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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
------------------------------------------
Commission File Number: 0-16540
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UNITED BANCORP, INC.
--------------------
(Exact name of registrant as specified in its charter.)
OHIO 34-1405357
---- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
201 SOUTH 4TH STREET, MARTINS FERRY, OHIO 43935-0010
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(740) 633-0445
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate the number of shares outstanding of the issuer's classes of common
stock as of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE 3,080,287 SHARES AS OF JULY 20, 2002
------------------------------------------------------------------
UNITED BANCORP, INC.
TABLE OF CONTENTS
FORM 10-Q
PART I FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets.............................................................................3
Condensed Consolidated Statements of Income.......................................................................4
Condensed Consolidated Statements of Shareholders' Equity.........................................................5
Condensed Consolidated Statements of Cash Flows...................................................................6
Notes to the Condensed Consolidated Financial Statements.....................................................7 - 13
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................................14 - 22
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................................23 - 24
PART II OTHER INFORMATION
ITEM 1.
Legal Proceedings................................................................................................25
ITEM 2.
Changes in Securities and Use of Proceeds........................................................................25
ITEM 3.
Default Upon Senior Securities...................................................................................25
ITEM 4.
Submission of Matters to a Vote of Security Holders..............................................................25
ITEM 5.
Other Information................................................................................................25
ITEM 6.
Exhibits and Reports on Form 8-K ...........................................................................25 - 26
SIGNATURES.........................................................................................................27
See accompanying notes to the condensed consolidated financial statements
2
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
PART I
FINANCIAL INFORMATION
JUNE 30, DECEMBER 31,
2002 2001
------------- --------------
ASSETS
Cash and due from financial institutions $ 9,790,319 $ 9,427,756
Federal funds sold 8,479,000 13,962,000
------------- -------------
Total cash and cash equivalents 18,269,319 23,389,756
Securities available for sale 108,246,056 114,044,617
Securities held to maturity
(Estimated fair value of $12,590,653 at 06/30/02 and $10,617,845 at 12/31/01) 12,028,253 10,378,811
Loans receivable
Commercial loans 23,911,759 21,502,208
Commercial real estate loans 63,203,500 61,962,953
Real estate loans 52,501,237 54,153,041
Installment loans 43,784,014 45,721,401
------------- -------------
Total loans receivable 183,400,510 183,339,603
Allowance for loan losses (2,992,118) (2,879,065)
------------- -------------
Net loans receivable 180,408,392 180,460,538
Premises and equipment, net 8,836,257 9,083,891
Accrued interest receivable and other assets 9,371,260 3,959,582
------------- -------------
Total Assets $ 337,159,537 $ 341,317,195
============= =============
LIABILITIES
Demand deposits
Noninterest-bearing $ 28,841,243 $ 26,297,805
Interest-bearing 45,772,254 42,423,962
Savings deposits 50,691,132 49,396,199
Time deposits - under $100,000 120,848,475 126,820,233
Time deposits - $100,000 and over 42,343,430 38,437,724
------------- -------------
Total deposits 288,496,534 283,375,923
Securities sold under agreements to repurchase 7,437,204 7,811,230
Other borrowed funds 8,938,285 18,415,230
Accrued expenses and other liabilities 1,220,981 1,240,617
------------- -------------
Total Liabilities 306,093,004 310,843,000
SHAREHOLDERS' EQUITY
Preferred stock, without par value: 2,000,000 shares authorized and unissued
Common stock - $1 Par Value: 10,000,000 shares authorized;
3,249,227 issued 3,249,227 3,249,227
Additional paid in capital 23,639,670 23,619,610
Retained earnings 5,711,277 5,044,540
Treasury stock - 130,599 shares in 2002 and 85,791 shares in 2001 at cost (1,435,983) (864,775)
Shares held by deferred compensation plan - 38,341 shares at cost
in 2002 and 36,550 in 2001 (537,898) (517,838)
Accumulated other comprehensive income (loss), net of tax 440,240 (56,569)
------------- -------------
Total Shareholders' Equity 31,066,533 30,474,195
------------- -------------
Total Liabilities and Shareholders' Equity $ 337,159,537 $ 341,317,195
============= =============
See accompanying notes to the condensed consolidated financial statements
3
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
-------------- ------------- ------------- --------------
Interest and dividend income
Loans, including fees $ 3,673,224 $ 4,269,846 $ 7,399,166 $ 8,607,630
Taxable securities 1,525,889 1,714,387 3,072,327 3,236,093
Non-taxable securities 264,137 272,577 523,733 541,195
Other interest and dividend income 82,597 63,887 183,979 139,630
----------- ----------- ----------- -----------
Total interest and dividend income 5,545,847 6,320,697 11,179,205 12,524,548
Interest expense
Deposits
Demand 127,780 228,829 244,051 508,027
Savings 102,892 182,283 210,548 413,365
Time 1,942,357 2,354,490 4,021,856 4,685,319
Other borrowings 149,740 431,832 310,484 915,939
----------- ----------- ----------- -----------
Total interest expense 2,322,769 3,197,434 4,786,939 6,522,650
----------- ----------- ----------- -----------
Net interest income 3,223,078 3,123,263 6,392,266 6,001,898
Provision for loan losses 157,500 195,000 315,000 390,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 3,065,578 2,928,263 6,077,266 5,611,898
Noninterest income
Service charges on deposit accounts 244,162 231,263 462,980 443,394
Gains/losses on sales of securities 67,159 10,224 113,504 34,438
Other income 130,946 143,871 310,994 275,641
----------- ----------- ----------- -----------
Total noninterest income 442,267 385,358 887,478 753,473
Noninterest expense
Salaries and employee benefits 1,250,139 1,205,151 2,531,483 2,346,723
Occupancy and equipment 370,552 372,768 735,292 741,793
Other expenses 789,629 840,240 1,678,447 1,589,451
----------- ----------- ----------- -----------
Total noninterest expense 2,410,320 2,418,159 4,945,222 4,677,967
Income before income taxes 1,097,525 895,462 2,019,522 1,687,404
Income tax expense 293,324 158,786 535,163 345,395
----------- ----------- ----------- -----------
Net income $ 804,201 $ 736,676 $ 1,484,359 $ 1,342,009
=========== =========== =========== ===========
Earnings per common share - Basic $ 0.26 $ 0.24 $ 0.48 $ 0.43
Earnings per common share - Diluted $ 0.26 $ 0.24 $ 0.48 $ 0.43
Dividends per common share $ 0.13 $ 0.12 $ 0.26 $ 0.25
See accompanying notes to the condensed consolidated financial statements
4
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
COMMON TREASURY
STOCK ADDITIONAL STOCK AND
PAID IN DEFERRED
SHARES DOLLARS CAPITAL PLAN
------------ ------------ ------------ ------------
BALANCE AT JANUARY 1, 2001 3,192,020 $3,094,882 $21,699,632 $ (695,002)
Net income
Net change in unrealized gain/(loss) on
securities available for sale
Comprehensive income
Shares purchased for deferred compensation plan (6,376) 70,235 (70,235)
Purchases of treasury stock, at cost (49,567) (505,611)
Cash dividends - $0.25 per share
--------- ---------- ----------- -----------
BALANCE AT JUNE 30, 2001 3,136,077 $3,094,882 $21,769,867 $(1,270,848)
========= ========== =========== ===========
BALANCE AT JANUARY 1, 2002 3,126,886 $3,249,227 $23,619,610 $(1,382,613)
Net income
Net change in unrealized gain/(loss) on
securities available for sale
Comprehensive income (loss)
Shares purchased for deferred compensation plan (5,322) 69,900 (69,900)
Shares distributed from deferred compensation plan 3,531 (49,840) 49,840
Purchases of treasury stock, at cost (44,808) (571,208)
Cash dividends - $0.26 per share
--------- ---------- ----------- -----------
BALANCE AT JUNE 30, 2002 3,080,287 $3,249,227 $23,639,670 $(1,973,881)
========= ========== =========== ===========
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME TOTAL
------------ ------------ ------------
BALANCE AT JANUARY 1, 2001 $5,852,284 $(1,272,709) $28,679,087
Net income 1,342,009 1,342,009
Net change in unrealized gain/(loss) on
securities available for sale 1,102,313 1,102,313
-----------
Comprehensive income 2,444,322
Shares purchased for deferred compensation plan
Purchases of treasury stock, at cost (505,611)
Cash dividends - $0.25 per share (787,261) (787,261)
---------- ----------- -----------
BALANCE AT JUNE 30, 2001 $6,407,032 $ (170,396) $29,830,537
========== =========== ===========
BALANCE AT JANUARY 1, 2002 $5,044,540 $ (56,569) $30,474,195
Net income 1,484,359 1,484,359
Net change in unrealized gain/(loss) on
securities available for sale 496,809 496,809
-----------
Comprehensive income (loss) 1,981,168
Shares purchased for deferred compensation plan
Shares distributed from deferred compensation plan
Purchases of treasury stock, at cost (571,208)
Cash dividends - $0.26 per share (817,622) (817,622)
---------- ----------- -----------
BALANCE AT JUNE 30, 2002 $5,711,277 $ 440,240 $31,066,533
========== =========== ===========
See accompanying notes to the condensed consolidated financial statements
5
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2002 2001
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,484,359 $ 1,342,009
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 420,166 462,628
Provision for loan losses 315,000 390,000
Deferred taxes (74,377) 27,475
Federal Home Loan Bank stock dividend (89,600) (123,200)
Net realized gains on sales or calls of securities (113,504) (34,438)
(Accretion)/amortization of securities, net (19,442) (15,656)
Net realized (gains)/losses on sales of loans (47,692) (28,255)
Net realized (gains)/losses on sale of real estate (2,665) (23,508)
Amortization of mortgage servicing rights 36,510 27,599
Net changes in accrued interest receivable and other assets (338,986) (575,032)
Net changes in accrued expenses and other liabilities (119,331) (578,050)
------------ ------------
Net cash from operating activities 1,450,438 871,572
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Sales 19,288,989 5,480,956
Maturities, prepayments and calls 19,987,628 12,861,740
Purchases (32,515,266) (47,119,272)
Securities held to maturity
Maturities, prepayments and calls 2,500,000
Purchases (1,637,004) (277,305)
Bank owned life insurance (5,180,000)
Net change in loans (262,854) 8,219,253
Purchases of premises and equipment (157,044) (368,058)
Proceeds from sale of real estate owned 23,865 154,261
------------ ------------
Net cash from investing activities (451,686) (18,548,425)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 5,120,611 3,406,472
Net change in short-term borrowings (10,514,292) 16,793,941
Proceeds from long term debt 960,383
Principal payments on long-term debt (297,062) (1,229,499)
Treasury stock purchases (571,208) (505,611)
Cash dividends paid (817,622) (787,261)
------------ ------------
Net cash from financing activities (6,119,190) 17,678,042
------------ ------------
Net change in cash and cash equivalents (5,120,438) 1,189
Cash and cash equivalents at beginning of year 23,389,756 10,694,118
------------ ------------
Cash and cash equivalents at end of period $ 18,269,318 $ 10,695,307
============ ============
Interest paid $ 4,919,251 $ 6,449,642
Income taxes paid 551,346 419,011
See accompanying notes to the condensed consolidated financial statements 6
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit
and reflect all adjustments which, in the opinion of management, are
necessary to present fairly the financial position of United Bancorp,
Inc. ("Company") at June 30, 2002, and its results of operations and
cash flows for the periods presented. All such adjustments are normal
and recurring in nature. The accompanying condensed consolidated
financial statements have been prepared in accordance with the
instructions of Form 10-Q and, therefore, do not purport to contain all
the necessary financial disclosures required by accounting principles
generally accepted in the United States of America that might otherwise
be necessary in the circumstances and should be read in conjunction
with the consolidated financial statements, and related notes thereto,
of the Company for the year ended December 31, 2001 included in its
annual report. Reference is made to the accounting policies of the
Company described in the notes to the consolidated financial statements
contained in its 2001 Annual Report to Shareholders. The Company has
consistently followed these policies in preparing this Form 10-Q.
PRINCIPLES OF CONDENSED CONSOLIDATION:
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, ("Banks") The Citizens
Savings Bank, Martins Ferry, Ohio ("CITIZENS") and The Community Bank,
Lancaster, Ohio ("COMMUNITY"). All significant intercompany
transactions and balances have been eliminated in consolidation.
NATURE OF OPERATIONS:
The Company's revenues, operating income and assets are
primarily from the banking industry. Accordingly, all of the Company's
banking operations are considered by Management to be aggregated in one
reportable operating segment. Customers are mainly located in Athens,
Belmont, Carroll, Fairfield, Harrison, Hocking, Jefferson, and
Tuscarawas Counties and the surrounding localities in northeastern,
eastern, southeastern, and central Ohio and include a wide range of
individuals, businesses and other organizations. CITIZENS conducts its
business through its main office in Martins Ferry, Ohio and nine
branches in Bridgeport, Colerain, Dellroy, Dover, Jewett, New
Philadelphia, St. Clairsville, Sherrodsville, and Strasburg, Ohio.
COMMUNITY conducts its business through its main office in Lancaster
and four branches in Amesville, Glouster, Lancaster, and Nelsonville,
Ohio. The Company's primary deposit products are checking, savings, and
term certificates of deposit, and its primary lending products are
residential mortgage, commercial, and installment loans. Substantially
all loans are secured by specific items of collateral including
business assets, consumer assets, and real estate. Commercial loans are
expected to be repaid from cash flows from operations of businesses.
Real estate loans are secured by both residential and commercial real
estate. Other financial instruments which potentially represent
concentrations of credit risk include deposit accounts in other
financial institutions.
USE OF ESTIMATES:
To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America,
management makes estimates and assumptions based
7
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on available information. These estimates and assumptions affect the
amounts reported in the financial statements and the disclosures
provided and future results could differ. The allowance for loan
losses, fair values of financial instruments and status of
contingencies are particularly subject to change.
INCOME TAXES:
Income tax expense is based on the effective tax rate expected
to be applicable for the entire year. Income tax expense is the total
of the current year income tax due or refundable and the change in
deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax amounts of temporary
differences between the carrying amounts and tax bases of assets and
liabilities computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be
realized.
EARNINGS AND DIVIDENDS PER COMMON SHARE:
Basic earnings per common share ("EPS") is net income divided
by the weighted-average number of shares outstanding during the period.
Diluted EPS includes the dilutive effect of additional potential common
shares issuable under stock options. Earnings and dividends per share
are restated for all stock dividends through the date of issuance of
the financial statements.
COMPREHENSIVE INCOME:
Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized
gains and losses on securities available for sale which is also
recognized as a separate component of equity. Other comprehensive
income components net of related taxes are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
--------------- ---------------- ---------------- ----------------
Other comprehensive income:
Unrealized holding gains(losses) on available
for sale securities arising during period $ 3,424,422 $ (430,009) $ 866,245 $1,704,774
Reclassification adjustment for gains
later recognized in income (67,159) (10,224) (113,504) (34,438)
--------------- ---------------- ---------------- ----------------
3,357,263 (440,233) 752,741 1,670,336
Tax effect (1,142,406) 149,598 (255,932) (568,023)
--------------- ---------------- ---------------- ----------------
Other comprehensive income (loss) $ 2,214,857 $ (290,635) $ 496,809 $1,102,313
=============== ================ ================ ================
8
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES:
Securities were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- ------------- ------------- -------------
AVAILABLE FOR SALE - JUNE 30, 2002
US Agency obligations $ 93,521,464 $ 538,588 $ (210,155) $ 93,849,897
State and Municipal obligations 10,214,827 312,242 -- 10,527,069
Mortgage-backed securities 127,316 5,555 -- 132,871
Other securities 3,715,419 20,800 -- 3,736,219
------------- ------------- ------------- -------------
$ 107,579,026 $ 877,185 $ (210,155) $ 108,246,056
============= ============= ============= =============
AVAILABLE FOR SALE - DECEMBER 31, 2001
US Agency obligations $ 99,893,474 $ 508,193 $ (911,894) $ 99,489,773
State and Municipal obligations 10,463,516 293,400 (8,563) 10,748,353
Mortgage-backed obligations 148,938 3,794 -- 152,732
Other securities 3,624,400 29,359 -- 3,653,759
------------- ------------- ------------- -------------
$ 114,130,328 $ 834,746 $ (920,457) $ 114,044,617
============= ============= ============= =============
HELD TO MATURITY - JUNE 30, 2002
State and Municipal obligations $ 12,028,253 $ 562,480 $ (80) $ 12,590,653
============= ============= ============= =============
HELD TO MATURITY - DECEMBER 31, 2001
State and Municipal obligations $ 10,378,811 $ 293,163 $ (54,129) $ 10,617,845
============= ============= ============= =============
Sales of securities available for sale were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
------------------- ------------------ ----------------- -----------------
Proceeds $ 13,263,208 $ 1,707,440 $ 19,288,989 $ 5,480,956
Gross gains 67,159 10,224 113,504 34,438
Gross losses
9
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES: (CONTINUED)
Contractual maturities of securities at June 30, 2002 were as
follows:
AVAILABLE FOR SALE AMORTIZED ESTIMATED
COST FAIR VALUE
-------------- -------------
US Agency obligations
Under 1 Year
1 - 5 Years 7,125,000 7,173,234
5 - 10 Years 22,220,116 22,342,900
Over 10 Years 64,176,348 64,333,763
------------- -------------
Total 93,521,464 93,849,897
------------- -------------
State and municipal obligations
Under 1 Year 5,046,597 5,117,867
1 - 5 Years 2,965,869 3,099,787
5 - 10 Years 1,902,361 2,005,138
Over 10 Years 300,000 304,277
------------- -------------
Total 10,214,827 10,527,069
------------- -------------
Mortgage Backed securities
5 - 10 Years 127,316 132,871
------------- -------------
Total 127,316 132,871
------------- -------------
Other investments
Equity securities 3,715,419 3,736,219
------------- -------------
Total securities available for sale $ 107,579,026 $ 108,246,056
============= =============
HELD TO MATURITY
State and municipal obligations
1 - 5 Years 4,076,464 4,321,673
5 - 10 Years 3,309,005 3,513,589
Over 10 Years 4,642,784 4,755,391
------------- -------------
Total securities held to maturity $12,028,253 $ 12,590,653
============= =============
Securities with a carrying value of approximately $58,803,000 at June 30, 2002
and $58,818,000 at December 31, 2001 were pledged to secure public deposits,
repurchase agreements and other liabilities as required or permitted by law.
10
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Beginning Balance $ 2,948,205 $ 2,857,058 $ 2,879,065 $ 2,790,133
Provision charged to operating expense 157,500 195,000 315,000 390,000
Loans charged-off (172,585) (274,550) (316,676) (528,552)
Recoveries 58,998 61,762 114,729 187,689
----------- ----------- ----------- -----------
Ending Balance $ 2,992,118 $ 2,839,270 $ 2,992,118 $ 2,839,270
=========== =========== =========== ===========
Non-performing loans were as follows:
JUNE 30, DECEMBER 31,
2002 2001
---------------- -----------------
Loans past due over 90 days still on accrual $ 570,000 $ 157,000
Nonaccrual Loans 742,000 661,000
4. COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
There are various contingent liabilities not reflected within
the financial statements, including claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these
matters is not expected to have a material effect on the Company's
financial condition or results of operations.
Some financial instruments, such as loan commitments, credit
lines, letters of credit, and overdraft protection, are issued to meet
customer financing needs. These are agreements to provide credit or to
support the credit of others, as long as conditions established in the
contracts are met, and usually have expiration dates. Commitments may
expire without being used. Off-balance sheet risk to credit loss exists
up to the face amount of these instruments, although material losses
are not anticipated. The same credit policies are used to make such
commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
11
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (CONTINUED)
A summary of the notional or contractual amounts of financial
instruments with off-balance sheet risk at June 30, 2002 and December
31, 2001 follows:
JUNE 30, DECEMBER 31,
2002 2001
-------------- --------------
Commitments to extend credit $ 21,635,810 $18,779,162
Credit card and ready reserve lines 1,382,638 1,275,919
Standby letters of credit 615,200 471,000
At June 30, 2002, and included above, commitments to make
fixed-rate loans totaled $2,535,995 with the interest rates on those
fixed-rate commitments ranging from 4.75% to 9.75%. At December 31,
2001, commitments to make fixed rate loans totaled $2,416,731 with
interest rates on those fixed-rate commitments ranging from 6.50% to
10.00%.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets", which addresses the accounting
for such assets arising from prior and future business combinations.
Upon adoption of this Statement, goodwill arising from business
combinations will no longer be amortized, but rather be assessed
regularly for impairment, with any such impairment recognized as a
reduction to earnings in the period identified. The Company adopted
this Statement on January 1, 2002. The adoption of this Statement did
not impact the Company's financial statements, as it has no goodwill.
The FASB issued Statement of Financial Accounting Standards
(SFAS) No. 143, which addresses the accounting for asset retirement
obligations. The Company does not believe this standard will have a
material affect on its financial position or results of operations.
On January 1, 2002, the Company adopted SFAS No. 144, which
addresses impairment and disposal of long-lived assets. The effect of
this standard on the financial position and results of operations of
the Company is not material.
12
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. EARNINGS PER SHARE
The factors used in the earnings per share computation were as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, JUNE 30,
2002 2001 2002 2001
----------- ---------- ----------- ----------
BASIC
Net income $ 804,201 $ 736,676 $ 1,484,359 $1,342,009
=========== =========== =========== ==========
Weighted average common shares outstanding 3,102,999 3,141,273 3,110,476 3,155,938
=========== =========== =========== ==========
Basic earnings per common share $ 0.26 $ 0.24 $ 0.48 $ 0.43
=========== =========== =========== ==========
DILUTED
Net income $ 804,201 $ 736,676 $ 1,484,359 $1,342,009
=========== =========== =========== ==========
Weighted average common shares outstanding for
basic earnings per common share 3,102,999 3,141,273 3,110,476 3,155,938
Add: Dilutive effects of assumed exercise of stock
options 9,687 2,604 9,229 1,579
----------- ----------- ----------- ----------
Average shares and dilutive potential common shares 3,112,686 3,143,877 3,119,705 3,157,517
=========== =========== =========== ==========
Diluted earnings per common share $ 0.26 $ 0.24 $ 0.48 $ 0.43
=========== =========== =========== ==========
Number of stock options not considered in computing
diluted earnings per share due to antidilutive nature 20,056 21,780 20,056 21,780
13
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discusses the financial condition of the Company
as of June 30, 2002, as compared to December 31, 2001 and the results
of operations for the three and six months ended June 30, 2002 compared
to the same periods in 2001. This discussion should be read in
conjunction with the interim condensed consolidated financial
statements and related footnotes included herein.
FORWARD-LOOKING STATEMENTS
When used in this document, the words or phrases "will likely
result," "are expected to," "will continue," " is anticipated,"
"estimated," "projected" or similar expressions are intended to
identify "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject
to certain risks and uncertainties including changes in economic
conditions in the Banks' market areas, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans
in the Banks' market areas and competition, that could cause actual
results to differ materially from historical earnings and those
presently anticipated or projected. Factors listed above could affect
the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from any
statements expressed with respect to future periods.
The Company does not undertake, and specifically disclaims any
obligation, to publicly revise any forward-looking statements to
reflect events or circumstances after the date such statements were
made or to reflect the occurrence of anticipated or unanticipated
events.
14
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
The following brief history of the Company and its subsidiary growth
and development highlights the continuing commitment to maintaining a presence
as a local "Hometown" community bank serving several diverse market areas.
- 1902 Original banking charter granted for The German
Savings Bank (later changed to The Citizens
Savings Bank).
- 1974 Construction of a full-service branch banking
facility 6 miles west in Colerain, Ohio.
- 1978 Construction of a full-service branch banking
facility 2 miles south in Bridgeport, Ohio.
- 1980 Construction of a limited-service auto-teller
banking location in Martins Ferry, Ohio.
- 1983 Creation of United Bancorp, Inc. as a
single-bank holding company through acquisition
of 100% of the voting stock of The Citizens
Savings Bank of Martins Ferry, Ohio
("CITIZENS"). Also, began operation of
Automated Teller Machine ("ATM") in Aetnaville,
Ohio.
- 1984 CITIZENS opened a newly constructed 21,500
square foot main-office facility in Martins
Ferry, Ohio, adjacent to the auto-teller
facility built in 1980.
- 1986 United Bancorp, Inc. became a multi-bank
holding company through the acquisition of 100%
of the voting stock of The Citizens-State Bank
of Strasburg, Strasburg, Ohio, merged into
CITIZENS in 1999.
- 1990 CITIZENS converted from third-party data
processing to in-house data processing.
CITIZENS constructed a full-service branch bank
6 miles south of Strasburg in Dover, Ohio.
- 1992 CITIZENS acquired two branch bank locations in
New Philadelphia and Sherrodsville, Ohio.
- 1993 CITIZENS relocated Data Processing, Accounting
and Bookkeeping to a renovated Operations
Center across from the main office in Martins
Ferry, Ohio.
- 1994 CITIZENS purchased a branch bank in Dellroy,
Ohio.
- 1996 CITIZENS converted to check imaging and optical
character recognition for data processing.
- 1997 CITIZENS opened a full-service Retail Banking
Center inside Riesbeck's Food Markets, Inc.'s
St. Clairsville, Ohio store. Additionally,
CITIZENS introduced a Secondary Market Real
Estate Mortgage Program available for all
locations and introduced a MasterCard (R) Check
Card to the local market area.
- 1998 CITIZENS increased ATM network by four cash
dispenser machines in various Riesbecks' Food
Markets.
- 1998 Effective July 7, 1998, the acquisition of
Southern Ohio Community Bancorporation, Inc.
was completed and The Community Bank, Glouster,
Ohio ("COMMUNITY") was added as a separate
banking charter to the Company.
- 1999 January 28, 1999 CITIZENS acquired a full
service banking facility in Jewett, Ohio
- 1999 March 1999 COMMUNITY opened a Loan Production
Office in Lancaster, Ohio.
- 1999 CITIZENS established a full service brokerage
division to be known as Brokerage United with
securities provided through Raymond James
Financial Services, Inc., member NASD/SIPC.
- 1999 COMMUNITY moved their main office to Lancaster,
Ohio.
- 2000 COMMUNITY opened a new branch in Lancaster and
their auto teller for the main office.
- 2000 CITIZENS and COMMUNITY introduced Electronic
Banking.
- 2001 CITIZENS and COMMUNITY introduced Electronic
Cash Management Services.
- 2002 CITIZENS and COMMUNITY upgraded check image
system.
15
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS - LOANS
At June 30, 2002, gross loans were $183,401,000 compared to
$183,340,000 at year-end 2001, a modest increase of $61,000. The relatively
static balance in total outstanding loans was the result of a decline in the
real estate and installment portfolios offset from growth in the commercial and
commercial real estate portfolios. Management attributes the overall static loan
balance to the general economic slow-down in the lending markets served.
Installment loans decreased to 23.9% of total loans at June 30, 2002
compared to 24.9% at year-end 2001. The indirect lending type of financing
carries somewhat more risk than real estate lending, however, it also provides
for higher yields. The targeted lending areas encompass four metropolitan areas,
minimizing the risk to changes in economic conditions in the communities housing
the Company's 17 branch locations. CITIZENS experienced a 1.7%, or $463,000
decline in installment loans while COMMUNITY had a decrease of 7.8%, or
$1,474,000 in installment loans. In general as the overall economy has slowed in
the markets we service, so has the demand for consumer based loans. Also with
interest rates depressed, Management has not been aggressive to lower rates on
these fixed rate loan products. Additionally, competition for installment loans
continues to be strong from captive finance companies offering low to zero
percent financing for extended periods. Recently, Management has employed the
strategy of focusing on adjustable rate products to position the Company for an
eventual rise in interest rates.
Commercial and commercial real estate loans comprised 47.5% of total
loans at June 30, 2002 compared to 45.5% at December 31, 2001. Commercial and
commercial real estate loans have increased $3,650,000 or 4.4% since December
31, 2001. The Company has originated and purchased participations in loans from
other banks for out-of-area commercial and commercial real estate loans to
benefit from consistent economic growth outside the Company's primary market
area. The majority of these loans are secured by real estate holdings comprised
of hotels, motels and churches located in various geographic locations,
including Columbus and the Akron-Canton, Ohio metropolitan areas.
Real estate loans were 28.6% of total loans at June 30, 2002 compared
to 29.5% at year-end 2001. Real estate loans decreased 3.1% since December 31,
2001. However, COMMUNITY actually experienced an increase in real estate loans
of 1.5% or $305,000. As previously mentioned, Management's position is to focus
on adjustable rate products as the overall rate environment reaches historical
low levels with the intent these products will adjust as interest rates rise.
The allowance for loan losses represents the amount which management
and the Board of Directors estimates is adequate to provide for probable losses
inherent in the loan portfolio. The allowance balance and the provision charged
to expense are reviewed by management and the Board of Directors monthly using a
risk evaluation model that considers borrowers' past due experience, economic
conditions and various other circumstances that are subject to change over time.
Management believes the current balance of the allowance for loan losses is
adequate to absorb probable incurred credit losses associated with the loan
portfolio. Net charge-offs for the six months ended June 30, 2002 were
approximately $201,947, or 7.0%, of the beginning balance in the allowance for
loan losses. Net charge-offs for the prior year six-month period were $343,862,
or 12.3% of the beginning balance in the
16
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
allowance for loan losses. Loans past due 90 days or more and still accruing
interest and nonaccrual loans have increased moderately since December 31, 2001.
Despite reducing the provision for loan losses from the prior year, the
allowance as a percentage of loans has increased slightly due to the modest loan
growth and decline in net charge-offs.
EARNING ASSETS - SECURITIES AND FEDERAL FUNDS SOLD
The securities portfolio is comprised of U.S. Government agency-backed
securities, tax-exempt obligations of states and political subdivisions and
certain other investments. The Company does not hold any collateralized
mortgage-backed securities, other than those issued by U.S. government agencies,
or derivative securities. The quality rating of obligations of state and
political subdivisions within Ohio is no less than Aaa, Aa or A, with all
out-of-state bonds rated at AAA. Board policy permits the purchase of certain
non-rated bonds of local schools, townships and municipalities, based on their
estimated levels of credit risk. Securities available for sale at June 30, 2002
decreased approximately $5,799,000, or 5.1% from year-end 2001 totals.
Securities held to maturity at June 30, 2002 increased approximately $1,649,000,
or 15.9% compared to year-end 2001 totals.
In June 2002, the Company instituted a Bank Owned Life Insurance
Program (BOLI) and invested approximately $5.2 million in the program. This
program was funded through excess liquidity and does contain some tax advantages
for the company along with a moderate level of return. The monies have been paid
and split between four insurance companies to provide for diversification as of
June 30, 2002. The insurance will provide a death benefit to directors and to
employees of the Company both while employed and into retirement. The program is
currently being underwritten and if approved by the insurance underwriters, will
be further detailed in the third quarter 2002.
SOURCES OF FUNDS -- DEPOSITS
The Company's primary source of funds is core deposits from retail and
business customers. These core deposits include all categories of
interest-bearing and noninterest-bearing deposits, excluding certificates of
deposit greater than $100,000. For the period ended June 30, 2002, total core
deposits increased approximately $1,215,000 due to an increase in
noninterest-bearing demand and savings deposits partially offset by a decline in
certificates of deposit.
The Company has a strong deposit base from public agencies, including
local school districts, city and township municipalities, public works
facilities and others that may tend to be more seasonal in nature resulting from
the receipt and disbursement of state and federal grants. These entities have
maintained fairly static balances with the Company due to various funding and
disbursement timeframes.
Certificates of deposit greater than $100,000 are not considered part
of core deposits and as such are used to balance rate sensitivity as a tool of
funds management. At June 30, 2002, certificates of deposit greater than
$100,000 increased approximately $3.9 million, or 10.2% from year-end 2001
totals. The majority of this increase is due to some large deposits from
municipalities.
SOURCES OF FUNDS - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND
OTHER BORROWINGS
Other interest-bearing liabilities include securities sold under
agreements to repurchase, sweep accounts, federal funds purchased, Treasury, Tax
& Loan notes payable and Federal Home Loan Bank
17
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
("FHLB") advances. In the first six months of 2002, the Company continued to
utilize the FHLB programs to manage interest rate risk and liquidity positions.
The majority of the Company's repurchase agreements are with local school
districts and city and county governments. Total other borrowings decreased
approximately $9.5 million, or 51.5% from year-end 2001 totals. This was due to
the large amount of called securities experienced and the increases in deposits.
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2002 AND 2001
NET INCOME
Basic and diluted earnings per share for the six months ended June 30,
2002 was $0.48, compared with $0.43 for the six months ended March 31, 2001. Net
income increased 10.6% for the six months ended June 30, 2002, compared to the
same period in 2001.
NET INTEREST INCOME
Net interest income, by definition, is the difference between interest
income generated on interest-earning assets and the interest expense incurred on
interest-bearing liabilities. Various factors contribute to changes in net
interest income, including volumes, interest rates and the composition or mix of
interest-earning assets in relation to interest-bearing liabilities. Net
interest income increased 6.5% for the six months ended June 30, 2002 compared
to the same period in 2001. The increase was a result of the Company having a
slightly larger base of average earning assets coupled with a higher net
interest margin mainly due to lower depository costs.
Total interest income for the six months ended June 30, 2002 was
$11,179,000 compared to $12,525,000 for the same period in 2001. Total interest
income decreased $1,346,000, or 10.7%. The decrease can be attributed to the
overall lower interest rate environment that currently exists.
Total interest expense for the six months ended June 30, 2002 when
compared to the same six-month period ended June 30, 2001, decreased 26.6%, or
$1,736,000. The Company has experienced a decrease in interest expense due the
effect of a lower interest rate environment on deposit products over the past
year. Management has been proactive in lowering deposit product interest rates
since the overall interest rate environment began to decrease in January of
2001.
PROVISION FOR LOAN LOSSES
The total provision for loan losses was $315,000 for the six months
ended June 30, 2002 compared to $390,000 for the same period in 2001. Management
decreased the provision in 2002 due to a decrease in net charge-offs for the
fiscal year. Additionally, the loan portfolio balance remained almost unchanged
since December 31, 2001.
NONINTEREST INCOME
Total noninterest income is made up of bank related fees and service
charges, as well as other income producing services provided, sale of secondary
market loans, ATM income, early redemption penalties for certificates of
deposit, safe deposit rental income, internet bank service fees and other
miscellaneous items. Noninterest income for the six months ended June 30, 2002
was $887,000 compared
18
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
to $753,000 for the same six months period ended June 30, 2001. For the six
months ended June 30, 2002 compared to the same period in 2001, noninterest
income increased approximately 17.8%. The Company's secondary market real estate
loan program increased $36,000 over the same period in 2001. In addition, the
Company's security portfolio generated approximately $113,500 in security gains
for the six months ended June 30, 2002 compared to $34,400 for the same period
in 2001. Management made the decision to sell these securities based on the
likelihood of the securities being called. These securities had coupons that
were higher than the current market rates and so made it advantageous to sell
the securities before they were called away.
NONINTEREST EXPENSE
Noninterest expense for the six months ended June 30, 2002 increased
$267,000, or 5.7% over the six months ended June 30, 2001. Salary and benefit
expense, which made up the majority of the increase, increased approximately
$185,000, or 7.9% for the six months ended June 30, 2002 mainly due to rising
health care costs.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2002
NET INCOME
Basic and diluted earnings per share for the three months ended June
30, 2002 was $0.26, compared with $0.24 for the three months ended March 31,
2001 an increase of 8.3%. Net income increased 9.2% for the six months ended
June 30, 2002, compared to the same period in 2001.
NET INTEREST INCOME
Net interest income, by definition, is the difference between interest
income generated on interest-earning assets and the interest expense incurred on
interest-bearing liabilities. Various factors contribute to changes in net
interest income, including volumes, interest rates and the composition or mix of
interest-earning assets in relation to interest-bearing liabilities. Net
interest income increased 3.2% for the three months ended June 30, 2002 compared
to the same period in 2001. The increase was a result of the Company having a
slightly larger base of average earning assets coupled with a higher net
interest margin mainly due to lower depository costs.
Total interest income for the three months ended June 30, 2002 was
$5,546,000 compared to $6,321,000 for the same period in 2001. Total interest
income decreased $775,000, or 12.3%. The decrease can be attributed to the
overall lower interest rate environment that currently exists. Also, as a result
of the prolonged decrease in interest rates, the Company's investment portfolio
will be subject to increased volatility due to the nature of the call features
in the agency portfolio. Over the past quarter the Company has experienced a
higher than expected level of called securities in the investment portfolio.
Total interest expense for the three months ended June 30, 2002 when
compared to the same three-month period ended June 30, 2001, decreased 27.3%, or
$874,000. The Company has experienced a decrease in interest expense due to the
effect of a lower interest rate environment on deposit products over the past
year. Management has been proactive in lowering deposit product interest rates
since the overall interest rate environment began to decrease in January of
2001. Also the mix of deposits has shifted slightly from the traditionally
higher costing certificates of deposit to lower cost deposits such as demand and
savings accounts from 2001 to 2002.
19
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROVISION FOR LOAN LOSSES
The total provision for loan losses was $157,500 for the three months
ended June 30, 2002 compared to $195,000 for the same period in 2001. Management
decreased the provision in 2002 due to a decrease in net charge-offs for the
fiscal year. Additionally, the loan portfolio balance remained almost unchanged
since December 31, 2001.
NONINTEREST INCOME
Total noninterest income is made up of bank related fees and service
charges, as well as other income producing services provided, sale of secondary
market loans, ATM income, early redemption penalties for certificates of
deposits, safe deposit rental income, internet bank service fees and other
miscellaneous items. Noninterest income for the three months ended June 30, 2002
was $442,000 compared to $385,000 for the same three month period ended June 30,
2001. For the three months ended June 30, 2002 compared to the same period in
2001, noninterest income increased approximately 14.8%. The Company's secondary
market real estate loan program increased $47,000 over the same period in 2001.
In addition, the Company's security portfolio generated approximately $67,000 in
security gains for the three months ended June 30, 2002 compared to $24,000 for
the same period in 2001.
NONINTEREST EXPENSE
Noninterest expense for the three months ended June 30, 2002 decreased
a modest $8,000 over the three months ended June 30, 2001. Overall, the Company
experienced lower costs for the second quarter of 2002 compared to 2001.
Although health care cost continues to increase for the Company, cost
containment in other expense categories offset the increase in health care
costs.
CAPITAL RESOURCES
Internal capital growth, through the retention of earnings, is the
primary means of maintaining capital adequacy for the Company. Shareholders'
equity at June 30, 2002 was $31,067,000 compared to $30,474,000 at December 31,
2001, a 1.9% increase. Total shareholders' equity in relation to total assets
was 9.21% at June 30, 2002 and 8.93% at December 31, 2001. In May 2001 our
shareholders approved an amendment to the Company's Articles of Incorporation to
create a class of preferred shares with 2,000,000 authorized shares. This will
enable the Company, at the option of the Board of Directors, to issue a series
of preferred shares in a manner calculated to take advantage of financing
techniques which may provide a lower effective cost of capital to the Company.
The amendment also provides greater flexibility to the Board of Directors in
structuring the terms of equity securities that may be issued by the Company.
The Company has a Dividend Reinvestment Plan ("The Plan") for
shareholders under which the Company's common stock will be purchased by the
Plan for participants with automatically reinvested dividends. The Plan does not
represent a change in the Company's dividend policy or a guarantee of future
dividends.
The Company maintains a deferred compensation plan for its Directors.
The plan permits the Directors to defer into a Rabbi Trust all or a portion of
their director fees. The plan is being accounted for under the provisions of
EITF 97-14.
20
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company and Banks are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities and certain off-balance sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings and other
factors and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the Banks' operations.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion and plans for capital restoration are required.
The minimum requirements are:
TOTAL TIER 1 TIER 1
CAPITAL TO CAPITAL TO CAPITAL TO
RISK-WEIGHTED RISK-WEIGHTED AVERAGE
ASSETS ASSETS ASSETS
--------------- --------------- --------------
Well capitalized 10.00% 6.00% 5.00%
Adequately capitalized 8.00% 4.00% 4.00%
Undercapitalized 6.00% 3.00% 3.00%
The following table illustrates the Company's risk-weighted capital
ratios at June 30, 2002:
JUNE 30,
(IN THOUSANDS) 2002
-----------------
Tier 1 capital $ 30,531
Total risk-based capital $ 33,232
Risk-weighted assets $ 216,006
Average total assets $ 338,002
Tier 1 capital to average assets 9.03%
Tier 1 risk-based capital ratio 14.13%
Total risk-based capital ratio 15.38%
LIQUIDITY
Management's objective in managing liquidity is maintaining the ability
to continue meeting the cash flow needs of its customers, such as borrowings or
deposit withdrawals, as well as its own financial commitments. The principal
sources of liquidity are net income, loan payments, maturing securities and
sales of securities available for sale, federal funds sold and cash and deposits
with banks. Along with its
21
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
liquid assets, the Company has additional sources of liquidity available to
ensure that adequate funds are available as needed. These include, but are not
limited to, the purchase of federal funds, the ability to borrow funds under
line of credit agreements with correspondent banks and a borrowing agreement
with the Federal Home Loan Bank of Cincinnati, Ohio and the adjustment of
interest rates to obtain depositors. Management feels that it has the capital
adequacy, profitability and reputation to meet the current and projected needs
of its customers.
For the six months ended June 30, 2002, the adjustments to reconcile
net income to net cash from operating activities consisted mainly of
depreciation and amortization of premises and equipment and intangibles, the
provision for loan losses, net amortization of securities and net changes in
other assets and liabilities. Cash and cash equivalents decreased as a result of
the purchasing of government agency securities and bank owned life insurance
policies. For a more detailed illustration of sources and uses of cash, refer to
the condensed consolidated statements of cash flows.
INFLATION
Substantially all of the Company's assets and liabilities relate to
banking activities and are monetary in nature. The consolidated financial
statements and related financial data are presented in accordance with generally
accepted accounting principles in the United States of America (GAAP). GAAP
currently requires the Company to measure the financial position and results of
operations in terms of historical dollars, with the exception of securities
available for sale, impaired loans and other real estate loans that are measured
at fair value. Changes in the value of money due to rising inflation can cause
purchasing power loss.
Management's opinion is that movements in interest rates affect the
financial condition and results of operations to a greater degree than changes
in the rate of inflation. It should be noted that interest rates and inflation
do effect each other, but do not always move in correlation with each other. The
Company's ability to match the interest sensitivity of its financial assets to
the interest sensitivity of its liabilities in its asset/liability management
may tend to minimize the effect of changes in interest rates on the Company's
performance.
REGULATORY MATTERS
The Company is subject to the regulatory requirements of The Federal
Reserve System as a multi-bank holding company. The affiliate banks are subject
to regulations of the Federal Deposit Insurance Corporation (FDIC) and the State
of Ohio, Division of Financial Institutions.
22
UNITED BANCORP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk affecting the Company is interest rate risk.
The Banks do not maintain a trading account for any class of financial
instrument and the Company is not affected by foreign currency exchange rate
risk or commodity price risk. Because the Banks do not hold any equity
securities other than stock in the Federal Home Loan Bank of Cincinnati, which
is not significant, the Company is not subject to equity price risk.
The Company, like other financial institutions, is subject to interest
rate risk to the extent that its interest-earning assets reprice differently
than its interest-bearing liabilities. One of the principal financial objectives
is to achieve long-term profitability while reducing its exposure to
fluctuations in interest rates. The Company has sought to reduce exposure of its
earnings to changes in market interest rates by managing assets and liability
maturities and interest rates primarily by originating variable-rate lending
products, or if issued with a fixed interest rate, as is the case with the
indirect automobile portfolio, the term is rather short in duration. Both the
variable interest rates inherent in the commercial, commercial real estate and
real estate loan portfolios, and the short duration loan products, mitigate the
Company's exposure to dramatic interest rate movements.
The Company's securities are all fixed rate and are weighted more
heavily towards available for sale which accounts for 90% of the portfolio
compared to the 10% for held to maturity securities. The Company primarily
invests in US Agency obligations and State and Municipal obligations and has a
modest amount invested in mortgage-backed securities. Due to total securities
approximating 36% of total assets and a significant portion of its loan
portfolio consisting of fixed rate loans, the Company is particularly sensitive
to periods of rising interest rates. In such periods, the Company's net interest
spread is negatively affected because the interest rate paid on deposits
increases faster than the rates earned on loans. Management is continuing to
originate variable rate loans as the primary means to manage this risk.
Management measures the Company's interest rate risk by computing
estimated changes in net interest income and the net portfolio value ("NPV") of
its cash flows from assets, liabilities and off-balance sheet items in the event
of a range of assumed changes in market interest rates. The following tables
present an analysis of the potential sensitivity of the Company's net present
value of its financial instruments to sudden and sustained changes in the
prevailing interest rates.
(Dollars in Thousands) (Dollars in Thousands)
- -------------------------------------------------------------- -------------------------------------------------------
NET PORTFOLIO VALUE-MARCH 31, 2002 NET PORTFOLIO VALUE-DECEMBER 31, 2001
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
--------------------------------------- ----------------------------------------
Up 200 $ 35,775 $ (5,041) -12.35% Up 200 $ 38,205 $ (3,349) -8.06%
Up 100 $ 39,549 $ (1,267) -3.10% Up 100 $ 42,965 $ 1,411 3.40%
Base $ 40,816 Base $ 41,554
Down 100 $ 38,958 $ (1,858) -4.55% Down 100 $ 37,711 $ (3,843) -9.25%
Down 200 $ 35,919 $ (4,897) -12.00% Down 200 $ 35,921 $ (5,633) -13.56%
23
UNITED BANCORP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
The Company's NPV is equally as sensitive to decreasing rates and
increasing rates. This similarity in sensitivity occurs principally because the
commercial, commercial real estate and real estate portfolios are comprised of
variable rate products and so would reprice within a short time frame and the
interest that the company pays on deposits would react similarly as deposits
generally have shorter periods to reprice. The certificate of deposit product is
fixed but the interest expense associated with certificates would be somewhat
offset by the fixed nature of our consumer loans and investment securities.
Certain shortcomings are inherent in the NPV method of analysis.
Certain assets such as adjustable-rate loans have features that restrict changes
in interest rates on a short-term basis and over the life of the asset. In
addition, the proportion of adjustable-rate loans in the Company's portfolio
could decrease in future periods if market interest rates remain at or decrease
below current levels due to refinancing activity. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate from those assumed in the analysis. Finally, the ability of many
borrowers to repay their adjustable-rate debt may decrease in the case of an
increase in interest rates.
24
UNITED BANCORP, INC.
OTHER INFORMATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of
security holders at the Annual meeting April 17, 2002.
Election of Directors for the class of 2004 to
include the following:
Michael J. Arciello Ayes 2,527,356 Withheld 12,679
Terry A. McGhee Ayes 2,527,356, Withheld 12,679
L.E. Richardson, Jr. Ayes 2,523,597, Withheld 16,438
Other directors whose term continues after the annual
meeting are James W. Everson, John M. Hoopingarner, Richard L.
Riesbeck, and Matthew C. Thomas.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2 Not Applicable
3 (i)(ii) Articles of Incorporation of United
Bancorp, Inc. including amendments and By
Laws, previously filed with the Securities
and Exchange Commission on November 16,
1983.
4 Not applicable.
9 Not applicable.
10 Reference to special severance agreement on
Page 9 of the 2002 Proxy Statement
11 Statement regarding computation of per share
earnings (included in Note 6 to the interim
consolidated financial statements on page 13
of this Form 10Q.
21.1 Reference to The Citizens Savings Bank,
Martins Ferry, Ohio, incorporated on
December 31, 1902, previously filed with the
Securities and Exchange Commission.
25
UNITED BANCORP, INC.
OTHER INFORMATION
21.2 Reference to The Community Bank, Lancaster, Ohio,
incorporated on August 1, 1949, previously filed with
the Securities and Exchange Commission.
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Acto of 2002.
99.2 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act of 2002.
(b) The Company filed no reports on SEC Form 8-K during the last
quarter of the period covered by this report.
26
UNITED BANCORP, INC.
SIGNATURES
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
August 2, 2002 By:/s/ James W. Everson
- ----------------------- -----------------------------
Date James W. Everson
Chairman, President & Chief Executive Officer
August 2, 2002 By:/s/ Randall M. Greenwood
- ----------------------- -----------------------------
Date Randall M. Greenwood
Senior Vice President and Chief Financial Officer
27
EXHIBIT INDEX
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Acto of 2002.
99.2 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The
Sarbanes-Oxley Act of 2002.