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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, 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 or (IRS Employer
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 3,523,268 SHARES AS OF OCTOBER 22, 2004
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
PART 1
FINANCIAL INFORMATION
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
ASSETS
Cash and due from financial institutions $ 9,098,857 $ 8,386,575
------------- -------------
Total cash and cash equivalents 9,098,857 8,386,575
Securities available for sale, at market 124,940,459 140,818,167
Securities held to maturity
(Estimated fair value of $16,684,735 at 09/30/04 and $16,344,353 at 12/31/03) 16,020,547 15,594,408
Federal Home Loan Bank Stock, at cost 4,072,300 3,954,300
Total loans 212,911,916 198,608,574
Allowance for loan losses (2,966,825) (2,843,484)
------------- -------------
Net loans receivable 209,945,091 195,765,090
Premises and equipment, net 7,905,865 8,152,480
Accrued interest receivable 2,433,765 2,373,573
Other real estate and repossessions 924,754 940,015
Core deposit and other intangible assets 38,917 57,452
Bank owned life insurance 7,470,729 7,185,507
Other assets 2,034,425 2,295,402
------------- -------------
Total Assets $ 384,885,709 $ 385,522,969
============= =============
LIABILITIES
Demand deposits
Noninterest-bearing $ 30,557,778 $ 30,049,919
Interest-bearing 65,501,101 61,137,605
Savings deposits 46,308,651 48,274,042
Time deposits - under $100,000 118,772,477 128,443,059
Time deposits - $100,000 and over 33,474,485 36,621,372
------------- -------------
Total deposits 294,614,492 304,525,997
Federal funds purchased 4,906,000 9,714,000
Advances from the Federal Home Loan Bank 42,230,726 30,974,611
Securities sold under agreements to repurchase 7,428,674 5,485,399
Other borrowed funds 227,589 159,398
Accrued expenses and other liabilities 1,947,135 2,149,105
------------- -------------
Total Liabilities 351,354,616 353,008,510
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 09/30/04 and 12/31/03 3,752,105 3,752,105
Additional paid in capital 25,793,282 25,712,990
Retained earnings 7,302,293 6,047,652
Shares held by deferred compensation plan at cost, 56,771 shares at 09/30/04
and 50,750 at 12/31/03 (714,125) (633,842)
Treasury stock at cost, 227,091 shares at 09/30/04 and 207,091 shares at 12/31/03 (2,439,695) (2,115,855)
Accumulated other comprehensive loss, net of tax benefits (162,767) (248,591)
------------- -------------
Total Shareholders' Equity 33,531,093 32,514,459
------------- -------------
Total Liabilities and Shareholders' Equity $ 384,885,709 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
2004 2003 2004 2003
------------ ------------ ------------ ------------
Interest and dividend income
Loans, including fees $ 3,481,371 $ 3,475,825 $ 10,264,106 $ 10,387,834
Taxable securities 1,290,797 1,235,272 3,824,116 3,769,606
Non-taxable securities 343,370 367,263 1,065,134 1,079,889
Federal funds sold 175 834 3,758 57,916
Dividends on Federal Home Loan Bank stock and other 43,516 41,970 126,047 120,814
------------ ------------ ------------ ------------
Total interest and dividend income 5,159,229 5,121,164 15,283,161 15,416,059
Interest expense
Deposits
Demand 162,516 129,246 468,649 380,748
Savings 40,483 67,846 122,225 194,375
Time 1,317,190 1,477,434 4,163,150 4,647,842
Other borrowings 330,648 240,925 841,418 675,819
------------ ------------ ------------ ------------
Total interest expense 1,850,837 1,915,451 5,595,442 5,898,784
------------ ------------ ------------ ------------
Net interest income 3,308,392 3,205,713 9,687,719 9,517,275
Provision for loan losses 159,500 114,000 498,500 414,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 3,148,892 3,091,713 9,189,219 9,103,275
Noninterest income
Service charges on deposit accounts 334,663 287,553 970,613 814,046
Net realized gains(losses) on sales of securities (22,684) 54,245 72,602 336,125
Net realized gains on sales of loans 8,024 76,416 32,560 166,937
Other income 205,165 234,276 633,292 760,038
------------ ------------ ------------ ------------
Total noninterest income 525,168 652,490 1,709,067 2,077,146
------------ ------------ ------------ ------------
Noninterest expense
Salaries and employee benefits 1,272,943 1,324,504 3,807,361 3,922,610
Occupancy and equipment 320,035 384,997 1,023,705 1,191,748
Professional services 100,918 93,519 283,287 313,215
Insurance 79,357 61,032 224,184 187,029
Franchise and other taxes 107,757 103,290 301,844 309,915
Advertising 58,831 84,950 212,283 240,012
Stationary and office supplies 90,619 78,752 199,306 224,705
Amortization of intangibles 4,500 4,500 13,500 13,500
Other expenses 525,271 540,819 1,500,414 1,555,665
------------ ------------ ------------ ------------
Total noninterest expense 2,560,231 2,676,363 7,565,884 7,958,399
------------ ------------ ------------ ------------
Income before income taxes 1,113,829 1,067,840 3,332,402 3,222,022
Income tax expense 215,400 175,500 703,005 699,929
------------ ------------ ------------ ------------
Net income $ 898,429 $ 892,340 $ 2,629,397 $ 2,522,093
============ ============ ============ ============
Earnings per common share - Basic $ 0.26 $ 0.25 $ 0.76 $ 0.72
Earnings per common share - Diluted $ 0.26 $ 0.25 $ 0.76 $ 0.72
Dividends per common share $ 0.13 $ 0.12 $ 0.39 $ 0.36
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
UNITED BANCORP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net earnings $ 898,429 $ 892,340 $ 2,629,397 $ 2,522,093
Other comprehensive income (loss), net of tax effects:
Unrealized holding gains (losses) on securities
during the period, net of taxes (benefits) of
$1,197,744, $(863,840) $68,897 and
and $(620,048) for each respective period. 2,325,033 (1,676,865) 133,741 (1,203,622)
Reclassification adjustment for (gains) losses included
in earnings, net of taxes (benefits) of ($7,713),
$18,443, $24,685 and $114,283 for each respective period. 14,971 (35,802) (47,917) (221,843)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 3,238,433 $ (820,327) $ 2,715,221 $ 1,096,628
============ ============ ============ ============
Accumulated comprehensive income (loss) $ (162,767) $ 893,111 $ (162,767) $ 893,111
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNITED BANCORP, INC.
(UNAUDITED)
TREASURY ACCUMULATED
ADDITIONAL STOCK AND OTHER
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 2,522,093 2,522,093
Net change in unrealized loss 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 - $0.36 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
============ ============ ============ ============ ============ ============
BALANCE AT JANUARY 1, 2004 $ 3,752,105 $ 25,712,990 $ (2,749,697) $ 6,047,652 $ (248,591) $ 32,514,459
Net income 2,629,397 2,629,397
Net change in unrealized loss on
securities available for sale 85,824 85,824
------------
Comprehensive income 2,715,221
Shares purchased for deferred compensation plan 80,292 (80,292) -
Purchases of treasury stock, at cost (323,831) (323,831)
Cash dividends - $0.39 per share (1,374,756) (1,374,756)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT SEPTEMBER 30, 2004 (UNAUDITED) $ 3,752,105 $ 25,793,282 $ (3,153,820) $ 7,302,293 $ (162,767) $ 33,531,093
============ ============ ============ ============ ============ ============
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,
2004 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income for the period $ 2,629,397 $ 2,522,093
Depreciation and amortization 604,316 702,355
Provision for loan losses 498,500 414,000
Deferred taxes (150,811) 71,899
Increase in value of bank owned life insurance (222,222) (276,731)
Federal Home Loan Bank stock dividend (118,000) (117,800)
Net realized gains on sales or calls of securities (72,602) (336,125)
Amortization of securities, net 428,544 639,029
Net realized gains on sales of loans (32,560) (166,937)
Net realized gains on sale of real estate owned (10,214) (10,500)
Amortization of mortgage servicing rights 68,662 96,964
Net change in accrued interest receivable and other assets (47,307) (441,971)
Net change in accrued expenses and other liabilities (201,970) (1,152,538)
-------------- --------------
Net cash flows from operating activities 3,373,733 1,943,738
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Securities available for sale
Sales 32,633,348 27,922,539
Maturities, prepayments and calls 32,745,427 68,432,513
Purchases (49,747,051) (111,275,642)
Securities held to maturity
Maturities, prepayments and calls 860,671 352,000
Purchases (1,266,732) (1,674,714)
Purchases of bank owned life insurance (63,000) -
Net change in loans (14,645,941) (7,864,302)
Purchase of premises and equipment (339,166) (94,867)
Proceeds from sale of real estate owned 311,504 76,000
-------------- --------------
Net cash flows provided by (used in) investing activities 489,060 (24,126,473)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net change in deposits (9,911,505) 6,625,495
Net change in borrowings 8,459,581 14,939,488
Treasury stock purchases (323,831) (343,728)
Cash dividends paid (1,374,756) (1,256,987)
-------------- --------------
Net cash flows provided by (used in) financing activities (3,150,511) 19,964,268
-------------- --------------
Net change in cash and cash equivalents 712,282 (2,218,467)
Cash and cash equivalents at beginning of period 8,386,575 10,288,554
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,098,857 $ 8,070,087
============== ==============
Supplemental disclosure of cash flow information:
Interest paid $ 5,663,769 $ 5,942,417
Income taxes paid 736,000 592,000
Supplemental disclosure of non-cash investing activities:
Non-cash transfer from loans to other real estate & repossessions $ 286,029 $ 395,015
Recognition of Mortgage Servicing Rights 30,731 98,704
Unrealized gain/(losses) on securities designated as available
for sale, next of tax effects 85,824 (1,425,465)
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
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, 2004, 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, 2003 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 2003 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.
7
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided and future results could differ. The allowance for loan losses, fair
values of financial instruments and status of contingencies are particularly
subject to change.
INCOME TAXES:
Income tax expense is based on the effective tax rate expected to be
applicable for the entire year. Income tax expense is the total of the current
year income tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be
realized.
EARNINGS AND DIVIDENDS PER SHARE:
Basic earnings per common share ("EPS") is net income divided by the
weighted-average number of shares outstanding during the period. Diluted EPS
includes the dilutive effect of additional potential common shares issuable
under stock options. Earnings and dividends per share are restated for all stock
dividends through the date of issuance of the financial statements.
The components used in the earnings per share computation were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
BASIC
Net income $ 898,429 $ 892,340 $ 2,629,397 $ 2,522,093
============ ============ ============ ============
Weighted average common shares outstanding 3,468,357 3,497,513 3,473,659 3,500,861
============ ============ ============ ============
Basic earnings per common share $ 0.26 $ 0.25 $ 0.76 $ 0.72
============ ============ ============ ============
DILUTED
Net income $ 898,429 $ 892,340 $ 2,629,397 $ 2,522,093
============ ============ ============ ============
Weighted average common shares outstanding for basic earnings
per common share 3,468,357 3,497,513 3,473,659 3,500,861
Add: Dilutive effects of assumed exercise of stock options 16,934 13,966 5,597 13,360
------------ ------------ ------------ ------------
Average shares and dilutive potential common shares 3,485,291 3,511,479 3,479,256 3,514,221
============ ============ ============ ============
Diluted earnings per common share $ 0.26 $ 0.25 $ 0.76 $ 0.72
============ ============ ============ ============
Number of stock options not considered in computing
diluted earnings per share due to antidilutive nature 23,164 21,057 9,125 21,057
Weighted average exercise price of dilutive potential common shares $ 8.81 $ 9.69 $ 9.71 $ 9.69
8
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
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 - SEPTEMBER 30, 2004
U.S. Government and federal agency $ 68,635,766 $ 153,827 $ (351,922) $ 68,437,671
State and municipal 15,562,813 230,259 (131,845) 15,661,227
Mortgage-backed 38,563,369 69,342 (213,583) 38,419,128
Collateralized mortgage obligations 2,421,132 1,549 (17,212) 2,405,469
--------------- --------------- --------------- ---------------
Total debt securities 125,183,080 454,977 (714,562) 124,923,495
--------------- --------------- --------------- ---------------
Other securities 4,000 12,964 - 16,964
--------------- --------------- --------------- ---------------
$ 125,187,080 $ 467,941 $ (714,562) $ 124,940,459
=============== =============== =============== ===============
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
CARRYING UNRECOGNIZED UNRECOGNIZED ESTIMATED FAIR
AMOUNT GAINS LOSSES VALUE
--------------- --------------- --------------- ---------------
HELD TO MATURITY - SEPTEMBER 30, 2004
State and municipal obligations $ 16,020,547 $ 685,592 $ (21,404) $ 16,684,735
=============== =============== =============== ===============
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Proceeds $ 14,523,225 $ 9,680,894 $ 32,633,348 $ 27,922,539
Gross gains 32,595 59,313 196,436 343,812
Gross losses 55,279 5,068 123,834 7,687
10
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
2. SECURITIES: (CONTINUED)
Contractual maturities of securities at September 30, 2004 were as
follows:
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
AVAILABLE FOR SALE
U.S. government and federal agency obligations
1 - 5 Years $ 999,940 $ 1,000,675
5 - 10 Years 20,169,343 20,166,853
Over 10 Years 47,466,483 47,270,143
------------ ------------
Total 68,635,766 68,437,671
------------ ------------
State and municipal obligations
Under 1 Year 490,110 490,582
1 - 5 Years 657,575 691,900
5 - 10 Years 6,296,510 6,426,691
Over 10 Years 8,118,618 8,052,054
------------ ------------
Total 15,562,813 15,661,227
------------ ------------
Mortgage backed securities
1 - 5 Years 1,362,195 1,360,508
5 - 10 Years 12,650,939 12,601,123
Over 10 Years 24,550,235 24,457,497
------------ ------------
Total 38,563,369 38,419,128
------------ ------------
Collateralized mortgage obligations
5 - 10 Years 340,632 340,102
Over 10 Years 2,080,500 2,065,367
------------ ------------
Total 2,421,132 2,405,469
------------ ------------
Other investments
Equity securities 4,000 16,964
------------ ------------
Total securities available for sale $125,187,080 $124,940,459
============ ============
HELD TO MATURITY
State and municipal obligations
Under 1 Year $ 1,265,677 $ 1,277,406
1 - 5 Years 2,527,532 2,669,868
5 - 10 Years 3,920,002 4,192,095
Over 10 Years 8,307,336 8,545,366
------------ ------------
Total securities held to maturity $ 16,020,547 $ 16,684,735
============ ============
Securities with a carrying value of approximately $61.4 million at September 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
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,
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Beginning Balance $ 2,925,133 $ 3,077,793 $ 2,843,484 $ 2,971,116
Provision charged to operating expense 159,500 114,000 498,500 414,000
Loans charged-off (218,963) (131,230) (554,171) (420,537)
Recoveries 101,155 28,693 179,012 124,677
--------------- --------------- --------------- ---------------
Ending Balance $ 2,966,825 $ 3,089,256 $ 2,966,825 $ 3,089,256
=============== =============== =============== ===============
Non-performing loans were as follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
---------------- ----------------
Loans past due over 90 days still on accrual $ 724,000 $ 655,000
Nonaccrual loans 369,000 101,000
Loans considered impaired under the provisions of SFAS No. 114 were not
material at September 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.
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
12
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
4. COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (CONTINUED)
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, 2004 and December
31, 2003 follows:
SEPTEMBER 30, DECEMBER 31,
2004 2003
---------------- ----------------
Commitments to extend credit $ 27,434,545 $ 21,638,388
Credit card and ready reserve lines 1,568,710 1,422,761
Standby letters of credit 460,000 640,200
5. BENEFIT PLAN
Pension expense includes the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Service Cost $ 55,403 $ 48,952 $ 166,209 $ 146,856
Interest Cost 49,248 41,747 147,744 125,241
Expected return on assets (67,493) (53,053) (202,479) (159,159)
Amortization of prior service cost - -
transition liability, net gain, - -
and plan amendment 10,623 3,807 31,869 11,421
--------------- --------------- --------------- ---------------
Pension Expense $ 47,781 $ 41,453 $ 143,343 $ 124,359
=============== =============== =============== ===============
The Company's pension expense is expected to increase in the fourth quarter of
2004 due to a settlement of pension obligations related to retired employees.
The exact amount of the charge is not known, however, the additional expense
should not be material to the Company's results of operations.
13
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discusses the financial condition of the Company as of
September 30, 2004, as compared to December 31, 2003 and the results of
operations for the nine and three months ended September 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 does not undertake, and specifically disclaims any
obligation, to publicly revise any forward-looking statements to reflect
events or circumstances after the date such statements were made or to
reflect the occurrence of anticipated or unanticipated events.
14
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS - LOANS
At September 30, 2004, gross loans were $212,911,916 compared to
$198,608,574 at year-end 2003, an increase of $14,303,342 or 7.2%. The increase
in total outstanding loans was the result of an increase in the commercial and
commercial real estate portfolios. Management attributes the increase in loans
to the slightly improved general economic conditions in the lending markets
served.
Installment loans represented 20.6% of total loans at September 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 an 8.9% or $3,029,763
decrease in installment loans while COMMUNITY had a decrease of 16.6%, or
$2,588,707 in installment loans.
Commercial and commercial real estate loans comprised 54.2% of total loans
at September 30, 2004 compared to 48.8% at December 31, 2003. Commercial and
commercial real estate loans have increased $18,455,728 or 19.0% 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 25.2% of total loans at September 30, 2004 and
26.3% at year-end 2003. In dollar volume real estate loans increased 2.8% since
December 31, 2003. However, COMMUNITY actually experienced an increase in real
estate loans of 5.2% or $1,330,364 and CITIZENS experienced an increase of 0.5%
or $132,720. Management's position is to focus on adjustable rate products or
short-term fixed rate products as the 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 September 30, 2004 were
approximately $117,808. During the first nine months of 2004, net charge-offs
were $375,159.
15
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, 2004 the
unrealized gain on available for sale securities increased approximately $86,000
due to the decrease in 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, 2004 decreased
approximately $15,877,708, or 11.3% from year-end 2003 totals. Securities held
to maturity at September 30, 2004 increased approximately $426,139 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 September 30, 2004, total
core deposits decreased $6,764,618 or 2.5% primarily from a decrease in
certificate of deposit balances of $9,670,582. This decrease was partially
off-set by an increase in interest bearing demand deposits of $4,363,496.
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, 2004, certificates of deposit greater than
$100,000 decreased approximately $3,147,000, or 8.6% from year-end 2003 totals.
COMMUNITY has developed several large depository customers. As of
September 30, 2004, the eight largest depository customers accounted for
approximately 30% of COMMUNITY'S certificate of deposits and approximately 94%
of total certificates of deposits greater than $100,000. These customers also
represent 16% of Community's demand deposits at September 30, 2004. Total
concentration of retail funding is approximately 27% of COMMUNITY'S total
deposits at September 30, 2004. On a consolidated level, this represents
approximately 9% of total retail deposits at September 30, 2004 compared to 7.9%
at December 31, 2003. 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 an active
asset/liability committee that monitors, among other items, monthly liquidity
needs on a 90 day time horizon.
16
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SOURCES OF FUNDS - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER
BORROWINGS
Other interest-bearing liabilities include securities sold under
agreements to repurchase, sweep accounts, federal funds purchased, Treasury, Tax
& Loan notes payable and Federal Home Loan Bank ("FHLB") advances. In the first
nine months of 2004, the Company continued to utilize the FHLB programs to
manage interest rate risk and liquidity positions. Total borrowings comprising
the FHLB and federal funds purchased at September 30, 2004 increased
approximately $6.4 million, or 15.8% from year-end 2003 totals. The majority of
the Company's repurchase agreements are with local school districts and city and
county governments.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
NET INCOME
Basic and diluted earnings per share for the nine months ended September
30, 2004 were $0.76, compared with $0.72 for the nine months ended September 30,
2003 an increase of 5.6%. Net income increased 4.3% or $107,304 for the nine
months ended September 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 1.8% for the nine months ended September 30, 2004
compared to the same period in 2003. The increase is a result of a larger base
of average earning assets of approximately 4.2% in the first nine months of 2004
compared to the same period in 2003.
Total interest income for the nine months ended September 30, 2004 was
$15,283,161 compared to $15,416,059 for the same period in 2003. Total interest
income decreased $132,898, or 0.9%. 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, 2004 when
compared to the same nine-month period ended September 30, 2003, decreased 5.1%,
or $303,342. 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.
PROVISION FOR LOAN LOSSES
The total provision for loan losses was $498,500 for the nine months ended
September 30, 2004 compared to $414,000 for the same period in 2003. Management
increased the loan loss provision in 2004 due to a growth the Company's loan
portfolio and a slight increase in loan charge-offs at COMMUNITY. Management
believes that all known and inherent losses in the loan portfolio have been
provided for.
17
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, 2004 was $1,636,465 compared to $1,741,021 for the same nine
months period ended September 30, 2003, a decrease of 6.4%. Gains related to the
Company's secondary market real estate loan program decreased approximately
$134,000 from the same period in 2003. In addition, the Company's security
portfolio generated approximately $73,000 in security gains for the nine months
ended September 30, 2004, compared to $336,000 for the same period in 2003.
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 decreased by approximately
$127,000, or 16.7% due primarily to a $18,000 decrease in earnings on bank owned
life insurance in 2004 and reduced fees income related to the secondary market
program of $45,000.
NONINTEREST EXPENSE
Noninterest expense for the nine months ended September 30, 2004 decreased
approximately $393,000 or 4.9% from the nine months ended September 30, 2003.
Salary and benefit expense decreased approximately $115,000, or 2.9% for the
nine months ended September 30, 2004, due primarily to decreased staffing levels
at both CITIZENS and COMMUNITY. Occupancy expense decreased approximately
$168,000 or 14.1% for the nine months ended September 30, 2004, as compared to
the same period in 2003. Occupancy decreased due to capital expenditures, mainly
consisting of technology enhancements, becoming fully depreciated in the first
quarter of 2004. Professional fees decreased $29,900 or 9.6% for the nine-months
ended September 30, 2004 as compared to the same period in 2003.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
NET INCOME
Basic and diluted earnings per share for the three months ended September
30, 2004 were $0.26, compared with $0.25 for the three months ended September
30, 2003 an increase of 4.0%. Net income increased 0.7% for the three months
ended September 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 3.2% for the three months ended September 30, 2004,
compared to the same period in 2003. The impact of the lower net interest margin
was offset by a larger base of average earning assets in the three months ended
September 30, 2004, compared to the same period in 2003.
Total interest income for the three months ended September 30, 2004 was
approximately $5,159,000, compared to $5,121,000 for the same period in 2003, an
increase of approximately $38,000,
18
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
or 0.74%. The increase can be attributed to the recent increase in the overall
interest rate environment that began in the third quarter of 2004.
Total interest expense for the three months ended September 30, 2004 when
compared to the same three-month period ended September 30, 2003, reflected a
decline of 3.4%, or approximately $65,000. 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. 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 2003 to 2004.
The Company has also utilized its credit lines from the FHLB and other
correspondent bank to balance out their liquidity needs.
PROVISION FOR LOAN LOSSES
The total provision for loan losses was $159,500 for the three months
ended September 30, 2004 compared to $114,000 for the same period in 2003.
Management increased the loan loss provision in 2004 due to a growth the
Company's loan portfolio and a slight increase in loan charge-offs at COMMUNITY.
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, 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/(losses) on sales of securities for the three
months ended September 30, 2004 was approximately $548,000 compared to
approximately $598,000 for the same three-month period ended September 30, 2003.
For the three months ended September 30, 2004, compared to the same period in
2003, noninterest income decreased approximately 8.4% or $50,000. Gains related
to the Company's secondary market real estate loan program decreased
approximately $68,000 from the same period in 2003. In addition, the Company's
security portfolio incurred a loss of approximately $23,000 for the three months
ended September 30, 2004, compared to a gain of $54,000 for the same period in
2003, for a net decrease of $77,000. Other income for the three months ended
September 30, 2004 decreased by approximately $29,000, from the comparable 2003
quarter.
NONINTEREST EXPENSE
Noninterest expense for the three months ended September 30, 2004
decreased approximately $116,000 over the three months ended September 30, 2003.
The majority of this decrease was a result of a decrease in salaries and
employee benefits of approximately $52,000, advertising of $26,000 and occupancy
expense of $65,000. Occupancy decreased 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
September 30, 2004, totaled $33,531,093 compared to $32,514,459 at December 31,
2003, a 3.1% increase. Total shareholders' equity in relation to total assets
was 8.71% at September 30, 2004 and 8.43% at December 31, 2003.
19
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, 2004:
SEPTEMBER 30,
(IN THOUSANDS) 2004
----------------
Tier 1 capital $ 33,644
Total risk-based capital $ 36,654
Risk-weighted assets $ 236,879
Average total assets $ 385,819
Total risk-based capital ratio 15.46%
Tier 1 risk-based capital ratio 14.20%
Tier 1 capital to average assets 8.72%
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 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, 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). 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
37% 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, 2004 NET PORTFOLIO VALUE-DECEMBER 31, 2003
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
-------------------------------------- -------------------------------------
Up 200 $ 46,890 $ (989) -2.07% Up 200 $ 25,958 $ (7,719) -22.92%
Up 100 $ 48,087 $ 208 0.43% Up 100 $ 30,501 $ (3,176) -9.43%
Base $ 47,879 Base $ 33,677
Down 100 $ 43,022 $ (4,857) -10.14% Down 100 $ 31,198 $ (2,479) -7.36%
Down 200 $ 37,727 $(10,152) -21.20% 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 September 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 10.14% and 21.20% given a 100 and
200 basis point decline in rates. In management's view there is a low
probability that interest rates would decrease another 100 to 200 basis points.
Given an upward change in interest rates the Company's NPV would increase .43%
with a 100 basis point interest rate increase. In a 200 basis point rate
increase, the Company's NPV would decrease 2.07%. 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 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, 2004, 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, 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 September 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
United Bancorp and its subsidiaries are not a party to, nor is any of
their property the subject of any material legal proceedings other than ordinary
routine litigation incidental to their respective businesses, nor are any such
proceedings known to be contemplated by governmental authorities.
25
UNITED BANCORP, INC.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
(c)
TOTAL (d)
NUMBER OF MAXIMUM
SHARES (OR NUMBER (OR
UNITS) APPROXIMATE
(a) PURCHASED AS DOLLAR VALUE) OF
TOTAL (b) PART OF SHARES (OR UNITS)
NUMBER OF AVERAGE PUBLICLY THAT MAY YET BE
SHARES (OR PRICE PAID ANNOUNCED PURCHASED UNDER
UNITS) PER SHARE (OR PLANS OR THE PLANS OR
PERIOD PURCHASED UNIT) PROGRAMS PROGRAMS
------ ------------ ------------- ------------ -----------------
MONTH #1
7/1/2004 TO 0 0 0 148,120
7/31/2004
MONTH #2
8/1/2004 TO 1,746 SHARES $14.29 0 148,120
8/31/2004 (1)
MONTH #3
9/1/2004 TO 0 0 0 148,120
9/30/2004
TOTAL 1,746 SHARES $14.29 0 148,120
(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
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
26
UNITED BANCORP, INC.
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended Articles of Incorporation of United Bancorp, Inc.
Incorporated by reference to Appendix B to the registrant's
Definitive Proxy Statement filed with the Securities and
Exchange Commission on March 14, 2001.
3.2 Amended Code of Regulations of United Bancorp, Inc.
Incorporated by reference to Appendix C to the registrant's
Definitive Proxy statement filed with the Securities and
Exchange Commission on March 14, 2001.
4.0 Instruments Defining the Rights of Security Holders (See
Exhibits 3.1 and 3.2)
31.1 Rule 13a-14(e) Certification - Principal Executive Officer
31.2 Rule 13a-14(a) Certification - Principal Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 1350, As Enacted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, As Enacted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
(b) The Company filed two reports on SEC Form 8-K during the period
covered by this report. The reports were on July 22, 2004 announcing
the financial results for the second quarter ended June 30, 2004,
and August 31, 2004 announcing a regular dividend payment
27
UNITED BANCORP, INC.
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 12, 2004 By: /s/ James W. Everson
- ----------------------------- ----------------------------------
Date James W. Everson
Chairman, President & Chief
Executive Officer
November 12, 2004 By: /s/ Randall M. Greenwood
- ----------------------------- ----------------------------------
Date Randall M. Greenwood
Senior Vice President, Chief
Financial Officer and Treasurer
28
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amended Articles of Incorporation of United Bancorp, Inc.
Incorporated by reference to Appendix B to the registrant's
Definitive Proxy Statement filed with the Securities and Exchange
Commission on March 14, 2001.
3.2 Amended Code of Regulations of United Bancorp, Inc. Incorporated
by reference to Appendix C to the registrant's Definitive Proxy
statement filed with the Securities and Exchange Commission on
March 14, 2001.
4.0 Instruments Defining the Rights of Security Holders (See Exhibits
3.1 and 3.2)
31.1 Rule 13a-14(e) Certification - Principal Executive Officer
31.2 Rule 13a-14(a) Certification - Principal Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 1350, As Enacted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, As Enacted
Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.