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UBCP > SEC Filings for UBCP > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for UNITED BANCORP INC /OH/

Form 10-Q for UNITED BANCORP INC /OH/


13-Nov-2012

Quarterly Report

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, 2012, as compared to December 31, 2011, and the results of operations for the three and nine months ended September 30, 2012, compared to the same periods in 2011. This discussion should be read in conjunction with the interim condensed consolidated financial statements and related footnotes included herein.

Introduction

The Company's earnings for the nine months ended September 30, 2012 generated an annualized 0.61% return on average assets ("ROA") and a 7.10% return on average equity ("ROE") compared to 0.72% ROA and 8.39% ROE for the nine months ended September 30, 2011. Comparing the nine months ended September 30, 2012 to 2011, the Company's net interest margin was 3.90% compared to 4.25%, a decrease of 35 basis points. This decrease in the margin resulted in an $815,000 drop in net interest income. Implementation of the government mandated regulations from the Dodd-Frank Act regarding our Courtesy Overdraft Program caused a reduction in customer service fees of approximately $169,000. This was offset by an increase in other service fees which resulted in a net reduction of $66,000 in service fee income for the nine months ended September 30, 2012. During this same period, the Company did not have the substantial gains that it had the previous year resulting from receiving a $100,000 BOLI benefit in excess of is surrender value and by recognizing a gain on sale of securities of $370,000 through liquidating its government sponsored mortgage-backed securities portfolio to take advantage of the favorable rate environment on these short term investments. The Company's 2012 earnings were positively impacted by a period over period decrease of $775,000 in its provision for loan losses. This decrease in the provision for loan losses is directly attributed to the overall improvement in the credit quality of the loan portfolio. Net loans of $916,000 were charged off during the nine months ended September 30, 2012, a decrease of $305,000 from the prior year period. A single out of area loan relationship accounted for $755,000 of the net loan amount charged off. Excluding this individual loan loss, net loans charged off for the current nine month period were $161,000. Other real estate owned decreased $256,000 from September 30, 2011 to September 30, 2012 and nonaccrual loans to total loans decreased by 29 basis points or $702,000, going from 1.53% in 2011 to 1.24%. These improving trends relating to credit quality are very positive considering that the present level of nonaccrual loans to total loans is nearly half of that of our peer group. Another area trending in a positive direction is core funding. Total deposits increased $46.3 million from December 31, 2011 to September 30, 2012 with most of this growth occurring in low cost funding.As a result of the booming activity of the oil and gas industry within our market areas, the Company has experienced a higher than normal influx of funds. Some of these funds may be temporary in nature and it is projected that a portion of these funds will flow back out of the Company within the next three to six months. These deposit fluctuations are closely monitored and are incorporated into our monthly asset/liability and funds management strategy. Also, in order to capitalize on its opportunities, the Company has implemented a marketing strategy within the past three months focusing on attracting a larger percentage of low cost funding at each of its banking locations, while continuing to allow higher cost term funding to flow out. This will help lower the cost of funding in future periods. The Company has a significant present liquid position in cash-type investments which can be invested in future periods in higher yielding investments. Each of these opportunities has the potential to lead to higher levels of profitability.

United Bancorp, Inc.

Management's Discussion and Analysis of Financial

Condition and Results of Operations

What we are seeing at present is the culmination of the monetary and regulatory burdens that have been placed upon the Company over the course of the last few years. Our weak economic recovery, the continuation of a zero rate monetary policy and the cumulative impact of the regulatory policies reducing our fee income opportunities and increasing our compliance expense collectively have led to our earnings performance being significantly impacted within these past nine months. The Federal Reserve's explicit extension of its quest to keep interest rates at exceedingly low levels for the next three years may further erode our interest margin as higher yielding securities are called or mature and are replaced with lower yieldinginvestment opportunities in this lackluster economy. Not wanting to take undue interest rate risk, we are keeping our liquidity in short term low yielding funds as Cash and due from Bank which has increased during the past nine months 552% to $102 million. With a 25 basis point return, this has impacted our third quarter earnings. Until we have a clearer vision of our government's direction, we are being careful at this point in time not to take a lot of interest rate risk by stretching maturities for higher yields. Our original budget forecast did not anticipate the continuation of this zero-based monetary policy. On this basis, we continued to reward our shareholders with a high yielding dividend payment until this past quarter when we reduced our cash dividend payment by 50%. This action was taken with much consideration after it became apparent there would not be a normalization of interest rates as originally anticipated due to continuing changes in the policy of the Federal Reserve. At this moment the Company is not taking market risk by extending investment maturities for return until we gain a better understanding of our economy's direction. For now we continue to aggressively and selectively make loans in the markets that we serve and consider this to be our only prudent and viable opportunity to generate an acceptable yield on our funds. We are pleased to report that gross loans are up $1.9 million, or 0.67%, during the past nine months with continued improvement in the credit quality of our loan portfolio

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 uncertainties including changes in economic conditions in the Bank's market areas, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Bank's 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 is not aware of any trends, events or uncertainties that will have or are reasonably likely to have a material effect on its financial condition, results of operations, liquidity or capital resources except as discussed herein. The Company is not aware of any current recommendation by regulatory authorities that would have such effect if implemented except as discussed herein.

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 were made or to reflect the occurrence of anticipated or unanticipated events.

Current Economic Conditions

The current protracted economic decline continues to present financial institutions with circumstances and challenges which in some cases have resulted in large declines in the fair values of investments and other assets, constraints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The consolidated financial statements have been prepared using values and information currently available to the Company.

Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital that could negatively impact the Company's ability to meet regulatory capital requirements and maintain sufficient liquidity.

United Bancorp, Inc.

Management's Discussion and Analysis of Financial

Condition and Results of Operations

Critical Accounting Policies

Management makes certain judgments that affect the amounts reported in the financial statements and footnotes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements, and as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.

The procedures for assessing the adequacy of the allowance for loan losses reflect our evaluation of credit risk after careful consideration of all information available to management. In developing this assessment, management must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown such as economic factors, developments affecting companies in specific industries and issues with respect to single borrowers. Depending on changes in circumstances, future assessments of credit risk may yield materially different results, which may require an increase or a decrease in the allowance for loan losses.

The allowance is regularly reviewed by management and the board to determine whether the amount is considered adequate to absorb probable losses. This evaluation includes specific loss estimates on certain individually reviewed loans, statistical loss estimates for loan pools that are based on historical loss experience, and general loss estimates that are based on the size, quality and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower's ability to repay and current economic and industry conditions. Also considered as part of that judgment is a review of the Bank's trend in delinquencies and loan losses, and economic factors.

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable loan losses inherent in the loan portfolio. Management's evaluation of the adequacy of the allowance is an estimate based on management's current judgment about the credit quality of the loan portfolio. While the Company strives to reflect all known risk factors in its evaluation, judgment errors may occur.

Analysis of Financial Condition

Earning Assets - Loans

Our focus as a community bank is to meet the credit needs of the markets we serve. At September 30, 2012, gross loans were $286.3 million, compared to $284.4 million at December 31, 2011, an increase of $1.9 million. The overall increase in the loan portfolio was comprised of a $9.1 million increase in residential real estate loans, which were partially offset by a $5.7 million decrease in installment lending and a $1.5 million decrease in commercial and commercial real estate loans since December 31, 2011.

Commercial and commercial real estate loans comprised 63.4% of total loans at September 30, 2012, compared to 64.5% at December 31, 2011. Commercial and commercial real estate loans have decreased $1.5 million, or less than 1% since December 31, 2011. This segment of the loan portfolio includes originated loans in our market areas and purchased participations in loans from other banks for out-of-area commercial and commercial real estate loans to benefit from consistent economic growth outside the Company's primary market area, but all within the state of Ohio.

United Bancorp, Inc.

Management's Discussion and Analysis of Financial

Condition and Results of Operations

Installment loans represented 11.7% of total loans at September 30, 2012 and 13.8% at December 31, 2011. Some of the installment loans are an indirect lending type of financing that carries somewhat more risk than real estate lending; however, it also provides for higher yields. Installment loans have decreased $5.7 million, or 14.6%, since December 31, 2011. The targeted lending areas encompass four separate metropolitan areas, minimizing the risk to changes in economic conditions in the communities housing the Company's 20 banking locations. Indirect installment loans are approximately 71.9% and 74.8% of the installment loan portfolio as of September 30, 2012 and December 31, 2011, respectively.

Residential real estate loans were 24.7% of total loans at September 30, 2012 and 21.7% at December 31, 2011, representing an increase of $9.1 million since December 31, 2011. As of September 30, 2012, the Bank has approximately $15.4 million in fixed-rate loans that have been sold in the secondary market but still serviced by the Company as compared to $20.8 million at December 31, 2011. The level of fixed rate mortgages serviced by the Company will continue to decline as the Company will not retain servicing rights on new sales going forward for these types of products. The Company will continue to service these loans for a fee that is typically 25 basis points. At September 30, 2012, the Company did not hold any loans for sale.

The allowance for loan losses totaled $2.8 million at September 30, 2012, which represented 0.97% of total loans, and $2.9 million at December 31, 2011, or 1.03% of total loans. The allowance 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 provision charged to expense are reviewed by management and the Board of Directors monthly using a risk evaluation 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 incurred credit losses associated with the loan portfolio. Net charge-offs for the nine months ended September 30, 2012 were approximately $917,000 or 31.4%, of the beginning balance in the allowance for loan losses. Net loans charged off did decrease for the nine months ended September 30, 2012 as compared to the same period in 2011. The decrease in the provision for loan losses was primarily due to overall improvement in the credit quality of the loan portfolio. Net loans charged off decreased approximately $305,000 for the nine months ended September 30, 2012 as compared to the same period in 2011. One out of area loan relationship accounted for $755,000 of the net loans charged off during the nine months ended September 30, 2012. Other real estate owned decreased $88,000 from December 31, 2011 to September 30, 2012. Nonaccrual loans to total loans decreased by 29 basis points, going from 1.52% in 2011 to 1.24% for the same period in 2012.

Earning Assets - Securities

The securities portfolio is comprised of U.S. Government agency-backed securities, tax-exempt obligations of state and political subdivisions and certain other investments. Securities available for sale and held-to-maturity at September 30, 2012 decreased approximately $44.3 million from December 31, 2011 totals. With the overall low interest rate environment, the Company has experienced a high level of called bond activity during the first nine months of 2012. The opportunities to reinvest these funds have been limited due to the historical low interest rates available on replacement investments.

United Bancorp, Inc.

Management's Discussion and Analysis of Financial

Condition and Results of Operations

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, 2012, total core deposits increased approximately $50.1 million, or 17.3%. The Company's savings accounts increased $8.6 million, or 14.9%, from December 31, 2011 totals. The Company's interest-bearing and non-interest bearing demand deposits increased $53.4 million, while certificates of deposit under $100,000 decreased by $12.0 million, or 13.4%. As a result of the booming activity of the oil and gas industry within our market areas, the Company has experienced a higher than normal influx of funds. Some of these funds may be temporary in nature and it is projected that a portion of these funds will flow back out of the Company within the next three to six months.

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, 2012, certificates of deposit greater than $100,000 decreased $8.6 million or 21.8%, from December 31, 2011 totals.

Sources of Funds - Securities Sold under Agreements to Repurchase and Other Borrowings

Other interest-bearing liabilities include securities sold under agreements to repurchase, sweep accounts, Treasury, Tax and Loan notes payable and Federal Home Loan Bank ("FHLB") advances. The majority of the Company's repurchase agreements are with local school districts and city and county governments. The Company's short-term borrowings increased approximately $3.7 million from December 31, 2011 totals.

Results of Operations for the Nine Months Ended September 30, 2012 and 2011

Net Income

The net earnings of Company were $1,943,000 for the nine months ended September 30, 2012, compared to $2,291,000 for the nine months ended September 30, 2011. On a per share basis, the Company's diluted earnings were $0.39 for the nine months ended September 30, 2012, as compared to $0.46 for the nine months ended September 30, 2011.

Net Interest Income

Net interest income, by definition, is the difference between interest income generated on interest-earning assets and the interest expense incurred on interest-bearing liabilities. Various factors contribute to changes in net interest income, including volumes, interest rates and the composition or mix of interest-earning assets in relation to interest-bearing liabilities. Net interest income decreased 6.9%, or $813,000, for the nine months ended September 30, 2012 compared to the same period in 2011.

Provision for Loan Losses

The provision for loan losses was $769,000 for the nine months ended September 30, 2012, compared to $1.5 million for the same period in 2011. As previously discussed, the decrease in the provision for loan losses was primarily due to overall improvement in the credit quality of the loan portfolio.

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, sales of loans in the secondary market, ATM income, early redemption penalties for certificates of deposit, safe deposit rental income, internet bank service fees, earnings on bank-owned life insurance and other miscellaneous items.

Noninterest income for the nine months ended September 30, 2012 was $2,140,000 a decrease of $651,000 or 23.3%, compared to $2,791,000 for the nine-month period ended September 30, 2011. A component of customer service fees are charges related to the Company's courtesy overdraft program. As the Company has implemented government mandated regulations from the Dodd-Frank Act regarding its courtesy overdraft program, the Company has seen a reduction in customer service fees of approximately $159,000 for the nine months ended September 30, 2012 as compared to the same period in 2011. During the nine months ended September 30, 2012 the Company did not sell any securities. In 2011, the Company sold its government sponsored mortgage-backed securities portfolio to take advantage of the favorable rate environment on these short term investments and provide liquidity to restructure the Company's balance sheet. As a result1, the Company recognized a gain on sale of securities of $370,000 for the nine months ended September 30, 2011 and the Company received a $100,000 BOLI benefit in excess of surrender value.

Noninterest Expense

Noninterest expense was $9.9 million for the nine months ended September 30, 2012 a decrease of $171,000, or 1.7%, compared to the nine months ended September 30, 2011. Salaries and employee benefit expense decreased $68,000, or 1.3%, for the period ended September 30, 2012 compared to the same period in 2011. Professional fees decreased $145,000 for the nine month ended September 30, 2012, as compared to the same period in 2011 as a result of the decreased levels of foreclosed assets. Advertising expense increased $132,000 for the nine months ended September 30, 2012 compared to the same period in 2011. Beginning in 2012 the Company now utilizes a direct marketing firm as a part of a customer acquisition strategy over traditional methods of advertising. Deposit insurance premiums decreased $25,000 for the nine months ended September 30, 2012, as compared to the same period in 2011. During the nine months ended September 30, 2012, the Company also recorded a $78,000 impairment on the value of certain repossessed properties.

Federal Income Taxes

The provision for federal income taxes was $423,000 for the nine months ended September 30, 2012, a decrease of $171,000 compared to the same period in 2011. The effective tax rate was 17.9% and 20.6% for the nine months ended September 30, 2012 and 2011, respectively. During the nine months ended September 30, 2012, the Company recognized a tax benefit resulting from the resolution of a tax contingency, which reduced federal income taxes by approximately $110,000.

Results of Operations for the Three Months Ended September 30, 2012 and 2011

Net Income

For the three months ended September 30, 2012 the Company reported net earnings of $451,000, compared to $801,000 for the three months ended September 30, 2011. On a per share basis, the Company's diluted earnings were $0.09 for the three months ended September 30, 2012, as compared to $0.16 for the three months ended September 30, 2011.

United Bancorp, Inc.

Management's Discussion and Analysis of Financial

Condition and Results of Operations

Net Interest Income

Net interest income, by definition, is the difference between interest income generated on interest-earning assets and the interest expense incurred on interest-bearing liabilities. Various factors contribute to changes in net interest income, including volumes, interest rates and the composition or mix of interest-earning assets in relation to interest-bearing liabilities. Net interest income decreased 8.5%, or $334,000 for the three months ended September 30, 2012 compared to the same period in 2011. Not wanting to take undue interest rate risk, we are keeping our liquidity in short term low yielding funds as Cash and due from Bank which has increased during the past nine months 552% to $102 million. With a 25 basis point return, this has impacted our third quarter earnings. Until we have a clearer vision of our government's direction, we are being careful at this point in time not to take a lot of interest rate risk by stretching maturities for higher yields. Our original budget forecast did not anticipate the continuation of this zero-based monetary policy.

Provision for Loan Losses

The provision for loan losses was $268,000 for the three months ended September 30, 2012, compared to $401,000 for the same period in 2011. As previously discussed, the decrease in the provision for loan losses was primarily due to overall improvement in the credit quality of the loan portfolio.

Noninterest Income

Total noninterest income is made up of bank related fees and service charges, as well as other income producing services provided, sales of loans in the secondary market, ATM income, early redemption penalties for certificates of deposit, safe deposit rental income, internet bank service fees, earnings on bank-owned life insurance and other miscellaneous items.

Noninterest income for the three months ended September 30, 2012 was $723,000, a decrease of $109,000, or 13.1%, compared to $832,000 for the three-month period ended September 30, 2011. A component of customer service fees are charges related to the Company's courtesy overdraft program. As the Company has implemented government mandated regulations from the Dodd-Frank Act regarding its courtesy overdraft program, the Company has seen a reduction in customer service fees of approximately $54,000 for the three months ended September 30, 2012 as compared to the same period in 2011.

Noninterest Expense

Noninterest expense was $3.5 million for the three months ended September 30, 2012 an increase of $182,000, compared to the three months ended September 30, 2011. Salaries and employee benefit expense increased $81,000, or 5.0%, for the three month period ended September 30, 2012, compared to the same period in 2011. This increase was primarily due to the Company's increase in health care costs which renews July 1st of each year. Professional fees decreased $65,000 for the three month ended September 30, 2012, as compared to the same period in 2011 as a result of the decreased levels of foreclosed assets. Deposit insurance premiums decreased $40,000 for the three months ended September 30, 2012, as compared to the same period in 2011. The Company also recorded a $26,000 impairment on the value of certain repossessed properties.

Federal Income Taxes

The provision for federal income taxes was $118,000 for the three months ended September 30, 2012, a decrease of $142,000 compared to the same period in 2011. The effective tax rate was 20.7% and 24.5% for the three months ended September 30, 2012 and 2011, respectively.

United Bancorp, Inc.

Management's Discussion and Analysis of Financial

Condition and Results of Operations

Capital Resources

Internal capital growth, through the retention of earnings, is the primary means of maintaining capital adequacy for the Company. Stockholders' equity totaled $36.5 million at September 30, 2012 compared to $36.2 million at December 31, 2011, a $339,000 increase. Total average stockholders' equity in relation to total average assets was 8.59% at September 30, 2012 and 8.52% at December 31, 2011. In 2001, our shareholders approved an amendment to the Company's Articles of Incorporation to create a class of preferred shares with 2,000,000 authorized shares. This enables the Company, at the option of the Board of Directors, to issue series of preferred shares in a manner calculated to take advantage of financing techniques which may provide a lower effective cost of capital to the . . .

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