-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PBR9SxdHONfyZRqu39iY460VmQGP1AP0o1ze9wyxCbIvwaLbtH3u8Y9oUJkC+7wj NDBXJo4+74Yt+KQ0tEou9Q== 0000950124-07-001890.txt : 20070330 0000950124-07-001890.hdr.sgml : 20070330 20070330150650 ACCESSION NUMBER: 0000950124-07-001890 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070330 DATE AS OF CHANGE: 20070330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED BANCORP INC /OH/ CENTRAL INDEX KEY: 0000731653 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 341405357 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16540 FILM NUMBER: 07732199 BUSINESS ADDRESS: STREET 1: 201 SOUTH FOURTH STREET STREET 2: P O BOX 10 CITY: MARTINS FERRY STATE: OH ZIP: 43935 BUSINESS PHONE: 7406330445 MAIL ADDRESS: STREET 1: 201 SOUTH FOURTH STREET STREET 2: P O BOX 10 CITY: MARTINS FERRY STATE: OH ZIP: 43935 10-K 1 k13508e10vk.txt ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 OR [ ] 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 (State or other jurisdiction 34-1405357 of incorporation or organization) (IRS) Employer Identification No.)
201 SOUTH FOURTH STREET, MARTINS FERRY, OHIO 43935 (Address of principal executive offices) (ZIP Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (740) 633-0445 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE N/A (Title of class) (Name of each exchange on which registered) Common Stock, Par Value $1.00 a share NASDAQ Capital Market
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE INDICATE BY CHECK MARK IF THE REGISTRANT IS A WELL-KNOWN SEASONED ISSUER, AS DEFINED IN RULE 405 OF THE SECURITIES ACT. YES [ ] NO [X]. INDICATED BY CHECK MARK IF THE REGISTRANT IS NOT REQUIRED TO FILE REPORTS PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE EXCHANGE ACT. YES [ ] NO [X]. 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 IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF 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 RULE 12b-2 OF THE EXCHANGE ACT). YES [ ] NO [X] AS OF JUNE 30, 2006, THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT WAS $43,884,823 BASED ON THE CLOSING SALE PRICE AS REPORTED ON THE NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED QUOTATION SYSTEM. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE REGISTRANT HAD 5,047,850 COMMON SHARES OUTSTANDING AS OF MARCH 6, 2007. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE PROXY STATEMENT FOR THE ANNUAL SHAREHOLDERS MEETING TO BE HELD APRIL 18, 2007 ARE INCORPORATED BY REFERENCE INTO PART III. PORTIONS OF THE ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 2006 ARE INCORPORATED BY REFERENCE INTO PARTS I AND II. PART I ITEM 1 BUSINESS BUSINESS United Bancorp, Inc. (Company) is a financial holding company headquartered in Martins Ferry, Ohio. The Company has two wholly owned subsidiary banks, The Citizens Savings Bank, Martins Ferry, Ohio (CITIZENS) and The Community Bank, Lancaster, Ohio (COMMUNITY), collectively "Banks". The Banks are located in northeastern, eastern, southeastern and south central Ohio and are engaged in the business of commercial and retail banking in Belmont, Harrison, Tuscarawas, Carroll, Athens, Hocking, and Fairfield counties and the surrounding localities. The Banks provide a broad range of banking and financial services, which include accepting demand, savings and time deposits and granting commercial, real estate and consumer loans. CITIZENS conducts its business through its main office in Martins Ferry, Ohio and nine branches located in Bridgeport, Colerain, Dellroy, Dover, Jewett, New Philadelphia, St. Clairsville, Sherrodsville, and Strasburg, Ohio. COMMUNITY conducts its business through its seven offices in Amesville, Glouster, Lancaster, and Nelsonsville, Ohio. COMMUNITY offers full brokerage service through UVEST(R) member NASD/SIPC. The markets in which the Banks operate continue to be highly competitive. CITIZENS competes for loans and deposits with other retail commercial banks, savings and loan associations, finance companies, credit unions and other types of financial institutions within the Mid-Ohio valley geographic area along the eastern border of Ohio, extending into the northern panhandle of West Virginia and the Tuscarawas and Carroll County geographic areas of northeastern Ohio. COMMUNITY also encounters similar competition for loans and deposits throughout the Athens, Hocking, and Fairfield County geographic areas of central and southeastern Ohio. The Company is regulated under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the Federal Reserve Board). The BHC Act requires the prior approval of the Federal Reserve Board for a bank holding company to acquire or hold more than a 5% voting interest in any bank. The BHC Act allows interstate bank acquisitions anywhere in the country and interstate branching by acquisition and consolidation in those states that did not opt out by January 1997. Other than as described more thoroughly below with respect to activities that are "financial in nature," the Company is generally prohibited by the Act from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of managing or controlling banks or furnishing services to its subsidiaries. In 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was enacted into law. The GLB Act made sweeping changes with respect to the permissible financial services, which various types of financial institutions may now provide. The Glass-Steagall Act, which had generally prevented banks from affiliation with securities and insurance firms, was repealed. Pursuant to the GLB Act, bank holding companies may elect to become a "financial holding company," provided that all of the depository institution subsidiaries of the bank holding company are "well capitalized" and "well managed" under applicable regulatory standards. Effective 2006, the Company is no loger a financial holding company. Under the GLB Act, a financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Activities that are "financial in nature" include securities underwriting, dealing and market-making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Federal Reserve Board has determined to be closely related to banking. The Company's banking subsidiaries are also subject to limitations with respect to transactions with affiliates. A substantial portion of the United Bancorp's cash revenues is derived from dividends paid by its subsidiary banks. The subsidiary banks' ability to pay dividends is subject to various legal and regulatory constraints. The Company's banking subsidiaries are subject to primary supervision, regulation and examination by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation (FDIC). Federal regulators adopted risk-based capital guidelines and leverage standards for banks and holding companies. A discussion of the impact of risk-based capital guidelines and leverage standards is presented in Note L to the audited consolidated financial statements of United Bancorp, Inc., captioned "Regulatory Capital." The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides that a holding company's controlled insured depository institutions are liable for any loss incurred by the Federal Deposit Insurance Corporation in connection with the default of, or any FDIC-assisted transaction involving an affiliated insured bank or savings association. Noncompliance with laws and regulations by financial holding companies and banks can lead to monetary penalties and/or an increased level of supervision or a combination of these two items. Management is not aware of any current instances of material noncompliance with laws and regulations and does not anticipate any problems maintaining compliance on a prospective basis. Recent regulatory inspections and examinations of United Bancorp, Inc. and its subsidiary banks have not disclosed any material instances of noncompliance. The earnings and growth of United Bancorp are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government and its agencies, particularly the Federal Reserve Board. The Federal Reserve Board's policies influence the amount of bank loans and deposits and the interest rates charged and paid thereon, and thus have an effect on earnings. The nature of future monetary policies and the effect of such policies on the future business and earnings of United Bancorp and its subsidiary banks cannot be predicted. The Banks have no single customer or related group of customers whose banking activities, whether through deposits or lending, would have a material impact on the continued earnings capabilities if those activities were removed. EMPLOYEES The Company itself, as a holding company, has no compensated employees. CITIZENS has 82 full time employees, with 19 of these serving in a management capacity and 36 part time employees. COMMUNITY has 32 full time employees, with 7 serving in a management capacity and 18 part time employees. The Company considers employee relations to be good at all subsidiary locations. INDUSTRY SEGMENTS United Bancorp and its subsidiaries are engaged in one line of business, banking. Item 8 of this 10-K provides financial information for United Bancorp's business. United Bancorp's internet website is www.unitedbancorp.com. I DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL Refer to Management's Discussion and Analysis "Average Balances, Net Interest Income and Yields Earned and Rates Paid" set forth at page 23 of our 2006 Annual Report, which is incorporated by reference. II INVESTMENT PORTFOLIO A The following table sets forth the carrying amount of securities at December 31, 2006, 2005 and 2004:
December 31, ------------------------------ (In thousands) 2006 2005 2004 -------- -------- -------- AVAILABLE FOR SALE (AT MARKET) US Government agency obligations $ 79,864 $ 75,483 $ 74,192 Mortgage-backed securities 28,221 35,440 42,706 Collateralized mortgage obligations 765 2,230 4,783 State and municipal obligations 24,953 8,769 16,117 Equity securities 5 24 18 -------- -------- -------- $133,808 $121,946 $137,816 ======== ======== ======== HELD TO MATURITY (AT COST) State and municipal obligations $ 17,870 $ 20,262 $ 14,948 ======== ======== ========
B Contractual maturities of securities at year-end 2006 were as follows:
Average Amortized Estimated Tax Equivalent Available for Sale Cost Fair Value Yield - ------------------ --------- ---------- -------------- (Dollars in Thousands) US GOVERNMENT AGENCY OBLIGATIONS Under 1 Year $ 2,000 $ 1,979 5.75% 1-5 years 4,890 4,762 4.02% 5-10 years 20,517 20,180 4.95% Over 10 years 53,945 52,943 5.48% -------- -------- -------- Total 81,352 79,864 4.65% -------- -------- -------- MORTGAGE-BACKED SECURITIES 1-5 years 5,407 5,279 3.89% 5-10 years 2,784 2,705 4.02% Over 10 years 20,818 20,237 4.44% -------- -------- -------- Total 29,009 28,221 4.30% -------- -------- -------- COLLATERALIZED MORTGAGE OBLIGATIONS 1-5 years 218 214 4.10% 5-10 years -- -- 0.00% Over 10 years 565 551 4.12% -------- -------- -------- Total 783 765 4.00% -------- -------- -------- STATE AND MUNICIPAL OBLIGATIONS Under 1 Year 390 393 6.01% 1-5 years 1,413 1,446 5.91% 5-10 years 4,224 4,160 5.58% Over 10 years 18,884 18,954 5.95% -------- -------- -------- Total 24,911 24,953 5.99% -------- -------- -------- OTHER SECURITIES Equity securities 4 5 0.00% -------- -------- -------- TOTAL SECURITIES AVAILABLE FOR SALE $136,059 $133,808 5.80% ======== ======== ======== HELD TO MATURITY STATE AND MUNICIPAL OBLIGATIONS Under 1 Year $ 475 $ 479 5.97% 1-5 years 2,643 2,735 5.98% 5-10 years 4,961 5,067 5.50% Over 10 years 9,791 9,939 6.05% -------- -------- -------- TOTAL SECURITIES HELD TO MATURITY $ 17,870 $ 18,220 5.88% ======== ======== ========
C Excluding holdings of U.S. Agency obligations, there were no investments in securities of any one issuer exceeding 10% of the Company's consolidated shareholders' equity at December 31, 2006. III LOAN PORTFOLIO A TYPES OF LOANS The amounts of gross loans outstanding at December 31, 2006, 2005, 2004, 2003 and 2002 are shown in the following table according to types of loans:
DECEMBER 31, ---------------------------------------------------- (In thousands) 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Commercial loans $ 40,512 $ 32,675 $ 35,309 $ 28,049 $ 21,060 Commercial real estate loans 92,895 97,706 83,103 68,902 69,287 Residential real estate loans 56,167 57,746 55,062 52,237 52,535 Installment loans 41,943 43,884 41,973 49,421 45,006 -------- -------- -------- -------- -------- Total loans $231,517 $232,011 $215,447 $198,609 $187,888 ======== ======== ======== ======== ========
Construction loans were not significant at any date indicated above. B MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES The following is a schedule of commercial and commercial real estate loans at December 31, 2006 maturing within the various time frames indicated:
ONE YEAR ONE THROUGH AFTER (In thousands) OR LESS FIVE YEARS FIVE YEARS TOTAL -------- ----------- ---------- -------- Commercial loans $13,992 $18,200 $ 8,320 $ 40,512 Commercial real estate loans 58,633 29,858 4,404 92,895 ------- ------- ------- -------- Total $72,625 $48,058 $12,724 $133,407 ======= ======= ======= ========
The following is a schedule of fixed rate and variable rate commercial and commercial real estate loans at December 31, 2006 due to mature after one year:
(In thousands) FIXED RATE VARIABLE RATE TOTAL > ONE YEAR ---------- ------------- ---------------- Commercial loans $ 8,926 $13,009 $21,935 Commercial real estate loans 9,939 28,908 38,847 ------- ------- ------- Total $18,865 $41,917 $60,782 ======= ======= =======
Variable rate loans are those loans with floating or adjustable interest rates. C RISK ELEMENTS 1. NONACCRUAL, PAST DUE, RESTRUCTURED AND IMPAIRED LOANS The following schedule summarizes nonaccrual loans, accruing loans which are contractually 90 days or more past due, and impaired loans at December 31, 2006, 2005 and 2004:
DECEMBER 31, -------------------------------------- (In thousands) 2006 2005 2004 2003 2002 ------ ------ ------ ---- ---- Nonaccrual basis (1) $3,396 $1,144 $1,106 $101 $685 Accruing loans 90 days or greater past due 55 417 500 655 85 Impaired loans (2) (3) 3,122 875 -- -- -- Impaired loan with related allowance for unconfirmed losses $1,012 -- -- -- -- Impaired loan without related allowance for unconfirmed losses $2,110 $ 875 -- -- --
(1) There were no restructured loans at any of the dates indicated above. (2) Loans considered impaired under the provisions of SFAS No. 114 and interest recognized on a cash received basis were not material for 2002 through 2004 inclusive. Interest recognized on impaired loans in 2006 was $309,000 (3) Additional information incorporated by reference on pages 26 and 36 of the Notes to Consolidated Financial Statements set forth in our 2006 Annual Report, which is incorporated herein by reference The additional amount of interest income that would have been recorded on nonaccrual loans, had they been current, totaled approximately $218,000 for the year ended December 31, 2006. At that date, all impaired loans were commercial or commercial real estate loans. Interest income is not reported when full loan repayment is doubtful, typically when the loan is impaired or payments are past due over 90 days. Payments received on such loans are reported as principal reductions. 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 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. 2. POTENTIAL PROBLEM LOANS The Company had no potential problem loans as of December 31, 2006 which have not been disclosed in Table C 1., but where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans into one of the problem loan categories. 3. LOAN CONCENTRATIONS Refer to Page 56, Note J of Notes to Consolidated Financial Statements set forth in our 2006 Annual Report, which is incorporated herein by reference. IV SUMMARY OF LOAN LOSS EXPERIENCE For additional explanation of factors which influence management's judgment in determining amounts charged to expense, refer pages 13 of the "Management's Discussion and Analysis" and Notes to Consolidated Financial Statements set forth in our 2006 Annual Report, which is incorporated herein by reference. A ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES The following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios for the years ended December 31, 2006, 2005, 2004, 2003 and 2002:
(Dollars in thousands) 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- LOANS Loans outstanding $231,517 $232,011 $215,447 $198,608 $187,888 Average loans outstanding $234,436 $224,945 $208,658 $192,725 $184,131 ALLOWANCE FOR LOAN LOSSES Balance at beginning of year $ 2,904 $ 2,995 $ 2,843 $ 2,971 $ 2,879 Loan Charge-offs: Commercial 1,420 89 58 250 135 Commercial real estate -- -- -- 79 45 Residential real estate 350 331 16 28 84 Installment 377 342 645 459 507 -------- -------- -------- -------- -------- Total loan charge-offs 2,147 762 719 816 771 -------- -------- -------- -------- -------- Loan recoveries Commercial 22 7 4 3 17 Commercial real estate -- -- -- -- -- Residential real estate 34 50 7 3 1 Installment 148 202 242 142 215 -------- -------- -------- -------- -------- Total loan recoveries 204 259 253 148 233 -------- -------- -------- -------- -------- Net loan charge-offs 1,943 503 466 668 538 Provision for loan losses 1,384 412 618 540 630 -------- -------- -------- -------- -------- Balance at end of year $ 2,345 $ 2,904 $ 2,995 $ 2,843 $ 2,971 ======== ======== ======== ======== ======== Ratio of net charge-offs to average loans 0.83% 0.22% 0.22% 0.35% 0.29% 0.29% -------- -------- -------- -------- -------- --------
B ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The following table allocates the allowance for possible loan losses at December 31, 2006, 2005, 2004, 2003 and 2002. Management adjusts the allowance periodically to account for changes in national trends and economic conditions in the Banks' service areas. The allowance has been allocated according to the amount deemed to be reasonably necessary to provide for the probability of losses being incurred within the following categories of loans at the dates indicated:
(Dollars in thousands) 2006 2005 2004 2003 2002 ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- Allowance % Loans to Allowance % Loans to Allowance % Loans to Allowance % Loans to Allowance % Loans to Loan type Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans - --------- --------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- ----------- Commercial $ 636 17.50% $ 502 14.08% $ 530 16.39% $ 452 14.13% $ 361 11.21% Commercial Real Estate 777 40.12% 1,092 42.11% 1,136 38.57% 1,005 34.69% 965 36.88% Residential Real Estate 138 24.26% 310 24.89% 313 25.56% 387 26.30% 403 27.96% Installment 442 18.12% 739 18.92% 532 19.48% 982 24.88% 879 23.95% Unallocated 352 N/A 261 N/A 484 N/A 17 N/A 363 N/A ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total $2,345 100.00% $2,904 100.00% $2,995 100.00% $2,843 100.00% $2,971 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
V DEPOSITS A SCHEDULE OF AVERAGE DEPOSIT AMOUNTS AND RATES Refer to Management's Discussion and Analysis and Results of Operations "Average Balances, Net Interest Income and Yields Earned and Rates Paid" set forth in our 2006 Annual Report and incorporated herein by reference. B MATURITY ANALYSIS OF TIME DEPOSITS GREATER THAN $100,000. The time to remaining maturity for time deposits in excess of $100,000 are:
(Dollars in thousands) 2006 ------- Less than 3 months $ 6,226 Over 3 through 6 months 5,422 Over 6 through 12 months 11,865 Over 12 months 22,705 ------- Totals $46,218 =======
VI RETURN ON EQUITY AND ASSETS Our dividend payout ratio and equity to assets ratio:
DECEMBER 31, ---------------------- 2006 2005 2004 ------ ----- ----- Dividend Payout Ratio 106.67% 61.97% 55.71% Equity to Assets 7.73% 7.88% 8.26%
For other ratios refer to the inside front cover of our 2006 Annual Report to Shareholders, incorporated herein by reference. VII SHORT-TERM BORROWINGS Information concerning securities sold under agreements to repurchase is summarized as follows:
(Dollars In thousands) 2006 2005 2004 ------- ------- ------- Balance at December 31, $ 6,218 $ 7,142 $12,612 Weighted average interest rate at December 31 4.26% 2.49% 0.96% Average daily balance during the year $10,557 $10,129 $ 9,013 Average interest rate during the year 4.18% 2.58% 0.92% Maximum month-end balance during the year $22,659 $14,555 $12,632
Securities sold under agreements to repurchase are financing arrangements whereby the Company sells securities and agrees to repurchase the identical securities at the maturities of the agreements at specified prices. Information concerning the cash management line of credit from the Federal Home Loan Bank of Cincinnati, Ohio is summarized as follows:
(In thousands) 2006 2005 2004 ------- ------- ------- Balance at December 31, $33,175 $35,000 $32,500 Weighted average interest rate at December 31, 5.79% 3.62% 2.70% Average daily balance during the year $31,034 $27,217 $29,466 Average interest rate during the year 4.99% 3.44% 1.90% Maximum month-end balance during the year $39,510 $36,057 $36,895
No other individual component of borrowed funds comprised more than 30% of shareholders' equity and accordingly is not disclosed in detail. SUPPLEMENTAL ITEM - EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3) of Form 10-K, the following information on the executive officers of the Company is included as an additional item in Part I:
Executive Officers Positions held with Company; Name Age Business Experience - ---- --- ---------------------------- James W. Everson 68 Chairman, President and Chief Executive Officer Scott Everson 39 Senior Vice President and Chief Operating Officer Randall M. Greenwood 43 Senior Vice President and Chief Financial Officer, Treasurer James A. Lodes 61 Vice President - Lending Norman F. Assenza, Jr. 61 Vice President - Operations and Secretary Michael A. Lloyd 38 Vice President - Information Systems
Each individual has held the position noted during the past five years, except for the following: Scott A. Everson served as President and Chief Operating Officer from April 2002 to November 2004 and Senior Vice President, Operations and Retail Banking, of The Citizens Savings Bank from May 1999 to April 2002. Prior to that he served as Assistant Vice President/Branch Manager Bridgeport Office from 1997 to May 1999. In addition, he is currently President and Chief Executive Office and a Director of The Citizens Savings Bank. He has held this position since November 2004. Michael A. Lloyd served as Senior Vice President Management Information Systems from October 1999 to April 2002 of the Citizens Savings Bank and prior to that he served as Vice President Management Information Systems from April 1999 to October 1999. He served as Data Processing Manager from 1994 to April 1999 for The Citizens Savings Bank. Each of these Executive Officers are serving at-will in their current positions. The Officers have held the positions for the following time periods: James W. Everson, 24 years, Norman F. Assenza, Jr., 24 years, James A. Lodes, 11 years, and Randall M. Greenwood, 9 years. ITEM 1A. RISK FACTORS An investment in the Company's common stock is subject to risks inherent to the Company's business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, investors should carefully consider the risks and uncertainties described below together with all the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that Management is not aware of or focused on or that management currently deems immaterial may also impair the Company's business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, the Company's financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company's common stock could decline significantly, and investors would lose all or part of their investment. RISKS RELATED TO THE COMPANY'S BUSINESS INTEREST RATE RISK - The Company's earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest earning assets such as loans and securities and interest income paid on interest bearing liabilities such as deposits and borrowings. Interest rates are highly sensitive to many factors that are beyond the Company's control, including general economic and market conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and investment securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect the Company's ability to originate loans and obtain deposits and the fair values of the Company's financial assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate or decrease at a slower rate than the interest rates received on loans and investments, the Company's net interest income, and therefore earnings, could be adversely affected. Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the Company's results of operations, any substantial, unexpected, or prolonged change in market interest rates or in the term structure of interest rates could have a material adverse effect on the Company's financial condition and results of operations. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk in this report for further discussion related to the Company's management if interest rate risk. LENDING RISK - There are inherent risks associated with the Company's lending activities. These risks include, among other things, the impact of changes in interest rates and changes in economic conditions in the markets where the Company operates as well as those across the State of Ohio and the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Company is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Company. The Company maintains an Allowance for Loan Losses, which is a reserve established through a provision for loan losses charged to expense, that represents management's best estimate of probable loan losses that have been incurred within the existing portfolio of loans. The Allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the Allowance reflects management's continuing evaluation of loan loss experience, current loan portfolio quality, present economic, political, and regulatory conditions, and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the Allowance inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of the Company's control, may require an increase in the Allowance. In addition, bank regulatory agencies periodically review the Company's Allowance and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different from those of management. ECONOMIC RISK - The Company's success depends significantly on the general economic conditions of Southeastern and Central Ohio. Unlike larger regional or national banks that are more geographically diversified, the Company provides banking and financial services to customers primarily in Southeast and Central Ohio and Northeast West Virginia. The local economic conditions in these areas have a significant impact on the demand for the Company's products and services as well as the ability of the Company's customers to repay loans, the value of the collateral securing loans, and the stability of the Company's deposit funding sources. A significant decline in general economic conditions caused by inflation, recession, acts of terrorism, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on the Company's financial condition and results of operations. COMPETITIVE RISK - The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include regional and national banks within the market the Company operates. The Company also faces competition from many other types of financial institutions, including savings and loan institutions, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory, and technological changes and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, and insurance. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Company's competitors have fewer regulatory constraints, and may have lower cost structures. Additionally, many competitors may be able to achieve economies of scale, and as a result, may offer a broader range of products and services as well as better pricing for those products and services. Increased competition could adversely affect the Company's growth and profitability, which, in turn, could have a material adverse effect on the Company's financial condition and results of operations. REGULATORY RISK - The Company is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors' funds, federal deposit insurance funds, and the banking system as a whole, not shareholders. These regulations affect the Company's lending practices, capital structure, investment practices, dividend policy, and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks to offer competing financial products and services, among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material adverse effect on the Company's business, financial condition, and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. FAILURE OR CIRCUMVENTION OF CONTROLS AND PROCEDURES - Management regularly reviews and updates the Company's internal controls, disclosure controls, and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company's controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company's business, results of operations, and financial condition. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2 PROPERTIES The Company owns and operates its Main Office in Martins Ferry, Ohio and the following offices:
Location - -------- Bridgeport, Ohio Owned Colerain, Ohio Owned Jewett, Ohio Owned St. Clairsville, Ohio Leased Dover, Ohio Owned Dellroy, Ohio Owned New Philadelphia, Ohio Owned Strasburg, Ohio Owned Sherrodsville, Ohio Owned Glouster, Ohio Owned Glouster, Ohio Owned Amesville, Ohio Owned Nelsonville, Ohio Owned Lancaster, Ohio Owned Lancaster, Ohio Owned Lancaster, Ohio Owned
Management believes the properties described above to be in good operating condition for the purpose for which they are used. The properties are unencumbered by any mortgage or security interest and is, in management's opinion, adequately insured. ITEM 3 LEGAL PROCEEDINGS There are no material legal proceedings, other than ordinary routine litigation incidental to its business, to which the Company or its subsidiaries is a party or to which any of its property is subject. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to shareholders for a vote during the fourth quarter of 2006. PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Refer to Page 3, "Shareholder Information" of the 2006 Annual Report To Shareholders and refer to Page 42, Note A, Number 20, of the Notes to the Consolidated Financial Statements of the Company in the 2006 Annual Report To Shareholders for common stock trading ranges, cash dividends declared and information relating to dividend restrictions, which are incorporated herein by reference. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ISSUER PURCHASES OF EQUITY SECURITIES
(C) TOTAL NUMBER OF (D) SHARES (OR MAXIMUM NUMBER (OR (A) UNITS) PURCHASED APPROXIMATE DOLLAR TOTAL NUMBER (B) AS PART OF VALUE) OF SHARES (OR OF SHARES (OR AVERAGE PRICE PUBLICLY UNITS) THAT MAY YET UNITS) PAID PER SHARE ANNOUNCED PLANS BE PURCHASED UNDER PERIOD PURCHASED (OR UNIT) OR PROGRAMS THE PLANS OR PROGRAMS - ------ ------------- -------------- ---------------- --------------------- Month #l 10/1/2006 to 10/31/2006 Month #2 11/1/2006 to 11/30/2006 Month #3 12/1/2006 to 12/31/2006 5,688 $ 9.91 5,688 $1,943,626 Total 5,688 $11.95 5,688 $1,943,626
UNITED BANCORP PURCHASED THESE SHARES UNDER A STOCK PURCHASE PROGRAM PUBLICLY ANNOUNCED BY A PRESS RELEASE ISSUED ON NOVEMBER 21, 2006, UNDER WHICH ITS BOARD OF DIRECTORS AUTHORIZED MANAGEMENT TO CAUSE THE COMPANY TO PURCHASE UP TO $2 MILLION OF ITS COMMON SHARES OVER A TWO-YEAR PERIOD. SUCH AUTHORIZATION WILL EXPIRE ON NOVEMBER 21, 2008. UNITED BANCORP, INC. TOTAL RETURN PERFORMANCE (PERFORMANCE GRAPH)
PERIOD ENDING --------------------------------------------------------------- INDEX 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 - ----- -------- -------- -------- -------- -------- -------- United Bancorp, Inc. 100.00 109.64 162.31 151.77 141.55 133.63 NASDAQ Composite 100.00 68.76 103.67 113.16 115.57 127.58 SNL Bank Index 100.00 91.69 123.69 138.61 140.50 164.35 SNL $250M-$500M Bank Index 100.00 128.95 186.31 211.46 224.51 234.58 SNL Midwest Bank Index 100.00 96.47 123.48 139.34 134.26 155.19 Dow Jones 100.00 84.99 109.03 114.82 116.79 139.03
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA Refer to inside front cover, "Decade of Progress" of the 2006 Annual Report To Shareholders, which is incorporated herein by reference. ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Refer to Pages 12-26, "Management's Discussion and Analysis" of the 2006 Annual Report To Shareholders. CRITICAL ACCOUNTING POLICY The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry. The application of these principles requires management to make certain estimates, assumptions and judgements that affect the amounts reported in the financial statements and footnotes. These estimates, assumptions and judgements are based on information available as of the date of the financial statements, and as this information changes, the financial statements could reflect different estimates, assumptions, and judgements. The procedures for assessing the adequacy of the allowance for loan losses reflect our evaluations of credit risk after careful consideration of all information available to management. In developing this assessment, management must rely on estimates and exercise judgement regarding matters where the ultimate outcome is unknown such as economic factors, development affecting companies in specific industries and issues with respect to single borrowers. Depending on changes in circumstances, future assessments of credit risk may yield materially different results, which may require an increase or a decrease in the allowance for loan losses. The allowance is regularly reviewed by management to determine whether the amount is considered adequate to absorb probable losses. This evaluation includes specific loss estimates on certain individually reviewed loans, statistical losses, estimates for loan pools that are based on historical loss experience, and general loss estimates that are based on the size, quality and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower's ability to repay, and current economic and industry conditions. Also considered as part of that judgement is a review of each bank's trend in delinquencies and loan losses, and economic factors. The allowance for loan loss is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio. Management's evaluation of the adequacy of the allowance is an estimate based on management's current judgement about the credit quality of the loan portfolio. While the Company strives to reflect all known risk factors in its evaluation, judgement errors may occur. The following table sets forth the Company's contractual obligations at December 31, 2006:
PAYMENT DUE BY PERIOD ------------------------------------------------------- LESS THAN MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS - ----------------------- ------- --------- --------- --------- --------- Long term debt obligations $44,135 $39,799 $1,268 $1,160 $1,908 Operating lease obligations 130 26 52 52 -- Loan and standby letters of credit commitments 46,802 46,802 -- -- -- ------- ------- ------ ------ ------ Total $91,067 $86,627 $1,320 $1,212 $1,908 ======= ======= ====== ====== ======
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Refer to Page 19-21 "Asset/Liability Management and Sensitivity to Market Risks" of the 2006 Annual Report to Shareholders, which is incorporated herein by reference. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Refer to the 2006 Annual Report To Shareholders, which is incorporated herein by reference. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS Not applicable. ITEM 9A 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 as of December 31, 2006, pursuant to the requirements of Exchange Act Rule 13a-15. 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 December 31, 2006, 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 December 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9B OTHER INFORMATION None. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning executive officers of the Company is set forth in Part I, "Supplemental Item - Executive Officers of Registrant." Other information responding to this Item 10 is included in the Registrant's Proxy Statement for the 2007 Annual Meeting of Shareholders and is incorporated by reference under the captions "Proposal 1 - Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance". Information concerning the Audit Committee Financial Expert is included in the Registrant's Proxy Statement for the 2007 Annual Meeting of Shareholders under the caption "Committees of the Board - Audit Committee", and is incorporated herein by reference. The Company's Board of Directors has adopted a Code of Ethics that applies to its Principal Executive, Principal Financial, and Principal Accounting Officers. A copy of the Company's Code of Ethics is posted and can be viewed on the Company's internet web site at http://www.unitedbancorp.com. In the event the Company amends or waives any provision of its Code of Ethics which applies to its Principal Executive, Principal Financial, or Principal Accounting Officers, and which relates to any element of the code of ethics definition set forth in Item 406(b) of Regulation S-K, the Company shall post a description of the nature of such amendment or waiver on its internet web site. With respect to a waiver of any relevant provision of the code of ethics, the Company shall also post the name of the person to whom the waiver was granted and the date of the waiver grant. ITEM 11 EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the captions titled "Executive Compensation and Other Information" and "Compensation Committee Interlocks and Insider Participation in Compensation Decisions" of the Registrant's Proxy Statement for 2007 Annual Meeting of Shareholders. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCK HOLDER MATTERS The information contained in the Registrant's Proxy Statement for the 2007 Annual Meeting of Shareholders under the caption "Ownership of Voting Shares" is incorporated herein by reference. The following table is a disclosure of securities authorized for issuance under equity compensation plans:
EQUITY COMPENSATION PLAN INFORMATION ------------------------------------------------------------- Number of securities Number of remaining available securities to be for future issuance issued upon Weighted-average under equity exercise of exercise price of compensation plans outstanding outstanding (excluding securities options, warrants options, warrants reflected in column and rights and rights (a)) ----------------- ----------------- --------------------- Equity compensation plans approved by security holders 69,489 $10.23 0 Equity compensation plans not approved by security holders ------ ------ --- Total 69,489 $10.23 0 ====== ====== ===
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the sections in the Registrant's Proxy Statement for the 2007 Annual Meeting of Shareholders captioned "Compensation Committee Interlocks and Insider Participation in Compensation Decisions," "Certain Transactions" and "Proposal 1-Election of Directors." ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated by reference from the section under the caption "Principal Accounting Firm Fees" of the Registrant's Proxy Statement for the 2007 Annual Meeting of Shareholders. PART IV ITEM 15 EXHIBITS AND FINANCIAL STATEMENT/SCHEDULES FINANCIAL STATEMENTS (a) The following Consolidated Financial Statements and related Notes to Consolidated Financial Statements, together with the report of Independent Registered Public Accounting Firm dated March 23, 2007, appear on pages 29 through 60 of the United Bancorp, Inc. 2005 Annual Report and are incorporated herein by reference. Consolidated Statements of Financial Condition December 31, 2006 and 2005 Consolidated Statements of Earnings for the Years Ended December 31, 2006, 2005 and 2004 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2006, 2005 and 2004 Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004 Notes to Consolidated Financial Statements for the Years Ended December 31, 2006, 2005 and 2004 Report of Independent Registered Public Accounting Firm EXHIBITS
Exhibit Number Exhibit Description - ------- ------------------- 3.1 Amended Articles of Incorporation (1) 3.2 Amended Code of Regulations (2) 10.1 James W. Everson Change in Control Agreement (3) 10.2 Randall M. Greenwood Change in Control agreement (3) 10.3 Scott A. Everson Change in Control Agreement (3) 10.4 Norman F. Assenza Change in Control Agreement (3) 10.5 James A. Lodes Change in Control Agreement (3) 10.6 Michael A. Lloyd Change in Control Agreement (3) 10.7 United Bancorp, Inc. Stock Option Plan (4) 10.8 United Bancorp, Inc. and Subsidiaries Director Supplemental Life Insurance Plan, covering Messrs. Hoopingarner, McGehee, Riesbeck and Thomas. (5) 10.9 United Bancorp, Inc. and Subsidiaries Senior Executive Supplemental Life Insurance Plan, covering James W. Everson, Scott A. Everson, Randall M. Greenwood, Norman F. Assenza, Michael A. Lloyd and James A. Lodes. (5) 10.10 United Bancorp, Inc. and United Bancorp, Inc. Affiliate Banks Directors Deferred Compensation Plan. (5) 10.11 Amended and Restated Trust Agreement among United Bancorp, Inc. as Depository, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, and Administrative Trustees, dated as of November 17, 2005. (6) 10.12 Junior Subordinated Indenture between United Bancorp, Inc. and Wilmington Trust Company, as Trustee, dated as of November 17, 2005. (6) 10.13 Guaranty Agreement between United Bancorp, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee, dated as of November 17, 2005. (6) 13 2006 Annual Report 21 Subsidiaries of the Registrant (5) 23 Consent of Grant Thornton, LLP 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. (3) Incorporated by reference to the registrant's 10-K filed with the Securities and Exchange Commission on March 27, 2003. (4) Incorporated by reference to Exhibit A to the registrant's Definitive Proxy Statement filed with the Securities and Exchange Commission on March 11, 1996. (5) Incorporated by reference to the registrant's 10-K filed with the Securities and Exchange Commission on March 29, 2004. (6) Incorporated by reference to the registrant's 10K filed with the Securities and Exchanges Commission on March 30, 2006. UNITED BANCORP INC. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. (Registrant) United Bancorp, Inc. By: /s/ James W. Everson March 29, 2007 --------------------------------- James W. Everson, Chairman, President & CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ James W. Everson March 29, 2007 --------------------------------- James W. Everson, Chairman, President & CEO By: /s/ Randall M. Greenwood March 29, 2007 --------------------------------- Randall M. Greenwood, Senior Vice President & CFO By: /s/ Michael J. Arciello March 29, 2007 --------------------------------- Michael J. Arciello, Director By: /s/ Terry A. McGhee March 29, 2007 --------------------------------- Terry A. McGhee, Director By: /s/ John M. Hoopingarner March 29, 2007 --------------------------------- John M. Hoopingarner, Director By: /s/ Richard L. Riesbeck March 29, 2007 --------------------------------- Richard L. Riesbeck, Director By: /s/ L.E. Richardson, Jr. March 29, 2007 --------------------------------- L.E. Richardson, Jr. , Director By: /s/ Matthew C. Thomas March 29, 2007 --------------------------------- Matthew C. Thomas, Director
UNITED BANCORP INC. EXHIBIT INDEX
Exhibit Number Exhibit Description - ------- ------------------- 3.1 Amended Articles of Incorporation (1) 3.2 Amended Code of Regulations (2) 10.1 James W. Everson Change in Control Agreement (3) 10.2 Randall M. Greenwood Change in Control agreement (3) 10.3 Scott A. Everson Change in Control Agreement (3) 10.4 Norman F. Assenza Change in Control Agreement (3) 10.5 James A. Lodes Change in Control Agreement (3) 10.6 Michael A. Lloyd Change in Control Agreement (3) 10.7 United Bancorp, Inc. Stock Option Plan (4) 10.8 United Bancorp, Inc. and Subsidiaries Director Supplemental Life Insurance Plan, covering Messrs. Hoopingarner, McGehee, Riesbeck and Thomas. (5) 10.9 United Bancorp, Inc. and Subsidiaries Senior Executive Supplemental Life Insurance Plan, covering James W. Everson, Scott A. Everson, Randall M. Greenwood, Norman F. Assenza, Michael A. Lloyd and James A. Lodes. (5) 10.10 United Bancorp, Inc. and United Bancorp, Inc. Affiliate Banks Directors Deferred Compensation Plan. (5) 10.11 Amended and Restated Trust Agreement among United Bancorp, Inc. as Depository, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, and Administrative Trustees, dated as of November 17, 2005. (6) 10.12 Junior Subordinated Indenture between United Bancorp, Inc. and Wilmington Trust Company, as Trustee, dated as of November 17, 2005. (6) 10.13 Guaranty Agreement between United Bancorp, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee, dated as of November 17, 2005. (6) 13 2006 Annual Report 21 Subsidiaries of the Registrant (5) 23 Consent of Grant Thornton, LLP 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. (3) Incorporated by reference to the registrant's 10-K filed with the Securities and Exchange Commission on March 27, 2003. (4) Incorporated by reference to Exhibit A to the registrant's Definitive Proxy Statement filed with the Securities and Exchange Commission on March 11, 1996. (5) Incorporated by reference to the registrant's 10-K filed with the Securities and Exchange Commission on March 29, 2004. (6) Incorporated by reference to the registrant's 10K filed with the Securities and Exchanges Commission on March 30, 2006. EX-13 2 k13508exv13.txt 2006 ANNUAL REPORT Exhibit 13 A LETTER FROM THE PRESIDENT TO THE SHAREHOLDERS OF UNITED BANCORP, INC.... The year 2006 was a challenging year for the Directors and Management Teams of United Bancorp, Inc. (UBCP) and its affiliate banks, The Citizens Savings Bank (Citizens) and The Community Bank (Community). We are pleased to report we have met these challenges head-on and have implemented strategic actions that position our Company for a return to continued growth in earnings and market expansion. (PHOTO OF JAMES W. EVERSON) CHAIRMAN, PRESIDENT AND CHEIF EXECUTIVE OFFICER In our last year's Annual Report Shareholder Letter, we stated that we recognize the fact that earnings drives shareholder value, and that our Board of Directors and Management Team were committed to earnings improvement. With this commitment to results, on March 2, 2006, I was appointed by the UBCP Board to serve as President and CEO of Community. Addressing immediate credit quality and asset/liability concerns, your Company was forced to make tough decisions in 2006 that resulted in charges to earnings net of taxes totaling $1.0 million, or $0.22 per share. We are pleased with our progress over the past nine months as we continued work to improve the future profitability of our Company. The events of 2006 have required our Company's senior management team to rapidly reassess our corporate strengths and weaknesses. Our tough decisions are now showing positive results, as reflected in our Company's quarterly earnings increases for the past three quarters. Continued earnings improvement is anticipated through operational efficiencies to be gained by carrying out our announced action plan of consolidating the charter of Community into Citizens in the second quarter of 2007, while keeping our current branded names in the markets we serve. Community's Board has endorsed this plan of reorganization, which will enable us to take advantage of enhanced operating and cost efficiencies for the combined bank and UBCP as a whole. The consolidation will be transparent to Community customers and to the Community market, and will allow us to offer improved products and services throughout the organization. More importantly, we shall benefit by centralizing management under the direction of Citizens' management team. Our Citizens affiliate's performance has been perennially ranked in the upper quartile of United States' banks. We believe a sharing of their operational knowledge will provide a significant future benefit to our shareholders. ANNUAL REPORT 1 2006 UNITED BANCORP INC. Our consolidated balance sheet at year-end 2006 again showed growth with total assets at $421.7 million, up 2.4% and deposits at $330.0 million, up 7.5% with net loans maintaining at $229.2 million. Management continues its focus on our credit quality which we believe will improve with the completion of several foreclosure actions in process. Our company enjoys a diversification of market risk by serving four distinct geographic and economic regions. On a positive note, we are pleased to report a resurgence of aluminum, coal and steel within the past six months that should help both our eastern and southern region banks. UBCP shareholders once again received a 10% stock split paid in the form of a share dividend on December 20, 2006 and a quarterly cash dividend of 13 cents per share paid on their total holdings, which included the new share dividend. This combination of cash and stock dividends follows the Company's mission of providing consistent returns to its shareholders. Please refer to the inside cover of this report for our Dividend and Stock History and our Decade of Progress. The challenges of 2006 will continue into this current year as we move to combine the synergies of Community and Citizens. Our goal is to take the best that each bank offers into one larger and stronger bank. Our vision is to make this as transparent as possible to the markets and customers we serve. Knowing our Team Members, I am confident that we shall make this happen. /s/ James W. Everson - ------------------------------------- James W. Everson Chairman, President and Executive Officer ceo@unitedbancorp.com February 16, 2007 CASH DIVIDENDS (PERFORMANCE GRAPH) 2002 $1,647,670 2003 $1,717,838 2004 $1,878,788 2005 $2,114,723 2006 $2,415,741
This letter contains forward-looking statements that involve risk and uncertainties, including changes in general economic and financial market conditions and the Company's ability to execute its business plans. Although management believes the expectations reflected in such statements are reasonable, actual results may differ materially. 2 ANNUAL REPORT 2006 UNITED BANCORP INC. SHAREHOLDER INFORMATION United Bancorp, Inc.'s (the Company) common stock trades on The Nasdaq SmallCap Market tier of The Nasdaq Stock Market under the symbol UBCP, CUSIP #909911109. At year-end 2006, there were 5,131,874 shares issued, held among approximately 2,000 shareholders of record and in street name. The following table sets forth the quarterly high and low closing prices of the Company's common stock from January 1, 2006 to December 31, 2006 compared to the same periods in 2005 as reported by the NASDAQ. The price quotes have been adjusted for comparison purposes for the 10% stock dividend distributed on December 20, 2006 and December 20, 2005. The price quotations presented should not necessarily be relied on in determining the value of the shareholders' investment.
2006 2005 --------------------------------- --------------------------------- 31-MAR 30-JUN 30-SEP 31-DEC 31-MAR 30-JUN 30-SEP 31-DEC ------ ------ ------ ------ ------ ------ ------ ------ Market Price Range High ($) $11.36 10.79 10.24 11.36 12.69 11.38 10.80 11.49 Low ($) $ 9.57 9.44 9.57 9.36 11.47 10.11 9.95 9.10 Cash Dividends Quarter ($) $0.118 0.118 0.118 0.124 0.106 0.106 0.106 0.106 Cumulative ($) $0.118 0.236 0.354 0.478 0.106 0.212 0.318 0.434
INVESTOR RELATIONS: A copy of the Company's Annual Report on form 10-K as filed with the SEC, will be furnished free of charge upon written or E-mail request to: Randall M. Greenwood, CFO United Bancorp, Inc. 201 South 4th Street PO Box 10 Martins Ferry, OH 43935 or cfo@unitedbancorp.com DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN: Shareholders may elect to reinvest their dividends in additional shares of United Bancorp, Inc.'s common stock through the Company's Dividend Reinvestment Plan. Shareholders may also invest optional cash payments of up to $5,000 per month in our common stock at market price. To arrange automatic purchase of shares with quarterly dividend proceeds, please contact: American Stock Transfer and Trust Company Attn: Dividend Reinvestment 6201 15th Avenue, 3rd Floor Brooklyn, NY 11219 1-800-278-4353 ANNUAL MEETING: The Annual Meeting of Shareholders will be held at 2:00 p.m., April 18, 2007 at the Corporate Offices in Martins Ferry, Ohio. INTERNET: Please look us up at http//: www.unitedbancorp.com INDEPENDENT AUDITORS: Grant Thornton LLP 4000 Smith Road, Suite 500 Cincinnati, Ohio 45209 (513) 762-5000 CORPORATE OFFICES: The Citizens Savings Bank Building 201 South 4th Street Martins Ferry, Ohio 43935 (740) 633-0445 (740) 633-1448 (FAX) TRANSFER AGENT AND REGISTRAR: For transfers and general correspondence, please contact: American Stock Transfer and Trust Company 6201 15th Avenue, 3rd Floor Brooklyn, NY 11219 1-800-937-5449 STOCK TRADING: FTN Midwest Research 2525 West End Avenue Suite 330 Nashville, TN 37203 Michael O'Boyle 866-344-4880 Howe Barnes Investments, Inc. 222 South Riverside Plaza 7th Floor Chicago, Illinois 60606 Lou Coines 800-800-4693 Ryan Beck & Co. 2000 Oxford Drive, Suite 605 Bethel Park, PA 15102 Jason E. Baer 866-253-0500 Stifel, Nicolaus & Company Inc. 655 Metro Place South Dublin, Ohio 43017 Steven Jefferis 877-875-9352 ANNUAL REPORT 3 2006 UNITED BANCORP INC. DIRECTORS (PHOTO OF (PHOTO OF (PHOTO OF MICHAEL J. ARCIELLO(1, 2)) EILEEN M. COMPETTI(3)) HERMAN E. BORKOSKI(2)) (PHOTO OF (PHOTO OF (PHOTO OF JAMES W. EVERSON(1, 2, 3)) SCOTT A. EVERSON(2)) LEON F. FAVEDE, O.D.(2)) (PHOTO OF (PHOTO OF JOHN R. HERZIG(2)) JOHN M. HOOPINGARNER (1, 2)) 1 = UNITED BANCORP, INC. 2 = THE CITIZENS SAVINGS BANK 3 = THE COMMUNITY BANK 4 ANNUAL REPORT 2006 UNITED BANCORP INC. DIRECTORS (PHOTO OF (PHOTO OF (PHOTO OF SAMUEL J. JONES(3)) TERRY A. MCGHEE(1,3)) ANDREW F. PHILLIPS(3)) (PHOTO OF (PHOTO OF (PHOTO OF L.E. RICHARDSON, JR.(1,3)) ROBIN L. RHODES, M.D.(3)) RICHARD L. RIESBECK(1,2)) (PHOTO OF (PHOTO OF ERROL C. SAMBUCO(2)) MATTHEW C. THOMAS(1,2)) 1 = UNITED BANCORP, INC. 2 = THE CITIZENS SAVINGS BANK 3 = THE COMMUNITY BANK ANNUAL REPORT 5 2006 UNITED BANCORP INC. DIRECTORS AND OFFICERS DIRECTORS OF UNITED BANCORP, INC. Michael J. Arciello(2) Retired Vice President of Finance, Nickles Bakeries, Inc., Navarre, Ohio James W. Everson(1) Chairman, President & Chief Executive Officer, United Bancorp, Inc., Chairman, The Citizens Savings Bank, Martins Ferry, Ohio, Chairman, Interim President & Chief Executive Officer, The Community Bank, Lancaster, Ohio John M. Hoopingarner(1,3,4) General Manager, Muskingum Watershed Conservancy District, New Philadelphia, Ohio Terry A. McGhee(1,2,4) President & Chief Executive Officer, Westerman Inc., Bremen, Ohio L.E. Richardson, Jr.(3) Retired President, Southern Ohio Community Bancorporation, Inc., Glouster, Ohio Richard L. Riesbeck(1,2,4) President, Riesbeck Food Markets, Inc., St. Clairsville, Ohio Matthew C. Thomas(3) President, M.C. Thomas Insurance Agency, Inc, Bridgeport, Ohio OFFICERS OF UNITED BANCORP,INC. James W. Everson Chairman, President & Chief Executive Officer Scott A. Everson Senior Vice President & Chief Operating Officer Randall M. Greenwood Senior Vice President, Chief Financial Officer & Treasurer Norman F. Assenza, Jr Vice President - Compliance Michael A. Lloyd Vice President - Information Systems James A. Lodes Vice President - Lending DIRECTORS OF THE CITIZENS SAVINGS BANK, MARTINS FERRY, OHIO Michael J. Arciello(2) Retired Vice President of Finance, Nickles Bakeries, Inc., Navarre, Ohio Herman E. Borkoski(2) President, Borkoski Funeral Homes, Inc., Tiltonsville, Ohio James W. Everson(1) Chairman, President & Chief Executive Officer, United Bancorp, Inc., Chairman, The Citizens Savings Bank, Martins Ferry, Ohio, Chairman, Interim President & Chief Executive Officer, The Community Bank, Lancaster, Ohio Scott A. Everson(1) Senior Vice President & Chief Operating Office r, United Bancorp, Inc.& President & Chief Executive Officer, The Citizens Savings Bank, Martins Ferry, Ohio Leon F. Favede, O.D Optometrist, Bridgeport, Ohio John R. Herzig President, Toland-Herzig Funeral Homes, Strasburg, Ohio John M. Hoopingarner(1) General Manager, Muskingum Watershed Conservancy District, New Philadelphia, Ohio Richard L. Riesbeck(1,2) President, Riesbeck Food Markets, Inc., St.Clairsville, Ohio Errol C. Sambuco(2) Consultant, Martins Ferry, Ohio Matthew C. Thomas(1) President, M.C. Thomas Insurance Agency, Inc, Bridgeport, Ohio DIRECTORS OF THE COMMUNITY BANK, LANCASTER, OHIO Eileen M. Competti President, Diamond Power, Lancaster, Ohio James W. Everson(1) Chairman, President & Chief Executive Officer, United Bancorp, Inc., Chairman, The Citizens Savings Bank, Martins Ferry, Ohio, Chairman, Interim President & Chief Executive Officer, The Community Bank, Lancaster, Ohio Samuel J. Jones(1,2) Business Owner, Glouster, Ohio Terry A. McGhee(1,2) President & Chief Executive Officer, Westerman Inc., Bremen, Ohio Andrew F. Phillips President & General Manager, Miller Brands of S.E. Ohio, Glouster, Ohio Robin L. Rhodes, M.D(2) Physician, Pediatric Associates of Lancaster, Inc., Lancaster, Ohio L.E. Richardson, Jr.(1) Retired President, Southern Ohio Community Bancorporation, Inc., Glouster, Ohio Paul J. Gerig, Director Emeritus 1974-2004 The Community Bank Dean A. Kasler, Director Emeritus 1970-1999 The Community Bank Philip D. Kasler, Director Emeritus 1977-2004 The Community Bank Joseph D. Kittle, Director Emeritus 1985-2001 The Community Bank
1 = Executive Committee 2 = Audit Committee 3 = Compensation Committee 4 = Nominating and Governance Committee 6 ANNUAL REPORT 2006 UNITED BANCORP INC. THE CITIZENS SAVINGS BANK PROFILE A CENTURY OF SERVICE AT THE CITIZENS SAVINGS BANK In the year 1902, a group of hometown businessmen in Martins Ferry felt there was room for another bank in the community in addition to the two already established and proceeded to organize. On the 27th of January, 1902, a charter was granted to The German Savings Bank of Martins Ferry, Ohio with authorized capital of $50,000. Martins Ferry is nestled among the scenic foothills along the Upper Ohio Valley across the river from the greater metropolitan area of Wheeling, West Virginia, 60 miles southwest of Pittsburgh, Pennsylvania and 125 miles east of Columbus, Ohio. The area has a strong network of transportation including easy access to major interstate highway systems, nearby river and railway transportation and within 45 minutes of the Pittsburgh International Airport. Organization was completed by electing the original Board of Directors: Attorney Edward E. McCombs, John E. Reynolds, Henry H. Rothermund, William M. Lupton, Dr. Joseph W. Darrah, Chris A. Heil, Fred K. Dixon, Thomas J. Ball and Dr. R.H. Wilson. The first officers were Edward E. McCombs, President; John E. Reynolds, Vice President; William C. Bergundthal, Cashier; and William H. Wood, Assistant Cashier. A room in the old Henderson Building located at the alley on Hanover Street between Fourth and Fifth Streets, currently occupied by a local realtor, was rented. A vault and counters were installed and the new Bank opened for business on Saturday, April 26, 1902. This was the beginning of The Citizens Savings Bank. (PICTURE OF CITIZENS SAVINGS BANK PROFILE) Upon Mr. Bergundthal's death in 1918, Harold H. Riethmiller, who began his banking career at the bank in 1911, was rehired by the Bank as Cashier. He had previously worked for the Bank and had been working for 6 months at the Citizens-Peoples Trust Company in Wheeling. Mr. Riethmiller brought with him an assistant, David W. Thompson, who upon his death in 1966 was Vice President and Cashier. In 1936 the Bank suffered a loss with the sudden death of Edward E. McCombs, who had served as President and Attorney for the Bank during the 34 years since its beginning. John E. Reynolds was then elected President with Attorney David H. James as Vice President. Mr. Reynolds served as the bank's second President until his death in 1940, at which time Harold H. Riethmiller was elected President. Upon Harold H. Riethmiller's retirement in January of 1973, James W. Everson, who began his banking career as a student intern with the Bank in 1959, was elected as the Bank's fourth President and Chief Executive Officer. In May 1999, The Citizens Savings Bank and its affiliate, The Citizens-State Bank then of Strasburg, Ohio were merged into one Bank under the leadership of James W. Everson continuing as Chairman and Harold W. Price as the Bank's fifth President and Chief Executive Officer since its founding in 1902. Harold W. Price served as President and CEO for five months, suffering a fatal heart attack on September 12th, 1999, after which James W. Everson was reappointed Chairman, President and CEO. Continuing growth and increased business at The German Savings Bank brought the need for larger quarters, and in 1917, the Bank relocated into a new banking building on the corner of Fourth and Walnut streets where they were located until February 21, 1984 when they moved to their current banking center located one block south at the corner of Fourth ANNUAL REPORT 7 2006 UNITED BANCORP INC. and Hickory Street in Martins Ferry. The First World War brought the name 'German' into bad repute, making a change in name necessary. On May 1, 1918, the old German Savings Bank became The Citizens Savings Bank of Martins Ferry, Ohio. In 1957, a total remodeling of the first level was completed at the Fourth and Walnut location enlarging the banking lobby by taking the adjoining room formerly occupied by the Mear Drug Store. In 1963, the Bank opened a Consumer Loan Office at the Fourth and Walnut Street location by expanding into the space occupied by the former Packer Insurance Agency. Upon James W. Everson becoming President in January 1973, the Bank began an expanded growth program. The Bank's first branch office was opened on November 18, 1974. A banking center was opened in Colerain, Ohio offering full service banking to that area, including safe deposit boxes and a modern new home for the Colerain, Ohio Post Office. On June 12, 1978, the Bank opened its second full service branch at the Corner of Howard and DeKalb Streets in Bridgeport, Ohio. Recognizing the continued growth of the Bank, the Board of Directors authorized the purchase in July 1979 of an .8 acre site formerly occupied by the vacated Central School, one block south on the Corner of Fourth and Hickory Streets, for the purpose of future expansion. A Phase I building program was completed on May 12, 1980 with the opening of a limited-service four-station auto teller with a two-station lobby and large off-street parking facility. In October of 1982, approval was granted by the State Banking Department and the Federal Deposit Insurance Corporation to relocate the Bank's Main Office to the corner of Fourth and Hickory streets in Martins Ferry and ground was immediately broken for a new banking center. As a result of 5 years of strategic planning, The Citizens Savings Bank introduced a new era of banking to the Ohio Valley on February 21, 1984 with the opening of their new 21,500 square foot headquarters office located at the corner of Fourth and Hickory streets. This new banking center offered state-of-the-art security with high-tech scanning and alarm equipment, and the latest in electronic data processing programs for banking. The new Bank building was designed by the architectural firm of Jack H. Tribbie and Associates of Martins Ferry and was constructed by the Byrum Construction Company of Martins Ferry. The new building was of colonial design in keeping with the Bank's Colerain and Bridgeport offices, with the interior of the Bank tastefully decorated in the Williamsburg period. On July 3, 1983, the Bank's Board of Directors positioned itself for continued growth by forming United Bancorp, Inc. of Martins Ferry, Ohio, the Citizens Savings Bank holding company. At formation, the shareholders of The Citizens Savings Bank exchanged their stock on a one-for-four basis for shares in United Bancorp, Inc. On December 29, 1986, United Bancorp, Inc. became one of Ohio's then 21 multi-bank holding companies by acquiring the outstanding shares of stock of the $12.5 million asset based Citizens-State Bank of Strasburg, Ohio. Under the leadership of James W. Everson as Chairman and Charles E. Allensworth as President and CEO, The Citizens-State Bank then grew from its one office in Strasburg by opening a new banking center at 2909 N. Wooster Avenue in Dover, Ohio in February 1990; the purchase of it's offices in New Philadelphia and Sherrodsville in April 1992; and the purchase of it's Dellroy Office in June 1994. Harold W. Price was appointed President and CEO of The Citizens-State Bank of Strasburg in April 1993. The Citizens Savings Bank of Martins Ferry further expanded into St. Clairsville with an in store location at Riesbeck's Food Market in July l997 and purchased a full service banking center in Jewett, Ohio in January 1999. United Bancorp entered Northern Athens County in July 1998 when the $47.8 million asset based Community Bank of Glouster was purchased, expanding United Bancorp, Inc. to a three bank holding company. Today, The Community Bank is headquartered in Lancaster, Ohio with three locations in Lancaster in addition to its two offices in Glouster and offices in Amesville and Nelsonville, Ohio. As space in the new headquarters became occupied, property across from the new Main Office on the other corner of Fourth and Hickory Streets was acquired in 1993 to support the continued growth. It was renovated into a modern Operations Center now housing the Data and Item Processing Equipment for the affiliate banks of United Bancorp, Inc. and the offices for United Bancorp, Inc.'s Accounting Group. With the introduction of 24 x 7 x 365 Automated Call Center and Internet Banking in 2001, the Accounting and Operations Center was further expanded through the purchase and renovation of the adjoining property formerly known as the Fullerton Bakery Building. Today, the Accounting and Operations Center Building supports the back room operations for the seventeen banking offices of The Citizens Bank and The Community Bank of Lancaster. On April 21, 1999 the $74.1 million asset based Citizens-State Bank of Strasburg was merged into The Citizens Savings Bank. This expanded customer service under the charter of The Citizens Savings Bank to 10 locations 8 ANNUAL REPORT 2006 UNITED BANCORP INC. in Belmont, Carroll, Harrison and Tuscarawas counties. Harold W. Price, who had served as President and CEO of The Citizens-State Bank of Strasburg was appointed The Citizens Savings Bank's fifth President and CEO with James W. Everson continuing as Chairman, in addition to serving as Chairman of The Community Bank and Chairman, President and CEO of United Bancorp. Everson was reappointed Chairman, President and CEO of The Citizens Savings Bank five months later upon Harold W. Price's sudden death. In November 2004, the Citizens Bank Board of Directors completed its senior management reorganization plans for the beginning of its second century of service. James W. Everson, will continue as the Bank's Chairman. Furthermore, the Citizens Bank Board of Directors announced the appointment of Scott A. Everson as Director, President and Chief Executive Officer, which became effective on November 1, 2004. The growth and success of The Citizens Savings Bank and the United Bancorp, Inc. have been attributed to the association of many dedicated men and women. Having served on the Board of Directors are Edward E. McCombs, 1902-1936; John E. Reynolds, 1902-1940; Dr. J.W. Darrah, 1902-1937; J.A. Crossley, 1902-1903; William M. Lupton, 1902-1902; F.K. Dixon, 1902-1909; Dr. R.H. Wilson, 1902-1905; C.A. Heil, 1903-1909; David Coss, 1904-1938; L.L. Scheele, 1905-1917; A.T. Selby, 1906-1954; H.H. Rothermund, 1907-1912; Dr. J.G. Parr, 1912-1930; T.E. Pugh, 1920-1953; J.J. Weiskircher, 1925-1942; David H. James, 1925-1963; Dr. C.B. Messerly, 1931-1957; H.H. Riethmiller, 1936-1980; E.M. Nickles, 1938-1968; L.A. Darrah, 1939-1962; R.L. Heslop, 1941-1983; Joseph E. Weiskircher, 1943-1975; Edward M. Selby, 1953-1976; David W. Thompson, 1954-1966; Dr. Charles D. Messerly, 1957-1987; James M. Blackford, 1962-1968; John H. Morgan, 1967-1976; Emil F. Snyder, 1968-1975; James H. Cook, 1976-1986; Paul Ochsenbein, 1978-1991; David W. Totterdale, 1981-1995; Albert W. Lash, 1975-1996; Premo R. Funari,1976-1997; Donald A. Davison, 1963-1997; Harold W. Price, 1999-1999; John H. Clark, Jr., 1976-2001; Dwain R. Hicks, 1999-2002; and Michael A. Ley, 1999-2002. Today,The Citizens Savings Bank is Martins Ferry's only locally owned financial institution. The general objective of The Citizens Savings Bank as outlined in its Mission Statement which was adopted by its Board of Directors on June 8, 1982 and renewed annually is to remain an independent state-chartered commercial bank and expand its asset base and market share through acquisitions and new branch construction where financially feasible. Currently serving on the Bank's board of directors are Michael J. Arciello, Retired Vice President of Finance, Nickles Bakery, Inc; Herman E. Borkoski, President, Borkoski Funeral Homes, Inc; James W. Everson, Chairman, President of United Bancorp, Inc., Chairman and Chief Executive Officer of The Citizens Savings Bank and Chairman, The Community Bank of Lancaster; Scott A. Everson, Senior Vice President and Chief Operating Officer of United Bancorp Inc. and Director, President and Chief Executive Officer of The Citizens Savings Bank; Dr. Leon F. Favede, Optometrist; John R. Herzig, President, Toland-Herzig Funeral Homes; John M. Hoopingarner, General Manager and Secretary-Treasurer of the Muskingum Watershed Conservancy District; Richard L. Riesbeck, President of Riesbeck Food Markets, Inc.; Errol C. Sambuco,Consultant; and Matthew C. Thomas, President, M. C. Thomas Insurance Agency Inc. ANNUAL REPORT 9 2006 UNITED BANCORP INC. THE COMMUNITY BANK PROFILE COMMUNITY was established in August 1945 with corporate offices in downtown Glouster, Ohio, in Athens County. Its founder was L.E. Richardson, a local entrepreneur. At that time, Athens County was booming with the industries of gas, oil and coal mining. COMMUNITY was then known as The Glouster Community Bank. The Bank played a vital role in the region as it developed, earning a reputation for friendliness, quality customer service and responsiveness to the individual financial needs of its customers, as well as the community. More than 25 years later, Richardson turned over the day-to-day management of the bank to his son, L.E. Richardson, Jr., in 1971. With that foundation, COMMUNITY acquired the First National Bank of Amesville, Ohio in 1976. The Bank's prosperity continued, and, in 1978, a three-lane Auto Bank drive-up facility was constructed on the west side of Glouster. In 1984, the Bank created a holding company, Southern Ohio Community Bancorp, Inc., in anticipation of future growth and diversification of products and services. In 1987, the service area was expanded once again. A modular office in Nelsonville served the village and the surrounding communities. A few years later, on December 6, 1993 a ribbon cutting ceremony was held for a newly constructed Nelsonville office. The brick building, which replaced the mobile bank unit, features four drive-up lanes and a drive-up ATM. Night deposit and safe deposit box services were also introduced to the Nelsonville area. (PICTURE OF COMMUNITY BANK PROFILE) COMMUNITY has a long and close association with Hocking College. The two-year college combines academics with hands-on technical learning, and attracts students from all over the United States and the world. COMMUNITY is pleased to meet the financial needs of Hocking College's faculty, staff and students. To enhance customer service, COMMUNITY has two automatic teller machines on the 2,300-acre Nelsonville campus, one at the Student Center and the other in the School of Nursing building. In 1996, COMMUNITY completed an extensive renovation of its downtown Glouster office, including the addition of a 24-hour access ATM in the vestibule. In 1998, COMMUNITY became affiliated with United Bancorp, Inc. of Martins Ferry, Ohio, when United Bancorp purchased The Glouster Community Bank and its holding company, Southern Ohio Community Bancorp, Inc. That acquisition led to COMMUNITY establishing a Loan Production Office (LPO) in 1998 in Lancaster, Ohio. This LPO provided the opportunity for COMMUNITY to build its franchise along the U.S. Route 33 corridor from Athens County through Fairfield County. 10 ANNUAL REPORT 2006 UNITED BANCORP INC. Lancaster, the county seat of Fairfield County, is approximately 30 miles southeast of Columbus, Ohio and is considered a bedroom community to Columbus. According to the city's Economic Development Office, Fairfield County is the fourth fastest growing county in Ohio and is ranked among the top six counties for growth potential. COMMUNITY opened its first Fairfield County banking office in December 1999. The East Main Street Banking Office in Lancaster offers full service banking with extended evening and Saturday hours. The office features a three-lane drive-up, a drive-up ATM and night depository. In January 2000, COMMUNITY relocated its Main Office from Glouster to downtown Lancaster. This substantial investment significantly strengthened COMMUNITY'S presence in Fairfield County. Formerly a furniture store, the historic 1919 building was restored to as near the original appearance as possible. The building was further enhanced with a Verdin Company clock. The 435-pound timepiece is attached to the southeast corner of the building. The interior of the building was converted from a furniture store to a modern full service banking office. Of special note is the historical mural of Fairfield County landmarks, painted by local stencil artist Cheryl Fey, which graces the main stairway. The renovation added greatly to the city's business district, as the Main Office complements the downtown revitalization that also was completed in 2000. COMMUNITY'S Auto Bank, located across the street from the Main Office, also was opened in January 2000. The structure is unique to the market, because of its walk-in lobby. It also features a four-lane drive-thru, night depository and automatic teller machine. In July 2000, COMMUNITY opened its Community Room, also unique to the area. The Community Room has grown quickly into a convenient and frequently used location for meeting of area civic organizations. It is also a popular gallery for local artists to display their talents. From the rolling hills of Athens County to the bustling commerce of Fairfield County, COMMUNITY continues to play a vital role in the lives of its customers and the region it serves. The Bank not only has built upon its customer base through the years, but upon its reputation for friendliness, quality customer service and responsiveness to the individual financial needs of its customers and the communities it proudly serves. ANNUAL REPORT 11 2006 UNITED BANCORP INC. MANAGEMENT'S DISCUSSION AND ANALYSIS In the following pages, management presents an analysis of United Bancorp, Inc.'s financial condition and results of operations as of and for the year ended December 31, 2006 as compared to prior years. This discussion is designed to provide shareholders with a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the Consolidated Financial Statements and related footnotes and the selected financial data included elsewhere in this report. When used in this discussion or future filings by the Company with the Securities and Exchange Commission, or other public or shareholder communications, or in oral statements made with approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "believe," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit risks of lending activities and competitive and regulatory factors, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. 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, capital resources or operations except as discussed herein. The Company is not aware of any current recommendations by regulatory authorities that would have such effect if implemented. The Company does not undertake, and specifically disclaims, any obligation to publicly release any revisions that may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements. FINANCIAL CONDITION OVERVIEW After four straight years, of managing in a historically low interest rate environment the Federal Reserve Open Market Committee ("FOMC) raised the short-term borrowing rate from 2.25% at December 31, 2004 to 5.25% December 31,2006.As short-term interest rates continued to increase from 2004 to 2006, long-term rates were not impacted resulting in a flattening of the yield curve, eventually leading to an inverted yield curve in December 2005 and continuing through 2006. Given the inverted yield curve, the Company's net interest income in 2006 decreased 4.5% from 2005. As a result the net interest margin of the Company decreased from 3.59% for 2005 to 3.28% for 2006. The growth of the Company did help offset the impact of a decreased interest margin. For the year ended December 31, 2006, the Company's total assets increased $9.7 million, or 2.4% from December 31, 2005 totals. The growth of the total assets of the Company was funded by 7.5% increase in deposits which were primarily invested in the Company's investment securities portfolio. EARNING ASSETS - LOANS Gross loans totaled $231.5 million at year-end 2006, representing a 0.2% decrease from $232.0 million at year-end 2005. However average loans totaled $234.4 million for 2006, representing a 4.2% increase compared to average loans of $224.9 million for 2005. TOTAL ASSETS (IN THOUSANDS) (PERFORMANCE GRAPH) 2002 $361,711 2003 $385,523 2004 $397,522 2005 $411,933 2006 $421,653
During 2006, Citizens' loan production yielded a net increase of $4.2 million while Community's loans decreased $4.7 million. Installment loans decreased $1.9 million, or 4.4%, real estate loans decreased $1.6 million, or 2.7%, and commercial real estate loans decreased $4.8 million, or 4.9%, from December 31, 2005. Commercial loans increased $7.8 million, or 24.0%, from December 31, 2005. 12 ANNUAL REPORT 2006 UNITED BANCORP INC. The Company's installment lending portfolio represented 18.1% of the total portfolio at year-end 2006, compared to 18.9% at year-end 2005. The targeted installment lending areas encompass the geographic areas serviced by the Banks, which are diverse, thereby reducing the risk to changes in economic conditions. Competition for installment loans principally comes from the captive finance companies offering low to zero percent financing for extended terms. The commercial and commercial real estate portfolio represented approximately 57.6% of the total loan portfolio at December 31, 2006 compared to 56.2% for December 31, 2005. The Company's commercial loan portfolio increased by $7.8 million, or 24.0%. The commercial real estate loan portfolio decreased in 2006 by $4.8 million or 4.9%. To protect the Company's net interest margin in a rising interest rate environment, the focus of loan pricing in 2006 was in the one and three year adjustable rate pricing and to mitigate its exposure to the eventual decline in interest rates certain interest rate floors and wider repricing indices have been established and followed for the last few years. This strategy may have caused our price sensitive customers to seek alternative financing arrangements. Residential real estate loans are comprised of 1, 3 and 5 year adjustable rate mortgages secured by 1-4 family units. The Company also offers fixed rate real estate loans through our Secondary Market Real Estate Mortgage Program. The fixed rate mortgages are serviced and originated by Citizens but are sold immediately in the secondary market. As a result, our customers enjoy the convenience of working with a local bank and are able to obtain long-term fixed-rate financing for their home. As mentioned, once these loans are originated they are immediately sold in what is referred to as the secondary market. Since the loans are sold without recourse, the Company does not assume any interest rate risk in this portfolio and does not have any loans held for sale. This arrangement is quite common in banks and without such an option our customers may look elsewhere for their home financing needs. As the overall interest rate environment increased in 2006 from their near historical low levels, consumer preferences are beginning to change from fixed-rate loan products to adjustable rate products. As a result, the Company's Secondary Market Program in 2006 did not experience any growth when compared to 2005. Although the interest rate environment is still favorable to the fixed-rate mortgage loan product, it did not result in a high volume of customers refinancing. With interest rates low for several years, most customers may have already taken advantage of the refinance options available to them. The Company recognized a gain on the sale of secondary market loans of $17,000 in 2006 and a gain of $21,000 in 2005. LOANS-NET (IN THOUSANDS) (PERFORMANCE GRAPH) 2002 $184,917 2003 $195,765 2004 $212,451 2005 $229,107 2006 $229,172
Community's loan portfolio decreased $4.7 million, or 6.3%. The decrease this past year is a result of a management's reorganization plan that began in March with the appointment of a new President and Chief Executive Officer. In addition, Community experienced a higher level of loan losses in 2006 causing the decline in the loan portfolio from 2005. Citizens generated an increase in loans for 2006. Total loans increased $4.2 million, or 2.7% from December 31, 2005. The increase primarily came in the commercial portfolio of $6.8 million. However, this increase was offset by decreases in the commercial real estate portfolio of $5.4 million, real estate portfolio of $1.6 million and in the installment portfolio of $1.9 million for 2006. The allowance for loan losses represents the amount which management and the Boards of Directors estimates is adequate to provide for probable and incurred losses in the loan portfolio. Accounting for the allowance and the related provision for loan losses is reviewed by management as a critical accounting policy. The allowance balance and the annual provision charged to expense are reviewed by management and the Boards of Directors on a monthly basis. The allowance calculation is determined by utilizing a risk grading model that considers borrowers' past due experience, coverage ratio to industry averages, economic conditions and various other circumstances that are subject to change over time. In general, the loan loss policy for installment loans requires a charge-off if the loan reaches 120- ANNUAL REPORT 13 2006 UNITED BANCORP INC. TOTAL AVERAGE EARNING ASSETS (IN THOUSANDS) (PERFORMANCE GRAPH) 2002 $319,789 2003 $348,009 2004 $389,832 2005 $403,174 2006 $417,160
day delinquent status or if notice of bankruptcy is received. The Company follows lending policies, with established criteria for determining the repayment capacity of borrowers, requirements for down payments and current market appraisals or other valuations of collateral when loans are originated. Installment lending also utilizes credit scoring to help in the determination of credit quality and pricing. The Company generally recognizes interest income on the accrual basis, except for certain loans which are placed on non-accrual status, when in the opinion of management, doubt exists as to collection on the loan. The Company's policy is to generally not allow loans greater than 90 days past due to accrue interest unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, interest income may be recognized as cash payment is received. Management believes the current balance of the allowance for loan losses is sufficient to cover probable but unconfirmed losses. Net charge-offs to average loans for the year-ended 2006 was 0.83% and 0.22% for 2005. Refer to Provision for Loan Losses section for further discussion on the Company's credit quality. EARNING ASSETS - SECURITIES AND FEDERAL FUNDS SOLD The securities portfolio is comprised of U.S. Government and agency obligations, tax-exempt obligations of states and political subdivisions, mortgage-backed securities and certain other investments. The Company does not hold any collateralized mortgage-backed securities, other than those issued by U.S. Government agencies. The Company does not hold any derivative securities. The quality rating of most obligations of states 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 known levels of credit risk. Securities available for sale at year-end 2006 increased $11.9 million, or 9.7%, from 2005, while securities held to maturity decreased $2.4 million, or 11.8%. In our planning process, management's forecast for 2006 was for a steady to slightly increasing interest rate environment with a positively sloped yield curve. In the first half of 2006, interest rates actually decreased to a level that caused a high volume of investment securities to be called. Management reinvested the funds in the Company's investment securities over the course of 2006. The increase in the available for sale portfolio is due to a focus in 2006 to increase the Company's state and municipal obligations portfolio due to the favorable tax-advantaged interest rate spread over other similar duration investment options. The focus of the state and municipal obligations was to purchase securities with extended call protection to protect the net interest margin of the Company if the overall interest rate environment would decrease in 2007 or future years. 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 deposits, excluding certificates of deposit greater than $100,000. During 2006, core deposits increased $16.0 million, or 6.0%. Citizens and Community experienced similar results in their core deposit balances for 2006. Citizens generated an in increase in core deposits of $14.0 million, and Community generated an increase in core deposits of $2.0 million for 2006. The key to the increase in core deposits at both banks was the introduction and promotion of money market accounts that offers competitive interest rates. Citizens promoted their existing money market account in 2006 with a higher promotional interest rate during the first six months after the account is opened. Community introduced a money market account named "Generation Gold". While this account offers a competitive interest rate, it also has other incentives such as travel discounts and merchant discounts both nationwide and with local merchants. Management believes the unique feature of this account is the participation of local merchants who offer discounts for their services to Generation Gold account holders. Over the past several years, Community has developed several 14 ANNUAL REPORT 2006 UNITED BANCORP INC. large depository customers. As of December 31, 2006, the eight largest depository customers accounted for approximately 24.1% of Community's certificate of deposits and approximately 58.8% of total certificates of deposits greater than $100,000. These customers also represent 11.9% of demand deposits at December 31, 2006. The total concentration of retail funding is approximately 20.4% of Community's total deposits at December 31, 2006. This concentration has posed additional liquidity and earnings risk for Community. The earnings risk 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. Citizens' management also has an active Asset/Liability Committee that monitors, among other items monthly liquidity needs on a 90 day time horizon. On a consolidated level, this concentration of funding at Community represents approximately 5.4% of total retail deposits at December 31, 2006. The Company maintains strong deposit relationships with public agencies, including local school districts, city and township municipalities, public works facilities and others, which may tend to be more seasonal in nature resulting from the receipt and disbursement of state and federal grants. These entities have maintained relatively stable balances with the Company due to staggered funding and disbursement timeframes. Certificates of deposit greater than $100,000 are not considered part of core deposits and, as such, are used as a tool to balance funding needs. At year-end 2006, certificates of deposit greater than $100,000 increased $7.1 million or 18.1% over year-end 2005 totals. Certificates of deposits greater than $100,000 increased in 2006 by $6.4 million, or 34.9%, at Citizens while Community increased by approximately $742,000, or 3.5%. NET INCOME (IN THOUSANDS) (PERFORMANCE GRAPH) 2002 $3,220 2003 $3,639 2004 $3,233 2005 $3,293 2006 $2,068
RETURN ON AVERAGE ASSETS (PERFORMANCE GRAPH) 2002 0.94% 2003 0.97% 2004 0.83% 2005 0.82% 2006 0.50%
The attraction of and retention of core deposits continues to be a challenge to the Company and the overall banking industry. Alternative financial products are continuously being introduced by our competition whether through a traditional bank or brokerage services company. SOURCES OF FUNDS - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS Other interest-bearing liabilities include securities sold under agreements to repurchase, federal funds purchased, Treasury, Tax and Loan, notes payable and Federal Home Loan Bank advances. Securities sold under agreements to repurchase decreased by $924,000. The average balance in securities sold under agreements to repurchase increased $428,000, or 4.2%, from 2005 to 2006. Advances from the Federal Home Loan Bank (FHLB) decreased $3.2 million, or 6.8%, from 2005 to 2006, while federal funds purchased decreased $12.5 million for the same period. As previously discussed, management utilized a strategy whereby excess liquidity created by the increase in core deposits was used to reduce wholesale borrowings. OTHER ASSETS The Company owns approximately $8.9 million in Company and Bank Owned Life Insurance (BOLI) with the original investment occurring in 2002. Refer to Performance Overview, Noninterest Income section for further information. ANNUAL REPORT 15 2006 UNITED BANCORP INC. PERFORMANCE OVERVIEW 2006 TO 2005 NET EARNINGS The Company reported earnings of $2.1 million in 2006 compared with $3.3 million in 2005. This earnings performance equates to a 0.50% Return on Average Assets ("ROA") and 6.61% Return on Average Equity ("ROE") for 2006 compared to 0.82% and 10.01%, respectively, for 2005. Both basic and Diluted Earnings per share ("EPS") were $0.45 and $0.71, respectively, for 2006 and 2005. Per share amounts for all periods have been restated to reflect the 10% stock split in the form of a dividend distributed in December 2006 and 2005. 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 $593,000 in 2006. The net interest margin decreased to 3.28% from 3.59%. Overall, due to the flattening to inverted yield curve in 2006, the Company has experienced deposits costs increasing at a more rapid rate than earning assets. While the Company's earnings assets have on average increased 43 basis points from 2005 to 2006, the cost of deposits have increased 89 basis points over the same period. Average interest-earning assets increased $34.3 million, or 3.8%, in 2006, while the associated weighted-average yield on these interest-earning assets increased from 6.03% in 2005, to 6.46% for 2006. Average interest-bearing liabilities increased $18.3 million, or 5.4%, in 2006, while the associated weighted-average costs on these interest-bearing liabilities increased from 2.69% to 3.58%. Refer to the sections on Asset and Liability Management and Sensitivity to Market Risks and Average Balances, Net Interest Income and Yields Earned and Rates Paid elsewhere herein for further information. PROVISION FOR LOAN LOSSES The provision for loan losses is a charge to expense recorded to maintain the related balance sheet allowance for loan losses at an amount considered adequate to cover probable but unconfirmed losses in the portfolio. The total provision for loan losses was $1.4 million in 2006 compared to $412,000 in 2005, an increase of $972,000. As previously discussed, the loan portfolio decreased approximately $494,000, or 0.2%, during 2006. The increase in loan loss provision for 2006 is primarily due to increased charge-offs and credit issues with a single large commercial customer at the Company's Community affiliate. Net loans charged-off for 2006 were approximately $1.9 million compared to $503,000 for 2005. The large commercial credit charge-off originated at Community accounted for approximately $1.3 million of the Company's net loans charged off during 2006. For 2006 and 2005 net loan charge-offs as a percentage of average loans were 0.83% and 0.22%, respectively. The allowance for loan losses as a percentage of loans decreased to 1.01% at year-end 2006, from 1.25% at yearend 2005. Citizens and Community utilize a consistent reserve methodology with detail reserve allocations specific to the individual loan portfolios. The change in the level of the allowance for loan loss was a function of the increase in nonperforming, including impaired loans, offset positively by a reduction in the allowance computation related to economic concerns in Citizens' market area. Specifically, the Company's allowance levels have been heavily influenced historically by concerns with the economy in eastern Ohio. During 2006, this segment of the Company's market area showed a dramatic improvement in future employment levels through new plant openings and expansion of existing employers. At December 31, 2006, the allowance covered the Company's historic loss percentages by loan type, augmented by a Board approved risk coefficient of approximately RETURN ON AVERAGE EQUITY (PERFORMANCE GRAPH) 2002 10.34% 2003 11.40% 2004 9.91% 2005 10.01% 2006 6.61%
16 ANNUAL REPORT 2006 UNITED BANCORP INC. $300,000 applied to the respective loan types. NONINTEREST INCOME Noninterest income is made up of bank-related fees and service charges, as well as other income-producing services. These include secondary market loan servicing fees, ATM/interchange income, internet bank fees, early redemption penalties for certificates of deposit, safe deposit box rental income, net gain or loss on sales of securities available for sale and loans, leased rental property, cash management services and other miscellaneous items. In addition, the Company has invested in Company and Bank Owned Life Insurance. The earnings from these investments are reflected in the Company's noninterest income. Total noninterest income for 2006 was $2.3 million, a decrease of $45,000, or 1.9% from 2005 totals. The increase in noninterest income in 2006 is primarily attributable to increases in service charge income, mortgage servicing revenue and increased income on Company and Bank Owned Life Insurance. These increases were offset by a reduction in gains on the sale of loans and investment securities during 2006. During 2006, the Company realized losses from the sale of securities and loans totaling $332,000 compared to $31,000 in 2005. Approximately $320,000 of the realized security losses in 2006 related to a repositioning of the Community security portfolio in June of 2006. Management's sale strategy in June 2006 took into consideration the average life of the bonds sold of approximately 4 years compared to the payback period of just over 2 years on reinvesting those funds in current market interest rates. Service charges on deposit accounts increased $158,000 or 11.8% from 2005 to 2006. The majority of the increase was fees related to overdrafts on checking accounts. Management introduced several new products and revenue enhancement strategies over the past several years and the result has been increased service charge income. TOTAL ALLOWANCE FOR LOAN LOSSES TO TOTAL LOANS (PERFORMANCE GRAPH) 2002 1.58% 2003 1.43% 2004 1.39% 2005 1.25% 2006 1.01%
DILUTED EARNINGS PER SHARE (PERFORMANCE GRAPH) 2002 $0.67 2003 $0.76 2004 $0.69 2005 $0.71 2006 $0.45
Other noninterest income increased $98,000 from 2005 to 2006, and is primarily due to gains on sale of other real estate owned of approximately $48,000 and increased fees from sales of life, accident and health insurance of approximately $24,000. This increase in other noninterest income was offset by a decrease of approximately $51,000 in fees related to the Company's secondary market mortgage program. NONINTEREST EXPENSE Noninterest expense for 2006 increased $283,000 or 2.6% over 2005. Salaries and employee benefits increased $236,000, or 4.3%, from 2005 to 2006. The increase is mainly due to normal merit increases year over year. Occupancy and equipment expense decreased $6,000, or 0.5%. Occupancy expense decreased due to a decrease of approximately $29,000 in building repairs and maintenance in 2006. Professional fees increased $31,000 or 5.5% for 2006 as compared to 2005. Professional fees increased due to additional collection and recovery efforts on delinquent loans and other real estate owned. Advertising decreased $37,000 or 9.3% mainly due to decreased advertising expenses by Community in 2006. Other expenses increased 1.9%, or $59,000. Overall there is not a single line item that contributes significantly to this decrease. Other noninterest expense including, insurance, franchise and other taxes, stationary and office supplies ANNUAL REPORT 17 2006 UNITED BANCORP INC. and amortization and other expenses did not vary materially from 2005 to 2006. PERFORMANCE OVERVIEW 2005 TO 2004 NET EARNINGS The Company reported earnings of $3.3 million in 2005 compared with $3.2 million in 2004, eclipsing what was previously the second most profitable year in the Company's history. This earnings performance equates to a 0.82% Return on Average Assets ("ROA") and 10.01% Return on Average Equity ("ROE") for 2005 compared to 0.83% and 9.91%, respectively, for 2004. Basic and Diluted Earnings per share ("EPS") was $0.71 and $0.70, respectively, for 2006, 2005 and 2004. Per share amounts for all periods have been restated to reflect the 10% stock split in the form of a dividend distributed in December 2005 and 2004. NET INTEREST INCOME Net interest income, by definition, is the difference between interest income generated on interest-earning assets and the interest expense incurred on interest-bearing liabilities. Various factors contribute to changes in net interest income, including volumes, interest rates and the composition or mix of interest-earning assets in relation to interest-bearing liabilities. Net interest income increased $67,000 in 2005. The net interest margin decreased to 3.59% from 3.71%. Overall, due to the flattening to inverted yield curve in 2005, the Company experienced deposits costs increasing at a more rapid rate then it's earning assets. While the Company's earnings assets on average increased 19 basis points from 2004 to 2005, the cost of deposits increased 37 basis points for the same period. NET CHARGE-OFFS TO AVERAGE LOANS (PERFORMANCE GRAPH) 2002 0.29% 2003 0.33% 2004 0.22% 2005 0.22% 2006 0.83%
Average interest-earning assets increased $13.2 million, or 3.7%, in 2005 while the associated weighted-average yield on these interest-earning assets increased from 5.80% in 2004, to 6.01% for 2005. Average interest-bearing liabilities increased $15.9 million, or 4.9%, in 2005 while the associated weighted-average costs on these interest-bearing liabilities increased from 2.32% to 2.69%. Refer to the sections on Asset and Liability Management and Sensitivity to Market Risks and Average Balances, Net Interest Income and Yields Earned and Rates Paid elsewhere herein for further information. PROVISION FOR LOAN LOSSES The provision for loan losses is a charge to expense recorded to maintain the related balance sheet allowance for loan losses at an amount considered adequate to cover probable but unconfirmed losses in the portfolio. The total provision for loan losses was $412,000 in 2005 compared to $618,000 in 2004, a decrease of $206,000 or 33.3%. The
(In thousands) 2006 2005 2004 ------- ------- ------- Noninterest income Service charges on deposit accounts .. $ 1,497 $ 1,339 $ 1,290 Gains on sales of securities ......... (349) (52) 77 Gains on sales of loans .............. 17 21 42 Other income ......................... 1,132 1,034 790 ------- ------- ------- Total noninterest income .......... $ 2,297 $ 2,342 $ 2,199 ======= ======= ======= Noninterest expense Salaries and employee benefits ....... $ 5,668 $ 5,432 $ 5,223 Occupancy and equipment .............. 1,314 1,320 1,382 Professional services ................ 590 559 479 Insurance ............................ 333 343 319 Franchise and other taxes ............ 425 412 419 Advertising .......................... 363 400 300 Stationery and office supplies ....... 276 273 261 Amortization of intangibles .......... 16 18 18 Other expenses ....................... 2,061 2,006 2,051 ------- ------- ------- Total noninterest expense ......... $11,046 $10,763 $10,452 ======= ======= =======
18 ANNUAL REPORT 2006 UNITED BANCORP INC. decrease in provision can be attributed to the Company's stable credit quality year over year, offset by growth in the portfolio. As previously discussed, the loan portfolio increased approximately $16.5 million, or 7.7%, during 2005. Net loans charged-off for 2005 were approximately $503,000, compared to $466,000 for 2004. Net charge-offs as a percentage of loans has been on a gradual decline since a high of 0.49% in 2000. For both 2005 and 2004 net charge-offs as a percentage of average loans were 0.22% more than a 50% decrease from the high in 2000. The allowance for loan losses as a percentage of loans decreased to 1.25% at year-end 2005, from 1.39% at year-end 2004. The Company utilizes a consistent reserve methodology with detail reserve allocations specific to the individual loan portfolios. NONINTEREST INCOME Noninterest income is made up of bank-related fees and service charges, as well as other income-producing services. These include secondary market loan servicing fees, ATM/interchange income, internet bank fees, early redemption penalties for certificates of deposit, safe deposit box rental income, net gain or loss on sales of securities available for sale and loans, leased rental property, cash management services and other miscellaneous items. In addition, the Company has invested in Company and Bank owned life insurance. The earnings from this investment are reflected in the Company's noninterest income. Total noninterest income for 2005 was $2.3 million, an increase of $143,000, or 6.5% from 2004 totals. Service charges on deposit accounts increased $49,000 or 3.8% from 2004 to 2005. The majority of the increase came from fees related to overdrafts on depository accounts. As stated previously, management introduced several new products and revenue enhancement strategies over the past several years and the result has been increased service charge income. The increase in noninterest income in 2005 is primarily attributable to increases in service charge income, mortgage servicing revenue and increased income on Company and Bank owned life insurance. These increases were offset by a reduction in gains on the sale of loans and investment securities during 2005. During 2005, the Company realized losses from the sale of securities and loans totaling $31,000 compared to a gain of $119,000 in 2004, reflecting a $99,000 after-tax reduction in earnings. Management's strategy in 2004, took into consideration the relative volatility in the bond market. At times during 2004, management realized there was an opportunity to sell and profitability reposition bonds in the portfolio when overall interest rates were depressed. Since interest rates were increasing for most of 2005, there was less opportunity to profitably sell and reposition bonds in 2005. Other noninterest income increased $244,000 from 2004 to 2005. With the overall decrease in refinancing activity and prepayment activity, the Company's mortgage servicing revenue increased as compared to 2004. Also, increasing other noninterest income was a $24,000 increase over 2004 in credit card merchant income. NONINTEREST EXPENSE Noninterest expense for 2005 increased $311,000 or 3.0% over 2004. Salaries and employee benefits increased $209,000, or 4.0%, from 2004 to 2005. The increase is mainly due to normal merit increases year over year. Occupancy and equipment expense decreased $62,000, or 4.5%. Occupancy expense decreased due to capital expenditures mainly technology enhancements, becoming fully depreciated in the first quarter of 2005. Professional fees increased $80,000 or 16.7% for 2005 as compared to 2004. Professional fees increased due to additional collection and recovery efforts on delinquent loans. Advertising increased $100,000 or 33.3% mainly due to increased advertising expenses by Community in 2005. Other expenses decreased 2.2%, or $45,000. Overall there is not a single line item that contributes significantly to this decrease. Other noninterest expense including, insurance, franchise and other taxes, stationary and office supplies and amortization did not vary much from 2004 to 2005. The core earnings growth of the Company's financial performance over 2004, was in part a reflection of management's strong control of noninterest expense in 2005. ASSET/LIABILITY MANAGEMENT AND SENSITIVITY TO MARKET RISK In the environment of changing business cycles, interest rate fluctuations and growing competition, it has become increasingly more difficult for banks to produce ANNUAL REPORT 19 2006 UNITED BANCORP INC. adequate earnings on a consistent basis. Although management can anticipate changes in interest rates, it is not possible to reliably predict the magnitude of interest rates changes. As a result, the Company must establish a sound asset/liability management policy, which will minimize exposure to interest rate risk while maintaining an acceptable interest rate spread and insuring adequate liquidity. The principal goal of asset/liability management - profit management - can be accomplished by establishing decision processes and control procedures for all bank assets and liabilities. Thus, the full scope of asset/liability management encompasses the entire balance sheet of the Company. The broader principal components of asset/liability management include, but are not limited to liquidity planning, capital planning, gap management and spread management. By definition, liquidity is measured by the Company's ability to raise cash at a reasonable cost or with a minimum amount of loss. Liquidity planning is necessary so the Company will be capable of funding all obligations to its customers at all times, from meeting their immediate cash withdrawal requirements to fulfilling their short-term credit needs. Capital planning is an essential portion of asset/liability management, as capital is a limited Bank resource, which, due to minimum capital requirements, can place possible restraints on Bank growth. Capital planning refers to maintaining capital standards through effective growth management, dividend policies and asset/liability strategies. Gap is defined as the dollar difference between rate sensitive assets and rate sensitive liabilities with respect to a specified time frame. A gap has three components - the asset component, the liability component, and the time component. Gap management involves the management of all three components. Gap management is defined as those actions taken to measure and match rate sensitive assets to rate sensitive liabilities. A rate sensitive asset is any interest-earning asset, which can be repriced to a market rate in a given time frame. Similarly, a rate sensitive liability is any interest-bearing liability, which can have its interest rate changed to a market rate during the specified time period. Caps and collars may prevent certain loans and securities from adjusting to the market rate. A negative gap is created when rate sensitive liabilities exceed rate sensitive assets and, conversely, a positive gap occurs when rate sensitive assets exceed rate sensitive liabilities. A negative gap position will cause profits to decline in a rising interest rate environment while conversely; a positive gap will cause profits to decline in a falling interest rate environment. The Company's goal is to have acceptable profits under any interest rate environment. To avoid volatile profits as a result of interest rate fluctuations, the Company attempts to match interest rate sensitivities, while pricing both the asset and liability components to yield a sufficient interest rate spread so that profits will remain relatively consistent across interest rate cycles. Management of the income statement is called spread management and is defined as managing investments, loans, and liabilities to achieve an acceptable spread between the Company's return on its earning assets and its cost of funds. Gap management without consideration of interest spread can cause unacceptable low profit margins while assuring that the level of profits is steady. Spread management without consideration of gap positions can cause acceptable profits in some interest rate environments and unacceptable profits in others. A sound asset/liability management program combines gap and spread management into a single cohesive system. Management measures the Company's interest rate risk by computing estimated changes in net interest income and the net portfolio value ("NPV") of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. The Banks' senior management and the Executive Committee of the Board of Directors, comprising the Asset/Liability Committee ("ALCO") review the exposure to interest rates at least quarterly. Exposure to interest rate risk is measured with the use of an interest rate sensitivity analysis to determine the change in NPV in the event of hypothetical changes in interest rates, while interest rate sensitivity gap analysis is used to determine the repricing characteristics of the assets and liabilities. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan pre- 20 ANNUAL REPORT 2006 UNITED BANCORP INC. payments and deposit decay rates, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates. The NPV calculation is based on the net present value of discounted cash flows utilizing market prepayment assumptions and market rates of interest provided by surveys performed during each quarterly period, with adjustments made to reflect the shift in the Treasury yield curve between the survey date and quarter-end date. Certain shortcomings are inherent in this method of analysis presented in the computation of estimated NPV. Certain assets such as adjustable-rate loans have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the portion of adjustable-rate loans in the Company's portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinancing activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed in the table. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the case of an increase in interest rates. The following tables present an analysis of the potential sensitivity of the Company's net present value of its financial instruments to sudden and sustained changes in the prevailing interest rates. The projected volatility of the net present value at both December 31, 2006 and 2005 fall within the general guidelines established by the Board of Directors. The NPV table shows that in a falling interest rate environment of either a 100 or 200 basis point change, the NPV would increase between 2% on 100 basis points and it would decrease 2% when rates fall 200 basis point. In the upward change in interest rates the Company's NPV would decrease 13% with a 100 basis point interest rate increase. In a 200 basis point rate increase, the Company's NPV would decrease 25%. This decrease is a result of the Company's available for sale securities portfolio that is invested in fixed-rate securities. As interest rates increase, the market value of the securities decrease. However, since the Company currently has the ability to hold these securities to their final maturity, we would not have to incur any losses. (Dollars in Thousands) Net Portfolio Value - December 31, 2006
Change in Rates $ Amount $ Change % Change - --------------- -------- -------- -------- +200 32,244 (10,967) -25% +100 37,700 (5,511) -13% Base 43,211 -100 43,938 727 2% -200 42,269 (942) -2%
Net Portfolio Value - December 31, 2005
Change in Rates $ Amount $ Change % Change - --------------- -------- -------- -------- +200 26,567 (3,988) -13% +100 29,888 (967) -3% Base 30,555 -100 33,901 3,346 11% -200 33,833 3,277 11%
ANNUAL REPORT 21 2006 UNITED BANCORP INC. The following table is a summary of selected quarterly results of operations for the years ended December 31, 2006 and 2005.
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 2006 Total interest income $5,985 $6,319 $6,552 $6,423 Total interest expense 2,855 3,151 3,385 3,466 ------ ------ ------ ------ Net interest income 3,150 3,168 3,167 2,957 Provision for losses on loans 102 302 652 328 Other income 612 280 699 706 General, administrative and other expense 2,789 2,941 2,773 2,543 ------ ------ ------ ------ Earnings before income taxes 871 205 441 792 Federal income taxes 169 (82) 38 116 ------ ------ ------ ------ Net earnings $ 702 $ 287 $ 403 $ 676 ====== ====== ====== ====== Earnings per share Basic $ 0.15 $ 0.06 $ 0.09 $ 0.15 ====== ====== ====== ====== Diluted $ 0.15 $ 0.06 $ 0.09 $ 0.15 ====== ====== ====== ====== 2005 Total interest income $5,223 $5,445 $5,658 $5,855 Total interest expense 1,974 2,161 2,404 2,607 ------ ------ ------ ------ Net interest income 3,249 3,284 3,254 3,248 Provision for losses on loans 144 116 68 84 Other income 566 589 574 613 General, administrative and other expense 2,620 2,640 2,664 2,839 ------ ------ ------ ------ Earnings before income taxes 1,051 1,117 1,096 938 Federal income taxes 230 237 268 174 ------ ------ ------ ------ Net earnings $ 821 $ 880 $ 828 $ 764 ====== ====== ====== ====== Earnings per share Basic $ 0.18 $ 0.19 $ 0.18 $ 0.16 ====== ====== ====== ====== Diluted $ 0.18 $ 0.19 $ 0.18 $ 0.16 ====== ====== ====== ======
22 ANNUAL REPORT 2006 UNITED BANCORP INC. AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID The following table provides information relating to average balance sheet information and reflects the taxable equivalent average yield on interest-earning assets and the average cost of interest-bearing liabilities for the years ended December 31, 2006, 2005, and 2004. The yields and costs are calculated by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities. The average balance of available for sale securities is computed using the carrying value of securities while the yield for available for sale securities has been computed using the average amortized cost. Average balances are derived from average month-end balances, which include nonaccruing loans in the loan portfolio, net of the allowance for loan losses. Interest income has been adjusted to tax equivalent basis.
2006 2005 2004 ---------------------------- ---------------------------- ---------------------------- INTEREST INTEREST INTEREST AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE -------- -------- ------ -------- -------- ------ -------- -------- ------ ASSETS Interest-earning assets Loans $234,436 17,724 7.56% $224,945 $15,513 6.90% $208,658 $13,844 6.63% Taxable securities - AFS 113,659 5,373 4.89% 113,491 5,163 4.49 113,502 5,130 4.47 Tax-exempt securities - AFS 12,826 719 5.52% 10,059 599 5.80 18,218 872 4.78 Tax-exempt securities - HTM 19,235 1,076 5.59% 20,718 1,078 5.20 15,698 935 5.96 Federal funds sold 3,099 170 5.49% -- -- -- 150 4 2.67 FHLB stock and other 4,464 275 6.16% 4,230 249 5.89 4,057 175 4.32 -------- ------ -------- ------- -------- ------- Total interest-earning assets 387,719 25,701 6.03% 373,443 22,602 6.03 360,283 20,960 5.80 Noninterest-earning assets Cash and due from banks 9,322 10,829 11,192 Premises and equipment (net) 7,295 7,436 7,825 Other nonearning assets 15,801 14,509 13,489 Less: allowance for loan losses (2,977) (3,043) (2,957) -------- -------- -------- Total noninterest-earning assets 29,441 29,731 29,549 -------- -------- -------- Total assets $417,160 $403,174 $389,832 ======== ======== ======== LIABILITIES & SHAREHOLDERS' EQUITY Interest-bearing liabilities Demand deposits $ 96,452 2,654 2.75% $ 76,991 $ 1,121 1.46% $ 68,006 $ 625 0.92% Savings deposits 34,384 121 0.35% 42,748 145 0.34 46,936 166 0.35 Time deposits 167,128 7,068 4.23% 165,109 5,919 3.58 158,325 5,563 3.51 Fed funds purchased & TT&L 2,794 162 5.80% 4,753 228 4.80 4,320 82 1.90 FHLB advances 43,342 2,132 4.92% 40,100 1,450 3.62 37,813 1,020 2.70 Trust preferred debentures 4,000 250 6.25% 496 31 6.25 -- -- -- Repurchase agreements 10,557 450 4.26% 10,129 252 2.49 9,013 83 0.92 -------- ------ -------- ------- -------- ------- Total interest-bearing liabilities 358,657 12,837 3.58% 340,326 9,146 2.69 324,413 7,539 2.32 ------ ------- ------- Noninterest-bearing liabilities Demand deposits 24,400 28,213 31,568 Other liabilities 2,237 1,750 1,229 -------- -------- -------- Total noninterest-bearing liabilities 26,637 29,963 32,797 -------- -------- -------- Total liabilities 357,210 Total shareholders' equity 31,866 32,885 32,622 -------- -------- -------- Total liabilities & shareholders' equity $417,160 $403,174 $389,832 ======== ======== ======== Net interest income $12,864 $13,456 $13,421 ======= ======= ======= Net interest spread 2.98% 3.34% 3.48% ==== ==== ==== Net yield on interest-earning assets 3.28% 3.59% 3.71% ==== ==== ====
- - For purposes of this schedule,nonaccrual loans are included in loans. - - Fees collected on loans are included in interest on loans. ANNUAL REPORT 23 2006 UNITED BANCORP INC. RATE/VOLUME ANALYSIS The table below describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the periods indicated. For purposes of this table, changes in interest due to volume and rate were determined using the following methods: - - Volume variance results when the change in volume is multiplied by the previous year's rate. - - Rate variance results when the change in rate is multiplied by the previous year's volume. - - Rate/volume variance results when the change in volume is multiplied by the change in rate. Note: The rate/volume variance was allocated to volume variance and rate variance in proportion to the relationship of the absolute dollar amount of the change in each. Nonaccrual loans are ignored for purposes of the calculations due to the nominal amount of the loans. CAPITAL RESOURCES Internal capital growth, through the retention of earnings, is the primary means of maintaining capital adequacy for the Banks. The Company's shareholders' equity at year-end 2006 was $32.6 million, compared to $32.5 million at year-end 2005, representing an increase of 0.3%. Equity totals include $1.9 million in accumulated other comprehensive loss which is comprised mainly of a net unrealized loss on securities available for sale, net of tax, and the effects of adopting SFAS No. 158, net of tax, at year-end 2006, compared to a $2.2 million loss at year-end 2005. Total shareholders' equity in relation to total assets was 7.7% at December 31, 2006 and 7.9% at December 31, 2005. DIVIDENDS PER SHARE (PERFORMANCE GRAPH) 2002 $0.33 2003 $0.35 2004 $0.39 2005 $0.43 2006 $0.48
The Company has established a Dividend Reinvestment
2006 COMPARED TO 2005 2005 COMPARED TO 2004 INCREASE/(DECREASE) INCREASE/(DECREASE) ------------------------- ------------------------ CHANGE CHANGE CHANGE CHANGE TOTAL DUE TO DUE TO TOTAL DUE TO DUE TO (IN THOUSANDS) CHANGE VOLUME RATE CHANGE VOLUME RATE ------ ------ ------- ------ ------ ------ Interest and dividend income Loans $2,211 $ 674 $ 1,537 $1,669 $1,109 $ 560 Taxable securities available for sale 574 8 566 33 10 23 Tax-exempt securities available for sale 120 154 (34) (273) (433) 160 Tax-exempt securities held to maturity (2) (80) 78 143 272 (129) Federal funds sold 170 170 -- (4) (4) -- FHLB stock and other 26 14 12 74 43 31 ------ ----- ------- ------ ------ ------ Total interest and dividend income 3,099 940 2,159 1,642 997 645 Interest expense Demand deposits 1,533 340 1,193 496 92 404 Savings deposits (24) (34) 10 (21) (14) (7) Time deposits 1,149 73 1,076 356 241 115 Fed funds purchased (66) (107) 41 146 9 137 FHLB advances 682 125 557 430 65 365 Trust Preferred debentures 219 219 -- 31 31 -- Repurchase agreements 198 11 187 169 11 158 ------ ----- ------- ------ ------ ------ Total interest expense 3,691 408 3,283 1,607 435 1,172 ------ ----- ------- ------ ------ ------ Net interest income $ (592) $ 532 $(1,124) $ 35 $ 562 $ (527) ====== ===== ======= ====== ====== ======
24 ANNUAL REPORT 2006 UNITED BANCORP INC. 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 dividend policy or a guarantee of future dividends. Shareholders who do not wish to participate in The Plan will continue to receive cash dividends, as declared in the usual and customary manner. In 2001, the Company's 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 will enable the Company, at the option of the Board of Directors, to issue series of preferred shares in a manner calculated to take advantage of financing techniques which may provide a lower effective cost of capital to the Company. The amendment also provides greater flexibility to the Board of Directors in structuring the terms of equity securities that may be issued by the Company. In 2005, a Delaware statutory business trust owned by the Company, United Bancorp Statutory Trust I ("Trust I" or the "Trust"), issued $4.0 million of mandatorily redeemable debt securities. The sale proceeds were utilized to purchase $4.0 million of the Company's subordinated debentures. The Company's subordinated debentures are the sole asset of Trust I. Pursuant to FIN 46(R), "Consolidation of Variable Interest Entities," the Company's investment in Trust I is not consolidated herein as the Company is not deemed the primary beneficiary of the Trust. However, the $4.0 million of mandatorily redeemable debt securities issued by the Trust are includible for regulatory purposes as a component of the Company's Tier 1 Capital. Interest on the Company's subordinated debentures are fixed at 6.25% and are payable quarterly. The $4.0 million of net proceeds received by the Company was primarily utilized to fund a $3.4 million note receivable from a newly formed Employee Stock Option Plan (ESOP). The ESOP in turn utilized the note proceeds to purchase $3.4 million of the Company's treasury stock. EQUITY CAPITAL (IN THOUSANDS) (PERFORMANCE GRAPH) 2002 $32,155 2003 $32,514 2004 $32,824 2005 $32,480 2006 $32,580
BOOK VALUE PER SHARE (PERFORMANCE GRAPH) 2002 $6.72 2003 $7.67 2004 $7.09 2005 $7.00 2006 $7.73
LIQUIDITY Liquidity relates primarily to the Company's ability to fund loan demand, meet deposit customers' withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold and securities available-for sale. These assets are commonly referred to as liquid assets. Liquid assets were $148.4 million at December 31, 2006, compared to $135.8 million at December 31, 2005. Management recognizes securities may need to be sold in the future to help fund loan demand and, accordingly, as of December 31, 2006, $133.8 million of the securities portfolio was classified as available for sale. The Company's residential real estate portfolio can and has been readily used to collateralize borrowings as an additional source of liquidity. Management believes its current liquidity level is sufficient to meet the cash requirement. The Cash Flow Statements for the periods presented provide an indication of the Company's sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements for 2006, 2005 and 2004 follows. The Company experienced a net increase in cash from operating activities in 2006, 2005 and 2004. Net cash provided by operating activities totaled $3.9 million, $4.0 million and $3.9 million for the years ended December 31, 2006, 2005 and 2004, respectively. The adjustments to reconcile net earnings to net cash from operating activities consisted mainly of depreciation and amortization of premises and equipment and intangibles, gain on sales of ANNUAL REPORT 25 2006 UNITED BANCORP INC. loans, securities and other assets, the provision for loan losses, Federal Home Loan Bank stock dividends, net amortization of securities and net changes in other assets and liabilities. NET CASH USED IN INVESTING ACTIVITIES totaled $7.2 million, $10.4 million and $14.8 million for the years ended December 31, 2006, 2005 and 2004, respectively. The changes in net cash from investing activities include loan growth, as well as normal maturities, security calls and reinvestments of securities and premises and equipment expenditures. In 2006, 2005 and 2004, the Company received $7.7 million, $15.9 million and $33.9 million, respectively, from sales of securities available for sale. Proceeds from securities, which matured or were called totaled $16.4 million, $22.8 million and $38.6 million in 2005, 2004 and 2003, respectively. NET CASH PROVIDED BY FINANCING ACTIVITIES totaled $4.0 million, $12.8 million and $10.1 million for the years ended December 31, 2006, 2005 and 2004, respectively. The net cash from financing activities in 2006 was primarily attributable to increases in deposits totaling $23.1 million. Management feels that it has the capital adequacy, profitability, and reputation to meet the current and projected financial needs of its customers. INFLATION The majority of assets and liabilities of the Company are monetary in nature and therefore the Company differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation significantly affects noninterest expense, which tends to rise during periods of general inflation. Management believes the most significant impact on financial results is the Company's ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest sensitive assets and liabilities and actively manages the amount of securities available for sale in order to protect against the effects of wide interest rate fluctuations on net income and shareholders' equity. 26 ANNUAL REPORT 2006 UNITED BANCORP INC. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS (GRANT THORNTON LOGO) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors United Bancorp, Inc. Martins Ferry, Ohio We have audited the accompanying consolidated statements of financial condition of United Bancorp, Inc. (the "Company") as of December 31, 2006 and 2005, and the related consolidated statements of earnings, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2006. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Bancorp, Inc. as of December 31, 2006 and 2005, and the results of its operations, comprehensive income and cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. As more fully described in Note A-15 and G, the Company changed its methods of accounting for stock-based compensation and defined benefit plans in accordance with Statement of Financial Accounting Standards No. 123(R) and Financial Accounting Standards No. 158. /s/ Grant Thornton LLP Cincinnati, Ohio March 23, 2007 27 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION As of December 31, 2006 and 2005 (In thousands, except share data)
2006 2005 -------- -------- ASSETS Cash and due from financial institutions $ 6,817 $ 10,009 Interest-bearing deposits in other financial institutions 7,737 3,868 -------- -------- Total cash and cash equivalents 14,554 13,877 Securities available for sale - at market 133,808 121,946 Securities held to maturity - estimated fair value of $18,220 and $20,483 at December 31, 2006 and 2005, respectively 17,870 20,262 Total loans 231,517 232,011 Allowance for loan losses (2,345) (2,904) -------- -------- Loans - net 229,172 229,107 Federal Home Loan Bank stock - at cost 4,556 4,306 Premises and equipment 7,261 7,605 Accrued interest receivable 2,578 2,363 Other real estate and repossessions 794 1,244 Core deposit and other intangible assets -- 18 Company and bank-owned life insurance 8,927 8,570 Other assets 2,133 2,635 -------- -------- Total assets $421,653 $411,933 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits Noninterest-bearing $ 23,703 $ 26,614 Interest-bearing 100,449 82,295 Savings deposits 30,972 37,634 Time deposits - under $100,000 128,663 121,249 Time deposits - $100,000 and over 46,218 39,123 -------- -------- Total deposits 330,005 306,915 Federal funds purchased -- 12,545 Advances from the Federal Home Loan Bank 44,135 47,334 Securities sold under agreements to repurchase 6,218 7,142 Trade date security purchases 2,886 -- Subordinated debentures 4,000 4,000 Accrued expenses and other liabilities 1,829 1,517 -------- -------- Total liabilities 389,073 379,453 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; 5,131,874 and 5,076,622 shares issued at December 31, 2006 and 2005, respectively 5,132 4,615 Additional paid-in capital 27,547 26,919 Retained earnings 6,962 7,776 Stock held by deferred compensation plan; 103,135 and 91,326 shares at December 31, 2006 and 2005, respectively - at cost (1,019) (892) Treasury stock - 84,024 and 30,250 shares at December 31, 2006 and 2005, respectively - at cost (864) (329) Less required contributions for shares acquired by Employee Stock Ownership Plan (ESOP) (3,266) (3,417) Accumulated comprehensive loss (1,912) (2,192) -------- -------- Total shareholders' equity 32,580 32,480 -------- -------- Total liabilities and shareholders' equity $421,653 $411,933 ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS 28 ANNUAL REPORT 2006 UNITED BANCORP INC. CONSOLIDATED STATEMENTS OF EARNINGS For the years ended December 31, 2006, 2005 and 2004 (In thousands, except share data)
2006 2005 2004 ------- ------- ------- Interest and dividend income Loans, including fees $17,725 $15,480 $13,808 Taxable securities 5,737 5,179 5,154 Tax-exempt securities 1,372 1,272 1,366 Federal funds sold 170 42 4 Dividends on Federal Home Loan Bank stock and other 275 208 175 ------- ------- ------- Total interest and dividend income 25,279 22,181 20,507 Interest expense Deposits Demand 2,646 1,121 625 Savings 121 145 166 Time 7,069 5,919 5,563 Borrowings 3,001 1,961 1,185 ------- ------- ------- Total interest expense 12,837 9,146 7,539 ------- ------- ------- Net interest income 12,442 13,035 12,968 Provision for loan losses 1,384 412 618 ------- ------- ------- Net interest income after provision for loan losses 11,058 12,623 12,350 Noninterest income Service charges on deposit accounts 1,497 1,339 1,290 Gain (loss) on sales or calls of securities designated as available for sale (349) (52) 77 Gain on sale of loans 17 21 42 Earnings on Company and bank owned life insurance 357 347 331 Gain on sale of other real estate 48 2 10 Other income 727 685 449 ------- ------- ------- Total noninterest income 2,297 2,342 2,199 Noninterest expense Salaries and employee benefits 5,668 5,432 5,223 Occupancy and equipment 1,314 1,320 1,382 Professional services 590 559 479 Insurance 333 343 319 Franchise and other taxes 425 412 419 Advertising 363 400 300 Stationery and office supplies 276 273 261 Amortization of intangible assets 18 18 18 Other expenses 2,059 2,006 2,051 ------- ------- ------- Total noninterest expense 11,046 10,763 10,452 ------- ------- ------- Earnings before income taxes 2,309 4,202 4,097 Income tax expense 241 909 864 ------- ------- ------- Net earnings $ 2,068 $ 3,293 $ 3,233 ======= ======= ======= EARNINGS PER COMMON SHARE Basic $ 0.45 $ 0.71 $ 0.70 ======= ======= ======= Diluted $ 0.45 $ 0.71 $ 0.70 ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS ANNUAL REPORT 29 2006 UNITED BANCORP INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, 2006, 2005 and 2004 (In thousands)
2006 2005 2004 ------- ------- ------ Net earnings $ 2,068 $ 3,293 $3,233 Other comprehensive income, net of related tax effects: Unrealized holding gains (losses) on securities during the year, net of (taxes) benefits of $(245), $820 and $173 in 2006, 2005 and 2004, respectively 476 (1,591) (336) Adoption of SFAS No. 158, net of tax benefits of $219 in 2006 (426) -- -- Reclassification adjustment for realized (gains) losses included in earnings, net of (taxes) benefits of $119, $17 and $(26) in 2006, 2005 and 2004, respectively 230 34 (51) ------- ------- ------ Comprehensive income $ 2,348 $ 1,736 $2,846 ======= ======= ====== Accumulated comprehensive loss $(1,912) $(2,192) $ (635) ======= ======= ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS 30 ANNUAL REPORT 2006 UNITED BANCORP INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 31, 2006, 2005 and 2004 (In thousands)
TREASURY SHARES ACCUMULATED ADDITIONAL STOCK AND ACQUIRED OTHER COMMON PAID-IN DEFERRED BY RETAINED COMPREHENSIVE STOCK CAPITAL COMPENSATION ESOP EARNINGS LOSS TOTAL ------ ---------- ------------ -------- -------- ------------- ------- Balance at January 1, 2004 $3,752 $25,713 $(2,750) $ -- $ 6,048 $ (249) $32,514 Net earnings -- -- -- -- 3,233 -- 3,233 Stock split in the form of a dividend 375 -- -- -- (375) -- -- Cash paid in lieu of fractional shares on stock dividend -- -- -- -- (6) -- (6) Cash dividends - $0.39 per share -- -- -- -- (1,879) -- (1,879) Shares purchased for deferred compensation plan -- 118 (118) -- -- -- -- Purchases of treasury stock - shares at cost -- -- (652) -- -- -- (652) Unrealized losses on securities designated as available for sale, net of tax benefits -- -- -- -- -- (386) (386) ------ ------- ------- ------- ------- ------- ------- Balance at December 31, 2004 4,127 25,831 (3,520) -- 7,021 (635) 32,824 Net earnings -- -- -- -- 3,293 -- 3,293 Stock split in the form of a dividend 419 -- -- -- (419) -- -- Cash paid in lieu of fractional shares on stock dividend -- -- -- -- (4) -- (4) Cash dividends - $0.44 per share -- -- -- -- (2,115) -- (2,115) Shares purchased for deferred compensation plan -- 147 (147) -- -- -- -- Shares distributed from deferred compensation plan -- (7) 7 -- -- -- -- Purchases of treasury stock - shares at cost -- -- (614) -- -- -- (614) Shares acquired by ESOP -- 364 3,053 (3,417) -- -- -- Proceeds from the exercise of stock options 42 254 -- -- -- -- 296 Issuance of shares to Dividend Reinvestment Plan 27 330 -- -- -- -- 357 Unrealized losses on securities designated as available for sale, net of tax benefits -- -- -- -- -- (1,557) (1,557) ------ ------- ------- ------- ------- ------- ------- Balance at December 31, 2005 4,615 26,919 (1,221) (3,417) 7,776 (2,192) 32,480 Net earnings -- -- -- -- 2,068 -- 2,068 Stock split in the form of a dividend 465 -- -- -- (465) -- -- Cash paid in lieu of fractional shares on stock dividend -- (4) -- -- -- -- (4) Cash dividends - $0.48 per share -- -- -- -- (2,417) -- (2,417) Shares purchased for deferred compensation plan -- 168 (168) -- -- -- -- Shares distributed from deferred compensation plan -- (41) 41 -- -- -- -- Purchases of treasury stock - shares at cost -- -- (535) -- -- -- (535) Stock options exercised 1 5 -- -- -- -- 6 Issuance of shares to Dividend Reinvestment Plan and Director Plan 51 500 -- -- -- -- 551 Adoption of SFAS No. 158 -- -- -- -- -- (426) (426) ESOP compensation -- -- -- 151 -- -- 151 Unrealized gains on securities designated as available for sale, net of related taxes -- -- -- -- -- 706 706 ------ ------- ------- ------- ------- ------- ------- Balance at December 31, 2006 $5,132 $27,547 $(1,883) $(3,266) $ 6,962 $(1,912) $32,580 ====== ======= ======= ======= ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS ANNUAL REPORT 31 2006 UNITED BANCORP INC. CONSOLIDATED STATEMENTS OF CASH FLOW For the years ended December 31, 2006, 2005 and 2004 (In thousands)
2006 2005 2004 -------- -------- -------- Cash flows from operating activities: Net earnings $ 2,068 $ 3,293 $ 3,233 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 608 621 805 Provision for loan losses 1,384 412 618 Deferred taxes 454 (49) 33 Federal Home Loan Bank stock dividends (250) (191) (161) Loss (gains) on sales or calls of securities 349 52 (77) Amortization of securities, net 184 383 542 Gain on sale of loans (17) (21) (42) Gain on sale of premises and equipment -- (10) -- Increase in value of bank-owned life insurance (357) (286) (269) Amortization of mortgage servicing rights 69 81 88 Amortization of stock benefit plan 151 -- -- Gain on sale of real estate owned and other repossessions (48) (2) (10) Net change in accrued interest receivable and other assets (1,154) (88) 412 Net change in accrued expenses and other liabilities 446 (229) (1,310) -------- -------- -------- Net cash provided by operating activities 3,887 3,966 3,862 Cash flows used in investing activities: Securities available for sale: Sales 7,730 15,899 33,936 Maturities, prepayments and calls 16,387 22,780 38,624 Purchases (32,589) (25,643) (70,636) Securities held to maturity: Maturities, prepayments and calls 2,425 710 1,941 Purchases -- (5,991) (1,267) Net change in loans (2,197) (17,644) (17,262) Proceeds from sale of real estate owned 1,262 289 344 Purchase of bank-owned life insurance -- (382) (63) Purchases of premises and equipment (248) (484) (391) Proceeds from sale of premises and equipment -- 44 -- -------- -------- -------- Net cash used in investing activities (7,230) (10,422) (14,774) Cash flows provided by financing activities: Net change in deposits 23,091 6,285 (3,896) Net change in FHLB advances and other borrowings (16,668) 4,549 16,539 Issuance of subordinated debentures -- 4,000 -- Cash dividends paid (2,417) (2,115) (1,879) Cash paid in lieu of fractional shares in stock dividend (4) (4) (6) Proceeds from issuance of shares to Dividend Reinvestment Plan 547 357 -- Proceeds from exercise of stock options 1 146 -- Treasury stock purchases (535) (614) (652) Treasury shares acquired by ESOP 3,417 -- Tax benefit on options exercised 5 150 -- Funding of note receivable from ESOP -- (3,417) -- -------- -------- -------- Net cash provided by financing activities 4,020 12,754 10,106 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 677 6,296 (806) Cash and cash equivalents at beginning of year 13,877 7,581 8,387 -------- -------- -------- Cash and cash equivalents at end of year $ 14,554 $ 13,877 $ 7,581 ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS 32 ANNUAL REPORT 2006 UNITED BANCORP INC. CONSOLIDATED STATEMENTS OF CASH FLOW Continued For the years ended December 31, 2006, 2005 and 2004 (In thousands)
2006 2005 2004 ------- ------- ------ Supplemental disclosure of cash flow information: Interest paid on deposits and borrowings $12,825 $ 9,105 $7,528 ======= ======= ====== Federal income taxes paid $ 395 $ 942 $ 735 ======= ======= ====== Supplemental disclosure of noncash investing activities: Noncash transfer from loans to other real estate and repossessions $ 765 $ 517 $ 407 ======= ======= ====== Unrealized gains (losses) on securities designated as available for sale, net of related tax effects $ 706 $(1,557) $ (386) ======= ======= ====== Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 106 $ 340 $ 200 ======= ======= ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS ANNUAL REPORT 33 2006 UNITED BANCORP INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Principles of Consolidation The consolidated financial statements include the accounts of United Bancorp, Inc. ("UNITED" or "the Company"), an Ohio corporation, 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/Segments 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 has historically conducted 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 has historically conducted its business through its seven offices in Amesville, Glouster, Lancaster, and Nelsonville, Ohio. Effective November 15, 2006, the Company's Board of Directors voted to consolidate Community's charter with Citizens, maintaining Community's name and operations as a division of Citizens. This reorganization will be complete in 2007. 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 The financial information presented herein has been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and general accounting practices within the financial services industry. In preparing consolidated financial statements in accordance with U.S. GAAP, management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenue and expenses during the reporting period. Actual results could differ from such estimates. 4. Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks, federal funds sold and interest-bearing deposits in other financial institutions with original maturities of 90 days or less. 34 ANNUAL REPORT 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 5. Securities The Company accounts for investment and mortgage-backed securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that investments be categorized as held-to-maturity, trading or available for sale. Investments and mortgage-backed securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of the related tax effects. Securities are classified as held to maturity or available for sale upon acquisition. Other securities such as Federal Home Loan Bank stock are carried at cost. Interest income includes amortization of purchase premiums and discounts. Realized gains and losses on sales and calls are based on the amortized cost of the security sold using the specific identification method. Securities are written down to fair value when a decline in fair value is deemed other than temporary. At December 31, 2006, the Company had $2.9 million in securities that have been purchased but had not been cleared by the selling broker. 6. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff, are reported at the principal balance outstanding, net of deferred loan origination fees and costs, and the allowance for loan losses. Loans held for sale are reported at the lower of cost or market, determined in the aggregate. Interest income includes amortization of net deferred loan origination fees and costs over the loan term using the interest method. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. Consumer loans are typically charged-off no later than 120 days past due. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Interest received on such loans is accounted for on a cash-basis or cost-recovery method, until qualifying for a return of the loan to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. 7. Investment in Federal Home Loan Bank Stock The Corporation is required as a condition of membership in the Federal Home Loan Bank of Cincinnati (FHLB) to maintain an investment in FHLB common stock. The stock is redeemable at par and, therefore, its cost is equivalent to its redemption value. The Corporation's ability to redeem FHLB shares is dependent on the redemption practices of the FHLB of Cincinnati. At December 31, 2006, the FHLB of Cincinnati placed no restrictions on redemption of shares in excess of a member's required investment in the stock. ANNUAL REPORT 35 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 8. Loan Servicing Rights Loan servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of underlying loans with similar characteristics. Any impairment of a grouping is reported as a valuation allowance. At December 31, 2006 and 2005, the carrying value of the Company's mortgage servicing rights, which approximate fair value, totaled approximately $403,000 and $367,000, respectively. 9. 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 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. The Company's impaired loan information is as follows as of and for the fiscal years ended December 31:
2006 2005 ------ ---- (In thousands) Impaired loans with related allowance for unconfirmed losses $1,012 $ -- Impaired loans without allowance for unconfirmed losses 2,110 875 ------ ---- Total impaired loans $3,122 $875 ====== ====
36 ANNUAL REPORT 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 9. Allowance for Loan Losses (continued)
2006 -------------- (In thousands) Allowance with respect to unconfirmed losses on impaired loans Beginning balance $ -- Provision 1,824 Charge-off of impaired loans (1,519) ------- Ending balance $ 305 ======= Average balance of impaired loans $ 2,311 ======= Interest income recognized on impaired loans $ 309 =======
10. Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and include expenditures which extend the useful lives of existing assets. Maintenance, repairs and minor improvements are expensed as incurred. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 5 to 39 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 5 years. An accelerated depreciation method is used for tax purposes. Premises and equipment are reviewed for impairment when events indicate the carrying amount may not be recoverable. As of December 31, 2006, there were no circumstances that indicated impairment of premises and equipment. 11. Other Real Estate and Repossessions Assets acquired through or in lieu of foreclosure are initially recorded at the lower of the loan's unpaid principal balance (cost) or fair value when acquired. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial cost or fair value less costs to sell. Expenses, gains and losses on disposition and changes in the valuation allowance are reported in other expenses as incurred. 12. Company-Owned and Bank-Owned Life Insurance The Company and the Banks have purchased life insurance policies on certain key executives. Company and bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized. 13. Intangible Assets Intangible assets consisted of core deposits arising from branch acquisitions. Such assets were recorded at fair value and are fully amortized as of December 31, 2006. Amortization expense related to intangible assets totaled $18,000 for each of the years ended December 31, 2006, 2005 and 2004. ANNUAL REPORT 37 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 14. 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 December 31, 2006, the ESOP held 324,769 unallocated shares which were not included in weighted-average common shares outstanding. At December 31, 2005, the ESOP held 339,660 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. The computation is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 2006 2005 2004 ---------- ---------- ---------- (Dollars in thousands) BASIC Net earnings $ 2,068 $ 3,293 $ 3,233 ========== ========== ========== Weighted average common shares outstanding 4,551,256 4,608,809 4,620,205 ========== ========== ========== Basic earnings per common share $ 0.45 $ 0.71 $ 0.70 ========== ========== ========== DILUTED Net earnings $ 2,068 $ 3,293 $ 3,233 ========== ========== ========== Weighted average common shares outstanding for basic earnings per common share 4,551,256 4,608,809 4,620,205 Add: Dilutive effects of assumed exercise of stock options 798 2,911 7,530 ---------- ---------- ---------- Average shares and dilutive potential common shares 4,552,054 4,611,720 4,627,735 ========== ========== ========== Diluted earnings per common share $ 0.45 $ 0.71 $ 0.70 ========== ========== ==========
Options to purchase 43,000 shares of common stock with a weighted-average price of $11.23 were outstanding at December 31, 2006. Options to purchase 24,245 shares of common stock with a weighted-average exercise price of $12.19 were outstanding at December 31, 2005. Options to purchase 12,146 shares of common stock with a weighted-average exercise price of $13.14 were outstanding at December 31, 2004. These options were excluded from the computation of common share equivalents for those respective years because the exercise prices were greater than the average market prices of common shares. Weighted average common shares outstanding have been restated to give effect to share distributions in the form of a dividend in each of the three years ended December 31, 2006, 2005 and 2004. 15. Stock Option and Benefit Plans The Company maintains a nonqualified stock option plan for directors and officers. The exercise price for options granted under this plan is no less than 100% of the fair market value of the shares on the date of grant adjusted for stock dividends and stock splits. 38 ANNUAL REPORT 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 15. Stock Option and Benefit Plans (continued) In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123(R), "Share-Based Payment," which revised SFAS No. 123, "Accounting for Stock-Based Compensation," and superseded Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123(R) requires that cost related to the fair value of all equity-based awards to employees, including grants of employee stock options, be recognized in the financial statements. The Company adopted the provisions of SFAS No. 123(R) effective January 1, 2006, using the modified prospective transition method, as permitted, and therefore has not restated its financial statements for prior periods. Under this method, the Company has applied the provisions of SFAS No. 123(R) to new equity-based awards and to equity-based awards modified, repurchased, or cancelled after January 1, 2006. In addition, the Company has recognized compensation cost for the portion of equity-based awards for which the requisite service period has not been rendered ("unvested equity-based awards") that were outstanding as of January 1, 2006. The compensation cost recorded for unvested equity-based awards will be based on their grant-date fair value. For the year ended December 31, 2006, the Company recorded $14,000 in compensation cost ($9,000 after-tax) for equity-based awards that vested during the year ended December 31, 2006. The Company has $130,000 of total unrecognized compensation cost related to non-vested equity-based awards granted under its stock incentive plan as of December 31, 2006, which is expected to be recognized over a weighted-average period of 5.3 years. 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. The Company had $5,000 and $150,000 of tax benefits classified as financing cash flows for the years ended December 31, 2006 and 2005, respectively. The Company accounted for its equity-based compensation awards prior to the adoption of SFAS No. 123(R) by applying APB Opinion No. 25 and related Interpretations, as permitted by SFAS No. 123. Accordingly, the Company did not recognize any compensation cost in its financial statements. Had compensation cost been recognized in accordance with the fair value recognition provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below for the twelve months ended December 31:
2005 2004 ------ ------ (Dollars in thousands) NET EARNINGS As reported $3,293 $3,233 Stock-based compensation, net of tax (6) (32) ------ ------ Pro-forma $3,287 $3,201 ====== ====== EARNINGS PER SHARE BASIC As reported $ .71 $ .70 Stock-based compensation, net of tax (.01) (.01) ------ ------ Pro-forma $ .70 $ .69 ====== ====== DILUTED As reported $ .71 $ .70 Stock-based compensation, net of tax (.01) (.01) ------ ------ Pro-forma $ .70 $ .69 ====== ======
ANNUAL REPORT 39 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 (Dollars in thousands) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 15. Stock Options and Benefit Plans (continued) There were no options granted during the year ended December 31, 2006 and 2004. The fair value of each option granted in 2005 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions. All share and per share prices have been restated to reflect stock dividends distributed or declared prior to issuance of the financial statements. 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 and 2004. Any option not exercised within the designated time frame is forfeited. All options become immediately exercisable upon retirement, death, 9 1/2 years after issuance, or in the event of a change in control of the Company. A summary of the status of the Company's stock option plan as of December 31, 2006, 2005 and 2004 and changes for the years then ended is presented below:
2006 2005 2004 ------------------- ------------------- ------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------- --------- ------- --------- ------- --------- Outstanding at beginning of year 104,069 $10.46 123,475 $ 7.70 123,475 $ 7.70 Granted -- -- 70,589 10.30 -- -- Exercised (2,650) 6.87 (85,149) 6.55 -- -- Forfeited (31,930) 10.20 (4,846) 6.55 -- -- ------- ------ ------- ------ ------- ------ Outstanding at end of year 69,489 $10.73 104,069 $10.46 123,475 $ 7.70 ======= ====== ======= ====== ======= ====== Options exercisable at year-end 9,737 $11.73 6,969 $ 9.74 96,938 $ 6.78 ======= ====== ======= ====== ======= ====== Weighted-average fair value of options granted during the year N/A $ 2.82 N/A ====== ====== ======
The following table summarizes information about stock options outstanding at December 31, 2006:
OPTIONS OPTIONS REMAINING EXERCISE OUTSTANDING DATE OF EXERCISABLE CONTRACTUAL PRICE AT 12/31/06 EXPIRATION AT 12/31/06 LIFE - -------- ----------- ---------- ----------- ----------- $ 9.63 26,489 05/15/15 -- 8.3 years 10.15 18,755 01/16/15 -- 8.1 years 11.65 9,343 3/01/07 9,343 .2 years 12.15 12,100 8/23/14 -- 7.7 years 13.65 2,802 07/07/07 394 .6 years
40 ANNUAL REPORT 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 15. Stock Options and Benefit Plans (continued) The Company initiated an Employee Stock Ownership Plan ("ESOP") in November 2005 that provided for the purchase of 354,550 adjusted treasury shares from the Company. The Company's loan to the ESOP will be repaid from contributions by the Banks over a 15 year period. The Company accounts for the ESOP in accordance with Statement of Position ("SOP") 93-6, "Employers Accounting for Employee Stock Ownership Plans." SOP 93-6 requires that compensation expense recorded by employers equal the fair value of ESOP shares allocated to participants during a given year. Allocation of shares to the ESOP participants are contingent upon the repayment of a loan to United Bancorp, Inc. totaling $3.3 million at December 31, 2006. The Company recorded expense for the ESOP plan of approximately $150,000 for the year ended December 31, 2006, resulting in the allocation of 14,891 shares. The Company has a defined benefit pension plan which covers all employees 21 or over who have completed 1,000 hours of service during an anniversary year, measured from date of hire. The plan calls for benefits to be paid to eligible employees at retirement, based primarily upon years of service and compensation rates near retirement. Contributions to the plan reflect benefits attributed to employees' services to date, as well as services expected to be earned in the future. Plan assets consist of primarily common stock and debt instruments. Pension expense is the net of service and interest cost, return on plan assets, and amortization of gains and losses not immediately recognized. The Company also offers a 401(k) plan, which covers all employees who have attained the age of 21 and have completed one year of service. Eligible employees may contribute up to $15,000 in 2006 and employees who have attained the age of 50 years or older may contribute an additional $5,000 in 2006. The Company may make a discretionary matching contribution equal to a percentage of each participant's elective deferral not to exceed 6% of the participant's annual compensation. Employee contributions are always vested. Employer contributions become 100% vested after 3 years of service. 16. Income Taxes The Company accounts for federal income taxes pursuant to SFAS 109, "Accounting for Income Taxes." In accordance with SFAS No. 109, a deferred tax liability or deferred tax asset is computed by applying the current statutory tax rates to net taxable or deductible temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that will result in net taxable or deductible amounts in future periods. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years' earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management's estimate of future taxable income. A valuation allowance is provided for deferred tax assets to the extent that the value of net deductible temporary differences and carryforward attributes exceeds management's estimates of taxes payable on future taxable income. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future. Deferred income taxes result from different methods of accounting for deferred loan origination fees and costs, Federal Home Loan Bank stock dividends, mortgage servicing rights, the loan loss allowance, amortization of intangibles, deferred compensation and pension expense. Additionally, a temporary difference is recognized for depreciation computed using accelerated methods for federal income tax purposes. ANNUAL REPORT 41 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 (Dollars in thousands) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 17. Fair Value of Financial Instruments The following methods and assumptions were used to estimate fair values for financial instruments. The carrying amount is considered to approximate fair value for cash and cash equivalents, deposit liabilities subject to immediate withdrawal, short-term borrowings, FHLB stock, accrued interest receivable and payable and variable-rate loans that reprice at intervals of less than six months. Fair values of securities are based on quoted market prices or, if no quotes are available, on the rate and term of the security and on information about the issuer. For fixed-rate loans that reprice less frequently than each six months, time deposits and longer-term borrowings, including subordinated debentures, the fair value is estimated by a discounted cash flow analysis using current market rates for the estimated life and credit risk of the related borrowing. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable. Fair value of loans held for sale is based on market estimates. The fair value of off-balance sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements. The estimated year-end fair values of financial instruments were:
2006 2005 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Financial assets: Cash and cash equivalents $ 14,554 $ 14,554 $ 13,877 $ 13,877 Securities available for sale 133,808 133,808 121,946 121,946 Securities held to maturity 17,870 18,220 20,262 20,483 FHLB stock 4,556 4,556 4,306 4,306 Loans receivable, net 229,172 228,042 229,107 227,480 Accrued interest receivable 2,578 2,578 2,363 2,363 Financial liabilities: Demand and savings deposits $155,124 $155,124 $146,543 $146,543 Time deposits 174,881 154,417 160,372 162,848 Federal funds purchased -- -- 12,545 12,545 Advances from the Federal Home Loan Bank 44,135 43,786 47,334 47,334 Securities sold under agreements to repurchase 6,218 6,218 7,142 7,142 Subordinated debentures 4,000 4,182 4,000 4,000 Accrued interest payable 745 745 641 641
18. Advertising Advertising costs are expensed as incurred. 19. Shareholders' Equity The Company has authorized 10,000,000 shares of $1.00 value common stock and 2,000,000 shares of preferred stock. Treasury stock is carried at cost. A 10% stock split in the form of a dividend was distributed during 2006, 2005 and 2004 to all shareholders of record. All per share data has been retroactively adjusted for these stock splits. 42 ANNUAL REPORT 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 20. Dividend Restrictions Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Banks to the Company or by the Company to shareholders. At December 31, 2006, the Banks have the ability to dividend $43,000 to the Company. In addition to such amount, the Banks may dividend 50% of future earnings. 21. Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any loss contingencies, the resolution of which will have an adverse effect on the financial statements. 22. Restrictions on Cash Cash on hand or on deposit with the Federal Reserve Bank totaling $2.3 million and $3.0 million was required to meet the regulatory reserve and clearing requirements at December 31, 2006 and 2005. These balances do not earn interest. 23. Reclassifications Certain prior year amounts have been reclassified to conform to the December 31, 2006 presentation. 24. 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: ANNUAL REPORT 43 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 24. Recent Accounting Pronouncements (continued) - 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. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement emphasizes that fair value is a market-based measurement and should be determined based on assumptions that a market participant would use when pricing an asset or liability. This Statement clarifies that market participant assumptions should include assumptions about risk as well as the effect of a restriction on the sale or use of an asset. Additionally, this Statement establishes a fair value hierarchy that provides the highest priority to quoted prices in active markets and the lowest priority to unobservable data. This Statement is effective for fiscal years beginning after November 15, 2007, or January 1, 2008 as to the Company, and interim periods within those fiscal years. The adoption of this Statement is not expected to have a material adverse effect on the Company's financial position or results of operations. In September 2006, the 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 44 ANNUAL REPORT 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 24. Recent Accounting Pronouncements (continued) 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. 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 January 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. SAB 108 had no 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 January 1, 2007 as to the Company. The Company adopted the requirements of FIN 48 on January 1, 2007, without effect on the consolidated financial statements. In September 2006, the FASB ratified the Emerging Issues Task Force's (EITF) Issue 06-4, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements," which requires companies to recognize a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee extending to postretirement periods. The liability should be recognized based on the substantive agreement with the employee. This Issue is effective beginning January 1, 2008. The Issue can be applied as either a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, or a change in accounting principle through retrospective application to all periods. The Company is in the process of evaluating the impact the adoption of Issue 06-4 will have on the financial statements. ANNUAL REPORT 45 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE B - SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of securities available for sale at December 31 are summarized as follows:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR 2006 COST GAINS LOSSES VALUE - ---- --------- ---------- ---------- --------- (In thousands) U.S. Government agency obligations $ 81,352 $ 15 $(1,503) $ 79,864 State and municipal obligations 24,911 133 (91) 24,953 Mortgage-backed securities 29,009 -- (788) 28,221 Collateralized mortgage obligations 783 -- (18) 765 -------- ---- ------- -------- Total debt securities 136,055 148 (2,400) 133,803 Equity securities 4 1 -- 5 -------- ---- ------- -------- $136,059 $149 $(2,400) $133,808 ======== ==== ======= ========
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR 2005 COST GAINS LOSSES VALUE - ---- --------- ---------- ---------- --------- (In thousands) U.S. Government agency obligations $ 77,436 $-- $(1,953) $ 75,483 State and municipal obligations 8,928 63 (222) 8,769 Mortgage-backed securities 36,599 -- (1,159) 35,440 Collateralized mortgage obligations 2,301 -- (71) 2,230 -------- --- ------- -------- Total debt securities 125,264 63 (3,405) 121,922 Equity securities 4 20 -- 24 -------- --- ------- -------- $125,268 $83 $(3,405) $121,946 ======== === ======= ========
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of securities held to maturity at December 31 are summarized as follows:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR 2006 COST GAINS LOSSES VALUE - ---- --------- ---------- ---------- --------- (In thousands) State and municipal obligations $17,870 $373 $ (23) $18,220 ======= ==== ===== ======= 2005 State and municipal obligations $20,262 $343 $(122) $20,483 ======= ==== ===== =======
46 ANNUAL REPORT 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE B - SECURITIES (continued) The amortized cost and fair value of debt securities by contractual maturity were as follows at December 31, 2006. Securities not due at a single maturity date, consisting of collateralized mortgage obligations and mortgage-backed securities, are shown separately.
AVAILABLE FOR SALE HELD TO MATURITY -------------------- ------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- -------- --------- ------- (In thousands) Due in one year or less $ 2,390 $ 2,372 $ 475 $ 479 Due from one to five years 6,303 6,208 2,643 2,735 Due from five to ten years 24,742 24,340 4,961 5,067 Due after ten years 72,828 71,896 9,791 9,939 Mortgage-backed securities 29,009 28,221 -- -- Collateralized mortgage obligations 783 766 -- -- -------- -------- ------- ------- $136,055 $133,803 $17,870 $18,220 ======== ======== ======= =======
Sales of available for sale securities were as follows:
YEAR ENDED DECEMBER 31, -------------------------- 2006 2005 2004 ------ ------- ------- (In thousands) Proceeds $7,729 $15,899 $33,936 Gross gains 1 44 199 Gross losses 350 96 122
The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2006 and 2005:
DECEMBER 31, 2006 ----------------------------------------------------------------------- LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL ---------------------- --------------------- ---------------------- ESTIMATED ESTIMATED ESTIMATED DESCRIPTION OF FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES - -------------- --------- ---------- -------- ---------- --------- ---------- (In thousands) U.S. Government agency obligations $ 9,467 $(32) $ 67,384 $(1,471) $ 76,851 $(1,503) State and municipal obligations 4,158 (1) 5,949 (113) 10,107 (114) Mortgage-backed securities -- -- 28,221 (788) 28,221 (788) Collateralized mortgage obligations -- -- 765 (18) 765 (18) ------- ---- -------- ------- -------- ------- Total temporarily impaired securities $13,625 $(33) $102,319 $(2,390) $115,944 $(2,423) ======= ==== ======== ======= ======== =======
ANNUAL REPORT 47 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE B - SECURITIES (continued)
DECEMBER 31, 2005 LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL ---------------------- ---------------------- ---------------------- ESTIMATED ESTIMATED ESTIMATED DESCRIPTION OF FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES - -------------- --------- ---------- --------- ---------- --------- ---------- (In thousands) U.S. Government agency obligations $45,581 $ (885) $25,903 $(1,068) $ 71,484 $(1,953) State and municipal obligations 7,996 (151) 734 (193) 8,730 (344) Mortgage-backed securities 12,672 (338) 22,768 (821) 35,440 (1,159) Collateralized mortgage obligations 485 (15) 1,745 (56) 2,230 (71) Total temporarily impaired securities $66,734 $(1,389) $51,150 $(2,138) $117,884 $(3,527)
Management has the intent and ability to hold these securities for the foreseeable future, and the declines in the fair value are largely due to an increase in market interest rates. The fair value is expected to recover as the securities approach their respective maturity dates. Management's ability to hold the securities is supported by cash flows from operations, staggered maturities within the loan portfolio and additional borrowing capacity as noted in Footnote F - Borrowings. Securities with an amortized cost of $78.4 million at December 31, 2006 and $97.2 million at December 31, 2005 were pledged to secure public deposits, repurchase agreements and other liabilities as required or permitted by law. At December 31, 2006 and 2005, there were no holdings of securities of any one issuer, other than the U. S. Government and its agencies, in an amount greater than 10% of shareholders' equity. NOTE C - LOANS The composition of total loans at December 31 is as follows:
2006 2005 -------- -------- (In thousands) Commercial loans $ 40,512 $ 32,675 Commercial real estate loans 92,895 97,706 Residential real estate loans 56,167 57,746 Installment loans 41,943 43,884 -------- -------- Total loans $231,517 $232,011 ======== ========
The Company has sold whole loans and participating interests in loans in the secondary market, retaining servicing on the loans sold. Loans sold and serviced for others totaled approximately $33.9 million and $30.4 million at December 31, 2006 and 2005, respectively. 48 ANNUAL REPORT 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE C - LOANS (continued) In the normal course of business, the Company has made loans to directors and officers, their immediate families, affiliated corporations and other entities in which they own more than a 10% voting interest. In the opinion of management, such loans are consistent with sound banking practices and were originated within applicable regulatory lending limitations. Such loans are summarized below:
(In thousands) -------------- Aggregate balance - December 31, 2005 $5,358 New loans 966 Repayments 262 ------ Aggregate balance - December 31, 2006 $6,062 ======
The activity in the allowance for loan losses was as follows:
YEAR ENDED DECEMBER 31, ------------------------- 2006 2005 2004 ------- ------ ------ (In thousands) Balance January 1, $ 2,904 $2,995 $2,843 Provision for loan losses 1,384 412 618 Loans charged-off (2,147) (762) (719) Recoveries of previous charge-offs 204 259 253 ------- ------ ------ Balance December 31, $ 2,345 $2,904 $2,995 ======= ====== ======
Nonperforming loans were as follows at December 31:
2006 2005 ------ ------ (In thousands) Loans past due over 90 days still on accrual $ 55 $ 417 Nonaccrual loans $3,396 $1,144
NOTE D - PREMISES AND EQUIPMENT Premises and equipment is comprised of the following at December 31:
2006 2005 -------- ------- (In thousands) Buildings and land $ 10,224 $10,174 Furniture and equipment 6,966 6,826 Leasehold improvements 264 264 Computer software 1,250 1,231 -------- ------- 18,704 18,495 Less accumulated depreciation and amortization (11,443) (10,890) -------- ------- Premises and equipment, net $ 7,261 $ 7,605 ======== =======
ANNUAL REPORT 49 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE D - PREMISES AND EQUIPMENT (continued) Depreciation expense totaled $534,000, $605,000 and $770,000 for the years ended December 31, 2006, 2005 and 2004, respectively. Citizens leases an in-store retail branch from a corporation in which a director of the Company holds an interest. The current five year lease provides for renewal options through 2012, and payments totaling $26,000 for each of the five subsequent years. Rental expense was $55,000, $57,000 and $36,000 for each of the years ended December 31, 2006, 2005 and 2004, respectively. During fiscal 2006, management determined that certain furniture and fixtures were determined to be impaired. An impairment charge to earnings totaling $60,000 was recognized in occupancy expense. NOTE E - DEPOSITS The scheduled maturities of time deposits as of December 31, 2006 were as follows:
UNDER OVER $100,000 $100,000 TOTALS -------- -------- -------- (In thousands) 2007 $ 88,317 $36,716 $125,033 2008 29,316 7,248 36,564 2009 7,792 1,815 9,607 2010 1,937 439 2,376 2011 1,120 -- 1,120 Thereafter 181 -- 181 -------- ------- -------- $128,663 $46,218 $174,881 ======== ======= ========
In the normal course of business, the Banks had received deposits totaling $1.1 million, as of December 31, 2006, from officers and directors of the Company. NOTE F - BORROWINGS At December 31, 2005, the Company had daily repricing federal funds borrowings totaling $12.5 million. The weighted-average interest rate for such borrowing was 4.50% at December 31, 2005. 50 ANNUAL REPORT 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE F - BORROWINGS (continued) At December 31 advances from the Federal Home Loan Bank were as follows:
2006 2005 ------- ------- (In thousands) Maturities November 2007 through August 2025, primarily fixed at rates from 2.68% to 7.20%, averaging 4.56% 10,960 $ -- Cash Management Lines of Credit, floating rate from 4.47% to 5.51%, averaging 4.99% 33,175 -- Maturities November 2006 through August 2025, primarily fixed at rates from 2.68% to 7.20%, averaging 5.54% -- 12,334 Cash Management Lines of Credit, floating rate from 2.52% to 4.42%, averaging 3.44% -- 35,000 ------- ------- $44,135 $47,334 ======= =======
At December 31, 2006, required annual principal payments on Federal Home Loan Bank advances and lines of credit were as follows: 2007 $39,799 2008 666 2009 602 2010 668 2011 492 Thereafter 1,908 ------- $44,135 =======
Additionally, as members of the Federal Home Loan Bank system at year-end 2006, the Banks had the ability to obtain up to $6.8 million in additional borrowings based on securities pledged to the FHLB at December 31, 2006. At December 31, 2006, the Company and its Banks have approximately $53.8 million one-to-four family residential real estate loans pledged as collateral for borrowings. Also at December 31, 2006, the Company and its Banks have cash management lines of credit with various correspondent banks (excluding FHLB cash management lines of credit) enabling additional borrowings of up to $24.4 million. ANNUAL REPORT 51 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE F - BORROWINGS (continued) Securities sold under agreements to repurchase are financing arrangements whereby the Company sells securities and agrees to repurchase the identical securities at the maturities of the agreements at specified prices. Physical control is maintained for all securities sold under repurchase agreements. Information concerning securities sold under agreements to repurchase is summarized as follows:
2006 2005 ------- ------- (In thousands) Balance outstanding at year end $ 6,218 $ 7,142 Average daily balance during the year $10,557 $10,129 Average interest rate during the year 4.18% 2.58% Maximum month-end balance during the year $22,659 $14,555 Weighted average interest rate at year end 4.26% 2.49%
Securities with an approximate carrying value of $16.9 million and $10.6 million at December 31, 2006 and 2005, respectively, were pledged as collateral for repurchase borrowings. NOTE G - BENEFIT PLANS In September 2006, the Financial Accounting Standards Board issued Statement 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB Statements No. 87, 88, 106, and 132(R)." Statement 158 requires the Company to recognize the funded status of its defined benefit postretirement plan in the Company's statement of financial condition. The funded status was previously disclosed in the notes to the Company's financial statements, but differed from the amount recognized in the statement of financial condition. The Statement does not change the accounting for the Company's defined contribution plan. The recognition and disclosure provisions of Statement 158 was effective as to the Company as of December 31, 2006. Retrospective application was not permitted. The Company adopted the recognition and disclosure provisions of Statement 158 effective December 31, 2006. The Company uses a December 31 measurement date for its pension plan. 52 ANNUAL REPORT 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE G - BENEFIT PLANS (continued) At December 31, 2006, the fair value of the Company's plan assets totaling $2.9 million exceeded the projected benefit obligation of $2.76 million by $143,000. The adoption of Statement 158 had the following effect on the Company's statement of financial position as of December 31, 2006:
AS OF DECEMBER 31, 2006 ---------------------------------------- PRIOR TO EFFECT OF ADOPTION OF ADOPTING AS STATEMENT 158 STATEMENT 158 ADJUSTED ------------- ------------- -------- (In thousands) Prepaid pension benefits $ 788 $(645) $ 143 Deferred income taxes (267) 219 (48) Accumulated other comprehensive loss (1,486) (426) (1,912)
The adoption of Statement 158 did not affect the Company's statement of earnings for the year ended December 31, 2006, or any prior periods. Application of the Statement will not change the calculation of net earnings in future periods, but will affect the calculation of other comprehensive income. The amounts recognized in accumulated other comprehensive income at December 31, 2006, consists of: (In thousands) Prior service costs $106 Actuarial losses 539 ---- $645 ====
The amounts included in accumulated other comprehensive income at December 31, 2006, and expected to be recognized in net periodic pension cost during the year ended December 31, 2007, are as follows: (In thousands) Prior service costs $15 Actuarial losses 15 --- $30 ===
The Company does not expect to have any plan assets returned during the year ended December 31, 2007. The Plan's assets are invested in prototype investment strategy classified as a "balanced investment approach." This investment strategy permits the asset allocation to range between 40% to 60% for equities and fixed income investments. This model is further defined to permit the use of multiple equity mutual funds as deemed appropriate by the funds investment advisor. The types of mutual funds include, but are not limited to, large, mid or small capitalization funds to international mutual funds. The fixed income investment model is categorized as a core model using a single mutual fund with both long and shorter term focus. Depending on the needs of the plan benefits, certain levels of liquidity in the Plan will vary depending on scheduled benefit or lump sum distribution requirements. The remaining fund assets are subject to the previously mentioned investment guidelines. The actual rate ANNUAL REPORT 53 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE G - BENEFIT PLANS (continued) of return on plan assets for 2006 was 5.40% for fixed income investments, 16.82% on equity investments and 12.76% on total plan assets. The actual rate of return and the expected long term rate of return using a balanced investment approach were used as the basis for the actuarial assumptions of 8.0%, 7.0% and 8.0% for the expected long term rate of return on assets in 2006, 2005 and 2004. The Company recognized net periodic pension costs of $218,000, $309,000 and $363,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The net periodic pension costs were computed using a 6.50% discount rate for each of the years presented. During 2004, an unusually large amount of pension benefits were paid to retirees. Such payments gave rise to a settlement loss of approximately $172,000. The Company anticipates a cash contribution of $300,000 in 2007. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
FISCAL YEAR ENDING IN RETIREMENT BENEFITS - --------------------- ------------------- (in thousands) 2007 $ 370 2008 295 2009 60 2010 1,125 2011 215 2012 - 2016 1,581
In addition to the defined benefit plan, the Company has an Employee Sock Ownership Plan ("ESOP") with an integrated 401(k) plan. The Company's 401(k) matching percentage was 50% of the employees' first 6% of contributions for 2006, 2005 and 2004. Expense related to the ESOP and integrated 401(k) plan totaled $151,000, $80,000 and $67,000 for the years ended December 31, 2006, 2005 and 2004, respectively. NOTE H - INCOME TAXES Income tax expense for the years ended December 31 was as follows:
2006 2005 2004 ----- ---- ---- (In thousands) Current $(213) $958 $831 Deferred 454 (49) 33 ----- ---- ---- $ 241 $909 $864 ===== ==== ====
54 ANNUAL REPORT 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE H - INCOME TAXES (continued) The effective tax rate differs from the statutory federal income tax rate as follows:
YEAR ENDED DECEMBER 31, ----------------------- 2006 2005 2004 ----- ------ ------ (In thousands) Statutory rate 34.0% 34.0% 34.0% Income taxes computed at the statutory federal tax rate $ 785 $1,429 $1,393 Effect of: Tax exempt interest income (431) (420) (454) Bank-owned life insurance (98) (98) (94) Other (15) (2) 19 ----- ------ ------ $ 241 $ 909 $ 864 ===== ====== ====== Effective tax rate 10.4% 21.6% 21.1% ===== ====== ======
Deferred tax assets and deferred tax liabilities at December 31, are comprised of the following:
2006 2005 ------- ------- (In thousands) Items giving rise to deferred tax assets: Allowance for loan losses $ 498 $ 818 Core deposit intangible -- 6 Deferred compensation 347 304 Accretion 5 -- Unrealized loss on securities available for sale 766 1,130 ------- ------- Total deferred tax assets 1,616 2,258 Items giving rise to deferred tax liabilities: Depreciation (181) (202) Deferred loan costs, net (130) (119) Accretion -- (28) FHLB stock dividends (523) (433) Mortgage servicing rights (137) (124) Pension expense (48) (206) Other (50) -- ------- ------- Total deferred tax liabilities (1,069) (1,112) ------- ------- Net deferred tax asset $ 547 $ 1,146 ======= =======
Management has not provided an allowance for any portion of the deferred tax assets based on the amount of taxes paid in available carryback periods. ANNUAL REPORT 55 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE I - OFF-BALANCE SHEET ACTIVITIES The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. The Company grants retail, commercial and commercial real estate loans to customers primarily located in northeastern, eastern and southeastern Ohio. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Although the Company has a diversified loan portfolio, a substantial portion of the borrowers' ability to honor their contracts is dependent upon the economic conditions in each borrower's geographic location. A summary of the notional or contractual amounts of financial instruments with off-balance sheet risk at December 31 is as follows:
2006 2005 ------- ------- (In thousands) Commitments to extend credit $33,429 $29,617 Credit card and ready reserve lines 12,666 2,028 Standby letters of credit 707 855
NOTE J - CONCENTRATIONS The Banks grant commercial, commercial real estate, real estate and installment loans to customers mainly in Athens, Belmont, Carroll, Fairfield, Harrison, Hocking and Tuscarawas Counties and surrounding localities. The Banks also grant commercial and commercial real estate loans in the Columbus, Ohio area. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, commercial real estate and residential real estate. At December 31, 2006 and 2005, total commercial and commercial real estate loans made up 57.6% and 56.2%, respectively of the loan portfolio with 8.0% and 4.9% of these loans secured by commercial real estate and business assets mainly in the Columbus, Ohio area. Installment loans account for 18.1% and 18.9% of the loan portfolio and are secured by consumer assets including automobiles, which account 56 ANNUAL REPORT 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE J - CONCENTRATIONS (continued) for 65.1% and 71.0%, respectively, of the installment loan portfolio. Real estate loans comprise 24.3% and 24.9% of the loan portfolio as of December 31, 2006 and 2005, respectively, and primarily include first mortgage loans on residential properties and home equity lines of credit. Included in cash and due from banks as of December 31, 2006 and 2005 is $6.4 million and $4.8 million, respectively, of uninsured deposits with J.P. Morgan Chase Bank, NA, Detroit, Michigan. Also included in cash and cash equivalents as of December 31, 2006 and 2005 is $2.8 million and $3.9 million, respectively, of uninsured interest-bearing deposits with First Tennessee Bank. A significant percentage of Community's deposit growth over the past several years has emanated from its dealings with eight large depository customers. As of December 31, 2006, these depositors accounted for approximately 11.9% of Community's deposits and 5.3% of the Company's deposit totals. This concentration of deposits poses possible liquidity and earnings risk to the Company. However, in the opinion of management, the potential risks associated with such deposit concentration is more than offset at December 31, 2006 by the Company's pending consolidation of bank charters and available borrowing capacity. NOTE K - SUBORDINATED DEBENTURES In 2005, a Delaware statutory business trust owned by the Company, United Bancorp Statutory Trust I ("Trust I" or the "Trust"), issued $4.0 million of mandatorily redeemable debt securities. The sale proceeds were utilized to purchase $4.0 million of the Company's subordinated debentures which mature in 2035. The Company's subordinated debentures are the sole asset of Trust I. Pursuant to FIN 46(R), the Company's investment in Trust I is not consolidated herein as the Company is not deemed the primary beneficiary of the Trust. However, the $4.0 million of mandatorily redeemable debt securities issued by the Trust are includible for regulatory purposes as a component of the Company's Tier 1 Capital. Interest on the Company's subordinated debentures are fixed at 6.25% and are payable quarterly. NOTE L - REGULATORY CAPITAL The Company and Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt correct action regulations involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet various capital requirements can initiate regulatory action. Prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The Banks were categorized as well capitalized at December 31, 2006. Management is not aware of any conditions subsequent to that date which would change the Banks' capital category. ANNUAL REPORT 57 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE L - REGULATORY CAPITAL (continued) AS OF DECEMBER 31, 2006
REQUIRED TO BE "WELL- REQUIRED CAPITALIZED" UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS --------------- ----------------- ------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ------- ----- ------- ----- Total capital (to risk-weighted assets) Consolidated $40,891 15.7% $20,876 8.0% N/A N/A Citizens 23,870 13.0% 14,633 8.0% $18,291 10.0% Community 7,923 11.0% 5,749 8.0% 7,186 10.0% Tier 1 capital (to risk-weighted assets) Consolidated $38,546 14.8% $10,438 4.0% N/A N/A Citizens 22,266 12.2% 7,316 4.0% $10,975 6.0% Community 7,181 10.0% 2,875 4.0% 4,312 6.0% Tier 1 capital (to average assets) Consolidated $38,546 9.2% $16,687 4.0% N/A N/A Citizens 22,266 7.3% 12,125 4.0% $15,156 5.0% Community 7,181 6.5% 4,430 4.0% 5,538 5.0%
AS OF DECEMBER 31, 2005
REQUIRED TO BE "WELL- REQUIRED CAPITALIZED" UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS --------------- ----------------- ------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ------- ----- ------- ----- Total capital (to risk-weighted assets) Consolidated $41,534 16.3% $20,338 8.0% N/A N/A Citizens 27,494 15.1 14,545 8.0 $18,182 10.0% Community 8,758 11.5 6,098 8.0 7,623 10.0 Tier 1 capital (to risk-weighted assets) Consolidated $38,620 15.2% $10,169 4.0% N/A N/A Citizens 25,340 13.9 7,273 4.0 $10,909 6.0% Community 7,998 10.5 3,049 4.0 4,574 6.0 Tier 1 capital (to average assets) Consolidated $38,620 9.6% $16,125 4.0% N/A N/A Citizens 25,340 9.0 11,314 4.0 $14,142 5.0% Community 7,998 6.7 4,812 4.0 6,016 5.0
The Company's primary source of funds to pay dividends to shareholders is the dividends it receives from the Banks. The Banks are subject to certain restrictions on the amount of dividends that they may declare without prior regulatory approval. Generally, capital distributions are limited to undistributed net earnings for the current and prior two years. At December 31, 2006, $43,000 were available for dividend declaration without prior regulatory approval. 58 ANNUAL REPORT 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE M - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS The following condensed financial statements summarize the financial position of the Company as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the years ended December 31, 2006, 2005 and 2004. UNITED BANCORP, INC. STATEMENTS OF FINANCIAL CONDITION December 31, (In thousands)
2006 2005 ------- ------- ASSETS Cash and cash equivalents $ 3,159 $ 4,245 Securities available for sale, at fair value 1 1 Investment in the Banks 28,000 31,198 Office premises 172 173 Corporate owned life insurance 4,828 -- Other assets 778 965 ------- ------- Total assets $36,938 $36,582 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Subordinated debentures $ 4,000 $ 4,000 Other liabilities 358 102 Shareholders' equity 32,580 32,480 ------- ------- Total liabilities and shareholders' equity $36,938 $36,582 ======= =======
UNITED BANCORP, INC. STATEMENTS OF EARNINGS Year ended December 31, (In thousands)
2006 2005 2004 ------ ------ ------ Operating income Dividends from subsidiaries $1,793 $1,952 $1,717 Interest and dividend income from securities and federal funds 156 27 -- Other income 167 30 7 ------ ------ ------ Total operating income 2,116 2,009 1,724 General, administrative and other expenses 1,366 1,030 873 ------ ------ ------ Income before income taxes and equity in undistributed net earnings 750 979 851 Income tax benefits (423) (336) (268) ------ ------ ------ Income before equity in undistributed earnings of subsidiaries 1,173 1,315 1,119 Equity in undistributed earnings of subsidiaries 895 1,978 2,114 ------ ------ ------ Net earnings $2,068 $3,293 $3,233 ====== ====== ======
ANNUAL REPORT 59 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE M - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (CONTINUED) UNITED BANCORP, INC. STATEMENTS OF CASH FLOWS Year ended December 31, (In thousands)
2006 2005 2004 ------- ------- ------- Cash flows provided by operating activities: Net earnings $ 2,068 $ 3,293 $ 3,233 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1 1 1 Equity in (undistributed earnings of) excess distributions from subsidiaries 4,122 (1,978) (2,114) Net change in other assets and other liabilities (58) 265 60 Amortization of intangibles 12 3 12 ------- ------- ------- Net cash provided by operating activities 6,145 1,584 1,192 Cash flows provided by (used in) financing activities: Dividends paid to shareholders (2,417) (2,115) (1,879) Cash paid in lieu of fractional shares (4) (4) (6) Proceeds from issuance to Dividend Reinvestment Plan 547 357 -- Proceeds from exercise of stock options 6 296 -- Proceeds from issuance of subordinated debentures -- 4,000 -- Acquisition of Company-owned life insurance (4,828) -- -- Acquisition of treasury shares by ESOP -- 3,417 -- Funding of note receivable to ESOP -- (3,417) -- Purchases of treasury stock (535) (614) (652 ------- ------- ------- Net cash provided by (used in) financing activities (7,231) 1,919 (2,537) ------- ------- ------- Net increase (decrease) in cash and cash equivalents (1,086) 3,504 (1,345) Cash and cash equivalents at beginning of year 4,245 741 2,086 ------- ------- ------- Cash and cash equivalents at end of year $ 3,159 $ 4,245 $ 741 ======= ======= =======
60 ANNUAL REPORT 2006 UNITED BANCORP INC. December 31, 2006, 2005 and 2004 NOTE N - QUARTERLY FINANCIAL DATA (UNAUDITED) The following table summarizes the Company's quarterly results of operations for the years ended December 31, 2006 and 2005.
THREE MONTHS ENDED --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ (In thousands) 2006: Total interest income $5,985 $ 6,319 $6,552 $6,423 Total interest expense 2,835 3,151 3,385 3,466 ------ ------- ------ ------ Net interest income 3,150 3,168 3,167 2,957 Provision for losses on loans 102 302 652 328 Other income 612 280 699 706 General, administrative and other expense 2,789 2,941 2,773 2,543 ------ ------- ------ ------ Earnings before income taxes 871 205 441 792 Federal income taxes 169 (82) 38 116 ------ ------- ------ ------ Net earnings $ 702 $ 287 $ 403 $ 676 ====== ======= ====== ====== Earnings per share Basic $ 0.15 $ 0.06 $ 0.09 $ 0.15 ====== ======= ====== ====== Diluted $ 0.15 $ 0.06 $ 0.09 $ 0.15 ====== ======= ====== ======
THREE MONTHS ENDED --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ (In thousands) 2005: Total interest income $5,223 $5,445 $5,658 $5,855 Total interest expense 1,974 2,161 2,404 2,607 ------ ------ ------ ------ Net interest income 3,249 3,284 3,254 3,248 Provision for losses on loans 144 116 68 84 Other income 566 589 574 613 General, administrative and other expense 2,620 2,640 2,664 2,839 ------ ------ ------ ------ Earnings before income taxes 1,051 1,117 1,096 938 Federal income taxes 230 237 268 174 ------ ------ ------ ------ Net earnings $ 821 $ 880 $ 828 $ 764 ====== ====== ====== ====== Earnings per share Basic $ 0.18 $ 0.19 $ 0.18 $ 0.16 ====== ====== ====== ====== Diluted $ 0.18 $ 0.19 $ 0.18 $ 0.16 ====== ====== ====== ======
The earnings per share data has been adjusted to account for the 10% stock split in the form of a dividend paid in 2006 and 2005. ANNUAL REPORT 61 2006 UNITED BANCORP INC. EX-23 3 k13508exv23.txt CONSENT OF GRANT THORNTON, LLP EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report dated March 23, 2007, accompanying the consolidated financial statements incorporated by reference in the Annual Report of United Bancorp, Inc. on Form 10K for the year ended December 31, 2006. We hereby consent to the incorporation by reference of said report in the Registration Statements of United Bancorp, Inc. on Forms S-8 (file No. 33-123036 effective February 28, 2005) and S-3 (file No. 333-136708 effective August 17, 2006). /s/ Grant Thornton LLP Cincinnati, Ohio March 23, 2007 EX-31.1 4 k13508exv31w1.txt RULE 13A-14(A) CERTIFICATION - CEO EXHIBIT 31.1 CERTIFICATIONS I, James W. Everson, Chairman, President and Chief Executive Officer of United Bancorp, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of United Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [THIS PARAGRAPH INTENTIONALLY LEFT BLANK.] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 29, 2007 /s/ James W. Everson ---------------------------------------- James W. Everson, Chairman, President and CEO EX-31.2 5 k13508exv31w2.txt RULE 13A-14(A) CERTIFICATION - CFO EXHIBIT 31.2 CERTIFICATIONS I, Randall M. Greenwood, Chief Financial Officer of United Bancorp, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of United Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [THIS PARAGRAPH INTENTIONALLY LEFT BLANK.] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 29, 2007 /s/ Randall M. Greenwood ---------------------------------------- Randall M. Greenwood, CFO EX-32.1 6 k13508exv32w1.txt SECTION 1350 CERTIFICATION - CEO EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of United Bancorp, Inc. (the "Company") on Form 10-K for the period ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James W. Everson, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ James W. Everson - ------------------------------------- James W. Everson, Chairman, President and Chief Executive Officer March 29, 2007 EX-32.2 7 k13508exv32w2.txt SECTION 1350 CERTIFICATION - CFO EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of United Bancorp, Inc. (the "Company") on Form 10-K for the period ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Randall M. Greenwood, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Randall M. Greenwood - ------------------------------------- Randall M. Greenwood, Chief Financial Officer March 29, 2007 -----END PRIVACY-ENHANCED MESSAGE-----