UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2007
[ ] 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
incorporation or organization) Identification No.)
201 SOUTH 4TH STREET, MARTINS FERRY, OHIO 43935-0010
(Address of principal executive offices) (Zip Code)
(740) 633-0445
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN
ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED
FILER AND LARGE ACCELERATED FILER" IN RULE 12B-2 OF THE EXCHANGE ACT. (CHECK
ONE.)
LARGE ACCELERATED FILER [ ] ACCELERATED FILER [ ] NON-ACCELERATED FILER [X]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (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 5,010,987 SHARES AS OF NOVEMBER 13, 2007
UNITED BANCORP, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except per share data)
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
(Unaudited)
ASSETS
Cash and due from financial institutions $ 5,250 $ 6,817
Interest-bearing deposits in other financial institutions 8,136 7,737
-------- --------
Total cash and cash equivalents 13,386 14,554
Securities available for sale - at market 159,398 133,808
Securities held to maturity - estimated fair value of $15,939
and $18,220 at September 30, 2007 and December 31, 2006,
respectively 16,735 17,870
Total loans 227,329 231,517
Allowance for loan losses (2,218) (2,345)
-------- --------
Loans -- net 225,111 229,172
Federal Home Loan Bank stock - at cost 4,624 4,556
Premises and equipment 7,082 7,261
Accrued interest receivable 3,587 2,578
Other real estate and repossessed assets 820 794
Bank-owned life insurance 9,207 8,927
Mortgage servicing assets - at amortized cost 435 403
Other assets 1,763 1,730
-------- --------
Total assets $442,148 $421,653
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits
Noninterest-bearing $ 22,386 $ 23,703
Interest-bearing 128,899 100,449
Savings deposits 28,585 30,972
Time deposits - under $100,000 126,357 128,663
Time deposits - $100,000 and over 43,460 46,218
-------- --------
Total deposits 349,687 330,005
Federal funds purchased 7,345 --
Advances from the Federal Home Loan Bank 33,801 44,135
Securities sold under agreements to repurchase 12,589 6,218
Trade date security purchases -- 2,886
Subordinated debentures 4,000 4,000
Accrued expenses and other liabilities 2,610 1,829
-------- --------
Total liabilities 410,032 389,073
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;
5,164,948 and 5,131,874 shares issued at September 30,
2007 and December 31, 2006, respectively 5,165 5,132
Additional paid-in capital 27,903 27,547
Retained earnings 6,875 6,962
Stock held by deferred compensation plan; 103,155 and
103,135 shares at September 30, 2007 and December 31,
2006, respectively (1,033) (1,019)
Treasury stock - at cost, 153,961 and 84,024 shares at
September 30, 2007 and December 31, 2006, respectively (1,609) (864)
Less required contributions for shares acquired by
Employee Stock Ownership Plan (ESOP) (3,266) (3,266)
Accumulated comprehensive loss (1,919) (1,912)
-------- --------
Total shareholders' equity 32,116 32,580
-------- --------
Total liabilities and shareholders' equity $442,148 $421,653
======== ========
See notes to consolidated financial statements.
2
UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE
MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- -----------------
2007 2006 2007 2006
------ ------ ------- -------
(Unaudited)
Interest and dividend income
Loans, including fees $4,395 $4,606 $13,450 $13,230
Taxable securities 1,709 1,491 4,553 4,301
Non-taxable securities 459 341 1,382 984
Federal funds sold 28 46 125 134
Dividends on Federal Home Loan Bank stock and other 82 68 237 207
------ ------ ------- -------
Total interest and dividend income 6,673 6,552 19,747 18,856
Interest expense
Deposits
Demand 1,075 748 2,869 1,862
Savings 34 31 94 92
Time 2,062 1,829 6,108 5,076
Borrowings 636 777 1,818 2,341
------ ------ ------- -------
Total interest expense 3,807 3,385 10,889 9,371
------ ------ ------- -------
Net interest income 2,866 3,167 8,858 9,485
Provision for loan losses 283 652 657 1,056
------ ------ ------- -------
Net interest income after provision for loan losses 2,583 2,515 8,201 8,429
Noninterest income
Service charges on deposit accounts 481 350 1,336 1,024
Net realized gains (losses) on sales of securities -- -- 1 (350)
Net realized gains on sales of loans 13 4 9 14
Other income 291 345 890 903
------ ------ ------- -------
Total noninterest income 785 699 2,236 1,591
Noninterest expense
Salaries and employee benefits 1,701 1,439 4,606 4,334
Occupancy and equipment 305 299 909 1,016
Professional services 153 123 457 454
Insurance 98 84 272 255
Franchise and other taxes 104 111 271 316
Advertising 92 91 277 285
Stationery and office supplies 72 86 192 207
Amortization of intangibles -- 5 -- 14
Other expenses 480 535 1,358 1,622
------ ------ ------- -------
Total noninterest expense 3,005 2,773 8,342 8,503
------ ------ ------- -------
Income before income taxes 363 441 2,095 1,517
Income tax (benefit) expense (29) 38 221 125
------ ------ ------- -------
Net income $ 392 $ 403 $ 1,874 $ 1,392
====== ====== ======= =======
EARNINGS PER COMMON SHARE
Basic $ 0.09 $ 0.09 $ 0.41 $ 0.30
====== ====== ======= =======
Diluted $ 0.09 $ 0.09 $ 0.41 $ 0.30
====== ====== ======= =======
DIVIDENDS PER COMMON SHARE $ 0.13 $ 0.12 $ 0.39 $ 0.35
====== ====== ======= =======
See notes to consolidated financial statements.
3
UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
2007 2006 2007 2006
------- ------- ------- -------
(Unaudited)
Net income $ 392 $ 403 $ 1,874 $ 1,392
Other comprehensive income, net of related tax effects:
Unrealized holding gains (losses) on securities during
the period, net of (taxes) benefits of $(936), $(1,039),
$8 and $(74) for each respective period 1,817 2,016 (16) 143
Reclassification adjustment for realized gains (losses)
included in income, net of tax benefits of $119 for
the nine months ended September 30, 2006 -- -- (1) 231
Amortization of prior service costs and actuarial losses, net
of tax effect of $4 -- -- 10 --
------- ------- ------- -------
Comprehensive income $ 2,581 $ 2,419 $ 1,867 $ 1,766
======= ======= ======= =======
Accumulated comprehensive loss $(1,919) $(1,818) $(1,919) $(1,818)
======= ======= ======= =======
See notes to consolidated financial statements.
4
UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2007 and 2006
(In thousands)
2007 2006
-------- --------
(Unaudited)
Cash flows from operating activities:
Net income for the period $ 1,874 $ 1,392
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 348 465
Provision for loan losses 657 1,056
Increase in value of bank-owned life insurance (221) (212)
Federal Home Loan Bank stock dividends (68) (186)
Net realized (gains) losses on sales of securities (1) 350
Amortization of securities, net 86 147
Net realized gains on sale of loans (4) (14)
Net realized gain (loss) on sale of repossessed assets (117) 33
Amortization of mortgage servicing rights 54 62
Net change in accrued interest receivable and other assets (1,273) (1,057)
Net change in accrued expenses and other liabilities (60) 4,301
-------- --------
Net cash provided by operating activities 1,277 6,337
Cash flows used in investing activities:
Securities available for sale:
Sales -- 7,729
Maturities, prepayments and calls 12,185 5,479
Purchases (38,420) (29,095)
Securities held to maturity:
Maturities, prepayments and calls 1,160 1,465
Trade date securities purchase (2,886) 3,985
Net change in loans receivable 4,150 (5,520)
Purchases of premises and equipment (178) (195)
Proceeds from sale of repossessed assets 835 1,020
-------- --------
Net cash used in investing activities (23,154) (15,132)
Cash flows provided by financing activities:
Net change in deposits 19,682 30,387
Net change in borrowings 3,382 (21,400)
Treasury stock purchases (745) (478)
Proceeds from issuance of common stock 350 322
Exercise of stock options, including tax benefits -- 95
Cash dividends paid (1,960) (1,785)
-------- --------
Net cash provided by financing activities 20,709 7,141
-------- --------
Net decrease in cash and cash equivalents (1,168) (1,654)
Cash and cash equivalents at beginning of period 14,554 13,877
-------- --------
Cash and cash equivalents at end of period $ 13,386 $ 12,223
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 10,097 $ 9,286
======== ========
Federal income taxes paid $ 246 $ 573
======== ========
Supplemental disclosure of noncash investing activities:
Transfer from loans to other real estate
and repossessions $ 743 $ 98
======== ========
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ (7) $ 143
======== ========
Recognition of mortgage servicing rights $ 85 $ 140
======== ========
See notes to consolidated financial statements.
5
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three months ended September 30, 2007 and 2006
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 September 30,
2007, and its results of operations and cash flows for the nine and three month
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 Company's consolidated financial statements and related notes for the
year ended December 31, 2006 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. The results of operations for the three and nine month periods
ended September 30, 2007 are not necessarily indicative of the results to be
expected for the full year.
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 (collectively the "Banks"). Effective July 1, 2007 the Company
merged The Community Bank into The Citizens Savings Bank and now operates that
market area as The Community Bank, a division of The Citizens Savings Bank. 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. The Community Bank, a division of The Citizens Savings Bank., conducts its
business through its main office in Lancaster, Ohio and six 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.
6
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2007 and 2006
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 and fair
values of financial instruments are particularly subject to change.
4. Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred
credit losses, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, the nature and volume of loans in the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged-off. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. The Company measures impaired loans based upon
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as an alternative, at the loan's observable market
price or fair value of the collateral. The Company considers its investment in
one-to-four family residential loans and consumer installment loans to be
homogenous and therefore excluded from separate identification for evaluation of
impairment. With respect to the Company's investment in nonresidential and
multi-family residential real estate loans, and its evaluation of impairment
thereof, such loans are generally collateral dependent and, as a result, are
carried as a practical expedient at the fair value of the collateral.
Collateral dependent loans which are more than ninety days delinquent are
considered to constitute more than a minimum delay in repayment and are
evaluated for impairment under SFAS No. 114 at that time.
The Company's impaired loan information is as follows as of and for the nine
months ended September 30:
2007 2006
------ ------
(In thousands)
Impaired loans with related allowance for
unconfirmed losses $1,064 $1,149
Impaired loans without allowance for
unconfirmed losses 1,712 1,973
------ ------
Total impaired loans $2,776 $3,122
====== ======
7
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2007 and 2006
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Allowance for Loan Losses (continued)
2007 2006
------ ------
(In thousands)
Allowance with respect to unconfirmed losses on impaired loans
Beginning balance $ 305 $ --
Transfers from allowance for loan losses 500 1,024
Charge-off of impaired loans (409) --
------ ------
Ending balance $ 396 $1,024
====== ======
Average balance of impaired loans $2,878 $2,311
Interest income recognized on impaired loans $ 109 $ 232
5. Mortgage Servicing Assets
A summary of the Company's mortgage servicing assets as of and for the nine
months ended September 30, 2007 and as of and for the year ended December 31,
2006 is as follows:
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
(In thousands)
Beginning balance $403 $367
Recognition of mortgage servicing rights on sale of loans 86 107
Amortization during the period (54) (71)
---- ----
Net carrying value $435 $403
==== ====
8
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2007 and 2006
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
6. Earnings Per Share
Basic earnings per common share is computed based upon the weighted-average
number of common shares outstanding during the period, less shares in the ESOP
which are unallocated and not committed to be released. At September 30, 2007
and 2006, the ESOP held 354,551 (adjusted) unallocated shares which were not
included in weighted-average common shares outstanding. 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 nine and three months ended September 30, 2006 have been restated
for the stock split in the form of a dividend declared and distributed in the
fourth quarter of 2006.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
BASIC
Net income (In thousands) $ 392 $ 403 $ 1,874 $ 1,392
========== ========== ========== ==========
Weighted average common shares outstanding 4,579,381 4,576,756 4,564,741 4,589,740
========== ========== ========== ==========
Basic earnings per common share $ 0.09 $ 0.09 $ 0.41 $ 0.30
========== ========== ========== ==========
DILUTED
Net income (In thousands) $ 392 $ 403 $ 1,874 $ 1,392
========== ========== ========== ==========
Weighted average common shares outstanding
for basic earnings per common share 4,579,381 4,576,756 4,564,741 4,589,740
Add: Dilutive effects of assumed exercise of
stock options 2,074 161 2,024 553
---------- ---------- ---------- ----------
Average shares and dilutive potential
common shares 4,581,455 4,576,917 4,566,765 4,590,293
========== ========== ========== ==========
Diluted earnings per common share $ 0.09 $ 0.09 $ 0.41 $ 0.30
========== ========== ========== ==========
Number of stock options not considered in
computing diluted earnings per share due to
antidilutive nature 12,100 43,001 12,100 43,001
========== ========== ========== ==========
Weighted average exercise price
of dilutive stock options $ 9.83 $ 9.72 $ 9.83 $ 9.72
========== ========== ========== ==========
9
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2007 and 2006
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. 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 splits in the form of a dividend.
In December, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123(R), "Share-Based Payment," which revised SFAS No. 123, "Accounting for
Stock-Based Compensation," and superseded Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123(R)
requires that cost related to the fair value of all equity-based awards to
employee, including grants of employee stock options, be recognized in the
financial statements.
The Company adopted the provisions of SFAS No. 123(R) effective January 1, 2006,
using the modified prospective transition method, as permitted, and therefore
did not restate its financial statements for prior periods. Under this method,
the Company has applied the provisions of SFAS No. 123(R) to new equity awards
and to equity based awards modified, repurchased, or cancelled after January 1,
2006. In addition, the Company has recognized compensation costs for the portion
of equity-based awards for which the requisite service period has not been
rendered ("unvested equity-based awards") that were outstanding January 1, 2006.
The compensation cost recorded for unvested equity-based awards is based on
their grant-date fair value. For the quarters ended September 30, 2007 and 2006,
the Company recorded $10,000 in compensation costs ($6,000 after-tax) for equity
based awards that vested in each period. The Company has $120,000 of total
unrecognized compensation costs related to non-vested equity-based awards
granted under its stock incentive plan as of September 30, 2007, which is
expected to be recognized over a remaining weighted-average period of 8 years.
No stock options were granted during the nine months ended September 30, 2007
and 2006.
The expected term of the options was based on evaluations of historical and
expected future employee exercise behavior. The risk free interest rate was
based upon the U.S. Treasury rates at the date of grant with maturity dates
approximately equal to the expected life at the grant date. Volatility was based
upon historical volatility of the Company's stock.
10
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2007 and 2006
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. Stock Options (continued)
There are no remaining options available for grant under the Company's plan as
of September 30, 2007. A summary of the status of the Company's stock option
plan for the nine months ended September 30, 2007 and 2006 is presented below:
2007 2006
------------------- -------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- --------- ------- ---------
Outstanding at January 1, 69,488 $10.73 104,069 $10.46
Granted -- -- -- --
Exercised -- -- (2,651) 6.87
Forfeited (13,960) 12.00 (31,930) 10.20
------- ------ ------- ------
Outstanding at end of period 55,528 $10.34 69,488 $10.73
======= ====== ======= ======
Options exercisable at period-end -- $ -- 3,011 $11.92
======= ====== ======= ======
The following table summarizes information about stock options outstanding at
September 30, 2007:
OPTIONS OPTIONS REMAINING
EXERCISE OUTSTANDING DATE OF EXERCISABLE CONTRACTUAL
PRICE AT 9/30/07 EXPIRATION AT 9/30/07 LIFE
-------- ----------- ---------- ----------- -----------
$ 9.63 26,489 05/15/15 -- 7.7 years
10.15 16,939 01/16/15 -- 7.7 years
12.15 12,100 8/23/14 -- 6.1 years
8. Income Taxes
The Company adopted the provisions of FASB Interpretation 48, "Accounting for
Uncertainty in Income Taxes," on January 1, 2007. Previously, the Company had
accounted for tax contingencies in accordance with Statement of Financial
Accounting Standards No. 5, "Accounting for Contingencies." As required by
Interpretation 48, which clarifies Statement No. 109, "Accounting for Income
Taxes," the Company recognizes the financial statement benefit of a tax position
only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority. At
the adoption date, the Company applied Interpretation 48 to all tax positions
for which the statute of limitations remained open. As a result of the
implementation of Interpretation 48, the Company was not required to record any
liability for unrecognized tax benefits as of January 1, 2007. There have been
no material changes in unrecognized tax benefits since January 1, 2007.
11
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2007 and 2006
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Income Taxes (continued)
The Company is subject to income taxes in the U.S. federal jurisdiction, as well
as various state jurisdictions. Tax regulations within each jurisdiction are
subject to the interpretation of the related tax laws and regulations and
require significant judgment to apply. With few exceptions, the Company is no
longer subject to U.S. federal, state and local income tax examinations by tax
authorities for the years before 2003.
The Company will recognize, if applicable, interest accrued related to
unrecognized tax benefits in interest expense and penalties in operating
expenses.
9. Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Instruments - an amendment of FASB Statements No. 133 and 140," to simplify and
make more consistent the accounting for certain financial instruments.
Specifically, SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to permit fair value remeasurement for any
hybrid financial instrument with an embedded derivative that otherwise would
require bifurcation, provided that the whole instrument is accounted for on a
fair value basis. SFAS No. 155 amends SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," to allow a
qualifying special purpose entity to hold a derivative instrument that pertains
to a beneficial interest other than another derivative financial instrument.
SFAS No. 155 is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006, or January 1, 2007 as to the Corporation, with earlier application
allowed. The Corporation adopted SFAS No. 155 effective January 1, 2007, as
required, without material effect on the Corporation's financial position or
results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets - an amendment of SFAS No. 140," to simplify the accounting for
separately recognized servicing assets and servicing liabilities. Specifically,
SFAS No. 156 amends SFAS No. 140 to require an entity to take the following
steps:
- Separately recognize financial assets as servicing assets or servicing
liabilities, each time it undertakes an obligation to service a financial
asset by entering into certain kinds of servicing contracts;
- Initially measure all separately recognized servicing assets and
liabilities at fair value, if practicable, and;
- Separately present servicing assets and liabilities subsequently measured
at fair value in the statement of financial position and additional
disclosure for all separately recognized servicing assets and servicing
liabilities.
Additionally, SFAS No. 156 permits, but does not require, an entity to choose
either the amortization method or the fair value measurement method for
measuring each class of separately recognized servicing assets and servicing
liabilities. SFAS No. 156 also permits a servicer that uses derivative financial
instruments to offset risks on servicing to use fair value measurement when
reporting both the derivative financial instrument and related servicing asset
or liability.
12
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2007 and 2006
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Recent Accounting Pronouncements (continued)
SFAS No. 156 applies to all separately recognized servicing assets and
liabilities acquired or issued after the beginning of an entity's fiscal year
that begins after September 15, 2006, or January 1, 2007 as to the Company, with
earlier application permitted. The Company adopted SFAS No. 156 effective
January 1, 2007, as required, utilizing the amortization method without effect
on the Company's financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. This Statement emphasizes
that fair value is a market-based measurement and should be determined based on
assumptions that a market participant would use when pricing an asset or
liability. This Statement clarifies that market participant assumptions should
include assumptions about risk as well as the effect of a restriction on the
sale or use of an asset. Additionally, this Statement establishes a fair value
hierarchy that provides the highest priority to quoted prices in active markets
and the lowest priority to unobservable data. This Statement is effective for
fiscal years beginning after November 15, 2007, or January 1, 2008 as to the
Company, and interim periods within that fiscal year. The adoption of this
Statement is not expected to have a material adverse effect on the Company's
financial position or results of operations.
In September 2006, the FASB ratified the Emerging Issues Task Force's (EITF)
Issue 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements," which requires
companies to recognize a liability and related compensation costs for
endorsement split-dollar life insurance policies that provide a benefit to an
employee extending to postretirement periods. The liability should be recognized
based on the substantive agreement with the employee. This Issue is effective
beginning January 1, 2008. The Issue can be applied as either a change in
accounting principle through a cumulative-effect adjustment to retained earnings
as of the beginning of the year of adoption, or a change in accounting principle
through retrospective application to all periods. The Company is in the process
of evaluating the impact the adoption of Issue 06-4 will have on the financial
statements.
In September 2006, the FASB ratified a consensus opinion reached by the EITF on
EITF Issue 06-5, "Accounting for Purchases of Life Insurance - Determining the
Amount that Could be Realized in Accordance with FASB Technical Bulletin No.
85-4." The guidance in EITF Issue 06-5 requires policyholders to consider other
amounts included in the contractual terms of an insurance policy, in addition to
cash surrender value, for purposes of determining the amount that could be
realized under the terms of the insurance contract. If it is probable that
contractual terms would limit the amount that could be realized under the
insurance contract, those contractual limitations should be considered when
determining the realizable amounts. The amount that could be realized under the
insurance contract should be determined on an individual policy (or certificate)
level and should include any amount realized on the assumed surrender of the
last individual policy or certificate in a group policy
The Company holds several life insurance policies; however, the policies do not
contain any provisions that would restrict or reduce the cash surrender value of
the policies. The consensus in EITF Issue 06-5 is effective for fiscal years
beginning after December 15, 2006. The Company applied the guidance in EITF
Issue 06-5 effective January 1, 2007 which did not have any effect on the
Company's financial statements.
13
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2007 and 2006
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Recent Accounting Pronouncements (continued)
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115." This Statement allows companies the choice to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term measurement
objectives for accounting for financial instruments. This Statement is effective
as of the beginning of an entity's first fiscal year that begins after November
15, 2007, or January 1, 2008 as to the Company, and interim periods within that
fiscal year. Early adoption is permitted as of the beginning of a fiscal year
that begins on or before November 15, 2007, provided the entity also elects to
apply the provisions of SFAS No. 157, "Fair Value Measurements." The Company is
currently evaluating the impact the adoption of SFAS No. 159 will have on the
financial statements.
NOTE B - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2007 2006 2007 2006
------ ------- ------ ------
(In thousands)
Beginning balance $2,188 $2,840 $2,345 $2,904
Provision for loan losses 283 652 657 1,056
Loans charged-off (313) (95) (966) (640)
Recoveries of previous charge-offs 60 77 182 154
------ ------ ------ ------
Ending balance $2,218 $3,474 $2,218 $3,474
====== ====== ====== ======
Nonperforming loans were as follows:
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
(In thousands)
Loans past due over 90 days still on accrual $1,915 $ 55
Nonaccrual loans 1,586 3,396
------ ------
Total nonperforming loans $3,501 $3,451
====== ======
14
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2007 and 2006
NOTE C - BENEFIT PLANS
Pension expense includes the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2007 2006 2007 2006
------ ------- ------ ------
(In thousands)
Service cost $ 65 $ 56 $ 195 $ 168
Interest cost 46 40 138 120
Expected return on assets (54) (43) (162) (129)
Amortization of prior service cost,
transition liability and plan amendment 15 7 45 21
---- ---- ----- -----
Pension expense $ 72 $ 60 $ 216 $ 180
==== ==== ===== =====
NOTE D - 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:
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
(Unaudited)
(In thousands)
Commitments to extend credit $31,666 $33,429
Credit card and ready reserve lines 12,675 12,666
Standby letters of credit 565 707
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 September
30, 2007, as compared to December 31, 2006, and the results of operations for
the nine and three months ended September 30, 2007, compared to the same periods
in 2006. This discussion should be read in conjunction with the interim
condensed consolidated financial statements and related footnotes included
herein.
FORWARD-LOOKING STATEMENTS
When used in this document, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimated," "projected" or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Banks' market areas, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Banks' market areas and competition, that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. Factors listed above could affect the Company's financial performance
and could cause the Company's actual results for future periods to differ
materially from any statements expressed with respect to future periods.
The Company does not undertake, and specifically disclaims any obligation, to
publicly revise any forward-looking statements to reflect events or
circumstances after the date such statements were made or to reflect the
occurrence of anticipated or unanticipated events.
CRITICAL ACCOUNTING POLICIES
Management makes certain judgments that affect the amounts reported in the
financial statements and footnotes. These estimates, assumptions and judgments
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 judgment.
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 judgment 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 and the board of directors 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 judgment is a
review of the Bank's trends in delinquencies and loan losses, and economic
factors.
16
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES (continued)
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 judgment about the credit quality of the loan portfolio.
While the Company strives to reflect all known risk factors in its evaluation,
judgment errors may occur.
ANALYSIS OF FINANCIAL CONDITION
Earning Assets - Loans
At September 30, 2007, gross loans were $227.3 million, compared to $231.5
million at December 31, 2006, a decrease of $4.2 million, or 1.8%. The decrease
in total outstanding loans was the result of a decrease in the commercial
portfolio. Management attributes the decrease in loans to the sluggish loan
demand in the markets served.
Installment loans represented 18.0% of total loans at both September 30, 2007
and December 31, 2006. This 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.
Commercial and commercial real estate loans comprised 56.9% of total loans at
September 30, 2007 compared to 57.6% at December 31, 2006. Commercial and
commercial real estate loans have decreased $4.1 million, or 3.1% since December
31, 2006. 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.
Real estate loans were 25.0% of total loans at September 30, 2007 and 24.3% at
December 31, 2006. Real estate loans decreased by 1.2%, or $694 thousand, since
December 31, 2006. Real estate lending for the nine months of 2007 has been
extremely slow with respect to the Company's adjustable-rate mortgage products.
As of September 30, 2007, the Banks have approximately $36.6 million in
fixed-rate loans that they service for a fee that is typically 25 basis points.
The Company did not hold any loans for sale at September 30, 2007 and December
31, 2006.
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 nine months ended September 30, 2007 were
approximately $784,000 or 33.5%, 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 September 30,
2007 increased approximately $25.6 million, or 19.1%, from December 31, 2006
totals. This growth partially reflects deployment of the Company's increased
deposits. Securities held to maturity at September 30, 2007, decreased
approximately $1.1 million, or 6.4% compared to December 31, 2006 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 nine-month period ended September 30, 2007, total core
deposits increased approximately $22.4 million, or 7.9%. The Company's
interest-bearing demand deposits increased $28.4 million, or 28.3%,
noninterest-bearing demand deposits decreased $1.3 million, or 5.6% while
certificates of deposit under $100,000 decreased by $2.3 million, or 1.8%. As
part of a strategic focus to grow deposits, the Banks have introduced premium
rate money market index accounts.
The Company has a strong deposit base from public agencies, including local
school districts, city and township municipalities, public works facilities and
others that may tend to be more seasonal in nature resulting from the receipt
and disbursement of state and federal grants. These entities have maintained
fairly static balances with the Company due to various funding and disbursement
timeframes.
Certificates of deposit greater than $100,000 are not considered part of core
deposits and as such are used to balance rate sensitivity as a tool of funds
management. At September 30, 2007, certificates of deposit greater than $100,000
decreased $2.7 million, or 6.0%, from December 31, 2006 totals.
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 and Loan
notes payable and Federal Home Loan Bank ("FHLB") advances. In the first nine
months of 2007, 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. As a result of the Company's growth in deposits in 2007, total
borrowings, including federal funds purchased, decreased approximately $3.0
million, or 6.8% from December 31, 2006 totals.
18
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
Net Income
Basic and diluted earnings per share for the nine months ended September 30,
2007 totaled $0.41, compared with $0.30, for the nine months ended September 30,
2006, an increase of 36.7%. In the aggregate, the Company's net income increased
by $482,000, or 34.6%, for the nine months ended September 30, 2007, compared to
the same period in 2006.
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 decreased 6.6%, or $627,000, for the nine months ended September
30, 2007, compared to the same period in 2006, due to continued downward
pressure on the net interest margin caused by a continuation of the flat yield
curve environment.
Total interest income for the nine months ended September 30, 2007, was $19.7
million compared to $18.9 million for the same period in 2006, an increase of
$891,000, or 4.7%. The increase can be attributed to the overall growth of the
Company's earning assets.
Total interest expense for the nine months ended September 30, 2007 when
compared to the same nine-month period ended September 30, 2006, increased by
16.2%, or $1.5 million. The Company has experienced an increase in interest
expense due to growth in interest-bearing liabilities, as well as the effect of
a higher interest rate environment in 2007 as compared to 2006. Also
contributing to higher interest expense is the higher costs of the Company's
certificates of deposit. As the current certificate of deposit portfolio
matures, they are replaced with higher costing certificates.
Provision for Loan Losses
The provision for loan losses was $657,000 for the nine months ended September
30, 2007 compared to $1.1 million for the same period in 2006. The decrease in
the provision for loan losses for the nine month period ended September 30, 2007
is primarily a result of a higher level of provision booked in September 2006
related to loans that were charged-off without specific loss allocations.
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-owned life
insurance and other miscellaneous items.
Noninterest income for the nine months ended September 30, 2007 was $2.2 million
compared to $1.6 million for the nine-month period ended September 30, 2006, an
increase of $645,000, or 40.5%. During the nine-months ended September 30, 2007,
the increase in noninterest income was primarily driven by increase of $312,000
related to service charges on deposit accounts.
19
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(CONTINUED)
Noninterest Expense
Noninterest expense for the nine months ended September 30, 2007 decreased
$161,000, or 1.9%, from the nine months ended September 30, 2006. Occupancy
expense decreased $107,000, mainly due to the additional charge of $90,000 taken
in 2006 to improve the profitability and customer service related to the
Company's ATM and credit card platforms. Other noninterest expenses decreased
$264,000, which included decreases in data communication expenses, merchant
interchange and expenses related to other real estate owned.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
Net Income
Basic and diluted earnings per share for the three months ended September 30,
2007 totaled $0.09, compared with $0.09 for the three months ended September 30,
2006. In dollars, the Company's net income decreased by $11,000 for the three
months ended September 30, 2007, compared to the same quarter in 2006. Refer to
"Net Income" discussion for Nine Months Ended September 30, 2007 for further
information.
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 decreased 9.5%, or $301,000, for the three months ended
September 30, 2007, compared to the same period in 2006, due to continued
downward pressure on the net interest margin due to a continuation of the flat
yield curve environment.
Total interest income for the three months ended September 30, 2007, was $6.7
million compared to $6.6 million for the same period in 2006, an increase of
$121,000, or 1.8%.
Total interest expense for the three months ended September 30, 2007, when
compared to the same three-month period ended September 30, 2006, increased by
12.5%, or $422,000. The Company has experienced an increase in interest expense
due to growth in interest-bearing liabilities and an increase in the cost of
funds year-to-year.
Provision for Loan Losses
The provision for loan losses was $283,000 for the three months ended September
30, 2007 compared to $652,000 for the same period in 2006. The decrease in loan
loss provision for the three month period ended September 30, 2007 is primarily
a result of a higher level of provision for loan losses booked in September of
2006 related to loans that were charged-off without specific loss allocations.
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 SEPTEMBER 30, 2007 AND 2006
(CONTINUED)
Net Interest Income (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-owned life
insurance and other miscellaneous items.
Noninterest income for the three months ended September 30, 2007 was $785,000
compared to $699,000 for the same three-month period ended September 30, 2006,
an increase of approximately $86,000, or 12.3%. During the three-months ended
September 30, 2007, the increase in noninterest income was primarily driven by
increase of $131,000 related to service charges on deposit accounts.
Noninterest Expense
Noninterest expense for the three months ended September 30, 2007, increased
$232,000, or 8.4%, from the three months ended September 30, 2006. Salaries and
employee benefits increased $262,000 due to merger related expenses for
severance payments and duplication of personnel related to the July 1, 2007
consolidation of bank charters.
21
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES
Internal capital growth, through the retention of earnings, is the primary means
of maintaining capital adequacy for the Company. Shareholders' equity at
September 30, 2007, totaled $32.1 million compared to $32.6 million at December
31, 2006, a $464,000 decrease. Total shareholders' equity in relation to total
assets was 7.3% at September 30, 2007 and 7.7% at December 31, 2006. In 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. Although this preferred stock is a financial tool, it has not been
utilized to date.
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 is subject to the regulatory requirements of The Federal Reserve
System as a bank holding company. The Bank is subject to regulations of the
Federal Deposit Insurance Corporation (FDIC) and the State of Ohio, Division of
Financial Institutions. The most important of these various regulations address
capital adequacy.
The minimums related to such capital 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 well-capitalized classification at
September 30, 2007
SEPTEMBER 30,
2007
----------------------
(Unaudited)
(Dollars in thousands)
Tier 1 capital $ 35,506
Total risk-based capital 37,733
Risk-weighted assets 262,806
Average total assets 457,733
Total risk-based capital ratio 14.36%
Tier 1 risk-based capital ratio 13.51%
Tier 1 capital to average assets 7.76%
22
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (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 earnings, 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 and profitability to meet the current and projected
liquidity needs of its customers.
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 of 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 affect
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no significant change from disclosures included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2006.
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 September 30, 2007 in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended September 30, 2007 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
23
UNITED BANCORP, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None, other than ordinary routine litigation incidental to the Company's
business.
ITEM 1A. RISK FACTORS
There have been no material changes from risk factors as previously
disclosed in Part 1 Item 1A of the Company's for 10K for the year ended
December 31, 2006, filed on March 30, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
(c) (d)
Total Number of Maximum Number or
Shares (or Units) Approximate Dollar
(a) Purchased as Part Value) of Shares (or
Total Number of (b) Of Publicly Units) that May Yet Be
Shares (or Units) Average Price Paid Announced Plans Purchased Under the Plans
Period Purchased Per Share (or Unit) Or Programs or Programs
------ ----------------- ------------------- ----------------- -------------------------
Month #1
7/1/2007 to 7/30/2007 6,813 $10.49 6,813 $1,358,816
Month #2
8/1/2007 to 8/31/2007 3,135 $10.47 3,135 $1,325,993
Month #3
9/1/2007 to 9/30/2007 2,411 $10.45 2,411 $1,300,677
United Bancorp maintains a stock repurchase program publicly announced by a
press release issued on November 21, 2006, under which its Board of Directors
authorized management to cause the Company to purchase up to $2 million of its
common shares over a two-year period. Such authorization will expire on November
21, 2008.
The Company adopted the United Bancorp, Inc. Affiliate Banks Directors and
Officers Deferred Compensation Plan (the "Plan"), which is an unfunded deferred
compensation plan. Amounts deferred pursuant to the Plan remain unrestricted
assets of the Company, and the right to participate in the Plan is limited to
members of the Board of Directors and certain senior executive officers. Under
the Plan, eligible participants may defer fees payable to them by the Company,
which fees are used to acquire common shares which are credited to a
participant's respective account. Except in the event of certain emergencies, no
distributions are to be made from any account as long as the participant
continues to be an employee or member of the Board of Directors. Upon
termination of service, the aggregate number of shares credited to the
participant's account are distributed to him or her along with any cash proceeds
credited to the account which have not yet been invested in the Company's stock.
There were no purchases during the quarter ended September 30, 2007. No
underwriting fees, discounts, or commissions are paid in connection with the
Plan. The shares allocated to participant accounts have not been registered
under the Securities Act of 1933 in reliance upon the exemption provided by
Section 4(2) thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
24
UNITED BANCORP, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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 by reference to Appendix B to the registrant's Definitive
Proxy Statement filed with the Securities and Exchange Commission on March
14, 2001.
(2) Incorporated by reference to Appendix C to the registrant's Definitive
Proxy Statement filed with the Securities and Exchange Commission on March
14, 2001.
25
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.
/s/United Bancorp, Inc.
Date: November 14, 2007 By: /s/ James W. Everson
------------------------------------
James W. Everson
Chairman, President &
Chief Executive Officer
Date: November 14, 2007 By: /s/ Randall M. Greenwood
------------------------------------
Randall M. Greenwood
Senior Vice President,
Chief Financial Officer and Treasurer
26
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(a) 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.