UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number 0-16540
UNITED BANCORP, INC. |
(Exact name of registrant as specified in its Charter.) |
Ohio | 34-1405357 | |
(State or other jurisdiction of incorporation or organization) | (IRS) Employer Identification No.) | |
201 South Fourth Street, Martins Ferry, Ohio | 43935 | |
(Address of principal executive offices) | (ZIP Code) |
Registrant’s telephone number, including area code: (740) 633-0445
Securities registered pursuant to Section 12(b) of the Act:
None | N/A |
(Title of class) | (Name of each exchange on which registered) |
Common Stock, Par Value $1.00 a share | NASDAQ Capital Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨No x.
Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x.
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).
Yes x No ¨.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. x
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |
Non-accelerated filer | ¨ | Smaller reporting company | x |
(Do not check if a smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of June 30, 2011 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $37,814,722 based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation System.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Registrant had 5,351,154 common shares outstanding as of March 6, 2012.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the Annual Shareholders meeting to be held April 18, 2012 are incorporated by reference into Part III.
Portions of the Annual Report to Shareholders for the year ended December 31, 2011 are incorporated by reference into Parts I and II.
PART I
Item 1 Business
Business
United Bancorp, Inc. (Company) is a bank holding company headquartered in Martins Ferry, Ohio. At December 31, 2011 the Company has one wholly-owned subsidiary bank, The Citizens Savings Bank, Martins Ferry, Ohio (CITIZENS, or the Bank). The Bank operates two divisions for marketing purposes, The Community Bank, a division of The Citizens Savings Bank and The Citizens Bank, a division of The Citizens Savings Bank.
On September 19, 2008, CITIZENS assumed from the Federal Deposit Insurance Corporation (“FDIC”) the deposits of three banking offices of a failed institution in Belmont County, Ohio. Deposits assumed in the transaction totaled approximately $39.3 million. The agreement provided the Bank with the option to purchase the office premises for the three banking locations. Management notified the FDIC that it would acquire two of the former banking locations for approximately $1.2 million which was the appraised fair value of the properties. The Company paid a premium to the FDIC of approximately $450,000 for the approximately $39.3 million in deposits assumed.
CITIZENS serves customers in northeastern, eastern, southeastern and south central Ohio and is engaged in the business of commercial and retail banking in Belmont, Harrison, Jefferson, Tuscarawas, Carroll, Athens, Hocking, and Fairfield counties and the surrounding localities. The Bank provides a broad range of banking and financial services, which includes accepting demand, savings and time deposits and granting commercial, real estate and consumer loans. CITIZENS conducts its business through its main office and stand alone operations center in Martins Ferry, Ohio and nineteen branches located in the counties mentioned above. CITIZENS under Brokerage United ® also offers full brokerage service through LPL Financial® member NASD/SIPC.
CITIZENS has no single customer or related group of customers whose banking activities, whether through deposits or lending, would have a material impact on the continued earnings capabilities if those activities were removed.
Competition
The markets in which CITIZENS operates continue to be highly competitive. CITIZENS competes for loans and deposits with other retail commercial banks, savings and loan associations, finance companies, credit unions and other types of financial institutions within the Mid-Ohio valley geographic area along the eastern border of Ohio including Belmont, Harrison and Jefferson counties and extending into the northern panhandle of West Virginia and the Tuscarawas and Carroll County geographic areas of northeastern Ohio. CITIZENS also encounters similar competition for loans and deposits throughout the Athens, Hocking, and Fairfield County geographic areas of central and southeastern Ohio.
Supervision and Regulation
General
The Company is a corporation organized under the laws of the State of Ohio. The business in which the Company and its subsidiary are engaged is subject to extensive supervision, regulation and examination by various bank regulatory authorities. The supervision, regulation and examination to which the Company and its subsidiary are subject are intended primarily for the protection of depositors and the deposit insurance funds that insure the deposits of banks, rather than for the protection of shareholders.
Several of the more significant regulatory provisions applicable to banks and bank holding companies to which the Company and CITIZENS are subject are discussed below. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company and CITIZENS.
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Regulatory Agencies
The Company is a registered bank holding company and is subject to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) pursuant to the Bank Holding Company Act of 1956, as amended.
CITIZENS is an Ohio chartered commercial bank. It is subject to regulation and examination by both the Ohio Division of Financial Institutions (the “ODFI”) and the FDIC.
Regulatory Reform
Overview. Congress, the U.S. Department of the Treasury (“Treasury”), and the federal banking regulators, including the FDIC, have taken broad action since early September 2008 to address volatility in the U.S. banking system and financial markets. Beginning in late 2008, the U.S. and global financial markets experienced deterioration of the worldwide credit markets, which created significant challenges for financial institutions both in the United States and around the world. Dramatic declines in the housing market during the past year, marked by falling home prices and increasing levels of mortgage foreclosures, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. In addition, many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers, including other financial institutions, as a result of concern about the stability of the financial markets and the strength of counterparties.
In response to the financial market crisis and continuing economic uncertainty, the United States government, specifically the Treasury, the Federal Reserve Board and the FDIC working in cooperation with foreign governments and other central banks, took a variety of extraordinary measures designed to restore confidence in the financial markets and to strengthen financial institutions, including measures available under the Emergency Economic Stabilization Act of 2008 (“EESA”), as amended by the American Recovery and Reinvestment Act of 2009 (“ARRA”), which included the Troubled Asset Relief Program (“TARP”).The stated purpose of TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. As part of TARP, Treasury purchased debt or equity securities from participating financial institutions through the Treasury’s Capital Purchase Plan (“CPP”). Participants in the CPP are subject to various restrictions regarding dividends, stock repurchases, corporate governance and executive compensation. The Company elected not to participate in the program and, therefore, is not subject to the restrictions imposed on CPP participants.
EESA also temporarily increased FDIC deposit insurance on most accounts, from $100,000 to $250,000. This increase became permanent at the end of 2010 under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). Following a systemic risk determination, on October 14, 2008, the FDIC established a Temporary Liquidity Guarantee Program (“TLGP”). Under the Transaction Account Guarantee Program of the TLGP, the FDIC temporarily provides a 100% guarantee of the deposits in non-interest-bearing transaction deposit accounts in participating financial institutions. The Bank participated in this program. Consequently, all funds held in non-interest-bearing transaction accounts (demand deposit accounts), Interest on Lawyers Trust Accounts (IOLTAs), and low-interest NOW accounts (defined as NOW accounts with interest rates no higher than 0.50%) with the Bank were covered under this program. The Dodd-Frank Act extended unlimited FDIC insurance coverage on non-interest bearing transaction accounts through December 31, 2012. Under the Dodd-Frank Act, low-interest NOW accounts are excluded from the definition of non-interest-bearing transaction accounts.
The Dodd-Frank Act is aimed, in part, at accountability and transparency in the financial system and includes numerous provisions that apply to and/or could impact the Corporation and its banking subsidiary. The Dodd-Frank Act implements changes that, among other things, affect the oversight and supervision of financial institutions, provide for a new resolution procedure for large financial companies, create a new agency responsible for implementing and enforcing compliance with consumer financial laws, introduce more stringent regulatory capital requirements, effect significant changes in the regulation of over-the- counter derivatives, reform the regulation of credit rating agencies, implement changes to corporate governance and executive compensation practices, incorporate requirements on proprietary trading and investing in certain funds by financial institutions (known as the "Volcker Rule"), require registration of advisers to certain private funds, and effect significant changes in the securitization market. In order to fully implement many provisions of the Dodd-Frank Act, various government agencies, in particular banking and other financial services agencies are required to promulgate regulations. Set forth below is a discussion of some of the major sections the Dodd-Frank Act and implementing regulations that have or could have a substantial impact on the Corporation and its banking subsidiary. Due to the volume of regulations required by the Dodd-Frank Act, not all proposed or final regulations that may have an impact on the Corporation or its banking subsidiary are necessarily discussed.
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Debit Card Interchange Fees. The Dodd-Frank Act provides for a set of new rules requiring that interchange transaction fees for electric debit transactions be "reasonable" and proportional to certain costs associated with processing the transactions. The FRB was given authority to, among other things, establish standards for assessing whether interchange fees are reasonable and proportional. In June 2011, the FRB issued a final rule establishing certain standards and prohibitions pursuant to the Dodd-Frank Act, including establishing standards for debit card interchange fees and allowing for an upward adjustment if the issuer develops and implements policies and procedures reasonably designed to prevent fraud. The provisions regarding debit card interchange fees and the fraud adjustment became effective October 1, 2011. The rules impose requirements on the Corporation and its banking subsidiary and may negatively impact our revenues and results of operations.
Consumer Issues. The Dodd-Frank Act creates the new Consumer Financial Protection Bureau (the “CFPB”), which has the authority to implement regulations pursuant to numerous consumer protection laws and has supervisory authority, including the power to conduct examination and take enforcement actions, with respect to depository institutions with more than $10 billion in consolidated assets. The CFPB also has authority, with respect to consumer financial services to, among other things, restrict unfair, deceptive or abusive acts or practices, enforce laws that prohibit discrimination and unfair treatment and to require certain consumer disclosures.
Corporate Governance. The Dodd-Frank Act clarifies that the SEC may, but is not required to promulgate rules that would require that a company's proxy materials include a nominee for the board of directors submitted by a shareholder. Although the SEC promulgated rules to accomplish this, these rules were invalidated by a federal appeals court decision. The Corporation is presently a “smaller reporting company” as defined by SEC regulations and is therefore exempt presently from these provisions. The SEC has said that it will not challenge the ruling, but has not ruled out the possibility that new rules could be proposed under the authority of Dodd-Frank. The Dodd-Frank Act requires stock exchanges to have rules prohibiting their members from voting securities that they do not beneficially own (unless they have received voting instructions from the beneficial owner) with respect to the election of a member of the board of directors (other than an uncontested election of directors of an investment company registered under the Investment Company Act of 1940), executive compensation or any other significant matter, as determined by the SEC by rule.
Executive Compensation. In addition to the say on pay provisions discussed above, the Dodd-Frank Act also adds disclosure and voting requirements for golden parachute compensation that is payable to named executive officers in connection with sale transactions. In addition, the Dodd-Frank Act requires the SEC to issue rules directing the stock exchanges to prohibit listing classes of equity securities if a company's compensation committee members are not independent. The Dodd-Frank Act also provides that a company's compensation committee may only select a compensation consultant, legal counsel or other advisor after taking into consideration factors to be identified by the SEC that affect the independence of a compensation consultant, legal counsel or other advisor.
The SEC is required under the Dodd-Frank Act to issue rules obligating companies to disclose in proxy materials for annual meetings of shareholders information that shows the relationship between executive compensation actually paid to their named executive officers and their financial performance, taking into account any change in the value of the shares of a company's stock and dividends or distributions.
The Dodd-Frank Act provides that the SEC must issue rules directing the stock exchanges to prohibit listing any security of a company unless the company develops and implements a policy providing for disclosure of the policy of the company on incentive-based compensation that is based on financial information required to be reported under the securities laws and that, in the event the company is required to prepare an accounting restatement due to the material noncompliance of the company with any financial reporting requirement under the securities laws, the company will recover from any current or former executive officer of the company who received incentive-based compensation during the three-year period preceding the date on which the company is required to prepare the restatement based on the erroneous data, any exceptional compensation above what would have been paid under the restatement.
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The Dodd-Frank Act requires the SEC, by rule, to require that each company disclose in the proxy materials for its annual meetings whether an employee or board member is permitted to purchase financial instruments designed to hedge or offset decreases in the market value of equity securities granted as compensation or otherwise held by the employee or board member.
The Corporation is presently a “smaller reporting company” as defined by SEC regulations and is therefore exempt presently from some of the provisions noted above regarding compensation disclosures and required voting regarding say on pay.
Deposit Insurance Assessments. All of the Bank’s deposits are insured under the Federal Deposit Insurance Act by the FDIC to the fullest extent permitted by law. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators.
The Dodd-Frank Act changes the deposit insurance assessment framework, primarily by basing assessments on an institution’s average total consolidated assets less average tangible equity (subject to risk-based adjustments that would further reduce the assessment base for custodial banks) rather than on the amount of an institution’s domestic deposits, which is how the assessment had previously been calculated. This change is expected to shift a greater portion of the aggregate assessments to large banks, as described in detail below. The Dodd-Frank Act also eliminates the upper limit for the reserve ratio designated by the FDIC each year, increases the minimum designated reserve ratio of the DIF from 1.15% to 1.35% of the estimated amount of total insured deposits by September 30, 2020, and eliminates the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. On December 20, 2010, the FDIC raised the minimum designated reserve ratio of DIF to 2.00%. The ratio is higher than the minimum reserve ratio of 1.35% as set by the Dodd-Frank Act. Under the Dodd-Frank Act, the FDIC is required to offset the effect of the higher reserve ratio on small insured depository institutions, defined as those with consolidated assets of less than $10 billion.
On February 7, 2011, the FDIC approved a final rule implementing the changes in the deposit insurance assessment framework mandated by the Dodd-Frank Act. Because the new assessment base under the Dodd-Frank Act results in a larger amount than the previous assessment base, the final rule’s assessment rates are lower than the current rates, which achieves the FDIC’s goal of not significantly altering the total amount of revenue collected from the industry. In addition, the final rule adopts a “scorecard” assessment scheme for larger banks and suspends dividend payments if the DIF reserve ratio exceeds 1.5% but provides for decreasing assessment rates when the DIF reserve ratio reaches certain thresholds. The final rule also determines how the effect of the higher reserve ratio will be offset for institutions with less than $10 billion of consolidated assets.
The Holding Company Regulation
As a holding company incorporated and doing business within the State of Ohio, the Company is subject to regulation and supervision under the Bank Holding Act of 1956, as amended (the "Act"). The Company is required to file with the Federal Reserve Board on quarterly basis information pursuant to the Act. The Federal Reserve Board may conduct examinations or inspections of the Company and CITIZENS.
The Company is required to obtain prior approval from the Federal Reserve Board for the acquisition of more than five percent of the voting shares or substantially all of the assets of any bank or bank holding company. In addition, the Company is generally prohibited by the Act from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. The Company may, however, subject to certain prior approval requirements of the Federal Reserve Board, engage in, or acquire shares of companies engaged in activities which are deemed by the Federal Reserve Board by order or by regulation to be financial in nature or closely related to banking.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was enacted into law. The GLB Act made sweeping changes with respect to the permissible financial services which various types of financial institutions may now provide. The Glass-Steagall Act, which had generally prevented banks from affiliation with securities and insurance firms, was repealed. Pursuant to the GLB Act, bank holding companies may elect to become a "financial holding company," provided that all of the depository institution subsidiaries of the bank holding company are “well capitalized” and “well managed” under applicable regulatory standards.
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Under the GLB Act, a bank holding company that has elected to become a financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Activities that are "financial in nature" include securities underwriting, dealing and market-making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Federal Reserve Board has determined to be closely related to banking. No Federal Reserve Board approval is required for the Company to acquire a company, other than a bank holding company, bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. Prior Federal Reserve Board approval is required before the Company may acquire the beneficial ownership or control of more than five percent of the voting shares, or substantially all of the assets, of a bank holding company, bank or savings association. If any subsidiary bank of the Company ceases to be "well capitalized" or "well managed" under applicable regulatory standards, the Federal Reserve Board may, among other actions, order the Company to divest the subsidiary bank. Alternatively, the Company may elect to conform its activities to those permissible for a bank holding company that is not also a financial holding company. If any subsidiary bank of the Company receives a rating under the Community Reinvestment Act of 1977 of less than satisfactory, the Company will be prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations. The Company is not a financial holding company and has no current intention of making such an election.
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Regulation of the Bank
General. CITIZENS is an Ohio-chartered bank that is not a member of the Federal Reserve System. CITIZENS is therefore regulated by the ODFI as well as the FDIC. The regulatory agencies have the authority to regularly examine CITIZENS, which is subject to all applicable rules and regulations promulgated by its supervisory agencies. In addition, the deposits of CITIZENS are insured by the FDIC to the fullest extent permitted by law.
Deposit Insurance. As an FDIC-insured institution, CITIZENS is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period.
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management of the Company is not aware of any activity or condition that could result in termination of the deposit insurance of CITIZENS.
Capital Requirements. The Federal Reserve Board, ODFI and FDIC require banks and holding companies to maintain minimum capital ratios. The “risk-adjusted” capital guidelines for CITIZENS and the Company involve a mathematical process of assigning various risk weights to different classes of assets, then evaluating the sum of the risk-weighted balance sheet structure against CITIZENS’s and Company’s capital base. The rules set the minimum guidelines for the ratio of capital to risk-weighted assets (including certain off-balance-sheet activities, such as standby letters of credit) at 8%. Tier 1 Capital is comprised of common equity, retained earnings, and a limited amount of perpetual preferred stock less certain intangible items. At least half of the total capital is to be Tier 1 Capital. The remainder may consist of a limited amount of subordinated debt, other preferred stock, and a portion of the loan loss reserves (not to exceed 1.25% of risk-weighted assets). CITIZENS anticipates maintaining capital at a level sufficient to be classified as “well capitalized” pursuant to the Federal Reserve guidelines.
In addition, the federal banking regulatory agencies have adopted leverage capital guidelines for banks and bank holding companies. Under these guidelines, banks and bank holding companies must maintain a minimum ratio of three percent (3%) Tier 1 Capital to total assets. However, most banking organizations are expected to maintain capital ratios well in excess of the minimum level and generally must keep their Tier 1 ratio at or above 5%. CITIZENS intends to maintain capital well above the regulatory minimum.
The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. As of December 31, 2011, CITIZENS exceeded its minimum regulatory capital requirements with a total risk-based capital ratio of 13.4%, a Tier 1 risk-based capital ratio of 12.4% and a Tier 1 leverage ratio of 9.0%.
In addition to the minimum regulatory capital requirements discussed above, provisions contained in the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) expressly provide for certain supervisory actions which are directly keyed to the capital levels of an insured depository institution. These “prompt corrective action” provisions impose progressively more restrictive constraints on operations, management and capital distributions of a particular institution as its regulatory capital decreases. Using Tier 1 risk-based, total risk-based, and Tier 1 leverage capital ratios as the relevant measures, FDIC insured depository institutions are grouped into one of the following five prompt corrective action capital categories: well capitalized, adequately capitalized; undercapitalized;
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significantly undercapitalized; and critically undercapitalized. An institution is considered well capitalized if it has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a Tier 1 leverage capital ratio of at least 5%, provided, however, such institution is not subject to a written advisement, order or capital directive to meet and maintain a specific capital level for any particular capital measure. An adequately capitalized institution must have a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a Tier 1 leverage capital ratio of at least 4% (3% if the institution has achieved the highest composite rating in its most recent examination). At December 31, 2011, CITIZENS satisfied all requirements for inclusion in the “well capitalized” category.
Dividends. Ohio law prohibits CITIZENS, without the prior approval of the ODFI, from paying dividends in an amount greater than the lesser of its undivided profits or the total of its net income for that year, combined with its retained net income from the preceding two years. The payment of dividends by any financial institution or its holding company is also affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations. To this effect, the Board of Governors of the Federal Reserve has issued Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases by Bank Holding Companies (the “Policy Statement”). In the Policy Statement, the Federal Reserve stated that it is important for a banking organization’s board of directors to ensure that the dividend level is prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios. As a general matter, the Policy Statement provides that the board of directors of a bank holding company should inform the Federal Reserve and should eliminate, defer, or significantly reduce its dividends if:
(1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;
(2) the prospective rate of earnings retention is not consistent with the company’s capital needs and overall current and prospective financial condition; or
(3) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
Failure to do so could result in a supervisory finding that the organization is operating in an unsafe and unsound manner. Moreover, the Policy Statement requires a bank holding company to inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the organization’s capital structure. Declaring or paying a dividend in either circumstance could raise supervisory concerns. As described above, CITIZENS exceeded its minimum capital requirements under applicable guidelines as of December 31, 2011.
Branching Authority. Ohio chartered banks have the authority under Ohio law to establish branches anywhere in the State of Ohio, subject to receipt of all required regulatory approvals. Additionally, in May 1997 Ohio adopted legislation “opting in” to the provisions of Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Act”) which allows banks to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is also allowed by the Riegle-Neal Act and authorized by Ohio law.
Affiliate Transactions. Various governmental requirements, including Sections 23A and 23B of the Federal Reserve Act, limit borrowings by holding companies and non-bank subsidiaries from affiliated insured depository institutions, and also limit various other transactions between holding companies and their non-bank subsidiaries, on the one hand, and their affiliated insured depository institutions on the other. Section 23A of the Federal Reserve Act also generally requires that an insured depository institution's loan to its non-bank affiliates be secured, and Section 23B of the Federal Reserve Act generally requires that an insured depository institution's transactions with its non-bank affiliates be on arms-length terms.
Depositor Preference. The Federal Deposit Insurance Act provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non deposit creditors and shareholders of the institution.
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Privacy Provisions of Gramm-Leach-Bliley Act. Under GLB, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to non-affiliated third parties. The privacy provisions of GLB affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
Anti-Money Laundering Provisions of the USA Patriot Act of 2001. On October 26, 2001, the USA Patriot Act of 2001 (the “Patriot Act”) was signed into law. The Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence community’s ability to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide-ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including: (a) due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons; (b) standards for verifying customer identification at account opening; and (c) rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
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Fiscal and Monetary Policies. CITIZENS’s business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies. CITIZENS is particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the Federal Reserve are (a) conducting open market operations in United States government securities, (b) changing the discount rates of borrowings of depository institutions, (c) imposing or changing reserve requirements against depository institutions’ deposits, and (d) imposing or changing reserve requirements against certain borrowing by banks and their affiliates. These methods are used in varying degrees and combinations to affect directly the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that reason alone, the policies of the Federal Reserve Board have a material effect on the earnings of CITIZENS.
Additional and Pending Regulation. CITIZENS is also subject to federal regulation as to such matters as the maintenance of required reserves against deposits, limitations in connection with affiliate transactions, limitations as to the nature and amount of its loans and investments, regulatory approval of any merger or consolidation, issuance or retirement by CITIZENS of its own securities and other aspects of banking operations. In addition, the activities and operations of CITIZENS are subject to a number of additional detailed, complex and sometimes overlapping laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-in-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws.
Congress regularly considers legislation that may have an impact upon the operation of the Company and CITIZENS. At this time, the Company is unable to predict whether any proposed legislation will be enacted and, therefore, is unable to predict the impact such legislation may have on the operations of the Company.
Employees
The Company itself, as a holding company, has no compensated employees. CITIZENS has 118 full time employees, with 35 of these serving in a management capacity, and 45 part time employees.
Industry Segments
United Bancorp and its subsidiary are engaged in one line of business, banking. Item 8 of this 10-K provides financial information for United Bancorp’s business.
Statistical Disclosures by Bank Holding Companies
I | Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential |
Refer to Management’s Discussion and Analysis “Average Balances, Net Interest Income and Yields Earned and Rates Paid” beginning on page 21 of our 2011 Annual Report, which is incorporated by reference.
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II Investment Portfolio
A | The following table sets forth the carrying amount of securities at December 31, 2011 and 2010. |
December 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Available for sale (at fair value) | ||||||||
U.S. Government agencies | $ | 64,168 | $ | 61,233 | ||||
State and political subdivisions | 17,817 | 25,295 | ||||||
Government sponsored entities mortgage-backed securities | — | 9,614 | ||||||
Equity securities | 13 | 13 | ||||||
$ | 81,998 | $ | 96,155 | |||||
Held to maturity (at cost) | ||||||||
State and political subdivisions | $ | 4,450 | $ | 6,331 |
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B | Contractual maturities of securities at year-end 2011 were as follows: |
Amortized Cost | Estimated Fair Value | Average Tax Equivalent Yield | ||||||||||
(dollars in thousands) | ||||||||||||
Available for Sale | ||||||||||||
US Government agencies | ||||||||||||
Under 1 Year | $ | — | $ | — | 0.00 | % | ||||||
1 - 5 Years | — | — | 0.00 | % | ||||||||
5 - 10 Years | 27,051 | 27,102 | 1.25 | % | ||||||||
Over 10 Years | 37,026 | 37,066 | 1.44 | % | ||||||||
Total | 64,077 | 64,168 | 1.36 | % | ||||||||
State and political subdivisions | ||||||||||||
Under 1 Year | 201 | 204 | 4.42 | % | ||||||||
1 - 5 Years | 2,893 | 2,975 | 5.11 | % | ||||||||
5 - 10 Years | 10,420 | 10,873 | 5.93 | % | ||||||||
Over 10 Years | 3,659 | 3,765 | 5.94 | % | ||||||||
Total | 17,173 | 17,817 | 5.77 | % | ||||||||
Equity securities | ||||||||||||
Equity securities | 4 | 13 | 0.00 | % | ||||||||
Total securities available for sale | $ | 81,254 | $ | 81,998 | 2.29 | % | ||||||
Held to Maturity | ||||||||||||
State and political subdivisions | ||||||||||||
Under 1 Year | $ | 904 | $ | 926 | 6.30 | % | ||||||
1 - 5 Years | 1,910 | 1,999 | 5.95 | % | ||||||||
5 - 10 Years | 1,636 | 1,672 | 6.07 | % | ||||||||
Over 10 Years | — | — | 0.00 | % | ||||||||
Total securities held to maturity | $ | 4,450 | $ | 4,597 | 2.49 | % |
C | Excluding holdings of U.S. Government agency obligations, there were no investments in securities of any one issuer exceeding 10% of the Company’s consolidated shareholders’ equity at December 31, 2011. |
III Loan Portfolio
A | Types of Loans |
The amounts of gross loans outstanding at December 31, 2011, 2010, 2009, 2008 and 2007 are shown in the following table according to types of loans:
12 |
December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Commercial loans | $ | 35,387 | $ | 32,153 | $ | 20,966 | $ | 19,493 | $ | 18,701 | ||||||||||
Commercial real estate loans | 148,052 | 136,369 | 129,757 | 120,648 | 115,744 | |||||||||||||||
Residential real estate loans | 61,765 | 63,378 | 62,128 | 59,807 | 58,524 | |||||||||||||||
Installment loans | 39,243 | 46,877 | 44,875 | 38,270 | 41,675 | |||||||||||||||
Total loans | $ | 284,447 | $ | 278,777 | $ | 257,726 | $ | 238,218 | $ | 234,644 |
Construction loans were not significant at any date indicated above.
B | Maturities and Sensitivities of Loans to Changes in Interest Rates |
The following is a schedule of commercial and commercial real estate loans at December 31, 2011 maturing within the various time frames indicated:
One Year or Less | One Through Five Years | After Five Years | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Commercial loans | $ | 8,922 | $ | 17,292 | $ | 9,173 | $ | 35,387 | ||||||||
Commercial real estate loans | 3,836 | 23,857 | 120,359 | 148,052 | ||||||||||||
Total | $ | 12,758 | $ | 41,149 | $ | 129,532 | $ | 183,439 |
The following is a schedule of fixed-rate and variable-rate commercial and commercial real estate loans at December 31, 2011 due to mature after one year:
Fixed Rate | Variable Rate | Total > One Year | ||||||||||
(In thousands) | ||||||||||||
Commercial loans | $ | 13,571 | $ | 21,816 | $ | 26,465 | ||||||
Commercial real estate loans | 9,646 | 138,406 | 144,216 | |||||||||
Total | $ | 23,217 | $ | 160,222 | $ | 170,681 |
Variable rate loans are those loans with floating or adjustable interest rates.
C | Risk Elements |
1. Nonaccrual, Past Due, Restructured and Impaired Loans
The following schedule summarizes nonaccrual loans, accruing loans which are contractually 90 days or more past due, and impaired loans at December 31, 2011, 2010, 2009, 2008 and 2007:
December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Nonaccrual basis | $ | 4,855 | $ | 4,526 | $ | 5,426 | $ | 5,398 | $ | 1,822 | ||||||||||
Accruing loans 90 days or greater past due | 85 | 25 | 971 | 1,573 | 2,585 | |||||||||||||||
Impaired loans | 8,891 | 7,274 | 4,728 | 7,523 | 3,399 | |||||||||||||||
Impaired loan with related allowance for unconfirmed losses | 6,554 | 5,493 | 3,265 | 5,571 | 2,347 | |||||||||||||||
Impaired loan without related allowance for unconfirmed losses | 2,337 | 1,781 | 1,463 | 1,952 | 1,052 |
13 |
Additional troubled debt restructuring information incorporated by reference on page 50 of the Notes to Consolidated Financial Statements set forth in our 2011 Annual Report, which is incorporated herein by reference.
The additional amount of interest income that would have been recorded on nonaccrual loans, had they been current, totaled approximately $515,000 and $577,000 for the years ended December 31, 2011 and 2010, respectively.
The Company’s policy is to generally not allow loans greater than 90 days past due to accrue interest unless the loan is both well secured and in the process of collection. Interest income is not reported when full loan repayment is doubtful, typically when the loan is impaired. Payments received on such loans are reported as principal reductions.
2. Potential Problem Loans
The Company had no potential problem loans as of December 31, 2011 which have not been disclosed in Table C 1., but where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans into one of the problem loan categories.
IV Summary of Loan Loss Experience
The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required based on past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. The Company accounts for impaired loans in accordance with ASC 310-10-35-16, “Accounting by Creditors for Impairment of a Loan.” ASC 310-10-35-16 requires that impaired loans be measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an alternative, at the loan’s observable market price or fair value of the collateral. A loan is defined under ASC 310-10-35-16 as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In applying the provisions of ASC 310-10-35-16, the Company considers its investment in one-to-four family residential loans and consumer installment loans to be homogenous and therefore excluded from separate identification for evaluation of impairment. With respect to the Company’s investment in nonresidential and multi-family residential real estate loans, and its evaluation of impairment thereof, such loans are generally collateral dependent and, as a result, are carried as a practical expedient at the fair value of the collateral.
Collateral dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under ASC 310-10-35-16 at that time.
For additional explanation of factors which influence management’s judgment in determining amounts charged to expense, refer to pages 13,14,15 and 16 of the “Management’s Discussion and Analysis” and Notes to Consolidated Financial Statements set forth in our 2011 Annual Report, which is incorporated herein by reference.
14 |
A | Analysis of the Allowance for Loan Losses |
The following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios for the years ended December 31, 2011, 2010, 2009, 2008and 2007:
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Loans | ||||||||||||||||||||
Gross loans outstanding | $ | 284,447 | $ | 278,777 | $ | 257,726 | $ | 238,218 | $ | 234,644 | ||||||||||
Average loans outstanding | $ | 278,719 | $ | 263,480 | $ | 243,599 | $ | 235,670 | $ | 228,673 | ||||||||||
Allowance for Loan Losses | ||||||||||||||||||||
Balance at beginning of year | $ | 2,740 | $ | 2,390 | $ | 2,770 | $ | 2,447 | $ | 2,345 | ||||||||||
Loan charge-offs: | ||||||||||||||||||||
Commercial | 616 | 256 | 125 | 92 | 206 | |||||||||||||||
Commercial real estate | 758 | 775 | 1,038 | 94 | 145 | |||||||||||||||
Residential real estate | 261 | 160 | 295 | 320 | 204 | |||||||||||||||
Installment | 489 | 579 | 472 | 560 | 583 | |||||||||||||||
Total loan charge-offs | 2,124 | 1,770 | 1,930 | 1,066 | 1,138 | |||||||||||||||
Loan recoveries | ||||||||||||||||||||
Commercial | 25 | 37 | 18 | 12 | 9 | |||||||||||||||
Commercial real estate | 54 | 3 | 8 | — | 7 | |||||||||||||||
Residential real estate | 28 | 3 | 56 | 23 | 45 | |||||||||||||||
Installment | 230 | 261 | 143 | 166 | 186 | |||||||||||||||
Total loan recoveries | 337 | 304 | 225 | 201 | 247 | |||||||||||||||
Net loan charge-offs | 1,787 | 1,466 | 1,705 | 865 | 891 | |||||||||||||||
Provision for loan losses | 1,968 | 1,816 | 1,325 | 1,188 | 993 | |||||||||||||||
Balance at end of year | $ | 2,921 | $ | 2,740 | $ | 2,390 | $ | 2,770 | $ | 2,447 | ||||||||||
Ratio of net charge-offs to average loans outstanding for the year | 0.64 | % | 0.55 | % | 0.70 | % | 0.37 | % | 0.39 | % |
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net loan charge-offs | ||||||||||||||||||||
Commercial | $ | 591 | $ | 219 | $ | 107 | $ | 80 | $ | 197 | ||||||||||
Commercial real estate | 704 | 772 | 1,030 | 94 | 138 | |||||||||||||||
Real estate | 233 | 157 | 239 | 297 | 159 | |||||||||||||||
Installment | 259 | 318 | 329 | 394 | 397 | |||||||||||||||
Total net loan charge-offs | $ | 1,787 | $ | 1,466 | $ | 1,705 | $ | 865 | $ | 891 | ||||||||||
Commercial Balance | $ | 35,387 | $ | 32,153 | $ | 20,966 | $ | 19,493 | $ | 18,701 | ||||||||||
Commercial Charge-off Percentage | 1.670 | % | 0.681 | % | 0.510 | % | 0.410 | % | 1.053 | % | ||||||||||
Commercial Real Estate | $ | 148,052 | $ | 136,369 | $ | 129,757 | $ | 120,648 | $ | 115,744 | ||||||||||
Commercial RE Charge-off Percentage | 0.476 | % | 0.566 | % | 0.794 | % | 0.078 | % | 0.119 | % | ||||||||||
Residential Real Estate | $ | 61,765 | $ | 63,378 | $ | 62,128 | $ | 59,807 | $ | 58,524 | ||||||||||
Residential Real Estate Charge-off Percentage | 0.377 | % | 0.248 | % | 0.385 | % | 0.497 | % | 0.272 | % | ||||||||||
Installment | $ | 39,243 | $ | 46,877 | $ | 44,875 | $ | 38,270 | $ | 41,675 | ||||||||||
Installment Charge-off Percentage | 0.657 | % | 0.678 | % | 0.733 | % | 1.030 | % | 0.953 | % |
15 |
B | Allocation of the Allowance for Loan Losses |
The following table allocates the allowance for loan losses at December 31, 2011, 2010, 2009, 2008 and 2007. Management adjusts the allowance periodically to account for changes in national trends and economic conditions in the Bank’s service areas. The allowance has been allocated according to the amount deemed to be reasonably necessary to provide for the probability of losses being incurred within the following categories of loans at the dates indicated:
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||||
Allowance
Amount | %
of Loans to Total Loans | Allowance
Amount | %
of Loans to Total Loans | Allowance
Amount | %
of Loans to Total Loans | Allowance
Amount | %
of Loans to Total Loans | Allowance Amount | %
of Loans to Total Loans | |||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||
Loan type | ||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 183 | 12.44 | % | $ | 561 | 11.53 | % | $ | 263 | 8.13 | % | $ | 331 | 8.18 | % | $ | 242 | 7.97 | % | ||||||||||||||||||||
Commercial real estate | 2,321 | 52.05 | % | 1,566 | 48.92 | % | 1626 | 50.35 | % | 2,046 | 50.65 | % | 1,497 | 49.33 | % | |||||||||||||||||||||||||
Residential real estate | 95 | 21.71 | % | 140 | 22.73 | % | 100 | 24.11 | % | 153 | 25.11 | % | 117 | 24.94 | % | |||||||||||||||||||||||||
Installment | 235 | 13.80 | % | 229 | 16.82 | % | 251 | 17.41 | % | 176 | 16.07 | % | 243 | 17.76 | % | |||||||||||||||||||||||||
General | 87 | N/A | 244 | N/A | 150 | N/A | 64 | N/A | 348 | N/A | ||||||||||||||||||||||||||||||
Total | $ | 2,921 | 100.00 | % | $ | 2,740 | 100.00 | % | $ | 2,390 | 100.00 | % | $ | 2,770 | 100.00 | % | $ | 2,447 | 100.00 | % |
V | Deposits |
A | Schedule of Average Deposit Amounts and Rates |
Refer to Management’s Discussion and Analysis and Results of Operations “Average Balances, Net Interest Income and Yields Earned and Rates Paid” set forth in our 2011 Annual Report and incorporated herein by reference. |
B | Maturity analysis of time deposits greater than $100,000. |
The time to remaining maturity for time deposits in excess of $100,000 are:
2011 | ||||
(In thousands) | ||||
Three months or less | $ | 6,014 | ||
Over three through six months | 3,501 | |||
Over six through twelve months | 9,521 | |||
Over twelve months | 20,462 | |||
Total | $ | 39,498 |
VI | Return on Equity and Assets |
Our dividend payout ratio and equity to assets ratio were as follows:
December 31, | ||||||||
2011 | 2010 | |||||||
Dividend Payout Ratio | 88.89 | % | 107.69 | % | ||||
Equity to Assets | 8.71 | % | 8.40 | % |
For other ratios refer to the inside front cover of our 2011 Annual Report to Shareholders, incorporated herein by reference.
16 |
VII Short-Term Borrowings
Information concerning securities sold under agreements to repurchase is summarized as follows:
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Balance at December 31, | $ | 9,968 | $ | 11,321 | ||||
Weighted average interest rate at December 31 | 0.18 | % | 0.21 | % | ||||
Average daily balance during the year | $ | 13,020 | $ | 12,734 | ||||
Average interest rate during the year | 0.18 | % | 0.21 | % | ||||
Maximum month-end balance during the year | $ | 15,704 | $ | 14,931 |
Securities sold under agreements to repurchase are financing arrangements whereby the Company sells securities and agrees to repurchase the identical securities at the maturities of the agreements at specified prices.
No other individual component of borrowed funds comprised more than 30% of shareholders’ equity and accordingly is not disclosed in detail.
Supplemental Item - Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following information on the executive officers of the Company is included as an additional item in Part I:
Executive Officers Positions held with Company; | ||||
Name | Age | Business Experience | ||
James W. Everson | 73 | Chairman, President and Chief Executive Officer | ||
Scott Everson | 44 | Executive Vice President and Chief Operating Officer | ||
Randall M. Greenwood | 48 | Senior Vice President, Chief Financial Officer, Secretary /Treasurer | ||
Matthew F. Branstetter | 44 | Vice President – Chief Lending Officer | ||
Elmer K. Leeper | 45 | Vice President – Chief Retail Banking Offier | ||
Michael A. Lloyd | 43 | Vice President – Chief Information Officer | ||
Each individual has held the position noted during the past five years, except for the following: | ||||
Matthew F. Branstetter | 44 | Vice President Chief Lending Officer |
17 |
Each of these Executive Officers are serving at-will in their current positions. The Officers have held the positions for the following time periods: James W. Everson, 29 years, Scott A. Everson , 10 years, Michael Lloyd, 9 years, Randall M. Greenwood, 14 years and Elmer K. Leeper, 6 years.
Item 1A. Risk Factors
Smaller Reporting Companies are not required to provide this disclosure.
Item 1B. Unresolved Staff Comments
None.
Item 2 Properties
The Company owns and operates its Main Office and stand alone operations center in Martins Ferry, Ohio and the following offices:
Location | Owned or Leased | Location | Owned or Leased | |||
Bridgeport, Ohio | Owned | Sherrodsville, Ohio | Owned | |||
Colerain, Ohio | Owned | Glouster, Ohio | Owned | |||
Jewett, Ohio | Owned | Glouster, Ohio | Owned | |||
St. Clairsville, Ohio | Leased | Amesville, Ohio | Owned | |||
Dover, Ohio | Owned | Nelsonville, Ohio | Owned | |||
Dellroy, Ohio | Owned | Lancaster, Ohio | Owned | |||
New Philadelphia, Ohio | Owned | Lancaster, Ohio | Owned | |||
Strasburg, Ohio | Owned | Lancaster, Ohio | Owned | |||
Tiltonsville, Ohio | Owned | |||||
Dillonvale, Ohio | Leased | |||||
St. Clairsville, Ohio | Owned |
Management believes the properties described above to be in good operating condition for the purpose for which they are used. The properties are unencumbered by any mortgage or security interest and are, in management’s opinion, adequately insured.
Item 3 Legal Proceedings
There are no material legal proceedings, other than ordinary routine litigation incidental to its business, to which the Company or its subsidiary is a party or to which any of its property is subject.
Item 4 Mine Safety Disclosures
Not applicable.
PART II
Item 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Refer to Page 7, “Shareholder Information” of the 2011 Annual Report To Shareholders and refer to Page 37, Note 1 of the Notes to the Consolidated Financial Statements of the Company in the 2011 Annual Report To Shareholders for common stock trading ranges, cash dividends declared and information relating to dividend restrictions, which are incorporated herein by reference.
18 |
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 #l 10/1/2011 to 10/31/2011 |
- | - | - | - | |||||
Month #2 11/1/2011 to 11/30/2011 |
- | - | - | - | |||||
Month #3 12/1/2011 to 12/31/2011 |
- | - | - | - | |||||
Total | - | - | - | - |
Item 6 Selected Consolidated Financial Data
Refer to inside front cover, “Decade of Progress” of the 2011 Annual Report To Shareholders, which is incorporated herein by reference.
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Refer to Pages 12-17 and 20-24, “Management’s Discussion and Analysis” of the 2011 Annual Report To Shareholders.
Critical Accounting Policy
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry. The application of these principles requires management to make certain estimates, assumptions and judgements that affect the amounts reported in the financial statements and footnotes. These estimates, assumptions and judgements 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 judgements.
The procedures for assessing the adequacy of the allowance for loan losses reflect our evaluations of credit risk after careful consideration of all information available to management. In developing this assessment, management must rely on estimates and exercise judgement regarding matters where the ultimate outcome is unknown such as economic factors, development 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 to determine whether the amount is considered adequate to absorb probable losses. This evaluation includes specific loss estimates on certain individually reviewed loans, statistical losses, 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 judgement is a review of the Bank’s trends in delinquencies and loan losses, and economic factors.
19 |
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on management’s current judgement about the credit quality of the loan portfolio. While the Company strives to reflect all known risk factors in its evaluation, judgement errors may occur.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Refer to Page 17-19 “Asset/Liability Management and Sensitivity to Market Risks” of the 2011 Annual Report to Shareholders, which is incorporated herein by reference.
Item 8 Financial Statements and Supplementary Data
Refer to the 2011 Annual Report To Shareholders, which is incorporated herein by reference.
Item 9 Changes In and Disagreements With Accountants
Not applicable.
Item 9A Controls and Procedures
The Company, under the supervision, and with the participation, of its management and its outsourced internal audit firm Greenstock Consulting LLC, 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 as of December 31, 2011, 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 December 31, 2011, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Under the supervision and with the participation of management, including our principal executive and principal financial officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, as required by paragraph (c) of § 240.13a-15 of this chapter. Based on the evaluation under Internal Control – Integrated Framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2011. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
There was no change in the Company's internal control over financial reporting that occurred during the Company's fiscal quarter ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B Other Information
None. |
20 |
PART III
Item 10 Directors and Executive Officers of the Registrant
Information concerning executive officers of the Company is set forth in Part I, “Supplemental Item – Executive Officers of Registrant.” Other information responding to this Item 10 is included in the Registrant’s Proxy Statement for the 2011 Annual Meeting of Shareholders and is incorporated by reference under the captions “Proposal 1 – Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance”. Information concerning the designation of the Audit Committee and the Audit Committee Financial Expert is included in the Registrant’s Proxy Statement for the 2011 Annual Meeting of Shareholders under the caption “Committees of the Board – Audit Committee”, and is incorporated herein by reference.
The Company's Board of Directors has adopted a Code of Ethics that applies to its Principal Executive, Principal Financial, and Principal Accounting Officers. A copy of the Company's Code of Ethics is posted and can be viewed on the Company's internet web site at http://www.unitedbancorp.com. In the event the Company amends or waives any provision of its Code of Ethics which applies to its Principal Executive, Principal Financial, or Principal Accounting Officers, and which relates to any element of the code of ethics definition set forth in Item 406(b) of Regulation S-K, the Company shall post a description of the nature of such amendment or waiver on its internet web site. With respect to a waiver of any relevant provision of the code of ethics, the Company shall also post the name of the person to whom the waiver was granted and the date of the waiver grant.
Item 11 Executive Compensation
The information required by this item is incorporated by reference from the section of the Registrant’s Proxy Statement for the 2011 Annual Meeting of Shareholders captioned “Executive Compensation and Other Information”.
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stock Holder Matters
The information contained in the Registrant’s Proxy Statement for the 2011 Annual Meeting of Shareholders under the caption “Ownership of Voting Shares” is incorporated herein by reference.
The following table is a disclosure of securities authorized for issuance under equity compensation plans:
Equity Compensation Plan Information
Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||||||
Equity compensation plans approved by security holders | 53,714 | $ | 10.34 | 330,000 | ||||||||
Equity compensation plans not approved by security holders | ||||||||||||
Total | 53,714 | $ | 10.34 | 330,000 |
Item 13 Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the sections in the Registrant’s Proxy Statement for the 2011 Annual Meeting of Shareholders captioned “Director Independence and Related Party Transactions.”
Item 14 Principal Accountant Fees and Services
The information required by this item is incorporated by reference from the section under the caption “Principal Accounting Firm Fees” of the Registrant’s Proxy Statement for the 2011 Annual Meeting of Shareholders.
21 |
PART IV
Item 15 Exhibits and Financial Statement/Schedules
Financial Statements
(a) | The following Consolidated Financial Statements and related Notes to Consolidated Financial Statements, together with the report of the Independent Registered Public Accounting Firm, appear on pages 25 through 82 of the United Bancorp, Inc. 2011 Annual Report and are incorporated herein by reference. |
Consolidated Balance Sheets December 31, 2011 and 2010
Consolidated Statements of Income Years Ended December 31, 2011 and 2010
Consolidated Statements of Stockholders’ Equity Years Ended December 31, 2011 and 2010
Consolidated Statements of Cash Flows Years Ended December 31, 2011 and 2010
Notes to Consolidated Financial Statements December 31, 2011 and 2010
Report of Independent Registered Public Accounting Firm
EXHIBITS
Exhibit Number | Exhibit Description | |
2 | Purchase and Assumption Agreement dated September 18, 2008 (7) | |
3.1 | Amended Articles of Incorporation (1) | |
3.2 | Amended Code of Regulations (2) | |
4.0 | Instruments Defining the Rights of Security Holders (See Exhibits 3.1 and 3.2) | |
10.1 | James W. Everson Change in Control Agreement (3) | |
10.2 | Randall M. Greenwood Change in Control agreement (3) | |
10.3 | Scott A. Everson Change in Control Agreement (3) | |
10.4 | Elmer K. Leeper Change in Control Agreement (3) | |
10.5 | Matthew F. Branstetter Change in Control Agreement (3) | |
10.6 | Michael A. Lloyd Change in Control Agreement (3) | |
10.7 | United Bancorp, Inc. Stock Option Plan (4) | |
10.8 | United Bancorp, Inc. and Subsidiaries Director Supplemental Life Insurance Plan, covering Messrs. Hoopingarner, Jones, McGehee, Riesbeck and Thomas. (5) | |
10.9 | United Bancorp, Inc. and Subsidiaries Senior Executive Supplemental Life Insurance Plan, covering James W. Everson, Scott A. Everson, Randall M. Greenwood, Michael A. Lloyd. (5) | |
10.10 | United Bancorp, Inc. and United Bancorp, Inc. Affiliate Banks Directors Deferred Compensation Plan. (5) | |
10.11 | Amended and Restated Trust Agreement among United Bancorp, Inc. as Depository, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, and Administrative Trustees, dated as of November 17, 2005. (6) |
22 |
10.12 | Junior Subordinated Indenture between United Bancorp, Inc. and Wilmington Trust Company, as Trustee, dated as of November 17, 2005. (6) | |
10.13 | Guaranty Agreement between United Bancorp, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee, dated as of November 17, 2005. (6) | |
10.14 | United Bancorp, Inc. 2008 Stock Incentive Plan (8) | |
13 | 2011 Annual Report | |
21 | Subsidiaries of the Registrant (5) | |
23.1 | Consent of BKD, LLP | |
31.1 | Rule 13a-14(a) Certification – CEO | |
31.2 | Rule 13a-14(a) Certification – CFO | |
32.1 | Section 1350 Certification – CEO | |
32.2 | Section 1350 Certification – CFO |
(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 Appendix C to the registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 14, 2001. |
(3) | Incorporated by reference to the registrant’s 10-K filed with the Securities and Exchange Commission on March 27, 2003. |
(4) | Incorporated by reference to Exhibit A to the registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 11, 1996. |
(5) | Incorporated by reference to the registrant’s 10-K filed with the Securities and Exchange Commission on March 29, 2004. |
(6) | Incorporated by reference to the registrant’s 10-K filed with the Securities and Exchanges Commission on March 30, 2006. |
(7) | Incorporated by reference to the registrant’s 8-K filed with the Securities and Exchange Commission on September 24, 2008. |
(8) | Incorporated by reference to the registrant’s 8-K filed with the Securities and Exchange Commission on April 22, 2008. |
23 |
United Bancorp Inc.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant) United Bancorp, Inc. | |||
By: | /s/James W. Everson | March 23, 2012 | |
James W. Everson, Chairman, President & CEO |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: | /s/James W. Everson | March 23, 2012 | |
James W. Everson, Chairman, President & CEO | |||
By: | /s/Scott A. Everson | March 23, 2012 | |
Scott A. Everson, Executive Vice President & Chief Operating Officer | |||
By: | /s/Randall M. Greenwood | March 23, 2012 | |
Randall M. Greenwood, Senior Vice President & CFO | |||
By: | /s/Terry A. McGhee | March 23, 2012 | |
Terry A. McGhee, Director | |||
By: | /s/John M. Hoopingarner | March 23, 2012 | |
John M. Hoopingarner, Director | |||
By: | /s/Richard L. Riesbeck | March 23, 2012 | |
Richard L. Riesbeck, Director | |||
By: | /s/Samual J. Jones | March 23, 2012 | |
Samual J. Jones , Director | |||
By: | /s/Matthew C. Thomas | March 23, 2012 | |
Matthew C. Thomas, Director |
24 |
United Bancorp Inc.
Exhibit Index
Exhibit Number | Exhibit Description | |
2 | Purchase and Assumption Agreement dated September 18, 2008 (7) | |
3.1 | Amended Articles of Incorporation (1) | |
3.2 | Amended Code of Regulations (2) | |
4.0 | Instruments Defining the Rights of Security Holders (See Exhibits 3.1 and 3.2) | |
10.1 | James W. Everson Change in Control Agreement (3) | |
10.2 | Randall M. Greenwood Change in Control agreement (3) | |
10.3 | Scott A. Everson Change in Control Agreement (3) | |
10.4 | Elmer K. Leeper Change in Control Agreement (3) | |
10.5 | Matthew F. Branstetter Change in Control Agreement (3) | |
10.5 | Not used | |
10.6 | Michael A. Lloyd Change in Control Agreement (3) | |
10.7 | United Bancorp, Inc. Stock Option Plan (4) | |
10.8 | United Bancorp, Inc. and Subsidiaries Director Supplemental Life Insurance Plan, covering Messrs. Hoopingarner, Jones, McGehee, Riesbeck and Thomas. (5) | |
10.9 | United Bancorp, Inc. and Subsidiaries Senior Executive Supplemental Life Insurance Plan, covering James W. Everson, Scott A. Everson, Randall M. Greenwood, Michael A. Lloyd . (5) | |
10.10 | United Bancorp, Inc. and United Bancorp, Inc. Affiliate Banks Directors Deferred Compensation Plan. (5) | |
10.11 | Amended and Restated Trust Agreement among United Bancorp, Inc. as Depository, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, and Administrative Trustees, dated as of November 17, 2005. (6) | |
10.12 | Junior Subordinated Indenture between United Bancorp, Inc. and Wilmington Trust Company, as Trustee, dated as of November 17, 2005. (6) | |
10.13 | Guaranty Agreement between United Bancorp, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee, dated as of November 17, 2005. (6) | |
10.14 | United Bancorp, Inc. 2008 Stock Incentive Plan (8) | |
13 | 2011 Annual Report | |
21 | Subsidiaries of the Registrant (5) | |
23.1 | Consent of BKD, LLP | |
31.1 | Rule 13a-14(a) Certification – CEO | |
31.2 | Rule 13a-14(a) Certification – CFO | |
32.1 | Section 1350 Certification – CEO | |
32.2 | Section 1350 Certification – CFO |
25 |
(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 Appendix C to the registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 14, 2001. |
(3) | Incorporated by reference to the registrant’s 10-K filed with the Securities and Exchange Commission on March 27, 2003. |
(4) | Incorporated by reference to Exhibit A to the registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 11, 1996. |
(5) | Incorporated by reference to the registrant’s 10-K filed with the Securities and Exchange Commission on March 29, 2004. |
(6) | Incorporated by reference to the registrant’s 10-K filed with the Securities and Exchanges Commission on March 30, 2006. |
(7) | Incorporated by reference to the registrant’s 8-K filed with the Securities and Exchange Commission on September 24, 2008. |
(8) | Incorporated by reference to the registrant’s 8-K filed with the Securities and Exchange Commission on April 22, 2008. |
26 |
Focus On…50 Years in Banking for Ohio’s Jim Everson
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Former Ohio Banker’s League Chairman James W. Everson recently celebrated his 50th anniversary in banking. Everson, chairman, president and chief executive officer of United Bancorp, Inc., Martins Ferry, began his banking career in 1959 at The Citizens Savings Bank of Martins Ferry as a student intern.
Upon graduation from The Ohio State University in 1961 with a Bachelor of Science Degree in Business Administration majoring in Commercial Banking and the completion of his active service with The Ohio Air National Guard, on Nov. 1, 1961 he returned to the bank which had assets of less than $10 million and one location at the corner of Fourth and Walnut Street in Martins Ferry. As a management trainee, he began as a bank teller and advanced through each department of the bank, being appointed its fourth president and CEO in January of 1973. Today he continues to serve as the bank’s chairman. Scott A. Everson, Jim’s son, was appointed president and CEO of The Citizens Savings Bank on Nov. 1, 2004.
Under Everson’s management – and that of his son Scott – The Citizens Savings Bank and its holding company United Bancorp, grew from a $17 million bank in 1973 to a $416 million bank with operations in several counties. Through its single bank charter now with its twenty banking offices and an operations center, The Citizens Saving Bank through its Community Bank Division serves Athens, Fairfield and Hocking counties and through its Citizens Bank Division serves Belmont, Carroll, Harrison, Jefferson and Tuscarawas counties. United Bancorp, Inc. is a part of the Russell Microcap Index and trades on The NASDAQ Capital Market tier of the NASDAQ Stock Market.
OBL President & CEO Mike Van Buskirk commented, “Jim Everson was one of Ohio’s very first community banking leaders to move to online banking. He’s long been a visionary understanding the implications of emerging technology and putting it to work for his customers.”
In his community, Everson is a life member of The First Presbyterian Church, Martins Ferry where he is an elder having served several terms on its session and the board of deacons. He was recognized in 1981 as “Citizens of the Year” by the Martins Ferry Chamber of Commerce, received a 30 year service award as director of the Belmont County Auto Club, is a 45 year member of the Salvation Army Board, and a past president of the former Martins Ferry Kiwanis Club. Everson was recognized by the Belmont County Legal Bar Association with their prestigious Liberty Bell Award for his community service. He has served as an instructor with the American Institute of Banking, a member of The State of Ohio Banking Commission and served on The Small Bank Council of The Cleveland Federal Reserve Bank. Jim and Marlene, his wife of 48 years, reside in Naples, Florida and St. Clairsville, Ohio and are the parents of four children with ten grandchildren.
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The board of directors of The Citizens Savings Bank recently recognized Jim Everson for his 50 years of service to the Bank. To mark the occasion, Everson was presented with a plaque commemoration his 50th anniversary which will be displayed in the bank lobby.
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Decade of Progress
Unaudited
2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | ||||||||||||||||||||||||||||||||||
Interest and dividend income | $ | 24,595,769 | $ | 22,095,682 | $ | 20,720,464 | $ | 20,506,914 | $ | 22,181,071 | $ | 25,279,212 | $ | 26,603,043 | $ | 25,715,309 | $ | 23,354,885 | $ | 21,667,356 | $ | 20,211,170 | ||||||||||||||||||||||
Interest expense | 12,348,548 | 9,328,867 | 7,837,463 | 7,538,572 | 9,146,249 | 12,837,256 | 14,517,591 | 10,251,384 | 8,064,768 | 6,480,008 | 4,707,077 | |||||||||||||||||||||||||||||||||
Net interest income | 12,247,221 | 12,766,815 | 12,883,001 | 12,968,342 | 13,034,822 | 12,441,956 | 12,085,452 | 15,463,925 | 15,290,117 | 15,187,348 | 15,504,093 | |||||||||||||||||||||||||||||||||
Provision for loan losses | 780,000 | 630,000 | 540,000 | 618,000 | 412,000 | 1,384,261 | 993,505 | 1,188,270 | 1,325,052 | 1,816,012 | 1,968,021 | |||||||||||||||||||||||||||||||||
Net interest income after provision for loan losses | 11,467,221 | 12,136,815 | 12,343,001 | 12,350,342 | 12,622,822 | 11,057,695 | 11,091,947 | 14,275,655 | 13,965,065 | 13,371,336 | 13,536,072 | |||||||||||||||||||||||||||||||||
Noninterest income, including security gains/(losses) | 1,606,046 | 2,059,173 | 2,611,566 | 2,199,020 | 2,341,826 | 2,297,373 | 3,079,567 | 3,066,769 | 3,295,030 | 3,317,126 | 3,512,340 | |||||||||||||||||||||||||||||||||
Noninterest expense | 9,382,984 | 9,989,172 | 10,415,947 | 10,452,666 | 10,763,473 | 11,046,170 | 11,252,758 | 12,627,590 | 13,838,651 | 13,921,806 | 13,103,041 | |||||||||||||||||||||||||||||||||
Income before income taxes | 3,690,283 | 4,206,816 | 4,538,620 | 4,096,696 | 4,201,175 | 2,308,898 | 2,918,755 | 4,714,834 | 3,421,444 | 2,766,656 | 3,945,371 | |||||||||||||||||||||||||||||||||
Income tax expense | 934,696 | 986,653 | 899,229 | 863,799 | 908,647 | 240,891 | 333,926 | 955,700 | 516,524 | 219,289 | 854,447 | |||||||||||||||||||||||||||||||||
Net income | $ | 2,755,587 | $ | 3,220,163 | $ | 3,639,391 | $ | 3,232,897 | $ | 3,292,528 | $ | 2,068,007 | $ | 2,584,829 | $ | 3,759,134 | $ | 2,904,920 | $ | 2,547,367 | $ | 3,090,924 | ||||||||||||||||||||||
Total assets | $ | 341,317,195 | $ | 361,711,069 | $ | 385,522,969 | $ | 397,521,584 | $ | 411,932,779 | $ | 421,653,341 | $ | 451,370,187 | $ | 441,804,491 | $ | 445,970,296 | $ | 423,434,966 | $ | 415,566,563 | ||||||||||||||||||||||
Deposits | 283,375,923 | 300,201,533 | 304,525,997 | 300,629,543 | 306,914,758 | 330,005,480 | 330,488,711 | 347,044,549 | 344,542,900 | 325,445,596 | 328,540,953 | |||||||||||||||||||||||||||||||||
Shareholders’ equity | 30,474,195 | 32,154,862 | 32,514,459 | 32,824,111 | 32,479,697 | 32,580,485 | 33,885,779 | 33,904,759 | 35,211,133 | 35,580,582 | 36,181,269 | |||||||||||||||||||||||||||||||||
Loans receivable, net | 180,460,538 | 184,916,798 | 195,765,090 | 212,451,448 | 229,106,682 | 229,171,793 | 232,196,753 | 235,448,307 | 255,335,658 | 276,036,674 | 281,526,111 | |||||||||||||||||||||||||||||||||
Allowance for loan losses | 2,879,065 | 2,971,116 | 2,843,484 | 2,995,422 | 2,904,447 | 2,345,419 | 2,447,254 | 2,770,360 | 2,390,015 | 2,739,736 | 2,921,067 | |||||||||||||||||||||||||||||||||
Net charge-offs | 691,068 | 537,949 | 667,632 | 466,062 | 502,833 | 1,936,046 | 891,648 | 865,000 | 1,705,000 | 1,466,000 | 1,785,689 | |||||||||||||||||||||||||||||||||
Full time employees (average equivalents) | 130 | 130 | 133 | 135 | 132 | 132 | 123 | 142 | 136 | 146 | 133 | |||||||||||||||||||||||||||||||||
Banking locations | Seventeen | Seventeen | Seventeen | Seventeen | Seventeen | Seventeen | Seventeen | Twenty | Twenty | Twenty | Twenty | |||||||||||||||||||||||||||||||||
Earnings per common share - Basic | $ | 0.56 | $ | 0.67 | $ | 0.76 | $ | 0.69 | $ | 0.71 | $ | 0.45 | $ | 0.57 | $ | 0.82 | $ | 0.62 | $ | 0.52 | $ | 0.63 | ||||||||||||||||||||||
Earnings per common share - Diluted | 0.56 | 0.67 | 0.76 | 0.69 | 0.71 | 0.45 | 0.57 | 0.82 | 0.62 | 0.52 | 0.62 | |||||||||||||||||||||||||||||||||
Dividends per share | 0.32 | 0.33 | 0.35 | 0.39 | 0.43 | 0.48 | 0.52 | 0.54 | 0.56 | 0.56 | 0.56 | |||||||||||||||||||||||||||||||||
Book value per share | 6.23 | 6.72 | 7.67 | 7.09 | 7.00 | 7.73 | 7.41 | 7.35 | 7.53 | 7.52 | 7.57 | |||||||||||||||||||||||||||||||||
Market value range per share | 5.95-8.93 | 7.82-9.54 | 8.96-13.60 | 9.43-13.56 | 9.10-12.69 | 9.36-11.36 | 9.78-11.39 | 7.41-10.85 | 7.00-9.49 | 7.70-9.90 | 7.56-9.03 | |||||||||||||||||||||||||||||||||
Cash dividends paid | $ | 1,590,220 | $ | 1,647,670 | $ | 1,717,838 | $ | 1,878,788 | $ | 2,114,723 | $ | 2,415,741 | $ | 2,435,317 | $ | 2,707,438 | $ | 2,871,801 | $ | 2,959,658 | $ | 2,988,155 | ||||||||||||||||||||||
Return on average assets (ROA) | 0.82 | % | 0.94 | % | 0.97 | % | 0.83 | % | 0.82 | % | 0.50 | % | 0.60 | % | 0.86 | % | 0.63 | % | 0.57 | % | 0.73 | % | ||||||||||||||||||||||
Return on average equity (ROE) | 9.13 | % | 10.34 | % | 11.40 | % | 9.91 | % | 10.01 | % | 6.49 | % | 8.12 | % | 11.33 | % | 7.56 | % | 7.05 | % | 8.53 | % |
our
mission
United Bancorp, Inc. is a nationally traded Bank holding company whose mission is to continue earning the respect....
— | Of its shareholders, through continued growth in shareholder value by sustaining profitability and acquiring well managed and capitalized businesses in the financial services industry; |
— | Of its customers, through reaching out with the technology they want and offering the financial products and services they need; |
— | Of its communities, through support of civic activities that make our communities better places to live and work; |
— | Of its team members, through training development and career growth opportunities in a comfortable environment with modern equipment; |
— | Of its affiliates, through providing data processing, item processing, accounting, human resource and management support; |
Although it is recognized there is more competition from non-bank businesses for market share, the general mission for United Bancorp, Inc. is to remain independent. We will accomplish this through an aggressive acquisition program, the management of technological change, and the placement of new office construction when deemed economically feasible.
A Letter from the Chairman, President and CEO
To the shareholders of United Bancorp, Inc….
It is amazing how quickly time flies when one is having fun. It hardly seems possible that fifty years have passed since I began my banking career at The Citizens Savings Bank. Needless to say, our board’s recognition of this momentous event in my life at our November meeting was a complete and pleasant surprise that allowed for many emotions for me. It is not often that I have been brought to tears, but that evening brought tears of joy, just knowing that someone remembered; tears of sadness, knowing that all good things must come to an end; and tears of happiness, knowing that we are in good hands and our future is secure. Fifty years of one’s life is a long time and I am extremely grateful that I was given an opportunity that allowed my tenure in banking to be with the same employer for my entire career. As they say, all good things must come to an end and, God willing, my wonderful career with my one, and only, employer will be concluding in April 2014.
Our Management Team is excited to present within this Annual Report our positive financial results for 2011. We are extremely pleased and proud of the fact that we met our mid-year announced earnings projection. Throughout this past year, our focus has been to maintain a balance in managing our asset size and our asset quality. While doing this dual responsibility, we were able to prudently provide a sufficient provision to our reserve for loan losses, retain earnings sufficient to maintain our regulatory “Well Capitalized” Status and maintain our liberal dividend payment policy which greatly rewards us all. As government imposed regulations from the Dodd-Frank Act are more fully implemented, we shall continue to experience regulatory requirements that may result in a decrease in customer service fees. In anticipation of this ongoing challenge, a variety of cost savings initiatives were implemented during our second and third quarters which should provide future benefit. As we move forward, we anticipate that these cost savings initiatives will continue to have a positive impact on future earnings and will help offset some of the potential decline in fee income.
We have effectively maintained our net interest margin, the primary driver of our earnings, during these very challenging economic times. For the third straight year, monetary rates have effectively been zero and long term rates, once again, have begun to swing downward. We have expanded our margin by attracting lower cost deposit balances to our offices as we begin to see an inflow of funds from energy related lease payment activities in our market areas, while reducing higher cost funding such as Federal Home Loan Bank advances and more costly term deposits. We continue to focus intently on managing our margin by restructuring our balance sheet by shifting out of lower yielding security investments into higher yielding loan relationships. This strategic focus enabled us to increase our average outstanding loans by over $10 million in 2011. With the Federal Reserve’s present control on interest rates, it would be easy for us to over-pay on deposits and add growth to our assets at the risk of capital adequacy and future earnings. Quite simply, this goes against our organizational philosophy and is contrary to our long term vision. Our action plan to meet the present challenge of lowering interest rates and a compressing margin is to continue our growth of quality loans within the markets that we serve and to which we are strongly committed. To make this plan a reality, we have recently added new key Team Members in each of our markets to further promote all of our lending services, both commercial and consumer. This commitment to building a quality and high performing team will help to ensure that we continue to execute our plan of building a higher level of quality loans!
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A Letter from the Chairman, President and CEO - Continued
We began 2011 with our new era in technology as a result of the complete upgrading of our core operating systems, allowing for the timely implementation of many cost saving initiatives and process improvements. These initiatives and improvements included the outsourcing of customer statement production and the implementation of transactional item image Capture, Correct and Balance at each of our banking centers. The latter of these undertakings realizes ongoing cost savings by eliminating the overhead of equipment maintenance costs and materials handling, a fleet of courier vehicles and the streamlining of personnel who worked within these areas of our operation. We were also able to renegotiate vendor contracts improving our revenue stream. Other efficiencies were gained by relocating our Tiltonsville Banking Center to a new energy efficient and staff/customer friendly facility. On a positive side-note, this relocation enabled us to work closely with officials from the Village of Tiltonsville to relocate their administrative offices into our former location which was a well received event within that community! Another cost saving initiative included the installation of the latest in Drive-Thru Closed Circuit Video Communication Equipment to effectively consolidate our Martins Ferry Auto Teller into our Main Office Banking Center. This efficiency allowed for expanded customer service hours, better flow through customer service and a reduction in personnel cost.
Our greatest asset is, and always will be, our human resource…. our fellow Team Members. Focusing on the health and well-being of this valued asset, our Workplace Wellness Program continued this past year with health screenings and the implementation of various behavior changing programs for weight loss and exercise. Our effort to increase awareness in health and wellness is playing a major role in helping to reduce our overall health care costs. Further investing in our human resource, we are now working to open a Training Center which will allow for a more dedicated approach to staff training and development. Our comprehensive training program will include corporate awareness, job and product specific training and career development. This renewed focus on training and staff development will improve the way we welcome and train new employees and further develop our current Team Members by continually improving their knowledge, skills and overall banking competence. Our goal will be to increase employee productivity, enhance customer service skills and promote retention; thus, effectively improving employee and customer satisfaction while reducing overall recruiting costs.
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We were excited to announce last August our new United Bancorp interactive website powered by SNL Financial. Our new website is a one-stop shop for anyone who already owns UBCP stock or for those who may be shopping for a good investment opportunity. Some of the drop-down options available on our new site include a complete corporate profile, current stock information with historical data, calculators, annual meeting documents, balance sheet and income statements, peer analysis, as well as extensive dividend data, market share information, plus press releases and contact information. If you have not done so, please take a few moments to check us out at www. UnitedBancorp.com. We are happy to report that in addition to our new corporate website, we shall be introducing in the first quarter of 2012 our new banking websites for our two divisions of The Citizens Savings Bank: www.TheCitizensBank.com and www.TheCommunityBank.com. These new websites, along with some related and enhanced services, will give us a much stronger presence in the virtual, online banking world!
We are also pleased to report that in the June 2011 issue of US Banker Magazine, United Bancorp, Inc. continued its ranking in our Country’s top 200 Community Banks and Thrifts as of December 31, 2010. Based upon our financial performance, we ranked 118 which is an improvement over last year’s ranking of 146. Needless-to-say, we are all extremely proud to continue to be recognized as one of the better run and performing financial organizations in our country!
As I begin to wind down my career in banking, I am pleased with our many accomplishments. Even though my time is somewhat limited with this great organization, I firmly believe there is still some time and opportunity for more! We have grown from one office and one community to now an operations center, twenty banking locations and four market areas. This was the result of the hard work and dedication of many individuals working together in harmony. Of course, there were some speed bumps along the way! But, as a Team made up of our Employees, Officers and Directors that had a common vision, we always found a way to bring positive change and direction to our organization. We are proud of our board policies and management style and the fact that our company is trading at 110% of its book value versus our peers who, on average, are trading at less than 70% of their book values during these recent difficult economic times. But, what truly excites me at this moment is to see the depth and skill level of our current group of Employees, Officers and Directors and the knowledge that our investment in United Bancorp, Inc., both yours and mine, is in good hands and our future is secure!
/s/ James W. Everson James W. Everson Chairman, President and Chief Executive Officer
ceo@unitedbancorp.com
February 16, 2012 |
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Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements, due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, changes in the financial and securities markets, including changes with respect to the market value of our financial assets, and the availability of and costs associated with sources of liquidity. The Company undertakes no obligation to update or clarify forward-looking statements, whether as a result of new information, future events or otherwise.
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Directors
1 = United Bancorp, Inc. 2 = The Citizens Savings Bank
4 |
Directors and Officers
DIRECTORS OF UNITED BANCORP, INC.
James W. Everson1 | Chairman, President & Chief Executive Officer, United Bancorp, Inc. | |
Chairman, The Citizens Savings Bank, Martins Ferry, Ohio | ||
Scott A. Everson | Executive Vice President & Chief Operating Officer, United Bancorp, Inc. | |
President & Chief Executive Officer, The Citizens Savings Bank, Martins Ferry, Ohio | ||
John M. Hoopingarner1,3,4 | Executive Director, Muskingum Watershed Conservancy District, New Philadelphia, Ohio | |
Samuel J. Jones2,4 | Business Owner, Glouster, Ohio | |
Terry A. McGhee1,3 | President & Chief Executive Officer, Westerman Inc., Bremen, Ohio | |
Richard L. Riesbeck1,2,4,ö | President, Riesbeck Food Markets, Inc., St. Clairsville, Ohio | |
Matthew C. Thomas2,3 | President, M.C. Thomas Insurance Agency, Inc., Bridgeport, Ohio | |
Michael J. Arciello | Director Emeritus1992 - 2009 | |
L.E. "Dick" Richardson | Director Emeritus1998 - 2007 |
OFFICERS OF UNITED BANCORP, INC.
James W. Everson | Chairman, President & Chief Executive Officer | |
Scott A. Everson | Executive Vice President & Chief Operating Officer | |
Randall M. Greenwood | Senior Vice President, Chief Financial Officer & Secretary/Treasurer | |
Matthew F. Branstetter | Vice President - Chief Lending Officer | |
Elmer K. Leeper | Vice President - Chief Retail Banking Officer | |
Michael A. Lloyd | Vice President - Chief Information Officer |
DIRECTORS OF THE CITIZENS SAVINGS BANK, MARTINS FERRY, OHIO
Herman E. Borkoski2 | President, Borkoski Funeral Homes, Inc., Tiltonsville, Ohio | |
James W. Everson1 | Chairman, President & Chief Executive Officer, United Bancorp, Inc. | |
Chairman, The Citizens Savings Bank, Martins Ferry, Ohio | ||
Scott A. Everson1 | Executive Vice President & Chief Operating Officer, United Bancorp, Inc. | |
President & Chief Executive Officer, The Citizens Savings Bank, Martins Ferry, Ohio | ||
John R. Herzig | President, Toland-Herzig Funeral Homes & Crematory, Strasburg, Ohio | |
John M. Hoopingarner1 | Executive Director, Muskingum Watershed Conservancy District, New Philadelphia, Ohio | |
Samuel J. Jones2 | Business Owner, Glouster, Ohio | |
Andrew F. Phillips | President & General Manager, Miller Brands of S.E. Ohio, Glouster, Ohio | |
Robin L. Rhodes, M.D | Physician, Pediatric Associates of Lancaster, Inc., Lancaster, Ohio | |
Richard L. Riesbeck1,2,ö | President, Riesbeck Food Markets, Inc., St. Clairsville, Ohio | |
Errol C. Sambuco2 | Consultant, Martins Ferry, Ohio | |
Matthew C. Thomas1 | President, M.C. Thomas Insurance Agency, Inc., Bridgeport, Ohio | |
Leon F. Favede, O.D | Director Emeritus1981 - 2012 |
1 = Executive Committee 2 = Audit Committee 3 = Compensation Committee
4 = Nominating and Governance Committee ö = Lead Director
5 |
DIVIDEND AND STOCK HISTORY
Distribution Date of | |||||||
Cash Dividends | Dividends and | ||||||
Declared(1) | Stock Dividends | Exchanges | |||||
1983 | $ | 0.05 | - | - | |||
1984 | $ | 0.06 | 4 for 1 Exchange(2) | January 2, 1984 | |||
1985 | $ | 0.07 | - | - | |||
1986 | $ | 0.09 | - | - | |||
1987 | $ | 0.09 | 50% Stock Dividend | October 2, 1987 | |||
1988 | $ | 0.10 | - | - | |||
1989 | $ | 0.10 | - | - | |||
1990 | $ | 0.11 | - | - | |||
1991 | $ | 0.12 | - | - | |||
1992 | $ | 0.12 | 100% Stock Dividend | September 10, 1992 | |||
1993 | $ | 0.12 | 100% Stock Dividend | November 30, 1993 | |||
1994 | $ | 0.13 | 10% Stock Dividend | September 9, 1994 | |||
1995 | $ | 0.19 | - | - | |||
1996 | $ | 0.20 | 10% Stock Dividend | June 20, 1996 | |||
1997 | $ | 0.23 | 10% Stock Dividend | September 19, 1997 | |||
1998 | $ | 0.26 | 5% Stock Dividend | December 18, 1998 | |||
1999 | $ | 0.30 | 5% Stock Dividend | December 20, 1999 | |||
2000 | $ | 0.31 | 5% Stock Dividend | December 20, 2000 | |||
2001 | $ | 0.32 | 5% Stock Dividend | December 20, 2001 | |||
2002 | $ | 0.33 | 5% Stock Dividend | December 20, 2002 | |||
2003 | $ | 0.35 | 10% Stock Dividend | December 19, 2003 | |||
2004 | $ | 0.39 | 10% Stock Dividend | December 20, 2004 | |||
2005 | $ | 0.43 | 10% Stock Dividend | December 20, 2005 | |||
2006 | $ | 0.48 | 10% Stock Dividend | December 20, 2006 | |||
2007 | $ | 0.52 | – | – | |||
2008 | $ | 0.54 | – | – | |||
2009 | $ | 0.56 | – | – | |||
2010 | $ | 0.56 | – | – | |||
2011 | $ | 0.56 | – | – |
2012 ANTICIPATED DIVIDEND PAYABLE DATES
First Quarter
March 20, 2012
Second Quarter*
June 20, 2012
Third Quarter*
September 20, 2012
Fourth Quarter*
December 20, 2012
*Subject to action by Board of Directors
(1) | Adjusted for stock dividends and exchanges. Does not include dividends from Southern Ohio Community Bancorporation, Inc. prior to the merger. |
(2) | Formation of United Bancorp, Inc. (UBCP). The Citizens Savings Bank shareholders received 4 shares of UBCP stock in exchange for 1 share of The Citizens Savings Bank. |
TOTAL RETURN PERFORMANCE
Index | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | 12/31/11 | ||||||||||||||||||
United Bancorp, Inc. | 100.00 | 104.27 | 105.21 | 96.09 | 104.93 | 115.13 | ||||||||||||||||||
NASDAQ Composite | 100.00 | 122.15 | 73.32 | 106.57 | 125.91 | 113.16 | ||||||||||||||||||
SNL Bank Index | 100.00 | 90.90 | 51.87 | 51.33 | 57.52 | 38.08 | ||||||||||||||||||
SNL $250M-$500M Bank Index | 100.00 | 84.92 | 48.50 | 44.89 | 50.22 | 45.15 | ||||||||||||||||||
SNL Midwest Bank Index | 100.00 | 90.09 | 59.27 | 50.23 | 62.37 | 50.97 | ||||||||||||||||||
Dow Jones | 100.00 | 126.70 | 86.24 | 105.80 | 120.68 | 109.87 |
6 |
Shareholder Information
United Bancorp, Inc.’s (the Company) common stock trades on The Nasdaq SmallCap Market tier of The Nasdaq Stock Market under the symbol UBCP, CUSIP #909911109. At year-end 2011, there were 5,360,304 shares issued, held among approximately 2,000 shareholders of record and in street name. The following table sets forth the quarterly high and low closing prices of the Company’s common stock from January 1, 2011 to December 31, 2011 compared to the same periods in 2010 as reported by the NASDAQ.
2011 | 2010 | |||||||||||||||||||||||||||||||
31-Mar | 30-Jun | 30-Sep | 31-Dec | 31-Mar | 30-Jun | 30-Sep | 31-Dec | |||||||||||||||||||||||||
Market Price Range | ||||||||||||||||||||||||||||||||
High ($) | $ | 9.03 | 8.83 | 8.66 | 8.60 | 9.90 | 8.70 | 8.99 | 9.00 | |||||||||||||||||||||||
Low ($) | $ | 7.56 | 8.43 | 8.55 | 7.82 | 8.12 | 8.00 | 7.70 | 7.70 | |||||||||||||||||||||||
Cash Dividends | ||||||||||||||||||||||||||||||||
Quarter ($) | $ | 0.14 | 0.14 | 0.14 | 0.14 | 0.14 | 0.14 | 0.14 | 0.14 | |||||||||||||||||||||||
Cumulative ($) | $ | 0.14 | 0.28 | 0.42 | .0.56 | 0.14 | 0.28 | 0.42 | 0.56 |
Investor Relations:
A copy of the Company’s Annual Report on form 10-K as filed with the SEC, will be furnished free of charge upon written or E-mail request to:
Randall M. Greenwood, CFO
United Bancorp, Inc.
201 South 4th Street
PO Box 10
Martins Ferry, OH 43935
or
cfo@unitedbancorp.com
Dividend Reinvestment and Stock Purchase Plan:
Shareholders may elect to rein- vest their dividends in additional shares of United Bancorp, Inc.’s common stock through the Company’s Dividend Reinvestment Plan. Shareholders may also invest optional cash payments of up to $5,000 per month in our common stock at market price. To arrange automatic purchase of shares with quarterly dividend proceeds,
please contact:
American Stock Transfer
and Trust Company
Attn: Dividend Reinvestment
6201 15th Avenue, 3rd Floor
Brooklyn, NY 11219
1-800-278-4353
Annual Meeting:
The Annual Meeting of Shareholders will be held at 2:00 p.m., April 18, 2012 at the Corporate Offices in Martins Ferry, Ohio.
Internet:
Please look us up at http//:www.unitedbancorp.com
Independent Auditors:
BKD LLP
312 Walnut Street, Suite 3000
Cincinnati, Ohio 45202
(513) 621-8300
Corporate Offices:
The Citizens Savings Bank Building
201 South 4th Street
Martins Ferry, Ohio 43935
(740) 633-0445
(740) 633-1448 (FAX)
Transfer Agent and Registrar:
For transfers and general correspondence, please contact:
American Stock Transfer
and Trust Company
6201 15th Avenue, 3rd Floor
Brooklyn, NY 11219
1-800-937-5449
Stock Trading:
Raymond James
222 South Riverside Plaza
7th Floor
Chicago, Illinois 60606
Lou Coines
800-800-4693
Stifel, Nicolaus & Company Inc.
655 Metro Place South
Dublin, Ohio 43017
Steven Jefferis
877-875-9352
7 |
The Citizens Bank Profile
A Division of The Citizens Savings Bank
OVER A CENTURY OF SERVICE AT THE CITIZENS SAVINGS BANK
In the year 1902, a group of home-town businessmen in Martins Ferry felt there was room for another bank in the community in addition to the two already established and proceeded to organize. On the 27th of January, 1902, a charter was granted to The German Savings Bank of Martins Ferry, Ohio with authorized capital of $50,000. Martins Ferry is nestled among the scenic foothills along the Upper Ohio Valley across the river from the greater metropolitan area of Wheeling, West Virginia, 60 miles southwest of Pittsburgh, Pennsylvania and 125 miles east of Columbus, Ohio. The area has a strong network of transportation including easy access to major interstate highway systems, nearby river and railway transportation and within 45 minutes of the Pittsburgh International Airport.
Organization was completed by electing the original Board of Directors: Attorney Edward E. McCombs, John E. Reynolds, Henry H. Rothermund, William M. Lupton, Dr. Joseph W. Darrah, Chris A. Heil, Fred K. Dixon, Thomas J. Ball and Dr. R.H. Wilson. The first officers were Edward E. McCombs, President; John E. Reynolds, Vice President; William C. Bergundthal, Cashier; and William H. Wood, Assistant Cashier. A room in the old Henderson Building located at the alley on Hanover Street between Fourth and Fifth Streets, currently occupied by a local realtor, was rented. A vault and counters were installed and the new Bank opened for business on Saturday, April 26, 1902. This was the beginning of The Citizens Savings Bank.
Upon Mr. Bergundthal’s death in 1918, Harold H. Riethmiller, who began his banking career at the bank in 1911, was rehired by the Bank as Cashier. He had previously worked for the Bank and had been working for 6 months at the Citizens-Peoples Trust Company in Wheeling. Mr. Riethmiller brought with him an assistant, David W. Thompson, who upon his death in 1966 was Vice President and Cashier.
In 1936 the Bank suffered a loss with the sudden death of Edward E. McCombs, who had served as President and Attorney for the Bank during the 34 years since its beginning. John E. Reynolds was then elected President with Attorney David H. James as Vice President. Mr. Reynolds served as the bank’s second President until his death in 1940, at which time Harold H. Riethmiller was elected President. Upon Harold H. Riethmiller’s retirement in January of 1973, James W. Everson, who began his banking career as a student intern with the Bank in 1959, was elected as the Bank’s fourth President and Chief Executive Officer.
In May 1999, The Citizens Savings Bank and its affiliate, The Citizens-State Bank then of Strasburg, Ohio were merged into one Bank under the leadership of James W. Everson continuing as Chairman and Harold W. Price as the Bank’s fifth President and Chief Executive Officer since its founding in 1902. Harold W. Price served as President and CEO for five months, suffering a fatal heart attack on September 12th, 1999, after which James W. Everson was reappointed Chairman, President and CEO.
Continuing growth and increased business at The German Savings Bank brought the need for larger quarters, and in 1917, the Bank relocated into a new banking building on the corner of Fourth and Walnut streets where they were located until February 21, 1984 when they moved to their current banking center located one block south at the corner of Fourth and Hickory Street in Martins Ferry. The First World War brought the name ‘German’ into bad repute, making a change in name necessary. On May 1, 1918, the old German Savings Bank became The Citizens Savings Bank of Martins Ferry, Ohio.
In 1957, a total remodeling of the first level was completed at the Fourth and Walnut location enlarging the banking lobby by taking the adjoining room formerly occupied by the Mear Drug Store. In 1963, the Bank opened a Consumer Loan Office at the Fourth and Walnut Street location by expanding into the space occupied by the former Packer Insurance Agency.
8 |
Upon James W. Everson becoming President in January 1973, the Bank began an expanded growth program. The Bank’s first branch office was opened on November 18, 1974. A banking center was opened in Colerain, Ohio offering full service banking to that area, including safe deposit boxes and a modern new home for the Colerain, Ohio Post Office. On June 12, 1978, the Bank opened its second full service branch at the Corner of Howard and DeKalb Streets in Bridgeport, Ohio.
Recognizing the continued growth of the Bank, the Board of Directors authorized the purchase in July 1979 of an .8 acre site formerly occupied by the vacated Central School, one block south on the Corner of Fourth and Hickory Streets, for the purpose of future expansion. A Phase I building program was completed on May 12, 1980 with the opening of a limited-service four-station auto teller with a two-station lobby and large off-street parking facility.
In October of 1982, approval was granted by the State Banking Department and the Federal Deposit Insurance Corporation to relocate the Bank’s Main Office to the corner of Fourth and Hickory streets in Martins Ferry and ground was immediately broken for a new banking center. As a result of 5 years of strategic planning, The Citizens Savings Bank introduced a new era of banking to the Ohio Valley on February 21, 1984 with the opening of their new 21,500 square foot headquarters office located at the corner of Fourth and Hickory streets. This new banking center offered state-of-the-art security with high-tech scanning and alarm equipment, and the latest in electronic data processing programs for banking. The new Bank building was designed by the architectural firm of Jack H. Tribbie and Associates of Martins Ferry and was constructed by the Byrum Construction Company of Martins Ferry. The new building was of colonial design in keeping with the Bank’s Colerain and Bridgeport offices, with the interior of the Bank tastefully decorated in the Williamsburg period.
On July 3, 1983, the Bank’s Board of Directors positioned itself for continued growth by forming United Bancorp, Inc. of Martins Ferry, Ohio, the Citizens Savings Bank holding company. At formation, the shareholders of The Citizens Savings Bank exchanged their stock on a one-for-four basis for shares in United Bancorp, Inc. On December 29, 1986, United Bancorp, Inc. became one of Ohio’s then 21 multi-bank holding companies by acquiring the outstanding shares of stock of the $12.5 million asset based Citizens-State Bank of Strasburg, Ohio. Under the leadership of James W. Everson as Chairman and Charles E. Allensworth as President and CEO, The Citizens-State Bank then grew from its one office in Strasburg by opening a new banking center at 2909 N. Wooster Avenue in Dover, Ohio in February 1990; the purchase of it’s offices in New Philadelphia and Sherrodsville in April 1992; and the purchase of it’s Dellroy Office in June 1994. Harold W. Price was appointed President and CEO of The Citizens-State Bank of Strasburg in April 1993. The Citizens Savings Bank of Martins Ferry further expanded into St. Clairsville with an in store location at Riesbeck’s Food Market in July l997 and purchased a full service banking center in Jewett, Ohio in January 1999. United Bancorp entered Northern Athens County in July 1998 when the $47.8 million asset based Community Bank of Glouster was purchased, expanding United Bancorp, Inc. to a three bank holding company. Today, The Community Bank is headquartered in Lancaster, Ohio with three locations in Lancaster in addition to its two offices in Glouster and offices in Amesville and Nelsonville, Ohio.
As space in the new headquarters became occupied, property across from the new Main Office on the other corner of Fourth and Hickory Streets was acquired in 1993 to support the continued growth. It was renovated into a modern Operations Center now housing the Data and Item Processing Equipment for the affiliate banks of United Bancorp, Inc. and the offices for United Bancorp, Inc.’s Accounting Group. With the introduction of 24 x 7 x 365 Automated Call Center and Internet Banking in 2001, the Accounting and Operations Center was further expanded through the purchase and renovation of the adjoining property formerly known as the Fullerton Bakery Building. Today, the Accounting and Operations Center Building supports the back room operations for the seventeen banking offices of The Citizens Bank and The Community Bank of Lancaster.
On April 21, 1999 the $74.1 million asset based Citizens-State Bank of Strasburg was merged into The Citizens Savings Bank. This expanded customer service under the charter of The Citizens Savings Bank to 10 locations in Belmont, Carroll, Harrison and Tuscarawas counties. Harold W. Price, who had served as President and CEO of The Citizens-State Bank of Strasburg was appointed The Citizens Savings Bank’s fifth President and CEO with James W. Everson continuing as Chairman, in addition to serving as Chairman of The Community Bank and Chairman, President and CEO of United Bancorp. Everson was reappointed Chairman, President and CEO of The Citizens Savings Bank five months later upon Harold W. Price’s sudden death.
In November 2004, the Citizens Bank Board of Directors completed its senior management reorganization plans for the beginning of its second century of service. James W. Everson, will continue as the Bank’s Chairman. Furthermore, the Citizens Bank Board of Directors announced the appointment of Scott A. Everson as Director, President and Chief Executive Officer, which became effective on November 1, 2004.
On September 19, 2008, Citizens acquired from the Federal Deposit Insurance Corporation ("FDIC") the deposits of three banking offices of a failed institution in St. Clairsville, Dillonvale and Tiltonsville, Ohio.
9 |
The growth and success of The Citizens Savings Bank and the United Bancorp, Inc. have been attributed to the association of many dedicated men and women. Having served on the Board of Directors are Edward E. McCombs, 1902-1936; John E. Reynolds, 1902-1940; Dr. J.W. Darrah, 1902-1937; J.A. Crossley, 1902-1903; William M. Lupton, 1902-1902; F.K. Dixon, 1902-1909; Dr. R.H. Wilson, 1902-1905; C.A. Heil, 1903-1909; David Coss, 1904-1938; L.L. Scheele, 1905-1917; A.T. Selby, 1906-1954; H.H. Rothermund, 1907-1912; Dr. J.G. Parr, 1912-1930; T.E. Pugh, 1920-1953; J.J. Weiskircher, 1925-1942; David H. James, 1925-1963; Dr. C.B. Messerly, 1931-1957; H.H. Riethmiller, 1936-1980; E.M. Nickles, 1938-1968; L.A. Darrah, 1939-1962; R.L. Heslop, 1941-1983; Joseph E. Weiskircher, 1943-1975; Edward M. Selby, 1953-1976; David W. Thompson, 1954-1966; Dr. Charles D. Messerly, 1957-1987; James M. Blackford, 1962-1968; John H. Morgan, 1967-1976; Emil F. Snyder, 1968-1975; James H. Cook, 1976-1986; Paul Ochsenbein, 1978-1991; David W. Totterdale, 1981-1995; Albert W. Lash, 1975-1996; Premo R. Funari, 1976-1997; Donald A. Davison, 1963-1997; Harold W. Price, 1999-1999; John H. Clark, Jr., 1976-2001; Dwain R. Hicks, 1999-2002; and Michael A. Ley, 1999-2002, Michael J. Arciello 1992-2009, and Leon F. Favede, O.D., 1981 - 2012.
Today, The Citizens Savings Bank is Martins Ferry’s only locally owned financial institution. The general objective of The Citizens Savings Bank as outlined in its Mission Statement which was adopted by its Board of Directors on June 8, 1982 and renewed annually is to remain an independent state-chartered commercial bank and expand its asset base and market share through acquisitions and new branch construction where financially feasible.
The Community Bank Profile
A Division of The Citizens Savings Bank
COMMUNITY was established in August 1945 with corporate offices in downtown Glouster, Ohio, in Athens County. Its founder was L.E. Richardson, a local entrepreneur. At that time, Athens County was booming with the industries of gas, oil and coal mining. COMMUNITY was then known as The Glouster Community Bank. The Bank played a vital role in the region as it developed, earning a reputation for friendliness, quality customer service and responsiveness to the individual financial needs of its customers, as well as the community. More than 25 years later, Richardson turned over the day-to-day management of the bank to his son, L.E. Richardson, Jr., in 1971.
With that foundation, COMMUNITY acquired the First National Bank of Amesville, Ohio in 1976. The Bank’s prosperity continued, and, in 1978, a three-lane Auto Bank drive-up facility was constructed on the west side of Glouster.
In 1984, the Bank created a holding company, Southern Ohio Community Bancorp, Inc., in anticipation of future growth and diversification of products and services.
In 1987, the service area was expanded once again. A modular office in Nelsonville served the village and the surrounding communities. A few years later, on December 6, 1993 a ribbon cutting ceremony was held for a newly constructed Nelsonville office. The brick building, which replaced the mobile bank unit, features four drive-up lanes and a drive-up ATM. Night deposit and safe deposit box services were also introduced to the Nelsonville area.
In 1996, COMMUNITY completed an extensive renovation of its downtown Glouster office, including the addition of a 24-hour access ATM in the vestibule.
In 1998, COMMUNITY became affiliated with United Bancorp, Inc. of Martins Ferry, Ohio, when United Bancorp purchased The Glouster Community Bank and its holding company, Southern Ohio Community Bancorp, Inc.
10 |
That acquisition led to COMMUNITY establishing a Loan Production Office (LPO) in 1998 in Lancaster, Ohio. This LPO provided the opportunity for COMMUNITY to build its franchise along the U.S. Route 33 corridor from Athens County through Fairfield County.
Lancaster, the county seat of Fairfield County, is approximately 30 miles southeast of Columbus, Ohio and is considered a bedroom community to Columbus. According to the city’s Economic Development Office, Fairfield County is the fourth fastest growing county in Ohio and is ranked among the top six counties for growth potential.
COMMUNITY opened its first Fairfield County banking office in December 1999. The East Main Street Banking Office in Lancaster offers full service banking with extended evening and Saturday hours. The office features a three-lane drive-up, a drive-up ATM and night depository.
In January 2000, COMMUNITY relocated its Main Office from Glouster to downtown Lancaster. This substantial investment significantly strengthened COMMUNITY’S presence in Fairfield County. Formerly a furniture store, the historic 1919 building was restored to as near the original appearance as possible. The building was further enhanced with a Verdin Company clock. The 435-pound timepiece is attached to the southeast corner of the building. The interior of the building was converted from a furniture store to a modern full service banking office. Of special note is the historical mural of Fairfield County landmarks, painted by local stencil artist Cheryl Fey, which graces the main stairway. The renovation added greatly to the city’s business district, as the Main Office complements the downtown revitalization that also was completed in 2000.
COMMUNITY’S Auto Bank, located across the street from the Main Office, also was opened in January 2000. The structure is unique to the market, because of its walk-in lobby. It also features a four-lane drive-thru, night depository and automatic teller machine.
In July 2000, COMMUNITY opened its Community Room, also unique to the area. The Community Room has grown quickly into a convenient and frequently used location for meeting of area civic organizations. It is also a popular gallery for local artists to display their talents.
From the rolling hills of Athens County to the bustling commerce of Fairfield County, COMMUNITY continues to play a vital role in the lives of its customers and the region it serves. The Bank not only has built upon its customer base through the years, but upon its reputation for friendliness, quality customer service and responsiveness to the individual financial needs of its customers and the communities it proudly serves.
On July 1, 2007, the Company received regulatory approval for the merger of its wholly owned subsidiaries, The Glouster Community Bank ("Community"), Lancaster, Ohio, and The Citizens Savings Bank ("Citizens"), Martins Ferry, Ohio, under the charter of the latter. The Boards of both Citizens and Community endorsed this consolidation. The Company continues to capitalize on the established branding in the market places of each institution. Community operates under the trade name "The Community Bank, a Division of The Citizens Savings Bank" and Citizens operates under the trade name "The Citizens Bank, a Division of The Citizens Savings Bank". A key focus of the consolidation involved the centralization of executive authority under Citizens’ proven management structure that has been perennially ranked in the upper quartile of all banks in the United States.
Including the Community Board members on the Board of the combined institution was essential for the Company to realize the full potential of the combination. Management was pleased to report on the merger date of July lst that Samuel J. Jones, Business Owner, Glouster, Ohio; Terry A. McGhee, President and CEO, Westerman, Inc., Bremen, Ohio; Andrew F. Phillips, President and General Manager, Miller Brands of South East Ohio, Glouster, Ohio; Robin L. Rhodes, M.D., Physician, Pediatric Associates of Lancaster, Inc., Lancaster, Ohio; and L.E. "Dick" Richardson, Jr., Retired President, Southern Ohio Community Bancorporation, Inc., Glouster, Ohio accepted the Company’s invitation to become members of The Citizens Savings Bank Board of Directors.
On October 31, 2007, the Company completed the ‘‘physical consolidation" of its two charters under the management group of The Citizens Savings Bank, resulting in a 22% reduction in staffing at The Community Bank division. Merging all of the Company’s bank charters into a single charter and common operating system now allows each banking office to focus on growing the Company’s banking franchises by providing the highest level of customer service from a common market basket of products.
11 |
Management’s Discussion and Analysis
In the following pages, management presents an analysis of United Bancorp, Inc.’s financial condition and results of operations as of and for the year ended December 31, 2011 as compared to prior years. This discussion is designed to provide shareholders with a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the Consolidated Financial Statements and related footnotes and the selected financial data included elsewhere in this report.
When used in this discussion or future filings by the Company with the Securities and Exchange Commission, or other public or shareholder communications, or in oral statements made with approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit risks of lending activities and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.
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 liquidity, capital resources or operations except as discussed herein. The Company is not aware of any current recommendations by regulatory authorities that would have such effect if implemented.
The Company does not undertake, and specifically disclaims, any obligation to publicly release any revisions that may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
Financial Condition
Overview
The Company’s net income in 2011 generated an annualized 0.73% return on average assets (“ROA”) and an 8.53% return on average equity (“ROE”), compared to 0.57% ROA and 7.05% ROE for 2010. Comparing the year ended December 31, 2011 to 2010, the Company’s net interest margin was 4.18% compared to 4.02%, an increase of 16 basis points. This increase in the margin resulted in a $317,000 increase in net interest income for the year ended December 31, 2011 as compared to 2010. Comparing the same periods, customer service fees on deposits decreased $128,000. As the Company continues to implement government imposed regulations from the Dodd-Frank Act regarding its courtesy overdraft program, we will continue to experience regulatory requirements that may result in a decrease in customer service fees. In anticipation of these challenges and their potential impact on non-interest income, a variety of cost savings initiatives have been implemented in 2011 to reduce the non-interest expense of the Company. Year-to-date non-interest expense, excluding the reduction in FDIC insurance premiums, conversion expenses and provision for losses on impairment of foreclosed real estate, decreased by $379,000. The majority of the decrease in non-interest expense is due to the Company’s cost savings initiatives implemented during the second and third quarters of 2011. As we move forward, these cost saving initiatives are expected to have a continuing positive impact on future earnings and help offset some of the anticipated decline in non-interest income. The Company recognized a gain on sale of securities of $370,000 for the year ended December 31, 2011 and the Company received $100,000 of a BOLI benefit in excess of surrender value. The securities gain was the result of the Company selling its government sponsored mortgage–backed securities portfolio to take advantage of the favorable rate environment on these short term investments and provide liquidity to restructure the Company’s balance sheet to shift towards higher yielding loan relationships. Accordingly, this shift in the mix of the interest-earning assets on the balance sheet contributed to average loans increasing by $10,259,000. On the expense side, the Company’s 2011 earnings were affected by a period over period increase of $152,000 in our provision for loan losses. The increase in the provision for loan losses was predicated primarily upon the continued economic challenges facing the banking industry. While net loans charged off did increase for the year ended December 31, 2011 as compared to 2010, the Company was able to move those charged off credits through the collection process and into Other Real Estate for Sale and begin to market these properties for sale.
12 |
Earning Assets – Loans
Gross loans totaled $284.4 million at December 31, 2011, representing a 2.0% increase from $278.8 million at December 31, 2010. Average loans totaled $278.7 million for 2011, representing a 5.8% increase compared to average loans of $263.5 million for 2010.
The increase in gross loans from December 31, 2010 to December 31, 2011 was primarily comprised of commercial and commercial real estate loans, which increased by $14.9 million, partially offset by a decrease in installment loans of $7.6 million and a decrease in residential real estate loans of $1.6 million.
The Company's commercial and commercial real estate loan portfolio represents 64.5% of the total portfolio at December 31, 2011, compared to 60.5% at December 31, 2010. During this past year, we found many new customers within our lending areas and our focus continues on our small business customer utilizing all the SBA, Ohio Department of Development and State of Ohio loan programs as well as local revolving loan funds to best fit the needs of our customers.
The Company’s installment lending portfolio represented 13.8% of the total portfolio at December 31, 2011, compared to 16.8% at December 31, 2010. The targeted installment lending areas encompass the four geographic areas serviced by the Bank, which are diverse, thereby reducing the risk to changes in economic conditions. Competition for installment loans principally comes from the captive finance companies offering low to zero percent financing for extended terms.
The Company's residential real estate portfolio represents 21.7% of the total portfolio at December 31, 2011, compared to 22.7% at December 31, 2010. Residential real estate loans are comprised of 1, 3 and 5 year adjustable-rate mortgages used to finance 1-4 family units. The Company also offers fixed-rate real estate loans through our Secondary Market Real Estate Mortgage Program. Once these fixed rate loans are originated and immediately sold without recourse in what is referred to as the secondary market, the Company does not assume credit risk or interest rate risk in this portfolio. This arrangement is quite common in banks and saves our customers from looking elsewhere for their home financing needs.
In 2011, the interest rate environment continued to be favorable to the fixed-rate mortgage loan product. However, the secondary market origination volume was impacted by an issue that has developed in the overall industry related to higher risk sub-prime loans. While the Company did not participate in sub-prime lending, the additional regulations and unstable appraisal market have made it more difficult to obtain a loan that is saleable in the secondary market. With these conditions, the Company did recognize a gain on the sale of secondary market loans of $94,000 in 2011 and a gain of $184,000 in 2010.
13 |
The allowance for loan losses represents the amount which management and the Board of Directors estimates is adequate to provide for probable incurred losses in the loan portfolio. Accounting for the allowance and the related provision for loan losses is viewed by management as a critical accounting policy. The allowance balance and the annual provision charged to expense are reviewed by management and the Board of Directors on a monthly basis. The allowance calculation is determined by utilizing a risk grading model that considers borrowers’ past due experience, coverage ratio to industry averages, economic conditions and various other circumstances that are subject to change over time. In general, the loan loss policy for installment loans requires a charge-off if the loan reaches 120-day delinquent status or if notice of bankruptcy liquidation is received. The Company follows lending policies, with established criteria for determining the repayment capacity of borrowers, requirements for down payments and current market appraisals or other valuations of collateral when loans are originated. Installment lending also utilizes credit scoring to help in the determination of credit quality and pricing.
The Company generally recognizes interest income on the accrual basis, except for certain loans which are placed on non-accrual status, when in the opinion of management, doubt exists as to collection on the loan. The Company’s policy is to generally place loans greater than 90 days past due on non-accrual status unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, interest income may be recognized on a cash basis as payment is received.
Management and the Board of Directors believe the current balance of the allowance for loan losses is sufficient to cover probable incurred losses. Refer to the Provision for Loan Losses section for further discussion on the Company’s credit quality.
Earning Assets – Securities and Federal Funds Sold
The securities portfolio is comprised of U.S. Government and agency obligations, tax-exempt obligations of states and political subdivisions, mortgage-backed securities and certain other investments. The Company does not hold any collateralized mortgage-backed securities, other than those issued by U.S. Government agencies. The Company does not hold any derivative securities. The quality rating of the majority of the Bank’s securities issued by political subdivisions within Ohio is generally no less than A, and the majority of the Bank’s out-of-state bonds are rated at AAA. Board policy permits the purchase of certain non-rated or lesser rated bonds of local schools, townships and municipalities, based on known levels of credit risk.
Securities available for sale at December 31, 2011 decreased $14.2 million, or 14.7%, from 2010, while securities held to maturity decreased $1.9 million or 29.7% during the same period. The Company’s U.S. Government agency portfolio is subject to increased levels of redemptions due to the call features in this type of investment security. Given the extent of the decrease in overall interest rates, the Company did experience a significant amount of called government agency investment securities during 2011 and 2010. This trend is expected to continue into 2012. While the Company has plans to reinvest a portion of these funds in other available-for-sale securities, there is lag between the time when bonds are called and the right investment opportunity is available to the Company. In addition, given the historical low interest rate environment, there is concern on the duration of future purchases in the investment portfolio. During 2012 the Company may leave a higher than typical level of excess liquidity invested short term in Federal Funds sold until these funds can be invested in loans rather than securities.
Sources of Funds – Deposits
The Company’s primary source of funds is retail core deposits from individuals and business customers. These core deposits include all categories of interest-bearing deposits, excluding certificates of deposit greater than $100,000. During 2011, total deposits increased $3.1 million, or 1.0%. During 2011, the Company experienced a shift from higher costing certificates of deposit to lower costing transactional and savings accounts. During 2011, our deposit growth was favorably affected as certain areas within Ohio have experienced an unusual growth in the natural gas and oil exploration efforts of major energy companies. This growth stems from new extraction techniques and has attracted significant investment from major energy companies in mineral rights for owners of local real estate in markets that we serve.
14 |
The Company maintains deposit relationships with public agencies, including local school districts, city and township municipalities, public works facilities and others, which may tend to be more seasonal in nature resulting from the receipt and disbursement of state and federal grants. These entities have maintained relatively stable 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 as a tool to balance funding needs. At December 31, 2011, certificates of deposit greater than $100,000 decreased $1.4 million, or 3.3%, from December 31, 2010 totals. During 2011, growth in lower costing deposits contributed to a planned reduction in certificates of deposit. The Company does not differentiate pricing for certificates of deposit that are greater than $100,000.
The attraction of and retention of core deposits, although improving due to the energy related activities in East Central Ohio, continues to be a challenge to the Company and the overall banking industry. Alternative financial products are continuously being introduced by our competition whether through traditional banks or brokerage services companies. As a result of this competition, the Company does offer full service brokerage services. Brokerage United®, a division of The Citizens Savings Bank, offers access to Brokerage Services through LPL Financial®.
Sources of Funds – Securities Sold Under Agreements to Repurchase and Other Borrowed Funds
Other interest-bearing liabilities include securities sold under agreements to repurchase, Treasury, Tax and Loan, notes payable and Federal Home Loan Bank advances. Securities sold under agreements to repurchase decreased approximately $1.4 million from December 31, 2010 as compared to December 31, 2011. The average balance in securities sold under agreements to repurchase increased $286,000, or 2.2%, from 2010 to 2011.
Advances from the Federal Home Loan Bank (FHLB) decreased $10.5 million, or 24.2%, from December 31, 2010 to December 31, 2011. During 2011, $10 million of fixed rate advances matured. Given the growth in the Company’s depository balances during 2011, these advances were not replaced.
Performance Overview 2011 to 2010
Net Income
The Company reported net income of $3.1 million in 2011 compared with $2.5 million for 2010, an increase of $544,000, or 21.4%. On a per share basis, the Company’s diluted earnings per share were $0.62 for 2011, as compared to $0.52 for 2010, an increase of 19.2%. This earnings performance equates to a 0.73% Return on Average Assets (“ROA”) and an 8.53% Return on Average Equity (“ROE”) for 2011 compared to 0.57% and 7.05%, respectively, for 2010.
Net Interest Income
Net interest income, by definition, is the difference between interest income generated on interest-earning assets and the interest expense incurred on interest-bearing liabilities. Various factors contribute to changes in net interest income, including volumes, interest rates and the composition or mix of interest-earning assets in relation to interest-bearing liabilities. Comparing the year ended December 31, 2011 to 2010, the Company’s net interest margin was 4.18% compared to 4.02%, an increase of 16 basis points. This increase in the margin resulted in a $317,000 increase in net interest income for the year ended December 31, 2011 as compared to 2010.
15 |
Average interest-earning assets decreased $20.8 million in 2011 as compared to 2010 while the associated weighted-average yield on these interest-earning assets decreased from 5.63% in 2010 to 5.42% for 2011. Average interest-bearing liabilities decreased $24.7 million in 2011 as compared to 2010, while the associated weighted-average costs on these interest-bearing liabilities decreased from 1.69% in 2010 to 1.31% in 2011. As the historically low interest rates are expected to continue into 2012 and beyond given recent interest rate forecasts by the Federal Open Market Committee, management expects that it will become difficult to lower the Company’s cost of funds in proportion to the weighted average yields on the earning assets of the Company.
Refer to the sections on Asset and Liability Management and Sensitivity to Market Risks and Average Balances, Net Interest Income and Yields Earned and Rates Paid elsewhere herein for further information.
Provision For Loan Losses
The provision for loan losses is a charge to expense recorded to maintain the related balance sheet allowance for loan losses at an amount considered adequate by Management and the Board of Directors to cover probable incurred losses in the portfolio. The provision for loan losses was $2.0 million in 2011 compared to $1.8 million in 2010, an increase of $152,000 or 8.4%. As previously discussed, the loan portfolio increased approximately $5.6 million, or 2.0%, during 2011. The provision for loan losses for the year ended December 31, 2011 was predicated primarily upon an increase in the level of charge-offs, growth in the loan portfolio and the effect of the current economic environment.
The level of net loans charged off to average loans has increased from 0.55% for the year ended December 31, 2010 to 0.64% for the year ended December 31, 2011. Net loans charged-off for 2011 were approximately $1.8 million compared to approximately $1.5 million for 2010. The Company’s non-accrual loans decreased by approximately $329,000 from December 31, 2010 to December 31, 2011.
The allowance for loan losses as a percentage of gross loans increased to 1.03% at December 31, 2011 from 0.98% at December 31, 2010. The Company utilizes a consistent methodology in determining its estimate of the allowance for loan losses.
Noninterest Income
Noninterest income is made up of bank-related fees and service charges, as well as other income-producing services. These include ATM/interchange income, internet bank fees, early redemption penalties for certificates of deposit, safe deposit box rental income, net gain or loss on sales of securities and loans, leased rental property, cash management services and other miscellaneous items. In addition, the Company has invested in Bank Owned Life Insurance (BOLI). The earnings from this BOLI investment are reflected in the Company’s noninterest income. Total noninterest income was $3.5 million for 2011 and $3.3 million for 2010, an increase of $195,000 or 5.9%. During the year ended December 31, 2011, the increase in noninterest income was due primarily to an increase in realized gains on sales of securities of $323,000 and a $100,000 BOLI benefit in excess of policy surrender value, which were partially offset by a $90,000 decrease in gain on sale of loans and a decrease in customer service fees on deposits of $127,000, due in part to changes in the way our overdraft program is structured as a result of regulatory guidance related to customer overdraft fees.
Noninterest Expense
Noninterest expense for 2011 decreased $819,000, or 5.9%, as compared to 2010.
Salaries and employee benefits decreased $366,000, or 5.4%, from 2010 to 2011. This decrease was primarily due to the Company’s efforts to gain cost savings due to a reduction in staff related to the efficiencies gained from the 2010 core system implementation.
Occupancy and equipment expense increased $93,000, or 5.5%, due primarily to an increase in depreciation expense on premises, computer hardware and software and related service maintenance on our new core computer system installed in the third quarter of 2010.
16 |
Professional fees increased $82,000, or 10.0%, for 2011 as compared to 2010. This increase is a primary result of additional legal expenses related to the collection of past due loans.
The provision for losses on foreclosed real estate was $87,000 for 2011 as compared to $90,000 for 2010.
In conjunction with the September 2008 branch acquisition, from the Federal Deposit Insurance Corporation, the Company recorded an intangible asset of approximately $812,000 consisting of a core deposit intangible. This asset was recorded at fair value and is being amortized over seven years using a straight line method. During 2011 and 2010, the Company recorded amortization expense of approximately $119,000 and $113,000, respectively, with approximately 4 years remaining in the amortization schedule of this intangible asset
During 2011, the Company incurred $28,000 in the remaining non-recurring direct expenses related to its 2010 core processing conversion. These expenses related to the consulting and training of the system during 2011. During 2010, the Company incurred $273,000 non-recurring direct expenses during the initial year of its core processing conversion.
As anticipated the Company’s FDIC insurance premiums decreased approximately $192,000 from 2010 to 2011. In 2009, the FDIC required banks to prepay their projected FDIC premiums for 2010 through 2012 as of December 31, 2009. The amount of the remaining prepaid premiums was approximately $1.0 million as of December 31, 2011.
Other expenses increased $50,000, or 2.3%. No single item contributed significantly to this increase.
Income tax expense for 2011 was $854,000 compared to $219,000 in 2010, an increase of $635,000. The increase was due primarily to a $1.2 million, or 42.6% increase in pre-tax income. In addition, during 2010, the Company recognized a tax benefit resulting from the resolution of a tax contingency, which reduced federal income taxes by approximately $120,000. The Company’s effective income tax rate was 21.6% in 2011 and 7.9% in 2010. The Company’s effective tax rate is less than the 34% statutory rate due primarily to the effects of nontaxable interest income and earnings on bank owned life insurance policies.
Asset/Liability
Management and Sensitivity to Market Risks
In the environment of changing business cycles, interest rate fluctuations and growing competition, it has become increasingly more difficult for banks to produce adequate earnings on a consistent basis. Although management can anticipate changes in interest rates, it is not possible to reliably predict the magnitude of interest rate changes. As a result, the Company must establish a sound asset/liability management policy, which will minimize exposure to interest rate risk while maintaining an acceptable interest rate spread and insuring adequate liquidity.
(In thousands) | 2011 | 2010 | ||||||
Noninterest income | ||||||||
Customer service fee | $ | 2,102 | $ | 2,229 | ||||
Gain on sales of securities | 370 | 47 | ||||||
Gains on sales of loans | 94 | 184 | ||||||
Other income | 946 | 857 | ||||||
Total noninterest income | $ | 3,512 | $ | 3,317 | ||||
Noninterest expense | ||||||||
Salaries and employee benefits | $ | 6,463 | $ | 6,829 | ||||
Occupancy and equipment | 1,776 | 1,683 | ||||||
Provision for losses on foreclosed real estate | 87 | 90 | ||||||
Professional services | 906 | 824 | ||||||
Insurance | 265 | 384 | ||||||
Deposit insurance premiums | 322 | 514 | ||||||
Franchise and other taxes | 493 | 505 | ||||||
Marketing expense | 212 | 289 | ||||||
Printing and office supplies | 225 | 261 | ||||||
Amortization of intangibles | 119 | 113 | ||||||
Core computer conversion expense | 28 | 273 | ||||||
Other expenses | 2,207 | 2,157 | ||||||
Total noninterest expense | $ | 13,103 | $ | 13,922 |
17 |
The principal goal of asset/liability management – earnings management – can be accomplished by establishing decision processes and control procedures for all bank assets and liabilities. Thus, the full scope of asset/liability management encompasses the entire balance sheet of the Company. The broader principal components of asset/liability management include, but are not limited to liquidity planning, capital planning, and gap management and spread management.
By definition, liquidity is measured by the Company’s ability to raise cash at a reasonable cost or with a minimum amount of loss. Liquidity planning is necessary so the Company will be capable of funding all obligations to its customers at all times, from meeting their immediate cash withdrawal requirements to fulfilling their short-term credit needs.
Capital planning is an essential portion of asset/liability management, as capital is a limited Bank resource, which, due to minimum capital requirements, can place possible restraints on Bank growth. Capital planning refers to maintaining capital standards through effective growth management, dividend policies and asset/liability strategies.
Gap is defined as the dollar difference between rate sensitive assets and rate sensitive liabilities with respect to a specified time frame. A gap has three components – the asset component, the liability component, and the time component. Gap management involves the management of all three components.
Gap management is defined as those actions taken to measure and match rate sensitive assets to rate sensitive liabilities. A rate sensitive asset is any interest-earning asset, which can be repriced to a market rate in a given time frame. Similarly, a rate sensitive liability is any interest-bearing liability, which can have its interest rate changed to a market rate during the specified time period. Caps, collars and prepayment penalties may prevent certain loans and securities from adjusting to the market rate.
A negative gap is created when rate sensitive liabilities exceed rate sensitive assets and conversely a positive gap occurs when rate sensitive assets exceed rate sensitive liabilities. A negative gap position will cause profits to decline in a rising interest rate environment while conversely a positive gap will cause profits to decline in a falling interest rate environment. The Company’s goal is to have acceptable profits under any interest rate environment. To avoid volatile profits as a result of interest rate fluctuations, the Company attempts to match interest rate sensitivities, while pricing both the asset and liability components to yield a sufficient interest rate spread so that profits will remain relatively consistent across interest rate cycles.
Management of the income statement is called spread management and is defined as managing investments, loans, and liabilities to achieve an acceptable spread between the Company’s return on its earning assets and its cost of funds. Gap management without consideration of interest spread can cause unacceptable low profit margins while assuring that the level of profits is steady. Spread management without consideration of gap positions can cause acceptable profits in some interest rate environments and unacceptable profits in others. A sound asset/liability management program combines gap and spread management into a single cohesive system.
18 |
Management measures the Company’s interest rate risk by computing estimated changes in net interest income and the Net Portfolio Value (“NPV”) of its cash flows from assets, liabilities and off-balance-sheet items in the event of a range of assumed changes in market interest rates. The Bank’s senior management and the Executive Committee of the Board of Directors, comprising the Asset/Liability Committee (“ALCO”) review the exposure to interest rates monthly. Exposure to interest rate risk is measured with the use of an interest rate sensitivity analysis to determine the change in NPV in the event of hypothetical changes in interest rates, while interest rate sensitivity gap analysis is used to determine the repricing characteristics of the assets and liabilities.
NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance-sheet items.
Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay rates, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates. The NPV calculation is based on the net present value of discounted cash flows utilizing market prepayment assumptions and market rates of interest provided by surveys performed during each quarterly period, with adjustments made to reflect the shift in the Treasury yield curve between the survey date and quarter-end date. Certain shortcomings are inherent in this method of analysis presented in the computation of estimated NPV. Certain assets such as adjustable-rate loans have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the portion of adjustable-rate loans in the Company’s portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinancing activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed in the table. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the case of an increase in interest rates.
The following tables present an analysis of the potential sensitivity of the Company’s net present value of its financial instruments to sudden and sustained changes in the prevailing interest rates.
The projected volatility of the net present value at both December 31, 2011 and 2010 fall within the general guidelines established by the Board of Directors. The 2011 NPV table shows that in a falling interest rate environment, in the event of a 100 basis point change, the NPV would decrease 2%, and with a 200 basis point change the NPV would decrease 3%. This decrease is the result of fixed rate certificates of deposit not repricing in lock step with an immediate downward rate adjustment of 100 and 200 basis points. The other component is that once rates decrease 100 or 200 basis points from current levels we tend to reach a floor on how low depository rates can adjust downward.
In an upward change in interest rates, the Company’s NPV would increase 1% with a 100 basis point interest rate increase. In a 200 basis point rate increase, the Company’s NPV would increase 2%. This increase is attributable to a portion of the Company’s loan and investment portfolios that have variable rates.
(Dollars in Thousands) | ||||||||||||
Net Portfolio Value - December 31, 2011 | ||||||||||||
Change in Rates | $ Amount | $ Change | % Change | |||||||||
+200 | 61,554 | 9,310 | 2 | % | ||||||||
+100 | 57,409 | 5,165 | 1 | % | ||||||||
Base | 52,244 | |||||||||||
-100 | 42,970 | (9,274 | ) | -2 | % | |||||||
-200 | 36,287 | (15,957 | ) | -3 | % |
(Dollars in Thousands) | ||||||||||||
Net Portfolio Value - December 31, 2010 | ||||||||||||
Change in Rates | $ Amount | $ Change | % Change | |||||||||
+200 | 53,457 | (984 | ) | -2 | % | |||||||
+100 | 55,027 | 586 | 1 | % | ||||||||
Base | 54,441 | - | - | |||||||||
-100 | 49,843 | (4,598 | ) | -8 | % | |||||||
-200 | 43,354 | (11,087 | ) | -20 | % |
19 |
The following table is a summary of selected quarterly results of operations for the years ended December 31, 2011 and 2010.
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
2011 | ||||||||||||||||
Total interest income | $ | 5,038 | $ | 5,212 | $ | 5,071 | $ | 4,890 | ||||||||
Total interest expense | 1,256 | 1,220 | 1,141 | 1,090 | ||||||||||||
Net interest income | 3,782 | 3,992 | 3,930 | 3,800 | ||||||||||||
Provision for losses on loans | 648 | 494 | 401 | 424 | ||||||||||||
Other income | 694 | 895 | 832 | 721 | ||||||||||||
Gain on sale of available for-sale securities net | 370 | - | - | - | ||||||||||||
General, administrative and other expense | 3,294 | 3,473 | 3,300 | 3,036 | ||||||||||||
Income before income taxes | 904 | 920 | 1,061 | 1,060 | ||||||||||||
Federal income taxes | 166 | 168 | 260 | 260 | ||||||||||||
Net income | $ | 738 | $ | 752 | $ | 801 | $ | 800 | ||||||||
Earnings per share | ||||||||||||||||
Basic | $ | 0.15 | $ | 0.15 | $ | 0.16 | $ | 0.17 | ||||||||
Diluted | $ | 0.15 | $ | 0.15 | $ | 0.16 | $ | 0.16 | ||||||||
2010 | ||||||||||||||||
Total interest income | $ | 5,530 | $ | 5,513 | $ | 5,403 | $ | 5,221 | ||||||||
Total interest expense | 1,804 | 1,715 | 1,582 | 1,379 | ||||||||||||
Net interest income | 3,726 | 3,798 | 3,821 | 3,842 | ||||||||||||
Provision for losses on loans | 360 | 370 | 321 | 765 | ||||||||||||
Other income | 776 | 859 | 849 | 786 | ||||||||||||
Gain on sale of available for-sale securities net | - | - | 47 | - | ||||||||||||
General, administrative and other expense | 3,371 | 3,471 | 3,687 | 3,393 | ||||||||||||
Income before income taxes | 771 | 816 | 709 | 470 | ||||||||||||
Federal income taxes (benefit) | 88 | 115 | (1 | ) | 17 | |||||||||||
Net income | $ | 683 | $ | 701 | $ | 710 | $ | 453 | ||||||||
Earnings per share | ||||||||||||||||
Basic | $ | 0.14 | $ | 0.14 | $ | 0.15 | $ | 0.09 | ||||||||
Diluted | $ | 0.14 | $ | 0.14 | $ | 0.15 | $ | 0.09 |
20 |
Average Balances, Net Interest Income and Yields Earned and Rates Paid
The following table provides average balance sheet information and reflects the taxable equivalent average yield on interest-earning assets and the average cost of interest-bearing liabilities for the years ended December 31, 2011 and 2010. The yields and costs are calculated by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities.
The average balance of available-for-sale securities is computed using the carrying value of securities while the yield for available for sale securities has been computed using the average amortized cost. Average balances are derived from average month-end balances, which include nonaccruing loans in the loan portfolio, net of the allowance for loan losses. Interest income has been adjusted to tax- equivalent basis.
2011 | 2010 | |||||||||||||||||||||||
(Dollars In thousands) | Interest | Interest | ||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Loans | $ | 278,719 | $ | 17,515 | 6.28 | % | $ | 263,480 | $ | 17,763 | 6.74 | % | ||||||||||||
Taxable securities - AFS | 70,062 | 1,328 | 1.90 | 62,405 | 2,229 | 3.57 | ||||||||||||||||||
Tax-exempt securities - AFS | 20,389 | 1,254 | 6.15 | 21,772 | 1,262 | 5.80 | ||||||||||||||||||
Tax-exempt securities - HTM | 6,225 | 314 | 5.04 | 14,887 | 945 | 6.35 | ||||||||||||||||||
Time deposits in other financial institutions | 690 | 11 | 1.59 | 7,138 | 143 | 2.00 | ||||||||||||||||||
Federal funds sold | - | - | - | 27,289 | 76 | 0.28 | ||||||||||||||||||
FHLB stock and other | 4,814 | 217 | 4.51 | 4,772 | 213 | 4.46 | ||||||||||||||||||
Total interest-earning assets | 380,899 | 20,639 | 5.42 | 401,743 | 22,631 | 5.63 | ||||||||||||||||||
Noninterest-earning assets | ||||||||||||||||||||||||
Cash and due from banks | 16,766 | 23,976 | ||||||||||||||||||||||
Premises and equipment (net) | 9,774 | 8,565 | ||||||||||||||||||||||
Other nonearning assets | 20,178 | 15,885 | ||||||||||||||||||||||
Less: allowance for loan losses | (2,876 | ) | (2,637 | ) | ||||||||||||||||||||
Total noninterest-earning assets | 43,842 | 45,789 | ||||||||||||||||||||||
Total assets | $ | 424,741 | $ | 447,532 | ||||||||||||||||||||
Liabilities & stockholders’ equity | ||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Demand deposits | $ | 112,451 | $ | 120 | 0.11 | % | $ | 109,523 | $ | 164 | 0.15 | % | ||||||||||||
Savings deposits | 54,739 | 64 | 0.12 | 49,581 | 83 | 0.17 | ||||||||||||||||||
Time deposits | 136,805 | 2,792 | 2.04 | 160,445 | 4,159 | 2.59 | ||||||||||||||||||
FHLB advances | 37,122 | 1,457 | 3.92 | 46,933 | 1,797 | 3.83 | ||||||||||||||||||
Trust preferred debentures | 4,000 | 250 | 6.25 | 4,000 | 250 | 6.25 | ||||||||||||||||||
Repurchase agreements | 13,350 | 24 | 0.18 | 12,734 | 27 | 0.21 | ||||||||||||||||||
Total interest-bearing liabilities | 358,467 | 4,707 | 1.31 | 383,216 | 6,480 | 1.69 | ||||||||||||||||||
Noninterest-bearing liabilities | ||||||||||||||||||||||||
Demand deposits | 26,886 | 24,530 | ||||||||||||||||||||||
Other liabilities | 3,067 | 3,638 | ||||||||||||||||||||||
Total noninterest-bearing liabilities | 29,953 | 28,168 | ||||||||||||||||||||||
Total liabilities | 388,420 | 411,384 | ||||||||||||||||||||||
Total stockholders’ equity | 36,321 | 36,148 | ||||||||||||||||||||||
Total liabilities & stockholders’ equity | $ | 424,741 | $ | 447,532 | ||||||||||||||||||||
Net interest income | $ | 15,932 | $ | 16,151 | ||||||||||||||||||||
Net interest spread | 4.11 | % | 3.94 | % | ||||||||||||||||||||
Net yield on interest-earning assets | 4.18 | % | 4.02 | % |
• For purposes of this schedule, nonaccrual loans are included in loans.
• Fees collected on loans are included in interest on loans.
21 |
Rate/Volume Analysis
The table below describes the extent to which
changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected interest
income and expense during 2011. For purposes of this table, changes in interest due to volume and rate were determined using the
following methods:
— | Volume variance results when the change in volume is multiplied by the previous year’s rate. |
— | Rate variance results when the change in rate is multiplied by the previous year’s volume. |
— | Rate/volume variance results when the change in volume is multiplied by the change in rate. |
Note: The rate/volume variance was allocated to volume variance and rate variance in proportion to the relationship of the absolute dollar amount of the change in each. Nonaccrual loans are ignored for purposes of the calculations due to the nominal amount of the loans.
2011 Compared to 2010 | ||||||||||||
Increase/(Decrease) | ||||||||||||
(In thousands) | Change | Change | ||||||||||
Total | Due To | Due To | ||||||||||
Change | Volume | Rate | ||||||||||
Interest and dividend income | ||||||||||||
Loans | $ | (248 | ) | $ | 995 | $ | (1,243 | ) | ||||
Taxable securities available for sale | (901 | ) | 247 | (1,148 | ) | |||||||
Tax-exempt securities available for sale | (8 | ) | (83 | ) | 75 | |||||||
Tax-exempt securities held to maturity | (631 | ) | (466 | ) | (165 | ) | ||||||
Time deposites in other financial institutes | (132 | ) | (108 | ) | (24 | ) | ||||||
Federal funds sold | (76 | ) | (76 | ) | ||||||||
FHLB stock and other | 4 | 2 | 2 | |||||||||
Total interest and dividend income | (1,992 | ) | 511 | (2,503 | ) | |||||||
Interest expense | ||||||||||||
Demand deposits | (44 | ) | 4 | (48 | ) | |||||||
Savings deposits | (19 | ) | 8 | (27 | ) | |||||||
Time deposits | (1,367 | ) | (559 | ) | (808 | ) | ||||||
FHLB advances | (340 | ) | (384 | ) | 44 | |||||||
Trust Preferred debentures | - | - | - | |||||||||
Repurchase agreements | (3 | ) | 2 | (5 | ) | |||||||
Total interest expense | (1,773 | ) | (929 | ) | (844 | ) | ||||||
Net interest income | $ | (219 | ) | $ | 1,440 | $ | (1,659 | ) |
22 |
Capital Resources
Internal capital growth, through the retention of earnings, is the primary means of maintaining capital adequacy for the Bank. The Company’s stockholders’ equity was $36.2 million and $35.6 million at December 31, 2011 and 2010, respectively. Equity totals for 2011 includes approximately $920,000 in accumulated other comprehensive loss, which is comprised mainly of a net unrealized loss related to the accumulated benefit obligation in excess of fair value of plan assets in the Company’s defined benefit pension plan, net of tax, at year-end 2011, compared to a $707,000 unrealized loss December 31, 2010. Total stockholders’ equity in relation to total assets was 8.7% at December 31, 2011 and 8.4% at December 31, 2010.
The Company has established a Dividend Reinvestment Plan (“The Plan”) for stockholders 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 dividend policy or a guarantee of future dividends. Stockholders who do not wish to participate in The Plan continue to receive cash dividends, as declared in the usual and customary manner.
In 2001, the Company’s stockholders approved an amendment to the Company’s Articles of Incorporation to create a class of preferred shares with 2,000,000 authorized shares. This will enable 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. As of December 31, 2011 the Company has not issued any preferred shares.
In 2005, a Delaware statutory business trust owned by the Company, United Bancorp Statutory Trust I (“Trust I” or the “Trust”), issued $4.0 million of mandatorily redeemable debt securities. The sale proceeds were utilized to purchase $4.0 million of the Company’s subordinated debentures. The Company’s subordinated debentures are the sole asset of Trust I. The Company’s investment in Trust I is not consolidated herein as the Company is not deemed the primary beneficiary of the Trust. However, the $4.0 million of mandatorily redeemable debt securities issued by the Trust are includible for regulatory purposes as a component of the Company’s Tier 1 Capital. Interest on the Company’s subordinated debentures is fixed at 6.25% and is payable quarterly.
The $4.0 million of net proceeds received by the Company was primarily utilized to fund a $3.4 million note receivable from a newly formed Employee Stock Option Plan (ESOP). The ESOP in turn utilized the note proceeds to purchase $3.4 million of the Company’s treasury stock.
Liquidity
Liquidity relates primarily to the Company's ability to fund loan demand, meet deposit customers' withdrawal requirements and provide for operating expenses. Assets used to satisfy these needs consist of cash and due from banks, federal funds sold and securities available-for-sale. These assets are commonly referred to as liquid assets. Liquid assets were $97.7 million at December 31, 2011, compared to $109.7 million at December 31, 2010. Management recognizes securities may need to be sold in the future to help fund loan demand and, accordingly, as of December 31, 2011, $82.0 million of the securities portfolio was classified as available for sale. The Company’s residential real estate portfolio can and has been readily used to collateralize borrowings as an additional source of liquidity. Management believes its current liquidity level is sufficient to meet cash requirements.
23 |
The Cash Flow Statements for the periods presented provide an indication of the Company’s sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A discussion of the cash flow statements for 2011 and 2010 follows.
The Company experienced a net increase in cash from operating activities in 2011 and 2010. Net cash provided by operating activities totaled $6.2 million and $6.6 million for the years ended December 31, 2011 and 2010, respectively. The adjustments to reconcile net income to net cash from operating activities consisted mainly of depreciation and amortization of premises and equipment and intangibles, gain on sales of loans, securities and other assets, the provision for loan losses, Federal Home Loan Bank stock dividends, net amortization of securities and net changes in other assets and liabilities.
Net cash provided by investing activities totaled $10.5 million for the year ended December 31, 2011. For year ended December 31, 2010 net cash used in investing activities totaled $1.4 million. The changes in net cash from investing activities include loan growth, as well as normal maturities, security calls and reinvestments of securities and premises and equipment expenditures. In 2011, the Company received approximately $9.4 million from sales of securities. Proceeds from securities, which matured or were called totaled $96.6 million and $107.6 million in 2011 and 2010, respectively.
Net cash used in financing activities totaled $12.0 million and $25.6 million for the years ended December 31, 2011 and 2010, respectively. The net cash used in financing activities in 2011 was primarily attributable to a decrease in borrowings of $12.4 million for the year ended December 31, 2011.
Management feels that it has the capital adequacy, profitability, liquidity and reputation to meet the current and projected financial needs of its customers.
Inflation
The majority of assets and liabilities of the Company are monetary in nature and therefore the Company differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation significantly affects noninterest expense, which tends to rise during periods of general inflation. Management believes the most significant impact on financial results is the Company’s ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest sensitive assets and liabilities and actively manages the amount of securities available for sale in order to protect against the effects of wide interest rate fluctuations on net income and shareholders' equity.
24 |
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
United Bancorp, Inc.
Martins Ferry, Ohio
We have audited the accompanying consolidated balance sheets of United Bancorp, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2011. The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Bancorp, Inc. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
/s/ BKD, llp
Cincinnati, Ohio
March 2, 2012
25 |
Consolidated Balance Sheets
December 31, 2011 and 2010
(In thousands, except share data)
2011 | 2010 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 4,764 | $ | 5,006 | ||||
Interest-bearing demand deposits | 10,917 | 5,929 | ||||||
Cash and cash equivalents | 15,681 | 10,935 | ||||||
Certificates of deposit in other financial institutions | –– | 2,564 | ||||||
Available-for-sale securities | 81,998 | 96,155 | ||||||
Held-to-maturity securities | 4,450 | 6,331 | ||||||
Loans, net of allowance for loan losses of $2,921 and $2,740 at December 31, 2011 and 2010, respectively | 281,526 | 276,037 | ||||||
Premises and equipment | 9,804 | 9,278 | ||||||
Federal Home Loan Bank stock | 4,810 | 4,810 | ||||||
Foreclosed assets held for sale, net | 2,046 | 1,912 | ||||||
Intangible assets | 424 | 543 | ||||||
Accrued interest receivable | 1,410 | 1,441 | ||||||
Deferred federal income taxes | 909 | 801 | ||||||
Bank-owned life insurance | 10,672 | 10,401 | ||||||
Other assets | 1,836 | 2,227 | ||||||
Total assets | $ | 415,566 | $ | 423,435 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Demand | $ | 142,021 | $ | 131,600 | ||||
Savings | 57,907 | 52,463 | ||||||
Time | 128,612 | 141,383 | ||||||
Total deposits | 328,540 | 325,446 | ||||||
Short-term borrowings | 9,968 | 11,843 | ||||||
Federal Home Loan Bank advances | 32,951 | 43,450 | ||||||
Subordinated debentures | 4,000 | 4,000 | ||||||
Interest payable and other liabilities | 3,925 | 3,115 | ||||||
Total liabilities | 379,384 | 387,854 | ||||||
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 2011 - 5,360,304 shares, 2010 5,370,304 shares | 5,360 | 5,370 | ||||||
Additional paid-in capital | 17,391 | 20,133 | ||||||
Retained earnings | 18,399 | 15,308 | ||||||
Stock held by deferred compensation plan; 2011 – 197,111 shares, 2010 – 176,392 shares | (1,856 | ) | (1,657 | ) | ||||
Unearned ESOP compensation | (2,081 | ) | (2,311 | ) | ||||
Accumulated other comprehensive loss | (920 | ) | (707 | ) | ||||
Treasury stock, at cost 2011 – 9,150 shares, 2010 – 45,717 shares | (111 | ) | (555 | ) | ||||
Total stockholders’ equity | 36,182 | 35,581 | ||||||
Total liabilities and stockholders’ equity | $ | 415,566 | $ | 423,435 |
See Notes to Consolidated Financial Statements
26 |
Consolidated Statements of Income
Years Ended December 31, 2011 and 2010
(In thousands, except per share data)
2011 | 2010 | |||||||
Interest and Dividend Income | ||||||||
Loans | $ | 17,541 | $ | 17,513 | ||||
Securities | ||||||||
Taxable | 1,374 | 2,229 | ||||||
Tax-exempt | 1,055 | 1,493 | ||||||
Certificates of deposit in other financial institutions | –– | 143 | ||||||
Federal funds sold | 24 | 76 | ||||||
Dividends on Federal Home Loan Bank and other stock | 217 | 213 | ||||||
Total interest and dividend income | 20,211 | 21,667 | ||||||
Interest Expense | ||||||||
Deposits | 2,977 | 4,406 | ||||||
Borrowings | 1,730 | 2,074 | ||||||
Total interest expense | 4,707 | 6,480 | ||||||
Net Interest Income | 15,504 | 15,187 | ||||||
Provision for Loan Losses | 1,968 | 1,816 | ||||||
Net Interest Income After Provision for Loan Losses | 13,536 | 13,371 | ||||||
Noninterest Income | ||||||||
Customer service fees | 2,102 | 2,229 | ||||||
Net gains on loan sales | 94 | 184 | ||||||
Gain on sales of securities - net | 370 | 47 | ||||||
Earnings on bank-owned life insurance | 449 | 423 | ||||||
Gain (loss) on sale of real estate and other repossessed assets | (15 | ) | 30 | |||||
BOLI benefit in excess of surrender value | 100 | –– | ||||||
Other | 412 | 404 | ||||||
Total noninterest income | 3,512 | 3,317 | ||||||
Noninterest Expense | ||||||||
Salaries and employee benefits | 6,463 | 6,829 | ||||||
Net occupancy and equipment expense | 1,776 | 1,683 | ||||||
Provision for losses on foreclosed real estate | 87 | 90 | ||||||
Professional fees | 906 | 824 | ||||||
Insurance | 265 | 384 | ||||||
Deposit insurance premiums | 322 | 514 | ||||||
Franchise and other taxes | 493 | 505 | ||||||
Marketing expense | 212 | 289 | ||||||
Printing and office supplies | 225 | 261 | ||||||
Amortization of intangible assets | 119 | 113 | ||||||
Core computer conversion expense | 28 | 273 | ||||||
Other | 2,207 | 2,157 | ||||||
Total noninterest expense | 13,103 | 13,922 | ||||||
Income Before Federal Income Taxes | 3,945 | 2,766 | ||||||
Provision for Federal Income Taxes | 854 | 219 | ||||||
Net Income | $ | 3,091 | $ | 2,547 | ||||
Basic Earnings Per Share | $ | 0.63 | $ | 0.52 | ||||
Diluted Earnings Per Share | $ | 0.62 | $ | 0.52 |
See Notes to Consolidated Financial Statements
27 |
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2011 and 2010
(In thousands, except per share data)
Treasury | Shares | Accumulated | ||||||||||||||||||||||||||
Additional | Stock and | Acquired | Other | |||||||||||||||||||||||||
Common | Paid-in | Deferred | By | Retained | Comprehensive | |||||||||||||||||||||||
Stock | Capital | Compensation | ESOP | Earnings | Loss | Total | ||||||||||||||||||||||
Balance, January 1, 2010 | $ | 5,370 | $ | 22,830 | $ | (2,731 | ) | $ | (2,512 | ) | $ | 12,761 | $ | (507 | ) | $ | 35,211 | |||||||||||
Comprehensive income | ||||||||||||||||||||||||||||
Net income | –– | –– | –– | –– | 2,547 | –– | 2,547 | |||||||||||||||||||||
Unrealized losses on securities designated as available for sale, net of related taxes | –– | –– | –– | –– | –– | (213 | ) | (213 | ) | |||||||||||||||||||
Defined benefit plan | –– | –– | –– | –– | –– | 13 | 13 | |||||||||||||||||||||
Total comprehensive income | 2,347 | |||||||||||||||||||||||||||
Cash dividends - $0.56 per share | –– | (2,960 | ) | –– | –– | –– | –– | (2.960 | ) | |||||||||||||||||||
Shares purchased for deferred compensation plan | –– | 195 | (91 | ) | –– | –– | –– | 104 | ||||||||||||||||||||
Shares distributed from deferred compensation plan | –– | (45 | ) | 45 | –– | –– | –– | –– | ||||||||||||||||||||
Expense related to share-based compensation plans | –– | 220 | –– | –– | –– | –– | 220 | |||||||||||||||||||||
Purchase of shares by Dividend Reinvestment Plan | –– | (107 | ) | 565 | –– | –– | –– | 458 | ||||||||||||||||||||
Amortization of ESOP | –– | –– | –– | 201 | –– | –– | 201 | |||||||||||||||||||||
Balance, December 31, 2010 | 5,370 | 20,133 | (2,212 | ) | (2,311 | ) | 15,308 | (707 | ) | 35,581 | ||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||
Net income | –– | –– | –– | –– | 3,091 | –– | 3,091 | |||||||||||||||||||||
Unrealized gains on securities designated as available for sale, net of related taxes | –– | –– | –– | –– | –– | 406 | 406 | |||||||||||||||||||||
Defined benefit plan | –– | –– | –– | –– | (619 | ) | (619 | ) | ||||||||||||||||||||
Total comprehensive income | 2,878 | |||||||||||||||||||||||||||
Cash dividends - $0.56 per share | –– | (2,988 | ) | –– | –– | –– | –– | (2,988 | ) | |||||||||||||||||||
Shares purchased for deferred compensation plan | –– | 167 | (95 | ) | –– | –– | –– | 72 | ||||||||||||||||||||
Shares distributed from deferred compensation plan | –– | (1 | ) | 1 | –– | –– | –– | –– | ||||||||||||||||||||
Expense related to share-based compensation plans | –– | 200 | –– | –– | –– | –– | 200 | |||||||||||||||||||||
Purchase of shares by Dividend Reinvestment Plan | –– | (103 | ) | 339 | –– | –– | –– | 236 | ||||||||||||||||||||
Forfeit of restricted stock | (10 | ) | 10 | –– | –– | –– | –– | –– | ||||||||||||||||||||
Amortization of ESOP | –– | (27 | ) | –– | 230 | –– | –– | 203 | ||||||||||||||||||||
Balance, December 31, 2011 | $ | 5,360 | $ | 17,391 | $ | (1,967 | ) | $ | (2,081 | ) | $ | 18,399 | $ | (920 | ) | $ | 36,182 |
See Notes to Consolidated Financial Statements
28 |
Consolidated Statements of Cash Flows
Years Ended December 31, 2011 and 2010
(Dollar amounts in thousands)
2011 | 2010 | |||||||
Operating Activities | ||||||||
Net income | $ | 3,091 | $ | 2,547 | ||||
Items not requiring (providing) cash | ||||||||
Depreciation and amortization | 963 | 815 | ||||||
Amortization of intangible assets | 119 | 113 | ||||||
Provision for loan losses | 1,968 | 1,816 | ||||||
Provision for losses on foreclosed real estate | 87 | 90 | ||||||
Amortization of premiums and discounts on securities-net | (68 | ) | 141 | |||||
Amortization and impairment of mortgage servicing rights | 47 | 52 | ||||||
Deferred income taxes | (44 | ) | (365 | ) | ||||
Gain on sales of securities | (370 | ) | (47 | ) | ||||
Originations of loans held for sale | (5,904 | ) | (14,096 | ) | ||||
Proceeds from sale of loans held for sale | 5,998 | 14,280 | ||||||
Net gains on sales of loans | (94 | ) | (184 | ) | ||||
Amortization of ESOP | 203 | 201 | ||||||
Expense related to share-based compensation plans | 200 | 220 | ||||||
Loss (gain) on sale of real estate and other repossessed assets | 15 | (30 | ) | |||||
Changes in | ||||||||
Bank-owned life insurance | (271 | ) | (383 | ) | ||||
Accrued interest receivable | 31 | 777 | ||||||
Other assets | 391 | 440 | ||||||
Interest payable and other liabilities | (125 | ) | 244 | |||||
Net cash provided by operating activities | 6,237 | 6,631 | ||||||
Investing Activities | ||||||||
Purchases of available-for-sale securities | (88,899 | ) | (104,099 | ) | ||||
Proceeds from maturities of available-for-sale securities | 94,993 | 100,674 | ||||||
Proceeds from sales of available-for-sale securities | 9,111 | 3,489 | ||||||
Proceeds from maturities of held-to-maturity securities | 1,581 | 6,927 | ||||||
Proceeds from sales of held-to-maturity securities | 302 | 971 | ||||||
Net changes in certificates of deposit in other financial institutions | 2,564 | 15,011 | ||||||
Net change in loans | (8,168 | ) | (23,604 | ) | ||||
Purchases of premises and equipment | (1,489 | ) | (1,404 | ) | ||||
Proceeds from sales of foreclosed assets | 474 | 676 | ||||||
Net cash provided by (used in) investing activities | 10,469 | (1,359 | ) |
See Notes to Consolidated Financial Statements
29 |
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 2011 and 2010
(Dollar amounts in thousands)
2011 | 2010 | |||||||
Financing Activities | ||||||||
Net increase (decrease) in deposits | $ | 3,094 | $ | (19,097 | ) | |||
Net change in Federal Home Loan Bank advances and short term borrowings | (12,374 | ) | (4,113 | ) | ||||
Cash dividends paid | (2,988 | ) | (2,960 | ) | ||||
Proceeds from purchase of shares by the dividend reinvestment plan | 236 | 458 | ||||||
Shares purchased for deferred compensation plan | 72 | 104 | ||||||
Net cash used in financing activities | (11,960 | ) | (25,608 | ) | ||||
Increase (Decrease) in Cash and Cash Equivalents | 4,746 | (20,336 | ) | |||||
Cash and Cash Equivalents, Beginning of Year | 10,935 | 31,271 | ||||||
Cash and Cash Equivalents, End of Year | $ | 15,681 | $ | 10,935 | ||||
Supplemental Cash Flows Information | ||||||||
Interest paid on deposits and borrowings | $ | 4,810 | $ | 6,541 | ||||
Federal income taxes paid | $ | 985 | $ | 445 | ||||
Supplemental Disclosure of Non-Cash Investing Activities | ||||||||
Transfers from loans to foreclosed assets held for sale | $ | 710 | $ | 1,271 | ||||
Unrealized gains (losses) on securities designated as available for sale, net of related tax effects | $ | 406 | $ | (213 | ) | |||
Change in unfunded status of defined benefit plan liability | $ | (937 | ) | $ | 20 |
See Notes to Consolidated Financial Statements
30 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 1: Nature of Operations and Summary of Significant Accounting Policies
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 Company operates in 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 branches in Bridgeport, Colerain, Dellroy, Dillonvale, Dover, Jewett, New Philadelphia, St. Clairsville East, Saint Clairsville West, Sherrodsville, Strasburg and Tiltonsville, Ohio. The Community Bank division conducts its business through its main office in Lancaster, Ohio and branches 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. 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 policy, that are outside of management’s control.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
31 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses (and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans). In connection with the determination of the allowance for loan losses (and the valuation of foreclosed assets held for sale), management obtains independent appraisals for significant properties.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2011 and 2010, cash equivalents consisted primarily of due from accounts with the Federal Reserve and other correspondent Banks.
Effective July 21, 2010, the FDIC’s insurance limits were permanently increased to $250,000. At December 31, 2011 and 2010, none of the Company’s interest-bearing cash accounts exceeded the federally insured limit of $250,000.
Pursuant to legislation enacted in 2010, the FDIC will fully insure all noninterest-bearing accounts beginning December 31, 2010 through December 31, 2012 at all FDIC institutions.
Securities
Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
For debt securities with fair value below amortized cost, when the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.
32 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. At December 31, 2011 and 2010, the Company did not have any loans held for sale.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses and any unamortized deferred fees or costs on originated 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.
The accrual of interest on mortgage and commercial loans 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. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is 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.
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 uncollectibility 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 collectibility 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.
33 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
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 nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
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. 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 commercial 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.
Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’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.
Premises and Equipment
Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets. An accelerated method is used for tax purposes.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment.
34 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
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, less costs to sell, 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. Revenue and expenses from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.
Bank-Owned Life Insurance
The Company and the Bank have purchased life insurance policies on certain key executives. Company and bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized.
Intangible Asset
In conjunction with an acquisition, the Company recorded a core deposit intangible asset of approximately $812,000. This asset was recorded at fair value and is being amortized over a seven year period using the straight line method. The carrying amount and accumulated amortization of the core deposit intangible asset at December 31, 2011 and 2010 was:
Gross Carrying Amount | 2011 Accumulated Amortization | 2010 Accumulated Amortization | ||||||||||
(In thousands) | ||||||||||||
Core deposits | $ | 812 | $ | 388 | $ | 269 |
35 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Amortization expense for the years ended December 31, 2011 and 2010, was $119,000 and $113,000, respectively. Estimated amortization expense for each of the following three years through 2014 is $119,000 per year and is $67,000 in 2015.
Treasury Stock
Common shares repurchased are recorded at cost. Cost of shares retired or reissued is determined using the weighted average cost.
Stock Options and Restricted Stock Awards
The Company has a share-based employee compensation plan, which is described more fully in Note 14. In accordance with the United Bancorp, Inc. 2008 Incentive Award Plan that was approved by stockholders, the Company issued restricted common stock to certain officers and directors of the Company during 2009 which is described more fully in Note 14.
Income Taxes
The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if based on the weight of evidence available it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. At December 31, 2011, the Company had no uncertain tax positions.
36 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
The Company files consolidated income tax returns with its subsidiary. With a few exceptions, the Company is no longer subject to the examination by tax authorities for years before 2010.
Deferred Compensation Plan
Directors have the option to defer all or a portion of fees for their services into a deferred stock compensation plan that invests in common shares of the Company. Officers of the Company have the option to defer up to 50% of their annual incentive award into this plan. The plan does not permit diversification and must be settled by the delivery of a fixed number of shares of the Company stock. The stock held in the plan is included in equity as deferred shares and is accounted for in a manner similar to treasury stock. Subsequent changes in the fair value of the Company’s stock are not recognized. The deferred compensation obligation is also classified as an equity instrument and changes in the fair value of the amount owed to the participant are not recognized.
Stockholders’ Equity and Dividend Restrictions
The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. Generally, the Bank’s payment of dividends is limited to net income for the current year plus the two preceding calendar years, less capital distributions paid over the comparable time period. Dividend payments to the stockholders may be legally paid from additional paid-in capital or retained earnings.
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 and unearned ESOP shares are not deemed outstanding for earnings per share calculations.
37 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized appreciation (depreciation) on available-for-sale securities and changes in the funded status of the defined benefit pension plan.
Advertising
Advertising costs are expensed as incurred.
Note 2: Restriction on Cash and Due From Banks
The Company is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2011 and 2010, was $6.9 million and $6.0 million, respectively.
38 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 3: Securities
The amortized cost and approximate fair values, together with gross unrealized gains and losses of securities are as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Approximate Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Available-for-sale Securities: | ||||||||||||||||
December 31, 2011: | ||||||||||||||||
U.S. government agencies | $ | 64,077 | $ | 98 | $ | (7 | ) | $ | 64,168 | |||||||
State and political subdivisions | 17,173 | 652 | (8 | ) | 17,817 | |||||||||||
Equity securities | 4 | 9 | –– | 13 | ||||||||||||
$ | 81,254 | $ | 759 | $ | (15 | ) | $ | 81,998 | ||||||||
December 31, 2010: | ||||||||||||||||
U.S. government agencies | $ | 61,908 | $ | 53 | $ | (728 | ) | $ | 61,233 | |||||||
State and political subdivisions | 25,008 | 315 | (28 | ) | 25,295 | |||||||||||
Government sponsored entities mortgage-backed securities | 9,105 | 509 | –– | 9,614 | ||||||||||||
Equity securities | 4 | 9 | –– | 13 | ||||||||||||
$ | 96,025 | $ | 886 | $ | (756 | ) | $ | 96,155 |
39 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Approximate Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Held-to-maturity Securities: | ||||||||||||||||
December 31, 2011: | ||||||||||||||||
State and political subdivisions | $ | 4,450 | $ | 147 | $ | –– | $ | 4,597 | ||||||||
December 31, 2010: | ||||||||||||||||
State and political subdivisions | $ | 6,331 | $ | 179 | $ | –– | $ | 6,510 |
The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at December 31, 2011, 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. Maturities for mortgage-backed securities are presented in the table below based on their projected maturities.
Available-for-sale | Held-to-maturity | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Within one year | $ | 201 | $ | 204 | $ | 904 | $ | 926 | ||||||||
One to five years | 2,893 | 2,975 | 1,910 | 1,999 | ||||||||||||
Five to ten years | 37,471 | 37,975 | 1,636 | 1,672 | ||||||||||||
After ten years | 40,685 | 40,831 | –– | –– | ||||||||||||
81,250 | 81,985 | 4,450 | 4,597 | |||||||||||||
Equity securities | 4 | 13 | –– | –– | ||||||||||||
Totals | $ | 81,254 | $ | 81,998 | $ | 4,450 | $ | 4,597 |
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $58.2 million and $66.4 million at December 31, 2011 and 2010, respectively.
40 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Information with respect to sales of securities and resulting gross realized gains and losses was as follows:
Year ended December 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Proceeds from sales | $ | 9,413 | $ | 4,460 | ||||
Gross gains | 370 | 104 | ||||||
Gross losses | –– | (57 | ) | |||||
Tax expense | 126 | 16 |
During 2011 the Company sold one security with an amortized cost of $295,000 resulting in a realized gain of approximately $7,000 and is included in the table above under gross gains. This security was classified on the books as held to maturity and was sold due to a credit quality down grade of the municipality issuer.
During 2010 the Company sold one security for net proceeds of $971,000 with an amortized cost of $1.0 million resulting in a realized loss of $29,000 and is included in table above under gross losses. This one security was classified on the books as held to maturity and was sold due to a credit quality downgrade of the municipality issuer.
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 December 31, 2011 and 2010, was $6.3 million and $35.7 million, which represented approximately 7% and 35% 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.
41 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
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 December 31, 2011 and 2010:
December 31, 2011 | ||||||||||||||||||||||||
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) | ||||||||||||||||||||||||
US Government agencies | $ | 5,992 | $ | (7 | ) | $ | –– | $ | –– | $ | 5,992 | $ | (7 | ) | ||||||||||
State and political subdivisions | 332 | (8 | ) | –– | –– | 332 | (8 | ) | ||||||||||||||||
Total temporarily impaired securities | $ | 6,324 | $ | (15 | ) | $ | –– | $ | –– | $ | 6,324 | $ | (15 | ) |
December 31, 2010 | ||||||||||||||||||||||||
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) | ||||||||||||||||||||||||
US Government agencies | $ | 33,215 | $ | (728 | ) | $ | –– | $ | –– | $ | 33,215 | $ | (728 | ) | ||||||||||
State and political subdivisions | 2,484 | (28 | ) | –– | –– | 2,484 | (28 | ) | ||||||||||||||||
Total temporarily impaired securities | $ | 35,699 | $ | (756 | ) | $ | –– | $ | –– | $ | 35,699 | $ | (756 | ) |
42 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The contractual terms of those investments in an unrealized loss position 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 December 31, 2011.
Note 4: Loans and Allowance for Loan Losses
Categories of loans at December 31, include:
2011 | 2010 | |||||||
(In thousands) | ||||||||
Commercial loans | $ | 35,387 | $ | 32,153 | ||||
Commercial real estate | 148,052 | 136,369 | ||||||
Residential real estate | 61,765 | 63,378 | ||||||
Installment loans | 39,243 | 46,877 | ||||||
Total gross loans | 284,447 | 278,777 | ||||||
Less allowance for loan losses | (2,921 | ) | (2,740 | ) | ||||
Total loans | $ | 281,526 | $ | 276,037 |
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.
43 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2011 and 2010:
2011 | ||||||||||||||||||||||||
Commercial | Commercial Real Estate | Installment | Residential | Unallocated | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance, beginning of year | $ | 561 | $ | 1,566 | $ | 229 | $ | 140 | $ | 244 | $ | 2,740 | ||||||||||||
Provision charged to expense | 213 | 1,459 | 265 | 188 | (157 | ) | 1,968 | |||||||||||||||||
Losses charged off | (616 | ) | (758 | ) | (489 | ) | (261 | ) | –– | (2,124 | ) | |||||||||||||
Recoveries | 25 | 54 | 230 | 28 | –– | 337 | ||||||||||||||||||
Balance, end of year | $ | 183 | $ | 2,321 | $ | 235 | $ | 95 | $ | 87 | $ | 2,921 | ||||||||||||
Ending balance: individually evaluated for impairment | $ | 59 | $ | 1,799 | $ | –– | $ | –– | $ | –– | $ | 1,858 | ||||||||||||
Ending balance: collectively evaluated for impairment | $ | 124 | $ | 522 | $ | 235 | $ | 95 | $ | 87 | $ | 1,063 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 637 | $ | 8,254 | $ | –– | $ | –– | $ | –– | $ | 8,891 | ||||||||||||
Ending balance: collectively evaluated for impairment | $ | 34,750 | $ | 139,798 | $ | 39,243 | $ | 61,765 | $ | –– | $ | 275,556 |
44 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
2010 | ||||||||||||||||||||||||
Commercial | Commercial Real Estate | Installment | Residential | Unallocated | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance, beginning of year | $ | 890 | $ | 999 | $ | 251 | $ | 100 | $ | 150 | $ | 2,390 | ||||||||||||
Provision charged to expense | (110 | ) | 1,339 | 296 | 197 | 94 | 1,816 | |||||||||||||||||
Losses charged off | (256 | ) | (775 | ) | (579 | ) | (160 | ) | –– | (1,770 | ) | |||||||||||||
Recoveries | 37 | 3 | 261 | 3 | –– | 304 | ||||||||||||||||||
Balance, end of year | $ | 561 | $ | 1,566 | $ | 229 | $ | 140 | $ | 244 | $ | 2,740 | ||||||||||||
Ending balance: individually evaluated for impairment | $ | 486 | $ | 1,226 | $ | –– | $ | 60 | $ | –– | $ | 1,772 | ||||||||||||
Ending balance: collectively evaluated for impairment | $ | 75 | $ | 340 | $ | 229 | $ | 80 | $ | 244 | $ | 968 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 1,184 | $ | 5,852 | $ | –– | $ | 238 | $ | –– | $ | 7,274 | ||||||||||||
Ending balance: collectively evaluated for impairment | $ | 30,969 | $ | 130,517 | $ | 46,877 | $ | 63,140 | $ | –– | $ | 271,503 |
The following tables show the portfolio quality indicators as of December 31, 2011 and 2010. For purposes of monitoring the credit quality and risk characteristics of its loan portfolio, the Company utilizes the following types of loans: commercial and commercial real estate, residential and installment.
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.
45 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
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.
The following table shows the portfolio quality indicators as of December 31, 2011:
Loan Class | Commercial | Commercial Real Estate | Residential | Installment | Total | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Pass Grade | $ | 31,320 | $ | 133,949 | $ | 61,590 | $ | 39,161 | $ | 266,020 | ||||||||||
Special Mention | 2,930 | 3,500 | 175 | 5 | 6,610 | |||||||||||||||
Substandard | 882 | 6,924 | –– | 77 | 7,883 | |||||||||||||||
Doubtful | 255 | 3,679 | –– | –– | 3,934 | |||||||||||||||
$ | 35,387 | $ | 148,052 | $ | 61,765 | $ | 39,243 | $ | 284,447 |
The following table shows the portfolio quality indicators as of December 31, 2010:
Loan Class | Commercial | Commercial Real Estate | Residential | Installment | Total | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Pass Grade | $ | 28,416 | $ | 122,795 | $ | 62,517 | $ | 46,877 | $ | 260,605 | ||||||||||
Special Mention | 134 | 1,141 | 623 | –– | 1,898 | |||||||||||||||
Substandard | 3,603 | 12,198 | 238 | –– | 16,039 | |||||||||||||||
Doubtful | –– | 235 | –– | –– | 235 | |||||||||||||||
$ | 32,153 | $ | 136,369 | $ | 63,378 | $ | 46,877 | $ | 278,777 |
46 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The following table shows the loan portfolio aging analysis of the recorded investment in loans as of December 31, 2011:
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 | $ | 661 | $ | 21 | $ | 80 | $ | 240 | $ | 1,002 | $ | 34,385 | $ | 35,387 | ||||||||||||||
Commercial real estate | 485 | –– | –– | 2,677 | 3,162 | 144,890 | 148,052 | |||||||||||||||||||||
Installment | 405 | 53 | 5 | 71 | 534 | 38,709 | 39,243 | |||||||||||||||||||||
Residential | 1,038 | 81 | –– | 1,867 | 2,986 | 58,779 | 61,765 | |||||||||||||||||||||
Total | $ | 2,589 | $ | 155 | $ | 85 | $ | 4,855 | $ | 7,684 | $ | 276,763 | $ | 284,447 |
The following table shows the loan portfolio aging analysis of the recorded investment in loans as of December 31, 2010:
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 | $ | 265 | $ | 201 | $ | 25 | $ | 300 | $ | 791 | $ | 31,362 | $ | 32,153 | ||||||||||||||
Commercial real estate | 567 | 525 | –– | 3,163 | 4,255 | 132,114 | 136,369 | |||||||||||||||||||||
Installment | 421 | 159 | –– | 240 | 820 | 46,057 | 46,877 | |||||||||||||||||||||
Residential | 529 | 279 | –– | 823 | 1,631 | 61,747 | 63,378 | |||||||||||||||||||||
Total | $ | 1,782 | $ | 1,164 | $ | 25 | $ | 4,526 | $ | 7,497 | $ | 271,280 | $ | 278,777 |
47 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The following table presents impaired loans for the year ended December 31, 2011:
Recorded Balance | Unpaid Principal Balance | Specific Allowance | Average Investment in Impaired Loans | Interest Income Recognized | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Loans without a specific valuation allowance: | ||||||||||||||||||||
Commercial | $ | 532 | $ | 532 | $ | –– | $ | 525 | $ | 28 | ||||||||||
Commercial real estate | 1,805 | 1,805 | –– | 1,496 | 87 | |||||||||||||||
Consumer | –– | –– | –– | –– | –– | |||||||||||||||
Residential | –– | –– | –– | 39 | –– | |||||||||||||||
2,337 | 2,337 | –– | 2,060 | 115 | ||||||||||||||||
Loans with a specific valuation allowance: | ||||||||||||||||||||
Commercial | 105 | 105 | 59 | 386 | 10 | |||||||||||||||
Commercial real estate | 6,449 | 6,449 | 1,799 | 5,558 | 278 | |||||||||||||||
Consumer | –– | –– | –– | –– | –– | |||||||||||||||
Residential | –– | –– | –– | 81 | –– | |||||||||||||||
6,554 | 6,554 | 1,858 | 6,025 | 288 | ||||||||||||||||
Total: | ||||||||||||||||||||
Commercial | $ | 637 | $ | 637 | $ | 59 | $ | 911 | $ | 38 | ||||||||||
Commercial Real Estate | $ | 8,254 | $ | 8,254 | $ | 1,799 | $ | 7,054 | $ | 365 | ||||||||||
Consumer | $ | –– | $ | –– | $ | –– | $ | –– | $ | –– | ||||||||||
Residential | $ | –– | $ | –– | $ | –– | $ | 120 | $ | –– |
48 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The following table presents impaired loans for the year ended December 31, 2010:
Recorded Balance | Unpaid Principal Balance | Specific Allowance | Average Investment in Impaired Loans | Interest Income Recognized | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Loans without a specific valuation allowance: | ||||||||||||||||||||
Commercial | $ | 518 | $ | 518 | $ | –– | $ | 510 | $ | 22 | ||||||||||
Commercial real estate | 1,186 | 1,186 | –– | 1,172 | 45 | |||||||||||||||
Consumer | –– | –– | –– | –– | –– | |||||||||||||||
Residential | 77 | 77 | –– | 69 | 4 | |||||||||||||||
1,781 | 1,781 | –– | 1,751 | 71 | ||||||||||||||||
Loans with a specific valuation allowance: | ||||||||||||||||||||
Commercial | 666 | 666 | 486 | 648 | 38 | |||||||||||||||
Commercial real estate | 4,666 | 4,666 | 1,226 | 4,688 | 80 | |||||||||||||||
Consumer | –– | –– | –– | –– | –– | |||||||||||||||
Residential | 161 | 161 | 60 | 148 | 3 | |||||||||||||||
5,493 | 5,493 | 1,772 | 5,484 | 121 | ||||||||||||||||
Total: | ||||||||||||||||||||
Commercial | $ | 1,184 | $ | 1,184 | $ | 486 | $ | 1,158 | $ | 60 | ||||||||||
Commercial Real Estate | $ | 5,852 | $ | 5,852 | $ | 1,226 | $ | 5,860 | $ | 125 | ||||||||||
Consumer | $ | –– | $ | –– | $ | –– | $ | –– | $ | –– | ||||||||||
Residential | $ | 238 | $ | 238 | $ | 60 | $ | 217 | $ | 7 |
At December 31, 2011, the Company had certain loans that were modified in troubled debt restructurings and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.
49 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The following table presents information regarding troubled debt restructurings by class for the year ended December 31, 2011:
Year Ended December 31, 2011 | ||||||||||||
Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | ||||||||||
(In thousands) | ||||||||||||
Commercial | 5 | $ | 91 | $ | 58 | |||||||
Commercial real estate | 5 | 716 | 315 | |||||||||
Residential | –– | –– | –– | |||||||||
Consumer | –– | –– | –– |
The troubled debt restructurings described above increased the allowance for loan losses by $426,000 and did not result in any charge offs during the year ended December 31, 2011.
There were no defaults of any of the restructurings described above in the last 12 months.
Note 5: Premises and Equipment
Major classifications of premises and equipment, stated at cost, are as follows:
2011 | 2010 | |||||||
(In thousands) | ||||||||
Land, buildings and improvements | $ | 12,710 | $ | 11,941 | ||||
Leasehold improvements | 264 | 264 | ||||||
Furniture and equipment | 9,724 | 9,160 | ||||||
Computer software | 1,953 | 1,822 | ||||||
24,651 | 23,187 | |||||||
Less accumulated depreciation | (14,847 | ) | (13,909 | ) | ||||
Net premises and equipment | $ | 9,804 | $ | 9,278 |
Note 6: Interest-bearing Deposits
Interest-bearing deposits in denominations of $100,000 or more were $39.5 million at December 31, 2011 and $40.9 million at December 31, 2010.
50 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
At December 31, 2011, the scheduled maturities of time deposits are as follows:
Due during the year ending December 31, | (In thousands) | |||
2012 | $ | 62,370 | ||
2013 | 32,441 | |||
2014 | 9,498 | |||
2015 | 7,027 | |||
2016 | 7,070 | |||
Thereafter | 10,206 | |||
$ | 128,612 |
Note 7: Borrowings
At December 31, advances from the Federal Home Loan Bank were as follows:
2011 | 2010 | |||||||
(In thousands) | ||||||||
Maturities February 2011 through August 2025, primarily at fixed rates ranging from 2.88% to 7.20%, averaging 3.84% | $ | –– | $ | 43,450 | ||||
Maturities September 2013 through August 2025, primarily at fixed rates ranging from 3.08% to 7.20%, averaging 3.62% | 32,951 | –– | ||||||
$ | 32,951 | $ | 43,450 |
At December 31, 2011 required annual principal payments on Federal Home Loan Bank advances were as follows:
For the year ending December 31, | (In thousands) | |||
2012 | $ | 446 | ||
2013 | 5,386 | |||
2014 | 247 | |||
2015 | 187 | |||
2016 | 6,181 | |||
Thereafter | 20,504 | |||
$ | 32,951 |
51 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
At December 31, 2011 and 2010, as a member of the Federal Home Loan Bank system the Bank had the ability to obtain up to $25.1 million and $2.5 million, respectively, in additional borrowings based on securities and certain loans pledged to the FHLB. At both December 31, 2011 and 2010, the Bank had approximately $98.0 million of one- to four-family residential real estate and commercial real estate loans pledged as collateral for borrowings. Also at December 31, 2011, the Company and the Bank have cash management lines of credit with various correspondent banks (excluding FHLB cash management lines of credit) enabling additional borrowings of up to $15 million.
Short-term borrowings include approximately $10.0 million and $11.3 million at December 31, 2011 and 2010, respectively, of securities sold under agreements to repurchase. At December 31, 2011 there were no treasury tax and loan obligations. At December 31, 2010, approximately $522,000, for treasury tax and loan obligations was included in short term borrowings.
Securities sold under agreements to repurchase are financing arrangements whereby the Company sells securities and agrees to repurchase the identical securities at the maturities of the agreements at specified prices. Physical control is maintained for all securities sold under repurchase agreements. Information concerning securities sold under agreements to repurchase is summarized as follows:
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Balance outstanding at year end | $ | 9,968 | $ | 11,321 | ||||
Average daily balance during the year | $ | 13,020 | $ | 12,734 | ||||
Average interest rate during the year | 0.18 | % | 0.21 | % | ||||
Maximum month-end balance during the year | $ | 15,704 | $ | 14,931 | ||||
Weighted-average interest rate at year end | 0.18 | % | 0.21 | % |
Securities with an approximate carrying value of $15.2 million and $13.6 million at December 31, 2011 and 2010, respectively, were pledged as collateral for repurchase borrowings.
Note 8: Subordinated Debentures
In 2005, a Delaware statutory business trust owned by the Company, United Bancorp Statutory Trust I (“Trust I” or the “Trust”), issued $4.0 million of mandatorily redeemable debt securities. The sale proceeds were utilized to purchase $4.0 million of the Company’s subordinated debentures which mature in 2035. The Company’s subordinated debentures are the sole asset of Trust I. The Company’s investment in Trust I is not consolidated herein as the Company is not deemed the primary beneficiary of the Trust. However, the $4.0 million of mandatorily redeemable debt securities issued by the Trust are includible for regulatory purposes as a component of the Company’s Tier I Capital. Interest on the Company’s subordinated debentures is fixed at 6.25% and is payable quarterly.
52 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 9: Income Taxes
The provision for income taxes includes these components:
2011 | 2010 | |||||||
(In thousands) | ||||||||
Taxes currently payable | $ | 898 | $ | 584 | ||||
Deferred income taxes | (44 | ) | (365 | ) | ||||
Income tax expense | $ | 854 | $ | 219 |
A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:
2011 | 2010 | |||||||
(In thousands) | ||||||||
Computed at the statutory rate (34%) | $ | 1,341 | $ | 941 | ||||
(Decrease) increase resulting from | ||||||||
Tax exempt interest | (356 | ) | (484 | ) | ||||
Earnings on bank-owned life insurance - net | (187 | ) | (144 | ) | ||||
Other | 56 | (94 | ) | |||||
Actual tax expense | $ | 854 | $ | 219 |
53 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:
2011 | 2010 | |||||||
(In thousands) | ||||||||
Deferred tax assets | ||||||||
Allowance for loan losses | $ | 497 | $ | 488 | ||||
Stock based compensation | 292 | 106 | ||||||
Allowance for losses on foreclosed real estate | 182 | 148 | ||||||
Deferred compensation | 668 | 563 | ||||||
Employee benefit expense | 459 | 225 | ||||||
Intangible assets | 66 | 51 | ||||||
Non-accrual loan interest | –– | 28 | ||||||
Alternative minimum taxes | 186 | 344 | ||||||
Total deferred tax assets | 2,350 | 1,953 | ||||||
Deferred tax liabilities | ||||||||
Depreciation | (280 | ) | (143 | ) | ||||
Deferred loan costs, net | (249 | ) | (288 | ) | ||||
Accretion | (20 | ) | (22 | ) | ||||
FHLB stock dividends | (583 | ) | (583 | ) | ||||
Mortgage servicing rights | (57 | ) | (73 | ) | ||||
Unrealized gains on securities available for sale | (252 | ) | (43 | ) | ||||
Total deferred tax liabilities | (1,441 | ) | (1,152 | ) | ||||
Net deferred tax asset | $ | 909 | $ | 801 |
54 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 10: | Other Comprehensive Loss |
Other comprehensive loss components and related taxes were as follows:
2011 | 2010 | |||||||
(In thousands) | ||||||||
Unrealized gains (losses) on available-for-sale securities | $ | 977 | $ | (247 | ) | |||
Reclassification adjustment for realized gains on available-for-sale securities included in income | (363 | ) | (76 | ) | ||||
Change in unfunded status of defined benefit plan liability | (1,018 | ) | (66 | ) | ||||
Amortization of prior service cost included in net periodic pension cost | 15 | 15 | ||||||
Amortization of net loss included in net periodic pension cost | 66 | 71 | ||||||
Components of other comprehensive loss, before tax effect | (323 | ) | (303 | ) | ||||
Tax benefit | (110 | ) | (103 | ) | ||||
Other comprehensive loss | $ | (213 | ) | $ | (200 | ) |
The components of accumulated other comprehensive loss, included in stockholders’ equity, are as follows:
2011 | 2010 | |||||||
(In thousands) | ||||||||
Net unrealized gain on securities available-for-sale | $ | 744 | $ | 130 | ||||
Net unrealized loss for unfunded status of defined benefit plan liability | (2,137 | ) | (1,200 | ) | ||||
(1,393 | ) | (1,070 | ) | |||||
Tax effect | 473 | 363 | ||||||
Net-of-tax amount | $ | (920 | ) | $ | (707 | ) |
55 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 11: | Regulatory Matters |
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory–and possibly additional discretionary–actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Company and the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2011, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2011, the most recent notification from Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain capital ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
56 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The Company’s and Bank’s actual capital amounts and ratios are presented in the following table.
Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
As of December 31, 2011 | ||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | ||||||||||||||||||||||||
Consolidated | $ | 42,176 | 14.0 | % | $ | 24,172 | 8.0 | % | $ | N/A | N/A | |||||||||||||
Citizens | 40,387 | 13.4 | 24,120 | 8.0 | 30,150 | 10.0 | % | |||||||||||||||||
Tier I Capital (to Risk-Weighted Assets) | ||||||||||||||||||||||||
Consolidated | $ | 39,250 | 13.0 | % | $ | 12,086 | 4.0 | % | $ | N/A | N/A | |||||||||||||
Citizens | 37,461 | 12.4 | 12,060 | 4.0 | 18,090 | 6.0 | % | |||||||||||||||||
Tier I Capital (to Average Assets) | ||||||||||||||||||||||||
Consolidated | $ | 39,250 | 9.3 | % | $ | 16,972 | 4.0 | % | $ | N/A | N/A | |||||||||||||
Citizens | 37,461 | 9.0 | 16,623 | 4.0 | 20,779 | 5.0 | % | |||||||||||||||||
As of December 31, 2010 | ||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | ||||||||||||||||||||||||
Consolidated | $ | 41,672 | 13.9 | % | $ | 24,052 | 8.0 | % | $ | N/A | N/A | |||||||||||||
Citizens | 40,049 | 13.3 | 24,022 | 8.0 | 30,028 | 10.0 | % | |||||||||||||||||
Tier I Capital (to Risk-Weighted Assets) | ||||||||||||||||||||||||
Consolidated | $ | 38,932 | 13.0 | % | $ | 12,026 | 4.0 | % | $ | N/A | N/A | |||||||||||||
Citizens | 37,309 | 12.4 | 12,011 | 4.0 | 18,017 | 6.0 | % | |||||||||||||||||
Tier I Capital (to Average Assets) | ||||||||||||||||||||||||
Consolidated | $ | 38,932 | 8.7 | % | $ | 17,891 | 4.0 | % | $ | N/A | N/A | |||||||||||||
Citizens | 37,309 | 8.6 | 17,392 | 4.0 | 21,740 | 5.0 | % |
57 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 12: | Related Party Transactions |
At December 31, 2011 and 2010, the Bank had loans outstanding to executive officers, directors, significant stockholders and their affiliates (related parties). In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectibility or present other unfavorable features. Such loans are summarized below.
2011 | 2010 | |||||||
(In thousands) | ||||||||
Aggregate balance – January 1 | $ | 8,846 | $ | 9,450 | ||||
New loans | 352 | 1,216 | ||||||
Repayments | (1,565 | ) | (1,820 | ) | ||||
Aggregate balance – December 31 | $ | 7,633 | $ | 8,846 |
Deposits from related parties held by the Bank at December 31, 2011 and 2010, totaled $1.3 million and $1.0 million, respectively.
Note 13: | Benefit Plans |
Pension and Other Postretirement Benefit Plans
The Company has a noncontributory defined benefit pension plan covering all employees who meet the eligibility requirements. The Company’s funding policy is to make the minimum annual contribution that is required by applicable regulations, plus such amounts as the Company may determine to be appropriate from time to time. The Company expects to contribute $235,000 to the plan in 2012.
58 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The Company uses a December 31 measurement date for the plan. Information about the plan’s funded status and pension cost follows:
Pension Benefits | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Change in benefit obligation | ||||||||
Beginning of year | $ | (3,312 | ) | $ | (3,133 | ) | ||
Service cost | (304 | ) | (266 | ) | ||||
Interest cost | (173 | ) | (180 | ) | ||||
Actuarial loss | (772 | ) | (182 | ) | ||||
Benefits paid | 398 | 449 | ||||||
End of year | (4,163 | ) | (3,312 | ) | ||||
Change in fair value of plan assets | ||||||||
Beginning of year | 2,969 | 2,669 | ||||||
Actual return on plan assets | (8 | ) | 349 | |||||
Employer contribution | 250 | 400 | ||||||
Benefits paid | (398 | ) | (449 | ) | ||||
End of year | 2,813 | 2,969 | ||||||
Funded status at end of year | $ | (1,350 | ) | $ | (343 | ) |
Amounts recognized in accumulated other comprehensive loss not yet recognized as components of net periodic benefit cost consist of:
Pension Benefits | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Unamortized net loss | $ | 2,107 | $ | 1,155 | ||||
Unamortized prior service cost | 30 | 45 | ||||||
$ | 2,137 | $ | 1,200 |
The estimated net loss and prior service cost for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is approximately $169,000.
The accumulated benefit obligation for the defined benefit pension plan was $2.8 million and $2.4 million at December 31, 2011 and 2010, respectively.
59 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Information for the pension plan with respect to accumulated benefit obligation and plan assets is as follows:
December 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Projected benefit obligation | $ | 4,164 | $ | 3,312 | ||||
Accumulated benefit obligation | $ | 2,806 | $ | 2,366 | ||||
Fair value of plan assets | $ | 2,814 | $ | 2,969 |
December 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Components of net periodic benefit cost | ||||||||
Service cost | $ | 304 | $ | 266 | ||||
Interest cost | 173 | 180 | ||||||
Expected return on plan assets | (239 | ) | (234 | ) | ||||
Amortization of prior service cost | 15 | 15 | ||||||
Amortization of net loss | 66 | 71 | ||||||
Net periodic benefit cost | $ | 319 | $ | 298 |
Significant assumptions include:
Pension Benefits | ||||||||
2011 | 2010 | |||||||
Weighted-average assumptions used to determine benefit obligation: | ||||||||
Discount rate | 4.40 | % | 5.54 | % | ||||
Rate of compensation increase | 3.00 | % | 3.00 | % | ||||
Weighted-average assumptions used to determine benefit cost: | ||||||||
Discount rate | 5.54 | % | 5.96 | % | ||||
Expected return on plan assets | 8.00 | % | 8.00 | % | ||||
Rate of compensation increase | 3.00 | % | 3.00 | % |
60 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The Company has estimated the long-term rate of return on plan assets based primarily on historical returns on plan assets, adjusted for changes in target portfolio allocations and recent changes in long-term interest rates based on publicly available information. The long-term rate of return did not change from 2010 to 2011.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as of December 31, 2011:
Pension Benefits | ||||
(In thousands) | ||||
2012 | $ | 190 | ||
2013 | 150 | |||
2014 | 183 | |||
2015 | 98 | |||
2016 | 432 | |||
2017-2019 | 2,309 | |||
Total | $ | 3,362 |
Plan assets are held by an outside trustee which invests the plan assets in accordance with the provisions of the plan agreement. All equity and fixed income investments are held in various mutual funds with quoted market prices. Mutual fund equity securities primarily include investment funds that are comprised of large-cap, mid-cap and international companies. Fixed income mutual funds primarily include investments in corporate bonds, mortgage-backed securities and U.S. Treasuries. Other types of investments include a prime money market fund.
The asset allocation strategy of the plan is designed to allow flexibility in the determination of the appropriate investment allocations between equity and fixed income investments. This strategy is designed to help achieve the actuarial long term rate on plan assets of 8%. The target asset allocation percentages for both 2011 and 2010 are as follows:
Large-Cap stocks | Not to exceed 60% |
SMID-Cap stocks | Not to exceed 20% |
International equity securities | Not to exceed 15% |
Fixed income investments | Not to exceed 40% |
Alternative investments | Not to exceed 20% |
61 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
At December 31, 2011 and 2010, the fair value of plan assets as a percentage of the total was invested in the following:
December 31, | ||||||||
2011 | 2010 | |||||||
Equity securities | 76.7 | % | 74.9 | % | ||||
Debt securities | 22.4 | 24.0 | ||||||
Cash and cash equivalents | 0.9 | 1.1 | ||||||
100.0 | % | 100.0 | % |
Pension Plan Assets
Following is a description of the valuation methodologies used for pension plan assets measured at fair value on a recurring basis, as well as the general classification of pension plan assets pursuant to the valuation hierarchy.
Where quoted market prices are available in an active market, plan assets are classified within Level 1 of the valuation hierarchy. Level 1 plan assets include investments in mutual funds that involve equity, bond and money market investments. All of the Plan’s assets are classified as Level 1. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of plan assets with similar characteristics or discounted cash flows. In certain cases where Level 1 or Level 2 inputs are not available, plan assets are classified within Level 3 of the hierarchy. At December 31, 2011 and 2010, the Plan did not contain Level 2 or Level 3 investments.
62 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The fair values of Company’s pension plan assets at December 31, by asset category are as follows:
December 31, 2011 | ||||||||||||||||
Fair Value Measurements Using | ||||||||||||||||
Asset Category | Total 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) | ||||||||||||||||
Mutual money market | $ | 25 | $ | 25 | $ | –– | $ | –– | ||||||||
Mutual funds – equities | ||||||||||||||||
International | 187 | 187 | –– | –– | ||||||||||||
Real estate | 31 | 31 | –– | –– | ||||||||||||
Large Cap | 1,139 | 1,139 | –– | –– | ||||||||||||
Small and Mid Cap | 776 | 776 | –– | –– | ||||||||||||
Commodities | 26 | 26 | ||||||||||||||
Mutual funds – fixed income | ||||||||||||||||
Core bond | 544 | 544 | –– | –– | ||||||||||||
High yield corporate | 86 | 86 | –– | –– | ||||||||||||
Total | $ | 2,814 | $ | 2,814 | $ | –– | $ | –– |
December 31, 2010 | ||||||||||||||||
Fair Value Measurements Using | ||||||||||||||||
Asset Category | Total 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) | ||||||||||||||||
Mutual money market | $ | 32 | $ | 32 | $ | –– | $ | –– | ||||||||
Mutual funds – equities | ||||||||||||||||
International | 209 | 209 | –– | –– | ||||||||||||
Real estate | 30 | 30 | –– | –– | ||||||||||||
Large Cap | 1,157 | 1,157 | –– | –– | ||||||||||||
Small and Mid Cap | 799 | 799 | –– | –– | ||||||||||||
Commodities | 30 | 30 | ||||||||||||||
Mutual funds – fixed income | ||||||||||||||||
Core bond | 593 | 593 | –– | –– | ||||||||||||
High yield corporate | 119 | 119 | –– | –– | ||||||||||||
Total | $ | 2,969 | $ | 2,969 | $ | –– | $ | –– |
63 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan (“ESOP”) with an integrated 401(k) plan covering substantially all employees of the Company. The ESOP acquired 354,551 shares of Company common stock at $9.64 per share in 2005 with funds provided by a loan from the Company. Accordingly, $3.4 million of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity. Shares are released to participants proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends and charged to retained earnings. Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Company, are made to the ESOP. The Company’s 401(k) matching percentage was 50% of the employees’ first 6% of contributions for 2011 and 2010.
ESOP and 401(k) expense for the years ended December 31, 2011 and 2010 was approximately $203,000 and $200,000, respectively.
Share information for the ESOP is as follows at December 31, 2011 and 2010:
2011 | 2010 | |||||||
Allocated shares at beginning of the year | 109,971 | 87,201 | ||||||
Shares released for allocation during the year | 23,639 | 23,639 | ||||||
Shares distributed due to retirement/diversification | (8,950 | ) | (869 | ) | ||||
Unearned shares | 212,718 | 236,357 | ||||||
Total ESOP shares | 337,378 | 346,328 | ||||||
Fair value of unearned shares at December 31 | $ | 1,800,000 | $ | 2,059,000 |
At December 31, 2011, the fair value of the 124,660 allocated shares held by the ESOP was approximately $1,055,000.
Split Dollar Life Insurance Arrangements
The Company has split-dollar life insurance arrangements with its executive officers and certain directors that provide certain death benefits to the executive’s beneficiaries upon his or her death. The agreements provide a pre- and post-retirement death benefit payable to the beneficiaries of the executive in the event of the executive’s death. The Company has purchased life insurance policies on the lives of all participants covered by these agreements in amounts sufficient to provide the sums necessary to pay the beneficiaries, and the Company pays all premiums due on the policies. The accumulated post retirement benefit obligation at December 31, 2011 and 2010 was $1.2 million and $1.3, respectively.
64 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 14: | Stock Option and Restricted Stock Plans |
The Company’s Employee Share Option Plan (the “1996 Plan”), which was stockholder approved, permitted the grant of share options to its employees. During 2008, the Company’s stockholders authorized the adoption of the United Bancorp, Inc. 2008 Stock Incentive Plan (the “2008 Plan”). No more than 500,000 shares of the Company’s common stock may be issued under the 2008 Plan. The shares that may be issued may be authorized but unissued shares or treasury shares. The 2008 Plan permits the grant of incentive awards in the form of options, stock appreciation rights, restricted share and share unit awards, and performance share awards. The 2008 Plan contains annual limits on certain types of awards to individual participants. In any calendar year, no participant may be granted awards covering more than 25,000 shares.
The Company believes that such awards better align the interests of its employees with those of its stockholders. Stock options are generally granted with an exercise price, and restricted stock awards are valued, equal to the market price of the Company’s stock at the date of grant; stock option awards generally vest within 9.25 years of continuous service and have a 9.5 year contractual term. Restricted stock awards generally vest over a 9.5 year contractual term, or over the period to retirement, whichever is shorter. Restricted stock awards have no post-vesting restrictions. Stock options and restricted stock awards provide for accelerated vesting if there is a change in control (as defined in the Plans).
The fair value of each option award was estimated on the date of grant using the Black-Scholes option valuation model. There were no stock options granted in 2011 and 2010.
A summary of option activity under the Plan as of December 31, 2011, and changes during the year then ended, is presented below:
Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding, beginning of year | 53,714 | $ | 10.34 | $ | –– | $ | –– | |||||||||
Granted | –– | –– | –– | –– | ||||||||||||
Exercised | –– | –– | –– | –– | ||||||||||||
Forfeited or expired | –– | –– | –– | –– | ||||||||||||
Outstanding, end of year | 53,714 | $ | 10.34 | 3.2 | $ | –– | ||||||||||
Exercisable, end of year | –– | $ | –– | –– | $ | –– |
65 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
A summary of the status of the Company’s nonvested restricted shares as of December 31, 2011, and changes during the year then ended, is presented below:
Shares | Weighted- Average Grant-Date Fair Value | |||||||
Nonvested, beginning of year | 180,000 | $ | 8.35 | |||||
Granted | –– | –– | ||||||
Vested | –– | –– | ||||||
Forfeited | (10,000 | ) | $ | 8.35 | ||||
Nonvested, end of year | 170,000 | $ | 8.35 |
Total compensation cost recognized in the income statement for share-based payment arrangements during the years ended December 31, 2011 and 2010 was $200,000 and $220,000, respectively. The recognized tax benefits related thereto were $68,000 and $75,000, for the years ended December 31, 2011 and 2010, respectively.
As of December 31, 2011 and 2010, there was $955,000 and $1.2 million, respectively, of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 6.9 years.
66 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 15: | Earnings Per Share |
Earnings per share (EPS) were computed as follows:
Year Ended December 31, 2011 | ||||||||||||
Net Income | Weighted- Average Shares | Per Share Amount | ||||||||||
(In thousands) | ||||||||||||
Net income | $ | 3,091 | ||||||||||
Dividends on non-vested restricted stock | (95 | ) | ||||||||||
Net income allocated to stockholders | 2,996 | |||||||||||
Basic earnings per share | ||||||||||||
Income available to common stockholders | –– | 4,754,739 | $ | 0.63 | ||||||||
Effect of dilutive securities | ||||||||||||
Restricted stock awards | –– | 41,067 | ||||||||||
Diluted earnings per share | ||||||||||||
Income available to common stockholders and assumed conversions | $ | 2,996 | $ | 4,795,806 | $ | 0.62 |
Options to purchase 53,714 shares of common stock at an average exercise price of $10.34 per share were outstanding at December 31, 2011, 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.
67 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Year Ended December 31, 2010 | ||||||||||||
Net Income | Weighted- Average Shares | Per Share Amount | ||||||||||
(In thousands) | ||||||||||||
Net income | $ | 2,547 | ||||||||||
Dividends on non-vested restricted stock | (101 | ) | ||||||||||
Net income allocated to stockholders | 2,446 | |||||||||||
Basic earnings per share | ||||||||||||
Income available to common stockholders | 4,690,458 | $ | 0.52 | |||||||||
Effect of dilutive securities | ||||||||||||
Restricted stock awards | 27,192 | |||||||||||
Diluted earnings per share | ||||||||||||
Income available to common stockholders and assumed conversions | $ | 2,446 | $ | 4,717,650 | $ | 0.52 |
Options to purchase 53,714 shares of common stock at an average exercise price of $10.34 per share were outstanding at December 31, 2010, 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.
68 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 16: | Disclosures about Fair Value of Financial Instruments and Other Assets and Liabilities |
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 |
Following is a description of the valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets 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. Level 1 securities include equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include government agency securities, mortgage-backed securities, certain collateralized mortgage and debt obligations and certain municipal securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include other less liquid securities.
69 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The following tables present the fair value measurements of assets recognized in the accompanying 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 December 31, 2011 and 2010:
December 31, 2011 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) | ||||||||||||||||
U.S government agencies | $ | 64,168 | $ | –– | $ | 64,168 | $ | –– | ||||||||
State and political subdivisions | 17,817 | –– | 17,817 | –– | ||||||||||||
Equity securities | 13 | 13 | –– | –– |
December 31, 2010 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) | ||||||||||||||||
U.S government agencies | $ | 61,233 | $ | –– | $ | 61,233 | $ | –– | ||||||||
State and political subdivisions | 25,295 | –– | 25,295 | –– | ||||||||||||
Government sponsored entities mortgage-backed securities | 9,614 | –– | 9,614 | –– | ||||||||||||
Equity securities | 13 | 13 | –– | –– |
Following is a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Impaired Loans (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.
70 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
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 foreclosed assets held for sale primarily through evaluations of appraisals performed, and current and past offers for the real estate under evaluation.
The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2011 and 2010:
December 31, 2011 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) | ||||||||||||||||
Impaired loans | $ | 1,746 | $ | –– | $ | –– | $ | 1,746 | ||||||||
Foreclosed assets held for sale | 415 | –– | –– | 415 |
December 31, 2010 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) | ||||||||||||||||
Impaired loans | $ | 3,595 | $ | –– | $ | –– | $ | 3,595 | ||||||||
Foreclosed assets held for sale | 238 | –– | –– | 238 |
71 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
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. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. 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.
December 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Financial assets | ||||||||||||||||
Cash and cash equivalents | $ | 15,681 | $ | 15,681 | $ | 10,935 | $ | 10,935 | ||||||||
Certificates of deposit in other financial institutions | –– | –– | 2,564 | 2,564 | ||||||||||||
Available-for-sale securities | 81,998 | 81,998 | 96,155 | 96,155 | ||||||||||||
Held-to-maturity securities | 4,450 | 4,597 | 6,331 | 6,510 | ||||||||||||
Loans, net of allowance for loan losses | 281,526 | 283,055 | 276,037 | 276,699 | ||||||||||||
Federal Home Loan Bank stock | 4,810 | 4,810 | 4,810 | 4,810 | ||||||||||||
Accrued interest receivable | 1,410 | 1,410 | 1,441 | 1,441 | ||||||||||||
Financial liabilities | ||||||||||||||||
Deposits | 328,540 | 313,817 | 325,446 | 308,387 | ||||||||||||
Short-term borrowings | 9,968 | 9,955 | 11,843 | 11,829 | ||||||||||||
Federal Home Loan Bank advances | 32,951 | 35,617 | 43,450 | 45,316 | ||||||||||||
Subordinated debentures | 4,000 | 3,632 | 4,000 | 3,412 | ||||||||||||
Interest payable | 234 | 234 | 337 | 337 |
The following methods and assumptions were used to estimate the fair value of each class of financial instruments not previously discussed.
Cash and Cash Equivalents, Federal Home Loan Bank Stock, Accrued Interest Receivable and Certificates of Deposit in Other Financial Institutions
The carrying amount approximates fair value.
Held-to-Maturity Securities
Fair value is based on quoted market prices if available. If a quoted market price is not available fair value is estimated using quoted market prices for similar securities.
72 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
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. The carrying amount of accrued interest approximates its fair value.
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.
Short-term Borrowings, Subordinated Debentures and Federal Home Loan Bank Advances
Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.
Interest Payable
The carrying amount approximates fair value.
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 December 31, 2011 and 2010.
Note 17: | Significant Estimates and Concentrations |
Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk.
73 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 18: | Commitments and Credit Risk |
At December 31, 2011 and 2010, total commercial and commercial real estate loans made up 64.5% and 60.5%, respectively, of the loan portfolio. Installment loans account for 13.8% and 16.8%, respectively, of the loan portfolio. Real estate loans comprise 21.7% and 22.7% of the loan portfolio as of December 31, 2011 and 2010, respectively, and primarily include first mortgage loans on residential properties and home equity lines of credit.
Included in cash and due from banks as of December 31, 2011 and 2010, is $10.4 million and $5.1 million, respectively, of deposits with the Federal Reserve Bank of Cleveland.
Commitments to Originate Loans
Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
At December 31, 2011 and 2010, the Company had outstanding commitments to originate variable rate loans aggregating approximately $11.0 million and $7.6 million, respectively. The commitments extended over varying periods of time with the majority being disbursed within a one-year period.
Mortgage loans in the process of origination represent amounts that the Company plans to fund within a normal period of 60 to 90 days, some of which are intended for sale to investors in the secondary market. The Company did not have any mortgage loans in the process of origination which are intended for sale at December 31, 2011. Total mortgage loans in the process of origination which are intended for sale amounted to approximately $1.6 million at December 31, 2010.
74 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Standby Letters of Credit
Standby letters of credit are irrevocable conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Fees for letters of credit are initially recorded by the Company as deferred revenue and are included in earnings at the termination of the respective agreements. Should the Company be obligated to perform under the standby letters of credit, the Company may seek recourse from the customer for reimbursement of amounts paid.
The Company had total outstanding standby letters of credit amounting to $962,000 and $897,000, at December 31, 2011 and 2010, respectively, with terms not exceeding nine months. At both December 31, 2011 and 2010, the Company had no deferred revenue under standby letter of credit agreements.
Lines of Credit and Other
Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.
At December 31, 2011, the Company had granted unused lines of credit to borrowers aggregating approximately $11.1 million and $30.0 million for commercial lines and open-end consumer lines, respectively. At December 31, 2010, the Company had granted unused lines of credit to borrowers aggregating approximately $12.9 million and $29.2 million for commercial lines and open-end consumer lines, respectively.
75 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Current Economic Conditions
The current protracted economic decline continues to present financial institutions with circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair values of investments and other assets, constraints on liquidity and capital and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans.
At December 31, 2011, the Company held approximately $148.1 million in loans secured by commercial real estate and distributed within three distinct geographic areas in which the Company operates. Due to national, state and local economic conditions, values for commercial and development real estate have declined significantly and the market for these properties is depressed.
The accompanying consolidated financial statements have been prepared using values and information currently available to the Company.
Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.
Note 19: | Recent Accounting Pronouncements |
FASB Accounting Standards Update (ASU) 2010-20, Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (Topic 310), issued on July 21, 2010, concerns improved disclosures regarding the credit quality in a financial institution’s loan portfolio. The guidance requires additional disaggregation of the credit portfolio by portfolio segment and class of receivable, a revised roll forward of the allowance for credit losses, presentation of the credit portfolio by credit quality indicators, an aging schedule of past due receivables, disclosure of troubled debt restructurings and purchases and sales of receivables by portfolio segment. The period-end disclosures were effective for periods ending on or after December 15, 2010 (December 31, 2010 for the Company). The activity disclosures are effective for periods beginning on or after December 15, 2010 (January 1, 2011 for the Company). The Company adopted FASB ASU 2010-20 as required, without a material effect on the Company’s financial condition or results of operations.
FASB ASU 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, issued in April 2011, amends Subtopic 310-40 to clarify existing guidance related to a creditor’s evaluation of whether a restructuring of debt is considered a troubled debt restructuring. The amendments add additional clarity in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties. The updated guidance and related disclosure requirements are effective for financial statements issued for the first interim or annual period beginning on or after June 15, 2011, and should be applied retroactively to the beginning of the annual period of adoption. Early adoption is permitted. The Company adopted FASB ASU 2011-02 as required, without a material effect on the Company’s financial condition or results of operations.
76 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
FASB ASU 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements, issued in April 2011, improves the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The updated guidance is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively. Management is currently evaluating the impact of the guidance on the Company’s condensed consolidated financial statements.
FASB ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements, issued in May 2011, provides guidance in common fair value measurement and disclosure requirements. The amendment changes the wording used to describe many of the requirements for measuring fair value and for disclosing information about fair value measurements. The amendments are effective during interim and annual periods beginning after December 15, 2011. Management is currently evaluating the impact of the guidance on the Company’s condensed consolidated financial statements.
FASB ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income, issued in June 2011, is designed to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in comprehensive income. The amendments are effective during interim and annual periods beginning after December 15, 2011. Management does not expect adoption of this standard to have a material impact on the Company’s condensed consolidated financial statements.
FASB ASU 2011-08, Intangibles (Topic 350), Testing Goodwill for Impairment, issued in September 2011, is designed to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test in Topic 350. The amendments are effective during interim and annual periods beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. Management does not expect adoption of this standard to have a material impact on the Company’s consolidated financial statements.
FASB ASU 2011-12, Comprehensive Income (Topic 220), Deferral of the effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-12, issued in December 2011 is a deferral of only those changes in update 2011-05 that relates to the presentation of reclassification adjustments out of accumulated other comprehensive income. All other requirements in Update 2011-05 are not affected by this update, including the requirements to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Management does not expect adoption of this standard to have a material impact on the Company’s consolidated financial statements.
77 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 20: | Condensed Financial Information (Parent Company Only) |
Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:
Condensed Balance Sheets
December 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Assets | ||||||||
Cash and cash equivalents | $ | 1,820 | $ | 1,812 | ||||
Investment in the Bank | 38,393 | 37,958 | ||||||
Corporate owned life insurance | 272 | 272 | ||||||
Other assets | 1,583 | 1,129 | ||||||
Total assets | $ | 42,068 | $ | 41,171 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Subordinated debentures | $ | 4,000 | $ | 4,000 | ||||
Other liabilities | 1,886 | 1,590 | ||||||
Stockholders’ equity | 36,182 | 35,581 | ||||||
Total liabilities and stockholders’ equity | $ | 42,068 | $ | 41,171 |
78 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Condensed Statements of Income
Years Ended December 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Operating Income | ||||||||
Dividends from subsidiary | $ | 4,448 | $ | 3,154 | ||||
Interest and dividend income from securities and federal funds | - | 10 | ||||||
Total operating income | 4,448 | 3,164 | ||||||
General, Administrative and Other Expenses | 1,959 | 1,907 | ||||||
Income Before Income Taxes and Equity in Undistributed Income of Subsidiary | 2,489 | 1,257 | ||||||
Income Tax Benefits | 572 | 563 | ||||||
Income Before Equity in Undistributed Income of Subsidiary | 3,061 | 1,820 | ||||||
Equity in Undistributed Income of Subsidiary | 30 | 727 | ||||||
Net Income | $ | 3,091 | $ | 2,547 |
79 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Condensed Statements of Cash Flows
Years Ended December 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Operating Activities | ||||||||
Net income | $ | 3,091 | $ | 2,547 | ||||
Items not requiring (providing) cash | ||||||||
Depreciation and amortization | 12 | 12 | ||||||
Equity in undistributed income of subsidiary | (30 | ) | (727 | ) | ||||
Amortization of ESOP and share-based compensation plans | 403 | 421 | ||||||
Net change in other assets and other liabilities | (788 | ) | 531 | |||||
Net cash provided by operating activities | 2,688 | 2,784 | ||||||
Financing Activities | ||||||||
Dividends paid to stockholders | (2,988 | ) | (2,960 | ) | ||||
Proceeds from purchases of common stock by the dividend reinvestment plan | 236 | 458 | ||||||
Shares purchased for deferred compensation plan | 72 | 104 | ||||||
Net cash used in financing activities | (2,680 | ) | (2,398 | ) | ||||
Net Change in Cash and Cash Equivalents | 8 | 386 | ||||||
Cash and Cash Equivalents at Beginning of Year | 1,812 | 1,426 | ||||||
Cash and Cash Equivalents at End of Year | $ | 1,820 | $ | 1,812 |
80 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Note 21: | Quarterly Financial Data (Unaudited) |
The following table summarizes the Company’s quarterly results of operations for the years ended December 31, 2011 and 2010.
Three Months Ended | ||||||||||||||||
2011: | March 31, | June 30, | September 30, | December 31, | ||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Total interest income | $ | 5,038 | $ | 5,212 | $ | 5,071 | $ | 4,890 | ||||||||
Total interest expense | 1,256 | 1,220 | 1,141 | 1,090 | ||||||||||||
Net interest income | 3,782 | 3,992 | 3,930 | 3,800 | ||||||||||||
Provision for loan losses | 648 | 494 | 401 | 425 | ||||||||||||
Other income | 694 | 895 | 832 | 721 | ||||||||||||
Gain on sale of securities - net | 370 | –– | –– | –– | ||||||||||||
General, administrative and other expense | 3,294 | 3,473 | 3,300 | 3,036 | ||||||||||||
Income before income taxes | 904 | 920 | 1,061 | 1,060 | ||||||||||||
Federal income taxes | 166 | 168 | 260 | 260 | ||||||||||||
Net income | $ | 738 | $ | 752 | $ | 801 | $ | 800 | ||||||||
Earnings per share | ||||||||||||||||
Basic | $ | 0.15 | $ | 0.15 | $ | 0.16 | $ | 0.17 | ||||||||
Diluted | $ | 0.15 | $ | 0.15 | $ | 0.16 | $ | 0.16 |
81 |
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Three Months Ended | ||||||||||||||||
2010: | March 31, | June 30, | September 30, | December 31, | ||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Total interest income | $ | 5,530 | $ | 5,513 | $ | 5,403 | $ | 5,221 | ||||||||
Total interest expense | 1,804 | 1,715 | 1,582 | 1,379 | ||||||||||||
Net interest income | 3,726 | 3,798 | 3,821 | 3,842 | ||||||||||||
Provision for loan losses | 360 | 370 | 321 | 765 | ||||||||||||
Other income | 776 | 859 | 849 | 786 | ||||||||||||
Gain on sale of securities - net | –– | –– | 47 | –– | ||||||||||||
General, administrative and other expense | 3,371 | 3,471 | 3,687 | 3,393 | ||||||||||||
Income before income taxes | 771 | 816 | 709 | 470 | ||||||||||||
Federal income taxes | 88 | 115 | (1 | ) | 17 | |||||||||||
Net income | $ | 683 | $ | 701 | $ | 710 | $ | 453 | ||||||||
Earnings per share | ||||||||||||||||
Basic | $ | 0.14 | $ | 0.14 | $ | 0.15 | $ | 0.09 | ||||||||
Diluted | $ | 0.14 | $ | 0.14 | $ | 0.15 | $ | 0.09 |
82 |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 2, 2012, accompanying the consolidated financial statements incorporated by reference in the Annual Report of United Bancorp, Inc. on Form 10-K for the years ended December 31, 2011 and 2010. We hereby consent to the incorporation by reference of said report in the Registration Statements of United Bancorp, Inc. on Forms S-8 (file No. 33-123036 effective February 28, 2005) and S-3 (file No. 333-136708 effective August 17, 2006).
/s/ BKD, LLP
BKD, LLP
Cincinnati, Ohio
March 23, 2012
Exhibit 31.1
CERTIFICATIONS
I, James W. Everson, Chairman, President and Chief Executive Officer of United Bancorp, Inc., certify that:
1. | I have reviewed this annual report on Form 10-K of United Bancorp, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 23, 2012 | /s/James W. Everson |
James W. Everson, Chairman, President and CEO |
Exhibit 31.2
CERTIFICATIONS
I, Randall M. Greenwood, Chief Financial Officer of United Bancorp, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of United Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c ) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 23, 2012 | /s/Randall M. Greenwood |
Randall M. Greenwood, CFO |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of United Bancorp, Inc. (the "Company") on Form 10-K for the period ending December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James W. Everson, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/James W. Everson | |
James W. Everson, | |
Chairman, President and Chief Executive Officer |
March 23, 2012
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of United Bancorp, Inc. (the "Company") on Form 10-K for the period ending December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Randall M. Greenwood, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/Randall M. Greenwood | |
Randall M. Greenwood, | |
Chief Financial Officer |
March 23, 2012
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