UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2013
Commission File #0-16640
(Exact name of registrant as specified in its charter)
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Michigan
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38-2606280
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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2723 South State Street, Ann Arbor, MI 48104
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (517) 423-8373
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such file).Yes þNo o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large Accelerated Filer o Accelerated Filer o
Non-Accelerated Filer o (do not check if a smaller reporting company) Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No þ
As of June 30, 2013, the aggregate market value of the common stock held by non-affiliates of the registrant was $65,852,000, based on a closing sale price of $5.40 as reported on the OTCQB market. As of January 31, 2014, there were 12,721,962 outstanding shares of registrant's common stock, no par value.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and United Bancorp, Inc. Forward-looking statements are identifiable by words or phrases such as "outlook" or "strategy"; that an event or trend "may," "could," "should," "will," "is likely," or is "probable" or "projected" to occur or "continue" or "is scheduled" or "on track" or that the Company or its management "anticipates," "believes," "estimates," "plans," "forecasts," "intends," "predicts," or "expects" a particular result, or is "confident," "optimistic" or has an "opinion" that an event will occur, or other words or phrases such as "ongoing," "future," "evaluating," "alternatives," "potential," "effort," "tend" and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, asset and credit quality trends, deployment of liquidity and loan demand, future economic conditions, future investment opportunities, future levels of expenses associated with other real estate owned, real estate valuation, future recognition of income, future levels of non-performing loans, the rate of asset dispositions, future capital levels, future growth and funding sources, future liquidity levels, future profitability levels, the effects on earnings of changes in interest rates and the future level of other revenue sources. All of the information concerning interest rate sensitivity is forward-looking. All statements referencing future time periods are forward-looking.
Management's determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including mortgage servicing rights and deferred tax assets) and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. There can be no assurance that future loan losses will be limited to the amounts estimated or that other real estate owned can be sold for its carrying value or at all. Our ability to successfully implement new programs and initiatives, increase efficiencies, utilize our deferred tax asset, address regulatory issues, respond to declines in collateral values and credit quality, and improve profitability is not entirely within our control and is not assured. The future effect of changes in the financial and credit markets and the national and regional economy on the banking industry, generally, and on United Bancorp, Inc., specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("risk factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. United Bancorp, Inc. undertakes no obligation to update, clarify or revise forward-looking statements to reflect developments that occur or information obtained after the date of this report.
In addition, expected cost savings, synergies and other financial benefits from the proposed merger with Old National Bancorp might not be realized within the expected time frame, and costs or difficulties relating to integration matters might be greater than expected. The requisite shareholder and regulatory approvals for the proposed mergers might not be obtained.
Risk factors include, but are not limited to, the risk factors described in "Item 1A - Risk Factors" of this report. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.
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Item No.
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Description
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United Bancorp, Inc. (the "Company" or "United") is a Michigan corporation headquartered in Ann Arbor, Michigan and serves as the holding company for United Bank & Trust ("UBT" or "the Bank"), a Michigan-chartered bank organized over 120 years ago. The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). The Company has corporate power to engage in activities permitted to business corporations under the Michigan Business Corporation Act, subject to the limitations of the Bank Holding Company Act and regulations of the Federal Reserve System. In general, the Bank Holding Company Act and regulations restrict the Company with respect to its own activities and activities of any subsidiaries to the business of banking or other activities that are closely related to the business of banking. At December 31, 2013, the Company had total assets of approximately $899.0 million, total deposits of approximately $790.5 million, and total shareholders' equity of approximately $82.2 million. For more information about the Company's financial condition and results of operations, see the consolidated financial statements and related notes filed as part of this report.
The Company has four primary lines of business under one operating segment of commercial banking: banking services, residential mortgage, wealth management and structured finance. During the year ended December 31, 2013, our net interest income accounted for approximately 59.6% of our consolidated operating revenue and our noninterest income accounted for approximately 40.4% of our consolidated operating revenue. This compares to 58.4% and 41.6%, respectively, for 2012, and 63.6% and 36.4%, respectively, for 2011.
The Company was formed in 1985 to acquire all of the capital stock of UBT. The Company provides services through the Bank's system of eighteen banking offices, one trust office, and twenty-one automated teller machines, located in Washtenaw, Lenawee, Livingston and Monroe Counties, Michigan. United's corporate headquarters are located in Ann Arbor, which is located in Washtenaw County, Michigan. The employment base of Washtenaw County is centered on health care, education and automotive high technology. Economic stability is provided to a great extent by the University of Michigan, which is a major employer and is not as economically sensitive to the fluctuations of the automotive industry. The services and public sectors account for a substantial percentage of total industry employment, in large part due to the University of Michigan and the University of Michigan Medical Center.
The Bank offers a full range of services to individuals, corporations, fiduciaries and other institutions. Banking services include checking accounts, NOW accounts, savings accounts, time deposit accounts, money market deposit accounts, safe deposit facilities and money transfers. Lending operations provide real estate loans, secured and unsecured business and personal loans, consumer installment loans, credit card and check-credit loans, home equity loans, accounts receivable and inventory financing, and construction financing. We offer our customers a full array of conventional residential mortgage products, including purchase, refinance and construction loans. The Bank offers a full complement of online services, including internet banking and bill payment.
The Bank maintains correspondent bank relationships with a small number of larger banks, which involve check clearing operations, securities safekeeping, transfer of funds, loan participation, purchase and sale of federal funds and other similar services.
Our mortgage group offers our customers a full array of conventional residential mortgage products, including purchase, refinance and construction loans. Due to our local decision making and fully-functional back office, we believe we have consistently been one of the most active originators of residential mortgage loans in our market area. Our mortgage group generated 32.2% of our noninterest income for the twelve months ended December 31, 2013.
Our Wealth Management Group is a key focus of our growth and diversification strategy and offers a variety of investment services to individuals, corporations and governmental entities. The department provides trust services, financial planning services, investment services, custody services, pension paying agent services and acts as the personal representative for estates. These products help to diversify the Company's sources of income. The Bank offers non-deposit investment products through licensed representatives in its banking offices. Our Wealth Management Group generated 27.6% of our noninterest income for the twelve months ended December 31, 2013.
Our structured finance group, United Structured Finance Company ("USFC"), offers simple, effective financing solutions to small businesses and commercial property owners, primarily by utilizing various government guaranteed loan programs and other off-balance sheet finance solutions through secondary market sources. The loans generated by USFC are typically sold on the secondary market, to the extent allowed by the applicable SBA programs. Gains on the sale of those loans are included in income from loan sales and servicing. USFC revenue provides additional diversity to the Company's income stream, and provides additional financing alternatives to clients of the Bank as well as non-bank clients.
For the twelve months ended September 30, 2013 and 2012, United Structured Finance Company was the leading SBA lender in Lenawee, Washtenaw and Livingston Counties, combined. For 2013, USFC was the third-largest SBA 7A lender in Michigan, based on loan volume.
The Company's loan portfolio is not concentrated in any one industry. The Company has no foreign loans, assets or activities. No material part of the business of the Company is dependent upon a single customer or very few customers.
Recent Developments
Pending Merger
On January 7, 2014, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Old National Bancorp ("Old National"), an Indiana corporation, pursuant to which the Company will merge with and into Old National, whereupon the separate corporate existence of the Company will cease and Old National will survive (the "Merger"). In connection with the Merger, the Bank will be merged with and into Old National Bank, a national banking association and wholly owned subsidiary of Old National, with Old National Bank as the surviving bank. Under the terms of the Merger Agreement, shareholders of United will receive .70 shares of Old National common stock and $2.66 in cash for each share of United common stock.
The Merger is expected to close late in the second quarter of 2014. The transaction remains subject to approval by United's shareholders and approval by federal and state regulatory authorities, as well as the satisfaction of other customary closing conditions provided in the Merger Agreement.
The Merger Agreement was previously filed with the Securities Exchange Commission on January 8, 2014 in the Company's Current Report on Form 8-K, Exhibit 2.1, and is here incorporated by reference.
Preferred Stock Redemption
The Company issued 20,600 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, Liquidation Preference Amount $1,000 per share ("Preferred Shares") to U.S. Treasury on January 16, 2009 as part of Treasury's Troubled Asset Relief Program ("TARP") Capital Purchase Program. On June 19, 2012, Treasury sold all 20,600 Preferred Shares to private investors.
During 2013, the Company redeemed all 20,600 Preferred Shares, with 10,300 shares redeemed on September 30, 2013 and 10,300 shares redeemed on December 27, 2013. Following completion of the redemption, no Preferred Shares remained outstanding.
The redemption price for the shares of Preferred Shares was the stated liquidation preference amount of $1,000 per share, plus any accrued and unpaid dividends to but excluding the dates of redemption. The total cost of the redemption of shares of Preferred Stock was approximately $20.7 million, which was funded with a combination of excess cash at the holding company, the dividends to the holding company of retained earnings at the Bank, and the borrowing of $10.0 million under the Company's revolving line of credit.
Following completion of the redemption of shares of Preferred Shares, the capital ratios of the Company and the Bank continue to exceed regulatory standards to be categorized as well-capitalized.
Line of Credit
The Company entered into a Business Loan Agreement with Chemical Bank (the "Loan Agreement") and a revolving line of credit as of September 16, 2013. The Loan Agreement provides for a $10.0 million line of credit by Chemical Bank to the Company at an interest rate of prime plus 0.125% (3.375% as of December 31, 2013). The Company will pay quarterly payments of accrued interest, and the balance of all outstanding principal and accrued interest will become due on September 16, 2015. As of December 31, 2013, the Company had an outstanding principal balance of $10.0 million on the line of credit.
The Loan Agreement contained customary affirmative and negative covenants and events of default. Affirmative covenants include the maintenance of certain minimum capital ratios, a maximum net charge off to average loan ratio, a maximum non-performing loan to total assets ratio, a minimum return on average assets, a minimum return on average equity and a limit on the amount of dividends that the Company may pay to holders of common stock.
If return on average assets falls below a certain specified level, then the Company's quarterly dividend payment to common shareholders could not be increased and the payout ratio could not exceed 40%. Negative covenants include restrictions on additional indebtedness, and a covenant not to merge, acquire or consolidate with another entity without Chemical Bank's consent. Events of default include payment defaults, false representations, insolvency and certain other events. As security for its obligations under the Loan Agreement, the Company pledged to Chemical Bank all of the outstanding common stock of its subsidiary, the Bank.
Under the Merger Agreement, the Company must terminate and repay all amounts outstanding under the Loan Agreement immediately before the effective time of the Merger. Old National must, to the extent reasonably required, provide sufficient funds to the Company to enable repayment of such amounts.
Board Resolution
The Board of Directors of the Bank, in connection with the November 2012 termination of the Memorandum of Understanding with the FDIC, adopted a resolution that the Bank maintain a Tier 1 leverage ratio at a level equal to or exceeding 8.5% and that the Bank not declare or pay any dividend to the Company unless the Board of Directors first determines that the Bank has produced stable earnings. As a result of the Bank's financial performance during 2013, and after consideration of the results of the 2013 regulatory examination, the Bank's Board of Directors rescinded this resolution on December 10, 2013.
Supervision and Regulation
General
The Company and the Bank are extensively regulated and are subject to a comprehensive regulatory framework that imposes restrictions on their activities, minimum capital requirements, lending and deposit restrictions, and numerous other requirements. This system of regulation is primarily intended for the protection of depositors, federal deposit insurance funds and the banking system as a whole, rather than for the protection of shareholders and creditors. Many of these laws and regulations have undergone significant change in recent years and are likely to change in the future.
Future legislative or regulatory change, or changes in enforcement practices or court rulings, may have a significant and potentially adverse impact on the Company's operations and financial condition.
The Company
The Company is subject to supervision and regulation by the Federal Reserve System. Its activities are generally limited to owning or controlling banks and engaging in such other activities as the Federal Reserve System may determine to be closely related to banking. Prior approval of the Federal Reserve System, and in some cases various other government agencies, is required for the Company to acquire control of any additional bank holding companies, banks or other operating subsidiaries. The Company is subject to periodic examination by the Federal Reserve System, and is required to file with the Federal Reserve System periodic reports of its operations and such additional information as the Federal Reserve System may require.
The Company is a legal entity separate and distinct from the Bank. There are legal limitations on the extent to which the Bank may lend or otherwise supply funds to the Company. Payment of dividends to the Company by the Bank, the Company's principal source of funds, is subject to various state and federal regulatory limitations. Under the Michigan Banking Code of 1999, the Bank's ability to pay dividends to the Company is subject to the following restrictions:
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· A bank may not declare of pay a dividend if a bank's surplus would be less than 20% of its capital after payment of the dividend.
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· A bank may not declare a dividend except out of net income then on hand after deducting its losses and bad debts.
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· A bank may not declare or pay a dividend until cumulative dividends on preferred stock, if any, are paid in full.
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· A bank may not pay a dividend from capital or surplus.
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Federal law generally prohibits a bank from making any capital distribution (including payment of a dividend) or paying any management fee to its parent company if the depository institution would thereafter be undercapitalized. The Federal Deposit Insurance Corporation ("FDIC") may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by a bank if such payment is determined, by reason of the financial conditions of the bank, to be an unsafe and unsound banking practice. Additional information on restrictions on payment of dividends by the Company and the Bank may be found under Item 5 of this report and under Note 14 hereof, all of which information is incorporated here by reference.
Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank. In addition, if the Michigan Department of Insurance and Financial Services ("DIFS") deems a Bank's capital to be impaired, DIFS may require the Bank to restore its capital by a special assessment on the Company as the Bank's only shareholder. If the Company fails to pay any assessment, the Company's directors would be required, under Michigan law, to sell the shares of the Bank's stock owned by the Company to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the Bank's capital.
The Federal Reserve Board and the FDIC have established guidelines for risk-based capital by bank holding companies and banks. These guidelines establish a risk-adjusted ratio relating capital to risk-weighted assets and off-balance-sheet exposures. These capital guidelines primarily define the components of capital, categorize assets into different risk classes, and include certain off-balance-sheet items in the calculation of capital requirements.
The FDIC Improvement Act of 1991 established a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, federal banking regulators have established five capital categories – well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each of the categories.
Federal banking regulators are required to take specified mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Subject to a narrow exception, the banking regulator must generally appoint a receiver or conservator for an institution that is critically undercapitalized. An institution in any of the under-capitalized categories is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval.
Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, such a bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless the bank could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time. At December 31, 2013, the capital ratios of the Company and the Bank exceeded the regulatory guidelines for an institution to be categorized as "well-capitalized". Information in Note 18 of the Company's Notes to Consolidated Financial Statements provides additional information regarding the capital ratios of the Company and the Bank, and is incorporated here by reference.
The Bank
The Bank is chartered under Michigan law and is subject to regulation by DIFS. Michigan banking laws place restrictions on various aspects of banking, including permitted activities, loan interest rates, branching, payment of dividends, and capital and surplus requirements.
Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund ("DIF") of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a matrix that takes into account a bank's capital level and supervisory rating. In addition, the Bank pays Financing Corporation ("FICO") assessments related to outstanding FICO bonds to the FDIC as collection agent. The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings and Loan Insurance Corporation. FICO assessments will continue in the future for the Bank.
The Bank is subject to a number of federal and state laws and regulations, which have a material impact on its business. These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the USA PATRIOT Act, The Bank Secrecy Act, Office of Foreign Assets Control regulations, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, money laundering laws and privacy laws. There are also new regulations pertaining to the passage of the Dodd-Frank Act and the creation of the Consumer Financial Protection Bureau ("CFPB"). The instruments of monetary policy of authorities, such as the Federal Reserve System, may influence the growth and distribution of bank loans, investments and deposits, and may also affect interest rates on loans and deposits. These policies may have a significant effect on the operating results of banks.
Bank holding companies may acquire banks and other bank holding companies located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state banking law. Banks may also establish interstate branch networks through acquisitions of and mergers with other banks.
The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law. The State of Michigan banking laws do not significantly restrict interstate banking.
The Michigan Banking Code of 1999 permits, in appropriate circumstances and with the approval of the DIFS, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan. A Michigan bank holding company may acquire a non-Michigan bank and a non-Michigan bank holding company may acquire a Michigan bank.
Competition
The banking business in the Company's service area is highly competitive. In its markets, the Bank competes with a number of community banks and subsidiaries of large multi-state, multi-bank holding companies. In addition, the Bank faces competition from credit unions, savings associations, finance companies, loan production offices and other financial services companies. The principal methods of competition that we face are price (interest rates paid on deposits, interest rates charged on borrowings and fees charged for services) and service (convenience and quality of services rendered to customers).
Employees
On December 31, 2013, the Company and its subsidiary employed 247 full-time and 34 part-time employees. This compares to 255 full-time and 30 part-time employees at December 31, 2012.
Accounting Standards
Information regarding accounting standards adopted by the Company is included in Note 1 of the Company's Notes to Consolidated Financial Statements, and is incorporated here by reference.
Available Information
You can find more information about us at our website, located at www.ubat.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available as soon as reasonably practicable after such forms have been filed with or furnished to the Securities and Exchange Commission (the "SEC") free of charge on our website through a link to the SEC website.
Additional statistical information describing our business appears in the following pages and in Management's Discussion and Analysis of Financial Condition and Results of Operations and in our consolidated financial statements and related notes contained in this report.
| I | DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL: |
The information required by these sections is contained on Pages A-15 through A-19, and is incorporated here by reference.
(A) Book Value of Investment Securities
The book value of investment securities as of December 31, 2013, 2012 and 2011 are as follows, in thousands of dollars:
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In thousands of dollars
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2013
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2012
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2011
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|||||||||
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U.S. Treasury and government agencies
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$
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169,640
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$
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187,815
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$
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152,064
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Obligations of states and political subdivisions
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21,490
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18,286
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20,976
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Corporate, asset backed and other debt securities
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-
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-
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126
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Equity securities
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28
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28
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31
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Total Investment Securities
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$
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191,158
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$
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206,129
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$
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173,197
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(B) Carrying Values and Yields of Investment Securities
The following table reflects the carrying values and yields of the Company's investment securities portfolio as of December 31, 2013. Average yields are based on amortized costs and the average yield on tax exempt securities of states and political subdivisions is adjusted to a taxable equivalent basis, assuming a 34% marginal tax rate.
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Carrying Values and Yields of Investments
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In thousands of dollars where applicable
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0 - 1
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1 - 5
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5 - 10
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Over 10
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Available For Sale
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Year
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Years
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Years
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Years
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Total
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U.S. Treasury and government agencies (1)
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$
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5,899
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$
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17,599
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$
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-
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$
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-
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$
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23,498
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Weighted average yield
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1.67
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%
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1.11
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%
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0.00
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%
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0.00
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%
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1.25
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%
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U.S. agency mortgage-backed securities
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$
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-
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$
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146,142
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$
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-
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$
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-
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$
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146,142
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Weighted average yield
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0.00
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%
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2.12
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%
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0.00
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%
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0.00
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%
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2.12
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%
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Obligations of states and political subdivisions
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$
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7,749
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$
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8,124
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$
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5,617
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$
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-
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$
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21,490
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Weighted average yield
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4.35
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%
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4.81
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%
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3.15
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%
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0.00
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%
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4.19
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%
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||||||||||
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Equity and other securities
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$
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28
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$
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-
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$
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-
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$
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-
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$
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28
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Weighted average yield
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0.00
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%
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0.00
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%
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0.00
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%
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0.00
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%
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0.00
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%
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||||||||||
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Total securities
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$
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13,676
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$
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171,865
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$
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5,617
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$
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-
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$
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191,158
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||||||||||
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Weighted average yield
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3.17
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%
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2.13
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%
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3.15
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%
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0.00
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%
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2.24
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%
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||||||||||
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(1) Reflects the scheduled amortization and an estimate of future prepayments based on past and current experience of amortizing U.S. agency securities
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||||||||||||||||||||
As of December 31, 2013, the Company's securities portfolio contains no concentrations by any single issuer of securities greater than 10% of shareholders' equity. As of December 31, 2013, the Company's securities portfolio contained no securities of issuers outside of the United States.
Additional information concerning the Company's securities portfolio is included under "Investment Securities" in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 of the Company's Notes to Consolidated Financial Statements, and is incorporated here by reference.
The tables below show loans outstanding (net of unearned interest) at December 31, and the percentage makeup of the portfolios. All loans are domestic and contain no concentrations by industry or customer.
|
Balances (thousands of dollars)
|
2013
|
2012
|
2011
|
2010
|
2009
|
|||||||||||||||
|
Commercial
|
||||||||||||||||||||
|
Commercial construction & land development loans
|
$
|
20,756
|
$
|
28,511
|
$
|
29,707
|
$
|
35,996
|
$
|
50,630
|
||||||||||
|
Owner-occupied commercial real estate loans
|
105,237
|
97,755
|
98,848
|
105,542
|
111,883
|
|||||||||||||||
|
Other commercial real estate loans
|
142,805
|
113,370
|
130,579
|
137,693
|
144,430
|
|||||||||||||||
|
Commercial & industrial loans
|
104,508
|
104,332
|
90,102
|
83,918
|
115,106
|
|||||||||||||||
|
Consumer
|
||||||||||||||||||||
|
Residential mortgages
|
134,048
|
121,393
|
104,599
|
113,541
|
108,697
|
|||||||||||||||
|
Consumer construction loans
|
17,369
|
12,123
|
10,016
|
5,558
|
17,071
|
|||||||||||||||
|
Home equity loans
|
80,870
|
72,983
|
74,915
|
78,151
|
73,066
|
|||||||||||||||
|
Other consumer loans
|
39,861
|
33,969
|
22,571
|
24,688
|
27,741
|
|||||||||||||||
|
Deferred loan fees and costs, overdrafts, in-process accounts
|
820
|
2,242
|
2,365
|
6,898
|
1,429
|
|||||||||||||||
|
Total portfolio loans
|
$
|
646,274
|
$
|
586,678
|
$
|
563,702
|
$
|
591,985
|
$
|
650,053
|
||||||||||
|
Percent of total portfolio loans
|
||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||
|
Commercial construction & land development loans
|
3.2
|
%
|
4.9
|
%
|
5.3
|
%
|
6.1
|
%
|
7.8
|
%
|
||||||||||
|
Owner-occupied commercial real estate loans
|
16.3
|
%
|
16.7
|
%
|
17.5
|
%
|
17.8
|
%
|
17.2
|
%
|
||||||||||
|
Other commercial real estate loans
|
22.1
|
%
|
19.3
|
%
|
23.1
|
%
|
23.2
|
%
|
22.3
|
%
|
||||||||||
|
Commercial & industrial loans
|
16.2
|
%
|
17.8
|
%
|
16.0
|
%
|
14.2
|
%
|
17.7
|
%
|
||||||||||
|
Consumer
|
||||||||||||||||||||
|
Residential mortgages
|
20.7
|
%
|
20.6
|
%
|
18.6
|
%
|
19.2
|
%
|
16.7
|
%
|
||||||||||
|
Consumer construction loans
|
2.7
|
%
|
2.1
|
%
|
1.8
|
%
|
0.9
|
%
|
2.6
|
%
|
||||||||||
|
Home equity loans
|
12.5
|
%
|
12.4
|
%
|
13.3
|
%
|
13.2
|
%
|
11.2
|
%
|
||||||||||
|
Other consumer loans
|
6.2
|
%
|
5.8
|
%
|
4.0
|
%
|
4.2
|
%
|
4.3
|
%
|
||||||||||
|
Deferred loan fees and costs, overdrafts, in-process accounts
|
0.1
|
%
|
0.4
|
%
|
0.4
|
%
|
1.2
|
%
|
0.2
|
%
|
||||||||||
|
Total portfolio loans
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||||||
The following table presents the maturity of total loans outstanding, other than consumer loans, as of December 31, 2013, according to scheduled repayments of principal.
|
Thousands of dollars
|
0 - 1 Year
|
1 - 5 Years
|
After 5 Years
|
Total
|
|||||||||||||
|
Commercial construction & land development loans
|
Fixed rate
|
$
|
49
|
$
|
2,666
|
$
|
-
|
$
|
2,715
|
||||||||
|
Variable rate
|
16,832
|
327
|
882
|
18,041
|
|||||||||||||
|
Owner-occupied commercial real estate loans
|
Fixed rate
|
4,690
|
40,772
|
1,013
|
$
|
46,475
|
|||||||||||
|
Variable rate
|
6,356
|
15,301
|
37,105
|
58,762
|
|||||||||||||
|
Other commercial real estate loans
|
Fixed rate
|
4,759
|
76,991
|
17,317
|
99,067
|
||||||||||||
|
Variable rate
|
15,718
|
19,685
|
8,335
|
43,738
|
|||||||||||||
|
Commercial & industrial loans
|
Fixed rate
|
2,989
|
14,777
|
4,360
|
22,126
|
||||||||||||
|
Variable rate
|
47,486
|
22,542
|
12,354
|
82,382
|
|||||||||||||
|
Total
|
$
|
98,879
|
$
|
193,061
|
$
|
81,366
|
$
|
373,306
|
|||||||||
|
Total fixed rate
|
$
|
12,487
|
$
|
135,206
|
$
|
22,690
|
$
|
170,383
|
|||||||||
|
Total variable rate
|
$
|
86,392
|
$
|
57,855
|
$
|
58,676
|
$
|
202,923
|
|||||||||
Nonaccrual, Past Due and Restructured Loans
Information regarding nonaccrual, past due and restructured loans is shown in the table below as of December 31, 2009 through 2013.
|
Nonperforming Assets, in thousands of dollars
|
2013
|
2012
|
2011
|
2010
|
2009
|
|||||||||||||||
|
Nonaccrual loans
|
$
|
7,927
|
$
|
16,714
|
$
|
25,754
|
$
|
28,661
|
$
|
26,188
|
||||||||||
|
Accruing loans past due 90 days or more
|
169
|
37
|
31
|
583
|
5,474
|
|||||||||||||||
|
Total nonperforming loans
|
$
|
8,096
|
$
|
16,751
|
$
|
25,785
|
$
|
29,244
|
$
|
31,662
|
||||||||||
|
Accruing restructured loans
|
$
|
10,964
|
$
|
15,819
|
$
|
21,839
|
$
|
17,271
|
$
|
15,584
|
||||||||||
The following shows the effect on interest revenue of nonaccrual loans as of December 31, 2013, in thousands of dollars:
|
2013
|
||||
|
Gross amount of interest that would have been recorded at original rate
|
$
|
351
|
||
|
Interest that was included in revenue
|
-
|
|||
|
Net impact on interest revenue
|
$
|
351
|
||
As of December 31, 2013, the Bank had no loans, other than those described above, which cause management to have serious doubts as to the ability of the borrower to comply with present loan repayment terms.
Additional information concerning nonperforming loans, the Company's nonaccrual policy, and loan concentrations is provided under "Credit Quality" in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations, in Note 5 of the Company's Notes to Consolidated Financial Statements, and is incorporated here by reference.
As of December 31, 2013, other than $1,850,000 in other real estate owned, there were no other interest bearing assets that would be required to be disclosed under Item III, Parts (C)(1) or (C)(2) of Industry Guide 3 if such assets were loans.
The table below summarizes changes in the allowance for loan losses for the years 2009 through 2013.
|
Thousands of dollars
|
2013
|
2012
|
2011
|
2010
|
2009
|
|||||||||||||||
|
Balance at beginning of period
|
$
|
22,543
|
$
|
20,633
|
$
|
25,163
|
$
|
20,020
|
$
|
18,312
|
||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Construction and land development loans
|
809
|
1,108
|
2,908
|
5,919
|
14,379
|
|||||||||||||||
|
Owner-occupied commercial real estate loans
|
3,220
|
3,346
|
1,221
|
1,690
|
1,539
|
|||||||||||||||
|
Other commercial real estate loans
|
336
|
2,057
|
4,645
|
2,258
|
2,388
|
|||||||||||||||
|
Commercial & industrial loans
|
1,397
|
1,768
|
6,197
|
3,735
|
4,330
|
|||||||||||||||
|
Residential mortgages
|
200
|
901
|
1,387
|
1,820
|
229
|
|||||||||||||||
|
Personal loans
|
546
|
707
|
2,006
|
1,907
|
1,503
|
|||||||||||||||
|
Total charge-offs
|
6,508
|
9,887
|
18,364
|
17,329
|
24,368
|
|||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Construction and land development loans
|
1,214
|
532
|
278
|
287
|
-
|
|||||||||||||||
|
Owner-occupied commercial real estate loans
|
379
|
68
|
35
|
9
|
9
|
|||||||||||||||
|
Other commercial real estate loans
|
303
|
332
|
42
|
44
|
59
|
|||||||||||||||
|
Commercial & industrial loans
|
120
|
1,820
|
1,034
|
371
|
117
|
|||||||||||||||
|
Residential mortgages
|
100
|
200
|
68
|
66
|
50
|
|||||||||||||||
|
Personal loans
|
396
|
495
|
227
|
165
|
71
|
|||||||||||||||
|
Total recoveries
|
2,512
|
3,447
|
1,684
|
942
|
306
|
|||||||||||||||
|
Net charge-offs
|
3,996
|
6,440
|
16,680
|
16,387
|
24,062
|
|||||||||||||||
|
Net provision (1)
|
1,900
|
8,350
|
12,150
|
21,530
|
25,770
|
|||||||||||||||
|
Balance at end of period
|
$
|
20,447
|
$
|
22,543
|
$
|
20,633
|
$
|
25,163
|
$
|
20,020
|
||||||||||
|
Ratio of net charge-offs to average loans
|
0.64
|
%
|
1.09
|
%
|
2.86
|
%
|
2.58
|
%
|
3.47
|
%
|
||||||||||
|
Allowance as % of total portfolio loans
|
3.16
|
%
|
3.84
|
%
|
3.66
|
%
|
4.25
|
%
|
3.08
|
%
|
||||||||||
|
(1) 2011 includes amounts related to change in allocation methodology.
|
||||||||||||||||||||
The allowance for loan losses is maintained at a level believed adequate by management to absorb losses inherent in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, amount and composition of the loan portfolio, and other relevant factors.
The provision charged to earnings was $1,900,000 in 2013, $8,350,000 in 2012, and $12,150,000 in 2011.
The following table presents the portion of the allowance for loan losses applicable to each loan category as of December 31. A table showing the percent of loans in each category to total loans is included in Section III (A), above.
|
Thousands of dollars
|
2013
|
2012
|
2011
|
2010
|
2009
|
|||||||||||||||
|
Construction and land development loans
|
$
|
2,893
|
$
|
4,216
|
$
|
3,553
|
$
|
3,248
|
$
|
5,164
|
||||||||||
|
Owner-occupied commercial real estate loans (1)
|
3,138
|
5,093
|
13,337
|
16,672
|
12,221
|
|||||||||||||||
|
Other commercial real estate loans
|
5,047
|
4,708
|
-
|
-
|
-
|
|||||||||||||||
|
Commercial & industrial loans
|
4,424
|
4,131
|
-
|
-
|
-
|
|||||||||||||||
|
Residential mortgage
|
2,534
|
2,456
|
1,931
|
2,661
|
760
|
|||||||||||||||
|
Personal loans
|
2,411
|
1,939
|
1,812
|
2,582
|
1,875
|
|||||||||||||||
|
Total
|
$
|
20,447
|
$
|
22,543
|
$
|
20,633
|
$
|
25,163
|
$
|
20,020
|
||||||||||
|
As a percent of total
|
||||||||||||||||||||
|
Construction and land development loans
|
14.1
|
%
|
18.7
|
%
|
17.2
|
%
|
12.9
|
%
|
25.8
|
%
|
||||||||||
|
Owner-occupied commercial real estate loans (1)
|
15.3
|
%
|
22.6
|
%
|
64.6
|
%
|
66.3
|
%
|
61.0
|
%
|
||||||||||
|
Other commercial real estate loans
|
24.7
|
%
|
20.9
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||||||||
|
Commercial & industrial loans
|
21.6
|
%
|
18.3
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||||||||
|
Residential mortgage
|
12.4
|
%
|
10.9
|
%
|
9.4
|
%
|
10.6
|
%
|
3.8
|
%
|
||||||||||
|
Personal loans
|
11.8
|
%
|
8.6
|
%
|
8.8
|
%
|
10.3
|
%
|
9.4
|
%
|
||||||||||
|
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||||||
|
(1) 2009-2011 includes all Business and Commercial mortgage categories
|
||||||||||||||||||||
Information regarding the Company's allocation methods used is provided in Note 5 of the Company's Notes to Consolidated Financial Statements, and is incorporated here by reference.
The information concerning average balances of deposits and the weighted-average rates paid thereon is included in the table titled "Yield Analysis of Consolidated Average Assets and Liabilities" contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, and information regarding maturities of time deposits is provided in Note 8 of the Company's Notes to Consolidated Financial Statements, and is incorporated here by reference. At December 31, 2013, 2012 and 2011, there were no foreign deposits.
Outstanding time deposits in amounts of $100,000 or more as of December 31, 2013, 2012 and 2011 were scheduled to mature as shown below.
|
Thousands of dollars
|
As of December 31,
|
|||||||||||
|
Time certificates of deposit $100,000 or more maturing:
|
2013
|
2012
|
2011
|
|||||||||
|
Within three months
|
$
|
9,137
|
$
|
17,400
|
$
|
14,466
|
||||||
|
Over three through six months
|
9,557
|
8,387
|
12,503
|
|||||||||
|
Over six through twelve months
|
14,243
|
18,635
|
23,815
|
|||||||||
|
Over twelve months
|
18,810
|
30,374
|
31,234
|
|||||||||
|
Total
|
$
|
51,748
|
$
|
74,795
|
$
|
82,018
|
||||||
Various ratios required by this section and other ratios commonly used in analyzing bank holding company financial statements are included in Item 6, Selected Financial Data, and are incorporated here by reference.
Information about the Company's short-term borrowings is contained in Note 9 of the Company's Notes to Consolidated Financial Statements, and is incorporated here by reference. The Company is not required to disclose any additional information, as for all reporting periods there were no categories of short-term borrowings for which the average balance outstanding during the period was 30% or more of shareholders' equity at the end of the period.
Risks Related to Our Pending Merger with Old National Bancorp
Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met.
Before the transactions contemplated in the Merger Agreement may be completed, various approvals must be obtained from the Federal Reserve Board and the Office of the Comptroller of the Currency. These governmental entities may impose conditions on the completion of the Merger or require changes to the terms of the Merger Agreement. Although Old National and United do not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the transactions contemplated in the Merger Agreement or imposing additional costs on or limiting Old National's revenues, any of which might have a material adverse effect on Old National following the Merger. There can be no assurance as to whether the regulatory approvals will be received, the timing of those approvals, or whether any conditions will be imposed.
The Merger Agreement may be terminated in accordance with its terms and the Merger may not be completed, which could have a negative impact on United.
The Merger Agreement with Old National is subject to a number of conditions which must be fulfilled in order to close. Those conditions include: United shareholder approval, regulatory approvals, the continued accuracy of certain representations and warranties by both parties and the performance by both parties of certain covenants and agreements. In particular, Old National is not obligated to close the Merger transaction if United's consolidated shareholders' equity is less than $75,000,000, subject to adjustments in the Merger Agreement, as of the end of the month prior to the effective time of the Merger or after-tax environmental costs exceed $2,500,000.
In addition, certain circumstances exist where United may choose to terminate the Merger Agreement, including the acceptance of a superior proposal or the decline in Old National's share price to below certain thresholds set forth in the Merger Agreement. There can be no assurance that the conditions to closing the Merger will be fulfilled or that the Merger will be completed.
If the Merger Agreement is terminated, there may be various consequences to United, including:
|
·
|
United's business may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger; |
|
|
|
|
·
|
United may have incurred substantial expenses in connection with the Merger, without realizing any of the anticipated benefits of completing the Merger; and |
|
|
|
|
·
|
the market price of United common stock might decline to the extent that United's market price following announcement of the Merger reflects a market assumption that the Merger will be completed. |
If the Merger Agreement is terminated and United's board of directors seeks another merger or business combination, under certain circumstances United may be required to pay Old National a $6,000,000 termination fee. United shareholders cannot be certain that United would be able to find a party willing to pay an equivalent or more attractive price than the price Old National has agreed to pay in the Merger.
Old National may be unable to successfully integrate United's operations and retain United's employees.
United will be merged with and into Old National Bank immediately following the closing of the Merger. The difficulties of merging the operations of United with Old National Bank include:
|
· integrating personnel with diverse business backgrounds;
|
|
|
|
· combining different corporate cultures; and
|
|
|
|
· retaining key employees.
|
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of Old National, Old National Bank or United, and the loss of key personnel. The integration of United with Old National Bank will require the experience and expertise of certain key employees of United who are expected to be retained by Old National. However, there can be no assurance that Old National will be successful in retaining these employees for the time period necessary to successfully integrate United into Old National Bank. The diversion of management's attention and any delays or difficulties encountered in connection with the Merger and integration of United into Old National Bank could have an adverse effect on the business and results of operation of Old National or Old National Bank.
Each party is subject to business uncertainties and contractual restrictions while the proposed merger is pending, which could adversely affect each party's business and operations.
In connection with the pendency of the Merger, it is possible that some customers and other persons with whom Old National or United has a business relationship may delay or defer certain business decisions or might seek to terminate, change, or renegotiate their relationships with Old National or United, as in the case may be, as a result of the Merger, which could negatively affect Old National's or United's respective revenues, earnings, and cash flows, as well as the market price of Old National's or United's common stock, regardless of whether the Merger is completed.
Under the terms of the Merger Agreement, United is subject to certain restrictions on the conduct of its business prior to completing the Merger, which may adversely affect its ability to execute certain of its business strategies, including the ability in certain cases to enter into or amend contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures. Such limitations could negatively affect United's businesses and operations prior to the completion of the Merger.
Litigation may be filed against United and its board of directors that could prevent or delay the consummation of the Merger or result in the payment of damages following completion of the Merger.
In connection with the Merger, it is possible that United's shareholders may file putative shareholder class action lawsuits against United and its board of directors. Among other remedies, the plaintiffs may seek to enjoin the Merger. The outcome of any such litigation is uncertain. If a dismissal is not granted or a settlement is not reached, such potential lawsuits could prevent or delay completion of the Merger and result in substantial costs to United, including any costs associated with indemnification. The defense or settlement of any lawsuit or claim that remains unresolved at the time the Merger is consummated may adversely affect the combined company's business, financial condition, results of operations, cash flows and market price.
Risks Related To Our Business
If our nonperforming assets increase, our earnings will be adversely affected.
At December 31, 2013, our nonperforming assets (which consist of non-accruing loans, loans 90 days or more past due, and other real estate owned) totaled $9.9 million, or 1.11% of total assets. At December 31, 2012 and December 31, 2011, our nonperforming assets were $20.2 million and $29.5 million, respectively, or 2.22% and 3.33% of total assets, respectively. Our nonperforming assets adversely affect our net income in various ways:
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· We do not record interest income on nonaccrual loans or other real estate owned.
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· We must provide for probable loan losses through a current period change to the provision for loan losses.
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· Non-interest expense increases when we must write down the value of properties in our other real estate owned portfolio to reflect changing market values.
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· There are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees related to other real estate owned.
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· The resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activity.
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If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our nonperforming assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our results of operations and financial condition.
The economic conditions in the State of Michigan could have a material adverse effect on our results of operations and financial condition.
Our success depends primarily on the general economic conditions in the State of Michigan and the specific local markets in which we operate. Unlike larger national or other regional banks that are more geographically diversified, we provide banking and financial services to customers primarily in the Lenawee, Livingston, Monroe and Washtenaw Counties, Michigan.
The local economic conditions in these areas have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities, financial, or credit markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on our results of operations and financial condition.
We are subject to lending risk, which could materially adversely affect our results of operations and financial condition.
There are inherent risks associated with our lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where we operate. Increases in interest rates or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans, which could have a material adverse effect on our results of operations and financial condition. Competition for limited, high-quality lending opportunities and core deposits in an increasingly competitive marketplace may adversely affect our results of operations.
Business loans may expose us to greater financial and credit risk than other loans.
Our business loan portfolio was approximately $352.6 million at December 31, 2013, comprising approximately 54.6% of our loan portfolio. Business loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans.
Any significant failure to pay on time by our customers would hurt our earnings. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans.
We have significant exposure to risks associated with commercial and residential real estate.
A substantial portion of our loan portfolio consists of commercial and residential real estate-related loans, including real estate development, construction and residential and commercial mortgage loans. As of December 31, 2013, we had approximately $248.0 million of commercial real estate loans outstanding, which represented approximately 38.4% of our loan portfolio. As of that same date, we had approximately $214.9 million in residential real estate loans outstanding, or approximately 33.2% of our loan portfolio. Consequently, real estate-related credit risks are a significant concern for us. The adverse consequences from real estate-related credit risks tend to be cyclical and are often driven by national economic developments that are not controllable or entirely foreseeable by us or our borrowers.
Our construction and development lending exposes us to significant risks and has resulted in a disproportionate amount of the increase in our provision for loan losses in recent periods.
Our construction and development loan portfolio includes residential and non-residential construction and development loans. Our residential construction and development portfolio consists mainly of loans for the construction, development, and improvement of residential lots, homes, and subdivisions. Our non-residential construction and development portfolio consists mainly of loans for the construction and development of office buildings and other non-residential commercial properties. This type of lending is generally considered to have more complex credit risks than traditional single-family residential lending because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and sale of the related real estate project. Consequently, these loans are often more sensitive to adverse conditions in the real estate market or the general economy than other real estate loans.
These loans are generally less predictable and more difficult to evaluate and monitor and collateral may be difficult to dispose of in a market decline. Additionally, we may experience significant construction loan losses because independent appraisers or project engineers inaccurately estimate the cost and value of construction loan projects.
Construction and development loans have contributed disproportionately to the increase in our provisions for loan losses in recent periods. As of December 31, 2013, we had approximately $38.1 million in construction and development loans outstanding, or approximately 5.9% of our loan portfolio. Approximately $4.7 million, or 23.8%, and $8.2 million, or 24.0%, at December 31, 2013 and 2012, respectively, of loans classified as impaired were attributable to construction and development loans. Further deterioration in our construction and development loan portfolio could result in additional increases in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.
Environmental liability associated with commercial lending could result in losses.
In the course of our business, we may acquire, through foreclosure, properties securing loans we have originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, we might be required to remove these substances from the affected properties at our sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on our business, results of operations and financial condition.
Our allowance for loan losses may not be adequate to cover actual future losses.
We maintain an allowance for loan losses to cover probable incurred loan losses. Every loan we make carries a certain risk of non-repayment, and we make various assumptions and judgments about the collectability of our loan portfolio including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of customers relative to their financial obligations with us.
The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. We cannot fully predict the amount or timing of losses or whether the loss allowance will be adequate in the future. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance for loan losses. In addition, bank regulatory agencies periodically review the Company's allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different from those of management.
Excessive loan losses and significant additions to our allowance for loan losses could have a material adverse impact on our financial condition and results of operations. As of December 31, 2013 and 2012, our allowance for loan losses was $20.4 million and $22.5 million, respectively. As of the same dates, the ratio of our allowance for loan losses to total nonperforming loans was 252.5% and 134.6%, respectively. Nonperforming loans include nonaccrual loans and accruing loans past due 90 days or more and excludes accruing restructured loans. As of the same dates, total accruing restructured loans were $11.0 million and $15.8 million, respectively.
We operate in a highly competitive industry and market area, which may adversely affect our profitability.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources.
Such competitors primarily include a number of community banks, subsidiaries of large multi-state and multi-bank holding companies, credit unions, savings associations, finance companies and loan production offices.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. We compete with these institutions both in attracting deposits and in making loans.
Price competition for loans might result in us originating fewer loans, or earning less on our loans, and price competition for deposits might result in a decrease in our total deposits or higher rates on our deposits. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Due to their size, many competitors may be able to achieve economies of scale and may offer a broader range of products and services as well as better pricing for those products and services than we can.
The Dodd-Frank Act enacted in 2010 may continue to adversely impact the Company's results of operations, financial condition or liquidity.
The Dodd-Frank Act was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, established the Consumer Financial Protection Bureau ("CFPB"), and requires the CFPB and other federal agencies to implement many new and significant rules and regulations. The CFPB has issued significant new regulations that impact consumer mortgage lending and servicing. Those regulations became effective in January 2014. In addition, the CFPB is drafting regulations that will change the disclosure requirements and forms used under the Truth in Lending Act and Real Estate Settlement and Procedures Act.
Compliance with these new laws and regulations and other regulations under consideration by Dodd-Frank and the CFPB will likely result in additional costs, which could be significant and could adversely impact our results of operations, financial condition or liquidity.
Legislative or regulatory changes or actions, or significant litigation, could adversely impact us or the businesses in which we are engaged.
The financial services industry is extensively regulated. We are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds, and not to benefit our shareholders.
The impact of changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution's allowance for loan losses. Future regulatory changes or accounting pronouncements may increase our regulatory capital requirements or adversely affect our regulatory capital levels.
Additionally, actions by regulatory agencies or significant litigation against us could require us to devote significant time and resources to defending our business and may lead to penalties that materially affect us and our shareholders.
We may face increasing pressure from historical purchasers of our residential mortgage loans to repurchase those loans or reimburse purchasers for losses related to those loans.
We generally sell the fixed rate long-term residential mortgage loans we originate on the secondary market and retain adjustable rate mortgage loans for our portfolios. In response to the financial crisis, purchasers of residential mortgage loans, such as government sponsored entities, are increasing their efforts to seek to require sellers of residential mortgage loans to either repurchase loans previously sold or reimburse purchasers for losses related to loans previously sold when losses are incurred on a loan previously sold due to actual or alleged failure to strictly conform to the purchaser's purchase criteria. As a result, we may face increasing pressure from historical purchasers of our residential mortgage loans to repurchase those loans or reimburse purchasers for losses related to those loans and we may face increasing expenses to defend against such claims. If we are required in the future to repurchase loans previously sold, reimburse purchasers for losses related to loans previously sold, or if we incur increasing expenses to defend against such claims, our financial condition and results of operations would be negatively affected.
We are subject to risks related to the prepayments of loans, which may negatively impact our business.
Generally, our customers may prepay the principal amount of their outstanding loans at any time. The speed at which prepayments occur, and the size of prepayments, are within customers' discretion. If customers prepay the principal amount of their loans, and we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, our interest income will be reduced. A significant reduction in interest income could have an adverse effect on our results of operations and financial condition.
Changes in interest rates may negatively affect our earnings and the value of our assets.
Our earnings and cash flows depend substantially upon our net interest income. Net interest income is the difference between interest income earned on interest-earnings assets, such as loans and investment securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are sensitive to many factors that are beyond our control, including general economic conditions, competition and policies of various governmental and regulatory agencies and, in particular, the policies of the Federal Reserve Board.
Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investment securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect: (i) our ability to originate loans and obtain deposits; (ii) the fair value of our financial assets and liabilities, including our securities portfolio; and (iii) the average duration of our interest-earning assets.
This also includes the risk that interest-earning assets may be more responsive to changes in interest rates than interest-bearing liabilities, or vice versa (re-pricing risk), the risk that the individual interest rates or rates indices underlying various interest-earning assets and interest-bearing liabilities may not change in the same degree over a given time period (basis risk), and the risk of changing interest rate relationships across the spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk), including a prolonged flat or inverted yield curve environment. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.
We are subject to liquidity risk in our operations, which could adversely affect our ability to fund various obligations.
Liquidity risk is the possibility of being unable to meet obligations as they come due, capitalize on growth opportunities as they arise, or pay regular dividends because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. Liquidity is required to fund various obligations, including credit obligations to borrowers, mortgage originations, withdrawals made by depositors, repayment of debt, dividends to shareholders, operating expenses and capital expenditures.
Liquidity is derived primarily from retail deposit growth and retention, principal and interest payments on loans and investment securities, net cash provided from operations and access to other funding sources. Liquidity is essential to our business.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or regulatory action that limits or eliminates our access to alternate funding sources.
Our ability to borrow could also be impaired by factors that are nonspecific to us, such as severe disruption of the financial markets or negative expectations about the prospects for the financial services industry as a whole, as evidenced by recent turmoil in the domestic and worldwide credit markets.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry.
As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral that we hold cannot be realized upon or is liquidated at prices insufficient to recover the full amount of the loan. We cannot assure you that any such losses would not materially and adversely affect our business, financial condition or results of operations.
Impairment of investment securities, other intangible assets, or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.
In assessing the impairment of investment securities, we consider the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuers, whether the market decline was affected by macroeconomic conditions and whether we have the intent to sell the investment security or will be required to sell the investment security before its anticipated maturity.
Deferred tax assets are only recognized to the extent that they will be realized. Should our management determine that the deferred tax assets will not be realized, a valuation allowance with a charge to earnings would be reflected in the period. At December 31, 2013, the Company's net deferred tax asset was $8.1 million.
Based on the levels of taxable income in prior years, the significant improvement in operating results in 2013 compared to 2012 and 2011, and the Company's belief that it has returned to sustained profitability as a result of strong core earnings and continued reduction in loan losses, management has determined that no valuation allowance was required at December 31, 2013. If the Company is required in the future to take a valuation allowance with respect to its deferred tax asset, its financial condition, results of operations and regulatory capital levels would be negatively affected.
An "ownership change" for purposes of Section 382 of the Internal Revenue Code may materially impair our ability to use our deferred tax assets.
Our ability to use our deferred tax assets to offset future taxable income will be limited if we experience an "ownership change" as defined in Section 382 of the Internal Revenue Code. In general, an ownership change will occur if there is a cumulative increase in our ownership by "5-percent shareholders" (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. A corporation that experiences an ownership change will generally be subject to an annual limitation on the use of its pre-ownership change deferred tax assets equal to the equity value of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate.
In the event an "ownership change" was to occur, we could realize a permanent loss of a portion of our U.S. federal deferred tax assets and lose certain built-in losses that have not been recognized for tax purposes.
The amount of the permanent loss would depend on the size of the annual limitation (which is a function of our market capitalization at the time of an "ownership change" and the then prevailing long-term tax exempt rate) and the remaining carry forward period (U.S. federal net operating losses generally may be carried forward for a period of 20 years). The resulting loss could have a material adverse effect on our results of operations and financial condition and could also decrease the Bank's regulatory capital. We performed an evaluation of potential impairment at December 31, 2013, and determined that if an "ownership change" had occurred on December 31, 2013, we would have had no impairment of our net deferred tax asset.
If we are required to take a valuation allowance with respect to our mortgage servicing rights, our financial condition and results of operations would be negatively affected.
At December 31, 2013, our mortgage servicing rights had a book value of $7.4 million and a fair value of approximately $12.1 million. Because of the fluctuating interest rate environment for mortgage loans and the resulting impact on the rate and speed of mortgage refinancing, it is possible that we may have to take a valuation allowance with respect to our mortgage servicing rights in the future. If we are required in the future to take a valuation allowance with respect to our mortgage servicing rights, our financial condition and results of operations would be negatively affected.
We depend upon the accuracy and completeness of information about customers.
In deciding whether to extend credit to customers, we may rely on information provided to us by our customers, including financial statements and other financial information. We may also rely on representations of customers as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. Our financial condition and results of operations could be negatively impacted to the extent that we extend credit in reliance on financial statements that do not comply with generally accepted accounting principles or that are misleading or other information provided by customers that is false or misleading.
We hold general obligation municipal bonds in our investment securities portfolio. If one or more issuers of these bonds were to become insolvent and default on its obligations under the bonds, it could have a negative effect on our financial condition and results of operations.
Municipal bonds held by us totaled $21.5 million at December 31, 2013, and were issued by different municipalities. The municipal portfolio contains a small level of geographic risk, as approximately 1.6% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan, 1.6% in Monroe County, Michigan and 2.1% in Washtenaw County, Michigan. If one or more of the issuers of these bonds were to become insolvent and default on their obligations under the bonds, it could have a negative effect on our financial condition and results of operations.
We may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on our financial condition and results of operations.
We may be involved from time to time in a variety of litigation arising out of our business. Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation or cause us to incur unexpected expenses, which could be material in amount. Should the ultimate expenses, judgments or settlements in any litigation exceed our insurance coverage, they could have a material adverse effect on our financial condition and results of operations. In addition, we may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms, if at all.
Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of computer systems or otherwise, or failure or interruption of the Company's communication or information systems, could severely harm the Company's business.
As part of our business, we collect, process and retain sensitive and confidential client and customer information. Despite the security measures we have in place for our facilities and systems, and the security measures of our third party service providers, we may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events.
We rely heavily on communications and information systems to conduct our business. Any failure or interruption of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. In addition, customers could lose access to their accounts and be unable to conduct financial transactions during a period of failure or interruption of these systems.
Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by us or by our vendors, or failure or interruption of our communication or information systems, could severely damage our reputation, expose us to risks of regulatory scrutiny, litigation and liability, disrupt our operations, or result in a loss of customer business, the occurrence of any of which could have a material adverse effect on our business.
We may not be able to effectively adapt to technological change, which could adversely affect our profitability.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements.
We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers, all of which could adversely affect our profitability.
Our controls and procedures may fail or be circumvented, which could have a material adverse effect on our business, results of operations and financial condition.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
Our ability to pay dividends is limited and we may be unable to pay future dividends.
We have suspended payment of dividends on our common stock in order to preserve capital. Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of the Bank to pay dividends to the Company is limited by its obligations to maintain sufficient capital and by other general restrictions on dividends that are applicable to banks.
If the Company or the Bank does not satisfy these regulatory requirements, we would be unable to pay dividends on our common stock. Additional information on restrictions on payment of dividends by the Company and the Banks may be found in Item 1 of this report under "Supervision and Regulation," and in Note 14 of the Company's Notes to Consolidated Financial Statements, all of which information is incorporated here by reference.
The market price of our common stock can be volatile, which may make it more difficult to resell our common stock at a desired time and price.
Stock price volatility may make it more difficult for a shareholder to resell our common stock when a shareholder wants to and at prices a shareholder finds attractive or at all. Our stock price can fluctuate significantly in response to a variety of factors.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results.
Our common stock is not insured by any governmental entity.
Our common stock is not a deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental entity. Investment in our common stock is subject to risk, including possible loss of the entire investment.
Anti-takeover provisions could negatively impact our shareholders.
Our articles of incorporation and the laws of Michigan include provisions which are designed to provide our board of directors with time to consider whether a hostile takeover offer is in the best interests of us and our shareholders. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control. The provisions also could diminish the opportunities for a holder of our common stock to participate in tender offers, including tender offers at a price above the then-current price for our common stock. These provisions could also prevent transactions in which our shareholders might otherwise receive a premium for their shares over then-current market prices, and may limit the ability of our shareholders to approve transactions that they may deem to be in their best interests.
If an entity holds as little as a 5% interest in our outstanding securities, that entity could, under certain circumstances, be subject to regulation as a "bank holding company."
Any entity, including a "group" composed of natural persons, owning or controlling with the power to vote 25% or more of our outstanding securities, or 5% or more if the holder otherwise exercises a "controlling influence" over us, may be subject to regulation as a "bank holding company" in accordance with the BHCA. In addition, (i) any bank holding company or foreign bank with a U.S. presence may be required to obtain the approval of the Federal Reserve Board under the BHCA to acquire or retain 5% or more of our outstanding securities and (ii) any person not otherwise defined as a company by the BHCA and its implementing regulations may be required to obtain the approval of the Federal Reserve Board under the Change in Bank Control Act of 1978, as amended, to acquire or retain 10% or more of our outstanding securities. Becoming a bank holding company imposes statutory and regulatory restrictions and obligations, such as providing managerial and financial strength for its bank subsidiaries. Regulation as a bank holding company could require the holder to divest all or a portion of the holder's investment in our securities or those nonbanking investments that may be deemed impermissible or incompatible with bank holding company status, such as a material investment in a company unrelated to banking.
None
The Company's executive offices are located in Ann Arbor, Michigan. The Company and the Bank operate twenty-one properties in Washtenaw, Lenawee, Livingston and Monroe Counties in Michigan. Seven of the properties are leased, and all others are owned. Eighteen properties include banking offices, and all but four of the banking offices offer drive-up banking services. All banking offices also offer ATM service.
In addition to banking offices, United operates administrative and support facilities at the Hickman Financial Center, support and training facilities at the Downing Center, a Wealth Management office, and additional training facilities, all in Tecumseh, Michigan.
On or about January 17, 2014, a putative class action complaint was filed in the Circuit Court for Washtenaw County, Michigan, Business Division, by an individual purporting to be a shareholder of United. The action is styled Parshall v. United Bancorp, Inc., et al., Case No. 14-39-CZ. The complaint alleges that the directors of United breached their fiduciary duties to the Company's shareholders in connection with the proposed merger between United and Old National by approving a transaction that allegedly provides for inadequate consideration; that the merger agreement includes allegedly preclusive deal protection provisions; and that United and Old National allegedly aided and abetted the United directors in breaching their duties to United's shareholders. The complaint seeks, on behalf of the putative class of all public shareholders of United, various remedies, including enjoining the merger from being consummated in accordance with its agreed-upon terms, rescission of the transaction in the event that it is consummated, damages, and costs and attorneys' and experts' fees relating to the lawsuit. The Company intends to vigorously contest this action.
As of the date of this report, there are no other material pending legal proceedings other than routine litigation incidental to the business of banking, to which the Company or its subsidiaries are a party or of which any of our properties are the subject. As of the date of this report, neither the Company nor its subsidiaries are involved in any other proceedings to which any director, principal officer, affiliate thereof, or person who owns of record or beneficially more than five percent (5%) of the outstanding stock of the Company, or any associate of the foregoing, is a party or has a material interest adverse to the Company.
Not applicable.
| ITEM 5 | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCK-HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
MARKET FOR COMMON STOCK
The following table shows the high and low sale prices of common stock of the Company for each quarter of 2013 and 2012 as quoted on the OTCQB, under the symbol of "UBMI" and cash dividends declared for each quarter of 2013 and 2012. The quoted sale prices reflect inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions, and do not include private transactions not involving brokers or dealers. The Company had 1,174 shareholders of record as of December 31, 2013.
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2013
|
2012
|
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|
Market Price
|
Cash Dividends
|
Market Price
|
Cash Dividends
|
|||||||||||||||||||||
|
Quarter
|
High
|
Low
|
Declared
|
High
|
Low
|
Declared
|
||||||||||||||||||
|
1st
|
$
|
5.99
|
$
|
4.35
|
$
|
-
|
$
|
3.45
|
$
|
2.49
|
$
|
-
|
||||||||||||
|
2nd
|
6.00
|
5.10
|
-
|
3.70
|
3.25
|
-
|
||||||||||||||||||
|
3rd
|
6.80
|
5.20
|
-
|
4.20
|
3.26
|
-
|
||||||||||||||||||
|
4th
|
7.60
|
6.75
|
-
|
4.65
|
3.91
|
-
|
||||||||||||||||||
Restrictions on the Company's ability to pay dividends and on the ability of the Bank to transfer funds to the Company are discussed in Note 14 of the consolidated financial statements included elsewhere in this report, and under the heading "Supervision and Regulation" in Item 1 of this report which discussion is incorporated here by reference.
The following table provides information regarding equity compensation plans approved by shareholders as of December 31, 2013.
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Plan Category
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Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights
|
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
|
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding
Securities Reflected in Column (A)) (3) |
|||||||||
|
Equity compensation plans approved by shareholders
|
(A)
|
(B)
|
(C)
|
|||||||||
|
Stock Option Plans (1)
|
321,236
|
$
|
21.51
|
-
|
||||||||
|
Stock Incentive Plan of 2010
|
270,499
|
3.88
|
186,930
|
|||||||||
|
Director Retainer Stock Plan (2)
|
133,191
|
NA
|
203,212
|
|||||||||
|
Senior Management Bonus Deferral Stock Plan (2)
|
3,791
|
NA
|
21,373
|
|||||||||
|
Total
|
728,717
|
$
|
15.01
|
411,515
|
||||||||
|
(1)
|
The Company's 2005 Stock Option Plan expired on January 1, 2010, and no additional options can be issued under the plan.
|
|
|
|
|
(2)
|
The number of shares credited to participants under the Director Retainer Stock and Senior Management Bonus Deferral Stock Plans is determined by dividing the amount of each deferral by the market price of stock at the date of that deferral.
|
|
|
|
|
(3)
|
The numbers of shares reflected in column (c) in the table above with respect to the Stock Incentive Plan of 2010, the Director Retainer Stock Plan and the Senior Management Bonus Deferral Stock Plan represent shares that may be issued other than upon the exercise of an option, warrant or right.
|
The Company has no equity compensation plans not approved by shareholders.
The following table shows summarized historical consolidated financial data for the Company. The table is unaudited. The information in the table is derived from the Company's audited financial statements for 2009 through 2013.
This information is only a summary. You should read it in conjunction with the consolidated financial statements, related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations, and other information included in this report.
|
Thousands of dollars
|
||||||||||||||||||||
|
FINANCIAL CONDITION
|
2013
|
2012
|
2011
|
2010
|
2009
|
|||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash and demand balances in other banks
|
$
|
13,748
|
$
|
13,769
|
$
|
15,798
|
$
|
10,623
|
$
|
10,047
|
||||||||||
|
Federal funds sold and equivalents
|
12,513
|
56,843
|
91,794
|
95,599
|
115,542
|
|||||||||||||||
|
Securities available for sale
|
191,158
|
206,129
|
173,197
|
124,544
|
92,146
|
|||||||||||||||
|
Net loans
|
630,087
|
577,515
|
551,359
|
577,111
|
638,012
|
|||||||||||||||
|
Other assets
|
51,523
|
53,485
|
52,861
|
53,833
|
53,581
|
|||||||||||||||
|
Total Assets
|
$
|
899,029
|
$
|
907,741
|
$
|
885,009
|
$
|
861,710
|
$
|
909,328
|
||||||||||
|
Liabilities and Shareholders' Equity
|
||||||||||||||||||||
|
Noninterest bearing deposits
|
$
|
167,236
|
$
|
165,430
|
$
|
139,346
|
$
|
113,206
|
$
|
99,893
|
||||||||||
|
Interest bearing deposits
|
623,261
|
619,213
|
625,510
|
620,792
|
682,908
|
|||||||||||||||
|
Total Deposits
|
790,497
|
784,643
|
764,856
|
733,998
|
782,801
|
|||||||||||||||
|
Fed funds sold and other short term borrowings
|
-
|
-
|
-
|
1,234
|
-
|
|||||||||||||||
|
FHLB advances
|
11,961
|
21,999
|
24,035
|
30,321
|
42,098
|
|||||||||||||||
|
Other borrowings
|
10,000
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Other liabilities
|
4,360
|
3,702
|
2,344
|
3,453
|
3,562
|
|||||||||||||||
|
Total Liabilities
|
816,818
|
810,344
|
791,235
|
769,006
|
828,461
|
|||||||||||||||
|
Shareholders' Equity
|
82,211
|
97,397
|
93,774
|
92,704
|
80,867
|
|||||||||||||||
|
Total Liabilities and Shareholders' Equity
|
$
|
899,029
|
$
|
907,741
|
$
|
885,009
|
$
|
861,710
|
$
|
909,328
|
||||||||||
|
RESULTS OF OPERATIONS
|
||||||||||||||||||||
|
Interest income
|
$
|
34,535
|
$
|
34,693
|
$
|
36,165
|
$
|
39,770
|
$
|
43,766
|
||||||||||
|
Interest expense
|
2,984
|
4,528
|
6,114
|
8,687
|
12,251
|
|||||||||||||||
|
Net Interest Income
|
31,551
|
30,165
|
30,051
|
31,083
|
31,515
|
|||||||||||||||
|
Provision for loan losses
|
1,900
|
8,350
|
12,150
|
21,530
|
25,770
|
|||||||||||||||
|
Noninterest income
|
21,345
|
21,491
|
17,211
|
16,298
|
16,899
|
|||||||||||||||
|
Goodwill impairment
|
-
|
-
|
-
|
-
|
3,469
|
|||||||||||||||
|
Other noninterest expense
|
38,367
|
37,203
|
34,618
|
32,497
|
33,647
|
|||||||||||||||
|
Income (loss) before federal income tax
|
12,629
|
6,103
|
494
|
(6,646
|
)
|
(14,472
|
)
|
|||||||||||||
|
Federal income tax (benefit)
|
3,818
|
1,640
|
(423
|
)
|
(2,938
|
)
|
(5,639
|
)
|
||||||||||||
|
Net income (loss)
|
$
|
8,811
|
$
|
4,463
|
$
|
917
|
$
|
(3,708
|
)
|
$
|
(8,833
|
)
|
||||||||
|
KEY RATIOS
|
2013
|
2012
|
2011
|
2010
|
2009
|
|||||||||||||||
|
Return on average assets
|
0.97
|
%
|
0.50
|
%
|
0.10
|
%
|
-0.42
|
%
|
-1.03
|
%
|
||||||||||
|
Return on average shareholders' equity
|
9.14
|
%
|
4.69
|
%
|
0.98
|
%
|
-4.66
|
%
|
-10.61
|
%
|
||||||||||
|
Net interest margin
|
3.69
|
%
|
3.59
|
%
|
3.64
|
%
|
3.79
|
%
|
3.80
|
%
|
||||||||||
|
Basic earnings (loss) per share (1)
|
$
|
0.61
|
$
|
0.26
|
$
|
(0.02
|
)
|
$
|
(0.89
|
)
|
$
|
(1.93
|
)
|
|||||||
|
Diluted earnings (loss) per share (1)
|
$
|
0.60
|
$
|
0.26
|
$
|
(0.02
|
)
|
$
|
(0.89
|
)
|
$
|
(1.93
|
)
|
|||||||
|
Cash dividends paid per common share
|
-
|
-
|
-
|
-
|
0.02
|
|||||||||||||||
|
Dividend payout ratio
|
NA
|
NA
|
NA
|
NA
|
NA
|
|||||||||||||||
|
Equity to assets ratio (2)
|
10.6
|
%
|
10.6
|
%
|
10.6
|
%
|
9.1
|
%
|
9.5
|
%
|
||||||||||
|
(1) Earnings per share data is based on income available to common shareholders, divided by average common shares outstanding plus average contingently issuable shares.
|
||||||||||||||||||||
|
(2) Average equity divided by average total assets.
|
||||||||||||||||||||
The information required by this item is contained on Pages A-1 through A-28, and is incorporated by reference here.
Not applicable.
Supplementary financial information required by this item is contained in Note 20 of the Company's Notes to Consolidated Financial Statements, and is incorporated by reference here.
Our consolidated financial statements and related notes are contained on Pages A-29 through A-74 hereof, and are incorporated by reference here.
|
INDEX TO FINANCIAL STATEMENTS
|
Page No.
|
||
|
Report of Independent Registered Public Accounting Firm
|
A-29
|
||
|
|
|
|
|
|
|
Consolidated Financial Statements
|
|
|
|
|
|
Consolidated Balance Sheets
|
A-30
|
|
|
|
Consolidated Statements of Operations
|
A-31
|
|
|
|
Condensed Consolidated Statement of Comprehensive Income (Loss)
|
A-32
|
|
|
|
Consolidated Statements of Changes in Shareholders' Equity
|
A-32
|
|
|
|
Consolidated Statements of Cash Flow
|
A-33
|
|
|
|
Notes to Consolidated Financial Statements
|
A-34
|
None.
|
(a)
|
Our management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (the "Evaluation Date"), and have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.
|
||||
|
|
|
||||
|
(b)
|
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Rule 13a-15(f) of the Exchange Act. The Company's internal control over financial reporting system was designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
|
||||
|
|
|
||||
|
|
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
|
||||
|
|
|
||||
|
|
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's internal control over financial reporting as of the Evaluation Date, and has concluded that, as of the Evaluation Date, the Company's internal control over financial reporting was effective. Management identified no material weakness in the Company's internal control over financial reporting as of the Evaluation Date. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of Treadway Commission in "Internal Control - Integrated Framework."
|
||||
|
|
|
||||
|
|
|
|
|
||
|
|
/s/ Robert K. Chapman
|
|
/s/ Randal J. Rabe
|
||
|
|
Robert K. Chapman
|
|
Randal J. Rabe
|
||
|
|
President and Chief Executive Officer
|
|
Executive Vice President and Chief Financial Officer
|
||
|
|
|
||||
|
|
|
||||
|
(c)
|
There has been no change in the Company's internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
OTHER INFORMATION
|
None.
Directors
The following table discloses the name and age of each Director, his or her five year business experience, the specific experience qualifications, attributes and skills that led to the conclusion of the Compensation & Governance Committee and the Board of Directors that the person should serve as a Director, and the year each became a Director of the Company. All information is as of the date of this report.
|
Class II Directors – Terms Expiring in 2014
|
|
Stephanie H. Boyse, age 45; President and Chief Executive Officer, Brazeway, Inc., manufacturer of extruded aluminum tubing and related products, Adrian, MI; Director of UBI and UBT since 2008; Director of Tecumseh Products Company, manufacturer of compressors and refrigeration components, engines, and power train components, Tecumseh, MI (2013). In nominating Ms. Boyse, the Compensation & Governance Committee considered as important factors her diverse range of experience including sales, marketing, operations, human resources, licensing and acquisitions including international experience, her familiarity with the markets in which we operate, her reputation as a respected business leader in our community, and her extensive work with non-profit organizations in our markets.
|
|
Kenneth W. Crawford, age 56; Independent financial consultant. Director of UBI and UBT since 2011. Retired Senior Vice President, Chief Financial Officer, Corporate Controller and Assistant Secretary of Kaydon Corporation, Ann Arbor, MI. Kaydon Corporation is a leading designer and manufacturer of custom engineered, performance-critical products, supplying a broad and diverse group of alternative energy, military, industrial, aerospace, medical and electronic equipment, and aftermarket customers. Mr. Crawford has held various accounting and finance positions with a number of public companies. In nominating Mr. Crawford, the Compensation & Governance Committee considered as important factors his strong accounting and financial background, his experience with mergers and acquisitions, his ability to understand financial statements and qualify as an "audit committee financial expert," and his experience working with public companies.
|
|
John H. Foss, age 71; Director, La-Z-Boy Incorporated; Retired Director, Vice President, Treasurer and Chief Financial Officer, Tecumseh Products Company; Director of UBI and UBT since 1992. Mr. Foss is a CPA, and his work experience includes financial management and auditing. He has served as CFO of two publicly traded companies and as Chairman of the Audit Committee of La-Z-Boy. In nominating Mr. Foss, the Compensation & Governance Committee considered as important factors his extensive financial management and auditing experience, his ability to understand financial statements and qualify as an "audit committee financial expert," his experience working with public companies, and his extensive practical experience and understanding in the areas of strategic planning, compensation management, internal controls, mergers and acquisitions and corporate governance.
|
|
Class III Directors – Terms to Expire in 2015
|
|
Robert K. Chapman, age 70; President (since 2003) and Chief Executive Officer (since 2006) of the Company; Director of UBI and UBT since 2001; Chief Executive Officer (2001 – 2007) of the Company's former subsidiary, United Bank & Trust - Washtenaw ("UBTW"); President and Chief Executive Officer of UBT since 2010. Mr. Chapman is a CPA. In nominating Mr. Chapman, the Compensation & Governance Committee considered as important factors his experience in the financial industry in a financial role and in mergers and acquisitions, his strong background in risk management, his ability to understand financial statements, his familiarity with the markets in which we operate, and his extensive work with non-profit organizations in our markets.
|
|
Norman G. Herbert, age 71; Independent financial consultant. Director of UBI since 2009; Director of UBT since 2010; Director of UBTW (2006 – 2010). Mr. Herbert has an extensive financial background. For thirty-five years, he was a part of the financial management team for the University of Michigan, with responsibilities including management of endowment and working capital, real estate acquisitions and dispositions, external financing activities and risk management. In nominating Mr. Herbert, the Compensation & Governance Committee considered as important factors his extensive financial background, his ability to understand financial statements, his analytical background and a meticulous attention to detail, and his work with professional, civic and non-profit organizations.
|
|
Len M. Middleton, age 50; Professor of Strategy and Entrepreneurship, Ross School of Business at the University of Michigan. Director of UBI and UBT since 2010; Director of UBTW (2009 – 2010). Trustee at the Ann Arbor Hands-On Museum. He holds an MBA, and is founder of a private equity firm that specializes in buyouts and other investment opportunities. In nominating Mr. Middleton, the Compensation & Governance Committee considered as important factors his extensive financial background, his experience with mergers and acquisitions, his ability to understand financial statements, his broad range of entrepreneurial experience, and his work with entrepreneurial companies and non-profit organizations.
|
|
Class I Directors – Terms to Expire in 2016
|
|
Karen F. Andrews, age 47; Consultant and Managing Director with The Andrews Group, a human resources consulting service in Ann Arbor, MI. Director of UBI and UBT since 2012. Ms. Andrews is a human resources professional and holds a Senior Professional in Human Resources certification. She has held leadership positions with Henry Ford Health System and McKinley, a real estate investment firm. In 2012, she launched The Andrews Group, which offers solutions and strategies to help business leaders create teams and cultures that allow them to meet their goals. In nominating Ms. Andrews, the Compensation & Governance Committee considered as important factors her extensive business experience, her familiarity with the markets in which we operate, her experience in the commercial real estate industry, and her extensive background in human resources management.
|
|
James D. Buhr, age 66; Owner, J.D. Buhr & Company, LLC, corporate finance advisors, Ann Arbor, MI; Vice-Chairman of the Board of UBI since 2011; Director of UBI since 2004; Director of UBT since 2010; Director of UBTW (2001 – 2010). Mr. Buhr has an extensive financial background, including experience as a bank credit analyst, commercial lender and investment banker. He is a native of Washtenaw County, is a registered stock broker, and holds an MBA from the University of Michigan. Mr. Buhr currently owns his own corporate finance advisory practice, which provides corporate finance advisory services to Michigan and Midwestern based companies. In nominating Mr. Buhr, the Compensation & Governance Committee considered as important factors his extensive business experience including commercial lending, his extensive background in corporate finance, his familiarity with the markets in which we operate, his reputation as a respected business leader in our community, and his familiarity with and ability to understand financial statements.
|
|
James C. Lawson, age 66; General Manager, Avery Oil & Propane, Tecumseh, MI; Director of UBI and UBT since 1986; Chairman of the Board of UBI since 2011; Vice-Chairman of the Board of UBI (2010 – 2011). In nominating Mr. Lawson, the Compensation & Governance Committee considered as important factors his familiarity with the markets in which we operate, his reputation as a respected business leader in our community, his familiarity with and ability to understand financial statements, his diverse background into the formation and operation of a successful business, and his leadership, strategic planning, human resources and administrative skills and background.
|
None of the Directors, with the exception of Stephanie H. Boyse, John H. Foss and Len M. Middleton, serves as a director, or at any time during the past five years served as a director, of any other company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or subject to the requirements of Section 15(d) of such act, or any company registered as an investment company under the Investment Company Act of 1940, as amended. Ms. Boyse is a director of Tecumseh Products Company. Mr. Foss is a director of La-Z-Boy Incorporated. Mr. Middleton is a Director of Arcadia Funds, Castle Oaks and One Tree.
Committees of the Board of Directors
The Board of Directors has established a standing Audit Committee and Compensation & Governance Committee. The Compensation & Governance Committee also performs the functions of a nominating committee.
Audit Committee
The Audit Committee consists of Kenneth W. Crawford, John H. Foss, Norman G. Herbert and Len M. Middleton. The Audit Committee met seven times during the year ended December 31, 2013. Each of the current members meets the requirements for independence as defined under NASDAQ listing rules. While the Company is not subject to these standards, it has chosen to comply with them voluntarily. In addition, the Board of Directors determined that Mr. Crawford and Mr. Foss have met the qualifications to be considered an "audit committee financial expert" as set forth under rules adopted by the Securities and Exchange Commission.
The Audit Committee has selected BKD LLP ("BKD") as its independent registered public accounting firm for 2014. BKD has served in that capacity since 2002. The services provided by BKD are limited by the Audit Committee to audit services and certain permitted audit related and tax services.
The Board of Directors has adopted a written charter for the Audit Committee, a copy of which is available on the Company's website at www.ubat.com. The Board of Directors reviews and approves changes to the Audit Committee charter annually.
The Audit Committee has full power and authority to perform the responsibilities of a public company audit committee under applicable law, regulations, stock exchange listing standards, generally accepted accounting principles and public company custom and practice. The Audit Committee assists the Board in its oversight responsibilities of the integrity of the Company's financial statements, the system of disclosure controls and procedures and internal control over financial reporting.
The Audit Committee also assists in ensuring the independence and performance of the Company's internal auditor, the independence and performance of the independent registered public accounting firm, the Company's process for monitoring compliance with legal and regulatory requirements, the integrity and security of the Company's information systems and technology and the Company's enterprise risk management.
Management is responsible for the Company's financial statements and the financial reporting process, and for establishing and maintaining the Company's system of internal controls. The independent registered public accounting firm is responsible for expressing an opinion on the conformity of the Company's financial statements with U.S. generally accepted accounting principles.
Audit Committee Report
The Audit Committee reports that with respect to the audit of the Company's consolidated financial statements for the year ended December 31, 2013:
|
•
|
The Audit Committee has reviewed and discussed the Company's 2013 audited consolidated financial statements with the Company's management.
|
|
|
|
|
•
|
The Audit Committee has discussed with its independent registered public accounting firm, BKD, LLP, the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU Section 380) as adopted by the Public Company Accounting Oversight Board in Rule 3200T.
|
|
|
|
|
•
|
The Audit Committee has received the written disclosures and the letter from its independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding BKD's communications with the Audit Committee concerning independence, and has discussed with BKD its independence.
|
Based on the review and the discussions referenced above, the Audit Committee recommended to the Board of Directors that the Company's 2013 audited consolidated financial statements be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.
|
|
Audit Committee
|
|
|
Norman G. Herbert, Chairman
|
|
|
Kenneth W. Crawford
|
|
|
John H. Foss
|
|
|
Len M. Middleton
|
Compensation & Governance Committee
The Board of Directors of the Company has established a Compensation & Governance Committee, which addresses matters relating to employment, compensation, and management performance. The Compensation & Governance Committee also performs the functions of a nominating committee for the Board of Directors. The Board of Directors has adopted a written charter for the Compensation & Governance Committee, a copy of which is available on the Company's website at www.ubat.com.
Our Compensation & Governance Committee annually reviews and approves our compensation program, evaluates the performance of our Chief Executive Officer and, with input from the Chief Executive Officer, reviews the performance of the executive officers in achieving our business objectives, and recommends executive officers' compensation to our Board of Directors for approval. The Chief Executive Officer of the Company provides input into the recommended compensation of the executive officers to the Compensation & Governance Committee, but does not determine, recommend or participate in compensation decisions regarding his own compensation. Although input from the Chief Executive Officer is considered by the Compensation & Governance Committee and the Board, it is not given any disproportionate weight. The committee has the authority to recommend executive officers' compensation to our Board of Directors for approval in its discretion. The committee also recommends targets for bonuses and profit sharing and has sole authority to grant stock options and other equity awards to eligible individuals. The Compensation & Governance Committee and the Board have the final authority on compensation matters. Except to the extent prohibited by exchange rules (if applicable) and state law, the committee may delegate its authority to subcommittees when it deems it appropriate and in the best interests of the Company.
The Compensation & Governance Committee considers various potential candidates for Director that may come to its attention through current board members, shareholders or other persons. The Compensation & Governance Committee will review and evaluate candidates for Director nominated by shareholders in the same manner as it evaluates all other candidates. When considering and evaluating candidates for nomination to the Board, the committee considers a number of factors. The Compensation & Governance Committee considers board diversity as a factor in identifying nominees for Director, but diversity is not a dispositive factor and the Company has no formal diversity policy for Directors. In addition, the Compensation & Governance Committee believes that a Board candidate should:
|
•
|
Be a shareholder of United Bancorp, Inc.
|
|
|
|
|
•
|
Be willing and able to devote full interest and attendance to the Board and its committees
|
|
|
|
|
•
|
Bring their financial business to the Company, including personal and business accounts
|
|
|
|
|
•
|
Lend credibility to the Company and enhance its image
|
|
|
|
|
•
|
Help develop business and promote the Company and its subsidiaries
|
|
|
|
|
•
|
Provide advice and counsel to the CEO
|
|
|
|
|
•
|
Maintain integrity and confidentiality at all times.
|
The Compensation & Governance Committee will consider shareholder nominations for candidates for membership on the Board when properly submitted in accordance with the Company's bylaws. The bylaws provide that no less than 120 days prior to the date of the meeting, in the case of an annual meeting, and not more than seven days following the date of notice of the meeting, in the case of a special meeting, any shareholder who intends to make a nomination at the meeting shall deliver a notice to the Secretary of the Company setting forth; (i) the name, age, business address and residence of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of each class and series of capital stock of the Company which are beneficially owned by each such nominee and (iv) such other information concerning each such nominee as would be required, under the rules of the Securities and Exchange Commission, in a proxy statement soliciting proxies for the election of such nominee.
The Compensation & Governance Committee met six times during 2013, and is composed of the following Directors of the Company: Karen F. Andrews, Stephanie H. Boyse, James D. Buhr, John H. Foss and James C. Lawson. All members of the Company's Compensation & Governance Committee meet the requirements for independence under NASDAQ Listing Rules. While the Company is not subject to these standards, it has chosen to comply with them voluntarily.
Corporate Governance
Corporate Governance Policy
The Company has adopted a comprehensive Corporate Governance Policy. The policy is designed to promote accountability and transparency for the Board of Directors and management of the Company. The policy contains guidelines regarding the responsibilities, membership, and structure of the Board of Directors, including policies addressing:
|
· Board leadership;
|
|
|
|
· Director independence, diversity, education, and conflicts of interest; and
|
|
|
|
· majority vote requirement for uncontested elections.
|
The policy also contains guidelines for other significant corporate governance matters, such as the Board of Directors' responsibility for risk management and succession planning. The Corporate Governance Policy is available at the Company's website, www.ubat.com, under the "About Us – Investor Relations – Governance Documents" section.
Code of Ethics
The Company has adopted a comprehensive Code of Ethics. The code is intended to deter wrongdoing and to promote:
|
· Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
|
|
|
|
· Full, fair, accurate, timely and understandable disclosure in documents the Company files with, or submits to, the SEC and in all public communications made by the Company;
|
|
|
|
· Compliance with applicable governmental laws, rules and regulations;
|
|
|
|
· Prompt internal reporting to designated person of violations of the code; and
|
|
|
|
· Accountability for adherence to the code.
|
The Code of Ethics is available on the Company's website, www.ubat.com, under "About Us – Investor Relations – Governance Documents" section.
Board of Directors Leadership Structure
The Board of Directors of United is led by its Chairman of the Board, who is not the Chief Executive Officer of the Company. The Compensation & Governance Committee believes that separation of the positions of Chairman of the Board and Chief Executive Officer recognizes the difference between the two roles and reflects good corporate governance practice. The Chairman of the Board leads the Board of Directors in adopting an overall strategic plan for the Company, sets the agenda for the meetings of the Board of Directors, presides over all meetings of the Board of Directors, and provides guidance to the Chief Executive Officer. The Chief Executive Officer implements the strategic plan for the Company, as adopted by the Board of Directors, and leads the Company, its management and its employees on a day-to-day basis. Because of these differences, the Company currently believes keeping the Chairman of the Board and Chief Executive Officer as separate positions is the appropriate leadership structure for the Company.
James C. Lawson was elected as Chairman of the Board following the 2011 Annual Meeting of Shareholders. Mr. Lawson has a diverse background in the formation and operation of a successful business, and has served as a Director of the Company since 1986. Robert K. Chapman serves as the Company's President and Chief Executive Officer, and brings more than thirty years of banking experience in various roles, as well as leadership in the Washtenaw County market, to his role.
Board of Directors Role in Risk Oversight
The Company continues to enhance and implement its enterprise risk management ("ERM") process. The Board is responsible for overseeing the ERM process. The Enterprise Risk Management Committee implements the ERM process by overseeing policies, procedures and practices relating to enterprise-wide risk and compliance with bank and regulatory obligations. The committee consists of members of the executive management team and other appointed individuals from the various identified risk areas. The Company's Chief Financial Officer serves as chair of the committee.
Among other things, the committee is responsible for designing and implementing effective ERM processes and practices, ensuring that management understands and accepts responsibility for identifying, assessing and managing risk, ensuring that risk assessments are completed for each identified risk area, and reviewing and updating risk assessments on at least a quarterly basis. The committee has identified and monitors twelve risk areas. The committee must meet at least four times per year. The Chief Financial Officer must report on the ERM process to the Board of Directors on at least a quarterly basis.
The Board of Directors, and the Audit Committee under authority and responsibility delegated by the Board of Directors, play a key role in the oversight of the Company's risk management. To that end, the Board of Directors or the Audit Committee must periodically require and receive direct reports from the Enterprise Risk Management Committee.
Communicating with the Board of Directors
Shareholders may communicate with the Board of Directors, its committees or any member of the Board of Directors by writing to Chairman of the Board, United Bancorp, Inc., P. O. Box 1127, Ann Arbor, Michigan, 48106. All shareholder communications will be forwarded to the Board, the committee or the Director as indicated in the writing. The Chairman has discretion to screen and not forward to Directors communications which the Chairman determines in his discretion to be communications unrelated to the business or governance of the Company and its subsidiaries, commercial solicitations, offensive, obscene or otherwise inappropriate. The Chairman shall, however, collect all security holder communications which are not forwarded, and such communications shall be available to any Director upon request.
Meetings of the Board of Directors
During the year ended December 31, 2013, the Board of Directors of the Company met a total of nine times. Each of the Directors attended at least 75% of the aggregate of the total number of meetings of the Board and of the Board committees of which he or she is a member.
The Company encourages members of its Board of Directors to attend the Annual Meeting of Shareholders. All directors serving at May 7, 2013 attended the Company's 2013 Annual Meeting of Shareholders held on that date.
Meetings of Independent Directors
The Company's independent directors meet periodically in executive sessions without any management directors in attendance. If the Board of Directors convenes a special meeting, the independent directors may hold an executive session if the circumstances warrant.
Whistleblower Program
The Audit Committee has established a program for employees of the Company and its subsidiaries to report violations of standards of conduct specified in the program, improper activity or other suspected wrongdoing by any officer or employee to the Chairman of the Audit Committee, in particular any activity that may jeopardize the accuracy of financial reporting, represent a conflict of interest, violate corporate ethics policies, or violate any provision of federal law. Retaliation against any employee who reports a good faith concern is not permitted.
Executive Officers
Following is a current listing of executive officers of the Company and biographical information about each executive officer. All information is as of the date of this report. Officer appointments for the Company are made or reaffirmed annually at the Organizational Meeting of the Board of Directors. The Board may also designate executive officers at regular or special meetings of the Board. Executive officers of the Company serve at the pleasure of the Board.
|
Name, Age, and Five Year Business Experience
|
Executive Officer Since
|
|
Robert K. Chapman, age 70; Director of UBI since 2001; President (since 2003) and Chief Executive Officer (since 2006) of the Company; President (2010–February, 2013) and Chief Executive Officer of UBT since 2010; President (2001–2005) and Chief Executive Officer (2001–2007) of UBTW; Director of UBTW (2001–2010)
|
2001
|
|
Randal J. Rabe, age 55; Executive Vice President (since 2003) and Chief Financial Officer (since December, 2007) of the Company; President (2003–2007) & Chief Executive Officer (2005–2007) and Director (2003–2007) of UBT
|
2003
|
|
Todd C. Clark, age 44; Executive Vice President of the Company; President (since February, 2013) of UBT; Chief Operating Officer and Washtenaw Community President (2010–2013); President (2006–2010) and Chief Executive Officer (2007–2010) of UBTW; Director (2006–2010) of UBTW
|
2005
|
|
Gary D. Haapala, age 50; Executive Vice President of the Company since 2006; President – Wealth Management Group of UBT since 2010
|
2006
|
|
Joseph R. Williams, age 50; Executive Vice President of the Company (since 2007); Lenawee Community President (since 2010); President and Chief Executive Officer and Director of UBT (2007–2010); Executive Vice President – Community Banking of UBT (2003–2007)
|
2007
|
|
Raymond J. Webb, age 48; Executive Vice President of the Company (since 2013). Senior Vice President – Head of Retail, Fifth Third Bank (2009-2012); Affiliate President, Fifth Third Bank (2001-2009)
|
2013
|
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, the Company's Directors and officers, and persons who own more than 10% of the Company's Common Stock, are required to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, Directors and greater than 10% shareholders are required by regulation to furnish the Company with copies of all Section 16(a) reports they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company, all officers, Directors and greater than 10% beneficial owners timely filed required reports under Section 16(a) during 2013.
Compensation Components
The key components of our executive compensation program consist of a base salary and participation in various performance-based compensation plans.
Base Salary
We use base salary to attract and retain executive officers near the midpoint of market rates, and rely on our performance-based plans to reward for performance. The Company generally hires executive officers at market rates necessary to attract talent. Raises and salary adjustments for named executive officers are provided primarily to allow us to retain our existing talent.
Generally, we believe that base salary should be set at mid-level market competitive levels. Base salaries are reviewed annually and are compared to several databases and public information, and adjusted from time to time.
2009 Management Committee Incentive Compensation Plan
The named executive officers participate in the Management Committee Incentive Compensation Plan. Under the plan, a participant is paid a percentage of his or her base salary based on the achievement of business and individual performance objectives. Bonuses under the plan are based all or in part on our achieving a target return on assets ("ROA") as established annually by the Board of Directors. For 2013, our target ROA was 1.00%.
The plan is divided into groups, each with differing payout levels based on a percentage of base salary. Participants in the plan may earn more or less than the prescribed bonus percentages at target levels, with threshold and maximum bonus levels established. The table below details the range of minimum, target and maximum thresholds and payouts for each group of the plan, relating to the named executive officers.
|
|
No Bonus is Earned if Performance
is Below: |
Bonus Earned
at Minimum Threshold |
Bonus Earned at 100% of Target
|
Maximum Bonus That Can Be Earned
|
Maximum Bonus
is Earned At or Above: |
||
|
Group 1
|
0.75%
|
ROA
|
11.25%
|
45%
|
90%
|
1.625%
|
ROA
|
|
Group 2
|
0.75%
|
ROA
|
8.75%
|
35%
|
70%
|
1.625%
|
ROA
|
Targets for 2013 for all participants were based 100% on ROA, as participants each have responsibilities with regard to the overall performance of the Company. The table below details the respective named executive officers in each group, the group within the plan that each participates in, the basis upon which the bonus is determined, and the payout percentages for calendar year 2013.
|
Executive Officer
|
Group
|
Based on:
|
2013 Payout
|
|
Chapman
|
1
|
Target ROA (100%)
|
40.8%
|
|
Rabe
|
2
|
Target ROA (100%)
|
31.8%
|
|
Clark
|
2
|
Target ROA (100%)
|
31.8%
|
Stock Incentive Plan of 2010
At the 2010 Annual Meeting of Shareholders, shareholders approved the United Bancorp, Inc. Stock Incentive Plan of 2010 (the "Incentive Plan"). The Incentive Plan is intended to supplement and continue the compensation policies and practices of our other equity compensation plans, which we have used for many years. The Board of Directors believes that the Incentive Plan is important to attract, retain and motivate corporate and subsidiary directors, officers and key employees of exceptional abilities, and to recognize the significant contributions these individuals have made to the long-term performance and growth of the Company and its subsidiaries. The Compensation & Governance Committee awarded grants in 2013 under the Incentive Plan based on the Company's 2012 performance, and in 2012 based on the Company's 2011 performance.
The Incentive Plan includes a number of components, as follows:
Stock Options
The Incentive Plan permits the Company to grant to participants options to purchase shares of common stock at stated prices for specific periods of time. Stock options that may be granted under the Incentive Plan could be either nonqualified stock options or incentive stock options as defined in Section 422 of the Internal Revenue Code. The Compensation & Governance Committee may award options for any amount of consideration or no consideration, as the committee determines. No stock options were granted in 2013 or 2012.
Stock Appreciation Rights
The Incentive Plan permits the Compensation & Governance Committee to grant stock appreciation rights. A stock appreciation right permits the holder to receive the difference between the market value of a share of common stock subject to the stock appreciation right on the exercise date of the stock appreciation right and a "base" price set by the Compensation & Governance Committee. Stock appreciation rights are exercisable on dates determined by the Compensation & Governance Committee at the time of grant. The committee may award stock appreciation rights for any amount of consideration or no consideration, as the committee determines.
Stock appreciation rights are subject to terms and conditions determined by the Compensation & Governance Committee. A stock appreciation right may relate to a particular stock option and may be granted simultaneously with or subsequent to the stock option to which it relates. The Company granted Stock-Only Stock Appreciation Rights ("SOSARs") in 2013 and 2012.
Restricted Stock and Restricted Stock Units
The Incentive Plan permits the Compensation & Governance Committee to award restricted stock and restricted stock units, subject to the terms and conditions set by the committee that are consistent with the Incentive Plan. The Compensation & Governance Committee may award restricted stock or restricted stock units for any amount of consideration or no consideration, as the committee determines.
Restricted stock and restricted stock units granted to a participant "vest" (i.e., the restrictions on them lapse) in the manner and at the times that the Compensation & Governance Committee determines. The Company awarded restricted stock in 2013 and restricted stock units ("RSUs") during 2012 and 2013.
The period during which restricted stock and RSUs are unvested under the Plan is known as the "Restricted Period." The restrictions imposed on 100% of the restricted stock awarded are time-based, and lapse two years from the date of grant.
RSUs vest upon satisfaction of time based and performance based vesting requirements. Vesting for RSUs granted in 2013 is as follows:
|
· Time Based Vesting. The percentage of RSUs awarded that satisfy the performance based vesting requirement will generally vest and be settled three years from the date of the grant.
|
|
|
|
· Performance Based Vesting. The performance period for the RSUs granted in 2013 is the period beginning January 1, 2013 and ending December 31, 2013.
|
The percentage specified below of RSUs awarded will satisfy the performance based vesting requirements of the award if the Company's core earnings, as measured by pre-tax, pre-provision return on assets ("PTPP ROA"), earnings, as measured by ROA and asset quality, as measured by Classified Assets Coverage,1 as determined by the Company in a manner consistent with the information reported in its filings with the Securities and Exchange Commission, meet the standards set forth in the following schedule:
|
Performance Measure (Metric)
|
Weight
|
Performance Standard
|
% of RSU Award Performance Vested
|
|
Core Earnings
(PTPP ROA)
|
1/3
|
1.35%
|
25%
|
|
1.45%
|
50%
|
||
|
1.55%
|
75%
|
||
|
1.65%
|
100%
|
||
|
Earnings
(ROA)
|
1/3
|
0.50%
|
25%
|
|
0.55%
|
50%
|
||
|
0.60%
|
75%
|
||
|
0.65%
|
100%
|
||
|
Asset Quality
(Classified Assets Coverage)
|
1/3
|
38.5%
|
25%
|
|
35.0%
|
50%
|
||
|
31.5%
|
75%
|
||
|
28.0%
|
100%
|
RSUs will not vest upon performance below the minimum performance standards provided above. Vesting upon performance between the performance standards provided above will be interpolated based on the actual performance. For 2013, RSUs performance vested at 95.8% of target.
Stock Option Plans
Before December 31, 2009, we granted stock options under one of two stock option plans: the 1999 and 2005 stock option plans. The 1999 and 2005 stock option plans have expired and been replaced by the Stock Incentive Plan of 2010. Options granted under the plans and not exercised are still outstanding, and no new options may be granted under either plan.
Under the plans, options were granted at the then-current market price at the time the option was granted. The options have a three-year vesting period and, with certain exceptions, expire at the end of ten years from the date of grant, or three years after retirement. Options granted under our plans are non-qualified stock options as defined under the Internal Revenue Code. Our Compensation & Governance Committee administers our stock option plans
401(k) Plan
Under our 401(k) plan, named executive officers and other participants may defer a portion of their compensation, and the Company's 401(k) plan provides for a match of up to 4% of salary, subject to IRS regulations. In addition to the match contributions, the plan includes a profit-sharing feature based on achievement of a net income target as established annually by the Board of Directors. Effective July 1, 2009, the Company discontinued its match and profit sharing contributions to the 401(k) plan as a cost-cutting measure. The Company reinstated match contributions beginning January 1, 2011, but did not make profit sharing contributions in 2012. During 2013, the Company accrued 3.2% of eligible compensation in profit sharing contributions, which were deposited into the individual accounts within the 401(k) plan in 2014.
Severance Arrangements
Each named executive officer has an employment agreement with the Company. The employment agreements renew annually on April 1 for one-year terms, unless either party gives timely notice of non-renewal.
As part of our goal to attract and retain our executive officers, such employment agreements provide that if the Company terminates the employee's employment before a Change in Control (as defined in the agreement) other than for Cause (as defined in the agreement), the employee will receive severance pay consisting of six months of salary continuation and six months of COBRA payments, provided that the severance pay will end if the employee secures other employment. If the Company terminates the employee's employment other than for Cause within 12 months after a Change in Control, or if the employee resigns for Good Reason (as defined in the agreement) within 12 months after a Change in Control, the employee will receive severance pay consisting of a lump sum payment equal to two year's salary, and will also receive 24 months of healthcare contribution payments.
The employment agreements provide for a general release from the employee as a condition to eligibility for severance pay. The employment agreements also provide that to be eligible for severance pay the employee must comply with confidentiality requirements and 24-month non-solicitation and non-competition commitments included in the employment agreements.
Inter-Relationship of Elements of Compensation Packages
The various elements of the compensation package are not inter-related. There is no significant interplay of the various elements of total compensation between each other. While the Compensation & Governance Committee may recommend, and the Board has discretion to make exceptions to any compensation or bonus payouts under existing plans, the Compensation & Governance Committee has not recommended, and the Board has not approved, any exceptions to the plans with regard to any named executive officer.
Limitations on Executive Compensation
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for taxable compensation in excess of $1,000,000 paid to their chief executive officer or certain other highly compensated officers. Qualifying performance-based compensation is not subject to the deduction limitation if certain requirements are met. We consider the impact of Section 162(m) when structuring the performance based portion of our executive compensation, but Section 162(m) is not a dispositive consideration. No compensation was non-deductible because of Section 162(m) in 2013, and we do not expect any compensation to be non-deductible because of Section 162(m) in 2014.
Pursuant to employment agreements entered into with each named executive officer, United may recover or "claw back" from named executive officers any bonus or incentive compensation based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate. It is anticipated that actions to be taken under such circumstances would be determined by the Compensation & Governance Committee.
Stock Ownership Guidelines
We believe that stock ownership by our executive officers is the clearest, most direct way to align their interests with those of our shareholders and that, by holding an equity position in the Company, executive officers demonstrate their commitment to and belief in the long-term profitability of the Company. Accordingly, guidelines for stock ownership by executive officers were adopted in 2008. As of December 31, 2013, all of the named executive officers had stock ownership in compliance with the stock ownership guidelines. We currently have no policies regarding hedging the economic risk of any ownership of our common stock.
Compensation of Executive Officers
The following table sets forth information concerning the compensation earned by each person who served as Chief Executive Officer during 2013 and the two most highly compensated executive officers other than the Chief Executive Officer during 2013.
Summary Compensation Table
|
Name and Principal Position
|
Year
|
Salary (1)
|
Option Awards (2)
|
Stock Awards (3)
|
Non-Equity Incentive Comp (4)
|
All Other Compensation (5)
|
Total Compen-sation
|
||||||||||||||||||
|
Robert K. Chapman, President and Chief Executive Officer
|
2013
|
$
|
283,461
|
$
|
0
|
$
|
58,570
|
$
|
124,726
|
$
|
22,700
|
$
|
489,457
|
||||||||||||
|
2012
|
274,615
|
0
|
38,280
|
0
|
21,000
|
333,895
|
|||||||||||||||||||
|
2011
|
267,692
|
0
|
44,976
|
0
|
20,300
|
332,968
|
|||||||||||||||||||
|
Randal J. Rabe, Executive Vice President & Chief Financial Officer
|
2013
|
$
|
211,000
|
$
|
0
|
$
|
29,285
|
$
|
74,244
|
$
|
12,336
|
$
|
326,865
|
||||||||||||
|
2012
|
205,846
|
0
|
19,140
|
0
|
12,259
|
237,245
|
|||||||||||||||||||
|
2011
|
199,231
|
0
|
22,488
|
0
|
11,694
|
233,413
|
|||||||||||||||||||
|
Todd C. Clark, Executive Vice President
|
2013
|
$
|
227,769
|
$
|
0
|
$
|
29,285
|
$
|
81,715
|
$
|
11,041
|
$
|
349,810
|
||||||||||||
|
2012
|
205,846
|
0
|
19,140
|
0
|
10,659
|
235,645
|
|||||||||||||||||||
|
2011
|
200,385
|
0
|
22,488
|
0
|
10,201
|
233,074
|
|||||||||||||||||||
|
(1)
|
Salary amounts include amounts deferred under the Company's 401(k) plan.
|
|
|
|
|
(2)
|
Amounts reflect the grant date fair value computed in accordance with FASB ASC Topic 718. Amounts include awards of stock options. Further information regarding grant valuation is contained in Note 15 of the Notes to Consolidated Financial Statements.
|
|
|
|
|
(3)
|
Amounts reflect the grant date fair value computed in accordance with FASB ASC Topic 718. Amounts include awards of restricted stock, RSUs and SOSARs. Further information regarding grant valuation is contained in Note 15 of the Notes to Consolidated Financial Statements.
|
|
|
|
|
(4)
|
"Non-Equity Incentive Compensation" includes amounts earned under the Management Committee Incentive Compensation Plan and as a profit-sharing contribution under the Company's 401(k) plan. Detail is shown in the table below.
|
|
|
|
|
(5)
|
"All Other Compensation" includes matching contributions made by us under our 401(k) plan and life insurance premiums paid by the Company for the benefit of the named executive officers. Detail is shown in the table below.
|
|
Name
|
Year
|
Management Committee Incentive Pay
|
401(k) Profit Sharing
|
Total Non-Equity Incentive Pay
|
401(k) Match Contributions (a)
|
Life Insurance Premiums
|
Total Other Compensation
|
||||||||||||||||||
|
Chapman
|
2013
|
$
|
116,566
|
$
|
8,160
|
$
|
124,726
|
$
|
10,200
|
$
|
12,500
|
$
|
22,700
|
||||||||||||
|
2012
|
0
|
0
|
0
|
10,000
|
11,000
|
21,000
|
|||||||||||||||||||
|
2011
|
0
|
0
|
0
|
9,800
|
10,500
|
20,300
|
|||||||||||||||||||
|
Rabe
|
2013
|
$
|
67,492
|
$
|
6,752
|
$
|
74,244
|
$
|
8,311
|
$
|
4,025
|
$
|
12,336
|
||||||||||||
|
2012
|
0
|
0
|
0
|
8,234
|
4,025
|
12,259
|
|||||||||||||||||||
|
2011
|
0
|
0
|
0
|
7,969
|
3,725
|
11,694
|
|||||||||||||||||||
|
Clark
|
2013
|
$
|
74,426
|
$
|
7,289
|
$
|
81,715
|
$
|
8,591
|
$
|
2,450
|
$
|
11,041
|
||||||||||||
|
2012
|
0
|
0
|
0
|
8,209
|
2,450
|
10,659
|
|||||||||||||||||||
|
2011
|
0
|
0
|
0
|
7,801
|
2,400
|
10,201
|
|||||||||||||||||||
|
|
|
||||||||||||||||||||||||
(a) The match, which was discontinued July 1, 2009, was reinstated January 1, 2011 at a maximum of 4%.
Outstanding Equity Awards at Fiscal Year End 2013
The following table provides information as of December 31, 2013 regarding the Company's outstanding equity awards under the Company's equity compensation plans. As of December 31, 2013, the exercise price of all of the stock options shown below was higher than the Company's stock price, and accordingly, the options could not be exercised profitably at that time. All shares issuable under the Senior Management Bonus Deferral Stock Plan are fully vested, and are not included in the table below.
|
|
Option and SOSAR Awards
|
Stock Awards
|
||||||||||||||
|
|
|
# of Shares Underlying Unexercised Grants at Year-End (2)
|
Option
|
Option
|
Number of Shares or Units of Stock
|
Market Value of Shares or Units of Stock
|
||||||||||
|
Name
|
Grant Date (1)
|
Exercisable
|
Unexercisable
|
Exercise Price (2)
|
Expiration Date (3)
|
That Have Not Vested 4,5
|
That Have Not Vested 4,5
|
|||||||||
|
Robert K. Chapman
|
|
|
|
|
||||||||||||
|
Stock Option Grants
|
01/09/04
|
5,788
|
- -
|
27.21
|
01/09/14
|
|
|
|||||||||
|
01/03/05
|
5,512
|
- -
|
30.39
|
01/03/15
|
|
|
||||||||||
|
01/03/06
|
5,880
|
- -
|
29.52
|
01/03/16
|
|
|
||||||||||
|
01/02/07
|
6,000
|
- -
|
22.50
|
01/02/17
|
|
|
||||||||||
|
02/15/08
|
7,200
|
- -
|
19.75
|
02/15/18
|
|
|
||||||||||
|
03/04/09
|
12,500
|
- -
|
7.24
|
03/04/19
|
|
|
||||||||||
|
SOSAR Grants
|
03/02/11
|
10,560
|
5,440
|
3.35
|
03/02/21
|
|
|
|||||||||
|
03/02/12
|
5,333
|
10,667
|
3.30
|
03/02/22
|
|
|
||||||||||
|
03/06/13
|
- -
|
6,000
|
5.05
|
03/06/23
|
|
|
||||||||||
|
RSU Grants
|
03/02/11
|
|
3,612
|
$ 26,115
|
||||||||||||
|
03/02/12
|
|
5,850
|
42,296
|
|||||||||||||
|
03/06/13
|
|
9,580
|
69,263
|
|||||||||||||
|
|
Option and SOSAR Awards
|
Stock Awards
|
|||||
|
|
|
# of Shares Underlying Unexercised Grants at Year-End (2)
|
Option
|
Option
|
Number of Shares or Units of Stock
|
Market Value of Shares or Units of Stock
|
|
|
Name
|
Grant Date (1)
|
Exercisable
|
Unexercisable
|
Exercise Price (2)
|
Expiration Date (3)
|
That Have Not Vested 4,5
|
That Have Not Vested 4,5
|
|
Randal J. Rabe
|
|
|
||||||||||||||||||||
|
Stock Option Grants
|
01/09/04
|
4,630
|
- -
|
27.21
|
01/09/14
|
|||||||||||||||||
|
01/03/05
|
4,410
|
- -
|
30.39
|
01/03/15
|
||||||||||||||||||
|
01/03/06
|
3,990
|
- -
|
29.52
|
01/03/16
|
||||||||||||||||||
|
01/02/07
|
3,800
|
- -
|
22.50
|
01/02/17
|
||||||||||||||||||
|
02/15/08
|
4,000
|
- -
|
19.75
|
02/15/18
|
||||||||||||||||||
|
03/04/09
|
7,000
|
- -
|
7.24
|
03/04/19
|
||||||||||||||||||
|
SOSAR Grants
|
03/02/11
|
5,280
|
2,720
|
3.35
|
03/02/21
|
|||||||||||||||||
|
03/02/12
|
2,666
|
5,334
|
3.30
|
03/02/22
|
||||||||||||||||||
|
03/06/13
|
- -
|
3,000
|
5.05
|
03/06/23
|
||||||||||||||||||
|
RSU Grants
|
03/02/11
|
|
1,806
|
$
|
13,057
|
|||||||||||||||||
|
03/02/12
|
|
2,925
|
21,148
|
|||||||||||||||||||
|
03/06/13
|
|
4,790
|
34,632
|
|||||||||||||||||||
|
Todd C. Clark
|
|
|
||||||||||||||||||||
|
Stock Option Grants
|
01/09/04
|
2,017
|
- -
|
27.21
|
01/09/14
|
|||||||||||||||||
|
01/03/05
|
3,528
|
- -
|
30.39
|
01/03/15
|
||||||||||||||||||
|
01/03/06
|
4,200
|
- -
|
29.52
|
01/03/16
|
||||||||||||||||||
|
01/02/07
|
4,600
|
- -
|
22.50
|
01/02/17
|
||||||||||||||||||
|
02/15/08
|
5,000
|
- -
|
19.75
|
02/15/18
|
||||||||||||||||||
|
03/04/09
|
7,000
|
- -
|
7.24
|
03/04/19
|
||||||||||||||||||
|
SOSAR Grants
|
03/02/11
|
5,280
|
2,720
|
3.35
|
03/02/21
|
|||||||||||||||||
|
03/02/12
|
2,666
|
5,334
|
3.30
|
03/02/22
|
||||||||||||||||||
|
03/06/13
|
- -
|
3,000
|
5.05
|
03/06/23
|
||||||||||||||||||
|
RSU Grants
|
03/02/11
|
|
1,806
|
$
|
13,057
|
|||||||||||||||||
|
03/02/12
|
|
2,925
|
21,148
|
|||||||||||||||||||
|
03/06/13
|
|
4,790
|
34,632
|
|||||||||||||||||||
|
(1)
|
Option grants are fully vested at the end of the first three years following the grant date; 33% per year at the end of each of the first two years and 34% at the end of the third year. The right to exercise SOSARs vests 1/3 on each of the first three anniversaries of the date of the award.
|
|
|
(2)
|
The number of shares granted and the exercise price for each stock option grant is adjusted in accordance with the Company's stock option plans to reflect stock dividends paid.
|
|
|
(3)
|
Dates shown for Stock Option and SOSAR awards are the award expiration dates.
|
|
|
(4)
|
Shares of restricted stock and RSUs are subject to risks of forfeiture as follows:
|
|
|
|
-
|
RSUs: For 2013, RSUs performance vested at 95.8% of target. The performance vested RSUs are subject to time-based vesting requirements and will generally vest and be settled three years from the date of grant.
|
|
(5)
|
The market value of the RSUs that have not vested is based on the closing price of the Company's common stock on December 31, 2013.
|
|
The Company has not adjusted or amended the exercise price of options previously awarded to any executive officer.
Retirement, Termination or Change of Control Payments
The Company has entered into employment agreements with each of the named executive officers. Additional information about retirement, termination or change in control payments under the employment agreements may be found above under the heading "Severance Arrangements" and is here incorporated by reference.
Under the terms of the Company's 2005 stock option plan, upon the earlier of the occurrence of an Applicable Event (as defined in the plan), and the death or total disability of a participant, all options granted to the participant shall be fully exercisable in accordance with terms of the plan.
At December 31, 2013, the exercise price of nearly all of the options granted to our named executive officers was higher than the Company's stock price, and therefore, the options could not have been exercised profitably.
Under the terms of the Incentive Plan, if an Incentive Plan participant retires, dies, or becomes disabled while an employee of the Company or one of its subsidiaries, SOSAR grants under the Incentive Plan shall become fully vested and exercisable for one year following participant's death or disability and for three years following participant's retirement; however, in no event will the participant's retirement, death, or disability extend the last date to exercise the SOSARs. Notwithstanding any provisions of the Incentive Plan, all of the SOSAR grants under the Incentive Plan shall be immediately exercisable in the event of any change in control (as defined in the Incentive Plan) and may be exercised for the remaining term of the award.
If the participant's employment or officer status with United or any of its subsidiaries is terminated during any restricted period as defined by the Incentive Plan, all restricted stock still subject to restrictions at the date of such termination shall either vest or automatically be forfeited and returned to United as provided in the plan. Notwithstanding any provisions of the Incentive Plan, 100% of the restricted stock shall fully vest upon the following events resulting in termination of employment or officer status: (a) death; (b) disability; (c) change in control; or (d) retirement.
Notwithstanding any provisions of the Incentive Plan, a portion of restricted stock units shall satisfy the time based vesting requirement upon the following events resulting in termination of employment or officer status: (a) death; (b) disability; or (c) retirement (collectively any of (a), (b) or (c) are an "Acceleration Event"). Upon the occurrence of an Acceleration Event, the percentage of restricted stock units that shall satisfy the time based vesting requirement shall be determined by dividing the number of full calendar months between the date of this Agreement and the date of the Acceleration Event by thirty six (36) and in no event may the percentage accelerated exceed 100%.
Notwithstanding the preceding two sentences, the restricted stock units that satisfy the time based vesting requirements due to an Acceleration Event remain subject to the performance based vesting requirements. Notwithstanding any provisions of the Incentive Plan or this Agreement, 100% of the restricted stock units outstanding shall fully vest, including both time based vesting and performance based vesting, upon a change in control.
Named executive officers may participate in the Company's 401(k) plan, which will provide payment following retirement dependent on contributions by the officer and the Company during their term as an employee. Terms of the plan are disclosed above under the heading "401(k) Plan." Named executive officers are not eligible for other Company benefits following retirement.
Compensation of Directors
All of the Company's Directors are Directors of United Bank & Trust. The table below details the fees paid to Directors for 2013:
|
Director Fees for 2013
|
UBI
|
UBT
|
||||||
|
Annual retainer
|
||||||||
|
Non-officer directors
|
$
|
1,000
|
$
|
4,000
|
||||
|
Audit Committee Chair
|
5,000
|
-
|
||||||
|
Other Committee Chairs
|
2,500
|
2,500
|
||||||
|
Meeting attendance fee
|
||||||||
|
Board meeting
|
500
|
500
|
||||||
|
Board Committee
|
350
|
350
|
||||||
The Chairman of the Board of the Company received an annual fee of $45,000 in 2013 for his services, and receives no other compensation for services as a Director. We have established community boards for each of our Lenawee and Washtenaw markets. Certain of our Directors also serve as a member of one of those community boards. For this service as a member of a community board, Directors receive an annual retainer of $1,000 and meeting fees of $500 per community board meeting and $350 per community board committee meeting as of December 31, 2013.
Directors that are not otherwise employees do not participate in our employee benefit programs, and receive no other direct or indirect compensation.
Under the 1996 Director Retainer Stock Plan, a Director may elect to defer all or a portion of the payments received for serving as a Director, except for fees for serving on or as chairman of a committee. A Director who elects to defer payment will instead be awarded units equal to the cash payment that was earned divided by the market price of our common stock on such date. The common stock earned will be issued to the Director on the date on which such Director no longer is serving as a Director. An election to defer made no later than 30 days after a Director is eligible is generally given effect commencing as of the next calendar quarter after the election. An election to defer made after 30 days from the date that a Director was eligible is generally given effect commencing as of the next calendar year. The plan is administered by the Company's Chief Executive Officer. Up to 400,000 shares may be issued pursuant to the plan.
No Director who is also an employee of either the Company or the Bank receives any compensation for his or her services as a Director. Accordingly, Mr. Chapman's compensation is not set forth below, but is disclosed above in the Summary Compensation Table.
Below is a summary of compensation paid to Directors of UBI for 2013:
|
Director
|
Fees Earned
or Paid in Cash (1) |
Stock Awards
|
Option Awards
|
Non-Equity Incentive Compensation
|
All
Other |
Total Director Compensation
|
Stock Awards Outstanding (2)
|
|||||||||||||||||||||
|
Karen F. Andrews
|
$
|
19,550
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
19,550
|
445.3
|
|||||||||||||||
|
Stephanie H. Boyse
|
18,850
|
-
|
-
|
-
|
-
|
18,850
|
19,983.8
|
|||||||||||||||||||||
|
James D. Buhr
|
41,550
|
-
|
-
|
-
|
-
|
41,550
|
15,798.0
|
|||||||||||||||||||||
|
Kenneth W. Crawford
|
31,600
|
-
|
-
|
-
|
-
|
31,600
|
9,204.0
|
|||||||||||||||||||||
|
John H. Foss
|
26,550
|
-
|
-
|
-
|
-
|
26,550
|
10,498.3
|
|||||||||||||||||||||
|
Norman G. Herbert
|
34,200
|
-
|
-
|
-
|
-
|
34,200
|
-
|
|||||||||||||||||||||
|
James C. Lawson
|
45,000
|
-
|
-
|
-
|
-
|
45,000
|
22,359.2
|
|||||||||||||||||||||
|
Len M. Middleton
|
23,250
|
-
|
-
|
-
|
-
|
23,250
|
11,740.2
|
|||||||||||||||||||||
|
(1)
|
Amounts include fees earned as a Director of the Company, the Bank and where applicable, as a member of a community board. All Directors except for Andrews, Crawford and Foss serve as a member of a community board. Amounts deferred are included in this column, and were as follows for 2013: Andrews, $1,550; Boyse, $15,500; Buhr, $21,000; Crawford, $15,500; and Lawson, $9,000.
|
|
(2)
|
Aggregate number of shares of stock awards outstanding December 31, 2013, representing payments deferred under the Director Retainer Stock Plan, along with accumulated cash dividends earned on deferred amounts.
|
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The information under Item 5 – Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – regarding equity compensation plans is here incorporated by reference.
Security Ownership of Certain Beneficial Owners
To the extent known by the Company, as of December 31, 2013, no shareholders except those listed in the following table owned beneficially more than five percent (5%) of the voting securities of the Company. The following table discloses the name and address of such beneficial owner, the total number of shares beneficially owned, and the percentage of ownership in relation to the total Common Stock of the Company outstanding. The Company is not responsible for the accuracy of this information.
|
Name of Beneficial Owner
|
Sole Voting Power
|
Sole Dispositive Power
|
Shared Voting and Dispositive Power
|
Total Beneficial Ownership
|
Percent
of Class |
|||||||||||||||
|
Wellington Management Company LLP (1)
|
-
|
-
|
1,256,491
|
1,256,491
|
9.88
|
%
|
||||||||||||||
|
280 Congress Street
|
||||||||||||||||||||
|
Boston, MA 02210
|
||||||||||||||||||||
|
Basswood Capital Management, LLC (2)
|
-
|
-
|
1,065,340
|
1,065,340
|
8.38
|
%
|
||||||||||||||
|
645 Madison Avenue, 10th Floor
|
||||||||||||||||||||
|
New York, NY 10022
|
||||||||||||||||||||
|
Manulife Asset Management (US) LLC (3)
|
892,859
|
-
|
-
|
892,859
|
7.02
|
%
|
||||||||||||||
|
101 Huntington Avenue
|
||||||||||||||||||||
|
Boston, MA 02199
|
||||||||||||||||||||
|
The Banc Funds LLC (4)
|
644,908
|
-
|
-
|
644,908
|
5.07
|
%
|
||||||||||||||
|
20 North Wacker Drive, Suite 3300
|
||||||||||||||||||||
|
Chicago, IL 60606
|
||||||||||||||||||||
|
(1)
|
Based on a Schedule 13G filed February 14, 2012 by Wellington Management Company, LLP, which is the most recent filing available to us. Wellington Management, in its capacity as investment adviser, may be deemed to beneficially own 1,256,491 shares of common stock, which are held of record by clients of Wellington Management.
|
|
(2)
|
Based on a Schedule 13G filed February 12, 2014 by Basswood Capital Management, LLC, Matthew Lindenbaum, and Bennett Lindenbaum.
|
|
(3)
|
Based on a Schedule 13G filed February 14, 2012 by MAM (US) and Manulife Financial Coproration, which is the most recent filing available to us. Manulife Asset Management (US) LLC ("MAM (US)") has beneficial ownership of 892,859 shares of common stock. Through its parent-subsidiary relationship to MAM (US), Manulife Financial Corporation may be deemed to have beneficial ownership of these same shares.
|
|
(4)
|
Based on a Schedule 13G filed February 14, 2014 by The Banc Funds LLC.
|
Security Ownership of Management
The table below discloses the number and percentage of shares of Company Common Stock beneficially owned by each of our Directors, each named executive officer in the Summary Compensation table above, and all Directors and named executive officers of the Company as a group.
The information is based on the total number of shares of Company Common Stock outstanding and entitled to vote as of December 31, 2013 plus shares of Common Stock that could be acquired within 60 days after December 31, 2013 pursuant to the exercise or vesting of stock options and stock awards. The information is based on information furnished to the Company by the listed persons and the Company is not responsible for its accuracy.
The numbers of shares shown below includes shares owned directly or indirectly, through any contract, arrangement, understanding, relationship, or which the listed persons otherwise have voting power, shared voting power, sole investment power or shared investment power.
|
|
Amount and Nature of Beneficial Ownership
|
|||||||||||||||||||
|
Name of Beneficial Owner
|
Shared
|
Sole
|
Vested Options
and Stock Awards (1) |
Total Beneficial Ownership
|
Percent of Class (2)
|
|||||||||||||||
|
Directors and Director Nominees of the Company
|
||||||||||||||||||||
|
Karen F. Andrews
|
-
|
-
|
445
|
445
|
*
|
|||||||||||||||
|
Stephanie H. Boyse
|
-
|
13,270
|
22,188
|
35,458
|
*
|
|||||||||||||||
|
James D. Buhr
|
15,000
|
59,472
|
18,003
|
92,475
|
*
|
|||||||||||||||
|
Robert K. Chapman
|
3,070
|
64,601
|
58,773
|
126,444
|
*
|
|||||||||||||||
|
Kenneth W. Crawford
|
-
|
-
|
9,204
|
9,204
|
*
|
|||||||||||||||
|
John H. Foss
|
-
|
25,306
|
12,703
|
38,009
|
*
|
|||||||||||||||
|
Norman G. Herbert
|
4,000
|
-
|
2,000
|
6,000
|
*
|
|||||||||||||||
|
James C. Lawson
|
47,742
|
99,362
|
24,564
|
171,668
|
1.33
|
%
|
||||||||||||||
|
Len M. Middleton
|
-
|
4,000
|
12,740
|
16,740
|
*
|
|||||||||||||||
|
Executive Officers who are not Directors of the Company
|
||||||||||||||||||||
|
Todd C. Clark
|
9,026
|
18,230
|
34,290
|
61,546
|
*
|
|||||||||||||||
|
Randal J. Rabe
|
2,464
|
35,670
|
35,776
|
73,910
|
*
|
|||||||||||||||
|
All Directors and Executive Officers as a Group (11 Persons)
|
631,899
|
4.88
|
%
|
|||||||||||||||||
|
(1) Includes stock options, SOSAR grants and Directors deferred fees. Excludes unvested RSUs as follows: Chapman, 19,042; Clark, 9,521; Rabe, 9,521.
|
||||||||||||||||||||
|
(2) The symbol "*" shown in this column indicates ownership of less than 1% of the current outstanding Common Stock of the Company, which is the Company's only class of voting securities.
|
||||||||||||||||||||
Directors and executive officers of the Company, and their related interests, were clients of and had transactions (including loans and commitments to lend) with the Bank in the ordinary course of business during 2013. All such loans and commitments were made by the Bank in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Bank, and did not involve more than the normal risk of collectability or present other unfavorable features. None of these loan relationships presently in effect are in default as of the date of this report.
Under the charter of the Audit Committee, the Audit Committee is to review and approve all related party transactions for potential conflicts of interest to the extent such transactions are ongoing business relationships with United Bancorp, Inc. and its subsidiaries. Related party transactions are those involving United Bancorp, Inc. and its subsidiaries, which are required to be disclosed pursuant to SEC Regulation S-K, Item 404.
With the exception of Mr. Chapman, each Director, and each person who served as a Director at any time during the last fiscal year, is or was independent as that term is defined under NASDAQ Listing Rules for service on the Board of Directors and each committee on which the Director serves. While the Company is not subject to these standards, it has chosen to comply with them voluntarily.
The Board of Directors reviews transactions with companies owned or managed by Directors, for the purpose of determining whether those transactions impact the independence of Directors. The Company conducted transactions in the normal course of business with companies affiliated with a single director during 2013 and 2012. The Board determined that these transactions did not impact the independence of that Director.
The Company has appointed BKD, LLP as its independent public accountants to audit the Company's consolidated financial statements for the year ending December 31, 2014. BKD, LLP has been appointed as the Company's independent public accountants to audit the Company's consolidated financial statements since the year ended December 31, 2002.
The following table details the fees billed by BKD, LLP for work performed for the fiscal years ended December 31, 2013 and 2012, by category of fee:
|
|
2013
|
2012
|
||||||
|
Audit Fees
|
$
|
165,463
|
$
|
200,000
|
||||
|
Audit Related Fees
|
- -
|
- -
|
||||||
|
Tax Fees
|
11,475
|
19,100
|
||||||
|
All Other Fees
|
- -
|
- -
|
||||||
|
Total
|
$
|
176,938
|
$
|
219,100
|
||||
Audit fees consist of fees for the audit of the Company's financial statements, or for services that are usually provided by an auditor in connection with statutory and regulatory filings and engagements. Tax fees consist of fees billed for tax preparation, tax compliance, tax advice and tax planning.
The Company's Audit Committee has concluded that the provision of services covered under the captions "Audit Related Fees" and "Tax Fees" with respect to BKD, LLP is compatible with BKD, LLP maintaining its independence. In compliance with its Audit Committee charter, which requires all audit and permitted non-audit services to be pre-approved by the Audit Committee, all audit and non-audit services as disclosed above were pre-approved by the Audit Committee. None of the hours expended on BKD, LLP's appointment to audit the consolidated financial statements for the year ended December 31, 2013 were attributed to work performed by persons other than BKD, LLP's full-time, permanent employees.
|
(a)
|
1.
|
The index to financial statements is included in Item 8, "Financial Statement and Supplementary Data," of this report, and is incorporated here by reference.
|
|
|
|
|
|
|
2.
|
Financial statement schedules are not applicable.
|
|
|
|
|
|
(b)
|
The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated here by reference.
|
|
|
|
|
|
|
(c)
|
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
|
|
UNITED BANCORP, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
and
Consolidated Financial Statements
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
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Consolidated Financial Statements
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United Bancorp, Inc. (the "Company" or "United") is a Michigan bank holding company headquartered in Ann Arbor, Michigan. The Company, through its subsidiary bank, United Bank & Trust ("UBT" or the "Bank"), offers a full range of financial services through a system of 18 banking offices located in Lenawee, Livingston, Monroe and Washtenaw Counties. The Bank's structured finance group conducts business under the name United Structured Finance Company ("USFC"). While the Company's chief decision makers monitor the revenue streams of the Company's various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company's financial services operations are considered by management to be aggregated in one reportable operating segment – commercial banking.
This discussion provides information about the consolidated financial condition and results of operations of the Company and the Bank.
We are a Michigan corporation headquartered in Ann Arbor, Michigan and serve as the holding company for United Bank & Trust (the "Bank"), a Michigan-chartered bank organized over 120 years ago. We are registered as a bank holding company under the Bank Holding Company Act of 1956. At December 31, 2013, we had total assets of approximately $899.0 million, deposits of approximately $790.5 million, and total shareholders' equity of approximately $82.2 million. Our common stock is quoted on the OTCQB under the symbol "UBMI."
We have four primary lines of business under one operating segment of commercial banking: banking services, residential mortgage, wealth management and structured finance. Subject to our overall business strategy, each line of business is encouraged to be entrepreneurial in how it develops and implements its business. We believe that these four lines of business provide us with a diverse and strong core revenue stream that is unmatched by our community bank competitors and positions us well for future revenue growth and profitability. During the twelve month period ended December 31, 2013, our non-interest income equaled 40.4% of our combined net interest income and noninterest income. For each of the last five years ended December 31, 2013, non-interest income approximated 37.5% of our combined net interest income and noninterest income. This diverse revenue stream has enabled us to recognize a pre-tax, pre-provision return on average assets of 1.60% for the twelve month period ended December 31, 2013. Our average pre-tax, pre-provision return on average assets over the last five years ended December 31, 2013 was approximately 1.61%. The presentation of pre-tax, pre-provision return on average assets is not consistent with, or intended to replace, presentation under generally accepted accounting principles. For additional information about our pre-tax, pre-provision income and pre-tax, pre-provision return on average assets, please see "Pre-tax, Pre-provision Income and Return on Average Assets" under "Results of Operations" below.
Our Bank offers a full range of services to individuals, corporations, fiduciaries and other institutions. Banking services include checking accounts, NOW accounts, savings accounts, time deposit accounts, money market deposit accounts, safe deposit facilities and money transfers. Lending operations provide real estate loans, secured and unsecured business and personal loans, consumer installment loans, credit card and check-credit loans, home equity loans, accounts receivable and inventory financing, and construction financing. The Bank offers a full complement of online services, including internet banking and bill payment. In 2011, the Bank opened its first loan production office in neighboring Livingston County, Michigan. In 2012, that office was converted to a full-service banking office, and the Bank opened a new loan production office in the city of Monroe, Michigan. In 2013, the Monroe office was converted to a full-service banking office.
Our mortgage group offers our customers a full array of conventional residential mortgage products, including purchase, refinance and construction loans. Due to our local decision making and fully-functional back office, we have consistently been one of the most active originators of mortgage loans in our market area.
United's mortgage group was the leading residential mortgage lender in Washtenaw County, and had the second-highest volume in Lenawee County for 2012.1 Information for 2013 is not yet available.
Our Wealth Management Group is a key focus of our growth and diversification strategy and offers a variety of investment services to individuals, corporations and governmental entities. Our Wealth Management Group generated 27.6% of our noninterest income for the twelve months ended December 31, 2013.
Our structured finance group, United Structured Finance Company, offers simple, effective financing solutions to small businesses and commercial property owners, primarily by utilizing various government guaranteed loan programs and other off-balance sheet finance solutions through secondary market sources. For the twelve months ended September 30, 2013 and 2012, USFC was the leading SBA lender in Lenawee, Washtenaw and Livingston Counties combined. For the twelve months ended September 30, 2013, USFC was the third largest SBA 7A lender in Michigan, based on loan volume.2
Pending Merger
On January 7, 2014, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Old National Bancorp ("Old National"), an Indiana corporation, pursuant to which the Company will merge with and into Old National, whereupon the separate corporate existence of the Company will cease and Old National will survive (the "Merger"). In connection with the Merger, the Bank will be merged with and into Old National Bank, a national banking association and wholly owned subsidiary of Old National, with Old National Bank as the surviving bank. Under the terms of the Merger Agreement, shareholders of United will receive .70 shares of Old National common stock and $2.66 in cash for each share of United common stock.
The Merger is expected to close late in the second quarter of 2014. The transaction remains subject to approval by United's shareholders and approval by federal and state regulatory authorities, as well as the satisfaction of other customary closing conditions provided in the Merger Agreement.
The Merger Agreement was previously filed with the Securities Exchange Commission on January 8, 2014 in the Company's Current Report on Form 8-K, Exhibit 2.1, and is here incorporated by reference.
Preferred Stock Redemption
The Company issued 20,600 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, Liquidation Preference Amount $1,000 per share ("Preferred Shares") to U.S. Treasury on January 16, 2009 as part of Treasury's Capital Purchase Program. On June 19, 2012, Treasury sold all 20,600 Preferred Shares to private investors.
During 2013, the Company redeemed all 20,600 Preferred Shares with 10,300 shares redeemed on September 30, 2013 and 10,300 shares redeemed on December 27, 2013. Following completion of the redemption, no shares of Preferred Stock remained outstanding.
The redemption price for the shares of Preferred Shares was the stated liquidation preference amount of $1,000 per share, plus any accrued and unpaid dividends up to but excluding the dates of redemption. The total cost of the redemption of the Preferred Shares was approximately $20.7 million, which was funded with a combination of excess cash at the holding company, the dividend to the holding company of retained earnings at the Bank, and the borrowing of $10.0 million under the Company's revolving line of credit.
Following completion of the redemption of Preferred Shares, the capital ratios of the Company and the Bank continue to exceed regulatory standards to be categorized as well-capitalized.
Line of Credit
The Company entered into a Business Loan Agreement with Chemical Bank (the "Loan Agreement") and a revolving line of credit as of September 16, 2013. The Loan Agreement provides for a $10.0 million line of credit by Chemical Bank to the Company at an interest rate of prime plus 0.125% (3.375% as of December 31, 2013). The Company will pay quarterly payments of accrued interest, and the balance of all outstanding principal and accrued interest will become due on September 16, 2015. As of December 31, 2013, the Company had an outstanding principal balance of $10.0 million on the line of credit.
The Loan Agreement contains customary affirmative and negative covenants and events of default. Affirmative covenants include the maintenance of certain minimum capital ratios, a maximum net charge off to average loan ratio, a maximum non-performing loan to total assets ratio, a minimum return on average assets, a minimum return on average equity and a limit on the amount of dividends that the Company may pay to shareholders of common stock.
If return on average assets falls below a certain specified level, then the Company's quarterly dividend payment to common shareholders could not be increased and the payout ratio could not exceed 40%. Negative covenants include restrictions on additional indebtedness, and a covenant not to merge, acquire or consolidate with another entity without Chemical Bank's consent. Events of default include payment defaults, false representations, insolvency and certain other events. As security for its obligations under the Loan Agreement, the Company pledged to Chemical Bank all of the outstanding common stock of the Bank.
Under the Merger Agreement, the Company must terminate and repay all amounts outstanding under the Loan Agreement immediately before the effective time of the Merger. Old National must, to the extent reasonably required, provide sufficient funds to the Company to enable repayment of such amounts.
Board Resolution
The Board of Directors of the Bank, in connection with the November 2012 termination of the Memorandum of Understanding with the FDIC, adopted a resolution that the Bank maintain a Tier 1 leverage ratio at a level equal to or exceeding 8.5% and that the Bank not declare or pay any dividend to the Company unless the Board of Directors first determines that the Bank has produced stable earnings. As a result of the Bank's financial performance during 2013, and after consideration of the results of the 2013 regulatory examination, the Bank's Board of Directors rescinded this resolution on December 20, 2013.
The Company's consolidated net income was $8.8 million for the twelve months ended December 31, 2013, improving from $4.5 million in 2012. Reduced levels of loan loss provision contributed to the higher earnings levels achieved in 2013. The Company's return on average assets ("ROA") for the twelve month period ended December 31, 2013 was 0.97%, up from 0.50% for the same period of 2012. Return on average shareholders' equity ("ROE") of 9.14% for the twelve months ended December 31, 2013 was up from 4.69% for 2012.
Net interest income for 2013 was 4.6% above 2012 levels. Net interest margin improved in each quarter of 2013 as a result of a shifting asset mix and reduced liquid assets, combined with a continued reduction on cost of funds.
Noninterest income decreased by $146,000 or 0.7%, in 2013 as compared to 2012, following an increase of 24.9% in 2012 compared to 2011. The decrease is primarily due to a decline in mortgage refinance activity during 2013.
Total noninterest expenses were up 3.1% in 2013 compared to 2012, following an increase of 7.5% in 2012 compared to 2011. The largest dollar increases for the full year 2013 were in compensation expense, while a number of categories of noninterest expense declined. Increases in compensation expense reflected, in part, moderate salary increases that were implemented effective April 1, 2013. The largest component of the compensation expense increase in 2013 was the accrual for profit sharing and incentive compensation expense, reflecting the Company's improved earnings for the year. Prior to 2013, the Company did not pay or accrue any profit sharing, nor did it pay or accrue any cash bonus or other payout to executive officers under our bonus plans since 2008.
The Company's provision for loan losses of $1.9 million for the twelve months ended December 31, 2013 was down 77.2% from $8.4 million for the same period of 2012. This significantly reduced level of provision for loan losses was a result of continued significant improvement in the Company's credit quality metrics.
Total consolidated assets of the Company were $899.0 million at December 31, 2013, down 1.0% from $907.7 million at December 31, 2012. The Company's total portfolio loans have increased by $59.6 million, or 10.2%, since December 2012, reflecting United's entry into adjacent markets, combined with a moderate strengthening of the local economy.
The Company's balances in federal funds sold and cash equivalents were $12.5 million at December 31, 2013, compared to $56.8 million at December 31, 2012. Securities available for sale of $191.2 million at December 31, 2013 were down $15.0 million or 7.3% from December 31, 2012. The net change in federal funds sold and cash equivalents and securities available for sale was $59.3 million at December 31, 2013 compared to December 31, 2012.
Total deposits of $790.5 million at December 31, 2013 were up $5.9 million from $784.6 million at December 31, 2012. The majority of the Bank's deposits are derived from core client sources, relating to long-term relationships with local individual, business and public clients. Public clients include local government and municipal bodies, hospitals, universities and other educational institutions. As a result of its strong core funding, the Company's cost of interest-bearing deposits was 0.40% for 2013, down from 0.61% for 2012.
The Company's ongoing proactive efforts to resolve nonperforming loans have contributed to the Company's continued improvement in credit quality trends in 2013. Within the Company's loan portfolio, $8.1 million of loans were considered nonperforming at December 31, 2013, compared to $16.8 million at December 31, 2012. Total nonperforming loans as a percent of total portfolio loans improved from 2.86% at the end of 2012 to 1.25% at December 31, 2013. For purposes of this presentation, nonperforming loans consist of nonaccrual loans and accruing loans that are past due 90 days or more and exclude accruing restructured loans. Balances of accruing restructured loans at December 31, 2013 and 2012 were $11.0 million and $15.8 million, respectively.
The Company's ratio of allowance for loan losses to total loans at December 31, 2013 was 3.16%, and covered 252.6% of nonperforming loans, compared to 3.84%, and 134.6%, respectively, at December 31, 2012. The Company's allowance for loan losses decreased by $2.1 million, or 9.3%, from December 31, 2012 to December 31, 2013. Net charge-offs of $4.0 million for 2013 were down 38.0% from $6.4 million for 2012.
Investment Securities
Balances in the Company's securities portfolio decreased in 2013 compared to 2012 in order to help fund the company's loan growth. The makeup of the Company's investment portfolio evolves with the changing price and risk structure, and liquidity needs of the Company.
The table below reflects the carrying value of various categories of investment securities of the Company, along with the percentage composition of the portfolio by type as of the end of 2013 and 2012.
|
December 31, 2013
|
December 31, 2012
|
|||||||||||||||
|
In thousands of dollars
|
Balance
|
% of total
|
Balance
|
% of total
|
||||||||||||
|
U.S. Treasury and agency securities
|
$
|
23,498
|
12.3
|
%
|
$
|
27,316
|
13.3
|
%
|
||||||||
|
Mortgage-backed agency securities
|
146,142
|
76.5
|
%
|
160,499
|
77.9
|
%
|
||||||||||
|
Obligations of states and political subdivisions
|
21,490
|
11.2
|
%
|
18,286
|
8.9
|
%
|
||||||||||
|
Equity securities
|
28
|
0.0
|
%
|
28
|
0.0
|
%
|
||||||||||
|
Total Investment Securities
|
$
|
191,158
|
100.0
|
%
|
$
|
206,129
|
100.0
|
%
|
||||||||
Investments in U.S. Treasury and agency securities are considered to possess low credit risk. Obligations of U.S. government agency mortgage-backed securities possess a somewhat higher interest rate risk due to certain prepayment risks. The Company's portfolio contains no mortgage-backed securities or structured notes that the Company believes to be "high risk." The municipal portfolio contains a small level of geographic risk, as approximately 1.6% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan, 2.1% in Washtenaw County, Michigan, and 1.6% in Monroe County, Michigan. The Bank's investment in local municipal issues reflects our commitment to the development of the local area through support of its local political subdivisions. The Company owns no obligations issued by the City of Detroit. The Company has no investments in securities of issuers outside of the United States.
Management believes that the unrealized gains and losses within the investment portfolio are temporary, since they are a result of market changes, rather than a reflection of credit quality. Management has no specific intent to sell any securities, although the entire investment portfolio is classified as available for sale. The following chart summarizes net unrealized gains (losses) in each category of the portfolio at the end of 2013 and 2012.
|
In thousands of dollars
|
2013
|
2012
|
Change
|
|||||||||
|
U.S. Treasury and agency securities
|
$
|
(975
|
)
|
$
|
116
|
$
|
(1,091
|
)
|
||||
|
Mortgage-backed agency securities
|
(440
|
)
|
1,670
|
(2,110
|
)
|
|||||||
|
Obligations of states and political subdivisions
|
50
|
735
|
(685
|
)
|
||||||||
|
Equity securities
|
2
|
2
|
-
|
|||||||||
|
Total net unrealized gains (losses)
|
$
|
(1,363
|
)
|
$
|
2,523
|
$
|
(3,886
|
)
|
||||
FHLB Stock
The Bank is a member of the Federal Home Loan Bank of Indianapolis ("FHLBI") and holds a $2.7 million investment in stock of the FHLBI. The investment is carried at par value, as there is not an active market for FHLBI stock. The FHLBI reported a profit of $137.9 million for the first nine months of 2013, and continues to pay dividends on its stock.3 The Company regularly reviews the credit quality of FHLBI stock for impairment, and determined that no impairment of FHLBI stock was necessary as of December 31, 2013.
Portfolio Loans
Total portfolio loan balances at December 31, 2013 increased by $59.6 million, or 10.2%, from December 31, 2012. The largest dollar increase in 2013 was in commercial real estate ("CRE") loans, including owner-occupied CRE, which increased $36.9 million. While the Company has continued to be an active lender in its markets, the loan growth has been aided by United's entry into adjacent markets, principally the Livingston County market.
The Bank's loan portfolio includes $2.1 million of purchased participations in business loans originated by other institutions. These participations represent 0.33% of total portfolio loans, and these loans are primarily the result of participations purchased from other banks headquartered in Michigan.
3 Federal Home Loan Bank of Indianapolis, Form 10-Q Quarterly Report for the period ended September 30, 2013.
The Bank generally sells its production of fixed-rate mortgages on the secondary market, and retains high credit quality mortgage loans that are not otherwise eligible to be sold on the secondary market and shorter-term adjustable rate mortgages in its portfolio. As a result, the mix of mortgage production for any given year will have an impact on the amount of mortgages held in the portfolio of the Bank. Improved economic conditions and stronger demand for larger non-conforming residential real estate mortgages in 2013 contributed to an increase in balances of $12.7 million, or 10.4%, in 2013 compared to 2012.
Outstanding balances of loans for construction and development have decreased by $2.5 million since December 31, 2012. The change in balances reflects an increase in the amount of individual construction loan volume, combined with a shift of some construction loans to permanent financing, and the payoff or charge-off of a number of construction and development loans. Residential construction loans generally convert to residential mortgages to be retained in the Bank's portfolio or to be sold in the secondary market, while commercial construction loans generally will be converted to commercial mortgages.
The following table shows the balances of each of the various categories of loans of the Company, along with the percentage of the total portfolio, as of the end of 2013 and 2012.
|
December 31, 2013
|
December 31, 2012
|
|||||||||||||||
|
In thousands of dollars
|
Balance
|
% of Total
|
Balance
|
% of Total
|
||||||||||||
|
Commercial construction & land development
|
$
|
20,756
|
3.2
|
%
|
$
|
28,511
|
4.9
|
%
|
||||||||
|
Owner-occupied commercial real estate loans
|
105,237
|
16.3
|
%
|
97,755
|
16.7
|
%
|
||||||||||
|
Other commercial real estate loans
|
142,805
|
22.1
|
%
|
113,370
|
19.3
|
%
|
||||||||||
|
Commercial & industrial loans
|
104,508
|
16.2
|
%
|
104,332
|
17.8
|
%
|
||||||||||
|
Residential mortgages
|
134,048
|
20.7
|
%
|
121,393
|
20.6
|
%
|
||||||||||
|
Consumer construction
|
17,369
|
2.7
|
%
|
12,123
|
2.1
|
%
|
||||||||||
|
Home equity loans
|
80,870
|
12.5
|
%
|
72,983
|
12.4
|
%
|
||||||||||
|
Other consumer loans
|
39,861
|
6.2
|
%
|
33,969
|
5.8
|
%
|
||||||||||
|
Deferred loan fees and costs, overdrafts, in-process accounts
|
820
|
0.1
|
%
|
2,242
|
0.4
|
%
|
||||||||||
|
Total portfolio loans
|
$
|
646,274
|
100.0
|
%
|
$
|
586,678
|
100.0
|
%
|
||||||||
Credit Quality
Nonperforming Assets. The Company actively monitors delinquencies, nonperforming assets and potential problem loans. The accrual of interest income is discontinued when a loan becomes ninety days past due unless the loan is both well secured and in the process of collection, or the borrower's capacity to repay the loan and the collateral value appears sufficient.
The chart below shows the amount of nonperforming assets by category at December 31, 2013 and 2012.
|
December 31,
|
Change
|
|||||||||||||||
|
Nonperforming Assets, in thousands of dollars
|
2013
|
2012
|
$
|
|
%
|
|||||||||||
|
Nonaccrual loans
|
$
|
7,927
|
$
|
16,714
|
$
|
(8,787
|
)
|
-52.6
|
%
|
|||||||
|
Accruing loans past due ninety days or more
|
169
|
37
|
132
|
356.8
|
%
|
|||||||||||
|
Total nonperforming loans
|
8,096
|
16,751
|
(8,655
|
)
|
-51.7
|
%
|
||||||||||
|
Percent of nonperforming loans to total loans
|
1.25
|
%
|
2.86
|
%
|
-1.61
|
%
|
||||||||||
|
Allowance coverage of nonperforming loans
|
252.6
|
%
|
134.6
|
%
|
118.0
|
%
|
||||||||||
|
Other repossessed assets
|
1,850
|
3,412
|
(1,562
|
)
|
-45.8
|
%
|
||||||||||
|
Total nonperforming assets
|
$
|
9,946
|
$
|
20,163
|
$
|
(10,217
|
)
|
-50.7
|
%
|
|||||||
|
Percent of nonperforming assets to total assets
|
1.11
|
%
|
2.22
|
%
|
-1.11
|
%
|
||||||||||
|
Loans delinquent 30-89 days
|
$
|
846
|
$
|
3,007
|
$
|
(2,161
|
)
|
-71.9
|
%
|
|||||||
|
Accruing restructured loans
|
||||||||||||||||
|
Commercial
|
||||||||||||||||
|
Commercial CLD
|
$
|
1,586
|
$
|
4,738
|
$
|
(3,152
|
)
|
-66.5
|
%
|
|||||||
|
Owner-Occupied CRE
|
704
|
1,361
|
(657
|
)
|
-48.3
|
%
|
||||||||||
|
Other CRE
|
3,707
|
5,429
|
(1,722
|
)
|
-31.7
|
%
|
||||||||||
|
Commercial & Industrial
|
774
|
853
|
(79
|
)
|
-9.3
|
%
|
||||||||||
|
Total commercial
|
6,771
|
12,381
|
(5,610
|
)
|
-45.3
|
%
|
||||||||||
|
Consumer
|
||||||||||||||||
|
Residential mortgage
|
4,023
|
3,267
|
756
|
23.1
|
%
|
|||||||||||
|
Home Equity
|
170
|
171
|
(1
|
)
|
-0.6
|
%
|
||||||||||
|
Total consumer
|
4,193
|
3,438
|
755
|
22.0
|
%
|
|||||||||||
|
Total accruing restructured loans
|
$
|
10,964
|
$
|
15,819
|
$
|
(4,855
|
)
|
-30.7
|
%
|
|||||||
Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, at which time payments received are recorded as reductions to principal. Subsequent payments on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the judgment of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.
The Company has achieved significant improvement in its credit quality measures in recent periods. Total nonaccrual loans have decreased by $8.8 million, or 52.6%, since the end of 2012. The change in nonaccrual loans principally reflects the payoff or charge-off of some nonperforming loans, net of the migration of some loans to nonaccrual status.
Total nonperforming loans as a percent of total portfolio loans were 1.25% at December 31, 2013, down from 2.86% at December 31, 2012, while the allowance coverage of nonperforming loans increased from 134.6% at December 31, 2012 to 252.6% at December 31, 2013. Loan workout and collection efforts continue with all delinquent and nonaccrual loan clients, in an effort to bring them back to performing status.
Other assets owned includes other real estate owned and other repossessed assets, which may include automobiles, boats and other personal property. Holdings of other assets owned decreased by 46% since the end of 2012, as the Bank continued to sell assets while others have been added to its totals. At December 31, 2013, other real estate owned included seven properties that were acquired through foreclosure or in lieu of foreclosure. The properties included six commercial properties, and one residential property. All properties are for sale. There were no other repossessed assets at the end of 2013.
The following table reflects the changes in other assets owned during 2013.
|
In thousands of dollars
|
Other Real Estate
|
Other Assets
|
Total
|
|||||||||
|
Balance at January 1
|
$
|
3,409
|
$
|
3
|
$
|
3,412
|
||||||
|
Additions
|
466
|
95
|
561
|
|||||||||
|
Sold
|
(1,851
|
)
|
(98
|
)
|
(1,949
|
)
|
||||||
|
Write-downs of book value
|
(174
|
)
|
-
|
(174
|
)
|
|||||||
|
Balance at December 31
|
$
|
1,850
|
$
|
-
|
$
|
1,850
|
||||||
Troubled Debt Restructurings. In the course of working with borrowers, the Bank may choose to restructure the contractual terms of certain loans. In this scenario, the Bank attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Bank to identify if a troubled debt restructuring ("TDR") has occurred, which is when, for economic or legal reasons related to a borrower's financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Bank do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Bank may terminate foreclosure proceedings if the borrower is able to work-out a satisfactory payment plan.
It is the Bank's policy to have any restructured loans that are on nonaccrual status prior to being restructured, remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. The balance of nonaccrual restructured loans, which is included in nonaccrual loans, was $4.2 million at December 31, 2013 and $10.8 million at December 31, 2012. If a restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status. The balance of accruing restructured loans was $11.0 million at December 31, 2013 and $15.8 million at December 31, 2012.
All TDRs are considered impaired by the Company. Loans that are considered TDRs are classified as performing unless they are on nonaccrual status or greater than 90 days delinquent as of the end of the most recent quarter. Under Company policy, a loan may be removed from TDR status when it is determined that the loan has performed according to its modified terms for a sustained period of repayment performance (generally not less than six months and not during the calendar year in which the restructuring took place), and the restructuring agreement specified an interest rate greater than or equal to an acceptable rate for a comparable new loan. On a quarterly basis, the Company individually reviews all TDR loans to determine if a loan meets these criteria. As of December 31, 2013, there were two commercial loans totaling $396,000 that were proceeding through this six-month performance period and whose rate is not below current market rates.
Accruing restructured loans at December 31, 2013 are comprised of two categories of loans on which interest is being accrued under their restructured terms, and the loans are current or less than ninety days past due. The first category consists of commercial loans, primarily comprised of business loans that have been temporarily modified as interest-only loans, generally for a period of up to one year, without a sufficient corresponding increase in the interest rate.
Within this category are CLD loans that have been renewed as interest only, generally for a period of up to one year, to assist the borrower. The Bank does not generally forgive principal or interest on restructured loans. However, when a loan is restructured, principal is generally received on a delayed basis as compared to the original repayment schedule. CLD loans that are restructured are generally modified to require interest-only for a period of time. The Bank does not generally reduce interest rates on restructured commercial loans.
The second category included in accruing restructured loans consists of residential mortgage and home equity loans whose terms have been restructured at less than market terms and include rate modifications, extension of maturity, and forbearance. The Company has no personal loans other than the loans included in the table below that are classified as troubled debt restructurings.
The table below provides a breakdown of accruing restructured loans by type at December 31, 2013. The table also includes the average yield on restructured loans and the yield for the entire portfolio, for commercial loans and the residential mortgage and home equity line portfolio, for the fourth quarter of 2013.
|
December 31, 2013
|
Fourth Quarter
|
|||||||||||||||
|
Dollars in thousands
|
Number of Loans
|
Recorded Balance
|
Average Yield
|
Portfolio Yield
|
||||||||||||
|
CLD Loans
|
4
|
$
|
1,586
|
|||||||||||||
|
Other Commercial Loans
|
13
|
5,185
|
||||||||||||||
|
Total Commercial Loans
|
17
|
6,771
|
4.96
|
%
|
5.04
|
%
|
||||||||||
|
Residential Mortgage & Home Equity Loans
|
20
|
4,193
|
3.56
|
%
|
4.70
|
%
|
||||||||||
|
Total accruing restructured loans
|
37
|
$
|
10,964
|
|||||||||||||
The Company performed its quarterly evaluation of the specific reserves on all of its loans previously identified as TDRs at December 31, 2013. All of the Company's accruing TDRs are performing in accordance with their modified terms and have demonstrated the necessary performance for the accrual of interest.
The following table compares the recorded investment in accruing TDR loans and their specific reserve amount, as of December 31, 2013 and December 31, 2012.
|
In thousands of dollars
|
12/31/13
|
12/31/12
|
Change
|
|||||||||
|
Balance of TDR Loans
|
$
|
10,964
|
$
|
15,819
|
$
|
(4,855
|
)
|
|||||
|
Specific reserve on above loans
|
2,968
|
4,467
|
(1,499
|
)
|
||||||||
|
Percent
|
27.1
|
%
|
28.2
|
%
|
||||||||
Impaired Loans. A loan is classified as impaired when it is probable that the Bank will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement. Within the Bank's loan portfolio, $19.7 million of impaired loans have been identified as of December 31, 2013, down from $34.3 million at December 31, 2012. The specific allowance for impaired loans was $4.6 million at December 31, 2013, down from $8.3 million at December 31, 2012. The ultimate amount of the impairment and the potential losses to the Company may be substantially higher or lower than estimated, depending on the realizable value of the collateral. The level of provision for loan losses made in connection with impaired loans reflects the amount management believes to be necessary to maintain the allowance for loan losses at an adequate level, based upon the Bank's current analysis of losses inherent in its loan portfolios.
Business loans carry the largest balances per loan, and any single loss would be proportionally larger than losses in other portfolios. In addition to internal loan rating systems and active monitoring of loan trends, the Bank uses an independent loan review firm to assess the quality of its business loan portfolio. Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, at which time payments received are recorded as reductions to principal.
CLD loans include residential and non-residential construction and land development loans. The residential CLD loan portfolio consists mainly of loans for the construction, development, and improvement of residential lots, homes, and subdivisions. The non-residential CLD loan portfolio consists mainly of loans for the construction and development of office buildings and other non-residential commercial properties.
This type of lending is generally considered to have more complex credit risks than traditional single-family residential lending because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and sales of the related real estate project. Consequently, these loans are often more sensitive to adverse conditions in the real estate market or the general economy than other real estate loans. These loans are generally less predictable and more difficult to evaluate and monitor and collateral may be difficult to dispose of in a market decline.
The Bank's portfolio of residential mortgages consists of loans to finance 1-4 family residences, second homes, vacation homes, and residential investment properties. The personal loan portfolio consists of direct and indirect installment, home equity and unsecured revolving line of credit loans. Installment loans consist primarily of home equity loans and loans for consumer durable goods, principally automobiles. Indirect personal loans, which make up a small percent of the personal loans, consist of loans for automobiles, boats and manufactured housing.
Allowance for Loan Losses. The Company's allowance for loan losses decreased $2.1 million at December 31, 2013 as compared to December 31, 2012. The allowance for loan losses as a percent of total loans of 3.16% at December 31, 2013 was down from 3.84% at December 31, 2012. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred credit losses in the loan portfolio. Management's determination of the adequacy of the allowance for loan losses is based on an evaluation of the loan portfolio, past loan loss experience, current economic conditions, volume, amount, and composition of the loan portfolio, and other factors management believes to be relevant.
The table below provides a breakdown of ALLL, charge-offs and combined losses as of December 31, 2013 for impaired and non-impaired loans. Impaired loans are further split between accruing TDRs and other impaired loans.
|
% of
|
||||||||||||||||
|
Unpaid
|
Unpaid
|
|||||||||||||||
|
Principal
|
Cumulative
|
Principal
|
||||||||||||||
|
Dollars in thousands
|
Balance
|
ALLL
|
Allowance
|
Balance
|
||||||||||||
|
Accruing TDRs
|
$
|
10,964
|
$
|
2,968
|
$
|
2,968
|
27.1
|
%
|
||||||||
|
Other Impaired Loans
|
8,769
|
1,645
|
1,645
|
|||||||||||||
|
Cumulative Charge-offs
|
4,909
|
-
|
4,909
|
|||||||||||||
|
Total
|
13,678
|
1,645
|
6,554
|
47.9
|
%
|
|||||||||||
|
Non-impaired loans
|
$
|
626,541
|
$
|
15,834
|
$
|
15,834
|
2.5
|
%
|
||||||||
Further information concerning credit quality is contained in Note 5 of the Company's Notes to Consolidated Financial Statements, which information is incorporated here by reference.
Deposits
United internally funds its operations through a large stable base of core deposits that provides cost-effective funding for its lending operations. The majority of deposits are derived from core client sources, relating to long term relationships with local individual, business and public clients. Public clients include local governments and municipal bodies, hospitals, universities and other educational institutions. At December 31, 2013 and 2012, core deposits accounted for 99.6% and 99.3%, respectively, of total deposits. For this presentation, core deposits consist of total deposits less national certificates of deposit and brokered deposits. Core deposits include deposits held through the Certificate of Deposit Account Registry Service® ("CDARS") as they represent deposits originated in the Bank's market area.
The table below shows the change in the various categories of the deposit portfolio for the reported periods.
|
2013 Change
|
2012 Change
|
|||||||||||||||
|
In thousands of dollars
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||
|
Noninterest bearing deposits
|
$
|
1,806
|
1.1
|
%
|
$
|
26,084
|
18.7
|
%
|
||||||||
|
Interest bearing deposits
|
4,048
|
0.7
|
%
|
(6,297
|
)
|
-1.0
|
%
|
|||||||||
|
Total deposits
|
$
|
5,854
|
0.7
|
%
|
$
|
19,787
|
2.6
|
%
|
||||||||
Total deposits grew by $5.9 million, or 0.7%, in the twelve months ended December 31, 2013, compared to growth of $19.8 million, or 2.6%, in the twelve months ended December 31, 2012. The Bank's noninterest bearing deposits increased by 1.1% during 2013, while interest bearing deposits climbed by 0.7%. As part of its capital ratio improvement initiatives, United generally did not replace maturing wholesale deposits in 2013 or 2012. The Bank utilizes purchased or brokered deposits for interest rate risk management purposes, but does not support its growth through the use of those products.
In addition, the Bank participates in the CDARS program, which allows it to provide competitive CD products while maintaining FDIC insurance for clients with larger balances. The Bank's deposit rates are consistently competitive with other banks in its market areas. As a result of its strong core funding, the Company's cost of interest-bearing deposits was 0.40% for all of 2013, down from 0.61% for 2012.
Noninterest bearing deposits made up 21.2% of total deposits at December 31, 2013, compared to 21.1% at December 31, 2012. The table below shows the makeup of the Company's deposits at December 31, 2013 and 2012.
|
December 31, 2013
|
December 31, 2012
|
|||||||||||||||
|
In thousands of dollars
|
Balance
|
% of total
|
Balance
|
% of total
|
||||||||||||
|
Noninterest bearing deposits
|
$
|
167,236
|
21.2
|
%
|
$
|
165,430
|
21.1
|
%
|
||||||||
|
Interest bearing deposits
|
623,261
|
78.8
|
%
|
619,213
|
78.9
|
%
|
||||||||||
|
Total deposits
|
$
|
790,497
|
100.0
|
%
|
$
|
784,643
|
100.0
|
%
|
||||||||
Cash Equivalents and Borrowed Funds
The Company maintains correspondent accounts with a number of other banks for various purposes. In addition, cash sufficient to meet the operating needs of its banking offices is maintained at its lowest practical levels. During 2013, the Bank continued as a participant in the federal funds market, either as a borrower or seller. The Bank also entered into a loan agreement with Chemical bank for a revolving line of credit.
Federal funds are generally borrowed or sold for one-day periods. The Bank maintains interest-bearing deposit accounts with the Federal Reserve Bank and the FHLBI, as alternatives to federal funds. The Bank also has the ability to utilize short-term advances from the FHLBI and borrowings at the discount window of the Federal Reserve Bank as additional short-term funding sources. Federal funds and equivalents were used during 2013 and 2012, while short-term advances and discount window borrowings were not utilized during either year.
The Company periodically finds it advantageous to utilize longer-term borrowings from the FHLBI. These long-term borrowings, as detailed in Note 10 of the Company's Notes to Consolidated Financial Statements, serve to provide a balance to some of the interest rate risk inherent in the Company's balance sheet. Additional information regarding borrowed funds is found in the Liquidity section below.
The Company entered into a Business Loan Agreement with Chemical Bank (the "Loan Agreement") and a revolving line of credit as of September 16, 2013. The Loan Agreement provides for a $10.0 million line of credit by Chemical Bank to the Company at an interest rate of prime plus 0.125% (3.375% as of December 31, 2013). The Company will pay quarterly payments of accrued interest, and the balance of all outstanding principal and accrued interest will become due on September 16, 2015. As of December 31, 2013, United had an outstanding principal balance of $10.0 million on the line of credit. For more information, see "Recent Developments – Line of Credit" above.
Earnings Summary and Key Ratios
Consolidated net income for the year ended December 31, 2013 was $8.8 million, or $0.60 diluted earnings per share of common stock, compared to $4.5 million, or $0.26 per share of common stock for 2012, and 917,000, or $(0.02) per share of common stock (after accounting for preferred stock dividends), for 2011. Lower provision for loan losses in 2013 contributed to improved earnings levels and performance ratios compared to 2012 and 2011. Return on average assets ("ROA") was 0.97% for 2013, compared to 0.50% for 2012 and 0.10% for 2011. Return on average shareholders' equity ("ROE") was 9.14% for 2013, compared to 4.69% for 2012 and 0.98% for 2011.
Net interest income of $31.6 million for 2013 was 4.6% above the same period of 2012. United's net interest margin was 3.69% for the twelve months ended December 31, 2013 and was up from 3.59% for 2012 and 3.64% for 2011.
Total noninterest income for the twelve months ended December 31, 2013 declined by $146,000, or 0.7%, in 2013 as compared to 2012. The decrease is primarily due to a decline in mortgage refinance activity in 2013. Noninterest income represented 40.4% of the Company's combined net interest income and noninterest income in 2013, compared to 41.6% for 2012.
Total noninterest expense was up $1.2 million, or 3.1%, in 2013 compared to 2012. The largest dollar increases for the full year 2013 were in compensation expense, while a number of categories of noninterest expense declined. Increases in compensation expense reflected, in part, moderate salary increases that were implemented effective April 1, 2013. The largest component of the compensation expense increase in 2013 was the accrual for profit sharing and incentive compensation expense, reflecting the Company's improved earnings for the year. Prior to 2013, the Company did not pay or accrue any profit sharing, nor did it pay or accrue any cash bonus or other payout to executive officers under our bonus plans since 2008.
The following table shows the trends of the major components of earnings and related ratios for the five most recent quarters.
|
2013
|
2012
|
|||||||||||||||||||
|
Dollars in thousands
|
4th Qtr
|
3rd Qtr
|
2nd Qtr
|
1st Qtr
|
4th Qtr
|
|||||||||||||||
|
Net interest income before provision
|
$
|
8,458
|
$
|
7,981
|
$
|
7,824
|
$
|
7,288
|
$
|
7,384
|
||||||||||
|
Provision for loan losses
|
-
|
300
|
600
|
1,000
|
1,700
|
|||||||||||||||
|
Noninterest income
|
4,659
|
5,115
|
5,647
|
5,924
|
5,891
|
|||||||||||||||
|
Noninterest expense
|
9,475
|
9,532
|
9,874
|
9,486
|
9,586
|
|||||||||||||||
|
Federal income taxes
|
1,136
|
988
|
910
|
784
|
543
|
|||||||||||||||
|
Net income
|
$
|
2,506
|
$
|
2,276
|
$
|
2,087
|
$
|
1,942
|
$
|
1,446
|
||||||||||
|
Basic and diluted earnings per share
|
$
|
0.18
|
$
|
0.15
|
$
|
0.14
|
$
|
0.13
|
$
|
0.09
|
||||||||||
|
Return on average assets
|
1.09
|
%
|
0.99
|
%
|
0.92
|
%
|
0.87
|
%
|
0.64
|
%
|
||||||||||
|
Return on average shareholders' equity
|
10.96
|
%
|
9.20
|
%
|
8.44
|
%
|
8.07
|
%
|
5.94
|
%
|
||||||||||
|
Net interest margin
|
3.91
|
%
|
3.70
|
%
|
3.68
|
%
|
3.46
|
%
|
3.45
|
%
|
||||||||||
|
Efficiency Ratio (tax equivalent basis)
|
71.7
|
%
|
72.2
|
%
|
72.8
|
%
|
71.3
|
%
|
71.7
|
%
|
||||||||||
|
Tier 1 Leverage Ratio
|
9.1
|
%
|
9.8
|
%
|
10.7
|
%
|
10.5
|
%
|
10.2
|
%
|
||||||||||
Pre-tax, Pre-provision Income and Return on Average Assets
In an attempt to evaluate the trends of net interest income, noninterest income and noninterest expense, the Company calculates pre-tax, pre-provision income ("PTPP Income") and pre-tax, pre-provision return on average assets ("PTPP ROA"). PTPP Income adjusts net income by the amount of the Company's federal income tax (benefit) and provision for loan losses, which is excluded because its level is elevated and volatile in times of economic stress. PTPP ROA measures PTPP Income as a percent of average assets. While this information is not consistent with, or intended to replace, presentation under generally accepted accounting principles, it is presented here for comparison.
Management believes that PTPP Income and PTPP ROA are useful and consistent measures of the Company's earning capacity, as these financial measures enable investors and others to assess the Company's ability to generate capital to cover credit losses through a credit cycle, particularly in times of economic stress.
The Company's strong PTPP Income has been achieved through a substantial core funding base, which has resulted in a comparatively strong net interest margin, a diversity of noninterest income sources and expansion of our markets. The Company's PTPP ROA was 1.60% for 2013, compared to 1.62% and 1.44%, respectively, for 2012 and 2011.
The table below shows the calculation and trend of PTPP Income and PTPP ROA for the twelve month periods ended December 31, 2013, 2012 and 2011.
|
Twelve Months Ended December 31,
|
||||||||||||||||||||
|
Dollars in thousands
|
2013
|
2012
|
Change
|
2011
|
Change
|
|||||||||||||||
|
Interest income
|
$
|
34,535
|
$
|
34,693
|
-0.5
|
%
|
$
|
36,165
|
-4.1
|
%
|
||||||||||
|
Interest expense
|
2,984
|
4,528
|
-34.1
|
%
|
6,114
|
-25.9
|
%
|
|||||||||||||
|
Net interest income
|
31,551
|
30,165
|
4.6
|
%
|
30,051
|
0.4
|
%
|
|||||||||||||
|
Noninterest income
|
21,345
|
21,491
|
-0.7
|
%
|
17,211
|
24.9
|
%
|
|||||||||||||
|
Noninterest expense
|
38,367
|
37,203
|
3.1
|
%
|
34,618
|
7.5
|
%
|
|||||||||||||
|
Pre-tax, pre-provision income
|
$
|
14,529
|
$
|
14,453
|
0.5
|
%
|
$
|
12,644
|
14.3
|
%
|
||||||||||
|
Average assets
|
$
|
908,651
|
$
|
893,239
|
1.7
|
%
|
$
|
876,008
|
2.0
|
%
|
||||||||||
|
Pre-tax, pre-provision ROA
|
1.60
|
%
|
1.62
|
%
|
-0.02
|
%
|
1.44
|
%
|
0.18
|
%
|
||||||||||
|
Reconcilement to GAAP income:
|
||||||||||||||||||||
|
Provision for loan losses
|
$
|
1,900
|
$
|
8,350
|
-77.2
|
%
|
$
|
12,150
|
-31.3
|
%
|
||||||||||
|
Income tax expense (benefit)
|
3,818
|
1,640
|
132.8
|
%
|
(423
|
)
|
NA
|
|||||||||||||
|
Net income
|
$
|
8,811
|
$
|
4,463
|
97.4
|
%
|
$
|
917
|
386.7
|
%
|
||||||||||
Net Interest Income
Declining interest rates over the past few years have significantly reduced the Company's yield on earning assets, but have also resulted in a reduction in its cost of funds. Interest income decreased 0.5% in 2013 compared to 2012, while interest expense decreased 34.1% for 2013 compared to 2012, resulting in an increase in net interest income of 4.6% for 2013 compared to 2012.
United's net interest margin was 3.69% for the twelve months ended December 31, 2013, compared to 3.59%, for 2012 and 3.64% for 2011. Net interest margin improved in each quarter of 2013 as a result of a shifting asset mix and reduced liquid assets, combined with a continued reduction in cost of funds. Portfolio loan growth of $59.6 million for the twelve months ended December 31, 2013 contributed to the shift in mix, and helped the Company's yield on its earning assets. In addition, an increase in longer-term interest rates during 2013 reduced prepayment speeds on the Bank's portfolio of mortgage-backed securities, resulting in an improved yield on taxable investments in 2013.
The Company has funded its loan growth through a combination of growth in core deposits, as well as utilization of excess liquidity that had been maintained in interest bearing deposit accounts with the Federal Reserve Bank. As a result of its strong core funding, the Company's cost of interest-bearing deposits was 0.40% in 2013, down from 0.61% in 2012 and 0.83% in 2011.
Tax-equivalent yields on earning assets declined from 4.11% for 2012 to 4.02% for 2013, for a reduction of 9 basis points. The Company's average cost of funds decreased by 25 basis points, and tax equivalent net interest margin rose from 3.59% for all of 2012 to 3.69% for 2013. The following table provides a summary of the various components of net interest income, and the results of changes in balance sheet makeup that have resulted in the changes in net interest spread and net interest margin for years ended December 31, 2013, 2012 and 2011.
|
Dollars in thousands
|
2013
|
2012
|
2011
|
|||||||||||||||||||||||||||||||||
|
Assets
|
Average Balance
|
Interest (b)
|
Yield/ Rate
|
Average Balance
|
Interest (b)
|
Yield/ Rate
|
Average Balance
|
Interest (b)
|
Yield/ Rate
|
|||||||||||||||||||||||||||
|
Interest earning assets (a)
|
||||||||||||||||||||||||||||||||||||
|
Federal funds sold and equivalents
|
$
|
36,686
|
$
|
94
|
0.25
|
%
|
$
|
67,504
|
$
|
172
|
0.25
|
%
|
$
|
101,985
|
$
|
260
|
0.25
|
%
|
||||||||||||||||||
|
Taxable investments
|
184,632
|
2,910
|
1.53
|
%
|
173,350
|
2,390
|
1.38
|
%
|
127,448
|
2,731
|
2.14
|
%
|
||||||||||||||||||||||||
|
Tax exempt securities (b)
|
18,879
|
933
|
4.78
|
%
|
19,570
|
992
|
5.87
|
%
|
22,276
|
1,147
|
5.15
|
%
|
||||||||||||||||||||||||
|
Taxable loans (c)
|
622,290
|
30,788
|
4.95
|
%
|
589,578
|
31,390
|
5.32
|
%
|
581,283
|
32,292
|
5.56
|
%
|
||||||||||||||||||||||||
|
Tax exempt loans (b)
|
3,379
|
184
|
5.28
|
%
|
1,760
|
120
|
6.84
|
%
|
2,105
|
174
|
8.28
|
%
|
||||||||||||||||||||||||
|
Total interest earning assets (b)
|
865,866
|
$
|
34,909
|
4.02
|
%
|
851,762
|
$
|
35,064
|
4.11
|
%
|
835,097
|
$
|
36,604
|
4.37
|
%
|
|||||||||||||||||||||
|
Cash and due from banks
|
15,572
|
14,930
|
13,742
|
|||||||||||||||||||||||||||||||||
|
Other nonearning assets
|
50,024
|
49,061
|
52,475
|
|||||||||||||||||||||||||||||||||
|
Allowance for loan losses
|
(22,811
|
)
|
(22,514
|
)
|
(25,306
|
)
|
||||||||||||||||||||||||||||||
|
Total Assets
|
$
|
908,651
|
$
|
893,239
|
$
|
876,008
|
||||||||||||||||||||||||||||||
|
Liabilities and Shareholders' Equity
|
||||||||||||||||||||||||||||||||||||
|
Interest bearing liabilities
|
||||||||||||||||||||||||||||||||||||
|
NOW and savings deposits
|
$
|
415,499
|
$
|
506
|
0.12
|
%
|
$
|
367,982
|
$
|
554
|
0.15
|
%
|
$
|
350,985
|
$
|
854
|
0.24
|
%
|
||||||||||||||||||
|
Other interest bearing deposits
|
216,213
|
2,047
|
0.95
|
%
|
246,293
|
3,194
|
1.30
|
%
|
265,143
|
4,242
|
1.60
|
%
|
||||||||||||||||||||||||
|
Total interest bearing deposits
|
631,712
|
2,553
|
0.40
|
%
|
614,275
|
3,748
|
0.61
|
%
|
616,128
|
5,096
|
0.83
|
%
|
||||||||||||||||||||||||
|
Short term borrowings
|
-
|
-
|
0.00
|
%
|
-
|
-
|
0.00
|
%
|
190
|
65
|
NM
|
|||||||||||||||||||||||||
|
FHLB advances
|
14,671
|
372
|
2.50
|
%
|
23,013
|
782
|
3.34
|
%
|
26,947
|
953
|
3.49
|
%
|
||||||||||||||||||||||||
|
Other borrowings
|
1,743
|
59
|
3.37
|
%
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||||
|
Total interest bearing liabilities
|
648,126
|
2,984
|
0.46
|
%
|
637,288
|
4,530
|
0.71
|
%
|
643,265
|
6,114
|
0.95
|
%
|
||||||||||||||||||||||||
|
Noninterest bearing deposits
|
159,489
|
157,147
|
136,389
|
|||||||||||||||||||||||||||||||||
|
Total including noninterest bearing deposits
|
807,615
|
2,984
|
0.37
|
%
|
794,435
|
4,530
|
0.57
|
%
|
779,654
|
6,114
|
0.78
|
%
|
||||||||||||||||||||||||
|
Other liabilities
|
4,620
|
3,683
|
3,096
|
|||||||||||||||||||||||||||||||||
|
Shareholders' equity
|
96,416
|
95,121
|
93,258
|
|||||||||||||||||||||||||||||||||
|
Total Liabilities and Shareholders' Equity
|
$
|
908,651
|
$
|
893,239
|
$
|
876,008
|
||||||||||||||||||||||||||||||
|
Net interest income (b)
|
$
|
31,925
|
$
|
30,534
|
$
|
30,490
|
||||||||||||||||||||||||||||||
|
Net spread (b)
|
3.56
|
%
|
3.40
|
%
|
3.42
|
%
|
||||||||||||||||||||||||||||||
|
Net yield on interest earning assets (b)
|
3.69
|
%
|
3.59
|
%
|
3.64
|
%
|
||||||||||||||||||||||||||||||
|
Tax equivalent adjustment on
interest income
|
374
|
369
|
439
|
|||||||||||||||||||||||||||||||||
|
Net interest income per income
statement
|
$
|
31,551
|
$
|
30,165
|
$
|
30,051
|
||||||||||||||||||||||||||||||
|
Ratio of interest earning assets to
interest bearing liabilities
|
1.34
|
1.34
|
1.30
|
|||||||||||||||||||||||||||||||||
|
(a) Non-accrual loans and overdrafts are included in the average balances of loans.
|
||||||||||||||||||||||||||||||||||||
|
(b) Fully tax-equivalent basis; 34% tax rate.
|
||||||||||||||||||||||||||||||||||||
|
(c) Loan fee income of $654, $454 and $460 is included in the computation of loan income for 2013, 2012 and 2011, respectively.
|
||||||||||||||||||||||||||||||||||||
The following tables demonstrate the effect of volume and rate changes on net interest income on a taxable equivalent basis for the past two years.
|
2013 compared to 2012
|
2012 compared to 2011
|
|||||||||||||||||||||||
|
Increase (decrease) due to: (a)
|
Increase (decrease) due to: (a)
|
|||||||||||||||||||||||
|
In thousands of dollars
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
||||||||||||||||||
|
Interest earned on:
|
||||||||||||||||||||||||
|
Federal funds sold and equivalents
|
$
|
(78
|
)
|
$
|
-
|
$
|
(78
|
)
|
$
|
(88
|
)
|
$
|
-
|
$
|
(88
|
)
|
||||||||
|
Taxable securities
|
162
|
358
|
520
|
807
|
(1,148
|
)
|
(341
|
)
|
||||||||||||||||
|
Tax exempt securities (b)
|
(39
|
)
|
(20
|
)
|
(59
|
)
|
(148
|
)
|
(7
|
)
|
(155
|
)
|
||||||||||||
|
Taxable loans (c)
|
1,687
|
(2,289
|
)
|
(602
|
)
|
456
|
(1,358
|
)
|
(902
|
)
|
||||||||||||||
|
Tax exempt loans (b)
|
91
|
(27
|
)
|
64
|
(26
|
)
|
(28
|
)
|
(54
|
)
|
||||||||||||||
|
Total interest income
|
$
|
1,823
|
$
|
(1,978
|
)
|
$
|
(155
|
)
|
$
|
1,001
|
$
|
(2,541
|
)
|
$
|
(1,540
|
)
|
||||||||
|
Interest expense on:
|
||||||||||||||||||||||||
|
NOW and savings deposits
|
$
|
66
|
$
|
(114
|
)
|
$
|
(48
|
)
|
$
|
39
|
$
|
(339
|
)
|
$
|
(300
|
)
|
||||||||
|
Other interest bearing deposits
|
(358
|
)
|
(789
|
)
|
(1,147
|
)
|
(286
|
)
|
(762
|
)
|
(1,048
|
)
|
||||||||||||
|
Short term borrowings
|
-
|
-
|
-
|
-
|
(65
|
)
|
(65
|
)
|
||||||||||||||||
|
FHLB advances
|
(237
|
)
|
(173
|
)
|
(410
|
)
|
(133
|
)
|
(38
|
)
|
(171
|
)
|
||||||||||||
|
Other borrowings
|
59
|
-
|
59
|
-
|
-
|
-
|
||||||||||||||||||
|
Total interest expense
|
$
|
(470
|
)
|
$
|
(1,076
|
)
|
$
|
(1,546
|
)
|
$
|
(380
|
)
|
$
|
(1,204
|
)
|
$
|
(1,584
|
)
|
||||||
|
Net change in net interest income
|
$
|
2,293
|
$
|
(902
|
)
|
$
|
1,391
|
$
|
1,381
|
$
|
(1,337
|
)
|
$
|
44
|
||||||||||
|
(a) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
|
||||||||||||||||||||||||
|
(b) Fully tax-equivalent basis; 34% tax rate.
|
||||||||||||||||||||||||
|
(c) Non-accrual loans and overdrafts are included in the average balances of loans.
|
||||||||||||||||||||||||
Provision for Loan Losses
The Company's provision for loan losses for 2013 was $1.9 million, down from $8.4 million for 2012 and $12.2 million for 2011. This significantly reduced level of provision for loan losses over the past two years is a result of a decline in nonperforming loans, a reduction in nonperforming asset formation, and a slowdown in loan rating downgrades. For 2013, the Company's net charge offs exceeded its provision for loan losses by $2.1 million, as the Company realized losses for which it had previously provided for in its allowance for loan losses. Similarly, in 2012, the Company's net charge offs exceeded its provision for loan losses by $1.9 million.
Noninterest Income
Total noninterest income decreased by 0.7% in 2013 compared to 2012, following an increase of 24.9% in 2012 compared with 2011. The following table summarizes changes in noninterest income by category for the twelve month periods ended December 31, 2013, 2012 and 2011.
|
Dollars in thousands
|
2013
|
2012
|
Change
|
2011
|
Change
|
|||||||||||||||
|
Service charges on deposit accounts
|
$
|
1,811
|
$
|
1,861
|
-2.7
|
%
|
$
|
1,971
|
-5.6
|
%
|
||||||||||
|
Wealth Management fee income
|
5,892
|
5,250
|
12.2
|
%
|
5,079
|
3.4
|
%
|
|||||||||||||
|
Gains on securities transactions
|
54
|
4
|
1250.0
|
%
|
-
|
0.0
|
%
|
|||||||||||||
|
Income from loan sales and servicing
|
9,788
|
10,104
|
-3.1
|
%
|
6,434
|
57.0
|
%
|
|||||||||||||
|
ATM, debit and credit card fee income
|
2,216
|
2,126
|
4.2
|
%
|
2,176
|
-2.3
|
%
|
|||||||||||||
|
Other income
|
1,584
|
2,146
|
-26.2
|
%
|
1,551
|
38.4
|
%
|
|||||||||||||
|
Total noninterest income
|
$
|
21,345
|
$
|
21,491
|
-0.7
|
%
|
$
|
17,211
|
24.9
|
%
|
||||||||||
Service charges on deposit accounts were down 2.7% in 2013 compared to 2012, following a decrease of 5.6% in 2012 compared to 2011. This continuing decline is in spite of the Company's 1.1% growth of noninterest bearing deposit account balances over the twelve months ended December 31, 2013. No significant changes to service charge structure were implemented in 2013 or 2012, and the decline in service charges in 2013 and 2012 was substantially due to a reduction in NSF and overdraft fees collected, in part, as a result of the broader use of electronic and mobile banking by the Company's client base.
The Wealth Management Group of UBT provides a relatively large component of the Company's noninterest income. Wealth Management income includes trust fee income and income from the sale of non-deposit investment products within the Bank's offices. Wealth Management income improved by 12.2% in 2013 compared to 2012, following an improvement of 3.4% in 2012 compared to 2011. Market values of assets managed by the Wealth Management Group have continued to grow, and combined with new business generation, have resulted in improvement in fee income.
The Bank generally sells its production of fixed rate long-term residential mortgages in the secondary market, and retains adjustable rate mortgages for its portfolio. The Company maintains a portfolio of sold residential real estate mortgages that it services, and this servicing provides ongoing income for the life of the loans. Loans serviced consist primarily of residential mortgages sold on the secondary market.
The Bank also originates, sells and services SBA loans through its structured finance group, United Structured Finance Company. The guaranteed portion of SBA loans originated by USFC is typically sold on the secondary market, and gains on the sale of those loans contribute to income from loan sales and servicing.
Income from loan sales and servicing decreased 3.1% in 2013 compared to 2012. This followed an increase of 57.0% in 2012 compared to 2011. This decline is attributed to a reduction in residential mortgage sales and servicing of 11.0%. Due to an increase in longer-term interest rates in mid-2013, the level of residential mortgage refinance activity slowed considerably in the last half of 2013. At December 31, 2013, United's servicing portfolio consisted of $978.2 million of loans the Company had originated and sold on the secondary market, up 14.6% from $853.8 million at December 31, 2012. The following table shows the breakdown of income from loan sales and servicing between residential mortgages and USFC.
|
In thousands of dollars
|
2013
|
2012
|
Change
|
2011
|
Change
|
|||||||||||||||
|
Residential mortgage sales and servicing
|
$
|
6,875
|
$
|
7,725
|
-11.0
|
%
|
$
|
5,307
|
45.6
|
%
|
||||||||||
|
USFC loan sales and servicing
|
2,913
|
2,379
|
22.4
|
%
|
1,127
|
111.1
|
%
|
|||||||||||||
|
Total income from loan sales and servicing
|
$
|
9,788
|
$
|
10,104
|
-3.1
|
%
|
$
|
6,434
|
57.0
|
%
|
||||||||||
ATM, debit and credit card fee income provides a steady source of noninterest income for the Company. The Bank operates twenty-one ATMs throughout its market areas, and Bank clients are active users of debit cards. The Bank receives ongoing fee income from credit card referrals and operation of its credit card merchant business. Fee income in these areas increased by $90,000, or 4.2%, from 2012 to 2013, following a decrease of 2.3% in 2012 compared to 2011.
Other income includes income from various fee-based banking services, such as sale of official checks, wire transfer fees, safe deposit box income, sweep account and other fees, income from bank-owned life insurance, as well as gains on the sale of assets, which generally represent gains realized on the sale of other real estate owned. Gains on the sale of ORE property were $352,000 in 2013, compared to $832,000 in 2012 and $301,000 in 2011. Total other income was down 26.2% in 2013 compared to 2012, following an increase of 38.4% in 2012 compared to 2011.
The diversity in United's revenue stream has resulted in noninterest income that represented 40.4% of the Company's combined net interest income and noninterest income for 2013, down from 41.6% for 2012 yet above 36.4% for 2011. At the same time, the makeup of that revenue stream varies from year to year, helping to protect the Company against swings within specific categories of net interest income.
The following table shows the percentage makeup of the Company's noninterest income by category for 2013, 2012 and 2011:
|
Dollars in thousands
|
2013
|
2012
|
2011
|
|||||||||
|
Service charges on deposit accounts
|
8.5
|
%
|
8.7
|
%
|
11.5
|
%
|
||||||
|
Wealth Management fee income
|
27.6
|
%
|
24.4
|
%
|
29.5
|
%
|
||||||
|
Income from loan sales and servicing
|
45.9
|
%
|
47.0
|
%
|
37.4
|
%
|
||||||
|
ATM, debit and credit card fee income
|
10.4
|
%
|
9.9
|
%
|
12.6
|
%
|
||||||
|
Other income
|
7.6
|
%
|
10.0
|
%
|
9.0
|
%
|
||||||
|
Total noninterest income
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||
The following table shows the trends of various noninterest income categories for the most recent five quarters.
|
2013
|
2012
|
|||||||||||||||||||
|
Dollars in thousands
|
4th Qtr
|
3rd Qtr
|
2nd Qtr
|
1st Qtr
|
4th Qtr
|
|||||||||||||||
|
Service charges on deposit accounts
|
$
|
442
|
$
|
473
|
$
|
472
|
$
|
424
|
$
|
483
|
||||||||||
|
Wealth Management fee income
|
1,536
|
1,465
|
1,487
|
1,404
|
1,395
|
|||||||||||||||
|
Gains on securities transactions
|
14
|
1
|
11
|
28
|
-
|
|||||||||||||||
|
Income from loan sales and servicing
|
1,717
|
2,252
|
2,767
|
3,052
|
2,805
|
|||||||||||||||
|
ATM, debit and credit card fee income
|
579
|
580
|
561
|
496
|
543
|
|||||||||||||||
|
Other income
|
371
|
344
|
349
|
520
|
665
|
|||||||||||||||
|
Total noninterest income
|
$
|
4,659
|
$
|
5,115
|
$
|
5,647
|
$
|
5,924
|
$
|
5,891
|
||||||||||
Noninterest Expense
Total noninterest expense for the twelve month period ended December 31, 2013 was up 3.1% compared to 2012, following an increase of 7.5% in 2012 compared to 2011. The following table summarizes changes in the Company's noninterest expense by category for 2013, 2012 and 2011.
|
In thousands of dollars
|
2013
|
2012
|
Change
|
2011
|
Change
|
|||||||||||||||
|
Salaries and employee benefits
|
$
|
23,712
|
$
|
21,482
|
10.4
|
%
|
$
|
18,971
|
13.2
|
%
|
||||||||||
|
Occupancy and equipment expense, net
|
5,395
|
5,311
|
1.6
|
%
|
5,015
|
5.9
|
%
|
|||||||||||||
|
External data processing
|
1,444
|
1,113
|
29.7
|
%
|
1,342
|
-17.1
|
%
|
|||||||||||||
|
Advertising and marketing
|
1,155
|
752
|
53.6
|
%
|
625
|
20.3
|
%
|
|||||||||||||
|
Attorney, accounting and other professional fees
|
1,354
|
1,880
|
-28.0
|
%
|
1,678
|
12.0
|
%
|
|||||||||||||
|
Expenses relating to ORE property and foreclosed assets
|
918
|
1,928
|
-52.4
|
%
|
2,019
|
-4.5
|
%
|
|||||||||||||
|
FDIC Insurance premiums
|
741
|
1,133
|
-34.6
|
%
|
1,315
|
-13.8
|
%
|
|||||||||||||
|
Other expenses
|
3,648
|
3,604
|
1.2
|
%
|
3,653
|
-1.3
|
%
|
|||||||||||||
|
Total noninterest expense
|
$
|
38,367
|
$
|
37,203
|
3.1
|
%
|
$
|
34,618
|
7.5
|
%
|
||||||||||
Salaries and employee benefits for the twelve months ended December 31, 2013 increased by 10.4% over the same period one year earlier, following an increase of 13.2% from 2011 to 2012. Increases in compensation expense reflected, in part, moderate salary increases that were implemented effective April 1, 2013. The largest component of the compensation expense increase in 2013 was the accrual for profit sharing and incentive compensation expense, reflecting the Company's improved earnings for the year. The Company accrued $527,000 in profit sharing expenses and $710,000 in Management Incentive Compensation Bonus in 2013. Prior to 2013, the Company did not pay or accrue any profit sharing, nor did it pay or accrue any cash bonus or other payout to executive officers under our bonus plans since 2008.
Occupancy and equipment expense is the Company's second largest noninterest expense category. This category of expense increased slightly by 1.6% in 2013 compared to 2012, after an increase in 2012 over 2011 of 5.9%, in part as a result of the Company's physical expansion in Livingston and Monroe Counties. External data processing expenses increased 29.7% in 2013 compared to 2012 as the company implemented changes in its data processing as part of its risk mitigation initiatives.
Advertising and marketing expenses increased by 53.6% for 2013 compared to 2012, following an increase of 20.3% in 2012 compared to 2011. These expenses had been reduced during the period of 2009 through 2011. The increase in 2012 and 2013 partially reflects the Company's launch of a new branding initiative in the third quarter of 2012.
Attorney, accounting and other professional fees fell 28% in 2013 compared to 2012. Costs in 2012 included $299,000 of attorney and accounting fees related to the sale of the Company's outstanding preferred stock by the U.S. Treasury to private investors.
Expenses relating to ORE property and foreclosed assets declined in 2013 by 52.4% compared to 2012 levels. Those expenses included write-downs of the value and losses on the sale of property held as ORE, along with costs to maintain and carry those properties. In addition, during 2013 and 2012, the Company recorded $510,000 and $1.0 million, respectively, of probable incurred expenses relating to residential mortgages previously sold on the secondary market that subsequently defaulted.
Federal Income Tax
The following chart shows the effective federal tax rates of the Company for the past three years.
|
Dollars in thousands
|
2013
|
2012
|
2011
|
|||||||||
|
Income before tax
|
$
|
12,629
|
$
|
6,103
|
$
|
494
|
||||||
|
Federal income tax (benefit)
|
3,818
|
1,640
|
(423
|
)
|
||||||||
|
Effective federal tax rate
|
30.2
|
%
|
26.9
|
%
|
-85.6
|
%
|
||||||
The difference between the effective tax rates and the Company's expected tax rate were primarily due to the benefit from tax-exempt income and low income housing tax credits. As of December 31, 2013, the Company had approximately $1.4 million of low income housing and alternative minimum tax credits available to offset future federal income taxes. The low income housing credits expire in 2028 through 2032, and the alternative minimum tax credits have no expiration date.
The Company's net deferred tax asset was $8.1 million at December 31, 2013. A valuation allowance related to deferred tax assets is required when it is considered likely that all or part of the benefit related to such assets will not be realized. Based upon analysis of the evidence (both negative and positive), management has determined that no valuation allowance was required at December 31, 2013 or 2012. See Note 12 of the Company's Notes to Consolidated Financial Statements for further discussion.
Liquidity
The Company maintains correspondent accounts with a number of other banks for various purposes. In addition, cash sufficient to meet the operating needs of its banking offices is maintained at its lowest practical levels. At times, the Bank is a participant in the federal funds market, either as a borrower or seller. Federal funds are generally borrowed or sold for one-day periods. In 2013 and 2012, the Bank generally utilized short-term interest-bearing balances with banks as an alternative to federal funds sold.
Total cash and due from banks, federal funds sold and securities available for sale were $217.4 million at December 31, 2013, down $59.3 million, or 21.4%, from December 31, 2012, when it was $276.7 million. The Company began to deploy its higher than normal levels of liquidity in 2012 and 2013 as economic conditions improved and more attractive investment opportunities emerged. However, the Company's combined liquidity of $217.4 million represented 24.2% of total assets at December 31, 2013.
The Bank also has the ability to utilize short-term advances from the FHLBI and borrowings at the discount window of the Federal Reserve Bank as additional short-term funding sources. Short-term advances and discount window borrowings were not utilized during 2013 or 2012.
The Company periodically finds it advantageous to utilize longer term borrowings from the FHLBI. These longer-term borrowings serve primarily to provide a balance to some of the interest rate risk inherent in the Company's balance sheet. In 2013, the Bank procured no new advances and repaid $10.0 million of matured borrowings and scheduled principal payments. Additional information concerning available lines is contained in Note 10 of the Company's Notes to Consolidated Financial Statements.
The Company entered into a Business Loan Agreement with Chemical Bank (the "Loan Agreement") and a revolving line of credit as of September 16, 2013. The Loan Agreement provides for a $10.0 million line of credit by Chemical Bank to the Company at an interest rate of prime plus 0.125% (3.375% as of December 31, 2013). The Company will pay quarterly payments of accrued interest, and the balance of all outstanding principal and accrued interest will become due on September 16, 2015. As of December 31, 2013, United had an outstanding principal balance of $10.0 million on the line of credit. For more information, see "Recent Developments – Line of Credit" above.
Funds Management and Market Risk
The composition of the Company's balance sheet consists of investments in interest earning assets (loans and investment securities) that are funded by interest bearing liabilities (deposits and borrowings). These financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk.
Policies of the Company place strong emphasis on stabilizing net interest margin while managing interest rate, liquidity and market risks, with the goal of providing a sustained level of satisfactory earnings. The Funds Management, Investment and Loan policies provide direction for the flow of funds necessary to supply the needs of depositors and borrowers. Management of interest sensitive assets and liabilities is also necessary to reduce interest rate risk during times of fluctuating interest rates.
Interest rate risk is the exposure of the Company's financial condition to adverse movements in interest rates. It results from differences in the maturities or timing of interest adjustments of the Company's assets, liabilities and off-balance-sheet instruments; from changes in the slope of the yield curve; from imperfect correlations in the adjustment of interest rates earned and paid on different financial instruments with otherwise similar re-pricing characteristics; and from interest rate related options embedded in the Company's products such as prepayment and early withdrawal options.
A number of measures are used to monitor and manage interest rate risk, including interest sensitivity and income simulation analyses. An interest sensitivity model is the primary tool used to assess this risk, with supplemental information supplied by an income simulation model. The simulation model is used to estimate the effect that specific interest rate changes would have on twelve months of pretax net interest income assuming an immediate and sustained up or down parallel change in interest rates of 300 basis points. Key assumptions in the models include prepayment speeds on mortgage related assets; cash flows and maturities of financial instruments; changes in market conditions, loan volumes and pricing; and management's determination of core deposit sensitivity.
These assumptions are inherently uncertain and, as a result, the models cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results may differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions.
The Funds Management Committee is also responsible for evaluating and anticipating various risks other than interest rate risk. Those risks include prepayment risk, pricing for credit risk and liquidity risk. The Committee is made up of senior members of management, and continually monitors the makeup of interest sensitive assets and liabilities to assure appropriate liquidity, maintain interest margins and to protect earnings in the face of changing interest rates and other economic factors.
The Funds Management policy provides for a level of interest sensitivity that, management believes, allows the Company to take advantage of opportunities within the market relating to liquidity and interest rate risk, allowing flexibility without subjecting the Company to undue exposure to risk. In addition, other measures are used to evaluate and project the anticipated results of management's decisions.
We conducted multiple simulations as of December 31, 2013, in which it was assumed that changes in market interest rates occurred ranging from up 400 basis points to down 100 basis points in equal quarterly installments over the next twelve months. The following table reflects the suggested impact on net interest income over the next twelve months in comparison to estimated net interest income based on our balance sheet structure, including the balances and interest rates associated with our specific loans, securities, deposits and borrowed funds as of December 31, 2013. The resulting estimates are within our policy parameters established to manage and monitor interest rate risk.
|
Dollars in thousands
|
Change in Net Interest Income
|
|||||||
|
Interest Rate Scenario
|
Amount
|
Percent
|
||||||
|
Interest rates down 100 basis points
|
$
|
(497
|
)
|
-1.5
|
%
|
|||
|
No change in interest rates
|
563
|
1.7
|
%
|
|||||
|
Interest rates up 100 basis points
|
1,291
|
3.9
|
%
|
|||||
|
Interest rates up 200 basis points
|
2,085
|
6.3
|
%
|
|||||
|
Interest rates up 300 basis points
|
2,946
|
8.9
|
%
|
|||||
|
Interest rates up 400 basis points
|
4,700
|
14.2
|
%
|
|||||
In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including the growth, composition and levels of loans, deposits and other earnings assets and interest-bearing liabilities, level of nonperforming assets, economic and competitive conditions, potential changes in lending, investing and deposit gathering strategies, client preferences and other factors.
The common stock of the Company is quoted on the OTCQB under the symbol "UBMI." 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 discretionary actions by regulators that, if undertaken, could have a direct material effect on the 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. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Current capital ratios for the Company and the Bank are shown in Note 18 of the Company's Notes to Consolidated Financial Statements. At December 31, 2013, the Company's consolidated Tier 1 capital ratio was 9.13%, its ratio of total capital to risk-weighted assets was 13.94% and its tangible common equity ratio was 9.14%. Book value per share of the Company's common stock increased from $6.05 at the end of 2012 to $6.46 at December 31, 2013.
The Company issued 20,600 Preferred Shares to U.S. Treasury on January 16, 2009 as part of Treasury's TARP Capital Purchase Program. On June 19, 2012, Treasury sold all 20,600 Preferred Shares to private investors.
During 2013, the Company redeemed all 20,600 Preferred Shares, with 10,300 shares redeemed on September 30, 2013 and 10,300 shares redeemed on December 27, 2013.Following completion of the redemption, no Preferred Shares remained outstanding. For additional information, see "Recent Developments – Preferred Stock Redemption" above.
The following table details the Company's known contractual obligations at December 31, 2013, in thousands of dollars:
|
Contractual Obligations
|
Less than
|
More than
|
||||||||||||||||||
|
Thousands of dollars
|
1 year
|
1-3 years
|
3-5 years
|
5 years
|
Total
|
|||||||||||||||
|
FHLB advances
|
$
|
41
|
$
|
10,091
|
$
|
105
|
$
|
1,724
|
$
|
11,961
|
||||||||||
|
Operating lease arrangements
|
1,258
|
2,292
|
2,197
|
1,795
|
7,542
|
|||||||||||||||
|
Other borrowings
|
-
|
10,000
|
-
|
-
|
10,000
|
|||||||||||||||
|
Total
|
$
|
1,299
|
$
|
22,383
|
$
|
2,302
|
$
|
3,519
|
$
|
29,503
|
||||||||||
Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. The Company's management must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of the Company's significant accounting policies, see Note 1 to the Company's Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the Company's financial statements.
Allowance for Loan Losses
The allowance for loan losses provides coverage for probable losses inherent in the Company's loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management's estimates of incurred losses, including volatility of default probabilities, credit rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.
The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous personal loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan's observable market price, the collateral value for collateral-dependent loans, or the discounted cash flows using the loan's effective interest rate.
Regardless of the extent of the Company's analysis of client performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a client's financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or client-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company's evaluation of imprecision risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.
Loan Servicing Rights
Loan servicing rights ("LSRs") associated with loans originated and sold, where servicing is retained, are capitalized and included in other intangible assets in the consolidated balance sheet. The value of the capitalized servicing rights represents the present value of the future servicing fees arising from the right to service loans in the portfolio. Critical accounting policies for LSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of LSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the LSRs is periodically reviewed for impairment based on a determination of fair value.
For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as amortization of intangible assets.
Deferred Tax Assets
Deferred tax assets are only recognized to the extent that they will be realized. Should our management determine that the deferred tax assets will be not realized, a valuation allowance with a charge to earnings would be reflected in the period. If the Company is required in the future to take a valuation allowance with respect to its deferred tax asset, its financial condition, results of operations and regulatory capital levels would be negatively affected.
Audit Committee, Board of Directors and Shareholders
United Bancorp, Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheets of United Bancorp, Inc. (Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2013. 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, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
/s/ BKD LLP
Indianapolis, Indiana
February 28, 2014
|
United Bancorp, Inc. and Subsidiary
|
||||||||
|
In thousands of dollars
|
December 31,
|
|||||||
|
Assets
|
2013
|
2012
|
||||||
|
Cash and demand balances in other banks
|
$
|
13,748
|
$
|
13,769
|
||||
|
Interest bearing balances with banks
|
12,513
|
56,843
|
||||||
|
Total cash and cash equivalents
|
26,261
|
70,612
|
||||||
|
Securities available for sale
|
191,158
|
206,129
|
||||||
|
FHLB Stock
|
2,691
|
2,571
|
||||||
|
Loans held for sale
|
4,260
|
13,380
|
||||||
|
Portfolio loans
|
646,274
|
586,678
|
||||||
|
Less allowance for loan losses
|
20,447
|
22,543
|
||||||
|
Net portfolio loans
|
625,827
|
564,135
|
||||||
|
Premises and equipment, net
|
10,187
|
10,719
|
||||||
|
Bank-owned life insurance
|
14,639
|
14,241
|
||||||
|
Accrued interest receivable and other assets
|
24,006
|
25,954
|
||||||
|
Total Assets
|
$
|
899,029
|
$
|
907,741
|
||||
|
Liabilities
|
||||||||
|
Deposits
|
||||||||
|
Noninterest bearing deposits
|
$
|
167,236
|
$
|
165,430
|
||||
|
Interest bearing deposits
|
623,261
|
619,213
|
||||||
|
Total deposits
|
790,497
|
784,643
|
||||||
|
FHLB advances payable
|
11,961
|
21,999
|
||||||
|
Other borrowings
|
10,000
|
-
|
||||||
|
Accrued interest payable and other liabilities
|
4,360
|
3,702
|
||||||
|
Total Liabilities
|
816,818
|
810,344
|
||||||
|
Commitments and Contingent Liabilities
|
||||||||
|
Shareholders' Equity
|
||||||||
|
Preferred stock, no par value; 2,000,000 shares authorized, 0 and 20,600 shares outstanding in 2013 and 2012
|
-
|
20,476
|
||||||
|
Common stock and paid in capital, no par value; 30,000,000 shares authorized; 12,718,080 and 12,705,983 shares issued and outstanding at December 31, 2013 and 2012
|
85,873
|
85,682
|
||||||
|
Accumulated deficit
|
(2,763
|
)
|
(10,426
|
)
|
||||
|
Accumulated other comprehensive income (loss), net of tax
|
(899
|
)
|
1,665
|
|||||
|
Total Shareholders' Equity
|
82,211
|
97,397
|
||||||
|
Total Liabilities and Shareholders' Equity
|
$
|
899,029
|
$
|
907,741
|
||||
|
The accompanying notes are an integral part of these consolidated financial statements.
|
||||||||
|
United Bancorp, Inc. and Subsidiary
|
||||||||||||
|
For the years ended December 31,
|
||||||||||||
|
In thousands of dollars, except per share data
|
2013
|
2012
|
2011
|
|||||||||
|
Interest Income
|
||||||||||||
|
Interest and fees on loans
|
$
|
30,910
|
$
|
31,470
|
$
|
32,408
|
||||||
|
Interest on securities
|
||||||||||||
|
Taxable
|
2,910
|
2,390
|
2,731
|
|||||||||
|
Tax exempt
|
621
|
661
|
766
|
|||||||||
|
Interest on federal funds sold and balances with banks
|
94
|
172
|
260
|
|||||||||
|
Total interest income
|
34,535
|
34,693
|
36,165
|
|||||||||
|
Interest Expense
|
||||||||||||
|
Interest on deposits
|
2,553
|
3,746
|
5,096
|
|||||||||
|
Interest on federal funds and other short term borrowings
|
-
|
-
|
65
|
|||||||||
|
Interest on FHLB advances
|
372
|
782
|
953
|
|||||||||
|
Interest on other borrowings
|
59
|
-
|
-
|
|||||||||
|
Total interest expense
|
2,984
|
4,528
|
6,114
|
|||||||||
|
Net Interest Income
|
31,551
|
30,165
|
30,051
|
|||||||||
|
Provision for loan losses
|
1,900
|
8,350
|
12,150
|
|||||||||
|
Net Interest Income After Provision for Loan Losses
|
29,651
|
21,815
|
17,901
|
|||||||||
|
Noninterest Income
|
||||||||||||
|
Service charges on deposit accounts
|
1,811
|
1,861
|
1,971
|
|||||||||
|
Wealth Management fee income
|
5,892
|
5,250
|
5,079
|
|||||||||
|
Gains on securities transactions
|
54
|
4
|
-
|
|||||||||
|
Income from loan sales and servicing
|
9,788
|
10,104
|
6,434
|
|||||||||
|
ATM, debit and credit card fee income
|
2,216
|
2,126
|
2,176
|
|||||||||
|
Other income
|
1,584
|
2,146
|
1,551
|
|||||||||
|
Total noninterest income
|
21,345
|
21,491
|
17,211
|
|||||||||
|
Noninterest Expense
|
||||||||||||
|
Salaries and employee benefits
|
23,712
|
21,482
|
18,971
|
|||||||||
|
Occupancy and equipment expense, net
|
5,395
|
5,311
|
5,015
|
|||||||||
|
External data processing
|
1,444
|
1,113
|
1,342
|
|||||||||
|
Advertising and marketing
|
1,155
|
752
|
625
|
|||||||||
|
Attorney, accounting and other professional fees
|
1,354
|
1,880
|
1,678
|
|||||||||
|
Expenses relating to ORE property and foreclosed assets
|
918
|
1,928
|
2,019
|
|||||||||
|
FDIC Insurance premiums
|
741
|
1,133
|
1,315
|
|||||||||
|
Other expenses
|
3,648
|
3,604
|
3,653
|
|||||||||
|
Total noninterest expense
|
38,367
|
37,203
|
34,618
|
|||||||||
|
Income Before Federal Income Tax
|
12,629
|
6,103
|
494
|
|||||||||
|
Federal income tax (benefit)
|
3,818
|
1,640
|
(423
|
)
|
||||||||
|
Net Income
|
$
|
8,811
|
$
|
4,463
|
$
|
917
|
||||||
|
Preferred stock dividends and accretion
|
(1,025
|
)
|
(1,142
|
)
|
(1,136
|
)
|
||||||
|
Income (Loss) Available to Common Shareholders
|
$
|
7,786
|
$
|
3,321
|
$
|
(219
|
)
|
|||||
|
Basic earnings (loss) per share
|
$
|
0.61
|
$
|
0.26
|
$
|
(0.02
|
)
|
|||||
|
Diluted earnings (loss) per share
|
$
|
0.60
|
$
|
0.26
|
$
|
(0.02
|
)
|
|||||
|
Cash dividend declared per share of common stock
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
The accompanying notes are an integral part of these consolidated financial statements.
|
||||||||||||
|
United Bancorp, Inc. and Subsidiary
|
||||||||||||
|
For the years ended December 31,
|
||||||||||||
|
In thousands of dollars
|
2013
|
2012
|
2011
|
|||||||||
|
Net income
|
$
|
8,811
|
$
|
4,463
|
$
|
917
|
||||||
|
Other comprehensive income (loss):
|
||||||||||||
|
Unrealized gains/losses on securities:
|
||||||||||||
|
Unrealized gains (losses) on securities available for sale
|
(3,832
|
)
|
26
|
1,561
|
||||||||
|
Less: Reclassification for realized amount included in income
|
(54
|
)
|
(4
|
)
|
-
|
|||||||
|
Other comprehensive income (loss) before tax effect
|
(3,886
|
)
|
22
|
1,561
|
||||||||
|
Tax expense (benefit)
|
(1,322
|
)
|
8
|
531
|
||||||||
|
Other comprehensive income (loss)
|
(2,564
|
)
|
14
|
1,030
|
||||||||
|
Total comprehensive income
|
$
|
6,247
|
$
|
4,477
|
$
|
1,947
|
||||||
|
The accompanying notes are an integral part of these consolidated financial statements.
|
||||||||||||
|
United Bancorp, Inc. and Subsidiary
|
||||||||||||||||||||
|
For the years ended December 31, 2013, 2012, 2011
|
||||||||||||||||||||
|
In thousands of dollars, except per share data
|
||||||||||||||||||||
|
Preferred Stock
|
Common Stock and Paid In Capital
|
Accumulated Deficit
|
AOCI (1)
|
Total
|
||||||||||||||||
|
Balance, December 31, 2010
|
$
|
20,258
|
$
|
85,351
|
$
|
(13,526
|
)
|
$
|
621
|
$
|
92,704
|
|||||||||
|
Net income, 2011
|
917
|
917
|
||||||||||||||||||
|
Other comprehensive income
|
1,030
|
1,030
|
||||||||||||||||||
|
Accretion of discount on preferred stock
|
106
|
(106
|
)
|
-
|
||||||||||||||||
|
Cash dividends paid on preferred shares
|
(1,030
|
)
|
(1,030
|
)
|
||||||||||||||||
|
Other common stock transactions
|
86
|
(1
|
)
|
85
|
||||||||||||||||
|
Director and management deferred stock plans
|
-
|
68
|
-
|
-
|
68
|
|||||||||||||||
|
Balance, December 31, 2011
|
20,364
|
85,505
|
(13,746
|
)
|
1,651
|
93,774
|
||||||||||||||
|
Net income, 2012
|
4,463
|
4,463
|
||||||||||||||||||
|
Other comprehensive income
|
14
|
14
|
||||||||||||||||||
|
Accretion of discount on preferred stock
|
112
|
(112
|
)
|
-
|
||||||||||||||||
|
Cash dividends paid on preferred shares
|
(1,030
|
)
|
(1,030
|
)
|
||||||||||||||||
|
Other common stock transactions
|
(8
|
)
|
(1
|
)
|
(9
|
)
|
||||||||||||||
|
Director and management deferred stock plans
|
-
|
185
|
-
|
-
|
185
|
|||||||||||||||
|
Balance, December 31, 2012
|
$
|
20,476
|
$
|
85,682
|
$
|
(10,426
|
)
|
$
|
1,665
|
97,397
|
||||||||||
|
Net income, 2013
|
8,811
|
8,811
|
||||||||||||||||||
|
Other comprehensive loss
|
(2,564
|
)
|
(2,564
|
)
|
||||||||||||||||
|
Preferred stock redemption
|
(20,600
|
)
|
(20,600
|
)
|
||||||||||||||||
|
Accretion of discount on preferred stock
|
124
|
(124
|
)
|
-
|
||||||||||||||||
|
Cash dividends paid on preferred shares
|
(1,025
|
)
|
(1,025
|
)
|
||||||||||||||||
|
Other common stock transactions
|
78
|
1
|
79
|
|||||||||||||||||
|
Director and management deferred stock plans
|
-
|
113
|
-
|
-
|
113
|
|||||||||||||||
|
Balance, December 31, 2013
|
$
|
-
|
$
|
85,873
|
$
|
(2,763
|
)
|
$
|
(899
|
)
|
$
|
82,211
|
||||||||
|
(1) Accumulated other comprehensive income, net of tax
|
||||||||||||||||||||
|
The accompanying notes are an integral part of these consolidated financial statements.
|
||||||||||||||||||||
|
United Bancorp, Inc. and Subsidiary
|
||||||||||||
|
Years Ended December 31,
|
||||||||||||
|
In thousands of dollars
|
2013
|
2012
|
2011
|
|||||||||
|
Cash Flows from Operating Activities
|
||||||||||||
|
Net income
|
$
|
8,811
|
$
|
4,463
|
$
|
917
|
||||||
|
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
|
||||||||||||
|
Depreciation and amortization
|
5,376
|
5,891
|
3,884
|
|||||||||
|
Provision for loan losses
|
1,900
|
8,350
|
12,150
|
|||||||||
|
Gain on sale of loans
|
(8,610
|
)
|
(9,509
|
)
|
(5,581
|
)
|
||||||
|
Proceeds from sales of loans originated for sale
|
315,874
|
376,496
|
248,631
|
|||||||||
|
Loans originated for sale
|
(298,144
|
)
|
(372,077
|
)
|
(241,051
|
)
|
||||||
|
Gains on securities transactions
|
(54
|
)
|
(4
|
)
|
-
|
|||||||
|
Change in deferred income taxes
|
1,973
|
1,142
|
(661
|
)
|
||||||||
|
Stock based compensation expense
|
250
|
150
|
138
|
|||||||||
|
Increase in cash surrender value on bank owned life insurance
|
(398
|
)
|
(422
|
)
|
(428
|
)
|
||||||
|
Change in investment in limited partnership
|
(322
|
)
|
(217
|
)
|
(93
|
)
|
||||||
|
Change in accrued interest receivable and other assets
|
1,665
|
2,286
|
3,741
|
|||||||||
|
Change in accrued interest payable and other liabilities
|
710
|
1,524
|
(928
|
)
|
||||||||
|
Total adjustments
|
20,220
|
13,610
|
19,802
|
|||||||||
|
Net cash from operating activities
|
29,031
|
18,073
|
20,719
|
|||||||||
|
Cash Flows from Investing Activities
|
||||||||||||
|
Securities available for sale
|
||||||||||||
|
Purchases
|
(73,887
|
)
|
(107,644
|
)
|
(82,544
|
)
|
||||||
|
Sales
|
12,753
|
2,847
|
-
|
|||||||||
|
Maturities and calls
|
23,845
|
30,037
|
15,873
|
|||||||||
|
Principal payments
|
44,374
|
37,300
|
17,122
|
|||||||||
|
Sale (purchase) of FHLB stock
|
(120
|
)
|
-
|
217
|
||||||||
|
Net change in portfolio loans
|
(64,058
|
)
|
(33,341
|
)
|
8,353
|
|||||||
|
Premises and equipment expenditures
|
(558
|
)
|
(1,030
|
)
|
(719
|
)
|
||||||
|
Net cash from investing activities
|
(57,651
|
)
|
(71,831
|
)
|
(41,698
|
)
|
||||||
|
Cash Flows from Financing Activities
|
||||||||||||
|
Net change in deposits
|
5,854
|
19,787
|
30,858
|
|||||||||
|
Net change in federal funds borrowed and other short term borrowings
|
-
|
-
|
(1,234
|
)
|
||||||||
|
Principal payments on FHLB advances
|
(10,038
|
)
|
(2,036
|
)
|
(6,286
|
)
|
||||||
|
Net change in other borrowings
|
10,000
|
-
|
-
|
|||||||||
|
Repurchase of preferred stock
|
(20,600
|
)
|
-
|
-
|
||||||||
|
Other common stock transactions
|
78
|
57
|
41
|
|||||||||
|
Cash dividends paid on preferred shares
|
(1,025
|
)
|
(1,030
|
)
|
(1,030
|
)
|
||||||
|
Net cash from financing activities
|
(15,731
|
)
|
16,778
|
22,349
|
||||||||
|
Net Change in Cash and Cash Equivalents
|
(44,351
|
)
|
(36,980
|
)
|
1,370
|
|||||||
|
Cash and cash equivalents at beginning of year
|
70,612
|
107,592
|
106,222
|
|||||||||
|
Cash and Cash Equivalents at End of Year
|
$
|
26,261
|
$
|
70,612
|
$
|
107,592
|
||||||
|
Supplemental Disclosures:
|
||||||||||||
|
Interest paid
|
$
|
3,148
|
$
|
4,665
|
$
|
6,235
|
||||||
|
Income tax paid
|
1,420
|
52
|
20
|
|||||||||
|
Loans transferred to other real estate
|
466
|
3,925
|
3,250
|
|||||||||
|
The accompanying notes are an integral part of these consolidated financial statements.
|
||||||||||||
United Bancorp, Inc. and Subsidiary
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
The consolidated financial statements include the accounts of United Bancorp, Inc. and its wholly owned subsidiary, United Bank & Trust ("UBT" or "the Bank") after elimination of significant intercompany transactions and accounts. The Company is engaged 100% in the business of commercial and retail banking, including trust and investment services, with operations conducted through its offices located in Lenawee, Washtenaw, Livingston and Monroe Counties in southeastern Michigan. These counties are the source of substantially all of the Company's deposit, loan, trust and investment activities.
Use of Estimates
The preparation of the consolidated 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period as well as affecting the disclosures provided. Actual results could differ from those estimates. The allowance for loan losses, loan servicing rights and the fair values of financial instruments are particularly subject to change.
Securities
Securities classified as available for sale consist of bonds and notes that might be sold prior to maturity. Securities classified as available for sale are reported at their fair values and the related net unrealized holding gain or loss is reported in other comprehensive income. Premiums and discounts on securities are recognized in interest income using the interest method over the period to maturity. Realized gains or losses are based upon the amortized cost of the specific securities sold.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or market value in the aggregate. Net unrealized losses, if any, are recognized in a valuation allowance by charges to income.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and the allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Loans are placed on nonaccrual status at ninety days or more past due and interest is considered a loss, unless the loan is well-secured and in the process of collection.
Allowance for Loan Losses
The allowance for loan losses ("allowance") is maintained at a level believed adequate by management to absorb probable incurred credit losses in the loan portfolio. The allowance is increased by provisions for loan losses charged to income.
Loan losses are charged against the allowance when management believes a loan is uncollectible. Subsequent recoveries, if any, are credited to the allowance. This policy applies to each of the Company's portfolio segments.
The Company's established methodology for evaluating the adequacy of the allowance for loan losses considers both components of the allowance: (1) specific allowances allocated to loans evaluated individually for impairment under the Accounting Standards Codification ("ASC") Section 310-10-35 of the Financial Accounting Standards Board ("FASB"), and (2) allowances calculated for pools of loans evaluated collectively for impairment under FASB ASC Subtopic 450-20. Until the third quarter of 2011, the Company's past loan loss experience was determined by evaluating the average charge-offs over the most recent eight quarters.
For the quarter ended September 30, 2011, the Company changed its methodology for evaluating the adequacy of the allowance for loan losses by revising and enhancing the methodology for loans evaluated collectively for impairment. Under this methodology, the Company revised and further disaggregated its pools of loans evaluated collectively for impairment. Similar to the prior methodology, pools were analyzed by general loan types, and further analyzed by collateral types, where appropriate. However, under the new methodology, pools were further disaggregated by internal credit risk ratings for commercial loans, commercial mortgages and construction loans and by delinquency status for residential mortgages, consumer loans and all other loan types.
Effective with the first quarter of 2012, the Company expanded the number of categories evaluated for allocation of the allowance for loan losses, from four to six. In order to be consistent with the migration analysis that is performed quarterly, allocations for Owner-Occupied Commercial Real Estate, Other Commercial Real Estate, and Commercial and Industrial loans were broken out beginning March 31, 2012. This change in allocation methodology had no material quantitative effect on the allocations.
Allowance allocations for each pool are determined through a migration analysis based on activity for the period beginning March 2008. The analysis computes loss rates based on a probability of default ("PD") and loss given default ("LGD"). Allowance allocations prior to the third quarter of 2011 were computed based on weighted average charge-off rates as opposed to the use of credit migration matrices, which compute PD and LGD based on historical losses as loans migrate through the various risk rating or delinquency categories. The March 2008 date was selected in an effort to capture sufficient data points to provide a meaningful migration analysis using available data in comparable formats.
Under both the current and previous methodologies, loss rates are adjusted to consider qualitative factors such as economic conditions and trends, among others. However, under the methodologies adopted beginning with the third quarter of 2011, the Company applies a more detailed analysis of qualitative factors that are assessed on a quarterly basis based upon grading specific to the Company, as well as regional economic metrics.
Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate, or the fair value of collateral if the loan is collateral dependent.
A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations require an increase in the allowance for loan losses, that increase is recorded as a component of the provision for loan losses. Loans are evaluated for impairment when payments are delayed or when the internal grading system indicates a substandard or doubtful classification. This policy applies to each class of the Company's loan portfolio.
Impairment is evaluated in total for smaller-balance loans of similar nature, such as residential mortgage, consumer, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, including loans to the borrower by the Bank, the loan is evaluated for impairment. Often this is associated with a delay or shortfall of payments of thirty days or more. Loans are generally moved to nonaccrual status when ninety days or more past due or in bankruptcy. These loans are often also considered impaired. Impaired loans are charged off, in part or in full, when deemed uncollectible. This typically occurs when the loan is 120 or more days past due, unless the loan is both well-secured and in the process of collection. This policy applies to each class of the Company's loan portfolio.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. The provisions for depreciation are computed principally by the straight-line method, based on useful lives of ten to forty years for premises and three to eight years for equipment.
Other Real Estate Owned
Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure and property acquired for possible future expansion. Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value, less estimated selling costs, at the date of foreclosure establishing a new cost basis. After acquisition, valuations are periodically performed and the real estate is carried at the lower of cost basis or fair value, less estimated selling costs. The historical average holding period for such properties is less than eighteen months. As of December 31, 2013 and 2012, other real estate owned totaled $1,850,000 and $3,409,000, respectively, and is included in other assets on the consolidated balance sheets.
Servicing Rights
Servicing rights are recognized as assets at the fair value of retained servicing on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates, remaining loan terms and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance.
Long-term Assets
Long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are written down to their fair value.
Income Tax
The Company records income tax expense based on the amount of taxes due on its tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates, adjusted for allowances made for uncertainty regarding the realization of deferred tax assets. The Company has no uncertain tax positions as defined by FASB ASC Topic 740.
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 subsidiaries. With a few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2010.
Earnings (Loss) Per Share
Amounts reported as earnings or losses per share are based on income or loss available to common shareholders divided by weighted average shares outstanding. Income or loss available to common shareholders is calculated by subtracting dividends on preferred stock and the accretion of discount on preferred stock from net income or loss. Weighted average shares outstanding include the weighted average number of common shares outstanding plus the weighted average number of contingently issuable shares associated with deferred compensation stock plans.
Stock Based Compensation
At December 31, 2013, the Company has stock-based employee compensation plans, which are described more fully in Note 15. The Company's disclosure regarding these plans is in accordance with the fair value recognition provisions of FASB ASC Topic 718-10.
Statements of Cash Flows
For purposes of this Statement, cash and cash equivalents include cash on hand, demand balances with banks, and federal funds sold and equivalents. Federal funds are generally sold for one-day periods. The Company reports net cash flows for client loan and deposit transactions, deposits made with other financial institutions, and short-term borrowings with an original maturity of ninety days or less.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). All other comprehensive income (loss) consists solely of net unrealized gains and losses on securities available for sale, net of tax, which is recognized as a separate component of shareholders' equity.
Industry Segment
The Company and its subsidiary are organized to operate in the banking industry. Substantially all revenues and services are derived from banking products and services in southeastern Michigan. While the Company's chief decision makers monitor various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company's banking operations are considered by management to be aggregated in one business segment.
Recently Issued Accounting Standards
Accounting Standards Update No. 2013-04 – Liabilities (Topic 405). On February 28, 2013, FASB issued ASU 2013-04. The amendments in this Update provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this Update is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors.
The guidance in this Update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. This Accounting Standards Update is the final version of Proposed Accounting Standards Update EITF12D – Liabilities (Topic 405) which has been deleted.
The amendments in this Update are effective for fiscal years beginning after December 31, 2013. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
Accounting Standards Update No. 2013-07 – Presentation of Financial Statements (Topic 205). On April 22, 2013, FASB issued ASU 2013-07. The objective of this Update is to clarify when an entity should apply the liquidation basis of accounting and to provide principles for the measurement of assets and liabilities under the liquidation basis of accounting, as well as any required disclosures. This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2012-210 – Presentation of Financial Statements (Topic 205), which has been deleted.
The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
Accounting Standards Update No. 2013-10 - Derivatives and Hedging (Topic 815) In July 2013, FASB issued ASU 2013-10. The objective of this Update is to provide for the inclusion of the Fed Funds Effective Swap Rate - Overnight Index Swap Rate (OIS) as a U.S. benchmark interest rate for hedge accounting purposes, in addition to U.S. Treasury (UST) or London Interbank Offered Rate (LIBOR) indices. The Update also removes a restriction stating that entities must use the same rates for similar hedges, offering greater flexibility in hedge accounting.
The amendments in this Update are effective prospectively for qualifying new or re-designated hedging relationships entered into on or after July 17, 2013. The Company has adopted the applicable methodologies prescribed by this ASU and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
Accounting Standards Update No. 2013-11- Income Taxes (Topic 740) – In July 2013, FASB issued ASU 2013-11. This update pertains to the unrecognized tax benefit when a net operating loss carry forward, a similar tax loss or a tax credit carry forward exists. The ASU is intended to end the varying ways that entities present these situations since GAAP is non-specific and leads to diversity in practice. The new standard deems that any unrecognized tax benefit or portion of an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward except for certain defined situations.
The amendments in this Update are effective for fiscal years beginning after December 15, 2013. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
NOTE 2 - RESTRICTIONS ON CASH AND DEMAND BALANCES IN OTHER BANKS
The Bank is subject to average reserve and clearing balance requirements in the form of cash on hand or balances due from the Federal Reserve Bank. The amount of reserve and clearing balances required at December 31, 2013 was $905,000. These reserve balances vary depending on the level of client deposits in the Bank.
The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2013 and 2012, cash equivalents consisted primarily of interest-bearing balances with banks.
As a result of legislation enacted in 2010, the FDIC fully insured without limitation all noninterest-bearing transaction accounts beginning December 31, 2010 through December 31, 2012 at all FDIC-insured institutions. This unlimited insurance coverage expired on December 31, 2012. Beginning January 1, 2013, noninterest-bearing transaction accounts were subject to a $250,000 limit on FDIC insurance per covered institution. At December 31, 2013, the Company's cash accounts with banks had balances of $14,201,000, which did not have FDIC coverage.
NOTE 3 - SECURITIES
Balances of securities by category are shown below, as of December 31, 2013 and 2012:
|
Thousands of dollars
|
Securities Available for Sale
|
|||||||||||||||
|
2013
|
Amortized Cost
|
Unrealized Gains
|
Unrealized Losses
|
Fair Value
|
||||||||||||
|
U.S. Treasury and agency securities
|
$
|
24,473
|
$
|
19
|
$
|
(994
|
)
|
$
|
23,498
|
|||||||
|
Mortgage-backed agency securities
|
146,582
|
1,331
|
(1,771
|
)
|
146,142
|
|||||||||||
|
Obligations of states and political subdivisions
|
21,440
|
410
|
(360
|
)
|
21,490
|
|||||||||||
|
Equity securities
|
26
|
2
|
-
|
28
|
||||||||||||
|
Total
|
$
|
192,521
|
$
|
1,762
|
$
|
(3,125
|
)
|
$
|
191,158
|
|||||||
|
2012
|
||||||||||||||||
|
U.S. Treasury and agency securities
|
$
|
27,200
|
$
|
130
|
$
|
(14
|
)
|
$
|
27,316
|
|||||||
|
Mortgage-backed agency securities
|
158,829
|
2,324
|
(654
|
)
|
160,499
|
|||||||||||
|
Obligations of states and political subdivisions
|
17,551
|
740
|
(5
|
)
|
18,286
|
|||||||||||
|
Equity securities
|
26
|
2
|
-
|
28
|
||||||||||||
|
Total
|
$
|
203,606
|
$
|
3,196
|
$
|
(673
|
)
|
$
|
206,129
|
|||||||
The following table shows the gross unrealized loss and fair value of the Company's investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2013 and 2012.
|
Less than 12 Months
|
12 Months or Longer
|
Total
|
||||||||||||||||||||||
|
Thousands of dollars
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
||||||||||||||||||
|
2013
|
||||||||||||||||||||||||
|
U.S. Treasury and agency securities
|
$
|
14,544
|
$
|
(802
|
)
|
$
|
2,862
|
$
|
(192
|
)
|
$
|
17,406
|
$
|
(994
|
)
|
|||||||||
|
Mortgage-backed agency securities
|
70,385
|
(1,524
|
)
|
10,367
|
(247
|
)
|
80,752
|
(1,771
|
)
|
|||||||||||||||
|
Obligations of states and political subdivisions
|
6,926
|
(360
|
)
|
-
|
-
|
6,926
|
(360
|
)
|
||||||||||||||||
|
Total
|
$
|
91,855
|
$
|
(2,686
|
)
|
$
|
13,229
|
$
|
(439
|
)
|
$
|
105,084
|
$
|
(3,125
|
)
|
|||||||||
|
2012
|
||||||||||||||||||||||||
|
U.S. Treasury and agency securities
|
$
|
4,131
|
$
|
(14
|
)
|
$
|
-
|
$
|
-
|
$
|
4,131
|
$
|
(14
|
)
|
||||||||||
|
Mortgage-backed agency securities
|
54,538
|
(639
|
)
|
1,309
|
(15
|
)
|
55,847
|
(654
|
)
|
|||||||||||||||
|
Obligations of states and political subdivisions
|
941
|
(5
|
)
|
-
|
-
|
941
|
(5
|
)
|
||||||||||||||||
|
Total
|
$
|
59,610
|
$
|
(658
|
)
|
$
|
1,309
|
$
|
(15
|
)
|
$
|
60,919
|
$
|
(673
|
)
|
|||||||||
Unrealized losses within the investment portfolio are temporary. The Company performed an evaluation of its investments for other than temporary impairment, and no losses were recognized during 2013 or 2012. The unrealized losses on the Company's investment in available for sale securities were caused by interest rate changes. All of the Company's mortgage-backed securities are issued by U.S. Government-sponsored agencies. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company did not consider those investments to be other-than-temporarily impaired at December 31, 2013 or December 31, 2012.
The Company does not hold any collateralized debt obligations backed by trust preferred securities in its securities portfolio, nor any other securities that may be considered "Covered Funds" under the Final Volcker Rule of the Dodd-Frank Act.
The entire investment portfolio is classified as available for sale. However, management has no specific intent to sell any securities, and management believes that it will not have to sell any security before recovery of its cost basis. Sales activities for securities, for the years indicated are shown in the following table. All sales were of securities identified as available for sale.
|
Thousands of dollars
|
2013
|
2012
|
2011
|
|||||||||
|
Sales proceeds
|
$
|
12,753
|
$
|
2,847
|
$
|
-
|
||||||
|
Gross gains on sales
|
137
|
4
|
-
|
|||||||||
|
Gross loss on sales
|
(97
|
)
|
-
|
-
|
||||||||
|
Gross gains on calls
|
14
|
-
|
-
|
|||||||||
The fair value of securities available for sale by contractual maturity as of December 31, 2013 is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset-backed securities are included in the "Due in one year or less" category.
|
Thousands of dollars
|
Amortized Cost
|
Fair Value
|
||||||
|
Due in one year or less
|
$
|
13,689
|
$
|
13,648
|
||||
|
Due after one year through five years
|
26,326
|
25,723
|
||||||
|
Due after five years through ten years
|
5,898
|
5,617
|
||||||
|
Due after ten years
|
-
|
-
|
||||||
|
Mortgage-backed agency securities
|
146,582
|
146,142
|
||||||
|
Equity securities
|
26
|
28
|
||||||
|
Total securities
|
$
|
192,521
|
$
|
191,158
|
||||
Securities carried at $996,000 and $1,007,000 as of December 31, 2013 and 2012, respectively, were pledged to secure deposits of public funds, funds borrowed, repurchase agreements, and for other purposes as required by law.
The municipal portfolio contains a small level of geographic risk, as approximately 1.4% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan, 1.0% in Monroe County, Michigan and 3.5% in Washtenaw County, Michigan. The total amount of municipal obligations issued by political subdivisions located in these three counties is approximately $11.4 million. The Company owns no obligations issued by the City of Detroit.
NOTE 4 - LOANS
The following table shows total loans outstanding at December 31, 2013 and 2012 and the percentage change in balances from the prior year. All loans are domestic and contain no significant concentrations by industry or client.
|
Thousands of dollars
|
2013
|
% Change
|
2012
|
% Change
|
||||||||||||
|
Commercial construction & land development loans
|
$
|
20,756
|
-27.2
|
%
|
$
|
28,511
|
-4.0
|
%
|
||||||||
|
Owner-occupied commercial real estate loans
|
105,237
|
7.7
|
%
|
97,755
|
-1.1
|
%
|
||||||||||
|
Other commercial real estate loans
|
142,805
|
26.0
|
%
|
113,370
|
-13.2
|
%
|
||||||||||
|
Commercial & industrial loans
|
104,508
|
0.2
|
%
|
104,332
|
15.8
|
%
|
||||||||||
|
Residential mortgages
|
134,048
|
10.4
|
%
|
121,393
|
16.1
|
%
|
||||||||||
|
Consumer construction loans
|
17,369
|
43.3
|
%
|
12,123
|
21.0
|
%
|
||||||||||
|
Home equity loans
|
80,870
|
10.8
|
%
|
72,983
|
-2.6
|
%
|
||||||||||
|
Other consumer loans
|
39,861
|
17.3
|
%
|
33,969
|
50.5
|
%
|
||||||||||
|
Deferred loan fees and costs, overdrafts, in-process accounts
|
820
|
-63.4
|
%
|
2,242
|
-5.2
|
%
|
||||||||||
|
Total portfolio loans
|
$
|
646,274
|
10.2
|
%
|
$
|
586,678
|
4.1
|
%
|
||||||||
NOTE 5 - ALLOWANCE FOR LOAN LOSSES AND CREDIT RISK
An analysis of the allowance for loan losses for the twelve-month periods ended December 31, 2013, 2012 and 2011 follows:
|
Twelve Months Ended December 31, 2013
|
||||||||||||||||||||||||||||
|
Thousands of dollars
|
CLD (1)
|
Owner- Occupied CRE (2)
|
Other
CRE (2) |
Commercial & Industrial
|
Residential Mortgage
|
Personal Loans
|
Total
|
|||||||||||||||||||||
|
Allowance for Loan Losses:
|
||||||||||||||||||||||||||||
|
Balance, January 1
|
$
|
4,216
|
$
|
5,093
|
$
|
4,708
|
$
|
4,131
|
$
|
2,456
|
$
|
1,939
|
$
|
22,543
|
||||||||||||||
|
Provision charged to expense
|
(1,728
|
)
|
886
|
372
|
1,570
|
178
|
622
|
1,900
|
||||||||||||||||||||
|
Losses charged off
|
(809
|
)
|
(3,220
|
)
|
(336
|
)
|
(1,397
|
)
|
(200
|
)
|
(546
|
)
|
(6,508
|
)
|
||||||||||||||
|
Recoveries
|
1,214
|
379
|
303
|
120
|
100
|
396
|
2,512
|
|||||||||||||||||||||
|
Balance, December 31
|
$
|
2,893
|
$
|
3,138
|
$
|
5,047
|
$
|
4,424
|
$
|
2,534
|
$
|
2,411
|
$
|
20,447
|
||||||||||||||
|
Ending Balance:
|
||||||||||||||||||||||||||||
|
Individually evaluated for impairment
|
$
|
1,901
|
$
|
494
|
$
|
894
|
$
|
589
|
$
|
735
|
$
|
-
|
$
|
4,613
|
||||||||||||||
|
Collectively evaluated for impairment
|
992
|
2,644
|
4,153
|
3,835
|
1,799
|
2,411
|
15,834
|
|||||||||||||||||||||
|
Balance, December 31
|
$
|
2,893
|
$
|
3,138
|
$
|
5,047
|
$
|
4,424
|
$
|
2,534
|
$
|
2,411
|
$
|
20,447
|
||||||||||||||
|
Total Loans:
|
||||||||||||||||||||||||||||
|
Ending balance:
|
||||||||||||||||||||||||||||
|
Individually evaluated for impairment
|
$
|
4,698
|
$
|
2,785
|
$
|
4,858
|
$
|
2,390
|
$
|
4,659
|
$
|
343
|
$
|
19,733
|
||||||||||||||
|
Collectively evaluated for impairment
|
33,427
|
103,656
|
160,937
|
103,944
|
99,476
|
125,101
|
626,541
|
|||||||||||||||||||||
|
Total Loans
|
$
|
38,125
|
$
|
106,441
|
$
|
165,795
|
$
|
106,334
|
$
|
104,135
|
$
|
125,444
|
$
|
646,274
|
||||||||||||||
|
Twelve Months Ended December 31, 2012
|
||||||||||||||||||||||||||||
|
Thousands of dollars
|
CLD (1)
|
Owner- Occupied CRE (2)
|
Other
CRE (2) |
Commercial & Industrial
|
Residential Mortgage
|
Personal Loans
|
Total
|
|||||||||||||||||||||
|
Allowance for Loan Losses:
|
||||||||||||||||||||||||||||
|
Balance, January 1
|
$
|
3,676
|
$
|
3,875
|
$
|
4,721
|
$
|
4,741
|
$
|
1,931
|
$
|
1,689
|
$
|
20,633
|
||||||||||||||
|
Provision charged to expense
|
1,116
|
4,496
|
1,712
|
(662
|
)
|
1,226
|
462
|
8,350
|
||||||||||||||||||||
|
Losses charged off
|
(1,108
|
)
|
(3,346
|
)
|
(2,057
|
)
|
(1,768
|
)
|
(901
|
)
|
(707
|
)
|
(9,887
|
)
|
||||||||||||||
|
Recoveries
|
532
|
68
|
332
|
1,820
|
200
|
495
|
3,447
|
|||||||||||||||||||||
|
Balance, December 31
|
$
|
4,216
|
$
|
5,093
|
$
|
4,708
|
$
|
4,131
|
$
|
2,456
|
$
|
1,939
|
$
|
22,543
|
||||||||||||||
|
Ending balance:
|
||||||||||||||||||||||||||||
|
Individually evaluated for impairment
|
$
|
3,271
|
$
|
2,904
|
$
|
1,079
|
$
|
274
|
$
|
771
|
$
|
5
|
$
|
8,304
|
||||||||||||||
|
Collectively evaluated for impairment
|
945
|
2,189
|
3,629
|
3,857
|
1,685
|
1,934
|
14,239
|
|||||||||||||||||||||
|
Total Allowance for Loan Losses
|
$
|
4,216
|
$
|
5,093
|
$
|
4,708
|
$
|
4,131
|
$
|
2,456
|
$
|
1,939
|
$
|
22,543
|
||||||||||||||
|
Total Loans:
|
||||||||||||||||||||||||||||
|
Ending balance:
|
||||||||||||||||||||||||||||
|
Individually evaluated for impairment
|
$
|
8,224
|
$
|
10,263
|
$
|
7,797
|
$
|
2,049
|
$
|
5,561
|
$
|
394
|
$
|
34,288
|
||||||||||||||
|
Collectively evaluated for impairment
|
32,410
|
92,316
|
123,207
|
96,336
|
96,095
|
112,026
|
552,390
|
|||||||||||||||||||||
|
Total Loans
|
$
|
40,634
|
$
|
102,579
|
$
|
131,004
|
$
|
98,385
|
$
|
101,656
|
$
|
112,420
|
$
|
586,678
|
||||||||||||||
|
Twelve Months Ended December 31, 2011
|
||||||||||||||||||||
|
Thousands of dollars
|
Business & Commercial Mortgages
|
CLD (1)
|
Residential Mortgage
|
Personal Loans
|
Total
|
|||||||||||||||
|
Balance, January 1
|
$
|
16,672
|
$
|
3,248
|
$
|
2,661
|
$
|
2,582
|
$
|
25,163
|
||||||||||
|
Provision charged to expense
|
9,863
|
2,886
|
1,579
|
1,536
|
15,864
|
|||||||||||||||
|
Amounts related to change in allocation methodology
|
(2,246
|
)
|
49
|
(990
|
)
|
(527
|
)
|
(3,714
|
)
|
|||||||||||
|
Net provision after amounts related to change in allocation methodology
|
7,617
|
2,935
|
589
|
1,009
|
12,150
|
|||||||||||||||
|
Losses charged off
|
(12,063
|
)
|
(2,908
|
)
|
(1,387
|
)
|
(2,006
|
)
|
(18,364
|
)
|
||||||||||
|
Recoveries
|
1,111
|
278
|
68
|
227
|
1,684
|
|||||||||||||||
|
Balance, December 31
|
$
|
13,337
|
$
|
3,553
|
$
|
1,931
|
$
|
1,812
|
$
|
20,633
|
||||||||||
|
(1) Construction and Land Development loans
|
||||||||||||||||||||
|
(2) Commercial Real Estate loans
|
||||||||||||||||||||
Loan totals in Note 4 and certain tables below are based on categories of loans as classified within the Bank's regulatory reporting. As a result, they may differ from totals of similar classifications in the tables above.
Credit Exposure and Quality Indicators
The Company categorizes commercial and tax-exempt loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, management capacity, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed during the loan approval process and is updated as circumstances warrant. The risk characteristics of each loan portfolio segment are as follows:
Construction and Land Development. Construction and Land Development ("CLD") loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. CLD loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. CLD loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project.
Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
Commercial Real Estate. Commercial Real Estate ("CRE") consists of two segments – owner-occupied real estate loans and other commercial real estate loans. CRE loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.
The characteristics of properties securing the Company's commercial real estate portfolio are diverse, but have geographic location almost entirely in the Company's market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria.
In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.
Commercial & Industrial Loans. Commercial and industrial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Consumer. Consumer loans consist of two segments – residential mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio, and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and personal loans are secured by personal assets, such as automobiles or recreational vehicles.
Some personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and are spread over a large number of borrowers.
Internal Risk Categories
Commercial and tax-exempt loans that are analyzed individually are assigned one of eight internal risk categories. Categories 1-4 are considered to be Pass-rated loans. Other risk category definitions for individually-analyzed commercial and tax-exempt loans are as follows:
|
5
|
Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank's credit position at some future date.
|
|
|
|
|
6
|
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral securing the loans, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
|
|
|
|
|
7
|
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
|
|
|
|
|
8
|
Loss. Loans classified as loss are regarded as uncollectible and should be charged off.
|
Consumer loans are not rated on the above-listed risk categories, but are classified by their payment activity, either as performing, accruing restructured, delinquent less than 90 days, or nonperforming.
Quality indicators for portfolio loans as of December 31, 2013 and 2012 based on the Bank's internal risk categories are detailed in the following tables.
|
In thousands of dollars
|
At December 31, 2013
|
||||||||||||||||||||
|
Commercial & Tax-exempt Loans
|
CLD
|
Owner-Occupied CRE
|
Other CRE
|
Commercial & Industrial
|
Total Commercial
|
||||||||||||||||
|
Credit Risk Profile by Internally Assigned Rating
|
|||||||||||||||||||||
|
1-4
|
Pass
|
$
|
9,524
|
$
|
95,500
|
$
|
124,600
|
$
|
92,443
|
$
|
322,067
|
||||||||||
|
5
|
Special Mention
|
5,970
|
6,939
|
12,591
|
6,504
|
32,004
|
|||||||||||||||
|
6
|
Substandard
|
4,782
|
2,798
|
5,614
|
5,561
|
18,755
|
|||||||||||||||
|
7
|
Doubtful
|
480
|
-
|
-
|
-
|
480
|
|||||||||||||||
|
8
|
Loss
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Total Commercial & Tax-exempt Loans
|
$
|
20,756
|
$
|
105,237
|
$
|
142,805
|
$
|
104,508
|
$
|
373,306
|
|||||||||||
|
In thousands of dollars
|
At December 31, 2013
|
|||||||
|
Consumer Loans
|
Residential Mortgage
|
Consumer Construction
|
Home Equity
|
Other Consumer
|
Total Consumer
|
|||||||||||||||
|
Credit risk profile based on payment activity
|
||||||||||||||||||||
|
Performing
|
$
|
128,198
|
$
|
17,369
|
$
|
80,576
|
$
|
39,670
|
$
|
265,813
|
||||||||||
|
Accruing restructured
|
4,023
|
-
|
170
|
-
|
4,193
|
|||||||||||||||
|
Delinquent less than 90 days
|
372
|
-
|
59
|
82
|
513
|
|||||||||||||||
|
Nonperforming
|
1,455
|
-
|
65
|
109
|
1,629
|
|||||||||||||||
|
Total Consumer Loans
|
$
|
134,048
|
$
|
17,369
|
$
|
80,870
|
$
|
39,861
|
$
|
272,148
|
||||||||||
|
Subtotal Commercial, Tax-exempt & Consumer Loans
|
$
|
645,454
|
||||||||||||||||||
|
Deferred loan fees and costs, overdrafts, in-process accounts
|
820
|
|||||||||||||||||||
|
Total Portfolio Loans
|
$
|
646,274
|
||||||||||||||||||
|
In thousands of dollars
|
At December 31, 2012
|
||||||||||||||||||||
|
Commercial & Tax-exempt Loans
|
CLD
|
Owner-Occupied CRE
|
Other CRE
|
Commercial & Industrial
|
Total Commercial
|
||||||||||||||||
|
Credit Risk Profile by Internally Assigned Rating
|
|||||||||||||||||||||
|
1-4
|
Pass
|
$
|
12,813
|
$
|
78,507
|
$
|
86,445
|
$
|
91,711
|
$
|
269,476
|
||||||||||
|
5
|
Special Mention
|
7,378
|
11,510
|
17,073
|
5,104
|
41,065
|
|||||||||||||||
|
6
|
Substandard
|
7,840
|
7,738
|
9,852
|
7,475
|
32,905
|
|||||||||||||||
|
7
|
Doubtful
|
480
|
-
|
-
|
42
|
522
|
|||||||||||||||
|
8
|
Loss
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Total Commercial & Tax-exempt Loans
|
$
|
28,511
|
$
|
97,755
|
$
|
113,370
|
$
|
104,332
|
$
|
343,968
|
|||||||||||
|
Consumer Loans
|
Residential Mortgage
|
Consumer Construction
|
Home Equity
|
Other Consumer
|
Total Consumer
|
|||||||||||||||
|
Credit risk profile based on payment activity
|
||||||||||||||||||||
|
Performing
|
$
|
114,071
|
$
|
12,123
|
$
|
72,344
|
$
|
33,764
|
$
|
232,302
|
||||||||||
|
Accruing restructured
|
3,267
|
-
|
171
|
-
|
3,438
|
|||||||||||||||
|
Delinquent less than 90 days
|
1,714
|
-
|
343
|
150
|
2,207
|
|||||||||||||||
|
Nonperforming
|
2,341
|
-
|
125
|
55
|
2,521
|
|||||||||||||||
|
Total Consumer Loans
|
$
|
121,393
|
$
|
12,123
|
$
|
72,983
|
$
|
33,969
|
$
|
240,468
|
||||||||||
|
Subtotal Commercial, Tax-exempt & Consumer Loans
|
$
|
584,436
|
||||||||||||||||||
|
Deferred loan fees and costs, overdrafts, in-process accounts
|
2,242
|
|||||||||||||||||||
|
Total Portfolio Loans
|
$
|
586,678
|
||||||||||||||||||
Loan Portfolio Aging Analysis
The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Schedules detailing the loan portfolio aging analysis as of December 31, 2013 and 2012 follow.
|
Thousands of dollars
|
Delinquent Loans
|
|||||||||||||||||||||||||||
|
As of December 31, 2013
|
30-89 Days Past Due
|
90 Days and Over (a) (1)
|
Total Past
Due (b) |
Current
(c-b-d) |
Total Portfolio Loans (c)
|
Nonaccrual Loans (d)
|
Total Non-performing (a+d)
|
|||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||||||
|
Commercial CLD
|
$
|
24
|
$
|
-
|
$
|
24
|
$
|
16,872
|
$
|
20,756
|
$
|
3,860
|
$
|
3,860
|
||||||||||||||
|
Owner-Occupied CRE
|
128
|
-
|
128
|
104,387
|
105,237
|
722
|
722
|
|||||||||||||||||||||
|
Other CRE
|
-
|
-
|
-
|
142,681
|
142,805
|
124
|
124
|
|||||||||||||||||||||
|
Commercial & Industrial
|
181
|
-
|
181
|
102,566
|
104,508
|
1,761
|
1,761
|
|||||||||||||||||||||
|
Consumer
|
||||||||||||||||||||||||||||
|
Residential Mortgage
|
372
|
169
|
541
|
132,221
|
134,048
|
1,286
|
1,455
|
|||||||||||||||||||||
|
Consumer Construction
|
-
|
-
|
-
|
17,369
|
17,369
|
-
|
-
|
|||||||||||||||||||||
|
Home Equity
|
59
|
-
|
59
|
80,746
|
80,870
|
65
|
65
|
|||||||||||||||||||||
|
Other Consumer
|
82
|
-
|
82
|
39,670
|
39,861
|
109
|
109
|
|||||||||||||||||||||
|
Subtotal
|
$
|
846
|
$
|
169
|
$
|
1,015
|
$
|
636,512
|
$
|
645,454
|
$
|
7,927
|
$
|
8,096
|
||||||||||||||
|
Deferred loan fees and costs, overdrafts, in-process accounts
|
820
|
|||||||||||||||||||||||||||
|
Total Portfolio Loans
|
$
|
646,274
|
||||||||||||||||||||||||||
|
Thousands of dollars
|
Delinquent Loans
|
|||||||||||||||||||||||||||
|
As of December 31, 2012
|
30-89 Days Past Due
|
90 Days and Over (a) (1)
|
Total Past
Due (b) |
Current
(c-b-d) |
Total Portfolio Loans (c)
|
Nonaccrual Loans (d)
|
Total Non-performing (a+d)
|
|||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||||||
|
Commercial CLD
|
$
|
117
|
$
|
-
|
$
|
117
|
$
|
24,545
|
$
|
28,511
|
$
|
3,849
|
$
|
3,849
|
||||||||||||||
|
Owner-Occupied CRE
|
-
|
-
|
-
|
92,498
|
97,755
|
5,257
|
5,257
|
|||||||||||||||||||||
|
Other CRE
|
-
|
-
|
-
|
109,638
|
113,370
|
3,732
|
3,732
|
|||||||||||||||||||||
|
Commercial & Industrial
|
683
|
-
|
683
|
102,257
|
104,332
|
1,392
|
1,392
|
|||||||||||||||||||||
|
Consumer
|
||||||||||||||||||||||||||||
|
Residential Mortgage
|
1,714
|
-
|
1,714
|
117,338
|
121,393
|
2,341
|
2,341
|
|||||||||||||||||||||
|
Consumer Construction
|
-
|
-
|
-
|
12,123
|
12,123
|
-
|
-
|
|||||||||||||||||||||
|
Home Equity
|
343
|
37
|
380
|
72,515
|
72,983
|
88
|
125
|
|||||||||||||||||||||
|
Other Consumer
|
150
|
-
|
150
|
33,764
|
33,969
|
55
|
55
|
|||||||||||||||||||||
|
Subtotal
|
$
|
3,007
|
$
|
37
|
$
|
3,044
|
$
|
564,678
|
$
|
584,436
|
$
|
16,714
|
$
|
16,751
|
||||||||||||||
|
Deferred loan fees and costs, overdrafts, in-process accounts
|
2,242
|
|||||||||||||||||||||||||||
|
Total Portfolio Loans
|
$
|
586,678
|
||||||||||||||||||||||||||
|
(1) All are accruing.
|
||||||||||||||||||||||||||||
Impaired Loans
Information regarding impaired loans as of December 31, 2013 and 2012 follows.
|
December 31, 2013
|
December 31, 2012
|
|||||||||||||||||||||||
|
Thousands of dollars
|
Recorded Balance
|
Unpaid Principal Balance
|
Specific Allowance
|
Recorded Balance
|
Unpaid Principal Balance
|
Specific Allowance
|
||||||||||||||||||
|
Loans without a specific valuation allowance
|
||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||
|
Commercial CLD
|
$
|
445
|
$
|
753
|
$
|
-
|
$
|
654
|
$
|
1,673
|
$
|
-
|
||||||||||||
|
Owner-Occupied CRE
|
1,248
|
2,086
|
-
|
4,181
|
6,267
|
-
|
||||||||||||||||||
|
Other CRE
|
929
|
1,238
|
-
|
4,438
|
6,158
|
-
|
||||||||||||||||||
|
Commercial & Industrial
|
351
|
3,309
|
-
|
1,640
|
3,992
|
-
|
||||||||||||||||||
|
Consumer
|
||||||||||||||||||||||||
|
Residential Mortgage
|
1,590
|
1,606
|
-
|
2,207
|
2,989
|
-
|
||||||||||||||||||
|
Home Equity
|
268
|
268
|
-
|
232
|
232
|
-
|
||||||||||||||||||
|
Other Consumer
|
75
|
75
|
-
|
157
|
157
|
-
|
||||||||||||||||||
|
Subtotal
|
$
|
4,906
|
$
|
9,335
|
$
|
-
|
$
|
13,509
|
$
|
21,468
|
$
|
-
|
||||||||||||
|
Loans with a specific valuation allowance
|
||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||
|
Commercial CLD
|
$
|
4,253
|
$
|
4,476
|
$
|
1,901
|
$
|
7,570
|
$
|
7,629
|
$
|
3,271
|
||||||||||||
|
Owner-Occupied CRE
|
1,537
|
1,787
|
494
|
6,082
|
7,495
|
2,904
|
||||||||||||||||||
|
Other CRE
|
3,929
|
3,929
|
894
|
3,359
|
3,359
|
1,079
|
||||||||||||||||||
|
Commercial & Industrial
|
2,039
|
2,046
|
589
|
409
|
409
|
274
|
||||||||||||||||||
|
Consumer
|
||||||||||||||||||||||||
|
Residential Mortgage
|
3,069
|
3,069
|
735
|
3,354
|
3,817
|
771
|
||||||||||||||||||
|
Other Consumer
|
-
|
-
|
-
|
5
|
5
|
5
|
||||||||||||||||||
|
Subtotal
|
$
|
14,827
|
$
|
15,307
|
$
|
4,613
|
$
|
20,779
|
$
|
22,714
|
$
|
8,304
|
||||||||||||
|
Total Impaired Loans
|
||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||
|
Commercial CLD
|
$
|
4,698
|
$
|
5,229
|
$
|
1,901
|
$
|
8,224
|
$
|
9,302
|
$
|
3,271
|
||||||||||||
|
Owner-Occupied CRE
|
2,785
|
3,873
|
494
|
10,263
|
13,762
|
2,904
|
||||||||||||||||||
|
Other CRE
|
4,858
|
5,167
|
894
|
7,797
|
9,517
|
1,079
|
||||||||||||||||||
|
Commercial & Industrial
|
2,390
|
5,355
|
589
|
2,049
|
4,401
|
274
|
||||||||||||||||||
|
Consumer
|
||||||||||||||||||||||||
|
Residential Mortgage
|
4,659
|
4,675
|
735
|
5,561
|
6,806
|
771
|
||||||||||||||||||
|
Home Equity
|
268
|
268
|
-
|
232
|
232
|
-
|
||||||||||||||||||
|
Other Consumer
|
75
|
75
|
-
|
162
|
162
|
5
|
||||||||||||||||||
|
Total Impaired Loans
|
$
|
19,733
|
$
|
24,642
|
$
|
4,613
|
$
|
34,288
|
$
|
44,182
|
$
|
8,304
|
||||||||||||
Information regarding average investment in impaired loans and interest income recognized on those loans for the periods ended December 31, 2013, 2012 and 2011 is shown below.
|
Twelve months ended December 31,
|
||||||||||||||||||||||||
|
2013
|
2012
|
2011
|
||||||||||||||||||||||
|
Thousands of dollars
|
Average Investment in Impaired Loans
|
Interest Income Recognized
|
Average Investment in Impaired Loans
|
Interest Income Recognized
|
Average Investment in Impaired Loans
|
Interest Income Recognized
|
||||||||||||||||||
|
Loans without a specific valuation allowance
|
||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||
|
Commercial CLD
|
$
|
461
|
$
|
-
|
$
|
3,656
|
$
|
-
|
$
|
7,222
|
$
|
-
|
||||||||||||
|
Owner-Occupied CRE
|
1,988
|
34
|
3,148
|
64
|
1,997
|
54
|
||||||||||||||||||
|
Other CRE
|
3,339
|
38
|
8,373
|
135
|
5,822
|
165
|
||||||||||||||||||
|
Commercial & Industrial
|
811
|
21
|
1,927
|
35
|
1,141
|
11
|
||||||||||||||||||
|
Consumer
|
||||||||||||||||||||||||
|
Residential Mortgage
|
1,072
|
27
|
1,319
|
23
|
867
|
4
|
||||||||||||||||||
|
Home Equity
|
29
|
5
|
30
|
5
|
295
|
-
|
||||||||||||||||||
|
Other Consumer
|
128
|
-
|
154
|
-
|
358
|
-
|
||||||||||||||||||
|
Subtotal
|
$
|
7,828
|
$
|
125
|
$
|
18,607
|
$
|
262
|
$
|
17,702
|
$
|
234
|
||||||||||||
|
Loans with a specific valuation allowance
|
||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||
|
Commercial CLD
|
$
|
5,165
|
$
|
111
|
$
|
8,236
|
$
|
350
|
$
|
6,956
|
$
|
328
|
||||||||||||
|
Owner-Occupied CRE
|
2,850
|
71
|
6,527
|
165
|
5,441
|
107
|
||||||||||||||||||
|
Other CRE
|
3,645
|
150
|
4,096
|
176
|
13,502
|
574
|
||||||||||||||||||
|
Commercial & Industrial
|
1,718
|
79
|
542
|
46
|
1,727
|
38
|
||||||||||||||||||
|
Consumer
|
||||||||||||||||||||||||
|
Residential Mortgage
|
3,584
|
139
|
4,122
|
127
|
5,740
|
148
|
||||||||||||||||||
|
Home Equity
|
-
|
-
|
-
|
-
|
184
|
5
|
||||||||||||||||||
|
Other Consumer
|
-
|
-
|
43
|
2
|
5
|
1
|
||||||||||||||||||
|
Subtotal
|
$
|
16,962
|
$
|
550
|
$
|
23,566
|
$
|
866
|
$
|
33,555
|
$
|
1,201
|
||||||||||||
|
Total Impaired Loans
|
||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||
|
Commercial CLD
|
$
|
5,626
|
$
|
111
|
$
|
11,892
|
$
|
350
|
$
|
14,178
|
$
|
328
|
||||||||||||
|
Owner-Occupied CRE
|
4,838
|
105
|
9,675
|
229
|
7,438
|
161
|
||||||||||||||||||
|
Other CRE
|
6,984
|
188
|
12,469
|
311
|
19,324
|
739
|
||||||||||||||||||
|
Commercial & Industrial
|
2,529
|
100
|
2,469
|
81
|
2,868
|
49
|
||||||||||||||||||
|
Consumer
|
||||||||||||||||||||||||
|
Residential Mortgage
|
4,656
|
166
|
5,441
|
150
|
6,607
|
152
|
||||||||||||||||||
|
Home Equity
|
29
|
5
|
30
|
5
|
479
|
5
|
||||||||||||||||||
|
Other Consumer
|
128
|
-
|
197
|
2
|
363
|
1
|
||||||||||||||||||
|
Total Impaired Loans
|
$
|
24,790
|
$
|
675
|
$
|
42,173
|
$
|
1,128
|
$
|
51,257
|
$
|
1,435
|
||||||||||||
Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, at which time payments received are recorded as reductions to principal. Subsequent payments on nonaccrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the judgment of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status. These policies apply to each class of the Company's loan portfolio.
Troubled Debt Restructurings
In the course of working with borrowers, the Bank may choose to restructure the contractual terms of certain loans. In this scenario, the Bank attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Bank to identify if a troubled debt restructuring ("TDR") has occurred, which is when, for economic or legal reasons related to a borrower's financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with the borrower's current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.
If such efforts by the Bank do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Bank may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.
It is the Bank's policy to have any restructured loans that are on nonaccrual status prior to being restructured, remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. The balance of nonaccrual restructured loans, which is included in nonaccrual loans, was $4.2 million at December 31, 2013 and $10.8 million at December 31, 2012.
If a restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status. The balance of accruing restructured loans was $11.0 million at December 31, 2013 and $15.8 million at December 31, 2012.
All TDRs are considered impaired by the Company. Loans that are considered TDRs are classified as performing unless they are on nonaccrual status or greater than 90 days delinquent as of the end of the most recent quarter. Under Company policy, a loan may be removed from TDR status when it is determined that the loan has performed according to its modified terms for a sustained period of repayment performance (generally not less than six months and not during the calendar year in which the restructuring took place), and the restructuring agreement specified an interest rate greater than or equal to an acceptable rate for a comparable new loan. On a quarterly basis, the Company individually reviews all TDR loans to determine if a loan meets these criteria.
Accruing restructured loans at December 31, 2013 are comprised of two categories of loans on which interest is being accrued under their restructured terms, and the loans are current or less than ninety days past due. The first category consists of commercial loans, primarily comprised of business loans that have been temporarily modified as interest-only loans, generally for a period of up to one year, without a sufficient corresponding increase in the interest rate.
Within this category are CLD loans that have been renewed as interest only, generally for a period of up to one year, to assist the borrower. The Bank does not generally forgive principal or interest on restructured loans. However, when a loan is restructured, principal is generally received on a delayed basis as compared to the original repayment schedule. CLD loans that are restructured are generally modified to require interest-only for a period of time. The Bank does not generally reduce interest rates on restructured commercial loans.
The second category included in accruing restructured loans consists of residential mortgage and home equity loans whose terms have been restructured at less than market terms and include rate modifications, extension of maturity, and forbearance.
The following table presents information regarding newly-classified troubled debt restructurings for the twelve-month periods ended December 31, 2013 and 2012.
|
Newly Classified Accruing Troubled Debt Restructurings
|
||||||||||||||||||||||||
|
Twelve months ended
|
December 31, 2013
|
December 31, 2012
|
||||||||||||||||||||||
|
Dollars in thousands
|
Total Number of Loans
|
Pre-Modification Outstanding Recorded Balance
|
Post-Modification Outstanding Recorded Balance
|
Total Number of Loans
|
Pre-Modification Outstanding Recorded Balance
|
Post-Modification Outstanding Recorded Balance
|
||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||
|
Commercial CLD
|
-
|
$
|
-
|
$
|
-
|
1
|
$
|
300
|
$
|
300
|
||||||||||||||
|
Owner-Occupied CRE
|
2
|
182
|
182
|
6
|
1,271
|
1,271
|
||||||||||||||||||
|
Other CRE
|
1
|
665
|
665
|
4
|
2,847
|
2,847
|
||||||||||||||||||
|
Commercial & Industrial
|
-
|
-
|
-
|
1
|
190
|
190
|
||||||||||||||||||
|
Consumer
|
||||||||||||||||||||||||
|
Residential Mortgage
|
4
|
648
|
648
|
2
|
224
|
224
|
||||||||||||||||||
|
Total
|
7
|
$
|
1,495
|
$
|
1,495
|
14
|
$
|
4,832
|
$
|
4,832
|
||||||||||||||
The table below provides a breakdown of accruing restructured loans by type at December 31, 2013. The table also includes the average yield on restructured loans and the yield for the entire portfolio, for commercial loans and the residential mortgage and home equity line portfolio, for the fourth quarter of 2013.
|
December 31, 2013
|
Fourth Quarter
|
|||||||||||||||
|
Dollars in thousands
|
Number of Loans
|
Recorded Balance
|
Average Yield
|
Portfolio Yield
|
||||||||||||
|
CLD Loans
|
4
|
$
|
1,586
|
|||||||||||||
|
Other Commercial Loans
|
13
|
5,185
|
||||||||||||||
|
Total Commercial Loans
|
17
|
6,771
|
4.96
|
%
|
5.04
|
%
|
||||||||||
|
Residential Mortgage & Home Equity Loans
|
20
|
4,193
|
3.56
|
%
|
4.70
|
%
|
||||||||||
|
Total accruing restructured loans
|
37
|
$
|
10,964
|
|||||||||||||
The Company has no personal loans other than the loans described above that are classified as troubled debt restructurings.
With regard to determination of the amount of the allowance for loan losses, all restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.
A loan is considered to be in payment default generally once it is 90 days contractually past due under the modified terms. Information regarding troubled debt restructurings that subsequently defaulted is shown below.
|
Twelve months ended
|
December 31, 2013
|
December 31, 2012
|
||||||||||||||
|
Dollars in thousands
|
Number of Loans
|
Recorded Balance
|
Number of Loans
|
Recorded Balance
|
||||||||||||
|
Commercial
|
||||||||||||||||
|
Commercial CLD
|
-
|
$
|
-
|
4
|
$
|
3,423
|
||||||||||
|
Owner-Occupied CRE
|
-
|
-
|
2
|
239
|
||||||||||||
|
Total
|
-
|
$
|
-
|
6
|
$
|
3,662
|
||||||||||
Since the Company treats accruing TDR's as impaired loans and evaluates them individually for impairment, the allowance for loan losses is not generally affected by a subsequent default. There were no charge-offs of TDR's that subsequently defaulted as described above for the twelve months ended December 31, 2013.
NOTE 6 - LOAN SERVICING
Loans serviced for others are not included in the accompanying consolidated financial statements. The unpaid principal balance of loans serviced for others at December 31, 2013 and December 31, 2012 were as follows:
|
In thousands of dollars
|
12/31/13
|
12/31/12
|
Change
|
Percent
|
||||||||||||
|
Total loans serviced
|
$
|
978,204
|
$
|
853,761
|
$
|
124,443
|
14.6
|
%
|
||||||||
Unamortized loan servicing rights are included in accrued interest receivable and other assets on the consolidated balance sheet, for the twelve month period ended December 31, 2013 and 2012, are shown below.
|
In thousands of dollars
|
2013
|
2012
|
||||||
|
Balance, January 1
|
$
|
6,378
|
$
|
5,405
|
||||
|
Amount capitalized
|
2,568
|
2,816
|
||||||
|
Amount amortized
|
(1,559
|
)
|
(1,843
|
)
|
||||
|
Balance, December 31
|
$
|
7,387
|
$
|
6,378
|
||||
The fair value of servicing rights was as follows at December 31:
|
In thousands of dollars
|
2013
|
2012
|
||||||
|
Fair value, January 1
|
$
|
8,285
|
$
|
7,331
|
||||
|
Fair value, December 31
|
$
|
12,127
|
$
|
8,285
|
||||
NOTE 7 - PREMISES AND EQUIPMENT
Depreciation expense was approximately $1,090,000 in 2013, $1,106,000 in 2012 and $1,124,000 in 2011. Premises and equipment as of December 31 consisted of the following:
|
In thousands of dollars
|
2013
|
2012
|
||||||
|
Land
|
$
|
1,863
|
$
|
1,863
|
||||
|
Buildings and improvements, including building in progress
|
15,346
|
15,094
|
||||||
|
Furniture and equipment
|
15,541
|
15,236
|
||||||
|
Total cost
|
32,750
|
32,193
|
||||||
|
Less accumulated depreciation
|
(22,563
|
)
|
(21,474
|
)
|
||||
|
Premises and equipment, net
|
$
|
10,187
|
$
|
10,719
|
||||
The Company has a small number of non-cancellable operating leases, primarily for banking facilities, that expire over the next fifteen years. The leases generally contain renewal options for periods ranging from one to five years. Rental expense for these leases was $1.3 million for the year ended December 31, 2013, $1.3 million for the year ended December 31, 2012, and $1.2 million for the year ended December 31, 2011.
Future minimum lease payments under operating leases are shown in the table below:
|
In thousands of dollars
|
||||
|
2014
|
$
|
1,258
|
||
|
2015
|
1,170
|
|||
|
2016
|
1,122
|
|||
|
2017
|
1,104
|
|||
|
2018
|
1,093
|
|||
|
Thereafter
|
1,795
|
|||
|
Total Minimum Lease Payments
|
$
|
7,542
|
||
NOTE 8 - DEPOSITS
Information relating to maturities of time deposits as of December 31 is summarized below:
|
In thousands of dollars
|
2013
|
2012
|
||||||
|
Within one year
|
$
|
116,850
|
$
|
141,325
|
||||
|
Between one and two years
|
33,704
|
56,667
|
||||||
|
Between two and three years
|
6,308
|
14,777
|
||||||
|
Between three and four years
|
1,960
|
2,904
|
||||||
|
Between four and five years
|
4,027
|
1,601
|
||||||
|
More than five years
|
107
|
-
|
||||||
|
Total time deposits
|
$
|
162,956
|
$
|
217,274
|
||||
|
Interest bearing time deposits in denominations of $100,000 or more
|
$
|
51,748
|
$
|
74,795
|
||||
NOTE 9 - SHORT TERM BORROWINGS
The Company has several credit facilities in place for short term borrowing which are used on occasion as a source of liquidity. These facilities consist of borrowing authority totaling $29.0 million from correspondent banks to purchase federal funds on a daily basis. There were no federal funds purchased outstanding at December 31, 2013 and 2012.
The Bank may also enter into sales of securities under agreements to repurchase ("repurchase agreements"). These agreements generally mature within one to 120 days from the transaction date. U.S. Treasury, agency and other securities involved with the agreements are recorded as assets and are generally held in safekeeping by correspondent banks. Repurchase agreements are offered principally to certain clients as an investment alternative to deposit products. There were no balances outstanding at any time during 2013 or 2012.
NOTE 10 - BORROWINGS
The Bank carried fixed rate, non-callable advances from the Federal Home Loan Bank (FHLB) of Indianapolis totaling $12.0 million and $22.0 million at December 31, 2013 and 2012, respectively. As of December 31, 2013, the rates on the advances ranged from 1.77% to 5.33% with a weighted average rate of 2.35%.
Advances are primarily collateralized by residential mortgage loans under a blanket security agreement. Additional coverage is provided by Other Real Estate Related ("ORER") and Community Financial Institution ("CFI") collateral. The unpaid principal balance of the loans pledged as collateral required is between 155% and 250%, depending on the type of collateral, and was $184.1 million at year-end 2013. Interest payments are made monthly, with principal due annually and at maturity. If principal payments are paid prior to maturity, advances are subject to a prepayment penalty.
The Company entered into a Business Loan Agreement with Chemical Bank (the "Loan Agreement") and a revolving line of credit as of September 16, 2013. The Loan Agreement provides for a $10.0 million line of credit by Chemical Bank to the Company at an interest rate of prime plus 0.125% (3.375% as of December 31, 2013). The Company will pay quarterly payments of accrued interest, and the balance of all outstanding principal and accrued interest will become due on September 16, 2015. As of December 31, 2013, the Company had an outstanding principal balance of $10.0 million on the line of credit.
The Loan Agreement contains customary affirmative and negative covenants and events of default. Affirmative covenants include the maintenance of certain minimum capital ratios, a maximum net charge off to average loan ratio, a maximum non-performing loan to total assets ratio, a minimum return on average assets, a minimum return on average equity and a limit on the amount of dividends that the Company may pay to holders of common stock.
If return on average assets falls below a certain specified level, then the Company's quarterly dividend payment to common shareholders could not be increased and the payout ratio could not exceed 40%. Negative covenants include restrictions on additional indebtedness, and a covenant not to merge, acquire or consolidate with another entity without Chemical Bank's consent. Events of default include payment defaults, false representations, insolvency and certain other events.
As security for its obligations under the Loan Agreement, the Company pledged to Chemical Bank all of the outstanding common stock of the Bank.
Maturities and scheduled principal payments for the FHLB advances and Chemical Bank line of credit over the next five years as of December 31 are shown below.
|
In thousands of dollars
|
FHLB Advances
|
Chemical Bank LOC
|
Total Other Borrowings
|
|||||||||
|
Within one year
|
$
|
41
|
$
|
-
|
$
|
41
|
||||||
|
Between one and two years
|
44
|
10,000
|
10,044
|
|||||||||
|
Between two and three years
|
10,047
|
-
|
10,047
|
|||||||||
|
Between three and four years
|
51
|
-
|
51
|
|||||||||
|
Between four and five years
|
54
|
-
|
54
|
|||||||||
|
More than five years
|
1,724
|
-
|
1,724
|
|||||||||
|
Total
|
$
|
11,961
|
$
|
10,000
|
$
|
21,961
|
||||||
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet financing needs of its clients. These financial instruments include commitments to make loans, unused lines of credit, and letters of credit. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank follows the same credit policy to make such commitments as is followed for loans and investments recorded in the consolidated financial statements. The Bank's commitments to make loans are agreements to extend credit at predetermined terms, as long as the client continues to meet specified criteria, with fixed expiration dates or termination clauses.
The following table shows the commitments to make loans and the unused lines of credit available to clients at December 31:
|
2013
|
2012
|
|||||||||||||||
|
In thousands of dollars
|
Variable Rate
|
Fixed Rate
|
Variable Rate
|
Fixed Rate
|
||||||||||||
|
Commitments to make loans
|
$
|
7,022
|
$
|
1,191
|
$
|
8,690
|
$
|
5,780
|
||||||||
|
Unused lines of credit
|
125,607
|
11,870
|
101,997
|
12,544
|
||||||||||||
|
Standby letters of credit
|
8,729
|
-
|
9,160
|
-
|
||||||||||||
Commitments to make loans generally expire within thirty to ninety days, while unused lines of credit expire at the maturity date of the individual loans. At December 31, 2013, the rates for amounts in the fixed rate category ranged from 3.38% to 5.75%.
In 2001, the Bank entered into a limited partnership agreement to purchase tax credits awarded from the construction, ownership and management of an affordable housing project and a residual interest in the real estate. As of December 31, 2013 and 2012, the total recorded investment including the obligation to make additional future investments was $1,054,000 and $920,000, respectively, and was included in other assets. As of December 31, 2013 and 2012, the obligation of the Bank to the limited partnership was $72,000 and $260,000, respectively, which was reported in other liabilities. While the Bank is a 99% partner, the investment is accounted for on the equity method as the Bank is a limited partner and has no control over the operation and management of the partnership or the affordable housing project.
NOTE 12 - FEDERAL INCOME TAX
Income tax expense (benefit) consists of the following for the years ended December 31:
|
In thousands of dollars
|
2013
|
2012
|
2011
|
|||||||||
|
Current
|
$
|
1,845
|
$
|
498
|
$
|
238
|
||||||
|
Deferred
|
1,973
|
1,142
|
(661
|
)
|
||||||||
|
Total income tax expense (benefit)
|
$
|
3,818
|
$
|
1,640
|
$
|
(423
|
)
|
|||||
The components of deferred tax assets and liabilities at December 31 are as follows:
|
In thousands of dollars
|
2013
|
2012
|
||||||
|
Deferred tax assets:
|
||||||||
|
Allowance for loan losses
|
$
|
6,952
|
$
|
7,665
|
||||
|
Other real estate owned
|
485
|
1,118
|
||||||
|
Deferred compensation
|
901
|
833
|
||||||
|
Low income housing and Alternative Minimum Tax credit
|
1,401
|
1,635
|
||||||
|
Net Operating Loss
|
-
|
539
|
||||||
|
Unrealized depreciation on securities available for sale
|
463
|
-
|
||||||
|
Other
|
913
|
763
|
||||||
|
Total deferred tax assets
|
$
|
11,115
|
$
|
12,553
|
||||
|
Deferred tax liabilities:
|
||||||||
|
Property and equipment
|
$
|
(212
|
)
|
$
|
(376
|
)
|
||
|
Mortgage servicing rights
|
(2,509
|
)
|
(2,169
|
)
|
||||
|
Unrealized appreciation on securities available for sale
|
-
|
(858
|
)
|
|||||
|
Other
|
(309
|
)
|
(413
|
)
|
||||
|
Total deferred tax liabilities
|
$
|
(3,030
|
)
|
$
|
(3,816
|
)
|
||
|
Net deferred tax asset
|
$
|
8,085
|
$
|
8,737
|
||||
As of December 31, 2013, the Company had approximately $1.4 million of low income housing and alternative minimum tax credits available to offset future federal income taxes. The low income housing credits expire in 2028 through 2032, and the alternative minimum tax credits have no expiration date.
The Company's net deferred tax asset was $8.1 million at December 31, 2013. The Company's net deferred tax asset is included in the category "Accrued interest receivable and other assets" on the balance sheet. A valuation allowance related to deferred tax assets is required when it is considered likely that all or part of the benefit related to such assets will not be realized.
The following lists the evidence considered in determining whether a valuation allowance was necessary for deferred tax assets:
Negative Evidence
While the Company fully utilized its net operating loss carry-forward in 2013, the Company has low income housing and alternative minimum tax credit carry-forwards of $673,000 and $729,000, respectively, as of December 31, 2013.
Positive Evidence
|
1.
|
The Company had many years of consistently profitable operations before 2009.
|
|
2.
|
The Company's tax credit carry-forward position of $1.4 million at December 31, 2013, which is not large in comparison to historical profitability (taxable income of $41.6 million from 2004 to 2008 and $14.0 million for 2012 to 2013).
|
|
3.
|
The Company can carry-forward low income housing credits for up to 20 years and the alternative minimum tax credits have no expiration date.
|
|
4.
|
The Company's pre-tax loss has been reduced from $14.5 million in 2009 to $6.6 million in 2010; the Company generated a pre-tax profit of $0.5 million in 2011, $6.1 million in 2012, and $12.6 million for 2013.
|
|
5.
|
The Company's 2009-2010 losses were due to a goodwill impairment of $3.5 million in 2009 along with high provision for loan losses, which have been reduced from $25.8 million in 2009 to $21.5 million in 2010, $12.2 million in 2011, $8.4 million in 2012 and $1.9 million in 2013.
|
|
6.
|
The Company believes it has returned to sustained profitability as a result of strong core earnings and continued reduction in loan losses.
|
|
7.
|
The Company does have available certain tax planning strategies, including:
|
|
a.
|
Sale and leaseback of premises
|
|
b.
|
Sale of mortgage servicing rights
|
|
c.
|
Sale of securities
|
Based upon its analysis of the evidence (both negative and positive), management has determined that no valuation allowance was required at December 31, 2013 or 2012.
Reconciliation between total federal income tax and the amount computed through the use of the federal statutory tax rate for the years ended is as follows:
|
In thousands of dollars
|
2013
|
2012
|
2011
|
|||||||||
|
Income taxes at statutory rate of 34%
|
$
|
4,295
|
$
|
2,076
|
$
|
169
|
||||||
|
Non-taxable income, net of nondeductible interest expense
|
(247
|
)
|
(232
|
)
|
(289
|
)
|
||||||
|
Income on non-taxable bank owned life insurance
|
(135
|
)
|
(143
|
)
|
(145
|
)
|
||||||
|
Affordable housing credit
|
(156
|
)
|
(188
|
)
|
(188
|
)
|
||||||
|
Non-deductible legal and accounting fees
|
15
|
109
|
-
|
|||||||||
|
Other
|
46
|
18
|
30
|
|||||||||
|
Total federal income tax (benefit)
|
$
|
3,818
|
$
|
1,640
|
$
|
(423
|
)
|
|||||
NOTE 13 - RELATED PARTY TRANSACTIONS
Related Party Loans
Certain directors and executive officers of the Company and the Bank, including their immediate families and companies in which they are principal owners, are clients of the Bank. Loans to these parties were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Company and the Bank, and did not, in the judgment of management, involve more than normal credit risk or present other unfavorable features. None of these loans were in default at December 31, 2013. The aggregate amount of these loans at December 31, 2012 was $763,000. That balance was adjusted to exclude directors and officers that were not with the Company at the end of 2013.
During 2013, new and newly reportable loans to such related parties amounted to $301,000 and repayments amounted to $98,000, resulting in a balance at December 31, 2013 of $966,000. Related party deposits totaled $2,007,000 at December 31, 2013 and $2,064,000 at December 31, 2012. The balance of deposits at December 31, 2012 was adjusted to exclude directors and officers that were not with the Company at the end of 2013.
NOTE 14 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Banking laws and regulations restrict the amount the Bank can transfer to the Company in the form of cash dividends and loans. It is not the intent of management to pay dividends in amounts that would reduce the capital of the Bank to a level below that which is considered prudent by management and in accordance with the guidelines of regulatory authorities.
NOTE 15 - EMPLOYEE BENEFIT PLANS
Employee Savings Plan
The Company maintains a 401(k) employee savings plan ("plan") which is available to substantially all employees. Individual employees may make contributions to the plan up to 100% of their compensation up to a maximum of $16,500 for 2011, $17,000 for 2012 and $17,500 for 2013. The Company offers discretionary matching of funds for a percentage of the employee contribution, plus an amount based on Company earnings. However, during 2011 and 2012, no profit sharing contributions were made. In 2013, contributions to the profit sharing plan were made in the amount of $527,000. The expense for the 401K plan for 2013, 2012 and 2011 was $568,000, $511,000 and $459,000, respectively. The plan offers employees the option of purchasing Company stock with the match portion of their 401(k) contribution, and shares available to employees within the plan are purchased on the open market.
Director Retainer Stock Plan
The Company maintains a deferred compensation plan designated as the Director Retainer Stock Plan ("Director Plan"). The plan provides eligible directors of the Company and the Bank with a means of deferring payment of retainers and certain fees payable to them for Board service. Under the Director Plan, any retainers or fees elected to be deferred under the plan by an eligible director ultimately will be payable in common stock at the time of payment.
Stock Options and Other Equity Awards
The Company has stock based compensation plans as described below. The Company has recorded approximately $250,000, $150,000, and $138,000 in compensation expense related to stock based compensation plans for the periods ended December 31, 2013, 2012 and 2011, respectively. The Company has a policy of issuing authorized but unissued shares upon the exercise of stock options or stock only stock appreciation rights or settlement of other stock-related awards.
Stock Incentive Plan
The Company's Stock Incentive Plan of 2010 (the "Incentive Plan") permits the grant and award of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards and other stock-based and stock-related awards (collectively referred to as "incentive awards") to directors, consultative board members, officers and other key employees of the Company and its subsidiary.
The following tables show activity for the twelve months ended December 31, 2013 for the Company's Incentive Plan:
|
Weighted
|
||||||||
|
Awards
|
Average
|
|||||||
|
SOSARs (1)
|
Outstanding
|
Exercise Price
|
||||||
|
Balance at January 1
|
167,250
|
$
|
3.33
|
|||||
|
Awards granted
|
46,250
|
5.05
|
||||||
|
Awards exercised
|
(9,446
|
)
|
3.34
|
|||||
|
Awards forfeited
|
(19,304
|
)
|
3.72
|
|||||
|
Balance at December 31
|
184,750
|
$
|
3.71
|
|||||
|
(1) Stock Only Stock Appreciation Rights
|
||||||||
|
Restricted Stock
|
Restricted Stock Units
|
|||||||||||||||
|
Awards
|
Grant Date
|
Awards
|
Grant Date
|
|||||||||||||
|
Outstanding
|
Fair Value
|
Outstanding
|
Fair Value
|
|||||||||||||
|
Nonvested at January 1
|
22,625
|
$
|
3.35
|
46,795
|
$
|
3.32
|
||||||||||
|
Awards granted
|
10,500
|
5.05
|
54,582
|
5.05
|
||||||||||||
|
Awards vested
|
(22,625
|
)
|
3.35
|
-
|
-
|
|||||||||||
|
Awards forfeited
|
-
|
-
|
(15,628
|
)
|
4.22
|
|||||||||||
|
Nonvested at December 31
|
10,500
|
$
|
5.05
|
85,749
|
$
|
4.26
|
||||||||||
As of December 31, 2013, unrecognized compensation expense related to the Incentive Plan totaled $323,300. Compensation expense for stock-only stock appreciation rights ("SOSARs") and restricted stock grants is recognized over approximately three years. Compensation expense for restricted stock units ("RSUs") is based on an expected level of achievement of performance targets as determined at the time of each grant, and is usually recognized over three years.
The fair value of restricted stock grants is considered to be the market price of Company stock at the grant date. The fair value of RSU grants is considered to be the market price of Company stock at the grant date, adjusted for an estimated probability of achieving performance targets.
The Company established three performance targets for 2013 RSU grants. Those targets were based on the Company's pre-tax, pre-provision return on average assets, return on average assets, and classified assets coverage ratio1. Each target was weighted equally, and target levels were based on United's 2013 financial plan. For 2013, RSU grants vested at 95.8% of target.
The fair value of each SOSAR grant is estimated on the grant date using the Black-Scholes option pricing model. Grants were awarded in March 2013, 2012, and 2011. Fair value of grants in 2013, 2012, and 2011 is based on the weighted-average assumptions shown in the following table.
|
2013
|
2012
|
2011
|
||||||||||
|
Dividend yield
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||||
|
Expected life in years
|
5
|
5
|
5
|
|||||||||
|
Expected volatility
|
28.8
|
%
|
37.0
|
%
|
35.0
|
%
|
||||||
|
Risk-free interest rate
|
0.72
|
%
|
0.84
|
%
|
2.16
|
%
|
||||||
|
Fair value
|
$
|
1.345
|
$
|
1.105
|
$
|
1.136
|
||||||
The table below provides information regarding SOSARs outstanding at December 31, 2013.
|
Options Outstanding
|
Options Exercisable
|
||||||||||||||||||||
|
Range of
|
Number
|
Weighted Average
|
Weighted Avg.
|
Number
|
Weighted Avg.
|
||||||||||||||||
|
Exercise Prices
|
Outstanding
|
Remaining Contractual Life
|
Exercise Price
|
Outstanding
|
Exercise Price
|
||||||||||||||||
|
$3.30 to $5.05
|
184,750
|
8.01
|
Years
|
$
|
3.71
|
71,015
|
$
|
3.33
|
|||||||||||||
At December 31, 2013, the aggregate intrinsic value of SOSARs outstanding was $649,400. Intrinsic value was determined by calculating the difference between the Company's closing stock price on December 31, 2013 and the exercise price of the SOSARs, multiplied by the number of in-the-money SOSARs held by each holder, assuming all holders had exercised their SOSARs on December 31, 2013. The weighted–average period over which non-vested SOSARs are expected to be recognized is 0.74 years.
Stock Option Plan
Through December 31, 2009, the Company granted stock options under its 2005 Stock Option Plan (the "2005 Plan"), which is a non-qualified stock option plan as defined under Internal Revenue Service regulations. The shares of stock that are subject to options are the authorized and unissued shares of common stock of the Company. Under the 2005 Plan, directors and management of the Company and subsidiaries were given the right to purchase stock of the Company at the then-current market price at the time the option was granted. The options have a three-year vesting period, and with certain exceptions, expire at the end of ten years, three years after retirement or ninety days after other separation from the Company.
The following summarizes year to date option activity for the 2005 Plan:
|
Options
|
Weighted Avg.
|
|||||||
|
Stock Options
|
Outstanding
|
Exercise Price
|
||||||
|
Balance, January 1, 2013
|
358,070
|
$
|
21.32
|
|||||
|
Options exercised
|
(1,000
|
)
|
7.24
|
|||||
|
Options expired
|
(25,434
|
)
|
22.97
|
|||||
|
Options forfeited
|
(10,400
|
)
|
12.73
|
|||||
|
Balance, December 31, 2013
|
321,236
|
$
|
21.51
|
|||||
|
Options exercisable at year-end
|
321,236
|
$
|
21.51
|
|||||
The table below provides information regarding stock options outstanding under the 2005 Plan at December 31, 2013.
|
Options Outstanding
|
Options Exercisable
|
||||||||||||||||||||
|
Range of
|
Number
|
Weighted Average
|
Weighted Avg.
|
Number
|
Weighted Avg.
|
||||||||||||||||
|
Exercise Prices
|
Outstanding
|
Remaining Contractual Life
|
Exercise Price
|
Outstanding
|
Exercise Price
|
||||||||||||||||
|
$6.00 to $32.14
|
321,236
|
2.82
|
Years
|
$
|
21.51
|
321,236
|
$
|
21.51
|
|||||||||||||
As of the end of 2013, there was no unrecognized compensation expense related to the stock options granted under the 2005 Plan.
At December 31, 2013, the total outstanding stock options granted under the 2005 Plan had an insignificant intrinsic value. Intrinsic value was determined by calculating the difference between the Company's closing stock price on December 31, 2013 and the exercise price of each option, multiplied by the number of in-the-money stock options held by each holder, assuming all holders had exercised their stock options on December 31, 2013.
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES
Fair Value Measurements. The Fair Value Measurements Topic of the FASB Accounting Standards Codification ("FASB ASC") defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC Topic 820-10-20 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. Topic 820-10-55 establishes a fair value hierarchy that emphasizes use of observable inputs and minimizes use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
|
Level 1
|
Quoted prices in active markets for identical assets or liabilities
|
|
|
|
|
Level 2
|
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
|
|
|
|
|
Level 3
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
|
Recurring Measurements
The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements were classified at December 31, 2013 and 2012, in thousands of dollars:
|
Thousands of dollars
|
Fair Value Measurements Using
|
|||||||||||||||
|
December 31, 2013
|
Fair Value
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
|
Available for sale securities:
|
||||||||||||||||
|
U.S. Treasury and agency securities
|
$
|
23,498
|
$
|
-
|
$
|
23,498
|
$
|
-
|
||||||||
|
Mortgage-backed agency securities
|
146,142
|
-
|
146,142
|
-
|
||||||||||||
|
Obligations of states and political subdivisions
|
21,490
|
-
|
21,490
|
-
|
||||||||||||
|
Equity securities
|
28
|
28
|
-
|
-
|
||||||||||||
|
Hedged loan
|
7,246
|
-
|
7,246
|
-
|
||||||||||||
|
Interest rate swap asset
|
86
|
-
|
86
|
-
|
||||||||||||
|
December 31, 2012
|
||||||||||||||||
|
Available for sale securities:
|
||||||||||||||||
|
U.S. Treasury and agency securities
|
$
|
27,316
|
$
|
-
|
$
|
27,316
|
$
|
-
|
||||||||
|
Mortgage-backed agency securities
|
160,499
|
-
|
160,499
|
-
|
||||||||||||
|
Obligations of states and political subdivisions
|
18,286
|
-
|
18,286
|
-
|
||||||||||||
|
Equity securities
|
28
|
28
|
-
|
-
|
||||||||||||
Following is a description of the inputs and valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of those instruments under 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. 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 U.S. Government agency securities, mortgage-backed securities, obligations of states and municipalities, and certain corporate securities.
Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities, but rather, relying on the investment securities' relationship to other benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The company has no Level 3 securities.
Hedged Loans
The fair value of hedged loans is based on valuation models using observable market data as of the measurement date (Level 2).
Interest Rate Swaps (Derivatives)
The fair value of interest rate swaps is based on valuation models using observable market data as of the measurement date (Level 2). Additional information is contained in Note 17 – Derivative Instruments.
Transfers between Levels
There were no transfers between Levels 1, 2 and 3 in 2013 or 2012 of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis.
Nonrecurring Measurements
The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at December 31, 2013 and 2012:
|
In thousands of dollars
|
Fair Value Measurements Using
|
|||||||||||||||
|
Impaired Loans (Collateral Dependent):
|
Fair Value
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
|
December 31, 2013
|
$
|
11,599
|
$
|
-
|
$
|
-
|
$
|
11,599
|
||||||||
|
December 31, 2012
|
21,866
|
-
|
-
|
21,866
|
||||||||||||
|
Other Real Estate Owned:
|
||||||||||||||||
|
December 31, 2013
|
792
|
-
|
-
|
792
|
||||||||||||
Significant Unobservable Inputs
The following is a discussion of the significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in nonrecurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.
Impaired Loans (Collateral Dependent)
Loans for which it is believed to be probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans, based on current appraisals. If the impaired loan is identified as collateral dependent, the fair value of collateral method of measuring the amount of impairment is utilized.
The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. The Company's practice is to obtain new or updated appraisals on the loans subject to the initial impairment review and then to generally update on an annual basis thereafter.
The Company discounts the appraisal amount as necessary for selling costs and past due real estate taxes. If a new or updated appraisal is not available at the time of a loan's impairment review, the Company typically applies a discount to the value of an old appraisal to reflect the property's current estimated value if there is believed to be deterioration in either (i) the physical or economic aspects of the subject property or (ii) any market conditions. These discounts and estimates are developed by the Company's Credit Department, and are reviewed by the Chief Credit Officer and the CFO. The results of the impairment review results in an increase in the allowance for loan loss or in a partial charge-off of the loan, if warranted. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method based on current appraisals.
Unobservable (Level 3) Inputs
The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements.
|
Impaired loans (collateral dependent)
|
||||||||
|
dollars in thousands
|
December 31, 2013
|
December 31, 2012
|
||||||
|
Fair value
|
$
|
11,599
|
$
|
21,866
|
||||
|
Range of appraisal discount
|
7.5%-32.5
|
%
|
7.5%-49.5
|
%
|
||||
|
Weighted average
|
12.0
|
%
|
14.0
|
%
|
||||
Other Real Estate Owned
Other Real Estate Owned is measured at fair value on a nonrecurring basis less costs to sell and had a net carrying amount of $792,000 at December 31, 2013. The estimates of fair value are based on the most recently available appraisals with certain adjustments made based on the type of property, age of appraisal, current status of the property and other related factors to estimate the current value of the collateral. These appraisals are discounted 7% to 48% depending on the type of property and the type of appraisal (market value vs. liquidation value). There were write-downs of other real estate owned of $174,000 in 2013.
Fair Value of Financial Instruments
The carrying amounts and estimated fair value of principal financial assets and liabilities, in thousands of dollars, at December 31, 2013 and 2012, were as follows:
|
December 31, 2013
|
||||||||||||||||
|
Carrying
|
Fair Value Measurements Using
|
|||||||||||||||
|
Amount
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
|
Financial Assets
|
||||||||||||||||
|
Cash and cash equivalents
|
$
|
26,261
|
$
|
26,261
|
$
|
-
|
$
|
-
|
||||||||
|
Securities available for sale
|
191,158
|
28
|
191,130
|
-
|
||||||||||||
|
FHLB Stock
|
2,691
|
-
|
2,691
|
-
|
||||||||||||
|
Loans held for sale
|
4,260
|
-
|
4,260
|
-
|
||||||||||||
|
Net portfolio loans
|
625,827
|
-
|
7,246
|
621,791
|
||||||||||||
|
Accrued interest receivable
|
2,607
|
-
|
2,607
|
-
|
||||||||||||
|
Interest rate swap asset
|
86
|
-
|
86
|
-
|
||||||||||||
|
Financial Liabilities
|
||||||||||||||||
|
Total deposits
|
$
|
(790,497
|
)
|
$
|
(167,236
|
)
|
$
|
(623,956
|
)
|
$
|
-
|
|||||
|
FHLB advances
|
(11,961
|
)
|
-
|
(12,517
|
)
|
-
|
||||||||||
|
Other borrowings
|
(10,000
|
)
|
-
|
(10,000
|
)
|
-
|
||||||||||
|
Accrued interest payable
|
(190
|
)
|
-
|
(190
|
)
|
-
|
||||||||||
|
December 31, 2012
|
||||||||||||||||
|
Carrying
|
Fair Value Measurements Using
|
|||||||||||||||
|
Amount
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
|
Financial Assets
|
||||||||||||||||
|
Cash and cash equivalents
|
$
|
70,612
|
$
|
70,612
|
$
|
-
|
$
|
-
|
||||||||
|
Securities available for sale
|
206,129
|
28
|
206,101
|
-
|
||||||||||||
|
FHLB Stock
|
2,571
|
-
|
2,571
|
-
|
||||||||||||
|
Loans held for sale
|
13,380
|
-
|
13,380
|
-
|
||||||||||||
|
Net portfolio loans
|
564,135
|
-
|
-
|
574,137
|
||||||||||||
|
Accrued interest receivable
|
2,620
|
-
|
2,620
|
-
|
||||||||||||
|
Financial Liabilities
|
||||||||||||||||
|
Total deposits
|
$
|
(784,643
|
)
|
$
|
-
|
$
|
(787,015
|
)
|
$
|
-
|
||||||
|
FHLB advances
|
(21,999
|
)
|
-
|
(23,007
|
)
|
-
|
||||||||||
|
Accrued interest payable
|
(354
|
)
|
-
|
(354
|
)
|
-
|
||||||||||
Estimated fair values require subjective judgments and are approximate. The above estimates of fair value are not necessarily representative of amounts that could be realized in actual market transactions, or of the underlying value of the Company. Changes in the following methodologies and assumptions could significantly affect the estimated fair value:
|
|
Cash and cash equivalents, FHLB stock, loans held for sale, accrued interest receivable and accrued interest payable – The carrying amounts are reasonable estimates of the fair values of these instruments at the respective balance sheet dates.
|
|
|
|
|
|
Net portfolio loans – The carrying amount is a reasonable estimate of fair value for personal loans for which rates adjust quarterly or more frequently, and for business and tax-exempt loans that are prime related and for which rates adjust immediately or quarterly. The fair value of all other loans is estimated by discounting future cash flows using current rates for loans with similar characteristics and maturities. The Bank's current loan rates are comparable with rates offered by other financial institutions. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns
|
|
|
|
|
|
Total deposits – With the exception of certificates of deposit, the carrying value is deemed to be the fair value due to the demand nature of the deposits. The fair value of fixed maturity certificates of deposit is estimated by discounting future cash flows using the current rates paid on certificates of deposit with similar maturities. The Bank's current deposit rates are comparable with rates offered by other financial institutions.
|
|
|
|
|
|
FHLB advances – The fair value is estimated by discounting future cash flows using current rates on advances with similar maturities.
Other borrowings – The fair value is estimated by discounting future cash flows using current rates on borrowings with similar maturities.
|
|
|
|
|
|
Off-balance-sheet financial instruments – Commitments to extend credit, standby letters of credit and undisbursed loans are deemed to have no material fair value as such commitments are generally fulfilled at current market rates.
|
NOTE 17 – DERIVATIVE INSTRUMENTS
The Company may use interest rate swaps as part of its interest rate risk management strategy to add stability to interest income and to manage its exposure to interest rate movements. The Company does not use derivative instruments for trading or speculative purposes. The Company has entered into an interest rate swap agreement, primarily as an asset/liability management strategy, in order to mitigate the changes in the fair value of a specified long-term fixed-rate loan caused by changes in interest rates. This hedge allowed us to offer a long-term fixed rate loan to a client without assuming the interest rate risk of a long-term asset. Converting our fixed-rate interest stream to a floating-rate interest stream, benchmarked to the one-month U.S. dollar LIBOR index, protects against changes in the fair value of our loan otherwise associated with fluctuating interest rates.
The fixed-rate payment feature of the interest rate swap is structured at inception to mirror substantially all of the provisions of the hedged loan agreements. This interest rate swap, designated and qualified as a fair value hedge, is carried on the consolidated balance sheet at fair value in "other assets" (when the fair value is positive) or in "other liabilities" (when the fair value is negative).
The change in fair value of the interest rate swap is recorded in interest income. The unrealized gain or loss in fair value of the hedged fixed-rate loan due to LIBOR interest rate movements is recorded as an adjustment to the hedged loan and is offset in interest income. The net effect of the change in fair value of the interest rate swap and the change in the fair value of the hedged loan may result in an insignificant amount of hedge ineffectiveness recognized in interest income.
Our credit exposure, if any, on the interest rate swap is limited to the favorable value (net of any collateral pledged to us) and interest payments of the interest rate swap by the counterparty. We are required to post collateral to the counterparty. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values. As of December 31, 2013, we have posted cash collateral of $370,100 related to the collateral requirements of the interest rate swap.
As of December 31, 2013, we had one interest rate swap, which is scheduled to mature in June 2020. The interest rate swap is accounted for as a fair value hedge, and is settled monthly with the counterparty. As of December 31, 2013, the notional amount of the interest rate swap was approximately $7.3 million. The fair value of the interest rate swap at December 31, 2013 was $86,000. The Company had no interest rate swaps at December 31, 2012.
The hedging relationship of the interest rate swap is tested for effectiveness on a quarterly basis, and, at December 31, 2013, was determined to be highly effective, with no resulting impact on the income statement of the Company for the three and twelve months ended December 31, 2013.
NOTE 18 - REGULATORY CAPITAL REQUIREMENTS
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 discretionary actions by regulators that, if undertaken, could have a direct material effect on the 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. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average assets.
The Board of Directors of the Bank continues to be committed to operation of the Bank in a safe and sound manner with a strong capital base. The Bank's Tier 1 leverage ratio was 9.77% and 9.59% at December 31, 2013 and December 31, 2012, respectively.
The following table shows information about the Company's and the Bank's capital levels compared to regulatory requirements at year-end 2013 and 2012.
|
Actual
|
Regulatory Minimum for Capital Adequacy (1)
|
Regulatory Minimum to be Well Capitalized (2)
|
||||||||||||||||||||||
|
As of December 31, 2013
|
$
|
000
|
%
|
$
|
000
|
%
|
$
|
000
|
%
|
|||||||||||||||
|
Tier 1 Capital to Average Assets
|
||||||||||||||||||||||||
|
Consolidated
|
$
|
83,110
|
9.1
|
%
|
$
|
36,414
|
4.0
|
%
|
N/
|
A
|
N/
|
A
|
||||||||||||
|
Bank
|
88,937
|
9.8
|
%
|
36,430
|
4.0
|
%
|
45,538
|
5.0
|
%
|
|||||||||||||||
|
Tier 1 Capital to Risk Weighted Assets
|
||||||||||||||||||||||||
|
Consolidated
|
83,110
|
12.7
|
%
|
26,245
|
4.0
|
%
|
N/
|
A
|
N/
|
A
|
||||||||||||||
|
Bank
|
88,937
|
13.6
|
%
|
26,219
|
4.0
|
%
|
39,328
|
6.0
|
%
|
|||||||||||||||
|
Total Capital to Risk Weighted Assets
|
||||||||||||||||||||||||
|
Consolidated
|
91,463
|
13.9
|
%
|
52,490
|
8.0
|
%
|
N/
|
A
|
N/
|
A
|
||||||||||||||
|
Bank
|
97,282
|
14.8
|
%
|
52,437
|
8.0
|
%
|
65,547
|
10.0
|
%
|
|||||||||||||||
|
Actual
|
Regulatory Minimum for Capital Adequacy (1)
|
Regulatory Minimum to be Well Capitalized (2)
|
Minimum Required by Board Resolution (3)
|
|||||||||||||||||||||||||||||
|
As of December 31, 2012
|
$
|
000
|
%
|
$
|
000
|
%
|
$
|
000
|
%
|
$
|
000
|
%
|
||||||||||||||||||||
|
Tier 1 Capital to Average Assets
|
||||||||||||||||||||||||||||||||
|
Consolidated
|
$
|
91,886
|
10.2
|
%
|
$
|
36,059
|
4.0
|
%
|
N/
|
A
|
N/
|
A
|
N/
|
A
|
N/
|
A
|
||||||||||||||||
|
Bank
|
85,727
|
9.6
|
%
|
35,755
|
4.0
|
%
|
44,694
|
5.0
|
%
|
75,980
|
8.5
|
%
|
||||||||||||||||||||
|
Tier 1 Capital to Risk Weighted Assets
|
||||||||||||||||||||||||||||||||
|
Consolidated
|
91,886
|
15.4
|
%
|
23,914
|
4.0
|
%
|
N/
|
A
|
N/
|
A
|
N/
|
A
|
N/
|
A
|
||||||||||||||||||
|
Bank
|
85,727
|
14.4
|
%
|
23,862
|
4.0
|
%
|
35,792
|
6.0
|
%
|
N/
|
A
|
N/
|
A
|
|||||||||||||||||||
|
Total Capital to Risk Weighted Assets
|
||||||||||||||||||||||||||||||||
|
Consolidated
|
99,545
|
16.7
|
%
|
47,829
|
8.0
|
%
|
N/
|
A
|
N/
|
A
|
N/
|
A
|
N/
|
A
|
||||||||||||||||||
|
Bank
|
93,370
|
15.7
|
%
|
47,723
|
8.0
|
%
|
59,654
|
10.0
|
%
|
N/
|
A
|
N/
|
A
|
|||||||||||||||||||
|
(1)
|
Represents minimum required to be categorized as adequately capitalized under Federal regulatory requirements.
|
|
Represents minimum generally required to be categorized as well-capitalized under Federal regulatory prompt corrective action provisions.
|
|
| (2) | |
|
(3)
|
Represents requirements of the Bank's board resolution. Resolution was rescinded by the Board on December 10, 2013.
|
NOTE 19 – EARNINGS (LOSS) PER SHARE
A reconciliation of basic and diluted earnings and loss per share follows:
|
In thousands, except per share data
|
2013
|
2012
|
2011
|
|||||||||
|
Net income
|
$
|
8,811
|
$
|
4,463
|
$
|
917
|
||||||
|
Less:
|
||||||||||||
|
Accretion of discount on preferred stock
|
(124
|
)
|
(112
|
)
|
(106
|
)
|
||||||
|
Dividends on preferred stock
|
(901
|
)
|
(1,030
|
)
|
(1,030
|
)
|
||||||
|
Income (loss) available to common shareholders
|
$
|
7,786
|
$
|
3,321
|
$
|
(219
|
)
|
|||||
|
Basic earnings (loss) per share:
|
||||||||||||
|
Weighted average common shares outstanding
|
12,700.7
|
12,702.4
|
12,688.2
|
|||||||||
|
Weighted average contingently issuable shares
|
131.0
|
115.3
|
82.9
|
|||||||||
|
Total weighted average common shares outstanding
|
12,831.7
|
12,817.7
|
12,771.2
|
|||||||||
|
Basic earnings (loss) per share
|
$
|
0.61
|
$
|
0.26
|
$
|
(0.02
|
)
|
|||||
|
Diluted earnings (loss) per share:
|
||||||||||||
|
Weighted average common shares outstanding from basic earnings per share
|
12,831.7
|
12,817.7
|
12,771.2
|
|||||||||
|
Dilutive effect of stock incentive plans
|
67.3
|
-
|
-
|
|||||||||
|
Total weighted average common shares outstanding
|
12,898.98
|
12,817.7
|
12,771.2
|
|||||||||
|
Diluted earnings (loss) per share
|
$
|
0.60
|
$
|
0.26
|
$
|
(0.02
|
)
|
|||||
There was no dilutive effect of stock awards in 2012 or 2011. Stock awards for 362,986, 358,070, and 381,743 shares of common stock were not considered in computing diluted earnings per share for 2013, 2012 and 2011, respectively, because they were not dilutive.
NOTE 20 - PARENT COMPANY ONLY FINANCIAL INFORMATION
The condensed financial information for United Bancorp, Inc. is summarized below.
|
CONDENSED BALANCE SHEETS
|
December 31,
|
|||||||
|
In thousands of dollars
|
2013
|
2012
|
||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$
|
3,709
|
$
|
4,965
|
||||
|
Securities available for sale
|
28
|
28
|
||||||
|
Investment in subsidiaries
|
88,037
|
91,238
|
||||||
|
Other assets
|
619
|
1,276
|
||||||
|
Total Assets
|
$
|
92,393
|
$
|
97,507
|
||||
|
Liabilities and Shareholders' Equity
|
||||||||
|
Borrowings
|
$
|
10,000
|
$
|
-
|
||||
|
Other Liabilities
|
182
|
110
|
||||||
|
Shareholders' equity
|
82,211
|
97,397
|
||||||
|
Total Liabilities and Shareholders' Equity
|
$
|
92,393
|
$
|
97,507
|
||||
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
|
For the years ended December 31,
|
|||||||||||
|
In thousands of dollars
|
2013
|
2012
|
2011
|
|||||||||
|
Income
|
||||||||||||
|
Dividends from subsidiaries
|
$
|
10,000
|
$
|
1,600
|
$
|
-
|
||||||
|
Other income
|
1
|
1
|
1
|
|||||||||
|
Total Income
|
10,001
|
1,601
|
1
|
|||||||||
|
Expense
|
||||||||||||
|
Interest expense on other borrowings
|
59
|
-
|
-
|
|||||||||
|
Total Interest Expense
|
59
|
-
|
-
|
|||||||||
|
Net Revenue
|
9,942
|
1,601
|
1
|
|||||||||
|
Total Noninterest Expense
|
756
|
763
|
480
|
|||||||||
|
Income (Loss) before undistributed net income of subsidiary and income taxes
|
9,186
|
838
|
(479
|
)
|
||||||||
|
Income tax expense (benefit)
|
(261
|
)
|
(151
|
)
|
(163
|
)
|
||||||
|
Net income (loss) before undistributed net income of subsidiary
|
9,447
|
989
|
(316
|
)
|
||||||||
|
Equity in undistributed (excess distributed) net income of subsidiary
|
(637
|
)
|
3,474
|
1,233
|
||||||||
|
Net Income
|
8,811
|
4,463
|
917
|
|||||||||
|
Other comprehensive income (loss), including net change in unrealized gains on securities available for sale, net of tax
|
(2,564
|
)
|
14
|
1,030
|
||||||||
|
Comprehensive Income
|
$
|
6,247
|
$
|
4,477
|
$
|
1,947
|
||||||
|
CONDENSED STATEMENTS OF CASH FLOWS
|
For the years ended December 31,
|
|||||||||||
|
In thousands of dollars
|
2013
|
2012
|
2011
|
|||||||||
|
Cash Flows from Operating Activities
|
||||||||||||
|
Net Income
|
$
|
8,811
|
$
|
4,463
|
$
|
917
|
||||||
|
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
|
||||||||||||
|
(Undistributed) Excess distributed net income of subsidiary
|
637
|
(3,474
|
)
|
(1,233
|
)
|
|||||||
|
Stock option expense
|
210
|
150
|
114
|
|||||||||
|
Change in other assets
|
585
|
(154
|
)
|
(687
|
)
|
|||||||
|
Change in other liabilities
|
48
|
39
|
(8
|
)
|
||||||||
|
Net cash used in operating activities
|
10,291
|
1,024
|
(897
|
)
|
||||||||
|
Cash Flows from Investing Activities
|
||||||||||||
|
Investments in subsidiary
|
-
|
-
|
(2,000
|
)
|
||||||||
|
Net cash from investing activities
|
-
|
-
|
(2,000
|
)
|
||||||||
|
Cash Flows from Financing Activities
|
||||||||||||
|
Net change in other borrowings
|
10,000
|
-
|
-
|
|||||||||
|
Repurchase of preferred stock
|
(20,600
|
)
|
-
|
-
|
||||||||
|
Other common stock transactions
|
78
|
57
|
41
|
|||||||||
|
Cash dividends paid on preferred stock
|
(1,025
|
)
|
(1,030
|
)
|
(1,030
|
)
|
||||||
|
Net cash used in financing activities
|
(11,547
|
)
|
(973
|
)
|
(989
|
)
|
||||||
|
Net Change in Cash and Cash Equivalents
|
(1,256
|
)
|
51
|
(3,886
|
)
|
|||||||
|
Cash and cash equivalents at beginning of year
|
4,965
|
4,914
|
8,800
|
|||||||||
|
Cash and Cash Equivalents at End of Year
|
$
|
3,709
|
$
|
4,965
|
$
|
4,914
|
||||||
NOTE 21 – QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information is summarized below:
|
In thousands of dollars, except per share data
|
Full Year
|
4th Qtr
|
3rd Qtr
|
2nd Qtr
|
1st Qtr
|
|||||||||||||||
|
2013
|
||||||||||||||||||||
|
Interest Income
|
$
|
34,535
|
$
|
9,105
|
$
|
8,675
|
$
|
8,595
|
$
|
8,160
|
||||||||||
|
Interest Expense
|
2,984
|
647
|
694
|
771
|
872
|
|||||||||||||||
|
Net Interest Income
|
31,551
|
8,458
|
7,981
|
7,824
|
7,288
|
|||||||||||||||
|
Provision for Loan Losses
|
1,900
|
-
|
300
|
600
|
1,000
|
|||||||||||||||
|
Net Income
|
$
|
8,811
|
$
|
2,506
|
$
|
2,276
|
$
|
2,087
|
$
|
1,942
|
||||||||||
|
Basic Earnings per Share
|
$
|
0.61
|
$
|
0.18
|
$
|
0.15
|
$
|
0.14
|
$
|
0.13
|
||||||||||
|
Diluted Earnings per Share
|
$
|
0.60
|
$
|
0.18
|
$
|
0.15
|
$
|
0.14
|
$
|
0.13
|
||||||||||
|
Full Year
|
4th Qtr
|
3rd Qtr
|
2nd Qtr
|
1st Qtr
|
||||||||||||||||
|
2012
|
||||||||||||||||||||
|
Interest Income
|
$
|
34,693
|
$
|
8,371
|
$
|
8,731
|
$
|
8,758
|
$
|
8,833
|
||||||||||
|
Interest Expense
|
4,528
|
987
|
1,085
|
1,192
|
1,264
|
|||||||||||||||
|
Net Interest Income
|
30,165
|
7,384
|
7,646
|
7,566
|
7,569
|
|||||||||||||||
|
Provision for Loan Losses
|
8,350
|
1,700
|
2,000
|
2,550
|
2,100
|
|||||||||||||||
|
Net Income
|
$
|
4,463
|
$
|
1,446
|
$
|
1,390
|
$
|
785
|
$
|
842
|
||||||||||
|
Basic and Diluted Earnings per Share
|
$
|
0.26
|
$
|
0.09
|
$
|
0.09
|
$
|
0.04
|
$
|
0.04
|
||||||||||
NOTE 22 — REDEMPTION OF PREFERRED STOCK
The Company issued 20,600 shares of Fixed Rate of Cumulative Perpetual Preferred Stock, Series A, Liquidation Preference Amount $1,000 per share ("Preferred Shares") to U.S. Treasury on January 16, 2009, as part of Treasury's Troubled Asset Relief Program Capital Purchase Program. On June 19, 2012, Treasury sold all 20,600 Preferred Shares to private investors.
During 2013, the Company redeemed all 20,600 Preferred Shares, with 10,300 shares redeemed on September 30, 2013 and 10,300 shares redeemed on December 27, 2013. Following completion of the redemption, no shares of Preferred Stock remained outstanding.
The redemption price for the Preferred Shares was the stated liquidation preference amount of $1,000 per share, plus any accrued and unpaid dividends to but excluding the dates of redemption. The total cost of the redemption of the Preferred Shares was approximately $20.7 million, which was funded with a combination of excess cash at the holding company, the dividend to the holding company of retained earnings at the Bank, and the borrowing of $10.0 million under the Company's revolving line of credit.
NOTE 23 – LEGAL PROCEEDINGS
Refer to "Note 24 – Subsequent Events" for information regarding legal proceedings the Company received notification on after December 31, 2013. As of the date of this report, there are no other material pending legal proceedings other than routine litigation incidental to the business of banking, to which the Company or its subsidiaries are a party or of which any of our properties are the subject. As of the date of this report, neither the Company nor its subsidiaries are involved in any other proceedings to which any director, principal officer, affiliate thereof, or person who owns of record or beneficially more than five percent (5%) of the outstanding stock of the Company, or any associate of the foregoing, is a party or has a material interest adverse to the Company.
NOTE 24 – SUBSEQUENT EVENTS
On January 7, 2014, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Old National Bancorp ("Old National"), an Indiana corporation, pursuant to which the Company will merge with and into Old National, whereupon the separate corporate existence of the Company will cease and Old National will survive (the "Merger"). In connection with the Merger, the Bank will be merged with and into Old National Bank, a national banking association and wholly owned subsidiary of Old National, with Old National Bank as the surviving bank.
Under the terms of the Merger Agreement, shareholders of United will receive .70 shares of Old National common stock and $2.66 in cash for each share of United common stock. The Merger is expected to close late in the second quarter of 2014. The transaction remains subject to approval by United's shareholders and approval by federal and state regulatory authorities, as well as the satisfaction of other customary closing conditions provided in the Merger Agreement.
The Merger Agreement was previously filed with the Securities Exchange Commission on January 8, 2014 in the Company's Current Report on Form 8-K, Exhibit 2.1, and is here incorporated by reference.
On or about January 17, 2014, a putative class action complaint was filed in the Circuit Court for Washtenaw County, Michigan, Business Division, by an individual purporting to be a shareholder of United. The action is styled Parshall v. United Bancorp, Inc., et al., Case No. 14-39-CZ. The complaint alleges that the directors of United breached their fiduciary duties to the Company's shareholders in connection with the proposed Merger between United and Old National by approving a transaction that allegedly provides for inadequate consideration; that the Merger Agreement includes allegedly preclusive deal protection provisions; and that United and Old National allegedly aided and abetted the United directors in breaching their duties to United's shareholders. The complaint seeks, on behalf of the putative class of all public shareholders of United, various remedies, including enjoining the Merger from being consummated in accordance with its agreed-upon terms, rescission of the transaction in the event that it is consummated, damages, and costs and attorneys' and experts' fees relating to the lawsuit. The Company intends to vigorously contest this action.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
United Bancorp, Inc.
|
|
|
|
|
|
|
|
|
By
|
/s/ Robert K. Chapman
|
|
February 28, 2014
|
|
|
Robert K. Chapman,
President and Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
/s/ Robert K. Chapman
|
|
Director, President and Chief Executive Officer
(Principal Executive Officer)
|
February 28, 2014
|
|
Robert K. Chapman
|
|
|
|
|
|
|
|
|
|
/s/ Randal J. Rabe
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
February 28, 2014
|
|
Randal J. Rabe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Karen F. Andrews
|
|
Director
|
February 28, 2014
|
|
Karen F. Andrews*
|
|
|
|
|
|
|
|
|
|
/s/ Stephanie H. Boyse
|
|
Director
|
February 28, 2014
|
|
Stephanie H. Boyse*
|
|
|
|
|
|
|
|
|
|
/s/ James D. Buhr
|
|
Director
|
February 28, 2014
|
|
James D. Buhr *
|
|
|
|
|
|
|
|
|
|
/s/ Kenneth W. Crawford
|
|
Director
|
February 28, 2014
|
|
Kenneth W. Crawford *
|
|
|
|
|
|
|
|
|
|
/s/ John H. Foss
|
|
Director
|
February 28, 2014
|
|
John H. Foss*
|
|
|
|
|
|
|
|
|
|
/s/ Norman G. Herbert
|
|
Director
|
February 28, 2014
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Norman G. Herbert*
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/s/ James C. Lawson
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Chairman of the Board
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February 28, 2014
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James C. Lawson*
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/s/ Len M. Middleton
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Director
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February 28, 2014
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Len M. Middleton*
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*By
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/s/ Robert K. Chapman
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Robert K. Chapman, Attorney-in-Fact
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Page 61
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Exhibit
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Description
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2.1
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Agreement and Plan of Merger between United Bancorp, Inc. and Old National Bancorp dated January 7, 2014. Previously filed with the Commission on January 8, 2014 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 2.1 Incorporated here by reference.
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| Blank Row | ||
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3.1
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Restated Articles of Incorporation of United Bancorp, Inc. Previously filed with the Commission on October 1, 2010 in United Bancorp, Inc.'s Form S-1 Registration Statement, Exhibit 3.1. Incorporated here by reference.
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Blank Row
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||
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3.2
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Amended and Restated Bylaws of United Bancorp, Inc. Previously filed with the Commission on October 25, 2013 in United Bancorp, Inc.'s Quarterly Report on Form 10-Q Exhibit 3.2. Incorporated here by reference.
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| Blank Row | ||
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4.1
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Restated Articles of Incorporation of United Bancorp, Inc. Exhibit 3.1 is incorporated here by reference.
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| Blank Row | ||
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4.2
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Amended and Restated Bylaws of United Bancorp, Inc. Exhibit 3.2 is incorporated here by reference.
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| Blank Row | ||
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10.1*
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United Bancorp, Inc. Amended and Restated Director Retainer Stock Plan (as amended through October 20, 2011). Previously filed with the Commission on November 21, 2011 in United Bancorp, Inc.'s Quarterly Report on Form 10-Q/A, Exhibit 10.1. Incorporated here by reference.
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| Blank Row | ||
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10.2*
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United Bancorp, Inc. Senior Management Bonus Deferral Stock Plan (as amended through October 20, 2011). Previously filed with the Commission on November 21, 2011 in United Bancorp, Inc.'s Quarterly Report on Form 10-Q/A, Exhibit 10.2. Incorporated here by reference.
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| Blank Row | ||
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10.3*
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United Bancorp, Inc. Stock Incentive Plan of 2010 (as amended through October 20, 2011). Previously filed with the Commission on November 21, 2011 in United Bancorp, Inc.'s Quarterly Report on Form 10-Q/A, Exhibit 10.3. Incorporated here by reference.
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| Blank Row | ||
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10.4*
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United Bancorp, Inc. 1999 Stock Option Plan. Previously filed with the Commission on February 27, 2009 in United Bancorp, Inc.'s Annual Report on Form 10-K, Exhibit 10.3. Incorporated here by reference.
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| Blank Row | ||
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10.5*
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United Bancorp, Inc. 2005 Stock Option Plan. Previously filed with the Commission on September 21, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.3. Incorporated here by reference.
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| Blank Row | ||
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10.6*
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Form of Employment Contract, effective as of October 24, 2013 through March 31, 2014. Previously filed with the Commission on October 25, 2013 in United Bancorp, Inc.'s Quarterly Report on Form 10-Q, Exhibit 10.1. Incorporated here by reference.
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| Blank Row | ||
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10.7*
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2009 Management Committee Incentive Compensation Plan. Previously filed with the Commission on September 21, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.1. Incorporated here by reference.
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| Blank Row | ||
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10.8*
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Form of 2005 United Bancorp, Inc. Stock Option Plan Award Agreement. Previously filed with the Commission on September 21, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.4. Incorporated here by reference.
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| Blank Row | ||
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10.9*
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Business Loan Agreement. Previously filed with the Commission on September 18, 2013 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.1. Here incorporated by reference.
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Page 62
| Blank Row | ||
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21.
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Subsidiaries of United Bancorp, Inc. Previously filed with the Commission on October 1, 2010 in United Bancorp., Inc.'s Form S-1 Registration Statement, Exhibit 21. Incorporated here by reference.
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| Blank Row | ||
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23.
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Consent of Independent Registered Public Accounting Firm.
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| Blank Row | ||
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24.
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Powers of Attorney.
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| Blank Row | ||
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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| Blank Row | ||
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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| Blank Row | ||
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32.1
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Certification pursuant to 18 U.S.C. Section 1350.
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| Blank Row | ||
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EX-101.ins
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XBRL Taxonomy Extension Definition Linkbase Document**
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| Blank Row | ||
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EX-101.sch
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XBRL Taxonomy Extension Schema Document**
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| Blank Row | ||
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EX-101.def
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XBRL Taxonomy Extension Definition Linkbase Document**
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| Blank Row | ||
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EX-101.cal
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XBRL Taxonomy Extension Calculation Linkbase Document**
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| Blank Row | ||
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EX-101.lab
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XBRL Taxonomy Extension Label Linkbase Document**
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| Blank Row | ||
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EX-101.pre
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XBRL Taxonomy Extension Presentation Linkbase Document**
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Blank Row
| * | These documents are management contracts or compensation plans or arrangements required to be filed as exhibits to this Form 10-K. |
| ** | Furnished, not filed, herewith. |
Page 63