UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended                                     March 31, 2015                                    

 

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT

 

For the transition period from ____________ to _______________

 

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 Fourth Street, Martins Ferry, Ohio 43935-0010

(Address of principal executive offices)

 

(740) 633-0445

(Registrant’s telephone number, including area code)

 

N/A

(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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes      ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer,” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨

Accelerated filer  ¨

Non-accelerated filer  ¨

Smaller Reporting Company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

 

Yes ¨           No x

 

Indicate the number of shares outstanding of the issuer’s classes of common stock as of the latest practicable date: As of May 1, 2015, 5,385,304 shares of the Company’s common stock, $1.00 par value, were issued and outstanding.

 

 

PART I - FINANCIAL INFORMATION
Item 1  Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Income	4
Condensed Consolidated Statements of Comprehensive Income	5
Condensed Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated Financial Statements	8
Item 2  Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3  Quantitative and Qualitative Disclosures About Market Risk	40
Item 4  Controls and Procedures	41
PART II - OTHER INFORMATION
Item 1  Legal Proceedings	42
Item 1A  Risk Factors	42
Item 2  Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3  Defaults Upon Senior Securities	42
Item 4  Other Information	43
Item 5  Exhibits	43
SIGNATURES	44

 

 

ITEM 1. Financial Statements

 

United Bancorp, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

 

		March 31,				December 31,
		2015				2014
		(Unaudited)
Assets
Cash and due from banks		$	5,265			$	5,170
Interest-bearing demand deposits			33,965				33,994
Cash and cash equivalents			39,230				39,164
Available-for-sale securities			37,317				19,348
Held-to-maturity securities			235				450
Loans, net of allowance for loan losses of $2,506 and $2,400 at March 31, 2015 and December 31, 2014, respectively			309,988				313,354
Premises and equipment			10,612				10,071
Federal Home Loan Bank stock			4,210				4,210
Foreclosed assets held for sale, net			1,140				1,140
Intangible assets			37				66
Accrued interest receivable			784				829
Deferred income taxes			483				493
Bank-owned life insurance			10,830				10,747
Other assets			2,054				1,940
Total assets		$	416,920			$	401,812
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand		$	191,291			$	183,550
Savings			74,383				71,319
Time			65,327				67,812
Total deposits			331,001				322,681
Short-term borrowings			12,113				5,098
Federal Home Loan Bank advances			26,678				26,719
Subordinated debentures			4,124				4,124
Interest payable and other liabilities			2,280				2,800
Total liabilities			376,196				361,422
Stockholders’ Equity
Preferred stock, no par value, authorized 2,000,000 shares; no shares issued			—				––
Common stock, $1 par value; authorized 10,000,000 shares; issued 2015 –5,385,304 shares, 2014 – 5,385,304 shares			5,385				5,385
Additional paid-in capital			18,097				18,044
Retained earnings			20,687				20,478
Stock held by deferred compensation plan; 2015 –230,446 shares, 2014 – 230,446 shares			(2,044	)			(2,044	)
Unearned ESOP compensation			(1,419	)			(1,467	)
Accumulated other comprehensive income			81				57
Treasury stock, at cost 2015 –7,850 shares, 2014 – 7,850 shares			(63	)			(63	)
Total stockholders’ equity			40,724				40,390
Total liabilities and stockholders’ equity		$	416,920			$	401,812

 

See Notes to Condensed Consolidated Financial Statements

 

 

United Bancorp, Inc.

Condensed Consolidated Statements of Income

For the Three Months Ended March 31, 2015 and 2014

(In thousands, except per share data)

(Unaudited)

 

		2015				2014
Interest and Dividend Income
Loans, including fees		$	3,682			$	3,893
Securities
Taxable			64				71
Non-taxable			47				69
Federal funds sold			17				11
Dividends on Federal Home Loan Bank and other stock			49				53
Total interest and dividend income			3,859				4,097
Interest Expense
Deposits			265				307
Borrowings			316				319
Total interest expense			581				626
Net Interest Income			3,278				3,471
Provision for Loan Losses			116				216
Net Interest Income After Provision for Loan Losses			3,162				3,255
Noninterest Income
Service charges on deposit accounts			699				627
Realized gains on sales of securities			20				—
Realized gains on sales of loans			11				4
Other income			212				207
Total noninterest income			942				838
Noninterest Expense
Salaries and employee benefits			1,595				1,660
Occupancy and equipment			491				518
Professional services			191				218
FDIC insurance			63				65
Insurance			67				74
Franchise and other taxes			67				54
Advertising			84				106
Stationery and office supplies			45				41
Amortization of intangibles			30				30
Provision for  losses on foreclosed real estate			—				162
Loss on sale of real estate and  other repossessed assets			—				6
Other expenses			501				552
Total noninterest expense			3,134				3,486
Income Before Federal Income Taxes			970				607
Provision for Federal Income Taxes			276				122
Net Income		$	694			$	485
Basic Earnings Per Share		$	0.14			$	0.10
Diluted Earnings Per Share		$	0.14			$	0.10
Dividends Per Share		$	0.09			$	0.08

 

See Notes to Condensed Consolidated Financial Statements

 

 

United Bancorp, Inc.

Condensed Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2015 and 2014

(In thousands)

(Unaudited)

 

		2015				2014
Net Income		$	694			$	485
Other comprehensive income(loss), net of related tax effects:
Reclassification adjustment for realized gains on available-for-sale securities included in net income, net of tax of $(7)			(13	)
Unrealized holding gain on securities during the period, net of tax taxes    of $13 and $74 in 2015 and 2014, respectively			37				144
Comprehensive Income		$	718			$	629

 

See Notes to Condensed Consolidated Financial Statements

 

 

United Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2015 and 2014

(In thousands)

(Unaudited)

 

		2015				2014
Operating Activities
Net income		$	694			$	485
Items not requiring (providing) cash
Depreciation and amortization			232				249
Amortization of intangible asset			30				30
Provision for loan losses			116				216
Provision for losses on impairment on foreclosed real estate			—				162
Amortization of premiums and discounts on securities, net			—				1
Gain on sale of available-for-sale securities			(20	)			—
Gain on sale of loans			(11	)			(4	)
Increase in value of bank-owned life insurance			(83	)			(84	)
Amortization of mortgage servicing rights			3				5
Originations of loans held for sale			(741	)			(289	)
Proceeds from sale of loans held for sale			752				293
Loss on sale of foreclosed assets			—				6
Expense related to share-based compensation plans and ESOP			100				93
Net change in accrued interest receivable and other assets			(90	)			(1,208	)
Net change in accrued expenses and other liabilities			(519	)			70
Net cash provided by operating activities			463				25
Investing Activities
Securities available for sale:
Maturities, prepayments and calls			4,718				2,458
Purchases			(22,999	)			—
Proceeds from maturity of held-to-maturity securities			215				120
Proceeds from sale of available-for-sale securities			370				—
Net change in loans			3,261				(3,687	)
Mandatory redemption of Federal Home Loan Bank Stock			—				600
Proceeds from sale of foreclosed assets			—				790
Purchases of premises and equipment			(773	)			(108	)
Net cash (used in) provided by investing activities			(15,208	)			173

 

See Notes to Condensed Consolidated Financial Statements

 

 

United Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

For the Three Months Ended March 31, 2015 and 2014

(In thousands)

(Unaudited)

 

		2015				2014
Financing Activities
Net change in deposits		$	8,320			$	13,724
Net change in short-term borrowings			7,015				3,843
Net change in long-term debt			(41	)			(89	)
Cash dividends paid			(483	)			(430	)
Treasury stock sold			—				14
Net cash provided by financing activities			14,811				17,062
Increase in Cash and Cash Equivalents			66				17,260
Cash and Cash Equivalents, Beginning of Period			39,164				23,474
Cash and Cash Equivalents, End of Period		$	39,230			$	40,734
Supplemental Cash Flows Information
Interest paid on deposits and borrowings		$	583			$	628
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Vesting of restricted stock		$	39			$	—

 

See Notes to Condensed Consolidated Financial Statements

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

Note 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 March 31, 2015, and its results of operations and cash flows for the interim 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 for Form 10-Q and, therefore, do not purport to contain all the necessary financial disclosures required by accounting principles generally accepted in the United States of America that might otherwise be necessary in the circumstances and should be read in conjunction with the Company’s consolidated financial statements and related notes for the year ended December 31, 2014 included in its Annual Report on Form 10-K. Reference is made to the accounting policies of the Company described in the Notes to the Consolidated Financial Statements contained in its Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2015, are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet of the Company as of December 31, 2014 has been derived from the audited consolidated balance sheet of the Company as of that date.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of United Bancorp, Inc. (“United” or “the Company”) and its wholly-owned subsidiary, The Citizens Savings Bank of Martins Ferry, Ohio (“the Bank” or “Citizens”). The Bank operates two divisions, The Community Bank, a division of The Citizens Savings Bank and The Citizens Bank, a division of The Citizens Savings Bank. All intercompany transactions and balances have been eliminated in consolidation.

 

Nature of Operations

 

The Company’s revenues, operating income, and assets are almost exclusively derived from banking. Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one reportable operating segment. Customers are mainly located in Athens, Belmont, Carroll, Fairfield, Harrison, Hocking, Jefferson, and Tuscarawas Counties and the surrounding localities in northeastern, east-central and southeastern Ohio, and include a wide range of individuals, businesses and other organizations. The Citizens Bank division conducts its business through its main office in Martins Ferry, Ohio and offices in Bridgeport, Colerain, Dellroy, Dillonvale, Dover, Jewett, New Philadelphia, St. Clairsville East, St. Clairsville West, Sherrodsville, Strasburg, and Tiltonsville, Ohio. The Community Bank division conducts its business through two offices in Lancaster, Ohio and offices in Amesville, Glouster, Lancaster, and Nelsonville, Ohio. The Company’s primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and real estate and are not considered “sub prime” type loans. The targeted lending areas of our Bank operations encompass four separate metropolitan areas, minimizing the risk to changes in economic conditions in the communities housing the Company’s branch locations.

 

The Company’s primary deposit products are checking, savings and term certificate accounts and its primary lending products are residential mortgage, commercial and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both residential and commercial real estate. Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Company can be significantly influenced by a number of environmental factors, such as governmental monetary and fiscal policies, that are outside of management’s control.

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

Use of Estimates

 

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, 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 and fair values of financial instruments are particularly subject to change.

 

Loans

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

 

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

 

For all loan classes, the accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

 

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral. Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

 

For all loan portfolio segments except residential and consumer loans, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

The Company charges-off residential and consumer loans when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 120 days past due, charge-off of unsecured open-end loans when the loan is 120 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

 

For all classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

 

When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms, no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the renegotiated terms for a period of at least six months.

 

Allowance for Loan Losses

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical charge-off experience by segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior three years. Management believes the three year historical loss experience methodology is appropriate in the current economic environment. Other adjustments (qualitative/environmental considerations) for each segment may be added to the allowance for each loan segment after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due based on the loan’s current payment status and the borrower’s financial condition including available sources of cash flows. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for non-homogenous type loans such as commercial, non-owner residential and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For impaired loans where the Company utilizes the discounted cash flows to determine the level of impairment, the Company includes the entire change in the present value of cash flows as bad debt expense.

 

The fair values of collateral dependent impaired loans are based on independent appraisals of the collateral. In general, the Company acquires an updated appraisal upon identification of impairment and annually thereafter for commercial, commercial real estate and multi-family loans. If the most recent appraisal is over a year old, and a new appraisal is not performed, due to lack of comparable values or other reasons, the existing appraisal is utilized and discounted generally 10% -35% based on the age of the appraisal, condition of the subject property, and overall economic conditions. After determining the collateral value as described, the fair value is calculated based on the determined collateral value less selling expenses. The potential for outdated appraisal values is considered in our determination of the allowance for loan losses through our analysis of various trends and conditions including the local economy, trends in charge-offs and delinquencies, etc. and the related qualitative adjustments assigned by the Company.

 

Segments of loans with similar risk characteristics are collectively evaluated for impairment based on the segment’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

 

In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In this scenario, the Company attempts to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Company do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Company may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory payment plan.

 

It is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being restructured remain on nonaccrual status until six months of satisfactory borrower performance at which time management would consider its return to accrual status. If a loan was accruing at the time of restructuring, the Company reviews the loan to determine if it is appropriate to continue the accrual of interest on the restructured loan.

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

With regard to determination of the amount of the allowance for credit losses, trouble debt restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.

 

Earnings Per Share

 

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during each period. Diluted earnings per share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock awards and are determined using the treasury stock method.

 

Treasury stock shares, deferred compensation shares and unearned ESOP shares are not deemed outstanding for earnings per share calculations.

 

		Three months ended March 31,
		2015				2014
		(In thousands, except share and per share data
Basic
Net income		$	694			$	485
Dividends on non-vested restricted stock			(14	)			(15	)
Net earnings allocated to stockholders		$	680			$	470
Weighted average common shares outstanding			4,853,349				4,813,957
Basic earnings per common share		$	0.14			$	0.10
Diluted
Net earnings allocated to stockholders		$	680			$	470
Weighted average common shares outstanding for basic earnings per common share			4,853,349				4,813,957
Add:  Dilutive effects of assumed exercise of stock options and restricted stock			85,240				101,918
Average shares and dilutive potential common shares			4,938,589				4,915,875
Diluted earnings per common share		$	0.14			$	0.10

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

Options to purchase 53,714 shares of common stock at a weighted-average exercise price of $10.34 per share were outstanding at both March 31, 2015 and 2014, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.

 

Income Taxes

 

The Company is subject to income taxes in the U.S. federal jurisdiction, as well as various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for the years before 2011.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). This update to the ASC is the culmination of efforts by the FASB and the International Accounting Standards Board (IASB) to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2014-09 supersedes Topic 605 – Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in ASU 2014-09 describes a 5-step process entities can apply to achieve the core principle of revenue recognition and requires disclosures sufficient to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and the significant judgments used in determining that information. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and early application is not allowed. The Company is currently evaluating the effects of ASU 2014-09 on its financial statements and disclosures, if any.

 

ASU No. 2014-11, Transfer and Servicing (Topic) 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures

 

ASU No. 2014-11 was issued in June 2014 and requires two accounting changes:

 

The accounting for repurchase-to-maturity transactions is changed to secured borrowings accounting, and for repurchase financing arrangements, separate accounting is required for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which results in secured borrowing accounting.

 

Additional disclosures are required. ASU No. 2014-11 was effective for first interim or annual reporting period beginning after December 15, 2014. In addition, for public companies, the disclosure for certain transactions accounted for as a sale is effective for the first interim or annual period beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required fro annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. The Company adopted ASU 2014-11 as required, without a material impact on the Company’s financial position or results of operations.

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

Note 2:

Securities

 

The amortized cost and fair values, together with gross unrealized gains and losses of securities are as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
Available-for-sale Securities:
March 31, 2015:
U.S. government agencies		$	33,299			$	36			$	(13	)		$	33,322
State and political subdivisions			3,922				73				––				3,995
		$	37,221			$	109			$	(13	)		$	37,317
Available-for-sale Securities:
December 31, 2014:
U.S. government agencies		$	14,443			$	4			$	(67	)		$	14,380
State and political subdivisions			4,841				105				––				4,946
Equity securities			4				18				––				22
		$	19,288			$	127			$	(67	)		$	19,348

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
Held-to-maturity Securities:
March 31, 2015:
State and political subdivisions		$	235			$	1			$	—			$	236
December 31, 2014:
State and political subdivisions		$	450			$	1			$	––			$	451

 

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at March 31, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

		Available-for-sale								Held-to-maturity
		Amortized Cost				Fair  Value				Amortized Cost				Fair  Value
		(In thousands)
Within one year		$	700			$	716			$	235			$	236
One to five years			35,028				35,089				—				—
Five to ten years			1,493				1,512				—				—
After ten years			—				—				—				—
Totals		$	37,221			$	37,317			$	235			$	236

 

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $27.3 million and $19.5 million at March 31, 2015 and December 31, 2014, respectively.

 

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. The total fair value of these investments at March 31, 2015 and December 31, 2014, was $11.0 million and $7.1 million, which represented approximately 29.25% and 35.7%, respectively, of the Company’s available-for-sale and held-to-maturity investment portfolio.

 

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary and are a result on an increase in longer term interest rates.

 

Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

 

The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2015 and December 31, 2014:

 

March 31, 2015
		Less than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
(In thousands)
U.S. Government agencies		$	5,989			$	(10	)		$	4,997			$	(3	)		$	10,986			$	(13	)

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

December 31, 2014
		Less than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
(In thousands)
U.S. Government agencies		$	1,141			$	(2	)		$	5,935			$	(65	)		$	7,076			$	(67	)

 

The unrealized losses on the Company’s investments in U.S. Government agency were caused primarily by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2015 and December 31, 2014.

 

For the three months ended March 31, 2015, proceeds from the sale of investment securities available-for-sale were $370,000, with gross realized gains of $20,000, and gross realized losses of zero. The gain is included in realized gains on sales of available-for-sale securities, net in the noninterest income section of the statement of income. There were no investment sales for the three months ended March 31, 2014.

 

Note 3:

Loans and Allowance for Loan Losses

 

Categories of loans include:

 

		March 31,				December 31,
		2015				2014
		(In thousands)
Commercial loans		$	47,916			$	52,286
Commercial real estate			161,459				158,314
Residential real estate			82,977				83,870
Installment loans			20,142				21,284
Total gross loans			312,494				315,754
Less allowance for loan losses			(2,506	)			(2,400	)
Total loans		$	309,988			$	313,354

 

The risk characteristics of each loan portfolio segment are as follows:

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

Commercial

 

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

 

Commercial Real Estate

 

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus nonowner-occupied loans.

 

Residential and Consumer

 

Residential and consumer loans consist of two segments - residential mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

Allowance for Loan Losses and Recorded Investment in Loans

As of and for the three month period ended March 31, 2015

 

		Commercial				Commercial Real Estate				Residential				Installment				Unallocated				Total
		(In thousands)
Allowance for loan losses:
Balance, beginning of period		$	254			$	1,116			$	92			$	147			$	791			$	2,400
Provision charged to expense			(35	)			(1	)			(5	)			61				96				116
Losses charged off			—				—				—				(53	)			—				(53	)
Recoveries			19				4				4				16				—				43
Balance, end of period		$	238			$	1,119			$	91			$	171			$	887			$	2,506
Ending balance:  individually evaluated for impairment		$	89			$	618			$	—			$	—			$	—			$	707
Ending balance:  collectively evaluated for impairment		$	149			$	501			$	91			$	171			$	887			$	1,799
Loans:
Ending balance:  individually evaluated for impairment		$	101			$	2,022			$	—			$	—			$	—			$	2,123
Ending balance:  collectively evaluated for impairment		$	47,815			$	159,437			$	82,977			$	20,142			$	—			$	310,371

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

Allowance for Loan Losses and Recorded Investment in Loans

As of and for the three month period ended March 31, 2014

 

		Commercial				Commercial Real Estate				Residential				Installment				Unallocated				Total
		(In thousands)
Allowance for loan losses:
Balance, beginning of period		$	412			$	1,609			$	90			$	141			$	642			$	2,894
Provision charged to expense			653				(533	)			9				152				(65	)			216
Losses charged off			(12	)			—				(10	)			(97	)			—				(119	)
Recoveries			1				4				1				41				—				47
Balance, end of period		$	1,054			$	1,080			$	90			$	237			$	577			$	3,038
Ending balance:  individually evaluated for impairment		$	403			$	1,080			$	—			$	—			$	—			$	1,483
Ending balance:  collectively evaluated for impairment		$	651			$	—			$	90			$	237			$	577			$	1,555
Loans:
Ending balance:  individually evaluated for impairment		$	617			$	5,453			$	—			$	—			$	—			$	6,070
Ending balance:  collectively evaluated for impairment		$	57,975			$	141,155			$	82,528			$	25,393			$	—			$	307,051

 

Allowance for Loan Losses and Recorded Investment in Loans

As of December 31, 2014

 

		Commercial				Commercial Real Estate				Residential				Installment				Unallocated				Total
		(In thousands)
Allowance for loan losses:
Ending balance:  individually evaluated for impairment		$	92			$	622			$	––			$	––			$	––			$	714
Ending balance:  collectively evaluated for impairment		$	162			$	494			$	92			$	147			$	791			$	1,686
Loans:
Ending balance:  individually evaluated for impairment		$	112			$	1,756			$	––			$	––			$	––			$	1,868
Ending balance:  collectively evaluated for impairment		$	52,174			$	156,558			$	83,870			$	21,284			$	––			$	313,886

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

The following tables show the portfolio quality indicators.

 

		March 31, 2015
Loan Class		Commercial				Commercial Real Estate				Residential				Installment				Total
		(In thousands)
Pass Grade		$	47,558			$	154,811			$	82,977			$	20,142			$	305,488
Special Mention			251				1,678				—				—				1,929
Substandard			107				4,970				—				—				5,077
Doubtful			—				—				—				—				—
		$	47,916			$	161,459			$	82,977			$	20,142			$	312,494

 

		December 31, 2014
Loan Class		Commercial				Commercial Real Estate				Residential				Installment				Total
		(In thousands)
Pass Grade		$	51,895			$	151,535			$	83,870			$	21,284			$	308,584
Special Mention			265				1,980				––				––				2,245
Substandard			126				4,799				––				––				4,925
Doubtful			––				––				––				––				––
		$	52,286			$	158,314			$	83,870			$	21,284			$	315,754

 

To facilitate the monitoring of credit quality within the loan portfolio, and for purposes of analyzing historical loss rates used in the determination of the ALLL, the Company utilizes the following categories of credit grades: pass, special mention, substandard, and doubtful. The four categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on at least a quarterly basis.

 

The Company assigns a special mention rating to loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or the Company’s credit position.

 

The Company assigns a substandard rating to loans that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans have well defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans and leases in this grade also are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies noted are not addressed and corrected.

 

The Company assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant changes were made to either during the past year to date period.

 

Loan Portfolio Aging Analysis

As of March 31, 2015

 

		30-59 Days Past Due and Accruing				60-89 Days Past Due and Accruing				Greater Than 90 Days and Accruing				Non Accrual				Total Past Due and Non Accrual				Current				Total Loans Receivable
		(In thousands)
Commercial		$	50			$	—			$	—			$	68			$	118			$	47,798			$	47,916
Commercial real estate			136				—				128				410				674				160,785				161,459
Residential			358				54				—				729				1,141				81,836				82,977
Installment			27				10				—				—				37				20,105				20,142
Total		$	571			$	64			$	128			$	1,207			$	1,970			$	310,524			$	312,494

 

Loan Portfolio Aging Analysis

As of December 31, 2014

 

		30-59 Days Past Due and Accruing				60-89 Days Past Due and Accruing				Greater Than 90 Days and Accruing				Non Accrual				Total Past Due and Non Accrual				Current				Total Loans Receivable
		(In thousands)
Commercial		$	—			$	––			$	—			$	46			$	46			$	52,240			$	52,286
Commercial real estate			394				––				127				247				768				157,546				158,314
Residential			292				17				––				658				967				82,903				83,870
Installment			70				11				––				7				88				21,196				21,284
Total		$	756			$	28			$	127			$	958			$	1,869			$	313,885			$	315,754

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

Impaired Loans

 

		As of March 31, 2015												Three Months Ended March 31, 2015
		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Investment in Impaired Loans				Interest Income Recognized
		(In thousands)
Loans without a specific valuation allowance:
Commercial		$	—			$	—			$	—			$	—			$	—
Commercial real estate			898				898				—				902				9
Consumer			—				—				—				—				—
Residential			—				—				—				—				—
			898				898				—				902				9
Loans with a specific valuation allowance:
Commercial			101				101				89				102				2
Commercial  real estate			1,124				1,124				618				1,581				15
Consumer			—				—				—				—				—
Residential			—				—				—				—				—
			1,225				1,225				707				1,683				17
Total:
Commercial		$	101			$	101			$	89			$	102			$	2
Commercial real estate		$	2,022			$	2,002			$	618			$	2,483			$	24
Consumer		$	—			$	—			$	—			$	—			$	—
Residential		$	—			$	—			$	—			$	—			$	—

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

		As of December 31, 2014												Three Months Ended March 31, 2014
		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Investment in Impaired Loans				Interest Income Recognized
		(In thousands)
Loans without a specific valuation allowance:
Commercial		$	7			$	7			$	––			$	98			$	—
Commercial real estate			794				1,144				––				579				8
			801				1,151				––				677				8
Loans with a specific valuation allowance:
Commercial			105				105				92				523				2
Commercial  real estate			962				962				622				4,963				43
			1,067				1,067				714				5,486				45
Total:
Commercial		$	112			$	112			$	92			$	621			$	2
Commercial real estate		$	1,756			$	2,106			$	622			$	5,542			$	51

 

Interest income recognized on a cash basis was not materiality different than interest income recognized.

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

For the TDRs noted in the tables below, the Company extended the maturity dates and granted interest rate concessions as part of each of those loan restructurings. The loans included in the tables are considered impaired and specific loss calculations are performed on the individual loans. In conjunction with the restructuring there were no amounts charged-off. For the three months ended March 31, 2015, the Company did not have any loans classified as TDRs

 

		Three Months ended March 31, 2014
		Number of Contracts				Pre- Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
		(In thousands)
Commercial			—			$	—			$	—
Commercial real estate			2				155				66
Residential			—				—				—
Installment			—				—				—

 

		Three Months ended March 31, 2014
		Interest Only				Term				Combination				Total Modification
						(In thousands)
Commercial		$	—			$	—			$	—			$	—
Commercial real estate			—				66				—				66
Residential			—				—				—				—
Consumer			—				—				—				—

 

During the three months ended March 31, 2014, troubled debt restructurings described above increased the allowance for loan losses by $89,000. During the three months ended March 31, 2015 the Company did not have any loans classified as troubled debt restructurings.

 

At March 31, 2015 and 2014 and for three month periods then ended, there were no material defaults of any troubled debt restructurings that were modified in the last 12 months. The Company generally considers TDR’s that become 90 days or more past due under the modified terms as subsequently defaulted.

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

Note 4:

Benefit Plans

 

Pension expense includes the following:

 

		Three months ended March 31,
		2015				2014
		(In thousands)
Service cost		$	85			$	74
Interest cost			48				35
Expected return on assets			(94	)			(83	)
Amortization of prior service cost and net loss			(12	)			(15	)
Pension expense		$	27			$	11

 

Note 5:

Off-balance-sheet Activities

 

Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contracts are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

 

A summary of the notional or contractual amounts of financial instruments with off-balance-sheet risk at the indicated dates is as follows:

 

		March 31,				December 31,
		2015				2014
		(In thousands)
Commercial loans unused lines of credit		$	14,677			$	13,950
Commitment to originate loans			9,100				9,228
Consumer open end lines of credit			36,261				35,604
Standby letters of credit			—				220

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

Note 6:

Accumulated Other Comprehensive Income

 

The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:

 

		March 31,  2015				December 31, 2014
		(In thousands)
Net unrealized gain on securities available-for-sale		$	97			$	60
Net unrealized gain for unfunded status of defined benefit plan liability			25				25
			122				85
Tax effect			41				28
Net-of-tax amount		$	81			$	57

 

Note 7:

Fair Value Measurements

 

The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company also utilizes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1

Quoted prices in active markets for identical assets or liabilities

 

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

 

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

Following is a description of the valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

 

Available-for-sale Securities

 

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The Company’s equity securities are classified within Level 1 of the hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy.

 

The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2015 and December 31, 2014:

 

						Fair Value Measurements Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
March 31, 2015
U.S. government agencies		$	33,322			$	—			$	33,322			$	—
State and political subdivisions			3,995				—				3,995				—
December 31, 2014
U.S. government agencies		$	14,380			$	––			$	14,380			$	––
State and political subdivisions			4,946				––				4,946				––
Equity securities			22				22				––				––

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

 

Impaired Loans (Collateral Dependent)

 

Collateral dependent impaired loans consisted primarily of loans secured by nonresidential real estate. Management has determined fair value measurements on impaired loans primarily through evaluations of appraisals performed. Due to the nature of the valuation inputs, impaired loans are classified within Level 3 of the hierarchy.

 

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Company’s Chief Lender. Appraisals are reviewed for accuracy and consistency by the Company’s Chief Lender. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the Company’s Chief Lender by comparison to historical results.

 

Foreclosed Assets Held for Sale

 

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value (based on current appraised value) at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Management has determined fair value measurements on other real estate owned primarily through evaluations of appraisals performed, and current and past offers for the other real estate under evaluation. Due to the nature of the valuation inputs, foreclosed assets held for sale are classified within Level 3 of the hierarchy.

 

Appraisals of OREO are obtained when the real estate is acquired and subsequently as deemed necessary by the Company’s Chief lender. Appraisals are reviewed for accuracy and consistency by the Company’s Chief Lender and are selected from the list of approved appraisers maintained by management.

 

  

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2015 and December 31, 2014.

 

						Fair Value Measurements Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
March 31, 2015
Collateral dependent impaired loans		$	239			$	—			$	—			$	239
December 31, 2014
Collateral dependent impaired loans		$	301			$	––			$	––			$	301
Foreclosed assets held for sale			991				––				––				991

 

Unobservable (Level 3) Inputs

 

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.

 

		Fair Value at 3/31/15				Valuation Technique		Unobservable Inputs		Range
		(In thousands)
Collateral-dependent impaired loans		$	239			Market comparable properties		Comparability discount		Not available

 

		Fair Value at 12/31/14				Valuation Technique		Unobservable Inputs		Range
		(In thousands)
Collateral-dependent impaired loans		$	301			Market comparable properties		Comparability adjustments		Not available
Foreclosed assets held for sale			991			Market comparable properties		Marketability discount		10% – 35%

 

There were no significant changes in the valuation techniques used during 2015.

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

The following table presents estimated fair values of the Company’s financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

 

						Fair Value Measurements Using
		Carrying Amount				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
March 31, 2015
Financial assets
Cash and cash  equivalents		$	39,230			$	39,230			$	—			$	—
Held-to-maturity securities			235				—				236				—
Loans, net of allowance			309,988				—				—				308,246
Federal Home Loan Bank stock			4,210				—				4,210				—
Accrued interest receivable			784				—				784				—
Financial liabilities
Deposits			331,001				—				319,344				—
Short term borrowings			12,113				—				12,113				—
Federal Home Loan Bank Advances			26,678				—				28,108				—
Subordinated debentures			4,124				—				3,962				—
Interest payable			133				—				133				—

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

						Fair Value Measurements Using
		Carrying Amount				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
December 31, 2014:
Financial assets
Cash and cash equivalents		$	39,164			$	39,164			$	—			$	––
Held-to-maturity securities			450				––				450				––
Loans, net of allowance			313,354				—				––				312,014
Federal Home Loan Bank stock			4,210				––				4,210				––
Accrued interest receivable			829				––				829				––
Financial liabilities
Deposits			322,681				––				309,186				––
Short term borrowings			5,098				––				5,098				––
Federal Home Loan Bank Advances			26,719				––				26,703				––
Subordinated debentures			4,124				––				3,962				––
Interest payable			135				––				135				––

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

 

Cash and Cash Equivalents, Accrued Interest Receivable and Federal Home Loan Bank Stock

 

The carrying amounts approximate fair value.

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

Held-to-maturity Securities

 

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 2 of the hierarchy. The Company has no securities classified as Level 3 of the hierarchy.

 

Loans

 

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.

 

Deposits

 

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

 

Interest Payable

 

The carrying amount approximates fair value.

 

Short-term Borrowings, Federal Home Loan Bank Advances and Subordinated Debentures

 

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.

 

Commitments to Originate Loans, Letters of Credit and Lines of Credit

 

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. Fair values of commitments were not material at March 31, 2015 and December 31, 2014.

 

 

United Bancorp, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

 

The following discusses the financial condition of the Company as of March 31, 2015, as compared to December 31, 2014, and the results of operations for the three months ended March 31, 2015, compared to the same period in 2014. This discussion should be read in conjunction with the interim condensed consolidated financial statements and related footnotes included herein.

 

Introduction

 

The reported diluted earnings per share of $0.14 for the quarter ended March 31, 2015 compared to $0.10 for the quarter ended March 31, 2014, an increase of 40%. This growth in earnings can be attributed to several factors which are explained in detail below.

 

We are very happy to report on the earnings improvement of our Company for the three months ended March 31, 2015. From an operating perspective, the Company’s net interest margin decreased slightly for the first three months of 2015 to a level of 3.71% compared to 3.86% for the same period in 2014. This decrease in the net interest margin is attributed to the Company having a higher level of lower-yielding, highly-liquid investment alternatives at the Federal Reserve. Even though the Company had an increase in average loans for the quarter, the average cash and due from Federal Reserve Bank increased which had a dilutive impact on the net interest margin. This reality was a direct result of the continued strong growth in lower-cost funding, primarily noninterest and interest bearing demand and savings deposits, which increased by $17.7 million year-over-year. Also, on a year-over-year basis, average loans were up by $3.0 million while higher-costing time deposits were down by $11.0 million. The Company maintained its funds management policy by continuing to keep its surplus funding in very-liquid, lower-yielding excess reserves at the Federal Reserve, which totaled $35.4 million on an average basis for the first quarter of 2015, and resist the temptation of extending the duration of its investment portfolio to achieve higher investment yields; although, investment in shorter-duration securities accelerated during the quarter. As a result, the securities and other restricted stock balance increased by $12.4 million to a level of $41.8 million at quarter-end. Most of this investment occurred earlier in the quarter when the structures of these shorter-duration investment securities were more favorable. Overall, the Company continued with a conservative investment posture to protect the Company’s capital and earnings when interest rates increase in future periods to more normalized levels. The Company’s credit quality improved dramatically as nonaccrual loans were down $1.4 million, or 53.93%, to a level of $1.2 million of total loans. Net loans charged off for the three months ended March 31, 2015 were only $10,501, or 0.01% of average loans, as compared to $73,019, or 0.09% of average loans, for the same period in 2014. With the improvement in credit quality, the Company decreased the provision for loan losses by $100,251 year-over-year. The overall total allowance for loan losses to total loans was 0.80% resulting in a total allowance for loan losses to nonperforming loans of 207.64% at March 31, 2015 compared to 0.97% and 115.99% respectively at March 31, 2014. With this continued trend of improving credit quality and coverage, the Company projects a further reduction of its provision for loan losses which should have a positive impact on future earnings.

 

 

United Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2015 and 2014

 

On the liability side of the balance sheet, the Company continued to see a positive return on its strategy of attracting additional customers into lower-cost funding accounts while allowing higher-cost funding to run off. Year-over-year, low-cost funding, consisting of demand and savings deposits, increased by $17.7 million which is the result of a strategy that began in June 2012. On another positive note, higher-cost time deposit balances decreased by over $11.0 million from March 31, 2014 to March 31, 2015, helping to reduce the overall interest expense level of the Company. With this trend, the Company continued to see the positive impact of attracting a higher number of active transaction accounts which resulted in service charges on deposit accounts increasing by $72,000, or 11.52%, on a year-over-year basis as of March 31, 2015. It is projected that this trend will continue even with the Government mandated regulations relating to the Dodd-Frank Act being more fully implemented. The heightened implementation of this legislation may potentially have a limiting effect on the level of revenue realized per account which should be offset by the Company’s focus on attracting a higher number of transaction accounts that can generate fee based income. Lastly, the Company was able to further reduce its level of noninterest expense or overhead. As of March 31, 2015, noninterest expense decreased on a year-over-year basis by $350,000 or 10.04%. A large portion of this cost savings is attributed to a pre-tax impairment charge on foreclosed real estate that was realized in the first quarter of 2014. But, even without this impairment charge, noninterest expense would still have decreased $197,000, or 5.91%. The Company’s previously announced office consolidation in its Glouster, Ohio marketplace was completed on March 16, 2015 and should lead to additional cost savings which should help to further contain noninterest expense in future periods. Our goal is to control our level of noninterest expense while continuing to build and strengthen our operational foundation which should lead to future growth, higher levels of earnings and, ultimately, a higher level of performance. With our continued focus of shifting lower-yielding liquid assets into higher-yielding quality loans, the continuing growth in service charge income on deposit accounts, the controlling of our noninterest expense and the potential lowering of our loan loss provision even further, we are projecting continued improvement in our earnings for 2015.

 

We are proud that our earnings are up on a double-digit basis year-over-year even though our strategy is to continue with a risk management posture that is somewhat conservative by keeping our surplus funding in highly-liquid, low-yielding excess reserves at the Federal Reserve and not leveraging our investment portfolio by stretching for yield at present. As demonstrated this past quarter, we will leverage our investment portfolio on a shorter-duration basis when we believe that it is in our best interest and prudent to do so. But, we will remain disciplined in our approach and not stretch for higher yields in our investment portfolio until longer-term market rates move closer to more historically normalized levels. Our Company has been able to successfully generate higher levels of operating earnings by focusing on attracting and expanding relationships in the direct markets that we serve. This has led to our Company originating a higher level of quality loans while improving our overall credit quality and bringing in a higher level of lower-cost transaction account funding which has increased the level of service charge income on deposit accounts. In addition, we have focused on building a more solid and efficient operational foundation which will lead to future growth and higher levels of profitability for our Company. We have accomplished all of the aforementioned while controlling our overall noninterest expense or overhead levels. We believe that the positive trends that we have seen over the course of this past year will continue and are budgeting for an even higher level of earnings this year. The actions that we have taken within the past couple of years when both long and short term interest rates hit historic lows has strongly positioned our Company for growth and higher levels of profitability when interest rates do finally increase by having both the liquid assets and capital to leverage. We anticipate that most of this leverage will primarily occur within our investment portfolio to levels at which we are we are more historically accustomed. By investing in longer-maturity securities today, we could expose our shareholders to losses in capital and earnings when interest rates normalize upward. As you can see in our financial statements, this conservative investment strategy has helped our Company preserve its book value, which improved on a year-over-year basis from $8.14 to $8.39, and has increased our shareholder’s equity by $1.55 million, or 4.0%, and equity to assets to a level of 9.77% as of March 31, 2015. We continue to be satisfied with our current strategy which has led to higher levels of operating earnings and has enabled us to maintain our very generous dividend policy with our cash dividend having a market yield of 4.56% based on our closing price at March 31, 2015. We are extremely proud of the fact that our Company was recognized this past year by American Banker Magazine as one of the top twenty-five publically traded U.S. banks and thrifts with the highest dividend yield in our country…coming in at number sixteen.” Everson concluded, Being a strong and profitable Company in this presently changing regulatory and economic environment and rewarding our owners with solid growth in their shareholder value continues to be our priority and our long term focus.

 

 

United Bancorp, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

 

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.

 

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.

 

 

United Bancorp, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

 

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 March 31, 2015, gross loans were $312.5 million, compared to $315.8 million at December 31, 2014, a decrease of $3.3 million after offsetting repayments for the period. The overall decrease in the loan portfolio was comprised of a $1.2 million decrease in commercial and commercial real estate loans and a $1.1 million decrease in installment lending and a $894,000 decrease in residential loans since December 31, 2014. As discussed in the introduction average loans a up quarter over quarter for the period ended March 31, 2015.

 

Commercial and commercial real estate loans comprised 67.0% of total loans at March 31, 2015, compared to 66.7% at December 31, 2014. Commercial and commercial real estate loans have decreased $1.2 million, or 0.6% since December 31, 2014. 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 mainly within the state of Ohio.

 

Installment loans represented 6.45% of total loans at March 31, 2015 and 6.74% at December 31, 2014. Some of the installment loans carry somewhat more risk than real estate lending; however, it also provides for higher yields. Installment loans have decreased $1.2 million, or 5.4%, since December 31, 2014. The targeted lending areas encompass four separate metropolitan areas, minimizing the risk to changes in economic conditions in the communities housing the Company’s 18 banking locations.

 

Residential real estate loans were 26.6% of total loans at March 31, 2015 and 26.6% at December 31, 2014, representing a decrease of $893,000, or 1.1% since December 31, 2014. As of March 31, 2015, the Bank has approximately $10.2 million in fixed-rate loans that have been sold in the secondary market but still serviced by the Company as compared to $10.7 million at December 31, 2014. 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 March 31, 2015, the Company did not hold any loans for sale.

 

The allowance for loan losses totaled $2.5 million at March 31, 2015, which represented 0.80% of total loans, and $2.4 million at December 31, 2014, or 0.76% 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 three months ended March 31, 2015 were approximately $11,000 or less than 1.0%, of the beginning balance in the allowance for loan losses. Net loans charged off did decrease for the three months ended March 31, 2015 as compared to the same period in 2014. Net loans charged off decreased approximately $61,000 for the three months ended March 31, 2015 as compared to the same period in 2014.

 

 

United Bancorp, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

 

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 March 31, 2015 increased approximately $17.8 million from December 31, 2014 totals.

 

Sources of Funds – Deposits

 

The Company’s primary source of funds is core deposits from retail and business customers. These core deposits include all categories of interest-bearing and noninterest-bearing deposits, excluding certificates of deposit greater than $100,000. For the period ended March 31, 2015, total core deposits increased approximately $8.7 million, or 2.8%. The Company’s savings accounts increased $3.1 million or 4.3% from December 31, 2014 totals. The Company’s interest-bearing and non-interest bearing demand deposits increased $7.7 million while certificates of deposit under $100,000 decreased by $2.1 million, or 4.2%. As a result of the booming activity of the oil and gas industry within our market areas, the Company had experienced a higher than normal influx of funds during 2014 and that continued into 2015.

 

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 March 31, 2015, certificates of deposit greater than $100,000 decreased $357,000 or 2.1%, from December 31, 2014 totals.

 

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

 

Other interest-bearing liabilities include securities sold under agreements to repurchase 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 $7.0 million from December 31, 2014 totals.

 

Results of Operations for the Three Months Ended March 31, 2015 and 2014

 

Net Income

 

The reported diluted earnings per share of $0.14 for the quarter ended March 31, 2015 compared to $0.10 for the quarter ended March 31, 2014, an increase of 40%. This growth in earnings can be attributed to several factors which are explained in detail below.

 

 

United Bancorp, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

 

Net Interest Income

 

Net interest income decreased $193,000 or 5.6% for the three months ended March 31, 2015 compared to the same period in 2014. As previously mentioned, and do to 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. With a 25 basis point return, this has impacted our earnings for three months ended March 31, 2015 and 2014. Until we have a clearer vision of our government’s direction on Monetary Policy, we are being careful at this point in time not to take a lot of interest rate risk by stretching maturities for higher yields.

 

Provision for Loan Losses

 

The provision for loan losses was $116,000 for the three months ended March 31, 2015, compared to $216,000 for the same period in 2014. As previously discussed, the decrease in the provision for loan losses was primarily due to and overall improvement in credit quality of the loan portfolio.

 

Noninterest Income

 

As previously mentioned, attracting a higher number of transaction accounts as a result of a customer marketing strategy had a positive impact on noninterest income. The Company’s service charges on deposit accounts, a component of non interest income increased by $72,000 for the three months ended March 31, 2015 as compared to the same period in 2014. It is projected this trend will continue even with the continuing Government mandated regulations relating to the Dodd-Frank Act, which have had a limiting effect on the level of revenue realized per account, being more fully implemented. This has been offset by the Company’s focus on attracting more transaction account customers and having a higher overall level of transaction accounts that can generate fee based income.

 

Noninterest Expense

 

The Company was able to further reduce its level of noninterest expense or overhead. As of March 31, 2015, noninterest expense decreased on a year-over-year basis by $352,000 or 10.04%. A large portion of this cost savings is attributed to a pre-tax impairment charge on foreclosed real estate that was realized in the first quarter of 2014. But, even without this impairment charge, noninterest expense would still have decreased $197,000, or 5.91%. The Company’s previously announced office consolidation in its Glouster, Ohio marketplace was completed on March 16, 2015 and should lead to additional cost savings which should help to further contain noninterest expense in future

 

Federal Income Taxes

 

The provision for federal income taxes was $276,000 for the three months ended March 31, 2015, an increase of $154,000 compared to the same period in 2014. The effective tax rate was approximately 28.5% and 20.0% for the three months ended March 31, 2015 and 2014, 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 $40.7 million at March 31, 2015 compared to $40.4 million at December 31, 2014, a $334,000 increase. Total average stockholders’ equity in relation to total average assets was 9.77% at March 31, 2015 and 9.63% at December 31, 2014. Several years ago, 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 Company. The amendment also provides greater flexibility to the Board of Directors in structuring the terms of equity securities that may be issued by the Company. Although this preferred stock is a financial tool, it has not been utilized to date.

 

The Company has offered for many years 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.

 

The Company is subject to the regulatory requirements of The Federal Reserve System as a bank holding company. The Bank is subject to regulations of the FDIC and the State of Ohio, Division of Financial Institutions. The most important of these various regulations address capital adequacy.

 

On January 1, 2015, the final rules of the Federal Reserve Board went into effect implementing in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

Under the final rule, minimum requirements increased for both the quality and quantity of capital held by banking organizations. The rule requires a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent and a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations.

 

The Company continues to be well-capitalized in accordance with Federal regulatory capital requirements as the capital ratios below show:

 

Common equity tier 1 capital ratio			13.18	%
Tier 1 capital ratio			14.49	%
Total capital ratio			15.31	%
Leverage ratio			10.88	%

 

 

United Bancorp, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

 

Liquidity

 

Management’s objective in managing liquidity is maintaining the ability to continue meeting the cash flow needs of its customers, such as borrowings or deposit withdrawals, as well as its own financial commitments. The principal sources of liquidity are net income, loan payments, maturing securities and sales of securities available for sale, federal funds sold and cash and deposits with banks. Along with its liquid assets, the Company has additional sources of liquidity available to ensure that adequate funds are available as needed. These include, but are not limited to, the purchase of federal funds, the ability to borrow funds under line of credit agreements with correspondent banks, a borrowing agreement with the Federal Home Loan Bank of Cincinnati and the adjustment of interest rates to obtain depositors. Management feels that it has the capital adequacy and profitability to meet the current and projected liquidity needs of its customers.

 

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 accounting principles generally accepted in the United States of America (“U.S. GAAP”). U.S. 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, certain impaired loans and certain other real estate and loans that may be 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 affect 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 affect 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.

 

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

 

There has been no significant change from disclosures included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

 

United Bancorp, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

 

ITEM 4.

Controls and Procedures

 

The Company, under the supervision, and with the participation, of its management, including the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to the requirements of Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2015, in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company's periodic SEC filings.

 

There was no change in the Company's internal control over financial reporting that occurred during the Company's fiscal quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 

United Bancorp, Inc.

Part II – Other Information

 

ITEM 1.

Legal Proceedings

 

None, other than ordinary routine litigation incidental to the Company’s business.

 

ITEM 1A.

Risk Factors

 

There have been no material changes from risk factors as previously disclosed in Part 1 Item 1A of the Company’s Form 10-K for the year ended December 31, 2014, filed on March 16, 2015.

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

(a) Total Number of Shares (or Units) Purchased

(b) Average Price Paid Per Share (or Unit)

(c) Total Number of Shares (or Units) Purchased as Part Of Publicly Announced Plans Or Programs

(d) Maximum Number or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

Month #1 1/1/2015 to 1/31/2015

––

––

––

––

Month #2 2/1/2015 to 2/28/2015

––

––

––

––

Month #3 3/1/2015 to 3/31/2015

––

––

––

––

 

The Company adopted the United Bancorp, Inc. Affiliate Banks Directors and Officers Deferred Compensation Plan (the “Plan”), which is an unfunded deferred compensation plan. Amounts deferred pursuant to the Plan remain unrestricted assets of the Company, and the right to participate in the Plan is limited to members of the Board of Directors and Company officers. Under the Plan, directors or other eligible participants may defer fees and up to 50% of their annual incentive award payable to them by the Company, which are used to acquire common shares which are credited to a participant’s respective account. Except in the event of certain emergencies, no distributions are to be made from any account as long as the participant continues to be an employee or member of the Board of Directors. Upon termination of service, the aggregate number of shares credited to the participant’s account are distributed to him or her along with any cash proceeds credited to the account which have not yet been invested in the Company’s stock. On May 15, 2013, the Plan purchased a total of 5,743 common shares for participant accounts. All purchases under this deferred compensation plan are funded with either earned director fees or officer incentive award payments. No underwriting fees, discounts, or commissions are paid in connection with the Plan. The shares allocated to participant accounts have not been registered under the Securities Act of 1933 in reliance upon the exemption provided by Section 4(2) thereof.

 

ITEM 3.

Defaults Upon Senior Securities

 

Not applicable.

 

 

United Bancorp, Inc.

Part II – Other Information

 

ITEM 4.

Mine Safety Disclosures

 

Not applicable.

 

ITEM 5.

Exhibits

 

EX-3.1		Amended Articles of Incorporation of United Bancorp, Inc. (1)
EX-3.2		Amended and Restated Code of Regulations of United Bancorp, Inc. (2)
EX-4.0		Instruments Defining the Rights of Security Holders (See Exhibits 3.1 and 3.2)
EX 31.1		Rule 13a-14(a) Certification – CEO
EX 31.2		Rule 13a-14(a) Certification – CFO
EX 32.1		Section 1350 Certification – CEO
EX 32.2		Section 1350 Certification – CFO
EX 101.INS		XBRL Instance Document
EX 101.SCH		XBRL Taxonomy Extension Schema Document
EX 101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
EX 101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
EX 101.LAB		XBRL Taxonomy Extension Label Linkbase Document
EX 101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

(1)

Incorporated by reference to Appendix B to the registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 14, 2001.

 

(2)

Incorporated by reference to Exhibit 3.2 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 22, 2014.

 

 

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.

 

	/s/United Bancorp, Inc.
Date: May 15, 2015	By:	/s/Scott A. Everson
		Scott A. Everson
		President and Chief Executive Officer
Date: May 15, 2015	By:	/s/Randall M. Greenwood
		Randall M. Greenwood
		Senior Vice President, Chief Financial Officer and Treasurer

 

  

Exhibit Index

 

Exhibit No.		Description
31.1		Rule 13a-14(a) Certification – Principal Executive Officer
31.2		Rule 13a-14(a) Certification – Principal Financial Officer
32.1		Certification pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of The Sarbanes-Oxley act of 2002.
32.2		Certification pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
EX 101.INS		XBRL Instance Document
EX 101.SCH		XBRL Taxonomy Extension Schema Document
EX 101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
EX 101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
EX 101.LAB		XBRL Taxonomy Extension Label Linkbase Document
EX 101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document