Attached files
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, 2012
Commission File #0-16640
(Exact name of registrant as specified in its charter)
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)
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) 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, 2012, the aggregate market value of the common stock held by non-affiliates of the registrant was $41,811,000, based on a closing sale price of $3.40 as reported on the OTCQB market.
As of January 31, 2013, there were 12,705,983 outstanding shares of registrant's common stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement in connection with the 2013 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
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, statements related to evaluation of alternatives related to the Preferred Shares, plans for raising capital, asset and credit quality trends, future levels of marketing and advertising expense, 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 dividends, market growth potential, 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.
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.
Page 2
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Item No.
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Description
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PART I
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PART II
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PART III
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PART IV
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PART I
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 115 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, 2012, the Company had total assets of approximately $907.7 million, total deposits of approximately $784.6 million, and total shareholders' equity of approximately $97.4 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, 2012, our net interest income accounted for approximately 58.4% of our operating revenues and our noninterest income accounted for approximately 41.6% of our operating revenues. This compares to 63.6% and 36.4%, respectively, for 2011 and 65.6% and 34.4%, respectively, for 2010.
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 seventeen banking offices, one trust office, one loan production 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 around 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 33.3% of our noninterest income for the twelve months ended December 31, 2012.
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 nondeposit investment products through licensed representatives in its banking offices. Our Wealth Management group generated 24.4% of our noninterest income for the twelve months ended December 31, 2012.
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, 2012 and 2011, United Structured Finance Company was the leading SBA lender in Lenawee, Washtenaw and Livingston Counties, combined. For 2012, USFC was the second-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.
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 or 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. In addition, the Federal Reserve Bank of Chicago (the "Reserve Bank") has restricted the Company from declaration or payment of common stock dividends without prior written approval of the Reserve Bank. See "Board Resolution" below.
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 Office of Financial and Insurance Regulation ("OFIR") deems a Bank's capital to be impaired, OFIR 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, 2012, 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 17 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 OFIR. 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. 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.
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 OFIR, (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.
Recent Developments
Exit from TARP Capital Purchase Program
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 Capital Purchase Program in a private placement exempt from the registration requirements of federal and state securities laws. On June 19, 2012, Treasury sold all 20,600 Preferred Shares in a modified dutch auction. The sale of the Preferred Shares did not result in any accounting entries on the books of the Company and did not change the Company's capital position. The Company incurred $299,000 of legal and accounting costs related to the sale of the Preferred Shares in the second quarter of 2012.
On July 18, 2012, the Company repurchased from Treasury for $38,000 a Warrant to purchase 311,492 shares of Company common stock. The Warrant was issued to Treasury in connection with the Company's participation in the TARP Capital Purchase Program.
As a result of these transactions, the Company no longer has any obligation to Treasury in connection with the TARP Capital Purchase Program and the Company is no longer subject to certain requirements of the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009, leaving the Company with greater flexibility to manage its business and affairs and eliminating the management time and expenses which were required to comply with these provisions.
Termination of Memorandum of Understanding
UBT previously entered into a Memorandum of Understanding with the FDIC and OFIR, which documented an understanding among the Bank, FDIC and OFIR relating to, among other things, the declaration and payment of dividends by the Bank to the Company and the maintenance of specified capital levels. On November 13, 2012, the Bank received a letter from FDIC and OFIR notifying the Bank that, as a result of an examination of the Bank as of June 30, 2012, FDIC and OFIR have terminated the Memorandum of Understanding with the Bank effective immediately.
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. In connection with termination of the Memorandum of Understanding, the Board of Directors of the Bank has resolved that the Bank will maintain Tier 1 leverage ratio at a level equal to or exceeding 8.5% and that the Bank will not declare or pay any dividend to the Company unless the Board of Directors first determines that the Bank has produced stable earnings.
Board Resolution
At the direction of the Reserve Bank, on April 22, 2010, the Company's Board of Directors adopted a resolution requiring the Company to obtain written approval from the Reserve Bank prior to any of the following: (i) declaration or payment of common or preferred stock dividends; (ii) any increase in debt or issuance of trust preferred obligations; or (iii) the redemption of Company stock.
The Company has requested and received Reserve Bank approval to declare and pay as required, and has declared and paid, all accrued dividends on the Preferred Shares to the date of this report. On February 12, 2013, the Reserve Bank notified the Company that it is no longer required to obtain prior approval of future payments of dividends on the Preferred Shares.
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).
The Company believes that the market perceives a competitive benefit to an independent, locally controlled commercial bank. Much of the Company's competition comes from affiliates of organizations controlled from outside the area.
Employees
On December 31, 2012, the Company and its subsidiary employed 255 full-time and 30 part-time employees. This compares to 244 full-time and 38 part-time employees at December 31, 2011.
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-19 and A-20, and is incorporated here by reference.
(A) Book Value of Investment Securities
The book value of investment securities as of December 31, 2012, 2011 and 2010 are as follows, in thousands of dollars:
In thousands of dollars
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2012
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2011
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2010
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U.S. Treasury and government agencies
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$
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187,815
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$
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152,064
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$
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99,785
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Obligations of states and political subdivisions
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18,286
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20,976
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24,605
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Corporate, asset backed and other debt securities
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-
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126
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126
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Equity securities
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28
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31
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28
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Total Investment Securities
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$
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206,129
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$
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173,197
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$
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124,544
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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, 2012. 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.
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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19,089
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$
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8,227
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$
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-
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$
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-
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$
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27,316
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Weighted average yield
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1.31
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%
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1.25
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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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1.29
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%
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U.S. agency mortgage-backed securities
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-
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160,499
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-
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-
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$
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160,499
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Weighted average yield
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0.00
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%
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1.85
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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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1.85
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%
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Obligations of states and political subdivisions
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$
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6,635
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$
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9,871
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$
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1,747
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$
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33
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$
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18,286
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Weighted average yield
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6.22
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%
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5.49
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%
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5.90
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%
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6.65
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%
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5.80
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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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Total securities
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$
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25,752
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$
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178,597
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$
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1,747
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$
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33
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$
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206,129
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Weighted average yield
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2.56
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%
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2.02
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%
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5.90
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%
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6.65
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%
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2.12
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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.
As of December 31, 2012, the Company's securities portfolio contains no concentrations by any single issuer of securities greater than 10% of shareholders' equity. As of December 31, 2012, 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)
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2012
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2011
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2010
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2009
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2008
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Personal
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$
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111,170
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$
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103,405
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$
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107,399
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$
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110,702
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$
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112,095
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Business and commercial mortgage
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336,772
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335,133
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354,340
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392,495
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410,911
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Tax exempt
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1,554
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2,045
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2,169
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3,005
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2,533
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Residential mortgage
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96,452
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83,072
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86,006
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86,417
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90,343
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Construction & development
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40,634
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39,721
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41,554
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56,706
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80,412
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Deferred loan fees and costs
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96
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326
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517
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728
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725
|
|||||||||||||||
Total portfolio loans
|
$
|
586,678
|
$
|
563,702
|
$
|
591,985
|
$
|
650,053
|
$
|
697,019
|
Percent of total portfolio loans
|
||||||||||||||||||||
Personal
|
18.9
|
%
|
18.3
|
%
|
18.1
|
%
|
17.0
|
%
|
16.1
|
%
|
||||||||||
Business and commercial mortgage
|
57.5
|
%
|
59.5
|
%
|
59.9
|
%
|
60.4
|
%
|
58.9
|
%
|
||||||||||
Tax exempt
|
0.3
|
%
|
0.4
|
%
|
0.4
|
%
|
0.5
|
%
|
0.4
|
%
|
||||||||||
Residential mortgage
|
16.4
|
%
|
14.7
|
%
|
14.5
|
%
|
13.3
|
%
|
13.0
|
%
|
||||||||||
Construction & development
|
6.9
|
%
|
7.0
|
%
|
7.0
|
%
|
8.7
|
%
|
11.5
|
%
|
||||||||||
Deferred loan fees and costs
|
0.0
|
%
|
0.1
|
%
|
0.1
|
%
|
0.1
|
%
|
0.1
|
%
|
||||||||||
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
The following table presents the maturity of total loans outstanding, other than residential mortgages and personal loans, as of December 31, 2012, according to scheduled repayments of principal.
Thousands of dollars
|
0 - 1 Year
|
1 - 5 Years
|
After 5 Years
|
Total
|
|||||||||||||
Business and commercial mortgage
|
Fixed rate
|
$
|
40,273
|
$
|
81,401
|
$
|
6,666
|
$
|
128,340
|
||||||||
|
Variable rate
|
193,038
|
15,006
|
388
|
208,432
|
||||||||||||
Commercial construction & development
|
Fixed rate
|
$
|
1,317
|
$
|
3,102
|
$
|
-
|
$
|
4,419
|
||||||||
|
Variable rate
|
18,302
|
3,372
|
2,418
|
24,092
|
||||||||||||
Tax exempt - fixed rate
|
Fixed rate
|
65
|
572
|
917
|
1,554
|
||||||||||||
Total
|
$
|
252,995
|
$
|
103,453
|
$
|
10,389
|
$
|
366,837
|
|||||||||
Total fixed rate
|
$
|
41,655
|
$
|
85,075
|
$
|
7,583
|
$
|
134,313
|
|||||||||
Total variable rate
|
$
|
211,340
|
$
|
18,378
|
$
|
2,806
|
$
|
232,524
|
Nonaccrual, Past Due and Restructured Loans
Information regarding nonaccrual, past due and restructured loans is shown in the table below as of December 31, 2008 through 2012.
Nonperforming Assets, in thousands of dollars
|
2012
|
2011
|
2010
|
2009
|
2008
|
|||||||||||||||
Nonaccrual loans
|
$
|
16,714
|
$
|
25,754
|
$
|
28,661
|
$
|
26,188
|
$
|
19,328
|
||||||||||
Accruing loans past due 90 days or more
|
37
|
31
|
583
|
5,474
|
1,504
|
|||||||||||||||
Total nonperforming loans
|
$
|
16,751
|
$
|
25,785
|
$
|
29,244
|
$
|
31,662
|
$
|
20,832
|
||||||||||
|
||||||||||||||||||||
Accruing restructured loans
|
$
|
15,819
|
$
|
21,839
|
$
|
17,271
|
$
|
15,584
|
$
|
3,283
|
The following shows the effect on interest revenue of nonaccrual loans as of December 31, 2012, in thousands of dollars:
2012
|
||||
Gross amount of interest that would have been recorded at original rate
|
$
|
735
|
||
Interest that was included in revenue
|
-
|
|||
Net impact on interest revenue
|
$
|
735
|
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 1 and Note 5 of the Company's Notes to Consolidated Financial Statements, and is incorporated here by reference.
At December 31, 2012, the Bank had one loan, other than those disclosed above, with a balance of $1.6 million, which cause management to have serious doubts as to the ability of the borrower to comply with the present loan repayment terms. This loan was included on the Bank's "watch list" and was classified as impaired; however, payments were current as of the date of this report.
As of December 31, 2012, other than $3,409,000 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 2008 through 2012.
Thousands of dollars
|
2012
|
2011
|
2010
|
2009
|
2008
|
|||||||||||||||
Balance at beginning of period
|
$
|
20,633
|
$
|
25,163
|
$
|
20,020
|
$
|
18,312
|
$
|
12,306
|
||||||||||
Charge-offs:
|
||||||||||||||||||||
Business and commercial mortgage (1)
|
7,171
|
12,063
|
7,683
|
8,257
|
7,298
|
|||||||||||||||
Construction and land development
|
1,108
|
2,908
|
5,919
|
14,379
|
-
|
|||||||||||||||
Residential mortgage
|
901
|
1,387
|
1,820
|
229
|
450
|
|||||||||||||||
Personal
|
707
|
2,006
|
1,907
|
1,503
|
1,024
|
|||||||||||||||
Total charge-offs
|
9,887
|
18,364
|
17,329
|
24,368
|
8,772
|
|||||||||||||||
Recoveries:
|
||||||||||||||||||||
Business and commercial mortgage (1)
|
2,220
|
1,111
|
424
|
185
|
98
|
|||||||||||||||
Construction and land development
|
532
|
278
|
287
|
-
|
-
|
|||||||||||||||
Residential mortgage
|
200
|
68
|
66
|
50
|
11
|
|||||||||||||||
Personal
|
495
|
227
|
165
|
71
|
62
|
|||||||||||||||
Total recoveries
|
3,447
|
1,684
|
942
|
306
|
171
|
|||||||||||||||
Net charge-offs
|
6,440
|
16,680
|
16,387
|
24,062
|
8,601
|
|||||||||||||||
Net provision (2)
|
8,350
|
12,150
|
21,530
|
25,770
|
14,607
|
|||||||||||||||
Balance at end of period
|
$
|
22,543
|
$
|
20,633
|
$
|
25,163
|
$
|
20,020
|
$
|
18,312
|
||||||||||
Ratio of net charge-offs to average loans
|
1.09
|
%
|
2.86
|
%
|
2.58
|
%
|
3.47
|
%
|
1.28
|
%
|
||||||||||
Allowance as % of total portfolio loans
|
3.84
|
%
|
3.66
|
%
|
4.25
|
%
|
3.08
|
%
|
2.63
|
%
|
||||||||||
(1) 2008 figures include construction and development loans
|
||||||||||||||||||||
(2) 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 $8,350,000 in 2012, $12,150,000 in 2011, and $21,530,000 in 2010.
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
|
2012
|
2011
|
2010
|
2009
|
2008
|
|||||||||||||||
Business and commercial mortgage (1)
|
$
|
13,932
|
$
|
13,337
|
$
|
16,672
|
$
|
12,221
|
$
|
16,148
|
||||||||||
Construction and development loans
|
4,216
|
3,553
|
3,248
|
5,164
|
-
|
|||||||||||||||
Residential mortgage
|
2,456
|
1,931
|
2,661
|
760
|
673
|
|||||||||||||||
Personal
|
1,939
|
1,812
|
2,582
|
1,875
|
1,491
|
|||||||||||||||
Total
|
$
|
22,543
|
$
|
20,633
|
$
|
25,163
|
$
|
20,020
|
$
|
18,312
|
As a percent of total
|
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Business and commercial mortgage (1)
|
61.8
|
%
|
64.6
|
%
|
66.3
|
%
|
61.0
|
%
|
88.2
|
%
|
||||||||||
Construction and development loans
|
18.7
|
%
|
17.2
|
%
|
12.9
|
%
|
25.8
|
%
|
0.0
|
%
|
||||||||||
Residential mortgage
|
10.9
|
%
|
9.4
|
%
|
10.6
|
%
|
3.8
|
%
|
3.7
|
%
|
||||||||||
Personal
|
8.6
|
%
|
8.8
|
%
|
10.3
|
%
|
9.4
|
%
|
8.1
|
%
|
||||||||||
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||||||
(1) 2008 figures include construction and development loans
|
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, 2012, 2011 and 2010, there were no foreign deposits.
Outstanding time deposits in amounts of $100,000 or more as of December 31, 2012, 2011 and 2010 were scheduled to mature as shown below.
Thousands of dollars
|
As of December 31,
|
|||||||||||
Time certificates of deposit $100,000 or more maturing:
|
2012
|
2011
|
2010
|
|||||||||
Within three months
|
$
|
17,400
|
$
|
14,466
|
$
|
16,344
|
||||||
Over three through six months
|
8,387
|
12,503
|
13,041
|
|||||||||
Over six through twelve months
|
18,635
|
23,815
|
16,619
|
|||||||||
Over twelve months
|
30,374
|
31,234
|
41,478
|
|||||||||
Total
|
$
|
74,795
|
$
|
82,018
|
$
|
87,482
|
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 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 Business
If our nonperforming assets increase, our earnings will be adversely affected.
At December 31, 2012, our nonperforming assets (which consist of non-accruing loans, loans 90 days or more past due, and other real estate owned) totaled $20.2 million, or 2.22% of total assets. At December 31, 2011 and December 31, 2010, our nonperforming assets were $29.5 million and $33.5 million, respectively, or 3.33% and 3.89% of total assets, respectively. Our nonperforming assets adversely affect our net income in various ways:
|
●
|
We do not record interest income on nonaccrual loans or other real estate owned.
|
|
|
|
|
●
|
We must provide for probable loan losses through a current period charge to the provision for loan losses.
|
|
|
|
|
●
|
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.
|
|
|
|
|
●
|
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 our other real estate owned.
|
|
|
|
|
●
|
The resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activity.
|
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.
Difficult market conditions have adversely affected the financial services industry.
The capital and credit markets have been experiencing unprecedented volatility and disruption for an extended period of time. Dramatic declines in the housing market, falling home prices, increased foreclosures and unemployment have negatively impacted the credit performance of mortgage loans and construction and development loans, and resulted in significant write-downs of asset values by financial institutions. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions.
This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and commercial borrowers and lack of confidence in the financial markets has adversely affected our business, results of operations and financial condition. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience adverse effects, which may be material, on our ability to access capital and on our business, 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, including commercial mortgages, was approximately $336.8 million at December 31, 2012, comprising approximately 57.4% 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, 2012, we had approximately $239.6 million of commercial real estate loans outstanding, which represented approximately 40.8% of our loan portfolio. As of that same date, we had approximately $96.5 million in residential real estate loans outstanding, or approximately 16.4% of our loan portfolio, and approximately $40.6 million in construction and development loans outstanding, or approximately 6.9% 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. General difficulties in our real estate markets have recently contributed to significant increases in our non-performing loans, charge-offs, and decreases in our income.
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, 2012, we had approximately $40.6 million in construction and development loans outstanding, or approximately 6.9% of our loan portfolio. Approximately $8.2 million, or 24.0%, and $14.5 million, or 28.3%, at December 31, 2012 and 2011, 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 collectibility 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, 2012 and 2011, our allowance for loan losses was $22.5 million and $20.6 million, respectively. As of the same dates, the ratio of our allowance for loan losses to total nonperforming loans was 134.6% and 80.0%, respectively. Nonperforming loans include nonaccrual loans and accruing loans past due 90 days or more and exclude accruing restructured loans. As of the same dates, total accruing restructured loans were $15.8 million and $21.8 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 new federal 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 will become 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 the CFPB will likely result in additional costs, which could be significant and could adversely impact the Corporation's 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 impact 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 (repricing 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 affect on our financial condition and results of operations.
The global market crisis has triggered a series of cuts in interest rates. During 2010, 2011 and 2012, the Federal Open Market Committee kept the target federal funds between 0% and 0.25% and we expect the low interest rate environment to continue in 2013. The low interest rate environment has compressed our net interest spread, which has had an adverse impact on our revenue 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 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, have led to market-wide liquidity problems and could lead to 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 it is more likely than not they will be realized. Should our management determine it is not more likely than not that the deferred tax assets will be realized, a valuation allowance with a charge to earnings would be reflected in the period. At December 31, 2012, the Company's net deferred tax asset was $8.7 million, of which $3.8 million was disallowed for regulatory capital purposes. Based on the levels of taxable income in prior years, the significant improvement in operating results in 2012 compared to 2011 and 2010, and the Company's expectation of a return to sustained profitability in future years as a result of strong core earnings, management has determined that no valuation allowance was required at December 31, 2012. 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, 2012, and determined that if an "ownership change" had occurred on December 31, 2012, 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, 2012, our mortgage servicing rights had a book value of $6.4 million and a fair value of approximately $8.2 million. Because of the current interest rate environment and the increasing rate and speed of mortgage refinancings, 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 may be required to pay additional insurance premiums to the FDIC, which could negatively impact earnings.
Recent insured institution failures, as well as deterioration in banking and economic conditions, have significantly increased FDIC loss provisions, resulting in a decline in the designated reserve ratio to historical lows. The reserve ratio may continue to decline over the next several years. In addition, the limit on FDIC coverage has been permanently increased to $250,000. These developments have caused our FDIC premiums to increase in recent periods.
Further, depending upon any future losses that the FDIC insurance fund may suffer, there can be no assurance that there will not be additional premium increases in order to replenish the fund. The FDIC may need to set a higher base rate schedule or impose special assessments due to future financial institution failures and updated failure and loss projections. Potentially higher FDIC assessment rates than those currently projected could have an adverse impact on our results of operations.
Expiration of the FDIC's Transaction Account Guarantee Program ("TAG") may result in a reduction of the Bank's deposit balances.
Temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts under the Dodd-Frank Act expired on December 31, 2012. TAG, which was originally part of the Temporary Liquidity Guarantee Program ("TLGP") of 2008, added unlimited insurance coverage to noninterest bearing accounts, regardless of balance. This temporary unlimited coverage was in addition to, and separate from, the general FDIC deposit insurance coverage of up to $250,000 available to depositors. Depending on the perceptions by depositors of the safety and soundness of banking institutions, the termination of the TAG program could result in deposit disintermediation in individual banks and in the banking industry as a whole.
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 $18.3 million at December 31, 2012, and were issued by different municipalities. The municipal portfolio contains a small level of geographic risk, as approximately 1.5% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan, 1.6% in Monroe County, Michigan and 2.0% 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.
We may face risks related to future expansion and acquisitions or mergers, which include substantial acquisition costs, an inability to effectively integrate an acquired business into our operations, lower than anticipated profit levels and economic dilution to shareholders.
We may seek to acquire other financial institutions or parts of those institutions and may engage in de novo branch expansion in the future. We may incur substantial costs to expand. An expansion may not result in the levels of profits we anticipate. Integration efforts for any future mergers or acquisitions may not be successful, which could have a material adverse effect on our results of operations and financial condition. Also, we may issue equity securities, including our common stock and securities convertible into shares of our common stock, in connection with future acquisitions, which could cause ownership and economic dilution to our current shareholders.
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 the its business, the Corporation collects, processes and retains sensitive and confidential client and customer information on behalf of the Company and other third parties. Despite the security measures the Company has in place for its facilities and systems, and the security measures of its third party service providers, the Company may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events.
The Company relies heavily on communications and information systems to conduct its business. Any failure or interruption of these systems could result in failures or disruptions in the Company's 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 the Company or by its vendors, or failure or interruption of the Company's communication or information systems, could severely damage the Company's reputation, expose it to risks of regulatory scrutiny, litigation and liability, disrupt the Company's operations, or result in a loss of customer business, the occurrence of any of which could have a material adverse effect on the Company's 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.
If we cannot raise additional capital when needed, our ability to further expand our operations through organic growth and acquisitions could be materially impaired.
We are required by federal and state regulatory authorities to maintain specified levels of capital to support our operations. We may need to raise additional capital to support our current level of assets or our growth. Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. We cannot assure that we will be able to raise additional capital in the future on terms acceptable to us or at all.
If we cannot raise additional capital when needed, our ability to maintain our current level of assets or to expand our operations through organic growth and acquisitions could be materially limited. Additional information on the capital requirements applicable to the Bank may be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources" hereof, and is incorporated here by reference.
Loss of our Chief Executive Officer or other executive officers could adversely affect our business.
Our success is dependent upon the continued service and skills of our executive officers and senior management. If we lose the services of these key personnel, it could adversely affect our business because of their skills, years of industry experience and the difficulty of promptly finding qualified replacement personnel. The services of Robert K. Chapman, our President and Chief Executive Officer, would be particularly difficult to replace.
Risks Associated with Our Stock
The Preferred Shares restrict our ability to pay dividends to common shareholders, and could have other negative effects.
The Company issued Preferred Shares to Treasury on January 16, 2009 as part of Treasury's Troubled Asset Relief Program Capital Purchase Program in a private placement exempt from the registration requirements of federal and state securities laws. On June 19, 2012, the United States Department of the Treasury sold all 20,600 Preferred Shares in a modified dutch auction. The sale of the Preferred Shares did not result in any accounting entries on the books of the Company and did not change the Company's capital position. The Company incurred $299,000 of legal and accounting costs related to the sale of the Preferred Shares in the second quarter of 2012.
On July 18, 2012, the Company repurchased from Treasury for $38,000 a Warrant to purchase 311,492 shares of Company common stock. The Warrant was issued to Treasury in connection with the Company's participation in the TARP Capital Purchase Program.
As a result of these transactions, the Company no longer has any obligation to Treasury in connection with the TARP Capital Purchase Program and the Company is no longer subject to certain requirements of the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009, leaving the Company with greater flexibility to manage its business and affairs and eliminating the management time and expenses which were required to comply with these provisions.
The Preferred Shares require payment of cumulative dividends at a rate of 5% for the first five years and 9% thereafter. The payment of dividends on the Preferred Shares will reduce the amount of earnings available to pay dividends to common shareholders. This could negatively affect our ability to pay dividends on our common stock.
We are subject to restrictions on the payment of dividends to common shareholders and the repurchase of common stock. We may not pay any dividends on our common stock unless we are current on our dividend payments on the Preferred Shares.
If we fail to pay in full dividends on the Preferred Shares for six dividend periods, whether consecutive or not, the total number of positions on the Company's Board of Directors will increase by two and the holders of the Preferred Shares, acting as a class with any other shares of our preferred stock with parity voting rights to the Preferred Shares, would have the right to elect two directors to our board of directors. This right and the terms of such directors would end when we have paid in full all accrued and unpaid dividends for all past dividend periods. This right could reduce the level of influence existing common shareholders have in our management policies.
Unless we are able to redeem the preferred stock before January 16, 2014, the cost of this capital will increase on that date, from 5% (approximately $1,030,000 annually) to 9% (approximately $1,854,000 annually). Depending on our financial condition at the time, this increase in dividends on the preferred stock could have a negative effect on our capacity to pay common stock dividends.
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 trading volume may not provide adequate liquidity for our shareholders.
Our common stock is quoted on the OTCQB. The average daily trading volume for our common stock is far less than larger financial institutions. Due to this relatively low trading volume, significant sales of our common stock, or the expectation of these sales, may place significant downward pressure on the market price of our common stock. No assurance can be given that an active trading market in our common stock will develop in the foreseeable future or can be maintained.
We may issue additional shares of our common stock in the future, which could dilute a shareholder's ownership of common stock.
Our articles of incorporation authorize our board of directors, without shareholder approval, to, among other things, issue additional shares of common or preferred stock. The issuance of any additional shares of common or preferred stock could be dilutive to a shareholder's ownership of our common stock. To the extent that we issue options or warrants to purchase common stock in the future and the options or warrants are exercised, our shareholders may experience further dilution. Holders of shares of our common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, shareholders may not be permitted to invest in future issuances of our common or preferred stock. We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Accordingly, regulatory requirements and/or further deterioration in our asset quality may require us to sell common stock to raise capital under circumstances and at prices which result in substantial dilution.
We may issue debt and equity securities that are senior to our common stock as to distributions and in liquidation, which could negatively affect the value of our common stock.
In the future, we may increase our capital resources by entering into debt or debt-like financing or issuing debt or equity securities, which could include issuances of senior notes, subordinated notes, preferred stock or common stock. In the event of our liquidation, our lenders and holders of our debt or preferred securities would receive a distribution of our available assets before distributions to the holders of our common stock. Our decision to incur debt and issue securities in future offerings will depend on market conditions and other factors beyond our control. We cannot predict or estimate the amount, timing or nature of its future offerings and debt financings. Future offerings could reduce the value of shares of our common stock and dilute a shareholder's interest in us.
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, MI. 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. Seventeen properties include banking offices, and all but three of the banking offices offer drive-up banking services. All banking offices also offer ATM service.
In addition to banking offices, United operates one loan production office in Monroe, Michigan, and 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.
As of the date of this report, there are no 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 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.
PART II
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 2012 and 2011 as quoted on the OTCQB, under the symbol of "UBMI" and cash dividends declared for each quarter of 2012 and 2011. 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 1,221 shareholders of record as of December 31, 2012.
2012
|
2011
|
|||||||||||||||||||||||
Market Price
|
Cash Dividends
|
Market Price
|
Cash Dividends
|
|||||||||||||||||||||
Quarter
|
High
|
Low
|
Declared
|
High
|
Low
|
Declared
|
||||||||||||||||||
1st
|
$
|
3.45
|
$
|
2.49
|
$
|
-
|
$
|
4.05
|
$
|
3.35
|
$
|
-
|
||||||||||||
2nd
|
3.70
|
3.25
|
-
|
3.75
|
3.00
|
-
|
||||||||||||||||||
3rd
|
4.20
|
3.26
|
-
|
3.50
|
2.90
|
-
|
||||||||||||||||||
4th
|
4.65
|
3.91
|
-
|
2.80
|
2.20
|
-
|
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, under the headings "Supervision and Regulation" and "Recent Developments" in Item 1 of this report and the risk factor in Item 1A of this report entitled "The Preferred Shares restrict our ability to pay dividends to common shareholders, and could have other negative effects," which discussion is incorporated here by reference.
The following table provides information regarding equity compensation plans approved by shareholders as of December 31, 2012.
Plan Category
|
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)
|
358,070
|
$
|
21.32
|
-
|
||||||||
Stock Incentive Plan of 2010
|
214,045
|
3.33
|
263,330
|
|||||||||
Director Retainer Stock Plan (2)
|
119,539
|
NA
|
216,864
|
|||||||||
Senior Management Bonus Deferral Stock Plan (2)
|
4,568
|
NA
|
21,373
|
|||||||||
Total
|
696,222
|
$ |
15.59
|
501,567
|
(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 2008 through 2012. 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
|
2012
|
2011
|
2010
|
2009
|
2008
|
|||||||||||||||
Assets
|
||||||||||||||||||||
Cash and demand balances in other banks
|
$
|
13,769
|
$
|
15,798
|
$
|
10,623
|
$
|
10,047
|
$
|
12,147
|
||||||||||
Federal funds sold and equivalents
|
56,843
|
91,794
|
95,599
|
115,542
|
6,325
|
|||||||||||||||
Securities available for sale
|
206,129
|
173,197
|
124,544
|
92,146
|
82,101
|
|||||||||||||||
Net loans
|
577,515
|
551,359
|
577,111
|
638,012
|
683,695
|
|||||||||||||||
Other assets
|
53,485
|
52,861
|
53,833
|
53,581
|
48,125
|
|||||||||||||||
Total Assets
|
$
|
907,741
|
$
|
885,009
|
$
|
861,710
|
$
|
909,328
|
$
|
832,393
|
||||||||||
Liabilities and Shareholders' Equity
|
||||||||||||||||||||
Noninterest bearing deposits
|
$
|
165,430
|
$
|
139,346
|
$
|
113,206
|
$
|
99,893
|
$
|
89,487
|
||||||||||
Interest bearing deposits
|
619,213
|
625,510
|
620,792
|
682,908
|
620,062
|
|||||||||||||||
Total deposits
|
784,643
|
764,856
|
733,998
|
782,801
|
709,549
|
|||||||||||||||
Short term borrowings
|
-
|
-
|
1,234
|
-
|
-
|
|||||||||||||||
Other borrowings
|
21,999
|
24,035
|
30,321
|
42,098
|
50,036
|
|||||||||||||||
Other liabilities
|
3,702
|
2,344
|
3,453
|
3,562
|
3,357
|
|||||||||||||||
Total Liabilities
|
810,344
|
791,235
|
769,006
|
828,461
|
762,942
|
|||||||||||||||
Shareholders' Equity
|
97,397
|
93,774
|
92,704
|
80,867
|
69,451
|
|||||||||||||||
Total Liabilities and Shareholders' Equity
|
$
|
907,741
|
$
|
885,009
|
$
|
861,710
|
$
|
909,328
|
$
|
832,393
|
RESULTS OF OPERATIONS
|
||||||||||||||||||||
Interest income
|
$
|
34,693
|
$
|
36,165
|
$
|
39,770
|
$
|
43,766
|
$
|
47,041
|
||||||||||
Interest expense
|
4,528
|
6,114
|
8,687
|
12,251
|
17,297
|
|||||||||||||||
Net Interest Income
|
30,165
|
30,051
|
31,083
|
31,515
|
29,744
|
|||||||||||||||
Provision for loan losses
|
8,350
|
12,150
|
21,530
|
25,770
|
14,607
|
|||||||||||||||
Noninterest income
|
21,491
|
17,211
|
16,298
|
16,899
|
13,510
|
|||||||||||||||
Goodwill impairment
|
-
|
-
|
-
|
3,469
|
-
|
|||||||||||||||
Other noninterest expense
|
37,203
|
34,618
|
32,497
|
33,647
|
29,963
|
|||||||||||||||
Income (loss) before federal income tax
|
6,103
|
494
|
(6,646
|
)
|
(14,472
|
)
|
(1,316
|
)
|
||||||||||||
Federal income tax (benefit)
|
1,640
|
(423
|
)
|
(2,938
|
)
|
(5,639
|
)
|
(1,280
|
)
|
|||||||||||
Net income (loss)
|
$
|
4,463
|
$
|
917
|
$
|
(3,708
|
)
|
$
|
(8,833
|
)
|
$
|
(36
|
)
|
KEY RATIOS
|
||||||||||||||||||||
Return on average assets
|
0.50
|
%
|
0.10
|
%
|
-0.42
|
%
|
-1.03
|
%
|
0.00
|
%
|
||||||||||
Return on average shareholders' equity
|
4.69
|
%
|
0.98
|
%
|
-4.66
|
%
|
-10.61
|
%
|
-0.05
|
%
|
||||||||||
Net interest margin
|
3.59
|
%
|
3.64
|
%
|
3.79
|
%
|
3.80
|
%
|
4.04
|
%
|
||||||||||
Basic and diluted earnings (loss) per share (1)
|
$
|
0.26
|
$
|
(0.02
|
)
|
$
|
(0.89
|
)
|
$
|
(1.93
|
)
|
$
|
(0.01
|
)
|
||||||
Cash dividends paid per common share
|
-
|
-
|
-
|
0.02
|
0.70
|
|||||||||||||||
Dividend payout ratio
|
NA
|
NA
|
NA
|
NA
|
NA
|
|||||||||||||||
Equity to assets ratio (2)
|
10.6
|
%
|
10.6
|
%
|
9.1
|
%
|
9.5
|
%
|
9.1
|
%
|
||||||||||
(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-30, 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-31 through A-71 hereof, and are incorporated by reference here.
INDEX TO FINANCIAL STATEMENTS
|
Page No.
|
||
|
|
|
|
|
Consolidated Financial Statements
|
|
|
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
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, 2012 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
|
None.
PART III
The Company has adopted a Code of Business Conduct and Ethics (the "Code") that applies to all co-workers, officers and directors of the Company and its subsidiaries. The Code is designed 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 reports and documents that the Company files with, or submits to, the Commission and in other public communications made by the registrant;
|
|
|
•
|
Compliance with applicable governmental laws, rules and regulations;
|
|
|
•
|
Prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and
|
|
|
•
|
Accountability for adherence to the Code.
|
A copy of the Code is posted on our website at www.ubat.com.
The information required by this item, other than as set forth above, is contained under the heading "Board of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement in connection with its 2013 Annual Meeting of Shareholders and is incorporated here by reference
The information required by this item is contained under the heading "Compensation of Directors and Executive Officers," "Compensation Committee Report" and "Compensation Committee Interlocks and Insider Participation" in the Company's definitive Proxy Statement in connection with its 2013 Annual Meeting of Shareholders and is incorporated here by reference.
ITEM 12 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this item is contained under the headings "Compensation of Directors and Executive Officers – Equity Compensation Plan Information," "Security Ownership of Certain Beneficial Owners," and "Security Ownership of Management," in the Company's definitive Proxy Statement in connection with its 2013 Annual Meeting of Shareholders and is incorporated here by reference.
The information required by this item is contained under the headings "Board of Directors," "Corporate Governance" and "Transactions with Related Persons" in the Company's definitive Proxy Statement in connection with its 2013 Annual Meeting of Shareholders and is incorporated here by reference.
The information required by this item is contained under the heading "Relationship With Independent Public Accountants" in the Company's definitive Proxy Statement in connection with its 2013 Annual Meeting of Shareholders and is incorporated here by reference.
PART IV
(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
|
|
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
|
|
|
|
|
Consolidated Financial Statements
|
|
|
|
||
|
||
|
||
|
||
|
||
|
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 seventeen banking offices located in Lenawee, Livingston, Monroe and Washtenaw Counties and one loan production office in Monroe County. 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 UBT, a Michigan-chartered bank organized over 115 years ago. We are registered as a bank holding company under the Bank Holding Company Act of 1956. At December 31, 2012, we had total assets of approximately $907.7 million, deposits of approximately $784.6 million, and total shareholders' equity of approximately $97.4 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, 2012, our non-interest income equaled 41.6% of our operating revenues and for each of the last five years ended December 31, 2012 approximated 35.7% of our operating revenues. This diverse revenue stream has enabled us to recognize a pre-tax, pre-provision return on average assets of 1.62% for the twelve month period ended December 31, 2012. Our average pre-tax, pre-provision return on average assets over the last five years ended December 31, 2012 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.
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 Lenawee County, and had the second-highest volume in Washtenaw County for 2011.1 Information for 2012 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 24.4% of our noninterest income for the twelve months ended December 31, 2012.
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, 2012 and 2011, USFC was the leading SBA lender in each of Lenawee, Washtenaw and Livingston Counties. For the twelve months ended September 30, 2012, USFC was the second largest SBA 7A lender in Michigan, based on loan volume.2
Our primary market area is Washtenaw, Livingston, Lenawee, and Monroe Counties in Michigan, and generally encompasses the Ann Arbor metropolitan area, which we believe is our primary area for future organic growth.
Michigan had the fifth highest seasonally-adjusted unemployment rate in the United States for November 2012.3 The Michigan seasonally-adjusted unemployment rate of 8.9%4 for November 2012 improved from 9.3% at December 31, 2011.5 At the same time, October, 2012 local area unemployment rates were below year-ago levels in every metropolitan area in Michigan, and below September levels in every area except Detroit/Warren/Livonia.
The University of Michigan's Research Seminar for Quantitative Economics reports that they see modest pickup in the Michigan economy going into 2013 and continuing through 2014. Their estimate is that Michigan job growth will accelerate from its 0.5 percent pace over the last three quarters of 2012 to 1.2 percent at the beginning of 2013, holding near that level throughout most of the year before increasing its tempo to around 1.5 percent during 2014.6 Washtenaw County had the lowest unadjusted unemployment rate in the state at 4.3% for November 2012.7 Washtenaw County had a population of approximately 345,000 for 20108 and had a median household income of approximately $54,900 for 2009, which was the fourth highest in the state.9
3 U.S. Bureau of Labor Statistics, Local Area Unemployment Statistics, Unemployment Rates for November 2012.
4 Michigan Labor Market Information, Data Explorer – Unemployment Statistics, Statewide, Adjusted (Monthly Historical).
6 University of Michigan's Research Seminar for Quantitative Economics; http://www.michiganadvantage.org
7 Michigan Labor Market Information, Data Explorer – Unemployment Statistics, by County (November, 2012).
The economic base of Washtenaw County has a substantial reliance 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 employment, in large part due to the University of Michigan and the University of Michigan Medical Center.
Livingston County had an unadjusted unemployment rate of 7.6% for November 2012.10 The county had a population of approximately 181,000 for 201011 and had a median household income of approximately $68,500 for 2009, which was the highest in the state.12 Approximately 35 percent of the land in Livingston County is used for farming, and a large portion of the population works outside the county. Manufacturing in the county is dominated by auto-related sectors. 13
The economic base of Lenawee and Monroe Counties is primarily agricultural and light manufacturing, with their manufacturing sectors exhibiting moderate dependence on the automotive industry. Lenawee County had a population of approximately 100,000 for 201014 and a median household income of approximately $46,700 for 2009.15 Monroe County had a population of approximately 152,000 for 2010 16 and a median household income of approximately $53,200 for 2009.17 Lenawee County had an unadjusted unemployment rate of 7.6% for November 2012 18 and Monroe County had an unadjusted unemployment rate of 6.4% for that same month.19
Expiration of the FDIC's Transaction Account Guarantee Program ("TAG")
Temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts under the Dodd-Frank Act expired on December 31, 2012. TAG, which was originally part of the Temporary Liquidity Guarantee Program of 2008, added unlimited insurance coverage to noninterest bearing accounts, regardless of balance. This temporary unlimited coverage was in addition to, and separate from, the general FDIC deposit insurance coverage of up to $250,000 available to depositors. Depending on the perceptions by depositors of the safety and soundness of banking institutions, the termination of the TAG program could result in deposit disintermediation in individual banks and in the banking industry as a whole.
10 Michigan Labor Market Information, Data Explorer – Unemployment Statistics, by County (November 2012).
Other Developments
Exit from TARP Capital Purchase Program
The Company issued Preferred Shares to U.S. Treasury on January 16, 2009 as part of Treasury's Troubled Asset Relief Program Capital Purchase Program in a private placement exempt from the registration requirements of federal and state securities laws. On June 19, 2012, Treasury sold all 20,600 Preferred Shares in a modified dutch auction. The sale of the Preferred Shares did not result in any accounting entries on the books of the Company and did not change the Company's capital position. The Company incurred $299,000 of legal and accounting costs related to the sale of the Preferred Shares in the second quarter of 2012.
On July 18, 2012, the Company repurchased from Treasury for $38,000 a Warrant to purchase 311,492 shares of Company common stock. The Warrant was issued to Treasury in connection with the Company's participation in the TARP Capital Purchase Program.
As a result of these transactions, the Company no longer has any obligation to Treasury in connection with the TARP Capital Purchase Program and the Company is no longer subject to certain requirements of the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009, leaving the Company with greater flexibility to manage its business and affairs and eliminating the management time and expenses which were required to comply with these provisions.
Termination of Memorandum of Understanding
UBT previously entered into a Memorandum of Understanding ("MOU") with the Federal Deposit Insurance Corporation ("FDIC") and the Michigan Office of Financial and Insurance Regulation ("OFIR") which documented an understanding among the Bank, FDIC and OFIR relating to, among other things, the declaration and payment of dividends by the Bank to the Company and the maintenance of specified capital levels. On November 13, 2012, the Bank received a letter from FDIC and OFIR notifying the Bank that, as a result of an examination of the Bank as of June 30, 2012, FDIC and OFIR have terminated the MOU with the Bank effective immediately.
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. In connection with termination of the MOU, the Board of Directors of the Bank has resolved that the Bank will maintain Tier 1 leverage ratio at a level equal to or exceeding 8.5% and that the Bank will not declare or pay any dividend to the Company unless the Board of Directors first determines that the Bank has produced stable earnings. The Bank's Tier 1 leverage ratio was 9.59% at December 31, 2012, after payment of a $1.6 million dividend to the Company in the fourth quarter of 2012.
Board Resolution
At the direction of the Reserve Bank, on April 22, 2010, the Company's Board of Directors adopted a resolution requiring the Company to obtain written approval from the Reserve Bank prior to any of the following:
(i) declaration or payment of common or preferred stock dividends; (ii) any increase in debt or issuance of trust preferred obligations; or (iii) the redemption of Company stock.
The Company has requested and received Reserve Bank approval to declare and pay as required, and has declared and paid, all accrued dividends on its 20,600 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, Liquidation Preference Amount $1,000 per share (the "Preferred Shares") to the date of this report. On February 12, 2013, the Reserve Bank notified the Company that it is no longer required to obtain prior approval of future payments of dividends on the Preferred Shares.
The Company's consolidated net income was $4.5 million for the twelve months ended December 31, 2012, improving from $917,000 for 2011. Reduced levels of loan loss provision and double-digit increases in the Company's noninterest income significantly contributed to the higher earnings levels achieved in 2012. The Company's return on average assets ("ROA") for the twelve month period ended December 31, 2012 was 0.50%, up from 0.10%, for the same period of 2011. Return on average shareholders' equity ("ROE") of 4.69% for the twelve months ended December 31, 2012 was up from 0.98% for 2011.
Net interest income for 2012 was 0.4% above 2011 levels, in spite of a 2.0% increase in average earning assets. Continued downward pressure on both short and long-term interest rates has contributed to the modest decline in the Company's net interest margin in 2012 compared to 2011. Net interest margin for the fourth quarter of 2012 declined from prior quarters primarily as a result of increasing prepayment speeds on the Bank's portfolio of mortgage-backed securities. While the current low rate environment has helped mortgage production, it has negatively impacted the yields on mortgage-backed securities.
Noninterest income improved by $4.3 million, or 24.9%, in 2012 as compared to 2011, following an increase of 5.6% in 2011 compared to 2010. United's double-digit increases in noninterest income were a significant driver of the Company's improved earnings in 2012. A significant portion of this growth in noninterest income resulted from increased loan originations, both of residential mortgages and SBA loans.
Total noninterest expenses were up 7.5% in 2012 compared to 2011, following an increase of 6.5% in 2011 compared to 2010. Several categories of noninterest expense declined in the twelve months ended December 31, 2012 compared to the same period of 2011. Among those were FDIC insurance premiums, external data processing expense and expenses related to other real estate owned ("ORE") and other foreclosed properties. At the same time, salaries and employee benefits, advertising and marketing expense and attorney and other professional fees each experienced increases in 2012 compared to 2011.
The Company's provision for loan losses of $8.4 million for the twelve months ended December 31, 2012 was down 31.3% from $12.2 million for the same period of 2011. 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 $907.7 million at December 31, 2012, up 2.6% from $885.0 million at December 31, 2011. The Company's total portfolio loans have increased by $23.0 million, or 4.1%, since December 2011, reflecting United's entry into adjacent markets, combined with a moderate strengthening of the local economy.
The Company continues to hold elevated levels of investments, federal funds sold and cash equivalents in order to protect the balance sheet during this prolonged period of economic uncertainty. In 2012, the Company moved some of its liquidity from federal funds sold and cash equivalents into securities available for sale. United's balances in federal funds sold and cash equivalents were $56.8 million at December 31, 2012, compared to $91.8 million at December 31, 2011. Securities available for sale of $206.1 million at December 31, 2012 were up $32.9 million or 19.0% from December 31, 2011. The net change in federal funds sold and cash equivalents and securities available for sale was $2.0 million at December 31, 2012 compared to December 31, 2011.
Total deposits of $784.6 million at December 31, 2012 were up $19.8 million from $764.9 million at December 31, 2011, with all of the growth in non-interest bearing deposit balances. 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 0.61% for 2012, down from 0.83% for 2011.
The Company's ongoing proactive efforts to resolve nonperforming loans have contributed to the Company's continued improvement in credit quality trends in 2012. Within the Company's loan portfolio, $16.8 million of loans were considered nonperforming at December 31, 2012, compared to $25.8 million at December 31, 2011. Total nonperforming loans as a percent of total portfolio loans improved from 4.57% at the end of 2011 to 2.86% at December 31, 2012. 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, 2012 and 2011 were $15.8 million and $21.8 million, respectively.
The Company's ratio of allowance for loan losses to total loans at December 31, 2012 was 3.84%, and covered 134.6% of nonperforming loans, compared to 3.66%, and 80.0%, respectively, at December 31, 2011. The Company's allowance for loan losses increased by $1.9 million, or 9.3%, from December 31, 2011 to December 31, 2012. Net charge-offs of $6.4 million for 2012 were down 61.4% from the $16.7 million charged off in 2011.
Investment Securities
Balances in the Company's securities portfolio increased in 2012 compared to 2011, generally reflecting a shift of liquidity from federal funds sold and equivalents. 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 2012 and 2011.
December 31, 2012
|
December 31, 2011
|
|||||||||||||||
In thousands of dollars
|
Balance
|
% of total
|
Balance
|
% of total
|
||||||||||||
U.S. Treasury and agency securities
|
$
|
27,316
|
13.3
|
%
|
$
|
49,366
|
28.5
|
%
|
||||||||
Mortgage-backed agency securities
|
160,499
|
77.9
|
%
|
102,697
|
59.3
|
%
|
||||||||||
Obligations of states and political subdivisions
|
18,286
|
8.9
|
%
|
20,977
|
12.1
|
%
|
||||||||||
Corporate, asset backed and other securities
|
-
|
0.0
|
%
|
126
|
0.1
|
%
|
||||||||||
Equity securities
|
28
|
0.0
|
%
|
31
|
0.0
|
%
|
||||||||||
Total Investment Securities
|
$
|
206,129
|
100.0
|
%
|
$
|
173,197
|
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 1.5% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan, 2.0% 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 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 2012 and 2011.
In thousands of dollars
|
12/31/12
|
12/31/11
|
Change
|
|||||||||
U.S. Treasury and agency securities
|
$
|
116
|
$
|
367
|
$
|
(251
|
)
|
|||||
Mortgage-backed agency securities
|
1,670
|
842
|
828
|
|||||||||
Obligations of states and political subdivisions
|
735
|
1,287
|
(552
|
)
|
||||||||
Equity securities
|
2
|
5
|
(3
|
)
|
||||||||
Total net unrealized gains
|
$
|
2,523
|
$
|
2,501
|
$
|
22
|
FHLB Stock
The Bank is a member of the Federal Home Loan Bank of Indianapolis ("FHLBI") and holds a $2.6 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 $107.8 million for the first nine months of 2012, and continues to pay dividends on its stock.20 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, 2012.
20 Federal Home Loan Bank of Indianapolis, Form 10-Q Quarterly Report for the period ended September 30, 2012.
Portfolio Loans
Total portfolio loan balances at December 31, 2012 increased by $23.0 million, or 4.1%, from December 31, 2011. Personal loans on the Company's balance sheet included home equity lines of credit, direct and indirect loans for automobiles, boats, recreational vehicles and other items for personal use. Personal loan balances increased by $7.8 million, or 7.5%, in 2012, with substantially all of the increase in consumer installment loans. Business loan balances increased by $1.6 million, or 0.5%, over the twelve months ended December 31, 2012, compared to a 5.4% decrease in 2011. Growth of business loans in 2012 reflects a modest improvement in loan demand, net of write-downs, charge-offs and payoffs.
The Bank's loan portfolio includes $4.8 million of purchased participations in business loans originated by other institutions. These participations represent 0.8% of total portfolio loans, and these loans are primarily the result of participations purchased from other banks headquartered in Michigan.
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 a favorable interest rate environment contributed to stronger demand for residential real estate mortgages in 2012, and balances increased by $13.4 million, or 16.1%, in 2012 compared to 2011.
Outstanding balances of loans for construction and development have increased by $913,000 since December 31, 2011. 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 2012 and 2011.
December 31, 2012
|
December 31, 2011
|
|||||||||||||||
In thousands of dollars
|
Balance
|
% of Total
|
Balance
|
% of Total
|
||||||||||||
Personal
|
$
|
111,170
|
18.9
|
%
|
$
|
103,405
|
18.3
|
%
|
||||||||
Business, including commercial mortgages
|
336,772
|
57.5
|
%
|
335,133
|
59.5
|
%
|
||||||||||
Tax exempt
|
1,554
|
0.3
|
%
|
2,045
|
0.4
|
%
|
||||||||||
Residential mortgage
|
96,452
|
16.4
|
%
|
83,072
|
14.7
|
%
|
||||||||||
Construction and development
|
40,634
|
6.9
|
%
|
39,721
|
7.0
|
%
|
||||||||||
Deferred loan fees and costs
|
96
|
0.0
|
%
|
326
|
0.1
|
%
|
||||||||||
Total portfolio loans
|
$
|
586,678
|
100.0
|
%
|
$
|
563,702
|
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, 2012 and 2011.
December 31,
|
Change
|
|||||||||||||||
Nonperforming Assets, in thousands of dollars
|
2012
|
2011
|
$
|
|
%
|
|||||||||||
Nonaccrual loans
|
$
|
16,714
|
$
|
25,754
|
$
|
(9,040
|
)
|
-35.1
|
%
|
|||||||
Accruing loans past due ninety days or more
|
37
|
31
|
6
|
19.4
|
%
|
|||||||||||
Total nonperforming loans
|
16,751
|
25,785
|
(9,034
|
)
|
-35.0
|
%
|
||||||||||
Percent of nonperforming loans to total loans
|
2.86
|
%
|
4.57
|
%
|
-1.72
|
%
|
||||||||||
Allowance coverage of nonperforming loans
|
134.6
|
%
|
80.0
|
%
|
54.6
|
%
|
||||||||||
Other assets owned
|
3,412
|
3,669
|
(257
|
)
|
-7.0
|
%
|
||||||||||
Total nonperforming assets
|
$
|
20,163
|
$
|
29,454
|
$
|
(9,291
|
)
|
-31.5
|
%
|
|||||||
Percent of nonperforming assets to total assets
|
2.22
|
%
|
3.33
|
%
|
-1.11
|
%
|
||||||||||
Loans delinquent 30-89 days
|
$
|
3,007
|
$
|
6,468
|
$
|
(3,461
|
)
|
-53.5
|
%
|
|||||||
Accruing restructured loans
|
||||||||||||||||
Business, including commercial mortgages
|
$
|
7,643
|
$
|
10,404
|
$
|
(2,761
|
)
|
-26.5
|
%
|
|||||||
Construction and development
|
4,738
|
8,186
|
(3,448
|
)
|
-42.1
|
%
|
||||||||||
Residential mortgage
|
3,267
|
3,078
|
189
|
6.1
|
%
|
|||||||||||
Home Equity
|
171
|
171
|
-
|
0.0
|
%
|
|||||||||||
Total accruing restructured loans
|
$
|
15,819
|
$
|
21,839
|
$
|
(6,020
|
)
|
-27.6
|
%
|
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 $9.0 million, or 35.1%, since the end of 2011. 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. During the second half of 2012, the Bank received payoffs of five loans, each in excess of $1.0 million, with an aggregate payoff of $7.2 million.
Total nonperforming loans as a percent of total portfolio loans were 2.86% at December 31, 2012, down from 4.57% at December 31, 2011, while the allowance coverage of nonperforming loans increased from 80.0% at December 31, 2011 to 134.6% at December 31, 2012. 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 7.0% since the end of 2011, as the Bank continued to sell assets while others have been added to its totals. At December 31, 2012, other real estate owned included 27 properties that were acquired through foreclosure or in lieu of foreclosure. The properties included 22 commercial properties, seven of which were the result of out-of-state loan participations, and five residential properties. All properties are for sale. Other repossessed assets at December 31, 2012 consisted of two automobiles.
The following table reflects the changes in other assets owned during 2012.
In thousands of dollars
|
Other Real Estate
|
Other Assets
|
Total
|
|||||||||
Balance at January 1
|
$
|
3,657
|
$
|
12
|
$
|
3,669
|
||||||
Additions
|
3,925
|
40
|
3,965
|
|||||||||
Sold
|
(3,674
|
)
|
(49
|
)
|
(3,723
|
)
|
||||||
Write-downs of book value
|
(499
|
)
|
-
|
(499
|
)
|
|||||||
Balance at December 31
|
$
|
3,409
|
$
|
3
|
$
|
3,412
|
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 $10.8 million at December 31, 2012 and $10.7 million at December 31, 2011. 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 $15.8 at December 31, 2012 and $21.8 million at December 31, 2011.
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, 2012, there were six commercial loans totaling $2.9 million that were proceeding through this six-month performance period and whose rate is not below current market rates.
Accruing restructured loans at December 31, 2012 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, 2012. 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 2012.
December 31, 2012
|
Fourth Quarter
|
|||||||||||||||
Dollars in thousands
|
Number of Loans
|
Recorded Balance
|
Average Yield
|
Portfolio Yield
|
||||||||||||
CLD Loans
|
6
|
$
|
4,738
|
|||||||||||||
Other Commercial Loans
|
18
|
7,643
|
||||||||||||||
Total Commercial Loans
|
24
|
12,381
|
5.15
|
%
|
5.25
|
%
|
||||||||||
Residential Mortgage & Home Equity Loans
|
17
|
3,438
|
3.81
|
%
|
5.23
|
%
|
||||||||||
Total accruing restructured loans
|
41
|
$
|
15,819
|
The Company performed its quarterly evaluation of the specific reserves on all of its loans previously identified as TDRs at December 31, 2012. 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, 2012 and December 31, 2011.
In thousands of dollars
|
12/31/12
|
12/31/11
|
Change
|
|||||||||
Balance of TDR Loans
|
$
|
15,819
|
$
|
21,839
|
$
|
(6,020
|
)
|
|||||
Specific reserve on above loans
|
4,467
|
4,764
|
(297
|
)
|
||||||||
Percent
|
28.2
|
%
|
21.8
|
%
|
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, $34.3 million of impaired loans have been identified as of December 31, 2012, down from $52.0 million at December 31, 2011. The specific allowance for impaired loans was $8.3 million at December 31, 2012, down from $9.0 million at December 31, 2011. 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 increased by $1.9 million at December 31, 2012 as compared to December 31, 2011. The allowance for loan losses as a percent of total loans of 3.84% at December 31, 2012 was up from 3.66% at December 31, 2011. 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, 2012 for impaired and non-impaired loans. Impaired loans are further split between accruing TDRs and other impaired loans.
% of
|
||||||||||||||||||||
Unpaid
|
Cumulative
|
Unpaid
|
||||||||||||||||||
Principal
|
Charge-
|
Combined
|
Principal
|
|||||||||||||||||
Dollars in thousands
|
Balance
|
ALLL
|
offs
|
Losses
|
Balance
|
|||||||||||||||
Accruing TDRs
|
$
|
15,819
|
$
|
4,467
|
$
|
4,467
|
28.2
|
%
|
||||||||||||
Other Impaired Loans
|
18,469
|
3,837
|
3,837
|
|||||||||||||||||
Cumulative Charge-offs
|
9,575
|
-
|
9,575
|
9,575
|
||||||||||||||||
Total
|
28,044
|
3,837
|
9,575
|
13,412
|
47.8
|
%
|
||||||||||||||
Non-impaired loans
|
$
|
552,390
|
$
|
14,239
|
$
|
14,239
|
2.6
|
%
|
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, 2012 and 2011, core deposits accounted for 99.3% and 98.8%, 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.
2012 Change
|
2011 Change
|
|||||||||||||||
In thousands of dollars
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||
Noninterest bearing deposits
|
$
|
26,084
|
18.7
|
%
|
$
|
26,140
|
23.1
|
%
|
||||||||
Interest bearing deposits
|
(6,297
|
)
|
-1.0
|
%
|
4,718
|
0.8
|
%
|
|||||||||
Total deposits
|
$
|
19,787
|
2.6
|
%
|
$
|
30,858
|
4.2
|
%
|
Total deposits grew by $19.8 million, or 2.6%, in the twelve months ended December 31, 2012, compared to growth of $30.9 million, or 4.2%, in the twelve months ended December 31, 2011. The Bank's noninterest bearing deposits increased by 18.7% during 2012, while interest bearing deposits declined by 1.0%. As part of its capital ratio improvement initiatives, United generally did not replace maturing wholesale deposits in 2012 or 2011. 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 0.61% for all of 2012, down from 0.83% for 2011.
Noninterest bearing deposits made up 21.1% of total deposits at December 31, 2012, compared to 18.2% at December 31, 2011. The table below shows the makeup of the Company's deposits at December 31, 2012 and 2011.
December 31, 2012
|
December 31, 2011
|
|||||||||||||||
In thousands of dollars
|
Balance
|
% of total
|
Balance
|
% of total
|
||||||||||||
Noninterest bearing deposits
|
$
|
165,430
|
21.1
|
%
|
$
|
139,346
|
18.2
|
%
|
||||||||
Interest bearing deposits
|
619,213
|
78.9
|
%
|
625,510
|
81.8
|
%
|
||||||||||
Total deposits
|
$
|
784,643
|
100.0
|
%
|
$
|
764,856
|
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. The Bank is also a participant in the federal funds market, either as a borrower or seller. 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 2012 and 2011, 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.
Earnings Summary and Key Ratios
Consolidated net income for the year ended December 31, 2012 was $4.5 million, or $0.26 per share of common stock, compared to $917,000, or $(0.02) per share of common stock (after accounting for preferred stock dividends), for 2011 and a loss of $3.7 million, or $(0.89) per common share, in 2010. Elevated levels of noninterest income and lower provision for loan losses in 2012 contributed to improved earnings levels and performance ratios compared to 2011 and 2010. Return on average assets ("ROA") was 0.50% for 2012, compared to 0.10% for 2011 and -0.42% for 2010. Return on average shareholders' equity ("ROE") was 4.69% for the full year of 2012, compared to 0.98% for 2011 and -4.66% for 2010.
Net interest income of $30.2 million for 2012 was 0.4% above the same period of 2011. These minimal changes resulted from relatively large reductions in both interest income and interest expense in 2012 compared to 2011. United's net interest margin was 3.59% for the twelve months ended December 31, 2012 and was down from 3.64% for 2011 and 3.79% for 2010.
Total noninterest income for the twelve months ended December 31, 2012 improved by $4.3 million, or 24.9%, in 2012 as compared to 2011. United's double-digit increases in noninterest income continued to be a significant driver of the Company's improved earnings. This growth in noninterest income resulted, in part, from increased loan originations, both of residential mortgages and SBA loans. Noninterest income represented 41.6% of the Company's total revenues in 2012, compared to 36.4% for 2011.
Total noninterest expense was up $2.6 million, or 7.5%, in 2012 compared to 2011. The largest dollar amount of increase for 2012 and 2011 was in salaries and employee benefits. Expenses relating to ORE properties, and attorney and other professional fees reflect costs related to the Company's credit quality concerns.
As a result of strong financial performance, the Company's combined net interest income and noninterest income was up 9.3% in 2012 compared to 2011, while the Company's noninterest expense increased by 7.5% in 2012 compared to 2011.The following table shows the trends of the major components of earnings and related ratios for the five most recent quarters.
2012
|
2011
|
|||||||||||||||||||
Dollars in thousands
|
4th Qtr
|
3rd Qtr
|
2nd Qtr
|
1st Qtr
|
4th Qtr
|
|||||||||||||||
Net interest income before provision
|
$
|
7,384
|
$
|
7,646
|
$
|
7,566
|
$
|
7,569
|
$
|
7,687
|
||||||||||
Provision for loan losses
|
1,700
|
2,000
|
2,550
|
2,100
|
250
|
|||||||||||||||
Noninterest income
|
5,891
|
5,564
|
5,278
|
4,758
|
4,635
|
|||||||||||||||
Noninterest expense
|
9,586
|
9,300
|
9,148
|
9,169
|
8,815
|
|||||||||||||||
Federal income taxes
|
543
|
520
|
361
|
216
|
960
|
|||||||||||||||
Net income (loss)
|
$
|
1,446
|
$
|
1,390
|
$
|
785
|
$
|
842
|
$
|
2,297
|
||||||||||
Basic and diluted earnings (loss) per share
|
$
|
0.09
|
$
|
0.09
|
$
|
0.04
|
$
|
0.04
|
$
|
0.16
|
||||||||||
Return on average assets
|
0.64
|
%
|
0.62
|
%
|
0.36
|
%
|
0.38
|
%
|
1.03
|
%
|
||||||||||
Return on average shareholders' equity
|
5.94
|
%
|
5.79
|
%
|
3.35
|
%
|
3.61
|
%
|
9.89
|
%
|
||||||||||
Net interest margin
|
3.45
|
%
|
3.63
|
%
|
3.62
|
%
|
3.62
|
%
|
3.67
|
%
|
||||||||||
Efficiency Ratio (tax equivalent basis)
|
71.7
|
%
|
69.9
|
%
|
70.7
|
%
|
73.8
|
%
|
70.9
|
%
|
||||||||||
Tier 1 Leverage Ratio
|
10.2
|
%
|
10.1
|
%
|
9.9
|
%
|
9.8
|
%
|
9.9
|
%
|
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 1.62% for 2012, compared to 1.44% and 1.70%, respectively, for 2011 and 2010. The reduction in PTPP ROA in 2011 compared to 2010 was in part a result of increases in noninterest expenses relating to collection and disposition of troubled assets, and the improvement in 2012 compared to 2011 resulted primarily as a result of the large increase in noninterest income from loan sales and servicing.
The table below shows the calculation and trend of PTPP Income and PTPP ROA for the twelve month periods ended December 31, 2012, 2011 and 2010.
Twelve Months Ended December 31,
|
||||||||||||||||||||
Dollars in thousands
|
2012
|
2011
|
Change
|
2010
|
Change
|
|||||||||||||||
Interest income
|
$
|
34,693
|
$
|
36,165
|
-4.1
|
%
|
$
|
39,770
|
-9.1
|
%
|
||||||||||
Interest expense
|
4,528
|
6,114
|
-25.9
|
%
|
8,687
|
-29.6
|
%
|
|||||||||||||
Net interest income
|
30,165
|
30,051
|
0.4
|
%
|
31,083
|
-3.3
|
%
|
|||||||||||||
Noninterest income
|
21,491
|
17,211
|
24.9
|
%
|
16,298
|
5.6
|
%
|
|||||||||||||
Noninterest expense
|
37,203
|
34,618
|
7.5
|
%
|
32,497
|
6.5
|
%
|
|||||||||||||
Pre-tax, pre-provision income
|
$
|
14,453
|
$
|
12,644
|
14.3
|
%
|
$
|
14,884
|
-15.0
|
%
|
||||||||||
Average assets
|
$
|
893,239
|
$
|
876,008
|
2.0
|
%
|
$
|
874,768
|
0.1
|
%
|
||||||||||
Pre-tax, pre-provision ROA
|
1.62
|
%
|
1.44
|
%
|
0.18
|
%
|
1.70
|
%
|
-0.26
|
%
|
||||||||||
Reconcilement to GAAP income:
|
||||||||||||||||||||
Provision for loan losses
|
$
|
8,350
|
$
|
12,150
|
-31.3
|
%
|
$
|
21,530
|
-43.6
|
%
|
||||||||||
Income tax expense (benefit)
|
1,640
|
(423
|
)
|
NA
|
(2,938
|
)
|
NA
|
|||||||||||||
Net income (loss)
|
$
|
4,463
|
$
|
917
|
386.7
|
%
|
$
|
(3,708
|
)
|
NA
|
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 4.1% in 2012 compared to 2011, while interest expense decreased 25.9% for 2012 compared to 2014, resulting in an increase in net interest income of 0.4% for 2012 compared to 2011.
United's net interest margin was 3.59% for the twelve months ended December 31, 2012, compared to 3.64%, for 2011 and 3.79% for 2010. The Company's net interest margin has continued to trend downward year over year, as a result of a decline in loan balances and continued elevated levels of investments and short-term liquid assets, and in spite of a relatively large increase in non-interest bearing deposits. Net interest margin for the fourth quarter of 2012 declined from prior quarters primarily as a result of increasing prepayment speeds on the Bank's portfolio of mortgage-backed securities, further reducing the Company's net interest margin for the full year 2012. While the current low rate environment has helped residential mortgage loan production, it has negatively impacted the yields on mortgage-backed securities.
The Company has held historically high levels of liquidity since 2009, during this extended period of economic uncertainty. While the additional liquidity contributed to the Company's margin compression during that time period, a shift of a portion of its liquidity from federal funds sold and equivalents to investment securities in 2012 and 2011 has slowed United's decline in yields on earning assets. At the same time, the Bank has reduced its average balances of FHLB advances and higher-cost deposits during 2012 and 2011, and continues to fund its growth primarily with core deposits.
Tax-equivalent yields on earning assets declined from 4.37% for 2011 to 4.11% for 2012, for a reduction of 26 basis points. The Company's average cost of funds decreased by 24 basis points, and tax equivalent net interest margin declined from 3.64% for all of 2011 to 3.59% for 2012. 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, 2012, 2011 and 2010.
Yield Analysis of Consolidated Average Assets and Liabilities
|
|||||||||||||||||||||||||||||||||||||
Dollars in thousands
|
2012
|
2011
|
2010
|
||||||||||||||||||||||||||||||||||
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
|
$
|
67,504
|
$
|
172
|
0.25
|
%
|
$
|
101,985
|
$
|
260
|
0.25
|
%
|
$
|
93,072
|
$
|
235
|
0.25
|
%
|
|||||||||||||||||||
Taxable securities
|
173,350
|
2,390
|
1.38
|
%
|
127,448
|
2,731
|
2.14
|
%
|
79,088
|
2,136
|
2.69
|
%
|
|||||||||||||||||||||||||
Tax exempt securities (b)
|
19,570
|
992
|
5.87
|
%
|
22,276
|
1,147
|
5.15
|
%
|
27,805
|
1,455
|
5.69
|
%
|
|||||||||||||||||||||||||
Taxable loans (c)
|
589,578
|
31,390
|
5.32
|
%
|
581,283
|
32,292
|
5.56
|
%
|
632,319
|
36,279
|
5.74
|
%
|
|||||||||||||||||||||||||
Tax exempt loans (b)
|
1,760
|
120
|
6.84
|
%
|
2,105
|
174
|
8.28
|
%
|
2,359
|
194
|
8.23
|
%
|
|||||||||||||||||||||||||
Total interest earning assets (b)
|
851,762
|
$
|
35,064
|
4.11
|
%
|
835,097
|
$
|
36,604
|
4.37
|
%
|
834,643
|
$
|
40,299
|
4.83
|
%
|
||||||||||||||||||||||
Cash and due from banks
|
14,930
|
13,742
|
13,683
|
||||||||||||||||||||||||||||||||||
Other nonearning assets
|
49,061
|
52,475
|
48,768
|
||||||||||||||||||||||||||||||||||
Allowance for loan losses
|
(22,514
|
)
|
(25,306
|
)
|
(22,326
|
)
|
|||||||||||||||||||||||||||||||
Total Assets
|
$
|
893,239
|
$
|
876,008
|
$
|
874,768
|
|||||||||||||||||||||||||||||||
Liabilities and Shareholders' Equity
|
|||||||||||||||||||||||||||||||||||||
Interest bearing liabilities
|
|||||||||||||||||||||||||||||||||||||
NOW and savings deposits
|
$
|
367,982
|
$
|
554
|
0.15
|
%
|
$
|
350,985
|
$
|
854
|
0.24
|
%
|
$
|
356,153
|
$
|
1,378
|
0.39
|
%
|
|||||||||||||||||||
Other interest bearing deposits
|
246,293
|
3,194
|
1.30
|
%
|
265,143
|
4,242
|
1.60
|
%
|
292,693
|
5,975
|
2.04
|
%
|
|||||||||||||||||||||||||
Total interest bearing deposits
|
614,275
|
3,748
|
0.61
|
%
|
616,128
|
5,096
|
0.83
|
%
|
648,846
|
7,353
|
1.13
|
%
|
|||||||||||||||||||||||||
Short term borrowings
|
-
|
-
|
0.00
|
%
|
190
|
65
|
NM
|
2,022
|
144
|
7.10
|
%
|
||||||||||||||||||||||||||
Long term borrowings
|
23,013
|
782
|
3.34
|
%
|
26,947
|
953
|
3.49
|
%
|
32,524
|
1,190
|
3.66
|
%
|
|||||||||||||||||||||||||
Total interest bearing liabilities
|
637,288
|
4,530
|
0.71
|
%
|
643,265
|
6,114
|
0.95
|
%
|
683,392
|
8,687
|
1.27
|
%
|
|||||||||||||||||||||||||
Noninterest bearing deposits
|
157,147
|
136,389
|
108,390
|
||||||||||||||||||||||||||||||||||
Total including noninterest bearing deposits
|
794,435
|
4,530
|
0.57
|
%
|
779,654
|
6,114
|
0.78
|
%
|
791,782
|
8,687
|
1.10
|
%
|
|||||||||||||||||||||||||
Other liabilities
|
3,683
|
3,096
|
3,442
|
||||||||||||||||||||||||||||||||||
Shareholders' equity
|
95,121
|
93,258
|
79,544
|
||||||||||||||||||||||||||||||||||
Total Liabilities and
Shareholders' Equity
|
$
|
893,239
|
$
|
876,008
|
$
|
874,768
|
|||||||||||||||||||||||||||||||
Net interest income (b)
|
$
|
30,534
|
$
|
30,490
|
$
|
31,612
|
|||||||||||||||||||||||||||||||
Net spread (b)
|
3.40
|
%
|
3.42
|
%
|
3.56
|
%
|
|||||||||||||||||||||||||||||||
Net yield on interest earning assets (b)
|
3.59
|
%
|
3.64
|
%
|
3.79
|
%
|
|||||||||||||||||||||||||||||||
Tax equivalent adjustment on interest income
|
369
|
439
|
529
|
||||||||||||||||||||||||||||||||||
Net interest income per income statement
|
$
|
30,165
|
$
|
30,051
|
$
|
31,083
|
|||||||||||||||||||||||||||||||
Ratio of interest earning assets to interest bearing liabilities
|
1.34
|
1.30
|
1.22
|
||||||||||||||||||||||||||||||||||
(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 $454, $460 and $372 is included in the computation of loan income for 2012, 2011 and 2010, 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. 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. Nonaccrual loans are included in total loans.
2012 compared to 2011
|
2011 compared to 2010
|
|||||||||||||||||||||||
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
|
$
|
(88
|
)
|
$
|
-
|
$
|
(88
|
)
|
$
|
25
|
$
|
-
|
$
|
25
|
||||||||||
Taxable securities
|
807
|
(1,148
|
)
|
(341
|
)
|
1,102
|
(507
|
)
|
595
|
|||||||||||||||
Tax exempt securities (b)
|
(148
|
)
|
(7
|
)
|
(155
|
)
|
(294
|
)
|
(14
|
)
|
(308
|
)
|
||||||||||||
Taxable loans (c)
|
456
|
(1,358
|
)
|
(902
|
)
|
(2,863
|
)
|
(1,124
|
)
|
(3,987
|
)
|
|||||||||||||
Tax exempt loans (b)
|
(26
|
)
|
(28
|
)
|
(54
|
)
|
(21
|
)
|
1
|
(20
|
)
|
|||||||||||||
Total interest income
|
$
|
1,001
|
$
|
(2,541
|
)
|
$
|
(1,540
|
)
|
$
|
(2,051
|
)
|
$
|
(1,644
|
)
|
$
|
(3,695
|
)
|
|||||||
Interest expense on:
|
||||||||||||||||||||||||
NOW and savings deposits
|
$
|
39
|
$
|
(339
|
)
|
$
|
(300
|
)
|
$
|
(20
|
)
|
$
|
(504
|
)
|
$
|
(524
|
)
|
|||||||
Other interest bearing deposits
|
(286
|
)
|
(762
|
)
|
(1,048
|
)
|
(525
|
)
|
(1,208
|
)
|
(1,733
|
)
|
||||||||||||
Short term borrowings
|
-
|
(65
|
)
|
(65
|
)
|
(130
|
)
|
51
|
(79
|
)
|
||||||||||||||
Long term borrowings
|
(133
|
)
|
(38
|
)
|
(171
|
)
|
(197
|
)
|
(40
|
)
|
(237
|
)
|
||||||||||||
Total interest expense
|
$
|
(380
|
)
|
$
|
(1,204
|
)
|
$
|
(1,584
|
)
|
$
|
(872
|
)
|
$
|
(1,701
|
)
|
$
|
(2,573
|
)
|
||||||
Net change in net interest income
|
$
|
1,381
|
$
|
(1,337
|
)
|
$
|
44
|
$
|
(1,179
|
)
|
$
|
57
|
$
|
(1,122
|
)
|
(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 2012 was $8.4 million, down from $12.2 million in 2011 and $21.5 million for 2010. This significantly reduced level of provision for loan losses is a result of a decline in nonperforming loans, a reduction in nonperforming asset formation, and a slowdown in loan rating downgrades. For 2012, the Company's provision for loan losses exceeded its net charge offs by $1.9 million. This is in contrast to 2011, when the Company's net charge offs exceeded its provision for loan losses by $4.5 million, as the Company realized losses for which it had previously provided for in its allowance for loan losses.
The reduced level of provision for loan losses for the full year 2011 compared to 2010 was a direct result of United's continued significant improvement in its credit quality measures. In addition, as discussed in Note 5 of the Company's Notes to Consolidated Financial Statements, the Company's allowance for loan losses for loans evaluated collectively for impairment decreased by $3.7 million as a result of a change in allocation methodology as of September 30, 2011. The impact of the decrease in the allowance (and provision for loan losses) due to the new methodology was largely offset by an increase in the specific reserve associated with the Company's troubled debt restructurings of $3.2 million during 2011, which included the impact of adopting the amendments in ASU No. 2011-02.
While the local real estate markets and the economy in general have experienced some signs of stabilization, the loan portfolio of the Bank is affected by loans to a number of residential real estate developers that continue to struggle to meet their financial obligations. Loans in the Bank's residential land development and construction portfolios are secured by unimproved and improved land, residential lots, and single-family homes and condominium units. In addition, loans secured by commercial real estate are continuing to experience stresses resulting from the current economic conditions, and the loan portfolio of the Bank continues to be affected by loans to a number of larger commercial borrowers that continue to struggle to meet their financial obligations. The Bank has continued to closely monitor the impact of economic circumstances on its lending clients, and is working with these clients to minimize losses. Information regarding the allowance for loan losses is included in the "Credit Quality" discussion above.
Noninterest Income
Total noninterest income increased by 24.9% in 2012 compared to 2011, following an increase of 5.6% in 2011 compared with 2010. The following table summarizes changes in noninterest income by category for the twelve month periods ended December 31, 2012, 2011 and 2010.
Dollars in thousands
|
2012
|
2011
|
Change
|
2010
|
Change
|
|||||||||||||||
Service charges on deposit accounts
|
$
|
1,861
|
$
|
1,971
|
-5.6
|
%
|
$
|
2,191
|
-10.0
|
%
|
||||||||||
Wealth Management fee income
|
5,250
|
5,079
|
3.4
|
%
|
4,518
|
12.4
|
%
|
|||||||||||||
Gains on securities transactions
|
4
|
-
|
0.0
|
%
|
31
|
-100.0
|
%
|
|||||||||||||
Income from loan sales and servicing
|
10,104
|
6,434
|
57.0
|
%
|
6,351
|
1.3
|
%
|
|||||||||||||
ATM, debit and credit card fee income
|
2,126
|
2,176
|
-2.3
|
%
|
1,940
|
12.2
|
%
|
|||||||||||||
Other income
|
2,146
|
1,551
|
38.4
|
%
|
1,267
|
22.4
|
%
|
|||||||||||||
Total noninterest income
|
$
|
21,491
|
$
|
17,211
|
24.9
|
%
|
$
|
16,298
|
5.6
|
%
|
Service charges on deposit accounts were down 5.6% in 2012 compared to 2011, following a decrease of 10.0% in 2011 compared to 2010. This continuing decline is in spite of the Company's 18.7% growth of noninterest bearing deposit account balances over the twelve months ended December 31, 2012. No significant changes to service charge structure were implemented in 2012 or 2011, and substantially all of the decline in service charges in 2012 and 2011 was due to a reduction in NSF and overdraft fees collected in part as a result of changes in banking regulations governing collection of these fees, effective in mid-2010.
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 nondeposit investment products within the Bank's offices. Wealth Management income improved by 3.4% in 2012 compared to 2011, following an increase of 12.4% in 2011 compared to 2010. 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.
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. The Bank also originates, sells and services SBA loans through USFC. Loans serviced consist primarily of residential mortgages sold on the secondary market.
Income from loan sales and servicing increased by 57.0% in 2012 compared to 2011, following an increase of 1.3% in 2011 compared to 2010. This improvement in income resulted from increased loan originations, both of residential mortgages and SBA loans. At December 31, 2012, United's servicing portfolio consisted of $853.8 million of loans the Company has originated and sold on the secondary market, up 16.1% from $735.1 million at December 31, 2011. The following table shows the breakdown of income from loan sales and servicing between residential mortgages and USFC.
In thousands of dollars
|
2012
|
2011
|
Change
|
2010
|
Change
|
|||||||||||||||
Residential mortgage sales and servicing
|
$
|
7,725
|
$
|
5,307
|
45.6
|
%
|
$
|
5,272
|
0.7
|
%
|
||||||||||
USFC loan sales and servicing
|
2,379
|
1,127
|
111.1
|
%
|
1,079
|
4.4
|
%
|
|||||||||||||
Total income from loan sales and servicing
|
$
|
10,104
|
$
|
6,434
|
57.0
|
%
|
$
|
6,351
|
1.3
|
%
|
ATM, debit and credit card fee income provides a steady source of noninterest income for the Company. The Bank operates twenty 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 declined by $50,000, or 2.3% from 2011 to 2012, following an increase of 12.2% in 2011 compared to 2010. However, the decrease in fee income in 2012 was more than offset by a reduction in ATM and debit card processing costs in 2012 compared to 2011, with a net benefit to the Bank.
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 was $832,000 in 2012, compared to $301,000 in 2011 and $41,000 in 2010.Total other income was up 38.4% in 2012 compared to 2011, following an increase of 22.4% in 2010 to 2011.
The diversity in United's revenue stream has resulted in noninterest income that represented 41.6% of the Company's combined net interest income and noninterest income for 2012, up from 36.4% for 2011 and 34.4% for 2010. 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 2012, 2011 and 2010:
Dollars in thousands
|
2012
|
2011
|
2010
|
|||||||||
Service charges on deposit accounts
|
8.7
|
%
|
11.5
|
%
|
13.4
|
%
|
||||||
Wealth Management fee income
|
24.4
|
%
|
29.5
|
%
|
27.7
|
%
|
||||||
Gains on securities transactions
|
0.0
|
%
|
0.0
|
%
|
0.2
|
%
|
||||||
Income from loan sales and servicing
|
47.0
|
%
|
37.4
|
%
|
39.0
|
%
|
||||||
ATM, debit and credit card fee income
|
9.9
|
%
|
12.6
|
%
|
11.9
|
%
|
||||||
Other income
|
10.0
|
%
|
9.0
|
%
|
7.8
|
%
|
||||||
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.
2012
|
2011
|
|||||||||||||||||||
Dollars in thousands
|
4th Qtr
|
3rd Qtr
|
2nd Qtr
|
1st Qtr
|
4th Qtr
|
|||||||||||||||
Service charges on deposit accounts
|
$
|
483
|
$
|
496
|
$
|
449
|
$
|
433
|
$
|
471
|
||||||||||
Wealth Management fee income
|
1,395
|
1,319
|
1,311
|
1,225
|
1,299
|
|||||||||||||||
Gains on securities transactions
|
-
|
-
|
-
|
4
|
-
|
|||||||||||||||
Income from loan sales and servicing
|
2,805
|
2,803
|
2,592
|
1,904
|
1,894
|
|||||||||||||||
ATM, debit and credit card fee income
|
543
|
517
|
559
|
507
|
557
|
|||||||||||||||
Other income
|
665
|
429
|
367
|
685
|
414
|
|||||||||||||||
Total noninterest income
|
5,891
|
5,564
|
5,278
|
4,758
|
4,635
|
Noninterest Expense
Total noninterest expense for the twelve month period ended December 31, 2012 was up 7.5% compared to 2011, following an increase of 6.5% in 2011 compared to 2010. The following table summarizes changes in the Company's noninterest expense by category for 2012, 2011 and 2010.
In thousands of dollars
|
2012
|
2011
|
Change
|
2010
|
Change
|
|||||||||||||||
Salaries and employee benefits
|
$
|
21,482
|
$
|
18,971
|
13.2
|
%
|
$
|
17,217
|
10.2
|
%
|
||||||||||
Occupancy and equipment expense, net
|
5,311
|
5,015
|
5.9
|
%
|
5,207
|
-3.7
|
%
|
|||||||||||||
External data processing
|
1,113
|
1,342
|
-17.1
|
%
|
1,206
|
11.3
|
%
|
|||||||||||||
Advertising and marketing
|
752
|
625
|
20.3
|
%
|
610
|
2.5
|
%
|
|||||||||||||
Attorney, accounting and other professional fees
|
1,880
|
1,678
|
12.0
|
%
|
1,561
|
7.5
|
%
|
|||||||||||||
Expenses relating to ORE property and foreclosed assets
|
1,928
|
2,019
|
-4.5
|
%
|
1,698
|
18.9
|
%
|
|||||||||||||
FDIC Insurance premiums
|
1,133
|
1,315
|
-13.8
|
%
|
1,806
|
-27.2
|
%
|
|||||||||||||
Other expenses
|
3,604
|
3,653
|
-1.3
|
%
|
3,192
|
14.4
|
%
|
|||||||||||||
Total Noninterest Expense
|
$
|
37,203
|
$
|
34,618
|
7.5
|
%
|
$
|
32,497
|
6.5
|
%
|
Salaries and employee benefits for the twelve months ended December 31, 2012 increased by 13.2% over the same period one year earlier, following an increase of 10.2% from 2010 to 2011. The increases in 2012 primarily reflect continued higher levels of commissions and other compensation costs related to the generation of income from loan sales and servicing. In addition, the Company has increased its staffing levels modestly in 2012 to accommodate its expansion into Livingston and Monroe Counties in Michigan. The Company did not pay or accrue any cash bonus or other payout to executive officers under our bonus plans in 2012 or 2011.
Occupancy and equipment expense is the Company's second-largest noninterest expense category. This category of expense increased by 5.9% in 2012 compared to 2011, in part as a result of the Company's physical expansion in Livingston and Monroe Counties. This followed a reduction of 3.7% from 2010 to 2011. External data processing expenses were down 17.1% in 2012 compared to 2011, in part as a result of lower costs of data processing within the Wealth Management Group, resulting from a conversion to a new processor in the second half of 2011.
The Company reduced its advertising and marketing expenditures by approximately 50% in 2009 compared to 2008, and those expenses remained at reduced levels until 2012. Advertising and marketing expenses increased by 20.3%, for the full year 2012 compared to 2011, following an increase of 2.5% in 2011 compared to 2010. The increase in 2012 partially reflects the Company's launch of a new branding initiative in the third quarter of 2012. This branding initiative represents a renewed emphasis on marketing, and the Company expects to trend toward more historic spending levels for marketing and advertising expense.
Attorney, accounting and other professional fees were up 12.0% in 2012 compared to 2011. Costs in 2012 included $299,000 of attorney and accounting fees related to the sale by U.S. Treasury of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, Liquidation Preference Amount $1,000 per share in a modified dutch auction during 2012. For more information about this transaction, see "Exit from TARP Capital Purchase Program" above.
Expenses relating to ORE property and foreclosed assets declined in 2012 compared to 2011 levels. Expenses relating to ORE properties reflect costs related to the Company's credit quality concerns, and expenses in those categories declined by 4.5% in the twelve months ended December 31, 2012 compared to the same period of 2011. 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 2012, the Company recorded $1.0 million 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
|
2012
|
2011
|
2010
|
|||||||||
Income (loss) before tax
|
$
|
6,103
|
$
|
494
|
$
|
(6,646
|
)
|
|||||
Federal income tax benefit
|
1,640
|
(423
|
)
|
(2,938
|
)
|
|||||||
Effective federal tax rate
|
26.9
|
%
|
-85.6
|
%
|
44.2
|
%
|
The differences between the effective rates and the Company's expected tax rate were primarily due to the benefit from tax-exempt income, partially offset by certain nondeductible expenses in the second quarter of 2012 related to the sale of the Preferred Shares by the U.S. Treasury. For more information about this transaction, see "Exit from TARP Capital Purchase Program" above. The Company's effective tax rate for 2010 was a calculated benefit based upon pre-tax losses, resulting in a tax benefit for that year.
At December 31, 2012, the Company had net operating losses of $1.6 million that are being carried forward to reduce future taxable income. The carryforwards expire in 2030 and 2031. As of December 31, 2012, the Company had approximately $1.6 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 2031, and the alternative minimum tax credits have no expiration date.
The Company's net deferred tax asset was $8.7 million at December 31, 2012. A valuation allowance related to deferred tax assets is required when it is considered more likely than not 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, 2012 or 2011. 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 2012 and 2011, the Bank generally utilized short-term interest-bearing balances with banks as an alternative to federal funds sold.
The Company has continued to maintain high levels of liquidity, with investments, federal funds sold and cash equivalents held to improve the liquidity of the balance sheet during this prolonged period of economic uncertainty. Total cash and due from banks, federal funds sold and securities available for sale were $276.7 million at December 31, 2012, down $4.0 million, or 1.4%, from December 31, 2011, and is up $46.0 million from December 31, 2010. The Company expects to maintain higher than normal levels of liquidity until economic conditions improve and more attractive investment opportunities emerge.
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 2012 or 2011.
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 2012, the Bank procured $10.0 million of new advances and repaid $12.0 million of matured borrowings and scheduled principal payments. In the past twelve months, maturities and principal payments on advances have reduced outstanding balances by $2.0 million. Additional information concerning available lines is contained in Note 10 of the Company's Notes to Consolidated Financial Statements.
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 repricing 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, 2012, in which it was assumed that changes in market interest rates occurred ranging from up 400 basis points to down 200 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, 2012. 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 200 basis points
|
$
|
(3,995
|
)
|
-12.6
|
%
|
|||
Interest rates down 100 basis points
|
(2,489
|
)
|
-7.9
|
%
|
||||
No change in interest rates
|
(1,137
|
)
|
-3.6
|
%
|
||||
Interest rates up 100 basis points
|
194
|
0.6
|
%
|
|||||
Interest rates up 200 basis points
|
1,604
|
5.1
|
%
|
|||||
Interest rates up 300 basis points
|
2,860
|
9.1
|
%
|
|||||
Interest rates up 400 basis points
|
3,907
|
12.4
|
%
|
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.
Through November 13, 2012, UBT was party to the MOU as described under "Other Developments – Memorandum of Understanding" above. On November 13, 2012, the Bank received a letter from FDIC and OFIR notifying the Bank that, as a result of an examination of the Bank as of June 30, 2012, FDIC and OFIR terminated the MOU with the Bank effective immediately. 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.
In connection with termination of the MOU, the Board of Directors of the Bank has resolved that the Bank will maintain a Tier 1 leverage ratio at a level equal to or exceeding 8.5% and that the Bank will not declare or pay any dividend to the Company unless the Board of Directors first determines that the Bank has produced stable earnings. The Bank's Tier 1 leverage ratio was 9.59% at December 31, 2012, after payment of a $1.6 million dividend to the Company in the fourth quarter of 2012.
Current capital ratios for the Company and the Bank are shown in Note 17 of the Company's Notes to Consolidated Financial Statements. At December 31, 2012, the Company's consolidated Tier 1 capital ratio was 10.19%, its ratio of total capital to risk-weighted assets was 16.65% and its tangible common equity ratio was 8.47%. Book value per share of the Company's common stock increased from $5.78 at the end of 2011 to $6.05 at December 31, 2012.
The Company issued Preferred Shares to U.S. Treasury on January 16, 2009 as part of Treasury's Troubled Asset Relief Program Capital Purchase Program in a private placement exempt from the registration requirements of federal and state securities laws. On June 19, 2012, Treasury sold all 20,600 Preferred Shares in a modified dutch auction. The sale of the Preferred Shares did not result in any accounting entries on the books of the Company and did not change the Company's capital position. The Company incurred $299,000 of legal and accounting costs related to the sale of the Preferred Shares in the second quarter of 2012.
On July 18, 2012, the Company repurchased from Treasury for $38,000 a Warrant to purchase 311,492 shares of Company common stock. The Warrant was issued to Treasury in connection with the Company's participation in the TARP Capital Purchase Program.
As a result of these transactions, the Company no longer has any obligation to Treasury in connection with the TARP Capital Purchase Program and the Company is no longer subject to certain requirements of the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009, leaving the Company with greater flexibility to manage its business and affairs and eliminating the management time and expenses which were required to comply with these provisions.
The increase in the dividend rate to 9% on the Preferred Shares will be effective in February, 2014, and the Company is cautiously evaluating its alternatives regarding potential redemption of the Preferred Shares. Key uncertainties, including, among others, finalization of Basel III regulations, economic conditions and the capital impact of proposed accounting standards, are factors in evaluating alternatives. The Company has begun an effort to build its cash balance at the holding company to provide additional flexibility. After a $1.6 million dividend from the Bank to the holding company in December 2012, the cash balance at the holding company was $5.0 million as of December 31, 2012. The Company does not have any current plans to raise capital through a common stock offering in order to redeem the Preferred Shares while its shares of common stock are trading at a significant discount to tangible book value, such as the discount in existence at December 31, 2012.
The following table details the Company's known contractual obligations at December 31, 2012, in thousands of dollars:
Contractual Obligations
|
Less than
|
More than
|
||||||||||||||||||
Thousands of dollars
|
1 year
|
1-3 years
|
3-5 years
|
5 years
|
Total
|
|||||||||||||||
Long term debt (FHLB advances)
|
$
|
10,038
|
$
|
85
|
$
|
10,098
|
$
|
1,778
|
$
|
21,999
|
||||||||||
Operating lease arrangements
|
1,294
|
2,314
|
2,166
|
1,801
|
7,575
|
|||||||||||||||
Total
|
$
|
11,332
|
$
|
2,399
|
$
|
12,264
|
$
|
3,579
|
$
|
29,574
|
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, 2012. 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 it is more likely than not they will be realized. Should our management determine it is not more likely than not that the deferred tax assets will be 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 Stockholders
United Bancorp, Inc.
Ann Arbor, Michigan
We have audited the accompanying consolidated balance sheets of United Bancorp, Inc. (Company) as of December 31, 2012 and 2011, 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, 2012. 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, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
/s/ BKD LLP
Indianapolis, Indiana
March 1, 2013
United Bancorp, Inc. and Subsidiary
|
||||||||
In thousands of dollars
|
December 31,
|
|||||||
Assets
|
2012
|
2011
|
||||||
Cash and demand balances in other banks
|
$
|
13,769
|
$
|
15,798
|
||||
Interest bearing balances with banks
|
56,843
|
91,428
|
||||||
Federal funds sold
|
-
|
366
|
||||||
Total cash and cash equivalents
|
70,612
|
107,592
|
||||||
Securities available for sale
|
206,129
|
173,197
|
||||||
FHLB Stock
|
2,571
|
2,571
|
||||||
Loans held for sale
|
13,380
|
8,290
|
||||||
Portfolio loans
|
586,678
|
563,702
|
||||||
Less allowance for loan losses
|
22,543
|
20,633
|
||||||
Net portfolio loans
|
564,135
|
543,069
|
||||||
Premises and equipment, net
|
10,719
|
10,795
|
||||||
Bank-owned life insurance
|
14,241
|
13,819
|
||||||
Accrued interest receivable and other assets
|
25,954
|
25,676
|
||||||
Total Assets
|
$
|
907,741
|
$
|
885,009
|
||||
Liabilities
|
||||||||
Deposits
|
||||||||
Noninterest bearing deposits
|
$
|
165,430
|
$
|
139,346
|
||||
Interest bearing deposits
|
619,213
|
625,510
|
||||||
Total deposits
|
784,643
|
764,856
|
||||||
FHLB advances payable
|
21,999
|
24,035
|
||||||
Accrued interest payable and other liabilities
|
3,702
|
2,344
|
||||||
Total Liabilities
|
810,344
|
791,235
|
||||||
Commitments and Contingent Liabilities
|
||||||||
Shareholders' Equity
|
||||||||
Preferred stock, no par value; 2,000,000 shares authorized, 20,600 shares outstanding in 2012 and 2011
|
20,476
|
20,364
|
||||||
Common stock and paid in capital, no par value; 30,000,000 shares authorized; 12,705,983 and
12,697,265 shares issued and outstanding at December 31, 2012 and 2011
|
85,682
|
85,505
|
||||||
Accumulated deficit
|
(10,426
|
)
|
(13,746
|
)
|
||||
Accumulated other comprehensive income, net of tax
|
1,665
|
1,651
|
||||||
Total Shareholders' Equity
|
97,397
|
93,774
|
||||||
Total Liabilities and Shareholders' Equity
|
$
|
907,741
|
$
|
885,009
|
||||
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
|
2012
|
2011
|
2010
|
|||||||||
Interest Income
|
||||||||||||
Interest and fees on loans
|
$
|
31,470
|
$
|
32,408
|
$
|
36,411
|
||||||
Interest on securities
|
||||||||||||
Taxable
|
2,390
|
2,731
|
2,136
|
|||||||||
Tax exempt
|
661
|
766
|
988
|
|||||||||
Interest on federal funds sold and balances with banks
|
172
|
260
|
235
|
|||||||||
Total interest income
|
34,693
|
36,165
|
39,770
|
|||||||||
Interest Expense
|
||||||||||||
Interest on deposits
|
3,746
|
5,096
|
7,353
|
|||||||||
Interest on federal funds and other short term borrowings
|
-
|
65
|
144
|
|||||||||
Interest on FHLB advances
|
782
|
953
|
1,190
|
|||||||||
Total interest expense
|
4,528
|
6,114
|
8,687
|
|||||||||
Net Interest Income
|
30,165
|
30,051
|
31,083
|
|||||||||
Provision for loan losses
|
8,350
|
12,150
|
21,530
|
|||||||||
Net Interest Income After Provision for Loan Losses
|
21,815
|
17,901
|
9,553
|
|||||||||
Noninterest Income
|
||||||||||||
Service charges on deposit accounts
|
1,861
|
1,971
|
2,191
|
|||||||||
Wealth Management fee income
|
5,250
|
5,079
|
4,518
|
|||||||||
Gains on securities transactions
|
4
|
-
|
31
|
|||||||||
Income from loan sales and servicing
|
10,104
|
6,434
|
6,351
|
|||||||||
ATM, debit and credit card fee income
|
2,126
|
2,176
|
1,940
|
|||||||||
Other income
|
2,146
|
1,551
|
1,267
|
|||||||||
Total noninterest income
|
21,491
|
17,211
|
16,298
|
|||||||||
Noninterest Expense
|
||||||||||||
Salaries and employee benefits
|
21,482
|
18,971
|
17,217
|
|||||||||
Occupancy and equipment expense, net
|
5,311
|
5,015
|
5,207
|
|||||||||
External data processing
|
1,113
|
1,342
|
1,206
|
|||||||||
Advertising and marketing
|
752
|
625
|
610
|
|||||||||
Attorney, accounting and other professional fees
|
1,880
|
1,678
|
1,561
|
|||||||||
Expenses relating to ORE property and foreclosed assets
|
1,928
|
2,019
|
1,698
|
|||||||||
FDIC Insurance premiums
|
1,133
|
1,315
|
1,806
|
|||||||||
Other expenses
|
3,604
|
3,653
|
3,192
|
|||||||||
Total noninterest expense
|
37,203
|
34,618
|
32,497
|
|||||||||
Income (Loss) Before Federal Income Tax
|
6,103
|
494
|
(6,646
|
)
|
||||||||
Federal income tax (benefit)
|
1,640
|
(423
|
)
|
(2,938
|
)
|
|||||||
Net Income (Loss)
|
$
|
4,463
|
$
|
917
|
$
|
(3,708
|
)
|
|||||
Preferred stock dividends and accretion
|
(1,142
|
)
|
(1,136
|
)
|
(1,130
|
)
|
||||||
Income (Loss) Available to Common Shareholders
|
$
|
3,321
|
$
|
(219
|
)
|
$
|
(4,838
|
)
|
||||
Basic and diluted earnings (loss) per share
|
$
|
0.26
|
$
|
(0.02
|
)
|
$
|
(0.89
|
)
|
||||
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, 2012, 2011, 2010
|
||||||||||||
Years Ended December 31,
|
||||||||||||
In thousands of dollars
|
2012
|
2011
|
2010
|
|||||||||
Net income (loss)
|
$
|
4,463
|
$
|
917
|
$
|
(3,708
|
)
|
|||||
Other comprehensive income (loss):
|
||||||||||||
Unrealized gains/losses on securities:
|
||||||||||||
Unrealized gains (losses) on securities available for sale
|
26
|
1,561
|
(962
|
)
|
||||||||
Less: Reclassification for realized amount included in income
|
(4
|
)
|
-
|
(31
|
)
|
|||||||
Other comprehensive income (loss) before tax effect
|
22
|
1,561
|
(993
|
)
|
||||||||
Tax expense (benefit)
|
8
|
531
|
(338
|
)
|
||||||||
Other comprehensive income (loss)
|
14
|
1,030
|
(655
|
)
|
||||||||
Total comprehensive income (loss)
|
$
|
4,477
|
$
|
1,947
|
$
|
(4,363
|
)
|
|||||
The accompanying notes are an integral part of these consolidated financial statements.
|
United Bancorp, Inc. and Subsidiary
|
||||||||||||||||||||
For the years ended December 31, 2012, 2011, 2010
|
||||||||||||||||||||
In thousands of dollars, except per share data
|
||||||||||||||||||||
Preferred Stock
|
Common Stock and Paid In Capital
|
Retained Earnings (Accumulated Deficit)
|
AOCI (1)
|
Total
|
||||||||||||||||
Balance, December 31, 2009
|
$
|
20,158
|
$
|
68,122
|
$
|
(8,689
|
)
|
$
|
1,276
|
$
|
80,867
|
|||||||||
Net loss, 2010
|
(3,708
|
)
|
(3,708
|
)
|
||||||||||||||||
Other comprehensive income (loss)
|
(655
|
)
|
(655
|
)
|
||||||||||||||||
Common stock issued
|
17,068
|
17,068
|
||||||||||||||||||
Accretion of discount on preferred stock
|
100
|
(100
|
)
|
-
|
||||||||||||||||
Cash dividends paid on preferred shares
|
(1,030
|
)
|
(1,030
|
)
|
||||||||||||||||
Other common stock transactions
|
89
|
1
|
90
|
|||||||||||||||||
Director and management deferred stock plans
|
-
|
72
|
-
|
-
|
72
|
|||||||||||||||
Balance, December 31, 2010
|
20,258
|
85,351
|
(13,526
|
)
|
621
|
92,704
|
||||||||||||||
Net income, 2011
|
917
|
917
|
||||||||||||||||||
Other comprehensive income (loss)
|
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 (loss)
|
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
|
|||||||||
(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
|
2012
|
2011
|
2010
|
|||||||||
Cash Flows from Operating Activities
|
||||||||||||
Net income (loss)
|
$
|
4,463
|
$
|
917
|
$
|
(3,708
|
)
|
|||||
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
|
||||||||||||
Depreciation and amortization
|
5,891
|
3,884
|
2,743
|
|||||||||
Provision for loan losses
|
8,350
|
12,150
|
21,530
|
|||||||||
Gain on sale of loans
|
(9,509
|
)
|
(5,581
|
)
|
(5,698
|
)
|
||||||
Proceeds from sales of loans originated for sale
|
376,496
|
248,631
|
268,874
|
|||||||||
Loans originated for sale
|
(372,077
|
)
|
(241,051
|
)
|
(265,486
|
)
|
||||||
Gains on securities transactions
|
(4
|
)
|
-
|
(31
|
)
|
|||||||
Change in deferred income taxes
|
1,142
|
(661
|
)
|
(2,748
|
)
|
|||||||
Stock based compensation expense
|
150
|
138
|
92
|
|||||||||
Increase in cash surrender value on bank owned life insurance
|
(422
|
)
|
(428
|
)
|
(451
|
)
|
||||||
Change in investment in limited partnership
|
(217
|
)
|
(93
|
)
|
(106
|
)
|
||||||
Change in accrued interest receivable and other assets
|
2,286
|
3,741
|
4,933
|
|||||||||
Change in accrued interest payable and other liabilities
|
1,524
|
(928
|
)
|
117
|
||||||||
Total adjustments
|
13,610
|
19,802
|
23,769
|
|||||||||
Net cash from operating activities
|
18,073
|
20,719
|
20,061
|
|||||||||
Cash Flows from Investing Activities
|
||||||||||||
Securities available for sale
|
||||||||||||
Purchases
|
(107,644
|
)
|
(82,544
|
)
|
(82,785
|
)
|
||||||
Sales
|
2,847
|
-
|
4,376
|
|||||||||
Maturities and calls
|
30,037
|
15,873
|
32,517
|
|||||||||
Principal payments
|
37,300
|
17,122
|
11,397
|
|||||||||
Sale or retirement of FHLB stock
|
-
|
217
|
204
|
|||||||||
Net change in portfolio loans
|
(33,341
|
)
|
8,353
|
38,302
|
||||||||
Premises and equipment expenditures
|
(1,030
|
)
|
(719
|
)
|
(201
|
)
|
||||||
Net cash from investing activities
|
(71,831
|
)
|
(41,698
|
)
|
3,810
|
|||||||
Cash Flows from Financing Activities
|
||||||||||||
Net change in deposits
|
19,787
|
30,858
|
(48,803
|
)
|
||||||||
Net change in federal funds borrowed and other short term borrowings
|
-
|
(1,234
|
)
|
1,234
|
||||||||
Principal payments on FHLB advances
|
(2,036
|
)
|
(6,286
|
)
|
(11,777
|
)
|
||||||
Proceeds from public stock offering and other common stock transactions
|
57
|
41
|
17,138
|
|||||||||
Cash dividends paid on preferred shares
|
(1,030
|
)
|
(1,030
|
)
|
(1,030
|
)
|
||||||
Net cash from financing activities
|
16,778
|
22,349
|
(43,238
|
)
|
||||||||
Net Change in Cash and Cash Equivalents
|
(36,980
|
)
|
1,370
|
(19,367
|
)
|
|||||||
Cash and cash equivalents at beginning of year
|
107,592
|
106,222
|
125,589
|
|||||||||
Cash and Cash Equivalents at End of Year
|
$
|
70,612
|
$
|
107,592
|
$
|
106,222
|
||||||
Supplemental Disclosures:
|
||||||||||||
Interest paid
|
$
|
4,665
|
$
|
6,235
|
$
|
9,004
|
||||||
Income tax paid
|
52
|
20
|
-
|
|||||||||
Loans transferred to other real estate
|
3,925
|
3,250
|
3,379
|
|||||||||
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 gradings 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, 2012 and 2011, other real estate owned totaled $3,409,000 and $3,657,000, respectively, and is included in other assets on the consolidated balance sheets.
Servicing Rights
Servicing rights are recognized as assets for the allocated 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 loss 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 the Directors' and Senior Management Group's deferred stock plans.
Stock Based Compensation
At December 31, 2012, 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 (Loss)
Comprehensive income (loss) consists of net income or loss 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 are also recognized as separate components of shareholders' equity.
Industry Segment
The Company and its subsidiary are primarily 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. 2011-11—Balance Sheet (Topic 210). In December 2011, FASB issued ASU 2011-11. The objective of this Update is to provide enhanced disclosures that will enable users of financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position. This includes the effect or potential effect of rights of setoff associated with an entity's recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45.
An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company adopted the methodologies prescribed by this ASU by the date required, and the ASU did not have a material effect on its financial position or results of operations.
Accounting Standards Update No. 2012-04—Technical Corrections and Improvements. On October 1, 2012, FASB released ASU 2012-04. The amendments in this Update make technical corrections, clarifications, and limited-scope improvements to various topics throughout the Codification. These amendments are presented in two sections—Technical Corrections and Improvements and Conforming Amendments Related to Fair Value Measurements. The amendments in this Update that will not have transition guidance will be effective upon issuance for both public entities and nonpublic entities. For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012.
The Company has adopted the methodologies prescribed by this ASU for the period ended December 31, 2012, and the ASU did not have a material effect on its financial position or results of operations.
Accounting Standards Update No. 2012-03— Technical Amendments and Corrections to SEC Sections. On August 27, 2012, FASB released ASU 2012-03. This Accounting Standards Update amends various SEC paragraphs pursuant to SAB 114, SEC Release No. 33-9250, and ASU 2010-22, which amend or rescind portions of certain SAB Topics. These amendments are presented in two sections – Amendments to the FASB Accounting Standards Codification® and Amendments to the XBRL Taxonomy. The Company has adopted the methodologies prescribed by this ASU, and the ASU did not have a material effect on its financial position or results of operations.
Accounting Standards Update No. 2012-02—Intangibles—Goodwill and Other (Topic 350). On July 27, 2012, FASB released ASU 2012-02. The amendments in this Update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test.
Under these amendments, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment.
The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company has adopted the methodologies prescribed by this ASU by the date required, and the ASU did not have a material effect on its financial position or results of operations.
Current Economic Conditions
Unfavorable economic conditions continue to present financial institutions with circumstances and challenges that in many cases have resulted in large and unanticipated declines in the fair values of investments and other assets, constraints on liquidity and capital and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The financial statements have been prepared using values and information currently available to the Company.
At December 31, 2012, the Company held $3.2 million in commercial real estate and $239.6 million in loans collateralized by commercial and development real estate. While some improvements have been noted recently in the national, state and local economic conditions, the market values for commercial and development real estate continues to be depressed.
Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital that could negatively impact the Company's ability to meet regulatory capital requirements and maintain sufficient liquidity.
Furthermore, the Company's regulators could require material adjustments to asset values or the allowance for loan losses for regulatory capital purposes that could affect the Company's measurement of regulatory capital and compliance with the capital adequacy under the regulatory framework for prompt corrective action.
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, 2012 were $957,000. 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, 2012 and 2011, 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 are subject to a $250,000 limit on FDIC insurance per covered institution. At December 31, 2012, the Company's cash accounts with banks did not exceed federally insured limits. At December 31, 2012, the Company had cash balances of $56,742,000 at the FRB and FHLB that did not have FDIC insurance coverage.
NOTE 3 - SECURITIES
Balances of securities by category are shown below, as of December 31, 2012 and 2011:
Thousands of dollars
|
Securities Available for Sale
|
|||||||||||||||
2012
|
Amortized Cost
|
Unrealized Gains
|
Unrealized Losses
|
Fair Value
|
||||||||||||
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
|
2011
|
||||||||||||||||
U.S. Treasury and agency securities
|
$
|
48,999
|
$
|
385
|
$
|
(18
|
)
|
$
|
49,366
|
|||||||
Mortgage-backed agency securities
|
101,855
|
1,321
|
(479
|
)
|
102,697
|
|||||||||||
Obligations of states and political subdivisions
|
19,690
|
1,287
|
-
|
20,977
|
||||||||||||
Corporate, asset backed and other debt securities
|
126
|
-
|
-
|
126
|
||||||||||||
Equity securities
|
26
|
5
|
-
|
31
|
||||||||||||
Total
|
$
|
170,696
|
$
|
2,998
|
$
|
(497
|
)
|
$
|
173,197
|
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, 2012 and 2011.
Less than 12 Months
|
12 Months or Longer
|
Total
|
||||||||||||||||||||||
Thousands of dollars
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
||||||||||||||||||
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
|
)
|
|||||||||
2011
|
||||||||||||||||||||||||
U.S. Treasury and agency securities
|
$
|
5,101
|
$
|
(18
|
)
|
$
|
-
|
$
|
-
|
$
|
5,101
|
$
|
(18
|
)
|
||||||||||
Mortgage-backed agency securities
|
36,420
|
(424
|
)
|
5,764
|
(55
|
)
|
42,184
|
(479
|
)
|
|||||||||||||||
Total
|
$
|
41,521
|
$
|
(442
|
)
|
$
|
5,764
|
$
|
(55
|
)
|
$
|
47,285
|
$
|
(497
|
)
|
Unrealized losses within the investment portfolio are determined to be temporary. The Company has performed an evaluation of its investments for other than temporary impairment, and no losses were recognized during 2012, 2011 or 2010.
The unrealized losses on the Company's investment in residential mortgage-backed securities were caused by interest rate changes. 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 more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2012.
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 is more likely than not that the Company 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
|
2012
|
2011
|
2010
|
|||||||||
Sales proceeds
|
$
|
2,847
|
$
|
-
|
$
|
4,376
|
||||||
Gross gains on sales
|
4
|
-
|
38
|
|||||||||
Gross loss on sales
|
-
|
-
|
(7
|
)
|
The fair value of securities available for sale by contractual maturity as of December 31, 2012 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
|
$
|
25,512
|
$
|
25,724
|
||||
Due after one year through five years
|
17,635
|
18,098
|
||||||
Due after five years through ten years
|
1,574
|
1,747
|
||||||
Due after ten years
|
30
|
33
|
||||||
Mortgage-backed agency securities
|
158,829
|
160,499
|
||||||
Equity securities
|
26
|
28
|
||||||
Total securities
|
$
|
203,606
|
$
|
206,129
|
Securities carried at $1,007,000 and $3,060,000 as of December 31, 2012 and 2011, 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 1.5% of the investment portfolio is issued by political subdivisions located within Lenawee County, Michigan, 1.6% in Monroe County, Michigan and 2.0% in Washtenaw County, Michigan. The total amount of municipal obligations issued by political subdivisions located in these three counties is approximately $10.0 million.
NOTE 4 - LOANS
The following table shows total loans outstanding at December 31, 2012 and 2011 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
|
2012
|
% Change
|
2011
|
% Change
|
||||||||||||
Personal
|
$
|
111,170
|
7.5
|
%
|
$
|
103,405
|
-3.7
|
%
|
||||||||
Business, including commercial mortgages
|
336,772
|
0.5
|
%
|
335,133
|
-5.4
|
%
|
||||||||||
Tax exempt
|
1,554
|
-24.0
|
%
|
2,045
|
-5.7
|
%
|
||||||||||
Residential mortgage
|
96,452
|
16.1
|
%
|
83,072
|
-3.4
|
%
|
||||||||||
Construction and development
|
40,634
|
2.3
|
%
|
39,721
|
-4.4
|
%
|
||||||||||
Deferred loan fees and costs
|
96
|
-70.6
|
%
|
326
|
-36.9
|
%
|
||||||||||
Total portfolio loans
|
$
|
586,678
|
4.1
|
%
|
$
|
563,702
|
-4.8
|
%
|
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, 2012, 2011 and 2010 follows:
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
|
|||||||||||||||||||||
Balance, December 31
|
$
|
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
|
|||||||||||||||
Allowance for Loan Losses, at January 1, 2011
|
$
|
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
|
||||||||||
Ending balance:
|
||||||||||||||||||||
Individually evaluated for impairment
|
$
|
5,213
|
$
|
2,907
|
$
|
871
|
$
|
40
|
$
|
9,031
|
||||||||||
Collectively evaluated for impairment
|
8,124
|
646
|
1,060
|
1,772
|
11,602
|
|||||||||||||||
Total Allowance for Loan Losses
|
$
|
13,337
|
$
|
3,553
|
$
|
1,931
|
$
|
1,812
|
$
|
20,633
|
Total Loans:
|
||||||||||||||||||||
Ending balance:
|
||||||||||||||||||||
Individually evaluated for impairment
|
$
|
31,225
|
$
|
14,486
|
$
|
5,241
|
$
|
183
|
$
|
51,135
|
||||||||||
Collectively evaluated for impairment
|
302,754
|
25,237
|
80,788
|
103,788
|
512,567
|
|||||||||||||||
Total Loans
|
$
|
333,979
|
$
|
39,723
|
$
|
86,029
|
$
|
103,971
|
$
|
563,702
|
Twelve Months Ended December 31, 2010
|
||||||||||||||||||||
Thousands of dollars
|
Business & Commercial Mortgages
|
CLD (1)
|
Residential Mortgage
|
Personal Loans
|
Total
|
|||||||||||||||
Allowance for Loan Losses, at January 1, 2010
|
$
|
12,221
|
$
|
5,164
|
$
|
760
|
$
|
1,875
|
$
|
20,020
|
||||||||||
Provision charged to expense
|
11,710
|
3,716
|
3,655
|
2,449
|
21,530
|
|||||||||||||||
Losses charged off
|
(7,683
|
)
|
(5,919
|
)
|
(1,820
|
)
|
(1,907
|
)
|
(17,329
|
)
|
||||||||||
Recoveries
|
424
|
287
|
66
|
165
|
942
|
|||||||||||||||
Balance, December 31
|
$
|
16,672
|
$
|
3,248
|
$
|
2,661
|
$
|
2,582
|
$
|
25,163
|
||||||||||
(1) Construction and Land Development loans
|
||||||||||||||||||||
(2) Commercial Real Estate loans
|
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, 2012 and 2011 based on the Bank's internal risk categories are detailed in the following tables.
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
|
$
|
584,436
|
|||||||||||||||||||
Deferred loan fees and costs, overdrafts, in-process accounts
|
2,242
|
||||||||||||||||||||
Total Portfolio Loans
|
$
|
586,678
|
In thousands of dollars
|
At December 31, 2011
|
||||||||||||||||||||
Commercial & Tax-exempt Loans
|
CLD
|
Owner-Occupied CRE
|
Other CRE
|
Commercial & Industrial
|
Total Commercial
|
||||||||||||||||
Credit Risk Profile by Internally Assigned Rating
|
|||||||||||||||||||||
1-4
|
Pass
|
$
|
11,940
|
$
|
77,447
|
$
|
96,864
|
$
|
63,466
|
$
|
249,717
|
||||||||||
5
|
Special Mention
|
2,920
|
15,526
|
15,897
|
17,212
|
51,555
|
|||||||||||||||
6
|
Substandard
|
14,020
|
5,803
|
17,818
|
8,799
|
46,440
|
|||||||||||||||
7
|
Doubtful
|
827
|
72
|
-
|
625
|
1,524
|
|||||||||||||||
8
|
Loss
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Total Commercial & Tax-exempt Loans
|
$
|
29,707
|
$
|
98,848
|
$
|
130,579
|
$
|
90,102
|
$
|
349,236
|
Consumer Loans
|
Residential Mortgage
|
Consumer Construction
|
Home Equity
|
Other Consumer
|
Total Consumer
|
|||||||||||||||
Credit risk profile based on payment activity
|
||||||||||||||||||||
Performing
|
$
|
95,045
|
$
|
10,016
|
$
|
74,387
|
$
|
22,394
|
$
|
201,842
|
||||||||||
Accruing restructured
|
3,078
|
-
|
171
|
-
|
3,249
|
|||||||||||||||
Delinquent less than 90 days
|
3,072
|
-
|
239
|
70
|
3,381
|
|||||||||||||||
Nonperforming
|
3,404
|
-
|
118
|
107
|
3,629
|
|||||||||||||||
Total Consumer Loans
|
$
|
104,599
|
$
|
10,016
|
$
|
74,915
|
$
|
22,571
|
$
|
212,101
|
||||||||||
Subtotal
|
$
|
561,337
|
||||||||||||||||||
Deferred loan fees and costs, overdrafts, in-process accounts
|
2,365
|
|||||||||||||||||||
Total Portfolio Loans
|
$
|
563,702
|
Loan totals in the classifications above 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 Note 4 and in the tables above.
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, 2012 and 2011 follow.
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
|
Thousands of dollars
|
Delinquent Loans
|
|||||||||||||||||||||||||||
As of December 31, 2011
|
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
|
$
|
426
|
$
|
-
|
$
|
426
|
$
|
23,277
|
$
|
29,707
|
$
|
6,004
|
$
|
6,004
|
||||||||||||||
Owner-Occupied CRE
|
1,511
|
-
|
1,511
|
92,828
|
98,848
|
4,509
|
4,509
|
|||||||||||||||||||||
Other CRE
|
703
|
-
|
703
|
122,672
|
130,579
|
7,204
|
7,204
|
|||||||||||||||||||||
Commercial & Industrial
|
447
|
-
|
447
|
85,216
|
90,102
|
4,439
|
4,439
|
|||||||||||||||||||||
Consumer
|
||||||||||||||||||||||||||||
Residential Mortgage
|
3,072
|
-
|
3,072
|
98,123
|
104,599
|
3,404
|
3,404
|
|||||||||||||||||||||
Consumer Construction
|
-
|
-
|
-
|
10,016
|
10,016
|
-
|
-
|
|||||||||||||||||||||
Home Equity
|
239
|
31
|
270
|
74,558
|
74,915
|
87
|
118
|
|||||||||||||||||||||
Other Consumer
|
70
|
-
|
70
|
22,394
|
22,571
|
107
|
107
|
|||||||||||||||||||||
Subtotal
|
$
|
6,468
|
$
|
31
|
$
|
6,499
|
$
|
529,084
|
$
|
561,337
|
$
|
25,754
|
$
|
25,785
|
||||||||||||||
Deferred loan fees and costs, overdrafts, in-process accounts
|
2,365
|
|||||||||||||||||||||||||||
Total Portfolio Loans
|
$
|
563,702
|
||||||||||||||||||||||||||
(1) All are accruing.
|
Impaired Loans
Information regarding impaired loans as of December 31, 2012 and 2011 follows.
December 31, 2012
|
December 31, 2011
|
|||||||||||||||||||||||
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
|
$
|
654
|
$
|
1,673
|
$
|
-
|
$
|
5,977
|
$
|
15,366
|
$
|
-
|
||||||||||||
Owner-Occupied CRE
|
4,181
|
6,267
|
-
|
1,622
|
2,502
|
-
|
||||||||||||||||||
Other CRE
|
4,438
|
6,158
|
-
|
4,922
|
8,031
|
-
|
||||||||||||||||||
Commercial & Industrial
|
1,640
|
3,992
|
-
|
1,696
|
3,774
|
-
|
||||||||||||||||||
Consumer
|
||||||||||||||||||||||||
Residential Mortgage
|
2,207
|
2,989
|
-
|
1,042
|
1,778
|
-
|
||||||||||||||||||
Home Equity
|
232
|
232
|
-
|
43
|
43
|
-
|
||||||||||||||||||
Other Consumer
|
157
|
157
|
-
|
189
|
189
|
-
|
||||||||||||||||||
Subtotal
|
$
|
13,509
|
$
|
21,468
|
$
|
-
|
$
|
15,491
|
$
|
31,683
|
$
|
-
|
||||||||||||
Loans with a specific valuation allowance
|
||||||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||
Commercial CLD
|
$
|
7,570
|
$
|
7,629
|
$
|
3,271
|
$
|
8,509
|
$
|
8,594
|
$
|
2,907
|
||||||||||||
Owner-Occupied CRE
|
6,082
|
7,495
|
2,904
|
6,391
|
7,925
|
2,344
|
||||||||||||||||||
Other CRE
|
3,359
|
3,359
|
1,079
|
15,259
|
17,205
|
2,085
|
||||||||||||||||||
Commercial & Industrial
|
409
|
409
|
274
|
1,335
|
2,372
|
785
|
||||||||||||||||||
Consumer
|
||||||||||||||||||||||||
Residential Mortgage
|
3,354
|
3,817
|
771
|
4,792
|
5,998
|
870
|
||||||||||||||||||
Home Equity
|
-
|
-
|
-
|
171
|
171
|
35
|
||||||||||||||||||
Other Consumer
|
5
|
5
|
5
|
5
|
5
|
5
|
||||||||||||||||||
Subtotal
|
$
|
20,779
|
$
|
22,714
|
$
|
8,304
|
$
|
36,462
|
$
|
42,270
|
$
|
9,031
|
December 31, 2012
|
December 31, 2011
|
|||||||||||||||||||||||
Thousands of dollars
|
Recorded Balance
|
Unpaid Principal Balance
|
Specific Allowance
|
Recorded Balance
|
Unpaid Principal Balance
|
Specific Allowance
|
||||||||||||||||||
Total Impaired Loans
|
||||||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||
Commercial CLD
|
$
|
8,224
|
$
|
9,302
|
$
|
3,271
|
$
|
14,486
|
$
|
23,960
|
$
|
2,907
|
||||||||||||
Owner-Occupied CRE
|
10,263
|
13,762
|
2,904
|
8,013
|
10,427
|
2,344
|
||||||||||||||||||
Other CRE
|
7,797
|
9,517
|
1,079
|
20,181
|
25,236
|
2,085
|
||||||||||||||||||
Commercial & Industrial
|
2,049
|
4,401
|
274
|
3,031
|
6,146
|
785
|
||||||||||||||||||
Consumer
|
||||||||||||||||||||||||
Residential Mortgage
|
5,561
|
6,806
|
771
|
5,834
|
7,776
|
870
|
||||||||||||||||||
Home Equity
|
232
|
232
|
-
|
214
|
214
|
35
|
||||||||||||||||||
Other Consumer
|
162
|
162
|
5
|
194
|
194
|
5
|
||||||||||||||||||
Total Impaired Loans
|
$
|
34,288
|
$
|
44,182
|
$
|
8,304
|
$
|
51,953
|
$
|
73,953
|
$
|
9,031
|
Information regarding average investment in impaired loans and interest income recognized on those loans for the periods ended December 31, 2012, 2011 and 2010 is shown below.
Twelve months ended December 31,
|
||||||||||||||||||||||||
2012
|
2011
|
2010
|
||||||||||||||||||||||
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
|
$
|
3,656
|
$
|
-
|
$
|
7,222
|
$
|
-
|
$
|
3,872
|
$
|
-
|
||||||||||||
Owner-Occupied CRE
|
3,148
|
64
|
1,997
|
54
|
2,225
|
60
|
||||||||||||||||||
Other CRE
|
8,373
|
135
|
5,822
|
165
|
1,405
|
16
|
||||||||||||||||||
Commercial & Industrial
|
1,927
|
35
|
1,141
|
11
|
783
|
48
|
||||||||||||||||||
Consumer
|
||||||||||||||||||||||||
Residential Mortgage
|
1,319
|
23
|
867
|
4
|
4,418
|
-
|
||||||||||||||||||
Home Equity
|
30
|
5
|
295
|
-
|
478
|
-
|
||||||||||||||||||
Other Consumer
|
154
|
-
|
358
|
-
|
542
|
-
|
||||||||||||||||||
Subtotal
|
$
|
18,607
|
$
|
262
|
$
|
17,702
|
$
|
234
|
$
|
13,723
|
$
|
124
|
||||||||||||
Loans with a specific valuation allowance
|
||||||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||
Commercial CLD
|
$
|
8,236
|
$
|
350
|
$
|
6,956
|
$
|
328
|
$
|
9,786
|
$
|
161
|
||||||||||||
Owner-Occupied CRE
|
6,527
|
165
|
5,441
|
107
|
5,595
|
198
|
||||||||||||||||||
Other CRE
|
4,096
|
176
|
13,502
|
574
|
13,230
|
408
|
||||||||||||||||||
Commercial & Industrial
|
542
|
46
|
1,727
|
38
|
917
|
20
|
||||||||||||||||||
Consumer
|
||||||||||||||||||||||||
Residential Mortgage
|
4,122
|
127
|
5,740
|
148
|
2,396
|
105
|
||||||||||||||||||
Home Equity
|
-
|
-
|
184
|
5
|
430
|
13
|
||||||||||||||||||
Other Consumer
|
43
|
2
|
5
|
1
|
10
|
7
|
||||||||||||||||||
Subtotal
|
$
|
23,566
|
$
|
866
|
$
|
33,555
|
$
|
1,201
|
$
|
32,364
|
$
|
911
|
Twelve months ended December 31,
|
||||||||||||||||||||||||
2012
|
2011
|
2010
|
||||||||||||||||||||||
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
|
||||||||||||||||||
Total Impaired Loans
|
||||||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||
Commercial CLD
|
$
|
11,892
|
$
|
350
|
$
|
14,178
|
$
|
328
|
$
|
13,658
|
$
|
161
|
||||||||||||
Owner-Occupied CRE
|
9,675
|
229
|
7,438
|
161
|
7,820
|
|||||||||||||||||||
Other CRE
|
12,469
|
311
|
19,324
|
739
|
14,635
|
424
|
||||||||||||||||||
Commercial & Industrial
|
2,469
|
81
|
2,868
|
49
|
1,700
|
|||||||||||||||||||
Consumer
|
||||||||||||||||||||||||
Residential Mortgage
|
5,441
|
150
|
6,607
|
152
|
6,814
|
105
|
||||||||||||||||||
Home Equity
|
30
|
5
|
479
|
5
|
908
|
|||||||||||||||||||
Other Consumer
|
197
|
2
|
363
|
1
|
552
|
7
|
||||||||||||||||||
Total Impaired Loans
|
$
|
42,173
|
$
|
1,128
|
$
|
51,257
|
$
|
1,435
|
$
|
46,087
|
$
|
1,035
|
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 $10.8 million at December 31, 2012 and $10.7 million at December 31, 2011.
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 $15.8 million at December 31, 2012 and $21.8 million at December 31, 2011.
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, 2012 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 tables present information regarding newly-classified troubled debt restructurings for the twelve-month periods ended December 31, 2012 and 2011.
Newly Classified Accruing Troubled Debt Restructurings
|
||||||||||||||||||||||||
Twelve months ended
|
December 31, 2012
|
December 31, 2011
|
||||||||||||||||||||||
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
|
4
|
$
|
3,858
|
$
|
3,858
|
||||||||||||||
Owner-Occupied CRE
|
6
|
1,271
|
1,271
|
2
|
479
|
479
|
||||||||||||||||||
Other CRE
|
4
|
2,847
|
2,847
|
3
|
3,128
|
3,128
|
||||||||||||||||||
Commercial & Industrial
|
1
|
190
|
190
|
3
|
704
|
704
|
||||||||||||||||||
Consumer
|
||||||||||||||||||||||||
Residential Mortgage
|
2
|
224
|
224
|
3
|
1,199
|
1,199
|
||||||||||||||||||
Total
|
|
14
|
$
|
4,832
|
$
|
4,832
|
|
15
|
$
|
9,368
|
$
|
9,368
|
The table below provides a breakdown of accruing restructured loans by type at December 31, 2012. 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 2012.
December 31, 2012
|
Fourth Quarter
|
|||||||||||||||
Dollars in thousands
|
Number of Loans
|
Recorded Balance
|
Average Yield
|
Portfolio Yield
|
||||||||||||
CLD Loans
|
6
|
$
|
4,738
|
|||||||||||||
Other Commercial Loans
|
18
|
7,643
|
||||||||||||||
Total Commercial Loans
|
24
|
12,381
|
5.15
|
%
|
5.25
|
%
|
||||||||||
Residential Mortgage & Home Equity Loans
|
17
|
3,438
|
3.81
|
%
|
5.23
|
%
|
||||||||||
Total accruing restructured loans
|
41
|
$
|
15,819
|
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, 2012
|
December 31, 2011
|
||||||||||||||
Dollars in thousands
|
Number of Loans
|
Recorded Balance
|
Number of Loans
|
Recorded Balance
|
||||||||||||
Commercial
|
||||||||||||||||
Commercial CLD
|
4
|
$
|
3,423
|
1
|
$
|
119
|
||||||||||
Owner-Occupied CRE
|
2
|
239
|
-
|
-
|
||||||||||||
Other CRE
|
-
|
-
|
3
|
740
|
||||||||||||
Consumer
|
||||||||||||||||
Residential Mortgage
|
-
|
-
|
3
|
1,236
|
||||||||||||
Total
|
6
|
$
|
3,662
|
7
|
$
|
2,095
|
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. Charge-offs of TDR's that subsequently defaulted as described above were $175,000 for the twelve months ended December 31, 2012.
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 was $853,761,000 and $735,108,000 at December 31, 2012 and 2011, respectively.
The balance of loans serviced for others related to servicing rights that have been capitalized was $850,728,000 and $732,591,000 at December 31, 2012 and 2011, respectively.
Unamortized cost of loan servicing rights included in accrued interest receivable and other assets on the consolidated balance sheet, for the years ended December 31 was as follows:
In thousands of dollars
|
2012
|
2011
|
||||||
Balance, January 1
|
$
|
5,405
|
$
|
4,763
|
||||
Amount capitalized
|
2,816
|
1,791
|
||||||
Amount amortized
|
(1,843
|
)
|
(1,149
|
)
|
||||
Balance, December 31
|
$
|
6,378
|
$
|
5,405
|
The fair value of servicing rights was as follows at December 31:
In thousands of dollars
|
2012
|
2011
|
||||||
Fair value, January 1
|
$
|
7,331
|
$
|
5,806
|
||||
Fair value, December 31
|
$
|
8,285
|
$
|
7,331
|
NOTE 7 - PREMISES AND EQUIPMENT
Depreciation expense was approximately $1,106,000 in 2012, $1,124,000 in 2011 and $1,251,000 in 2010. Premises and equipment as of December 31 consisted of the following:
In thousands of dollars
|
2012
|
2011
|
||||||
Land
|
$
|
1,863
|
$
|
1,863
|
||||
Buildings and improvements, including building in progress
|
15,094
|
15,131
|
||||||
Furniture and equipment
|
15,236
|
14,680
|
||||||
Total cost
|
32,193
|
31,674
|
||||||
Less accumulated depreciation
|
(21,474
|
)
|
(20,879
|
)
|
||||
Premises and equipment, net
|
$
|
10,719
|
$
|
10,795
|
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, 2012, $1.2 million for the year ended December 31, 2011, and $1.1 million for the year ended December 31, 2010.
Future minimum lease payments under operating leases are shown in the table below:
In thousands of dollars
|
||||
2013
|
$
|
1,294
|
||
2014
|
1,185
|
|||
2015
|
1,129
|
|||
2016
|
1,093
|
|||
2017
|
1,073
|
|||
Thereafter
|
1,801
|
|||
Total Minimum Lease Payments
|
$
|
7,575
|
NOTE 8 - DEPOSITS
Information relating to maturities of time deposits as of December 31 is summarized below:
In thousands of dollars
|
2012
|
2011
|
||||||
Within one year
|
$
|
141,325
|
$
|
168,471
|
||||
Between one and two years
|
56,667
|
50,150
|
||||||
Between two and three years
|
14,777
|
19,923
|
||||||
Between three and four years
|
2,904
|
4,351
|
||||||
Between four and five years
|
1,601
|
2,380
|
||||||
Total time deposits
|
$
|
217,274
|
$
|
245,275
|
||||
Interest bearing time deposits in denominations of $100,000 or more
|
$
|
74,795
|
$
|
82,018
|
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 $9.0 million from correspondent banks to purchase federal funds on a daily basis. There were no federal funds purchased outstanding at December 31, 2012 and 2011.
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 2012 or 2011.
NOTE 10 - OTHER BORROWINGS
The Bank carried fixed rate, non-callable advances from the Federal Home Loan Bank of Indianapolis totaling $22.0 million and $24.0 million at December 31, 2012 and 2011, respectively. As of December 31, 2012, the rates on the advances ranged from 1.77% to 5.33% with a weighted average rate of 2.70%.
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 $163.6 million at year-end 2012. 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.
Maturities and scheduled principal payments for other borrowings over the next five years as of December 31 are shown below.
In thousands of dollars
|
2012
|
|||
Within one year
|
$
|
10,038
|
||
Between one and two years
|
41
|
|||
Between two and three years
|
44
|
|||
Between three and four years
|
10,047
|
|||
Between four and five years
|
51
|
|||
More than five years
|
1,778
|
|||
Total
|
$
|
21,999
|
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:
2012
|
2011
|
|||||||||||||||
In thousands of dollars
|
Variable Rate
|
Fixed Rate
|
Variable Rate
|
Fixed Rate
|
||||||||||||
Commitments to make loans
|
$
|
8,690
|
$
|
5,780
|
$
|
21,309
|
$
|
7,017
|
||||||||
Unused lines of credit
|
101,997
|
12,544
|
96,948
|
4,116
|
||||||||||||
Standby letters of credit
|
9,160
|
-
|
10,262
|
-
|
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, 2012, the rates for amounts in the fixed rate category ranged from 2.625% to 5.75%.
In 2001, United Bank & Trust 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, 2012 and 2011, the total recorded investment including the obligation to make additional future investments were $920,000 and $900,000 respectively, and was included in other assets. As of December 31, 2012 and 2011, the obligation of UBT to the limited partnership was $260,000 and $457,000, respectively, which was reported in other liabilities. While UBT is a 99% partner, the investment is accounted for on the equity method as UBT 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
|
2012
|
2011
|
2010
|
|||||||||
Current
|
$
|
498
|
$
|
238
|
$
|
(190
|
)
|
|||||
Deferred
|
1,142
|
(661
|
)
|
(2,748
|
)
|
|||||||
Total income tax expense (benefit)
|
$
|
1,640
|
$
|
(423
|
)
|
$
|
(2,938
|
)
|
The Company's effective tax rate for 2010 was a calculated benefit based upon a pre-tax loss, resulting in a tax benefit for that year.
The components of deferred tax assets and liabilities at December 31 are as follows:
In thousands of dollars
|
2012
|
2011
|
||||||
Deferred tax assets:
|
||||||||
Allowance for loan losses
|
$
|
7,665
|
$
|
7,054
|
||||
Other real estate owned and allowance for sold loans
|
1,118
|
1,280
|
||||||
Deferred compensation
|
833
|
778
|
||||||
Low income housing and Alternative Minimum Tax credit
|
1,635
|
947
|
||||||
Net Operating Loss
|
539
|
2,590
|
||||||
Other
|
763
|
1,120
|
||||||
Total deferred tax assets
|
$
|
12,553
|
$
|
13,769
|
||||
Deferred tax liabilities:
|
||||||||
Property and equipment
|
$
|
(376
|
)
|
$
|
(286
|
)
|
||
Mortgage servicing rights
|
(2,169
|
)
|
(1,838
|
)
|
||||
Unrealized appreciation on securities available for sale
|
(858
|
)
|
(850
|
)
|
||||
Other
|
(413
|
)
|
(908
|
)
|
||||
Total deferred tax liabilities
|
$
|
(3,816
|
)
|
$
|
(3,882
|
)
|
||
Net deferred tax asset
|
$
|
8,737
|
$
|
9,887
|
At December 31, 2012, the Company had net operating losses of $1.6 million that are being carried forward to reduce future taxable income. The carryforwards expire in 2030 and 2031. As of December 31, 2012, the Company had approximately $1.6 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 2031, and the alternative minimum tax credits have no expiration date.
The Company's net deferred tax asset was $8.7 million at December 31, 2012. 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 more likely than not 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
As a result of cumulative losses from 2009 to 2011, the Company has a tax NOL of $1.6 million as of December 31, 2012.
Positive Evidence
1.
|
The Company had many years of consistently profitable operations before 2009.
|
2.
|
The Company's NOL carry-forward position of $1.6 million at December 31, 2012, which is not large in comparison to historical profitability (taxable income of $41.6 million from 2004 to 2008).
|
3.
|
The Company can carry-forward losses for up to 20 years.
|
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 and $6.1 million in 2012.
|
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 and $8.4 million in 2012.
|
6.
|
The Company expects a return to sustained profitability as a result of strong core earnings and a 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, 2012 or 2011.
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
|
2012
|
2011
|
2010
|
|||||||||
Income taxes at statutory rate of 34%
|
$
|
2,076
|
$
|
169
|
$
|
(2,259
|
)
|
|||||
Non-taxable income, net of nondeductible interest expense
|
(232
|
)
|
(289
|
)
|
(363
|
)
|
||||||
Income on non-taxable bank owned life insurance
|
(143
|
)
|
(145
|
)
|
(153
|
)
|
||||||
Affordable housing credit
|
(188
|
)
|
(188
|
)
|
(188
|
)
|
||||||
Non-deductible legal and accounting fees - TARP refinance
|
109
|
-
|
-
|
|||||||||
Other
|
18
|
30
|
25
|
|||||||||
Total federal income tax
|
$
|
1,640
|
$
|
(423
|
)
|
$
|
(2,938
|
)
|
NOTE 13 - RELATED PARTY TRANSACTIONS
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, 2012. The aggregate amount of these loans at December 31, 2011 was $1,170,000. That balance was adjusted to exclude directors and officers that were not with the Company at the end of 2012. During 2012, new and newly reportable loans to such related parties amounted to $99,000 and repayments amounted to $448,000, resulting in a balance at December 31, 2012 of $821,000. Related party deposits totaled $2,064,000 and $1,315,000 at December 31, 2012 and 2011, respectively. The balance of deposits at December 31, 2011 was adjusted to exclude directors and officers that were not with the Company at the end of 2012.
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 $17,000 for 2012, and $16,500 for 2011 and 2010. Prior to July 2009, the Company offered discretionary matching of funds for a percentage of the employee contribution, plus an amount based on Company earnings. In July 1, 2009, the Company discontinued its profit sharing and employer matching contributions to the plan, and had no expense for the plan for 2010. The Company reinstated matching contributions beginning January 1, 2011, but did not make profit sharing contributions in 2011 or 2012. The expense for the plan for 2012 and 2011 was $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.
Senior Management Bonus Deferral Stock Plan
The Company maintains a deferred compensation plan designated as the Senior Management Bonus Deferral Stock Plan ("Management Plan"). The Management Plan has essentially the same purposes as the Director Plan discussed above and permits eligible employees of the Company and its affiliates to elect cash bonus deferrals and, after employment termination, to receive payouts in whole or in part in the form of common stock on terms substantially similar to those of the Director Plan.
Stock Options and Other Equity Awards
The Company has stock based compensation plans as described below. The Company has recorded approximately $150,000, $138,000, and $92,000 in compensation expense related to stock based compensation plans for the periods ended December 31, 2012, 2011 and 2010, 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 shows activity for the twelve months ended December 31, 2012 for the Company's Incentive Plan:
SOSARs (1)
|
Awards
Outstanding |
Weighted
Average |
||||||
Balance at January 1
|
85,750
|
$
|
3.35
|
|||||
Awards granted
|
83,500
|
3.30
|
||||||
Awards forfeited
|
(2,000
|
)
|
3.35
|
|||||
Balance at December 31
|
167,250
|
$
|
3.33
|
|||||
(1) Stock Only Stock Appreciation Rights
|
|
Restricted Stock
|
Restricted Stock Units
|
|||||||||||||||||||||||
Awards
|
Grant Date
|
Exercise
|
Awards
|
Grant Date
|
Exercise
|
|||||||||||||||||||
Outstanding
|
Fair Value
|
Price
|
Outstanding
|
Fair Value
|
Price
|
|||||||||||||||||||
Nonvested at January 1
|
24,250
|
$
|
3.35
|
$
|
3.35
|
28,000
|
$
|
3.35
|
$
|
3.35
|
||||||||||||||
Awards granted
|
-
|
3.30
|
3.30
|
32,750
|
3.30
|
3.30
|
||||||||||||||||||
Awards vested
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Awards forfeited
|
(1,625
|
)
|
3.34
|
3.34
|
(13,955
|
)
|
3.35
|
3.35
|
||||||||||||||||
Nonvested at December 31
|
22,625
|
$
|
3.35
|
$
|
3.35
|
46,795
|
$
|
3.32
|
$
|
3.32
|
As of December 31, 2012, unrecognized compensation expense related to the Incentive Plan totaled $195,200. Costs for SOSARs are recognized over approximately three years. The compensation costs for RSUs are based on an expected level of achievement of performance targets as determined at the time of each grant, and are expected to be recognized over three years. Compensation costs for restricted stock grants will be recognized over two 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 2012 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 2012 financial plan. For 2012, RSU grants vested at 97.5% 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 2012 and 2011. Fair value of grants in 2012 and 2011 is based on the weighted-average assumptions shown in the following table.
2012
|
2011
|
|||||||
Dividend yield
|
0.0
|
%
|
0.0
|
%
|
||||
Expected life (in years)
|
5
|
5
|
||||||
Expected volatility
|
37
|
%
|
35
|
%
|
||||
Risk-free interest rate
|
0.84
|
%
|
2.16
|
%
|
||||
Fair value
|
$
|
1.105
|
$
|
1.136
|
At December 31, 2012, the aggregate intrinsic value of SOSARs outstanding was $196,500. Intrinsic value was determined by calculating the difference between the Company's closing stock price on December 31, 2012 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, 2012. The weighted–average period over which nonvested SOSARs are expected to be recognized is 0.96 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:
Stock Options
|
Options
Outstanding |
Weighted Avg.
Exercise Price |
||||||
Balance, January 1, 2012
|
381,743
|
$
|
21.19
|
|||||
Options expired
|
(13,883
|
)
|
20.48
|
|||||
Options forfeited
|
(9,790
|
)
|
17.42
|
|||||
Balance, December 31, 2012
|
358,070
|
$
|
21.32
|
|||||
Options exercisable at year-end
|
358,070
|
$
|
21.32
|
The table below provides information regarding stock options outstanding under the 2005 Plan at December 31, 2012.
Options Outstanding
|
Options Exercisable
|
||||||||||||||||||||
Range of Exercise Prices
|
Number Outstanding
|
Weighted Average
Remaining Contractual Life
|
Weighted Avg. Exercise Price
|
Number Outstanding
|
Weighted Avg. Exercise Price
|
||||||||||||||||
$6.00 to $32.14
|
358,070
|
3.61
|
Years
|
$
|
21.32
|
358,070
|
$
|
21.32
|
As of the end of 2012, there was no unrecognized compensation expense related to the stock options granted under the 2005 Plan.
At December 31, 2012, the total outstanding stock options granted under the 2005 Plan had no intrinsic value. Intrinsic value was determined by calculating the difference between the Company's closing stock price on December 31, 2012 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, 2012.
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, 2012 and 2011, in thousands of dollars:
Thousands of dollars
|
Fair Value Measurements Using
|
|||||||||||||||
December 31, 2012
|
Fair Value
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
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
|
-
|
-
|
||||||||||||
Total available for sale securities
|
$
|
206,129
|
$
|
28
|
$
|
206,101
|
$
|
-
|
December 31, 2011
|
||||||||||||||||
Available for sale securities:
|
||||||||||||||||
U.S. Treasury and agency securities
|
$
|
49,366
|
$
|
-
|
$
|
49,366
|
$
|
-
|
||||||||
Mortgage-backed agency securities
|
102,697
|
-
|
102,697
|
-
|
||||||||||||
Obligations of states and political subdivisions
|
20,977
|
-
|
20,977
|
-
|
||||||||||||
Corporate, asset backed and other debt securities
|
126
|
-
|
126
|
-
|
||||||||||||
Equity securities
|
31
|
31
|
-
|
-
|
||||||||||||
Total available for sale securities
|
$
|
173,197
|
$
|
31
|
$
|
173,166
|
$
|
-
|
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.
|
Transfers between Levels
There were no transfers between Levels 1, 2 and 3 in 2012 or 2011 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 non-recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at December 31, 2012 and 2011:
In thousands of dollars
|
Fair Value Measurements Using
|
|||||||||||||||
Impaired Loans (Collateral Dependent):
|
Fair Value
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
December 31, 2012
|
$
|
21,866
|
$
|
-
|
$
|
-
|
$
|
21,866
|
||||||||
December 31, 2011
|
39,438
|
-
|
-
|
39,438
|
Significant Unobservable Inputs
The following is a discussion of the significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring 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 recurring and nonrecurring Level 3 fair value measurements.
As of December 31, 2012
|
Fair Value ($000)
|
Valuation
Technique
|
Unobservable Inputs
|
Range (Weighted Average)
|
|||||||
Impaired Loans (Collateral Dependent):
|
$
|
21,866
|
Market comparable properties
|
Marketability discount
|
7.5% – 49.5% (14.0%)
|
|
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, 2012 and 2011, were as follows:
December 31, 2012
|
December 31, 2011
|
|||||||||||||||||||||||
Carrying
|
Fair Value Measurements Using
|
Carrying
|
||||||||||||||||||||||
Amount
|
Level 1
|
Level 2
|
Level 3
|
Amount
|
Fair Value
|
|||||||||||||||||||
Financial Assets
|
||||||||||||||||||||||||
Cash and cash equivalents
|
$
|
70,612
|
$
|
70,612
|
$
|
-
|
$
|
-
|
$
|
107,592
|
$
|
107,592
|
||||||||||||
Securities available for sale
|
206,129
|
28
|
206,101
|
-
|
173,197
|
173,197
|
||||||||||||||||||
FHLB Stock
|
2,571
|
-
|
2,571
|
-
|
2,571
|
2,571
|
||||||||||||||||||
Loans held for sale
|
13,380
|
-
|
13,380
|
-
|
8,290
|
8,290
|
||||||||||||||||||
Net portfolio loans
|
564,135
|
-
|
-
|
574,137
|
543,069
|
551,616
|
||||||||||||||||||
Accrued interest receivable
|
2,620
|
-
|
2,620
|
-
|
2,772
|
2,772
|
||||||||||||||||||
Financial Liabilities
|
||||||||||||||||||||||||
Total deposits
|
$
|
(784,643
|
)
|
$
|
-
|
$
|
(787,015
|
)
|
$
|
-
|
$
|
(764,856
|
)
|
$
|
(768,783
|
)
|
||||||||
FHLB advances
|
(21,999
|
)
|
-
|
(23,007
|
)
|
-
|
(24,035
|
)
|
(25,475
|
)
|
||||||||||||||
Accrued interest payable
|
(354
|
)
|
-
|
(354
|
)
|
-
|
(491
|
)
|
(491
|
)
|
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.
|
|
|
|
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 - 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.
In December 2010, the Company closed its public offering of common stock. The net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, were approximately $17.1 million. The Company has contributed $12.0 million of the net proceeds of the offering to the capital of the Bank to increase the Bank's capital and regulatory capital ratios.
On January 15, 2010, UBT entered into a Memorandum of Understanding with the Federal Deposit Insurance Corporation ("FDIC") and the Michigan Office of Financial and Insurance Regulation ("OFIR"). On January 11, 2011, we entered into a revised Memorandum of Understanding ("MOU") with substantially the same requirements as the MOU dated January 15, 2010. The MOU is not a "written agreement" for purposes of Section 8 of the Federal Deposit Insurance Act. The MOU documents an understanding among UBT, the FDIC and OFIR, that, among other things, (i) UBT will not declare or pay any dividend to the Company without the prior consent of the FDIC and OFIR; and (ii) UBT will have and maintain its Tier 1 capital ratio at a minimum of 9% for the duration of the MOU, and will maintain its ratio of total capital to risk-weighted assets at a minimum of 12% for the duration of the MOU.
On November 13, 2012, the Bank received a letter from FDIC and OFIR notifying the Bank that, as a result of an examination of the Bank as of June 30, 2012, FDIC and OFIR have terminated the Memorandum of Understanding with the Bank effective immediately.
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. In connection with termination of the Memorandum of Understanding, the Board of Directors of the Bank has resolved that the Bank will maintain Tier 1 leverage ratio at a level equal to or exceeding 8.5% and that the Bank will not declare or pay any dividend to the Company unless the Board of Directors first determines that the Bank has produced stable earnings. The Bank's Tier 1 leverage ratio was 9.59% at December 31, 2012.
The following table shows information about the Company's and the Bank's capital levels compared to regulatory requirements at year-end 2012 and 2011.
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
|
||||||||||||||||||||
Actual
|
Regulatory Minimum for Capital Adequacy (1)
|
Regulatory Minimum to be Well Capitalized (2)
|
Required by MOU (4)
|
||||||||||||||||||||||||||||||
As of December 31, 2011
|
$
|
000
|
%
|
$
|
000
|
%
|
$
|
000
|
%
|
$
|
000
|
%
|
|||||||||||||||||||||
Tier 1 Capital to Average Assets
|
|||||||||||||||||||||||||||||||||
Consolidated
|
$
|
86,430
|
9.9
|
%
|
$
|
35,031
|
4.0
|
%
|
N/
|
A
|
N/
|
A
|
N/
|
A
|
N/
|
A
|
|||||||||||||||||
Bank
|
80,388
|
9.2
|
%
|
34,950
|
4.0
|
%
|
43,688
|
5.0
|
%
|
78,638
|
9.0
|
%
|
|||||||||||||||||||||
Tier 1 Capital to Risk Weighted Assets
|
|||||||||||||||||||||||||||||||||
Consolidated
|
86,430
|
15.3
|
%
|
22,675
|
4.0
|
%
|
N/
|
A
|
N/
|
A
|
N/
|
A
|
N/
|
A
|
|||||||||||||||||||
Bank
|
80,388
|
14.2
|
%
|
22,628
|
4.0
|
%
|
33,942
|
6.0
|
%
|
N/
|
A
|
N/
|
A
|
||||||||||||||||||||
Total Capital to Risk Weighted Assets
|
|||||||||||||||||||||||||||||||||
Consolidated
|
93,683
|
16.5
|
%
|
45,349
|
8.0
|
%
|
N/
|
A
|
N/
|
A
|
N/
|
A
|
N/
|
A
|
|||||||||||||||||||
Bank
|
87,627
|
15.5
|
%
|
45,256
|
8.0
|
%
|
56,570
|
10.0
|
%
|
67,884
|
12.0
|
%
|
(1)
|
Represents minimum required to be categorized as adequately capitalized under Federal regulatory requirements.
|
(2)
|
Represents minimum generally required to be categorized as well-capitalized under Federal regulatory prompt corrective action provisions. The Memorandum of Understanding, described in Note 17, subjected the Bank to higher requirements through November 13, 2012.
|
(3)
|
Represents requirements of the Bank's board resolution.
|
(4)
|
Represents requirements by the Bank's regulators under terms of the MOU.
|
NOTE 18 – EARNINGS (LOSS) PER SHARE
A reconciliation of basic and diluted earnings and loss per share follows:
In thousands, except per share data
|
2012
|
2011
|
2010
|
|||||||||
Net income (loss)
|
$
|
4,463
|
$
|
917
|
$
|
(3,708
|
)
|
|||||
Less:
|
||||||||||||
Accretion of discount on preferred stock
|
(112
|
)
|
(106
|
)
|
(100
|
)
|
||||||
Dividends on preferred stock
|
(1,030
|
)
|
(1,030
|
)
|
(1,030
|
)
|
||||||
Income (loss) available to common shareholders
|
$
|
3,321
|
$
|
(219
|
)
|
$
|
(4,838
|
)
|
||||
Basic and diluted income (loss) per share:
|
||||||||||||
Weighted average common shares outstanding
|
12,702.4
|
12,688.2
|
5,389.9
|
|||||||||
Weighted average contingently issuable shares
|
115.3
|
82.9
|
60.9
|
|||||||||
Total weighted average shares outstanding
|
12,817.7
|
12,771.2
|
5,450.8
|
|||||||||
Basic and diluted income (loss) per share
|
$
|
0.26
|
$
|
(0.02
|
)
|
$
|
(0.89
|
)
|
There was no dilutive effect of stock warrants in 2012, 2011 or 2010. Stock options for 358,070 381,743 and 407,730 shares of common stock were not considered in computing diluted earnings per share for 2012, 2011 and 2010 because they were not dilutive.
NOTE 19 – 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
|
2012
|
2011
|
||||||
Assets
|
||||||||
Cash and cash equivalents
|
$
|
4,965
|
$
|
4,914
|
||||
Securities available for sale
|
28
|
31
|
||||||
Investment in subsidiaries
|
91,238
|
87,747
|
||||||
Other assets
|
1,276
|
1,122
|
||||||
Total Assets
|
$
|
97,507
|
$
|
93,814
|
||||
Liabilities and Shareholders' Equity
|
||||||||
Liabilities
|
$
|
110
|
$
|
40
|
||||
Shareholders' equity
|
97,397
|
93,774
|
||||||
Total Liabilities and Shareholders' Equity
|
$
|
97,507
|
$
|
93,814
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
For the years ended December 31,
|
|||||||||||
In thousands of dollars
|
2012
|
2011
|
2010
|
|||||||||
Income
|
||||||||||||
Dividends from subsidiaries
|
$
|
1,600
|
$
|
-
|
$
|
-
|
||||||
Other income
|
1
|
1
|
2,398
|
|||||||||
Total Income
|
1,601
|
1
|
2,398
|
|||||||||
Total Noninterest Expense
|
763
|
480
|
3,083
|
|||||||||
Income (Loss) before undistributed net income of subsidiary and income taxes
|
838
|
(479
|
)
|
(685
|
)
|
|||||||
Income tax benefit
|
(151
|
)
|
(163
|
)
|
(222
|
)
|
||||||
Net income (loss) before undistributed net income of subsidiary
|
989
|
(316
|
)
|
(463
|
)
|
|||||||
Equity in undistributed (excess distributed) net income of subsidiary
|
3,474
|
1,233
|
(3,245
|
)
|
||||||||
Net Income (Loss)
|
4,463
|
917
|
(3,708
|
)
|
||||||||
Other comprehensive income (loss), including net change in unrealized
gains on securities available for sale, net of tax
|
14
|
1,030
|
(655
|
)
|
||||||||
Comprehensive Income (Loss)
|
$
|
4,477
|
$
|
1,947
|
$
|
(4,363
|
)
|
CONDENSED STATEMENTS OF CASH FLOWS
|
For the years ended December 31,
|
|||||||||||
In thousands of dollars
|
2012
|
2011
|
2010
|
|||||||||
Cash Flows from Operating Activities
|
||||||||||||
Net Income (Loss)
|
$
|
4,463
|
$
|
917
|
$
|
(3,708
|
)
|
|||||
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
|
||||||||||||
(Undistributed) Excess distributed net income of subsidiary
|
(3,474
|
)
|
(1,233
|
)
|
3,245
|
|||||||
Stock option expense
|
150
|
114
|
92
|
|||||||||
Change in other assets
|
(154
|
)
|
(687
|
)
|
1,684
|
|||||||
Change in other liabilities
|
39
|
(8
|
)
|
(626
|
)
|
|||||||
Net cash from operating activities
|
1,024
|
(897
|
)
|
687
|
||||||||
Cash Flows from Investing Activities
|
||||||||||||
Investments in subsidiary
|
-
|
(2,000
|
)
|
(13,500
|
)
|
|||||||
Change in loan to subsidiary
|
-
|
-
|
2,400
|
|||||||||
Net change in premises and equipment
|
-
|
-
|
2,261
|
|||||||||
Net cash from investing activities
|
-
|
(2,000
|
)
|
(8,839
|
)
|
|||||||
Cash Flows from Financing Activities
|
||||||||||||
Proceeds from common stock transactions
|
57
|
41
|
17,138
|
|||||||||
Cash dividends paid on preferred stock
|
(1,030
|
)
|
(1,030
|
)
|
(1,030
|
)
|
||||||
Net cash from (used in) financing activities
|
(973
|
)
|
(989
|
)
|
16,108
|
|||||||
Net Change in Cash and Cash Equivalents
|
51
|
(3,886
|
)
|
7,956
|
||||||||
Cash and cash equivalents at beginning of year
|
4,914
|
8,800
|
844
|
|||||||||
Cash and Cash Equivalents at End of Year
|
$
|
4,965
|
$
|
4,914
|
$
|
8,800
|
NOTE 20 – 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
|
|||||||||||||||
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
|
2011
|
||||||||||||||||||||
Interest Income
|
$
|
36,165
|
$
|
9,079
|
$
|
8,906
|
$
|
9,091
|
$
|
9,089
|
||||||||||
Interest Expense
|
6,114
|
1,392
|
1,469
|
1,566
|
1,687
|
|||||||||||||||
Net Interest Income
|
30,051
|
7,687
|
7,437
|
7,525
|
7,402
|
|||||||||||||||
Provision for Loan Losses
|
12,150
|
250
|
6,000
|
3,100
|
2,800
|
|||||||||||||||
Net Income (Loss)
|
$
|
917
|
$
|
2,297
|
$
|
(2,100
|
)
|
$
|
361
|
$
|
359
|
|||||||||
Basic and Diluted Earnings (Loss) per Share (1)
|
$
|
(0.02
|
)
|
$
|
0.16
|
$
|
(0.19
|
)
|
$
|
0.01
|
$
|
0.01
|
||||||||
(1) As a result of rounding, the sum of the EPS figures for the four quarters of 2011 does not equal the calculation of EPS for the full year of 2011.
|
NOTE 21 — CAPITAL PURCHASE PROGRAM
On January 16, 2009, the Company issued and sold to the U.S. Department of the Treasury ("Treasury") (a) 20,600 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A ("Preferred Shares") for an aggregate purchase price of $20,600,000 and (b) a 10-year warrant ("Warrant") to purchase 311,492 shares of our common stock at an aggregate exercise price of $3,090,000 as part of Treasury's Troubled Asset Relief Program Capital Purchase Program in a private placement exempt from the registration requirements of federal and state securities laws.
The Preferred Shares qualify as Tier I capital and will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. The Preferred Shares are non-voting except with respect to certain matters affecting the rights of the holders, and may be redeemed by United after three years.
On June 19, 2012, Treasury sold all 20,600 shares of Preferred Shares in a modified dutch auction. The Company did not receive any proceeds from the sale of the Preferred Shares. The sale of the Preferred Shares did not result in any accounting entries on the books of the Company and did not change the Company's capital position. The Company incurred $299,000 of legal and accounting costs related to the sale of the Preferred Shares in the second quarter of 2012. On July 18, 2012, the Company repurchased the Warrant from Treasury for $38,000.
As a result of these transactions, the Company no longer has any obligation to Treasury in connection with the TARP Capital Purchase Program and the Company is no longer subject to certain requirements of the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009, leaving the Company with greater flexibility to manage its business and affairs and eliminating the management time and expenses which were required to comply with these provisions.
NOTE 22 – LEGAL PROCEEDINGS
A class action lawsuit was filed against the Bank in early 2011 that alleges the Bank violated the Electronic Funds Transfer Act ("EFTA"), 15 U.S.C. §1693 et seq., by allegedly failing to provide adequate notice of automated teller machines ("ATMs") fees at the Bank's ATMs. The plaintiff sought class certification of the lawsuit, statutory damages, payment of costs of the lawsuit and payment of reasonable attorneys' fees. In the third quarter of 2012, the class was certified by the court. In the fourth quarter of 2012, the Company and the plaintiff reached a settlement agreement in this matter. While the Company believes that this lawsuit was without merit, it believes that settlement of the lawsuit was prudent. The impact of the settlement was not considered to be material on the Company's financial statements, and was expensed in the fourth quarter of 2012.
Other than the above-referenced matter, the Company is involved in routine legal proceedings occurring in the ordinary course of its business, which, in the aggregate, are believed to be immaterial to the financial condition of the Company.
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
|
|
March 1, 2013
|
|
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)
|
March 1, 2013
|
Robert K. Chapman
|
|
|
|
|
|
|
|
/s/ Randal J. Rabe
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
March 1, 2013
|
Randal J. Rabe
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Karen F. Andrews
|
|
Director
|
March 1, 2013
|
Karen F. Andrews*
|
|
|
|
|
|
|
|
/s/ Stephanie H. Boyse
|
|
Director
|
March 1, 2013
|
Stephanie H. Boyse*
|
|
|
|
|
|
|
|
/s/ James D. Buhr
|
|
Director
|
March 1, 2013
|
James D. Buhr *
|
|
|
|
|
|
|
|
/s/ Kenneth W. Crawford
|
|
Director
|
March 1, 2013
|
Kenneth W. Crawford *
|
|
|
|
|
|
|
|
/s/ John H. Foss
|
|
Director
|
March 1, 2013
|
John H. Foss*
|
|
|
|
|
|
|
|
/s/ Norman G. Herbert
|
|
Director
|
March 1, 2013
|
Norman G. Herbert*
|
|
|
|
|
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/s/ James C. Lawson
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Chairman of the Board
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March 1, 2013
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James C. Lawson*
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/s/ Len M. Middleton
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Director
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March 1, 2013
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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 38
Exhibit
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Description
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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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3.2
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Amended and Restated Bylaws of United Bancorp, Inc. Previously filed with the Commission on December 9, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 3.1. Incorporated here by reference.
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3.3
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Certificate of Designations for Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Previously filed with the Commission on January 16, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 3.1. Incorporated here by reference.
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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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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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4.3
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Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Previously filed with the Commission on January 16, 2009 in the United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 4.1. Incorporated here by reference.
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4.4
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Certificate of Designations for Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Exhibit 3.3 is incorporated here by reference.
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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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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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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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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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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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10.6*
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Form of Employment Contract, effective as of June 1, 2009. Previously filed with the Commission on June 2, 2009 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 10.1. Incorporated here by reference.
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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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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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10.9*
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Underwriting Agreement. Previously filed with the Commission on June 19, 2012 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 1.1. Here incorporated by reference.
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10.10*
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Letter Agreement. Previously filed with the Commission on June 19, 2012 in United Bancorp, Inc.'s Current Report on Form 8-K, Exhibit 1.2. Here incorporated by reference.
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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 S1 Registration Statement, Exhibit 21. Incorporated here by reference.
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23.
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Consent of Independent Registered Public Accounting Firm.
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24.
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Powers of Attorney.
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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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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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32.1
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Certification pursuant to 18 U.S.C. Section 1350.
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99.1
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Certification of the Principal Executive Officer Pursuant to Section 111 of the Emergency Economic Stabilization Act of 2008.
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99.2
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Certification of the Principal Financial Officer Pursuant to Section 111 of the Emergency Economic Stabilization Act of 2008.
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* These documents are management contracts or compensation plans or arrangements required to be filed as exhibits to this Form 10-K.
Page 40