EX-13 2 v305251_ex13.htm EXHIBIT 13

  

 

 

 

 

 

 

 
 

 

 

 

 

 

Focus On…50 Years in Banking for Ohio’s Jim Everson

 

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.

 

    
 

 

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.

 

 

 

 
 

 

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

  

  

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

 

 

 

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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

 

 

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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 

 

 

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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.

 

 

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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.

 

 

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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.

 

 

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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.

 

 

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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.

 

 

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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.

 

 

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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 1Quoted prices in active markets for identical assets or liabilities

 

Level 2Observable 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 3Unobservable 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