1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2001
[ ] 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 organization) (IRS Employer Identification No.)
201 SOUTH 4TH STREET, MARTINS FERRY, OHIO 43935-0010
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(740) 633-0445
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate 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 3,019,076 SHARES AS OF JULY 19, 2001
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UNITED BANCORP, INC.
TABLE OF CONTENTS
FORM 10-Q
PART I FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets.............................................................................3
Condensed Consolidated Statements of Income.......................................................................4
Condensed Consolidated Statements of Shareholders' Equity.........................................................5
Condensed Consolidated Statements of Cash Flows...................................................................6
Notes to the Condensed Consolidated Financial Statements.....................................................7 - 13
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................................14 - 23
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................................24 - 25
PART II OTHER INFORMATION
ITEM 1.
Legal Proceedings................................................................................................26
ITEM 2.
Changes in Securities and Use of Proceeds........................................................................26
ITEM 3.
Default Upon Senior Securities...................................................................................26
ITEM 4.
Submission of Matters to a Vote of Security Holders..............................................................26
ITEM 5.
Other Information................................................................................................26
ITEM 6.
Exhibits and Reports on Form 8-K.................................................................................26
SIGNATURES.........................................................................................................27
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UNITED BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
PART I FINANCIAL INFORMATION
JUNE 30, DECEMBER 31,
2001 2000
----------------- ------------------
ASSETS
Cash and due from financial institutions $ 10,695,307 $ 10,694,118
Securities available for sale 125,046,716 94,438,970
Securities held to maturity
(Estimated fair value of $8,912,552 at 06/30/01 and $10,946,251 at 12/31/00) 8,591,898 10,802,213
Loans receivable
Commercial loans 19,059,592 20,414,810
Commercial real estate loans 63,533,021 64,811,940
Real estate loans 54,900,080 55,931,621
Installment loans 50,444,423 55,338,861
----------------- ------------------
Total loans receivable 187,937,116 196,497,232
Allowance for loan losses (2,839,270) (2,790,133)
----------------- ------------------
Net loans receivable 185,097,846 193,707,099
Premises and equipment, net 9,440,259 9,521,046
Accrued interest receivable and other assets 4,663,972 4,722,355
----------------- ------------------
Total Assets $343,535,998 $ 323,885,801
================= ==================
LIABILITIES
Demand deposits
Noninterest-bearing $ 23,056,063 $ 22,708,636
Interest-bearing 42,899,462 45,470,957
Savings deposits 48,687,281 49,158,941
Time deposits - under $100,000 121,355,917 120,797,039
Time deposits - $100,000 and over 34,960,624 29,417,302
----------------- ------------------
Total deposits 270,959,347 267,552,875
Securities sold under agreements to repurchase 7,717,201 4,861,430
Other borrowed funds 33,956,286 21,247,616
Accrued expenses and other liabilities 1,072,627 1,544,793
----------------- ------------------
Total Liabilities 313,705,461 295,206,714
SHAREHOLDERS' EQUITY
Preferred stock, without par value: 2,000,000 authorized and unissued
Common stock - $1 par value: 10,000,000 shares authorized;
3,094,882 issued 3,094,882 3,094,882
Additional paid in capital 21,769,867 21,699,632
Treasury stock - 75,706 shares in 2001 and 28,499 shares in 2000 at cost (789,175) (283,564)
Shares held by deferred compensation plan - 32,227 shares at cost
in 2001 and 26,155 in 2000 (481,673) (411,438)
Retained earnings 6,407,032 5,852,284
Accumulated other comprehensive income (loss), net of tax (170,396) (1,272,709)
----------------- ------------------
Total Shareholders' Equity 29,830,537 28,679,087
----------------- ------------------
Total Liabilities and Shareholders' Equity $343,535,998 $ 323,885,801
================= ==================
See accompanying notes to the condensed consolidated financial statements
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UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
---------------- --------------- ----------------- ----------------
Interest and dividend income
Loans, including fees $ 4,269,846 $ 4,172,931 $ 8,607,630 $ 8,180,199
Taxable securities 1,714,387 1,290,589 3,236,093 2,528,422
Non-taxable securities 272,577 271,039 541,195 535,238
Other interest and dividend income 63,887 64,624 139,630 148,668
---------------- --------------- ----------------- ----------------
Total interest and dividend income 6,320,697 5,799,183 12,524,548 11,392,527
Interest expense
Deposits
Demand 228,829 268,143 508,027 493,788
Savings 182,283 274,664 413,365 553,726
Time 2,354,490 2,041,363 4,685,319 3,866,198
Other borrowings 431,832 367,253 915,939 790,083
---------------- --------------- ----------------- ----------------
Total interest expense 3,197,434 2,951,423 6,522,650 5,703,795
Net interest income 3,123,263 2,847,760 6,001,898 5,688,732
Provision for loan losses 195,000 115,500 390,000 231,000
---------------- --------------- ----------------- ----------------
Net interest income after provision for loan losses 2,928,263 2,732,260 5,611,898 5,457,732
Noninterest income
Service charges on deposit accounts 231,263 216,549 443,394 389,198
Other income 154,095 118,245 310,079 270,174
---------------- --------------- ----------------- ----------------
Total noninterest income 385,358 334,794 753,473 659,372
Noninterest expense
Salaries and employee benefits 1,205,151 1,016,411 2,346,723 2,148,506
Occupancy and equipment 372,768 365,774 741,793 715,024
Other expenses 840,240 749,334 1,589,451 1,557,667
---------------- --------------- ----------------- ----------------
Total noninterest expense 2,418,159 2,131,519 4,677,967 4,421,197
Income before income taxes 895,462 935,535 1,687,404 1,695,907
Income tax expense 158,786 230,200 345,395 414,250
---------------- --------------- ----------------- ----------------
Net income $ 736,676 $ 705,335 $ 1,342,009 $ 1,281,657
================ =============== ================= ================
Earnings per common share - Basic $ 0.25 $ 0.23 $ 0.45 $ 0.42
Earnings per common share - Diluted $ 0.25 $ 0.23 $ 0.45 $ 0.42
Dividends per common share $ 0.13 $ 0.12 $ 0.26 $ 0.25
See accompanying notes to the condensed consolidated financial statements
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UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
TREASURY
ADDITIONAL STOCK AND
COMMON PAID IN DEFERRED RETAINED
STOCK CAPITAL PLAN EARNINGS
-------------- --------------- --------------- --------------
BALANCE AT JANUARY 1, 2000 $ 2,942,885 $ 19,660,205 $ - $ 6,542,711
Net income 1,281,657
Stock issuance 4,954 47,288
Net change in unrealized gain/(loss) on
securities available for sale
Comprehensive income
Recognition of shares held by deferred
compensation plan 370,198 (370,198)
Cash dividends - $0.12 per share (765,150)
-------------- --------------- -------------- ---------------
BALANCE AT JUNE 30, 2000 $ 2,947,839 $ 20,077,691 $ (370,198) $ 7,059,218
============== =============== ============== ===============
BALANCE AT JANUARY 1, 2001 $ 3,094,882 $ 21,699,632 $ (695,002) $ 5,852,284
Net income 1,342,009
Net change in unrealized gain/(loss) on
securities available for sale
Comprehensive income
Shares purchased for deferred compensation plan 70,235 (70,235)
Purchases of treasury stock - 47,207 shares at cost (505,611)
Cash dividends - $0.13 per share (787,261)
-------------- --------------- -------------- --------------
BALANCE AT JUNE 30, 2001 $ 3,094,882 $ 21,769,867 $ (1,270,848) $ 6,407,032
============== =============== ============== ==============
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME INCOME TOTAL
--------------- --------------- --------------
BALANCE AT JANUARY 1, 2000 $ (3,847,828) $ 25,297,973
Net income $ 1,281,657 1,281,657
Stock issuance 52,242
Net change in unrealized gain/(loss) on
securities available for sale (153,935) (153,935) (153,935)
---------------
Comprehensive income $ 1,127,722
===============
Recognition of shares held by deferred
compensation plan
Cash dividends - $0.12 per share (765,150)
--------------- --------------
BALANCE AT JUNE 30, 2000 $ (4,001,763) $ 25,712,787
=============== ==============
BALANCE AT JANUARY 1, 2001 $ (1,272,709) $ 28,679,087
Net income $ 1,342,009 1,342,009
Net change in unrealized gain/(loss) on
securities available for sale 1,102,312 1,102,312 1,102,312
-------------
Comprehensive income $ 2,444,321
==============
Shares purchased for deferred compensation plan
Purchases of treasury stock - 47,207 shares at cost (505,611)
Cash dividends - $0.13 per share (787,261)
--------------- --------------
BALANCE AT JUNE 30, 2001 $ (170,396) $ 29,830,537
=============== ==============
See accompanying notes to the condensed consolidated financial statements 5
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UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2001 2000
----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,342,009 $ 1,281,657
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 462,628 443,259
Provision for loan losses 390,000 231,000
Deferred taxes 27,475 (17,240)
Federal Home Loan Bank stock dividend (123,200) (78,000)
Net realized gains on sales or calls of securities (34,438) (16,674)
(Accretion)/amortization of securities, net (15,656) 3,383
Net realized gains on sales of loans (28,255) (4,648)
Amortization of mortgage servicing rights 27,599 22,495
Net changes in accrued interest receivable and other assets (575,032) (359,535)
Net changes in accrued expenses and other liabilities (578,050) (417,233)
------------------------ ------------------------
Net cash from operating activities 895,080 1,088,464
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Sales 5,480,956 17,367
Maturities, prepayments and calls 12,861,740 303,084
Purchases (47,119,272) (5,999,063)
Securities held to maturity
Maturities, prepayments and calls 2,500,000
Purchases (277,305) (1,050,711)
Net change in loans 8,219,253 (13,844,392)
Net purchases of premises and equipment (368,058) (1,112,629)
Proceeds from sale of real estate owned 130,753
------------------------ ------------------------
Net cash from investing activities (18,571,933) (21,686,344)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 3,406,472 22,453,004
Net change in short-term borrowings 16,793,941 (3,362,992)
Principal payments on long-term debt (1,229,499) (512,565)
Treasury stock purchases (505,611)
Proceeds from stock issuance 52,242
Cash dividends paid (787,261) (765,150)
------------------------ ------------------------
Net cash from financing activities 17,678,042 17,864,539
------------------------ ------------------------
Net change in cash and cash equivalents 1,189 (2,733,341)
Cash and cash equivalents at beginning of year 10,694,118 11,876,955
------------------------ ------------------------
Cash and cash equivalents at end of period $ 10,695,307 $ 9,143,614
======================== ========================
Interest paid $ 6,449,642 $ 5,613,289
Income taxes paid 419,011 549,470
See accompanying notes to the condensed consolidated financial statements 6
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. 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 June 30, 2001, 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 of Form 10-Q and,
therefore, do not purport to contain all the necessary financial
disclosures required by generally accepted accounting principles 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, 2000 included in
its annual report. Reference is made to the accounting policies of the
Company described in the notes to the consolidated financial statements
contained in its 2000 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, ("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. 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. Loan 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
Lancaster, Glouster, Nelsonville and Amesville, Ohio.
USE OF ESTIMATES:
To prepare financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions based on
available information. These
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
COMPREHENSIVE INCOME:
Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and losses on
securities available for sale which is also recognized as a separate
component of equity. Other comprehensive income components net of related
taxes are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
------------ ------------ ------------ -----------
Other comprehensive income:
Unrealized holding gains on available
for sale securities arising during period (430,009) (549,683) 1,704,774 (220,149)
Reclassification adjustment for gains
later recognized in income (10,224) 2,859 (34,438) (16,674)
----------- ----------- ----------- -----------
(440,233) (546,824) 1,670,336 (236,823)
Tax effect 149,598 188,654 (568,023) 82,888
----------- ----------- ----------- -----------
Other comprehensive income $ (290,635) $ (358,170) $ 1,102,313 $ (153,935)
=========== =========== =========== ===========
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES:
Securities were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------------- -------------- --------------- -----------------
AVAILABLE FOR SALE - JUNE 30, 2001
US Agency obligations $ 108,193,806 $ 211,369 $ (858,254) $107,546,921
State and Municipal obligations 13,436,046 377,360 (3,025) 13,810,381
Mortgage-backed securities 174,764 1,525 176,289
Other securities 3,500,200 12,925 3,513,125
----------------- -------------- --------------- -----------------
$ 125,304,816 $ 603,179 $ (861,278) $125,046,716
================= ============== =============== =================
AVAILABLE FOR SALE - DECEMBER 31, 2000
US Agency obligations $ 77,808,200 $ 62,193 $ (2,185,777) $ 75,684,616
State and Municipal obligations 13,247,607 207,123 (20,430) 13,434,300
Mortgage-backed obligations 1,934,599 (4,470) 1,930,129
Other securities 3,377,000 12,925 3,389,925
----------------- -------------- --------------- -----------------
$ 96,367,406 $ 282,241 $ (2,210,677) $ 94,438,970
================= ============== =============== =================
HELD TO MATURITY - JUNE 30, 2001
US Agency obligations
State and Municipal obligations $ 8,591,898 $ 326,016 $ (5,362) $ 8,912,552
----------------- -------------- --------------- -----------------
$ 8,591,898 $ 326,016 $ (5,362) $ 8,912,552
================= ============== =============== =================
HELD TO MATURITY - DECEMBER 31, 2000
US Agency obligations $ 2,495,865 $ 2,432 $ (13,077) $ 2,485,220
State and Municipal obligations 8,306,348 194,353 (39,670) $ 8,461,031
----------------- -------------- --------------- -----------------
$ 10,802,213 $ 196,785 $ (52,747) $ 10,946,251
================= ============== =============== =================
Sales of securities available for sale were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
--------------- ------------- -------------- --------------
Proceeds $ 1,707,440 $ 5,480,956 $ 17,367
Gross gains 10,224 34,438 19,534
Gross losses 2,859 2,859
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES: (CONTINUED)
Contractual maturities of securities at June 30, 2001 were as follows:
AVAILABLE FOR SALE AMORTIZED ESTIMATED
COST FAIR VALUE
---------------- ----------------
US Agency obligations
Under 1 Year $ 1,000,000 $ 1,005,000
1 - 5 Years 1,374,090 1,379,640
5 - 10 Years 42,485,715 42,582,039
Over 10 Years 63,334,001 62,580,242
---------------- ----------------
Total 108,193,806 107,546,921
---------------- ----------------
State and municipal obligations
Under 1 Year 3,404,061 3,439,137
1 - 5 Years 7,481,270 7,755,592
5 - 10 Years 1,504,680 1,548,425
Over 10 Years 1,046,035 1,067,227
---------------- ----------------
Total 13,436,046 13,810,381
---------------- ----------------
Mortgage Backed securities
5 - 10 Years 174,764 176,289
---------------- ----------------
Total 174,764 176,289
---------------- ----------------
Other investments
Equity securities 3,500,200 3,513,125
---------------- ----------------
Total securities available for sale $ 125,304,816 $ 125,046,716
================ ================
HELD TO MATURITY
State and municipal obligations
1 - 5 Years $ 2,951,331 $ 3,068,766
5 - 10 Years 3,829,679 3,998,762
Over 10 Years 1,810,888 1,845,024
---------------- ----------------
Total 8,591,898 8,912,552
---------------- ----------------
Total securities held to maturity $ 8,591,898 $ 8,912,552
================ ================
Securities with a carrying value of approximately $59,259,257 at June 30, 2001
and $45,332,000 at December 31, 2000 were pledged to secure public deposits,
repurchase agreements and other liabilities as required or permitted by law.
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
BEGINNING BALANCE $ 2,857,058 $ 3,019,809 $ 2,790,133 $ 3,109,821
Provision charged to operating expense 195,000 115,500 390,000 231,000
Loans charged-off (274,550) (130,671) (528,552) (375,772)
Recoveries 61,762 83,089 187,689 122,678
---------------- ---------------- ---------------- ----------------
Ending Balance $ 2,839,270 $ 3,087,727 $ 2,839,270 $ 3,087,727
================ ================ ================ ================
Non-performing loans were as follows:
JUNE 30, DECEMBER 31,
2001 2000
-------------- --------------
Loans past due over 90 days still on accrual $ 55,091 $ 124,000
Nonaccrual Loans $ 647,353 793,360
Loans considered impaired under the provisions of SFAS No. 114 were
not material at June 30, 2001 and December 31, 2000 or for the three and
six months ended June 30, 2001 and 2000. Nonperforming loans include all
impaired loans and smaller balance homogenous loans, such as residential
mortgage and consumer loans that are collectively excluded for impairment.
4. COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
There are various contingent liabilities not reflected within the
financial statements, including claims and legal actions arising in the
ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters
is not expected to have a material effect on the Company's financial
condition or results of operations.
Some financial instruments are used in the normal course of business
to meet the financing needs of customers. These 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
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
accounts receivable, inventory, property, equipment, income-producing
commercial properties, residential real estate and consumer assets.
4. COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
commitment. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being used, total commitments do
not necessarily represent future cash requirements. Standby letters of
credit and financial guarantees written are conditional commitments to
guarantee a customer's performance to a third party.
A summary of the notional or contractual amounts of financial
instruments with off-balance sheet risk at June 30, 2001 and December 31,
2000 follows:
JUNE 30, DECEMBER 31,
2001 2000
-------------- --------------
Commitments to extend credit $ 19,053,317 $ 16,656,030
Credit card and ready reserve lines 1,276,168 1,256,090
Standby letters of credit 335,990 596,000
At June 30, 2001, and included above, commitments to make fixed-rate
loans totaled $2,377,105 with the interest rates on those fixed-rate
commitments ranging from 6.95% to 10.00%. At December 31, 2000, commitments
to make fixed rate loans totaled $2,740,105 with interest rates on those
fixed-rate commitments ranging from 7.50% to 10.00%.
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. EARNINGS PER SHARE
The factors used in the earnings per share computation were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
------------- -------------- --------------- -------------
BASIC
Net income $ 736,676 $ 705,335 $ 1,342,009 $ 1,281,657
============= ============== ============== =============
Weighted average common shares outstanding 2,991,689 3,090,087 3,005,655 3,090,058
============= ============== ============== =============
Basic earnings per common share $ 0.25 $ 0.23 $ 0.45 $ 0.42
============= ============== ============== =============
DILUTED
Net income $ 736,676 $ 705,335 $ 1,342,009 $ 1,281,657
============= ============== ============== =============
Weighted average common shares outstanding for
basic earnings per common share 2,991,689 3,090,087 3,005,655 3,090,058
Add: Dilutive effects of assumed exercised of stock
options 2,480 4,587 1,504 4,552
------------- -------------- -------------- -------------
Average shares and dilutive potential common shares 2,994,169 3,094,674 3,007,159 3,094,610
============= ============== ============== =============
Average shares and dilutive potential common shares $ 0.25 $ 0.23 $ 0.45 $ 0.42
============= ============== ============== =============
Number of stock options not considered in computing
diluted earnings per share due to antidilutive nature 20,743 18,191 20,743 18,191
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UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discusses the financial condition of the Company as
of June 30, 2001, as compared to December 31, 2000 and the results of
operations for the three and six months ended June 30, 2001 compared
to the same periods in 2000. 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 or to
reflect the occurrence of anticipated or unanticipated events.
14
15
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following brief history of the Company and its subsidiary growth
and development highlights the continuing commitment to maintaining a
presence as a local "Hometown" community bank serving several diverse
market areas.
>> 1902 Original banking charter granted for The German
Savings Bank (later changed to The Citizens Savings
Bank).
>> 1974 Construction of a full-service branch banking
facility 6 miles west in Colerain, Ohio.
>> 1978 Construction of a full-service branch banking
facility 2 miles south in Bridgeport, Ohio.
>> 1980 Construction of a limited-service auto-teller banking
location in Martins Ferry, Ohio.
>> 1983 Creation of United Bancorp, Inc. as a single-bank
holding company through acquisition of 100% of the
voting stock of The Citizens Savings Bank of Martins
Ferry, Ohio ("CITIZENS"). Also, began operation of
Automated Teller Machine ("ATM") in Aetnaville, Ohio.
>> 1984 CITIZENS opened a newly constructed 21,500 square
foot main-office facility in Martins Ferry, Ohio,
adjacent to the auto-teller facility built in 1980.
>> 1986 United Bancorp, Inc. became a multi-bank holding
company through the acquisition of 100% of the voting
stock of The Citizens-State Bank of Strasburg,
Strasburg, Ohio, merged into CITIZENS in 1999.
>> 1990 CITIZENS converted from third-party data processing
to in-house data processing. CITIZENS constructed a
full-service branch bank 6 miles south of Strasburg
in Dover, Ohio.
>> 1992 CITIZENS acquired two branch bank locations in New
Philadelphia and Sherrodsville, Ohio.
>> 1993 CITIZENS relocated Data Processing, Accounting and
Bookkeeping to a renovated Operations Center across
from the main office in Martins Ferry, Ohio.
>> 1994 CITIZENS purchased a branch bank in Dellroy, Ohio.
>> 1996 CITIZENS converted to check imaging and optical
character recognition for data processing.
>> 1997 CITIZENS opened a full-service Retail Banking Center
inside Riesbeck's Food Markets, Inc.'s St.
Clairsville, Ohio store. Additionally, CITIZENS
introduced a Secondary Market Real Estate Mortgage
Program available for all locations and introduced a
MasterCard(R)Check Card to the local market area.
>> 1998 CITIZENS increased ATM network by four cash dispenser
machines in various Riesbecks' Food Markets.
>> 1998 Effective July 7, 1998, the acquisition of Southern
Ohio Community Bancorporation, Inc. was completed and
The Community Bank, Glouster, Ohio ("COMMUNITY") was
added as a separate banking charter to the Company.
>> 1999 January 28, 1999 CITIZENS acquired a full service
banking facility in Jewett, Ohio
>> 1999 March 1999 COMMUNITY opened a Loan Production Office
in Lancaster, Ohio.
>> 1999 CITIZENS established a full service brokerage
division to be known as Brokerage United with
securities provided through Raymond James Financial
Services, Inc., member NASD/SIPC.
>> 1999 COMMUNITY moved their main office to Lancaster, Ohio.
>> 2000 COMMUNITY opened a new branch in Lancaster and their
auto teller for the main office.
>> 2000 CITIZENS and COMMUNITY introduced Electronic Banking.
15
16
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS - LOANS
At June 30, 2001, gross loans were $187,937,000 compared to
$196,497,000 at year-end 2000, a decrease of 4.4%. The decrease in
total outstanding loans was the result of a decline in the commercial
and installment portfolios. Management attributes the overall decrease
in loans to the general economic slow-down in the lending markets
served.
Installment loans, with continued emphasis placed on the indirect
automobile lending market, decreased to 26.8% of total loans at June
30, 2001 compared to 28.2% at year-end 2000. 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 a 9.5%, or
$3,180,000 decline in installment loans while COMMUNITY had a decrease
of 7.9%, or $1,715,000 in installment loans. In general as the overall
economy has slowed in the markets we service, so has the demand for
consumer based loans. Also with interest rates depressed, Management
has not been aggressive to lower 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 44.0% of
total loans at June 30, 2001 compared to 43.4% at December 31, 2000.
Commercial and commercial real estate loans have decreased $2,634,000
or 3.1% since December 31, 2000. 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. Out-of-area loans at June 30, 2001 were 6.8% of total loans and
15.4% of total commercial and commercial real estate loans compared to
6.9% and 16.0% at year-end 2000.
Real estate loans were 29.2% of total loans at June 30, 2001
compared to 28.4% at year-end 2000. Real estate loans decreased 1.8%
since December 31, 2000. However, COMMUNITY actually experienced an
increase in real estate loans of 5.9% or $1,074,000. As previously
mentioned, management's position is to focus on adjustable rate
products as the overall rate environment reaches historical low levels
with the intent these products will adjust as interest rates rise.
The allowance for loan losses represents the amount which
management and the Board of Directors estimates is adequate to provide
for probable losses inherent in the loan portfolio. The allowance
balance and the provision charged to expense are reviewed by
management and the Board of Directors monthly using a risk code 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
16
17
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
absorb probable incurred credit losses associated with the loan
portfolio. Net charge-offs for the six months ended June 30, 2001 were
approximately $341,000, or 12.2%, of the beginning balance in the
allowance for loan losses compared to $253,000, or 8.1%, of the
beginning balance for loan losses for the six months ended June 30,
2000. During the first half of 2001, net charge-offs for consumer
loans totaled approximately $217,000 compared to $132,000 for the
first half of 2000.
EARNING ASSETS - SECURITIES AND FEDERAL FUNDS SOLD
The securities portfolio is comprised of U.S. Government
agency-backed securities, tax-exempt obligations of states and
political subdivisions and certain other investments. The Company does
not hold any collateralized mortgage-backed securities, other than
those issued by U.S. government agencies, or derivative securities.
The quality rating of obligations of state and political subdivisions
within Ohio is no less than Aaa, Aa or A, with all out-of-state bonds
rated at AAA. Board policy permits the purchase of certain non-rated
bonds of local schools, townships and municipalities, based on their
estimated levels of credit risk. Securities available for sale at June
30, 2001 increased approximately $30,608,000, or 32.4% from year-end
2000 totals. Securities held to maturity at June 30, 2001 decreased
approximately $2,210,000, or 20.5% compared to year-end 2000 totals.
SOURCES OF FUNDS - DEPOSITS
The Company's primary source of funds is core deposits from
retail and business customers. These core deposits include all
categories of interest-bearing and noninterest-bearing deposits,
excluding certificates of deposit greater than $100,000. For the
period ended June 30, 2001, total core deposits decreased
approximately $2.1 million primarily from a decrease of
interest-bearing demand deposits and savings deposits of $2.6 million
and $0.5 million, respectively. This was partly offset by an increase
in time deposits under $100,000 of $559,000.
The Company has a strong deposit base from public agencies,
including local school districts, city and township municipalities,
public works facilities and others that may tend to be more seasonal
in nature resulting from the receipt and disbursement of state and
federal grants. These entities have maintained fairly static balances
with the Company due to various funding and disbursement timeframes.
Certificates of deposit greater than $100,000 are not considered
part of core deposits and as such are used to balance rate sensitivity
as a tool of funds management. At June 30, 2001, certificates of
deposit greater than $100,000 increased approximately $5.5 million, or
18.8% from year-end 2000 totals. The majority of the increase,
approximately $4.6 million, came from COMMUNITY'S growth in the public
agency account relationships.
SOURCES OF FUNDS - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND
OTHER BORROWINGS
Other interest-bearing liabilities include securities sold under
agreements to repurchase, sweep accounts, federal funds purchased,
Treasury, Tax & Loan notes payable and Federal Home Loan Bank ("FHLB")
advances. In the first six months of 2001, 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
17
18
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
governments. Total other borrowings increased approximately
$15,564,000 million, or 59.6% from year-end 2000 totals. Management
took advantage of the favorable interest rate environment and
leveraged both CITIZENS and COMMUNITY through the use of FHLB advances
and the purchasing of fixed rate government agency securities. This
strategy was deemed prudent in light of the general slow-down in the
Company's lending activities related specifically to a sluggish
economy. Management focused on purchasing investment securities to
maintain the Company's earning assets at a level to support growth in
earnings for 2001.
18
19
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001
NET INCOME
Basic earnings per share for the six months ended June 30, 2001 was $0.45,
compared with $0.42 for the six months ended June 30, 2000. Net income increased
$60,000 for six months ended June 30, 2001, compared to the same period in 2000.
On an annualized basis, Return on Average Assets (ROA) was 0.80% and Return on
Average Equity (ROE) was 9.1% compared to ROA of .85% and ROE of 10.27% for the
six months ended June 30, 2000.
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 5.5% for the six months ended June 30, 2001 compared
to the same period in 2000.
Total interest income for the six months ended June 30, 2001 was
$12,525,000 compared to $11,393,000 for the same period in 2000. Total interest
income increased $1,132,000, or 9.9%. The increase can be attributed to the
overall growth in the Company's interest-earning assets, mainly investment
securities.
Total interest expense for the six months ended June 30, 2001 when compared
to the same six months period ended June 30, 2000, increased 14.4%, or $819,000.
The Company has experienced an increase in interest expense due to an increased
use of time deposits to fund growth and capture market share in Fairfield
County.
PROVISION FOR LOAN LOSSES
The provision for loan losses is an operating expense recorded to maintain
the related balance sheet allowance for loan losses at an amount considered
adequate to cover probable losses associated with the loan portfolio.
The total provision for loan losses was $390,000 for the six months ended
June 30, 2001 compared to $231,000 for the same period in 2000. Management
increased the provision in 2001 due to an anticipated increase in net
charge-offs for the fiscal year and as a result of projected loan growth. The
Company has not experienced the loan growth it anticipated in 2001, however,
with the slow down in the overall economic cycle, Management felt it was prudent
at this point not to reduce the provision expense.
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
deposits, safe deposit rental income and other miscellaneous items. Noninterest
income for the six months ended June 30, 2001 was $753,000 compared to $659,000
for the same six-month period ended June 30, 2000. For the six months ended June
30, 2001 compared to the same period in 2000, noninterest income increased
approximately 14.3%. The increase in noninterest income can be
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20
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
attributed to an increase in security gains of approximately $15,000. a gain of
23,500 on the sale of an OREO property and increases in service charges on
deposit accounts.
NONINTEREST EXPENSE
Noninterest expense for the six months ended June 30, 2001 increased 5.8%
over the six months ended June 30, 2000. The increase is attributable to an
approximate increase of $198,000 in employee salary and benefits. This is a
result of increased benefit costs namely health care and employee salary
adjustments.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2001
NET INCOME
Basic earnings per share for the three months ended June 30, 2001 was
$0.25, compared with $0.23 for the three months ended June 30, 2000. Net income
increased $31,000 for three months ended June 30, 2001, compared to the same
period in 2000. On an annualized basis, Return on Average Assets (ROA) was 0.88%
and Return on Average Equity (ROE) was 10.0% compared to ROA of 0.93% and ROE of
11.3% for the three months ended June 30, 2000.
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 9.7% for the three months ended June 30, 2001 compared
to the same period in 2000. The increase was a result of the Company having a
larger base of average earning assets combined with a decrease in short-term
interest rates. Management anticipates the short-term impact to continue over
the next several quarters if short-term rates continue at their current levels.
As a result of the decline in short term interest rates, Management was able to
lower the Company's overall cost of funds.
Total interest income for the three months ended June 30, 2001 was
$6,321,000 compared to $5,799,000 for the same period in 2000. Total interest
income increased $522,000, or 9.0%. The increase can be attributed to the
overall growth in the Company's interest-earning assets do mainly in part by a
significant volume of security purchases in the early part of 2001. Please refer
to the page 6 Condensed Consolidated Statements of Cash Flows for further
details on investment activity.
Total interest expense for the three months ended June 30, 2001 when
compared to the same three month period ended June 30, 2000, increased 8.3%, or
$246,000. The Company has experienced an increase in interest expense due to an
increase use of FHLB advances to fund security purchases. The security purchases
will help offset the loss of interest income due to an anticipated soft loan
market in 2001. Management has been proactive in lowering deposit product rates
as the overall rate environment began to decrease in January of this year.
20
21
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
PROVISION FOR LOAN LOSSES
The total provision for loan losses was $195,000 for the three months ended
June 30, 2001 compared to $115,500 for the same period in 2000. Management
increased the provision in 2001 due to an anticipated increase in net
charge-offs for the fiscal year and as a result of projected loan growth. The
Company has not experienced the loan growth it anticipated in 2001, however,
with the slow down in the overall economic cycle, Management felt it was prudent
at this point not to reduce the provision expense.
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
deposits, safe deposit rental income and other miscellaneous items. Noninterest
income for the three months ended June 30, 2001 was $385,000 compared to
$335,000 for the same three months period ended June 30, 2000. For the three
months ended June 30, 2001 compared to the same period in 2000, noninterest
income increased approximately 15.1%. As previously discussed, an increase in
security gains of $10,000 along with an OREO gain of $23,500 were the main
contributors to the added additional noninterest income for the three months
ended June 30, 2001.
NONINTEREST EXPENSE
Noninterest expense for the three months ended June 30, 2001 increased
$287,000 or 13.4% over the three months ended June 30, 2000. Salary and benefit
expense increased approximately $189,000 for the three months ended June 30,
2001 as a result of rising benefit costs. Other expenses increased $90,906 or
12.1% from 2000 to 2001 primarily as a result of the expansion into our Internet
banking program in December 2000.
CAPITAL RESOURCES
Internal capital growth, through the retention of earnings, is the primary
means of maintaining capital adequacy for the Company. Shareholders' equity at
June 30, 2001 was $29,831,000 compared to $28,679,000 at December 31, 2000, a
4.0% increase. Total shareholders' equity in relation to total assets was 8.68%
at June 30, 2001 and 8.85% at December 31, 2000. In May 2001 our shareholders
approved to amend the Company's Articles of incorporation to create a class of
preferred shares with 2,000,000 authorized shares. This will enable the Company,
at the option of the Board of Directors, to issue series of preferred shares in
a manner calculated to take advantage of financing techniques which may provide
a lower effective cost of capital to the Company. The amendment also provides
greater flexibility to the Board of Directors in structuring the terms of equity
securities that may be issued by the Company.
The Company has a Dividend Reinvestment Plan ("The Plan") for shareholders
under which the Company's common stock 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.
The Company maintains a deferred compensation plan for its Directors. The
plan permits the Directors to defer into a Rabbi Trust all or a portion of their
director fees. The plan is being accounted for under the provisions of EITF
97-14.
21
22
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The Company and 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 risk-weighted capital ratios
at June 30, 2001:
JUNE 30,
(IN THOUSANDS) 2001
---------------
Tier 1 capital $ 29,876
Total risk-based capital $ 32,441
Risk-weighted assets $ 208,124
Average total assets $ 338,649
Tier 1 capital to average assets 8.82%
Tier 1 risk-based capital ratio 14.35%
Total risk-based capital ratio 15.59%
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
22
23
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
borrow funds under line of credit agreements with correspondent banks and a
borrowing agreement with the Federal Home Loan Bank of Cincinnati, Ohio and the
adjustment of interest rates to obtain depositors. Management feels that it has
the capital adequacy, profitability and reputation to meet the current and
projected needs of its customers.
For the six months ended June 30, 2001, 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 remained relatively stable as a result of
a decrease in loan and deposit volume and the use of borrowed funds to purchase
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 Generally Accepted
Accounting Principles (GAAP). GAAP currently requires the Company to measure the
financial position and results of operations in terms of historical dollars,
with the exception of securities available for sale, impaired loans and other
real estate loans that are measured at fair value. Changes in the value of money
due to rising inflation can cause purchasing power loss.
Management's opinion is that movements in interest rates affect the
financial condition and results of operations to a greater degree than changes
in the rate of inflation. It should be noted that interest rates and inflation
do effect each other, but do not always move in correlation with each other. The
Company's ability to match the interest sensitivity of its financial assets to
the interest sensitivity of its liabilities in its asset/liability management
may tend to minimize the effect of changes in interest rates on the Company's
performance.
REGULATORY MATTERS
The Company is subject to the regulatory requirements of The Federal
Reserve System as a multi-bank holding company. The affiliate banks are subject
to regulations of the Federal Deposit Insurance Corporation (FDIC) and the State
of Ohio, Division of Financial Institutions.
23
24
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 94% of the portfolio compared to
the 6% for held to maturity securities. The Company primarily invests in US
Agency obligations and State and Municipal obligations and has a modest amount
invested in mortgage-backed securities. Due to total securities approximating
39% of total assets and a significant portion of its loan portfolio consisting
of fixed rate loans, the Company is particularly 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
mortgage loans as the primary means to manage this risk. In addition, the
Company also originates consumer and commercial loans, which make up a
significant percentage of the overall loan portfolio. Consumer loans typically
have a significantly shorter weighted-average maturity and offer less exposure
to interest rate risks while commercial loans generally carry variable interest
rates.
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 new present value of
its financial instruments to sudden and sustained changes in the prevailing
interest rates.
(Dollars in Thousands)
- -----------------------------------------------------------
NET PORTFOLIO VALUE-JUNE 30, 2001
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
------------------------------------
Up 200 $ 38,157 $ (7,556) -16.53%
Up 100 $ 50,468 $ 4,755 10.40%
Base $ 45,713
Down 100 $ 45,473 $ (240) -0.53%
Down 200 $ 40,715 $ (4,998) -10.93%
(Dollars in Thousands)
- -----------------------------------------------------------
NET PORTFOLIO VALUE-DECEMBER 31, 2000
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE
------------------------------------
Up 200 $ 24,728 $ (7,351) -22.92%
Up 100 $ 34,210 $ 2,131 6.64%
Base $ 32,079
Down 100 $ 31,398 $ (681) -2.12%
Down 200 $ 31,734 $ (345) -1.08%
24
25
UNITED BANCORP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's NPV is more sensitive to increasing rates than decreasing
rates. Such difference in sensitivity occurs principally because, as rates rise,
the effect is offset on a short-term basis by the rather fixed nature of our
consumer loans and investment securities. This occurs even though the
commercial, commercial real estate and real estate portfolios are comprised of
variable rate products. Also in a rising rate environment consumers tend not to
prepay fixed rate loans as quickly as they would have had rates not changed
dramatically. Moreover, the interest the Company pays on its deposits would
increase because deposits generally have shorter periods to reprice.
Certain shortcomings are inherent in the NPV method of analysis. Certain
assets such as adjustable-rate loans have features that restrict changes in
interest rates on a short-term basis and over the life of the asset. In
addition, the proportion of adjustable-rate loans in the Company's portfolio
could decrease in future periods if market interest rates remain at or decrease
below current levels due to refinancing activity. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate from those assumed in the analysis. Finally, the ability of many
borrowers to repay their adjustable-rate debt may decrease in the case of an
increase in interest rates.
25
26
UNITED BANCORP, INC.
OTHER INFORMATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security holders at
the Annual meeting April 18, 2001, which meeting was adjourned and
reconvened on May 19, 2001.
Election of Directors for the class of 2003 to include the following:
James W. Everson Ayes 2,488,949 Withheld 13,831
John M. Hoopingarner Ayes 2,487,283, Withheld 15,497
Richard L. Riesbeck Ayes 2,482,725, Withheld 20,055
Matthew C. Thomas Ayes 2,485,566, Withheld 17,224
Authorization of Preferred Shares: Ayes 2,084,415, Nays 349,433,
Abstain 59,385
Elimination of Cumulative Voting: Ayes 2,133,888, Nays 297,499,
Abstain 61,843
Addition of Supermajority Shareholder Vote and Fair Price Provisions:
Ayes 2,189,427, Nays 250,697, Abstain 53,110
Shareholder Vote Required: Ayes 2,241,801, Nays 199,688, Abstain
51,742
Technical Revisions to the Articles of Incorporation: Ayes 2,248,627,
Nays 151,075, Abstain 93,529
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) The registrant filed no current reports on Form 8-K during the
quarter ended June 30, 2001.
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UNITED BANCORP, INC.
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 4, 2001 By: /s/ James W. Everson
- ------------------------------ -----------------------------
Date James W. Everson
Chairman, President & Chief
Executive Officer
August 4, 2001 By: /s/ Randall M. Greenwood
- ------------------------------ -----------------------------
Date Randall M. Greenwood
Chief Financial Officer
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