<PAGE> 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 JUNE 30, 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
-------
UNITED BANCORP, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter.)
OHIO 34-1405357
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 2,802,922 SHARES AS OF JULY 14, 1999
<PAGE> 2
UNITED BANCORP, INC.
TABLE OF CONTENTS
FORM 10-Q
PART I FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. Financial Statements
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 the 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 - 26
PART II OTHER INFORMATION
ITEM 1.
Legal Proceedings..........................................................27
ITEM 2.
Changes in Securities and Use of Proceeds..................................27
ITEM 3.
Default Upon Senior Securities.............................................27
ITEM 4.
Submission of Matters to a Vote of Security Holders........................27
ITEM 5.
Other Information..........................................................27
ITEM 6.
Exhibits and Reports on Form 8-K...........................................27
SIGNATURES...................................................................28
2
<PAGE> 3
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,949 $ 11,322
Federal funds sold 1,350 5,170
--------- ---------
Total cash and cash equivalents 9,299 16,492
Securities available for sale 92,471 75,792
Securities held to maturity
(Estimated fair value of $8,818 at 06/30/99 and $22,885 at 12/31/98) 8,836 21,893
Loans receivable
Commercial loans 11,896 12,912
Commercial real estate loans 55,277 54,195
Real estate loans 49,215 49,438
Installment loans 50,649 47,676
--------- ---------
Total loans receivable 167,037 164,221
Allowance for loan losses (2,935) (3,033)
--------- ---------
Net loans receivable 164,102 161,188
Premises and equipment, net 7,770 6,981
Accrued interest receivable and other assets 5,019 3,147
----------------------
Total Assets $ 287,497 $ 285,493
======================
LIABILITIES
Demand deposits
Noninterest bearing $ 18,408 $ 21,033
Interest bearing 40,246 41,780
Savings deposits 61,988 57,091
Time deposits - under $100,000 89,617 87,242
Time deposits - $100,000 and over 18,093 21,964
--------- ---------
Total deposits 228,352 229,110
Securities sold under agreements to repurchase 7,414 7,733
Other borrowed funds 24,453 19,700
Accrued expenses and other liabilities 1,475 1,629
--------- ---------
Total Liabilities 261,694 258,172
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 7,616 6,840
Accumulated other comprehensive income, net of tax (2,439) (121)
--------- ---------
Total Shareholders' Equity 25,803 27,321
--------- ---------
Total Liabilities and Shareholders' Equity $ 287,497 $ 285,493
========= =========
</TABLE>
3
See accompanying notes to the condensed consolidated financial statements
<PAGE> 4
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS-EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------ ------ ------- -------
<S> <C> <C> <C> <C>
Interest and dividend income
Loans, including fees $3,684 $4,024 $ 7,295 $ 8,075
Taxable securities 1,269 844 2,501 1,717
Non-taxable securities 337 333 656 629
Other interest and dividend income 54 115 123 194
------ ------ ------- -------
Total interest and dividend income 5,344 5,316 10,575 10,615
Interest expense
Deposits
Demand 225 263 442 522
Savings 385 457 763 937
Time 1,450 1,547 2,934 3,058
Other borrowings 306 151 598 358
------ ------ ------- -------
Total interest expense 2,366 2,418 4,737 4,875
NET INTEREST INCOME 2,978 2,898 5,838 5,740
Provision for loan losses 205 431 403 548
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,773 2,467 5,435 5,192
Non-interest income
Service charges on deposit accounts 185 193 359 359
Other income 121 145 326 340
------ ------ ------- -------
Total non-interest income 306 338 685 699
Non-interest expense
Salaries and employee benefits 1,034 1,009 2,013 2,082
Occupancy 334 283 640 572
Other expenses 795 799 1,477 1,422
------ ------ ------- -------
Total non-interest expense 2,163 2,091 4,130 4,076
INCOME BEFORE INCOME TAXES 916 714 1,990 1,815
Income tax expense 241 180 485 451
------ ------ ------- -------
NET INCOME $ 675 $ 534 $ 1,505 $ 1,364
====== ====== ======= =======
Earnings per common share - Basic $ 0.24 $ 0.19 $ 0.54 $ 0.49
Earnings per common share - Diluted $ 0.24 $ 0.19 $ 0.53 $ 0.48
Dividends per common share $ 0.13 $ 0.11 $ 0.26 $ 0.23
</TABLE>
4
See accompanying notes to the condensed consolidated financial statements
<PAGE> 5
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID IN RETAINED COMPREHENSIVE COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME INCOME TOTAL
------ ------- -------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 $2,667 $15,551 $ 7,322 $ 172 $ 25,712
Net income 1,364 $ 1,364 1,364
Other comprehensive income, net of tax:
Unrealized gains (loss) on securities (2) (2) (2)
-------------
Comprehensive income 1,362
=============
Cash dividends - $0.23 per share (494) (494)
------ ------- -------- ------------- --------
BALANCE AT JUNE 30, 1998 2,667 15,551 8,192 170 26,580
BALANCE AT JANUARY 1, 1999 2,800 17,802 6,840 (121) 27,321
Net income 1,505 $ 1,505 1,505
Proceeds and tax benefit from 3 21 24
exercise of stock options
Other comprehensive income, net of tax:
Cumulative effect change from transfer of securities
from held to maturity to available for sale upon
adoption of SFAS No. 133 445 445 445
Unrealized gains (loss) on securities (2,763) (2,763) (2,763)
-------------
Comprehensive income $ (813)
=============
Cash dividends - $0.26 per share (729) (729)
------ ------- -------- ------------- --------
BALANCE AT JUNE 30, 1999 $2,803 $17,823 $ 7,616 $ (2,439) $ 25,803
====== ======= ======== ============= ========
</TABLE>
5
See accompanying notes to the condensed consolidated financial statements
<PAGE> 6
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS) SIX MONTHS ENDED
JUNE 30,
1999 1998
-----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,505 $ 1,364
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 379 287
Provision for loan losses 403 548
Deferred taxes (142) (40)
Federal Home Loan Bank stock dividend (44) (42)
Gain on sale/call of securities - (1)
(Accretion)/amortization of securities, net 19 (17)
Gain on sale of loans (49) (54)
Amortization of mortgage servicing rights 18 11
Gain/Loss on sale of assets 5 (7)
Net changes in accrued interest receivable and other assets (518) (528)
Net changes in accrued expenses and other liabilities (146) (206)
-------- --------
Net cash from operating activities 1,430 1,315
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Proceeds from sales - -
Proceeds from maturities/calls 13,932 15,509
Purchases (18,078) (17,885)
Securities held to maturity
Proceeds from maturities/calls - 2,740
Purchases (2,961) (353)
Net change in loans (3,467) 2,419
Net purchases of premises and equipment (1,150) (245)
Proceeds from sale of assets 130 -
-------- --------
Net cash from investing activities (11,594) 2,185
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (758) 987
Net change in short-term borrowings 2,546 (3,457)
Proceeds from long-term debt 2,500 6,100
Principal payments on long-term debt (612) (2,588)
Proceeds from exercise of stock options 24 -
Cash dividends paid (729) (494)
-------- --------
Net cash from financing activities 2,971 548
-------- --------
Net change in cash and cash equivalents (7,193) 4,048
Cash and cash equivalents at beginning of year 16,492 10,587
-------- --------
Cash and cash equivalents at end of period $ 9,299 $ 14,635
======== ========
Interest paid $ 4,862 $ 4,771
Income taxes paid 359 294
Non-cash transfer from loans to other real estate and repossessions $ 150 $ 138
Non-cash transfer of securities from held to maturity to available for sale
upon adoption of SFAS No. 133 16,005 -
</TABLE>
6
See accompanying notes to the condensed consolidated financial statements
<PAGE> 7
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 financial position of United Bancorp,
Inc. ("Company") at June 30, 1999, and its results of operations and
cash flows for the periods presented. All such adjustments are normal
and recurring in nature. The accompanying condensed consolidated
financial statements have been prepared in accordance with the
instructions 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 consolidated
financial statements, and related notes thereto, of the Company for the
year ended December 31, 1998 included in its annual report. 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") and The Community Bank,
Lancaster, Ohio ("COMMUNITY"). All significant intercompany
transactions and balances have been eliminated in consolidation.
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, southeastern, and central 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 nine branches in Bridgeport, Colerain, Dellroy,
Dover, Jewett, New Philadelphia, St. Clairsville, Sherrodsville, and
Strasburg, 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 allowance
for loan losses, fair values of financial instruments and status of
contingencies are particularly subject to change.
7
<PAGE> 8
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES:
Income tax expense is based on the effective tax rate expected
to be applicable for the entire year. Income tax expense is the total
of the current year income tax due or refundable and the change in
deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance,
if needed, reduces deferred tax assets to the amount expected to be
realized.
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 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 2,801,617 and 2,800,298 for the
six months ended June 30, 1999 and 1998, respectively. The
weighted-average number of shares outstanding for diluted EPS was
2,825,660 and 2,841,667 for the six months ended June 30, 1999 and
1998, respectively. The per share dilution of the stock options was
$0.01 for the six months ended June 30, 1999 and 1998.
IMPACT OF RECENT ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999 with early adoption encouraged for any fiscal quarter
beginning July 1, 1998 or later, with no retroactive application. The
Corporation adopted SFAS No. 133 effective April 1, 1999. SFAS No. 133
requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives are accounted for depending
on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes
in fair value or cash flows. SFAS No. 133 does not allow hedging of a
security which is classified as held to maturity, accordingly, upon
adoption of SFAS No. 133, companies may reclassify any security from
held to maturity to available for sale if they wish to be able to hedge
the security in the future. As a result, the Company transferred
$16,005,000 of securities classified as held to maturity to available
for sale. The unrealized gain at the time the securities were
transferred was approximately $674,000. The after tax effect of the
transfer was to increase equity by $445,000 and is shown as cumulative
effect of accounting change in other comprehensive income. The adoption
of SFAS No. 133 did not have any other significant impact on the
Company's financial statements.
8
<PAGE> 9
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(IN THOUSANDS) 1999 1998 1999 1998
------- ------ ------- --------
<S> <C> <C> <C> <C>
Net Income $ 675 $ 534 $ 1,505 $ 1,364
Other comprehensive income, net of tax:
Unrealized gains (loss) on available
for sale securities arising during period (1,954) 3 (2,763) (2)
Transfer of securities from held to maturity
to available for sale upon adoption of
SFAS No. 133 445 - 445 -
------- ------ ------- --------
Total other comprehensive income (loss), net of tax (1,509) 3 (2,318) (2)
------- ------ ------- --------
Comprehensive Income (Loss) $ (834) $ 537 $ (813) $ 1,362
======= ====== ======= ========
</TABLE>
9
<PAGE> 10
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SECURITIES:
Securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE - JUNE 30, 1999
US Agency obligations $73,318 $ 11 $ (4,097) $69,232
State and Municipal obligations 18,771 454 (58) 19,167
Mortgage-backed securities 2,253 - (21) 2,232
Other securities 1,824 16 1,840
------- ------- -------- -------
$96,166 $ 481 $ (4,176) $92,471
======= ======= ======== =======
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 - JUNE 30, 1999
US Agency obligations $ 1,494 $ - $ - $ 1,494
State and Municipal obligations 7,296 104 (122) 7,278
Other securities 46 - - 46
------- ------- -------- -------
$ 8,836 $ 104 $ (122) $ 8,818
======= ======= ======== =======
HELD TO MATURITY - DECEMBER 31, 1998
State and Municipal obligations $21,847 $ 996 $ (4) $22,839
Other securities 46 - - 46
------- ------- -------- -------
$21,893 $ 996 $ (4) $22,885
======= ======= ======== =======
</TABLE>
Sales of securities available for sale were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) SIX MONTHS ENDED
JUNE 30,
1999 1998
---------- -----------
<S> <C> <C>
Proceeds $ - $ 2,121
Gross gains - 13
Gross losses - 12
</TABLE>
Included above in gross gains for 1998, were gains of $10,000 resulting from
securities called prior to maturity.
10
<PAGE> 11
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SECURITIES: (CONTINUED)
Contractual maturities of securities at June 30, 1999 were as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE (IN THOUSANDS) AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ------------
<S> <C> <C>
US Agency obligations
2 - 5 Years $ 2,250 $ 2,236
5 - 10 Years 33,317 32,027
Over 10 Years 37,751 34,969
------- -------
Total 73,318 69,232
------- -------
State and municipal obligations
Under 1 Year 1,337 1,351
1 - 2 Years 2,408 2,460
2 - 5 Years 11,691 12,050
5 - 10 Years 1,400 1,414
Over 10 Years 1,935 1,892
------- -------
Total 18,771 19,167
------- -------
Mortgage Backed securities
5 - 10 Years 242 236
Over 10 Years 2,011 1,996
------- -------
Total 2,253 2,232
------- -------
Other investments
Equity securities 1,824 1,840
------- -------
Total securities available for sale $96,166 $92,471
======= =======
<CAPTION>
HELD TO MATURITY (IN THOUSANDS)
<S> <C> <C>
US Agency obligations
5 - 10 Years 495 495
Over 10 Years 999 999
------- -------
Total 1,494 1,494
------- -------
State and municipal obligations
2 - 5 Years 214 220
5 - 10 Years 4,848 4,925
Over 10 Years 2,234 2,133
------- -------
Total 7,296 7,278
------- -------
Other investments
Equity securities 46 46
Total securities held to maturity $ 8,836 $ 8,818
======= =======
</TABLE>
Securities with an amortized cost of approximately $36,122,000 at June 30, 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.
11
<PAGE> 12
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(IN THOUSANDS) 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Beginning Balance $ 3,086 $ 2,934 $ 3,033 $ 3,039
Provision charged to operating expense 206 431 403 548
Loans charged-off (419) (349) (600) (603)
Recoveries 62 37 99 69
------- ------- ------- -------
Ending Balance $ 2,935 $ 3,053 $ 2,935 $ 3,053
======= ======= ======= =======
</TABLE>
Loans considered impaired under the provisions of SFAS No. 114
were not material at June 30, 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.
12
<PAGE> 13
UNITED BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 30, 1999 and December
31, 1998 follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(IN THOUSANDS) 1999 1998
------- ------------
<S> <C> <C>
Commitments to extend credit $13,794 $ 16,655
Credit card lines $ 615 $ 541
Standby letters of credit 519 269
</TABLE>
At June 30, 1999, and included above, commitments to make
fixed-rate loans totaling $3,818,000 with the interest rates on those
fixed-rate commitments ranging from 7.50% 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 June 30, 1999 and December 31, 1998, reserves of $1,146,000
and $1,116,000 were required as deposits with the Federal Reserve or as
cash on hand. These reserves do not earn interest.
13
<PAGE> 14
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discusses the financial condition of the Company
as of June 30, 1999, as compared to December 31, 1998 and the results
of operations for the three and six months ended June 30, 1999 compared
to the same period in 1998. This discussion should be read in
conjunction with the interim consolidated financial statements and
related footnotes included herein.
FORWARD-LOOKING STATEMENTS
When used in this document, the words or phrases "will likely
result," "are expected to," "will continue," " is anticipated,"
"estimated," "projected" or similar expressions are intended to
identify "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject
to certain risks and uncertainities including changes in economic
conditions in the Banks' market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the
Banks' market area and competition, that could cause actual results to
differ materially from historical earnings and those presently
anticipated or projected. Factors listed above could affect the
Company's financial performance and could cause the Company's actual
results for future periods to differ materially from any statements
expressed with respect to future periods.
The Company does not undertake, and specifically disclaims any
obligation, to publicly revise any forward-looking statements to
reflect events or circumstances after the date such statements or to
reflect the occurrence of anticipated or unanticipated events.
14
<PAGE> 15
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 division to be known as Brokerage
United with securities provided through
Raymond James Financial Services, Inc.
member NASD/SIPC.
-- 1999 CITIZENS-STATE merged into CITIZENS.
-- 1999 COMMUNITY moved their main office to
Lancaster, Ohio.
15
<PAGE> 16
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS - LOANS
At June 30, 1999, gross loans were $167,037,000 compared to
$164,221,000 at year-end 1998, an increase of 1.7%. The modest increase
in total outstanding loans was the result of increased competition in
our markets, particularly in the commercial loan category. Real estate
loans 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.
COMMUNITY opened a Loan Production Office during the first quarter of
1999 in Lancaster, Ohio. Management anticipates the expansion plans for
COMMUNITY will provide a solid market for loan growth as total
outstanding loans have increased 11.0% at that affiliate from December
31, 1998.
Installment loans, with continued emphasis placed on the
indirect automobile lending market, stayed relatively constant at 30.3%
of total loans at June 30, 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 14 branch locations. Management has worked to expand the
lending market of COMMUNITY into the Lancaster, Ohio area which
provided an increase of installment loans of $4,776,000 from December
31, 1998. As a result of the expansion of the lending market, the
installment loan portfolio increased 6.2% since December 31, 1998.
Commercial and commercial real estate loans comprised 40.2% of
total loans at June 30, 1999 compared to 40.9% at 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 June 30, 1999 were 9.4% of total loans and 23.4%
of total commercial and commercial real estate loans compared to 11.6%
and 28.4% at year-end 1998.
Real estate loans were 29.5% of total loans at June 30, 1999
compared to 30.1% at year-end 1998. 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 probable losses inherent in the loan portfolio. The allowance
balance and the annual provision charged to expense are reviewed by
management monthly and the Board of Directors quarterly 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
16
<PAGE> 17
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
adequate to absorb probable losses associated with the loan portfolio.
Net charge-offs for the six months ended June 30, 1999 were
approximately $501,000, or 16.5%, of the beginning allowance for loan
losses compared to $534,000, or 17.6%, of the beginning balance for
loan losses for the six months ended June 30, 1998.
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 June 30, 1999 increased approximately $16.7
million, or 22.0% from year-end 1998 totals. The overall 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 decreased $13.1
million, or 59.6% at June 30, 1999 compared to year-end 1998 totals.
Management elected to reclassify $16.0 million of securities held to
maturity to available for sale upon adoption of SFAS No. 133.
Short-term federal funds sold are used to manage interest rate
sensitivity and to meet liquidity needs of the Company. At June 30,
1999, federal funds sold totaled $1,350,000 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 June 30, 1999, total core deposits increased approximately
$3,113,000 primarily from an increase of savings and time deposits
under $100,000 of $4.9 million and $2.4 million, respectively. This was
partly offset by decreases in interest bearing demand deposits of $1.5
million and noninterest bearing demand deposits of $2.6 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 June 30, 1999,
certificates of deposit greater than $100,000 decreased approximately
$3.9 million, or 17.6% from year-end 1998 totals.
17
<PAGE> 18
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. In the first six months of 1999, the Company
continued to utilize the FHLB programs to manage interest rate risk and
liquidity positions. The majority of the Company's repurchase agreement
are with local school districts, city and county government.
RESULTS OF OPERATIONS
NET INCOME
Basic earnings per share for the six months ended June 30,
1999 was $0.54, compared with $0.49 for the six months ended June 30,
1998. On an annualized basis, Return on Average Assets (ROA) was 1.05%
and Return on Average Equity (ROE) was 11.26% compared to ROA of 1.01%
and ROE of 10.20% for the six months ended June 30, 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 increased
1.7% for the six months ended June 30, 1999 compared to the same period
in 1998.
Total interest income for the six months ended June 30, 1999,
when compared to the same six months period ended June 30, 1998,
decreased 0.4%. 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 a decrease in loan
interest income of $780,000, when compared to the same six months
period ended June 30, 1998.
Total interest expense for the six months ended June 30, 1999
when compared to the same six months period ended June 30, 1998,
decreased 2.8%. 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.
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 $403,000 for the six
months ended June 30, 1999 compared to $548,000 the same period in
1998. The provision decreased due to strengthened underwriting
standards, especially in unsecured installment area. Please refer to
the previous discussion of the allowance for loan losses under Earnings
Assets.
18
<PAGE> 19
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 six months ended June
30, 1999 was $685,000 compared to $699,000 for the same six months
periods ended June 30, 1998. For the six months ended June 30, 1999
compared to the same period in 1998, noninterest income decreased
approximately 2.0%
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 six months ended June 30, 1999
increased 1.3% over the six months ended June 30, 1998. Non-recurring
costs of approximately $150,000 were incurred during the first six
months 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 June 30, 1999 was $25,803,000 compared to
$27,321,000 at December 31, 1998, a 5.6% decrease. Total shareholders'
equity in relation to total assets was 9.0% at June 30, 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.
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
19
<PAGE> 20
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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:
<TABLE>
<CAPTION>
TOTAL TIER 1 TIER 1
CAPITAL TO CAPITAL TO CAPITAL TO
RISK-WEIGHTED RISK-WEIGHTED AVERAGE
ASSETS ASSETS ASSETS
-------------- ------------- ----------
<S> <C> <C> <C>
Well capitalized 10.00% 6.00% 5.00%
Adequately capitalized 8.00% 4.00% 4.00%
Undercapitalized 6.00% 3.00% 3.00%
</TABLE>
The following table illustrates the Company's risk-weighted
capital ratios at June 30, 1999:
<TABLE>
<CAPTION>
JUNE 30,
(IN THOUSANDS) 1999
--------
<S> <C>
Tier 1 capital $ 28,051
Total risk-based capital $ 30,288
Risk-weighted assets $178,282
Average total assets $282,163
Tier 1 capital to average assets 9.94%
Tier 1 risk-based capital ratio 15.73%
Total risk-based capital ratio 16.99%
</TABLE>
20
<PAGE> 21
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 six months ended June 30, 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 $7,193,000 was primarily the
result of a net purchase of investment securities of $7,107,000 and
increase in loans of $3,467,000, partially off-set by net cash provided
in financing activities of $2,971,000 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
<PAGE> 22
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
<PAGE> 23
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
- - Banker Systems, Inc. Loan Processor Laser - Utilized for loan
document preparation
- - Best Software FAS!Encore - Fixed Asset accounting
- - First Tennessee - Portfolio Accounting Services
- - Intuit Quickbooks - Accounts Payable software
- - Lotus 1-2-3/Microsoft Excel - Spreadsheet applications
- - Lotus Amipro/Microsoft Word - Word processing software
- - Midwest Payment Systems (MPS)
- - ATM and check card processor
- - Money Access Service (MAC) - ATM and check card processor
23
<PAGE> 24
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. The company has spent
approximately $25,000 of these costs and anticipates to incur the
remaining costs during the second half of the 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
<PAGE> 25
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 financial objectives is to achieve
long-term profitability while reducing its exposure to fluctuations in
interest rates. The Company has sought to reduce exposure of its
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 91% of the
portfolio compared to the 9% 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. Due to total securities approximating 35%
of total assets and a significant portion of its loan portfolio
consisting of fixed rate loans, the Company is particularly sensitive
to periods of rising interest rates. In such periods, the Company's net
interest spread is negatively affected because the interest rate paid
on deposits increases faster than the rates earned on loans. Management
is continuing to originate variable rate mortgage loans as the primary
means to manage this risk. In addition, the Company also originates
consumer and commercial loans, which make up a significant percentage
of the overall loan portfolio. Consumer loans typically have a
significantly shorter weighted-average maturity and offer less exposure
to interest rate risks while commercial loans generally carry variable
interest rates.
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 June 30, 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
25
<PAGE> 26
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
26
<PAGE> 27
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
The following matters were submitted to a vote of security
holders at the Annual Meeting of Shareholders on April 21,
1999.
Dispense with the reading of the minutes of the last
shareholders meeting held April 15, 1998.
Roll Call: Ayes 2,097,930 Nays 7,470 Abstaining 4,870
Compensation for outside Directors to be set at $5,000 per
year as retainer and $400 per meeting attended.
Roll Call: Ayes 2,097,930 Nays 7,470 Abstaining 4,870
Number of Directors to be set at ten for the ensuing year.
Roll Call: Ayes 2,097,930 Nays 7,470 Abstaining 4,870
Election of the Directors for the class of 2002 to include
the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Michael J. Arciello Ayes 2,105,194 Nays 0 Abstaining 5,076
John H. Clark, Jr. Ayes 2,105,194 Nays 0 Abstaining 5,076
Dr. Leon F. Favede Ayes 2,105,194 Nays 0 Abstaining 5,076
L.E. Richardson, Jr. Ayes 2,101,844 Nays 0 Abstaining 8,426
</TABLE>
Crowe, Chizek, and Company LLP, Independent Certified Public
Accountants to continue to serve as the Company's external
audit firm for the fiscal year 1999.
Roll Call: Ayes 1,639,260 Nays 7,297 Abstaining 3,470
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 June
30, 1999.
27
<PAGE> 28
UNITED BANCORP, INC.
OTHER INFORMATION
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
August 2, 1999 By: /s/ James W. Everson
--------------------------- ------------------------------
Date James W. Everson
Chairman, President &
Chief Executive Officer
August 2, 1999 By: /s/ Randall M. Greenwood
--------------------------- ------------------------------
Date Randall M. Greenwood
Chief Financial Officer
28
<PAGE> 29
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 7,949
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 92,471
<INVESTMENTS-CARRYING> 8,836
<INVESTMENTS-MARKET> 8,818
<LOANS> 164,102
<ALLOWANCE> 2,935
<TOTAL-ASSETS> 287,497
<DEPOSITS> 228,352
<SHORT-TERM> 24,185
<LIABILITIES-OTHER> 1,475
<LONG-TERM> 7,682
0
0
<COMMON> 2,803
<OTHER-SE> 23,000
<TOTAL-LIABILITIES-AND-EQUITY> 287,497
<INTEREST-LOAN> 7,295
<INTEREST-INVEST> 3,157
<INTEREST-OTHER> 123
<INTEREST-TOTAL> 10,575
<INTEREST-DEPOSIT> 4,139
<INTEREST-EXPENSE> 4,737
<INTEREST-INCOME-NET> 5,838
<LOAN-LOSSES> 403
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,130
<INCOME-PRETAX> 1,990
<INCOME-PRE-EXTRAORDINARY> 1,505
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,505
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.53
<YIELD-ACTUAL> 4.10
<LOANS-NON> 599
<LOANS-PAST> 62
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,033
<CHARGE-OFFS> 600
<RECOVERIES> 99
<ALLOWANCE-CLOSE> 2,935
<ALLOWANCE-DOMESTIC> 2,935
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,208
</TABLE>
