor and one office each in the city of Saline, the villages of Dexter and
Manchester, and Scio Township, Washtenaw County, Michigan. The bank owns the
Saline and Dexter buildings, leases the buildings for the Manchester and Scio
Township offices, and leases the land for the Dexter office. UBTW holds a
long-term lease on the facilities for its administrative and banking
offices
in Ann
Arbor. All offices offer ATM services, and all offices other than Manchester
offer drive-up facilities.
ITEM
3 LEGAL
PROCEEDINGS
The
Company and its subsidiaries are not involved in any material pending legal
proceedings. They are involved in ordinary routine litigation incidental to
their business; however, no such proceedings are expected to result in any
material adverse effect on the operations or earnings of the Company. Neither
the Company nor it subsidiaries are involved in any proceedings to which any
director, principal officer, affiliate thereof, or person who owns of record or
beneficially more than five percent (5%) of the outstanding stock of the
Company, or any associate of the foregoing, is a party or has a material
interest adverse to the Company.
ITEM
4 SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART
II
|
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
MARKET FOR COMMON
STOCK
The
following table shows the high and low bid prices of common stock of the Company
for each quarter of 2009 and 2008 as quoted on the OTC Bulletin Board, under the
symbol of "UBMI.” The prices listed below are OTC Bulletin Board quotations.
They reflect inter-dealer prices without retail markup, markdown or commission
and may not necessarily represent actual transactions. They also do not include
private transactions not involving brokers or dealers. The Company had 1,233
shareholders of record as of December 31, 2009.
|
2009
|
2008
|
|||||||||||||||||||||||
|
Cash
|
Cash
|
|||||||||||||||||||||||
|
Market Price
|
Dividends
|
Market Price
|
Dividends
|
|||||||||||||||||||||
|
Quarter
|
High
|
Low
|
Declared
|
High
|
Low
|
Declared
|
||||||||||||||||||
|
1st
|
$ | 10.50 | $ | 5.50 | $ | 0.02 | $ | 22.00 | $ | 17.55 | $ | 0.20 | ||||||||||||
|
2nd
|
7.00 | 5.60 | - | 20.00 | 14.00 | 0.20 | ||||||||||||||||||
|
3rd
|
6.90 | 4.74 | - | 14.98 | 9.20 | 0.20 | ||||||||||||||||||
|
4th
|
6.50 | 5.00 | - | 12.99 | 7.55 | 0.10 | ||||||||||||||||||
The board
of directors of the Company suspended payment of cash dividends on its shares of
common stock in the second quarter of 2009. The board believes that it is in the
Company’s best interest to preserve capital given the severe financial market
conditions in Michigan and the United States.
Banking
laws and regulations restrict the amount the Banks can transfer to the Company
in the form of cash dividends and loans. Those restrictions are discussed in Note 15 on Page A-41, which discussion is incorporated here
by reference. In addition, under the CPP, the Company is subject to restrictions
on the declaration and payment of dividends to common shareholders. These
restrictions are discussed in Part I, Item 1 of this
report and Note 15 on Page A-41, which discussion is
incorporated here by reference. See also, the risk factor on Page 21 of this report entitled "The Company's participation in U.S.
Treasury's TARP Capital Purchase Program
restricts
the Company's ability to pay dividends to common shareholders, restricts the
Company's ability to repurchase shares of common stock, and could have other
negative effects," which is incorporated here by reference. Additional
information on restrictions on payment of dividends by UBT may be found in Part
I, Item 1 of this report under the heading "Recent
Developments," which information is incorporated here by
reference.
Information
regarding the equity compensation plans both approved and not approved by
shareholders at December 31, 2009 is included under the heading "Equity
Compensation Plan Information" in the Company's definitive Proxy Statement in
connection with the 2010 Annual Meeting of Shareholders, and is incorporated
here by reference.
|
SELECTED
FINANCIAL DATA
|
The
following table shows summarized historical consolidated financial data for the
Company. The table is unaudited. The information in the table is derived from
the Company's audited financial statements for 2005 through 2009. This
information is only a summary. You should read it in conjunction with the
consolidated financial statements, related notes, Management's Discussion and
Analysis of Financial Condition and Results of Operations, and other information
included in this report. Information is unaudited; in thousands, except per
share data.
|
Thousands
of dollars
|
||||||||||||||||||||
|
FINANCIAL CONDITION
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash
and demand balances in other banks
|
$ | 10,047 | $ | 12,147 | $ | 17,996 | $ | 17,606 | $ | 20,416 | ||||||||||
|
Federal
funds sold and equivalents
|
115,542 | 6,325 | 11,130 | 3,770 | - | |||||||||||||||
|
Securities
available for sale
|
92,146 | 82,101 | 83,128 | 93,141 | 100,629 | |||||||||||||||
|
Net
loans
|
638,012 | 683,695 | 637,994 | 593,914 | 551,751 | |||||||||||||||
|
Other
assets
|
53,581 | 48,125 | 45,439 | 42,558 | 40,983 | |||||||||||||||
|
Total
Assets
|
$ | 909,328 | $ | 832,393 | $ | 795,687 | $ | 750,989 | $ | 713,779 | ||||||||||
|
Liabilities
and Shareholders' Equity
|
||||||||||||||||||||
|
Noninterest
bearing deposits
|
$ | 99,893 | $ | 89,487 | $ | 77,878 | $ | 81,373 | $ | 88,404 | ||||||||||
|
Interest
bearing certificates of deposit of $100,000 or more
|
107,942 | 132,139 | 122,266 | 102,492 | 68,062 | |||||||||||||||
|
Other
interest bearing deposits
|
574,966 | 487,923 | 471,393 | 444,137 | 434,186 | |||||||||||||||
|
Total
deposits
|
782,801 | 709,549 | 671,537 | 628,002 | 590,652 | |||||||||||||||
|
Short
term borrowings
|
- | - | - | 77 | 6,376 | |||||||||||||||
|
Other
borrowings
|
42,098 | 50,036 | 44,611 | 40,945 | 42,228 | |||||||||||||||
|
Other
liabilities
|
3,562 | 3,357 | 6,572 | 7,429 | 6,901 | |||||||||||||||
|
Total
Liabilities
|
828,461 | 762,942 | 722,720 | 676,453 | 646,157 | |||||||||||||||
|
Shareholders'
Equity
|
80,867 | 69,451 | 72,967 | 74,536 | 67,622 | |||||||||||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 909,328 | $ | 832,393 | $ | 795,687 | $ | 750,989 | $ | 713,779 | ||||||||||
|
RESULTS OF OPERATIONS
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Interest
income
|
$ | 43,766 | $ | 47,041 | $ | 51,634 | $ | 47,056 | $ | 38,649 | |||||||||||
|
Interest
expense
|
12,251 | 17,297 | 21,873 | 17,802 | 12,286 | ||||||||||||||||
|
Net
Interest Income
|
31,515 | 29,744 | 29,761 | 29,254 | 26,363 | ||||||||||||||||
|
Provision
for loan losses
|
25,770 | 14,607 | 8,637 | 2,123 | 1,332 | ||||||||||||||||
|
Noninterest
income
|
16,899 | 13,510 | 13,652 | 12,175 | 11,669 | ||||||||||||||||
|
Goodwill
impairment
|
3,469 | ||||||||||||||||||||
|
Other
noninterest expense
|
33,647 | 29,963 | 27,559 | 26,914 | 25,195 | ||||||||||||||||
|
Income
(loss) before federal income tax
|
(14,472 | ) | (1,316 | ) | 7,217 | 12,392 | 11,505 | ||||||||||||||
|
Federal
income tax
|
(5,639 | ) | (1,280 | ) | 1,635 | 3,420 | 3,181 | ||||||||||||||
|
Net
income (loss)
|
$ | (8,833 | ) | $ | (36 | ) | $ | 5,582 | $ | 8,972 | $ | 8,324 | |||||||||
|
Basic
earnings (loss) per share (1)
(2)
|
$ | (1.93 | ) | $ | (0.01 | ) | $ | 1.06 | $ | 1.69 | $ | 1.58 | |||||||||
|
Diluted
earnings (loss) per share (1)
(2)
|
(1.93 | ) | (0.01 | ) | 1.06 | 1.69 | 1.57 | ||||||||||||||
|
Cash
dividends paid per common share (2)
|
0.02 | 0.70 | 0.79 | 0.73 | 0.68 | ||||||||||||||||
|
(1)
|
Earnings
per share data is based on average shares outstanding plus average
contingently issuable shares.
|
||||||||||||||||||||
|
(2)
|
Adjusted
to reflect stock dividends paid in 2007, 2006 and
2005.
|
||||||||||||||||||||
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
information required by this item is contained on Pages A-1
through A-23 hereof, and is incorporated by reference here.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not
applicable.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Selected
Quarterly Financial Data – The information required by this item is contained in
Note 22 on Page A-50 hereof, and is incorporated by
reference here.
Other
information required by this item is contained on Pages A-25 through A-50 hereof, and is incorporated by reference
here.
|
INDEX TO FINANCIAL
STATEMENTS
|
Page No.
|
|||
| A-24 | ||||
|
Consolidated
Financial Statements
|
||||
| A-25 | ||||
| A-26 | ||||
| A-27 | ||||
| A-28 | ||||
| A-29 | ||||
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None
|
CONTROLS
AND PROCEDURES
|
|
(a.)
|
Our
management is responsible for establishing and maintaining effective
disclosure controls and procedures, as defined under Rules 13a-15(e)
of the Securities Exchange Act of 1934 (the "Exchange Act"). Our
management, with the participation of our Chief Executive Officer and
Chief Financial Officer, have evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period covered by
this report (the "Evaluation Date"), and have concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective to
ensure that information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the
Commission's rules and forms.
|
|
(b.)
|
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined under
Rules 13a-15(f). The Company's internal control system was designed
by, or under the supervision of, our Chief Executive Officer and Chief
Financial Officer, and effected by our board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles, and includes those policies and procedures that (1) pertain to
the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial statements.
All internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's internal control over financial reporting
as of the Evaluation Date, and has concluded that, as of the Evaluation
Date, the Company's internal control over financial reporting was
effective. Management identified no material weakness in the Company's
internal control over financial reporting. In making this evaluation,
management used the criteria set forth by the Committee of Sponsoring
Organizations of Treadway Commission ("COSO") in "Internal Control -
Integrated Framework."
This annual report does not include an attestation report of
the Company's registered public accounting firm regarding internal control
over financial reporting. Management's report was not subject to
attestation by the Company's registered public accounting
firm
|
pursuant
to temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management's report in this annual report.
|
/s/
Robert K. Chapman
|
/s/
Randal J. Rabe
|
||
|
Robert
K. Chapman
|
Randal
J. Rabe
|
||
|
President
and Chief Executive Officer
|
Executive
Vice President and Chief Financial
Officer
|
|
(c.)
|
There
has been no change in the Company's internal control over financial
reporting that occurred during the fiscal quarter ended December 31, 2009
that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial
reporting.
|
|
OTHER
INFORMATION
|
None
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The
Company has adopted a Code of Business Conduct and Ethics (the "Code") that
applies to all co-workers, officers and directors of the Company and its
subsidiaries. The Code is designed to deter wrongdoing and to
promote:
|
·
|
Honest
and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional
relationships;
|
|
·
|
Full,
fair, accurate, timely and understandable disclosure in reports and
documents that the Company files with, or submits to, the Commission and
in other public communications made by the
registrant;
|
|
·
|
Compliance
with applicable governmental laws, rules and
regulations;
|
|
·
|
Prompt
internal reporting of violations of the Code to an appropriate person or
persons identified in the Code; and
|
|
·
|
Accountability
for adherence to the Code.
|
A copy of
the Code is posted on our website at www.ubat.com.
The
information required by this item, other than as set forth above, is contained
under the heading "Directors and Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's 2010 Proxy Statement
and is incorporated here by reference.
|
EXECUTIVE
COMPENSATION
|
The
information required by this item is contained under the heading "Compensation
of Directors and Executive Officers" and "Compensation Committee Interlocks and
Insider Participation" in the Company's definitive Proxy Statement in connection
with its 2010 Annual Meeting of Shareholders and is incorporated here by
reference.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
information required by this item is contained under the headings "Compensation
of Directors and Executive Officers – Equity Compensation Plan Information,"
"Security Ownership of Certain Beneficial Owners," and "Security Ownership of
Management," in the
Company's
definitive Proxy Statement in connection with its 2010 Annual Meeting of
Shareholders and is incorporated here by reference.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
information required by this item is contained under the headings "Directors and
Executive Officers," "Committees and Meetings of the Board of Directors," and
"Directors, Executive Officers, Principal Shareholders and their Related
Interests - Transactions with the Banks" in the Company's definitive Proxy
Statement in connection with its 2010 Annual Meeting of Shareholders and in Note 14 on Page A-41 hereof and is incorporated here by
reference.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The
information required by this item is contained under the heading "Relationship
With Independent Public Accountants" in the Company's definitive Proxy Statement
in connection with its 2010 Annual Meeting of Shareholders and is incorporated
here by reference.
PART
IV
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
|
(a)
|
1.
|
The
information required by this Item is included in Item
8 on Page 26 of this report, and is incorporated here by
reference.
|
|
|
2.
|
Financial
statement schedules are not
applicable.
|
|
(b)
|
The
exhibits filed in response to Item 601 of Regulation S-K are listed in the
Exhibit Index, which is incorporated here by
reference.
|
|
(c)
|
All
other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have
been omitted.
|
UNITED
BANCORP, INC.
Management's
Discussion and Analysis of
Financial
Condition and Results of Operations
and
Consolidated
Financial Statements
|
The
Business of United Bancorp, Inc.
|
A-1
|
|
|
A-2
|
||
|
A-2
|
||
|
A-3
|
||
|
A-4
|
||
|
A-5
|
||
|
A-6
|
||
|
A-12
|
||
|
A-19
|
||
|
A-21
|
||
|
A-21
|
||
|
A-22
|
||
|
A-24
|
||
|
Consolidated
Financial Statements
|
||
|
A-25
|
||
|
A-26
|
||
|
A-27
|
||
|
A-28
|
||
|
A-29
|
||
United
Bancorp, Inc. (the "Company" or “United”) is a Michigan Bank Holding Company
headquartered in Tecumseh, Michigan. The Company's subsidiary banks (the
"Banks") have local Boards of Directors and are locally managed. The Banks offer
a full range of financial services through a system of sixteen banking offices
located in Lenawee, Monroe and Washtenaw Counties. While the Company's chief
decision makers monitor the revenue streams of the various Company products and
services, operations are managed and financial performance is evaluated on a
Companywide basis. Accordingly, all of the Company's financial services
operations are considered by management to be aggregated in one reportable
operating segment.
This
discussion provides information about the consolidated financial condition and
results of operations of the Company and its subsidiary banks, United Bank &
Trust ("UBT") and United Bank & Trust – Washtenaw ("UBTW").
The
Company is a bank holding company registered with the Federal Reserve 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. 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.
United’s
lending operations provide real estate loans, secured and unsecured business and
personal loans, consumer installment loans, check-credit loans, home equity
loans, accounts receivable and inventory financing, equipment lease financing
and construction financing. The Company’s Treasury Management Division provides
cash management services including remote deposit capture, Image Positive Pay,
lockbox services, business sweep accounts and credit card and merchant
services.
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 operates United Structured Finance ("USFC"). USFC is a finance company
that offers simple, effective financing solutions to small businesses, primarily
by engaging in SBA 504 and 7(a) lending. The loans generated by USFC are
typically sold on the secondary market. Gains on the sale of those loans are
included in income from loan sales and servicing. USFC revenue provides
additional diversity to the Company's income stream, and provides financing
alternatives to clients of the Banks as well as non-bank clients.
Economic Trends
Unemployment
for the State of Michigan at the end of December 2009 was 14.6%, and as a
result, the State retains its position with the highest unemployment level among
the fifty states. The U.S. average unemployment rate at the end of 2009 was
10.0%. The Lenawee County unemployment rate of 16.6% is above the State's
average level, while the Washtenaw County unemployment rate of 8.0% results in
its ranking of lowest in the State.
Automotive
industry expert Polk reports that light vehicle sales for 2009 were 10.4
million, the lowest level in 27 years and 21.2% lower than in 2008. Polk
predicts the light vehicle market will be 11.5 million units in 2010, according
to its most recent U.S. light vehicle forecast.
The
American Bankers Association commented in November, 2009 that although economic
recovery may have technically begun, activity is not yet back to full health,
and many headwinds and imbalances still exist that will likely dampen growth
moving into the near to intermediate future. The private sector is continuing a
process of deleveraging. Consumer credit outstanding has declined for eight
consecutive months as households have reduced their debt relative to income.
Therefore, the savings rate has increased significantly since its lows of recent
past years, and this is causing reduced consumption. Fiscal and monetary
policies have aimed at countering this effect through large public deficits,
very expansionary monetary policy, and various other measures designed to spur
consumption.
These
difficult economic conditions are having a profound and direct negative impact
on the businesses and residents of Michigan. The Company's loan demand (other
than for residential mortgages) has contracted and loan quality has
deteriorated. Decreases in loan quality have been primarily concentrated in the
areas of construction and residential real estate development, but have expanded
somewhat to include a broader base of the Banks’ loan portfolios in
2009.
Deposit
Insurance
Substantially
all of the deposits of the Banks are insured up to applicable limits by the
Deposit Insurance Fund ("DIF") of the FDIC and are subject to deposit insurance
assessments to maintain the DIF. The FDIC utilizes a risk-based assessment
system that imposes insurance premiums based upon a matrix that takes into
account a bank's capital level and supervisory rating.
On
February 27, 2009, the FDIC adopted a final rule modifying the risk-based
assessment system and setting initial base assessment rates beginning April 1,
2009, at 12 to 45 basis points; and due to extraordinary circumstances, extended
the time within which the reserve ratio must be returned to 1.15 percent from
five to seven years. On May 22, 2009, the FDIC adopted a final rule imposing a 5
basis point special assessment on each insured depository institution's assets
minus Tier 1 capital as of June 30, 2009. The Banks incurred expenses of
$405,400 as a result of the special assessment in the second quarter of
2009.
On
November 12, 2009, the FDIC amended its regulations requiring certain insured
institutions to prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009, and for all of 2010, 2011, and 2012. The prepaid
assessment for these periods was collected on December 30, 2009, along with each
institution's regular quarterly risk-based deposit insurance assessment for the
third quarter of 2009. The prepayment has been treated as a prepaid expense on
the books of the Company, and will be recognized as expense in the period for
which the assessments are effective.
TARP Capital Purchase
Program
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act
of 2008 (EESA) was signed into law. The EESA created the Troubled Asset Relief
Program (TARP), under which the United States Department of the Treasury
(Treasury) was given the authority to, among other things, purchase up to
$700 billion of mortgages, mortgage-backed securities and certain other
financial instruments from financial institutions for the purpose of stabilizing
and providing liquidity to the U.S. financial markets.
EESA also
temporarily increased the amount of deposit insurance coverage available on
customer deposit accounts from $100,000 per depositor to $250,000 per depositor
until December 31, 2009. In May 2009, the Helping Families Save Their Homes Act
was signed into
law,
which extended the temporary deposit insurance increase of $250,000 per
depositor through December 31, 2013.
In
October 2008, the Treasury announced that it would purchase equity stakes in a
wide variety of banks and thrifts. Under the program, known as the Capital
Purchase Program (CPP), the Treasury made $250 billion of the
$700 billion authorized under TARP available to U.S. financial
institutions through the purchase of preferred stock. In conjunction with the
purchase of preferred stock, the Treasury received, from participating financial
institutions, warrants to purchase common stock with an aggregate market price
equal to 15% of the preferred stock investment. Participating financial
institutions were required to agree to restrictions on future dividends and
share repurchases during the period in which the preferred stock remained
outstanding.
In
January of 2009, the Company issued and sold $20.6 million in preferred stock to
the United States Department of the Treasury under the TARP Capital Purchase
Program. The Board believes that it is in the Company's best interest to
preserve capital given the severe economic and financial market conditions in
Michigan and the U.S. In its ongoing efforts to preserve capital, the Board of
Directors of the Company suspended payment of a quarterly dividend on its common
shares in the second quarter of 2009.
Other
The
federal government has introduced a comprehensive Financial Stability Plan to
address the key problems at the heart of the current crisis and get the U.S.
economy back on track. A critical piece of that effort is Making Home Affordable
(MHA), a plan to stabilize the U.S. housing market and help Americans reduce
their monthly mortgage payments to more affordable levels. In the spirit of the
MHA program, United has implemented a proprietary mortgage modification program
that was designed to comply with changes in the Michigan statutes governing
foreclosure by advertisement that went into effect in July of 2009. This program
is available both to holders of residential real estate mortgages in the
portfolio of the Banks and those sold on the secondary market but serviced by
United.
Other Developments
Memorandum of
Understanding
On
January 15, 2010, UBT entered into a Memorandum of Understanding ("MOU") with
the FDIC and OFIR. The MOU is not a "written agreement" for purposes of Section
8 of the Federal Deposit Insurance Act. The MOU documents an understanding among
UBT, the FDIC and OFIR that, among other things: (i) UBT will not declare or pay
any dividend without the prior consent of the FDIC and OFIR; and (ii) UBT will
have and maintain its Tier 1 capital ratio at a minimum of 9% within six months
from the date of the MOU and for the duration of the MOU, and will maintain its
total capital ratio at a minimum of 12% for the duration of the MOU. UBTW is
also a party to a Memorandum of Understanding with the FDIC and OFIR that
documents an understanding that UBTW will have and maintain its Tier 1 capital
ratio at a minimum of 8%. For additional information about the capital ratios of
UBT and UBTW, see Note 18 on Page A-46 hereof, which
information is incorporated here by reference.
Consolidation of
Banks
As
previously announced, on January 15, 2010, the Company filed applications with
its regulators for permission to consolidate and merge UBTW with and into UBT,
with the consolidated bank operating under the charter of UBT. The proposed bank
consolidation is subject to the receipt of all applicable federal and state
regulatory approvals. It is anticipated that
the
proposed bank consolidation will be completed during the second quarter of 2010.
Following the transaction, the consolidated bank will continue to operate the
same banking offices in the same markets that UBT and UBTW currently
operate.
The
ongoing economic downturn has taken its toll on the financial services industry,
and United has seen a resulting impact to earnings and stock price. Economic
issues continue to impact the credit quality of the Banks' loan portfolios,
reflected in an increase in its allowance for loan losses and nonperforming
loans. A significant contributor to the decline in loan quality is the decrease
in collateral values and cashflows for the Banks’ personal and commercial
borrowers. Foreclosures on residential real estate mortgages continue to
increase, although the Banks sell most of their mortgage production without
recourse on the secondary market.
The net
loss for the year of $8.833 million for United Bancorp, Inc. reflects a
deterioration from prior years, as difficult economic conditions increased the
Company’s charge to its provision for loan losses. In addition, costs related to
ORE property, increased FDIC insurance rates and a loss from goodwill impairment
all served to significantly increase expenses for 2009. Loss per share of $1.93
was up from a loss of $0.01 per share for 2008. Return on average shareholders’
equity for 2009 was -10.47%, compared to -0.05% for 2008, and return on average
assets for the year ended December 31, 2009 was -1.00%, compared to 0.00% for
2008.
There
were positive components to the Company’s 2009 operating results. Net interest
income improved by 6.0% from 2008 to 2009, and 2009 noninterest income improved
by 25.1% over 2008. The Company's pre-tax, pre-provision ROA improved from 1.64%
for 2008 to 1.67% for all of 2009. This calculation adjusts net income before
tax by the amount of the Company's provision for loan losses and one-time
goodwill impairment charge in 2009.
Gross
portfolio loans declined by $47.0 million from the end of 2008, representing a
drop of 6.7% for the year. Approximately half of that decline was the result of
charge-offs within the Company’s loan portfolio during the year, and the
remaining decline was a result of slowing economic conditions in the region. At
the same time, the Company significantly increased its liquidity, with growth of
investments and fed funds and equivalents held to improve the liquidity of the
balance sheet during this period of economic uncertainty. The Company expects to
maintain these higher levels of liquidity until portfolio loan volume improves
and more attractive investment opportunities emerge. Total assets grew by 9.2%
in 2009 over 2008, as growth was funded by deposit growth of 10.3%, or $73.3
million, less a reduction in borrowings of $7.9 million.
Net
interest income continues to exhibit strength, reaching record levels for 2009.
While mortgage volumes were particularly strong in the first half of 2009,
primarily as a result of refinancing during a period of low rates, the volume of
refinancing activity has begun to subside. We do not anticipate that credit
quality will improve significantly until the economy rebounds, and other
noninterest income will remain under pressure as long as the economy is
struggling. However, the Company’s business includes a diversity of sources of
noninterest income that provided 34.9% of 2009 net revenue.
While
current economic conditions present significant challenges, United has taken
steps intended to protect its capital for the long-term benefit of its
shareholders. The Company instituted cost containment and reduction measures
during 2009. The Company did not pay merit increases to its staff in 2009, and
incentive compensation was not paid at the depressed level of earnings. In
addition, effective July 1, 2009, the Company discontinued its profit sharing
and
employer
matching contributions to our 401(k) plan. In the fourth quarter of 2009, the
Company implemented a number of staff reductions, which along with attrition,
should result in annualized savings in excess of $1.0 million in 2010.
Reductions were also made in Director fees for 2010.
Securities
Balances
in the securities portfolio increased in recent periods, generally reflecting
deposit growth in excess of loan growth. The makeup of the Company’s investment
portfolio evolves with the changing price and risk structure, and liquidity
needs of the Company. The table below reflects the carrying 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 2009 and
2008.
|
At
December 31,
|
2009
|
2008
|
||||||||||||||
|
In
thousands of dollars
|
Balance
|
% of total
|
Balance
|
% of total
|
||||||||||||
|
U.S.
Treasury and agency securities
|
$ | 32,239 | 35.0 | % | $ | 19,712 | 24.0 | % | ||||||||
|
Mortgage
backed agency securities
|
23,142 | 25.1 | % | 21,972 | 26.8 | % | ||||||||||
|
Obligations
of states and political subdivisions
|
34,111 | 37.0 | % | 37,889 | 46.1 | % | ||||||||||
|
Corporate,
asset backed and other securities
|
2,623 | 2.8 | % | 2,478 | 3.0 | % | ||||||||||
|
Equity
securities
|
31 | 0.0 | % | 50 | 0.1 | % | ||||||||||
|
Total
Investment Securities
|
$ | 92,146 | 100.0 | % | $ | 82,101 | 100.0 | % | ||||||||
Investments
in U.S. Treasury and agency securities are considered to possess low credit
risk. Obligations of U.S. government agency mortgage-backed securities possess a
somewhat higher interest rate risk due to certain prepayment risks. The
municipal portfolio contains a small level of geographic risk, as
approximately 4.7% of the investment portfolio is issued by political
subdivisions located within Lenawee County, Michigan and 8.2% in Washtenaw
County, Michigan. The Company's portfolio contains no mortgage securities or
structured notes that the Company believes to be “high risk.” The Banks'
investment in local municipal issues also reflects their commitment to the
development of the local area through support of its local political
subdivisions.
Management
believes that the 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
following chart summarizes net unrealized gains (losses) in each category
of the portfolio at the end of 2009 and 2008.
|
In
thousands of dollars
|
2009
|
2008
|
Change
|
|||||||||
|
U.S.
Treasury and agency securities
|
$ | 393 | $ | 641 | $ | (248 | ) | |||||
|
Mortgage
backed agency securities
|
685 | 526 | 159 | |||||||||
|
Obligations
of states and political subdivisions
|
856 | 372 | 484 | |||||||||
|
Corporate,
asset backed and other securities
|
(5 | ) | (155 | ) | 150 | |||||||
|
Equity
securities
|
5 | 6 | (1 | ) | ||||||||
|
Total
Investment Securities
|
$ | 1,934 | $ | 1,390 | $ | 544 | ||||||
FHLB
Stock
The Banks
are members of the Federal Home Loan Bank of Indianapolis (“FHLBI”) and
collectively hold a $3.0 million investment in stock of the FHLBI. The
investment is carried at
par value, as there is not an active market for FHLBI stock. The
Federal Home Loan Banks continue to record accounting impairments on their
private label mortgage-backed securities portfolios, which they hold as
long-term investments, and account for them on an amortized cost basis. If total
Federal Home Loan Bank gross unrealized losses were deemed “other than
temporary” for accounting purposes, this would significantly impair the FHLB
capital levels and the resulting value of FHLB stock.
The
Company regularly reviews the credit quality of FHLBI stock for impairment.
FHLBI stock has a rating of Aaa, and that rating was affirmed in May of 2009 by
Moody’s. In spite of some accounting impairments on private-label MBS
securities, FHLBI was profitable in the first nine months of 2009, and paid
dividends for each quarter of the year. Based on these and other factors, the
Company determined that no impairment of FHLBI stock was
necessary.
Loans
As full
service lenders, the Banks offer a variety of loan products in their markets.
Loan balances declined by 6.7% in 2009, with the declines across all major
categories of the portfolio. Personal loans on the Company's balance sheet
included home equity lines of credit, direct and indirect loans for automobiles,
boats and recreational vehicles, and other items for personal use. Personal loan
balances declined by 1.2% for the year.
Business
loan balances were down 4.5% during 2009, following growth of 9.3% in 2008. The
decline in loans to commercial enterprises reflects a reduction in demand,
primarily relating to the current economic conditions, as well as write-downs,
charge-offs and payoffs.
The Banks
generally sell their production of fixed-rate mortgages on the secondary market,
and retain high credit quality mortgage loans that are not otherwise eligible to
be sold on the secondary market and shorter-term adjustable rate mortgages in
their portfolios. As a result, the mix of mortgage production for any given year
will have an impact on the amount of mortgages held in the portfolios of the
Banks. The Banks experienced significant volume in residential real estate
mortgage financing during 2009, and this included the refinancing of some
portfolio loans sold on the secondary market. This resulted in a decline in
residential mortgage balances on the Banks' portfolios of 4.3%, compared to
growth of 5.0% in 2008.
Outstanding
balances of loans for construction and development declined by approximately $24
million during 2009. The change in balances reflects a decrease in the amount of
individual construction loan volume, the shift of some construction loans to
permanent financing, and the payoff or charge-off of a number of residential
construction and development loans. Residential construction loans generally
convert to residential mortgages to be retained in the Banks' portfolios or to
be sold in the secondary market, while commercial construction loans generally
will be converted to commercial mortgages.
The
following table shows the balances of the various categories of loans of the
Company, along with the percentage change of the portfolio by type as of the end
2009 and 2008.
|
In
thousands of dollars
|
2009
|
% Change
|
2008
|
% Change
|
||||||||||||
|
Personal
|
$ | 110,702 | -1.2 | % | $ | 112,095 | 14.3 | % | ||||||||
|
Business,
including commercial mortgages
|
392,495 | -4.5 | % | 410,911 | 9.2 | % | ||||||||||
|
Tax
exempt
|
3,005 | 18.6 | % | 2,533 | -6.5 | % | ||||||||||
|
Residential
mortgage
|
86,417 | -4.3 | % | 90,343 | 5.0 | % | ||||||||||
|
Construction
and development
|
56,706 | -29.5 | % | 80,412 | -0.8 | % | ||||||||||
|
Deferred
loan fees and costs
|
728 | 0.4 | % | 725 | 46.5 | % | ||||||||||
|
Total
loans
|
$ | 650,053 | -6.7 | % | $ | 697,019 | 8.1 | % | ||||||||
The
Company actively monitors 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 chart below shows the amount of nonperforming
assets by category at December 31 for each of the past two years.
|
December 31,
|
Change
|
|||||||||||||||
|
Nonperforming
Assets, in thousands of dollars
|
2009
|
2008
|
$ | % | ||||||||||||
|
Nonaccrual
loans
|
$ | 26,188 | $ | 19,328 | $ | 6,860 | 35.5 | % | ||||||||
|
Accruing
loans past due 90 days or more
|
5,474 | 1,504 | 3,970 | 264.0 | % | |||||||||||
|
Troubled
debt restructurings
|
1,035 | 690 | 345 | 50.0 | % | |||||||||||
|
Total
nonperforming loans
|
32,697 | 21,522 | 11,175 | 51.9 | % | |||||||||||
|
Other
assets owned
|
2,803 | 3,459 | (656 | ) | -19.0 | % | ||||||||||
|
Total
nonperforming assets
|
$ | 35,500 | $ | 24,981 | $ | 10,519 | 42.1 | % | ||||||||
|
Percent
of nonperforming loans to total loans
|
5.03 | % | 3.09 | % | 1.94 | % | ||||||||||
|
Percent
of nonperforming assets to total assets
|
3.90 | % | 3.00 | % | 0.90 | % | ||||||||||
|
Allowance
coverage of nonperforming loans
|
61.2 | % | 85.1 | % | -23.86 | % | ||||||||||
Total
nonaccrual loans have increased by $6.9 million since the end of 2008, while
accruing loans past due 90 days or more have increased by $4.0 million. 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. Loan workout and collection efforts continue
with all delinquent clients, in an effort to bring them back to performing
status.
Troubled debt
restructurings consist of five loans at December 31, 2009, all of which are the
result of residential mortgage loans modified as part of United’s mortgage
modification program implemented in 2009. All of the loans include rate
modifications as well as forbearance. Total nonperforming loans as a percent of
total portfolio loans moved from 3.09% at the end of 2008 to 5.03% at the end of
2009.
Holdings
of other assets owned decreased by $656,000 since the end of 2008. Other real
estate owned includes fifteen properties that were acquired through foreclosure
or in lieu of foreclosure. The properties include fourteen commercial
properties, five of which are the result of out-of-state loan participations,
and one residential home. One commercial property is leased, and all are for
sale. Also included in these totals are other assets owned of $29,000,
consisting of motor vehicles, boats and one mobile home. These assets are also
for sale.
The table
below reflects the changes in other assets owned during 2009:
|
In
thousands of dollars
|
ORE
|
Other Assets
|
Total
|
|||||||||
|
Balance
at January 1
|
$ | 3,386 | $ | 72 | $ | 3,458 | ||||||
|
Additions
|
1,814 | 741 | 2,555 | |||||||||
|
Sold
|
(1,274 | ) | (345 | ) | (1,619 | ) | ||||||
|
Write-downs
|
(1,152 | ) | (439 | ) | (1,591 | ) | ||||||
|
Balance
at December 31
|
$ | 2,774 | $ | 29 | $ | 2,803 | ||||||
Management
believes that the Company's allowance for loan losses provides for currently
estimated losses inherent in the portfolio. An analysis of the allowance for
loan losses for the twelve months ended December 31, 2009, 2008 and 2007
follows:
|
In
thousands of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Balance,
January 1
|
$ | 18,312 | $ | 12,306 | $ | 7,849 | ||||||
|
Loans
charged off
|
(24,368 | ) | (8,772 | ) | (4,290 | ) | ||||||
|
Recoveries
credited to allowance
|
306 | 171 | 110 | |||||||||
|
Provision
charged to operations
|
25,770 | 14,607 | 8,637 | |||||||||
|
Balance,
December 31
|
$ | 20,020 | $ | 18,312 | $ | 12,306 | ||||||
|
Allowance
as % of total loans
|
3.08 | % | 2.63 | % | 1.91 | % | ||||||
A loan is classified
as impaired when it is probable that the bank will be unable to collect all
amounts due (including both interest and principal) according to the contractual
terms of the loan agreement. Within the Banks’ loan portfolios, $36.2
million of impaired loans have been identified as of December 31, 2009, compared
with $37.2 million as of December 31, 2008, and the specific allowance for
impaired loans was $5.8 million at December 31, 2009, compared to $8.1 million
at December 31, 2008. 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 management believes to be
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 believes, in its judgment, that the allowance is at a level that is
appropriate for the risks in the Company’s loan portfolio.
In 2009,
the Company modified its method of estimating allocation of the allowance for
loan losses for non-impaired loans. The Company has identified pools of loans on
which to apply historical loss experience methodology. For each of these pools,
the Company calculated a historical base rate and then attempted to bring the
historical charge-off rate up to current conditions through various qualitative
adjustments. Beginning in 2007, the historical period used was a three-year
period. Effective with the first quarter of 2009, the Company slightly modified
this approach by using a rolling twelve quarter historical
approach.
The Interagency Policy Statement on the Allowance for
Loan and Lease Losses issued in 2006 by Federal banking regulators indicates
that “during periods of significant economic expansion or contraction, the
relevance of data that are several years old may be limited.” Current economic
conditions have resulted in significantly increasing charge-offs. Total net
charge-offs as a percent of average loans for 2007 were 0.66%, increased to
1.28% in 2008, and were 3.47% in 2009. For these reasons, the Company began
using a rolling eight-quarter historical base effective with the fourth quarter
of 2009.
Another
change was made in the fourth quarter of 2009 with regard to the number of pools
used. Historically, the Company used three pools on which to apply historical
loss experience methodology, those being business, residential mortgage and
consumer loans. The Company’s construction and land development (“CLD”)
portfolio has incurred significantly higher losses than the overall business
portfolio, due to the more severe impact of the recession on the real estate
development segment and the more pronounced drop in collateral value (i.e. raw
land and residential real estate developments). It became apparent that the CLD
loans were not representative of the overall business loan portfolio and should
be analyzed separately. As a result, a fourth classification for allocation of
the allowance for loan losses was implemented as of December 31,
2009.
The
following table presents the allocation of the allowance for loan losses
applicable to each loan category in thousands of dollars, as of December 31,
2009 and 2008. The allocation method used takes into account specific
allocations for identified credits and a historical loss average, adjusted for
certain qualitative factors, in determining the allocation for the balance of
the portfolio.
|
Allocation
of the allowance for loan losses at December 31,
|
2009
|
2008
|
|||||||
|
Business
and commercial mortgage (1)
|
$ | 12,221 | $ | 16,148 | |||||
|
Construction
and development loans
|
5,164 | - | |||||||
|
Residential
mortgage
|
760 | 673 | |||||||
|
Personal
|
1,875 | 1,491 | |||||||
|
Total
|
$ | 20,020 | $ | 18,312 | |||||
|
(1)
|
Includes
construction and development loans for 2008
|
||||||||
The
personal loan portfolio consists of direct and indirect installment, home equity
and unsecured revolving line of credit loans. Installment loans consist
primarily of home equity loans and loans for consumer durable goods, principally
automobiles. Indirect personal loans consist of loans for automobiles, boats and
manufactured housing, but make up a small percent of the personal
loans.
Business
loans carry the largest balances per loan, and therefore, any single loss would
be proportionally larger than losses in other portfolios. In addition to
internal loan rating systems and active monitoring of loan trends, the Banks use
an independent loan review firm to assess the quality of its business loan
portfolio. There are no significant concentrations in the business loan
portfolio.
CLD loans
make up 8.7% of the Company’s loan portfolio. This sector of the economy has
been particularly impacted by declines in housing activity, and has had a
disproportionate impact on the credit quality of the Company.
The
following table shows trends of CLD loans, along with ratios relating to their
relative credit quality.
|
CLD Loans
|
All Other Loans
|
Total
|
||||||||||||||||||
|
Dollars
in thousands
|
Balance
|
% of Total
|
Balance
|
% of Total
|
Loans
|
|||||||||||||||
|
Balances
at December 31, 2009
|
$ | 56,706 | 8.7 | % | $ | 593,347 | 91.3 | % | $ | 650,053 | ||||||||||
|
Impaired
loans
|
14,441 | 39.9 | % | 21,719 | 60.1 | % | 36,160 | |||||||||||||
|
Specific
allowance
|
2,097 | 36.3 | % | 3,678 | 63.7 | % | 5,775 | |||||||||||||
|
YTD
Net Charge-offs
|
14,379 | 59.8 | % | 9,684 | 40.2 | % | 24,063 | |||||||||||||
|
Nonperforming
loans (NPL)
|
14,138 | 43.2 | % | 18,559 | 56.8 | % | 32,697 | |||||||||||||
|
NPL
as % of loans
|
24.9 | % | 3.1 | % | 5.0 | % | ||||||||||||||
While
balances of CLD loans make up 8.7% of total portfolio loans, they represent
39.9% of the Company’s impaired loans and 59.8% of charge-offs in 2009. The
currently impaired CLD loans, in addition to the specific allowance of $2.1
million, have been partially charged down by $13.4 million.
As can be
seen in the following table, currently impaired loans represent 39.7% of the
total CLD loans, and the Company has provided for loan losses on impaired CLD
loans of 55.7% of the balance of such loans.
|
CLD Loans
|
%
of
|
|||||||||||
|
Dollars
in thousands
|
Total
|
Impaired
|
Total
|
|||||||||
|
Balances
at December 31, 2009
|
$ | 56,706 | $ | 14,441 | ||||||||
|
Cumulative
partial charge-offs
|
13,427 | 13,427 | ||||||||||
|
Loan
balance before charge-offs
|
$ | 70,133 | $ | 27,868 | 39.7 | % | ||||||
Cumulative
loss on impaired CLD loans is shown below.
|
Dollars
in thousands
|
CLD
|
|||
|
Cumulative
partial charge-offs
|
$ | 13,427 | ||
|
Specific
allowance at December 31, 2009
|
2,097 | |||
|
Cumulative
loss on impaired loans
|
$ | 15,524 | ||
|
Percent
of impaired loans
|
55.7 | % | ||
Further
information concerning credit quality is contained in Note
5 of the Notes to Consolidated Financial Statements, which information is
incorporated here by reference.
Deposits
The
following chart shows the percentage change in deposits by category for 2009 and
2008.
|
2009 Change
|
2008 Change
|
|||||||||||||||
|
In
thousands of dollars
|
$ | 000 |
%
|
$ | 000 |
%
|
||||||||||
|
Noninterest
bearing deposits
|
10,406 | 11.6 | % | 11,609 | 14.9 | % | ||||||||||
|
Interest
bearing certificates of deposit of $100,000 or more
|
(24,197 | ) | -18.3 | % | 9,873 | 8.1 | % | |||||||||
|
Other
interest bearing deposits
|
87,043 | 17.8 | % | 16,530 | 3.5 | % | ||||||||||
|
Total
deposits
|
$ | 73,252 | 10.3 | % | $ | 38,012 | 5.7 | % | ||||||||
Total
deposits grew $73.2 million in the twelve months ended December 31, 2009.
Deposit growth was in noninterest bearing deposits (up 11.6%) and other interest
bearing deposits (up 17.8%), while interest-bearing CDs of $100,000 or more
declined by $24.2 million in 2009, or 18.3%.
The Banks
utilize purchased or brokered deposits for interest rate risk management
purposes, but they do not support their growth through the use of those
products. The majority of the Banks’ deposits are derived from core client
sources, relating to long term relationships with local personal, business and
public clients. In addition, the Banks participate in the CDARS program, which
allows them to provide competitive CD products while maintaining FDIC insurance
for clients with larger balances. The Banks' deposit rates are consistently
competitive with other banks in their market areas.
Cash Equivalents and
Borrowed Funds
The
Company maintains correspondent accounts with a number of other banks for
various purposes. In addition, cash sufficient to meet the operating needs of
its banking offices is maintained at its lowest practical levels. The Banks are
also participants in the federal funds market, either as borrowers or sellers.
Federal funds are generally borrowed or sold for one-day periods. The Banks also
have the ability to utilize short term advances from the FHLBI and borrowings at
the discount window of the Federal Reserve Bank as additional short-term
funding
sources.
Federal funds were used during 2009 and 2008, while short term advances and
discount window borrowings were not utilized during either year.
The
Company periodically finds it advantageous to utilize longer-term borrowings
from the FHLBI. These long-term borrowings, as detailed in Note 11 of the Notes to Consolidated Financial Statements,
serve to provide a balance to some of the interest rate risk inherent in the
Company's balance sheet. Additional information regarding borrowed funds is
found in the Liquidity section below.
Results of Operations
Earnings Summary and Key
Ratios
The
Company experienced a consolidated net loss of $8.8 million for 2009. Growth of
earning assets resulted in an increase in net interest income of 6.0% in 2009
compared to 2008 and followed a decline of 0.1% from 2007 to 2008. This increase
occurred in spite of significant increases in the Company’s liquidity during the
year, which had a negative impact on the Company’s net interest
margin.
At the
same time, noninterest income improved by 25.1% from 2008 compared to a decline
of 1.0% from 2007 to 2008. By far, the biggest driver in that increase was
income from loan sales and servicing, while most other categories of noninterest
income were flat or down compared to 2008. Those items are discussed in more
detail later in this discussion. Noninterest income represented 34.9% of the
Company’s total revenues for 2009, compared to 31.2% for 2008. Noninterest
expenses excluding goodwill impairment were up 12.3% over 2008, with those costs
driven by increased FDIC insurance premiums, expenses relating to ORE property
and costs incurred relative to exceptional levels of mortgage production during
the year. The Company’s provision for loan losses was $25.8 million in 2009, up
from $14.6 million in 2008, increasing by 76.4% following an increase of 69.1%
in 2008 over 2007.
Return on
average assets declined to -1.00%, down from 0.00% for 2008 and 0.72% for 2007.
Return on average shareholders’ equity for 2009 was -10.47%, compared to -0.05%
for 2008 and 7.44% for 2007. Book value per share of common stock also declined
during the year. The following chart shows the trends of the major components of
earnings for the five most recent quarters.
|
2009
|
2008
|
|||||||||||||||||||
|
Dollars
in thousands
|
4th Qtr
|
3rd Qtr
|
2nd Qtr
|
1st Qtr
|
4th Qtr
|
|||||||||||||||
|
Net
interest income before provision
|
$ | 8,180 | $ | 7,860 | $ | 7,913 | $ | 7,562 | $ | 7,342 | ||||||||||
|
Provision
for loan losses
|
5,300 | 8,200 | 5,400 | 6,870 | 8,997 | |||||||||||||||
|
Noninterest
income
|
4,022 | 4,081 | 4,713 | 4,083 | 2,538 | |||||||||||||||
|
Noninterest
expense (1)
|
7,953 | 8,443 | 8,699 | 8,553 | 7,291 | |||||||||||||||
|
Federal
income taxes
|
(569 | ) | (1,812 | ) | (711 | ) | (2,547 | ) | (2,392 | ) | ||||||||||
|
Net
loss
|
$ | (482 | ) | $ | (2,890 | ) | $ | (762 | ) | $ | (4,699 | ) | $ | (4,016 | ) | |||||
|
Basic
and diluted earnings (loss) per share
|
$ | (0.15 | ) | $ | (0.62 | ) | $ | (0.20 | ) | $ | (0.96 | ) | $ | (0.79 | ) | |||||
|
Return
on average assets
|
-0.21 | % | -1.28 | % | -0.34 | % | -2.20 | % | -1.91 | % | ||||||||||
|
Return
on average shareholders' equity
|
-2.34 | % | -13.48 | % | -3.54 | % | -22.14 | % | -22.08 | % | ||||||||||
|
Dividend
payout ratio
|
0.0 | % | 0.0 | % | 0.0 | % |
NA
|
NA
|
||||||||||||
|
Tier
1 Leverage Ratio
|
8.6 | % | 8.9 | % | 9.4 | % | 9.7 | % | 7.9 | % | ||||||||||
|
(1)
|
Excludes
first quarter 2009 goodwill impairment charge
|
|||||||||||||||||||
In an
attempt to evaluate the trends of net interest income, noninterest income and
noninterest expense, the Company calculates pre-tax, pre-provision income and
return on average assets.
This
calculation adjusts net income before tax by the amount of the Company’s
provision for loan losses and one-time goodwill impairment charge. While this
information is not consistent with, or intended to replace, presentation under
generally accepted accounting principles, it is presented here for comparison.
The table below shows the calculation and trend of pre-tax, pre-provision income
and return on average assets for the twelve month periods ended December 31,
2009, 2008 and 2007.
|
Twelve Months Ended December
31,
|
||||||||||||||||||||
|
In
thousands of dollars
|
2009
|
2008
|
Change
|
2007
|
Change
|
|||||||||||||||
|
Interest
income
|
$ | 43,766 | $ | 47,041 | -7.0 | % | 51,634 | -8.9 | % | |||||||||||
|
Interest
expense
|
12,251 | 17,297 | -29.2 | % | 21,873 | -20.9 | % | |||||||||||||
|
Net
interest income
|
31,515 | 29,744 | 6.0 | % | 29,761 | -0.1 | % | |||||||||||||
|
Noninterest
income
|
16,899 | 13,510 | 25.1 | % | 13,652 | -1.0 | % | |||||||||||||
|
Noninterest
expense (1)
|
33,647 | 29,963 | 12.3 | % | 27,559 | 8.7 | % | |||||||||||||
|
Pre-tax,
pre-provision income
|
$ | 14,767 | $ | 13,291 | 11.1 | % | $ | 15,854 | -16.2 | % | ||||||||||
|
Pre-tax,
pre-provision ROA
|
1.67 | % | 1.64 | % | 0.03 | % | 2.04 | % | -0.40 | % | ||||||||||
| (1) Excludes goodwill impairment charge in 1st quarter of 2009 | ||||||||||||||||||||
Net Interest
Income
Declining
interest rates over the past three and a half years have reduced the Company’s
yield on earning assets, but have also resulted in a reduction in its cost of
funds. Interest income decreased 7.0% in 2009 compared to 2008, while interest
expense decreased 29.2% for 2009, resulting in an improvement in net interest
income of 6.0% for 2009 compared to 2008. Net interest margin for all of 2009
was 3.80%, compared to 4.04% for 2008. The decline in net interest margin
resulted primarily from significantly increased liquidity on the balance sheets
of the Banks.
Tax-equivalent
yields on earning assets declined from 6.28% for 2008 to 5.25% for 2009, for a
reduction of 103 basis points. The Company's average cost of funds decreased by
93 basis points, and tax equivalent spread declined from 3.59% for 2008 to 3.49%
for all of 2009.
The following table provides a summary of the various components
of net interest income, as well as the results of changes in balance sheet
makeup that have resulted in the changes in spread and net interest margin for
2009, 2008 and 2007.
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
||||||||||||||||||||||||||||
|
Dollars
in thousands
|
Balance
|
(b)
|
Rate
|
Balance
|
(b)
|
Rate
|
Balance
|
(b)
|
Rate
|
|||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Interest
earning assets (a)
|
||||||||||||||||||||||||||||||||||||
|
Federal
funds sold and equivalents
|
$ | 61,027 | $ | 153 | 0.25 | % | $ | 5,170 | $ | 128 | 2.47 | % | $ | 6,211 | $ | 271 | 4.36 | % | ||||||||||||||||||
|
Taxable
securities
|
60,363 | 1,896 | 3.14 | % | 46,366 | 2,164 | 4.67 | % | 52,799 | 2,593 | 4.91 | % | ||||||||||||||||||||||||
|
Tax
exempt securities (b)
|
33,594 | 1,989 | 5.92 | % | 36,939 | 2,148 | 5.82 | % | 36,561 | 2,145 | 5.87 | % | ||||||||||||||||||||||||
|
Taxable
loans
|
690,299 | 40,238 | 5.83 | % | 670,279 | 43,171 | 6.44 | % | 630,887 | 47,168 | 7.48 | % | ||||||||||||||||||||||||
|
Tax
exempt loans (b)
|
2,767 | 210 | 7.57 | % | 2,606 | 172 | 6.58 | % | 2,967 | 195 | 6.57 | % | ||||||||||||||||||||||||
|
Total
interest earning assets (b)
|
848,049 | $ | 44,486 | 5.25 | % | 761,360 | $ | 47,783 | 6.28 | % | 729,425 | $ | 52,372 | 7.18 | % | |||||||||||||||||||||
|
Cash
and due from banks
|
12,301 | 17,260 | 14,202 | |||||||||||||||||||||||||||||||||
|
Premises
and equipment, net
|
12,703 | 13,006 | 14,149 | |||||||||||||||||||||||||||||||||
|
Intangible
assets
|
855 | 3,469 | 3,469 | |||||||||||||||||||||||||||||||||
|
Other
assets
|
30,630 | 26,870 | 23,831 | |||||||||||||||||||||||||||||||||
|
Unrealized
(gain) loss on securities
|
||||||||||||||||||||||||||||||||||||
|
available
for sale
|
1,839 | 370 | 74 | |||||||||||||||||||||||||||||||||
|
Allowance
for loan losses
|
(22,666 | ) | (13,035 | ) | (7,907 | ) | ||||||||||||||||||||||||||||||
|
Total
Assets
|
$ | 883,711 | $ | 809,300 | $ | 777,243 | ||||||||||||||||||||||||||||||
|
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
|||||||||||||||||||||||||||||
|
Balance
|
(b)
|
Rate
|
Balance
|
(b)
|
Rate
|
Balance
|
(b)
|
Rate
|
|||||||||||||||||||||||||||||
|
Liabilities
and Shareholders' Equity
|
|||||||||||||||||||||||||||||||||||||
|
Interest
bearing liabilities
|
|||||||||||||||||||||||||||||||||||||
|
NOW
and savings deposits
|
$ | 340,509 | $ | 1,752 | 0.51 | % | $ | 310,569 | $ | 4,069 | 1.31 | % | $ | 288,925 | $ | 6,641 | 2.30 | % | |||||||||||||||||||
|
CDs
$100,000 and over
|
112,866 | 3,725 | 3.30 | % | 122,905 | 5,139 | 4.18 | % | 120,653 | 5,924 | 4.91 | % | |||||||||||||||||||||||||
|
Other
interest bearing deposits
|
196,096 | 4,925 | 2.51 | % | 157,122 | 5,756 | 3.66 | % | 156,062 | 7,065 | 4.53 | % | |||||||||||||||||||||||||
|
Total
interest bearing deposits
|
649,471 | 10,402 | 1.60 | % | 590,596 | 14,964 | 2.53 | % | 565,640 | 19,631 | 3.47 | % | |||||||||||||||||||||||||
|
Short
term borrowings
|
- | - | 0.00 | % | 4,399 | 96 | 2.18 | % | 3,757 | 175 | 4.67 | % | |||||||||||||||||||||||||
|
Long
term borrowings
|
44,896 | 1,849 | 4.12 | % | 48,833 | 2,238 | 4.58 | % | 43,580 | 2,067 | 4.74 | % | |||||||||||||||||||||||||
|
Total
interest bearing liabilities
|
694,367 | 12,251 | 1.76 | % | 643,828 | 17,298 | 2.69 | % | 612,977 | 21,873 | 3.57 | % | |||||||||||||||||||||||||
|
Noninterest
bearing deposits
|
102,549 | 86,248 | 81,701 | ||||||||||||||||||||||||||||||||||
|
Other
liabilities
|
2,462 | 5,639 | 7,523 | ||||||||||||||||||||||||||||||||||
|
Shareholders'
equity
|
84,333 | 73,585 | 75,042 | ||||||||||||||||||||||||||||||||||
|
Total
Liabilities and
|
|||||||||||||||||||||||||||||||||||||
|
Shareholders'
Equity
|
$ | 883,711 | $ | 809,300 | $ | 777,243 | |||||||||||||||||||||||||||||||
|
Net
interest income (b)
|
$ | 32,236 | $ | 30,485 | $ | 30,499 | |||||||||||||||||||||||||||||||
|
Net
spread (b)
|
3.49 | % | 3.59 | % | 3.61 | % | |||||||||||||||||||||||||||||||
|
Net
yield on interest earning assets (b)
|
3.80 | % | 4.04 | % | 4.18 | % | |||||||||||||||||||||||||||||||
|
Tax
equivalent adjustment on interest income
|
721 | 741 | 738 | ||||||||||||||||||||||||||||||||||
|
Net
interest income per income statement
|
$ | 31,515 | $ | 29,744 | $ | 29,761 | |||||||||||||||||||||||||||||||
|
Ratio
of interest earning assets to interest bearing liabilities
|
1.22 | 1.18 | 1.19 | ||||||||||||||||||||||||||||||||||
|
(a)
|
Non-accrual
loans and overdrafts are included in the average balances of
loans.
|
||||||||||||||||||||||||||||||||||||
|
(b)
|
Fully
tax-equivalent basis; 34% tax rate.
|
||||||||||||||||||||||||||||||||||||
The
following table demonstrates the effect of volume and interest rate changes on
net interest income on a taxable equivalent basis for the past two years. The
change in interest due to both rate and volume has been allocated to volume and
rate changes in proportion to the relationship of the absolute dollar amounts of
the change in each. Nonaccrual loans are included in total loans.
|
2009 compared to 2008
|
2008 compared to 2007
|
|||||||||||||||||||||||
|
Increase
(decrease) due to: (a)
|
Increase
(decrease) due to: (a)
|
|||||||||||||||||||||||
|
In
thousands of dollars
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
||||||||||||||||||
|
Interest
earned on:
|
||||||||||||||||||||||||
|
Federal
funds sold and equivalents
|
$ | 234 | $ | (209 | ) | $ | 25 | $ | (40 | ) | $ | (103 | ) | $ | (143 | ) | ||||||||
|
Taxable
securities
|
551 | (819 | ) | (268 | ) | (305 | ) | (124 | ) | (429 | ) | |||||||||||||
|
Tax
exempt securities (b)
|
(196 | ) | 37 | (159 | ) | 22 | (19 | ) | 3 | |||||||||||||||
|
Taxable
loans
|
1,260 | (4,193 | ) | (2,933 | ) | 2,818 | (6,815 | ) | (3,997 | ) | ||||||||||||||
|
Tax
exempt loans (b)
|
11 | 27 | 38 | (24 | ) | 1 | (23 | ) | ||||||||||||||||
|
Total
interest income
|
$ | 1,860 | $ | (5,157 | ) | $ | (3,297 | ) | $ | 2,471 | $ | (7,060 | ) | $ | (4,589 | ) | ||||||||
|
Interest
expense on:
|
||||||||||||||||||||||||
|
NOW
and savings deposits
|
$ | 360 | $ | (2,677 | ) | $ | (2,317 | ) | $ | 466 | $ | (3,038 | ) | $ | (2,572 | ) | ||||||||
|
CDs
$100,000 and over
|
(395 | ) | (1,019 | ) | (1,414 | ) | 109 | (894 | ) | (785 | ) | |||||||||||||
|
Other
interest bearing deposits
|
1,230 | (2,061 | ) | (831 | ) | 48 | (1,357 | ) | (1,309 | ) | ||||||||||||||
|
Short
term borrowings
|
(48 | ) | (48 | ) | (96 | ) | 26 | (106 | ) | (80 | ) | |||||||||||||
|
Long
term borrowings
|
(173 | ) | (216 | ) | (389 | ) | 243 | (72 | ) | 171 | ||||||||||||||
|
Total
interest expense
|
$ | 974 | $ | (6,021 | ) | $ | (5,047 | ) | $ | 892 | $ | (5,467 | ) | $ | (4,575 | ) | ||||||||
|
Net
change in net interest income
|
$ | 886 | $ | 864 | $ | 1,751 | $ | 1,579 | $ | (1,593 | ) | $ | (14 | ) | ||||||||||
|
(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.
|
|
(b)
|
Fully
tax-equivalent basis; 34% tax
rate.
|
Provision for Loan Losses
The
Company’s provision for loan losses for the fourth quarter of 2009 was $5.3
million, bringing the full year 2009 provision to $25.8 million. The provision
provides for probable incurred losses inherent in the current portfolio. Ongoing
stresses within the economy and their resulting impact on borrowers has resulted
in further additions to the Company’s provision for loan losses. The increases
over 2008 levels reflect declines in borrowers’ ability to repay loans, in large
part due to pressures on cashflows and from declining collateral
values.
As the
southeast Michigan real estate markets and the economy in general experience
further deterioration, the loan portfolios of the Banks are affected by loans to
a number of residential real estate developers that are struggling to meet their
financial obligations. 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. In addition, loans secured
by commercial real estate are experiencing increased stresses resulting from the
current economic conditions.
Generally,
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 borrowers, and are working with these clients to
minimize losses. Additional information regarding the provision for loan losses
is included in the Credit Quality discussion above.
Noninterest
Income
Total
noninterest income improved by 25.1% in 2009 over 2008, compared to a decrease
of 1.0% in 2008 and an increase of 12.1% in 2007. The following table
summarizes changes in noninterest income by category for 2009, 2008 and 2007, in
thousands of dollars where appropriate.
|
In
thousands of dollars
|
2009
|
2008
|
Change
|
2007
|
Change
|
|||||||||||||||
|
Service
charges on deposit accounts
|
$ | 2,731 | $ | 3,381 | -19.2 | % | $ | 3,579 | -5.5 | % | ||||||||||
|
Wealth
Management fee income
|
4,070 | 4,343 | -6.3 | % | 4,801 | -9.5 | % | |||||||||||||
|
Gains
(losses) on securities transactions
|
(24 | ) | (18 | ) | 33.3 | % | 9 | -300.0 | % | |||||||||||
|
Income
from loan sales and servicing
|
6,689 | 2,187 | 205.9 | % | 1,749 | 25.0 | % | |||||||||||||
|
ATM,
debit and credit card fee income
|
2,174 | 2,257 | -3.7 | % | 2,118 | 6.6 | % | |||||||||||||
|
Income
from bank-owned life insurance
|
493 | 486 | 1.4 | % | 461 | 5.4 | % | |||||||||||||
|
Other
income
|
766 | 874 | -12.4 | % | 935 | -6.5 | % | |||||||||||||
|
Total
Noninterest Income
|
$ | 16,899 | $ | 13,510 | 25.1 | % | $ | 13,652 | -1.0 | % | ||||||||||
Service
charges on deposit accounts were down 19.2% in 2009 compared to a decrease of
5.5% in 2008 over 2007. This continuing decline is in spite of the Company's
11.6% growth of noninterest bearing deposit account balances over the twelve
months ended December 31, 2009. No significant changes to service charge
structure were implemented in 2009, although improvements in the Banks’
reporting systems in the second half of 2008 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 provides a relatively large component of the
Company's noninterest income. Wealth Management income includes trust fee income
and income from the sale of nondeposit investment products within the Banks’
offices. Wealth Management income was down 6.3% in 2009 compared to 2008.
Although market values of assets managed by the Wealth Management Group have
begun to recover in the past year, the decline in Wealth Management income
generally reflects a decline in the average market value of assets managed in
2009 compared to 2008.
Income
from loan sales and servicing increased 205.9% in 2009 compared to 2008. This
significant improvement in income is a result of the recent rate-driven
refinancing boom in residential mortgages, along with an increase in home
purchase activity. The Company had a positive valuation adjustment to loan
servicing rights of $520,000 in 2009, reversing all of the valuation adjustment
taken in 2008. The loan servicing rights valuation adjustment is a reflection of
the change in the fair value of certain sectors of the Company’s portfolio of
loan servicing rights. 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 loans that it services, and this servicing
provides ongoing income for the life of the loans. Loans serviced consist
primarily of residential mortgages sold on the secondary market. In addition, a
small number of loans originated by USFC are typically sold on the secondary
market, and gains on the sale of those loans contributed to the increased income
from loan sales and servicing. USFC revenue provides additional diversity to the
Company's income stream, and provides additional financing alternatives to
clients and non-clients of the Banks. The following table shows the breakdown of
income from loan sales and servicing between residential mortgages and
USFC:
|
In
thousands of dollars
|
2009
|
2008
|
Change
|
|||||||||
|
Residential
mortgage sales and servicing
|
$ | 6,009 | $ | 1,684 | 256.8 | % | ||||||
|
USFC
loan sales and servicing
|
680 | 503 | 35.2 | % | ||||||||
|
Total
income from loan sales and servicing
|
$ | 6,689 | $ | 2,187 | 205.9 | % | ||||||
ATM,
debit and credit card fee income provides a steady source of noninterest income
for the Company. The Banks operate nineteen ATMs throughout their market areas,
and Bank clients are active users of debit cards. The Banks receive ongoing fee
income from credit card referrals and operation of its credit card merchant
business.
Income
from bank-owned life insurance (“BOLI”) increased 1.4% in 2009 compared to 2008,
following growth of 5.4% in 2008 compared to 2007. The larger increase in 2008
reflects increases in interest crediting rates and some minor restructuring of
BOLI holdings during the last half of 2008. Other fee income during 2009
consisted primarily of income from various fee-based banking services, such as
sale of official checks, wire transfer fees, safe deposit box income, sweep
account and other fees.
Noninterest
Expense
The
following table summarizes changes in the Company's noninterest expense by
category for 2009 , 2008 and 2007.
|
In
thousands of dollars
|
2009
|
2008
|
Change
|
2007
|
Change
|
|||||||||||||||
|
Salaries
and employee benefits
|
$ | 17,904 | $ | 16,333 | 9.6 | % | $ | 14,862 | 9.9 | % | ||||||||||
|
Occupancy
and equipment expense, net
|
5,255 | 4,874 | 7.8 | % | 4,724 | 3.2 | % | |||||||||||||
|
External
data processing
|
1,590 | 1,755 | -9.4 | % | 1,605 | 9.3 | % | |||||||||||||
|
Advertising
and marketing
|
605 | 1,191 | -49.2 | % | 1,193 | -0.2 | % | |||||||||||||
|
Attorney,
accounting and other professional fees
|
1,183 | 1,020 | 16.0 | % | 1,070 | -4.7 | % | |||||||||||||
|
Director
fees
|
404 | 397 | 1.8 | % | 413 | -3.9 | % | |||||||||||||
|
Expenses
relating to ORE property
|
1,797 | 639 | 181.2 | % | 169 | 278.1 | % | |||||||||||||
|
FDIC
Insurance premiums
|
1,954 | 408 | 378.9 | % | 221 | 84.6 | % | |||||||||||||
|
Goodwill
impairment
|
3,469 | - | 100.0 | % | - | 0.0 | % | |||||||||||||
|
Other
expenses
|
2,955 | 3,346 | -11.7 | % | 3,302 | 1.3 | % | |||||||||||||
|
Total
Noninterest Expense
|
$ | 37,116 | $ | 29,963 | 23.9 | % | $ | 27,559 | 8.7 | % | ||||||||||
The
largest increases in noninterest expense during 2009 were in four areas. Those
were compensation costs of generating income from loan sales and servicing, the
charge for impairment of the Company’s goodwill during the first quarter,
increases in FDIC insurance costs, and expenses relating to ORE
property.
Salaries
and benefits are the Company’s largest single area of expense, and compensation
expenses increased by 9.6% in 2009 compared to 2008. A significant portion of
the additional expense reflects increased commissions and processing expense
related to record volumes of residential mortgage originations during 2009. In
addition, for comparison purposes, most salary increases for 2008 were effective
April 1, 2008, so their impact on the income statement was not apparent until
the second quarter of 2008. The Company did not pay merit increases to its staff
during 2009, and incentive compensation was not paid given the depressed level
of earnings. In addition, effective July 1, 2009, the Company discontinued its
profit sharing and employer matching contributions to our 401(k) plan. In the
fourth quarter of 2009, the Company implemented a number of staff reductions,
which along with attrition, should result in annualized savings in excess of
$1.0 million in 2010.
An
increase of 7.8% in occupancy and equipment expense in 2009 over 2008 primarily
reflects increases in maintenance and utility costs, along with an increase in
building and premises lease expense. External data processing costs were down
year to date compared to 2008, primarily as a result of a change of vendors in
2009 for credit card merchant processing. Advertising and marketing expenses for
2009 decreased by 49.2% compared to last year, as a result of the Company’s
cost-containment efforts. Attorney, accounting and other professional fees were
up 16.0% in 2009 compared to 2008, reflecting additional costs of doing business
during difficult economic times. A significant portion of the increase
represented attorney fees.
Expenses
related to ORE property continued to make up a larger portion of the Company’s
expenses. Those expenses included write-downs of the value and losses on the
sale of property held as ORE, along with costs to maintain and carry those
properties. Deterioration in the value of certain of these properties resulted
in losses of $1.2 million for 2009, compared to $0.4 million in 2008. Assets
were written down to their estimated fair value as a result of a decline in
prevailing real estate prices and the Banks’ experience with increased
foreclosures resulting from the weakened economy.
FDIC
insurance costs increased by 378.9% in 2009 over 2008, as a result of increased
premiums, a special assessment and the exhaustion of credits during 2008. The
Banks incurred expenses of $405,400 in the second quarter of 2009 as a result of
the industry-wide FDIC special assessment for that quarter. In addition, as a
result of increased FDIC assessment rates, the Banks have
experienced
higher FDIC premium costs. Management anticipates continued increases in FDIC
insurance costs during 2010 as a result of increased premiums resulting from
higher base charges and an increase in average deposit balances.
As a
result of an evaluation of the value of its goodwill, United took an impairment
charge of $3.47 million during the first quarter of 2009. Additional information
regarding the goodwill impairment charge is included in Note
8 to the consolidated financial statements, which information is
incorporated here by reference.
Other
expenses were down 11.7% in 2009 compared to 2008, with those expenses including
shareholder and compliance expense, among others.
Federal Income
Tax
The
Company's effective tax rate for 2009 was 39.0% compared with 97.3% for the same
period in 2008 and 22.7% for 2007. The effective tax rates for 2009 and 2008
were a calculated benefit based upon a pre-tax loss. The 2009 effective rate was
slightly higher than the Company’s expected tax rate as the benefit from
tax-exempt income more than offset the portion of the goodwill impairment that
was not deductible for tax purposes. While the Company had a loss for both book
and tax purposes for 2009, the Company had taxable income of $11.7 million from
2007 and 2008 that can be utilized for the Company’s tax loss in 2009. The
Company’s net deferred tax asset was $6.6 million at December 31, 2009. A
valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefit related to such
assets will not be realized. Based on the levels of taxable income in prior
years and the Company’s expectation of a return to profitability in future years
as a result of strong core earnings, Management has determined that no valuation
allowance was required at December 31, 2009.
The
following chart shows the effective federal tax rates of the Company for the
past three years, in thousands of dollars where applicable.
|
Dollars
in thousands
|
2009
|
2008
|
2007
|
|||||||||
|
Income
(loss) before tax
|
$ | (14,472 | ) | $ | (1,316 | ) | $ | 7,217 | ||||
|
Federal
income tax
|
(5,639 | ) | (1,280 | ) | 1,635 | |||||||
|
Effective
federal tax rate
|
39.0 | % | 97.3 | % | 22.7 | % | ||||||
Liquidity, Funds Management and Market Risk
Liquidity
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. At
times, the Banks utilize short-term interest-bearing balances with banks as a
substitute for excess federal funds.
The
Company’s balances in federal funds sold and short-term interest-bearing
balances with banks were $115.5 million at December 31, 2009, up from $6.3
million at December 31, 2008. The increase has resulted from funding growth in
excess of loan and investment growth, and reflects short-term investments held
to improve the liquidity of the balance sheet during this period of economic
uncertainty. The Company expects to maintain these higher balances until
portfolio loan volume improves and more attractive investment opportunities
emerge.
The Banks
also have the ability to utilize short-term advances from the FHLBI and
borrowings at the discount window of the Federal Reserve Bank as additional
short-term funding sources. Short-term advances and discount window borrowings
were not utilized during 2009 or 2008.
The
Company periodically finds it advantageous to utilize longer term borrowings
from the FHLBI. Theselong-term
borrowings serve primarily to provide a balance to some of the interest rate
risk inherent in the Company's balance sheet. During 2009, the Banks procured
$10.5 million in new advances and repaid $18.4 million in matured borrowings and
scheduled principal payments, resulting in a decrease in total FHLBI borrowings
outstanding for the year. Total FHLBI advances have declined $7.9 million in
2009, as the Banks have replaced portions of that funding with deposit growth.
Information concerning available lines is contained in Note 10
of the Notes to Consolidated Financial Statements.
Funds Management and Market
Risk
The
composition of the Company’s balance sheet consists of investments in interest
earning assets (loans and investment securities) that are funded by interest
bearing liabilities (deposits and borrowings). These financial instruments have
varying levels of sensitivity to changes in market interest rates resulting in
market risk.
Policies
of the Company place strong emphasis on stabilizing net interest margin while
managing interest rate, liquidity and market risks, with the goal of providing a
sustained level of satisfactory earnings. The Funds Management, Investment and
Loan policies provide direction for the flow of funds necessary to supply the
needs of depositors and borrowers. Management of interest sensitive assets and
liabilities is also necessary to reduce interest rate risk during times of
fluctuating interest rates.
Interest
rate risk is the exposure of the Company’s financial condition to adverse
movements in interest rates. It results from differences in the maturities or
timing of interest adjustments of the Company’s assets, liabilities and
off-balance-sheet instruments; from changes in the slope of the yield curve;
from imperfect correlations in the adjustment of interest rates earned and paid
on different financial instruments with otherwise similar repricing
characteristics; and from interest rate related options embedded in the
Company’s products such as prepayment and early withdrawal options.
A number
of measures are used to monitor and manage interest rate risk, including
interest sensitivity and income simulation analyses. An interest sensitivity
model is the primary tool used to assess this risk, with supplemental
information supplied by an income simulation model. The simulation model is used
to estimate the effect that specific interest rate changes would have on twelve
months of pretax net interest income assuming an immediate and sustained up or
down parallel change in interest rates of 300 basis points. Key assumptions in
the models include prepayment speeds on mortgage related assets; cash flows and
maturities of financial instruments; changes in market conditions, loan volumes
and pricing; and management’s determination of core deposit sensitivity. These
assumptions are inherently uncertain and, as a result, the models cannot
precisely estimate net interest income or precisely predict the impact of higher
or lower interest rates on net interest income. Actual results may differ from
simulated results due to timing, magnitude, and frequency of interest rate
changes and changes in market conditions.
The Funds
Management Committee is also responsible for evaluating and anticipating various
risks other than interest rate risk. Those risks include prepayment risk,
pricing for credit risk and liquidity risk. The Committee is made up of senior
members of management, and continually
monitors
the makeup of interest sensitive assets and liabilities to assure appropriate
liquidity, maintain interest margins and to protect earnings in the face of
changing interest rates and other economic factors.
The Funds
Management policy provides for a level of interest sensitivity that, Management
believes, allows the Company to take advantage of opportunities within the
market relating to liquidity and interest rate risk, allowing flexibility
without subjecting the Company to undue exposure to risk. In addition, other
measures are used to evaluate and project the anticipated results of
Management's decisions.
We
conducted multiple simulations as of December 31, 2009, in which it was assumed
that changes in market interest rates occurred ranging from up 300 basis points
to down 200 basis points in equal quarterly installments over the next twelve
months. The following table reflects the suggested impact on net interest income
over the next twelve months in comparison to estimated net interest income based
on our balance sheet structure, including the balances and interest rates
associated with our specific loans, securities, deposits and borrowed funds as
of December 31, 2009. The resulting estimates are within our policy parameters
established to manage and monitor interest rate risk.
|
Change
in
|
||||||||
|
Dollars
in thousands
|
Net Interest Income
|
|||||||
|
Interest
Rate Scenario
|
Amount
|
Percent
|
||||||
|
Interest
rates down 200 basis points
|
(2,476 | ) | -9.0 | % | ||||
|
Interest rates
down 100 basis points
|
(1,176 | ) | -4.3 | % | ||||
|
No
change in interest rates
|
- | 0.0 | % | |||||
|
Interest rates
up 100 basis points
|
1,402 | 5.1 | % | |||||
|
Interest rates
up 200 basis points
|
2,687 | 9.7 | % | |||||
|
Interest rates
up 300 basis points
|
3,841 | 13.9 | % | |||||
In
addition to changes in interest rates, the level of future net interest income
is also dependent on a number of other variables, including the growth,
composition and levels of loans, deposits and other earnings assets and
interest-bearing liabilities, level of nonperforming assets, economic and
competitive conditions, potential changes in lending, investing and deposit
gathering strategies, client preferences and other factors.
Capital Resources
The
common stock of the Company is quoted on the OTC Bulletin Board under the symbol
“UBMI.” As was the case with much of the financial services industry, the stock
of the Company continued to experience significant price declines during 2009.
It had been the policy of the Company to pay 30% to 45% of net earnings as cash
dividends to shareholders. In its ongoing efforts to preserve capital, the Board
of Directors of the Company suspended payment of a quarterly dividend on its
common shares in the second quarter of 2009. Book value per share of the
Company’s common stock declined from $13.75 at December 31, 2008 to $11.98 at
the end of 2009.
In
January of 2009, through its participation in the TARP CPP, United sold to
Treasury 20,600 shares of its Fixed Rate Cumulative Perpetual Preferred Stock,
Series A, which pays cumulative dividends at a rate of 5% for the first five
years and 9% thereafter. United also issued to Treasury a 10-year Warrant to
purchase 311,492 shares of United common stock at an exercise price of $9.92 per
share. United will have the right to redeem the preferred stock at any time
after three
years.
Terms of the preferred stock and warrants are set by Treasury and are
standardized for most institutions participating in the CPP.
Current
capital ratios for the Company and the Banks are shown in Note
18 of the Notes to Consolidated Financial Statements. At December 31, 2009,
the Company’s level of Tier 1 capital as a percentage of its total assets was
8.6% and its level of qualifying total capital as a percentage of risk-weighted
assets was 13.2%.
On
January 15, 2010, UBT entered into the MOU with the FDIC and OFIR. The MOU is
not a "written agreement" for purposes of Section 8 of the Federal Deposit
Insurance Act. The MOU documents an understanding among UBT, the FDIC and OFIR
that, among other things: (i) UBT will not declare or pay any dividend without
the prior consent of the FDIC and OFIR; and (ii) UBT will have and maintain its
Tier 1 capital ratio at a minimum of 9% within six months from the date of the
MOU and for the duration of the MOU, and will maintain its total capital ratio
at a minimum of 12% for the duration of the MOU. UBTW is also a party to a
Memorandum of Understanding with the FDIC and OFIR that documents an
understanding that UBTW will have and maintain its Tier 1 capital ratio at a
minimum of 8%. For additional information about the capital ratios of UBT and
UBTW, see Note 18 on Page A-46 hereof, which information
is incorporated here by reference.
Management
and the Board of UBT are evaluating alternatives to reach and maintain the
prescribed capital levels. The proposed consolidation of the banks is expected
to improve the capital ratios of the resulting bank. Other alternatives are also
being explored to increase capital levels at UBT within the prescribed timeline.
The Board has not determined whether it will be able to meet the timeline
prescribed by the MOU for reaching a 9% tier 1 capital ratio. Achievement of
this ratio could be impacted positively or negatively as a result of certain
uncertainties, including, but not limited to, earnings levels, changing economic
conditions, asset quality and property values.
The
following table details the Company's known contractual obligations at December
31, 2009, in thousands of dollars:
|
Payments due by period
|
||||||||||||||||||||
|
Contractual
Obligations
|
Less
than
|
More
than
|
||||||||||||||||||
|
Thousands
of dollars
|
1 year
|
1-3 years
|
3-5 years
|
5 years
|
Total
|
|||||||||||||||
|
Long
term debt (FHLB advances)
|
$ | 11,776 | $ | 8,582 | $ | 19,819 | $ | 1,921 | $ | 42,098 | ||||||||||
|
Operating
lease arrangements
|
1,073 | 2,169 | 2,153 | 3,034 | 8,429 | |||||||||||||||
|
Total
|
$ | 12,849 | $ | 10,751 | $ | 21,972 | $ | 4,955 | $ | 50,527 | ||||||||||
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-29 to A50 of
the Company's Annual Report on Form 10-K for the year ended December 31, 2009.
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.
Allowance for Credit
Losses
The
allowance for credit losses provides coverage for probable losses inherent in
the Company’s loan portfolio. Management evaluates the adequacy of the allowance
for credit losses each quarter based on changes, if any, in underwriting
activities, the loan portfolio composition (including product mix and
geographic, industry or customer-specific concentrations), trends in loan
performance, regulatory guidance and economic factors. This evaluation is
inherently subjective, as it requires the use of significant management
estimates. Many factors can affect management’s estimates of incurred losses,
including volatility of default probabilities, credit rating migrations, loss
severity and economic and political conditions. The allowance is increased
through provisions charged to operating earnings and reduced by net
charge-offs.
The
Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio. The allowance recorded for commercial
loans is based on reviews of individual credit relationships and an analysis of
the migration of commercial loans and actual loss experience. The allowance
recorded for homogeneous consumer loans is based on an analysis of loan mix,
risk characteristics of the portfolio, fraud loss and bankruptcy experiences,
and historical losses, adjusted for current trends, for each homogeneous
category or group of loans. The allowance for credit losses relating to impaired
loans is based on the loan’s observable market price, the collateral value for
collateral-dependent loans, or the discounted cash flows using the loan’s
effective interest rate.
Regardless
of the extent of the Company’s analysis of client performance, portfolio trends
or risk management processes, certain inherent but undetected losses are
probable within the loan portfolio. This is due to several factors including
inherent delays in obtaining information regarding a client’s financial
condition or changes in their unique business conditions, the judgmental nature
of individual loan evaluations, collateral assessments and the interpretation of
economic trends. Volatility of economic or client-specific conditions affecting
the identification and estimation of losses for larger non-homogeneous credits
and the sensitivity of assumptions utilized to establish allowances for
homogenous groups of loans are among other factors. The Company estimates a
range of inherent losses related to the existence of these exposures. The
estimates are based upon the Company’s evaluation of imprecision risk associated
with the commercial and consumer allowance levels and the estimated impact of
the current economic environment.
Loan Servicing
Rights
Loan
servicing rights (“LSRs”) associated with loans originated and sold, where
servicing is retained, are capitalized and included in other intangible assets
in the consolidated balance sheet. The value of the capitalized servicing rights
represents the present value of the future servicing fees arising from the right
to service loans in the portfolio. Critical accounting policies for LSRs relate
to the initial valuation and subsequent impairment tests. The methodology used
to determine the valuation of LSRs requires the development and use of a number
of estimates, including anticipated principal amortization and prepayments of
that principal balance. Events that may significantly affect the estimates used
are changes in interest rates, mortgage loan prepayment speeds and the payment
performance of the underlying loans. The carrying value of the LSRs is
periodically reviewed for impairment based on a determination of fair value. For
purposes of measuring impairment, the servicing rights are compared to a
valuation prepared based on a discounted cash flow methodology, utilizing
current prepayment speeds and discount rates. Impairment, if any, is recognized
through a valuation allowance and is recorded as amortization of intangible
assets.
Goodwill and Other
Intangibles
The
Company records all assets and liabilities acquired in purchase acquisitions,
including goodwill and other intangibles, at fair value as required by ASC 350.
Goodwill is subject, at a minimum, to annual tests for impairment. Other
intangible assets are amortized over their estimated useful lives using
straight-line and accelerated methods, and are subject to impairment if events
or circumstances indicate a possible inability to realize the carrying amount.
The initial goodwill and other intangibles recorded and subsequent impairment
analysis requires management to make subjective judgments concerning estimates
of how the acquired asset will perform in the future. Events and factors that
may significantly affect the estimates include, among others, customer
attrition, changes in revenue growth trends, specific industry conditions and
changes in competition.
Deteriorating
economic conditions in the United States have significantly impacted the banking
industry in the past two years. The resulting impact on the Company’s financial
results was reflected in a substantial decline in stock price below book value.
As of March 31, 2009, management performed the first phase of an impairment
evaluation used to identify potential impairment of goodwill carried by the
Company’s subsidiary banks (the "Banks"). That Phase I impairment evaluation
determined that the carrying value of the Company’s goodwill exceeded its fair
value.
In
accordance with ASC 350-10, that determination of impairment necessitated a
Phase 2 impairment analysis of the entity-wide goodwill. The second phase
calculates an implied fair value of goodwill by comparing the fair value of the
Company to the aggregate fair values of its individual assets, liabilities, and
identified intangibles. The second phase of the analysis confirmed that the
goodwill of the Company was fully impaired. A goodwill impairment charge was
taken in the first quarter of 2009 for the entire book value of goodwill of
$3.469 million. This non-cash charge was recorded as a component of noninterest
expense. The goodwill on the books of the Banks originally resulted from the
acquisition of various banking offices between 1992 and 1999.
Report of Independent Registered Public Accounting
Firm
United
Bancorp, Inc. and Subsidiaries
Audit
Committee, Board of Directors and Shareholders
United
Bancorp, Inc.
Tecumseh,
MI
We have
audited the accompanying consolidated balance sheets of United Bancorp, Inc. as
of December 31, 2009 and 2008, and the related consolidated statements of
operations, changes in shareholders’ equity and cash flows for each of the years
in the three-year period ended December 31, 2009. The Company's management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting in 2009. Our 2009 audit included consideration
of internal control over financial reporting as a basis for designing auditing
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. Our audits
included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of United Bancorp, Inc. as of
December 31, 2009 and 2008, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America.
BKD,
LLP
Indianapolis,
Indiana
February
25, 2010
|
Consolidated Balance Sheets
|
||||||||
|
United
Bancorp, Inc. and Subsidiaries
|
||||||||
|
In
thousands of dollars
|
December
31,
|
|||||||
|
Assets
|
2009
|
2008
|
||||||
|
Cash
and demand balances in other banks
|
$ | 10,047 | $ | 12,147 | ||||
|
Interest
bearing balances with banks
|
115,247 | 6,325 | ||||||
|
Federal
funds sold
|
295 | - | ||||||
|
Total
cash and cash equivalents
|
125,589 | 18,472 | ||||||
|
Securities
available for sale
|
92,146 | 82,101 | ||||||
|
FHLB
Stock
|
2,992 | 2,992 | ||||||
|
Loans
held for sale
|
7,979 | 4,988 | ||||||
|
Portfolio
loans
|
650,053 | 697,019 | ||||||
|
Less
allowance for loan losses
|
20,020 | 18,312 | ||||||
|
Net
portfolio loans
|
630,033 | 678,707 | ||||||
|
Premises
and equipment, net
|
12,332 | 13,205 | ||||||
|
Goodwill
|
- | 3,469 | ||||||
|
Bank-owned
life insurance
|
12,939 | 12,447 | ||||||
|
Accrued
interest receivable and other assets
|
25,318 | 16,012 | ||||||
|
Total
Assets
|
$ | 909,328 | $ | 832,393 | ||||
|
Liabilities
|
||||||||
|
Deposits
|
||||||||
|
Noninterest
bearing deposits
|
$ | 99,893 | $ | 89,487 | ||||
|
Interest
bearing certificates of deposit of $100,000 or more
|
107,942 | 132,139 | ||||||
|
Other
interest bearing deposits
|
574,966 | 487,923 | ||||||
|
Total
deposits
|
782,801 | 709,549 | ||||||
|
FHLB
advances payable
|
42,098 | 50,036 | ||||||
|
Accrued
interest payable and other liabilities
|
3,562 | 3,357 | ||||||
|
Total
Liabilities
|
828,461 | 762,942 | ||||||
|
Commitments
and Contingent Liabilities
|
||||||||
|
Shareholders'
Equity
|
||||||||
|
Preferred
stock, no par value; 2,000,000 shares authorized, 20,600 shares
outstanding in 2009, no shares outstanding in 2008
|
20,158 | - | ||||||
|
Common
stock and paid in capital, no par value; 10,000,000 shares authorized;
5,066,384 and 5,052,573 shares issued and outstanding
|
68,122 | 67,340 | ||||||
|
Retained
earnings (accumulated deficit)
|
(8,689 | ) | 1,193 | |||||
|
Accumulated
other comprehensive income, net of tax
|
1,276 | 918 | ||||||
|
Total
Shareholders' Equity
|
80,867 | 69,451 | ||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 909,328 | $ | 832,393 | ||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||
|
Consolidated Statements of Operations
|
||||||||||||
|
United
Bancorp, Inc. and Subsidiaries
|
For
the years ended
|
|||||||||||
|
December
31,
|
||||||||||||
|
In
thousands of dollars, except per share data
|
2009
|
2008
|
2007
|
|||||||||
|
Interest
Income
|
||||||||||||
|
Interest
and fees on loans
|
$ | 40,379 | $ | 43,288 | $ | 47,301 | ||||||
|
Interest
on securities
|
||||||||||||
|
Taxable
|
1,896 | 2,164 | 2,593 | |||||||||
|
Tax
exempt
|
1,338 | 1,461 | 1,469 | |||||||||
|
Interest
on federal funds sold and balances with banks
|
153 | 128 | 271 | |||||||||
|
Total
interest income
|
43,766 | 47,041 | 51,634 | |||||||||
|
Interest
Expense
|
||||||||||||
|
Interest
on deposits
|
10,402 | 14,964 | 19,631 | |||||||||
|
Interest
on fed funds and other short term borrowings
|
- | 96 | 175 | |||||||||
|
Interest
on FHLB advances
|
1,849 | 2,237 | 2,067 | |||||||||
|
Total
interest expense
|
12,251 | 17,297 | 21,873 | |||||||||
|
Net
Interest Income
|
31,515 | 29,744 | 29,761 | |||||||||
|
Provision
for loan losses
|
25,770 | 14,607 | 8,637 | |||||||||
|
Net
Interest Income After Provision for Loan Losses
|
5,745 | 15,137 | 21,124 | |||||||||
|
Noninterest
Income
|
||||||||||||
|
Service
charges on deposit accounts
|
2,731 | 3,381 | 3,579 | |||||||||
|
Wealth
Management fee income
|
4,070 | 4,343 | 4,801 | |||||||||
|
Gains
(losses) on securities transactions
|
(24 | ) | (18 | ) | 9 | |||||||
|
Income
from loan sales and servicing
|
6,689 | 2,187 | 1,749 | |||||||||
|
ATM,
debit and credit card fee income
|
2,174 | 2,257 | 2,118 | |||||||||
|
Income
from bank-owned life insurance
|
493 | 486 | 461 | |||||||||
|
Other
income
|
766 | 874 | 935 | |||||||||
|
Total
noninterest income
|
16,899 | 13,510 | 13,652 | |||||||||
|
Noninterest
Expense
|
||||||||||||
|
Salaries
and employee benefits
|
17,904 | 16,333 | 14,862 | |||||||||
|
Occupancy
and equipment expense, net
|
5,255 | 4,874 | 4,724 | |||||||||
|
External
data processing
|
1,590 | 1,755 | 1,605 | |||||||||
|
Advertising
and marketing
|
605 | 1,191 | 1,193 | |||||||||
|
Attorney,
accounting and other professional fees
|
1,183 | 1,020 | 1,070 | |||||||||
|
Director
fees
|
404 | 397 | 413 | |||||||||
|
Expenses
relating to ORE property
|
1,797 | 639 | 169 | |||||||||
|
FDIC
Insurance premiums
|
1,954 | 408 | 221 | |||||||||
|
Goodwill
impairment
|
3,469 | - | - | |||||||||
|
Other
expenses
|
2,955 | 3,346 | 3,302 | |||||||||
|
Total
noninterest expense
|
37,116 | 29,963 | 27,559 | |||||||||
|
Income
(Loss) Before Federal Income Tax
|
(14,472 | ) | (1,316 | ) | 7,217 | |||||||
|
Federal
income tax
|
(5,639 | ) | (1,280 | ) | 1,635 | |||||||
|
Net
Income (Loss)
|
$ | (8,833 | ) | $ | (36 | ) | $ | 5,582 | ||||
|
Basic
and diluted earnings (loss) per share
|
$ | (1.93 | ) | $ | (0.01 | ) | $ | 1.06 | ||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||||||
|
Consolidated Statements of Cash Flows
|
||||||||||||
|
United
Bancorp, Inc. and Subsidiaries
|
For
the years ended
|
|||||||||||
|
December
31,
|
||||||||||||
|
In
thousands of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Cash
Flows from Operating Activities
|
||||||||||||
|
Net
income (loss)
|
$ | (8,833 | ) | $ | (36 | ) | $ | 5,582 | ||||
|
Adjustments
to Reconcile Net Income to Net Cash from Operating
Activities
|
||||||||||||
|
Depreciation
and amortization
|
2,121 | 1,679 | 1,390 | |||||||||
|
Provision
for loan losses
|
25,770 | 14,607 | 8,637 | |||||||||
|
Gain
on sale of loans
|
(5,891 | ) | (2,229 | ) | (1,248 | ) | ||||||
|
Proceeds
from sales of loans originated for sale
|
309,558 | 120,027 | 70,931 | |||||||||
|
Loans
originated for sale
|
(306,658 | ) | (117,016 | ) | (69,681 | ) | ||||||
|
Losses
(gains) on securities transactions
|
24 | 18 | (9 | ) | ||||||||
|
Change
in deferred income taxes
|
(2,672 | ) | (2,036 | ) | (1,290 | ) | ||||||
|
Stock
option expense
|
150 | 137 | 205 | |||||||||
|
Increase
in cash surrender value on bank owned life insurance
|
(493 | ) | (486 | ) | (461 | ) | ||||||
|
Change
in investment in limited partnership
|
(135 | ) | (116 | ) | (36 | ) | ||||||
|
Goodwill
impairment
|
3,469 | - | - | |||||||||
|
Change
in accrued interest receivable and other assets
|
(5,410 | ) | 1,607 | 588 | ||||||||
|
Change
in accrued interest payable and other liabilities
|
441 | (2,969 | ) | (779 | ) | |||||||
|
Total
adjustments
|
20,274 | 13,223 | 8,247 | |||||||||
|
Net
cash from operating activities
|
11,441 | 13,187 | 13,829 | |||||||||
|
Cash
Flows from Investing Activities
|
||||||||||||
|
Securities
available for sale
|
||||||||||||
|
Purchases
|
(43,373 | ) | (46,896 | ) | (13,980 | ) | ||||||
|
Sales
|
- | 214 | - | |||||||||
|
Maturities
and calls
|
26,789 | 44,526 | 19,495 | |||||||||
|
Principal
payments
|
6,629 | 3,840 | 4,898 | |||||||||
|
Net
change in portfolio loans
|
21,090 | (63,334 | ) | (54,829 | ) | |||||||
|
Premises
and equipment expenditures
|
(514 | ) | (1,386 | ) | (1,226 | ) | ||||||
|
Net
cash from investing activities
|
10,621 | (63,036 | ) | (45,642 | ) | |||||||
|
Cash
Flows from Financing Activities
|
||||||||||||
|
Net
change in deposits
|
73,252 | 38,012 | 43,535 | |||||||||
|
Net
change in short term borrowings
|
- | - | (77 | ) | ||||||||
|
Principal
payments on other borrowings
|
(18,438 | ) | (8,575 | ) | (21,364 | ) | ||||||
|
Proceeds
from other borrowings
|
10,500 | 14,000 | 25,030 | |||||||||
|
Proceeds
from issuance of preferred stock and warrants
|
20,600 | - | - | |||||||||
|
Purchase
of common stock
|
- | (831 | ) | (3,873 | ) | |||||||
|
Proceeds
from other common stock transactions
|
98 | 133 | 425 | |||||||||
|
Cash
dividends paid on common and preferred
|
(957 | ) | (3,544 | ) | (4,113 | ) | ||||||
|
Net
cash from financing activities
|
85,055 | 39,195 | 39,563 | |||||||||
|
Net
Change in Cash and Cash Equivalents
|
107,117 | (10,654 | ) | 7,750 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
18,472 | 29,126 | 21,376 | |||||||||
|
Cash
and Cash Equivalents at End of Year
|
$ | 125,589 | $ | 18,472 | $ | 29,126 | ||||||
|
Supplemental
Disclosures:
|
||||||||||||
|
Interest
paid
|
$ | 12,707 | $ | 19,060 | $ | 20,677 | ||||||
|
Income
tax paid
|
- | 2,163 | 3,271 | |||||||||
|
Loans
transferred to other real estate
|
1,814 | 2,244 | 2,110 | |||||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||||||
|
Consolidated Statements of Changes in Shareholders'
Equity
|
|||||||||||||||||||||
|
United
Bancorp, Inc. and Subsidiaries
|
|||||||||||||||||||||
|
For
the years ended December 31, 2009, 2008, 2007
|
|||||||||||||||||||||
|
In
thousands of dollars, except per share data
|
Preferred
Stock
|
Common
Stock (1)
|
Retained
Earnings
(Accumulated
Deficit)
|
AOCI (2)
|
Total
|
||||||||||||||||
|
Balance,
December 31, 2006
|
$ | - | $ | 71,075 | $ | 3,393 | $ | 68 | $ | 74,536 | |||||||||||
|
Net
income, 2007
|
5,582 | 5,582 | |||||||||||||||||||
|
Other
comprehensive income:
|
|||||||||||||||||||||
|
Net
change in unrealized gains on securities available for sale, net of
reclass adjustments for realized gains and related taxes
|
225 | 225 | |||||||||||||||||||
|
Total
comprehensive income
|
5,807 | ||||||||||||||||||||
|
Cash
dividends declared, $0.79 per share
|
(4,113 | ) | (4,113 | ) | |||||||||||||||||
|
Common
stock transactions
|
423 | 423 | |||||||||||||||||||
|
Purchase
of common stock
|
(3,873 | ) | (3,873 | ) | |||||||||||||||||
|
Tax
effect of options exercised
|
20 | 20 | |||||||||||||||||||
|
Director
and management deferred stock plans
|
- | 215 | (48 | ) | - | 167 | |||||||||||||||
|
Balance,
December 31, 2007
|
$ | - | $ | 67,860 | $ | 4,814 | $ | 293 | $ | 72,967 | |||||||||||
|
Net
loss, 2008
|
(36 | ) | (36 | ) | |||||||||||||||||
|
Other
comprehensive income:
|
|||||||||||||||||||||
|
Net
change in unrealized gains on securities available for sale, net of
reclass adjustments for realized losses and related taxes
|
625 | 625 | |||||||||||||||||||
|
Total
comprehensive income
|
589 | ||||||||||||||||||||
|
Cash
dividends declared, $0.70 per share
|
(3,544 | ) | (3,544 | ) | |||||||||||||||||
|
Common
stock transactions
|
137 | 137 | |||||||||||||||||||
|
Purchase
of common stock
|
(831 | ) | (831 | ) | |||||||||||||||||
|
Director
and management deferred stock plans
|
- | 174 | (41 | ) | - | 133 | |||||||||||||||
|
Balance,
December 31, 2008
|
$ | - | $ | 67,340 | $ | 1,193 | $ | 918 | $ | 69,451 | |||||||||||
|
Net
loss, 2009
|
(8,833 | ) | (8,833 | ) | |||||||||||||||||
|
Other
comprehensive income:
|
|||||||||||||||||||||
|
Net
change in unrealized gains on securities available for sale, net of
reclass adjustments for realized losses and related taxes
|
358 | 358 | |||||||||||||||||||
|
Total
comprehensive income (loss)
|
(8,475 | ) | |||||||||||||||||||
|
Preferred
stock issued
|
20,067 | 20,067 | |||||||||||||||||||
|
Warrants
issued
|
533 | 533 | |||||||||||||||||||
|
Accretion
of discount on preferred stock
|
91 | (91 | ) | - | |||||||||||||||||
|
Cash
dividends paid on preferred shares
|
(855 | ) | (855 | ) | |||||||||||||||||
|
Cash
dividends paid on common shares, $0.02 per share
|
(102 | ) | (102 | ) | |||||||||||||||||
|
Common
stock transactions
|
150 | 150 | |||||||||||||||||||
|
Director
and management deferred stock plans
|
- | 99 | (1 | ) | - | 98 | |||||||||||||||
|
Balance,
December 31, 2009
|
$ | 20,158 | $ | 68,122 | $ | (8,689 | ) | $ | 1,276 | $ | 80,867 | ||||||||||
|
(1)
|
Includes
Paid In Capital
|
||||||||||||||||||||
|
(2)
|
Accumulated
Other Comprehensive Income (Loss), Net of Tax
|
||||||||||||||||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|||||||||||||||||||||
United
Bancorp, Inc. and Subsidiaries
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations and Basis of Presentation
The
consolidated financial statements include the accounts of United Bancorp, Inc.
and its wholly owned subsidiaries, United Bank & Trust and United Bank &
Trust – Washtenaw, after elimination of significant intercompany transactions
and accounts. The Company is engaged 100% in the business of commercial and
retail banking, including trust and investment services, with operations
conducted through its offices located in Lenawee, Washtenaw, and Monroe Counties
in southeastern Michigan. These counties are the source of substantially all of
the Company's deposit, loan, trust and investment activities.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires Management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period as
well as affecting the disclosures provided. Actual results could differ from
those estimates. The allowance for loan losses, goodwill, loan servicing rights
and the fair values of financial instruments are particularly subject to
change.
Securities
Securities
available for sale consist of bonds and notes that might be sold prior to
maturity. Securities classified as available for sale are reported at their fair
values and the related net unrealized holding gain or loss is reported in other
comprehensive income. Premiums and discounts on securities are recognized in
interest income using the interest method over the period to maturity. Realized
gains or losses are based upon the amortized cost of the specific securities
sold.
Loans
Held for Sale
Mortgage
loans originated and intended for sale in the secondary market are carried at
the lower of cost or market value in the aggregate. Net unrealized losses, if
any, are recognized in a valuation allowance by charges to income.
Loans
Loans
that Management has the intent and ability to hold for the foreseeable future or
until maturity or payoff are reported at the principal balance outstanding, net
of deferred loan fees and costs and the allowance for loan losses. Interest
income is reported on the interest method and includes amortization of net
deferred loan fees and costs over the loan term. Loans are placed on non-accrual
status at ninety days or more past due and interest is considered a loss, unless
the loan is well-secured and in the process of collection.
Allowance
for Loan Losses
The
allowance for loan losses is maintained at a level believed adequate by
management to absorb probable incurred credit losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, amount and composition of the loan portfolio, and other
factors management believes to be relevant. The Company’s past loan loss
experience is
determined
by evaluating the average charge-offs over the most recent eight
quarters. Prior to the fourth quarter of 2009, the Company used a
rolling twelve quarter historical approach. The allowance is increased by
provisions for loan losses charged to income. Loan losses are charged against
the allowance when management believes the uncollectability of a loan is
confirmed. Subsequent recoveries, if any, are credited to the
allowance.
Loan
impairment is reported when full payment under the loan terms is not expected.
Impaired loans are carried at the present value of estimated future cash flows
using the loan's existing rate, or the fair value of collateral if the loan is
collateral dependent. A portion of the allowance for loan losses is allocated to
impaired loans if the value of such loans is deemed to be less than the unpaid
balance. If these allocations require an increase in the allowance for loan
losses, that increase is recorded as a component of the provision for loan
losses. Loans are evaluated for impairment when payments are delayed or when the
internal grading system indicates a substandard or doubtful
classification.
Impairment
is evaluated in total for smaller-balance loans of similar nature such as
residential mortgage, consumer, home equity and second mortgage loans.
Commercial loans and mortgage loans secured by other properties are evaluated
individually for impairment. When credit analysis of borrower operating results
and financial condition indicates that underlying cash flows of the borrower's
business are not adequate to meet its debt service requirements, including the
Company’s subsidiary banks' loans to the borrower, the loan is evaluated for
impairment. Often this is associated with a delay or shortfall of payments of
thirty days or more. Loans are generally moved to nonaccrual status when ninety
days or more past due or in bankruptcy. These loans are often also considered
impaired. Impaired loans, or portions thereof, are charged off when deemed
uncollectible. This typically occurs when the loan is 120 or more days past due
unless the loan is both well-secured and in the process of
collection.
Premises
and Equipment
Premises
and equipment are stated at cost, less accumulated depreciation. The provisions
for depreciation are computed principally by the straight-line method, based on
useful lives of ten to forty years for premises and three to eight years for
equipment.
Other
Real Estate Owned
Other
real estate consists of properties acquired through foreclosure or acceptance of
a deed in lieu of foreclosure and property acquired for possible future
expansion. Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair value, less
estimated selling costs, at the date of foreclosure establishing a new cost
basis. After foreclosure, valuations are periodically performed and the real
estate is carried at the lower of cost basis or fair value, less estimated
selling costs. The historical average holding period for such properties is less
than eighteen months. As of December 31, 2009 and 2008, other real estate owned
totaled $2,774,000 and $3,386,000, and is included in other assets on the
consolidated balance sheets.
Goodwill
Goodwill
is tested annually for impairment, or more frequently if events indicate that
the asset might be impaired. If the implied fair value of goodwill is lower than
its carrying amount, goodwill impairment is indicated and goodwill is written
down to its implied fair value. Subsequent increases in goodwill value are not
recognized in the financial statements. The Company has no goodwill on its
balance sheet at December 31, 2009.
Servicing
Rights
Servicing
rights are recognized as assets for the allocated value of retained servicing on
loans sold. Servicing rights are expensed in proportion to, and over the period
of, estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to interest
rates, remaining loan terms and prepayment characteristics. Any impairment of a
grouping is reported as a valuation allowance.
Long-term
Assets
Long-term
assets are reviewed for impairment when events indicate their carrying amount
may not be recoverable from future undiscounted cash flows. If impaired, the
assets are written down to discounted amounts.
Income
Tax
The
Company records income tax expense based on the amount of taxes due on its tax
return plus deferred taxes computed based on the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities, using enacted tax rates, adjusted for allowances made
for uncertainty regarding the realization of deferred tax assets. The Company
has no uncertain tax positions as defined by The Tax Position Topic of the FASB
Accounting Standards Codification (“FASB ASC”) Topic 740-10-05
Earnings
Per Share
Amounts
reported as earnings per share are based on income available to common
shareholders divided by weighted average shares outstanding. Income available to
common shareholders is calculated by subtracting dividends on preferred stock
and the accretion of discount on preferred stock from net income. Weighted
average shares outstanding include the weighted average number of common shares
outstanding plus the weighted average number of contingently issuable shares
associated with the Directors' and Senior Management Group's deferred stock
plans. In 2007, the company paid a 100% stock dividend. Earnings per share,
dividends per share, and weighted average shares have been restated to reflect
the stock dividend.
Stock
Based Compensation
At
December 31, 2009, the Company has a stock-based employee compensation plan,
which is described more fully in Note 16. The Company’s
disclosure regarding this plan is in accordance with the fair value recognition
provisions of FASB ASC Topic 718-10.
Statements
of Cash Flows
For
purposes of this Statement, cash and cash equivalents include cash on hand,
demand balances with banks, and federal funds sold. Federal funds are generally
sold for one-day periods. The Company reports net cash flows for client loan and
deposit transactions, deposits made with other financial institutions, and
short-term borrowings with an original maturity of ninety days or
less.
Comprehensive
Income
Comprehensive
income consists of net income and other comprehensive income (loss). Other
comprehensive income (loss) includes net unrealized gains and losses on
securities available for sale, net of tax, which are also recognized as separate
components of shareholders' equity.
Industry
Segment
The
Company and its subsidiaries are primarily organized to operate in the banking
industry. Substantially all revenues and services are derived from banking
products and services in southeastern Michigan. While the Company's chief
decision makers monitor various products and services, operations are managed
and financial performance is evaluated on a Company-wide basis. Accordingly, all
of the Company's banking operations are considered by Management to be
aggregated in one business segment.
Recently
Issued Accounting Standards
FASB ASC Topic 860-10, Accounting for Transfers of
Financial Assets (“SFAS 166”), and No. 167, Amendments to FASB ASC
810-10 (“SFAS 167”) In
June 2009, FASB issued FASB ASC Topic 860-10 and FASB ASC 810-10, which change
the way entities account for securitizations and special-purpose entities, and
will have a material effect on how banking organizations account for off-balance
sheet vehicles. The new standards amend Statement of FASB ASC 860-10,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, and FASB ASC 810-10, Consolidation of Variable Interest
Entities. Both FASB ASC Topic 860-10 and FASB ASC Topic 810-10 were effective
January 1, 2010 for companies reporting earnings on a calendar-year basis.
On
January 21, 2010, the Board of Governors of the Federal Reserve System issued
final risk-based capital rules related to the adoption of these accounting
standards by financial institutions. FAS 166 and FAS 167 make substantive
changes to how banking organizations account for many items, including
securitized assets, that had been previously excluded from their balance sheets.
Banking organizations affected by FAS 166 and FAS 167 generally will be subject
to higher risk-based regulatory capital requirements intended to better align
risk-based capital requirements with the actual risks of certain
exposures.
United is
evaluating the impact that adoption of these standards will have on the
Company’s consolidated financial statements. We will take into account in our
internal capital planning processes the impact of these standards and will
assess whether additional capital may be necessary to support the risks
associated with off-balance-sheet vehicles affected by the new accounting
standards.
Current
Economic Conditions
The
current protracted economic decline continues to present financial institutions
with circumstances and challenges that in many cases have resulted in large and
unanticipated declines in the fair values of investments and other assets,
constraints on liquidity and capital and significant credit quality problems,
including severe volatility in the valuation of real estate and other collateral
supporting loans. The financial statements have been prepared using values and
information currently available to the Company.
At
December 31, 2009, the Company held $2.6 million in commercial real estate and
$299.2 million in loans collateralized by commercial and development real
estate. Due to national, state and local economic conditions, values for
commercial and development real estate have declined significantly, and the
market for these properties is depressed.
At
December 31, 2009, the Company held $99,000 in agricultural production loans and
$1.6 million in agricultural real estate loans. These totals do not represent a
significant portion of the Company’s loan portfolio.
Given the
volatility of current economic conditions, the values of assets and liabilities
recorded in the financial statements could change rapidly, resulting in material
future adjustments in asset values, the allowance for loan losses, capital that
could negatively impact the Company’s ability to meet regulatory capital
requirements and maintain sufficient liquidity.
NOTE
2 - RESTRICTIONS ON CASH AND DEMAND BALANCES IN OTHER BANKS
The Banks
are subject to average reserve and clearing balance requirements in the form of
cash on hand or balances due from the Federal Reserve Bank. The amount of
reserve and clearing balances required at December 31, 2009 were $355,000. These
reserve balances vary depending on the level of client deposits in the
Banks.
The
Company considers all liquid investments with original maturities of three
months or less to be cash equivalents. At December 31, 2009 and 2008, cash
equivalents consisted primarily of fed funds sold.
The
financial institution holding the Company’s cash accounts is participating in
the FDIC’s Transaction Account Guarantee Program. Under that program, through
June 30, 2010, all non-interest bearing transactions are fully guaranteed by the
FDIC for the entire amount in the account.
Effective
October 3, 2008, the FDIC insurance limits increased to $250,000. The increase
in federally insured limits is currently set to expire December 31, 2013. At
December 31, 2009, the Company’s cash accounts did not exceed federally insured
limits. At December 31, 2009, the Company had cash balances of $115,678,000 at
the FRB and FHLB that did not have FDIC insurance coverage.
NOTE 3 - SECURITIES
Balances of securities by category are shown
below, as of December 31, 2009 and 2008:
|
In
thousands of dollars
|
Securities Available for
Sale
|
|||||||||||||||
|
2009
|
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
U.S.
Treasury and agency securities
|
$ | 31,846 | $ | 412 | $ | (19 | ) | $ | 32,239 | |||||||
|
Mortgage
backed agency securities
|
22,457 | 713 | (28 | ) | 23,142 | |||||||||||
|
Obligations
of states and political subdivisions
|
33,255 | 997 | (141 | ) | 34,111 | |||||||||||
|
Corporate,
asset backed and other debt securities
|
2,628 | - | (5 | ) | 2,623 | |||||||||||
|
Equity
securities
|
26 | 5 | - | 31 | ||||||||||||
|
Total
|
$ | 90,212 | $ | 2,127 | $ | (193 | ) | $ | 92,146 | |||||||
|
2008
|
||||||||||||||||
|
U.S.
Treasury and agency securities
|
$ | 19,071 | $ | 641 | $ | - | $ | 19,712 | ||||||||
|
Mortgage
backed agency securities
|
21,446 | 540 | (14 | ) | 21,972 | |||||||||||
|
Obligations
of states and political subdivisions
|
37,517 | 630 | (258 | ) | 37,889 | |||||||||||
|
Corporate,
asset backed and other debt securities
|
2,633 | - | (155 | ) | 2,478 | |||||||||||
|
Equity
securities
|
44 | 6 | - | 50 | ||||||||||||
|
Total
|
$ | 80,711 | $ | 1,817 | $ | (427 | ) | $ | 82,101 | |||||||
The
following table shows the gross unrealized loss and fair value of the Company's
investments, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position at
December 31, 2009 and 2008.
|
Less than 12 Months
|
12 Months or Longer
|
Total
|
||||||||||||||||||||||
|
In
thousands of dollars
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
||||||||||||||||||
|
2009
|
||||||||||||||||||||||||
|
U.S.
Treasury and agency securities
|
$ | 10,105 | $ | (19 | ) | $ | - | $ | - | $ | 10,105 | $ | (19 | ) | ||||||||||
|
Mortgage
backed agency securities
|
5,123 | (28 | ) | - | - | 5,123 | (28 | ) | ||||||||||||||||
|
Obligations
of states and political subdivisions
|
1,156 | (41 | ) | 2,089 | (100 | ) | 3,245 | (141 | ) | |||||||||||||||
|
Corporate,
asset backed and other debt securities
|
- | - | 2,496 | (5 | ) | 2,496 | (5 | ) | ||||||||||||||||
|
Equity
securities
|
- | - | - | - | - | - | ||||||||||||||||||
|
Total
|
$ | 16,384 | $ | (88 | ) | $ | 4,585 | $ | (105 | ) | $ | 20,969 | $ | (193 | ) | |||||||||
|
2008
|
||||||||||||||||||||||||
|
Mortgage
backed agency securities
|
$ | - | $ | - | $ | 1,984 | $ | (14 | ) | $ | 1,984 | $ | (14 | ) | ||||||||||
|
Obligations
of states and political subdivisions
|
4,177 | (115 | ) | 2,964 | (143 | ) | 7,141 | (258 | ) | |||||||||||||||
|
Corporate,
asset backed and other debt securities
|
2,346 | (155 | ) | - | - | 2,346 | (155 | ) | ||||||||||||||||
|
Total
|
$ | 6,523 | $ | (270 | ) | $ | 4,948 | $ | (157 | ) | $ | 11,471 | $ | (427 | ) | |||||||||
Unrealized
gains and losses within the investment portfolio are determined to be temporary.
The Company has performed an evaluation of its investments for other than
temporary impairment, and losses of $24,000 and $123,000 were recognized during
2009 and 2008, respectively. Loss from other than temporary impairment for 2009
and 2008 consisted of write-down of one equity security that was deemed to be
impaired.
The
entire investment portfolio is classified as available for sale. However,
management has no specific intent to sell any securities, and it is more likely
than not that the Company will not have to sell any security before recovery of
its cost basis. Sales activities for securities for the years indicated are
shown in the following table. All sales were of securities identified as
available for sale.
|
In
thousands of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Sales
proceeds
|
$ | - | $ | 214 | $ | - | ||||||
|
Gross
gains on sales
|
- | 15 | - | |||||||||
|
Gross
gains on calls
|
- | 90 | 9 | |||||||||
|
Loss
from other than temporary impairment
|
(24 | ) | (123 | ) | - | |||||||
The fair
value of securities available for sale by contractual maturity as of December
31, 2009 is shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties. Asset-backed securities are
included in the shortest category.
|
In
thousands of dollars
|
Fair Value
|
|||
|
Due
in one year or less
|
$ | 34,727 | ||
|
Due
after one year through five years
|
48,695 | |||
|
Due
after five years through ten years
|
7,708 | |||
|
Due
after ten years
|
985 | |||
|
Equity
securities
|
31 | |||
|
Total
securities
|
$ | 92,146 | ||
Securities
carried at $8,122,000 and $8,780,000 as of December 31, 2009 and 2008 were
pledged to secure deposits of public funds, funds borrowed, repurchase
agreements, and for other purposes as required by law.
NOTE 4 - LOANS
The
following table shows total loans outstanding at December 31, and the percentage
change in balances from the prior year. All loans are domestic and contain no
concentrations by industry or client.
|
In
thousands of dollars
|
2009
|
% Change
|
2008
|
% Change
|
||||||||||||
|
Personal
|
$ | 110,702 | -1.2 | % | $ | 112,095 | 14.3 | % | ||||||||
|
Business,
including commercial mortgages
|
392,495 | -4.5 | % | 410,911 | 9.2 | % | ||||||||||
|
Tax
exempt
|
3,005 | 18.6 | % | 2,533 | -6.5 | % | ||||||||||
|
Residential
mortgage
|
86,417 | -4.3 | % | 90,343 | 5.0 | % | ||||||||||
|
Construction
and development
|
56,706 | -29.5 | % | 80,412 | -0.8 | % | ||||||||||
|
Deferred
loan fees and costs
|
728 | 0.4 | % | 725 | 46.5 | % | ||||||||||
|
Total
loans
|
$ | 650,053 | -6.7 | % | $ | 697,019 | 8.1 | % | ||||||||
Accruing loans delinquent ninety days or more totaled $5,474,000 and $1,504,000 at December 31, 2009 and 2008. Non-accruing loans at December 31, 2009 and 2008 were $26,188,000 and $19,328,000.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
An
analysis of the allowance for loan losses for the years ended December 31
follows:
|
In
thousands of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Balance,
January 1
|
$ | 18,312 | $ | 12,306 | $ | 7,849 | ||||||
|
Loans
charged off
|
(24,368 | ) | (8,772 | ) | (4,290 | ) | ||||||
|
Recoveries
credited to allowance
|
306 | 171 | 110 | |||||||||
|
Provision
charged to operations
|
25,770 | 14,607 | 8,637 | |||||||||
|
Balance,
December 31
|
$ | 20,020 | $ | 18,312 | $ | 12,306 | ||||||
Information
regarding impaired loans for the years ended December 31 follows:
|
In
thousands of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Average
investment in impaired loans
|
$ | 40,295 | $ | 27,342 | $ | 17,031 | ||||||
|
Interest
income recognized on impaired loans
|
936 | 794 | 545 | |||||||||
|
Interest
income recognized on a cash basis
|
936 | 794 | 545 | |||||||||
|
Balance
of impaired loans at December 31
|
$ | 36,160 | $ | 37,206 | $ | 24,692 | ||||||
|
Portion
for which no allowance for loan losses is allocated
|
7,029 | 4,160 | 1,121 | |||||||||
|
Portion
for which an allowance for loan losses is allocated
|
29,131 | 33,046 | 23,571 | |||||||||
|
Portion
of allowance for loan losses allocated to impaired loans
|
5,775 | 8,126 | 6,055 | |||||||||
NOTE
6 - LOAN SERVICING
Loans
serviced for others are not included in the accompanying consolidated financial
statements. The unpaid principal balance of loans serviced for others was
$522,462,000 and $326,659,000 at December 31, 2009 and 2008. The balance of
loans serviced for others related to servicing rights that have been capitalized
was $521,076,000 and $324,643,000 at December 31, 2009 and 2008.
Unamortized
cost of loan servicing rights included in accrued interest receivable and other
assets on the consolidated balance sheet, for the years ended December 31 was as
follows:
|
2009
|
2008
|
|||||||||||||||||||||||
|
Residential
|
Residential
|
|||||||||||||||||||||||
|
In
thousands of dollars
|
Commercial
|
Mortgage
|
Total
|
Commercial
|
Mortgage
|
Total
|
||||||||||||||||||
|
Balance,
January 1
|
$ | 86 | $ | 1,686 | $ | 1,772 | $ | 29 | $ | 1,694 | $ | 1,723 | ||||||||||||
|
Amount
capitalized
|
108 | 2,211 | 2,319 | 85 | 780 | 865 | ||||||||||||||||||
|
Amount
amortized
|
(16 | ) | (819 | ) | (835 | ) | (23 | ) | (272 | ) | (295 | ) | ||||||||||||
|
Valuation
allowance (increase) decrease
|
4 | 516 | 520 | (5 | ) | (516 | ) | (521 | ) | |||||||||||||||
|
Balance,
December 31
|
$ | 182 | $ | 3,593 | $ | 3,775 | $ | 86 | $ | 1,686 | $ | 1,772 | ||||||||||||
Activity
in the valuation allowance for 2009 and 2008 was as follows:
|
2009
|
2008
|
|||||||||||||||||||||||
|
In
thousands of dollars
|
Commercial
|
Residential Mortgage |
Total
|
Commercial
|
Residential Mortgage |
Total
|
||||||||||||||||||
|
Balance,
January 1
|
$ | 5 | $ | 516 | $ | 521 | $ | - | $ | - | $ | - | ||||||||||||
|
Additions
|
- | - | - | 5 | 516 | 521 | ||||||||||||||||||
|
Deductions
|
4 | 516 | 520 | - | - | - | ||||||||||||||||||
|
Balance,
December 31
|
$ | 1 | $ | 0 | $ | 1 | $ | 5 | $ | 516 | $ | 521 | ||||||||||||
The fair
value of servicing rights as follows at December 31:
|
2009
|
2008
|
|||||||||||||||
|
Residential
|
Residential
|
|||||||||||||||
|
In
thousands of dollars
|
Commercial
|
Mortgage
|
Commercial
|
Mortgage
|
||||||||||||
|
Fair
value, January 1
|
$ | 86 | $ | 1,686 | $ | 29 | $ | 2,705 | ||||||||
|
Fair
value, December 31
|
$ | 195 | $ | 4,340 | $ | 86 | $ | 1,686 | ||||||||
NOTE
7 - PREMISES AND EQUIPMENT
Depreciation
expense was approximately $1,387,000 in 2009, $1,371,000 in 2008 and $1,281,000
in 2007. Premises and equipment as of December 31 consisted of the
following:
|
In
thousands of dollars
|
2009
|
2008
|
||||||
|
Land
|
$ | 1,863 | $ | 1,863 | ||||
|
Buildings
and improvements
|
14,783 | 14,630 | ||||||
|
Furniture
and equipment
|
14,687 | 14,368 | ||||||
|
Total
cost
|
31,333 | 30,861 | ||||||
|
Less
accumulated depreciation
|
(19,001 | ) | (17,656 | ) | ||||
|
Premises
and equipment, net
|
$ | 12,332 | $ | 13,205 | ||||
The
company has several noncancellable operating leases, primarily for banking
facilities, that expire over the next fifteen years. The leases generally
contain renewal options for periods ranging from one to five years. Rental
expense for these leases was $1.1 million, $988,000 and $885,000 for the years
ended December 31, 2009, 2008 and 2007, respectively.
Future
minimum lease payments under operating leases are shown in the table
below:
|
In
thousands of dollars
|
||||
|
2010
|
$ | 1,073 | ||
|
2011
|
1,082 | |||
|
2012
|
1,087 | |||
|
2013
|
1,101 | |||
|
2014
|
1,052 | |||
|
Thereafter
|
3,034 | |||
|
Total
Minimum Lease Payments
|
$ | 8,429 | ||
NOTE 8 - GOODWILL
Deteriorating
economic conditions in the United States have significantly impacted the banking
industry in the past two years. The resulting impact on the Company’s financial
results was reflected in a substantial decline in stock price below book value.
As of March 31, 2009, management performed the first phase of an impairment
evaluation used to identify potential impairment of goodwill carried by the
Company’s subsidiary banks (the "Banks"). That Phase I impairment evaluation
determined that the carrying value of the Company’s goodwill exceeded its fair
value.
In
accordance with ASC 350-10, that determination of impairment necessitated a
Phase 2 impairment analysis of the entity-wide goodwill. The second phase
calculates an implied fair value of goodwill by comparing the fair value of the
Company to the aggregate fair values of its individual assets, liabilities, and
identified intangibles. The second phase of the analysis confirmed that the
goodwill of the Company was fully impaired. A goodwill impairment charge was
taken in the first quarter of 2009 for the entire book value of goodwill of
$3.469 million. This non-cash charge was recorded as a component of noninterest
expense. The goodwill on the books of the Banks originally resulted from the
acquisition of various banking offices between 1992 and 1999.
NOTE 9 - DEPOSITS
Information
relating to maturities of time deposits as of December 31 is summarized
below:
|
In
thousands of dollars
|
2009
|
2008
|
||||||
|
Within
one year
|
$ | 211,353 | $ | 175,655 | ||||
|
Between
one and two years
|
36,947 | 54,616 | ||||||
|
Between
two and three years
|
19,923 | 21,113 | ||||||
|
Between
three and four years
|
15,828 | 6,480 | ||||||
|
Between
four and five years
|
6,420 | 6,968 | ||||||
|
Total
time deposits
|
$ | 290,471 | $ | 264,832 | ||||
|
Interest
bearing time deposits in denominations of $100,000 or more
|
$ | 107,942 | $ | 132,139 | ||||
NOTE 10 - SHORT TERM BORROWINGS
The
Company has several credit facilities in place for short term borrowing which
are used on occasion as a source of liquidity. These facilities consist of
borrowing authority totaling $7.9 million from correspondent banks to purchase
federal funds on a daily basis. There were no fed funds purchased outstanding at
December 31, 2009 and 2008.
The Banks
may also enter into sales of securities under agreements to repurchase
("repurchase agreements"). These agreements generally mature within one to 120
days from the transaction date. U.S. Treasury, agency and other securities
involved with the agreements are recorded as assets and are generally held in
safekeeping by correspondent banks. Repurchase agreements are offered
principally to certain clients as an investment alternative to deposit products.
There were no balances outstanding at any time during 2009 or 2008.
NOTE 11 - OTHER BORROWINGS
The Banks
carried fixed rate, non-callable advances from the Federal Home Loan Bank of
Indianapolis totaling $42.1 million and $50.0 million at December 31, 2009 and
2008. As of December 31, 2009, the rates on the advances ranged from 2.74% to
5.36% with a weighted average rate of 3.90%. Amounts advanced totaling $2.0
million are subject to an option for the FHLB to convert the entire advance to a
periodic adjustable rate one year after the date of the advance, and advances
totaling $8.0 million are subject to an option for the FHLB to convert the
entire advance to a periodic adjustable rate two years after the date of the
advance. If the FHLB exercises its option to convert the advance to an
adjustable rate, the advance will be pre-payable at the Company’s option, at par
without a penalty fee.
Advances
are primarily collateralized by residential mortgage loans under a blanket
security agreement. Additional coverage is provided by Other Real Estate Related
(“ORER”) and Community Financial Institution (“CFI”) collateral. The unpaid
principal balance of the loans pledged as collateral required is between 155%
and 250%, depending on the type of collateral and was $145.8 million at year-end
2009. Interest payments are made monthly, with principal due annually and at
maturity. If principal payments are paid prior to maturity, advances are subject
to a prepayment penalties.
Maturities
and scheduled principal payments for other borrowings over the next five years
as of December 31 are shown below.
|
In
thousands of dollars
|
2009
|
|||
|
Within
one year
|
$ | 11,777 | ||
|
Between
one and two years
|
6,286 | |||
|
Between
two and three years
|
2,296 | |||
|
Between
three and four years
|
10,306 | |||
|
Between
four and five years
|
9,513 | |||
|
More
than five years
|
1,920 | |||
|
Total
|
$ | 42,098 | ||
NOTE
12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Banks
are party to financial instruments with off-balance-sheet risk in the normal
course of business to meet financing needs of their clients. These financial
instruments include commitments to make loans, unused lines of credit, and
letters of credit. The Banks' exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual amount of those instruments. The
Banks follow the same credit policy to make such commitments as is followed for
loans and investments recorded in the consolidated financial statements. The
Banks' commitments to extend credit are agreements at predetermined terms, as
long as the client continues to meet specified criteria, with fixed expiration
dates or termination clauses. The following table shows the commitments to make
loans and the unused lines of credit available to clients at December
31:
|
2009
|
2008
|
|||||||||||||||
|
In
thousands of dollars
|
Variable Rate |
Fixed Rate
|
Variable Rate |
Fixed Rate
|
||||||||||||
|
Commitments
to make loans
|
$ | 1,486 | $ | 10,285 | $ | 9,247 | $ | 8,046 | ||||||||
|
Unused
lines of credit
|
95,891 | 5,361 | 102,621 | 10,853 | ||||||||||||
|
Standby
letters of credit
|
7,380 | - | 11,266 | - | ||||||||||||
Commitments
to make loans generally expire within thirty to ninety days, while unused lines
of credit expire at the maturity date of the individual loans. At December 31,
2009, the rates for amounts in the fixed rate category ranged from 4.25% to
8.50%.
In
December 2001, United Bank & Trust entered into a limited partnership
agreement to purchase tax credits awarded from the construction, ownership and
management of an affordable housing project and a residual interest in the real
estate. As of December 31, 2009 and 2008, the total recorded investment
including the obligation to make additional future investments were $1,134,000
and $1,235,000 and was included in other assets. As of December 31, 2009 and
2008, the obligation of UBT to the limited partnership were $890,000 and
$1,126,000, which was reported in other liabilities. While UBT is a 99% partner,
the investment is accounted for on the equity method as UBT is a limited partner
and has no control over the operation and management of the partnership or the
affordable housing project.
NOTE
13 - FEDERAL INCOME TAX
Income
tax expense consists of the following for the years ended December
31:
|
In
thousands of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Current
|
$ | (2,967 | ) | $ | 756 | $ | 2,925 | |||||
|
Deferred
|
(2,672 | ) | (2,036 | ) | (1,290 | ) | ||||||
|
Total
income tax expense
|
$ | (5,639 | ) | $ | (1,280 | ) | $ | 1,635 | ||||
The
components of deferred tax assets and liabilities at December 31 are as
follows:
|
In
thousands of dollars
|
2009
|
2008
|
||||||
|
Deferred
tax assets:
|
||||||||
|
Allowance
for loan losses
|
$ | 6,807 | $ | 6,226 | ||||
|
Deferred
compensation
|
750 | 559 | ||||||
|
Low
income housing and Alternative Minimum Tax credit
|
1,231 | - | ||||||
|
Other
|
1,256 | 407 | ||||||
|
Total
deferred tax assets
|
$ | 10,044 | $ | 7,192 | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Property
and equipment
|
$ | (484 | ) | $ | (555 | ) | ||
|
Mortgage
servicing rights
|
(1,284 | ) | (603 | ) | ||||
|
Unrealized
appreciation on securities available for sale
|
(657 | ) | (473 | ) | ||||
|
Other
|
(1,051 | ) | (1,480 | ) | ||||
|
Total
deferred tax liabilities
|
$ | (3,476 | ) | $ | (3,111 | ) | ||
|
Net
deferred tax asset
|
$ | 6,568 | $ | 4,081 | ||||
The Company’s net deferred tax asset is included in the category “Accrued interest receivable and other assets” on the balance sheet. While the Company had a loss for both book and tax purposes for 2009, the Company had taxable income of $11.7 million from 2007 and 2008 that can be utilized for the Company’s tax loss in 2009. The Company’s net deferred tax asset was $6.6 million at December 31, 2009. A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. Based on the levels of taxable income in prior years and the Company’s expectation of a return to profitability in future years as a result of strong core earnings, Management has determined that no valuation allowance was required at December 31, 2009 or 2008. Reconciliation between total federal income tax and the amount computed through the use of the federal statutory tax rate for the years ended is as follows:
|
In
thousands of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Income
taxes at statutory rate of 34%
|
$ | (4,920 | ) | $ | (447 | ) | $ | 2,454 | ||||
|
Non-taxable
income, net of nondeductible interest expense
|
(476 | ) | (490 | ) | (487 | ) | ||||||
|
Income
on non-taxable bank owned life insurance
|
(168 | ) | (165 | ) | (157 | ) | ||||||
|
Affordable
housing credit
|
(188 | ) | (188 | ) | (188 | ) | ||||||
|
Goodwill
write-off
|
150 | - | - | |||||||||
|
Other
|
(37 | ) | 10 | 13 | ||||||||
|
Total
federal income tax
|
$ | (5,639 | ) | $ | (1,280 | ) | $ | 1,635 | ||||
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain
directors and executive officers of the Company and the Banks, including their
immediate families and companies in which they are principal owners, are clients
of the Banks. Loans to these parties did not, in the opinion of Management,
involve more than normal credit risk or present other unfavorable features. The
aggregate amount of these loans at December 31, 2008 was $12,786,000. That
balance was adjusted to exclude Directors and Officers that were not with the
Company at the end of 2009. During 2009, new and newly reportable loans to such
related parties amounted to $2,373,000 and repayments amounted to $3,114,000,
resulting in a balance at December 31, 2009 of $12,029,000. Related party
deposits totaled $9,284,000 and $7,607,000 at December 31, 2009 and
2008.
NOTE 15 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR
ADVANCES
Banking
laws and regulations restrict the amount the Banks can transfer to the Company
in the form of cash dividends and loans. Under the Memorandums of Understanding
described in Note 18, as of January 15, 2010, neither
United Bank & Trust nor United Bank & Trust – Washtenaw may declare or
pay any dividends without prior approval of regulators. It is not the intent of
Management to pay dividends in amounts that would reduce the capital of the
Banks to a level below that which is considered prudent by Management and in
accordance with the guidelines of regulatory authorities.
NOTE 16 - EMPLOYEE BENEFIT PLANS
Employee
Savings Plan
The
Company maintains a 401(k) employee savings plan ("plan") which is available to
substantially all employees. Individual employees may make contributions to the
plan up to 100% of their compensation up to a maximum of $16,500 for 2009, and
$15,500 for 2008 and 2007. The Banks offers discretionary matching of funds for
a percentage of the employee contribution, plus an amount based on Company
earnings. In July 1, 2009, the Company discontinued its profit sharing and
employer matching contributions to the plan. The expense for the plan for 2009,
2008 and 2007 was $238,000, $556,000 and $486,000.
The plan
offers employees the option of purchasing Company stock with the match portion
of their 401(k) contribution. Prior to 2008, those shares were issued
specifically for that purpose. Beginning in 2008, shares available to employees
within the plan are purchased on the open market. On that basis, 4,136 shares in
2007 of United Bancorp, Inc. common stock were issued to the 401(k) plan for the
benefit of plan participants who so elected Company stock for their
match.
Director
Retainer Stock Plan
The
Company maintains a deferred compensation plan designated as the Director
Retainer Stock Plan ("Director Plan"). The plan provides eligible directors of
the Company and the Banks with a means of deferring payment of retainers and
certain fees payable to them for Board service. Under the Director Plan, any
retainers or fees elected to be deferred under the plan by an eligible director
ultimately will be payable in common stock at the time of payment.
Senior
Management Bonus Deferral Stock Plan
The
Company maintains a deferred compensation plan designated as the Senior
Management Bonus Deferral Stock Plan ("Management Plan"). The Management Plan
has essentially the same purposes as the Director Plan discussed above and
permits eligible employees of the Company and its affiliates to elect cash bonus
deferrals and, after employment termination, to
receive
payouts in whole or in part in the form of common stock on terms substantially
similar to those of the Director Plan.
Stock
Options
In 2004,
Shareholders approved the Company's 2005 Stock Option Plan (the "2005 Plan"),
which became effective January 1, 2005. The plan is a non-qualified stock option
plan as defined under Internal Revenue Service regulations. Under the plan,
directors and management of the Company and subsidiaries are given the right to
purchase stock of the Company at the market price at the time the options are
granted. The 2005 Plan replaced the 1999 Stock Option Plan ("the 1999 Plan"),
under which no more options are to be granted. The 2005 Stock Option Plan
expired effective January 1, 2010, and no additional options may be granted
under the plan.
The stock
subject to the options is shares of authorized and unissued common stock of the
Company. As defined in the 2005 Plan, options representing no more than 385,875
shares (adjusted for stock dividends declared) are to be made available to the
plan. The options have a three-year vesting period, and with certain exceptions,
expire at the end of ten years, or three years after retirement.
The
following table summarizes option activity for the 1999 Plan and the 2005 Plan
during 2009:
|
Options
|
Weighted
Avg.
|
|||||||
|
In
thousands of dollars
|
Outstanding
|
Exercise Price
|
||||||
|
Balance,
January 1, 2009
|
353,861 | $ | 24.93 | |||||
|
Options
granted
|
100,000 | 7.20 | ||||||
|
Options
exercised
|
- | - | ||||||
|
Options
forfeited
|
(18,300 | ) | 22.19 | |||||
|
Balance,
December 31
|
435,561 | $ | 20.98 | |||||
|
Options
exercisable at year-end
|
281,525 | $ | 25.92 | |||||
|
Weighted
average fair value of options granted during the year
|
$ | 1.66 | ||||||
The
following table provides information regarding stock options under the 2005 Plan
at December 31, 2009:
|
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||||
|
Range
of Exercise Prices |
Number Outstanding |
Weighted
Average Remaining Contractual Life |
Weighted
Avg. Exercise Price |
Number Outstanding |
Weighted
Avg. Exercise Price |
|||||||||||||||||
| $6.00 to $32.14 | 435,561 | 6.23 |
Years
|
$ | 20.98 | 281,525 | $ | 25.92 | ||||||||||||||
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
|
2009
|
2008
|
2007
|
||||||||||
|
Dividend
yield
|
1.00 | % | 4.02 | % | 3.26 | % | ||||||
|
Expected
life
|
5
years
|
5
years
|
5
years
|
|||||||||
|
Expected
volatility
|
25.67 | % | 17.55 | % | 11.61 | % | ||||||
|
Risk-free
interest rate
|
1.98 | % | 2.76 | % | 4.68 | % | ||||||
The
Company has recorded approximately $150,000, $137,000 and $205,000 in
compensation expense related to vested stock options less estimated forfeitures
for the periods ended December 31, 2009, 2008 and 2007, respectively. As of
December 31, 2009, unrecognized compensation
expense
related to the stock options totaled $164,000, and is expected to be recognized
over three years.
At
December 31, 2009, 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 2009 and the exercise price
multiplied by the number of in-the-money options assuming all option holders had
exercised their stock options on December 31, 2009. No stock options were
exercised during 2009 or 2008. The intrinsic value of options exercised in 2007
was $59,000.
NOTE
17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value Measurements. The
Fair Value Measurements Topic of the FASB Accounting Standards Codification
(“FASB ASC”) defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. FASB ASC Topic
820-10-20 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. Topic 820-10-55 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
|
Following
is a description of the inputs and valuation methodologies used for instruments
measured at fair value on a recurring basis and recognized in the accompanying
consolidated balance sheets, as well as the general classification of those
instruments under the valuation hierarchy.
|
Available-for-sale
Securities
Where
quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. If quoted market
prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics, or
discounted cash flows. Level 2 securities include U.S. Government agency
securities, mortgage backed securities, obligations of states and
municipalities, and certain corporate securities. Matrix pricing is a
mathematical technique widely used in the banking industry to value
investment securities without relying exclusively on quoted prices for
specific investment securities, but rather, relying on the investment
securities’ relationship to other benchmark quoted investment securities.
In certain cases where Level 1 or Level 2 inputs are not available,
securities are classified within Level 3 of the hierarchy.
|
The
following table presents the fair value measurements of assets recognized in the
accompanying condensed consolidated balance sheets measured at fair value on a
recurring basis and the level within the FASB ASC fair value hierarchy in which
the fair value measurements fall at December 31, 2009 and 2008:
|
In
thousands of dollars
|
Fair Value Measurements
Using
|
|||||||||||||||
|
December
31, 2009
|
Fair Value
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
|
Available
for sale securities:
|
||||||||||||||||
|
U.S.
Treasury and agency securities
|
$ | 32,239 | $ | - | $ | 32,239 | $ | - | ||||||||
|
Mortgage
backed agency securities
|
23,142 | - | 23,142 | - | ||||||||||||
|
Obligations
of states and political subdivisions
|
34,111 | - | 34,111 | - | ||||||||||||
|
Corporate,
asset backed and other debt securities
|
2,623 | - | 2,623 | - | ||||||||||||
|
Equity
securities
|
31 | - | 31 | - | ||||||||||||
|
Total
available for sale securities
|
$ | 92,146 | $ | - | $ | 92,146 | $ | - | ||||||||
|
December
31, 2008
|
||||||||||||||||
|
Available
for sale securities:
|
||||||||||||||||
|
U.S.
Treasury and agency securities
|
$ | 19,712 | $ | - | $ | 19,712 | $ | - | ||||||||
|
Mortgage
backed agency securities
|
21,972 | - | 21,972 | - | ||||||||||||
|
Obligations
of states and political subdivisions
|
37,889 | - | 37,889 | - | ||||||||||||
|
Corporate,
asset backed and other debt securities
|
2,478 | - | 2,478 | - | ||||||||||||
|
Equity
securities
|
50 | - | 50 | - | ||||||||||||
|
Total
available for sale securities
|
$ | 82,101 | $ | - | $ | 82,101 | $ | - | ||||||||
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
sheets, as well as the general classification of those instruments under the
valuation hierarchy.
Impaired Loans (Collateral
Dependent)
Loans for
which it is probable that the Company will not collect all principal and
interest due according to contractual terms are measured for impairment.
Allowable methods for determining the amount of impairment include estimating
fair value using the fair value of the collateral for collateral-dependent
loans. If the impaired loan is identified as collateral dependent, the fair
value method of measuring the amount of impairment is utilized. This method
requires obtaining a current independent appraisal of the collateral and
applying a discount factor to the value. Impaired loans that are collateral
dependent are classified within Level 3 of the fair value hierarchy when
impairment is determined using the fair value method.
During
the three and twelve months ended December 31, 2009 and 2008, certain loans
became impaired, while certain loans previously identified as impaired were
partially charged-off or re-evaluated. These changes during the fourth quarter
of 2009 resulted in a balance for these loans, net of specific allowance, of
$23.3 million. Year to date changes resulted in a balance, net of specific
allowance, of $26.9 million at December 31, 2009.
Changes
during the fourth quarter of 2008 resulted in a balance for these loans, net of
specific allowance, of $16.5 million. Full year 2008 changes resulted in a
balance, net of specific allowance, of $17.3 million at December 31, 2008. This
valuation was considered Level 3, consisting of appraisals of underlying
collateral and discounted cash flow analysis.
Prior to
the third quarter of 2009, for construction and development loans, the Company
used the loan’s effective interest rate to discount future cash flows to
determine fair value, except for situations when the Company determined that
foreclosure was probable. In those cases, the Company used appraised values and
the discount rates contained in the appraisals.
Effective
for the third quarter of 2009, the Company changed its valuation estimates for
all impaired collateral-dependent construction and land development loans.
Current valuation is based on estimated collateral values using appraised values
or estimated cash flows from disposal of the collateral utilizing discount rates
ranging from 15% to 24%, which are generally higher than those used in prior
periods. This resulted in an increase to our provision for loan losses of $2.7
million in the third quarter of 2009. While either approach is acceptable under
generally accepted accounting principles, the current valuation better reflects
bank regulatory reporting requirements within the consolidated financial
statements of the Company.
The
carrying amounts and estimated fair value of principal financial assets and
liabilities were as follows:
|
As
of December 31,
|
2009
|
2008
|
||||||||||||||
|
Carrying
|
Carrying
|
|||||||||||||||
|
In
thousands of dollars
|
Value
|
Fair Value
|
Value
|
Fair Value
|
||||||||||||
|
Financial
Assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 125,589 | $ | 125,589 | $ | 18,472 | $ | 18,472 | ||||||||
|
Securities
available for sale
|
92,146 | 92,146 | 82,101 | 82,101 | ||||||||||||
|
FHLB
Stock
|
2,992 | 2,992 | 2,992 | 2,992 | ||||||||||||
|
Loans
held for sale
|
7,979 | 7,979 | 4,988 | 4,988 | ||||||||||||
|
Net
portfolio loans
|
630,033 | 632,831 | 678,707 | 683,346 | ||||||||||||
|
Accrued
interest receivable
|
3,349 | 3,349 | 3,492 | 3,492 | ||||||||||||
|
Financial
Liabilities
|
||||||||||||||||
|
Total
deposits
|
$ | (782,801 | ) | $ | (787,443 | ) | $ | (709,549 | ) | $ | (715,331 | ) | ||||
|
FHLB
advances
|
(42,098 | ) | (43,167 | ) | (50,036 | ) | (51,776 | ) | ||||||||
|
Accrued
interest payable
|
(930 | ) | (930 | ) | (1,379 | ) | (1,379 | ) | ||||||||
Estimated
fair values require subjective judgments and are approximate. The above
estimates of fair value are not necessarily representative of amounts that could
be realized in actual market transactions, or of the underlying value of the
Company. Changes in the following methodologies and assumptions could
significantly affect the estimated fair value:
Cash and cash equivalents, FHLB
stock, loans held for sale, accrued interest receivable and accrued interest
payable – The
carrying amounts are reasonable estimates of the fair values of these
instruments at the respective balance sheet dates.
Net portfolio loans – The
carrying amount is a reasonable estimate of fair value for personal loans for
which rates adjust quarterly or more frequently, and for business and tax exempt
loans that are prime related and for which rates adjust immediately or
quarterly. The fair value for residential mortgage loans that are held for sale
on the secondary market is the price offered by the secondary market purchaser.
The fair value of all other loans is estimated by discounting future cash flows
using current rates for loans with similar
characteristics
and maturities. The allowance for loan losses is considered to be a reasonable
estimate of discount for credit quality concerns.
Total deposits – With the
exception of certificates of deposit, the carrying value is deemed to be the
fair value due to the demand nature of the deposits. The fair value of fixed
maturity certificates of deposit is estimated by discounting future cash flows
using the current rates paid on certificates of deposit with similar
maturities.
FHLB Advances – The fair
value is estimated by discounting future cash flows using current rates on
advances with similar maturities.
Off-balance-sheet financial
instruments – Commitments to extend credit, standby letters of credit and
undisbursed loans are deemed to have no material fair value as such commitments
are generally fulfilled at current market rates.
NOTE 18 - REGULATORY CAPITAL REQUIREMENTS
The
Company and Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Banks must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. Capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. Quantitative measures established by regulation to ensure capital
adequacy require the Company and Banks to maintain minimum ratios of Total and
Tier I capital to risk-weighted assets, and of Tier I capital to average assets.
The Company and the Banks were categorized as well-capitalized at year end 2009
and 2008 under applicable regulations.
On
January 15, 2010, UBT entered into a Memorandum of Understanding (“MOU”) with
the Federal Deposit Insurance Corporation and the Michigan Office of Financial
and Insurance Regulation. The MOU is not a “written agreement” for purposes of
Section 8 of the Federal Deposit Insurance Act. The MOU documents an
understanding among UBT, the Federal Deposit Insurance Corporation and the
Michigan Office of Financial and Insurance Regulation, that, among other things,
(i) UBT will not declare or pay any dividend without the prior consent of the
Federal Deposit Insurance Corporation and the Michigan Office of Financial and
Insurance Regulation; and (ii) UBT will have and maintain its Tier 1 capital
ratio at a minimum of 9% within six months from the date of the MOU and for the
duration of the MOU, and will maintain its total capital ratio at a minimum of
12% for the duration of the MOU. UBTW is also a party to a Memorandum of
Understanding with the Federal Deposit Insurance Corporation and the Michigan
Office of Financial and Insurance Regulation that documents an understanding
that UBTW will have and maintain its Tier 1 capital ratio at a minimum of 8% and
will not declare or pay any dividend without the approval of its
regulators.
The
following table shows the Company's and the Banks' capital ratios and the
Company's amounts compared to regulatory requirements at year-end 2009 and
2008.
|
Actual
|
Regulatory Minimum for
Capital Adequacy (1)
|
Regulatory Minimum to be
Well Capitalized
(2)
|
||||||||||||||||||||||
|
As
of December 31, 2009
|
$ | 000 |
%
|
$ | 000 |
%
|
$ | 000 |
%
|
|||||||||||||||
|
Tier
1 Capital to Average Assets
|
||||||||||||||||||||||||
|
United
Bancorp, Inc. (consolidated)
|
$ | 78,076 | 8.6 | % | $ | 36,108 | 4.0 | % | N/A | N/A | ||||||||||||||
|
United
Bank & Trust
|
37,590 | 7.3 | % | 20,495 | 4.0 | % | 25,618 | 5.0 | % | |||||||||||||||
|
United
Bank & Trust – Washtenaw
|
33,506 | 8.7 | % | 15,487 | 4.0 | % | 19,358 | 5.0 | % | |||||||||||||||
|
Tier
1 Capital to Risk Weighted Assets
|
||||||||||||||||||||||||
|
United
Bancorp, Inc. (consolidated)
|
78,076 | 11.9 | % | 26,219 | 4.0 | % | N/A | N/A | ||||||||||||||||
|
United
Bank & Trust
|
37,590 | 11.2 | % | 13,376 | 4.0 | % | 20,064 | 6.0 | % | |||||||||||||||
|
United
Bank & Trust – Washtenaw
|
33,506 | 10.6 | % | 12,694 | 4.0 | % | 19,041 | 6.0 | % | |||||||||||||||
|
Total
Capital to Risk Weighted Assets
|
||||||||||||||||||||||||
|
United
Bancorp, Inc. (consolidated)
|
86,416 | 13.2 | % | 52,438 | 8.0 | % | N/A | N/A | ||||||||||||||||
|
United
Bank & Trust
|
41,872 | 12.5 | % | 26,752 | 8.0 | % | 33,440 | 10.0 | % | |||||||||||||||
|
United
Bank & Trust – Washtenaw
|
37,517 | 11.8 | % | 25,388 | 8.0 | % | 31,735 | 10.0 | % | |||||||||||||||
|
As
of December 31, 2008
|
||||||||||||||||||||||||
|
Tier
1 Capital to Average Assets
|
||||||||||||||||||||||||
|
United
Bancorp, Inc. (consolidated)
|
$ | 65,696 | 7.9 | % | $ | 33,470 | 4.0 | % | N/A | N/A | ||||||||||||||
|
United
Bank & Trust
|
33,497 | 6.7 | % | 19,967 | 4.0 | % | 24,959 | 5.0 | % | |||||||||||||||
|
United
Bank & Trust – Washtenaw
|
29,156 | 8.6 | % | 13,667 | 4.0 | % | 17,083 | 5.0 | % | |||||||||||||||
|
Tier
1 Capital to Risk Weighted Assets
|
||||||||||||||||||||||||
|
United
Bancorp, Inc. (consolidated)
|
65,696 | 9.5 | % | 27,744 | 4.0 | % | N/A | N/A | ||||||||||||||||
|
United
Bank & Trust
|
33,497 | 8.9 | % | 15,076 | 4.0 | % | 22,614 | 6.0 | % | |||||||||||||||
|
United
Bank & Trust – Washtenaw
|
29,256 | 9.2 | % | 12,668 | 4.0 | % | 19,003 | 6.0 | % | |||||||||||||||
|
Total
Capital to Risk Weighted Assets
|
||||||||||||||||||||||||
|
United
Bancorp, Inc. (consolidated)
|
74,487 | 10.7 | % | 55,488 | 8.0 | % | N/A | N/A | ||||||||||||||||
|
United
Bank & Trust
|
38,295 | 10.2 | % | 30,152 | 8.0 | % | 37,690 | 10.0 | % | |||||||||||||||
|
United
Bank & Trust – Washtenaw
|
33,149 | 10.5 | % | 25,337 | 8.0 | % | 31,671 | 10.0 | % | |||||||||||||||
|
(1)
|
Represents
minimum required to be categorized as adequately capitalized under Federal
regulatory requirements.
|
|
(2)
|
Represents
minimum generally required to be categorized as well-capitalized under
Federal regulatory prompt corrective action provisions. The Memorandum of
Understanding described above in Note 18 subjects
UBT and UBTW to higher
requirements.
|
NOTE 19 - EARNINGS PER SHARE
A
reconciliation of basic and diluted earnings per share follows:
|
In
thousands of dollars, except share data
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income (loss)
|
$ | (8,833 | ) | $ | (36 | ) | $ | 5,582 | |||||
|
Less:
|
Accretion
of discount on preferred stock
|
(91 | ) | - | - | ||||||||
|
Dividends
on preferred stock
|
(987 | ) | - | - | |||||||||
|
Income
available to common shareholders
|
$ | (9,911 | ) | $ | (36 | ) | $ | 5,582 | |||||
|
Basic
earnings (loss) per share:
|
|||||||||||||
|
Weighted
average common shares outstanding
|
5,059,669 | 5,061,544 | 5,190,868 | ||||||||||
|
Weighted
average contingently issuable shares
|
67,244 | 59,830 | 59,743 | ||||||||||
|
Total
weighted average shares outstanding
|
5,126,913 | 5,121,374 | 5,250,611 | ||||||||||
|
Basic
earnings (loss) per share
|
$ | (1.93 | ) | $ | (0.01 | ) | $ | 1.06 | |||||
|
Diluted
earnings (loss) per share:
|
2009
|
2008
|
2007
|
|||||||||
|
Weighted average common
shares outstanding from basic earnings per share
|
5,126,913 | 5,121,374 | 5,250,611 | |||||||||
|
Dilutive effect of
stock options
|
- | - | - | |||||||||
|
Dilutive effect of
warrants
|
- | - | - | |||||||||
|
Total weighted
average shares outstanding
|
5,126,913 | 5,121,374 | 5,250,611 | |||||||||
|
Diluted earnings
(loss) per share
|
$ | (1.93 | ) | $ | (0.01 | ) | $ | 1.06 | ||||
Stock
options for 416,594, 340,886 and 263,808 shares of common stock were not
considered in computing diluted earnings per share for 2009, 2008 and 2007
because they were not dilutive.
NOTE
20 - OTHER COMPREHENSIVE INCOME
Other
comprehensive income components and related taxes were as follows:
|
In
thousands of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Unrealized
gains on securities available for sale
|
$ | 519 | $ | 936 | $ | 350 | ||||||
|
Reclassification
for realized amount included in income
|
24 | 18 | 9 | |||||||||
|
Other
comprehensive income before tax effect
|
543 | 954 | 341 | |||||||||
|
Tax
expense
|
185 | 329 | 116 | |||||||||
|
Other
comprehensive income
|
$ | 358 | $ | 625 | $ | 225 | ||||||
NOTE
21 - PARENT COMPANY ONLY FINANCIAL INFORMATION
The
condensed financial information for United Bancorp, Inc. is summarized
below.
|
CONDENSED
BALANCE SHEETS
|
December 31,
|
|||||||
|
In
thousands of dollars
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 844 | $ | 18 | ||||
|
Investment
in subsidiaries
|
73,885 | 66,404 | ||||||
|
Furniture
and equipment
|
2,262 | 2,571 | ||||||
|
Loan
to subsidiaries
|
2,400 | - | ||||||
|
Other
assets
|
2,150 | 1,424 | ||||||
|
Total
Assets
|
$ | 81,541 | $ | 70,417 | ||||
|
Liabilities
and Shareholders' Equity
|
||||||||
|
Liabilities
|
$ | 674 | $ | 966 | ||||
|
Shareholders'
equity
|
80,867 | 69,451 | ||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 81,541 | $ | 70,417 | ||||
|
CONDENSED
STATEMENTS OF OPERATIONS
|
For the years ended December
31,
|
|||||||||||
|
In
thousands of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Income
|
||||||||||||
|
Dividends
from subsidiaries
|
$ | - | $ | 5,480 | $ | 9,250 | ||||||
|
Other
income
|
11,144 | 10,273 | 8,664 | |||||||||
|
Total
Income
|
11,144 | 15,753 | 17,914 | |||||||||
|
Total
Noninterest Expense
|
11,757 | 10,525 | 8,679 | |||||||||
|
Income
(loss) before undistributed net income of subsidiaries and income
taxes
|
(613 | ) | 5,228 | 9,235 | ||||||||
|
Income
tax benefit
|
(258 | ) | (87 | ) | (1 | ) | ||||||
|
Net
income (loss) before undistributed net income of
subsidiaries
|
(355 | ) | 5,315 | 9,236 | ||||||||
|
(Excess
distributed) net income of subsidiaries
|
(8,478 | ) | (5,351 | ) | (3,654 | ) | ||||||
|
Net
Income (Loss)
|
(8,833 | ) | (36 | ) | 5,582 | |||||||
|
Other
comprehensive income, including net change in unrealized gains on
securities available for sale
|
358 | 625 | 225 | |||||||||
|
Comprehensive
Income (Loss)
|
$ | (8,475 | ) | $ | 589 | $ | 5,807 | |||||
|
CONDENSED
STATEMENTS OF CASH FLOWS
|
For the years ended December
31,
|
|||||||||||
|
In
thousands of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Cash
Flows from Operating Activities
|
||||||||||||
|
Net
Income
|
$ | (8,833 | ) | $ | (36 | ) | $ | 5,582 | ||||
|
Adjustments
to Reconcile Net Income to Net Cash from Operating
Activities
|
||||||||||||
|
Excess
distributed net income of subsidiaries
|
8,478 | 5,351 | 3,654 | |||||||||
|
Stock
option expense
|
150 | 137 | 205 | |||||||||
|
Change
in other assets
|
(727 | ) | (16 | ) | (104 | ) | ||||||
|
Change
in other liabilities
|
(292 | ) | 48 | (646 | ) | |||||||
|
Total
adjustments
|
7,609 | 5,520 | 3,109 | |||||||||
|
Net
cash from operating activities
|
(1,224 | ) | 5,484 | 8,691 | ||||||||
|
Cash
Flows from Investing Activities
|
||||||||||||
|
Proceeds
from sale of securities available for sale
|
- | 214 | - | |||||||||
|
Investments
in subsidiaries
|
(15,600 | ) | (1,500 | ) | (1,000 | ) | ||||||
|
Loan
to subsidiaries
|
(2,400 | ) | - | - | ||||||||
|
Net
(increase) decrease in premises and equipment
|
309 | (540 | ) | (243 | ) | |||||||
|
Net
cash from investing activities
|
(17,691 | ) | (1,826 | ) | (1,243 | ) | ||||||
|
Cash
Flows from Financing Activities
|
||||||||||||
|
Proceeds
from issuance of preferred stock and warrants
|
20,600 | - | - | |||||||||
|
Proceeds
from common stock transactions
|
98 | 133 | 425 | |||||||||
|
Purchase
of common stock
|
- | (831 | ) | (3,873 | ) | |||||||
|
Cash
dividends paid on common and preferred stock
|
(957 | ) | (3,544 | ) | (4,113 | ) | ||||||
|
Net
cash from financing activities
|
19,741 | (4,242 | ) | (7,561 | ) | |||||||
|
Net
Change in Cash and Cash Equivalents
|
826 | (584 | ) | (113 | ) | |||||||
|
Cash
and cash equivalents at beginning of year
|
18 | 602 | 715 | |||||||||
|
Cash
and Cash Equivalents at End of Year
|
$ | 844 | $ | 18 | $ | 602 | ||||||
NOTE 22 – QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly
financial information is summarized below.
|
In
thousands of dollars, except per share data
|
Full Year
|
4th Qtr
|
3rd Qtr
|
2nd Qtr
|
1st Qtr
|
|||||||||||||||
|
2009
|
||||||||||||||||||||
|
Interest
Income
|
43,766 | 10,955 | 10,775 | 11,007 | 11,029 | |||||||||||||||
|
Interest
Expense
|
12,251 | 2,775 | 2,915 | 3,094 | 3,467 | |||||||||||||||
|
Net
Interest Income
|
31,515 | 8,180 | 7,860 | 7,913 | 7,562 | |||||||||||||||
|
Provision
for Loan Losses
|
25,770 | 5,300 | 8,200 | 5,400 | 6,870 | |||||||||||||||
|
Net
Income (Loss)
|
(8,833 | ) | (482 | ) | (2,890 | ) | (762 | ) | (4,699 | ) | ||||||||||
|
Basic
and Diluted Earnings (Loss) per Share
|
(1.93 | ) | (0.15 | ) | (0.62 | ) | (0.20 | ) | (0.96 | ) | ||||||||||
|
2008
|
||||||||||||||||||||
|
Interest
Income
|
47,041 | 11,516 | 11,618 | 11,491 | 12,416 | |||||||||||||||
|
Interest
Expense
|
17,297 | 4,174 | 4,081 | 4,104 | 4,938 | |||||||||||||||
|
Net
Interest Income
|
29,744 | 7,342 | 7,537 | 7,387 | 7,478 | |||||||||||||||
|
Provision
for Loan Losses
|
14,607 | 8,997 | 3,300 | 1,650 | 660 | |||||||||||||||
|
Net
Income (Loss)
|
(36 | ) | (4,016 | ) | 397 | 1,695 | 1,888 | |||||||||||||
|
Basic
and Diluted Earnings (Loss) per Share
|
(0.01 | ) | (0.79 | ) | 0.08 | 0.33 | 0.37 | |||||||||||||
NOTE
23 – SUBSEQUENT EVENTS
On
January 15, 2010, the Company filed applications with its regulators for
permission to consolidate and merge UBTW with and into UBT, with the
consolidated bank operating under the charter of UBT. The proposed bank
consolidation is subject to the receipt of all applicable federal and state
regulatory approvals. It is anticipated that the proposed bank consolidation
will be completed during the second quarter of 2010. Following the transaction,
the consolidated bank will continue to operate the same banking offices in the
same markets that UBT and UBTW currently operate.
Subsequent
events have been evaluated through February 26, 2010, which is the date the
financial statements were issued.
A-50
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.
|
|||
|
By
|
/s/ Robert K. Chapman |
February
25, 2010
|
|
|
Robert
K. Chapman, President and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates
indicated.
| /s/ Robert K. Chapman |
Director,
President and Chief Executive
Officer
(Principal Executive Officer)
|
February
25, 2010
|
|
|
Robert
K. Chapman
|
|||
| /s/ Randal J. Rabe |
Executive
Vice President and Chief Financial Officer (Principal Financial
Officer)
|
February
25, 2010
|
|
|
Randal
J. Rabe
|
|||
|
Director
|
February
25, 2010
|
||
|
Stephanie
H. Boyse*
|
|||
|
|
Director
|
February
25, 2010
|
|
|
James
D. Buhr *
|
|||
|
Director
|
February
25, 2010
|
||
|
John
H. Foss*
|
|||
|
Director
|
February
25, 2010
|
||
|
Norman
G. Herbert*
|
|||
|
Chairman
of the Board
|
February
25, 2010
|
||
|
David
S. Hickman*
|
|||
|
Director
|
February
25, 2010
|
||
|
James
C. Lawson*
|
|||
|
Director
|
February
25, 2010
|
||
|
Donald
J. Martin*
|
|||
|
Director
|
February
25, 2010
|
||
|
David
E. Maxwell*
|
|||
|
Director
|
February
25, 2010
|
||
|
Len
M. Middleton*
|
|
*By
|
/s/ Robert K. Chapman | |
|
Robert
K. Chapman, Attorney-in-Fact
|
|
Exhibit
|
Description
|
||
| 2.1 |
Agreement
of Consolidation. Previously filed with the Commission on January 15, 2010
in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 2.1.
Incorporated here by reference.
|
||
| 3.1 |
Restated
Articles of Incorporation of United Bancorp, Inc. Previously filed with
the Commission on February 27, 2009 in United Bancorp, Inc.'s Annual
Report on Form 10-K, Exhibit 3.1. Incorporated here by
reference.
|
||
| 3.2 |
Amended
and Restated Bylaws of United Bancorp, Inc. Previously filed with the
Commission on December 9, 2009 in United Bancorp, Inc.'s Current Report on
Form 8-K, Exhibit 3.1. Incorporated here by reference.
|
||
| 3.3 |
Certificate
of Designations for Fixed Rate Cumulative Perpetual Preferred Stock,
Series A. Previously filed with the Commission on January 16, 2009 in
United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 3.1.
Incorporated here by reference.
|
||
| 4.1 |
Restated
Articles of Incorporation of United Bancorp, Inc. Exhibit 3.1 is
incorporated here by reference.
|
||
| 4.2 |
Amended
and Restated Bylaws of United Bancorp, Inc. Exhibit 3.2 is incorporated
here by reference.
|
||
| 4.3 |
Form
of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series
A. Previously filed with the Commission on January 16, 2009 in United
Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 4.1. Incorporated here
by reference.
|
||
| 4.4 |
Warrant,
dated January 16, 2009, issued to the United States Department of the
Treasury. Previously filed with the Commission on January 16, 2009 in
United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 4.2.
Incorporated here by reference.
|
||
| 4.5 |
Certificate
of Designations for Fixed Rate Cumulative Perpetual Preferred Stock,
Series A. Exhibit 3.3 is incorporated here by reference.
|
||
| 10.1 | * |
United
Bancorp, Inc. Director Retainer Stock Plan. Previously filed with the
Commission on February 27, 2009 in United Bancorp, Inc.'s Annual Report on
Form 10-K, Exhibit 10.1. Incorporated here by reference.
|
|
| 10.2 | * |
United
Bancorp, Inc. Senior Management Bonus Deferral Stock Plan. Previously
filed with the Commission on February 27, 2009 in United Bancorp, Inc.'s
Annual Report on Form 10-K, Exhibit 10.2, as amended by the First
Amendment to the Senior Management Bonus Deferral Stock Plan previously
filed with the Commission on September 21, 2009 in United Bancorp, Inc.'s
Current Report on Form 8-K, Exhibit 10.5. Incorporated here by
reference.
|
|
| 10.3 | * |
United
Bancorp, Inc. 1999 Stock Option Plan. Previously filed with the Commission
on February 27, 2009 in United Bancorp, Inc.'s Annual Report on Form 10-K,
Exhibit 10.3. Incorporated here by reference.
|
|
| 10.4 | * |
United
Bancorp, Inc. 2005 Stock Option Plan. Previously filed with the Commission
on September 21, 2009 in United Bancorp, Inc.'s Current Report on Form
8-K, Exhibit 10.3. Incorporated here by reference.
|
|
| 10.5 | * |
Chairman's
Agreement, effective February 1, 2010, between United Bancorp, Inc. and
David S. Hickman. Previously filed with the Commission on November 2, 2009
in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.1.
Incorporated here by reference.
|
|
| 10.6 | * |
Form
of Employment Contract, effective as of June 1, 2009. Previously filed
with the Commission on June 2, 2009 in United Bancorp, Inc.'s Current
Report on Form 8-K, Exhibit 10.1. Incorporated here by
reference.
|
|
| 10.7 |
Letter
Agreement, dated January 16, 2009, between United Bancorp, Inc. and the
United States Department of the Treasury. Previously filed with the
Commission on January 16, 2009 in United Bancorp, Inc.'s Current Report on
Form 8-K, Exhibit 10.1. Incorporated here by reference.
|
||
| 10.8 |
Form
of Waiver. Previously filed with the Commission on January 16, 2009 in
United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.2.
Incorporated here by reference.
|
||
| 10.9 | * |
Form
of Consent and Amendments to Benefit Plans. Previously filed with the
Commission on January 16, 2009 in United Bancorp, Inc.'s Current Report on
Form 8-K, Exhibit 10.3. Incorporated here by reference.
|
|
| 10.10 | * |
2009
Management Committee Incentive Compensation Plan. Previously filed with
the Commission on September 21, 2009 in United Bancorp, Inc.'s Current
Report on Form 8-K, Exhibit 10.1. Incorporated here by
reference.
|
|
| 10.11 | * |
2009
Stakeholder Incentive Compensation Plan. Previously filed with the
Commission on September 21, 2009 in United Bancorp, Inc.'s Current Report
on Form 8-K, Exhibit 10.2. Incorporated here by reference.
|
|
| 10.12 | * |
Form
of Supplemental Executive Retirement Benefits Plan for David S. Hickman.
Previously filed with the Commission on February 27, 2009 in United
Bancorp, Inc.'s Annual Report on Form 10-K, Exhibit 10.16. Incorporated
here by reference.
|
|
| 10.13 | * |
Form
of 2005 Stock Option Plan Award Agreement. Previously filed with the
Commission on September 21, 2009 in United Bancorp, Inc.'s Current Report
on Form 8-K, Exhibit 10.4. Incorporated here by reference.
|
|
| 21. |
Subsidiaries
of United Bancorp, Inc. Previously filed with the Commission on February
22, 2008 in United Bancorp., Inc.'s Annual Report on Form 10-K, Exhibit
21. Incorporated here by reference.
|
||
| 23. |
Consent
of Independent Registered Public Accounting Firm.
|
||
| 24. |
Powers
of Attorney.
|
||
| 31.1 |
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
||
| 31.2 |
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
||
| 32.1 |
Certification
pursuant to 18 U.S.C. Section 1350.
|
||
| 99.1 |
Certification
of the Principal Executive Officer Pursuant to Section 111 of the
Emergency Economic Stabilization Act of 2008.
|
||
| 99.2 |
Certification
of the Principal Financial Officer Pursuant to Section 111 of the
Emergency Economic Stabilization Act of 2008.
|
* These documents are management contracts or compensation plans or arrangements required to be filed as exhibits to this Form 10-K.
Page
32