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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 MARCH 31, 2005
[ ] 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 (IRS Employer Identification No.)
incorporation or organization)
201 SOUTH 4TH STREET, MARTINS FERRY, OHIO 43935-0010
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(740) 633-0445
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed since last
report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE 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 3,801,012 SHARES AS OF APRIL 30, 2005
UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
PART I
FINANCIAL INFORMATION
MARCH 31, DECEMBER 31,
2005 2004
(Unaudited)
ASSETS
Cash and due from financial institutions $ 7,928,891 $ 7,580,576
Securities available for sale - at market 129,577,905 137,816,329
Securities held to maturity - estimated fair value of
$17,240,602 at March 31, 2005 and $15,475,005 at December 31, 2004 16,851,638 14,947,520
Federal Home Loan Bank stock - at cost 4,158,500 4,115,200
Total loans 218,677,565 215,446,870
Allowance for loan losses (2,994,302) (2,995,422)
------------- -------------
Loans - net 215,683,263 212,451,448
Premises and equipment 7,636,606 7,760,360
Accrued interest receivable 2,449,017 2,253,212
Other real estate and repossessions 888,207 1,014,207
Core deposit and other intangible assets 24,917 34,417
Bank owned life insurance 7,848,718 7,517,548
Other assets 2,730,606 2,030,767
------------- -------------
Total assets $ 395,778,268 $ 397,521,584
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits
Noninterest-bearing $ 32,801,901 $ 31,777,495
Interest-bearing 60,219,089 62,038,985
Savings deposits 45,620,294 45,143,133
Time deposits - under $100,000 122,152,199 122,018,788
Time deposits - $100,000 and over 39,946,207 39,651,142
------------- -------------
Total deposits 300,739,690 300,629,543
Federal funds purchased 8,005,000 3,180,000
Advances from the Federal Home Loan Bank 42,091,531 46,680,311
Securities sold under agreements to repurchase 8,110,478 12,612,270
Other borrowed funds 295,738 399,283
Trade date security purchases 3,615,000 -
Accrued expenses and other liabilities 964,517 1,196,066
------------- -------------
Total liabilities 363,821,954 364,697,473
Commitments - -
Shareholders' equity
Preferred stock - 2,000,000 shares without par value authorized;
no shares issued - -
Common stock - $1 par value; 10,000,000 shares authorized;
4,160,379 at March 31, 2005 and 4,126,970 shares issued at
December 31, 2004 4,160,379 4,126,970
Additional paid-in capital 26,090,040 25,831,585
Retained earnings 7,339,175 7,021,185
Stock held by deferred compensation plan; 66,350 shares
at March 31, 2005 and 62,977 shares at December 31, 2004 - at cost (772,990) (752,437)
Treasury stock - 293,017 at March 31, 2005 and 273,017 shares
at December 31, 2004 - at cost (3,052,851) (2,767,751)
Accumulated comprehensive loss, unrealized losses on
securities designated as available for sale, net of tax (1,807,439) (635,441)
------------- -------------
Total shareholders' equity 31,956,314 32,824,111
------------- -------------
Total liabilities and shareholders' equity $ 395,778,268 $ 397,521,584
============= =============
The accompanying notes are an integral part of these statements.
2
UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended March 31, 2005 and 2004
2005 2004
(Unaudited)
Interest and dividend income
Loans, including fees $3,533,736 $3,352,573
Taxable securities 1,327,139 1,274,210
Non-taxable securities 315,483 357,299
Federal funds sold 1,092 2,178
Dividends on Federal Home Loan Bank stock and other 45,234 41,189
---------- ----------
Total interest and dividend income 5,222,684 5,027,449
Interest expense
Deposits
Demand 145,855 146,528
Savings 38,461 41,265
Time 1,380,907 1,451,503
Borrowings 409,130 242,798
---------- ----------
Total interest expense 1,974,353 1,882,094
---------- ----------
Net interest income 3,248,331 3,145,355
Provision for loan losses 144,000 139,500
---------- ----------
Net interest income after provision for loan losses 3,104,331 3,005,855
Noninterest income
Service charges on deposit accounts 314,376 305,314
Gain on sales/calls of securities designated
as available for sale 2,566 110,558
Gain on sale of loans 6,478 11,516
Other income 243,020 223,115
---------- ----------
Total noninterest income 566,440 650,503
Noninterest expense
Salaries and employee benefits 1,365,290 1,313,822
Occupancy and equipment 330,203 358,993
Professional services 102,021 107,600
Insurance 75,470 74,224
Franchise and other taxes 98,739 97,323
Advertising 81,965 61,854
Stationery and office supplies 65,607 54,945
Amortization of intangibles 4,500 4,500
Other expenses 496,528 494,225
---------- ----------
Total noninterest expense 2,620,322 2,567,486
---------- ----------
Earnings before income taxes 1,050,449 1,088,872
Income tax expense 229,500 232,900
---------- ----------
Net Earnings $ 820,949 $ 855,972
========== ==========
EARNINGS PER COMMON SHARE
Basic $ 0.22 $ 0.22
========== ==========
Diluted $ 0.22 $ 0.22
========== ==========
The accompanying notes are an integral part of these statements.
3
UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31,
2005 2004
(Unaudited)
Net earnings $ 820,949 $ 855,972
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during
the period, net of taxes (benefits) of $(602,884) and
$425,446 in 2005 and 2004, respectively (1,170,304) 825,867
Reclassification adjustment for realized gains
included in earnings, net of taxes of $872, and
$37,590 in 2005 and 2004, respectively (1,694) (72,968)
----------- -----------
Comprehensive income (loss) $ (351,049) $ 1,608,871
=========== ===========
Accumulated comprehensive income (loss) $(1,807,439) $ 504,308
=========== ===========
The accompanying notes are an integral part of these statements.
4
UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unaudited
TREASURY ACCUMULATED
ADDITIONAL STOCK AND COMPREHENSIVE TOTAL
COMMON PAID-IN DEFERRED RETAINED INCOME SHAREHOLDERS'
STOCK CAPITAL COMPENSATION EARNINGS (LOSS) EQUITY
Balance at January 1, 2004 $ 3,752,105 $25,712,990 $ (2,749,697) $6,047,652 $ (248,591) $ 32,514,459
Net income - - - 855,972 - 855,972
Cash dividends - $0.12 per share - - - (458,251) - (458,251)
Shares purchased for deferred
compensation plan - 34,430 (34,430) - - -
Purchases of treasury stock -
shares at cost - - (323,840) - - (323,840)
Unrealized gain on securities designated
as available for sale, net of tax - - - - 752,899 752,899
----------- ----------- ------------ ---------- ------------- -------------
Balance at March 31, 2004 (unaudited) 3,752,105 25,747,420 (3,107,967) 6,445,373 504,308 33,341,239
Balance January 1, 2005 4,126,970 25,831,585 (3,520,188) 7,021,185 (635,441) 32,824,111
Net income - - - 820,949 - 820,949
Cash dividends - $0.13 per share - - - (502,959) - (502,959)
Shares purchased for deferred
compensation plan - 27,894 (27,894) - - -
Shares distributed from deferred
compensation plan - (7,342) 7,342 - - -
Purchases of treasury stock -
shares at cost - - (285,101) - - (285,101)
Stock options exercised - net 27,346 154,840 - - - 182,186
Tax benefit on options exercised - 113,785 - - - 113,785
Proceeds from dividend reinvestment program 6,063 83,063 - - - 89,126
Unrealized losses on securities designated
as available for sale, net of tax - - - - (1,171,998) (1,171,998)
----------- ----------- ------------ ---------- ------------- -------------
Balance at March 31, 2005 (unaudited) $ 4,160,379 $26,090,040 $ (3,825,841) $7,339,175 $ (1,807,439) $ 31,956,314
=========== =========== ============ ========== ============= ============
The accompanying notes are an integral part of these statements.
5
UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
2005 2004
(Unaudited)
Cash flows from operating activities:
Net income $ 820,949 $ 855,972
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 181,537 213,359
Provision for loan losses 144,000 139,500
Federal Home Loan Bank stock dividend (43,300) (84,800)
Net realized gains on sales or calls of securities (2,566) (110,558)
Amortization of securities, net 114,332 140,156
Net realized gain on sale of loans (6,478) (11,516)
Increase in value of bank owned life insurance (65,367) (73,251)
Amortization of mortgage servicing rights 20,163 20,705
Tax benefits related to exercise of stock options 113,785 -
Net realized (gain) loss on sale of real estate owned (2,944) 9,578
Net change in accrued interest receivable and other assets (565,520) 21,804
Net change in accrued expenses and other liabilities 26,921 7,726,720
-------------- --------------
Net cash provided by operating activities 735,512 8,847,669
Cash flows provided by investing activities:
Securities available for sale:
Sales 4,579,658 16,086,129
Maturities, prepayments and calls 13,785,294 20,324,540
Purchases (8,406,545) (30,320,722)
Securities held to maturity:
Maturities, prepayments and calls 50,000 349,035
Purchases (1,946,621) -
Net change in loans (3,369,337) (5,819,108)
Proceeds from sale of real estate owned 128,944 109,706
Purchase of bank owned life insurance (265,803) -
Purchases of premises and equipment (53,283) (105,724)
-------------- --------------
Net cash provided by investing activities 4,502,307 623,856
Cash flows used in financing activities:
Net change in deposits 110,147 (1,724,075)
Net change in short-term borrowings (4,108,338) (7,947,449)
Proceeds from long-term debt - 54,000
Principal payments on long-term debt (260,780) (298,707)
Cash dividends paid (502,959) (458,251)
Proceeds from stock issuance 89,126 -
Proceeds from exercise of stock options 68,401 -
Treasury stock purchases (285,101) (323,840)
-------------- --------------
Net cash used in financing activities (4,889,504) (10,698,322)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 348,315 (1,226,797)
Cash and cash equivalents at beginning of period 7,580,576 8,386,575
-------------- --------------
Cash and cash equivalents at end of period $ 7,928,891 $ 7,159,778
============== ==============
Supplemental disclosure of cash flow information:
Interest paid $ 1,971,027 $ 1,918,976
============== ==============
Federal income taxes paid $ - $ 55,000
============== ==============
Supplemental disclosure of noncash investing activities:
Noncash transfer from loans to other real estate
and repossessions $ - $ 69,275
============== ==============
Recognition of mortgage servicing rights $ 20,163 $ 7,797
============== ==============
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ (1,171,998) $ 752,899
============== ==============
The accompanying notes are an integral part of these statements.
6
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of United Bancorp, Inc. ("Company") at March 31, 2005,
and its results of operations and cash flows for the periods presented. All such
adjustments are normal and recurring in nature. The accompanying condensed
consolidated financial statements have been prepared in accordance with the
instructions 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 consolidated
financial statements, and related notes thereto, of the Company for the year
ended December 31, 2004 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.
1. Principles of Condensed Consolidation
The consolidated financial statements include the accounts of United Bancorp,
Inc. ("UNITED" or "the Company") and its wholly-owned subsidiaries, The Citizens
Savings Bank of Martins Ferry, Ohio ("CITIZENS") and The Community Bank,
Lancaster, Ohio ("COMMUNITY"), (collectively hereinafter "the Banks"). All
intercompany transactions and balances have been eliminated in consolidation.
2. Nature of Operations
The Company's revenues, operating income, and assets are almost exclusively
derived from banking. 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, and Tuscarawas Counties and the surrounding localities in northeastern,
eastern and southeastern 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 seven offices in Amesville,
Glouster, Lancaster, and Nelsonville, Ohio. The Company's primary deposit
products are checking, savings, and term certificate accounts, 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 businesses. Real estate loans are
secured by both residential and commercial real estate. Net interest income is
affected by the relative amount of interest-earning assets and interest-bearing
liabilities and the interest received or paid on these balances. The level of
interest rates paid or received by the Company can be significantly influenced
by a number of environmental factors, such as governmental monetary policy, that
are outside of management's control.
3. 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.
7
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Earnings Per Share
Basic earnings per common share ("EPS") is computed based upon the
weighted-average number of common shares outstanding during the period. Diluted
earnings per common share include the dilutive effect of additional potential
common shares issuable under the Company's stock option plans. Earnings and
dividends per share for the quarter ended March 31, 2004 have been restated for
the stock split in the form of a dividend declared and distributed in the fourth
quarter of 2004. The computation are as follows:
THREE MONTHS ENDED
MARCH 31,
2005 2004
BASIC
Net income $ 820,949 $ 855,972
=========== =============
Weighted average common shares outstanding 3,788,143 3,828,480
=========== =============
Basic earnings per common share $ 0.22 $ 0.22
=========== =============
DILUTED
Net income $ 820,949 $ 855,972
=========== =============
Weighted average common shares outstanding
for basic earnings per common share 3,788,143 3,828,480
Add: Dilutive effects of assumed exercise of
stock options 9,251 23,406
----------- -------------
Average shares and dilutive potential
common shares 3,797,394 3,851,886
=========== =============
Diluted earnings per common share $ 0.22 $ 0.22
=========== =============
Outstanding options to purchase 20,038 and 24,480 shares of common stock were
excluded from the computation of common share equivalents for the three months
ended March 31, 2005 and 2004, respectively, because the exercise prices were
greater than the average market prices of common shares.
5. Stock Options
The Company maintains a nonqualified stock option plan for directors and
officers. The exercise price for options granted under this plan is no less than
100% of the fair market value of the shares on the date of grant adjusted for
stock dividends and stock splits.
8
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Stock Options (continued)
The Company accounts for its stock option plan in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," which contains a fair value-based
method for valuing stock-based compensation that entities may use, which
measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, SFAS No. 123 permits companies to continue to
account for stock options and similar equity investments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB No. 25
are required to make pro forma disclosures of net earnings and earnings per
share as if the fair value-based method of accounting defined in SFAS No. 123
had been applied.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for it stock option plan. Accordingly, no compensation cost has been recognized
for the plans. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant dates for awards under the plan
consistent with the accounting method utilized in SFAS No. 123, the Company's
net earnings and earnings per share would have been reported at the pro-forma
amounts indicated in the table below.
THREE MONTHS ENDED
MARCH 31,
2005 2004
NET EARNINGS As reported $ 820,949 $ 855,972
Stock-based compensation, net of tax (2,414) (8,010)
--------- ------------
Pro-forma $ 818,535 $ 847,962
========= ============
EARNINGS PER SHARE
BASIC As reported $ .22 $ .22
Stock-based compensation, net of tax - -
--------- ------------
Pro-forma $ .22 $ .22
========= ============
DILUTED As reported $ .22 $ .22
Stock-based compensation, net of tax - -
--------- ------------
Pro-forma $ .22 $ .22
========= ============
All share and per share prices have been restated to reflect stock splits or
dividends distributed or declared prior to issuance of the financial statements.
The fair value of each option grant for 2005 has been estimated on the date of
grant using the modified Black-Scholes options pricing model with the following
assumptions: dividend yield of 3.75%, expected volatility of 25.63%, a risk-free
interest rate of 4.27% and a 9 1/2 year expected life for all grants. In
February 2005, 76,546 options previously granted became exercisable for 90 days.
Any option not exercised within the designated time frame will be forfeited. All
options become immediately exercisable upon retirement, death, or 9 1/2 years
after issuance, or in the event of a change in control of the Company.
9
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Stock Options (continued)
A summary of the status of the Company's stock option plan for the three months
ended March 31, 2005 and 2004. is presented below:
2005 2004
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
Outstanding at January 1, 102,025 $ 9.32 102,025 $ 9.32
Granted 10,000 14.85 - -
Exercised (48,800) 7.93 - -
Forfeited - - - -
------- --------- ------- ---------
Outstanding at March 31, 63,225 $ 11.27 102,025 $ 9.32
======= ========= ======= =========
Options exercisable at quarter-end 31,314 $ 8.64 7,212 $ 9.57
======= ========= ======= =========
Weighted-average fair value of options
granted during the period $ 3.42 $ -
========= =========
The following table summarizes information about stock options outstanding at
March 31, 2005:
NUMBER NUMBER REMAINING
EXERCISE OUTSTANDING DATE OF EXERCISABLE CONTRACTUAL
PRICE AT 3/31/05 EXPIRATION AT 3/31/05 LIFE
$ 7.93 25,555 5/24/05 25,555 .20 years
$ 8.32 2,191 5/24/05 2,191 .20 years
$ 12.74 15,442 10/26/07 1,080 2.58 years
$ 14.10 7,722 12/1/06 2,163 1.67 years
$ 16.52 2,315 7/7/07 325 2.33 years
$ 14.85 10,000 08/23/14 - 10.00 years
6. 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.
10
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (the "FASB") issued a
revision to Statement of Financial Accounting Standards ("SFAS") No. 123 which
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services, primarily on accounting
for transactions in which an entity obtains employee services in share-based
transactions. This Statement, SFAS No. 123 (R), requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award, with limited
exceptions. That cost will be recognized over the period during which an
employee is required to provide services in exchange for the award - the
requisite service period. No compensation cost is recognized for equity
instruments for which employees do not render the requisite service. Employee
share purchase plans will not result in recognition of compensation cost if
certain conditions are met.
Initially, the cost of employee services received in exchange for an award of
liability instruments will be measured based on current fair value; the fair
value of that award will be remeasured subsequently at each reporting date
through the settlement date. Changes in fair value during the requisite service
period will be recognized as compensation cost over that period. The grant-date
fair value of employee share options and similar instruments will be estimated
using option-pricing models adjusted for the unique characteristics of those
instruments (unless observable market prices for the same or similar instruments
are available). If an equity award is modified after the grant date, incremental
compensation cost will be recognized in an amount equal to the excess of the
fair value of the modified award over the fair value of the original award
immediately before the modification.
Excess tax benefits, as defined by SFAS 123(R) will be recognized as an addition
to additional paid in capital. Cash retained as a result of those excess tax
benefits will be presented in the statement of cash flows as financing cash
inflows. The write-off of deferred tax assets relating to unrealized tax
benefits associated with recognized compensation cost will be recognized as
income tax expense unless there are excess tax benefits from previous awards
remaining in additional paid in capital to which it can be offset.
Compensation cost is required to be recognized in the beginning of the annual
period that begins after June 15, 2005, or January 1, 2006 as to the Company.
Management believes the future effect on quarterly operations will approximate
the economic effects previously set forth in the pro-forma stock option
disclosure.
11
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2005 and 2004
NOTE B - SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of securities available for sale are summarized as
follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
MARCH 31, 2005 COST GAINS LOSSES VALUE
U.S. Government and agency
obligations $ 68,789,551 $ - $ (1,547,111) $ 67,242,440
State and municipal obligations 14,609,810 110,395 (260,764) 14,459,441
Mortgage-backed securities 43,919,693 - (960,204) 42,959,489
Collateralized mortgage obligations 4,993,395 - (90,842) 4,902,553
------------- -------------- -------------- -------------
Total debt securities 132,312,449 110,395 (2,858,921) 129,563,923
Equity securities 4,000 9,982 - 13,982
------------- -------------- -------------- -------------
$ 132,316,449 $ 120,377 $ (2,858,921) $ 129,577,905
============= ============== ============== =============
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2004 COST GAINS LOSSES VALUE
U.S. Government and agency
obligations $ 74,844,818 $ 86,754 $ (739,889) $ 74,191,683
State and municipal obligations 16,135,425 159,033 (176,425) 16,118,033
Mortgage-backed securities 42,978,408 32,293 (304,367) 42,706,334
Collateralized mortgage obligations 4,816,467 - (34,288) 4,782,179
------------- -------------- -------------- -------------
Total debt securities 138,775,118 278,080 (1,254,969) 137,798,229
Equity securities 4,000 14,100 - 18,100
------------- -------------- -------------- -------------
$ 138,779,118 $ 292,180 $ (1,254,969) $ 137,816,329
============= ============== ============== =============
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of securities held to maturity are summarized as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
MARCH 31, 2005
State and municipal obligations $ 16,851,638 $ 460,828 $ (71,864) $ 17,240,602
============= ============== ============== =============
DECEMBER 31, 2004
State and municipal obligations $ 14,947,520 $ 559,426 $ (31,941) $ 15,475,005
============= ============== ============== =============
12
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2005 and 2004
NOTE B - SECURITIES (continued)
The fair value of debt securities and carrying amount, if different, at March
31, 2005 by contractual maturity were as follows. Securities not due at a single
maturity date, primarily mortgage-backed securities, are shown separately.
AVAILABLE FOR SALE HELD TO MATURITY
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
Due in one year or less $ 471,613 $ 472,345 $ 660,154 $ 666,513
Due from one to five years 3,730,479 3,726,432 2,440,967 2,541,696
Due from five to ten years 32,969,683 32,516,455 5,582,537 5,799,454
Due after ten years 46,231,586 44,986,649 8,167,980 8,232,939
Mortgage-backed securities 43,919,693 42,959,489 - -
Collateralized mortgage obligations 4,993,395 4,902,553 - -
------------- -------------- -------------- -------------
$ 132,312,449 $ 129,563,923 $ 16,851,638 $ 17,240,602
============= ============== ============== =============
Sales of available for sale securities were as follows:
2005 2004
Proceeds $ 4,579,658 $ 16,086,129
Gross gains 22,747 150,765
Gross losses (20,181) 40,207
Securities with an amortized cost of $68,723,815 at March 31, 2005 and
$66,072,274 at December 31, 2004 were pledged to secure public deposits,
repurchase agreements and other liabilities as required or permitted by law. At
March 31, 2005 and December 31, 2004, there were no holdings of securities of
any one issuer, other than the U. S. Government and its agencies, in an amount
greater than 10% of shareholders' equity.
13
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2005 and 2004
NOTE C - LOANS
The activity in the allowance for loan losses was as follows:
THREE MONTHS ENDED
MARCH 31,
2005 2004
Balance January 1, $2,995,422 $ 2,843,484
Provision for loan losses 144,000 139,500
Loans charged-off (197,157) (217,056)
Recoveries of previous charge-offs 52,037 47,434
---------- ------------
Balance March 31, $2,994,302 $ 2,813,362
========== ============
Nonperforming loans were as follows:
MARCH 31, DECEMBER 31,
2005 2004
Loans past due over 90 days still on accrual $ 401,000 $ 500,000
Nonaccrual loans $1,003,000 $ 1,106,000
As of March 31, 2005 and 2004, and for the quarters then ended, individually
impaired loans were not material to the consolidated financial statements.
NOTE D - BENEFIT PLANS
Pension expense includes the following:
THREE MONTHS ENDED
MARCH 31,
2005 2004
Service cost $ 59,004 $ 55,403
Interest cost 34,404 49,248
Expected return on assets (43,090) (67,493)
Amortization of prior service cost, transition
liability, net gain, and plan amendment 9,333 10,623
-------- --------
Pension expense $ 59,651 $ 47,781
======== ========
14
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended March 31, 2005 and 2004
NOTE E - OFF-BALANCE SHEET ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters of
credit and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contracts are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
A summary of the notional or contractual amounts of financial instruments with
off-balance sheet risk at the indicated dates is as follows:
MARCH 31,
2005 DECEMBER 31,
(Unaudited) 2004
Commitments to extend credit $ 26,970,926 $ 26,879,212
Credit card and ready reserve lines 1,127,453 1,582,377
Standby letters of credit 855,300 475,100
15
UNITED BANCORP, INC.
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 March 31,
2005, as compared to December 31, 2004 and the results of operations for the
three months ended March 31, 2005 compared to the same period in 2004. 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.
Management makes certain judgments 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 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.
16
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Analysis of Financial Condition
Earning Assets - Loans
At March 31, 2005, gross loans were $218,678,000 compared to $215,447,000 at
year-end 2004, an increase of $3,231,000 or 1.5%. The increase in total
outstanding loans was the result of an increase in the commercial, commercial
real estate and real estate portfolios. Management attributes the relatively
strong increase in commercial loans to the gradual strengthening of the economic
environment in the lending markets served.
Installment loans represented 19.1% of total loans at March 31, 2005 compared to
19.5% at December 31, 2004. 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,
minimizing the risk to changes in economic conditions in the communities housing
the Company's 17 branch locations. CITIZENS experienced an increase of 1.5%, or
$462,000 in installment loans. COMMUNITY experienced a decrease of 5.3%, or
$643,000 in installment loans. With interest rates depressed, management has not
been aggressive in lowering rates on these fixed rate loan products. Recently,
management has employed the strategy of focusing on adjustable rate products to
position the Company for an eventual rise in interest rates.
Commercial and commercial real estate loans comprised 56.5% of total loans at
March 31, 2005 compared to 55.0% at December 31, 2004. Commercial and commercial
real estate loans have increased $5,060,000 or 4.3% since December 31, 2004. The
Company has originated and purchased participations in loans from other banks
for out-of-area commercial and commercial real estate loans to benefit from
consistent economic growth outside the Company's primary market area. The
majority of these loans are secured by real estate holdings comprised of hotels,
motels and churches located in various geographic locations, including Columbus
and the Akron-Canton, Ohio metropolitan areas.
Real estate loans were 24.4% of total loans at March 31, 2005 and 25.6% at
year-end 2004. Real estate loans decreased by 3.0% or $1,678,000 since December
31, 2004. Real estate lending for the first quarter of 2005 has been extremely
slow with respect to the Company's adjustable rate mortgage products. As of
March 31, 2005, CITIZENS has $27.6 million in fixed rate loans that they service
for a fee that is typically 25 basis points.
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 March 31, 2005 were
approximately $145,000, or 4.8%, of the beginning balance in the allowance for
loan losses.
17
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Analysis of Financial Condition (continued)
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 March 31, 2005
decreased approximately $8,238,000, or 6.0% from year-end 2004 totals.
Securities held to maturity at March 31, 2005 increased approximately
$1,904,000, or 12.7% compared to year-end 2004 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 March 31, 2005, total core deposits decreased
approximately $185,000, or 0.1%. The Company's interest-bearing demand deposits
decreased $1,820,000 or 2.9%, noninterest-bearing demand deposits increased
$1,024,000 or 3.2% while certificates of deposits under $100,000 increased by
$133,000, or 0.1%.
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 March 31, 2005, certificates of deposit greater than $100,000
increased $295,000, or 0.7%, from year-end 2004 totals.
Over the past several years, COMMUNITY has developed several large depository
customers. As of March 31, 2005, the nine largest depository customers accounted
for approximately 29% of COMMUNITY'S certificate of deposits and approximately
85% of total certificates of deposits greater than $100,000. These customers
also represent 32% of COMMUNITY'S demand deposits at March 31, 2005. Total
concentration of retail funding is approximately 29% of COMMUNITY'S total
deposits at March 31, 2005. On a consolidated level, this represents
approximately 7.9% of total retail deposits at March 31, 2005 compared to 8.0%
at December 31, 2004. This deposit concentration does pose possible liquidity
and earnings risk for COMMUNITY. The earnings risks would be triggered if
COMMUNITY would be placed in a position to sell assets below book value to meet
current liquidity needs. This risk is mitigated with COMMUNITY'S capability to
borrow wholesale funding from its correspondent banks. Management has an active
asset/liability committee that monitors, among other items, monthly liquidity
needs on a 90 day time horizon.
18
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Analysis of Financial Condition (continued)
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 three months
of 2005, 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, including federal funds purchased, decreased approximately
$4,369,000, or 6.9% from year-end 2004 totals.
Results of Operations for the Three Months Ended March 31, 2005
Net Income
Basic and diluted earnings per share for the three months ended March 31, 2005
totaled $0.22, compared with $0.22 for the three months ended March 31, 2004. In
dollars, net income decreased 4.1% for the three months ended March 31, 2005,
compared to the same quarter in 2004.
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 3.3% or $103,000 for the three months ended March 31,
2005 compared to the same period in 2004. This resulted from a growth in earning
assets, primarily loans.
Total interest income for the three months ended March 31, 2005 was $5,222,684
compared to $5,027,449 for the same period in 2004. Total interest income
increased $195,000, or 3.9%. The increase can be attributed to the overall
growth of the loan portfolio from March 31, 2004 to March 31, 2005 of
$14,408,000 or 7.1%.
Total interest expense for the three months ended March 31, 2005 when compared
to the same three-month period ended March 31, 2004, increased 4.9%, or $92,000.
The Company has experienced an increase in interest expense due to the effect of
a higher interest rate environment for the first three months of 2005 as
compared to 2004.
Provision for Loan Losses
The total provision for loan losses was $144,000 for the three months ended
March 31, 2005 compared to $139,500 for the same period in 2004. At March 31,
2005 the allowance for loan losses to total gross loans was 1.37% as compared to
1.39% at December 31, 2004. The allowance for loan losses to nonperforming loans
was 213.3% at March 31, 2005, compared to 175.2% at December 31, 2004. The loan
portfolio balance has increased approximately 1.5% since December 31, 2004.
19
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations for the Three Months Ended March 31, 2005 (continued)
Noninterest Income
Total noninterest income is made up of bank related fees and service charges, as
well as other income producing services provided, sale of secondary market
loans, ATM income, early redemption penalties for certificates of deposit, safe
deposit rental income, internet bank service fees, earnings on bank-owed life
insurance and other miscellaneous items.
Noninterest income for the three months ended March 31, 2005 was $566,000
compared to $651,000 for the same three-month period ended March 31, 2004, a
decrease of approximately 12.9% or $84,000. The Company's security portfolio
generated approximately $3,000 in security gains for the three months ended
March 31, 2005, compared to $111,000 for the same period in 2004, resulting in a
decrease of $108,000 from first quarter 2004 to 2005. Management's sale strategy
in 2004 took into consideration the relative volatility in the bond market
during the first quarter of 2004. Management realized there were opportunities
to sell certain bonds in the portfolio when overall interest rates were
depressed. Security gains are not a component of core income and depending on
future interest rate scenarios, gains on the sale of investment securities may
negatively impact the yield on the investment portfolio and the Company's net
interest margin in future periods. For the first quarter of 2005, market
conditions, with the overall increase in interest rates, did not provide
management with the opportunity to replicate the level of security gains that
were available in first quarter 2004. The Company has also experienced a
slow-down in the fixed rate residential mortgage activity, resulting in a
decrease in net realized gains on the sale of loans of $5,000 from first quarter
2004 to first quarter 2005.
Noninterest Expense
Noninterest expense for the three months ended March 31, 2005 increased $53,000
or 2.1% over the three months ended March 31, 2004. Salaries and employee
benefits expense increased $51,000 or 3.9% mainly due to annual merit increases.
Occupancy expense decreased $29,000 or 8.0% due to capital expenditures mainly
technology enhancements, becoming fully depreciated in the first quarter of
2005.
Capital Resources
Internal capital growth, through the retention of earnings, is the primary means
of maintaining capital adequacy for the Company. Shareholders' equity at March
31, 2005, totaled $31,956,000 compared to $32,824,000 at December 31, 2004, a
2.6% decrease. Total shareholders' equity in relation to total assets was 8.07%
at March 31, 2005 and 8.26% at December 31, 2004. In May 2001, our shareholders
approved an amendment to the Company's Articles of Incorporation to create a
class of preferred shares with 2,000,000 authorized shares. This enables the
Company, at the option of the Board of Directors, to issue series of preferred
shares in a manner calculated to take advantage of financing techniques which
may provide a lower effective cost of capital to the Company. The amendment also
provides greater flexibility to the Board of Directors in structuring the terms
of equity securities that may be issued by the Company.
The Company has a Dividend Reinvestment Plan ("The Plan") for shareholders under
which the Company's common stock will be purchased by the Plan for participants
with automatically reinvested dividends. The Plan does not represent a change in
the Company's dividend policy or a guarantee of future dividends.
20
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations for the Three Months Ended March 31, 2005 (continued)
Capital Resources (continued)
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.
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 as well capitalized at March 31,
2005:
MARCH 31,
2005
(Unaudited)
Tier 1 capital $ 33,705
Total risk-based capital $ 36,514
Risk-weighted assets $ 244,738
Average total assets $ 393,971
Tier 1 capital to average assets 8.56%
Tier 1 risk-based capital ratio 13.77%
Total risk-based capital ratio 14.92%
21
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Results of Operations for the Three Months Ended March 31, 2005 (continued)
Liquidity
Management's objective in managing liquidity is maintaining the ability to
continue meeting the cash flow needs of its customers, such as borrowings or
deposit withdrawals, as well as its own financial commitments. The principal
sources of liquidity are net income, loan payments, maturing securities and
sales of securities available for sale, federal funds sold and cash and deposits
with banks. Along with its liquid assets, the Company has additional sources of
liquidity available to ensure that adequate funds are available as needed. These
include, but are not limited to, the purchase of federal funds, the ability to
borrow funds under line of credit agreements with correspondent banks, a
borrowing agreement with the Federal Home Loan Bank of Cincinnati 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 three months ended March 31, 2005, 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 increased slightly as a result of a
decrease in government agency securities. For a more detailed illustration of
sources and uses of cash, refer to the condensed consolidated statements of cash
flows.
Inflation
Substantially all of the Company's assets and liabilities relate to banking
activities and are monetary in nature. The consolidated financial statements and
related financial data are presented in accordance with 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.
22
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 material equity securities other
than stock in the Federal Home Loan Bank of Cincinnati, 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 88% of the portfolio compared to
the 12% 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 portion of its loan portfolio consisting of long term
fixed rate loans, the Company is somewhat sensitive to periods of rising
interest rates. In such periods, the Company's net interest spread could be
negatively affected because the interest rate paid on deposits may increase
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
financial instruments to sudden and sustained changes in the prevailing interest
rates.
NET PORTFOLIO VALUE
MARCH 31, 2005
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
(Dollars in thousands)
+200 $ 33,836 $ (1,018) (3)%
+100 35,363 509 2%
Base 34,854
-100 29,122 (5,732) (16)%
-200 24,624 (10,230) (29)%
23
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Item 3. Quantitative and Qualitative Disclosures About Market Risk (continued)
NET PORTFOLIO VALUE
DECEMBER 31, 2004
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
(Dollars in thousands)
+200 $ 34,352 $ (5,396) (14)%
+100 37,782 (1,966) (5)%
Base 39,748
-100 36,357 (3,391) (9)%
-200 32,302 (7,446) (19)%
The projected volatility of the net present value at both March 31, 2005 and
December 31, 2004 fall within the general guidelines established by the Board of
Directors. The NPV tab\le for March 31, 2005 shows that in a rising interest
rate environment, the NPV would increase 2% for a 100 basis point increase in
rates and then decrease 3%. The eventual decrease in a 200 basis point increase
in rate 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 declines. However, since the Company currently
has the ability to hold these securities to their final maturity, it would not
have to recognize any losses. In a falling interest rate environment, the
Company's NPV at March 31, 2005 would decrease 16% with a 100 basis point
interest rate decrease. In a 200 basis point rate decrease the Company's NPV
would decrease 29%. In Management's view, there is a low probability that
interest rates would decrease another 100 to 200 basis points.
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.
24
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-15e. 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 March 31, 2005 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 March 31, 2005 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
25
UNITED BANCORP, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
(c) (d)
TOTAL NUMBER OF MAXIMUM NUMBER (OR
(a) (b) SHARES (OR UNITS) APPROXIMATE DOLLAR VALUE)
TOTAL NUMBER OF AVERAGE PRICE PURCHASED AS PART OF OF SHARES (OR UNITS) THAT
SHARES (OR UNITS) PAID PUBLICLY ANNOUNCED MAY YET BE PURCHASED UNDER
PERIOD PURCHASED PER SHARE (OR UNIT) PLANS OR PROGRAMS THE PLANS OR PROGRAMS
- ---------- ---------------- ------------------ -------------------- ----------------------------
Month #l
1/1/2005 to 10,000 $ 14.48 10,000 $ 527,144
1/31/2005
Month #2
2/1/2005 to
2/28/2005
Month #3
3/1/2005 to 10,000 $ 14.05 10,000 $ 386,844
3/31/2005
---------------- ------------------ -------------------- ----------------------------
Total 20,000 $ 14.27 20,000 $ 386,844
---------------- ------------------ -------------------- ----------------------------
United Bancorp purchased these shares under a stock purchase program
publicly announced by a press release issued on August 24, 2004,
under which its Board of Directors authorized management to cause
the Company to purchase up to $1 million of its common shares over a
two-year period. Such authorization will expire on August 23, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
26
UNITED BANCORP, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit No.
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
(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 B to the registrant's Definitive Proxy
Statement filed with the Securities and Exchange Commission on March 14,
2001.
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.
United Bancorp, Inc.
Date: May 12, 2005 By: /s/ James W. Everson
--------------------
James W. Everson
Chairman, President & Chief
Executive Officer
Date: May 12, 2005 By: /s/ Randall M. Greenwood
------------------------
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.