UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT
For the transition period from ____________ to _______________
Commission File Number: 0-16540
UNITED BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Ohio 34-1405357
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
201 South Fourth Street, Martins Ferry, Ohio 43935-0010
(Address of principal executive offices)
(740) 633-0445
(Registrant's telephone number, including area code)
N/A
(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, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
Indicate the number of shares outstanding of the issuer's classes of common
stock as of the latest practicable date: As of August 12, 2008, 5,017,274 shares
of the small business issuer's common stock, $0.01 par value, were issued and
outstanding.
UNITED BANCORP, INC.
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Condensed Balance Sheets........................... 3
Consolidated Condensed Statements of Income..................... 4
Consolidated Condensed Statements of Comprehensive Income....... 5
Consolidated Condensed Statements of Cash Flows................. 6
Notes to Consolidated Condensed Financial Statements............ 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 19
Item 3 Quantitative and Qualitative Disclosures About Market Risk...... 27
Item 4 Controls and Procedures......................................... 27
PART II - OTHER INFORMATION
Item 1 Legal Proceedings.............................................. 28
Item 1A Risk Factors.................................................. 28
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds.... 28
Item 3 Defaults Upon Senior Securities................................ 29
Item 4 Submission of Matters to a Vote of Security Holders............ 29
Item 5 Other Information.............................................. 30
Item 6 Exhibits....................................................... 30
SIGNATURES................................................................ 31
2
ITEM 1. FINANCIAL STATEMENTS
UNITED BANCORP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2008 2007
----------- ------------
(Unaudited)
ASSETS
Cash and due from banks $ 5,193 $ 4,678
Interest-bearing demand deposits 10,763 7,646
-------- --------
Cash and cash equivalents 15,956 12,324
-------- --------
Available-for-sale securities 137,072 165,324
Held-to-maturity securities 16,158 16,142
Loans, net of allowance for loan losses of $2,870 and $2,447 at
June 30, 2008 and December 31, 2007, respectively 231,562 232,197
Premises and equipment 7,130 7,077
Federal Home Loan Bank stock 4,684 4,624
Foreclosed assets held for sale, net 501 525
Accrued interest receivable 2,991 3,146
Deferred federal income taxes 484 180
Bank-owned life insurance 8,875 9,296
Other assets 1,574 535
-------- --------
Total assets $426,987 $451,370
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $143,731 $146,057
Savings 30,029 27,816
Time 148,156 156,615
-------- --------
Total deposits 321,916 330,488
-------- --------
Short-term borrowings 6,586 19,609
Federal Home Loan Bank advances 59,490 58,926
Trade date security purchases -- 3,000
Subordinated debentures 4,000 4,000
Interest payable, deferred taxes and other liabilities 2,525 1,460
-------- --------
Total liabilities 394,517 417,483
-------- --------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, no par value, authorized 2,000,000 shares; no
shares issued -- --
Common stock, $1 par value; authorized 10,000,000 shares; issued
June 30, 2008 - 5,190,304 shares and December 31, 2007 -
5,178,869 shares 5,190 5,179
Additional paid-in capital 26,993 28,048
Retained earnings 8,062 7,112
Stock held by deferred compensation plan; 123,039 and 108,322
shares at June 30, 2008 and December 31, 2007, respectively (1,217) (1,051)
Unearned ESOP compensation (2,931) (2,931)
Accumulated other comprehensive loss (1,831) (500)
Treasury stock, at cost
June 30, 2008 - 173,030 shares, December 31, 2007 - 190,266
shares (1,796) (1,970)
-------- --------
Total stockholders' equity 32,470 33,887
-------- --------
Total liabilities and stockholders' equity $426,987 $451,370
======== ========
See Notes to Consolidated Condensed Financial Statements
3
UNITED BANCORP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2008 2007 2008 2007
------- -------- ------- -------
(Unaudited)
Interest and dividend income
Loans, including fees $4,342 $4,602 $ 8,682 $9,055
Taxable securities 1,646 1,447 3,420 2,844
Non-taxable securities 446 463 893 923
Federal funds sold 11 57 12 97
Dividends on Federal Home Loan Bank stock and other 36 79 134 155
------ ------ ------- ------
Total interest and dividend income 6,481 6,648 13,141 13,074
Interest expense
Deposits
Demand 414 968 1,093 1,794
Savings 35 30 65 60
Time 1,531 2,055 3,238 4,046
Borrowings 537 548 1,264 1,182
------ ------ ------- ------
Total interest expense 2,517 3,601 5,660 7,082
------ ------ ------- ------
Net interest income 3,964 3,047 7,481 5,992
Provision for loan losses 395 191 563 374
------ ------ ------- ------
Net interest income after provision for loan losses 3,569 2,856 6,918 5,618
Noninterest income
Service charges on deposit accounts 511 457 1,002 855
Realized gains on sales of securities -- -- -- 1
Realized gains (losses) on sales of loans 45 (3) 59 (4)
Realized gains on sales of other real estate and
repossessed assets -- 62 3 74
Other income 202 267 450 517
------ ------ ------- ------
Total noninterest income 758 783 1,514 1,443
Noninterest expense
Salaries and employee benefits 1,608 1,485 3,087 2,905
Occupancy and equipment 341 292 661 604
Professional services 182 165 372 304
Insurance 105 89 208 174
Franchise and other taxes 118 88 238 167
Advertising 79 92 174 185
Stationery and office supplies 86 52 151 120
Provision for losses on foreclosed real estate -- -- 155 --
Other expenses 483 464 933 870
------ ------ ------- ------
Total noninterest expense 3,002 2,727 5,979 5,329
------ ------ ------- ------
Income before federal income taxes 1,325 912 2,453 1,732
Federal income taxes 300 148 525 250
------ ------ ------- ------
Net income $1,025 $ 764 $ 1,928 $1,482
====== ====== ======= ======
EARNINGS PER COMMON SHARE
Basic $ 0.22 $ 0.17 $ 0.42 $ 0.32
====== ====== ======= ======
Diluted $ 0.22 $ 0.17 $ 0.42 $ 0.32
====== ====== ======= ======
DIVIDENDS PER COMMON SHARE $ 0.13 $ 0.13 $ 0.26 $ 0.26
====== ====== ======= ======
See Notes to Consolidated Condensed Financial Statements
4
UNITED BANCORP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2008 2007 2008 2007
------- -------- ------- -------
(Unaudited)
Net income $ 1,025 $ 764 $ 1,928 $ 1,482
Other comprehensive income (loss), net of tax:
Unrealized holding losses on securities during the
period, net of tax benefits of $1,146, $1,064,
$686 and $944 for each respective period (2,225) (2,066) (1,331) (1,833)
Reclassification adjustment for realized gains
included in income, net of taxes -- -- -- (1)
Amortization of prior service costs and actuarial
losses, net of tax effects of $2 and $4 in the
respective 2007 periods -- 5 -- 10
------- ------- ------- -------
Comprehensive income (loss) $(1,200) $(1,297) $ 597 $ (342)
======= ======= ======= =======
Accumulated comprehensive loss $(1,831) $(3,736) $(1,831) $(3,736)
======= ======= ======= =======
See Notes to Consolidated Condensed Financial Statements
5
UNITED BANCORP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(IN THOUSANDS)
(UNAUDITED)
2008 2007
-------- --------
OPERATING ACTIVITIES
Net income $ 1,928 $ 1,482
Items not requiring (providing) cash
Depreciation and amortization 272 249
Provision for loan losses 563 374
Provision for losses on foreclosed assets 155 --
Increase in value of bank-owned life insurance (114) (195)
Federal Home Loan Bank stock dividends (60) (68)
Realized gains on sales of securities -- (1)
Gain on called securities (25) --
Amortization of premiums and discounts on securities, net 40 61
Realized (gains) losses on sales of loans (59) 4
Proceeds from sale of loans 2,460 3,438
Loans originated for sale (2,401) (3,442)
Realized gain on sale of real estate owned (3) (12)
Deferred income taxes 510 (129)
Amortization of mortgage servicing rights 43 35
Net change in accrued interest receivable and other assets (491) (68)
Net change in accrued expenses and other liabilities (2,519) 57
-------- --------
Net cash provided by operating activities 299 1,785
INVESTING ACTIVITIES
Securities available for sale:
Sales, maturities, prepayments and calls 72,311 12,155
Purchases (46,107) (35,797)
Securities held to maturity:
Maturities, prepayments and calls -- 1,060
Net change in loans (89) 4,222
Purchases of premises and equipment (325) (77)
Proceeds from sale of real estate owned 3 55
-------- --------
Net cash provided by (used in) investing activities 25,793 (18,382)
-------- --------
See Notes to Consolidated Condensed Financial Statements
6
UNITED BANCORP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS)
(UNAUDITED)
2008 2007
-------- -------
FINANCING ACTIVITIES
Net change in deposits $ (8,572) $16,131
Net change in FHLB advances and other borrowings (12,854) --
Net change in short-term borrowings -- (372)
Principal payments on long-term debt -- (317)
Treasury stock (purchased) issued 174 (600)
Proceeds from issuance of common stock 99 259
Cash dividends paid on common stock (1,308) (1,303)
-------- -------
Net cash (used in) provided by financing activities (22,461) 13,798
-------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,631 (2,799)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,324 14,554
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,955 $11,755
======== =======
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid on deposits and borrowings $ 2,748 $ 6,509
======== =======
Federal income taxes paid $ 150 $ --
======== =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Transfers from loans to real estate and other repossessed assets $ 131 $ 315
======== =======
Unrealized losses on securities designated as available for sale, net
of related tax effects $ (1,331) $(1,833)
======== =======
Recognition of mortgage servicing rights $ 30 $ 55
======== =======
See Notes to Consolidated Condensed Financial Statements
7
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 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, 2008, and its results of operations and
cash flows for the six 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,
2007 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. Except for the adoption of EITF 06-4, as described in
"Recent Accounting Pronouncements," the Company has consistently
followed these policies in preparing this Form 10-Q. The results of
operations for the six and three months ended June 30, 2008, are not
necessarily indicative of the results to be expected for the full
year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of United
Bancorp, Inc. ("United" or "the Company") and its wholly-owned
subsidiary, The Citizens Savings Bank of Martins Ferry, Ohio ("the
Bank" or "Citizens"). For periods prior to July 1, 2007, the
consolidated financial statements include the Company and its two
wholly-owned subsidiaries, Citizens and The Community Bank. 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 and operates The Citizens
Bank, a division of The Citizens Savings Bank. All intercompany
transactions and balances have been eliminated in consolidation.
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, east-central
and southeastern Ohio, and include a wide range of individuals,
businesses and other organizations. The Citizens Bank division
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 division 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
and are not considered
8
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007
"sub prime" type loans. 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.
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.
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 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 accounts
for impaired loans in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting for Creditors for
Impairment of a Loan." SFAS 114 requires that impaired loans be
measured 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. A loan is defined under SFAS No. 114 as impaired when,
based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. In applying the provisions of
SFAS No. 114, 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.
9
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007
MORTGAGE SERVICING ASSETS
A summary of the Company's mortgage servicing assets (included in
other assets) as of and for the six months ended June 30, 2008 and
2007 is as follows:
JUNE 30, JUNE 30,
2008 2007
-------- --------
(In thousands)
Beginning balance $439 $403
Recognition of mortgage servicing rights on sale of loans 30 55
Amortization during the period (43) (34)
---- ----
Net carrying value $426 $424
==== ====
10
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007
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 June 30, 2008, the ESOP held 307,274
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.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
BASIC
Net income (In thousands) $ 1,025 $ 764 $ 1,928 $ 1,482
========== ========== ========== ==========
Weighted average common
shares outstanding 4,579,773 4,603,769 4,575,930 4,607,900
========== ========== ========== ==========
Basic earnings per common
share $ 0.22 $ 0.17 $ 0.42 $ 0.32
========== ========== ========== ==========
DILUTED
Net income (In thousands) $ 1,025 $ 764 $ 1,928 $ 1,482
========== ========== ========== ==========
Weighted average common
shares outstanding for
basic earnings per
common share 4,579,773 4,603,769 4,575,930 4,607,900
Add: Dilutive effects of
assumed exercise of
stock options 161 1,888 145 1,428
--------- --------- --------- ---------
Average shares and
dilutive potential
common shares 4,579,934 4,605,657 4,576,075 4,609,328
========== ========== ========== ==========
Diluted earnings per
common share $ 0.22 $ 0.17 $ 0.42 $ 0.32
========== ========== ========== ==========
Number of stock options
not considered in
computing diluted
earnings per share due
to antidilutive nature 29,040 14,902 29,040 14,902
Weighted-average exercise
price of dilutive stock
options $ 10.98 $ 9.85 $ 10.98 $ 9.85
========== ========== ========== ==========
Options to purchase 55,529 shares of common stock at a
weighted-average exercise price of $10.34 per share were outstanding
at June 30, 2008, but 29,040 options to purchase common stock were not
included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common
shares. Options to purchase 60,146 shares of common stock at a
weighted-average $10.49 per share were outstanding at June 30, 2007,
but 14,902 options to purchase common stock were not included in the
computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares.
11
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007
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.
The Company accounts for its stock option plan in accordance with SFAS
No. 123(R), "Share-Based Payment," which requires that the cost
related to the fair value of grants of stock options be recognized in
the financial statements.
The compensation cost recorded for unvested equity-based awards is
based on their grant-date fair value. For the six month periods ended
June 30, 2008 and 2007, the Company recorded approximately $9,000 and
$20,000, respectively, in compensation costs for stock option awards
that vested in each period. The Company has approximately $89,000 of
total unrecognized compensation expense related to non-vested
equity-based awards granted under its stock incentive plan as of June
30, 2008, which is expected to be recognized over a remaining
weighted-average period of 6.6 years.
No stock options were granted during the six month periods ended June
30, 2008 and 2007.
There are no remaining options available for grant under the Company's
1996 plan as of June 30, 2008. A summary of the status of the
Company's stock option plan for the six months ended June 30, 2008 and
2007 is presented below:
2008 2007
------------------------- -------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ----------------
Outstanding at January 1, 55,529 $10.34 69,488 $10.73
Granted -- -- -- --
Exercised -- -- -- --
Forfeited -- -- (9,342) 11.65
------ ------
Outstanding at end of period 55,529 $10.34 60,146 $10.49
====== ====== ====== ======
Options exercisable at
period-end -- $ -- 394 $13.65
====== ====== ====== ======
At the Company's Annual Shareholder meeting that was held on April 16, 2008, a
2008 Stock Incentive Plan was approved by the shareholders. The Plan provides
for awards of up to 500,000 common shares in the form of stock options,
restricted stock and stock warrants.
12
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007
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.
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 2004.
The Company will recognize, if applicable, interest accrued related to
unrecognized tax benefits in interest expense and penalties in
operating expenses.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("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
Company adopted SFAS No. 157 effective January 1, 2008, as required,
without material effect on the Company's financial position or results
of operations.
13
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007
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 adopted Issue 06-4 effective
January 1, 2008, as required. The Company recorded a liability and a
corresponding charge to retained earnings totaling $1.0 million to
recognize the commitment obligation under its split-dollar life
insurance policies. The Company will recognize expense in 2008
totaling approximately $133,000 for these policies.
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. The Company
adopted SFAS No. 159 effective January 1, 2008, as required, without
material effect on the Company's financial position or results of
operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
"Business Combinations," which replaces SFAS No. 141. The Statement
applies to all transactions or other events in which one entity
obtains control of one or more businesses. It requires all assets
acquired, liabilities assumed and any noncontrolling interest to be
measured at fair value at the acquisition date. The Statement requires
certain costs such as acquisition-related costs that were previously
recognized as a component of the purchase price, and expected
restructuring costs that were previously recognized as an assumed
liability, to be recognized separately from the acquisition as an
expense when incurred.
SFAS No. 141(R) applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008 and
may not be applied before that date.
Concurrent with SFAS No. 141 (revised 2007), the FASB recently issued
SFAS No. 160, "Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB 51." SFAS No. 160 amends ARB 51 to
establish accounting and reporting standards for the noncontrolling
interest (formerly known as minority interest) in a subsidiary and for
the deconsolidation of a subsidiary. A subsidiary, as defined by SFAS
No. 160, includes a variable interest entity that is consolidated by a
primary beneficiary.
14
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007
A noncontrolling interest in a subsidiary, previously reported in the
statement of financial position as a liability or in the mezzanine section
outside of permanent equity, will be included within consolidated equity as
a separate line item upon the adoption of SFAS No. 160. Further,
consolidated net income will be reported at amounts that include both the
parent (or primary beneficiary) and the noncontrolling interest with
separate disclosure on the face of the consolidated statement of income of
the amounts attributable to the parent and to the noncontrolling interest.
SFAS No. 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008.
NOTE 2: 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,
------------------ ----------------
2008 2007 2008 2007
-------- ------- ------ -------
(In thousands)
Beginning balance $2,540 $2,382 $2,447 $2,345
Provision for loan losses 395 191 563 374
Loans charged-off (141) (458) (263) (653)
Recoveries of previous
charge-offs 76 73 123 122
------ ------ ------ ------
Ending balance $2,870 $2,188 $2,870 $2,188
====== ====== ====== ======
Impaired loans totaled $4.6 million and $3.4 million at June 30, 2008 and
December 31, 2007, respectively. An allowance for loan losses of $950,000
and $673,000 relates to impaired loans of $3.5 million and $2.3 million, at
June 30, 2008 and December 31, 2007, respectively. At June 30, 2008 and
December 31, 2007, impaired loans of $1.1 million and $1.1 million,
respectively, had no related allowance for loan losses.
Interest income of approximately $100,000 and $500 was recognized on
average impaired loans of $3.9 million and $2.6 million for the six months
ended June 30, 2008 and 2007, respectively. Interest income was recognized
on impaired loans on a cash basis for the six months ended June 30, 2008
and 2007, respectively.
At June 30, 2008 and December 31, 2007, accruing loans delinquent 90 days
or more (including impaired loans of $1.3 at June 30, 2008 and $1.7 million
at December 31, 2007) totaled $1.8 million and $2.6 million, respectively.
Non-accruing loans at June 30, 2008 and December 31, 2007 (including
impaired loans of $3.2 million at June 30, 2008 and $1.7 million at
December 31, 2007) were $4.5 million and $1.8 million, respectively.
15
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 3: BENEFIT PLANS
Pension expense includes the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------
2008 2007 2008 2007
--------- -------- ------ -------
(In thousands)
Service cost $ 118 $ 65 $ 59 $ 130
Interest cost 90 46 45 92
Expected return on assets (118) (54) (59) (108)
Amortization of prior
service cost, transition
liability, net gain and
plan amendment 30 15 15 30
----- ---- ---- -----
Pension expense $ 120 $ 72 $ 60 $ 144
===== ==== ==== =====
During the six months ended June, 2008, the Company recorded expense of
approximately $28,000 as certain participants in the Company's defined
benefit plan were paid lump sum distributions from the plan. During 2008 it
is anticipated that Company will incur approximately $231,000 of additional
settlement accounting expense under the provisions of SFAS No. 88.
NOTE 4: 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:
JUNE 30, DECEMBER 31,
2008 2007
----------- ------------
(Unaudited)
(In thousands)
Commitments to extend credit $42,125 $44,692
Standby letters of credit 720 565
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007
NOTE 5: FAIR VALUE MEASUREMENTS
Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value
Measurements." SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.
SFAS No. 157 has been applied prospectively as of the beginning of the
period.
SFAS No. 157 defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. SFAS No. 157 also establishes
a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that
may be used to measure fair value:
LEVEL 1 Quoted prices in active markets for identical assets or
liabilities
LEVEL 2 Observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable
market data for substantially the full term of the assets
or liabilities
LEVEL 3 Unobservable inputs that are supported by little or no
market activity and that are significant to the fair
value of the assets or liabilities
Following is a description of the valuation methodologies used for
instruments measured at fair value on a recurring basis and recognized
in the accompanying balance sheet, as well as the general
classification of such instruments pursuant to the valuation
hierarchy.
AVAILABLE-FOR-SALE SECURITIES
Where quoted market prices are available in an active market,
securities are classified within Level 1 of the valuation hierarchy.
Level 1 securities include highly liquid government agency bonds and
mortgage-backed securities. If quoted market prices are not available,
then fair values are estimated by using pricing models, quoted prices
of securities with similar characteristics or discounted cash flows.
Level 2 securities include certain collateralized mortgage and debt
obligations and certain municipal securities. In certain cases where
Level 1 or Level 2 inputs are not available, securities are classified
within Level 3 of the hierarchy and include other less liquid
securities.
17
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007
The following table presents the fair value measurements of assets and
liabilities recognized in the accompanying balance sheet measured at fair value
on a recurring basis and the level within the SFAS No. 157 fair value hierarchy
in which the fair value measurements fall at June 30, 2008:
FAIR VALUE MEASUREMENTS USING
------------------------------------------------------------------
QUOTED PRICES IN SIGNIFICANT
ACTIVE MARKETS FOR SIGNIFICANT OTHER UNOBSERVABLE
IDENTICAL ASSETS OBSERVABLE INPUTS INPUTS
FAIR VALUE (LEVEL 1) (LEVEL 2) (LEVEL 3)
---------- ------------------ ----------------- ------------
(In thousands)
Available-for-sale
securities $137,072 $-- $137,072 $--
The following table presents the fair value measurements of assets and
liabilities measured at fair value on a nonrecurring basis and the level within
the SFAS No. 157 fair value hierarchy in which the fair value measurements fall
at June 30, 2008.
FAIR VALUE MEASUREMENTS USING
------------------------------------------------------------------
QUOTED PRICES IN SIGNIFICANT
ACTIVE MARKETS FOR SIGNIFICANT OTHER UNOBSERVABLE
IDENTICAL ASSETS OBSERVABLE INPUTS INPUTS
FAIR VALUE (LEVEL 1) (LEVEL 2) (LEVEL 3)
---------- ------------------ ----------------- ------------
(In thousands)
Impaired loans $1,826 $-- $-- $1,826
18
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 June 30,
2008, as compared to December 31, 2007, and the results of operations for the
six and three month periods ended June 30, 2008, compared to the same periods in
2007. This discussion should be read in conjunction with the interim condensed
consolidated financial statements and related footnotes included herein.
INTRODUCTION
The Company's net interest margin of 3.96% for the six months ended June 30,
2008, generated an increase of approximately $1.5 million in net interest income
over the same period in 2007. As a result, the Company has experienced an
improvement in earnings per share of 31% for the six months ended June 30, 2008.
We believe the Company's positive results of operations for the six months ended
June 30, 2008 are a result of several factors, including: (1) reductions by the
Federal Reserve in prior periods of short term interest rates; (2) enhanced
service charge income on deposit accounts; and (3) the operational efficiencies
gained from the full integration of our two subsidiary banks. As a result of
previous reductions in short term interest rates by the Federal Reserve, we are
projecting the Company's net interest margin to reflect continued improvements
in 2008. In addition, the increases in service charge income on deposit accounts
for the six months ended June 30, 2008 reflects the continuing positive impact
of the Company's courtesy overdraft and merchant check capture programs, which
programs are expected to enhance revenues for the remainder of 2008. Finally,
the Company's management team has worked aggressively to fully integrate the
operations of the Company's subsidiary commercial banks, which merged under one
charter in July 2007. With the operational efficiencies gained from the full
integration of our two subsidiary banks and the streamlining of our management
and operational support positions, which has reduced time and money spent on
duplicated efforts, we anticipate a continuation of solid earnings improvement
throughout 2008.
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 Bank's market areas, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Bank's market areas and competition, that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. Factors listed above could affect the Company's financial performance
and could cause the Company's actual results for future periods to differ
materially from any statements expressed with respect to future periods.
The Company is not aware of any trends, events or uncertainties that will have
or are reasonably likely to have a material effect on its financial condition,
results of operations, liquidity or capital resources except as discussed
herein. The Company is not aware of any current recommendation by regulatory
authorities that would have such effect if implemented.
The Company does not undertake, and specifically disclaims any obligation, to
publicly revise any forward-looking statements to reflect events or
circumstances after the date such statements were made or to reflect the
occurrence of anticipated or unanticipated events.
19
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 judgments.
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, developments 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 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 trend in delinquencies and loan losses, and economic factors.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb probable loan losses inherent in the loan portfolio.
Management's evaluation of the adequacy of the allowance is an estimate based on
management's current 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 June 30, 2008, gross loans were $234.4 million, compared to $234.6 million at
year-end 2007, a slight decrease of $212,000. Management attributes the decrease
in loans to the sluggish loan demand in the markets served.
Installment loans represented 17.2% of total loans at June 30, 2008, and 17.8%
at December 31, 2007. 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 58.4% of total loans at
June 30, 2008 compared to 57.3% at December 31, 2007. Commercial and commercial
real estate loans have increased $2.4 million, or 1.8% since December 31, 2007.
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, but
all within the state of Ohio.
20
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Real estate loans were 24.4% of total loans at June 30, 2008 and 24.9% at
year-end 2007. Real estate loans decreased by 2.3% or $1.3 million from December
31, 2007. Real estate lending for the six months of 2008 has been slow with
respect to the Company's adjustable-rate mortgage products. As of June 30, 2008,
the Bank has approximately $35.8 million in fixed-rate loans that it services
for a fee that is typically 25 basis points. At June 30, 2008, the Company did
not hold any loans for sale.
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 six months ended June 30, 2008 were
approximately $140,000, or 5.7%, of the beginning balance in the allowance for
loan losses.
EARNING ASSETS - SECURITIES AND FEDERAL FUNDS SOLD
The securities portfolio is comprised of U.S. Government agency-backed
securities, tax-exempt obligations of states and political subdivisions and
certain other investments. The Company does not hold any collateralized
mortgage-backed securities other than those issued by U.S. government agencies,
or derivative securities. The quality rating of obligations of state and
political subdivisions within Ohio is no less than Aaa, Aa or A, with all
out-of-state bonds rated at AAA. Board policy permits the purchase of certain
non-rated bonds of local schools, townships and municipalities, based on their
estimated levels of credit risk. Securities available for sale at June 30, 2008
decreased approximately $28.3 million, or 17.1%, from year-end 2007 totals. With
the overall decreasing interest rate environment, the Company has experienced a
high level of called bond activity during the first six months of 2008. While
the Company has plans to reinvest a portion of these funds in other
available-for-sale securities, there is lag between the time when bonds are
called and the right investment opportunity is available to the Company.
Proceeds from the called securities were used to repay wholesale borrowings,
which decreased approximately $13.0 million from year end 2007 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, 2008, total core deposits decreased
approximately $7.2 million, or 2.5%. The Company's interest-bearing demand
deposits decreased $2.1 million, or 1.7%, noninterest-bearing demand deposits
decreased $365,000, or 1.7%, while certificates of deposit under $100,000
decreased by $7.1 million, or 6.0%. The Company's savings accounts increased
$2.2 million or 8.0% from December 31, 2007 totals.
The Company has a strong deposit base from public agencies, including local
school districts, city and township municipalities, public works facilities and
others that may tend to be more seasonal in nature resulting from the receipt
and disbursement of state and federal grants. These entities have maintained
fairly static balances with the Company due to various funding and disbursement
timeframes.
Certificates of deposit greater than $100,000 are not considered part of core
deposits and as such are used to balance rate sensitivity as a tool of funds
management. At June 30, 2008, certificates of deposit greater than $100,000
decreased $1.4 million, or 3.6%, from year-end 2007 totals.
21
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SOURCES OF FUNDS - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER
BORROWINGS
Other interest-bearing liabilities include securities sold under agreements to
repurchase, sweep accounts, federal funds purchased, Treasury, Tax and Loan
notes payable and Federal Home Loan Bank ("FHLB") advances. In the first six
months of 2008, 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 use of cash flow from called available
for sale securities in 2008, total borrowings, including federal funds
purchased, decreased approximately $12.5 million, or 15.1% from year-end 2007
totals.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
NET INCOME
Basic and diluted earnings per share for the six months ended June 30, 2008
totaled $0.42, compared with $0.32 for the six months ended June 30, 2007, an
increase of 31.3%. In dollars, the Company's net income was $1,928,000 an
increase of $446,000, or 30.1%, for the six months ended June 30, 2008, compared
to the same period in 2007.
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 24.8%, or $1,489,000, for the six months ended June
30, 2008 compared to the same period in 2007, due primarily to the effects of
decreasing interest rates in the economy, which resulted in a lower cost of
funds during the six months ended June 30, 2008. During the six months ended
June 30, 2008, the Company's net interest margin increased 80 basis points over
the same period in 2007. The primarily reason for the net interest margin
increase is the decrease of 55 basis points in the Company's cost of funds from
3.21% for the six months ended June 30, 2007 to 2.66% for the same period in
2008.
Total interest income for the six months ended June 30, 2008, was $13.1 million,
an increase of $67,000, or 0.5%, compared to the same period in 2007.
Total interest expense was $5.7 million for the six months ended June 30, 2008,
a decrease of 20.1%, or $1.4 million, compared to the six-month period ended
June 30, 2007. A majority of the Company's cost of funds is tied to the short
end of the yield curve and with the short-term rates decreasing dramatically
since September 2007, the Company's cost of funds has decreased in the first six
months of 2008.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $563,000 for the six months ended June 30,
2008, compared to $374,000 for the same period in 2007. The increase in loan
loss provision for the six-month period ended June 30, 2008, was predicated upon
the increase in nonperforming loans and consideration of the economic challenges
facing the banking industry.
22
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NONINTEREST INCOME
Total noninterest income is comprised of bank related fees and service charges,
as well as other income producing services provided, gains on sales of loans in
the secondary market, gains and losses on sales of repossessed assets, 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 six months ended June 30, 2008 was $1,514,000, an
increase of $71,000, or 4.9%, compared to $1,443,000 for the six-month period
ended June 30, 2007. During the six-months ended June 30, 2008, the increase in
noninterest income was primarily driven by an increase of $49,000 related to a
our merchant capture program that was introduced in late 2007, a $66,000
increase in customer service fees on deposit accounts and a $21,000 increase in
income related to brokerage services, which were offset by a $71,000 decrease in
gains on sales of repossessed assets.
NONINTEREST EXPENSE
Noninterest expense was $6.0 million for the six months ended June 30, 2008 an
increase of $650,000, or 12.2%, over the six months ended June 30, 2007.
Salaries and employee benefit expense increased approximately $182,000, or 6.3%,
for the period ended June 30, 2008 over the same period in 2007. This increase
was primarily due to normal merit increases, increased incentive awards and ESOP
expenses. Professional fees increased $68,000 for the first six months of 2008
over the same period in 2007. Legal fees for loan collection efforts increased
approximately $52,000 for the first six months of 2008. It is anticipated this
trend will continue for the remainder of 2008. Occupancy expense increased
$57,000, or 9.4% for the period ended June 30, 2008 over the same period in
2007. Increased depreciation expense on computer hardware and software and
related service maintenance was the primary reason for the increase. The
provision for losses on foreclosed real estate increased by $155,000 due to
management's estimate of the net realizable value of a parcel of real estate,
requiring the write-down.
Other noninterest expense increased $63,000, or 7.2%, for the period ended June
30, 2008 over the same period in 2007. No one item accounted for a majority of
the increase in other noninterest expense.
FEDERAL INCOME TAXES
The provision for federal income taxes was $525,000 for the six months ended
June 30, 2008, an increase of $275,000, or 11.0%, over the same period in 2007.
The increase was due primarily to the increase in pretax income of $721,000, or
41.6%. The effective tax rate was 21.4% and 14.4% for the six months ended June
30, 2008 and 2007, respectively.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007
NET INCOME
Basic and diluted earnings per share for the three months ended June 30, 2008
totaled $0.22 compared with $0.17 for the three months ended June 30, 2007, an
increase of 29.4%. In dollars, the Company's net income was $1,025,000, an
increase of $261,000, or 34.2%, for the three months ended June 30, 2008,
compared to the same quarter in 2007.
23
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 30.1%, or $917,000, for the three months ended June
30, 2008 compared to the same period in 2007, due primarily to the effects of
decreasing interest rates in the economy, which resulted in a lower cost of
funds during the three months ended June 30, 2008. During the three months ended
June 30, 2008, the Company's net interest margin increased 90 basis points over
the same period in 2007. The primary reason for the increase in the net interest
margin was a decrease in the Company's cost of funds of 113 basis points from
3.52% for the three months ended June 30, 2007 to 2.39% for the same period in
2008.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $395,000 for the three months ended June 30,
2008, compared to $191,000 for the same period in 2007. The increase in loan
loss provision for the three-month period ended June 30, 2008, was predicated
upon the increase in nonperforming loans and consideration of the economic
challenges facing the banking industry.
NONINTEREST INCOME
Total noninterest income is made up of bank related fees and service charges, as
well as other income producing services provided, gains on sales of loans in the
secondary market, gains and losses on sales of repossessed assets, 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 June 30, 2008 was $758,000, a
decrease of $25,000 or 3.2%, compared to $783,000 for the same three-month
period ended June 30, 2007. During the three-months ended June 30, 2008, the
decrease in noninterest income was primarily driven by a decrease of $62,000
related to a gain on the sale of other real estate and repossessed assets in
2007.
NONINTEREST EXPENSE
Noninterest expense was $3.0 million for the three months ended June 30, 2008,
an increase of $275,000, or 10.1%, over the three months ended June 30, 2007.
Salaries and employee benefit expense increased $123,000, or 8.3%, for the
period ended June 30, 2008 over the same period in 2007. This increase was
primarily due to normal merit increases, increased incentive award and ESOP
expenses. Professional fees, mainly collection expenses, increased $17,000 for
the second quarter of 2008 over the same period in 2007. It is anticipated this
trend will continue for the remainder of 2008. Occupancy and equipment increased
$49,000 or 16.8% for the second quarter of 2008 over the same period in 2007.
Increased depreciation expense on computer hardware and software and related
service maintenance was the primary reason for the increase. Stationary and
office supplies increased $34,000 for the second quarter of 2008 over the same
period in 2007. This was due to reorganization of some of the branch offices
filing systems.
FEDERAL INCOME TAXES
The provision for federal income taxes was $300,000 for the three months ended
June 30, 2008, an increase of $152,000, or 50.7%, over the same period in 2007.
The increase in tax expense was due primarily to a $413,000, or 45.3%, increase
in pretax income. The effective tax rate was 22.6% and 16.2% for the three
months ended June 30, 2008 and 2007, respectively.
24
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, 2008, totaled $32.5 million compared to $33.9 million at December 31, 2007,
a $1.4 million decrease. This decrease was due primarily to a $1.0 million
charge to retained earnings from the adoption of EITF Issue 06-4, as previously
discussed in Note 1. Total shareholders' equity in relation to total assets was
7.6% at June 30, 2008 and 7.5% at December 31, 2007. 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%
25
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table illustrates the Company's well-capitalized classification at
June 30, 2008.
JUNE 30,
2008
----------------------
(Unaudited)
(Dollars in thousands)
Tier 1 capital $ 38,257
Total risk-based capital 41,135
Risk-weighted assets 264,921
Average total assets 440,752
Total risk-based capital ratio 8.68%
Tier 1 risk-based capital ratio 14.44%
Tier 1 capital to average assets 15.53%
LIQUIDITY
Management's objective in managing liquidity is maintaining the ability to
continue meeting the cash flow needs of its customers, such as borrowings or
deposit withdrawals, as well as its own financial commitments. The principal
sources of liquidity are net income, loan payments, maturing securities and
sales of securities available for sale, federal funds sold and cash and deposits
with banks. Along with its liquid assets, the Company has additional sources of
liquidity available to ensure that adequate funds are available as needed. These
include, but are not limited to, the purchase of federal funds, the ability to
borrow funds under line of credit agreements with correspondent banks, a
borrowing agreement with the Federal Home Loan Bank of Cincinnati and the
adjustment of interest rates to obtain depositors. Management feels that it has
the capital adequacy 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 accounting principles
generally accepted in the United States of America ("U.S. GAAP"). U.S. 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, certain impaired loans and certain other real estate and
loans that may be 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.
26
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, 2007.
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 June 30, 2008, in timely alerting
them to material information relating to the Company (including its consolidated
subsidiary) required to be included in the Company's periodic SEC filings.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended June 30, 2008 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
27
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 Form 10-K for the year ended December 31, 2007,
filed on March 31, 2008.
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
4/1/2008 to
4/30/2008 -- -- -- $882,320
Month #2
5/1/2008 to
5/31/2008 -- -- -- $882,320
Month #3
6/1/2008 to
6/30/2008 -- -- -- $882,320
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 $2.0 million of its
common shares over a two-year period. Such authorization will expire on November
21, 2008.
The Company maintains 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 Company officers. Under the Plan, eligible
participants may defer fees and up to 50% of their annual incentive award
payable to them by the Company, which 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.
On April 28, 2008, the Company purchased a total of 2,236 common shares for
participant accounts for the aggregate purchase price of $26,618. 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.
28
UNITED BANCORP, INC.
PART II - OTHER INFORMATION
On June 27, 2008, UBCP was added to the Russell Microcap Index after the Russell
Investment Group reconstituted its comprehensive set of U.S. and global equity
indexes. Russell indexes are widely used by investment managers and
institutional investors for both index funds and as benchmarks for passive and
active investment strategies. UBCP will hold its membership until Russell
reconstitutes its indexes in June 2009.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On Wednesday April 16, 2008, United Bancorp, Inc. held its annual meeting of
shareholders, at which meeting the following matters were voted upon:
1. Proposal to elect three nominees to Class II of the Corporation's Board of
Directors.
The results of the voting on this proposal are as follows:
DIRECTOR FOR WITHHELD
-------- --------- --------
Michael J. Arciello 4,179,615 46,677
Terry A. McGhee 4,189,917 36,375
Samuel J. Jones 4,187,847 38,445
2. Proposal to approve the United Bancorp, Inc. 2008 Stock Incentive Plan.
The results of the voting on this proposal, which was approved, are as
follows:
FOR AGAINST ABSTAIN BROKER NONVOTE
--- ------- ------- --------------
2,515,477 487,591 40,358 1,182,866
3. Proposal to amend Section 8 of the Amended Code of Regulations to eliminate
the classified board structure to require all directors to stand for
election to the Board of Directors annually.
The results of the voting on this proposal, which was approved, are as
follows:
FOR AGAINST ABSTAIN BROKER NONVOTE
--- ------- ------- --------------
4,818,532 73,907 33,852 0
4. Proposal to amend Section 34 of the Amended Code of Regulations to
eliminate certain shareholder super-voting requirements regarding the
number and classification of directors, and to authorize the Board of
Directors to amend the Regulations as permitted by the Ohio Revised Code.
The results of the voting on this proposal, which was approved, are as
follows:
FOR AGAINST ABSTAIN BROKER NONVOTE
--- ------- ------- --------------
2,846,146 158,584 38,696 1,182,866
29
UNITED BANCORP, INC.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
EX-3.1 Amended Articles of Incorporation of United Bancorp, Inc. (1)
EX-3.2 Amended Code of Regulations of United Bancorp, Inc. (2)
EX-4.0 Instruments Defining the Rights of Security Holders
(See Exhibits 3.1 and 3.2)
EX 10.0 United Bancorp, Inc. 2008 Stock Incentive Plan(3)
EX 31.1 Rule 13a-14(a) Certification - CEO
EX 31.2 Rule 13a-14(a) Certification - CFO
EX 32.1 Section 1350 Certification - CEO
EX 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.
(3) Incorporated by reference to Exhibit 10 to registrant's Form 8-K filed with
the Securities and Exchange Commission on April 22, 2008
30
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: August 12, 2008 By: /s/ James W. Everson
------------------------------------
James W. Everson
Chairman, President and Chief
Executive Officer
Date: August 12, 2008 By: /s/ Randall M. Greenwood
------------------------------------
Randall M. Greenwood
Senior Vice President, Chief
Financial Officer and Treasurer
31
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)
10.0 United Bancorp, Inc. 2008 Stock Incentive Plan, incorporated by
reference to Exhibit 10 to registrant's Form 8-K filed with the
Securities and Exchange Commission on April 22, 2008.
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.