1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
[ ] 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
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UNITED BANCORP, INC.
--------------------
(Exact name of registrant as specified in its charter.)
OHIO 34-1405357
---- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
FOURTH AT HICKORY STREET, MARTINS FERRY, OHIO 43935
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(Address of principal executive offices) (Zip Code)
(614) 633-0445
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of the issuer's classes of common
stock as of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE 2,238,314 SHARES AS OF NOVEMBER 4, 1997
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UNITED BANCORP, INC.
TABLE OF CONTENTS
FORM 10-Q
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets . . . September 30, 1997 and December 31, 1996..............................3
Condensed Consolidated Statements of Income . . . Three and Nine Months Ended
September 30, 1997 and 1996.......................................................................................4
Condensed Consolidated Statements of Cash Flows . . . Nine Months Ended
September 30, 1997 and 1996.......................................................................................5
Notes to Condensed Consolidated Financial Statements.........................................................6 - 18
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................................19 - 26
PART II OTHER INFORMATION
ITEM 1.
Legal Proceedings................................................................................................27
ITEM 2.
Changes in Securities............................................................................................27
ITEM 3.
Default Upon Senior Securities...................................................................................27
ITEM 4.
Submission of Matters to a Vote of Security Holders..............................................................27
ITEM 5.
Other Information................................................................................................27
ITEM 6.
Exhibits and Reports on Form 8-K.................................................................................27
Signatures.......................................................................................................28
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UNITED BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
FORM 10-Q (IN THOUSANDS)
PART I FINANCIAL INFORMATION
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ---------------
ASSETS
Cash and due from banks $ 5,887 $ 6,394
Federal funds sold 1,490 225
------------- ---------------
Total cash and cash equivalents 7,377 6,619
Securities available for sale 30,042 28,064
Securities held to maturity
(Estimated fair value of $29,562 at 09/30/97 and $30,252
at 12/31/96) 28,834 29,794
Loans receivable
Commercial loans 13,830 12,415
Commercial real estate loans 44,034 41,213
Real estate loans 32,712 33,886
Installment loans 47,142 45,147
------------- ---------------
Total loans receivable 137,718 132,661
Allowance for loan losses (2,251) (2,023)
------------- ---------------
Net loans receivable 135,467 130,638
Premises and equipment, net 5,239 5,185
Accrued interest receivable and other assets 2,465 2,065
------------- ---------------
Total Assets $ 209,424 $ 202,365
============= ===============
LIABILITIES
Demand deposits
Noninterest bearing $ 12,283 $ 13,384
Interest bearing 26,914 26,815
Savings deposits 50,426 49,882
Time deposits - under $100,000 69,435 67,491
Time deposits - $100,000 and over 15,502 13,940
------------- ---------------
Total deposits 174,560 171,512
Securities sold under agreements to repurchase 8,665 8,642
Other borrowed funds 3,505 704
Accrued expenses and other liabilities 1,257 1,491
------------- ---------------
Total Liabilities 187,987 182,349
SHAREHOLDERS' EQUITY
Common stock - $1 Par Value: 10,000,000 shares authorized;
2,238,314 - 09/30/97 and 2,033,385 - 12/31/96 issued and
outstanding 2,238 2,033
Additional-paid-in-capital 15,663 11,726
Retained earnings 3,362 6,115
Unrealized gain on securities available for sale, net of tax 174 142
------------- ---------------
Total Shareholders' Equity 21,437 20,016
------------- ---------------
Total Liabilities and Shareholders' Equity $ 209,424 $ 202,365
============= ===============
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FORM 10-Q (IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1996 1997 1996
------------------------------------------------------------------
Interest and dividend income
Loans, including fees $ 3,178 $ 2,898 $ 9,283 $ 8,491
Taxable securities 583 538 1,758 1,703
Non-taxable securities 279 274 834 786
Other interest and dividend income 51 64 107 156
--------- --------- --------- ----------
Total interest and dividend income 4,091 3,774 11,982 11,136
Interest expense
Deposits
Demand 169 162 499 477
Savings 393 391 1,160 1,142
Time 1,171 1,078 3,402 3,124
Other borrowed funds 130 76 356 243
--------- --------- --------- ----------
Total interest expense 1,863 1,707 5,417 4,986
NET INTEREST INCOME 2,228 2,067 6,565 6,150
Provision for loan losses (111) (111) (333) (344)
--------- --------- --------- ----------
Net interest income after provision for loan losses 2,117 1,956 6,232 5,806
Noninterest income
Service charges on deposit accounts 144 152 430 453
Security gains - net 1 0 1 27
Other income 122 77 285 223
--------- --------- --------- ----------
Total noninterest income 267 229 716 703
Noninterest expense
Salaries and employee benefits 724 662 2,140 2,005
Occupancy 167 221 470 613
Other expenses 523 456 1,569 1,322
--------- --------- --------- ----------
Total noninterest expense 1,414 1,339 4,179 3,940
INCOME BEFORE INCOME TAXES 970 846 2,769 2,569
Income Tax Expense 257 214 685 632
--------- --------- --------- ----------
NET INCOME $ 713 $ 632 $ 2,084 $ 1,937
========= ========= ========= ==========
Earnings per common share $ 0.32 $ 0.28 $ 0.93 $ 0.86
Weighted average shares outstanding 2,238 2,236 2,237 2,236
Dividends per common share $ 0.12 $ 0.10 $ 0.32 $ 0.28
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FORM 10-Q (IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,084 $ 1,937
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 348 331
Amortization of intangibles 43 69
Provision for loan losses 333 344
Deferred taxes (98) (39)
Federal Home Loan Bank stock dividend (26) (29)
Gain on sale/call of securities (1) (27)
(Accretion)/amortization of securities, net (9) 8
Gain on sale of other real estate owned (5) -
Net changes in accrued interest receivable and other assets (443) (521)
Net changes in accrued expenses and other liabilities 234 43
-------- --------
Net cash from operating activities 2,460 2,116
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Proceeds from sales - 3,623
Proceeds from maturities/calls 7,750 10,000
Purchases (9,640) (11,697)
Securities held to maturity
Proceeds from maturities/calls 1,427 3,435
Purchases (496) (4,839)
Net change in loans (5,187) (4,940)
Net purchases of premises and equipment (403) (707)
Proceeds from sale of other real estate owned 30 -
-------- --------
Net cash from investing activities (6,519) (5,125)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 3,048 4,595
Net change in short-term borrowings 2,179 2,896
Proceeds from long-term debt 680 -
Princiapl payments on long-term debt (35) -
Proceeds from exercise of stock options 23 -
Tax benefit from exercise of stock options 2 -
Cash dividends paid (720) (650)
-------- --------
Net cash from financing activities 5,177 6,841
-------- --------
Net change in cash and cash equivalents 1,118 3,832
Cash and cash equivalents at beginning of year 6,619 6,982
-------- --------
Cash and cash equivalents at end of period $ 7,737 $ 10,814
======== ========
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and
reflect all adjustments which, in the opinion of management, are necessary to
present fairly the consolidated financial position of the Company at
September 30, 1997 and its results of operations and statements of cash flows
for the periods presented. These adjustments are of a normal and recurring
nature. The accompanying condensed consolidated financial statements do not
purport to contain all the necessary financial disclosures required by
generally accepted accounting principles that might otherwise be necessary in
the circumstances and should be read in conjunction with the 1996 United
Bancorp, Inc. consolidated financial statements and related notes thereto
included in its Annual Report To Shareholders for the year ended December 31,
1996.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of United
Bancorp, Inc. (Company) and its wholly owned subsidiaries (Banks), The
Citizens Savings Bank, Martins Ferry, Ohio (Citizens-Martins Ferry) and The
Citizens-State Bank of Strasburg, Strasburg, Ohio (Citizens-Strasburg). All
significant intercompany transactions and balances have been eliminated in
consolidation. The results of operations for the period ended September 30,
1997 are not necessarily indicative of the operating results for the full
year of 1997.
NATURE OF OPERATIONS:
The Company and Banks' revenues, operating income and assets are
primarily from the banking industry. Citizens-Martins Ferry's loan customers
are located in Belmont and Jefferson counties in eastern Ohio and Marshall
and Ohio counties in the northern panhandle of West Virginia.
Citizens-Strasburg's loan customers are located in Tuscarawas and Carroll
Counties. Both geographic locations include a wide range of individuals,
businesses and other organizations. A major portion of loans are secured by
various forms of collateral including real estate, business assets, consumer
property and other items, although borrower cash flow may also be a primary
source of payment. Citizens-Martins Ferry conducts its business through its
main office in Martins Ferry, Ohio and three branches located in Bridgeport,
Colerain and St. Clairsville, Ohio. Citizens-Strasburg conducts its business
through its main office in Strasburg, Ohio and its four branches located in
Dover, New Philadelphia, Sherrodsville and Dellroy, Ohio.
USE OF ESTIMATES:
To prepare financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions based on
available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided and future
results could differ. The collectibility of loans, fair values of financial
instruments and status of contingencies are particularly subject to change.
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH FLOW REPORTING:
Cash and cash equivalents are defined as cash and due from banks and
federal funds sold. Net cash flows are reported for customer loan and deposit
transactions, securities sold under agreements to repurchase and short-term
borrowings. For the periods ended September 30, 1997 and September 30, 1996,
the Company paid $5,464,000 and $5,018,000 in interest on deposits and other
borrowings and $703,000 and $710,000 for income taxes, respectively.
SECURITIES:
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 are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair
value, with unrealized holding gains and losses reported separately in
shareholders' equity, net of tax. Securities are classified as trading when
held for short term periods in anticipation of market gains and are carried
at fair value. Securities are written down to fair value when a decline in
fair value is not temporary.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest income includes amortization of purchase
premiums and discounts.
LOANS:
Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs. Interest income is reported on the interest method and
includes amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt,
typically when payments are past due over 90 days. Payments received on such
loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is a valuation allowance, 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, known and inherent risks in the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Effective January 1, 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") Nos. 114 and 118, which
modify the accounting for impaired loans. A loan is considered impaired when
management believes that full collection of principal and interest is not
probable. The Company reduces the carrying value of impaired loans to the
present value of expected future cash flows, or to the fair value of
collateral if the loan is collateral dependent, by allocating a portion of
the allowance for loan losses to such loans. If these allocations should
require an increase to the allowance, such increase is reported as bad debt
expense.
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES: (CONTINUED)
Management analyzes commercial and commercial real estate loans on an
individual basis and classifies a loan as impaired when an analysis of the
borrower's operating results and financial condition indicates that
underlying cash flows are not adequate to meet its debt service requirements.
Often this is associated with a delay or shortfall in payments of 30 days or
more, or when the internal grading system indicates a doubtful
classification. Loan impairment is evaluated in total for smaller-balance
loans of similar nature. Such loans include residential first mortgage loans
secured by one to four-family residences, residential construction loans and
consumer automobile, boat and home equity loans. The carrying values of
impaired loans are periodically adjusted to reflect cash payments, revised
estimates of future cash flows and increases in the present value of expected
cash flows due to the passage of time. Cash payments representing interest
income are reported as such. Other cash payments are reported as reductions
in carrying value, while increases or decreases due to changes in future
payments and due to the passage of time are reported as part of the provision
for loan losses.
PREMISES AND EQUIPMENT:
Asset cost is reported net of accumulated depreciation. Depreciation
expense is calculated on the straight-line method over asset useful lives.
These assets are reviewed for impairment when events indicate the carrying
amount may not be recoverable.
OTHER REAL ESTATE:
Real estate acquired in settlement of loans is initially reported at
estimated fair value at acquisition. After acquisition, a valuation allowance
reduces the reported amount to the lower of the initial amount or fair value
less costs to sell. Expenses, gains and losses on disposition and changes in
the valuation allowance are reported in other expenses.
LOAN SERVICING:
The Company became subject to the provisions of SFAS No. 122,
"Accounting for Mortgage Servicing Rights," on January 1, 1996. This Standard
requires entities to recognize, as separate assets, rights to service
mortgage loans for others, regardless of how these rights are acquired.
Mortgage servicing rights acquired through either the purchase or the
origination of mortgage loans which are subsequently sold with servicing
rights retained should be determined by allocating the total cost of the
mortgage loans to mortgage servicing rights and to loans (without the
mortgage servicing rights) based on their relative fair values. Mortgage
servicing rights recorded as a separate asset are amortized in proportion to,
and over the period of, estimated net servicing income.
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IDENTIFIED INTANGIBLES:
Identified intangibles include the value of depositor relationships
purchased which are being amortized on an accelerated method over eight
years. Identified intangibles also include a non-compete covenant and
capitalized organizational costs which are being amortized on a straight-line
method over five years. Identified intangibles are assessed for impairment
based on estimated undiscounted cash flows and written down if necessary. At
September 30, 1997 and December 31, 1996, identified intangibles net of
accumulated amortization totaled $131,196 and $173,638 and are included in
other assets in the accompanying consolidated balance sheets.
EMPLOYEE BENEFITS:
A defined benefit pension plan covers all employees who have completed
1,000 hours of service during an anniversary year, measured from their date
of hire, who have attained age 21 and who were hired before age 60. 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 certificates of deposit.
Beginning March of 1995, the Company began offering 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% of their
compensation subject to a maximum statutory limitation. 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 5 years of service.
Expense of the defined benefit plan is reported by spreading the
expected contributions to the plan less long-term earnings on plan assets
over the employee's service period. Expense of the 401(k) plan is based on
the annual contribution.
STOCK COMPENSATION:
Expense for employee compensation under stock option plans is based on
Opinion 25, with expense reported only if options are granted below market
price at grant date.
INCOME TAXES:
Income tax expense is the sum of the current year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets
and liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK DIVIDENDS:
Dividends issued in stock are reported by transferring the market value
of the stock issued from retained earnings to common stock and additional
paid-in-capital. Stock splits are recorded by transferring the par value of
shares issued from retained earnings to common stock. On August 19, 1997, a
10% stock dividend was approved for all shareholders of record on September
2, 1997 and distributed on September 19, 1997. On April 17, 1996, a 10% stock
dividend was approved for all shareholders of record on May 20, 1996 and
distributed on June 20, 1996.
EARNINGS AND DIVIDENDS PER COMMON SHARE:
Earnings per common share is based on the weighted-average number of
shares outstanding for the period. Stock options outstanding do not presently
have a dilutive effect greater than or equal to 3% on earnings per common
share. All per share data has been retroactively adjusted for the 10% stock
dividend in 1997.
RECLASSIFICATIONS:
Some items in prior financial statements have been reclassified to
conform with the current presentation.
IMPACT OF RECENT ACCOUNTING STANDARDS:
SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," was issued by the Financial
Accounting Standards Board ("FASB") in 1996. It revises the accounting for
transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It was originally
effective for some transactions in 1997 and others in 1998. SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125" was issued in December 1996. SFAS No. 127 defers for one year the
effective date of provisions related to securities lending, repurchase
agreements and other similar transactions. The remaining portions of SFAS No.
125 will continue to be effective January 1, 1997. SFAS No. 125 did not have
a material impact on the Company's financial statements.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which
is effective for financial statements for periods ending after December 15,
1997, including interim periods. SFAS No. 128 simplifies the calculation of
earnings per share by replacing primary EPS with basic EPS. It also requires
dual presentation of basis EPS and diluted EPS for entities with complex
capital structures. Basic EPS includes no dilution and is computed by
dividing income available to common shareholders by the weighted-average
common shares outstanding for the period. Diluted EPS reflects the potential
dilution of securities that could share in earnings such as stock options,
warrants or other common stock equivalents. All prior period EPS data will be
restated to conform with the new presentation.
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENT ACCOUNTING STANDARDS: (CONTINUED)
In February 1997, the FASB issued SFAS No. 129, "Disclosures of
Information about Capital Structure." SFAS No. 129 consolidated existing
accounting guidance relating to disclosure about a company's capital
structure. Public companies generally have always been required to make
disclosures now required by SFAS no. 129 and, therefore, SFAS No. 129 should
have no impact on the Company. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. It does not require a specific format for that financial
statement but requires that an enterprise display an amount representing
total comprehensive income for the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital in the equity section of a
statement of financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This Statement significantly
changes the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about reportable segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 uses a "management approach" to disclose financial
and descriptive information about an enterprise's reportable operating
segments which is based on reporting information the way the management
organizes the segments within the enterprise for making operating decisions
and assessing performance. For many enterprises, the management approach will
likely result in more segments being reported. In addition, the Statement
requires significantly more information to be disclosed for each reportable
segment than is presently being reported in annual financial statements. The
Statement also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997.
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
2. SECURITIES:
The amortized cost and estimated fair values of investment securities
are as follows:
AMORTIZED GROSS GROSS ESTIMATED
COST UNREALIZED GAINS UNREALIZED LOSSES FAIR VALUE
----------------------------------------------------------------------------
AVAILABLE FOR SALE - SEPTEMBER 30, 1997
US Treasury obligations $ 3,256,563 $ 51,062 $ 3,307,625
US Agency obligations 25,212,115 171,135 $ (12,031) 25,371,219
State and Municipal obligations 456,825 27,506 484,331
Other investments 852,800 26,363 879,163
------------- ---------- ----------- -------------
$ 29,778,303 $ 276,066 $ (12,031) $ 30,042,338
============= ========== =========== =============
AVAILABLE FOR SALE - DECEMBER 31, 1996
US Treasury obligations $ 3,725,832 $ 73,570 $ 3,799,402
US Agency obligations 23,032,148 146,839 $ (35,153) 23,143,834
State and Municipal obligations 456,645 19,298 475,943
Other investments 635,175 9,675 644,850
------------- ---------- ----------- -------------
$ 27,849,800 $ 249,382 $ (35,153) $ 28,064,029
============= ========== =========== =============
HELD TO MATURITY - SEPTEMBER 30, 1997
US Agency obligations $ 8,499,806 $ (23,605) $ 8,476,201
State and Municipal obligations 20,333,994 $ 752,346 (250) 21,086,090
------------- ---------- ----------- -------------
$ 28,833,800 $ 752,346 $ (23,855) $ 29,562,291
============= ========== =========== =============
HELD TO MATURITY - DECEMBER 31, 1996
US Agency obligations $ 9,535,396 $ 1,000 $ (84,324) $ 9,452,072
State and Municipal obligations 20,258,388 634,056 (92,335) 20,800,109
------------- ---------- ----------- -------------
$ 29,793,784 $ 635,056 $ (176,659) $ 30,252,181
============= ========== =========== =============
There were no sales of securities classified as available for sale for
the three and nine month periods ended September 30, 1997. Total proceeds
from sales of securities classified as available for sale for the three and
nine month periods ended September 30, 1996 were $607,797 and $3,623,266,
with $5,416 and $31,936 realized as gross gains. Gross realized losses were
$5,416 for each of the three and nine month periods ended September 30, 1996.
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
2. SECURITIES: (CONTINUED)
Contractual maturities of securities at September 30, 1997 were as
follows:
AVAILABLE FOR SALE AMORTIZED ESTIMATED
COST FAIR VALUE
------------ -------------
US Treasury obligations
6 - 12 Months $ 1,769,449 $ 1,787,625
1 - 2 Years 1,487,114 1,520,000
------------ ------------
Total 3,256,563 3,307,625
------------ ------------
US Agency obligations
0 - 3 Months 1,950,000 1,955,938
3 - 6 Months 1,000,910 1,006,719
6 - 12 Months 485,974 495,937
1 - 2 Years 2,000,000 2,008,737
2 - 5 Years 8,585,986 8,657,135
5 - 10 Years 11,189,245 11,246,753
------------ ------------
Total 25,212,115 25,371,219
------------ ------------
State and municipal obligations
5 - 10 Years 336,825 356,243
Over 10 Years 120,000 128,088
------------ ------------
Total 456,825 484,331
------------ ------------
Other investments
Equity securities 852,800 879,163
------------ ------------
Total securities available for sale $ 29,778,303 $ 30,042,338
============ ============
HELD TO MATURITY
US Agency obligations
0 - 3 Months $ 1,000,000 $ 1,000,000
3 - 6 Months 500,000 498,800
6 - 12 Months 4,000,000 3,988,325
1 - 2 Years 2,499,806 2,491,226
2 - 5 Years 500,000 497,850
------------ ------------
Total $ 8,499,806 $ 8,476,201
------------ ------------
State and municipal obligations
0 - 3 Months 345,285 345,033
6 - 12 Months 100,365 100,590
1 - 2 Years 791,974 815,285
2 - 5 Years 7,488,861 7,773,656
5 - 10 Years 11,399,944 11,843,325
Over 10 Years 207,565 208,201
------------ ------------
Total 20,333,994 21,086,090
------------ ------------
Total securities held to maturity $ 28,833,800 $ 29,562,291
============ ============
13
14
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
2. SECURITIES (CONTINUED)
Securities with an amortized cost of approximately $28,417,000 at
September 30, 1997 and $25,125,000 at December 31, 1996 were pledged to
secure public deposits, repurchase agreements and other liabilities as
required or permitted by law.
3. LOANS
Loans to directors and officers, their immediate families, affiliated
corporations, and other entities in which they own more than a 10% voting
interest are summarized below:
Aggregate balance - December 31, 1996 $ 2,135,565
New loans 1,367,485
Repayments (1,229,917)
-------------
Aggregate balance - September 30, 1997 $ 2,273,133
=============
4. ALLOWANCE FOR LOAN LOSSES
The allowance in the allowance for loan losses is summarized as follows:
1997 1996
------------ --------------
Balance 01/01/97 and 01/01/96 $ 2,022,987 $ 1,775,383
Provision charged to operating expense 333,000 455,400
Loans chrged-off (145,265) (251,241)
Recoveries 40,018 43,445
------------ ------------
Balance 09/30/97 and 12/31/96 $ 2,250,740 $ 2,022,987
============ ============
Loans considered impaired under the provisions of SFAS No. 114 were not
material at September 30, 1997 and December 31, 1996 and during the nine
months ended September 30, 1997 and 1996.
5. PREMISES AND EQUIPMENT
Premises and equipment at September 30, 1997 and December 31, 1996 are
summarized as follows:
1997 1996
------------- --------------
Buildings and land $ 5,296,704 $ 5,297,242
Buildings - leasehold 331,962 -
Furniture and equipment 2,555,690 2,649,536
Furniture and equipment - leasehold 67,985 -
Computer software 655,357 637,629
------------ -----------
TOTAL 8,907,698 8,584,407
Accumulated depreciation and amortization 3,668,313 3,399,625
------------ -----------
PREMISES AND EQUIPMENT, NET $ 5,239,385 $ 5,184,782
============ ===========
14
15
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
5. PREMISES AND EQUIPMENT (CONTINUED)
On April 1, 1997, Citizens-Martins Ferry entered into a five year
noncancelable operating lease for an in-store banking facility. The lease may
be renewed for up to two additional five-year terms after March 31, 2002.
Annual rent expense during the initial term of the lease is $22,500. Annual
rent during the second and third five year terms would be $26,000 and
$30,000, respectively. Rental expense through September 30, 1997 was $11,250.
Future lease payments are as follows:
Year ended September 30, 1998 $ 22,500
1999 22,500
2000 22,500
2001 22,500
2002 11,250
----------
$ 101,250
==========
6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are financing
arrangements whereby the Banks sell securities and agree 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:
NINE MONTHS TWELVE MONTHS
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
Average daily balance during the period $ 7,969,160 $ 6,523,271
Average interest rate during the period 4.39% 4.30%
Maximum month-end balance during the period $ 8,910,322 $ 8,667,310
Securities underlying these agreements were as follows:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
Carrying value of securities $ 11,531,603 $ 9,574,054
Fair value of securities 11,665,033 9,606,556
15
16
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
7. COMMITMENTS AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the
financial statements, including claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected
to have a material effect on financial condition or results of operations.
Some financial instruments are used in the normal course of business to
meet the financing needs of customers. These financial instruments include
commitments to extend credit, standby letters of credit and financial
guarantees. These involve, to varying degrees, credit and interest-rate risk
in excess of the amount reported in the financial statements.
Exposure to credit loss if the other party does not perform is
represented by the contractual amount for commitments to extend credit,
standby letters of credit and financial guarantees written. The same credit
policies are used for commitments and conditional obligations as are used for
loans. The amount of collateral obtained, if deemed necessary, upon extension
of credit is based on management's credit evaluation. Collateral varies, but
may include accounts receivable, inventory, property, equipment,
income-producing commercial properties, residential real estate and consumer
assets.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being used, the total commitments do not
necessarily represent future cash requirements. Standby letters of credit and
financial guarantees written are conditional commitments to guarantee a
customer's performance to a third party.
A summary of the notional or contractual amounts of financial
instruments with off-balance sheet risk at September 30, 1997 and December
31, 1996 follows:
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- --------------
Commitment to extend credit $ 18,219,708 $ 11,751,000
Standby letters of credit 156,000 156,000
------------ ------------
$ 18,375,708 $ 11,907,000
============ ============
At September 30, 1997 and December 31, 1996 and included above,
commitments to make fixed-rate loans at current market rates totaled $87,000
and $80,000, respectively with the interest rates on those fixed-rate
commitments ranging from 7.82% to 10.50% and 7.84% to 9.99%, respectively.
At September 30, 1997 and December 31, 1996, reserves of $691,000 and
$676,000, respectively were required as deposits with the Federal Reserve or
as cash on hand. These reserves do not earn interest.
16
17
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
8. CONCENTRATION OF CREDIT RISK
The Banks grant commercial, commercial real estate, real estate and
installment loans to customers in Belmont and Jefferson counties in eastern
Ohio and Tuscarawas and Carroll Counties in northeastern Ohio. 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 September 30, 1997 and December 31, 1996, total commercial and
commercial real estate loans made up 42.0% and 40.4%, respectively, of the
loan portfolio, with 25.6% and 29.4% of these loans secured by commercial and
residential real estate and business assets in the Columbus, Ohio area. At
September 30, 1997 and December 31, 1996, installment loans account for 34.2%
and 34.0% of the loan portfolio and are secured by consumer assets including
automobiles which account for 84.1% and 83.1%, respectively, of the
installment loan portfolio. Real estate loans comprise 23.8% and 25.5% of the
loan portfolio as of September 30, 1997 and December 31, 1996, respectively,
and primarily include first mortgage loans on residential properties and home
equity lines of credit.
Included in cash and due from banks and Federal funds sold as of
September 30, 1997 and December 31, 1996 is $2,560,018 and $3,639,127,
respectively, on deposit with a correspondent bank.
9. STOCK OPTIONS
The Company adopted a nonqualified stock option plan for directors and
bank holding company officers in 1995. The plan was subsequently ratified by
shareholders on April 17, 1996. The exercise price for options granted under
this plan will be no less than 100% of the fair market value of the shares on
the date of grant.
AVERAGE
EXERCISE
SHARES PRICE
------ -----
Outstanding at December 31, 1996 78,485 $ 14.96
Granted - -
Exercised (1,815) 14.95
Forfeited (1,815) 14.95
-------- -------
Outstanding at September 30, 1997 74,855 $ 14.96
======== ========
Remaining shares avilable for grant
at September 30, 1997 35,131
Options exercisable at September 30, 1997 -
17
18
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
9. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding at
September 30, 1997:
NUMBER NUMBER
EXERCISE OUTSTANDING DATE OF EXERCISABLE
PRICE AT 09/30/97 EXPIRATION AT 09/30/97
-------- ----------- ---------- -----------
$ 14.95 73,205 11/21/05 -
15.69 1,650 11/21/05 -
The options are first exercisable after February 21, 2005, except in the
event certain financial performance criteria are met, in which case such
options may become exercisable in installment, 40% in 1998, 20% in 1999 and
the balance in 2000. All options become immediately exercisable upon
retirement, death or in the event of a change in control of the Company.
10. DIVIDEND RESTRICTION
Dividends paid by the subsidiary banks are the primary source of funds
available to the Company for payment of dividends to shareholders and for
other working capital needs. Applicable state statutes and regulations impose
restrictions on the amount of dividends that may be declared by the Company.
Those restrictions generally limit dividends to the current and prior two
years earnings, (as defined), totaling $5,346,544 as of September 30, 1997.
In addition to these restrictions, as a practical matter, dividend payments
cannot reduce regulatory capital levels below minimum regulatory guidelines.
These restrictions would not limit the Company's ability to pay normal
dividends.
18
19
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORM 10 - Q
In the following pages, Management presents an analysis of United Bancorp,
Inc.'s financial condition at September 30, 1997 compared to December 31, 1996
and results of operations for the three and nine months ended September 30, 1997
compared to the same periods in 1996. 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 financial
statements and related footnotes and the selected financial data included
elsewhere in this report.
United Bancorp, Inc. was created as a single-bank holding company in July
of 1983 through the acquisition of 100% of the voting stock of The Citizens
Savings Bank of Martins Ferry, Ohio. United Bancorp, Inc. became a multi-bank
holding company in December of 1986 through the purchase of 100% of the voting
stock of The Citizens-State Bank of Strasburg, Strasburg, Ohio. Common stock was
available through over-the-counter trading until February 1994 when it began
trading on The Nasdaq SmallCaps Market tier of The Nasdaq Stock Market under the
trading symbol UBCP.
The Citizens Savings Bank (Citizens-Martins Ferry), originally established
as The German Savings Bank in 1902, remains the lead bank in the multi-bank
holding company and continues as an integral part of the development of the
commercial and residential base in Martins Ferry and other local communities.
The Bank expanded its market through the construction of a full service branch
banking facility six miles west in nearby Colerain, Ohio in 1974. Expansion
opportunities continued in 1978 with the construction of another full service
branch bank in Bridgeport, Ohio, located two miles south of Martins Ferry. A
limited service auto-teller facility was opened in Martins Ferry in 1980, one
block south of the former main office location. An Automated Teller Machine
(ATM) began operation in nearby Aetnaville, Ohio in 1983, providing additional
24 hour limited banking services to area residents. The main banking facility
outgrew the physical limitations of its previous location and subsequently
relocated in 1984 to a newly constructed 21,500 square foot addition to the
auto-teller facility mentioned above. On June 16, 1997 an in-store retail
banking sales center was opened within a local area food store in St.
Clairsville, Ohio. This newest banking facility is open seven days a week
providing full-service banking to an expanding new market. The site also
includes a free standing ATM for additional customer service.
The Citizens-State Bank of Strasburg (Citizens-Strasburg), was also
established in 1902 and is located in an area of northeastern Ohio whose economy
is supported by agriculture and light industry. Additionally, it benefits as a
"bedroom community" for the Akron-Canton metropolitan area. Citizens-Strasburg
joined the bank holding company in 1986 through the acquisition of 100% of its
voting stock by UBCP. Citizens-Strasburg constructed a new full service banking
facility in Dover, Ohio in 1990. This expansion was soon followed with the
acquisition of two branch banking facilities in New Philadelphia and
Sherrodsville in 1992. Additionally, a branch banking facility located in
Dellroy, Ohio was acquired in 1994. This most recent acquisition brought the
number of offices to five for Citizens-Strasburg and nine overall for UBCP.
19
20
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORM 10 - Q
The registrant is not aware of any trend, events or uncertainties that will
have or are reasonably likely to have a material affect on the liquidity,
capital resources or operations except as discussed herein. Also, the registrant
is not aware of any current recommendations by regulatory authorities which
would have such affect if implemented. The Company cautions that any
forward-looking statements contained in this report, in a report incorporated by
reference to this report or made by management of the Company involves risks and
uncertainties and are subject to change based on various important factors.
Actual results could differ materially from those expressed or implied.
Additionally, the Company claims no notification responsibilities should their
opinions change from those expressed herein.
FINANCIAL CONDITION
EARNING ASSETS - LOANS
At September 30, 1997, gross loans were $137,718,000 compared to
$132,661,000 at year-end 1996, representing a 3.8% increase in loan volume. Loan
growth continued despite the effects of a prolonged work stoppage at the
Wheeling-Pittsburgh Steel Corporation's plants located within the
Citizens-Martins Ferry market area. Although now settled, the effects of the
work stoppage on the local economy remains evident. Real estate loan origination
volume increased due to the Banks' involvement in the secondary market program,
however, as these loans are sold, the balance of real estate loans held in the
portfolio continues to decline.
Installment loans, with continued emphasis placed on the indirect
automobile lending market located primarily within the Citizens-Martins Ferry
market area, increased $1,995,000, or 4.4% at September 30, 1997 compared to
year-end 1996. Installment lending represented 34.2% of the entire portfolio mix
at September 30, 1997, up slightly from 34.0% at year-end 1996. The indirect
lending type of financing carries somewhat more risk than real estate lending,
however, it also provides for potentially higher yields. The targeted lending
areas encompass four metropolitan areas, minimizing the risk to changes in
economic conditions in the communities housing the Company's nine banking
locations. Despite the geographic market diversification, the Company's
installment lending activity slowed due to the work stoppage cited above within
the Citizens-Martins Ferry market area, but is anticipated to generate
additional growth as the local market area recovers economically. Expanded
dealership relationships and continued competitive pricing is expected to
maintain and possibly increase current market share in indirect lending.
Commercial real estate loans at September 30, 1997 increased $2,821,000 or
6.8% over year-end 1996 totals, while commercial loans at September 30, 1997
increased $1,415,000, or 11.4% over year-end 1996 totals. Commercial real estate
loans represented 32.0% of the total portfolio mix at September 30, 1997
compared to 31.1% at year-end 1996. Commercial loans were 10.0% of the portfolio
at September 30, 1997 compared to 9.4% at year-end 1996 due partly from general
business activity across all product lines, including growth in automobile
dealer floorplans and out of area construction loans.
20
21
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORM 10 - Q
FINANCIAL CONDITION
EARNING ASSETS - LOANS (CONTINUED)
Out of area loans occur mostly in the Columbus and Akron-Canton, Ohio
areas. Lending beyond the local area has been for projects and borrowers with
substantial net worth. The majority of these loans are secured by real estate
holdings comprised of hotels, motels and churches located in various geographic
locations minimizing potential risks associated with lending activities specific
to a limited area. Out of area loans at September 30, 1997 were 10.8% of total
loans and 25.6% of total commercial and commercial real estate loans compared to
11.9% and 29.4% at year-end 1996.
Real estate loans were 23.8% of total loans at September 30, 1997 compared
to 25.5% at year-end 1996. As indicated above, the Banks' involvement in the
secondary market program has yielded increases in loan origination volume,
generating secondary market fee income, however, it is anticipated that borrower
preferences will continue to favor the secondary market product offerings and a
decline in real estate loans held within the loan portfolio is expected.
The allowance for loan losses represents the amount which management and
the Board of Directors estimates is adequate to provide for inherent losses in
the loan portfolio. The allowance balance and the annual provision charged to
expense are reviewed by management and the Board of Directors monthly using a
risk code model that considers borrowers past due experience, economic
conditions and various other circumstances that are subject to change over time.
Management believes the balance of the allowance for loan losses currently in
place continues to be sufficient to deal with potential losses associated with
the aforementioned work stoppage. Net charge-offs for the nine months ended
September 30, 1997 were 13.2% less than the total for the same nine month period
in 1996.
EARNING ASSETS - SECURITIES AND FEDERAL FUNDS SOLD
The securities portfolio is comprised of U.S. Treasury notes and other U.S.
Government agency-backed securities, tax-exempt obligations of states and
political subdivisions and certain other investments. The Company does not hold
any collateralized mortgage-backed securities, other than those issued by U.S.
government agencies or derivative securities. The quality rating of obligations
of state and political subdivisions within Ohio is no less than Aaa, Aa or A,
with all out-of-state bonds rated at AAA. Board policy permits the purchase of
certain non-rated bonds of local schools, townships and municipalities, based on
their known levels of credit risk.
Securities available for sale at September 30, 1997, net of the unrealized
gain market value adjustment of $264,000 (before tax effect), increased
$1,978,000 from year-end 1996 totals, net of an unrealized gain market value
adjustment of approximately $214,000 (before tax effect) at year-end 1996.
Securities held to maturity decreased a net $960,000 at September 30, 1997
compared to year-end 1996 totals. Management anticipates maintaining relatively
stable levels of securities, utilizing excess deposit growth to fund future loan
development.
21
22
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORM 10 - Q
SOURCES OF FUNDS - DEPOSITS
The Company's primary source of funds is core deposits from retail and
business customers. These core deposits include interest-bearing and
noninterest-bearing deposits, excluding certificates of deposit over $100,000.
Total core deposits increased $1,486,000 during the nine months ended September
30, 1997 due to pricing efforts on special rate certificates of deposit. The
Company has a strong deposit base from 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 fairly
static balances with the Company due to various funding and disbursement
timeframes.
Certificates of deposit over $100,000 are not considered part of core
deposits and as such are used to balance rate sensitivity as a tool of funds
management. At September 30, 1997, certificates of deposit over $100,000
increased $1,562,000 over year-end 1996 totals.
SOURCES OF FUNDS - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER
SHORT-TERM BORROWINGS
Other interest-bearing liabilities include securities sold under agreements
to repurchase, sweep accounts, Federal funds purchased, Treasury, Tax & Loan
notes payable and Federal Home Loan Bank advances. Total short-term borrowings
at September 30, 1997 increased $2,179,000 from management's utilization of FHLB
lines of credit and repurchase agreements to fund loan growth. Short-term
borrowing sources were used to fund loan demand during the first six months of
the year with future funding anticipated to be from targeted deposit growth.
PERFORMANCE OVERVIEW
NET INCOME
Net income for the three and nine months ended September 30, 1997 was
$713,000, or 12.8% over the three months ended September 30, 1996 and
$2,084,000, or 7.6% over the nine months ended September 30, 1996. This equates
to an annualized income performance of 1.35% Return on Average Assets (ROA) and
a 13.40% Return on Average Equity (ROE).
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 for the three and nine months ended September 30, 1997 increased
$162,000, or 7.8% and $415,000, or 6.7%, respectively over the same periods in
1996. The increases mirror the growth in total assets since September 30, 1996.
The Company's net interest spread has remained relatively stable over the past
year. Consequently, the increases in net interest income over the comparative
prior periods remains largely due to growth.
22
23
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORM 10 - Q
PERFORMANCE OVERVIEW (CONTINUED)
NET INTEREST INCOME (CONTINUED)
Total interest income for the three and nine months ended September 30,
1997 increased $317,000, or 8.4% and $846,000, or 7.6%, respectively over the
same periods in 1996. The increases in interest income slightly outpace the
growth in assets primarily because the growth occurred in the loan portfolio
which traditionally yields a higher return than the security portfolio or other
short-term investments.
Total interest expense for the three and nine months ended September 30,
1997 increased $155,000, or 9.1% and $431,000, or 8.6%, respectively over the
same periods in 1996. Management has funded loan growth through borrowed funds
of short duration rather than increasing the cost of funds across the board on
depository products during the first half of the year. As future events unfold,
pricing strategies may be implemented to enhance the Company's position to
attract additional deposits.
PROVISION FOR LOAN LOSSES
The provision for loan losses is an operating expense recorded to maintain
the related balance sheet allowance for loan losses at an amount considered
adequate to cover losses that may occur in the normal course of lending. The
total provision for loan losses was $111,000 and $333,000 for the three and nine
months ended September 30, 1997 compared to $111,000 and $344,000 for the three
and nine months ended September 30, 1996.
NONINTEREST INCOME
Total noninterest income is made up of Bank related fees and service
charges, as well as other income producing services provided, including
secondary market loan servicing fees, ATM income, early redemption penalties for
certificates of deposits, safe deposit rental income and other miscellaneous
items. Noninterest income for the three and nine months ended September 30, 1997
increased $38,000, or 17.0% and $13,000, or 1.8% over the same periods in 1996.
The prior comparative periods include $27,000 in security gains recognized on
the sale of securities available for sale during 1996. Other income included
within the noninterest income category increased $45,000, or 58.4% for the three
months ended September 30, 1997 over the third quarter of 1996. For the nine
months ended September 30, 1997, the other income category increased $62,000, or
27.8% over the same period in 1996. The majority of the increase in other income
was the result of recognition of approximately $29,000 in gains on the sale of
fixed rate mortgages to the secondary market with servicing rights retained.
Previous gains related to servicing rights within the startup secondary market
program were immaterial prior to the recognition of gains during the third
quarter.
NONINTEREST EXPENSE
Noninterest expense for the three and nine months ended September 30, 1997
increased $75,000, or 5.6% and $239,000, or 6.1% over the three and nine months
ended September 30, 1996. Increases in salaries and employee benefits and other
related expenses attributable to the new banking facility in St. Clairsville,
Ohio contributed most to the increase in noninterest expenses for the period.
23
24
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORM 10 - Q
CAPITAL RESOURCES
Internal capital growth, through the retention of earnings, is the primary
means of maintaining capital adequacy for the Company. Shareholders' equity at
September 30, 1997 was $21,437,000 compared to $20,016,000 at December 31, 1996,
a 7.1% increase. Equity at September 30, 1997 includes a $174,000 unrecognized
increase in equity due to the after tax impact of the fair value of securities
categorized as available for sale as compared to a $142,000 increase in equity
at December 31, 1996. Total shareholders' equity in relation to total assets was
10.2% at September 30, 1997 and 9.9% at December 31, 1996.
During 1996, the Company initiated a Dividend Reinvestment Plan (The Plan)
for shareholders. Under The Plan the Company's common stock may be purchased by
The Plan for participants with automatically reinvested dividends. The Plan
provides an economical and convenient method for the holders of shares of the
Company's common stock to purchase additional shares of common stock at market
prices and without payment of brokerage commissions or service charges. The Plan
does not represent a change in the Company's dividend policy or a guarantee of
future dividends. Shareholders who do not wish to participate in The Plan
continue to receive cash dividends, as declared in the usual and customary
manner. The Company has approved the issuance of 150,000 authorized and unissued
shares of the Company's common stock for purchase under The Plan. To date, all
shares purchased by the Plan except for 797 shares purchased on October 21, 1996
have been purchased on the open market.
The Company and Banks are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities and certain off-balance sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings and other
factors and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the Banks' operations.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion and plans for capital restoration are required. The minimum
requirements are:
TOTAL TIER 1 TIER 1
CAPITAL TO CAPITAL TO CAPITAL TO
RISK-WEIGHTED RISK-WEIGHTED AVERAGE
ASSETS ASSETS ASSETS
------------- ------------- -------
Well capitalized 10.00% 6.00% 5.00%
Adequately capitalized 8.00% 4.00% 4.00%
Undercapitalized 6.00% 3.00% 3.00%
24
25
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORM 10 - Q
CAPITAL RESOURCES (CONTINUED)
The following table illustrates the Company's risk-weighted capital ratios
at September 30, 1997:
SEPTEMBER 30, 1997
------------------
Tier 1 capital $ 21,130,000
Total risk-based capital $ 22,913,000
Risk-weighted assets $ 142,173,000
Average total assets $ 210,424,000
Tier 1 capital to average assets 10.04%
Tier 1 risk-based capital ratio 14.86%
Total risk-based capital ratio 16.12%
LIQUIDITY
Management's objective in managing liquidity is to maintain the ability to
continue to meet the cash flow needs of its customers, such as borrowings or
deposit withdrawals, as well as its own financial commitments. The principal
sources of liquidity are net income, loan payments, maturing securities and
sales of securities available for sale, federal funds sold and cash and deposits
with banks. Along with their liquid assets, the Banks have additional sources of
liquidity available to ensure that adequate funds are available as needed which
include, but are not limited to, the purchase of federal funds, the ability to
borrow funds under line of credit agreements with correspondent banks and a
borrowing agreement with the Federal Home Loan Bank of Cincinnati, Ohio, and the
adjustment of interest rates to obtain depositors. Management feels that is has
the capital adequacy, profitability and reputation to meet the current and
projected needs of its customers.
For the nine months ended September 30, 1997, the adjustment to reconcile
net income to net cash from operating activities consisted mainly of
depreciation and amortization of premises and equipment and intangibles, the
provision for loan losses, deferred taxes, net accretion of securities and net
changes in other assets and liabilities. For a more detailed illustration of
sources and uses of cash, refer to the condensed consolidated statements of cash
flows.
INFLATION
Substantially all of the Company's assets and liabilities relate to banking
activities and are monetary in nature. The consolidated financial statements and
related financial data are presented in accordance with Generally Accepted
Accounting principles (GAAP). GAAP currently requires the Company to measure its
financial position and results of operations in terms of historical dollars,
with the exception of securities available for sale which are measured at fair
value. Changes in the value of money due to rising inflation can cause
purchasing power loss.
Management's opinion is that movements in interest rates affect the
financial condition and results of operations to a greater degree than changes
in the rate of inflation. It should be noted that interest rates and inflation
do effect each other, but do not always move in correlation with each other. The
Company's ability to match the interest sensitivity of its financial assets to
the interest sensitivity of its liabilities in its asset/liability management
may tend to minimize the effect of changes in interest rates on the Company's
performance.
25
26
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORM 10 - Q
REGULATORY REVIEW
The Company is subject to the regulatory requirements of The Federal
Reserve System as a multi-bank holding company. The affiliate banks are subject
to regulations of the Federal Deposit Insurance Corporation (FDIC) and the State
of Ohio, Division of Financial Institutions.
26
27
UNITED BANCORP, INC.
OTHER INFORMATION
FORM 10 - Q
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 K
(a) Exhibits
(b) Reports on Form 8 K
The Company filed no Form 8 Ks with the Securities Exchange
Commission during the quarter ending September 30, 1997.
27
28
UNITED BANCORP, INC.
OTHER INFORMATION
FORM 10 - Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 10, 1997 By: /s/ James W. Everson
- ----------------------------- ---------------------------
Date James W. Everson
Chairman, President & Chief
Executive Officer
November 10, 1997 By: /s/ Ronald S. Blake
- ----------------------------- ---------------------------
Date Ronald S. Blake
Treasurer
28
29
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
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27 Financial Data Schedule