<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 SEPTEMBER 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 Identification No.)
incorporation or organization)
201 SOUTH 4TH STREET, MARTINS FERRY, OHIO 43935-0010
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(740) 633-0445
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of the issuer's classes of common
stock as of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE 2,802,922 SHARES AS OF NOVEMBER 2, 1999
---------------------------------------------------------------------
<PAGE> 2
UNITED BANCORP, INC.
TABLE OF CONTENTS
FORM 10-Q
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION (UNAUDITED)
<S> <C>
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 - 25
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................................26 - 27
<CAPTION>
PART II OTHER INFORMATION
<S> <C>
ITEM 1.
Legal Proceedings................................................................................................28
ITEM 2.
Changes in Securities and Use of Proceeds........................................................................28
ITEM 3.
Default Upon Senior Securities...................................................................................28
ITEM 4.
Submission of Matters to a Vote of Security Holders..............................................................28
ITEM 5.
Other Information................................................................................................28
ITEM 6.
Exhibits and Reports on Form 8-K.................................................................................28
SIGNATURES.........................................................................................................29
</TABLE>
2
<PAGE> 3
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,010 $ 11,322
Federal funds sold 1,465 5,170
----------- -----------
Total cash and cash equivalents 10,475 16,492
Securities available for sale 90,100 75,792
Securities held to maturity
(Estimated fair value of $9,716 at 09/30/99 and $22,885 at 12/31/98) 9,838 21,893
Loans receivable
Commercial loans 13,949 12,912
Commercial real estate loans 59,026 54,195
Real estate loans 50,700 49,438
Installment loans 52,749 47,676
----------- -----------
Total loans receivable 176,424 164,221
Allowance for loan losses (3,021) (3,033)
----------- -----------
Net loans receivable 173,403 161,188
Premises and equipment, net 8,142 6,981
Accrued interest receivable and other assets 4,000 3,147
----------- -----------
Total Assets $ 295,958 $ 285,493
=========== ===========
LIABILITIES
Demand deposits
Noninterest bearing $ 19,239 $ 21,033
Interest bearing 40,525 41,780
Savings deposits 59,441 57,091
Time deposits - under $100,000 96,571 87,242
Time deposits - $100,000 and over 20,399 21,964
---------- -----------
Total deposits 236,175 229,110
Securities sold under agreements to repurchase 6,069 7,733
Other borrowed funds 27,679 19,700
Accrued expenses and other liabilities 313 1,629
---------- -----------
Total Liabilities 270,236 258,172
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 8,028 6,840
Accumulated other comprehensive income, net of tax (2,932) (121)
---------- -----------
Total Shareholders' Equity 25,722 27,321
----------- -----------
Total Liabilities and Shareholders' Equity $ 295,958 $ 285,493
=========== ===========
</TABLE>
See accompanying notes to the condensed consolidated financial statements
3
<PAGE> 4
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS-EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------- -------- --------- ---------
<S> <C> <C> <C> <C>
Interest and dividend income
Loans, including fees $ 3,849 $ 3,873 $ 11,144 $ 11,948
Taxable securities 1,238 934 3,739 2,651
Non-taxable securities 324 278 980 906
Other interest and dividend income 65 114 188 309
------- ------- -------- --------
Total interest and dividend income 5,476 5,199 16,051 15,814
Interest expense
Deposits
Demand 214 269 656 791
Savings 383 479 1,146 1,416
Time 1,458 1,481 4,392 4,540
Other borrowings 437 180 1,035 538
------- ------- -------- --------
Total interest expense 2,492 2,409 7,229 7,285
NET INTEREST INCOME 2,984 2,790 8,822 8,529
Provision for loan losses 141 128 544 676
------- ------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,843 2,662 8,278 7,853
Non-interest income
Service charges on deposit accounts 181 201 540 560
Other income 89 262 415 602
------- ------- -------- --------
Total non-interest income 270 463 955 1,162
Non-interest expense
Salaries and employee benefits 1,032 949 3,045 3,032
Occupancy 334 301 974 872
Other expenses 707 804 2,184 2,225
------- ------- -------- --------
Total non-interest expense 2,073 2,054 6,203 6,129
INCOME BEFORE INCOME TAXES 1,040 1,071 3,030 2,886
Income tax expense 264 296 749 747
------- ------- -------- --------
NET INCOME $ 776 $ 775 $ 2,281 $ 2,139
======= ======= ======== ========
Earnings per common share - Basic $ 0.28 $ 0.28 $ 0.81 $ 0.77
Earnings per common share - Diluted $ 0.28 $ 0.28 $ 0.81 $ 0.76
Dividends per common share $ 0.13 $ 0.11 $ 0.39 $ 0.34
</TABLE>
See accompanying notes to the condensed consolidated financial statements
4
<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 2,139 $ 2,139 2,139
Other comprehensive income, net of tax:
Net change in unrealized gain/(loss) on
securities available for sale 209 209 209
=======
Comprehensive income 2,348
=======
Cash dividends - $0.34 per share (855) (855)
------- -------- ------- ------- --------
BALANCE AT SEPTEMBER 30, 1998 2,667 15,551 8,606 381 27,205
BALANCE AT JANUARY 1, 1999 2,800 17,802 6,840 (121) 27,321
Net income 2,281 $ 2,281 2,281
Proceeds and tax benefit from
exercise of stock options 3 21 24
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
Net change in unrealized gain/(loss) on
securities available for sale (3,256) (3,256) (3,256)
=======
Comprehensive income (loss) $ (530)
=======
Cash dividends - $0.39 per share (1,093) (1,093)
------- -------- ------- -------- --------
BALANCE AT SEPTEMBER 30, 1999 $ 2,803 $ 17,823 $ 8,028 $ (2,932) $ 25,722
======= ======== ======= ======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements
5
<PAGE> 6
UNITED BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands) Nine Months Ended
September 30,
1999 1998
-----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,281 $ 2,139
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 570 521
Provision for loan losses 544 676
Deferred taxes (172) 31
Federal Home Loan Bank stock dividend (83) (108)
Gain on sale/call of securities - -
(Accretion)/amortization of securities, net 122 92
Gain on sale of loans (53) -
Amortization of mortgage servicing rights 29 -
Gain/Loss on sale of assets 9 (88)
Net changes in accrued interest receivable and other assets (889) (1,241)
Net changes in accrued expenses and other liabilities 207 5
-------- --------
Net cash from operating activities 2,565 2,027
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Proceeds from sales - -
Proceeds from maturities/calls 16,584 25,762
Purchases (19,077) (34,771)
Securities held to maturity
Proceeds from maturities/calls - 5,342
Purchases (3,961) (958)
Net change in loans (13,003) 7,493
Net purchases of premises and equipment (1,705) (414)
Proceeds from sale of assets 269 (42)
-------- --------
Net cash from investing activities (20,893) 2,412
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 7,065 679
Net change in short-term borrowings 3,336 (4,767)
Proceeds from long-term debt 3,693 3,600
Principal payments on long-term debt (714) (180)
Proceeds from exercise of stock options 24 -
Cash dividends paid (1,093) (855)
-------- --------
Net cash from financing activities 12,311 (1,523)
-------- --------
Net change in cash and cash equivalents (6,017) 2,916
Cash and cash equivalents at beginning of year 16,492 10,587
-------- --------
Cash and cash equivalents at end of period $ 10,475 $ 13,503
======== ========
Interest paid $ 7,276 $ 7,392
Income taxes paid 559 484
Non-cash transfer from loans to other real estate and repossessions $ 244 -
Non-cash transfer of securities from held to maturity to available for sale
upon adoption of SFAS No. 133 16,005 -
</TABLE>
See accompanying notes to the condensed consolidated financial statements
6
<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 September 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. All of the Company's banking operations are considered by
Management to be aggregated in one reportable operating segment.
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 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 2,802,057 and 2,802,298 for the
nine months ended September 30, 1999 and 1998, respectively. The
weighted-average number of shares outstanding for diluted EPS was
2,824,704 and 2,826,903 for the nine months ended September 30, 1999
and 1998, respectively. There was no per share dilution of the stock
options for the nine months ended September 30, 1999. The per share
dilution of the stock options was $0.01 for the nine months ended
September 30, 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, as amended by SFAS No. 137, is effective for
fiscal years beginning after June 15, 2000 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 net of related taxes are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1999 1998 1999 1998
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income $ 776 $ 775 $ 2,281 $ 2,139
Other comprehensive income, net of tax:
Unrealized gains (loss) on available
for sale securities arising during period (493) 211 (3,256) 209
Transfer of securities from held to maturity
to available for sale upon adoption of
SFAS No. 133 - - 445 -
----- ----- ------ -------
Total other comprehensive income (loss), net of tax (493) 211 (2,811) 209
----- ----- ------ -------
Comprehensive Income (Loss) $ 283 $ 986 $ (530) $ 2,348
===== ===== ====== =======
</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 - SEPTEMBER 30, 1999
US Agency obligations $ 71,818 $ 7 $ (4,606) $ 67,219
State and Municipal obligations 17,918 345 (161) 18,102
Mortgage-backed securities 2,124 - (42) 2,082
Other securities 2,681 16 - 2,697
-------- --------- --------- ---------
$ 94,541 $ 368 $ (4,809) $ 90,100
======== ========= ========= =========
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 - SEPTEMBER 30, 1999
US Agency obligations $ 2,494 $ - $ (52) $ 2,442
State and Municipal obligations 7,298 81 (151) 7,228
Other securities 46 - - 46
-------- --------- --------- ---------
$ 9,838 $ 81 $ (203) $ 9,716
======== ========= ========= =========
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) NINE MONTHS ENDED
SEPTEMBER 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 September 30, 1999
were as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE (IN THOUSANDS) AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
US Agency obligations
1 - 2 Years $ 1,000 $ 1,007
2 - 5 Years 1,250 1,222
5 - 10 Years 31,815 30,413
Over 10 Years 37,753 34,577
--------- ----------
Total 71,818 67,219
--------- ----------
State and municipal obligations
Under 1 Year 1,271 1,277
1 - 2 Years 2,536 2,577
2 - 5 Years 11,115 11,326
5 - 10 Years 881 879
Over 10 Years 2,115 2,043
--------- ----------
Total 17,918 18,102
--------- ----------
Mortgage Backed securities
5 - 10 Years 234 227
Over 10 Years 1,890 1,855
--------- ----------
Total 2,124 2,082
--------- ----------
Other investments
Equity securities 2,681 2,697
--------- ----------
Total securities available for sale $ 94,541 $ 90,100
========= ==========
HELD TO MATURITY (IN THOUSANDS)
US Agency obligations
5 - 10 Years 1,495 1,476
Over 10 Years 999 966
--------- ----------
Total 2,494 2,442
--------- ----------
State and municipal obligations
2 - 5 Years 560 566
5 - 10 Years 4,602 4,652
Over 10 Years 2,136 2,010
--------- ----------
Total 7,298 7,228
--------- ----------
Other investments
Equity securities 46 46
Total securities held to maturity $ 9,838 $ 9,716
========= ==========
</TABLE>
Securities with an amortized cost of approximately $45,538,000 at September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Beginning Balance $ 2,935 $ 3,053 $ 3,033 $ 3,039
Provision charged to operating expense 141 128 544 676
Loans charged-off (164) (206) (764) (809)
Recoveries 109 78 208 147
------- ------- ------- -------
Ending Balance $ 3,021 $ 3,053 $ 3,021 $ 3,053
======= ======= ======= =======
</TABLE>
Loans considered impaired under the provisions of SFAS No. 114
were not material at September 30, 1999 and December 31, 1998 and for
the three and nine months ended September 30, 1999 and 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 September 30, 1999 and
December 31, 1998 follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 1999 1998
---------------- -----------------
<S> <C> <C>
Commitments to extend credit $ 15,470 $ 16,655
Credit card lines 638 541
Standby letters of credit 379 269
</TABLE>
At September 30, 1999, and included above, commitments to make
fixed-rate loans totaled $5,790,000 with the interest rates on those
fixed-rate commitments ranging from 7.25% 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 September 30, 1999 and December 31, 1998, reserves of
$1,088,000 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 September 30, 1999, as compared to December 31, 1998 and the
results of operations for the three and nine months ended September 30,
1999 compared to the same periods 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 areas, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans
in the Banks' market areas 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.
<TABLE>
<S> <C> <C>
- - 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.
</TABLE>
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 September 30, 1999, gross loans were $176,424,000 compared
to $164,221,000 at year-end 1998, an increase of 7.4%. The increase in
total outstanding loans was the result of growth in the commercial real
estate and installment portfolios. 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 39.5%
at that affiliate from December 31, 1998.
Installment loans, with continued emphasis placed on the
indirect automobile lending market, stayed relatively constant at 29.9%
of total loans at September 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 $5,073,000
from December 31, 1998. As a result of the expansion of the lending
market, the installment loan portfolio increased 10.6% since December
31, 1998.
Commercial and commercial real estate loans comprised 41.4% of
total loans at September 30, 1999 compared to 40.9% at December 31,
1998. Commercial and Commercial real estate have increased $5,868,000
since December 31, 1998. The commercial and commerical real estate
portfolios have increased 8.7% from December 31, 1998. The Company has
originated and bought participations in loans from other banks for
out-of-area commercial and commercial real estate loans to benefit from
consistent economic growth outside the area. The majority of these
loans are secured by real estate holdings comprised of hotels, motels
and churches located in various geographic locations, including
Columbus and the Akron-Canton, Ohio metropolitan areas. Out-of-area
loans at September 30, 1999 were 9.3% of total loans and 22.4% of total
commercial and commercial real estate loans compared to 11.6% and 28.4%
at year-end 1998.
Real estate loans were 28.7% of total loans at September 30,
1999 compared to 30.1% at year-end 1998. Real estate loans increased
$1,262,000 since December 31, 1998. Our real estate loans are not
growing as quickly as commercial, commercial real estate, and
installment, however, we are seeing a steady increase in real estate
due to customers' preference change to adjustable rate real estate
loans in the rising rate environment.
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 adequate to absorb probable losses associated with the
loan portfolio. Net charge-offs for the
16
<PAGE> 17
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
nine months ended September 30, 1999 were approximately $556,000, or
18.3%, of the beginning allowance for loan losses compared to $662,000,
or 21.8%, of the beginning balance for loan losses for the nine months
ended September 30, 1998. Almost all charge-offs in 1999 have been
related to the installment loan portfolio.
EARNING ASSETS - SECURITIES AND FEDERAL FUNDS SOLD
The securities portfolio is comprised of U.S. Government
agency-backed securities, tax-exempt obligations of states and
political subdivisions and certain other investments. The Company does
not hold any collateralized mortgage-backed securities, other than
those issued by U.S. government agencies, or derivative securities. The
quality rating of obligations of state and political subdivisions
within Ohio is no less than Aaa, Aa or A, with all out-of-state bonds
rated at AAA. Board policy permits the purchase of certain non-rated
bonds of local schools, townships and municipalities, based on their
known levels of credit risk. Securities available for sale at September
30, 1999 increased approximately $14.3 million, or 18.9% from year-end
1998 totals. The overall upward movement resulted primarily from the
reclassification of securities from held to maturity to available for
sale. Securities held to maturity decreased $12.1 million, or 55.1% at
September 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 September
30, 1999, federal funds sold totaled $1,465,000 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 September 30, 1999, total core deposits increased approximately
$8,630,000 primarily from an increase of savings and time deposits
under $100,000 of $2.3 million and $9.3 million, respectively. This was
partly offset by decreases in interest bearing demand deposits of $1.3
million and noninterest bearing demand deposits of $1.8 million. The
Company has a strong deposit base from public agencies, including local
school districts, city and township municipalities, public works
facilities and others that may tend to be more seasonal in nature
resulting from the receipt and disbursement of state and federal
grants. These entities have maintained fairly static balances with the
Company due to various funding and disbursement timeframes.
Certificates of deposit greater than $100,000 are not
considered part of core deposits and as such are used to balance rate
sensitivity as a tool of funds management. At September 30, 1999,
certificates of deposit greater than $100,000 decreased approximately
$1.6 million, or 7.1% 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 nine 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 FOR THREE MONTHS ENDED
SEPTEMBER 30, 1999
NET INCOME
Basic earnings per share for the three months ended September
30, 1999 was $0.28, compared with $0.28 for the three months ended
September 30, 1998. Net income increased $1,000 for three months ended
September 30, 1999, compared to the same period in 1998.
NET INTEREST INCOME
Net interest income for the three months ended September 30,
1999 was $2,984,000 compared to $2,790,000 for the same period in 1998.
Net interest income increased $194,000, or 7.0%. The increase can be
attributed to the overall growth in the Company's interest-bearing
assets, partially offset by a decrease in the interest rate spread.
Total interest income for the three months ended September 30,
1999, when compared to the same three months period ended September 30,
1998, increased 5.3%. The Company has experienced increased competition
in the lending area and expects this trend to continue. The cause for
the incline in total interest income is a result an increase in
securities interest income of $350,000, when compared to the same three
months period ended September 30, 1998.
Total interest expense for the three months ended September
30, 1999 when compared to the same three months period ended September
30, 1998, increased 3.4%. The Company has seen an increase in interest
expense due to an increase in the third quarter of time deposits.
PROVISION FOR LOAN LOSSES
The provision for loan losses is an operating expense recorded
to maintain the related balance sheet allowance for loan losses at an
amount considered adequate to cover losses that may occur in the normal
course of lending.
The total provision for loan losses was $141,000 for the three
months ended September 30, 1999 compared to $128,000 the same period in
1998. Management increased the provision due to increased lending
volume in the third quarter.
NONINTEREST INCOME
Noninterest income for the three months ended September 30,
1999 was $270,000 compared to $463,000 for the same three months period
ended September 30, 1998. For the three months ended September 30, 1999
compared to the same period in 1998, noninterest
18
<PAGE> 19
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
income decreased approximately 41.7%. The decrease in noninterest
income can be attributed to a decrease in secondary market fee income
of approximately $52,000. The secondary market loan production has
declined due to the rise in interest rates. Customer preference has
shifted to adjustable rate mortgages during 1999.
NONINTEREST EXPENSE
Noninterest expense for the three months ended September 30,
1999 increased 0.9% over the three months ended September 30, 1998.
Management has taken an active role in maintaining control over
noninterest expense.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED
SEPTEMBER 30, 1999
NET INCOME
Basic earnings per share for the nine months ended September
30, 1999 was $0.81, compared with $0.77 for the nine months ended
September 30, 1998. On an annualized basis, Return on Average Assets
(ROA) was 1.06% and Return on Average Equity (ROE) was 11.47% compared
to ROA of 1.07% and ROE of 10.76% for the nine months ended September
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
3.4% for the nine months ended September 30, 1999 compared to the same
period in 1998.
Total interest income for the nine months ended September 30,
1999, when compared to the same nine months period ended September 30,
1998, increased 1.5%. The Company has experienced increased competition
in the lending area and expects this trend to continue. The cause for
the incline in total interest income is a result an increase in
securities interest income of $1,162,000, when compared to the same
nine months period ended September 30, 1998.
Total interest expense for the nine months ended September 30,
1999 when compared to the same nine months period ended September 30,
1998, decreased 0.7%. Overall, the Company has seen some downward
pressures to cost of funds relative to demand and savings deposit
accounts. This downward pressure has been offset by the increased cost
of certificates of deposit. 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.
19
<PAGE> 20
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The total provision for loan losses was $544,000 for the nine
months ended September 30, 1999 compared to $676,000 for the same
period in 1998. In 1998, Management recorded an additional provision at
COMMUNITY of approximately $300,000 to bring their loan loss reserve in
line with the Company's loan loss reserve methodology. Without this
adjustment the provision for the nine months ending September 30, 1998
would have been $376,000. With consideration of this adjustment, the
provision for the nine months ending September 30, 1999 would have
increased $168,000. Management increased the provision in 1999, due to
an increase in the loan volumes.
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 nine months ended
September 30, 1999 was $955,000 compared to $1,162,000 for the same
nine months periods ended September 30, 1998. For the nine months ended
September 30, 1999 compared to the same period in 1998, noninterest
income decreased approximately 17.8%
NONINTEREST EXPENSE
Noninterest expense for the nine months ended September 30,
1999 increased 1.2% over the nine months ended September 30, 1998.
Nonrecurring costs of approximately $150,000 were incurred during the
first nine months of 1999 related to CITIZENS Jewett branch purchase,
CITIZENS opening of a full service brokerage operations and COMMUNITY's
construction of a new headquarters in downtown Lancaster and a full
service banking center on the east side of 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 September 30, 1999 was $25,722,000 compared to
$27,321,000 at December 31, 1998, a 5.9% decrease. This decrease is
attributable to the market value adjustment on the company's available
for sale securities. Total shareholders' equity in relation to total
assets was 8.7% at September 30, 1999 and 9.6% at December 31, 1998.
The Company has 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.
20
<PAGE> 21
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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:
<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 September 30, 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30,
(IN THOUSANDS) 1999
-------------
<S> <C>
Tier 1 capital $ 28,475
Total risk-based capital $ 30,837
Risk-weighted assets $ 188,318
Average total assets $ 287,278
Tier 1 capital to average assets 9.91%
Tier 1 risk-based capital ratio 15.12%
Total risk-based capital ratio 16.37%
</TABLE>
LIQUIDITY
Management's objective in managing liquidity is maintaining
the ability to continue 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
21
<PAGE> 22
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
not limited to, the purchase of federal funds, the ability to
borrow funds under line of credit agreements with correspondent banks
and a borrowing agreement with the Federal Home Loan Bank of
Cincinnati, Ohio and the adjustment of interest rates to obtain
depositors. Management feels that it has the capital adequacy,
profitability and reputation to meet the current and projected needs of
its customers.
For the nine months ended September 30, 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 $6,017,000 was primarily the
result of a net purchase of investment securities of $6,454,000 and
increase in loans of $13,003,000, off-set by net cash provided in
financing activities of $12,311,000 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.
22
<PAGE> 23
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.
23
<PAGE> 24
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
24
<PAGE> 25
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 $30,000. The company has spent approximately $25,000 of
these costs and anticipates to incur the remaining costs during the last quarter
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.
25
<PAGE> 26
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 Agency obligations and State and Municipal obligations and has a
modest amount invested in mortgage-backed securities. Due to total securities
approximating 34% 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 September 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
26
<PAGE> 27
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.
27
<PAGE> 28
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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM
(a) Exhibits
(b) Reports on Form
Form 8 K filed on September 15, 1999, disclosed the Company's
reappointment of James W. Everson as Chairman, President, &
Chief Executive Officer of the Citizens Savings Bank.
28
<PAGE> 29
UNITED BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
November 2, 1999 By: /s/ James W. Everson
------------------ -------------------------------
Date James W. Everson
Chairman, President &
Chief Executive Officer
November 2, 1999 By: /s/ Randall M. Greenwood
------------------ -------------------------------
Date Randall M. Greenwood
Chief Financial Officer
29
<PAGE> 30
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ---------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,010
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,465
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 90,100
<INVESTMENTS-CARRYING> 9,838
<INVESTMENTS-MARKET> 9,716
<LOANS> 173,403
<ALLOWANCE> 3,021
<TOTAL-ASSETS> 295,958
<DEPOSITS> 236,175
<SHORT-TERM> 24,974
<LIABILITIES-OTHER> 313
<LONG-TERM> 8,774
0
0
<COMMON> 2,803
<OTHER-SE> 22,919
<TOTAL-LIABILITIES-AND-EQUITY> 295,958
<INTEREST-LOAN> 11,144
<INTEREST-INVEST> 4,719
<INTEREST-OTHER> 188
<INTEREST-TOTAL> 16,051
<INTEREST-DEPOSIT> 6,194
<INTEREST-EXPENSE> 7,229
<INTEREST-INCOME-NET> 8,822
<LOAN-LOSSES> 544
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,203
<INCOME-PRETAX> 3,030
<INCOME-PRE-EXTRAORDINARY> 2,281
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,281
<EPS-BASIC> .81
<EPS-DILUTED> .81
<YIELD-ACTUAL> 4.09
<LOANS-NON> 586
<LOANS-PAST> 36
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,033
<CHARGE-OFFS> 764
<RECOVERIES> 208
<ALLOWANCE-CLOSE> 3,021
<ALLOWANCE-DOMESTIC> 3,021
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,194
</TABLE>
