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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
-------------------------------------------
Commission File Number: 0-16540
-------
UNITED BANCORP, INC.
--------------------
(Exact name of registrant as specified in its charter.)
OHIO 34-1405357
---- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
201 SOUTH 4TH STREET, MARTINS FERRY, OHIO 43935-0010
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(740) 633-0445
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate 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 2,667,314 SHARES AS OF OCTOBER 27, 1998
---------------------------------------------------------------------
2
UNITED BANCORP, INC.
TABLE OF CONTENTS
FORM 10-Q
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets............................................3
Condensed Consolidated Statements of Income......................................4
Condensed Consolidated Statements of Shareholders' Equity........................5
Condensed Consolidated Statements of Cash Flows..................................6
Notes to Condensed Consolidated Financial Statements........................7 - 13
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................14 - 22
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk................23
PART II OTHER INFORMATION
ITEM 1.
Legal Proceedings...............................................................25
ITEM 2.
Changes in Securities and Use of Proceeds.......................................25
ITEM 3.
Default Upon Senior Securities..................................................25
ITEM 4.
Submission of Matters to a Vote of Security Holders.............................25
ITEM 5.
Other Information...............................................................25
ITEM 6.
Exhibits and Reports on Form 8-K................................................25
SIGNATURES........................................................................26
2
3
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
FORM 10-Q (IN THOUSANDS)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS
Cash and due from banks $ 8,110 $ 9,845
Federal funds sold 5,393 742
------------- ------------
Total cash and cash equivalents 13,503 10,587
Securities available for sale 55,316 46,003
Securities held to maturity
(Estimated fair value of $25,643 at 09/30/98 and
$29,860 at 12/31/97) 24,700 29,060
Loans receivable
Commercial loans 12,468 16,637
Commercial real estate loans 53,098 49,189
Real estate loans 49,043 49,857
Installment loans 49,650 56,069
------------- ------------
Total loans receivable 164,259 171,752
Allowance for loan losses (3,053) (3,130)
------------- ------------
Net loans receivable 161,206 168,622
Premises and equipment, net 6,469 6,530
Accrued interest receivable and other assets 3,233 2,805
----------------------------------
Total Assets $ 264,427 $ 263,607
==================================
LIABILITIES
Demand deposits
Noninterest bearing $ 17,882 $ 16,663
Interest bearing 40,250 37,801
Savings deposits 56,113 58,295
Time deposits - under $100,000 87,564 89,422
Time deposits - $100,000 and over 22,359 21,308
------------- ------------
Total deposits 224,168 223,489
Securities sold under agreements to repurchase 6,197 8,391
Other borrowed funds 5,125 4,278
Accrued expenses and other liabilities 1,732 1,737
------------- ------------
Total Liabilities 237,222 237,895
SHAREHOLDERS' EQUITY
Common stock - $1 Par Value: 10,000,000 shares authorized;
2,667,314 issued and outstanding 2,667 2,667
Additional-paid-in-capital 15,552 15,552
Retained earnings 8,607 7,323
Unrealized gain on securities available for sale, net of tax 379 170
------------- ------------
Total Shareholders' Equity 27,205 25,712
------------- ------------
Total Liabilities and Shareholders' Equity $ 264,427 $ 263,607
============= ============
See accompanying notes to the condensed consolidated financial statements 3
4
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FORM 10-Q (IN THOUSANDS-EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------- -------- -------- -------
Interest and dividend income
Loans, including fees $ 3,873 $ 4,089 $11,948 $12,012
Taxable securities 934 780 2,651 2,314
Non-taxable securities 278 299 906 904
Other interest and dividend income 114 74 309 204
------- ------- ------- -------
Total interest and dividend income 5,199 5,242 15,814 15,434
Interest expense
Deposits
Demand 269 262 791 767
Savings 479 508 1,416 1,464
Time 1,481 1,480 4,540 4,368
Other borrowings 180 129 538 355
------- ------- ------- -------
Total interest expense 2,409 2,379 7,285 6,954
NET INTEREST INCOME 2,790 2,863 8,529 8,480
Provision for loan losses 128 171 676 661
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,662 2,692 7,853 7,819
Noninterest income
Service charges on deposit accounts 201 184 560 540
Other income 262 153 602 360
------- ------- ------- -------
Total noninterest income 463 337 1,162 900
Noninterest expense
Salaries and employee benefits 949 990 3,032 2,971
Occupancy 301 269 872 690
Other expenses 804 713 2,225 2,126
------- ------- ------- -------
Total noninterest expense 2,054 1,972 6,129 5,787
INCOME BEFORE INCOME TAXES 1,071 1,057 2,886 2,932
Income tax expense 296 272 747 703
------- ------- ------- -------
NET INCOME
$ 775 $ 785 $ 2,139 $ 2,229
======= ======= ======= =======
Earnings per common share - Basic $ 0.29 $ 0.29 $ 0.80 $ 0.84
Earnings per common share - Diluted $ 0.29 $ 0.29 $ 0.79 $ 0.83
Dividends per common share $ 0.12 $ 0.12 $ 0.36 $ 0.32
See accompanying notes to the condensed consolidated financial statements 4
5
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
FORM 10-Q (IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID IN RETAINED COMPREHENSIVE COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME INCOME TOTAL
------------ ------------ ------------ ------------- ------------- ----------
BALANCE AT JANUARY 1, 1997 $ 2,462 $ 11,814 $ 9,407 $ 92 $ 23,775
Net income 2,229 $ 2,229 2,229
10% Stock dividend 203 3,710 (3,913) -
Cash paid in lieu of fractional shares
on 10% stock dividend (4) (4)
Proceeds and tax benefit from 2 23 25
exercise of stock options
Other comprehensive income, net of tax:
Unrealized gains/losses on securities 85 85 85
-------------
Comprehensive income 2,314
=============
Cash dividends (740) (740)
------------ ------------ ----------- ------------ ----------
BALANCE AT SEPTEMBER 30, 1997 2,667 15,547 6,979 177 25,370
BALANCE AT JANUARY 1, 1998 2,667 15,552 7,323 170 25,712
Net income 2,139 $ 2,139 2,139
Other comprehensive income, net of tax:
Unrealized gains/losses on securities 209 209 209
-------------
Comprehensive income $ 2,348
=============
Cash dividends (855) (855)
------------ ------------ ----------- ------------ ----------
BALANCE AT SEPTEMBER 30, 1998 $ 2,667 $ 15,552 $ 8,607 $ 379 $ 27,205
============ ============ ============ ============ ==========
See accompanying notes to the condensed consolidated financial statements 5
6
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FORM 10-Q (IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,139 $ 2,230
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 475 447
Amortization of intangibles 46 42
Provision for loan losses 676 661
Deferred taxes 31 72
Federal Home Loan Bank stock dividend (108) (26)
(Accretion)/amortization of securities, net 92 (10)
Gain on sale of other real assets and other real estate owned (88) (5)
Net changes in accrued interest receivable and other assets (1,241) (1,061)
Net changes in accrued expenses and other liabilities 5 (99)
--------------------- ------------------
Net cash from operating activities 2,027 2,251
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Proceeds from sales - -
Proceeds from maturities/calls 25,762 9,859
Purchases (34,771) (16,946)
Securities held to maturity
Proceeds from maturities/calls 5,342 4,136
Purchases (958) (496)
Net change in loans 7,493 (3,346)
Net purchases of premises and equipment (414) (723)
Proceeds from sale of other real assets and other real estate owned (42) 30
--------------------- ------------------
Net cash from investing activities
2,412 (7,486)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 679 6,346
Net change in short-term borrowings (4,767) 2,182
Proceeds from long-term debt 3,600 680
Principal payments on long-term debt (180) (35)
Proceeds from exercise of stock options - 23
Tax benefit from exercise of stock options - 2
Cash dividends paid (855) (720)
--------------------- ------------------
Net cash from financing activities (1,523) 8,478
--------------------- ------------------
Net change in cash and cash equivalents 2,916 3,243
Cash and cash equivalents at beginning of year 10,587 9,525
--------------------- ------------------
Cash and cash equivalents at end of period $ 13,503 $ 12,768
===================== ==================
Interest paid $ 7,392 $ 6,957
Income taxes paid 648 621
See accompanying notes to the condensed consolidated financial statements 6
7
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
United Bancorp, Inc. ("Company") at September 30, 1998 and its results
of operations and statements of cash flows for the periods presented.
These adjustments are normal and recurring in nature. The accompanying
condensed consolidated financial statements have been prepared in
accordance with the instructions of Form 10-Q and, therefore, 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 1997 United Bancorp, Inc. consolidated financial statements and
related notes thereto included in its Annual Report to Shareholders for
the year ended December 31, 1997. Reference is made to the accounting
policies of the Company described in the notes to the consolidated
financial statements contained in its 1997 Annual Report to
Shareholders. The Company has consistently followed these policies in
preparing this Form 10-Q.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, ("Banks") The Citizens
Savings Bank, Martins Ferry, Ohio ("CITIZENS"), The Citizens-State Bank
of Strasburg, Strasburg, Ohio ("CITIZENS-STATE"), and The Community
Bank, Glouster, Ohio ("COMMUNITY"). All significant intercompany
transactions and balances have been eliminated in consolidation. The
results of operations for the period ended September 30, 1998 are not
necessarily indicative of the operating results for the full year of
1998.
NATURE OF OPERATIONS:
The Company's and Banks' revenues, operating income and assets
are primarily from the banking industry. Loan customers are mainly
located in Belmont, Jefferson, Tuscarawas, Carroll and Athens Counties
and the surrounding localities in northeastern, eastern and
southeastern Ohio and include a wide range of individuals, business 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. Commercial loans are expected to be repaid
from cash flows of the business. CITIZENS conducts its business through
its main office in Martins Ferry, Ohio and three branches in
Bridgeport, Colerain and St. Clairsville, Ohio. CITIZENS-STATE conducts
its business through its main office in Strasburg, Ohio and its four
branches located in Dover, New Philadelphia, Sherrodsville and Dellroy,
Ohio. COMMUNITY conducts its business through its main office in
Glouster, and its branches in Nelsonville and Amesville, 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.
7
8
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES:
The provision for income taxes is based on the effective tax
rate expected to be applicable for the entire year. 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 basis 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.
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. 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. Additionally, 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. All per share data
has been retroactively adjusted for the 10% stock dividends in 1997 and
1996.
EARNINGS AND DIVIDENDS PER COMMON SHARE:
The Company adopted SFAS No. 128, "Earnings Per Share," on
December 31, 1997. SFAS No. 128 requires dual presentation of basic and
diluted earnings per share ("EPS") for entities with complex capital
structures. All prior EPS data has been restated to conform to the new
method. Basic EPS is based on net income divided by the
weighted-average number of shares outstanding during the period.
Diluted EPS shows the dilutive effect of additional common shares
issuable under stock options. The weighted-average number of shares
outstanding for basic EPS was 2,667,314 and 2,666,555 for the nine
months ended September 30, 1998 and 1997, respectively. The
weighted-average number of shares outstanding for diluted EPS was
2,692,289 and 2,681,400 for the nine months ended September 30, 1998
and 1997, respectively. There was no per share dilution due to the
stock options for the three months ended September 30, 1998 and 1997.
The per share dilution of the stock options was $0.01 for nine months
ended September 30, 1998 and 1997.
RECLASSIFICATIONS:
Some items in prior financial statements have been
reclassified to conform to the current presentation.
COMPLETED AFFILIATIONS
On July 7, 1998 the Company completed its merger with Southern
Ohio Community Bancorporation, Inc. ("Southern"), whereby Southern's
wholly owned subsidiary The Community Bank, Glouster, Ohio
("COMMUNITY") is now the Company's third banking charter. The merger
provided for an exchange ratio of 11 Company common shares for each
issued and outstanding share of Southern common stock. The transaction
was accounted for under the pooling of interest method of accounting.
Community has been included in the Company's financial results
beginning in the third quarter with all prior results restated to
include the effect of Community.
8
9
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:
During the first quarter of 1998, the Company was required to
adopt Statement of Financial Accounting Standards' ("SFAS") No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131 does
not materially effect the Company's interim disclosure requirements.
SFAS No. 130 established standards for reporting and display
of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income includes both
net income and other comprehensive income. Other comprehensive income
relevant to the Company includes the change in unrealized gains and
losses on securities available for sale. The statement requires the
Company to classify items of other comprehensive income by their nature
and 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. The Company elected
to present comprehensive income and the accumulated balance in the
Condensed Consolidated Statement of Shareholders' Equity for interim
reporting purposes. The table below presents reclassification
adjustments related to comprehensive income. Reclassification
adjustments are needed when an item is included in net income in one
period and comprehensive income in another accounting period.
THREE MONTHS NINE MONTHS
ENDED ENDED YEAR-ENDED YEAR-ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
(In thousands) 1998 1998 1997 1996
--------------- --------------- ---------------- --------------
Net Income $ 775 $ 2,139 $ 2,847 $ 2,630
Unrealized gain/(loss) arising in period 200 221 81 (185)
Reclassification for realized amount - (8) 25 27
Net unrealized gain/(loss) recognized in
other comprehensive income 200 209 56 (158)
--------------- --------------- ---------------- --------------
Comprehensive Income $ 975 $ 2,348 $ 2,903 $ 2,472
=============== =============== ================ ==============
SFAS No. 132, "Employers' Disclosure about Pensions and Other
Post Retirement Benefits", and SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" are issued statements that are not
yet effective. SFAS No. 133 will not be applicable to the Company.
SFAS No. 132 revises the required disclosures for employee
benefit plans, but it does not change the measurement or recognition of
such plans. The new standard requires some additional information about
benefit plans while eliminating certain disclosures and standardizes the
disclosures for pension and other post retirement benefits. This
statement is effective for fiscal years beginning after December 15,
1997. Management does not believe this statement will have a material
impact on the Company's financial position or results of operations.
9
10
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
2. SECURITIES:
The amortized cost and estimated fair values of securities are
as follows:
GROSS GROSS
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------------- ---------------- ----------------- ---------------------
AVAILABLE FOR SALE - SEPTEMBER 30, 1998
US Treasury obligations $ 1,495 $ 18 $ 1,513
US Agency obligations 47,008 453 $ (3) 47,458
Mortgage Backed securities 3,259 15 (2) 3,272
State and Municipal obligations 1,857 69 (2) 1,924
Other investments 1,123 26 1,149
------------------- ---------------- ----------------- ---------------------
$ 54,742 $ 581 $ (7) $ 55,316
=================== ================ ================= =====================
AVAILABLE FOR SALE - DECEMBER 31, 1997
US Treasury obligations $ 3,263 $ 45 $ 3,308
US Agency obligations 37,033 199 $ (34) 37,198
Mortgage Backed securities 3,788 11 (13) 3,786
State and Municipal obligations 551 25 576
Other investments 1,109 26 1,135
------------------- ---------------- ----------------- ---------------------
$ 45,744 $ 306 $ (47) $ 46,003
=================== ================ ================= =====================
HELD TO MATURITY - SEPTEMBER 30, 1998
US Agency obligations $ 2,500 - - $ 2,500
State and Municipal obligations $ 22,154 $ 952 $ (9) $ 23,097
Other Investments $ 46 $ - $ - $ 46
------------------------------------------------------- ---------------------
$ 24,700 $ 952 $ (9) $ 25,643
======================================================= =====================
HELD TO MATURITY - DECEMBER 31, 1997
US Agency obligations $ 7,500 $ $ (27) $ 7,473
State and Municipal obligations 21,560 828 (1) 22,387
------------------------------------ ----------------- ---------------------
$ 29,060 $ 828 $ (28) $ 29,860
==================================== ================= =====================
11
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
2. SECURITIES: (CONTINUED)
There were no sales of securities during the nine months ended
September 30, 1998 or 1997. Contractual maturities of securities at
September 30, 1998 were as follows:
AVAILABLE FOR SALE (IN THOUSANDS) AMORTIZED ESTIMATED
COST FAIR VALUE
---------------- ------------------
US Treasury obligations
Under 1 Year $ 1,495 $ 1,513
1 - 2 Years
- -
---------------- ------------------
Total 1,495 1,513
---------------- ------------------
US Agency obligations
Under 1 Year 3,500 3,513
1 - 2 Years 497 500
2 - 5 Years 2,845 2,911
5 - 10 Years 35,666 36,004
Over 10 Years 4,500 4,529
---------------- ------------------
Total 47,008 47,457
---------------- ------------------
State and municipal obligations
5 - 10 Years 672 706
Over 10 Years 1,185 1,218
---------------- ------------------
Total 1,857 1,924
---------------- ------------------
Mortgage Backed securities
2 - 5 Years 1,153 1,160
5 - 10 Years 1,122 1,126
Over 10 Years 984 987
---------------- ------------------
Total 3,259 3,273
---------------- ------------------
Other investments
Equity securities 1,123 1,149
---------------- ------------------
Total securities available for sale $ 54,742 $ 55,316
================ ==================
HELD TO MATURITY (IN THOUSANDS)
US Agency obligations
Under 1 Year $ 2,500 $ 2,500
2 - 5 Years - -
---------------- -----------------
Total 2,500 2,500
---------------- -----------------
State and municipal obligations
Under 1 Year 798 797
1 - 2 Years 1,580 1,630
2 - 5 Years 11,158 11,656
5 - 10 Years 7,631 8,008
Over 10 Years 987 998
---------------- -----------------
Total 22,154 23,089
---------------- -----------------
Other investments
Equity securities 46 46
Total securities held to maturity $ 24,700 $ 25,635
================ =================
Securities with an amortized cost of approximately $37,132,000 at September 30,
1998 and $38,027,000 at December 31, 1997 were pledged to secure public
deposits, repurchase agreements and other liabilities as required or permitted
by law.
12
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
3. ALLOWANCE FOR LOAN LOSSES
The detail of the allowance for loan losses is summarized as
follows:
(IN THOUSANDS) 1998 1997
---------- ----------
Balance January 1, $ 3,039 $ 2,756
Provision charged to operating expense 676 661
Loans charged-off (809) (597)
Recoveries 147 97
---------- ----------
Balance September 30, $ 3,053 $ 2,917
========== ==========
Loans considered impaired under the provisions of SFAS No. 114
were not material at September 30, 1998 and December 31, 1997 or during
the three and nine months ended September 30, 1998 and 1997.
4. COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
There are various contingent liabilities not reflected within
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 the Company's
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 amounts 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, 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.
12
13
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
4. COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES (CONTINUED)
A summary of the notional or contractual amounts of financial
instruments with off-balance sheet risk at September 30, 1998 and
December 31, 1997 follows:
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 1998 1997
------------- ------------
Commitments to extend credit $ 18,007 $ 17,063
Standby letters of credit 204 244
There were no fixed-rate commitments or standby letters of
credit at September 30, 1998 or December 31, 1997.
At September 30, 1998 and December 31, 1997, reserves of
$937,000 and $997,000 were required as deposits with the Federal
Reserve or as cash on hand. These reserves do not earn interest.
5. BRANCH ACQUISITION
On November 6, 1998, the Company acting through CITIZENS
announced a branch acquisition of approximately $10 million. Citizens will
assume certain deposit and other liabilities of this branch and will purchase
the real estate at fair market value. The transaction is subject to regulatory
approval and is expected to close in mid December 1998.
13
14
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In the following pages, Management presents an analysis of
United Bancorp, Inc.'s ("Company") financial condition at September 30,
1998 compared to December 31, 1997 and results of operations for the
three and nine months ended September 30, 1998 compared to the same
periods in 1997. 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.
FORWARD-LOOKING STATEMENTS
In addition to the historical information contained herein,
the following discussion contains forward-looking statements, (as
contained in the Safe Harbor under the Private Securities Litigation
Reform Act) involving risks and uncertainties. Economic circumstances,
the Company's operations and actual results could differ significantly
from those discussed in the forward-looking statements. Some factors
that could cause or contribute to such differences are discussed
herein, but also include changes in the economy and interest rates in
the nation and in the Company's general market area.
Some of the forward-looking Company statements included herein
are statements regarding:
1. Management's determination of the amount of the allowance for
loan losses and the provision for loan losses;
2. The Company's forward looking statements regarding future
financial performance;
3. The sufficiency of the Company's liquidity and capital
reserves; and
4. The projections regarding Quantitative and Qualitative
Disclosure about Market Risk.
The Company is headquartered in Martins Ferry, Ohio, adjacent
to the Ohio River on the eastern border of Ohio and the northern
panhandle of West Virginia. It is located approximately 60 miles
southwest of Pittsburgh, Pennsylvania and approximately 125 miles east
of Columbus, Ohio.
Common stock of the Company was initially available through
over-the-counter trading. In February 1994, the Company began trading
on The Nasdaq SmallCaps Market tier of The Nasdaq Stock Market under
the trading symbol UBCP.
14
15
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
The following brief history of the Company and its subsidiary growth
and development highlights the continuing commitment to maintaining a presence
as a local "Hometown" community bank serving several diverse market areas.
> 1902 Original banking charter granted for The German Savings Bank
(later changed to The Citizens Savings Bank).
> 1974 Construction of a full-service branch banking facility 6 miles
west in Colerain, Ohio.
> 1978 Construction of a full-service branch banking facility 2 miles
south in Bridgeport, Ohio.
> 1980 Construction of a limited-service auto-teller banking location
in Martins Ferry, Ohio.
> 1983 Creation of United Bancorp, Inc. as a single-bank holding
company through acquisition of 100% of the voting stock of The
Citizens Savings Bank of Martins Ferry, Ohio ("CITIZENS").
Also, began operation of Automated Teller Machine ("ATM") in
Aetnaville, Ohio.
> 1984 CITIZENS opened a newly constructed 21,500 square foot
main-office facility in Martins Ferry, Ohio, adjacent to the
auto-teller facility built in 1980.
> 1986 United Bancorp, Inc. became a multi-bank holding company
through the acquisition of 100% of the voting stock of The
Citizens-State Bank of Strasburg, Strasburg, Ohio
("CITIZENS-STATE").
> 1990 CITIZENS converted from third-party data processing to
in-house data processing. CITIZENS-STATE constructed a
full-service branch bank 6 miles south of Strasburg in Dover,
Ohio.
> 1991 CITIZENS began providing third party data processing services
to affiliate bank CITIZENS-STATE.
> 1992 CITIZENS-STATE acquired two branch bank locations in New
Philadelphia and Sherrodsville, Ohio.
> 1993 CITIZENS relocated Data Processing, Accounting and Bookkeeping
to a renovated Operations Center across from the main office
in Martins Ferry, Ohio.
> 1994 CITIZENS-STATE purchased a branch bank in Dellroy, Ohio.
> 1996 CITIZENS converted to check imaging and optical character
recognition for data processing at all locations.
> 1997 CITIZENS opened a full-service Retail Banking Center inside
Riesbeck's Food Markets, Inc.'s St. Clairsville, Ohio store.
Additionally, CITIZENS introduced a Secondary Market Real
Estate Mortgage Program available for all locations and
introduced a MasterCard(R) Check Card to the local market
area.
> 1998 CITIZENS-STATE introduced an indirect automobile lending
program.
> 1998 CITIZENS increased ATM network by six cash dispenser machines
in various Riesbecks' Food Markets.
> 1998 Effective July 7, 1998, the acquisition of Southern Ohio
Community Bancorporation, Inc. was completed and The Community
Bank, Glouster, Ohio ("COMMUNITY") was added as a third
banking charter to the Company.
15
16
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
FINANCIAL CONDITION
EARNING ASSETS - LOANS
At September 30, 1998, gross loans were $164,259,000 compared
to $171,752,000 at year-end 1997, a modest decrease of 4.36%. The
decrease in total outstanding loans was the result of increased
competition in our markets, particularly in the installment loan
category. Real estate loan continues to decline slightly, as
anticipated, due to the increased activity in the Secondary Market Real
Estate program offered to all banking locations through their
affiliation with CITIZENS. Commercial and commercial real estate loans
in total have held relatively constant from December 31, 1997.
Management anticipates the expansion plans for Community will provide a
solid market for loan growth.
Installment loans, with continued emphasis placed on the
indirect automobile lending market, decreased to 30.2% of total loans
at September 30, 1998 compared to 32.6% at year-end 1997. The indirect
lending type of financing carries somewhat more risk than real estate
lending, however, it also provides for higher yields. The targeted
lending areas encompass four metropolitan areas, minimizing the risk to
changes in economic conditions in the communities housing the Company's
13 branch locations. During the first quarter of 1998, CITIZENS-STATE
introduced into their market an indirect automobile lending program.
The results for the first three quarters have been in line with
management's projections with total installment loans increasing
approximately 18% from December 31, 1997. However, the indirect market
for CITIZENS has seen increased competition and charge-offs during 1998
and as a result has experienced a decrease in installment loan totals
of approximately 8% from December 31, 1997. Since the January 1998
announcement of the acquisition of Southern, UBCP Management has worked
closely with Management at our newest affiliate with respect to product
pricing and underwriting standards. Based upon COMMUNITY'S past
experience with credit quality concerns in unsecured consumer debt
lending, UPCB Management strengthened underwriting standards and priced
these products at a level commensurate with the inherent risk in
unsecured lending. However, these changes resulted in a decrease in the
overall installment portfolio of COMMUNITY of approximately 40% since
December 31, 1997.
Commercial and commercial real estate loans comprised 39.9% of
total loans at September 30, 1998 compared to 38.3% at year-end 1997, a
modest decrease of approximately $260,000. During 1998, we have
experienced prepayment on commercial loans as commercial borrowers
continue to be price sensitive in this area of lending. The Company has
originated and bought participations in loans from other banks for
out-of-area commercial and commercial real estate loans to benefit from
consistent economic growth outside the area. The majority of these
loans are secured by real estate holdings comprised of hotels, motels
and churches located in various geographic locations, including
Columbus and the Akron-Canton, Ohio metropolitan areas. Out of area
loans at September 30, 1998 were 5.1% of total loans and 12.7% of total
commercial and commercial real estate loans compared to 9.1% and 24.2%
at year-end 1997. The Company has already seen the benefit of adding
Community into the consolidated group. Even before the effective merger
date of July 7, 1998, the Company has benefited from having a presence
in Athens County, Ohio. As a stand alone charter Community did not have
the legal lending capacity to handle the larger commercial customers
and as a result could not bid for the larger commercial credits.
However, with their affiliation pending during the first half of 1998,
management at Community worked closely with the Company to successfully
bid on some larger commercial credits.
16
17
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
EARNING ASSETS - LOANS (CONTINUED)
Real estate loans were 29.9% of total loans at September 30,
1998 compared to 29.1% at year-end 1997. As indicated above, the Banks'
involvement in the secondary market program should yield increases
in loan origination volume. It is anticipated that borrower preferences
will favor the secondary market product offerings with a decline
expected in real estate loans held within the loan portfolio.
The allowance for loan losses represents the amount which
management and the Board of Directors estimates is adequate to provide
for reasonably foreseeable losses inherent 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 current balance of the allowance for
loan losses is sufficient to deal with the probable losses associated
with the loan portfolio. Net charge-offs for the nine months ended
September 30, 1998 were approximately $662,000, or 21.0%, of the
beginning allowance for loan losses compared to $500,000 or 18.1%, of
the beginning balance for loan losses for the year-ended ended December
31, 1997. As previously mentioned COMMUNITY has strengthened its
underwriting standards, especially in the unsecured installment area.
For the nine months ended September 30, 1998 COMMUNITY
accounted for approximately 38% of net charge-offs or approximately
$244,000. For the three months ended September 30, 1998 total
charge-offs for COMMUNITY were less than $3,000. Management is
extremely please with the progress made during the third quarter of
1998 with respect to the amount of loans charged-off. Management
believes the necessary adjustments were made to COMMUNITY'S loan loss
reserve to bring it in line with UBCP's loan loss reserve methodology.
Management does not feel that comparison to previous periods with
respect to the allowance for loan loss is meaningful as the management,
underwriting standards and reserving methodology in now under the
control and monitoring of UBCP. As reported in the 1997 Annual Report
the longest steel strike in the Ohio Valley's history ended during the
fourth quarter of 1997. The effect of this strike is apparent in the
increased level of net charge-offs during the first three quarters of
1998. Management is closely monitoring charge-offs and does not
anticipate the remaining effect of the strike to have a material impact
on UBCP's financial results.
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, 1998 increased approximately $9.3
million, or 20.2% from year-end 1997 totals. This upward movement
resulted primarily from purchases with funds that were available from
loan payoffs and security calls/maturities for the nine months ended
September 30, 1998. Securities held to maturity decreased 15.0% at
September 30, 1998 compared to year-end 1997 totals. This was a result
of increased level of
17
18
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
maturities compared to nine months ended September 30, 1997 and the
reinvestment of these funds into available for sale securities.
Short-term federal funds sold are used to manage interest rate
sensitivity and to meet liquidity needs of the Company. At September
30, 1998, federal funds sold totaled $5,393,000 compared to $742,000 at
year-end 1997.
SOURCES OF FUNDS - DEPOSITS
The Company's primary source of funds is core deposits from
retail and business customers. These core deposits include all
categories of interest-bearing and noninterest-bearing deposits,
excluding certificates of deposit greater than $100,000. For the period
ended September 30, 1998, total core deposits decreased approximately
$372,000 primarily from a decrease of savings and time deposits under
$100,000 of $2.2 million and $1.9 million, respectively. This was
offset by increases in interest bearing demand deposits of $2.4 million
and noninterest bearing demand deposits of $1.2 million. The Company
has a strong deposit base from public agencies, including local school
districts, city and township municipalities, public works facilities
and others that may tend to be more seasonal in nature resulting from
the receipt and disbursement of state and federal grants. These
entities have maintained fairly static balances with the Company due to
various funding and disbursement timeframes.
Certificates of deposit greater than $100,000 are not
considered part of core deposits and as such are used to balance rate
sensitivity as a tool of funds management. At September 30, 1998,
certificates of deposit greater than $100,000 increased approximately
$1.1 million, or 4.9% over year-end 1997 totals.
SOURCES OF FUNDS - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND
OTHER BORROWINGS
Other interest-bearing liabilities include securities sold
under agreements to repurchase, sweep accounts, federal funds
purchased, Treasury, Tax & Loan notes payable and Federal Home Loan
Bank ("FHLB") advances. This general category decreased approximately
$1.3 million or 10.6% from December 31, 1997. Of notable discussion,
the decrease from December 31, 1997 is due to seasonal changes in
repurchase agreements. The majority of the Company's repurchase
agreement are with local school districts, city and county government.
PERFORMANCE OVERVIEW
NET INCOME
Basic earnings per share for the three and nine months ended
September 30, 1998 was $0.29, and $0.80 compared with $0.29 and $0.84
for the three and nine months ended September 30, 1997. On an
annualized basis, Return on Average Assets (ROA) was 1.07% and Return
on Average Equity (ROE) was 10.8% compared to ROA of 1.16% and ROE of
12.1% for the nine months ended September 30, 1997.
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
approximately 2.5% and increased approximately 1% for the three and
nine months ended September 30, 1998 compared to the same periods in
1997.
18
19
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
Total interest income for the three and nine months ended
September 30, 1998, when compared to the same three and nine month
periods ended September 30, 1997, decreased 1.0%, and increased 2.5%.
Total loans have decreased approximately $7.5 million since December
31, 1997. COMMUNITY accounted for approximately $5 million of the
decrease. As previously discussed, UBCP Management has strengthened the
underwriting standards at COMMUNITY. These changes has caused a
temporarily decrease in the loan production for COMMUNITY.
Additionally, the Company has experienced increased competition in the
lending area and expects this trend to continue. The cause for the
decline in total interest income is a result of investment of these
funds on a short-term basis in the Company's security portfolio.
Total interest expense for the three and nine months ended
September 30, 1998 when compared to the same three and nine-month
periods ended September 30, 1997, increased 1.4% and increased 4.8%.
Overall, the Company has seen some upward pressures to cost of funds.
This increase in interest expense was primarily the result of a higher
volume of certificates of deposits and increased borrowings.
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 $128,000 and $675,000
for the three and nine months ended September 30, 1998 compared to
$171,000 and $661,000 for the same periods in 1997. Management has
maintained the relative level of the provision in relation to loan
outstanding and mix within the loan portfolio experienced throughout
the first nine months of 1998. Please refer to the previous discussion
of the allowance for loan losses under Earnings Assets.
NONINTEREST INCOME
Total noninterest income is made up of bank related fees and
service charges, as well as other income producing services provided,
sale of secondary market loans, ATM income, early redemption penalties
for certificates of deposits, safe deposit rental income and other
miscellaneous items. Noninterest income for the three and nine months
ended September 30, 1998 was $463,000 and $1,162,000 compared to
$337,000 and $900,000 for the same three and nine month periods ended
September 30, 1997. As discussed in the Company's 1997 Annual Report,
the introduction of the Secondary Market Real Estate Mortgage Program
has dramatically increased the Company's noninterest income. Compared
with the first three quarters of 1997, noninterest income increased
approximately 29.1%. For the three months ended September 30, 1998
compared to the same period in 1997, noninterest income increased
approximately 37.4%
As previously reported, other recent developments have already
added to the strong growth in noninterest income. In April 1998, six
additional ATM's have been installed throughout the Riesbeck's Food
Market retail distribution network. In addition, in March 1998 the
Company initiated a surcharge throughout our entire ATM network to
non-customers of our affiliate Banks. During the third quarter of 1998
we introduced a cash management product that will give both our retail
and corporate customers the ability to transfer funds remotely via the
phone or by their personal computer. This product is in the early stage
of implementation and should provide another reliable source of
noninterest income.
19
20
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
NONINTEREST EXPENSE
Noninterest expense for the three and nine months ended
September 30, 1998 increased 4.2% and 5.9% over the three and nine
months ended September 30, 1997. The largest component of the increase
in noninterest expense is related to non-recurring costs related to the
acquisition of Southern. The merger/integration related pre-tax costs
totaled approximately $124,000 and $220,000 for the three and nine
months ended September 30, 1998. Without the merger/integration costs
noninterest expense for the three months ended September 30, 1998 would
have decreased 2.1% compared to the same period in 1997. For the nine
months ended September 30, 1998 compared with the same period in 1997
the increase in noninterest expense without consideration to the
merger/integration costs would have been 2.1%.
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, 1998 was $27,205,000 compared to
$25,712,000 at December 31, 1997, a 5.8% increase. Total shareholders'
equity in relation to total assets was 10.3% at September 30, 1998 and
9.8% at December 31, 1997.
In 1996, the Company established a Dividend Reinvestment Plan
("The Plan") for shareholders under which the Company's common stock
will be purchased by the Plan for participants with automatically
reinvested dividends. The Plan does not represent a change in the
Company's dividend policy or a guarantee of future dividends.
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.
20
21
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
CAPITAL RESOURCES (CONTINUED)
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%
The following table illustrates the Company's risk-weighted
capital ratios at September 30, 1998:
SEPTEMBER 30,
(IN THOUSANDS) 1998
------------------
Tier 1 capital $ 26,693
Total risk-based capital $ 29,747
Risk-weighted assets $ 168,589
Average total assets $ 262,763
Tier 1 capital to average assets 10.16%
Tier 1 risk-based capital ratio 7.92%
Total risk-based capital ratio 8.82%
21
22
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
LIQUIDITY
Management's objective in managing liquidity is maintaining
the ability to continue to meeting the cash flow needs of its
customers, such as borrowings or deposit withdrawals, as well as its
own financial commitments. The principal sources of liquidity are net
income, loan payments, maturing securities and sales of securities
available for sale, federal funds sold and cash and deposits with
banks. Along with its liquid assets, the Company has additional sources
of liquidity available to ensure that adequate funds are available as
needed. These include, but are not limited to, the purchase of federal
funds, the ability to borrow funds under line of credit agreements with
correspondent banks 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 it has the capital adequacy,
profitability and reputation to meet the current and projected needs of
its customers.
For the nine months ended September 30, 1998, the adjustments
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, net amortization of
securities and net changes in other assets and liabilities. The net
increase in cash and cash equivalents of $2,916,000 was primarily the
result of a net increase in cash from investing activities of
$2,412,000, partially off-set by net cash utilized in financing
activities of $1,523,000 related primarily to an increase in other
borrowed funds. The investing activity increase primarily related to
the net decrease in loans.. 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 the financial
position and results of operations in terms of historical dollars, with
the exception of securities available-for-sale, impaired loans and
other real estate loans 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
affects 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.
22
23
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
YEAR 2000
Many computer programs, which are in use today, use only two
digits to indicate which year is represented. If such computer
applications are not changed to allow the data field to reflect the
change in the century, the application may fail or create erroneous
results at the Year 2000 due to the improper sequence of the year from
"99" to "00".
Management has conducted an evaluation of all significant
computer systems used in the business of the Company to determine
whether such systems will function at the change of the century.
Management determined that most programs are or will be capable of
identifying the turn of the century. In order to prevent potential
credit quality issues, management is also assessing the Year 2000
compliance status of major loan customers to determine whether or not
such entities are taking steps to ensure their systems will function
properly in the Year 2000. Management is still in the evaluation
process but does not anticipate adverse effect from a major loan
customer not being year 2000 compliant. During the fourth quarter
Management is testing what is deemed mission critical systems.
Management closely monitors the issue with respect to our in-house
systems and full compliance is expected by the end of first quarter
1999. Management does not anticipate any material costs to be incurred
to update its systems to be Year 2000 compliant. Our current estimate
is to have total cost of less than $50,000 with approximately $15,000
expense through the nine months ended September 30, 1998.
REGULATORY MATTERS
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk affecting the Company is interest
rate risk. The Banks do not maintain a trading account for any class of
financial instrument and the Company is not affected by foreign
currency exchange rate risk or commodity price risk. Because the Banks
do not hold any equity securities other than stock in the Federal Home
Loan Bank of Cincinnati, which is not significant, the Company is not
subject to equity price risk.
The Company and its Banks, like other financial institutions,
are subject to interest rate risk to the extent that its
interest-earning assets reprice differently than its interest-bearing
liabilities. One of the principal objectives is to achieve long-term
profitability while reducing its exposure to fluctuations in interest
rates. The Company has sought to reduce exposure of earnings to changes
in market interest rates by managing assets and liability maturities
and interest rates primarily by originating variable-rate lending
products, or if issued with a fixed interest rate, as is the case with
the indirect automobile portfolio, the term is rather short in
duration. Both the variable interests rates inherent in the commercial,
commercial real estate and real estate loan portfolios, and the short
duration loan products, mitigate the Company's exposure to dramatic
interest rate movements.
The Company's securities are all fixed rate and are weighted
more heavily towards available for sale which accounts for 69% of the
portfolio compared to the 31% for held to maturity securities. The
Company primarily invests in US Treasury and Agency obligations and
State and Municipal obligations and has a modest amount invested in
mortgage-backed securities. Because total securities approximate 30% of
total assets, the Company could be sensitive to periods of rising
interest rates. However, this risk is
23
24
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
offset by the fact that approximately 10.4% of the total security
portfolio matures in less than one year and another 2.6% matures
within 1 to 2 years. 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. Presented in the Company's 1997 Annual Report
as of December 31, 1997, is an analysis of the Company's interest rate
risk as measured by changes in NPV for instantaneous and sustained
parallel shifts of 50 basis points in market interest rates.
Management believes that no events have occurred since December 31,
1997 which would significantly change the Company's NPV at September
30, 1998 under each assumed shifts of 50 basis points in market
interest rates.
The Company's NPV is more sensitive to increasing rates than
decreasing rates. Such difference in sensitivity occurs principally
because, as rates rise, the effect is offset on a short-term basis by
the rather fixed nature of our consumer loans. This occurs even though
the commercial, commercial real estate and real estate portfolios are
comprised of variable rate products. Also in a rising rate environment
consumers tend not to prepay fixed rate loans as quickly as they would
have had rates not changed dramatically. Moreover, the interest the
Company pays on its deposits would increase because deposits generally
have shorter periods to reprice.
Certain shortcomings are inherent in the NPV method of
analysis. 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 proportion 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 analysis. Finally, the ability of many borrowers
to repay their adjustable-rate debt may decrease in the case of an
increase in interest rates.
24
25
UNITED BANCORP, INC.
OTHER INFORMATION
FORM 10-Q
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None were submitted
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM
(a) Exhibits
(b) Reports on Form
The Company filed no Form with the Securities Exchange
Commission during the quarter ending September 30, 1998.
25
26
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, 1998 By: /s/ James W. Everson
--------------------------- -----------------------------
Date James W. Everson
Chairman, President & Chief
Executive Officer
November 10, 1998 By: /s/ Randall M. Greenwood
--------------------------- -----------------------------
Date Randall M. Greenwood
Chief Financial Officer
26
27
Exhibit Index
Exhibit
Number Description
------- -----------
27.1 Nine Months Ended September 30, 1998
27.2 Nine Months Ended September 30, 1997
27.3 Year Ended December 31, 1997