1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
[] 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 of incorporation or organization) (IRS Employer Identification No.)
201 SOUTH 4TH STREET, MARTINS FERRY, OHIO 43935-0010
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(Address of principal executive offices) (Zip Code)
(740) 633-0445
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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 2,802,922 SHARES AS OF MAY 5, 1999
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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.............................................................................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 - 24
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.................................................25
PART II OTHER INFORMATION
ITEM 1.
Legal Proceedings................................................................................................26
ITEM 2.
Changes in Securities and Use of Proceeds........................................................................26
ITEM 3.
Default Upon Senior Securities...................................................................................26
ITEM 4.
Submission of Matters to a Vote of Security Holders..............................................................26
ITEM 5.
Other Information................................................................................................26
ITEM 6.
Exhibits and Reports on Form 8-K.................................................................................26
SIGNATURES.........................................................................................................27
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UNITED BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
FORM 10-Q (IN THOUSANDS)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
------------------ ------------------
ASSETS
Cash and due from banks $ 7,731 $ 11,322
Federal funds sold 1,360 5,170
------------------ ------------------
Total cash and cash equivalents 9,091 16,492
Securities available for sale 85,358 75,792
Securities held to maturity
(Estimated fair value of $24,085 at 03/31/99 and $22,885 at 12/31/98) 23,168 21,893
Loans receivable
Commercial loans 9,965 12,912
Commercial real estate loans 55,877 54,195
Real estate loans 48,077 49,438
Installment loans 47,268 47,676
------------------ ------------------
Total loans receivable 161,187 164,221
Allowance for loan losses (3,086) (3,033)
------------------ ------------------
Net loans receivable 158,101 161,188
Premises and equipment, net 7,148 6,981
Accrued interest receivable and other assets 4,359 3,147
--------------------------------------
Total Assets $ 287,225 $ 285,493
======================================
LIABILITIES
Demand deposits
Noninterest bearing $ 18,301 $ 21,033
Interest bearing 38,408 41,780
Savings deposits 60,351 57,091
Time deposits - under $100,000 92,160 87,242
Time deposits - $100,000 and over 21,628 21,964
------------------ ------------------
Total deposits 230,848 229,110
Securities sold under agreements to repurchase 7,925 7,733
Other borrowed funds 20,042 19,700
Accrued expenses and other liabilities 1,406 1,629
------------------ ------------------
Total Liabilities 260,221 258,172
SHAREHOLDERS' EQUITY
Common stock - $1 Par Value: 10,000,000 shares authorized;
2,802,922 issued and outstanding 2,803 2,800
Additional-paid-in-capital 17,823 17,802
Retained earnings 7,307 6,840
Accumulated other comprehensive income, net of tax (929) (121)
------------------ ------------------
Total Shareholders' Equity 27,004 27,321
------------------ ------------------
Total Liabilities and Shareholders' Equity $ 287,225 $ 285,493
================== ==================
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 MONTH ENDED
MARCH 31,
1999 1998
----------------- ----------------
Interest and dividend income
Loans, including fees $ 3,611 $ 4,051
Taxable securities 1,232 873
Non-taxable securities 319 296
Other interest and dividend income 69 79
----------------- ----------------
Total interest and dividend income 5,231 5,299
Interest expense
Deposits
Demand 217 259
Savings 378 480
Time 1,484 1,511
Other borrowings 292 207
----------------- ----------------
Total interest expense 2,371 2,457
NET INTEREST INCOME 2,860 2,842
Provision for loan losses 198 117
----------------- ----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,662 2,725
Noninterest income
Service charges on deposit accounts 174 166
Other income 205 195
----------------- ----------------
Total noninterest income 379 361
Noninterest expense
Salaries and employee benefits 979 1,073
Occupancy 306 289
Other expenses 682 623
----------------- ----------------
Total noninterest expense 1,967 1,985
INCOME BEFORE INCOME TAXES 1,074 1,101
Income tax expense 244 271
----------------- ----------------
NET INCOME $ 830 $ 830
================= ================
Earnings per common share - Basic $ 0.30 $ 0.30
Earnings per common share - Diluted $ 0.29 $ 0.29
Dividends per common share $ 0.13 $ 0.11
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)
ADDITIONAL
COMMON PAID IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME
------------- ----------------- ------------------ ------------------
BALANCE AT JANUARY 1, 1998 $ 2,800 $ 17,801 $ 4,933
Net income 830 $ 830
Proceeds and tax benefit from
exercise of stock options
Other comprehensive income, net of tax:
Unrealized gains/losses on securities (5)
------------------
Comprehensive income 825
==================
Cash dividends (224)
------------- ----------------- ------------------
BALANCE AT MARCH 31, 1998 2,800 17,801 5,539
BALANCE AT JANUARY 1, 1999 2,800 17,801 6,840
Net income 830 $ 830
Proceeds and tax benefit from 3 22
exercise of stock options
Other comprehensive income, net of tax:
Unrealized gains (loss) on securities (809)
------------------
Comprehensive income $ 21
==================
Cash dividends - $0.13 per share (363)
------------- ----------------- ------------------
BALANCE AT MARCH 31, 1999 $ 2,803 $ 17,823 $ 7,307
============= ================= ==================
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME TOTAL
------------- -----------------
BALANCE AT JANUARY 1, 1998 $ 172 $ 25,706
Net income 830
Proceeds and tax benefit from
exercise of stock options
Other comprehensive income, net of tax:
Unrealized gains/losses on securities (5) (5)
Comprehensive income
Cash dividends (224)
------------- -----------------
BALANCE AT MARCH 31, 1998 167 26,307
BALANCE AT JANUARY 1, 1999 (120) 27,321
Net income 830
Proceeds and tax benefit from 25
exercise of stock options
Other comprehensive income, net of tax:
Unrealized gains (loss) on securities (809) (809)
Comprehensive income
Cash dividends - $0.13 per share (363)
------------- -----------------
BALANCE AT MARCH 31, 1999 $ (929) $ 27,004
============= =================
See accompanying notes to the condensed consolidated financial statements 5
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UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FORM 10-Q (IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
1999 1998
---------------------------------------------------
Cash flows from operating activities
Net income $ 830 $ 830
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 185 165
Provision for loan losses 198 117
Deferred taxes (262) 259
Federal Home Loan Bank stock dividend (15) (20)
Gain on sale/call of securities - (1)
(Accretion)/amortization of securities, net 9 1
Gain on sale of loans (35) (29)
Amortization of mortgage servicing rights 8 6
Gain/Loss on sale of assets 1 (23)
Net changes in accrued interest receivable and other assets (517) (781)
Net changes in accrued expenses and other liabilities (216) (275)
----------------------- -----------------------
Net cash from operating activities 186 249
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Proceeds from sales - -
Proceeds from maturities/calls 6,315 5,043
Purchases (17,091) (8,680)
Securities held to maturity
Proceeds from maturities/calls - 500
Purchases (1,282) (353)
Net change in loans 2,785 (1,531)
Net purchases of premises and equipment (343) (119)
Proceeds from sale of assets 95 -
----------------------- -----------------------
Net cash from investing activities (9,521) (5,140)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 1,738 5,118
Net change in short-term borrowings (1,422) (1,024)
Proceeds from long-term debt 2,500 6,100
Principal payments on long-term debt (544) (21)
Proceeds from exercise of stock options 25 -
Tax benefit from exercise of stock options - -
Cash dividends paid (363) (231)
----------------------- -----------------------
Net cash from financing activities 1,934 9,942
----------------------- -----------------------
Net change in cash and cash equivalents (7,401) 5,051
Cash and cash equivalents at beginning of year 16,492 10,587
----------------------- -----------------------
Cash and cash equivalents at end of period $ 9,091 $ 15,638
======================= =======================
Interest paid $ 2,416 $ 2,518
Income taxes paid 152 7
See accompanying notes to the condensed consolidated financial statements 6
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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
United Bancorp, Inc. ("Company") at March 31, 1999, 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 1998 United Bancorp, Inc. consolidated financial statements and
related notes thereto included in its Annual Report to Shareholders for
the year ended December 31, 1998. Reference is made to the accounting
policies of the Company described in the notes to the consolidated
financial statements contained in its 1998 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"). On April 21, 1999, CITIZENS-STATE
merged into CITIZENS. All significant intercompany transactions and
balances have been eliminated in consolidation. The results of
operations for the period ended March 31, 1999 are not necessarily
indicative of the operating results for the full year of 1999.
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 Athens, Belmont, Carroll, Fairfield, Harrison, Hocking Jefferson,
and Tuscarawas, 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 in Glouster, Nelsonville, Amesville, and a Loan Production
office in Lancaster, 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)
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. All per share data has been retroactively
adjusted for the 5% stock dividend distributed on December 18, 1998 and
the 10% stock dividends distributed in 1997 and 1996.
EARNINGS AND DIVIDENDS PER COMMON SHARE:
Basic Earnings per share ("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 2,800,327 and 2,800,298 for the three
months ended March 31, 1999 and 1998, respectively. The
weighted-average number of shares outstanding for diluted EPS was
2,823,235 and 2,826,520 for the three months ended March 31, 1999 and
1998, respectively. The per share dilution of the stock options was
$0.01 for the three months ended March 31, 1999 and 1998.
RECLASSIFICATIONS:
Some items in prior financial statements have been reclassified to
conform to the current presentation.
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UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FORM 10-Q
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME:
Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized
gains and losses on securities available for sale which is also
recognized as a separate component of equity. Other comprehensive
income components and related taxes are as follows:
THREE MONTHS THREE MONTHS
ENDED ENDED YEAR-ENDED
MARCH 31, MARCH 31, DECEMBER 31,
(In thousands) 1999 1998 1998
------------------ ---------------- -----------------
Net Income $ 830 $ 830 $ 3,155
Unrealized gain/(loss) arising in period (809) (5) (293)
Reclassification for realized amount - - -
Net unrealized gain/(loss) recognized in
other comprehensive income (809) (5) (293)
------------------ ---------------- -----------------
Comprehensive Income $ 21 $ 825 $ 2,862
================== ================ =================
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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 securities are as
follows:
GROSS GROSS
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- --------------
AVAILABLE FOR SALE - MARCH 31, 1999
US Treasury obligations $ 1,000 $ 2 - $ 1,002
US Agency obligations 78,758 - $ (1,505) 77,253
Mortgage-backed securities 2,932 22 - 2,954
State and Municipal obligations 2,418 58 - 2,476
Other securities 1,657 16 1,673
-------------- -------------- -------------- --------------
$ 86,765 $ 98 $ (1,505) $ 85,358
============== ============== ============== ==============
AVAILABLE FOR SALE - DECEMBER 31, 1998
US Treasury obligations $ 1,497 $ 12 $ 1,509
US Agency obligations 67,814 263 $ (571) 67,506
State and Municipal obligations 2,118 80 (1) 2,197
Mortgage-backed obligations 3,010 20 (2) 3,028
Other securities 1,536 16 - 1,552
-------------- -------------- -------------- --------------
$ 75,975 $ 391 $ (574) $ 75,792
============== ============== ============== ==============
HELD TO MATURITY - MARCH 31, 1999
State and Municipal obligations $ 23,122 $ 917 $ - $ 24,039
Other securities 46 - - 46
-------------- -------------- -------------- --------------
$ 23,168 $ 917 $ - $ 24,085
============== ============== ============== ==============
HELD TO MATURITY - DECEMBER 31, 1998
State and Municipal obligations $ 21,848 996 $ (4) $ 22,840
Other securities 46 $ - - 46
-------------- -------------- -------------- --------------
$ 21,894 $ 996 $ (4) $ 22,886
============== ============== ============== ==============
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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 three months
ended March 31, 1999 or 1998. Contractual maturities of securities at
March 31, 1999 were as follows:
AVAILABLE FOR SALE (IN THOUSANDS) AMORTIZED ESTIMATED
COST FAIR VALUE
----------------- ----------------
US Treasury obligations
Under 1 Year $ 1,000 $ 1,002
1 - 2 Years - -
----------------- ----------------
Total 1,000 1,002
----------------- ----------------
US Agency obligations
Under 1 Year 2,000 2,005
1 - 2 Years - -
2 - 5 Years 3,597 3,619
5 - 10 Years 35,410 35,061
Over 10 Years 37,751 36,568
----------------- ----------------
Total 78,758 77,253
----------------- ----------------
State and municipal obligations
2 - 5 Years 50 54
5 - 10 Years 882 912
Over 10 Years 1,486 1,510
----------------- ----------------
Total 2,418 2,476
----------------- ----------------
Mortgage Backed securities
5 - 10 Years 248 248
Over 10 Years 2,684 2,706
----------------- ----------------
Total 2,932 2,954
----------------- ----------------
Other investments
Equity securities 1,657 1,673
----------------- ----------------
Total securities available for sale $ 86,765 $ 85,358
================= ================
HELD TO MATURITY (IN THOUSANDS)
State and municipal obligations
Under 1 Year 1,177 1,198
1 - 2 Years 2,470 2,549
2 - 5 Years 11,746 12,311
5 - 10 Years 5,582 5,826
Over 10 Years 2,147 2,155
----------------- ----------------
Total 23,122 24,039
----------------- ----------------
Other investments
Equity securities 46 46
Total securities held to maturity $ 23,168 $ 24,085
----------------- ----------------
Securities with an amortized cost of approximately $40,666,000 at March 31, 1999
and $37,084,000 at December 31, 1998 were pledged to secure public deposits,
repurchase agreements and other liabilities as required or permitted by law.
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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) 1999 1998
----------------- ----------------
Balance January 1, $ 3,033 $ 3,039
Provision charged to operating expense 197 117
Loans charged-off (181) (254)
Recoveries 37 32
----------------- ----------------
Balance March 31, $ 3,086 $ 2,934
----------------- ----------------
Loans considered impaired under the provisions of SFAS No. 114
were not material at March 31, 1999 and December 31, 1998.
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.
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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 March 31, 1999 and December
31, 1998 follows:
MARCH 31, DECEMBER 31,
(IN THOUSANDS) 1999 1998
----------------- ----------------
Commitments to extend credit $ 16,052 $ 16,655
Credit Card Lines $ 600 $ 541
Standby letters of credit 369 269
March 31, 1999, and included above, commitments to make fixed-rate
loans totaling $1,621,000 with the interest rates on those fixed-rate
commitments ranging from 7.75% to 8.25%. At December 31, 1998,
commitments to make fixed rate loans totaled $843,000 with interest
rates on those fixed-rate commitments ranging from 7.75% to 8.25%.
At March 31, 1999 and December 31, 1998, reserves of $978,000 and
$1,116,000 were required as deposits with the Federal Reserve or as
cash on hand. These reserves do not earn interest.
5. BRANCH ACQUISITION
On January 28, 1999, the Company acting through CITIZENS consummated
its previously announced branch purchase from Belmont National Bank.
CITIZENS has assumed certain deposit and other liabilities of
approximately $11 million of this branch and purchased the real estate
at fair market value. This transaction was accounted for as a purchase,
and accordingly, the assets and liabilities have been recorded on the
respective fair market value as the date of acquisition. The intangible
assets from this acquisition are not material to the Company's
financial statements.
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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 March 31, 1999
compared to December 31, 1998 and results of operations for the three
months ended March 31, 1999 compared to the same period in 1998. 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.
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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.
-- 1999 January 28, 1999 CITIZENS acquired a full
service banking facility in Jewett, Ohio
-- 1999 March 1999 COMMUNITY opened a Loan
Production Office in Lancaster, Ohio.
-- 1999 CITIZENS established a full service
brokerage divisions to be known as
Brokerage United with securities provided
through Raymond James Financial Services,
Inc. member NASD/SIPC.
15
16
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
FINANCIAL CONDITION
EARNING ASSETS - LOANS
At March 31, 1999, gross loans were $161,187,000 compared to
$164,221,000 at year-end 1998, a modest decrease of 1.85%. The decrease
in total outstanding loans was the result of increased competition in
our markets, particularly in the commercial and installment loan
categories. 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 real estate loans increased
slightly from December 31, 1998. Management anticipates the expansion
plans for COMMUNITY will provide a solid market for loan growth since a
Loan Production Office was established during the first quarter of 1999
in Lancaster, Ohio.
Installment loans, with continued emphasis placed on the indirect
automobile lending market, stayed relatively constant 29.3 % of total
loans at March 31, 1999 compared to 29.0% at year-end 1998. 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 year have been in line with
management's projections. However, CITIZENS-STATE has seen the growth
slow somewhat in the first quarter with total installment loan
increasing 2.9% since December 31, 1998. However, the indirect market
for CITIZENS has seen increased competition and charge-offs during 1999
and as a result has experienced a decrease in installment loan totals
from December 31, 1998. Based upon COMMUNITY'S past experience with
credit quality concerns in unsecured consumer debt lending, our new
Management Team at COMMUNITY strengthened underwriting standards and
priced these products at a level commensurate with the inherent risk in
unsecured lending. At the same Management has worked to expand the
lending market of COMMUNITY into the Lancaster, Ohio area. As a result
of tightening credit standards and selective expansion of the lending
market, the installment loan portfolio decreased a modest 2.9% since
December 31, 1998.
Commercial and commercial real estate loans comprised 40.9% of
total loans at March 31, 1999 and December 31, 1998. During 1999, 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 March 31, 1999 were 9.9% of total loans and 24.1% of total
commercial and commercial real estate loans compared to 11.6% and 28.4%
at year-end 1998.
Real estate loans were 29.8% of total loans at March 31, 1999
compared to 30.1% at year-end 1998. As indicated above, the Banks'
involvement in the secondary market program should yield increases
16
17
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
EARNING ASSETS - LOANS (CONTINUED)
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 three months ended
March 31, 1999 were approximately $160,000, or 5.3%, of the beginning
allowance for loan losses compared to $222,000 or 7.3%, of the
beginning balance for loan losses for the three months ended March 31,
1998. As previously mentioned COMMUNITY has strengthened its
underwriting standards, especially in the unsecured installment area.
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 March 31, 1999 increased approximately $9.6 million, or 12.6%
from year-end 1998 totals. This upward movement resulted primarily from
purchases with funds that were available from loan payoffs and
utilization of amounts previously in federal funds sold. Securities
held to maturity increased 5.8% at March 31, 1999 compared to year-end
1998 totals. Management capitalized on favorably priced municipal s
during the three months ended March 31, 1999.
Short-term federal funds sold are used to manage interest rate
sensitivity and to meet liquidity needs of the Company. At March 31,
1999, federal funds sold totaled $1,360,000 compared to $5,170,000 at
year-end 1998.
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
March 31, 1999, total core deposits increased approximately $2,074,000
primarily from an increase of savings and time deposits under $100,000
of $3.3 million and $4.9 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,
17
18
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
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 March 31, 1999, certificates of
deposit greater than $100,000 decreased approximately $0.5 million, or
less than 1.0% over year-end 1998 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 stayed relatively constant from
December 31, 1998. 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 months ended March 31, 1999
was $0.30, compared with $0.30 for the three months ended March 31,
1998. On an annualized basis, Return on Average Assets (ROA) was 1.16%
and Return on Average Equity (ROE) was 12.18% compared to ROA of 1.24%
and ROE of 12.74% for the three months ended March 31, 1998.
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
less than 1.0% for the three months ended March 31, 1999 compared to
the same period in 1998.
Total interest income for the three months ended March 31, 1999,
when compared to the same three month period ended March 31, 1998,
decreased 1.3%. Total loans have decreased approximately $3.0 million
since December 31, 1998. 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 months ended March 31, 1999
when compared to the same three month period ended March 31, 1998,
decreased 3.5%. Overall, the Company has seen some downward pressures
to cost of funds. This decrease in interest expense was primarily the
result of lower rates on demand and savings accounts.
18
19
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
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 $198,000 for the three
months ended March 31, 1999 compared to $117,000 the same period in
1998. Management has increased the relative level of the provision in
relation to loan outstanding and mix within the loan portfolio
experienced over the past twelve months. 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 months ended
March 31, 1999 was $379,000 compared to $361,000 for the same three
month periods ended March 31, 1998. As discussed in the Company's 1998
Annual Report, the Secondary Market Real Estate Mortgage Program has
increased the Company's noninterest income. For the three months ended
March 31, 1999 compared to the same period in 1998, noninterest income
increased approximately 5.0%
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.
NONINTEREST EXPENSE
Noninterest expense for the three months ended March 31, 1999
decreased 1.0% over the three months ended March 31, 1998. The largest
component of the decrease in noninterest expense is related to salaries
and employee benefits. Non-recurring costs of approximately $50,000
were incurred during the first quarter of 1999 related to CITIZENS
Jewett branch purchase, CITIZENS opening of a full service brokerage
operations and COMMUNITY's opening of a Loan Production in Lancaster,
Ohio.
CAPITAL RESOURCES
Internal capital growth, through the retention of earnings, is the
primary means of maintaining capital adequacy for the Company.
Shareholders' equity at March 31, 1999 was $27,004,000 compared to
$25,321,000 at December 31, 1998, a 1.2% decrease. Total shareholders'
equity in relation to total assets was 9.4% at March 31, 1999 and 9.6%
at December 31, 1998.
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.
19
20
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
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%
The following table illustrates the Company's risk-weighted
capital ratios at March 31, 1999:
MARCH 31,
(IN THOUSANDS) 1999
----------------
Tier 1 capital $ 27,732
Total risk-based capital $ 29,906
Risk-weighted assets $ 172,990
Average total assets $ 278,211
Tier 1 capital (to average assets) 9.97%
Tier 1 capital (to risk-weighted assets) 17.29%
Total capital (to risk-weighted assets 16.03%
20
21
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 three months ended March 31, 1999, 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
decrease in cash and cash equivalents of $7,401,000 was primarily the
result of a net purchase of investment securities of $9,521,000,
partially off-set by net cash provided in financing activities of
$1,934,000 related primarily to an increase in other borrowed funds and
deposits. 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.
21
22
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
YEAR 2000
In April, 1997, United Bancorp (the "Company") management began its commitment
for evaluating the Year 2000 (Y2K) impact on its internal and external
Information Systems (IS). Understanding the problem was the first approach
management took in its evaluation.
The assessment stage began by conducting extensive inventories of all systems
within the Company. All systems were then assigned priorities from 1-9 where 1
represented the most significant systems for testing and evaluation. A priority
9 represented the least critical systems. The following were major factors
contributing to the assignment of the priorities.
- Ascertain which systems constitute a material Y2K risk to our
customers.
- How quickly and effectively can a contingency plan be
implemented if systems fail?
- What is the potential impact to the Company's liquidity if
systems fail?
Some Priority 1 systems were also labeled as "mission critical," and are
summarized below. Although other Priority 1 systems are also important to the
Company, they are not deemed to be critical to the Company's operation.
- BancTec Banker 80-II
- Bisys/Document Solutions POD/Power Proof
- Fedline
- Personal Computers and Operating Systems
BancTec Banker 80-II
Banker 80-II is the core account processing software used by the Company for
processing and recording customer deposit and loan accounts and transactions as
well as the Company's General Ledger. Banker 80-II produces information critical
to the proper operation of the Company and its affiliates and serves as the
database for virtually all financial and regulatory reporting. Banker 80-II is
leased from and maintained by BancTec, Inc.
and is utilized by more than 400 community banks nationwide.
Banker 80-II Y2K compliant software release was tested by BancTec in March, 1998
and released to the financial institution user base in May, 1998. The Company
installed this Y2K compliant release in September, 1998. Since every Banker
80-II bank may be different, individual bank testing had to be done; however,
"Proxy" testing could occur within an organization which used the same hardware
and software. Therefore, the Company's lead bank, The Citizens Savings Bank, was
identified as the base used for testing. Y2K Committee members of The Citizens
Savings Bank then developed test scripts and established a baseline test date of
December 16, 1998. Due to the "mission critical" nature of Banker 80-II, it was
determined that testing of all FFIEC critical dates was necessary. Testing
occured during January, 1999 within our own production system on a "like" but
separate database using a third-party software package for advancing dates. The
test revealed no significant deficiencies in Banker 80-II's ability to properly
process and record transactions and reports beyond the year 2000. To summarize,
testing produced "Satisfactory" results.
22
23
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
Results from the testing phase were made available to the affiliate banks who
then performed their "Proxy" testing, and concurred with the findings of The
Citizens Savings Bank.
Fedline
Fedline is the operating system software utilized to process transactions and
communicate with the Federal Reserve Bank. The most significant transactions
processed with the Federal Reserve are wire transfers, ACH, savings bonds, and
cash ordering. The Federal Reserve has developed a comprehensive testing
schedule that allows banks to operate in a "test" mode during certain times and
dates. The Company has completed the testing of Fedline and all testing has
produced "Satisfactory" results.
Bisys/Document Solutions
The Company's Item Processing system uses software developed by Bisys/Document
Solutions (DSI) that utilizes NCR equipment to create images of internal and
external transactions accepted by bank personnel. The equipment separates the
items into unique categories; such as, checks and deposits, savings, and loans.
The software is then used to balance each transaction allowing checks drawn on
other banks to be magnetically encoded by the equipment at a later time.
The Company's software and equipment has been certified for Y2K compliance by
the vendors of their particular systems.
Personal Computers and Operating Systems
All personal computers were tested using a third-party software package designed
specifically for Y2K testing. The PC's found to be non-compliant were either
taken out of production and replaced or utilized where the application software
was not date sensitive.
Standardization is essential with the way technology has grown; therefore, all
personal computers with date sensitive applications have been standardized with
the core operating system Windows95/98, which contains only minor and
insignificant Y2K issues.
Other IS Systems
The following list identifies software the Company feels required some level of
Y2K testing or verification. Procedures included written verification with
vendors, review of vendor testing plans, methodology and results and, where
deemed necessary, operating the software in a year 2000 testing mode. No notable
Y2K issues were apparent, with overall results "Satisfactory."
- - Advantage - Payroll processing - Lotus 1-2-3/Microsoft Excel - Spreadsheet applications
- - Banker Systems, Inc. Loan Processor Laser - - Lotus Amipro/Microsoft Word - Word processing software
Utilized for loan document preparation
- Midwest Payment Systems (MPS) - ATM and check card
- - Best Software FAS!Encore - Fixed Asset accounting processor
- - First Tennessee - Portfolio Accounting Services - Money Access Service (MAC) - ATM and check card
processor
- - Intuit Quickbooks - Accounts Payable software
23
24
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
Other Operating Systems
The Company has evaluated other operating system, including HVAC and security,
and considers all to be Y2K compliant. Whereas, some systems are computerized,
most are mechanical and Y2K is not an issue. Y2K compliance statements have been
recorded on those systems containing computerized chips. American Electric Power
serves as the electric company for the Company's Operation's Center and
experiences periodic power outages. In the event of a power outage, the
Operations Center is having a Natural Gas backup generator installed and
thoroughly tested prior to year-end. This is being done to back-up all future
power outages. A Communications giant TCI services telecommunications; however,
aside from obtaining documentation regarding their Y2K compliance, testing by
the Company is virtually impossible.
Customer Y2K Evaluation
Management of each affiliate completed a review of all customers with aggregate
loans exceeding designated amounts to assess whether any customer had a
significant risk to a Y2K related failure which would significantly impact their
business, and alter their ability to repay their loans. Management's procedures
included a review of the customers' most recent loan grading, review of
collateral and, in most cases, completion of a detailed Y2K questionnaire which
was reviewed directly with the borrower. Based on this information, Management
assigned an overall Y2K risk grade. In the aggregate, the Company rated its
overall risk due to potential customer Y2K issues as low. Individual borrowers
will continue to be monitored as new loan requests or line of credit renewals
are considered for approval by loan committee. Similarly deposit customers, who
qualify by virtue of size or risk, were also contacted in order to have them
think about the problem and to develop an awareness of their status.
Current "Worst Case" Scenario
The Company is confident that its internal systems will not be significantly
impacted by Y2K. However, the Company does anticipate that some problems may
occur with customer systems, and with our suppliers and customers. There is some
potential for slower collection of payments that may result in increases in past
dues and decreases in depository balances. The Company will maintain higher
levels of liquidity in the final quarter of 1999 and continuing into the year
2000 to offset this risk. No material Y2K related issues by foreign nations or
companies have been identified.
Year 2000 Costs
Management anticipates the external costs associated with preparing for the Year
2000 to be approximately $50,000. For 1998, the Company incurred approximately
$25,000 and an additional $20,000 for the three months ended March 31, 1999. The
remainder of the costs will be incurred during the remainder of the fiscal year.
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.
24
25
UNITED BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
FORM 10-Q
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 79% of the portfolio compared to
the 21% 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 38% of total assets, the Company could be sensitive to periods of
rising interest rates. However, this risk is offset by the fact that
approximately 3.9% of the total security portfolio matures in less than one year
and another 2.2% 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 1998 Annual Report as of December 31,
1998, 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, 1998 which would significantly change the Company's NPV at March
31, 1999 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.
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26
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 March 31, 1999.
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27
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.
May 14, 1999 By: /s/ James W. Everson
--------------------------- ----------------------------
Date James W. Everson
Chairman, President & Chief
Executive Officer
May 14, 1999 By: /s/ Randall M. Greenwood
--------------------------- ----------------------------
Date Randall M. Greenwood
Chief Financial Officer
27