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| UBMI.OB > SEC Filings for UBMI.OB > Form 10-Q on 25-Jul-2008 | All Recent SEC Filings |
25-Jul-2008
Quarterly Report
This discussion provides information about the consolidated financial condition and results of operations for United Bancorp, Inc. and its subsidiary banks, United Bank & Trust ("UBT") and United Bank & Trust - Washtenaw ("UBTW") for the three and six month periods ended June 30, 2008 and 2007.
The Company is a financial holding company registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act. The Company has corporate power to engage in such activities as permitted to business corporations under the Michigan Business Corporation Act, subject to the limitations of the Bank Holding Company Act and regulations of the Federal Reserve System. The Company's subsidiary banks offer a full range of services to individuals, corporations, fiduciaries and other institutions. Banking services include checking, NOW accounts, savings, time deposit accounts, money market deposit accounts, safe deposit facilities, electronic banking and bill payment, and money transfers. Lending operations provide real estate loans, secured and unsecured business and personal loans, consumer installment loans, check-credit loans, home equity loans, accounts receivable and inventory financing, equipment lease financing and construction financing.
UBT operates a trust department, and provides trust services to UBTW on a contract basis. The Wealth Management Group offers a variety of fiduciary services to individuals, corporations and governmental entities, including services as trustee for personal, pension, and employee benefit trusts. The department provides trust services, financial planning services, investment services, custody services, pension paying agent services and acts as the personal representative for estates. The Banks offer the sale of nondeposit investment products through licensed representatives in their banking offices, and sell credit and life insurance products. In addition, the Company and/or the Banks derive income from the sale of various insurance products to banking clients.
The Company owns a structured finance company that was established in the third quarter of 2007. United Structured Finance ("USFC") is a finance company that offers simple, effective financing solutions to small businesses, primarily by engaging in SBA 504 and 7(a) lending. The loans generated by USFC are typically
sold on the secondary market. Gains on the sale of those loans is included in income from loan sales and servicing. USFC revenue provides additional diversity to the Company's income stream, and provides additional financing alternatives to clients of the Banks as well as non-bank clients.
Unemployment for the State of Michigan at the end of May, 2008 was 8.5%, and as a result, the State retains its position with the highest unemployment level among the fifty states. The Lenawee County unemployment rate of 9.7% is above the State's average level, while the Washtenaw County unemployment rate of 6.0% increased from 5.0% at the end of February. This caused the Washtenaw County ranking to move from the lowest in the State to the fifth-lowest. The ongoing economic issues in Michigan have continued to have an impact on earnings of the Company. The Company's rate of growth continues to slow and loan quality has deteriorated, particularly in the areas of construction and residential real estate development. Management is actively addressing the quality issues in the loan portfolios while continuing efforts to gain market share in challenging local economic conditions.
United Bancorp, Inc. net income for the second quarter of 2008 declined by 25.2% from the level achieved in the same quarter of 2007. For the first six months of 2008, net income is 10.3% below that of the same period of 2007. Economic conditions continue to impact earnings of the Company, as net interest income continues to tighten and credit quality concerns have resulted in additional increases in the provision for loan losses.
Earnings per share of $.33 for the quarter was down from $.43 per share for the same period last year. Year to date basic and diluted earnings per share for 2008 is $.70, down from $.75 for the same period of 2007. Return on average assets declined to 0.86% for the quarter, down from 1.18% last year, and year to date ROA of 0.90% is below 2007 levels of 1.05%. Return on average shareholders' equity for the second quarter of this year was 9.29%, compared to 12.11% for the same period of 2007, and year to date ROE of 9.82% is below the 10.75% level of last year.
Total consolidated assets of the Company of $798.9 million at June 30, 2008 were up 2.2% from the same period last year, and increased by $1.0 million during the most recent quarter. At the end of June, gross portfolio loan balances reached $662.0 million, while deposits grew to $669.1 million.
EARNINGS SUMMARY AND KEY RATIOS
Consolidated net income for the second quarter of 2008 of $1.695 million was down from $2.267 million for the same quarter of last year, and year to date net income of $3.583 million is down from $3.993 million for the first six months of 2007. The Company's net interest income has remained relatively flat over the past five quarters, in spite of continued growth of the Company. The Company's provision for loan losses for the second quarter of this year was significantly higher than the levels for the first quarter of this year and the second quarter of last year. Noninterest income improved over prior periods, while noninterest expenses have increased compared to the same quarter of last year. The following table shows the trends of the major components of earnings for the five most recent quarters.
2008 2007
----------------- ---------------------------
in thousands of dollars, where appropriate 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr
------- ------- ------- ------- -------
Net interest income $7,387 $7,478 $ 7,411 $7,580 $7,478
Provision for loan losses 1,650 660 5,801 618 710
Noninterest income 3,766 3,537 3,567 3,538 3,338
Noninterest expense 7,248 7,802 6,613 7,267 6,990
Federal income tax provision 560 665 (686) 895 849
Net income (loss) 1,695 1,888 (750) 2,339 2,267
Earnings (loss) per share (a) $ 0.33 $ 0.37 $ (0.15) $ 0.45 $ 0.43
Return on average assets (b) 0.86% 0.94% -0.37% 1.18% 1.18%
Return on average shareholders' equity (b) 9.29% 10.35% -3.97% 12.32% 12.11%
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(a) Basic earnings per share, adjusted for stock dividends paid
(b) annualized
NET INTEREST INCOME
As a financial services holding company, United Bancorp, Inc. derives the greatest portion of its income from net interest income. During 2007, short-term rates were unchanged for the first eight months of the year. However, beginning in September of 2007, the Federal Open Market Committee began lowering short-term rates, and in the fourth quarter of 2007, the yield curve regained its normal shape. During the first half of 2008, the FOMC continued its lowering of short-term rates, with declines of 225 basis points within a four-month period. During that period, the Company has been able to lower its cost of deposits, but not to the degree that the shifting yield curve would indicate.
The Company's interest income decreased 10.8% in the second quarter of 2008 over the same quarter of 2007, while interest expense decreased 24.0% over the same timeframe. The net result was a decrease of 1.2% in net interest income. Year to date net interest income grew less than 1% from the first six months of 2007, with interest income declining 5.3% while interest expense declined 13.6%.
Tax-equivalent yields on earning assets declined to 6.47% for the first six months of 2008, down from 7.16% for the same period of 2007. During that same timeframe, the Company's average cost of funds declined by sixty-four basis points, and tax equivalent spread declined from 3.66% to 3.61%. Net interest margin experienced similar declines, moving from 4.23% to 4.10% for comparable six-month periods of 2008 and 2007.
The table below provides insight into the various components of net interest income, as well as the results of changes in balance sheet makeup that have resulted in the compression of spread and net interest margin. The table shows the year to date daily average consolidated balance sheets, interest earned (on a taxable equivalent basis) or paid, and the annualized effective yield or rate, for the periods ended June 30 2008 and 2007.
Six Months Ended June 30,
--------------------------------------------------------------
dollars in thousands 2008 2007
-------------------- ------------------------------ ------------------------------
Average Interest Yield/ Average Interest Yield/
ASSETS Balance (b) Rate (c) Balance (b) Rate (c)
------ -------- -------- -------- -------- -------- --------
Interest earning assets (a)
Federal funds sold $ 7,149 $ 121 3.42% 5,542 $ 142 5.12%
Taxable securities 49,295 1,154 4.71% 54,118 1,326 4.90%
Tax exempt securities (b) 48,890 1,427 5.87% 37,992 1,109 5.84%
Taxable loans 657,277 21,841 6.68% 615,024 22,936 7.46%
Tax exempt loans (b) 2,646 85 6.47% 3,132 104 6.63%
-------- ------- ------- -------
Total int. earning assets (b) 765,257 24,629 6.47% 715,808 25,617 7.16%
Less allowance for loan losses (12,296) (8,144)
Other assets 44,853 55,758
-------- -------
TOTAL ASSETS $797,815 $763,422
======== ========
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Six Months Ended June 30,
--------------------------------------------------------------
2008 2007
------------------------------ -----------------------------
dollars in thousands Average Interest Yield/ Average Interest Yield/
(CONTINUED) Balance (b) Rate (c) Balance (b) Rate (c)
-------------------- -------- -------- -------- ------- -------- --------
LIABILITIES AND SHAREHOLDERS'
EQUITY
NOW and savings deposits 307,781 2,200 1.44% 288,096 3,286 2.30%
CDs $100,000 and over 118,463 2,596 4.41% 114,061 2,759 4.84%
Other interest bearing deposits 157,486 3,092 3.95% 150,503 3,320 4.41%
-------- ------- -------- -------
Total int. bearing deposits 583,730 7,888 2.72% 552,660 9,365 3.39%
Short term borrowings 6,311 76 2.41% 3,237 87 5.37%
Other borrowings 46,246 1,079 4.69% 43,031 1,012 4.70%
-------- ------- -------- -------
Total int. bearing liabilities 636,287 9,042 2.86% 598,928 10,464 3.49%
------- -------
Noninterest bearing deposits 82,439 82,113
Other liabilities 6,265 7,452
Shareholders' equity 72,823 74,929
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $797,815 $763,422
======== ========
Net interest income (b) 15,587 15,153
------- -------
Net spread (b) 3.61% 3.66%
==== ====
Net yield on interest earning
assets (b) 4.10% 4.23%
==== ====
Tax equivalent adjustment on
interest income (722) (383)
------- -------
Net interest income per income
statement $14,865 $14,770
======= =======
Ratio of interest earning assets to
interest bearing liabilities 1.20 1.20
==== ====
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(a) Non-accrual loans and overdrafts are included in the average balances of loans.
(b) Fully tax-equivalent basis, net of nondeductible interest impact; 34% tax rate.
(c) Annualized
The following table shows the effect of volume and rate changes on net interest income for the six months ended June 30, 2008 and 2007 on a taxable equivalent basis, in thousands of dollars.
2008 Compared to 2007 2007 Compared to 2006
-------------------------- ------------------------
Increase (Decrease) Increase (Decrease)
Due To: (a) Due To: (a)
-------------------------- ------------------------
Volume Rate Net Volume Rate Net
------ ------- ------- ------ ----- ------
Interest earned on:
Federal funds sold $ 35 $ (55) $ (20) $ (64) $ 14 $ (50)
Taxable securities (119) (53) (172) (169) 387 218
Tax exempt securities 312 6 318 86 18 104
Taxable loans 1,463 (2,557) (1,094) 2,075 391 2,466
Tax exempt loans (16) (3) (19) 2 5 7
------ ------- ------- ------ ------ ------
Total interest income $1,675 $(2,662) $ (987) $1,930 $ 815 $2,745
====== ======= ======= ====== ====== ======
Interest paid on:
Now and savings deposits 216 (1,302) (1,086) (1) 534 533
CDs $100,000 and over 99 (262) (163) 626 307 933
Other interest bearing deposits 144 (373) (229) 215 519 734
Short term borrowings 54 (65) (11) 40 6 46
Other borrowings 70 (3) 67 69 36 105
------ ------- ------- ------ ------ ------
Total interest expense $ 583 $(2,005) $(1,422) $ 949 $1,402 $2,351
====== ======= ======= ====== ====== ======
Net change in net interest income $1,092 $ (657) $ 435 $ 981 $ (587) $ 394
====== ======= ======= ====== ====== ======
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(a) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
PROVISION FOR LOAN LOSS
Management continues to be concerned for economic conditions within the Nation, State of Michigan and the market areas of the Banks, as the Michigan economy endures its third year of recession. In the second quarter of 2008, the Company identified adverse developments with respect to certain loans in the loan portfolios of its subsidiary banks, and in response to that determination, the Company increased its provision for loan losses during the quarter, to address the risks within its loan portfolio. The action reflects the negative impact of the continued deterioration in the Southeast Michigan real estate markets and the economy in general.
Loans in the Banks' residential land development and construction portfolios are secured by unimproved and improved land, residential lots, and single-family homes and condominium units. Generally, current lot sales by the developers/ borrowers are taking place at a greatly reduced pace and at reduced prices. As home sales volumes have declined, income of residential developers, contractors and other real estate-dependent borrowers has also been reduced. This difficult operating environment, along with the additional loan carrying time has caused some borrowers to exhaust repayment sources. For the second quarter of 2008, the impact of these economic conditions have spread to other borrowers, less directly related to real estate development. The Banks have continued to closely watch the impact of economic circumstances on their loan clients. The Company's provision for loan loss for the second quarter of 2008 was $1.65 million, up from $710,000 for the second quarter of 2007. The Company's year to date provision of $2.31 million is 4.1% higher than its provision for the first half of 2007.
NONINTEREST INCOME
Noninterest income continues to contribute to the earnings of the Company. Total noninterest income improved 12.8% over the same quarter of 2007, and for the first six months of this year, is 11.6% higher than the first half of 2007. Income from loan sales and servicing and ATM, debit and credit card fee income provided considerable increases over the same quarter of last year. Most other categories of noninterest income experienced modest growth during the quarter and year to date compared to the same periods of 2007.
Service charges on deposit accounts were up 1.8% in the second quarter compared to the same quarter last year, and year to date service charges are up 1.7% over the first six months of 2007. This is consistent with the Company's growth in total deposits of 1.9% over the past year. No significant changes to service charge structure were implemented in the second quarter of 2008.
The Wealth Management Group of UBT continues to provide a steady contribution to the Company's income statement. Wealth Management income includes Trust fee income and income from the sale of nondeposit investment products within the banking offices. Wealth Management income was down 2.6% in the second quarter of 2008 compared to 2007, and was down 3.1% year to date. Substantially all of the decline is a result of a decrease in market values of assets under management, as financial markets continue to experience declines. Assets managed by the department at June 30, 2008 were $701.4 million, down from $727.6 million at the end of the same quarter of 2007 and down from $729.7 million at the end of 2007. Income from the sale of nondeposit investment products is derived from the sale of investments and insurance products to clients, including annuities, mutual funds and other investment products.
The Banks generally market their production of fixed rate long-term residential mortgages in the secondary market, and retain adjustable rate mortgages for their portfolios. The Company maintains a portfolio of sold residential real estate mortgages, which it continues to service. This servicing provides ongoing income for the life of the loans. No write-downs in mortgage servicing rights were required in 2008 or 2007 as a result of impairment or other reasons.
The Banks continue to experience strong volume in conventional residential real estate mortgage loans, particularly with regard to the volume of loans sold on the secondary market. Income from loan sales and servicing was up 105.6% in the second quarter of 2008 compared to the same period of 2007, and year to date, is up 84.3% over the first half of 2007. During the third quarter of 2007, the Company formed United Structured Finance ("USFC"), a finance company that offers simple, effective financing solutions to small businesses, primarily by engaging in SBA 504 and 7(a) lending. The loans generated by USFC are typically sold on the secondary market, and gains on the sale of those loans contributed to the increase income from loan sales and servicing for the current quarter. USFC revenue provides additional diversity to the Company's income stream, and provides additional financing alternatives to clients and non-clients of the Banks.
ATM, debit and credit card fee income continues to provide a steady source of noninterest income for the Company. The Banks operate twenty ATMs throughout their market areas, and Bank clients are active users of debit cards. The Banks continue to receive ongoing fee income from credit card referrals and operation of its credit card merchant business. Income from these areas was up 11.1% in the most recent quarter compared to the same quarter of 2007, and are up 11.6% year to date over 2007. At the same time, income from bank owned life insurance has increased slightly, and other income has declined. Other income generally includes other service charges and fees, as well as nonrecurring income.
NONINTEREST EXPENSE
Total noninterest expenses were up 3.7% in the second quarter of 2008 compared to the same quarter of last year, and are up 10.0% year to date. Salaries and benefits are the organization's largest single area of expense, and for the quarter, provided the largest dollars of increase. In addition to the increased cost of employee benefits, the Company continues to selectively expand its staff, in order to provide for continued growth and client service within its market areas. As a result of all of these changes, salaries and employee benefits increased 8.8% over the same quarter of 2007 and 15.4% over the first half of last year.
Occupancy and equipment expense increased modestly in the second quarter and year to date compared to 2007 levels, and reflects the Company's ongoing investment in technology and equipment. External data processing costs were up significantly over the first half of 2007, which included a large cost recovery from a vendor. Advertising and marketing expenses increased by 5.0% for the quarter and 4.4% year to date compared to the comparable periods last year. The increase reflects the cost of expanded marketing and advertising presence in the communities served by the Banks, as well as continued development of the Company's brand. Director fees and attorney, accounting and other professional fees were down from the comparable quarter and six month periods of 2007.
Other expenses were also down for the quarter, but were up year to date compared to 2007 levels. Those expenses include FDIC insurance costs, fraud losses, losses on closed accounts and write-offs on the sale of property held as other real estate. These losses increased broadly across all categories compared to 2007, and the increase reflects a general trend in the economy and the industry.
FEDERAL INCOME TAX
The Company's effective tax rate for the first six months of 2008 was 25.5%, compared to 26.3% for the same period of 2007. The decrease in the effective tax rate is the result of the benefits received from the Company's investment in tax exempt assets and resulting tax exempt income, as well as an increase in the proportional level of tax-exempt income to total income.
SECURITIES
The Company's investment securities portfolio decreased by $6.2 million from June 30, 2007 and $2.7 million from the end of last year. During recent quarters, the Company has elected not to replace some maturing investments to fund additional loan growth. The mix of the Company's investment portfolio has shifted during the past twelve months, as the percentage of investments held in treasury and agency securities has declined while the percentages of mortgage backed agencies, municipal obligations and corporate securities have increased. The table below reflects the fair value of various categories of investment securities of the Company, along with the percentage composition of the portfolio by type as of the end of the current quarter for 2008 and 2007, and December 31, 2007.
In thousands of dollars June 30, 2008 December 31, 2007 June 30, 2007
-------------------- -------------------- --------------------
Balance % of total Balance % of total Balance % of total
------- ---------- ------- ---------- ------- ----------
U.S. Treasury and agency
securities $22,240 26.7% $33,532 39.0% $36,158 40.5%
Mortgage backed agency
securities 15,853 19.1% 13,051 15.2% $11,217 12.6%
Obligations of states and
political subdivisions 39,460 47.4% 36,128 42.1% 38,743 43.3%
Corporate, asset backed, and
other securities 5,651 6.8% 3,187 3.7% 3,245 3.6%
------- ---------- ------- ---------- ------- ----------
Total Investment Securities $83,204 100.0% $85,898 100.0% $89,363 100.0%
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The Company is conservative in its investments, preferring to concentrate its risks within the loan portfolio. Investments in U.S. Treasury and agency securities are considered to possess low credit risk. Obligations of U.S. government agency mortgage-backed securities possess a somewhat higher interest rate risk due to certain prepayment risks. The corporate, asset backed and other securities portfolio also contains a moderate level of credit risk. The municipal portfolio contains a small amount of geographic risk, as approximately 48% of the municipal bond portfolio is issued by political subdivisions located within the Banks' market areas of Lenawee and Washtenaw Counties and Dundee, Michigan. There are currently no credit issues with any of the municipal bonds held in the Company's portfolio. The Company's portfolio contains no "high risk" mortgage securities or structured notes.
The Company's current and projected tax position continues to make carrying tax-exempt securities beneficial, and the Company does not anticipate being . . .
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