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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, 2003
[ ] 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 incorporation or organization) (IRS Employer Identification No.)
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 BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN EXCHANGE ACT RULE 12B-2).
YES NO X
--- ---
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 3,223,071 SHARES AS OF JULY 21, 2003
------------------------------------------------------------------
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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 - 15
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................................16 - 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..............................................................................27-28
SIGNATURES.........................................................................................................29
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PART I
FINANCIAL INFORMATION
(UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
--------------------- -------------------
ASSETS
Cash and due from financial institutions $ 12,132,914 $ 8,248,554
Federal funds sold 2,109,000 2,040,000
--------------------- -------------------
Total cash and cash equivalents 14,241,914 10,288,554
Securities available for sale 144,994,140 132,869,484
Securities held to maturity
(Estimated fair value of $15,431,199 at 06/30/03 and $13,634,177 at 12/31/02) 14,363,260 12,925,517
Loans receivable
Commercial loans 24,527,989 21,059,890
Commercial real estate loans 69,887,498 69,286,653
Real estate loans 52,674,275 52,535,507
Installment loans 46,770,509 45,005,864
--------------------- -------------------
Total loans receivable 193,860,271 187,887,914
Allowance for loan losses (3,077,793) (2,971,116)
--------------------- -------------------
Net loans receivable 190,782,478 184,916,798
Premises and equipment, net 8,563,372 8,932,684
Other real estate and repossessions 689,077 698,065
Core deposit and other intangible assets 61,417 75,452
Bank owned life insurance 7,025,687 6,860,601
Accrued interest receivable 2,270,043 2,602,091
Other assets 2,193,841 1,541,823
--------------------- -------------------
Total Assets $ 385,185,229 $361,711,069
===================== ===================
LIABILITIES
Demand deposits
Noninterest-bearing $ 30,707,154 $26,843,394
Interest-bearing 57,746,225 48,341,237
Savings deposits 50,379,487 50,382,277
Time deposits - under $100,000 129,940,723 131,794,499
Time deposits - $100,000 and over 36,774,870 42,840,126
--------------------- -------------------
Total deposits 305,548,459 300,201,533
Federal funds purchased 10,905,000 2,055,000
Securities sold under agreements to repurchase 7,241,763 7,009,799
Other borrowed funds 16,869,526 17,347,429
Accrued expenses and other liabilities 11,766,185 2,942,446
--------------------- -------------------
Total Liabilities 352,330,933 329,556,207
SHAREHOLDERS' EQUITY
Preferred stock, without par value: 2,000,000 shares authorized and unissued - -
Common stock - $1 Par Value: 10,000,000 shares authorized;
3,411,307 issued at June 30, 2003 and December 31, 2002 3,411,307 3,411,307
Additional paid in capital 25,643,618 25,651,879
Retained earnings 5,264,306 4,472,544
Treasury stock at cost, 188,265 shares at 06/30/03 and 163,065 shares at 12/31/02 (2,115,855) (1,772,127)
Shares held by deferred compensation plan at cost, 42,178 shares at 06/30/03
and 42,828 at 12/31/02 (564,470) (572,731)
Accumulated other comprehensive income, net of tax 1,215,390 963,990
--------------------- -------------------
Total Shareholders' Equity 32,854,296 32,154,862
--------------------- -------------------
Total Liabilities and Shareholders' Equity $ 385,185,229 $361,711,069
===================== ===================
See accompanying notes to the condensed consolidated financial statements
3
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) (UNAUDITED)
2003 2002 2003 2002
----------------- ---------------- ------------------ ---------------
Interest and dividend income
Loans, including fees $ 3,496,285 $ 3,673,224 $6,912,009 $7,399,166
Taxable securities 1,152,481 1,525,889 2,534,334 3,072,327
Non-taxable securities 363,334 264,137 712,626 523,733
Federal funds sold 33,134 52,437 57,082 114,062
Dividends on Federal Home Loan Bank stock and other 35,009 30,160 78,844 69,917
----------------- ---------------- ------------------ ---------------
Total interest and dividend income 5,080,243 5,545,847 10,294,895 11,179,205
Interest expense
Deposits
Demand 133,299 127,780 251,502 244,051
Savings 63,316 102,892 126,529 210,548
Time 1,532,344 1,942,357 3,170,408 4,021,856
Other borrowings 225,058 149,740 434,894 310,484
----------------- ---------------- ------------------ ---------------
Total interest expense 1,954,017 2,322,769 3,983,333 4,786,939
----------------- ---------------- ------------------ ---------------
Net interest income 3,126,226 3,223,078 6,311,562 6,392,266
Provision for loan losses 150,000 157,500 300,000 315,000
----------------- ---------------- ------------------ ---------------
Net interest income after provision for loan losses 2,976,226 3,065,578 6,011,562 6,077,266
Noninterest income
Service charges on deposit accounts 278,206 244,162 526,493 462,980
Net realized gains on sales of securities 79,952 67,159 281,880 113,504
Net realized gains on sales of loans 64,540 2,275 89,449 39,982
Other income 257,729 128,671 526,834 271,012
----------------- ---------------- ------------------ ---------------
Total noninterest income 680,427 442,267 1,424,656 887,478
----------------- ---------------- ------------------ ---------------
Noninterest expense
Salaries and employee benefits 1,282,282 1,250,139 2,598,106 2,531,483
Occupancy and equipment 386,395 370,552 806,751 735,292
Professional services 97,408 105,197 219,696 193,638
Insurance 63,848 43,779 125,997 111,763
Franchise and other taxes 109,975 88,218 206,625 177,131
Advertising 80,927 73,720 155,062 147,506
Stationary and office supplies 62,723 69,224 145,953 131,444
Amortization of intangibles 4,500 4,988 9,000 21,488
Other expenses 480,067 404,503 1,014,846 895,477
----------------- ---------------- ------------------ ---------------
Total noninterest expense 2,568,125 2,410,320 5,282,036 4,945,222
Income before income taxes 1,088,528 1,097,525 2,154,182 2,019,522
Income tax expense 261,300 293,324 524,429 535,163
----------------- ---------------- ------------------ ---------------
Net income $ 827,228 $ 804,201 $1,629,753 $1,484,359
================= ================ ================== ===============
Earnings per common share - Basic $ 0.26 $ 0.24 $ 0.51 $ 0.45
Earnings per common share - Diluted $ 0.26 $ 0.24 $ 0.51 $ 0.45
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
COMMON
STOCK
TREASURY ACCUMULATED
ADDITIONAL STOCK AND OTHER
SHARES ISSUED PAID IN DEFERRED RETAINED COMPREHENSIVE
AND OUTSTANDING DOLLARS CAPITAL PLAN EARNINGS INCOME (LOSS) TOTAL
------------- --------- ---------- --------- -------- ------------- ----------
BALANCE AT JANUARY 1, 2002 3,283,230 $3,249,227 $23,619,610 $(1,382,613) $5,044,540 $ (56,569) $30,474,195
Net income 1,484,359 1,484,359
Net change in unrealized loss on
securities available for sale 496,809 496,809
-----------
Comprehensive income 1,981,168
Shares purchased for deferred
compensation plan (5,588) 69,900 (69,900) -
Shares distributed from deferred
compensation plan 3,708 (49,840) 49,840 -
Purchases of treasury stock, at cost (47,048) (571,208) (571,208)
Cash dividends - $0.25 per share (817,622) (817,622)
---------- ---------- ----------- ----------- ---------- ---------- -----------
BALANCE AT JUNE 30, 2002 (UNAUDITED) 3,234,302 $3,249,227 $23,639,670 $(1,973,881) $5,711,277 $ 440,240 $31,066,533
========== ========== =========== =========== ========== ========== ===========
BALANCE AT JANUARY 1, 2003 3,205,414 $3,411,307 $25,651,879 $(2,344,858) $4,472,544 $ 963,990 $32,154,862
Net income 1,629,753 1,629,753
Net change in unrealized gain on
securities available for sale 251,400 251,400
-----------
Comprehensive income 1,881,153
Shares purchased for deferred
compensation plan (3,380) 42,031 (42,031) -
Shares distributed from deferred
compensation plan 4,030 (50,292) 50,292 -
Purchases of treasury stock, at cost (25,200) (343,728) (343,728)
Cash dividends - $0.26 per share (837,991) (837,991)
---------- ---------- ----------- ----------- ---------- ---------- -----------
BALANCE AT JUNE 30, 2003 (UNAUDITED) 3,180,864 $3,411,307 $25,643,618 $(2,680,325) $5,264,306 $1,215,390 $32,854,296
========== ========== =========== =========== ========== ========== ===========
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2003 2002
----------------------- -----------------------
Cash flows from operating activities
Net income for the period $ 1,629,753 $ 1,484,359
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 473,179 420,166
Provision for loan losses 300,000 315,000
Deferred taxes 71,900 (74,377)
Bank owned life insurance income (182,072) -
Federal Home Loan Bank stock dividend (79,700) (89,600)
Net realized gains on sales of securities (281,880) (113,504)
(Accretion)/amortization of premium and discount on securities, net 354,784 (19,442)
Net realized gains on sales of loans (53,828) (47,692)
Net realized gains on sale of real estate owned (9,500) (2,665)
Amortization of mortgage servicing rights 54,900 36,510
Net changes in accrued interest receivable and other assets (345,533) (338,986)
Net changes in accrued expenses and other liabilities 8,622,330 (119,331)
----------------------- -----------------------
Net cash provided by operating activities 10,554,333 1,450,438
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Securities available for sale
Sales 18,241,645 19,288,989
Maturities, prepayments and calls 58,510,072 19,987,628
Purchases (88,503,697) (32,515,266)
Securities held to maturity
Maturities, prepayments and calls 252,000 -
Purchases (1,674,714) (1,637,004)
Purchases of bank owned life insurance - (5,180,000)
Net change in loans receivable (6,165,680) (262,854)
Purchases of premises and equipment (98,176) (157,044)
Sales of premises and equipment 3,309 -
Proceeds from sale of real estate owned 65,000 23,865
----------------------- -----------------------
Net cash (used in) investing activities (19,370,241) (451,686)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net change in deposits 5,346,926 5,120,611
Net change in borrowings 8,604,061 (9,850,971)
Treasury stock purchases (343,728) (571,208)
Cash dividends paid (837,991) (817,622)
----------------------- -----------------------
Net cash provided by (used in) financing activities 12,769,268 (6,119,190)
----------------------- -----------------------
Net change in cash and cash equivalents 3,953,360 (5,120,438)
Cash and cash equivalents at beginning of period 10,288,554 23,389,756
----------------------- -----------------------
Cash and cash equivalents at end of period $ 14,241,914 $ 18,269,318
======================= =======================
Interest paid $ 4,003,646 $ 4,919,251
Income taxes paid 395,000 551,346
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 consolidated financial statements are prepared without
audit and reflect all adjustments which, in the opinion of management, are
necessary to present fairly the consolidated financial position of United
Bancorp, Inc. ("Company") at June 30, 2003, and its results of operations
and cash flows for the three and six month periods then ended. All such
adjustments are normal and recurring in nature. The accompanying condensed
consolidated financial statements have been prepared in accordance with the
instructions for 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
Company's consolidated financial statements and related notes thereto, for
the year ended December 31, 2002 included in its Annual Report to
Shareholders. Reference is made to the accounting policies of the Company
described in the notes to the consolidated financial statements contained
in its 2002 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, (collectively, "the 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, business 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 deposits, 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 flow from operations of business.
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 consequences 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 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.
The components used in the earnings per share computation were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
---------------- ---------------- --------------- --------------
BASIC
Net income $827,228 $804,201 $ 1,629,753 $ 1,484,359
================ ================ =============== ==============
Weighted average common shares outstanding 3,181,546 3,258,149 3,184,125 3,266,051
================ ================ =============== ==============
Basic earnings per common share $ 0.26 $ 0.24 $ 0.51 $ 0.45
================ ================ =============== ==============
DILUTED
Net income $827,228 $804,201 $ 1,629,753 $ 1,484,359
================ ================ =============== ==============
Weighted average common shares outstanding for
basic earnings per common share 3,181,546 3,258,149 3,184,125 3,266,051
Add: Dilutive effects of assumed exercise of stock
options 12,381 10,171 12,381 9,721
---------------- ---------------- --------------- --------------
Average shares and dilutive potential common shares 3,193,927 3,268,320 3,196,506 3,275,772
================ ================ =============== ==============
Diluted earnings per common share $ 0.26 $ 0.24 $ 0.51 $ 0.45
================ ================ =============== ==============
Number of stock options not considered in computing
diluted earnings per share due to antidilutive nature 21,057 21,059 21,057 21,059
Weighted average exercise price $ 9.69 $ 9.69 $ 9.69 $ 9.69
8
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS AND DIVIDENDS PER SHARE (CONTINUED):
The interim period disclosures for the stock option plan as required
under Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 148 "Accounting for Stock Based Compensation --
Transition and Disclosure" have been omitted due to no activity in the
option plan subsequent to December 31, 2002.
COMPREHENSIVE INCOME:
Comprehensive income consists of net income and other elements of
comprehensive income(loss). Other comprehensive income includes net
unrealized gains and losses on securities available for sale which are
recognized as a separate component of shareholders' equity. The detailed
components of the net change in unrealized gains on securities available
for sale are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
------------------ ---------------- ---------------- ----------------
Net change in unrealized gains
on securities available for sale:
Unrealized holding gains on available
for sale securities arising during period $ 1,171,994 $3,424,422 $ 662,790 $ 866,245
Reclassification adjustment for gains
later recognized in income (79,952) (67,159) (281,880) (113,504)
------------------ ---------------- ---------------- ----------------
1,092,042 3,357,263 380,910 752,741
Tax effects thereon (371,295) (1,142,406) (129,510) (255,932)
------------------ ---------------- ---------------- ----------------
Net change in unrealized gains
on securities available for sale $ 720,747 $2,214,857 $ 251,400 $ 496,809
================== ================ ================ ================
9
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES:
Securities were as follows:
----------------------------------------------------------------
ESTIMATED GROSS GROSS
FAIR VALUE UNREALIZED GAINS UNREALIZED LOSSES
------------------- ---------------------- ---------------------
AVAILABLE FOR SALE - JUNE 30, 2003
U.S. Government and federal agency $ 81,564,665 $ 1,157,068 $ -
State and municipal obligations 22,137,540 714,671 (101,112)
Mortgage-backed securities 34,175,676 158,876 (85,289)
Collateralized mortgage obligations 3,220,737 10,057 (26,992)
------------------- ---------------------- ---------------------
Total debt securities 141,098,618 2,040,672 (213,393)
------------------- ---------------------- ---------------------
Other securities 3,895,522 14,222 -
------------------- ---------------------- ---------------------
$ 144,994,140 $ 2,054,894 $ (213,393)
=================== ====================== =====================
AVAILABLE FOR SALE - DECEMBER 31, 2002
U.S. Government and federal agency $ 93,261,759 $ 1,186,116 $ (17,179)
State and municipal 20,713,901 310,894 (58,552)
Mortgage-backed 14,074,772 50,763 (31,647)
Collateralized mortgage obligations 998,589 2,752 -
------------------- ---------------------- ---------------------
Total debt securities 129,049,021 1,550,525 (107,378)
------------------- ---------------------- ---------------------
Other securities 3,820,463 18,200 (756)
------------------- ---------------------- ---------------------
$ 132,869,484 $ 1,568,725 $ (108,134)
=================== ====================== =====================
GROSS GROSS
CARRYING UNRECOGNIZED UNRECOGNIZED FAIR VALUE
AMOUNT GAINS LOSSES
------------------ --------------------- --------------------- ----------------
HELD TO MATURITY - JUNE 30, 2003
State and municipal obligations $ 14,363,260 $ 1,077,429 $ (9,490) $ 15,431,199
================== ===================== ===================== ================
HELD TO MATURITY - DECEMBER 31, 2002
State and municipal obligations $ 12,925,517 $ 712,282 $ (3,622) $ 13,634,177
================== ===================== ===================== ================
Sales of securities available for sale were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
------------------ --------------------- --------------------- ----------------
Proceeds $ 5,629,133 $ 13,263,208 $ 18,241,645 $ 19,288,989
Gross gains 82,571 67,159 284,499 113,504
Gross losses 2,619 - 2,619 -
10
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES: (CONTINUED)
Contractual maturities of securities at June 30, 2003 were as follows:
AVAILABLE FOR SALE AMORTIZED ESTIMATED
COST FAIR VALUE
------------------ ------------------
U.S. government and federal agency obligations
1 - 5 Years $ 499,859 $ 512,635
5 - 10 Years 19,469,275 19,895,869
Over 10 Years 60,438,463 61,156,161
------------------ ------------------
Total 80,407,597 81,564,665
------------------ ------------------
State and municipal obligations
Under 1 Year 3,623,881 3,664,558
1 - 5 Years 1,316,535 1,405,571
5 - 10 Years 6,583,267 6,932,126
Over 10 Years 10,000,298 10,135,285
------------------ ------------------
Total 21,523,981 22,137,540
------------------ ------------------
Mortgage backed securities
1 - 5 Years 1,992,752 1,997,039
5 - 10 Years 16,638,433 16,709,859
Over 10 Years 15,470,904 15,468,778
------------------ ------------------
Total 34,102,089 34,175,676
------------------ ------------------
Collateralized mortgage obligations
5 - 10 Years 1,204,403 1,205,384
Over 10 Years 2,033,269 2,015,353
------------------ ------------------
Total 3,237,672 3,220,737
------------------ ------------------
Other investments
Equity securities 3,881,300 3,895,522
------------------ ------------------
Total securities available for sale $143,152,639 $ 144,994,140
================== ==================
HELD TO MATURITY
State and municipal obligations
Under 1 Year $ 264,791 $ 273,058
1 - 5 Years 4,136,254 4,446,981
5 - 10 Years 3,248,880 3,627,116
Over 10 Years 6,713,335 7,084,044
------------------ ------------------
Total securities held to maturity $ 14,363,260 $ 15,431,199
================== ==================
Securities with a carrying value of approximately $56.5 million at June 30, 2003
and $49.7 million at December 31, 2002 were pledged to secure public deposits,
repurchase agreements and other liabilities as required or permitted by law.
11
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,
2003 2002 2003 2002
---------------- ----------------- ----------------- -----------------
Beginning Balance $ 3,005,291 $ 2,948,205 $ 2,971,116 $ 2,879,065
Provision charged to operating expense 150,000 157,500 300,000 315,000
Loans charged-off (121,427) (172,585) (289,307) (316,676)
Recoveries 43,929 58,998 95,984 114,729
---------------- ----------------- ----------------- -----------------
Ending Balance $ 3,077,793 $ 2,992,118 $ 3,077,793 $ 2,992,118
================ ================= ================= =================
Non-performing loans were as follows:
JUNE 30, DECEMBER 31,
2003 2002
---------------- -----------------
Loans past due over 90 days still on accrual $ 420,000 $ 85,000
Nonaccrual loans 592,000 685,000
Loans considered impaired under the provisions of SFAS No. 114 were not
material at June 30, 2003 and December 31, 2002. Nonaccrual loans include
all impaired loans and smaller balance homogenous loans, such as
residential mortgage and consumer loans which are collectively evaluated
for impairment.
4. COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
Financial instruments are used in the normal course of business to meet
the financing needs of customers. Such financial instruments include
commitments to extend credit, standby letters of credit and financial
guarantees. These involve, to varying degrees, credit and interest-rate
risk in excess of the amounts reported in the financial statements.
Exposure to credit loss if the other party does not perform is
represented by the contractual amount for commitments to extend credit,
standby letters of credit and financial guarantees written. The same credit
policies are used for commitments and conditional obligations as are used
for loans. The amount of collateral obtained, if deemed necessary, upon
extension of credit is based on management's credit evaluation. Collateral
varies, but may include accounts receivable, inventory, property,
equipment, income-producing commercial properties, residential real estate
and consumer assets.
12
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
commitment. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being used, total commitments do
not necessarily represent future cash requirements. Standby letters of
credit and financial guarantees written are conditional commitments to
guarantee a customer's performance to a third party.
A summary of the notional or contractual amounts of financial
instruments with off-balance sheet risk at June 30, 2003 and December 31,
2002 follows:
JUNE 30, DECEMBER 31,
2003 2002
---------------- -----------------
Commitments to extend credit $27,162,593 $ 25,423,442
Credit card and ready reserve lines 1,424,108 1,384,224
Standby letters of credit 610,200 490,200
At June 30, 2003 commitments to make fixed-rate loans totaled
$1,538,721 with the interest rates on those fixed-rate commitments ranging
from 4.75% to 9.75%. At December 31, 2002, commitments to make fixed rate
loans totaled $2,087,373 with interest rates on those fixed-rate
commitments ranging from 4.75% to 9.75%. Fixed rate commitment totals as of
June 30, 2003 and December 31, 2002 are included in the tables above.
5. NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the ("FASB") issued FASB Interpretation No. 45, (FIN
No. 45) "Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires a
guarantor entity, at the inception of a guarantee covered by the measurement
provisions of the interpretation, to record a liability for the fair value of
the obligation undertaken in issuing guarantee. The Corporation has financial
letters of credit. Financial letters of credit require the Corporation to make
payment if the customer's financial condition deteriorates, as defined in the
agreements. FIN No. 45 requires the Corporation to record an initial liability
generally equal to the fees received for these letters of credit, when
guaranteeing obligations unless it became probable that the Corporation would
have to perform under the guarantee. FIN No. 45 applies prospectively to letters
of credit the Corporation issues or modifies subsequent to December 31, 2002.
The Corporation adopted FIN No. 45 on January 1, 2003, without material effect
on its consolidated financial statements.
The Corporation defines the initial fair value of these letters of credit as the
fee received from the customer. The maximum potential undiscounted amount of
future payments of these letters of credit, as of June 30, 2003 are $535,000,
which expire through February 2004. Amounts due under these letters of credit
would be reduced by any proceeds that the Corporation would be able to obtain in
liquidating the collateral for the loans, which varies depending on the
customer.
13
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns, or both. FIN 46
also requires disclosures about variable interest entities that a company is not
required to consolidate, but in which it has a significant variable interest.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Corporation is currently evaluating the
impact of FIN 46 and expects no material effect on its financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 150 changes the
classification in the statement of financial position of certain common
financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS No.
150 requires the issuer to classify the following financial instruments as
liabilities: mandatorily redeemable preferred and common stocks; forward
purchase contracts that obligate the issuer to repurchases shares of its stock
by transferring assets; freestanding put options that may obligate the issuer to
repurchase shares of its stock by transferring assets; freestanding financial
instruments that require or permit the issuer to settle an obligation by issuing
a variable number of its shares if, at inception, the monetary value of the
obligation is based solely or predominately on any of the following: a fixed
monetary amount known at inception; variations in something other than the
issuer's shares; or variations inversely related to changes in the value of the
issuer's shares. SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and, with one exception, is effective at
the beginning of the first interim period beginning after June 15, 2003. SFAS
No. 150 is not expected to have a material effect on the Corporation's financial
position or results of operations.
6. APPLICATION OF CRITICAL ACCOUNTING POLICIES
United Bancorp Inc.'s consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States
and follow general practices within the financial services industry. The
application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions, and judgments
are based on information available as of the date of the financial statements;
as this information changes, the financial statements could reflect different
estimates, assumptions, and judgments.
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements contained in the Company's
2002 Annual Report. These policies, along with the disclosures presented in the
other financial statement notes and in this financial review,
14
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. APPLICATION OF CRITICAL ACCOUNTING POLICIES (CONTINUED)
provide information on how significant assets and liabilities are valued in the
financial statements and how those values are determined.
15
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, 2003, as compared to December 31, 2002 and the results of
operations for the six and three months ended June 30, 2003 compared to the
same period in 2002. 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.
16
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, 2003, gross loans were $193,860,271 compared to $187,887,914 at
year-end 2002, an increase of $5,972,357 or 3.2%. The increase in total
outstanding loans was the result of an increase in the commercial, commercial
real estate, installment and real estate portfolios. Management attributes the
increase in loans to the slightly improved general economic conditions in the
lending markets served.
Installment loans represented to 24.1% of total loans at June 30, 2003
compared to 24.0% at year-end 2002. 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,
reducing the risk to changes in economic conditions in the communities housing
the Company's 17 branch locations. CITIZENS experienced a 11.3%, or $3,148,432
increase in installment loans while COMMUNITY had a decrease of 8.1%, or
$1,383,787 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 in lowering rates
on these fixed rate loan products. 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 48.7% of total loans
at June 30, 2003 compared to 48.1% at December 31, 2002. Commercial and
commercial real estate loans have increased $4,068,944 or 4.5% since December
31, 2002. 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 more consistent economic growth occurring 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 27.2% of total loans at June 30, 2003 and 28.0% at
year-end 2002. In dollar volume real estate loans increased 0.3% since December
31, 2002. However, COMMUNITY actually experienced an increase in real estate
loans of 6.3% or $1,411,816 and CITIZENS experienced a decrease of 4.2% or
$1,273,048. 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 three months ended June 30, 2003 were
approximately $77,000, or 2.6%, of the beginning balance in the allowance for
loan losses. During the first six months of 2003, net charge-offs were almost
entirely consumer loans and totaled approximately $193,000.
17
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, 2003
increased approximately $12,125,000, or 9.1% from year-end 2002 totals.
Securities held to maturity at March 31, 2002 increased approximately $1,438,000
or 11.1% compared to year-end 2002 totals.
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, 2003, total core
deposits increased approximately $11,412,182 or 4.4% primarily from an increase
in interest bearing demand deposits of $9.4 million.
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, 2003, certificates of deposit greater than
$100,000 decreased approximately $6,065,000, or 14.2% from year-end 2002 totals.
Over the past year, COMMUNITY has developed several large depository
customers. As of June 30, 2003, the eight largest depository customers accounted
for approximately 29% of COMMUNITY'S certificate of deposits and approximately
90% of total certificates of deposits greater than $100,000. These customers
also represent 28% of Community's demand deposits at June 30, 2003. Total
concentration of retail funding is approximately 30% of COMMUNITY'S total
deposits at June 30, 2003. On a consolidated level, this represents
approximately 9% of total retail deposits at June 30, 2003 compared to 9% at
December 31, 2002. This deposit concentration does pose possible liquidity and
earnings risk for COMMUNITY. The earnings risks would be triggered if COMMUNITY
would be placed in a position to sell assets below book value to meet current
liquidity needs. This risk is mitigated with COMMUNITY'S capability to borrow
wholesale funding from its correspondent banks. Management has an active
asset/liability committee that monitors, among other items, monthly liquidity
needs on a 90 day time horizon.
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
18
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
("FHLB") advances. In the first six months of 2003, 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 borrowings increased
approximately $8.6 million, or 32.6% from year-end 2002 totals.
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2003 AND 2002
NET INCOME
Basic and diluted earnings per share for the six months ended June 30, 2003
was $0.51, compared with $0.45 for the six months ended June 30, 2002. Net
income increased 9.8% for the six months ended June 30, 2003, compared to the
same period in 2002.
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 1.3% for the six months ended June 30, 2003 compared
to the same period in 2002. The decrease was a result of the Company having a
lower net interest margin. This was offset by a larger base of average earning
assets in the first six months of 2003 compared to the same period in 2002.
Total interest income for the six months ended June 30, 2003 was
$10,295,000 compared to $11,179,000 for the same period in 2002. Total interest
income decreased $884,000, or 7.9%. 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, 2003 when compared
to the same six-month period ended June 30, 2002, decreased 16.8%, or $804,000.
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 $300,000 for the six months ended
June 30, 2003 compared to $315,000 for the same period in 2002. Management
decreased the provision in 2003 due to a decrease in net charge-offs for the
2003 six-month period, partially offset by a modest 3.2% growth in the loan
portfolio since December 31, 2002. Management believes that all known and
inherent losses in the loan portfolio have been provided for.
NONINTEREST INCOME
Total noninterest income is made up of bank related fees and service
charges, earnings on bank owned life insurance, 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
19
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
June 30, 2003 was $1,425,000 compared to $887,000 for the same six months period
ended June 30, 2002, an increase of 60.5%. The Company's secondary market real
estate loan program increased $49,000 over the same period in 2002. In addition,
the Company's security portfolio generated approximately $282,000 in security
gains for the six months ended June 30, 2003, compared to $114,000 for the same
period in 2002. Primarily, 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. Other income
increased by approximately $256,000, or 94.4% due primarily to a $182,000
increase in earnings on bank owned life insurance in 2003.
NONINTEREST EXPENSE
Noninterest expense for the six months ended June 30, 2003 increased
$337,000 or 6.7% over the six months ended June 30, 2002. Salary and benefit
expense increased approximately $67,000, or 2.6% for the six months ended June
30, 2003, due primarily to rising health care costs. Occupancy expense also
accounted for an increase. Occupancy expense increased $71,000 or 9.7% for the
six months ended June 30, 2003, as compared to the same period in 2002.
Occupancy increased due to hardware and software upgrades that occurred in mid
2002 and therefore did not impact occupancy expense for the six months ended
June 30, 2002.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2003
NET INCOME
Basic and diluted earnings per share for the three months ended June 30,
2003 was $0.26, compared with $0.24 for the three months ended June 30, 2003 an
increase of 8.3%. Net income increased 2.9% for the three months ended June 30,
2003, compared to the same period in 2002.
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 3.0% for the three months ended June 30, 2003,
compared to the same period in 2002. The decrease was a result of the Company
having a lower net interest margin. The impact of the lower net interest margin
was offset slightly by a larger base of average earning assets in the three
months ended June 30, 2003, compared to the same period in 2002.
Total interest income for the three months ended June 30, 2003 was
$5,080,000, compared to $5,546,000 for the same period in 2002, a decrease of
$466,000, or 8.4%. 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 and that trend
is expected to continue.
Total interest expense for the three months ended June 30, 2003 when
compared to the same three-month period ended June 30, 2002, reflected a decline
of 15.9%, or $369,000. The Company has
20
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 and this trend continues in 2003.
PROVISION FOR LOAN LOSSES
The total provision for loan losses was $150,000 for the three months ended
June 30, 2003 compared to $157,500 for the same period in 2003. Management
decreased the provision in 2003 due to a decrease in net charge-offs in the
current year, partially offset by a modest 3.2% growth in the loan portfolio
since December 31, 2002.
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, earnings on bank owned life insurance, 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, 2003 was $680,000 compared to $442,000 for the
same three-month period ended June 30, 2002. For the three months ended June 30,
2003, compared to the same period in 2002, noninterest income increased
approximately 53.9% or $238,000. The Company's secondary market real estate loan
program increased $62,000 over the same period in 2002. In addition, the
Company's security portfolio generated approximately $80,000 in gains for the
three months ended June 30, 2003, compared to $67,000 for the same period in
2002, an increase of $13,000, or 19.0%. Other income for the three months ended
June 30, 2003 increased by $129,000, or 100.3% over the comparable 2002 period
due primarily to $94,000 of bank owned life insurance purchased in late 2002.
NONINTEREST EXPENSE
Noninterest expense for the three months ended June 30, 2003 increased
$158,000 over the three months ended June 30, 2002. The majority of this
increase was a result of an increase in company franchise tax expense, insurance
costs and health care benefits for the company's employees.
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, 2003, totaled $32,854,296 compared to $32,154,862 at December 31, 2002,
a 2.2% decrease. Total shareholders' equity in relation to total assets was
8.53% at June 30, 2003 and 8.89% at December 31, 2002. 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 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 is be purchased by the Plan for
participants with automatically reinvested
21
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
dividends. The Plan does not represent a change in the Company's dividend policy
or a guarantee of future dividends.
The Company and the 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 consolidated regulatory
capital ratios at June 30, 2003:
JUNE 30,
(IN THOUSANDS) 2003
-----------------
Tier 1 capital $ 31,560
Total risk-based capital $ 34,297
Risk-weighted assets $ 234,244
Average total assets $ 366,687
Tier 1 capital to average assets 8.61%
Tier 1 risk-based capital ratio 13.47%
Total risk-based capital ratio 14.64%
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
22
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY-CONTINUED
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, and 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, 2003, 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. For a more detailed illustration of sources and
uses of cash, refer to the condensed consolidated statements of cash flows.
INFLATION AND CHANGING PRICES
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 GAAP 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.
23
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 U.S.
Agency obligations and State and Municipal obligations and has a modest amount
invested in mortgage-backed securities. Due to total securities approximating
41% of total assets and a significant portion of its loan portfolio consisting
of fixed rate loans, the Company is 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 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-JUNE 30, 2003 NET PORTFOLIO VALUE-DECEMBER 31, 2002
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
--------------------------------------------- -------------------------------------------
Up 200 $ 30,561 $ (536) -1.72% Up 200 $ 27,138 $ (1,912) -6.58%
Up 100 $ 32,735 $ 1,638 5.27% Up 100 $ 30,396 $ 1,346 4.63%
Base $ 31,097 Base $ 29,050
Down 100 $ 27,655 $ (3,442) -11.07% Down 100 $ 26,391 $ (2,659) -9.15%
Down 200 $ 27,924 $ (3,173) -10.20% Down 200 $ 26,553 $ (2,497) -8.60%
24
UNITED BANCORP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
The projected volatility of the net present value at both June 30, 2003 and
December 31, 2002 fall within the general guidelines established by the Board of
Directors. The NPV table shows that in a falling interest rate environment, the
NPV would decrease between 11.07% and 10.20% given a 100 and 200 basis point
decline in rates. In management's view there is a low probability that interest
rates would decrease another 100 to 200 basis points. Given an upward change in
interest rates the Company's NPV would increase 5.27% with a 100 basis point
interest rate increase. In a 200 basis point rate increase, the Company's NPV
would decrease 1.72%. This decrease is a result of the Company's available for
sale securities portfolio that is invested in fixed-rate securities. As interest
rates increase, the market value of the securities decrease. However, since the
Company currently has the ability to hold these securities to their final
maturity, it would not have to incur any losses.
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
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
June 30, 2003, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of June 30, 2003,
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.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended June 30, 2003, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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
The annual meeting of the shareholders of United Bancorp, Inc.
was held on April 23, 2003 for the purpose of electing four
Directors to hold office until the annual meeting of shareholders
to be held in 2005. Proxies for the meeting were solicited
pursuant to Section 14(a) of the Securities Exchange Act of 1934
and there was no solicitation in opposition to management's
nominees. All of management's nominees for Director as listed in
the proxy statement were elected by the votes set forth below.
Nominees For Withheld
-------- --- --------
James W. Everson 2,503,994 36,711
John M. Hoopingarner 2,522,951 17,753
Richard L. Riesbeck 2,537,585 3,119
Matthew C. Thomas 2,537,465 3,239
Other directors whose term continues after the Annual Meeting of
Shareholders are Michael J. Arciello, Terry A. McGhee, and L.E.
Richardson, Jr.
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 by reference to Appendix B of
United Bancorp's definitive proxy statement on
Schedule 14A filed March 14, 2001; Commission file
number 0-16540.)
3.2 Amended Code of Regulations of United Bancorp, Inc.
(Incorporated by reference to United Bancorp's
definitive proxy statement on Schedule 14A filed
March 14, 2001; Commission file number 0-16540.)
27
UNITED BANCORP, INC.
OTHER INFORMATION (CONTINUED)
31.1 Certification by Chief Executive Officer required by
Securities and Exchange Commission Rule 13a-14.
31.2 Certification by Chief Financial Officer required by
Securities and Exchange Commission Rule 13a-14.
32.1 Certification pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.
32.2 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 furnished one report on SEC Form 8-K during the quarter ended
June 30, 2003.
Date of Event Reported Event Reported
- ---------------------- --------------
April 24, 2003 Items 9 and 12 -- Regulation FD Disclosure, and Disclosure of Results
of Operations and Financial Condition, financial results for the
first quarter ended March 31, 2003
28
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 14, 2003 By: /s/ James W. Everson
- ------------------------------------------- -----------------------------
Date James W. Everson
Chairman, President & Chief Executive Officer
August 14, 2003 By: /s/ Randall M. Greenwood
- -------------------------------------------- -----------------------------
Date Randall M. Greenwood
Senior Vice President, Chief Financial Officer and Treasurer
29
UNITED BANCORP, INC.
EXHIBIT INDEX
Exhibit Number Description of Exhibits
- -------------- -----------------------
3.1 Restated Articles of Incorporation of United Bancorp,
Inc. (Incorporated by reference to Appendix B to
United Bancorp's definitive proxy statement on
Schedule 14A filed March 14, 2001; Commission file
number 0-16540.)
3.2 Restated Code of Regulations of United Bancorp, Inc.
(Incorporated by reference to Appendix C to United
Bancorp's definitive proxy statement on Schedule 14A
filed March 14, 2001; Commission file number
0-16540.)
31.1 Certification by Chief Executive Officer required by
Securities and Exchange Commission Rule 13a-14.
31.2 Certification by Chief Financial Officer required by
Securities and Exchange Commission Rule 13a-14.
32.1 Certification by Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as enacted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as enacted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
30