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, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number: 0-16540
UNITED BANCORP, INC.
(Exact name of registrant as specified in its charter.)
OHIO 34-1405357
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
201 SOUTH 4TH STREET, MARTINS FERRY, OHIO 43935-0010
(Address of principal executive offices) (Zip Code)
(740) 633-0445
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since
last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS 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 4,653,818 SHARES AS OF NOVEMBER 1, 2006
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,
2006 2005
------------- ------------
(Unaudited)
ASSETS
Cash and due from financial institutions $ 8,858 $ 10,009
Interest-bearing deposits in other financial institutions 3,365 3,868
-------- ---------
Total cash and cash equivalents 12,223 13,877
Securities available for sale - at market 133,893 121,946
Securities held to maturity - estimated fair value of $16,006 at
September 30, 2006 and $20,483 at December 31, 2005 18,822 20,262
Total loans 237,066 232,011
Allowance for loan losses (3,474) (2,904)
-------- ---------
Loans - net 233,592 229,107
Federal Home Loan Bank stock - at cost 4,492 4,306
Premises and equipment 7,340 7,605
Accrued interest receivable 3,146 2,363
Other real estate and repossessions 274 1,244
Core deposit and other intangible assets 8 18
Bank-owned life insurance 8,398 8,186
Other assets 3,158 3,019
-------- ---------
Total assets $425,346 $ 411,933
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits
Noninterest-bearing $ 25,615 $ 26,614
Interest-bearing 101,979 82,295
Savings deposits 32,775 37,634
Time deposits - under $100,000 130,586 121,249
Time deposits - $100,000 and over 46,347 39,123
-------- ---------
Total deposits 337,302 306,915
Federal funds purchased 195 12,545
Advances from the Federal Home Loan Bank 37,279 47,334
Securities sold under agreements to repurchase 7,977 7,142
Trade date security purchases 3,089 --
Subordinated debentures 4,000 4,000
Accrued expenses and other liabilities 3,096 1,517
-------- ---------
Total liabilities 392,938 379,453
Commitments -- --
Shareholders' equity
Preferred stock - 2,000,000 shares without par value authorized; no shares issued -- --
Common stock - $1 par value; 10,000,000 shares authorized; 4,653,818 and
4,615,111 shares issued at September 30, 2006 and December 31, 2005,
respectively 4,654 4,615
Additional paid-in capital 27,381 26,919
Retained earnings 7,383 7,776
Stock held by deferred compensation plan; 89,814 and 83,024 shares
at September 30, 2006 and December 31, 2005 (969) (892)
Treasury stock - at cost, 71,214 and 27,500 shares at September 30, 2006
and December 31, 2005 (806) (329)
Less required contributions for shares acquired by Employee Stock
Ownership Plan (ESOP) (3,417) (3,417)
Accumulated comprehensive loss, unrealized losses on securities
designated as available for sale, net of related tax benefits (1,818) (2,192)
-------- ---------
Total shareholders' equity 32,408 32,480
-------- ---------
Total liabilities and shareholders' equity $425,346 $ 411,933
======== =========
The accompanying notes are an integral part of these statements.
2
UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------- -------
(Unaudited)
Interest and dividend income
Loans, including fees $4,606 $3,991 $13,230 $11,335
Taxable securities 1,491 1,276 4,301 3,861
Non-taxable securities 341 330 984 968
Federal funds sold 46 1 134 6
Dividends on Federal Home Loan Bank stock and other 68 60 207 156
------ ------ ------- -------
Total interest and dividend income 6,552 5,658 18,856 16,326
Interest expense
Deposits
Demand 748 330 1,862 707
Savings 31 35 92 112
Time 1,829 1,540 5,076 4,385
Borrowings 777 499 2,341 1,335
------ ------ ------- -------
Total interest expense 3,385 2,404 9,371 6,539
Net interest income 3,167 3,254 9,485 9,787
Provision for loan losses 652 68 1,056 328
------ ------ ------- -------
Net interest income after provision for loan losses 2,515 3,186 8,429 9,459
Noninterest income
Service charges on deposit accounts 350 343 1,024 972
Net realized losses on sales of securities -- (19) (350) (25)
Net realized gains on sales of loans 4 4 14 16
Other income 345 246 903 766
------ ------ ------- -------
Total noninterest income 699 574 1,591 1,729
Noninterest expense
Salaries and employee benefits 1,439 1,339 4,334 4,017
Occupancy and equipment 299 337 1,016 992
Professional services 123 115 454 364
Insurance 84 101 255 258
Franchise and other taxes 111 105 316 306
Advertising 91 94 285 258
Stationery and office supplies 86 79 207 199
Amortization of intangibles 5 5 14 14
Other expenses 535 489 1,622 1,516
------ ------ ------- -------
Total noninterest expense 2,773 2,664 8,503 7,924
------ ------ ------- -------
Earnings before income taxes 441 1,096 1,517 3,264
Income tax expense 38 268 125 735
------ ------ ------- -------
Net earnings $ 403 $ 828 $ 1,392 $ 2,529
====== ====== ======= =======
EARNINGS PER COMMON SHARE
Basic $ 0.10 $ 0.20 $ 0.33 $ 0.60
====== ====== ======= =======
Diluted $ 0.10 $ 0.20 $ 0.33 $ 0.60
====== ====== ======= =======
DIVIDENDS PER COMMON SHARE $ 0.13 $ 0.12 $ 0.39 $ 0.36
====== ====== ======= =======
The accompanying notes are an integral part of these 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,
------------------ -----------------
2006 2005 2006 2005
------- ----- ------- ------
(Unaudited)
Net earnings $ 403 $ 828 $ 1,392 $2,529
Other comprehensive income, net of related tax effects:
Unrealized holding gains (losses) on securities during
the period, net of (taxes) benefits of $(1,039), $162, $(74)
and $114 for each respective period 2,016 (314) 143 (222)
Reclassification adjustment for realized losses included
in earnings, net of tax benefits of $6, $119 and $8 for the
three months ended September 30, 2005 and the nine
months ended September 30, 2006 and 2005, respectively -- 13 231 17
------- ----- ------- ------
Comprehensive income $ 2,419 $ 527 $ 1,766 $2,324
======= ===== ======= ======
Accumulated comprehensive loss $(1,818) $(841) $(1,818) $ (841)
======= ===== ======= ======
The accompanying notes are an integral part of these statements.
4
UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2006 and 2005
(In thousands)
2006 2005
-------- --------
(Unaudited)
Cash flows from operating activities:
Net earnings for the period $ 1,392 $ 2,529
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 465 499
Provision for loan losses 1,056 328
Increase in value of bank-owned life insurance (212) (206)
Federal Home Loan Bank stock dividends (186) (139)
Net realized losses on sales of securities 350 25
Amortization of securities, net 147 312
Net realized gains on sale of loans (14) (16)
Net realized loss on sale of real estate owned 33 1
Amortization of mortgage servicing rights 62 61
Net change in accrued interest receivable and other assets (1,057) (1,268)
Net change in accrued expenses and other liabilities 4,301 148
-------- --------
Net cash provided by operating activities 6,337 2,224
Cash flows used in investing activities:
Securities available for sale:
Sales 7,729 15,385
Maturities, prepayments and calls 5,479 19,401
Purchases (29,095) (18,941)
Securities held to maturity:
Maturities, prepayments and calls 1,465 315
Purchases -- (5,991)
Trade date securities purchase 3,985 --
Purchase of bank-owned life insurance -- (382)
Net change in loans receivable (5,520) (15,506)
Purchases of premises and equipment (195) (201)
Proceeds from sale of real estate owned 1,020 246
-------- --------
Net cash used in investing activities (15,132) (5,674)
Cash flows provided by financing activities:
Net change in deposits 30,387 14,500
Net change in borrowings (21,400) (9,501)
Treasury stock purchases (478) (285)
Proceeds from issuance of common stock 322 262
Exercise of stock options, including tax benefits 95 296
Cash dividends paid (1,785) (1,516)
-------- --------
Net cash provided by financing activities 7,141 3,756
-------- --------
Net increase (decrease) in cash and cash equivalents (1,654) 306
Cash and cash equivalents at beginning of period 13,877 7,581
-------- --------
Cash and cash equivalents at end of period $ 12,223 $ 7,887
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 9,286 $ 6,462
======== ========
Federal income taxes paid $ 573 $ 583
======== ========
Supplemental disclosure of noncash investing activities:
Noncash transfer from loans to other real estate
and repossessions $ 98 $ 373
======== ========
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ 143 $ (206)
======== ========
The accompanying notes are an integral part of these statements.
5
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three months ended September 30, 2006 and 2005
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,
2006, 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, 2005 included in its Annual Report on Form 10-K.
Reference is made to the accounting policies of the Company described in the
Notes to the Consolidated Financial Statements contained in its Annual Report on
Form 10-K. The Company has consistently followed these policies in preparing
this Form 10-Q.
1. Principles of Condensed Consolidation
The consolidated financial statements include the accounts of United Bancorp,
Inc. ("UNITED" or "the Company") and its wholly-owned subsidiaries, The Citizens
Savings Bank of Martins Ferry, Ohio ("CITIZENS") and The Community Bank,
Lancaster, Ohio ("COMMUNITY"), (collectively hereinafter "the Banks"). All
intercompany transactions and balances have been eliminated in consolidation.
2. Nature of Operations
The Company's revenues, operating income, and assets are almost exclusively
derived from banking. Accordingly, all of the Company's banking operations are
considered by management to be aggregated in one reportable operating segment.
Customers are mainly located in Athens, Belmont, Carroll, Fairfield, Harrison,
Hocking, and Tuscarawas Counties and the surrounding localities in northeastern,
eastern and southeastern Ohio, and include a wide range of individuals, business
and other organizations. CITIZENS conducts its business through its main office
in Martins Ferry, Ohio and nine branches in Bridgeport, Colerain, Dellroy,
Dover, Jewett, New Philadelphia, St. Clairsville, Sherrodsville, and Strasburg
Ohio. COMMUNITY conducts its business through its 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.
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.
6
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2006 and 2005
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Earnings Per Share
Basic earnings per common share is computed based upon the weighted-average
number of common shares outstanding during the year, less shares in the ESOP
which are unallocated and not committed to be released. At September 30, 2006,
the ESOP held 322,319 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
2005.
The components used in the earnings per share computation were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
BASIC
Net earnings $ 403 $ 828 $ 1,392 $ 2,529
========== ========== ========== ==========
Weighted average common shares outstanding 4,160,687 4,243,151 4,172,491 4,227,686
========== ========== ========== ==========
Basic earnings per common share $ 0.10 $ 0.20 $ 0.33 $ 0.60
========== ========== ========== ==========
DILUTED
Net earnings $ 403 $ 828 $ 1,392 $ 2,529
========== ========== ========== ==========
Weighted average common shares outstanding
for basic earnings per common share 4,160,687 4,243,151 4,172,491 4,227,686
Add: Dilutive effects of assumed exercise of
stock options 147 489 503 1,245
---------- ---------- ---------- ----------
Average shares and dilutive potential
common shares 4,160,834 4,243,640 4,172,994 4,228,931
========== ========== ========== ==========
Diluted earnings per common share $ 0.10 $ 0.20 $ 0.33 $ 0.60
========== ========== ========== ==========
Number of stock options not considered in
computing diluted earnings per share due to
antidilutive nature 39,092 39,029 39,092 22,642
========== ========== ========== ==========
Weighted average exercise price
of dilutive stock options $ 10.70 $ 7.49 $ 10.70 $ 10.97
========== ========== ========== ==========
7
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2006 and 2005
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Stock Options (continued)
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.
Effective January 1, 2006, the Company accounts for its stock option plan in
accordance with Statement of Financial Accounting Standards, ("SFAS") No.
123(R), "Share-Based Payment." This standard requires the Company to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. The Company elected
to use the modified prospective transition method as permitted by SFAS No.
123(R) and therefore has not restated financial results for prior periods. The
Company recognizes compensation cost for the portion of awards for which the
requisite service period has not been rendered (unvested awards) that are
outstanding as of January 1, 2006, as the remaining service is rendered. The
after-tax compensation costs under SFAS No. 123(R) totaling $6,000 and $2,000
($8,000 and $4,000 pretax) for the nine and three months ended September 30,
2006 have been based upon the grant date fair value.
Prior to the adoption of SFAS No. 123(R), the Company presented tax benefits
resulting from the exercise of stock options as operating cash flows in the
Consolidated Statement of Cash Flows. SFAS No. 123 (R) requires that cash flows
from the exercise of stock options resulting from tax benefits in excess of
recognized cumulative compensation cost ("excess tax benefits") be classified as
financing cash flows. Tax benefits related to the exercise of stock options
totaling $10,000 and $150,000 for the nine months ended September 30, 2006 and
2005 have been classified as financing activities.
Prior to January 1, 2006, the Company accounted for its stock option plan in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"
contains a fair value-based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date based on
the fair value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123 permits
companies to continue to account for stock options and similar equity
investments under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities that continued to account
for stock options using APB No. 25 were required to make pro forma disclosures
of net earnings and earnings per share as if the fair value-based method of
accounting defined is SFAS No. 123 had been applied.
Prior to January 1, 2006, the Company applied APB Opinion No. 25 and related
Interpretations in accounting for it stock option plan. Accordingly, no
compensation cost has been recognized in 2005 for the plan. Had compensation
cost for the Company's stock option plan been determined based on the fair value
at the grant dates for awards under the plan consistent with the accounting
method utilized in SFAS No. 123, the Company's net earnings and earnings per
share would have been reported at the pro-forma amounts indicated in the table
below.
8
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2006 and 2005
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Stock Options (continued)
A summary of the status of the Company's stock option plan for the three and
nine months ended September 30, 2005 is presented below:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2005
------------------ ------------------
(Dollars in thousands)
NET EARNINGS
As reported $ 828 $2,529
Stock-based compensation, net of tax (5) (15)
------ ------
Pro-forma $ 823 $2,514
====== ======
EARNINGS PER SHARE
BASIC
As reported $ 0.20 $ 0.60
Stock-based compensation, net of tax (0.01) --
------ ------
Pro-forma $ 0.19 $ 0.60
====== ======
DILUTED
As reported $ 0.20 $ 0.60
Stock-based compensation, net of tax (0.01) (0.01)
------ ------
Pro-forma $ 0.19 $ 0.59
====== ======
All share and per share prices have been restated to reflect the stock split in
the form of a dividend distributed in 2005. The fair value of each option
granted in 2005 was estimated using the Black-Scholes options pricing model with
the following assumptions; risk-free interest rate of 4.54%, dividend yield of
4.21% and expected volatility of 30.53%. No stock options were granted in 2006.
Any option not exercised within the designated timeframe will be forfeited. All
options become immediately exercisable upon retirement, death, or 9 1/2 years
after issuance, or in the event of a change in control of the Company.
The expected term of the options is based on evaluations of historical and
expected future employee exercise behavior. The risk free interest rate is 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 is based
upon historical volatility of the Company's stock.
9
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2006 and 2005
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Stock Options (continued)
There are no remaining options available for grant under the Company's plan as
of September 30, 2006. A summary of the status of the Company's stock option
plan for the nine months ended September 30, 2006 and 2005 is presented below:
2006 2005
------------------- -------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- --------- ------- ---------
(Dollars in thousands)
Outstanding at January 1, 94,609 $ 11.51 112,250 $ 8.47
Granted -- 14.85 11,000 13.50
Exercised (2,410) 7.56 (77,408) 7.21
Forfeited (29,027) 11.22 (4,405) 7.21
------- ------- ------- -------
Outstanding at June 30, 63,172 $ 11.33 41,437 $ 12.32
======= ======= ======= =======
Options exercisable at period-end 2,737 $ 13.11 6,335 $ 10.71
======= ======= ======= =======
Weighted-average fair value of options
granted during the period $ -- $ 3.11
======= =======
Aggregate intrinsic value of vested options $75,200 $99,530
======= =======
The following table summarizes information about stock options outstanding at
September 30, 2006:
OPTIONS OPTIONS REMAINING
EXERCISE OUTSTANDING DATE OF EXERCISABLE CONTRACTUAL
PRICE AT 9/30/06 EXPIRATION AT 9/30/06 LIFE
-------- ----------- ---------- ----------- -----------
$10.70 24,081 05/15/15 -- 8.5 years
11.27 17,050 01/16/15 -- 8.3 years
12.82 8,494 12/01/06 2,379 .2 years
13.50 11,000 8/23/14 -- 7.7 years
15.02 2,547 07/07/07 358 .75 years
6. Income Taxes
Income tax expense is based on the effective tax rate expected to be applicable
for the entire year. Income tax expense is the total of the current year income
tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
10
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2006 and 2005
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. 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 is currently evaluating SFAS No. 155, but does not
expect it to have a 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.
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 Corporation,
with earlier application permitted. The Corporation is currently evaluating SFAS
No. 156, but does not expect it to have a material effect on the Corporation's
financial position or results of operations.
11
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2006 and 2005
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. Recent Accounting Pronouncements (continued)
In September 2006, the FASB issued SFAS No. 158, "Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans: An Amendment of FASB
Statements No. 87, 88, 106 and 132R." The Statement requires recognition of the
funded status of postretirement benefit plans in the consolidated statement of
financial condition. An employer must recognize an asset or liability in its
statement of financial condition for the difference between the fair value of
the plan assets and the projected benefit obligations. Changes in the plan's
funded status must be recognized, in the year of change, in comprehensive
income.
Additionally, the Statement will require entities to measure the funded status
of the plan as of the date of the year-end statement of financial condition,
with a few exceptions.
The recognition provisions of this Statement are effective for fiscal years
ending after December 31, 2006, or January 1, 2007, as to the Company. The
Statement is to be applied as of the end of the year adopted. Retrospective
application is prohibited.
The provisions that may require an entity to change the plan measurement date
are effective for fiscal years ending after December 31, 2008, or January 1,
2009, as to the Company.
Management is currently evaluating the requirements of SFAS No. 158 but does not
expect it to have a material effect on its consolidated statement of financial
condition and results of operations.
In September 2006, the SEC staff issued Staff Accounting Bulletin ("SAB") No.
108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB 108 was issued to
provide consistency between how registrants quantify financial statement
misstatements.
Historically, there have been two widely-used methods for quantifying the
effects of financial statement misstatements. These methods are referred to as
the "roll-over" and "iron curtain" method. The roll-over method quantifies the
amount by which the current year income statement is misstated. Exclusive
reliance on an income statement approach can result in the accumulation of
errors on the balance sheet that may not have been material to any individual
income statement, but which may misstate one or more balance sheet accounts. The
iron curtain method quantifies the error as the cumulative amount by which the
current year balance sheet is misstated. Exclusive reliance on a balance sheet
approach can result in disregarding the effects of errors in the current year
income statement that results from the correction of an error existing in
previously issued financial statements. We currently use the roll-over method
for quantifying identified financial statement misstatements.
SAB 108 established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatement on each of the
company's financial statements and the related financial statement disclosures.
This approach is commonly referred to as the "dual approach" because it requires
quantification of errors under both the roll-over and iron curtain methods.
12
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2006 and 2005
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. Recent Accounting Pronouncements (continued)
SAB 108 allows registrants to initially apply the dual approach either by (1)
retroactively adjusting prior financial statements as if the dual approach had
always been used, or by (2) recording the cumulative effect of initially
applying the dual approach as adjustments to the carrying values of assets and
liabilities as of April 1, 2006, with an offsetting adjustment recorded to the
opening balance of retained earnings. Use of this "cumulative effect" transition
method requires detailed disclosure of the nature and amount of each individual
error being corrected through the cumulative adjustment and how and when it
arose.
Management is currently evaluating the requirements of SAB 108 but does not
expect it to have a material adverse effect on the Company's financial position
or results of operations.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes." The interpretation clarifies the accounting
for uncertainty in income taxes recognized in a company's financial statements
in accordance with SFAS No. 109, "Accounting for Income Taxes." Specifically,
FIN 48 prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of a tax provision taken or
expected to be taken on a tax return. FIN 48 also provides guidance on the
related derecognition, classification, interest and penalties, accounting for
interim periods, disclosure, and transition of uncertain tax positions. FIN 48
is effective for fiscal years beginning after December 15, 2006, or April 1,
2007 as to the Company. The Company is currently evaluating the requirements of
FIN 48 and has not quantified effects on adoption, if any.
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,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------ ------
Beginning balance $2,840 $3,111 $2,904 $2,995
Provision for loan losses 652 68 1,056 328
Loans charged-off (95) (275) (640) (562)
Recoveries of previous charge-offs 77 38 154 181
------ ------ ------ ------
Ending balance $3,474 $2,942 $3,474 $2,942
====== ====== ====== ======
13
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2006 and 2005
NOTE B - ALLOWANCE FOR LOAN LOSSES (continued)
Nonperforming loans were as follows:
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
Loans past due over 90 days still accruing $ 213 $ 417
Nonaccrual loans $1,299 $1,144
As of September 30, 2006 and 2005, individually impaired loans were not material
to the consolidated financial statements.
NOTE C - BENEFIT PLANS
Pension expense includes the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2006 2005 2006 2005
---- ---- ---- ----
Service cost $56 $62 $168 $187
Interest cost 40 38 120 116
Expected return on assets (43) (37) (129) (113)
Amortization of prior service cost, transition
liability and plan amendment 7 14 21 42
--- --- ---- ----
Pension expense $60 $77 $180 $232
=== === ==== ====
During the nine months ended September 30, 2006, there were no recognized gains
or losses nor any gains or losses due to settlements or curtailments.
14
UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2006 and 2005
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,
2006 2005
------------- ------------
(Unaudited)
(In thousands)
Commitments to extend credit $35,652 $29,617
Credit card and ready reserve lines 1,166 2,028
Standby letters of credit 707 855
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, 2006, as compared to December 31, 2005 and the results of operations for the
nine and three months ended September 30, 2006 compared to the same periods in
2005. This discussion should be read in conjunction with the interim condensed
consolidated financial statements and related footnotes included herein.
FORWARD-LOOKING STATEMENTS
When used in this document, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimated," "projected" or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Banks' market areas, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Banks' market areas and competition, that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. Factors listed above could affect the Company's financial performance
and could cause the Company's actual results for future periods to differ
materially from any statements expressed with respect to future periods.
The Company is not aware of any trends, events or uncertainties that will have
or are reasonably likely to have a material effect on its liquidity or capital
resources except as discussed herein. The Company is not aware of any current
recommendation by regulatory authorities that would have such effect if
implemented.
The Company does not undertake, and specifically disclaims any obligation, to
publicly revise any forward-looking statements to reflect events or
circumstances after the date such statements were made or to reflect the
occurrence of anticipated or unanticipated events.
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 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 each bank's
trend 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, 2006, gross loans were $237,066,000, compared to $232,011,000
at year-end 2005, an increase of $5,055,000 or 2.2%. The increase in total
outstanding loans was the result of an increase in the commercial portfolio.
Management attributes the relatively strong increase in commercial loans to the
gradual strengthening of the economic environment in the lending markets served.
Installment loans represented 17.9% of total loans at September 30, 2006
compared to 18.9% at December 31, 2005. 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 58.2% of total loans at
September 30, 2006 compared to 56.2% at December 31, 2005. Commercial and
commercial real estate loans have increased $5,676,000 or 4.4% since December
31, 2005. The Company has originated and purchased participations in loans from
other banks for out-of-area commercial and commercial real estate loans to
benefit from consistent economic growth outside the Company's primary market
area. The majority of these loans are secured by real estate holdings comprised
of hotels, motels and churches located in various geographic locations,
including Columbus and the Akron-Canton, Ohio metropolitan areas.
Real estate loans were 23.8% of total loans at September 30, 2006 and 24.9% at
year-end 2005. Real estate loans decreased by 2.1% or $1,221,000 since December
31, 2005. Real estate lending for the nine months of 2006 has been extremely
slow with respect to the Company's adjustable rate mortgage products. As of
September 30, 2006, CITIZENS has $33,968,000 in fixed rate loans that they
service for a fee that is typically 25 basis points.
The allowance for loan losses represents the amount which management and the
Board of Directors estimates is adequate to provide for probable losses inherent
in the loan portfolio. The allowance balance and the provision charged to
expense are reviewed by management and the Board of Directors monthly using a
risk evaluation model that considers borrowers' past due experience, economic
conditions and various other circumstances that are subject to change over time.
Management believes the current balance of the allowance for loan losses is
adequate to absorb probable incurred credit losses associated with the loan
portfolio. Net charge-offs for the nine months ended September 30, 2006 were
approximately $486,000, or 16.7%, 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,
2006 increased approximately $11,947,000, or 9.8% from year-end 2005 totals.
This growth partially reflects deployment of the Company's increased deposits
over the 2006 period. Securities held to maturity at September 30, 2006
decreased approximately $1,440,000, or 7.1% compared to year-end 2005 totals.
Sources of Funds - Deposits
The Company's primary source of funds is core deposits from retail and business
customers. These core deposits include all categories of interest-bearing and
noninterest-bearing deposits, excluding certificates of deposit greater than
$100,000. For the period ended September 30, 2006, total core deposits increased
approximately $23,163,000, or 8.6%. The Company's interest-bearing demand
deposits increased $19,684,000 or 23.9%, noninterest-bearing demand deposits
decreased $999,000 or 3.8% while certificates of deposits under $100,000
increased by $9,337,000, or 7.7%. As part of a strategic focus to grow deposits,
the Company introduced a new premium rate money market index account with a
guaranteed interest rate for 180 days. In addition to paying a premium interest
rate, a debit/ATM named the "Freedom Card" is issued with the account. The
benefit of the Freedom Card is to allow our customers to use any ATM in the
continental United States without a service fee.
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, 2006, certificates of deposit greater than $100,000
increased $7,224,000, or 18.5%, from year-end 2005 totals.
Over the past several years, COMMUNITY has developed several large depository
customers. As of September 30, 2006, the eight largest depository customers
accounted for approximately 31.0% of COMMUNITY'S certificate of deposits and
approximately 76.8% of total certificates of deposits greater than $100,000.
These customers also represent 11.1% of COMMUNITY'S demand deposits at September
30, 2006. Total concentration of retail funding is approximately 23.3% of
COMMUNITY'S total deposits at September 30, 2006. On a consolidated level, this
represents approximately 6.8% of total retail deposits at September 30, 2006
compared to 10.0% at December 31, 2005. This deposit concentration does pose
possible liquidity and earnings risk for COMMUNITY. The earnings risks would be
triggered if COMMUNITY would be placed in a position to sell assets below book
value to meet current liquidity needs. This risk is mitigated with COMMUNITY'S
capability to borrow wholesale funding from its correspondent banks. Management
has an active asset/liability committee that monitors, among other items,
monthly liquidity needs on a 90 day time horizon.
18
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ANALYSIS OF FINANCIAL CONDITION (CONTINUED)
Sources of Funds - Securities Sold under Agreements to Repurchase and Other
Borrowings
Other interest-bearing liabilities include securities sold under agreements to
repurchase, sweep accounts, federal funds purchased, Treasury, Tax and Loan
notes payable and Federal Home Loan Bank ("FHLB") advances. In the first nine
months of 2006, 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 2006, total
borrowings, including federal funds purchased, decreased approximately
$21,570,000, or 32.2% from year-end 2005 totals.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
Net Income
Basic and diluted earnings per share for the nine months ended September 30,
2006 totaled $0.33, compared with $0.60 for the nine months ended September 30,
2005. In dollars, the Company's net income decreased by $1,137,000, for the nine
months ended September 30, 2006, compared to the same period in 2005.
In March 2006, James W. Everson was appointed President and Chief Executive
Officer of COMMUNITY after the affiliate did not meet its 2006 business plan by
posting losses in January and February. Management developed three strategic and
tactical initiatives in June of 2006 aimed at enhancing future profitability of
COMMUNITY. First, the Company took a charge against earnings of approximately
$330,000 relative to COMMUNITY's bond portfolio. With our current reinvestment
strategy, management anticipates this loss to be recouped in just slightly over
two years, while the average life of the bonds sold was approximately four
years. Second, a $90,000 charge against earnings was taken to improve the
profitability and customer service related to COMMUNITY's ATM and credit card
platforms. Finally, an additional $210,000 was charged in loan loss provision
expense against earnings to replenish the loan loss reserve account at COMMUNITY
for loans charged off during the quarter.
In September, COMMUNITY recorded an additional $550,000 in loan loss provision
against earnings, reflecting the charge-off related to a commercial loan. In
total, COMMUNITY has recorded additional pre-tax charges against income during
2006 of approximately $1,247,000.
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 3.1% or $302,000 for the nine months ended September
30, 2006 compared to the same period in 2005.
Total interest income for the nine months ended September 30, 2006 was
$18,856,000 compared to $16,326,000 for the same period in 2005. Total interest
income increased $2,530,000, or 15.5%. Contributing to the increase is the
overall increase in the interest rate environment in 2006.
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, 2006 AND 2005
(CONTINUED)
Net Interest Income (continued)
Total interest expense for the nine months ended September 30, 2006 when
compared to the same nine-month period ended September 30, 2005, increased
43.3%, or $2,832,000. The Company has experienced an increase in interest
expense due to both the effect of a higher interest rate environment for the
first nine months of 2006 as compared to 2005. The increase is also attributable
to the increase in interest-bearing liabilities during the nine month period
ended September 30, 2006.
Provision for Loan Losses
The total provision for loan losses was $1,056,000 for the nine months ended
September 30, 2006 compared to $328,000 for the same period in 2005. At
September 30, 2006 the allowance for loan losses to total gross loans was 1.47%
as compared to 1.25% at December 31, 2005. The allowance for loan losses to
nonperforming loans was 229.76% at September 30, 2006, compared to 188.47% at
December 31, 2005. The increase in loan loss provision for the nine month period
ended September 30, 2006 is due primarily to the aforementioned charge-off with
a large commercial customer at the COMMUNITY affiliate.
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, 2006 was $1,591,000
compared to $1,729,000 for the same nine-month period ended September 30, 2005,
a decrease of approximately 8.0% or $138,000. The decline is fully attributable
to a $350,000 realized loss on sale of securities for the nine months ended
September 30, 2006, compared to a $25,000 realized loss for the same period in
2005. As stated previously, management's sale strategy in 2006 was largely
predicated on a payback period of 2 years based on reinvesting those funds in 4
year bonds at increased interest rates. The Company has also experienced a
slow-down in the fixed rate residential mortgage activity, resulting in a
decrease in net realized gains on the sale of loans of $2,000 from 2005 to 2006.
Noninterest Expense
Noninterest expense for the nine months ended September 30, 2006 increased
$579,000 or 7.3% over the nine months ended September 30, 2005. Salaries and
employee benefits costs increased $317,000 or 7.9% mainly due to annual merit
increases and higher costs related to the Company's defined benefit plan and
medical insurance benefits. Legal fees related to collection and foreclosure
proceedings increased $90,000 for the nine months ended September 30, 2005.
Other operating expenses increased $106,000 due mainly to the $80,000 charge
against other real estate and repossessions at COMMUNITY during the nine months
ended September 30, 2006
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, 2006 AND 2005
Net Income
Basic and diluted earnings per share for the three months ended September 30,
2006 each totaled $0.10, compared with $0.20, respectively, for the three months
ended September 30, 2005. In dollars, the Company's net income decreased by
$425,000, or 51.3%, for the three months ended September 30, 2006, compared to
the same quarter in 2005. As stated previously, in the 2006 quarter an
additional $550,000 was charged to the loan loss provision.
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 2.7%, or $87,000, for the three months ended September
30, 2006 compared to the same period in 2005 due to continued downward pressure
on the net interest margin during the current three month period caused by a
continued flattening of the yield curve.
Total interest income for the three months ended September 30, 2006 was
$6,552,000 compared to $5,658,000 for the same period in 2005, an increase of
$894,000, or 15.8%. The increase can be attributed to the overall growth of the
loan portfolio.
Total interest expense for the three months ended September 30, 2006 when
compared to the same three-month period ended September 30, 2005, increased by
40.8%, or $981,000. 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 2006 as compared to 2005.
Provision for Loan Losses
The provision for loan losses was $652,000 for the three months ended September
30, 2006 compared to $68,000 for the same period in 2005. The increase in loan
loss provision for the three month period ended September 30, 2006 is due to the
aforementioned credit issues with a larger commercial customer.
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, 2006 was $699,000
compared to $574,000 for the same three-month period ended September 30, 2005,
an increase of approximately 21.8%, or $125,000. During the three-months ended
September 30, 2006, the increase in noninterest income was driven by increase in
the gain on sale of other real estate owned properties approximately $113,000.
21
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
Noninterest Expense
Noninterest expense for the three months ended September 30, 2006 increased
$109,000, or 4.1%, over the three months ended September 30, 2005. Salaries and
employee benefits expense increased $100,000 or 7.5% mainly due to annual merit
increases and higher costs related to the Company's defined benefit plan and
medical insurance benefits.
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, 2006, totaled $32,408,000 compared to $32,480,000 at December 31,
2005, a 0.2% decrease. Total shareholders' equity in relation to total assets
was 7.6% at September 30, 2006 and 7.9% at December 31, 2005. 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 multi-bank holding company. The affiliate banks are subject to
regulations of the Federal Deposit Insurance Corporation (FDIC) and the State of
Ohio, Division of Financial Institutions. The 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%
22
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES (CONTINUED)
The following table illustrates the Company's well-capitalized classification at
September 30, 2006
SEPTEMBER 30, 2006
----------------------
(Unaudited)
(Dollars in thousands)
Tier 1 capital $ 38,182
Total risk-based capital $ 41,282
Risk-weighted assets $263,644
Average total assets $416,225
Tier 1 capital to average assets 9.17%
Tier 1 risk-based capital ratio 14.48%
Total risk-based capital ratio 15.66%
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.
23
UNITED BANCORP, INC.
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, 2005.
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, 2005 in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended September 30, 2005 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
24
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, 2005, filed on March 30, 2006.
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
7/1/2006 to 0 0 $1,190,025
7/31/2006
Month #2
8/1/2006 to 0 0 $1,190,025
8/31/2006
Month #3
9/1/2006 to 0 0 $1,190,025
9/30/2006
United Bancorp maintains a stock repurchase program publicly announced by a
press release issued on November 16, 2005, 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
15, 2007.
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.
On August 30, 2006, the Company allocated a total of 2,017 common shares to
participant accounts for the aggregate purchase price of $22,005. 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.
25
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.
26
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, 2006 By: /s/ James W. Everson
------------------------------------
James W. Everson
Chairman, President &
Chief Executive Officer
Date: November 14, 2006 By: /s/ Randall M. Greenwood
------------------------------------
Randall M. Greenwood
Senior Vice President, Chief
Financial Officer and Treasurer
27
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.