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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 SEPTEMBER 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 (IRS Employer
incorporation or organization) 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 OCTOBER 21, 2003
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UNITED BANCORP, INC.
TABLE OF CONTENTS
FORM 10-Q
PART I FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets.............................................................................3
Condensed Consolidated Statements of Income.......................................................................4
Condensed Consolidated Statements of Shareholders' Equity.........................................................5
Condensed Consolidated Statements of Cash Flows...................................................................6
Notes to the Condensed Consolidated Financial Statements.....................................................7 - 14
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................................15 - 22
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................................23 - 24
ITEM 4. Controls and Procedures....................................................................................25
PART II OTHER INFORMATION
ITEM 1.
Legal Proceedings................................................................................................26
ITEM 2.
Changes in Securities and Use of Proceeds........................................................................26
ITEM 3.
Default Upon Senior Securities...................................................................................26
ITEM 4.
Submission of Matters to a Vote of Security Holders..............................................................26
ITEM 5.
Other Information................................................................................................26
ITEM 6.
Exhibits and Reports on Form 8-K.................................................................................26
SIGNATURES.........................................................................................................27
See accompanying notes to the condensed consolidated financial statements 2
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
PART I
FINANCIAL INFORMATION
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------------- ------------------
ASSETS
Cash and due from financial institutions $ 8,070,087 $ 8,248,554
Federal funds sold - 2,040,000
----------------- ------------------
Total cash and cash equivalents 8,070,087 10,288,554
Securities available for sale 145,422,653 132,869,484
Securities held to maturity
(Estimated fair value of $14,955,438 at 09/30/03 and $13,634,177 at 12/31/02) 14,270,754 12,925,517
Loans receivable
Commercial loans 25,593,302 21,059,890
Commercial real estate loans 70,329,228 69,286,653
Real estate loans 51,245,392 52,535,507
Installment loans 48,257,963 45,005,864
----------------- ------------------
Total loans receivable 195,425,885 187,887,914
Allowance for loan losses (3,089,256) (2,971,116)
----------------- ------------------
Net loans receivable 192,336,629 184,916,798
Premises and equipment, net 8,338,696 8,932,684
Other real estate and repossessions 719,077 698,065
Core deposit and other intangible assets 56,917 75,452
Bank owned life insurance 7,108,278 6,860,601
Accrued interest receivable 2,551,994 2,602,091
Other assets 2,520,327 1,541,823
----------------- ------------------
Total Assets $ 381,395,412 $ 361,711,069
================= ==================
LIABILITIES
Demand deposits
Noninterest-bearing $ 30,908,206 $ 26,843,394
Interest-bearing 60,333,456 48,341,237
Savings deposits 49,454,549 50,382,277
Time deposits - under $100,000 130,287,308 131,794,499
Time deposits - $100,000 and over 35,843,509 42,840,126
----------------- ------------------
Total deposits 306,827,028 300,201,533
Federal funds purchased 7,080,000 2,055,000
Securities sold under agreements to repurchase 8,555,382 7,009,799
Other borrowed funds 25,716,334 17,347,429
Accrued expenses and other liabilities 1,565,893 2,942,446
----------------- ------------------
Total Liabilities 349,744,637 329,556,207
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 September 30, 2003 and December 31, 2002 3,411,307 3,411,307
Additional paid in capital 25,673,217 25,651,879
Retained earnings 5,737,650 4,472,544
Treasury stock at cost, 188,265 shares at 09/30/03 and 163,065 shares at 12/31/02 (2,115,855) (1,772,127)
Shares held by deferred compensation plan at cost, 44,319 shares at 09/30/03
and 42,828 at 12/31/02 (594,069) (572,731)
Accumulated other comprehensive income(loss), net of tax (461,475) 963,990
----------------- ------------------
Total Shareholders' Equity 31,650,775 32,154,862
----------------- ------------------
Total Liabilities and Shareholders' Equity $ 381,395,412 $ 361,711,069
================= ==================
See accompanying notes to the condensed consolidated financial statements 3
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Interest and dividend income
Loans, including fees $ 3,475,825 $ 3,645,649 $ 10,387,834 $ 11,044,815
Taxable securities 1,235,272 1,297,166 3,769,606 4,369,493
Non-taxable securities 367,263 314,669 1,079,889 838,402
Federal funds sold 834 70,570 57,916 184,632
Dividends on Federal Home Loan Bank stock and other 41,970 53,580 120,814 123,497
--------------- --------------- --------------- ---------------
Total interest and dividend income 5,121,164 5,381,634 15,416,059 16,560,839
Interest expense
Deposits
Demand 129,246 128,440 380,748 372,491
Savings 67,846 101,990 194,375 312,538
Time 1,477,434 1,907,318 4,647,842 5,929,174
Other borrowings 240,925 152,138 675,819 462,622
--------------- --------------- --------------- ---------------
Total interest expense 1,915,451 2,289,886 5,898,784 7,076,825
--------------- --------------- --------------- ---------------
Net interest income 3,205,713 3,091,748 9,517,275 9,484,014
Provision for loan losses 114,000 157,500 414,000 472,500
--------------- --------------- --------------- ---------------
Net interest income after provision for loan losses 3,091,713 2,934,248 9,103,275 9,011,514
Noninterest income
Service charges on deposit accounts 287,553 235,187 814,046 698,167
Net realized gains on sales of securities 54,245 9,493 336,125 122,997
Net realized gains on sales of loans 77,488 2,330 166,937 42,312
Other income 233,204 224,212 760,038 495,224
--------------- --------------- --------------- ---------------
Total noninterest income 652,490 471,222 2,077,146 1,358,700
--------------- --------------- --------------- ---------------
Noninterest expense
Salaries and employee benefits 1,324,504 1,254,251 3,922,610 3,785,734
Occupancy and equipment 384,997 368,674 1,191,748 1,088,478
Professional services 93,519 42,446 313,215 236,084
Insurance 61,032 62,823 187,029 174,586
Franchise and other taxes 103,290 88,485 309,915 265,616
Advertising 84,950 80,423 240,012 227,929
Stationary and office supplies 78,752 83,796 224,705 215,240
Amortization of intangibles 4,500 4,500 13,500 19,988
Other expenses 540,819 472,857 1,555,665 1,389,822
--------------- --------------- --------------- ---------------
Total noninterest expense 2,676,363 2,458,255 7,958,399 7,403,477
Income before income taxes 1,067,840 947,215 3,222,022 2,966,737
Income tax expense 175,500 211,600 699,929 746,763
--------------- --------------- --------------- ---------------
Net income $ 892,340 $ 735,615 $ 2,522,093 $ 2,219,974
=============== =============== =============== ===============
Earnings per common share - Basic $ 0.28 $ 0.22 $ 0.79 $ 0.67
Earnings per common share - Diluted $ 0.28 $ 0.22 $ 0.79 $ 0.67
Dividends per common share $ 0.13 $ 0.12 $ 0.39 $ 0.37
See accompanying notes to the condensed consolidated financial statements 4
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TREASURY ACCUMULATED
ADDITIONAL STOCK AND OTHER
COMMON PAID IN DEFERRED RETAINED COMPREHENSIVE
STOCK CAPITAL PLAN EARNINGS INCOME (LOSS) TOTAL
------------ ------------- ------------- ------------ ------------- ------------
BALANCE AT JANUARY 1, 2002 $ 3,249,227 $ 23,619,610 $ (1,382,613) $ 5,044,540 $ (56,569) $ 30,474,195
Net income 2,219,974 2,219,974
Net change in unrealized loss on
securities available for sale 949,680 949,680
-------------
Comprehensive income 3,169,654
Shares purchased for deferred compensation plan 85,397 (85,397) -
Shares distributed from deferred compensation plan (49,840) 49,840 -
Purchases of treasury stock, at cost (571,208) (571,208)
Cash dividends - $0.37 per share (1,222,104) (1,222,104)
------------ ------------- ------------- ------------ ------------ -------------
BALANCE AT SEPTEMBER 30, 2002 (UNAUDITED) $ 3,249,227 $ 23,655,167 $ (1,989,378) $ 6,042,410 $ 893,111 $ 31,850,537
============ ============= ============= ============ ============ =============
BALANCE AT JANUARY 1, 2003 $ 3,411,307 $ 25,651,879 $ (2,344,858) $ 4,472,544 $ 963,990 $ 32,154,862
Net income 2,522,093 2,522,093
Net change in unrealized gain on
securities available for sale (1,425,465) (1,425,465)
-------------
Comprehensive income 1,096,628
Shares purchased for deferred compensation plan 71,630 (71,630) -
Shares distributed from deferred compensation plan (50,292) 50,292 -
Purchases of treasury stock, at cost (343,728) (343,728)
Cash dividends - $0.39 per share (1,256,987) (1,256,987)
------------ ------------- ------------- ------------ ------------ -------------
BALANCE AT SEPTEMBER 30, 2003 (UNAUDITED) $ 3,411,307 $ 25,673,217 $ (2,709,924) $ 5,737,650 $ (461,475) $ 31,650,775
============ ============= ============= ============ ============ =============
See accompanying notes to the condensed consolidated financial statements 5
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---------------- ----------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net income for the period $ 2,522,093 $ 2,219,974
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 702,355 638,436
Provision for loan losses 414,000 472,500
Deferred taxes 71,899 (74,377)
Bank owned life insurance income (276,731) (87,545)
Federal Home Loan Bank stock dividend (117,800) (132,900)
Net realized gains on sales of securities (336,125) (122,997)
(Accretion)/amortization of premium and discount on securities, net 639,029 (34,240)
Net realized gains on sales of loans (68,233) 21,464
Net realized gains on sale of real estate owned (10,500) (6,693)
Amortization of mortgage servicing rights 96,964 55,868
Net changes in accrued interest receivable and other assets (540,675) (391,565)
Net changes in accrued expenses and other liabilities (1,152,538) (92,319)
---------------- ----------------
Net cash provided by operating activities 1,943,738 2,465,606
CASH FLOWS USED IN INVESTING ACTIVITIES
Securities available for sale
Sales 27,922,539 34,753,322
Maturities, prepayments and calls 68,432,513 54,491,357
Purchases (111,275,642) (88,855,524)
Securities held to maturity
Maturities, prepayments and calls 352,000 --
Purchases (1,674,714) (1,637,004)
Purchases of bank owned life insurance -- (6,527,554)
Net change in loans receivable (7,864,302) (1,949,792)
Purchases of premises and equipment (94,867) (630,941)
Proceeds from sale of real estate owned 76,000 27,893
---------------- ----------------
Net cash used in investing activities (24,126,473) (10,328,243)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Net change in deposits 6,625,495 7,124,599
Net change in borrowings 14,939,488 (3,032,632)
Treasury stock purchases (343,728) (571,208)
Cash dividends paid (1,256,987) (1,222,104)
---------------- ----------------
Net cash provided by financing activities 19,964,268 2,298,655
---------------- ----------------
Net decrease in cash and cash equivalents (2,218,467) (5,563,982)
Cash and cash equivalents at beginning of period 10,288,554 23,389,756
---------------- ----------------
Cash and cash equivalents at end of period $ 8,070,087 $ 17,825,774
================ ================
Interest paid $ 5,942,417 $ 7,225,836
Income taxes paid 592,000 810,346
Recognition of Mortgage Servicing Rights 98,704 63,776
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 September 30, 2003, and
its results of operations and cash flows for the three and nine 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. The effective tax rate differs from the statutory rate due to
tax exempt municipal income and earnings on bank owned life insurance.
The effective tax rate is lower in the three month period ended
September 30, 2003 than for the three month period ended September 30,
2002 due to a change in the estimated tax provision that will be
required for the year ended December 31, 2003.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
BASIC
Net income $ 892,340 $ 735,615 $ 2,522,093 $ 2,219,974
============ ============ ============ ============
Weighted average common shares outstanding 3,179,557 3,233,555 3,182,601 3,255,102
============ ============ ============ ============
Basic earnings per common share $ 0.28 $ 0.22 $ 0.79 $ 0.67
============ ============ ============ ============
DILUTED
Net income $ 892,340 $ 735,615 $ 2,522,093 $ 2,219,974
============ ============ ============ ============
Weighted average common shares outstanding for
basic earnings per common share 3,179,557 3,233,555 3,182,601 3,255,102
Add: Dilutive effects of assumed exercise of stock
options 12,697 9,847 12,145 9,770
------------ ------------ ------------ ------------
Average shares and dilutive potential common shares 3,192,254 3,243,402 3,194,746 3,264,872
============ ============ ============ ============
Diluted earnings per common share $ 0.28 $ 0.22 $ 0.79 $ 0.67
============ ============ ============ ============
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 of dilutive potential common shares $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net change in unrealized gains on securities available for sale:
Unrealized holding gains(losses) on available
for sale securities arising during period $ (2,486,459) $ 695,661 $ (1,823,669) $ 1,561,906
Reclassification adjustment for gains
later recognized in income (54,245) (9,493) (336,125) (122,997)
------------- ------------- ------------- -------------
(2,540,704) 686,168 (2,159,794) 1,438,909
Tax effects thereon 863,839 (233,297) 734,329 (489,229)
------------- ------------- ------------- -------------
Net change in unrealized gains(losses)
on securities available for sale $ (1,676,865) $ 452,871 $ (1,425,465) $ 949,680
============= ============= ============= =============
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 - SEPTEMBER 30, 2003
U.S. Government and federal agency $ 77,094,507 $ 248,912 $ (675,199)
State and municipal obligations 22,232,188 301,440 (259,248)
Mortgage-backed securities 39,205,734 52,359 (342,046)
Collateralized mortgage obligations 2,952,026 3,800 (48,019)
-------------- -------------- --------------
Total debt securities 141,484,455 606,511 (1,324,512)
-------------- -------------- --------------
Other securities 3,938,198 18,798 --
-------------- -------------- --------------
$ 145,422,653 $ 625,309 $ (1,324,512)
============== ============== ==============
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)
Collaterized 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 ESTIMATED FAIR
AMOUNT GAINS LOSSES VALUE
-------------- -------------- -------------- ---------------
HELD TO MATURITY - SEPTEMBER 30, 2003
State and municipal obligations $ 14,270,754 $ 740,907 $ (56,223) $ 14,955,438
============== ============== ============== ==============
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
-------------- -------------- -------------- ---------------
Proceeds $ 9,680,894 $ 15,464,333 $ 27,922,539 $ 34,753,322
Gross gains 59,313 9,493 343,812 122,997
Gross losses 5,068 - 7,687 -
10
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES: (CONTINUED)
Contractual maturities of securities at September 30, 2003
were as follows:
AVAILABLE FOR SALE AMORTIZED ESTIMATED
COST FAIR VALUE
--------------- ---------------
U.S. government and federal agency obligations
1 - 5 Years $ 1,012,995 $ 1,018,535
5 - 10 Years 21,567,138 21,486,332
Over 10 Years 54,940,661 54,589,640
--------------- ---------------
Total 77,520,794 77,094,507
--------------- ---------------
State and municipal obligations
Under 1 Year 3,351,694 3,370,364
1 - 5 Years 1,315,497 1,384,956
5 - 10 Years 7,050,039 7,185,594
Over 10 Years 10,472,766 10,291,274
--------------- ---------------
Total 22,189,996 22,232,188
--------------- ---------------
Mortgage backed securities
1 - 5 Years 2,160,375 2,131,159
5 - 10 Years 17,260,401 17,129,454
Over 10 Years 20,074,645 19,945,121
--------------- ---------------
Total 39,495,421 39,205,734
--------------- ---------------
Collateralized mortgage obligations
5 - 10 Years 735,956 729,327
Over 10 Years 2,260,289 2,222,699
--------------- ---------------
Total 2,996,245 2,952,026
--------------- ---------------
Other investments
Equity securities 3,919,400 3,938,198
--------------- ---------------
Total securities available for sale $ 146,121,856 $ 145,422,653
=============== ===============
HELD TO MATURITY
State and municipal obligations
Under 1 Year $ 435,376 $ 445,868
1 - 5 Years 3,865,792 4,124,037
5 - 10 Years 3,252,120 3,526,835
Over 10 Years 6,717,466 6,858,698
--------------- ---------------
Total securities held to maturity $ 14,270,754 $ 14,955,438
=============== ===============
Securities with a carrying value of approximately $56.7 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Beginning Balance $ 3,077,793 $ 2,992,118 $ 2,971,116 $ 2,879,065
Provision charged to operating expense 114,000 157,500 414,000 472,500
Loans charged-off (131,230) (154,015) (420,537) (470,691)
Recoveries 28,693 57,501 124,677 172,230
--------------- --------------- --------------- ---------------
Ending Balance $ 3,089,256 $ 3,053,104 $ 3,089,256 $ 3,053,104
=============== =============== =============== ===============
Non-performing loans were as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
---------------- -----------------
Loans past due over 90 days still on accrual $ 143,000 $ 85,000
Nonaccrual loans 646,000 685,000
Loans considered impaired under the provisions of SFAS No. 114
were not material at September 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.
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
12
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (CONTINUED)
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 September 30, 2003 and
December 31, 2002 follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
---------------- -----------------
Commitments to extend credit $25,494,690 $ 25,423,442
Credit card and ready reserve lines 1,402,000 1,384,224
Standby letters of credit 595,200 490,200
At September 30, 2003 commitments to make fixed-rate loans
totaled $1,439,058 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 September 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 Company has financial
letters of credit. Financial letters of credit require the Company to make
payment if the customer's financial condition deteriorates, as defined in the
agreements. FIN No. 45 requires the Company 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 Company would have
to perform under the guarantee. FIN No. 45 applies prospectively to letters of
credit the Company issues or modifies subsequent to December 31, 2002. The
Company adopted FIN No. 45 on January 1, 2003, without material effect on its
consolidated financial statements.
The Company 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 September 30, 2003 are
$595,200, which expire through February 2004. Amounts due under these letters of
credit would be reduced by any proceeds that the Company would be able to obtain
in liquidating the collateral for the loans, which varies depending on the
customer.
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
13
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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 Company has evaluated the impact of FIN 46 and has
determined that the interpretation has no material effect on its financial
statements.
In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" which clarifies certain
implementation issues raised by constituents and amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to include the
conclusions reached by the FASB on certain FASB Staff Implementation Issues
that, while inconsistent with Statement 133's conclusions, were considered by
the Board to be preferable; amends SFAS No. 133's discussion of financial
guarantee contracts and the application of the shortcut method to an
interest-rate swap agreement that includes an embedded option and amends other
pronouncements. The guidance in Statement 149 is effective for new contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after that date. Management adopted SFAS No. 149 effective July 1,
2003, as required, without a material effect on the Company's financial position
or results of operations.
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. The
Company has evaluated SFAS No. 150 is not expected to have a material effect on
the Company's financial position or results of operations.
14
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 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 September 30, 2003, as compared to December 31, 2002 and the
results of operations for the nine and three months ended September 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 September 30, 2003, gross loans were $195,425,885 compared
to $187,887,914 at year-end 2002, an increase of $7,537,971 or 4.0%.
The increase in total outstanding loans was the result of an increase
in the commercial, commercial real estate, and installment portfolios.
Management attributes the increase in loans to the slightly improved
general economic conditions in the lending markets served.
Installment loans represented 24.7% of total loans at
September 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 19.3%, or $5,375,310
increase in installment loans while COMMUNITY had a decrease of 12.4%,
or $2,123,211 in installment loans.
Commercial and commercial real estate loans comprised 49.1% of
total loans at September 30, 2003 compared to 48.0% at December 31,
2002. Commercial and commercial real estate loans have increased
$5,575,987 or 6.2% 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 26.2% of total loans at September 30,
2003 and 28.0% at year-end 2002. In dollar volume real estate loans
decreased 2.5% since December 31, 2002. However, COMMUNITY actually
experienced an increase in real estate loans of 8.1% or $1,800,883 and
CITIZENS experienced a decrease of 10.2% or $3,090,998. Management's
position is to focus on adjustable rate products or short-term fixed
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
September 30, 2003 were approximately $103,000, or 3.3 %, of the
beginning balance in the allowance for loan losses. During the first
nine months of 2003, net charge-offs were mainly consumer loans and
totaled approximately $296,000.
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, mortgage backed securities, collateralized
mortgage obligations and certain other investments. Changes in long
term interest rates do subject the Company in market value changes
especially in the Company's callable agency-backed securities. During
the three month period ended September 30, 2003 the unrealized gain on
available for sale securities decreased approximately $2.5 million due
to the sale of callable securities with unrealized gains, leaving
fixed, lower rate securities with unrealized losses in the portfolio.
The overall market value of available for sale investments also
decreased due to the increase in market long-term interest rates.
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, 2003 increased approximately $12,553,000, or
9.5% from year-end 2002 totals. Securities held to maturity at
September 30, 2002 increased approximately $1,345,000 or 10.4% 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 September 30, 2003, total core deposits increased approximately
$13,622,112 or 5.4% primarily from an increase in interest bearing
demand deposits of $12.0 million and non-interest bearing deposits of
$4.1 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 September 30, 2003,
certificates of deposit greater than $100,000 decreased approximately
$6,997,000, or 16.3% from year-end 2002 totals.
COMMUNITY has developed several large depository customers. As
of September 30, 2003, the eight largest depository customers accounted
for approximately 29% of COMMUNITY'S certificate of deposits and
approximately 92% of total certificates of deposits greater than
$100,000. These customers also represent 20% of Community's demand
deposits at September 30, 2003. Total concentration of retail funding
is approximately 29% of COMMUNITY'S total deposits at September 30,
2003. On a consolidated level, this represents approximately 8% of
total retail deposits at September 30, 2003 compared to 9% at December
31, 2002. This deposit concentration does pose possible liquidity and
earnings risk for COMMUNITY. The earnings risk 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
18
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 ("FHLB") advances. In the first nine 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 at September 30, 2003 increased
approximately $14.9 million, or 56.6% from year-end 2002 totals.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
NET INCOME
Basic and diluted earnings per share for the nine months ended
September 30, 2003 were $0.79, compared with $0.67 for the nine months
ended September 30, 2002 an increase of 17.9%. Net income increased
13.6% or $302,119 for the nine months ended September 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 increased
less than 1% for the nine months ended September 30, 2003 compared to
the same period in 2002. The increase is a result of a larger base of
average earning assets of 9.0% in the first nine months of 2003
compared to the same period in 2002. This increase was partially offset
by an 8.4% decrease in the net interest margin for the nine months
ended September 30, 2003 as compared to the same period in 2002.
Total interest income for the nine months ended September 30,
2003 was $15,416,000 compared to $16,561,000 for the same period in
2002. Total interest income decreased $1,145,000, or 6.9%. The decrease
can be attributed to the overall lower interest rate environment that
currently exists.
Total interest expense for the nine months ended September 30,
2003 when compared to the same nine-month period ended September 30,
2002, decreased 16.6%, or $1,178,000. 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 $414,000 for the nine
months ended September 30, 2003 compared to $472,500 for the same
period in 2002. Management decreased the loan loss provision in
19
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2003 due to an improvement in the Company's credit quality experienced
during 2003. 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 excluding net realized
gains on sales of securities for the nine months ended September 30,
2003 was $1,741,000 compared to $1,236,000 for the same nine months
period ended September 30, 2002, an increase of 40.9%. Gains related to
the Company's secondary market real estate loan program increased
$125,000 over the same period in 2002. In addition, the Company's
security portfolio generated approximately $336,000 in security gains
for the nine months ended September 30, 2003, compared to $123,000 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 $265,000, or
53.5% due primarily to a $189,000 increase in earnings on bank owned
life insurance in 2003.
NONINTEREST EXPENSE
Noninterest expense for the nine months ended September 30,
2003 increased $555,000 or 7.5% over the nine months ended September
30, 2002. Salary and benefit expense increased approximately $137,000,
or 3.6% for the nine months ended September 30, 2003, due primarily to
rising health care costs. Occupancy expense increased $103,000 or 9.5%
for the nine months ended September 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 fully impact
occupancy expense for the nine months ended September 30, 2002.
Professional fees increased $77,000 or 33% for the nine-months ended
September 30, 2003 as compared to the same period in 2002. Professional
fees increased due to additional costs relating to compliance with the
Sarbanes-Oxley Act of 2002 requirements as well as increased risk
management costs relating to payments of an insurance policy
deductible.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2003 AND
2002
NET INCOME
Basic and diluted earnings per share for the three months
ended September 30, 2003 were $0.28, compared with $0.22 for the three
months ended September 30, 2003 an increase of 27.3%. Net income
increased 21.3% for the three months ended September 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 increased
3.7% for the three months ended September 30, 2003, compared to the
same period in 2002. The impact of the lower net
20
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
interest margin was offset by a larger base of average earning assets
in the three months ended September 30, 2003, compared to the same
period in 2002.
Total interest income for the three months ended September 30,
2003 was $5,121,000, compared to $5,382,000 for the same period in
2002, a decrease of $260,000, or 4.8%. 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 September
30, 2003 when compared to the same three-month period ended September
30, 2002, reflected a decline of 16.4%, or $374,000. 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 and this
trend continues in 2003.
PROVISION FOR LOAN LOSSES
The total provision for loan losses was $114,000 for the three
months ended September 30, 2003 compared to $157,500 for the same
period in 2003. Management decreased the provision heading into 2003
and then again in September 2003 due to improvement in credit quality
during the year.
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 excluding net realized gains on
sales of securities for the three months ended September 30, 2003 was
$598,000 compared to $462,000 for the same three-month period ended
September 30, 2002. For the three months ended September 30, 2003,
compared to the same period in 2002, noninterest income increased
approximately 29.6% or $136,000. Gains related to the Company's
secondary market real estate loan program increased $75,000 over the
same period in 2002. In addition, the Company's security portfolio
generated approximately $54,000 in gains for the three months ended
September 30, 2003, compared to $9,000 for the same period in 2002, an
increase of $45,000. Other income for the three months ended September
30, 2003 increased by $9,000, over the comparable 2002.
NONINTEREST EXPENSE
Noninterest expense for the three months ended September 30,
2003 increased $218,000 over the three months ended September 30, 2002.
The majority of this increase was a result of an increase in salaries
and employee benefits of $70,253, professional service of $51,000 and
occupancy expense of $16,000. Occupancy increased due to hardware and
software upgrades that occurred in mid 2002 and therefore did not fully
impact occupancy expense for the three months ended September 30, 2002.
Professional fees increased due to additional costs relating to
compliance with the Sarbanes-Oxley Act of 2002 requirements as well as
increased risk management costs relating to the payment of an insurance
21
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
policy deductible. Salaries and benefits increased due to annual merit
increases and an increase in health care costs.
CAPITAL RESOURCES
Internal capital growth, through the retention of earnings, is
the primary means of maintaining capital adequacy for the Company.
Shareholders' equity at September 30, 2003, totaled $31,650,775
compared to $32,154,862 at December 31, 2002, a 1.6% decrease. Total
shareholders' equity in relation to total assets was 8.30% at September
30, 2003 and 8.89% at December 31, 2002.
The Company has a Dividend Reinvestment Plan ("The Plan") for
shareholders under which the Company's common stock is 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 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 September 30, 2003:
SEPTEMBER 30,
(in thousands) 2003
-----------------
Tier 1 capital $ 32,039
Total risk-based capital $ 34,828
Risk-weighted assets $ 235,214
Average total assets $ 370,255
Total risk-based capital ratio 14.81%
Tier 1 risk-based capital ratio 13.62%
Tier 1 capital to average assets 8.65%
22
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 and principal reductions on 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, 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 nine months ended September 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 91% of the portfolio
compared to the 9% 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 42% 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-SEPTEMBER 30, 2003 NET PORTFOLIO VALUE-DECEMBER 31, 2002
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
---------------------------------------- -----------------------------------------
Up 200 $ 27,967 $ (5,528) -16.50% Up 200 $ 27,138 $ (1,912) -6.58%
Up 100 $ 31,599 $ (1,896) -5.66% Up 100 $ 30,396 $ 1,346 4.63%
Base $ 33,495 Base $ 29,050
Down 100 $ 29,804 $ (3,691) -11.02% Down 100 $ 26,391 $ (2,659) -9.15%
Down 200 $ 29,454 $ (4,041) -12.06% Down 200 $ 26,553 $ (2,497) -8.60%
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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 September 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 11.02% and 12.06% 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 decrease 5.66%
with a 100 basis point interest rate increase. In a 200 basis point rate
increase, the Company's NPV would decrease 16.50%. 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
September 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
September 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 September 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
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certificate
31.2 Certificate
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 filed two reports on SEC Form 8-K during
the last quarter of the period covered by this
report. The reports were on July 25, 2003 announcing
the financial results for the second quarter ended
June 30, 2003, and August 28, 2003 announcing a
regular dividend payment
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.
November 13, 2003 By: /s/ James W. Everson
- --------------------- -----------------------------
Date James W. Everson
Chairman, President & Chief Executive Officer
November 13, 2003 By: /s/ Randall M. Greenwood
- --------------------- -----------------------------
Date Randall M. Greenwood
Senior Vice President, Chief Financial
Officer and Treasurer
28
EXHIBIT NO. DESCRIPTION
31.1 Certification
31.2 Certification
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.
29