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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 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 3,118,628 SHARES AS OF OCTOBER 29, 2002
---------------------------------------------------------------------
1
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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 - 23
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk......................24 - 25
ITEM 4. Controls and Procedures..............................................................26
PART II OTHER INFORMATION
ITEM 1.
Legal Proceedings..........................................................................27
ITEM 2.
Changes in Securities and Use of Proceeds..................................................27
ITEM 3.
Default Upon Senior Securities.............................................................27
ITEM 4.
Submission of Matters to a Vote of Security Holders........................................27
ITEM 5.
Other Information..........................................................................27
ITEM 6.
Exhibits and Reports on Form 8-K...........................................................27
SIGNATURES...................................................................................28
2
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
PART I
FINANCIAL INFORMATION
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
ASSETS
Cash and due from financial institutions $ 9,244,774 $ 9,427,756
Federal funds sold 8,581,000 13,962,000
------------- -------------
Total cash and cash equivalents 17,825,774 23,389,756
Securities available for sale 115,365,581 114,044,617
Securities held to maturity
(Estimated fair value of $12,868,654 at 09/30/02 and $10,617,845 at 12/31/01) 12,034,683 10,378,811
Loans receivable
Commercial loans 19,712,932 21,502,208
Commercial real estate loans 66,542,378 61,962,953
Real estate loans 53,411,291 54,153,041
Installment loans 45,239,093 45,721,401
------------- -------------
Total loans receivable 184,905,694 183,339,603
Allowance for loan losses (3,053,104) (2,879,065)
------------- -------------
Net loans receivable 181,852,590 180,460,538
Premises and equipment, net 9,096,384 9,083,891
Bank owned life insurance 6,615,099
Accrued interest receivable and other assets 4,236,066 3,959,582
------------- -------------
Total Assets $ 347,026,177 $ 341,317,195
============= =============
LIABILITIES
Demand deposits
Noninterest-bearing $ 27,056,436 $ 26,297,805
Interest-bearing 48,687,862 42,423,962
Savings deposits 50,742,869 49,396,199
Time deposits - under $100,000 123,597,622 126,820,233
Time deposits - $100,000 and over 40,415,733 38,437,724
------------- -------------
Total deposits 290,500,522 283,375,923
Securities sold under agreements to repurchase 7,532,012 7,811,230
Other borrowed funds 15,661,816 18,415,230
Accrued expenses and other liabilities 1,481,290 1,240,617
------------- -------------
Total Liabilities 315,175,640 310,843,000
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 23,655,167 23,619,610
Retained earnings 6,042,410 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 - 39,475 shares at cost
in 2002 and 36,550 in 2001 (553,395) (517,838)
Accumulated other comprehensive income (loss), net of tax 893,111 (56,569)
------------- -------------
Total Shareholders' Equity 31,850,537 30,474,195
------------- -------------
Total Liabilities and Shareholders' Equity $ 347,026,177 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Interest and dividend income
Loans, including fees $ 3,645,649 $ 4,083,136 $11,044,815 $12,690,766
Taxable securities 1,297,166 1,764,431 4,369,493 5,000,524
Non-taxable securities 314,669 275,855 838,402 817,051
Other interest and dividend income 124,150 79,502 308,129 219,131
----------- ----------- ----------- -----------
Total interest and dividend income 5,381,634 6,202,924 16,560,839 18,727,472
Interest expense
Deposits
Demand 128,440 200,712 372,491 708,739
Savings 101,990 175,141 312,538 588,506
Time 1,907,318 2,398,339 5,929,174 7,083,658
Other borrowings 152,138 309,369 462,622 1,225,308
----------- ----------- ----------- -----------
Total interest expense 2,289,886 3,083,561 7,076,825 9,606,211
----------- ----------- ----------- -----------
Net interest income 3,091,748 3,119,363 9,484,014 9,121,261
Provision for loan losses 157,500 195,000 472,500 585,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 2,934,248 2,924,363 9,011,514 8,536,261
Noninterest income
Service charges on deposit accounts 235,187 224,273 698,167 667,667
Gains/losses on sales of securities 9,493 122,997 34,358
Other income 226,542 171,179 537,536 446,899
----------- ----------- ----------- -----------
Total noninterest income 471,222 395,452 1,358,700 1,148,924
----------- ----------- ----------- -----------
Noninterest expense
Salaries and employee benefits 1,254,251 1,162,142 3,785,734 3,508,865
Occupancy and equipment 373,174 383,502 1,108,466 1,125,295
Other expenses 830,830 811,960 2,509,277 2,401,411
----------- ----------- ----------- -----------
Total noninterest expense 2,458,255 2,357,604 7,403,477 7,035,571
Income before income taxes 947,215 962,211 2,966,737 2,649,614
Income tax expense 211,600 284,214 746,763 629,608
----------- ----------- ----------- -----------
Net income $ 735,615 $ 677,997 $ 2,219,974 $ 2,020,006
=========== =========== =========== ===========
Earnings per common share - Basic $ 0.24 $ 0.22 $ 0.72 $ 0.64
Earnings per common share - Diluted $ 0.24 $ 0.22 $ 0.71 $ 0.64
Dividends per common share $ 0.13 $ 0.12 $ 0.39 $ 0.37
4
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(UNAUDITED)
COMMON TREASURY
STOCK ADDITIONAL STOCK AND
PAID IN DEFERRED RETAINED
SHARES DOLLARS CAPITAL PLAN EARNINGS
------------ ------------ ------------ ------------ ------------
BALANCE AT JANUARY 1, 2001 3,192,239 $ 3,094,882 $21,699,632 $ (695,002) $ 5,852,284
Net income 2,219,974
Net change in unrealized gain/(loss) on
securities available for sale
Comprehensive income
Shares purchased for deferred compensation plan (7,138) 84,787 (84,787)
Purchases of treasury stock, at cost (53,207) (581,211)
Cash dividends - $0.37 per share (1,189,595)
------------ ------------ ------------ ------------ ------------
BALANCE AT SEPTEMBER 30, 2001 3,131,894 $ 3,094,882 $21,784,419 $(1,361,000) $ 6,882,663
============ ============ ============ ============ ============
BALANCE AT JANUARY 1, 2002 3,126,886 $ 3,249,227 $23,619,610 $(1,382,613) $ 5,044,540
Net income 2,219,974
Net change in unrealized gain/(loss) on
securities available for sale
Comprehensive income (loss)
Shares purchased for deferred compensation plan (6,456) 85,397 (85,397)
Shares distributed from deferred compensation plan 3,531 (49,840) 49,840
Purchases of treasury stock, at cost (44,808) (571,208)
Cash dividends - $0.39 per share (1,222,104)
------------ ------------ ------------ ------------ ------------
BALANCE AT SEPTEMBER 30, 2002 3,079,153 $ 3,249,227 $23,655,167 $(1,989,378) $ 6,042,410
============ ============ ============ ============ ============
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME TOTAL
------------ ------------
BALANCE AT JANUARY 1, 2001 $ (1,272,709) $28,679,087
Net income 2,219,974
Net change in unrealized gain/(loss) on
securities available for sale 2,143,470 2,143,470
------------
Comprehensive income 4,363,444
Shares purchased for deferred compensation plan
Purchases of treasury stock, at cost (581,211)
Cash dividends - $0.37 per share (1,189,595)
------------ ------------
BALANCE AT SEPTEMBER 30, 2001 $ 870,761 $31,271,725
============ ============
BALANCE AT JANUARY 1, 2002 $ (56,569) $30,474,195
Net income 2,219,974
Net change in unrealized gain/(loss) on
securities available for sale 949,680 949,680
------------
Comprehensive income (loss) 3,169,654
Shares purchased for deferred compensation plan
Shares distributed from deferred compensation plan
Purchases of treasury stock, at cost (571,208)
Cash dividends - $0.39 per share (1,222,104)
------------ ------------
BALANCE AT SEPTEMBER 30, 2002 $ 893,111 $31,850,537
============ ============
5
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,219,974 $ 2,020,006
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 638,436 684,724
Provision for loan losses 472,500 585,000
Deferred taxes (74,377) 27,475
Bank owned life insurance income (87,545)
Federal Home Loan Bank stock dividend (132,900) (185,500)
Net realized gains on sales or calls of securities (122,997) (34,358)
(Accretion)/amortization of securities, net (34,240) (29,274)
Net realized (gains)/losses on sales of loans (63,776) (49,744)
Net realized (gains)/losses on sale of real estate owned (6,693) (23,508)
Amortization of mortgage servicing rights 55,868 44,325
Net changes in accrued interest receivable and other assets (391,565) (435,434)
Net changes in accrued expenses and other liabilities (92,319) (458,678)
------------ ------------
Net cash from operating activities 2,380,366 2,145,034
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Sales 34,753,322 5,480,956
Maturities, prepayments and calls 54,491,357 38,990,063
Purchases (88,855,524) (67,363,773)
Securities held to maturity
Maturities, prepayments and calls 2,500,000
Purchases (1,637,004) (1,022,305)
Purchase of bank owned life insurance (6,527,554)
Net change in loans (1,864,552) 11,318,149
Purchases of premises and equipment (630,941) (408,842)
Proceeds from sale of real estate owned 27,893 315,502
------------ ------------
Net cash from investing activities (10,243,003) (10,190,250)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 7,124,599 16,040,782
Net change in short-term borrowings (3,856,694) (5,806,450)
Proceeds from long term debt 1,722,987 1,354,611
Principal payments on long-term debt (898,925) (684,883)
Treasury stock purchases (571,208) (581,211)
Cash dividends paid (1,222,104) (1,189,595)
------------ ------------
Net cash from financing activities 2,298,655 9,133,254
------------ ------------
Net change in cash and cash equivalents (5,563,982) 1,088,038
Cash and cash equivalents at beginning of year 23,389,756 10,694,118
------------ ------------
Cash and cash equivalents at end of period $ 17,825,774 $ 11,782,156
============ ============
Interest paid $ 7,225,836 $ 9,451,726
Income taxes paid 810,346 700,011
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 September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- --------------
Other comprehensive income:
Unrealized holding gains(losses) on available
for sale securities arising during period $ 695,661 $ 1,577,043 $ 1,561,906 $ 3,281,817
Reclassification adjustment for gains
later recognized in income (9,493) 80 (122,997) (34,358)
----------- ----------- ----------- -----------
686,168 1,577,123 1,438,909 3,247,459
Tax effect (233,297) (535,966) (489,229) (1,103,989)
----------- ----------- ----------- -----------
Other comprehensive income (loss) $ 452,871 $ 1,041,157 $ 949,680 $ 2,143,470
=========== =========== =========== ===========
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 - SEPTEMBER 30, 2002
US Agency obligations $ 82,890,981 $ 896,157 $ (33,054) $ 83,754,084
State and Municipal obligations 18,690,047 466,734 (7,620) 19,149,161
Mortgage-backed securities 8,168,189 18,191 (5,398) 8,180,982
Collateralized mortgage obligations 504,447 504,447
Other securities 3,758,719 18,188 3,776,907
------------- ------------- ------------- -------------
$ 114,012,383 $ 1,399,270 $ (46,072) $ 115,365,581
============= ============= ============= =============
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 securities 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 - SEPTEMBER 30, 2002
State and Municipal obligations $ 12,034,683 $ 833,971 $ 12,868,654
============= ============= ============= =============
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Proceeds $15,464,333 $34,753,322 $ 5,480,956
Gross gains 9,493 122,997 34,358
Gross losses
9
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES: (CONTINUED)
Contractual maturities of securities at September 30, 2002
were as follows:
AVAILABLE FOR SALE AMORTIZED ESTIMATED
COST FAIR VALUE
-------------- --------------
US Agency obligations
Under 1 Year
1 - 5 Years $ 5,682,005 $ 5,784,704
5 - 10 Years 18,731,701 18,997,423
Over 10 Years 58,477,275 58,971,957
------------ ------------
Total 82,890,981 83,754,084
------------ ------------
State and municipal obligations
Under 1 Year 5,137,558 5,183,425
1 - 5 Years 2,995,925 3,109,982
5 - 10 Years 4,317,780 4,508,654
Over 10 Years 6,238,784 6,347,100
------------ ------------
Total 18,690,047 19,149,161
------------ ------------
Mortgage backed securities
5 - 10 Years 2,705,151 2,713,184
Over 10 Years 5,463,038 5,467,798
------------ ------------
Total 8,168,189 8,180,982
------------ ------------
Collateralized mortgage obligations
5 - 10 Years 504,447 504,447
------------ ------------
Total 504,447 504,447
------------ ------------
Other investments
Equity securities 3,758,719 3,776,907
------------ ------------
Total securities available for sale $114,012,383 $115,365,581
============ ============
HELD TO MATURITY
State and municipal obligations
Under 1 Year 50,000 51,601
1 - 5 Years 4,026,038 4,308,618
5 - 10 Years 3,311,870 3,617,385
Over 10 Years 4,646,775 4,891,050
------------ ------------
Total securities held to maturity $ 12,034,683 $ 12,868,654
============ ============
Securities with a carrying value of approximately $58,094,000 at September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Beginning Balance $ 2,992,118 $ 2,839,270 $ 2,879,065 $ 2,790,133
Provision charged to operating expense 157,500 195,000 472,500 585,000
Loans charged-off (154,015) (351,276) (470,691) (879,829)
Recoveries 57,501 101,233 172,230 288,923
----------- ----------- ----------- -----------
Ending Balance $ 3,053,104 $ 2,784,227 $ 3,053,104 $ 2,784,227
=========== =========== =========== ===========
Non-performing loans were as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
Loans past due over 90 days still on accrual $ 432,000 $ 157,000
Nonaccrual Loans 1,047,000 661,000
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 September 30, 2002 and
December 31, 2001 follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
Commitments to extend credit $22,852,406 $18,779,162
Credit card and ready reserve lines 1,440,066 1,275,919
Standby letters of credit 490,200 471,000
At September 30, 2002, and included above, commitments to make
fixed-rate loans totaled $2,222,452 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 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendments of FASB Statement No. 13,
and Technical Corrections". This Statement eliminates inconsistency
between the required accounting for certain lease modifications that
have economic effects similar to sale-leaseback transactions. The
Company does not believe this statement will have a material effect on
its financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities". This Statement
addresses the timing of recognition of a liability for exit and
disposal cost at the time a liability is incurred, rather than at a
plan commitment date, as
12
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
previously required. Exit or disposal costs will be measured at fair
value, and the recorded liability will be subsequently adjusted for
changes in estimated cash flows. This statement is required to be
effective for exit or disposal activities entered after December 31,
2002, and early adoption is encouraged. The Company does not believe
this statement will have a material effect on its financial position or
results of operations.
SFAS No. 147, "Acquisition of Certain Financial Institutions"
became effective October 1, 2002. This standard requires any
unidentifiable intangible asset previously recorded as the result of a
business combination to be reclassified as goodwill and the
amortization of this asset will cease. The effect of this standard on
the financial position and results of operations of the Company was not
material.
6. EARNINGS PER SHARE
The factors used in the earnings per share computation were as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
BASIC
Net income $ 735,559 $ 677,997 $2,219,918 $2,020,006
========== ========== ========== ==========
Weighted average common shares outstanding 3,079,576 3,132,801 3,100,097 3,148,140
========== ========== ========== ==========
Basic earnings per common share $ 0.24 $ 0.22 $ 0.72 $ 0.64
========== ========== ========== ==========
DILUTED
Net income $ 735,559 $ 677,997 $2,219,918 $2,020,006
========== ========== ========== ==========
Weighted average common shares outstanding for
basic earnings per common share 3,079,576 3,132,801 3,100,097 3,148,140
Add: Dilutive effects of assumed exercise of stock
options 9,378 6,858 9,305 3,430
---------- ---------- ---------- ----------
Average shares and dilutive potential common shares 3,088,954 3,139,659 3,109,402 3,151,570
========== ========== ========== ==========
Diluted earnings per common share $ 0.24 $ 0.22 $ 0.71 $ 0.64
========== ========== ========== ==========
Number of stock options not considered in computing
diluted earnings per share due to antidilutive nature 20,056 20,056 20,056 20,056
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 September 30, 2002, as compared to December 31, 2001 and the
results of operations for the three and nine months ended September 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 (changed in 1917 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. (Three
were later removed)
- -- 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 UVEST with securities
provided through Raymond James Financial Services,
Inc., member NASD/SIPC.
- -- 1999 COMMUNITY moved their main office to Lancaster, Ohio.
- -- 2000 CITIZENS purchased adjoining property and expanded
Operations Center by 1500 square feet.
- -- 2000 COMMUNITY opened a new branch in Lancaster and their
auto teller for the main office.
- -- 2000 CITIZENS and COMMUNITY introduced Electronic Internet
Banking and Bill Payment.
- -- 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 September 30, 2002, gross loans were $184,906,000 compared
to $183,340,000 at year-end 2001, an increase of $1,566,000. The
relatively small growth in total outstanding loans was the result of a
decline in the real estate, installment portfolios and commercial loans
offset from growth in the commercial real estate portfolios. Management
attributes the overall static loan balance to the general economic
slow-down in the lending markets served and to competitive pricing in
the markets served.
Installment loans were 24.5% of total loans at September 30,
2002 compared to 24.9% at year-end 2001. The installment 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 2.7%, or $728,000 increase in
installment loans while COMMUNITY experienced a decrease of 6.4%, or
$1,210,000 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. Management has employed the strategy of focusing
on adjustable rate commercial loan products to position the Company for
an eventual rise in interest rates.
Commercial and commercial real estate loans comprised 46.6% of
total loans at September 30, 2002 compared to 45.5% at December 31,
2001. Commercial and commercial real estate loans have increased
$2,790,000 or 3.3% 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 28.9% of total loans at September 30,
2002 compared to 29.5% at year-end 2001. Real estate loans decreased
1.4% since December 31, 2001. However, COMMUNITY experienced an
increase in real estate loans of 8.7% or $1,759,000. Management's
position is to focus on adjustable rate products as the overall rate
environment reaches historically 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 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 nine months ended September 30, 2002
were
16
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
approximately $298,000, or 10.4%, of the beginning balance in the
allowance for loan losses. Net charge-offs for the prior year
nine-month period were approximately $591,000, or 21.2%, of the
beginning balance in the allowance for loan losses. Loans past due 90
days or more and still accruing interest and nonaccrual loans have
increased since December 31, 2001. The majority of these loans are
residential mortgages and commercial real estate loans. Management does
not expect to experience material losses with these loans. Subsequent
to the September 30, 2002 reporting date approximately $270,000 of
loans past due 90 days or more has been paid off and an additional
$277,000 in nonaccrual loan property has been repossessed. 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
September 30, 2002 increased approximately $1,321,000, or 1.2% from
year-end 2001 totals. Securities held to maturity at September 30, 2002
increased approximately $1,655,000, or 16.0% compared to year-end 2001
totals.
In June 2002, the Company instituted a Bank Owned Life
Insurance Program (BOLI) and invested approximately $6.6 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 allocated between several
insurance companies to provide for diversification as of September 30,
2002. The insurance will provide a death benefit to directors and to
employees of the Company and to the two subsidiary banks.
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 September 30, 2002, total core deposits increased approximately
$5,146,590 due to an increase in interest-bearing demand and savings
deposits 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 September 30, 2002,
certificates of deposit greater than $100,000 increased approximately
$2.0 million, or 5.2% from year-end 2001 totals. The majority of this
increase is due to some large deposits from municipalities.
17
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 ("FHLB") advances. In the first nine 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 $2.8
million, or 15.0% from year-end 2001 totals. This was due to the heavy
volume of called securities experienced during 2002 and the increases
in deposits.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
NET INCOME
Basic earnings per share for the nine months ended September
30, 2002 was $0.72, compared with $0.64 for the nine months ended
September 30, 2001 or a 12.5% increase. Diluted earnings per share for
the nine months ended September 30, 2002 was $0.71, compared with $0.64
for the nine months ended September 30, 2001 or a 10.9% increase.
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
3.9% for the nine months ended September 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 nine months ended September 30,
2002 was $16,561,000 compared to $18,727,000 for the same period in
2001. Total interest income decreased $2,166,000, or 11.6%. The
decrease can be attributed to the overall lower interest rate
environment experienced to date in 2002.
Total interest expense for the nine months ended September 30,
2002 when compared to the same nine-month period ended September 30,
2001, decreased 26.3%, or $2,529,000. 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 $472,500 for the nine
months ended September 30, 2002 compared to $585,000 for the same
period in 2001. Management decreased the provision in 2002 due to a
decrease in net charge-offs for the fiscal year. 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.
18
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Loans past due 90 days or more and still accruing interest and
nonaccrual loans have increased since December 31, 2001. The majority
of these loans are residential mortgages and commercial real estate
loans. Management does not expect to experience material losses with
these loans. Subsequent to the September 30, 2002 reporting date,
approximately $270,000 of loans past due 90 days or more has been paid
off and an additional $277,000 in nonaccrual loan property has been
repossessed.
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
nine months ended September 30, 2002 was $1,358,000 compared to
$1,148,000 for the same nine months period ended September 30, 2001.
For the nine months ended September 30, 2002 compared to the same
period in 2001, noninterest income increased approximately 18.3%. The
Company's two affiliates invested in Bank Owned Life Insurance on June
30, 2002. To date, the Company has recognized $88,000 of income related
to this product. Fee income from the Company's secondary market real
estate loan program increased $41,000 over the same period in 2001. In
addition, the Company's security portfolio generated approximately
$123,000 in security gains for the nine months ended September 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 during the falling rate
environment.
NONINTEREST EXPENSE
Noninterest expense for the nine months ended September 30,
2002 increased $368,000, or 5.2% over the nine months ended September
30, 2001. Salary and health care expense, which made up the majority of
the increase, increased approximately $277,000, or 7.9% for the nine
months ended September 30, 2002 mainly due to rising health care costs.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2002
NET INCOME
Basic and diluted earnings per share for the three months
ended September 30, 2002 was $0.24, compared with $0.22 for the three
months ended September 30, 2001 or a 9.1% increase.
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 decreased
.98% for the three months ended September 30, 2002 compared to the same
period in 2001. The decrease was a result of the Company's higher
yielding securities being sold or called and replaced with lower
yielding securities. This was somewhat offset by the Company having a
larger average earning asset base than the prior year.
19
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Total interest income for the three months ended September 30,
2002 was $5,382,000 compared to $6,203,000 for the same period in 2001.
Total interest income decreased $821,000, or 13.2%. 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 September
30, 2002 when compared to the same three-month period ended September
30, 2001, decreased 25.7%, or $794,000. 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.
PROVISION FOR LOAN LOSSES
The total provision for loan losses was $157,500 for the three
months ended September 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. 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. Loans past due 90 days or more
and still accruing interest and nonaccrual loans have increased. The
majority of these loans are residential mortgages and commercial real
estate loans. Management does not expect to experience material losses
with these loans. Subsequent to the September 30, 2002 reporting date
approximately $270,000 of loans past due 90 days or more has been paid
off and an additional $277,000 in nonaccrual loan property has been
repossessed.
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 September 30, 2002 was $471,000 compared to $395,000
for the same three month period ended September 30, 2001. For the three
months ended September 30, 2002 compared to the same period in 2001,
noninterest income increased approximately 19.2%. The Company's Bank
Owned Life Insurance generated approximately $88,000 in income for the
three months ended September 30, 2002.
NONINTEREST EXPENSE
Noninterest expense for the three months ended September 30,
2002 increased a modest $101,000, or 4.3%, over the three months ended
September 30, 2001. The majority of this increase was health care
costs, which continue to increase for the Company.
CAPITAL RESOURCES
Internal capital growth, through the retention of earnings, is
the primary means of maintaining capital adequacy for the Company.
Shareholders' equity at September 30, 2002 was $31,851,000 compared to
$30,474,000 at December 31, 2001, a 4.5% increase. Total shareholders'
equity in relation to
20
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
total assets was 9.2% at September 30, 2002 and 8.9% 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.
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%
21
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table illustrates the Company's risk-weighted
capital ratios at September 30, 2002:
SEPTEMBER 30,
(in thousands) 2002
---------------
Tier 1 capital $ 30,866
Total risk-based capital $ 33,614
Risk-weighted assets $ 221,393
Average total assets $ 339,846
Tier 1 capital to average assets 9.08%
Tier 1 risk-based capital ratio 13.94%
Total risk-based capital ratio 15.18%
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 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 nine months ended September 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 accounting principles generally accepted
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
22
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
23
UNITED BANCORP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(UNAUDITED)
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 91% of the portfolio
compared to the 9% 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 and collateral-backed securities. Due
to total securities approximating 37% 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-SEPTEMBER 30, 2002 NET PORTFOLIO VALUE-DECEMBER 31, 2001
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
--------------------------------- ---------------------------------------
Up 200 $29,450 $ (197) -0.66% Up 200 $38,205 $(3,349) -8.06%
Up 100 $31,927 $ 2,280 7.69% Up 100 $42,965 $ 1,411 3.40%
Base $29,647 Base $41,554
Down 100 $28,032 $(1,615) -5.45% Down 100 $37,711 $(3,843) -9.25%
Down 200 $27,709 $(1,938) -6.54% Down 200 $35,921 $(5,633) -13.56%
24
UNITED BANCORP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(UNAUDITED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
The Company's NPV is more sensitive to decreasing rates than increasing
rates. Such difference in sensitivity occurs principally because, as rates
decrease, the effect is offset on a short-term basis by the rather fixed nature
of our consumer loans and investment securities. This occurs even though the
commercial, commercial real estate and real estate portfolios are comprised of
variable rate products. Also in a decreasing rate environment the Company's
callable securities would continue to be called away. Moreover, the interest the
Company pays on its deposits would decrease at a slower pace as interest rate
floors are established.
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.
25
UNITED BANCORP, INC.
CONTROLS AND PROCEDURES
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chairman, President and Chief
Executive Officer, and Senior Vice President and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
the President and Chief Executive Officer and Senior Vice President and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings.
26
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
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended Articles of Incorporation of United
Bancorp, Inc. (incorporated herein by
reference to the company's DEF 14A filed
with the Securities and Exchange Commission
on March 14, 2001)
3.2 Amended Code of Regulations of United
Bancorp, Inc. (incorporated herein by
reference to the company's DEF 14A filed
with the Securities and Exchange Commission
on March 14, 2001)
4.0 Instruments Defining the Rights of Security
Holders (See Exhibits 3.1 and 3.2)
99.1 Certification pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of
The Sarbanes-Oxley Act 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.
27
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.
October 31, 2002 By: /s/ James W. Everson
- ---------------------------------- ------------------------
Date James W. Everson
Chairman, President & Chief
Executive Officer
October 31, 2002 By: /s/ Randall M. Greenwood
- ---------------------------------- ------------------------
Date Randall M. Greenwood
Senior Vice President and
Chief Financial Officer
28
UNITED BANCORP, INC.
CERTIFICATIONS
I, James W. Everson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date or our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date November 14, 2002
--------------------------------------------------------------------
By /s/ James W. Everson
---------------------------------------------------------------------
James W. Everson, Chairman, President and Chief Executive Officer
29
UNITED BANCORP, INC.
CERTIFICATIONS
I, Randall M. Greenwood, certify that:
6. I have reviewed this quarterly report on Form 10-Q of United
Bancorp, Inc.;
7. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
8. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
9. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
d) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
e) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
f) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
10. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
c) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
d) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date or our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date November 14, 2002
--------------------------------------------------------------------
By /s/ Randall M. Greenwood
---------------------------------------------------------------------
Randall M. Greenwood, Senior Vice President and Chief Financial Officer
30
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 Amended Articles of Incorporation of United Bancorp,
Inc. (incorporated herein by reference to the
company's DEF 14A filed with the Securities and
Exchange Commission on March 14, 2001)
3.2 Amended Code of Regulations of United Bancorp, Inc.
(incorporated herein by reference to the company's
DEF 14A filed with the Securities and Exchange
Commission on March 14,2001)
4.0 Instruments Defining the Rights of Security Holders
(See Exhibits 3.1 and 3.2)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act 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