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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, 2004
[ ] 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
UNITED BANCORP, INC.
--------------------
(Exact name of registrant as specified in its charter.)
OHIO 34-1405357
---- ----------
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
201 SOUTH 4TH STREET, MARTINS FERRY, OHIO 43935-0010
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(740) 633-0445
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed
since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE 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 3,525,014 SHARES AS OF JULY 30, 2004
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
PART I
FINANCIAL INFORMATION
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
------------- -------------
ASSETS
Cash and due from financial institutions $ 10,070,107 $ 8,386,575
------------- -------------
Total cash and cash equivalents 10,070,107 8,386,575
Securities available for sale, at market 134,439,788 140,818,167
Securities held to maturity
(Estimated fair value of $16,229,075 at 06/30/04 and $16,344,353 at 12/31/03 16,023,188 15,594,408
Federal Home Loan Bank Stock, at cost 4,032,800 3,954,300
Total loans 209,646,517 198,608,574
Allowance for loan losses (2,925,133) (2,843,484)
------------- -------------
Net loans receivable 206,721,384 195,765,090
Premises and equipment, net 7,994,493 8,152,480
Accrued interest receivable 2,248,502 2,373,573
Other real estate and repossessions 975,029 940,015
Core deposit and other intangible assets 43,417 57,452
Bank owned life insurance 7,341,754 7,185,507
Other assets 3,291,242 2,295,402
------------- -------------
Total Assets $ 393,181,704 $ 385,522,969
============= =============
LIABILITIES
Demand deposits
Noninterest-bearing $ 31,642,785 $ 30,049,919
Interest-bearing 66,760,428 61,137,605
Savings deposits 47,460,423 48,274,042
Time deposits - under $100,000 121,296,625 128,443,059
Time deposits - $100,000 and over 33,185,205 36,621,372
------------- -------------
Total deposits 300,345,466 304,525,997
Federal funds purchased 10,351,000 9,714,000
Advances from the Federal Home Loan Bank 41,659,250 30,974,611
Securities sold under agreements to repurchase 9,043,277 5,485,399
Other borrowed funds 193,142 159,398
Accrued expenses and other liabilities 838,666 2,149,105
------------- -------------
Total Liabilities 362,430,801 353,008,510
SHAREHOLDERS' EQUITY
Preferred stock, without par value: 2,000,000 shares authorized and unissued
Common stock - $1 Par Value: 10,000,000 shares authorized;
3,752,105 issued at 06/30/04 and 12/31/03 3,752,105 3,752,105
Additional paid in capital 25,767,755 25,712,990
Retained earnings 6,862,116 6,047,652
Shares held by deferred compensation plan at cost, 54,561 shares at 06/30/04
and 50,750 at 12/31/03 (688,607) (633,842)
Treasury stock at cost, 227,091 shares at 06/30/04 and 207,091 shares 12/31/03 (2,439,695) (2,115,855)
Accumulated other comprehensive loss, net of tax effects (2,502,771) (248,591)
------------- -------------
Total Shareholders' Equity 30,750,903 32,514,459
------------- -------------
Total Liabilities and Shareholders' Equity $ 393,181,704 $ 385,522,969
============= =============
See accompanying notes to the condensed consolidated financial statements
2
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(UNAUDITED) (UNAUDITED)
2004 2003 2004 2003
---------- ---------- ----------- -----------
Interest and dividend income
Loans, including fees $3,430,162 $3,496,285 $ 6,782,735 $ 6,912,009
Taxable securities 1,259,109 1,152,481 2,533,319 2,534,334
Non-taxable securities 364,465 363,334 721,764 712,626
Federal funds sold 1,405 33,134 3,583 57,082
Dividends on Federal Home Loan Bank stock and other 41,342 35,009 82,531 78,844
---------- ---------- ----------- -----------
Total interest and dividend income 5,096,483 5,080,243 10,123,932 10,294,895
Interest expense
Deposits
Demand 159,605 133,299 306,133 251,502
Savings 40,477 63,316 81,742 126,529
Time 1,394,457 1,532,344 2,845,960 3,170,408
Other borrowings 267,972 225,058 510,770 434,894
---------- ---------- ----------- -----------
Total interest expense 1,862,511 1,954,017 3,744,605 3,983,333
---------- ---------- ----------- -----------
Net interest income 3,233,972 3,126,226 6,379,327 6,311,562
Provision for loan losses 199,500 150,000 339,000 300,000
---------- ---------- ----------- -----------
Net interest income after provision for loan losses 3,034,472 2,976,226 6,040,327 6,011,562
Noninterest income
Service charges on deposit accounts 330,636 278,206 635,950 526,493
Net realized gains (losses) on sales of securities (15,272) 79,952 95,286 281,880
Net realized gains on sales of loans 13,019 54,395 24,536 90,521
Other income 205,013 267,874 428,127 525,762
---------- ---------- ----------- -----------
Total noninterest income 533,396 680,427 1,183,899 1,424,656
---------- ---------- ----------- -----------
Noninterest expense
Salaries and employee benefits 1,220,596 1,282,282 2,534,418 2,598,106
Occupancy and equipment 344,677 360,245 703,670 797,752
Professional services 74,769 105,713 182,369 217,995
Insurance 70,603 72,341 144,827 142,983
Franchise and other taxes 96,764 103,975 194,087 206,625
Advertising 91,598 80,927 153,452 155,062
Stationery and office supplies 53,742 62,723 108,687 145,953
Amortization of intangibles 4,500 4,500 9,000 9,000
Other expenses 480,918 495,419 975,143 1,008,560
---------- ---------- ----------- -----------
Total noninterest expense 2,438,167 2,568,125 5,005,653 5,282,036
---------- ---------- ----------- -----------
Income before income taxes 1,129,701 1,088,528 2,218,573 2,154,182
Income tax expense 254,705 261,300 487,605 524,429
---------- ---------- ----------- -----------
Net income $ 874,996 $ 827,228 $ 1,730,968 $ 1,629,753
========== ========== =========== ===========
Earnings per common share - Basic $ 0.25 $ 0.24 $ 0.50 $ 0.47
Earnings per common share - Diluted $ 0.25 $ 0.24 $ 0.50 $ 0.47
Dividends per common share $ 0.13 $ 0.12 $ 0.26 $ 0.24
See accompanying notes to the condensed consolidated financial statements
3
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
(UNAUDITED)
TREASURY
ADDITIONAL STOCK AND ACCUMULATED
COMMON PAID IN DEFERRED RETAINED COMPREHENSIVE
STOCK CAPITAL PLAN EARNINGS INCOME (LOSS) TOTAL
----------- ------------ ----------- ---------- ----------- -----------
BALANCE AT JANUARY 1, 2003 $ 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
Shares purchased for deferred compensation plan 42,031 (42,031)
Shares distributed from deferred compensation plan (50,292) 50,292
Purchases of treasury stock, at cost (343,728) (343,728)
Unrealized gain on securities designated as
available for sale 251,400 251,400
Cash dividends - $0.24 per share (837,991) (837,991)
----------- ------------ ----------- ---------- ----------- -----------
BALANCE AT JUNE 30, 2003 (UNAUDITED) $ 3,411,307 $ 25,643,618 $(2,680,325) $5,264,306 $ 1,215,390 $32,854,296
=========== ============ =========== ========== =========== ===========
BALANCE AT JANUARY 1, 2004 $ 3,752,105 $ 25,712,990 $(2,749,697) $6,047,652 $ (248,591) $32,514,459
Net income 1,730,968 1,730,968
Shares purchased for deferred compensation plan 54,765 (54,765)
Purchases of treasury stock, at cost (323,840) (323,840)
Unrealized loss on securities designated as
available for sale (2,254,180) (2,254,180)
Cash dividends - $0.26 per share (916,504) (916,504)
----------- ------------ ----------- ---------- ----------- -----------
BALANCE AT JUNE 30, 2004 (UNAUDITED) $ 3,752,105 $ 25,767,755 $(3,128,302) $6,862,116 $(2,502,771) $30,750,903
=========== ============ =========== ========== =========== ===========
See accompanying notes to the condensed consolidated financial statements
4
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net earnings $ 874,996 $ 827,228 $ 1,730,968 $ 1,629,753
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities
during the period, net of taxes (benefits) of
$(1,554,294). $398,477 $(1,128,847) and
and $225,349 for each respective period. (3,017,158) 773,515 (2,191,291) 437,441
Reclassification adjustment for (gains) losses
included in earnings, net of taxes (benefits) of
($5,193) $27,184, $32,397 and $95,839
for each respective period. 10,079 (52,768) (62,889) (186,041)
----------- ----------- ----------- -----------
Comprehensive income (loss) $(2,132,083) $ 1,547,975 $ (523,212) $ 1,881,153
=========== =========== =========== ===========
Accumulated comprehensive income (loss) $(2,502,771) $ 1,215,390 $(2,502,771) $ 1,215,390
=========== =========== =========== ===========
See accompanying notes to the condensed consolidated financial statements
5
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income for the period $ 1,730,968 $ 1,629,753
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 405,188 473,179
Provision for loan losses 339,000 300,000
Deferred taxes (150,811) 71,900
Increase in value of bank owned life insurance (156,247) (182,072)
Federal Home Loan Bank stock dividend (78,500) (79,700)
Net realized gains on sales of securities (95,286) (281,880)
Amortization of premium on securities, net 306,963 354,784
Net realized gains on sales of loans (24,536) (90,521)
Net realized loss (gains) on sale of real estate owned 10,214 (9,500)
Amortization of mortgage servicing rights 46,848 54,900
Net changes in accrued interest receivable and other assets 573,711 (308,840)
Net changes in accrued expenses and other liabilities (1,310,439) 8,622,330
------------ ------------
Net cash provided by operating activities 1,597,073 10,554,333
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Securities available for sale
Sales, maturities, prepayments and calls 44,375,997 76,751,717
Purchases (41,630,676) (88,503,697)
Securities held to maturity
Maturities, prepayments and calls 681,449 252,000
Purchases (1,105,690) (1,674,714)
Net change in loans receivable (11,270,758) (6,165,680)
Purchases of premises and equipment (233,166) (98,176)
Sales of premises and equipment - 3,309
Proceeds from sale of real estate owned (223,083) 65,000
------------ ------------
Net cash used in investing activities (9,405,927) (19,370,241)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net change in deposits (4,180,531) 5,346,926
Net proceeds from borrowings 14,913,261 8,604,061
Treasury stock purchases (323,840) (343,728)
Cash dividends paid (916,504) (837,991)
------------ ------------
Net cash provided by financing activities 9,492,386 12,769,268
------------ ------------
Net change in cash and cash equivalents 1,683,532 3,953,360
Cash and cash equivalents at beginning of period 8,386,575 10,288,554
------------ ------------
Cash and cash equivalents at end of period $ 10,070,107 $ 14,241,914
============ ============
Interest paid $ 3,689,858 $ 4,003,646
Income taxes paid 458,000 395,000
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, 2004, 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 ("GAAP") 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, 2003 included in
its Annual Report on Form 10-K. Reference is made to the accounting
policies of the Company described in the notes to the consolidated
financial statements contained in its Annual Report on Form 10-K. 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.
The components used in the earnings per share computation were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
BASIC
Net income $ 874,996 $ 827,228 $1,730,968 $1,629,753
========== ========== ========== ==========
Weighted average common shares outstanding 3,471,118 3,502,538 3,475,777 3,505,407
========== ========== ========== ==========
Basic earnings per common share $ 0.25 $ 0.24 $ 0.50 $ 0.47
========== ========== ========== ==========
DILUTED
Net income $ 874,996 $ 827,228 $1,730,968 $1,629,753
========== ========== ========== ==========
Weighted average common shares outstanding for
basic earnings per common share 3,471,118 3,502,538 3,475,777 3,505,407
Add: Dilutive effects of assumed exercise of stock
options 9,843 13,619 11,644 13,595
---------- ---------- ---------- ----------
Average shares and dilutive potential common shares 3,480,961 3,516,157 3,487,421 3,519,002
========== ========== ========== ==========
Diluted earnings per common share $ 0.25 $ 0.24 $ 0.50 $ 0.47
========== ========== ========== ==========
Number of stock options not considered in computing
diluted earnings per share due to antidilutive nature 9,125 23,163 9,125 23,163
Weighted average exercise price
of dilutive stock $ 9.71 $ 8.81 $ 9.71 $ 8.81
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, 2003.
9
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES:
Securities were as follows:
AMORTIZED GROSS GROSS ESTIMATED
COST UNREALIZED GAINS UNREALIZED LOSSES FAIR VALUE
------------- ---------------- ----------------- ------------
AVAILABLE FOR SALE - JUNE 30, 2004
U.S. Government and federal agency $ 77,158,796 $ 30,812 $ (2,161,049) $ 75,028,559
State and municipal 19,247,810 111,291 (693,407) 18,665,694
Mortgage-backed 39,358,761 3,277 (1,049,789) 38,312,249
Collateralized mortgage obligations 2,462,497 - (47,592) 2,414,905
Total debt securities 138,227,864 145,380 (3,951,837) 134,421,407
Other securities 4,000 14,381 - 18,381
------------- ----------- ------------- -------------
$ 138,231,864 $ 159,761 $ (3,951,837) $ 134,439,788
============= =========== ============= =============
AVAILABLE FOR SALE - DECEMBER 31, 2003
U.S. Government and federal agency $ 81,675,557 $ 249,762 $ (626,828) $ 81,298,491
State and municipal 20,486,465 342,815 (186,456) 20,642,824
Mortgage-backed 36,021,522 73,958 (223,858) 35,871,622
Collaterized mortgage obligations 3,007,277 10,700 (36,345) 2,981,632
Total debt securities 141,190,821 677,235 (1,073,487) 140,794,569
Other securities 4,000 19,598 23,598
------------- ----------- ------------- -------------
$ 141,194,821 $ 696,833 $ (1,073,487) $ 140,818,167
============= =========== ============= =============
GROSS GROSS
AMORTIZED UNRECOGNIZED UNRECOGNIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---- ----- ------ ----------
HELD TO MATURITY - JUNE 30, 2004
State and municipal obligations $ 16,023,188 $ 417,324 $ (211,437) $ 16,229,075
============= =========== ============== =============
HELD TO MATURITY - DECEMBER 31, 2003
State and municipal obligations $ 15,594,408 $ 781,888 $ (31,943) $ 16,344,353
============= =========== ============== =============
Sales of securities available for sale were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---- ---- ---- ----
Proceeds $ 2,023,994 $ 5,629,133 $ 18,110,123 $ 18,241,645
Gross gains 13,076 82,571 163,841 284,499
Gross losses (28,348) (2,619) (68,555) (2,619)
10
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES: (CONTINUED)
Contractual maturities of securities at June 30, 2004 were as follows:
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
AVAILABLE FOR SALE
U.S. government and federal agency obligations
1 - 5 Years $ 499,923 $ 485,755
5 - 10 Years 23,708,566 23,051,879
Over 10 Years 52,950,308 51,490,916
------------ ------------
Total 77,158,797 75,028,550
------------ ------------
State and municipal obligations
Under 1 Year 490,358 490,947
1 - 5 Years 658,021 688,776
5 - 10 Years 7,926,983 7,791,050
Over 10 Years 10,172,447 9,694,920
------------ ------------
Total 19,247,809 18,665,693
------------ ------------
Mortgage backed securities
1 - 5 Years 1,083,626 1,075,320
5 - 10 Years 12,380,549 12,071,142
Over 10 Years 25,894,586 25,165,797
------------ ------------
Total 39,358,761 38,312,259
------------ ------------
Collateralized mortgage obligations
5 - 10 Years 357,496 351,329
Over 10 Years 2,105,001 2,063,576
------------ ------------
Total 2,462,497 2,414,905
------------ ------------
Other investments
Equity securities 4,000 18,381
------------ ------------
Total securities available for sale $138,231,864 $134,439,788
============ ============
HELD TO MATURITY
State and municipal obligations
Under 1 Year $ 1,336,616 $ 1,355,522
1 - 5 Years 2,527,378 2,658,643
5 - 10 Years 4,013,046 4,153,979
Over 10 Years 8,146,148 8,060,931
------------ ------------
Total securities held to maturity $ 16,023,188 $ 16,229,075
------------ ------------
Securities with a carrying value of approximately $ 50.1 million at June 30,
2004 and $55.4 million at December 31, 2003 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,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Beginning Balance $ 2,813,362 $ 3,005,291 $ 2,843,484 $ 2,971,116
Provision charged to operating expense 199,500 150,000 339,000 300,000
Loans charged-off (118,152) (121,427) (335,208) (289,307)
Recoveries 30,423 43,929 77,857 95,984
----------- ----------- ----------- -----------
Ending Balance $ 2,925,133 $ 3,077,793 $ 2,925,133 $ 3,077,793
=========== =========== =========== ===========
Non-performing loans were as follows:
JUNE 30, DECEMBER 31,
2004 2003
-------- --------
Loans past due over 90 days still on accrual $740,000 $655,000
Nonaccrual loans 278,000 101,000
Loans considered impaired under the provisions of SFAS No. 114 were not
material at June 30, 2004 and December 31, 2003. 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, 2004 and December 31, 2003 follows:
JUNE 30, DECEMBER 31,
2004 2003
----------- -----------
Commitments to extend credit $25,604,704 $21,638,388
Credit card and ready reserve lines 1,469,781 1,422,761
Standby letters of credit 640,200 640,200
In the opinion of management, all loan commitments equaled or exceeded current
market interest rates at June 30, 2004.
5. BENEFIT PLAN
Pension expense includes the following:
THREE MONTHS ENDING SIX MONTHS ENDING
JUNE 30, JUNE 30,
2004 2003 2004 2003
-------- -------- --------- ---------
Service cost $ 55,403 $ 48,952 $ 110,806 $ 97,904
Interest cost 49,248 41,747 98,496 83,494
Expected return on assets (67,493) (53,053) (134,986) (106,106)
Amortization of prior service cost,
transition liability, net gain,
and plan amendment 10,623 3,807 21,246 7,614
-------- -------- --------- ---------
Pension expense $ 47,781 $ 41,453 $ 95,562 $ 82,906
======== ======== ========= =========
13
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discusses the financial condition of the Company as of
June 30, 2004 as compared to December 31, 2003 and the results of
operations for the six and three months ended June 30, 2004 compared to
the same period in 2003. 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 is not aware of any trends, events or uncertainties that
will have or are reasonably likely to have a material effect on its
liquidity or capital resources except as discussed herein. The Company is
not aware of any current recommendation by regulatory authorities that
would have such effect if implemented.
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.
The consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of
America and follow general practices within the financial services
industry. The application of these principles requires management to make
certain judgements that affect the amounts reported in the financial
statements and footnotes. These estimates, assumptions and judgements are
based on information available as of the date of the financial statements,
and as this information changes, the financial statements could reflect
different estimates, assumptions, and judgement.
The procedures for assessing the adequacy of the allowance for loan
losses reflect our evaluation of credit risk after careful consideration
of all information available to management. In developing this assessment,
management must rely on estimates and exercise judgement regarding matters
where the ultimate outcome is unknown such as economic factors,
development affecting companies in specific industries and issues with
respect to single borrowers. Depending on changes in circumstances, future
assessments of credit risk may yield materially different results, which
may require an increase or a decrease in the allowance for loan losses.
The allowance is regularly reviewed by management to determine
whether the amount is considered adequate to absorb probable losses. This
evaluation includes specific loss estimates on certain
14
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
individually reviewed loans, statistical loss estimates for loan pools that are
based on historical loss experience, and general loss estimates that are based
on the size, quality and concentration characteristics of the various loan
portfolios, adverse situations that may affect a borrower's ability to repay and
current economic and industry conditions. Also considered as part of that
judgement is a review of each Bank's trend in delinquencies and loan losses, and
economic factors.
The allowance for loan losses is maintained at a level believed adequate
by management to absorb probable loan losses inherent in the loan portfolio.
Management's evaluation of the adequacy of the allowance is an estimate based on
management's current judgement about the credit quality of the loan portfolio.
While the Company strives to reflect all knows risk factors in its evaluation,
judgement errors may occur.
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS - LOANS
At June 30, 2004 gross loans were $209,646,517 compared to $198,608,574 at
year end 2003, an increase of $11,039,943 or 5.6%. 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 21.9% of total loans at June 30, 2004
compared to 24.9% at year-end 2003. 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 4.7% or $1,597,137
decrease in installment loans while COMMUNITY had a decrease of 12.5%, or
$1,946,540 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. 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 52.7% of total loans
at June 30, 2004 compared to 48.8% at December 31, 2003. Commercial and
commercial real estate loans have increased $13,518,263 or 13.9% since December
31, 2003. 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 25.4% of total loans at June 30, 2004 and 26.3% at
year-end 2003. In dollar volume, real estate loans increased 2.0% since December
31, 2003. COMMUNITY experienced an increase in real estate loans of 3.4% or
$853,939 and CITIZENS experienced an increase of 0.8% or $209,418. As previously
mentioned, management's position is to focus on adjustable rate products as the
15
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
overall rate environment reached 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, 2004 were
approximately $87,729, or 3.1%, of the beginning balance in the allowance for
loan losses.
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, 2004
decreased approximately $6,378,379, or 4.5% from year-end 2003 totals.
Securities held to maturity at June 30, 2004 increased approximately $428,780 or
2.7% compared to year-end 2003 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, 2004, total core
deposits decreased approximately $744,364 or 0.3% compared to year-end 2003
totals.
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, 2004, certificates of deposit greater than
$100,000 decreased approximately $3,436,167, or 9.4% from year-end 2003 totals.
Over the past year, COMMUNITY has developed several large depository
customers. As of June 30, 2004, the eight largest depository customers accounted
for approximately 29% of COMMUNITY'S certificate of deposits and approximately
93% of total certificates of deposits greater than $100,000. These customers
also represent 24% of Community's demand deposits at June 30, 2004. Total
concentration of retail funding is approximately 30% of COMMUNITY'S total
deposits at June 30, 2004. On a consolidated level, this represents
approximately 8.8% of total retail deposits at June 30, 2004 compared to 7.9% at
December 31, 2003. This deposit concentration does pose possible liquidity and
earnings risk
16
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 ("FHLB") advances. In the first
six months of 2004, 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 $14.9 million, or 32.2%
from year-end 2003 totals.
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 2004 AND 2003
NET INCOME
Basic and diluted earnings per share for the six months ended June 30,
2004 was $0.50, compared with $.47 for the six months ended June 30, 2003. Net
income increased 6.2% for the six months ended June 30, 2004, compared to the
same period in 2003.
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 1.1% for the six months ended June 30, 2004 compared
to the same period in 2003.
Total interest income for the six months ended June 30, 2004 was
approximately $10,124,000 compared to $10,295,000 for the same period in 2003.
Total interest income decreased approximately $171,000, or 1.7%. The decrease
can be attributed to the overall lower interest rate environment that currently
exists.
Total interest expense for the six months ended June 30, 2004 when
compared to the same six-month period ended June 30, 2003, decreased 6.0%, or
approximately $239,000. 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 $339,000 for the six months ended
June 30, 2004 compared to $300,000 for the same period in 2003. Management
increased the provision in 2004 due to a slight increase in net charge-offs for
the six-month period ended June 30, 2004 in addition to the increase in
17
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
loans of 5.6% for the six months ended June 30, 2004. 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 June 30, 2004 was approximately $1,184,000 compared to
approximately $1,425,000 for the same six months period ended June 30, 2003, a
decrease of 16.9%. The Company's gain on sale from the secondary market real
estate loan program decreased $66,000 from the same period in 2003. In addition,
the Company's security portfolio generated approximately $95,000 in security
gains for the six months ended June 30, 2004, compared to $282,000 for the same
period in 2003. During 2002, primarily, management made the decision to sell
these securities based on the likelihood of the securities being called and to
fund current loan growth. 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.
NONINTEREST EXPENSE
Noninterest expense for the six months ended June 30, 2004 decreased
approximately $276,000 or 5.2% from the six months ended June 30, 2003. Salary
and benefit expense decreased approximately $64,000, or 2.5% for the six months
ended June 30, 2004, due primarily to lower staffing levels. Occupancy expense
also accounted for a portion of the decrease. Occupancy expense decreased
$94,000 or 11.8% for the six months ended June 30, 2004, as compared to the same
period in 2003 due to capital expenditures mainly technology enhancements,
becoming fully depreciated in the first quarter of 2004. Other expenses
decreased primarily due to a decrease in stationary and office supplies of
$37,000 and a decrease in professional fees of $36,000.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2004
NET INCOME
Basic and diluted earnings per share for the three months ended June 30,
2004 was $0.25, compared with $0.24 for the three months ended June 30, 2003 an
increase of 4.2%. Net income increased 5.8% for the three months ended June 30,
2004, compared to the same period in 2003.
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 by 3.4% for the three months ended June 30, 2004,
compared to the same period in 2003. 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, 2004, compared to the same period in 2003.
Total interest income for the three months ended June 30, 2004 was
approximately $5,096,000, compared to $5,080,000 for the same period in 2003, an
increase of $16,000, or 0.3%. The increase can
18
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
be attributed to the overall growth in earning assets of the Company and
slightly offset by the lower interest rate environment that currently exists.
Also, as a result of the prolonged decrease in interest rates, the Company's
investment portfolio was 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. Given that interest rates seem to have stabilized, that
trend is not expected to continue.
Total interest expense for the three months ended June 30, 2004 when
compared to the same three-month period ended June 30, 2003, reflected a decline
of 4.7%, or $92,000. 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 2003 and this trend continues in
2004.
PROVISION FOR LOAN LOSSES
The total provision for loan losses was $199,500 for the three months
ended June 30, 2004 compared to $150,000 for the same period in 2004. Management
increased the provision in 2004 due to a increase in net charge-offs in the
current year, in addition to the 5.6% growth in the loan portfolio since
December 31, 2003.
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, 2004 was approximately $533,000 compared to
$680,000 for the same three-month period ended June 30, 2003. For the three
months ended June 30, 2004, compared to the same period in 2003, noninterest
income decreased approximately 21.6% or $147,000. The Company's gain on sale of
loans from the secondary market real estate loan program decreased $41,000 from
the same period in 2003. In addition, the Company's security portfolio incurred
approximately $15,000 in losses for the three months ended June 30, 2004,
compared to $80,000 in gains for the same period in 2003, a difference of
$95,000 between the two periods.
NONINTEREST EXPENSE
Noninterest expense for the three months ended June 30, 2004 decreased
$130,000 from the three months ended June 30, 2003. Salary and benefit expense
decreased approximately $62,000, or 4.8% for the three months ended June 30,
2004, due primarily to lower staffing levels. Occupancy expense also accounted
for a portion of the decrease. Occupancy expense decreased $16,000 or 4.3% for
the three months ended June 30, 2004, as compared to the same period in 2003 due
to capital expenditures mainly technology enhancements becoming fully
depreciated in the first quarter of 2004.
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, 2004, totaled $30,750,903 compared
19
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
to $32,514,459 at December 31, 2003, a 5.4% decrease. Total shareholders' equity
in relation to total assets was 7.82% at June 30, 2004 and 8.43% at December 31,
2003.
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 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, 2004:
JUNE 30,
(IN THOUSANDS) 2004
--------
Tier 1 capital $ 33,198
Total risk-based capital $ 35,973
Risk-weighted assets $239,075
Average total assets $384,491
Tier 1 capital to average assets 8.63%
Tier 1 risk-based capital ratio 13.89%
Total risk-based capital ratio 15.05%
20
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 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 six months ended June 30, 2004, 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 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.
21
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 89% of the portfolio
compared to the 11% 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 38% 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, 2004 NET PORTFOLIO VALUE-DECEMBER 31, 2003
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
-------- -------- -------- -------- -------- ---------
Up 200 $ 38,671 $ (3,977) -9.33% Up 200 $ 25,958 $ (7,719) -22.92%
Up 100 $ 40,363 $ (2,285) -5.36% Up 100 $ 30,501 $ (3,176) - 9.43%
Base $ 42,648 Base $ 33,677
Down 100 $ 36,468 $ (6,180) -14.49% Down 100 $ 31,198 $ (2,479) - 7.36%
Down 200 $ 31,847 $(10,801) -25.33% Down 200 $ 30,943 $ (2,734) - 8.12%
22
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, 2004
and December 31, 2003 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 14.49% and 25.33% 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 5.36%
with a 100 basis point interest rate increase. In a 200 basis point rate
increase, the Company's NPV would decrease 9.33%. 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.
23
UNITED BANCORP, INC.
CONTROLS AND PROCEDURES
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the supervision, and with the participation, of its
management, including the Company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to the requirements of
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, 2004 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, 2004
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
24
UNITED BANCORP, INC.
OTHER INFORMATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
(c) (d)
TOTAL NUMBER OF SHARES (OR MAXIMUM NUMBER (OR APPROXIMATE
(a) (b) UNITS) PURCHASED AS PART DOLLAR VALUE) OF SHARES (OR UNITS)
TOTAL NUMBER OF SHARES AVERAGE PRICE PAID PER OF PUBLICLY ANNOUNCED THAT MAY YET BE PURCHASED UNDER
PERIOD (OR UNITS) PURCHASED SHARE (OR UNIT) PLANS OR PROGRAMS THE PLANS OR PROGRAMS
------ -------------------- --------------- ----------------- ---------------------
MONTH #1
4/1/2004 TO 0 0 0 148,120 SHARES
4/30/2004
- ----------------------------------------------------------------------------------------------------------------------------
MONTH #2
5/1/2004 TO 1,441 SHARES (1) $14.95 0 148,120 SHARES
5/31/2004
- ----------------------------------------------------------------------------------------------------------------------------
MONTH #3
6/1/2004 TO 0 0 0 148,120 SHARES
6/30/2004
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL 1,441 SHARES $14.95 0 148,120 SHARES
- ----------------------------------------------------------------------------------------------------------------------------
(1) These shares were acquired on the open market on behalf of the Company's
Directors' Deferred Compensation Plan and are held in a rabbi trust for the
benefit of Plan participants
25
UNITED BANCORP, INC.
OTHER INFORMATION
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 21, 2004 for the purpose of electing four Directors to hold office until
the annual meeting of shareholders to be held in 2006. 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
- -------------------- --------- --------
Michael J. Arciello 2,650,989 5,329
Terry A. McGhee 2,646.507 9,810
L.E. Richardson, Jr. 2,642,646, 13,668
Other directors whose term continues after the Annual Meeting of Shareholders
are James W. Everson, John M. Hoopingarner, Richard L. Riesbeck and Matthew C.
Thomas.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended Articles of Incorporation of United Bancorp, Inc. (1)
3.2 Amended Code of Regulations of United Bancorp, Inc.(2)
4.0 Instruments Defining the Rights of Security Holders (See
Exhibits 3.1 and 3.2)
31.1 Rule 13a-14(a) Certification - CEO
31.2 Rule 13a-14(a) Certification - CFO
32.1 Section 1350 Certification - CEO
32.2 Section 1350 Certification -CFO
26
UNITED BANCORP, INC.
OTHER INFORMATION
(1) Incorporated be reference to Appendix B to the registrant's
Definitive Proxy Statement filed with the Securities and
Exchange Commission on March 14, 2001.
(2) Incorporated be reference to Appendix C to the registrant's
Definitive Proxy Statement filed with the Securities and
Exchange Commission on March 14, 2001.
(b) No current reports were filed with the Commission on Form 8-K during
the fiscal quarter ended June 30, 2004.
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.
/s/ United Bancorp, Inc.
August 6, 2004 By: /s/ James W. Everson
- ---------------- ------------------------------------
Date James W. Everson
Chairman, President & Chief Executive Officer
August 6, 2004 By: /s/ Randall M. Greenwood
- ---------------- -------------------------
Date Randall M. Greenwood
Senior Vice President, Chief Financial
Officer and Treasurer
28
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ------------ -----------
31.1 Rule 13a-14(a) Certification-CEO
31.2 Rule 13a-14(a) Certification-CFO
32.1 Section 1350 Certification-CEO
32.2 Section 1350 Certification-CFO